Strategy for gross national happiness (sgnh) Annexures to the Main Document

The construction of big power projects will require special attention since they are the biggest importers of non-national workers and also because the construction of power projects will have to be speeded up in order to make more significant impact on the Bhutanese economy. While the areas identified above will partially address the issue since the power projects involve heavy investments in buildings and roads, there are other specialized areas that will require more in-depth study such as:

• 
  Tunnels
  
• 
  Dams
  
• 
  Power House
  
• 
  Transmission Towers
  

Apart from the two major areas of road and building construction, opportunities to mechanize or prefabricate exist in other areas such as irrigation channels, roadside or building drains, footpath paving and edging, etc. Some work has already been initiated in some of these areas and now require further support through standardization and aggressive promotion.

Tenders are sought on Design and build basis where the procuring agency gives preliminary specifications and data and the contracting firm does both detailed design and construction. This has been found to facilitate designs that are easier to build and supervision will also become easier since the designer and constructor are the same. Much of the construction problems such as design defects and financial deviations can be controlled through this system of procurement. It will also promote accountability and encourage contractors to build a professional team of engineers and architects. Alternatively, consultancy firms can also be hired to perform the functions of both designer and supervisor with a contractor executing the job. Currently, when design jobs are outsourced to private consultancies, their accountability ends once the design process is complete and the job has been tendered for construction. Design defects observed during the construction period are hard to rectify due to this lack of accountability. Design and Build or Design and Supervise projects will enable full accountability as since only one party is involved, there is no one else at whom to point the finger. Only through increased accountability is it likely to improve the professionalism and ethical conduct of those in the construction industry.

The use of IT in the Bhutanese construction industry is limited to partial use of design software such as AutoCAD and StaadPro and the use of spreadsheets to prepare estimates. While any number of software and IT aids are available for engineering design, planning and monitoring, IT use is still limited due, firstly, to the natural human reluctance to learn or try anything new and secondly, to the government’s restrictive approach to the purchase of software and sometimes even the basic hardware. With the move now to create a knowledge based economy, the government must seek to provide a Desktop on every desk top and the connectivity and the software required along with it. Appropriate engineering and architectural software must be selected and all industry professionals trained in their use.

The construction industry has the potential to reach much higher productivity levels mainly because current productivity levels are very low and because the small size of the industry will be easier to regulate and promote. In order to achieve this, however, there is the need for a comprehensive strategy that addresses all issues of design, production, fabrication and skills requirements that include the following:

1. 
   Development and promotion of designs that use prefabricated components and standardized modules requiring only assembly at site and substitution of wet finishing methods with dry walls.
   
2. 
   Aggressive promotion, through a mix of incentives and directives, of premixed concrete in the short and medium term and precast structural components in the long term
   
3. 
   Adoption of fully mechanized construction techniques in the roads sector.
   
4. 
   Adoption of construction techniques that make extensive use of light tools and equipment such as electric-powered drills, planes, saws, painting rollers, Sun blaster (for plastering), etc.
   
5. 
   Development of core of skilled Bhutanese workers. With the shift from manual to mechanized construction processes coupled with other incentives, there will be more Bhutanese youth opting for the construction trade but the training methods at the CTC’s and VTI’s will have to change accordingly.
   
6. 
   Adoption of design, planning and monitoring software and training of professionals; substitution of manual records by electronic record-keeping; e-tendering.
   
7. 
   Promotion of specialized equipment hiring units while also discouraging contractors to own their own equipment.
   
8. 
   The Competition Act that is mentioned in EE 2008 is strongly endorsed and must be enacted urgently to curb monopolies and the practices of collusion and price-fixing/bid-rigging.
   

The private construction sector today comprises of more than 1700 firms - Thimphu has the highest number of contractors at 478, followed by Chhukha with 134. Trashigang and Mongar have 112 and 108 respectively. As of 31^st December 2006, the above 1700 construction firms reportedly hold some 6030 licenses under different categories of works as shown in the table below:

Table-I

Class/category	W1 Roads and Bridges	W2 Traditional Paintings	W3 Building, water supply & drainage	W4 Power and Telecommunication
A	35		44	14
B	31		28	12
C	262		273	79
D	1,378		1,375	1,459
Total__1,706__1,370__1,720__1,564'>Total	1,706	1,370	1,720	1,564

In terms of volume of works executed in 2006 by different classes of contractors, Class A contractors (44 nos.) have executed as much as 70% of the total volume of work while class B (31 nos.) has executed 8%, C (280 nos.) 18% and D (1,378 nos.) has executed only 4%. The above figure indicates that classes B, C and D together which make up to 97% of the total strength has executed only 30%. On the other hand, 44 Class A contractors have executed up to 70% comparatively far more than the rest of the classes put together.

Notwithstanding the above, the current situation of the private construction sector however, as revealed during the qualitative survey involving series of interviews and consultations with stakeholders and reviews of reports including strategy for development of private construction sector in Bhutan undertaken by CAB, parts of which have been reproduced given its relevance, reveals that contractors, by and large, are still in an emerging phase with limited growth in terms of its capacity.

An indigenous Bhutanese private construction sector only started to emerge and develop in the late 80’s, when the Government decided to privatize construction operations. The Royal Government has since been in the process of redefining its role from that of “Provider” to “Enabler” of public services, confining its role to policy, planning and regulation. Despite many years of this initiative, the private construction sector is still relatively small and grappling with issues of shortage of manpower at all levels, plant and equipment, and limited capacity. Typically, Bhutanese construction firms are categorized by a highly personalized management structures. Most of these firms are owned and operated by a family (sole proprietorship) and often looked at as a means to supplement other businesses. The private construction sector to this day has nonetheless played its role in the physical realization of facilities of the Royal Government. The principal impediments to growth of contractors are attributable to:

Lack of professionalism among contractors is identified as the primary problem confronted by the construction industry. Weak organizational set up, highly personalized management structures - owned and operated by family, briefcase contractors, poor quality, under-quoting of bids, unofficial sub-letting of works, absence of any qualified staff and collusion are some of the common features of the Bhutanese construction industry. Construction firms are generally weak in management with most managers being technically unqualified and inexperienced and therefore most do not have the capacity to effectively deal with contractual and site managerial issues. Instances of “Briefcase contractors” accessing to opportunities at the detriment of established and bona fide contractors are quite common. Efforts to build capacity by way of setting aside requisite funds to train and upgrade the capacity of their employees to enhance efficiency, productivity and quality of works and undertake works in a more professional way is hardly existent. Construction business, by some, is considered as a casual part time business and a stepping stone to other more lucrative business.

One of the reasons that deter expansion of their business is the perceived notion of insecurity – lack of continuity of work. Consultations reveal that absence of a long range market perspective or absence of any kind of construction industry development policy/vision is attributable to this lack of initiative. A stable market would allow Contractors to plan their long term investments in the construction business in the absence of which most contractors have no long term plans to help organize and encourage staffing at appropriate levels to build their capacity and resources.

Collusion and business fronting among contractors do not ensure fair competition and prejudice the growth of the private sector construction industry. Yet these are major challenges faced today in the Bhutanese construction industry. According to CDB, fronting has become a norm in the interior parts of the country and more so in the Southern Dzongkhags affecting the national contractors in their business. Given its seriousness, the matter was discussed on several occasions during CDB meetings, Annual Engineering Conference and during the 84^th and 85th National Assembly as well. CDB, since March 2004, had initiated measures to curb fronting that included frequent inspections, verification of documents and creating awareness including strict action on defaulters. This is an ongoing effort. Fronting is unethical and unprofessional and impacts adversely on the growth of the contractors, vis-à-vis the construction industry. Common forms of fronting taking place are:

1. 
   among national contractors of same or different classes where in the latter big contractors either down-plunge or small classes take up works beyond their capacity,
   
2. 
   with non-nationals, particularly in bordering Dzongkhags in the guise of employees where government’s resources are piped out.
   

CDB at present registers contractors under four classes and four categories based on their financial capacity, technical capability and past experience. Registration with CDB is a system of a formal pre-qualification and it is not limited to particular contract. Proof of enrolment on CDB’s Registration System constitutes a presumption of overall suitability of contractors, unless proved otherwise, and qualify contractors to participate in the biding within the range of their class and category of works. Only CDB registered contractors are eligible for obtaining contract license. The present system of procurement is a restrictive bidding as is evident from the Table-III.

Contractors are confined to bid only within their allowable range of contract and the prescribed number of contracts that can be taken up simultaneously. Bigger contractors are prohibited to participate in the smaller contracts falling below their prescribed limits and vice-versa smaller contractor taking up larger works. Further, all new entrants to the industry are required to register initially in the Petty category and work their way up to ‘A’ after gaining experience in the smaller categories. This system does not allow entry of new companies directly into the ‘A’ class even though they might be well equipped in terms of technical and financial capacity and therefore capable of delivering quality services. Such a restrictive system which does not facilitate competition and allocates works for a particular class does not encourage economy and efficiency in public procurement and gives no sense of urgency to grow. For example, contracts valuing between Nu. 7.5 to 15 million are exclusively reserved for 32 “B” class contractors for bidding. It is quite likely that several of these are not active in the business currently. Thus, the broader competition is denied at the cost of the public resource.

The private sector Development Strategy report of CAB recognizes the constraints of technical competence in the private construction sector. The capacity of most contractors in Bhutan to deal with both managerial and technical issues related to work execution, especially for larger and more sophisticated jobs, is limited, according to the report. Due to lack of skilled and experienced domestic personnel, engineers and site technical staff often have to be hired from outside on a project basis. This is a unique feature amongst Bhutanese contractors where firms, irrespective of its class, do not assimilate its past knowledge and experience for future usage. By the same token, there is no professional approach towards tender bidding, or perhaps even reading the tender documents, indicating casualness in their business approach which results in brain-drain and loss of valuable experience.

In keeping with the development and time it is felt necessary that appropriate Laws, Rules and Acts related to construction industry are put in place so as to realign and bring about a fundamental change in enforcing quality. Clear regulatory guidelines allow Contractors that focus on quality and value for money to remain in business weeding out incompetent competitors. Against this backdrop there is the need for Acts and laws in order to guide, nurture and develop the construction industry to attain the required quality. In its absence, the industry is challenged with decline in construction quality, acute shortage of skilled and unskilled labour, leading to an over-dependency on foreign labour. These policy reforms have been identified as instrumental in order to enhance construction quality.

Most construction firms are weak in management with most managers being technically unqualified and inexperienced. Due to lack of experience in operating in a competitive environment, most contractors do not have the capacity to effectively deal with contractual and site managerial issues. This leads to uneconomic operations, wastage in terms of material and labour inputs, wrong deployment and mishandling of equipment, time and quality losses. Ignorance of the kind of skills to support the business activities, value for worker training, best practices and appropriate technologies required for their line of operation create weak management. Training opportunities for contract and site management are basically not available in Bhutan.

One of the main concerns raised is the absence of a strong regulatory body for the construction sector that has a clear authority, vision and mandate to give the desired directions towards a systematic growth. At present, efforts to develop the industry are fragmented and ambiguous and considered by many as decelerating factor to the growth of the industry. CDB’s efforts to promote and regulate is severely constrained due to its poor staffing. This is evident from the fact that despite its many years of establishment, CDB has even today a very lean establishment structure facing severe capacity constraint. This has forced it to limit its functions to registration aspects only compromising on other important mandates such as:

1. 
   development and promotion of technical and managerial skill within the domestic construction industry;
   
2. 
   promotion of private participation in construction activities;
   
3. 
   administration of institutional capacity and performance of contractors; and
   
4. 
   development of policy guidelines for construction industry.
   

There has been expressed desire by stakeholders that the current capacity is not in a position to carry out its mandate of regulatory and promotional activities of contractors effectively.

Bidding practices by many Bhutanese construction firms are not yet professional. Therefore, bidding, especially by lower class contractors, is seldom based on detailed analysis and true facts but is guesswork in the best of instances. This leads, more often than not, to under-bidding far below any reasonable market rates. There is a danger that this may lead to killing the domestic construction sector and constantly providing “compromised” quality products. Further, the present item rate system of contract is mainly a post qualification method. It has its own limitations and weaknesses. The modern concept of project delivery systems such as Build Operate and Transfer (BOT), Design and Build, Lump Sum contracts, etc. are some of the useful applications foreseen to be applied in the future constructions for which our contractors will take some time to develop its capacity.

Because of the small size of our industry, foreign investors are almost non existent. This is also true because of the absence of a sound legal system. Few joint ventures and consortium initiated with the foreign contractors has failed to meet the desired objectives to tap the extensive resources and experience of the foreign contractors by way of technology transfer and capacity building measures which will immensely help to promote the national contractors. At this rate, it is felt that Bhutanese contractors will not get to build its capacity to participate in hydropower projects that are in the pipeline unless government intervenes to support the sector.