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

1. 
   Strengthening of CDB/CDA
   
2. 
   Enabling policies and Legal frame work
   
3. 
   Introducing preferential treatment and penalties system in procurement of works
   
4. 
   Restructuring contractors’ classification to promote professionalism
   
5. 
   Broader competition in public procurement
   

The need for a strong agency and clear leadership that has the capacity and authority in the construction sector to play a more proactive and dynamic role towards the overall development of construction industry is of paramount importance for an emerging and vibrant industry such as ours. It was in this light the CDB was established as an interagency of the Royal Government in 1987, consisting of members from both government and private agencies. Its role, among others, is to act as bridge between the private construction industry and public sector, provide essential services, promote, regulate and provide effective leadership of the construction industry. The overall mission being “promotion of an efficient and quality-based construction industry in Bhutan”, its role briefly is to:

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  Act as overseer as well as promoter of the construction industry;
  
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  Act as a bridge between the private and public sectors;
  
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  Assist contractors in undertaking a more expansive part in the industry while also helping the Government to obtain an increased return on its investment.
  
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  Ensure contractors fair and equal access to the award of contracts as well as fair treatment in the execution of contracts.
  
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  Establish and maintain the list of Registered Contractors by classes and categories based on set criteria;
  
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  To regulate, monitor and promote the construction industry;
  

In light of the above, the CDB should be strengthened with the long term strategy of delinking it from the MoWHS and establishing it as an independent Construction Development Authority (CDA) for effective and unbiased pursuance of its important functions. The quality division presently under SQCA is proposed to be transferred under CDA. The advantage for all partners would be an unbiased link between the different entities, transparent procedures and relationships and improved efficiency.

Appropriate Laws, Rules and Acts related to the construction industry are required so as to realign and bring about a fundamental change in bringing professionalism and enforcing quality of construction. A clear regulatory framework viz. Contract Acts (which is being drafted), Arbitration Act, Procurement Acts, National Construction Industry Policy, and Construction Development Board Act would not only enable growth of construction industry vis-à-vis domestic contractors but also create an enabling environment to foreign contractors interested to invest in Bhutan. The following is proposed:

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  Enact the Contract Act as early as possible (draft in progress)
  
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  Development of Arbitration Act
  
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  Development of Procurement Act
  
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  Amend penal code of Bhutan not to make breach of contract a ‘Criminal Act’.
  
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  Frame a CDB Act to enable CDB to carry out the Registration, Regulation and Promotion functions which will be binding on all the players in the construction industry
  
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  Develop a comprehensive strategy or the National Construction Industry Policy (policies based on long term planning with the long term market perspective).
  

3. 
   Preferential treatment to good contractors and penalties for poor performance
   

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  Develop appropriate and objective construction qualitative assessment system such as CONQUAS of Singapore; every completed project will be subjected to a Quality Audit, the results of which will be used to grade contractors for future tender evaluations.
  
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  Develop evaluation system that recognizes scores produced by CONQUAS giving advantage to good-performing contractors during evaluation of bids;
  
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  Study feasibility of ‘Repeat Order System’. An agency who is satisfied with the past performance with a construction firm could directly award work orders under very well defined and unambiguous conditions and transparency. Such a system would encourage contractors to consistently improve their performance and deliver quality works.
  

Conversely, there is also the need to promote greater accountability in the contractors by changing the approach to construction supervision and incorporating penalties for poor work. As in any other industry or service, the government should set the specifications and refrain from day-to-day supervision which is the responsibility of the contractor. Government supervision must be limited to inspections of the quality of the finished work and ensuring that the project is progressing within the specified time and financial limits. In this regard, the following recommendations are made:

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  The implementing agency must ensure that the completed work is within the specifications stipulated and sub-standard work must be rejected or adjusted through payments as may be specified in the Tender terms and conditions.
  
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  Supervision of day-to-day works must be left to the contractor who must be trusted to complete the job in accordance with the terms and conditions of the contract and government supervision must be limited to milestone and financial monitoring.
  
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  Guarantees must be built into the contract agreement and contractors must be liable for faulty workmanship for the period of the guarantee which can be anything from 1 to 5 years depending on the size and nature of the work.
  
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  Failure to make good the rectifications during the guarantee period must be reported to the CDB which should formulate rules that will take into account such poor performance during tender evaluation or suspension of license for repeated breach of terms.
  

3. 
   Restructuring contractors’ classification to promote professionalism
   

9. 
   Contractors will be placed into two categories – Class I and Class II.
   

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  Class II contractors will be allowed to take part in works upto Nu. 2.0 million. For this category, there will be minimal or no criteria for registration. Even in terms of tender evaluations, there will be very simple criteria with the work being generally awarded to the lowest bidder after determining the reasonability of the bid.
  
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  Class I contractors can take up works greater in value than Nu. 2.0 million with no upper limits. Registration into this category will have some criteria based mainly on financial capacity and technical manpower with some considerations for equipment.
  

2. 
   Under such a scenario, however, there are concerns that it may result in a free for all and create a situation conducive to the proliferation of briefcase contractors who will submit their bids based on “paper resources” and then run into a series of problems trying to complete the project. In order to prevent this, during registration, CDB will verify the technical personnel employed by the registering company based on which they will be allowed to take up works as under:
   
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  Class I contractors who employ only diploma engineers will be allowed to take up works upto Nu. 20.0 million;
  
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  Class I contractors who employ graduate engineers will be allowed to take up works with no upper ceiling.
  
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  Those contractors who wish to take up larger projects (financial ceilings to be fixed) on Design and Build System will have to employ design teams in addition to the employees mentioned above OR affect collaboration with registered architectural/engineering design companies.
  

3. 
   Similarly, the number of works that can be taken up simultaneously by a contractor needs to be rationalized. Currently, as given in Table III, this number has been arbitrarily fixed as 3 for smaller contractors and 5 in the case of Class A contractors which means that a Class A contractor can take up 5 works simultaneously even though he may be employing only 2 engineers. With his technical resources spread so thinly, it obviously leads to poor project execution and in many cases to ‘fronting’. Therefore, it is recommended that this number be fixed depending upon the number of technical personnel that is employed by that contractor so that if a contractor employs only 1 engineer, he will be allowed only 1 work regardless of his financial capacity while a contractor employing 10 engineers may be allowed 10 works (the exact number of engineers and thus the number of works will depend upon the specifications laid out by each project). However, a maximum of about 7 works may be considered as the upper ceiling since beyond this, there will be too much demand on the contractor’s managerial and financial resources and capabilities. Such a scenario will not only lead to professional execution of projects but also have the greatest impact on the capacity development of the contractors since now their intrinsic capacity will dictate the number of works they have access to unlike the present scenario where capabilities may differ from contractor to contractor but they are all treated alike with arbitrary limitations such as 5 works per contractor irrespective of their capacities.
   

3. 
   There may be a third category of contractors called ‘Trade Specialists’ which would include Traditional Painting, HVAC Specialists, Lift & Escalator Specialists, Internal Electrification, etc. This category will have no threshold limits and they will work either through sub-contracts through the Class I and II Contractors or independently where the works are awarded through competitive bidding directly to them by the Procuring Agency.
   

Class - II

Pre-conditions, however, to implementing the above are as listed below:

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  Frame rules, procedures and criteria for regulation/registration of contractors based on above proposal. Effort must be made to ensure that the registration criteria are clear, detailed and unambiguous specifying items of assessment. (Class would be based on Turnover, Technical personnel, Financial Capacity, Experience, Equipment, Office establishment etc.)
  
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  Review and revise Procurement Manual, Standard Bidding Documents, and Evaluation System,
  
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  Create enabling environment for pooling of contractor’s resources by way of forming Companies, Joint Venture or Consortium – criteria/rules need to be developed.
  
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  Develop rules for mandatory sub-contracting by main contractor based on trade and specialization. Rules should however have defined conditions so that fronting does not take place.
  

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  Review packaging of works; the present practice of fragmenting larger contracts to small packages does not justify overhead investments while deterring further growth.
  
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  Enhance engineers’ capacity to carry out evaluation more objectively,
  
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  CDB to maintain up-to-date information and track record of each firm
  
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  Registration of foreign contractors desiring to work in Bhutan with CDB
  

Frequent instances of collusion and bid rigging by the contractors, particularly in the larger categories, indicate that there is a lack of true competition even though the number of contractors is quite large. Given this scenario, contractors are not willing to upgrade their capacities any further than what is already existent. Moreover, the government’s tendency to break up large projects into smaller components to fit the contractors’ perceived capacities gives rise to a Catch 22 situation. The government breaks up large projects into smaller components out of concerns that contractors will not be able to complete the large project on time and with the required quality. And since these downscaled projects are now within the contractors “capacities”, there is no incentive for contractors to develop any further. In fact, one contractor even claims that they are downsizing since having large resources, either in terms of professional manpower or in equipment, only adds to overheads with no corresponding access to larger projects. In order to stimulate greater competition and encourage contractors to upgrade, the following is proposed:

9. 
   All procuring agencies shall be encouraged to float tenders as single packages so that works values are enhanced and contractors will upgrade their capacities in order to execute these large projects¹⁹.
   
10. 
    For projects valued at more than Nu. 50 million, international competitive bidding will be mandatory (or at the least bidding within the SAARC region).This is firstly to ensure wider competition since local competition, particularly for large projects, is limited and secondly, to expose local contractors to the kind of competition that will encourage and stimulate professional capacity development. It is likely that in the initial stages, international contractors will outbid local ones but in the long term, local contractors will be forced to consolidate and upgrade in order to compete, thereby resulting in improvements in the professional capacity of the contractors, eventually allowing them to also compete in regional markets.
    

1. 
   Situation Analysis
   

Within the areas of Institutional and Human Resource development, the following key issues have been observed to be fundamental to the development of professionalism and capacity within the Construction Industry.

The lack of motivation, morale and initiatives among the National professionals and workers within the Construction Industry is seen as one of the main threats that could seriously hinder the qualitative growth of the Industry.

With the start of a number of important Government projects and in view of its important social and economic implications, the Construction Industry attracts regular media and public attentions. Unfortunately, such publicity has often drawn the negative aspects of the Industry only. Given the Industry’s current stage of development where professional capacities of both the private and the Government sectors have not matured, there are increased possibilities of inadequate performances by these sectors. Correspondingly, consistent and indiscriminate negative publicity in the construction field has given reasons for alarm and concern among the public and the authorities. This situation in turn has led to persistent and often stern public scrutiny over the activities carried out by these professionals causing professional disdain and apprehensions within and outside the Industry. Some of the repeated and rather prejudiced coverage of the Industry by the media and by the investigating agencies have raised serious and extended doubts on the credibility of the profession and the ethics of the professionals on the whole. Wide spread apprehension and the lack of incentives, investments and environment for these professionals and skilled workers to take risk and innovate has largely been responsible for the decline in motivation and morale among those with the capacity or interest to improve their profession and the Industry on the whole. It has even been reported that some of the training Institutions are finding it increasingly difficult to attract competent faculties and students in the profession.
ii. Mismatch in the supply and demand of professionals and skilled workers

Considering the demand for appropriate and adequate human resources within the Construction Industry, it is not too early if not too late, to review the long-term strategy concerning the overall supply and demand of professionals, skills and other manpower requirements of the Industry.

The capacities of the premier institutions in the Country show that, during the 9^th plan period, only a total number of 175 students at degree level, 350 at diploma level and about 500 at the certificate level can be produced. These figures in the current context are seen to be far too short of the demand.
The available information also shows that the Government agencies currently employ close to a total of only about 800 construction Engineers of various categories. On the side of the private sector, the available 1,731 registered contractors employ about 578 Engineers (including 148 numbers of non-nationals) against the minimum required number of 613. In both the cases, acute shortages of professionals and skilled workers have been experienced given the limited supply of National Engineers and skilled workers from the institutions. The fact that Tala Hydro-Electric project alone has employed about 20,000 workers clearly indicates that the demand for professionals and workers for any project of equivalent size or bigger would demand corresponding size of manpower. The demand for human resources within the Industry will skyrocket once the proposed major infrastructure development projects are underway (e.g. Tala II, Sunkosh, Puna Tsangchhu, Southern East-West highway construction, widening of lateral East-West Highway etc.). Unless immediate measures to plan and prepare for the upcoming demand are initiated on priority, a major human resource problem in the Construction Industry will occur.
Presently, it has been reported that higher institutions viz. the College of Science and Technology and the Royal Bhutan Polytechnic, both responsible for the primary development of Engineering professionals within the Country, are plagued with protracted problems of infrastructure adequacy and shortages of quality faculties. It has been reported that the institutions are increasingly unable to attract capable faculties or competent students in their strength. Such shortcomings are mainly the result of lack of investment priority and incentives required by the Institutions. The lack of adequate infrastructure and capable faculties in turn has affected the quality and the quantity of the students’ output.
On the other hand, the MoLHR has made some attempts to review market demand for skilled workers and are currently expanding Vocational Training Institutes (VTI) and the Construction Training Center (CTC) for increased intake of students. However, the expansion program seems to require practical consultation with those involved in the Construction Industry to ascertain the quantity of intake and output of these institutions based on market demand including the assessment on the relevance of such skills development programs over time.