Abstract
The construction contract for the seventeen storey STP building was awarded to China State Construction & Engineering Corporation (CSCEC) as it was the lowest and technically qualified bidder. The contract was awarded for a fixed fee of PKR 2.99 billion (USD 49.83 million) with a completion timeline of eighteen months. However, after nine months of construction, the contractor approached Punjab Information Technology Board (PITB) and asked for relaxation on high value items like elevators, escalators and building glass. The CSCEC asked PITB to allow them to change the country of origin (manufacturing) and brand name on these items while they ensured that all technical specifications would be met and there would be no compromise on quality. The dilemma Jasem faced was whether to allow CSCEC’s request or not. He also had to understand the consequences of whatever decision he made.
Jasem was the Chairman of the Punjab Information Technology Board (PITB) and the Chief Minister of Punjab, Chaudhry Pervaiz Elahi had assigned PITB the task of constructing a state-of-the-art Software Technology Park (STP) on Ferozepur Road, in Lahore.
The construction contract for the seventeen storey STP building was awarded to China State Construction & Engineering Corporation (CSCEC) as the lowest and technically qualified bidder. The contract was awarded for a fixed fee of Pakistani Rupee - PKR 2.99 billion (USD 57 million 1 ) with a completion timeline of eighteen months. However, after nine months of construction, the contractor approached PITB and asked for relaxation on high value items like elevators, escalators and building glass. The CSCEC asked PITB to allow them to change the country of origin (manufacturing) and brand name on these items while all technical specifications would be met and there would be no compromise on quality. The dilemma Jasem faced was whether to allow CSCEC’s request or not. He also had to understand the consequences of whatever decision he made.
Background
The PITB was formed in March 1999 with an objective to promote Information Technology (IT) throughout the province of Punjab. PITB was run by a Chairman who as the chief executive of the organization worked under the Board which was headed by the Chief Minster (chief executive of the province). At various times, PITB had Chairmen selected from both the private and public sectors.
The PML (Q) government was elected in 2002 and Chaudhry Pervaiz Elahi became the Chief Minister and Chief Executive of the province of Punjab. In 2004, the Punjab Government started to focus on IT potential. It was realized by the government that the absence of a robust and purpose-built IT infrastructure was a major impediment to the growth of the IT industry. Therefore, it was decided by the government to construct a state-of-the-art STP in Lahore. The Chief Minister wanted to build a robust infrastructure and create a success story in the IT sector for the next elections, which were scheduled to be held in November 2007. The elections in 2007 also created a sense of urgency within the Punjab government to build an IT infrastructure in Punjab and show progress to the IT industry as well as the general public. The Punjab government decided to hire an IT professional from the private sector with extensive foreign exposure to help formulate and implement its IT vision.
Jasem was hired by the Punjab government in December 2004 as Chairman of PITB. He held a B.Sc. in Information Systems from the Ohio State University and an MBA from Cleveland State University. He had over fifteen years of IT and management consulting (Deloitte Consulting) experience of working in the US, UK, Germany, Finland, Denmark and Mexico. He had also served as an Assistant Professor at Lahore University of Management Sciences (LUMS) prior to joining the Punjab government.
The STP Project
According to the project charter that was also known as PC-I, the STP on Ferozepur Road Lahore was conceived to be the first high-tech, purpose-built, and an iconic building for the IT industry in Pakistan. The STP was envisioned to be an iconic and state-of-the-art high-tech building for the IT industry. It was the first of its kind in Pakistan in 2005–06 with 475,000 square feet at an estimated cost of PKR 3.42 billion (USD 57 million 1 ). It was envisaged to have all modern facilities that no other government and private sector building had at that time. It was also a good example of inter-departmental and key stakeholder coordination as the building design was a team effort of Punjab Information Technology Board (PITB), Project Management Office (PMO), Directorate General Monitoring & Evaluation (DGM&E) of Planning & Development (P&D) Department, and Jurong Consultants of Singapore.
Given the size of the project and the tightness of government finances, the project team was asked by the Chief Minister of Punjab to manage the constraints on scope, time and budget in a way that would bring the project to completion within the stipulated time without exceeding the approved funding by over ten percent.
As per the PC-I document, a high-tech and high-rise building like STP did not exist in Pakistan at that time in 2006. The PITB management wanted to make sure that a qualified architect and designer with experience in high-rise and high-tech buildings was selected. The PITB management decided to follow an International Competitive Bidding (ICB) process for the selection of a qualified architect, designer and construction supervisor. Advertisements were placed in key newspapers nationwide and also mailed to Pakistani embassies overseas. Proposals were invited for architecture, design and construction supervision of the STP. As per Planning & Development (P&D) department’s consultant selection guidelines, a consultant selection committee (CSC) comprising seven members was formed. The CSC members included, the Chairman of PITB, General Manager of PITB, DGM&E and representatives of Finance, Planning and Development (P&D), Irrigation & Power and Communication & Works (C&W) department not below the rank of a deputy secretary (BPS 18). The CSC devised an evaluation criterion under which 60 per cent weight was given to technical qualifications and 40 per cent weight was assigned to the professional fee of the consultant. As per the instructions of the CSC, each bidder was required to submit technical and financial proposals separately. This was known as a two-envelope bidding process and was also followed by the World Bank for procurement of consultants. The CSC first evaluated all technical proposals and then opened the financial proposals of consultants who were declared technically qualified by the CSC. A total of five firms submitted proposals in response to the advertisement. After scrutinizing and applying the 60/40 criteria to all the proposals, the CSC selected Messers Jurong Consultants of Singapore as the most qualified consultants for the architecture, design and construction supervisor of the STP project.
Pre-Contract Management
The Chairman of PITB and the STP project team conducted a survey of local contractors and found out that there were no contractors in the local market that had constructed a high-tech, high-rise (seventeen storey or higher) building in Pakistan at that time in 2006. This posed a challenge, since the team wanted to hire a contractor with experience of constructing high-rise and high-tech buildings.
Another challenge was that none of the international contractors were willing to sign the standard Punjab government’s construction contract as it did not follow international contracting standards and practices. International contractors wanted to sign a contract that followed Geneva conventions and protected the interests of both the client (government) and the contractor. Therefore, the project manager had to go back to the Board and the Punjab government for allowing PITB to use international contracting standards like International Federation of Consulting Engineers (FIDIC) along with Pakistan Engineering Council’s contracting standards and to enter into a lump sum contract.
The government approved the execution of the project into two contracts: one for construction of the piling foundation and second for the construction of the main seventeen storey tower and car park block. The piling contract was awarded to Condrill (Pvt) Ltd through national competitive bidding (NCB). The NCB was a process under which firms from all over Pakistan were invited to bid on the project. Firms were prequalified based upon their experience, technical expertise and financial strength. Once the firms were prequalified, they were invited to submit technical and financial proposals, which were reviewed and approved by a committee. The contract was awarded to the lowest qualified bidder. Condrill constructed the piling foundations on-time, within budget and as per technical specifications. Their contract ran from 27 November, 2006 through 25 April, 2007.
Once the detailed design and engineering drawings were completed, PITB had to make the decision of selecting the contractor for the seventeen storey tower and car park block. For the purpose of this contract, Pakistani contractors were allowed to form JVs (Joint ventures) with an international partner having necessary financial strength and experience in high-rise and high-tech buildings. The contract was eventually awarded to CSCEC as the lowest qualified bidder in the open competitive bidding process. A lump-sum contract of PKR 2.99 billion (approximately USD 49.83 million) was awarded.
The PITB Board of Governors wanted to keep risk low so they decided to have a firm fixed price contract. Moreover, Jurong Consultants had advised that a firm fixed price contract would be suitable to meet the aggressive timeline of eighteen months and risk averseness of the government. PITB had to specify in great detail the products and services that it wanted to procure. Meaning, the project scope, business requirements, activities, costs, technical specifications and engineering drawings had to be clearly defined and required professional and diligent contract administration. Under the firm fixed price, PITB and the contractor would have to agree to a firm fixed price as well as the scope of the project. The contractor would not make any change unless the scope was changed. If the scope was changed, the contractor could increase the contract price significantly.
Contract Management and Execution
The PITB management and STP project team along with Jurong Consultants worked closely on the design and technical specifications of the project. The brand name, country of origin and technical specifications of all major components (i.e., lifts, wiring, gen sets, etc.) were clearly defined in the bidding documents and contract agreement. During 2006, PPRA wasn’t implemented and the PITB was following Purchase Manual of Punjab Government which laid down no restrictions on country of origin (manufacturing) and brand name. The Purchase Manual required the contractor to meet technical specifications mentioned in the bidding document and contract agreement.
After award of the contract and upon commencement of project execution, PITB received a number of proposals from the contractor that slightly deviated from the contract agreement, especially related to procurement of building glass, elevators and escalators. Each of these cases posed a dilemma for Jasem and the rest of the project management team.
Building Glass
The external glass of the building was an item costing about PKR 700 million ($11.66 million). The STP project team conducted secondary research through the internet on worldwide top quality brands of building glass and mentioned four brands in the tender documents. PITB tried to include Pakistani brands, but unfortunately high-tech glass with the quality and specifications required for the STP project was not available in Pakistan at that time.
The international brand names that met the project specifications included Saint-Gobain of France, Guardian of USA, Asahi of Japan and Viracon of USA. As per the contract agreement, the contractor was only allowed to pick from these four brands along with the detailed technical specifications that were made part of the tender document and contract agreement. The glass colour, thickness, UV rating, heat tolerance factors and country of manufacture (origin) were also defined.
The building glass from the aforementioned vendors, with the required specifications, cost PKR 700 million. The contractor came up with a proposal that the building glass with exactly the same specifications, if acquired from China, would cost PITB 30 per cent less than the original cost of PKR 700 million. The contractor proposed a discount of PKR 210 million (30 per cent) if he was allowed to procure the building glass that was manufactured in China. Jasem had to decide whether to allow this deviation and try to save thirty percent on the price of the building glass.
Elevators and Escalators
The high-tech STP building required high-tech elevators and escalators from floor to floor of the seventeen storey building. Therefore, detailed research was conducted through the internet by the STP project team on worldwide brands and quality of elevators and escalators. The project team decided on the top three brands for elevators and escalators. The brands included OTIS (USA), Schindler and Mitsubishi. Detailed specifications including lift capacity, speed, after-sale service, country of origin, etc. were also defined and made part of the contract agreement. The cost of the lifts and escalators was about PKR 765 million (about USD 12.75 million).
The contractor made a proposal to PITB as was done for the building glass. However, this proposal was a bit different from the building glass. He proposed to supply OTIS elevators and escalators manufactured in China as opposed to the ones manufactured in the United States. He also agreed to meet all the technical specifications and adhere to the brand name that was mentioned in the bidding documents. However, the contract agreement mentioned the country of origin (manufacturing) to be the USA. The contractor offered a 15 per cent discount on the original quoted price of PKR 765 million. This would amount to savings of about PKR 114 million (USD 1.9 million) for the government.
This again created a dilemma for Jasem: should he go for savings of PKR 114 million of public money and not worry about public scrutiny, media and the National Accountability Bureau (NAB)? He was also concerned about the quality and risks associated with this decision.
Legal Considerations
PPRA required open competitive bidding for procurement on projects of such elaborate scope. This in turn meant that the lowest evaluated bid should be selected for each procurement. The SOP number 37 of Standard Bidding Document of PPRA 2004 (see Exhibit 1) allowed amendments to the contract. However, Jasem was thinking about NAB, public scrutiny, quality of Chinese products and the contract amendment process that should be followed to accept contractor’s proposals. Other relevant PPRA rules are mentioned as follows:
44. Entry into Force of the Procurement Contract
A procurement contract shall come into force;
where no formal signing of a contract is required, from the date the notice of the acceptance of the bid or purchase order has been given to the bidder whose bid has been accepted. Such notice of acceptance or purchase order shall be issued within a reasonable time; or where the procuring agency requires signing of a written contract, from the date on which the signatures of both the procuring agency and the successful bidder are affixed to the written contract. Such affixing of signatures shall take place within a reasonable time:
Provided that where the coming into force of a contract is contingent upon fulfillment of a certain condition or conditions, the contract shall take effect from the date whereon such fulfillment takes place.
45. Closing of Contract
Except for defect liability or maintenance by the supplier or contractor, as specified in the conditions of contract, performance of the contract shall be deemed close on the issue of overall delivery certificate or taking over certificate which shall be issued within thirty days of final taking over of goods or receiving the deliverables or completion of works enabling the supplier or contractor to submit final bill and the auditors to do substantial audit.
In case of defect liability or maintenance period, defect liability certificate shall be issued within thirty days of the expiry of the said period enabling the supplier or contractor to submit the final bill. Except for unsettled claims, which shall be resolved through arbitration, the bill shall be paid within the time given in the conditions of contract, which shall not exceed sixty days to close the contract for final audit.
Moving Forward
Jasem understood that the importance of making the right decisions was immense. A number of considerations accrued from the aforementioned circumstances. Should he accept or reject the contractor’s proposal of substituting glass, elevators and escalators to the ones manufactured in China? Would this be considered a de-scoping and what were the implications of such a decision? He was also concerned if it would become a transparency issue and lead to lawsuits from other vendors and media defame. How would the NAB look at this relaxation? What should be the process of granting such a relaxation? Could the public’s money really be saved without compromising the quality? What were the risks associated with his decision?
