Monitoring Road Works Contracts and Unit Costs in Sub-Saharan

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Monitoring Road Works Contracts and Unit Costs in Sub-Saharan Powered By Docstoc
					       Tanzania Roads Fund Board
        Monitoring Road Works 
        Contracts and Unit Costs 
         in Sub-Saharan Africa 
       for Enhanced Governance
                           Cesar Queiroz
                       Consultant, former World Bank
                            Highways Adviser
                         Dar es Salaam, Tanzania
                                July 2, 2012


Construction and Maintenance Unit Costs Workshop
                    OUTLINE
n Building a new dataset of road works contracts of
     Bank-financed projects in Sub-Saharan Africa
n    Analyzing trends and key indicators
n    Examining “red flags”
n    Explaining what drives road construction costs:
     issues addressed by project implementing
     agencies
n    Enhancing accountability and attaining a higher
     degree of control of corruption in World Bank-
     financed projects in the road sector
n    Conclusions
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            A SPECIALIZED DATABASE
n 109 completed and on-          n For 13 countries in Sub-
     going road and bridge           Saharan Africa:
     works contracts             n Congo
n    76 supervision              n Democratic Republic of
     consultancy contracts for       Congo
     relevant road works         n   Ethiopia
n    Signed between 1999 and     n   Ghana
     2007                        n   Kenya
n    From 22 projects financed   n   Malawi
     by the World Bank           n   Mauritania
n    Range of works contracts:   n   Mozambique
     From US$595,518 to          n   Madagascar
     US$58,436,429               n   Nigeria
                                 n   Tanzania
                                 n   Uganda
6/18/2013
                                 n   Zambia                   3
              DATABASE: SET OF COST 
                  INDICATORS
      n Road Works Costs                 n Road Works Unit Costs
for 7-m wide, 2-lane road equivalent           in 2007 US$
          in 2007 US$/km

Rehabilitation/ Inter-   Engineer’s    Asphalt Concrete ($/m3)
Reconstruction Urban     Estimate      Portland Cement Concrete ($/m3)
                                       Base: Gravel, Crushed stone,
Upgrade to                             Bituminous ($/m3)
Paved           Urban    Contract      Subbase: Gravel, Crushed Stone ($/m3)
                         Price         Earthworks: Soft, Hard ($/m3)
Periodic                               Surface treatment: Single, Double
Maintenance     Rural    Actual        ($/m2)
                Access   Cost
Regravel


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        DATABASE: SET OF BIDDING 
              INDICATORS
n Contracts with Pre-                  n Contracts without Pre-
     qualification                        qualification

n Number of applicants for pre-        n Number of firms buying
     qualification                       bidding documents
n    Number of pre-qualified firms     n Number of bidders
n    Number of firms buying            n Number of bidders accepted
     bidding documents                   for detailed examination
n    Number of bidders
n    Number of bidders accepted
     for detailed examination
                              nBid Amounts
                n    Name and Nationalities of All Bidders

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            DATABASE: SET OF OTHER 
                 INDICATORS
                           DATES
n    Bid Opening Date
n    Contract Signing Date
n    Contract Completion Date
n    Delays in Completion of Work


            SUPERVISION CONSULTANCY
       n Names and Nationalities of Supervision Consultants
                 n Supervision Contract Amount
              n Actual Supervision Contract Amount


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        KEY STATISTICAL TRENDS
n The road sector contracting     Percentage of Contracts by Geographical Group

  of Bank-financed operations
  is characterized by a limited
  number of firms dominating
  large-scale works
n The market is split between
  African firms and mainly
  Chinese and European              Share of Contract Totals by Geographical Group

  contractors
n The largest contracts are
  generally awarded to
  international contractors, in
  particular Chinese

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   KEY TRENDS: BIDDING PATTERN
            CONTRACTS WITH PRE-QUALIFICATION

n About half of the pre-qualified firms do not bid
n The overall number of pre-qualified firms to bid for large works
     seems competitive (more than 6 firms on average). However,
     the actual participation in tenders is quite low
     Average Number of Pre-qualified Firms, Bidders, and Bidders Accepted for Detailed Examination




6/18/2013                                                                                            8
   KEY TRENDS: BIDDING PATTERN
      CONTRACTS WITHOUT PRE-QUALIFICATION

n Half or more firms buying bidding documents do not bid in the
     reviewed contracts in Mozambique, Madagascar, DRC, Zambia,
     and Malawi
     Average Number of Firms Buying Bidding Documents, Bidders, and Bidders Accepted for Detailed
     Examination, by Country




6/18/2013                                                                                           9
   KEY TRENDS: BIDDING PATTERN
 CONTRACT VALUE  AND ENGINEER’S ESTIMATE

n Several road works contract values exceed the
     engineer’s estimate by more than 30 percent

     Difference between Contract Values and Engineer’s Estimates, Averages and Ranges




6/18/2013                                                                          10
KEY TRENDS: BIDDING PATTERN
BID OPENING AND CONTRACT SIGNING DATES

n Extensions of the
     original bid validity
     period seem to be a
     norm

n Only the DRC, Congo,
     and Madagascar have
     the contracts awarded
     within the original period
     of validity of bids (90 or
     120 days in the sample)



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   KEY TRENDS: IMPLEMENTATION
                            COST OVERRUNS

n Contract cost increase during implementation is
     substantially high in some of the countries in the sample
      Cost Overruns, Averages and Ranges by Country




6/18/2013                                                        12
   KEY TRENDS: IMPLEMENTATION
                      COST OVERRUNS (cont’d)

n Cost overruns vary across the countries. The highest number of
     contracts with cost overruns is in Nigeria where almost 43 percent
     of all the reviewed contracts increased their value by more than 15
     percent. Mozambique and Ghana had cost overruns in 30 percent
     of the contracts in the sample

     Percentage of Contracts with Cost Overruns of more than 15% by Country




6/18/2013                                                                     13
   KEY TRENDS: IMPLEMENTATION
                             TIME OVERRUNS

n The delays in completion of work reaches up to a
     year and half
     Average Delay in Completion of Work in Months, by Country




6/18/2013                                                        14
 KEY TRENDS: ROAD WORKS COST 
            PER KM OF A 7-M WIDE, 2-LANE ROAD




6/18/2013                                       15
 KEY TRENDS: ROAD WORKS COST 
    PER KM OF A 7-M WIDE, 2-LANE INTER-URBAN 
                      ROAD
n A wider range of the average costs per km is observed for
     the re-gravel and periodic maintenance works; the range is
     relatively narrower for the upgrade to paved and
     rehabilitation/reconstruction works

     Cost per km of a 2-Lane Road by Type of Work for Inter-Urban Roads (2007 US$/km)




6/18/2013                                                                               16
            KEY TRENDS: UNIT COSTS
            ASPHALT CONCRETE AND PORTLAND 
             CEMENT CONCRETE (2007 US$/M3)
  n Large variations are observed in the unit costs of road
       works across the countries in the sample




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            KEY TRENDS: UNIT COSTS
             BASE AND SUBBASE (2007 US$/M3)




6/18/2013                                     18
            KEY TRENDS: UNIT COSTS
                  EARTHWORKS AND 
             SURFACE TREATMENT (2007 US$)




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     KEY STATISTICAL TRENDS BY 
GEOGRAPHICAL GROUP OF CONTRACTORS
n The African firms outperform the Chinese and European
  contractors in several indicators related to the procurement
  process but underperform in the implementation

  Statistical Averages by Geographical Groups




 6/18/2013                                                       20
            KEY TRENDS BY GEOGRAPHICAL 
              GROUP OF CONTRACTORS: 
                     COST PER KM 
n The African firms have a cost advantage over the Chinese
     and European firms in the sample, when implementing
     rehabilitation or reconstruction works or upgrading a road
     to pavement standards

     Cost per km of a 2-Lane Road Equivalent by Geographical Group and Type of Work
     (2007 US$)




6/18/2013                                                                             21
             LEADING ROAD WORKS 
                CONTRACTORS
n A Chinese contractor carried out about 19% of Bank-financed
  road works in the sample (in financial terms)
n The total value of road works contracts in the sample is about
  US$ 1.5 billion
n
     Leading Contractors by Awarded Contract Totals




6/18/2013                                                          22
      SUPERVISION CONSULTANCY 
         CONTRACTS: RATIOS
n The supervision contract amounts vary between 3%
     and13% of the respective road works contract amounts in
     the countries reviewed

     Ratio of Supervision Contract Amounts to Road Works Contract Amounts




6/18/2013                                                                   23
      SUPERVISION CONSULTANCY 
       CONTRACTS: COST PER KM
n There is a wide range between the average costs of
     supervision per kilometer of similar road works across the
     countries

     Average Cost of Supervision per km of a 2-Lane Road by Country (2007 US$)
 




6/18/2013                                                                        24
        SELECTION OF ‘RED FLAGS”
n The following is a set of “red flags” that was
    selected under the study:
n   Period between bid opening and contract signing is more than 7 months
n   Cost increases by more than 20% during implementation
n   Time overrun is more than 30% of the originally contracted period
n   Contract value is more than 20% above the Engineer’s Estimate
n   Half or more firms buying bidding documents do not bid
n   20% or more of pre-qualified firms do not bid
n   Difference between winning bid and next lowest bid is within 2%
n   Difference between contract price and read-out bid price is more than
    10%
n   Winning bid is not the lowest bid accepted for detailed examination
n   Only one or two bidders
n   Cost per km for similar works and unit road works costs are higher than
    the 75% percentile
6/18/2013                                                               25
  EXAMINATION OF ‘RED FLAGS”
n An inventory of risks was performed for each
  road works contract using a checklist of “red
  flags”
n The presence of “red flags” does not prove that
  corrupt or fraudulent practices have taken place
  in the procurement and implementation of a
  contract
n A red flag is rather a warning signal of a potential
  procurement and implementation problem that
  may justify further investigation
n Conversely, the absence of “red flags” does not
  imply that fraud or corruption did not occur
6/18/2013                                            26
            “RED FLAGS”: 
 FREQUENCY IN THE SAMPLE OF 109 CONTRACTS 
   30



   25



   20



   15



   10



    5



    0
            More than 7 month period from bid opening to contract signing
            Delay in completion more than 30% of the contract duration period
            20% or more of prequalified firms fail to bid
            Contract value more than 20% higher than estimate
            Half or more firms buying bidding documents don’t bid
            Winning bid not the lowest bid accepted for detailed examination
            Difference between contract price and read-out bid price is >10%
            Cost/km by type of work is higher than the 75th percentile
            Variation order>20%
            Less than 3 bidders
            Difference between winning bid and next lowest bid is within 2%
6/18/2013                                                                       27
              “RED FLAGS”: 
            FREQUENCY BY COUNTRY




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                  “RED FLAGS” 
       NORMALIZED BY NUMBER OF CONTRACTS IN EACH 
                       COUNTRY




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                 “RED FLAGS” 
      NORMALIZED BY NUMBER OF CONTRACTS IN EACH 
     COUNTRY AND WBI CONTROL OF CORRUPTION INDEX




6/18/2013                                          30
                    “RED FLAGS”: 
            IN THE CONTRACTS WITH COMPLAINTS 
                      RECEIVED BY INT

n The Department of Institutional Integrity (INT) received
     complaints on 14 contracts from the sample of 109 road
     works contracts (13% of total)

n The nature of complaints was mainly related to allegations
     of bidder collusion or bid rigging, paying bribes, and
     bidding irregularities

n The pattern of “red flags” in the contracts with complaints
     received by INT slightly differs from the overall pattern
     observed across all the contracts in the sample



6/18/2013                                                    31
                      “RED FLAGS”: 
            PATTERN IN THE CONTRACTS WITH 
              COMPLAINTS RECEIVED BY INT
      70%

      60%

      50%

      40%

      30%

      20%

      10%

       0%
                 20% or more of prequalified firms fail to bid
                 More than 7 month period from bid opening to contract signing
                 Cost per km by type of work/type of road higher than the 75th percentile
                 Contract Value more than 20% higher than the estimate
                 Winning bid not the lowest bid accepted for detailed examination
                 Delay in completion more than 30% of the contract duration period
                 Less than 3 bidders
                 Variation order more than 20%
                 Half or more of firms buying bidding documents fail to bid
6/18/2013                    Governance and Anti-Corruption in is within 2%
                 Difference between winning bid and next lowest bidTransport                32
                 Difference between contract price and read-out bid price is within 10%
“RED FLAGS”: ROAD WORKS UNIT COSTS
Frequency of “Red Flags” for Unit Costs in the Contracts with Complaints Received by
    INT in Comparison with other Contracts in the Sample




6/18/2013                                                                         33
SELECTED ISSUES AS ADDRESSED BY 
PROJECT IMPLEMENTING AGENCIES 
n Reasons for high bids:
n The effect of increase in prices of fuel, power, materials, and
     equipment on major cost items of contracts
n    A fixed price contract that is not subject to price adjustment
n    Supply and demand effect
n    Potential collusion by bidders
n    Inadequate prediction of major market forces by the engineer’s
     estimate
n    Perception of risks incorporated by bidders in their bid prices
     (e.g., provisions of extended contract procurement cycle time
     associated with price inflation risks)
n    Other factors (e.g., a delayed delivery of goods due to
     congestion and transport problems, the high cost of input taxes,
     political instability and insecurity)
6/18/2013                                                           34
            OTHER SELECTED ISSUES

n Reasons for low response to invitation to bid:
n Increased demand for contractors’ services
n Insecure areas in a post-conflict country (DRC)


n Reasons for cost overruns
n Global trend of rising oil prices
n Labor cost increase and impact of other regulatory measures
  (taxation)
n Unsatisfactory contractor performance
n Time lag between design and contract execution dates
n Time extensions

6/18/2013                                                       35
            RECOMMENDED ACTIONS
n The following is a set of selected recommendations geared to enhance
     accountability and attain a higher degree of control of corruption in
     Bank-financed projects in the road sector in Sub-Saharan Africa:

n Consider establishing a tighter timeframe for contract signing. A
     stricter adherence to the Bank’s procurement guidelines should be
     observed that provide for an extension of bid validity “if justified by
     exceptional circumstances” (Procurement Guidelines). A delayed bid
     evaluation process provides opportunities for corrupt practices and
     back-door negotiations.

n Allow using a selection procedure of post-qualification in bidding
     for large works instead of pre-qualification. Knowledge of other pre-
     qualified firms carries a potential risk of collusion. Also, other firms may
     choose not to bid due to a potential collusion of well-connected
     companies.

6/18/2013                                                                       36
            RECOMMENDED ACTIONS
n Create a system to monitor and assess contractors’ and
     consultants’ performance. Tracking of information on contractors and
     consultants in the road industry in the region could mitigate risks of
     misjudging on qualifications of firms as well as ensure due diligence on
     poor performers. The rankings of major contractors and consultants
     could identify strong performers who could be encouraged to bid or
     hired through direct contracting in case of emergencies.

n Strengthen the monitoring over the procurement and
     implementation processes to enhance detection of the risks to
     integrity. It is important to generate the data to increase accountability.




6/18/2013                                                                      37
                   CONCLUSIONS
n It is critical to continue collecting data on the procurement and
     implementation processes of the road sector contracts to allow
     comparison of cost trends, bidding competition, and performance
     in the road sector. A standard framework (including a template) has
     been developed within this study to provide the platform for monitoring
     and evaluation of prices, bidding data, and contractor’s information to
     help improve governance.

n Capturing costs and unit price information of road works is
     important for evaluation of the trends across countries and
     regions. Empirical evidence could be built on such indicators as price
     increases relative to the engineer’s estimates, cost increases, and key
     roads input costs to investigate the sources of increased costs and
     possible factors behind the increase in bid prices.


6/18/2013                                                                      38
                    CONCLUSIONS
n Assessing bidding behavior is essential for measuring the level of
     competition and road works activity financed by the Bank.
     Verifying the extent of competition in the bidding environment is an
     important tool for procurement decisions. Detailed bidding data could
     facilitate measuring if the procurement process is affected by collusion
     and bid rigging through detection of patterns and “red flags” in the
     structure of bids and firms.

n Measuring performance more consistently would help to address
     inefficiencies that arise in the current procurement and
     implementation practices. This would ensure that irregularities are
     properly captured in the observed trends in a specific country or area. It
     is important to link the performance measures to contractors and
     consultants as well as project implementing agencies for accountability.


6/18/2013                                                                       39
            Thank you!


6/18/2013                40
                    References
n “Monitoring Road Works Contracts and Unit Costs for
  Enhanced Governance in Sub-Saharan Africa.” World Bank
  Transport Paper No. TP-21. 2008.
  http://siteresources.worldbank.org/INTTRANSPORT/Resources/
  336291-1227561426235/5611053-1229359963828/tp_21.pdf
n “Monitoring Road Works Contracts and Unit Costs for
  Enhanced Governance in Europe and Central Asia.” World
  Bank Transport Paper No. TP-33. 2011.
  http://go.worldbank.org/9XN7FBUCD0
n “Prediction model for the cost of road rehabilitation and
  reconstruction works.” 2nd International Conference on Road
  and Rail Infrastructure, Dubrovnik, Croatia, 7-9 May 2012.
  http://www.grad.hr/cetra/ocs/index.php/cetra/cetra2012


 6/18/2013                                                41
                   Attachment

An example of a regression model to
   predict the cost of road works

  Source: “Prediction model for the cost of road
  rehabilitation and reconstruction works.” 2nd
  International Conference on Road and Rail
  Infrastructure, Dubrovnik, Croatia, 7-9 May 2012
  http://www.grad.hr/cetra/ocs/index.php/cetra/cetra2012
  Example of a regression model to
predict the cost of road rehabilitation
          and reconstruction



  Y    - the dependent variable
  Xi   - independent variables
  p    - the number of independent variables
  ε    - the residual error
  bi   - regression coefficients, and
  b0   - a constant
                 Methodology
•   Data sample covered 94 completed or on-going
    road works contracts in Europe and Central
    Asia
•   The correlation between independent variables
    was tested
•   Four diagnostic methods were used for testing
    the dataset for outliers:
•   Analyses of the (square) residuals
•   Standardized residuals
•   Cook’s distance
•   Leverage matrix
•   A backward analysis was used based on the
    removal of the variable with the highest p-value
Resulting regression models




 *p-value < 0.01, **p-value < 0.05, ***p-value < 0.1
Comparison of predicted and
    actual cost per km
    Resulting regression models
    Statistics      Model 1        Model 2
        R2           0.831          0.835
  Adjusted R2        0.803          0.807
Standard error of
                    0.2782         0.2753
  the estimate
     F value        29.506         30.258
  Sample size                 43
Cesar Queiroz
Road and Transport Infrastructure Consultant
Former World Bank Highways Adviser
Tel +1 301 755 7591
queiroz.cesar@gmail.com
Washington, DC, USA

				
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