Report No. 43188 Pakistan Infrastructure Implementation Capacity Assessment Public Disclosure Authorized (PIICA) Discussion Paper Series: Technical Note 4 BUSINESS ENVIRONMENT AND Public Disclosure Authorized COST OF DOING BUSINESS November 2007 Abid Abrar Hussain, Aized H. Mir, Amer Z. Durrani, Hasan A. Zaidi Public Disclosure Authorized South Asia Sustainable Development Unit (SASSD) Document of the World Bank BUSINESS ENVIRONMENT AND COST OF DOING BUSINESS November 2007 (SSD) South Asia Sustainable Development Unit (SASSD) Document of the World Bank Cover art credit: Aized H Mir The discussion paper series were prepared as a part of the Pakistan Infrastructure Implementation Capacity Assessment (PIICA) study and comprise of the following technical notes. Technical Note 1: Development of Construction Industry –A Literature Review Technical Note 2: Local Stakeholders’ Perception Survey Technical Note 3: Foreign Stakeholders’ Perception Survey Technical Note 4: Business Environment and Cost of Doing Business Technical Note 5: Purchase Price Review in the Infrastructure Industry Technical Note 6: A Review of Allocations and Expenditures in the Public Sector Technical Note 7: Demand – Supply Gap Analysis Technical Note 8: International Case Studies – UAE, China and Malaysia Technical Note 9: Local Case Studies Technical Note 10: Response to International and Local Bids Technical Note 11: Focus Group Discussions i Discussion Papers are published to communicate the results of the World Bank’s work to the development community with the least possible delay. The typescript manuscript of this paper therefore has not been prepared in accordance with the procedures appropriate to formally edited texts. Some sources cited in the paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the International Bank for Reconstruction and Development / The World Bank and its affiliated organizers, or those of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. ii ACKNOWLEDGEMENTS Acknowledgements are due to the World Bank core team comprising Amer Zafar Durrani (Task Team Leader), Aized H. Mir (Co Task Team Leader), Abid Abrar Hussain, Hasan Afzal Zaidi, Dr. Zafar Raja, Hiam Abbas, Huma Waheed, Ermeena Malik, Mehreen Tanvir, Nazifa Sheikh and Shaukat Javed. Asif Faiz, Cesar Augusto Querio, Fabio Galli, Giovanni Casartelli, Fang Xu, John Carter Scales, Richard Scurfield, Shahzad Sharjeel, Usman Qamar and Uzma Sadaf, are thanked for their extensive review of the PIICA report which is based on the technical notes. Mazhar Malik’s extensive inputs on tackling Human Resource issues along with a detailed review of the report are greatly appreciated. Unjela Siddiqi (M/s Media Solutions) and Huma Ajam for providing editorial support. iii GOVERNMENT FISCAL YEAR July 1 – June 30 CURRENCY EQUIVALENTS Currency Unit = Pakistan Rupee (PKR) US$ 1 = PKR60.70 (February 6, 2007) ABBREVIATIONS AND ACRONYMS AASHTO American Association of State Highway GIKU Ghulam Ishaq Khan University of Science and Transportation Officials & Technology ACI Airports Council International GoP Government of Pakistan ADB Asian Development Bank GoS Government of Sindh ADP Annual Development Program GoB Government of Balochistan AIT Asian Institute of Technology (Bangkok, HR Human Resource Thailand) APCCA All Pakistan Construction & Contractors HRDF Human Resources Development Fund Association BCA Building and Construction Authority ICB International Competitive Bidding CAA Civil Aviation Authority ICT Information and Communications Technology CAK Contractors Association in Korea IFC International Finance Corporation CAPECO The Peruvian Chamber of Construction ILO International Labor Organization CBR Central Board of Revenue IPC Interim Payment Certificate CDA Capital Development Authority JXB Jebel Ali International Airport CICA Confederation of International Contractors’ KPT Karachi Port Trust Association CIDB Construction Industry Development Board KWSB Karachi Water and Sewerage Board CIJC Construction Industry Joint Committee L/C Letter of Credit CITC Construction Industry Training Center LCB Local Competitive Bidding CITI Construction Industry Training Institute LUMS Lahore University of Management Sciences COTI Construction Official Training Institute MBA Master of Business Administration CRS Contractors’ Registry System MCA Monopoly Control Authority CWTC Construction Workers Training Center MIT Massachusetts Institute of Technology DBS Development Bank of Singapore MOC Ministry of Construction (Korea) DELFT Delft University of Technology, Holland MTDF Medium Term Development Framework DEWA Dubai Electricity and Water Authority NAB National Accountability Bureau DFCs Development Finance Companies NEPRA National Electric Power Regulatory Authority DIB Dubai Islamic Bank NESPAK National Engineering Services Pakistan (Pvt.) Ltd. DIFC Dubai International Financial Center NHA National Highway Authority DLC Dubai Logistics City NIT Notice Inviting Tender DURL Dubai Rail Link NLC National Logistic Cell EDR Engineering Development Board NPRP National Procurement Reforms Program ENR Engineering News Record NWFP North-West Frontier Province FBR Federal Board of Revenue OGRA Oil & Gas Regulatory Authority FBS Federal Bureau of Statistics P&D Planning and Development FIA Federal Investigation Agency PC-1 Planning Commission’s Performa 1 FIDIC International Federation of Consulting PEC Pakistan Engineering Council Engineers FWO Frontier Works Organization PERT/CPM Project Evaluation Review Technique/Critical Path Method PIDs Provincial Irrigation Departments SOP Security of Payment iv PKR Pakistan Rupee SPO Special Purpose Organization PPP Purchase Power Parity SSGC Sui Southern Gas Company PPRA Public Procurement Regulatory Authority TEVTA Technical Education and Vocational Training Authority PSDP Public Sector Development Program ToR Terms of Reference PTA Pakistan Telecommunication Authority UAE United Arab Emirates RFP Request for Proposal USAID United States Agency for International Development RTA Road & Transport Authority (Dubai) WAPDA Water and Power Development Authority SECP Security and Exchange Commission of WB World Bank Pakistan SNGPL Sui Northern Gas Pipelines Limited Vice President: Praful C. Patel Country Director: Yusupha B. Crookes Sector Director: Constance A. Bernard Sector Manager: Guang Z. Chen Task Team Leader: Amer Z. Durrani v Technical Note 4 BUSINESS ENVIRONMENT AND COST OF DOING BUSINESS Table of Contents OBJECTIVE................................................................................................................................................. 1 METHODOLOGY ....................................................................................................................................... 1 SUMMARY FINDINGS .............................................................................................................................. 2 BUSINESS ENVIRONMENT ........................................................................................................................... 3 Mapping of Business Processes in an Infrastructure Project ............................................................... 4 Inefficiencies in the Defined Processes Zone.................................................................................................... 4 Impediments in the Outer Processes Zone ........................................................................................................ 5 Unofficial Practices “Dark” Zone ..................................................................................................................... 6 Identified Bottlenecks in Business Processes ........................................................................................ 6 Impact of Delays on Project Cost ......................................................................................................... 7 REGULATORY ENVIRONMENT .................................................................................................................... 9 Registration and Regulation Mechanisms ............................................................................................ 9 Registration with Pakistan Engineering Council and Regulation of the Industry .............................. 10 Evaluation and Selection of Consultants and Contractors ................................................................. 11 FIDIC Contract Conditions ................................................................................................................ 12 Taxation .............................................................................................................................................. 13 Workforce and Payroll Related Contributions & Levies .................................................................... 16 Bid Bonds & Performance Guarantees............................................................................................... 17 Mobilization Advance & Retentions.................................................................................................... 18 Interim and Progress Payments.......................................................................................................... 18 Project Management........................................................................................................................... 19 Quality and Standards ........................................................................................................................ 19 RECOMMENDATIONS: REGULATORY FRAMEWORK ................................................................ 20 DOCUMENTATION..................................................................................................................................... 20 THE CLIENT ORGANIZATION AND ITS BUSINESS PROCESSES .................................................................... 21 PROJECT MANAGEMENT ........................................................................................................................... 21 vi ANNEXURE A: Participation Process For Firms In Large Infrastructure Projects.......................... 22 ANNEXURE B: Relative Time & Effort Involved In Processes Of Pre-Execution Stage .................. 23 ANNEXURE C: Evaluation Of Major Factors Involved In Inefficiency Of Processes....................... 24 ANNEXURE D: Relative Time & Effort Of Processes Involving Interface With External Agencies – During Execution Stages............................................................................................................................ 25 ANNEXURE E: Graphical Representation Of Business Processes ...................................................... 26 ANNEXURE F: Impact Of Delays On Project Cost – Water Reservoir Project................................. 27 CHARTS Chart 1: Monthly Closing Cash Balance of Contractor on Water Reservoir Project...................................... 8 BOXES Box 1: Cost of Delays in a Water Reservoir Project ...................................................................................... 8 TABLES Table 1: Taxation Rates applicable to Individuals & AOPs ......................................................................... 13 Table 2: Employee Welfare and Other Schemes .......................................................................................... 16 Table 3: Regulatory Organizations for Standards and Materials Quality .................................................... 20 vii OBJECTIVE A need to map the business processes involved in delivering infrastructure projects, in order to obtain an in depth insight into the workings of “actual real life” business environment functions, was identified in the first focus group meeting held with stakeholders as a part of the Pakistan Infrastructure Implementation Capacity Assessment (PIICA) study. The literature reviews also indicated that the business environment has a significant impact on the construction industry. The business processes, regulatory framework and other practices in the industry together contribute towards creating conducive business environments (or otherwise). Hence, as part of a series of technical analyses carried out under the infrastructure implementation capacity assessment, the mapping of the business processes, the cost of doing business and an evaluation of the regulatory framework plays a key role in validating perceptions and in separating mere perceptions from facts. Substantial delays during project completion are perceived to be the norm in the present scenario in Pakistan. It is believed that one of the major factors causing delays in project completion and consequently renders the construction sector as unattractive for competent and capable new participants is the overall complexity of the operating environment and dysfunctional external processes. In this context, external process refers to the necessary and inescapable interaction of contractors and consultants with external agencies, both government and non-government, during the life-cycle of an infrastructure project. If an infrastructure project is completed within the prescribed time, resources that constitute overall capacity for executing the project (i.e. human resources (HR), money, plant and equipment) can be freed and utilized for the next project. Any delays therefore directly impact the overall capacity as the resources remain tied-up beyond the planned duration of a project. Delays also cause an increase in direct cost of materials and other inputs that get purchased at a later stage of the project than originally planned, as the cost of these materials generally increases during the intervening period. Moreover, extended project periods involve additional fixed overheads or prolongation costs. Financial or “time cost” of money is incurred on delayed payment releases and on money invested by the contractor on plant and equipment which stays idle or is only partially utilized when delays occur. The objective of the study was to identify and ascertain the extent to which certain complex and dysfunctional business processes in fact contribute to the overall delays caused in completion of infrastructure projects. The primary focus was to understand and document the business processes relating to the life cycle of infrastructure projects, especially processes that involve an interface with external agencies. The study was further extended to assess the resultant impact of the delays caused on overall capacity, efficiency and costs of the project. METHODOLOGY The study was based on the hypothesis that amongst the factors that inhibit capacity for executing infrastructure projects in Pakistan is the existing complex business environment, in which construction contractors and consultants are expected to operate efficiently and deliver projects on time. For the study, a list of fifteen small to large construction and consulting organizations, with experience of varying scales mostly in large infrastructure projects, was drawn for obtaining information. Information was obtained through a process of confidential meetings and 1 interviews. The initial meetings with a few organizations showed that it was difficult for discussions to remain focused to specific areas relating to business processes. A questionnaire was then developed and circulated to the organizations preceding further meetings and discussions, so that subjects and issues already listed in the questionnaire could be the main focus in the subsequent discussions. Of 15 construction and consulting organizations, 9 showed some response, either in completing the questionnaire or in using the questionnaire as the basis for holding detailed and focused discussions on the issues. An understanding of the business processes, complexities residing in external interfaces (with both governmental and non-governmental agencies) and specific issues emerged. Certain complexities and issues relating to the processes and overall business environment emerged at the preliminary discussions stage, as being the main cause of delays in project completion and cost over-runs. The business processes during the life cycle of a typical infrastructure project were mapped, showing the relative time and effort involved at different stages of a project. The process mapping methodology was further refined and applied to an actual infrastructure project as a case study, in which a major execution delay had been experienced. One of the large construction organizations was contacted, on the premise that reliable data and detailed information would be readily available and accessible. The case study selected was a water sector project that was planned for completion over a two-year period but actually took six years to attain final project closure and handover. Time and cost impact was ascertained by a detailed confidential study of the records and books of the project. The case study enabled a detailed mapping of the project, through its life cycle, including the major stages where delays occurred, the business processes and related reasons that caused the delays and the overall impact of the delays on finances, in terms of direct cost overruns, additional overheads and the imputed financial costs of plant and equipment, money and time invested in the project. In addition the prevailing regulatory framework including cost and taxation structures were also researched and the implications for the growth of this industry reported in the study. SUMMARY FINDINGS The mapping shows that from the beginning construction and engineering consulting firms trying to participate in the construction sector are faced with frustratingly lengthy, complicated processes and government regulations. Complex and dysfunctional processes contribute to delays in completion of infrastructure projects. These delays in turn have an adverse impact on overall capacity, efficiency and costs. The study enabled the following: i. Documenting and visualizing high level dissected views of the different stages involved in the project life cycle, starting with the stages relating to first time entry of start-up organizations to the execution of infrastructure projects, as experienced by construction and engineering consulting organizations. Annexure A depicts the four major stages involved in the participation by contractors and consultants (both new entrants and established organizations) in infrastructure projects. It is these four stages that contain respective sets of business processes, 2 commencing with first time entry in the infrastructure projects sector and followed by continued involvement in winning and executing infrastructure projects. ii. Identifying factors and business processes at different stages, which according to established construction and consulting organizations, either make entry of new players difficult and unattractive, or constitute complex and potential choke points, causing delays in completion of projects. Annexure B depicts the relative time and effort involved in business processes that new entrants experience (one time or repeatedly) during the period that they first apply for registration up to the time that through repeated attempts (at pre-qualifying and bidding for projects) they secure a contract. Annexure C depicts some major reasons identified that prevent entry, recognition and participation of new players in the industry. Annexure D depicts the relative time and effort – during the different steps involved in the execution of a project over its life cycle – that are experienced by contractors and consultants (new or established), after a contract has been successfully won. Business Environment The study identifies areas that contain business processes and which relative to other processes in the life cycle of a project are disproportionate, or a cause of significant time delays in completion of such projects. Such disproportionate business processes that are unpredictable and vary greatly from the planned time or inputs are areas that can be the focus for selective and further analysis, process re-engineering and recommendations. Such areas can be targeted to improve the overall business and regulatory environment applicable to players and stakeholders relevant to infrastructure projects. The study indicates that the potential areas in which delays occur are many. For the new entrant, apart from the complex or inefficient business processes, there is a lack of access to complete and reliable information and absence of a single point of entry for seeking guidance. Such issues create an overall complex and dysfunctional business environment. Furthermore, there is no centralized data repository to provide reliable and updated information on ongoing projects, data on contractors and consultants involved and their performance in projects. Other than that there needs to be a system which can augment capacity and quality of such functions and processes as evaluation, selection, monitoring and regulation. The study also indicates that factors which inhibit capacity and efficiency not only reside in the external processes and procedures but also in the internal business and organizational systems and methods of construction and in consulting organizations. It is also observed that some of the internal business and organizational systems are the result of short-term government policies introduced as quick fixes or “holidays,” the long-term effect of which have emerged over time as severe gaps and inadequacies in the accounting, reporting and project management systems of construction organizations. The study identifies that corruption in the overall environment exists which over time has become embedded and is accepted as “necessary,” if a project is to be successfully won and then executed with minimum hindrances from the government. These practices cannot be called 3 business processes but are an integral and unavoidable reality of the current business environment. The study highlights: • The business processes and relative time and effort required at different steps during a project life cycle, under normal or prevailing business environment in the country. • A comparison of the relative time and effort in the given environment with the actual time and effort as experienced by contractors and consultants, highlighting the major areas and delays. These account for large variances even for time and effort which have come to be the accepted norm for planning a project in Pakistan. • That many delays are caused, not because several steps exist for completing a process, but simply due to duplication of efforts and lack of responsibility and weak regulations that cause hindrances in moving to the next step. • Stages or processes where delays are caused because of inadequate documentation, lack of pro-active project management systems and accounting methods and records. • The defined and undefined procedures that exist, many of which are not stated in contract documents, neither in project plans nor subjected to risk analysis and risk mitigation at the outset. These appear to render the best of project time lines and budgeted plans as mere estimates. Mapping of Business Processes in an Infrastructure Project The major stages, steps and activities involved in a project life cycle have been graphically illustrated in Annexure E. The illustration is based on actual data from a water reservoir project that was planned to be completed in two years but instead took six years. The analyses allowed each main project activity to be mapped and placed into three “zones” identified as the defined core processes, the outer processes and the unofficial “dark zone” processes. The illustration depicts not only the main stages involved during the life cycle of a project, but also highlights the time and relative effort as compared to the expected norms, the business processes where major delays occur and the different zones where such processes reside. Inefficiencies in the Defined Processes Zone This zone contains all such defined business processes that are expected in the project plan of any infrastructure project. The main players, client, contractor and consultant, involved in executing a project according to a realistic and agreed project plan are assumed to have a tacit understanding of various stages, steps and activities and the time that a process will realistically take to complete. Variances or delays in this zone are a direct result of inefficiencies and non- performance by one or more of the players or because, an unrealistic project plan is agreed upon. The efficiency of defined business processes depends on whether the unexpected or undefined aspects have been adequately catered for and taken into account. Efficiencies can be improved through i) direct involvement from all stakeholders by having in place a Contract Document that goes beyond the legal content and also encompasses internationally accepted best 4 practices (such as those embodied by FIDIC); ii) by providing a comprehensive business framework for a project by recognizing the role of effective and proactive Project Management and therefore, emphasizing on sound project management methods, tools, documentation and continuous monitoring so that the impact of delays on overall time to complete the project, or on additional costs (direct and indirect) are highlighted and quantified at each step of the project, rather than be the subject of attention at the major phases or milestones only; and iii) by recognizing the importance of Risk Analysis & Management, so that at the time of project planning all the players have reached consensus on risks involved, its potential impact on time and costs of the project and how the risks will be mitigated or managed. An environment that includes the above means that the Defined Processes Zone – as defined and agreed between the main players - is relatively free of unexpected or undefined aspects. Impediments in the Outer Processes Zone Projects contain elements or processes, which bring the project or its players in contact with external agencies and processes. The processes are not core to the project, cannot be fully anticipated and are generally not mentioned in the contract document. However, many of these processes are an integral part of the overall business and regulatory environment of the country, such as governmental verification and payment release audit requirements; provincial and district permissions and licenses; land acquisition; removal of encroachments and utilities; and others. Detailed project plans that are based on past experience of similar projects, or are undertaken in the same project location (province /district) provide the anticipation of such “outer processes” and external requirements. This zone provides many risks, especially for new entrants, in terms of the time delays and cost escalations that can be caused due to inadequate information and lack of prior knowledge. The following questions arise from the mapping of business processes and requirements in this zone: • Why cannot the Terms of Reference (ToR) of a project be improved so that either the information relating to the requirements (governmental laws and regulations that will need to be taken into account by the bidder) are included or alternatively the relevant sources where the information can be obtained from are identified? Without such a mechanism, can we say that an even playing field exists, when the project contains imponderables that only perhaps certain experienced stakeholders know about? • If such requirements, residing in the external processes zone form an integral part of the existing business and governmental environment, why do contract documents not state them upfront, so that these are seen as residing in the “defined core processes zone” and hence the responsibility for addressing the requirements is clearly seen as primarily that of the respective industry players? • Are there any processes (such as standard governmental audit and payment release procedures, and even internal institutional procedures), which supplant the agreed terms and specific clauses of the contract, with no regard to the main substance of a contract or the effect that these have on the undertakings committed by the contractor or consultant? Why these are not incorporated in the contract agreements? 5 Unofficial Practices “Dark” Zone This zone contains corrupt practices, which are a bane in the overall environment but over time have come to be accepted as ‘necessary’ and to be included if a project is to be won and then delivered with minimum hindrances. These practices cannot be called business processes but are an integral and unavoidable reality of the existing business environment. The zone contains unwritten procedures and fixed financial costs and charges for procedures such as; obtaining successful pre-qualification or enlisting with client organizations; for facilitation in winning a contract; for having an audit objection cleared or expedited; for obtaining timely approvals of work and release of payments; for winning the support of the local government official; for mobilizing the police to assist when needed; for requesting the Patwari1 to facilitate; and for getting customs to give a favorable ruling of the duties and taxes on imports. The options in this zone are clear. The contractor can either continue to persevere by addressing the written objections and completing the requirements until these are cleared, or pay the accepted charges and obtain an expeditious exit out of the zone. The questions, which arise relating to this zone, are: • Are these practices and related costs accepted as the ‘norm’ by the contractor because of inadequacies present in the “system,” documentation and contract administration or are they due to weaknesses on part of the contractor in complying with sound project management practices? • Are there any requirements where the burden of responsibility is being unfairly shifted on the contractor when it should actually be the client that should be responsible? Identified Bottlenecks in Business Processes Many delays are caused, not because several steps exist for completing a process, but simply due to repeated effort required to move a stage or process forward and lack of responsibility or weak regulations that cause hindrances in moving to the next step. Similarly there are several processes where delays are caused because of inadequate documentation, lack of pro-active project management systems and accounting methods and records. In addition, there are many defined and undefined procedures that reside in different zones, many of which are not stated in the contract documents, nor contained in the project plans and are not subjected to risk analysis and risk mitigation at the outset. These render the best of project time-lines and budgets irrelevant. While entry barriers are greater for new firms during start-up of operations, fulfilling pre-requisites and pre-qualification criteria, difficulties are also faced by all contractors in carrying out the project cycle activities; areas that contain business processes and which relative to other processes in the life cycle of a project are disproportionate, are a cause of significant time delays in completion of projects. Such disproportionate business processes, that are unpredictable and vary greatly from the planned time or inputs, are areas that can be the focus for selective 1 Patwari is an important official in the revenue administration. Being responsible for maintaining land revenue records, the register of mutations and the record of rights, Patwaris play an important role in compensation for land acquisitions and transfers. 6 further analysis, process re-engineering and recommendations. Some of the processes identified include land acquisition, obtaining clearances, work and progress certification, audit procedures, external agencies processes, funding and payments, cost escalations, changes and modifications, final certification, final payments, legal closure, release of performance guarantees and others. Such areas can be targeted to improve the overall business and regulatory environment applicable to stakeholders and relevant to infrastructure projects. Capacity and efficiency is inhibited by factors that not only reside in the external processes and procedures but also in the internal business and organizational systems and methods of construction and consulting organizations. Some of the internal business and organizational systems are the result of short-term government policies introduced as quick fixes or “holidays,” the long-term effect of which have emerged over time as severe gaps and inadequacies in the accounting, reporting and project management systems of construction organizations. The mapping process showed that corruption in the overall environment exists which over time has become embedded and accepted as “necessary” if a project is to be successfully won and executed with minimum hindrances from the government. Offering bribes during the project lifecycle has become institutionalized. These practices cannot be called business processes but are an integral and unavoidable reality of the current business environment. Lack of regulatory reforms, inadequate government planning, cumbersome policies and weak client agencies are responsible for the problems faced by stakeholders. One of the main impediments in the development of the construction industry appears to be the poor business environment and practices. All of these drawbacks serve to multiply the transaction costs of doing business. Impact of Delays on Project Cost The overall delay in completion of projects is an accumulation of various delays that are caused during the different stages of a project life cycle. In turn the impact of delays on the cost of the project can be viewed as consisting of: i) Additional cost of fixed overheads incurred by the contractor ii) Increase in cost of construction materials purchased at a date later than that when the materials would have been purchased when the inputs were required according to the project plan iii) Financial costs of idle plant and equipment committed to the project by the contractor iv) Opportunity cost of the contractor when resources and capacity remain tied-down to a project during the period of delays (consisting of HR, finances, plant and equipment, management) and hence, prevented him from taking up other projects v) Operating with negative cash flows and hence incurring a cost of funds arranged, or extended credit availed vi) Delays in completion of the project vii) Reduced benefits from the project to the beneficiaries Annexure F shows the detailed analysis of project cash flows and costs for the same water reservoir project for which business processes had been mapped (Refer Annexure E). The 7 timing of cash inflows, outflows and the net cash balances, and most importantly, the impact of delays in terms of additional costs such as fixed overheads, increased cost of running finances, and the effective profit or loss for the project are quite revealing. For the relatively medium sized water reservoir project (estimated cost at Rs271 million), the planned project completion time was 24 months and actual completion was achieved in 72 months. The contractor is seen to generally operate with a negative cash flow from the 12th month until the claims were settled three years after the final payment against work done. Chart 1: Monthly Closing Cash Balance of Contractor on Water Reservoir Project 30.0 - Rs Million 1 11 21 31 41 51 61 71 81 91 101 (30.0) (60.0) (90.0) Time (M onths) M onth Closing Cash Balance Estimated cost of delays is Rs86 million or 32 percent of the initial project costs (excluding lost benefits planned from the project).2 The loss to the national exchequer in the form of delayed benefits is above and beyond this figure. The contractor ended up indirectly financing the project and incurred losses of Rs19.4 million due to uncompensated costs of delays. The role of the contractor seems to have shifted from that of a provider of specialized services to that of a financier of the project Box 1: Cost of Delays in a Water Reservoir Project The analysis also helps in Contract Cost Rs (In millions) 271 raising questions, for focusing on Variations 1 the following aspects discussed in Revised Contract Cost 272 various parts of the study: Expenses incurred 265 Net Profit on books before claims - at end of project i) If the contractor is not expected after a delay of 48 months 7 to play the role of a financier, why Claims Paid (out of 100 Mil claims)30 and how does he operate with Total Revised Completion Cost 302 negative cash profiles and what is 37 Revised Net Profit on books with claims paid the impact of this on his capacity to Un compensated losses (56.5) perform, deliver on time and (19.4) Actual Profit/(Loss) to Contractor enhance his future prospects as a 358.5 Actual cost ( including uncompensated losses) contractor? 32 percent Percent increase in Project Cost on completion ii) What is the impact of advance taxes deducted at source on each payment installment (under the presumptive tax method applicable to the construction industry)? 2 Project final cost including uncompensated losses is Rs358 million (Rs271 million initial cost+Rs1 million variations+Rs30 million claims paid+Rs56.5 million uncompensated claims) 8 iii) What is the impact on cash flows and profit of retentions deducted from each payment installment and deferred for release until well after the end of the project? iv) What is the impact of costs and charges incurred by the contractor for activities falling in the “corrupt practices zone,” on the overall cost of the project? The business mapping process and the analysis of the impact of delays on project costs reinforce the conclusions that the business environment and implementing agencies role needs to be carefully evaluated and perhaps re-engineered. Regulatory Environment Registration and Regulation Mechanisms The registration, legal and taxation requirements applicable to the construction and engineering consulting industry are the same as applicable to any other registered and unregistered business. The typical costs, including legal and professional fees required for registering a new business as a registered sole proprietorship, partnership or private limited company (the latter under the Companies Ordinance) can range from Rs40,000 to Rs75,000 ($US 700 ~1200). Construction, engineering and consulting organizations in Pakistan are subjected to three types of registration, which at present, are the only form of regulation for the industry. These are; • Registration for the legal entity of the business upon its formation, followed by the requirement to submit annual/periodic reports; • Registration with the official engineering body, i.e. the PEC, requiring periodic renewal of registration • Registration with client agencies In the case of registration as a legal entity, the submission of annual/periodic returns applies only to incorporated business entities such as limited liability, public or private companies. Other registered entities, such as registered partnership, sole proprietorships do not have a requirement for annual returns. In registration with PEC, the periodic renewal plays a limited role, in so far as regulation is concerned, and registration requirements with the client agencies vary from client to client. Apart from the above, other associations which exist for the construction and consulting organizations mainly provide a forum and voice for their members, but cannot be considered as part of the regulatory framework of the construction and engineering consulting industry. Regulation of the construction and engineering consulting organizations is hence weak if not altogether absent, and in the absence of an effective regulatory body the client plays the role of a regulator to a great extent through flawed and one sided contract documents. At times, in addition to client, several other government agencies and “committees” (such as chief ministers’ inspection team) also indulge in acting as regulators. The client can, in the short to medium term and until such time as an effective overall regulatory environment develops, play its de facto role of a regulator in a more positive manner, provided that the relationship between client, “The Engineer” (consultant), and the contractor is honored as laid down in the FIDIC and PEC standard contract documents in letter and spirit. 9 Strengthening of the PEC or establishing a separate regulatory body is an option, which can be explored. In order to strengthen the role of the PEC, it may be understood that it is perhaps not the ideal body to play the role of a regulator. Consider the role of Institute of Chartered Accountants of Pakistan (ICAP). While ICAP defines the professional and ethical standards for compliance by registered members (firms and individuals), regulation is a role of the Securities & Exchange Commission of Pakistan (SECP), in terms of compliance with accepted accounting and auditing standards. The banking and insurance industries are similar, with the respective registration bodies requiring registration and compliance with professional standards but the regulatory functions being performed by the SECP. The absence of a strong regulatory environment and authority which is at par with the role and functions that Oil and Gas Regulatory Authority (OGRA), National Electric Power Regulatory Authority (NEPRA) or Pakistan Telecom Authority (PTA) play is a problem that requires priority attention. Structurally weak legal and regulatory framework acts as a deterrent for attracting qualified consultants and contractors. Legal and regulatory limitations affect the GoP’s ability to manage risk and raise capital for investment. The construction sector perhaps needs to be augmented with an independent regulatory function, responsible for quality and engineering standards. It may therefore be pertinent to consider the longer term vision and role that the PEC envisages. Registration with Pakistan Engineering Council and Regulation of the Industry The PEC is the only formally recognized legal body which plays the role of a regulator for the industry, ensuring that minimum criteria are met for initial registration of an organization (construction contractors and consultants) and those criteria are maintained to enable yearly renewal of registration. A participating construction or consulting organization is required to keep its registration with the PEC up to date. Although, the PEC is the official body for the industry, its role as a regulator is not dynamic or effective. At present, the PEC is not capable of monitoring projects and activities, their performance, adherence to professional and ethical standards or quality of construction materials used or application of technical skills on a project. There is an absence of regular reporting or verification mechanisms which should be in place for enabling such continuous monitoring3. Traditional pre-qualification processes continue to rely on information directly required for submission by the applicant and assessed as such by the evaluator (client). There is a need to rely on external information which authenticates the applicant’s information relating to involvement in current projects, such as nature and location of project, value, stage of completion of the project, senior engineers and consultants employed on the project, extent of variance from project plan and time lines, delays and reasons. Moreover, such data and information enables a better evaluation of the contractor’s or consultant’s current available or freed-up capacity for the 3 The PEC classifies contractors in various categories (value of project eligible to undertake, required average 3 years turnover) from C1 (no limit) to C6 (work up to Rs5 million). There is no mechanism to report how many projects a contractor is currently handling and smaller contractors may take on several contracts simultaneously which cumulatively exceed the limits defined for this category of registration. 10 project under consideration. It is one of the parameters for evaluating the current risks of awarding the project to the particular contractor/consultant. Such data should be treated as public information and be accessible accordingly, by residing in a public information domain. It could be updated by the client on a systematic and standardized reporting format (possibly a case for a web-based portal), and be a concept introduced as a pre-requisite for infrastructure projects. It could be taken up as a role and responsibility by an engineering association or registration regulatory body (such as the PEC). The current registration requirements are viewed by stakeholders as being cumbersome and play a protectionist role by discouraging foreign companies from operating in Pakistan.4 The PEC’s role is limited to encouraging contractors/consultants to employ qualified engineers without any effort to facilitate joint ventures or other programs aimed at transfer of technology. The exclusion of foreign firms limits competition in the Pakistani market and restricts exposure to international ‘best practices’ and to latest technology upgrades. Given these negative impacts, it was recently announced that the PEC will revise the registration requirements. The question that arises is the present and future role of the PEC. At present, it appears to be limited while the future vision can encapsulate a role and system which improves quality and value of such external and public domain data, which can be of value to a wide ranging group of stakeholders and is required for pre-qualification and technical evaluation of consultants and contractors. Evaluation and Selection of Consultants and Contractors The evaluation and award criteria for public sector projects are generally dependent on the lowest bids. Pre-qualification, based on technical criteria which have a bias towards construction and consulting organizations with previous experience (details of projects executed) and currently possessing a portfolio of projects in hand, is the norm, particularly for selection of local participants. Criteria which enable selecting a new construction or consulting organization, showing a composition of expertise, skills and experience, as an amalgam of the ownership, management and senior technical team, is largely not present or favored. Prudence and a low risk evaluation/selection approach prevail, which does not enable easy entry for new organizations, when increasing capacity of the industry is the context. For selection of consultants in the public sector projects, except those funded or assisted by international agencies, a technical/financial evaluation path which results in selection of the technically best and the lowest cost solution is seemingly followed but results in many cases of award on the basis of the lowest bid price. Similarly, contractors are awarded work almost exclusively on the basis of lowest bid. With the promulgation of the Pakistan Procurement Rules (PPR) and establishment of the Public Procurement Regulatory Authority (PPRA) 5, a significant initiative has been taken by the government for regulating procurement activities. However, considerable efforts are needed to propagate the rules throughout the industry and provide capacity building, awareness and training of all stakeholders. The rules have a potential to bring about substantial change in the procurement processes in the country if they are judiciously enforced. 4 In 2002, only 3 out of 170 professional consulting companies registered with the PEC were foreign firms. 5 PPRA has the status of an ordinance in pursuance of the Proclamation of Emergency of 14th October, 1999 and the Provisional Constitution Order No. 1 of 1999, read with the Provisional Constitution (Amendment Order No. 9 of 1999). 11 The federal government through PPRA has issued procurement rules with legal and constitutional cover for all procurements. PPRA rules provide an over arching framework for procurement of goods and services, specifically, for consulting services, these can follow donor agency or present PEC rules, depending upon their application. In the first two years since the rules were promulgated, PPRA has been focusing on creating awareness about its rules and re- drafting of procurement procedures for major departments, such as the Karachi Port Trust (KPT), Water And Power Development Authority (WAPDA), Sui Northern Gas Pipelines Limited (SNGPL), Sui Southern Gas Company (SSGC), Capital Development Authority (CDA) and National Highway Authority (NHA) in order to bring them in line with procurement rules. This is being followed up in the next phase with detailed procurement audits of selected line departments. Although, the PPRA rules are applicable to federally funded projects, the Government of Sindh (GoS) has adopted the same rules by reference for all its procurement. However, at present, a lot of work is needed to streamline procurement practices, develop institutional capacities to implement the new procurement rules and bring all procurement procedures into compliance with the PPRA rules. Hence in practice, various procurement rules and regulations are vague, often having contradictory clauses, making them not only inefficient but also impractical to apply. Ambiguous and imprecise rules allow for inconsistent and arbitrary behavior to flourish in public procurement. A lack of consistency in overall rules means higher transaction costs for consultants and contractors when doing business with the government. The regulatory framework leaves many issues unaddressed including remuneration, which is seldom adjusted creating unfavorable terms for prospective consultants and contractors and adversely impacting the quality of industry’s output. Additionally, the only criterion emphasized in the regulations available is price competition and no provision is made to ensure the quality of work being delivered. A weak regulatory system implies weak institutional capacity on part of the government to select, monitor and regulate consulting and contracting services. Institutional weakness allows corrupt practices and rent-seeking to thrive. There is no institution that is dedicated to the development of the construction industry. There is no government or professional body working on upgrading the management capabilities of contractors and consultants. The role and mandate of institutions such as the PEC should be clarified and be made devoid of conflicting agendas as both a representative of the profession and an agent of the government. FIDIC Contract Conditions Although it is generally accepted by the construction, contracting and engineering consulting industry (and also the client) that FIDIC provides the internationally accepted standard format for management of construction related contracts, this consensus exists without detailed and meaningful knowledge about the FIDIC. Interestingly, the small to medium sized construction and consulting organizations consider FIDIC far too detailed and therefore, not particularly relevant to the smaller scale projects they typically undertake. Although bid documents and contracts now frequently require that management of projects accord with FIDIC (or its modified version as recommended by the PEC), there is either complete or partial divergence from it. Frequently, the client either includes additional or modified clauses in the contract or disregards terms of the contract by invoking other requirements that are not contained in the original contract. These are typically requirements for pre payment release audits, verification by extraneous departments, verifications by independent consultants, certification, 12 etc., which dilute the value of management of contracts supposedly based on FIDIC or the adapted PEC version. As a result, there is a lack of standardized format for contracts that can be consistently adopted within the public or private sectors themselves or indeed between the public and private sectors. The client holds a proprietary view of contract formats, as much as the content, and disregards external intervention that suggests recommended or accepted best practices. Taxation The standard provisions of the Income Tax Ordinance (ITO) 2001 are applicable to construction and engineering consulting organizations. Profits from public and private limited companies are taxable at 35 percent, based on a detailed assessment of their accounts. Section 115 (4), also makes available the option of treating 6 percent tax deduction at source from payments made by clients as the final tax liability. This option bypasses the requirement for detailed scrutiny or final assessment of accounts submitted by the business entity. Previously these options applied similarly to construction organizations. However, this is no longer the case and construction companies are subjected to 6 percent deduction at source, which is treated as the final tax liability, under Section 115 – Sub section 4 of the ITO. Consulting organizations, which are limited companies or have a declared profit of more than Rs700,000 are subjected to 35percent on computed and assessed profits, based on submission of detailed tax returns. For the smaller consulting organizations, which are sole proprietorships or partnerships (referred to as Association of Persons–AOPs), tax incentives under separate provisions exist. The applicable rate of tax ranges from 7.5 percent to 35 percent, according to the profits of the entity. These are as shown in Table 1. Table 1: Taxation Rates applicable to Individuals & AOPs Profits between (Pak Rs) Applicable Rate 100,000 – 150,000 7.5% of Amount > 100,000 151,000 – 300,000 Rs3750 + 12.5% of Amount > Rs150,000 301,000 – 400,000 Rs22,500 + 20% of amount > Rs300,000 401,000 – 700,000 Rs42,500 + 25% of amount > Rs400,000 701,000 & > Rs117,500 + 35% of amount > Rs700,000 The amount computed becomes payable at the time of submission of the tax returns. Advance tax at source, at 5 percent, is also deductible from payments made to consultants. This applies to advances or payments, made against invoices. Such advance tax payments are adjusted against the tax payable to arrive at the final liability based on detailed accounts and assessment. Final assessments, to arrive at the agreed tax liability could take from one to three years, following a process of hearings, examination of documentation to substantiate revenue and expenditure, appeals and adjudication. However, with the system making a move towards a self- assessment culture, meaning that returns and taxes paid at the point of submission are to be generally accepted as the final tax liability, the processes are expected to result in early settlement of the required paperwork. The exceptions would be where the taxation authority would have direct or indirect information regarding the existence of the major inconsistencies in the reported results. Currently it is reported that the practice of frivolous objections by the income tax 13 department, long drawn out appeals and adjudication process remains a major bottleneck and a source for corrupt practices. Whether the construction contractors will be inclined to move towards a self-assessment culture is yet to be observed. There are several reasons which explain the preference of the construction industry for accepting 6 percent tax deducted at source as a final tax liability. Some major reasons include: • Submission of returns, whether based on self assessment or the previous system, requires maintaining detailed accounts based on sound accounting and book-keeping practices, which are largely lacking. • Supporting bills and invoices from suppliers of goods and services are required. It also involves reconciliation and periodic reporting (currently quarterly) of taxes deducted at source from suppliers. It entails adjusting and reporting the taxes deducted and paid over against amounts reported in the end of the year audited (or un-audited) profit & loss account & balance sheet. • The system of detailed examination (i.e. the pre self-assessment culture) created possibilities for direct interface between the tax payer and the tax inspector. The inadequate and poor accounting documents gave the tax inspector the opportunity to question the credibility and authenticity of reported revenues, expenditures, profits and the overall accuracy of the submitted accounts. The illegal costs and efforts involved in “compromising” with the tax inspector are seen as much higher and avoidable by adopting the option of 6 percent deductions at source. • Even if construction contractors wanted, in a tax environment in which documentation is largely weak, it is generally difficult for them to obtain acceptable proof of payments from a particular category of suppliers of construction materials and services. Such suppliers continue to remain effectively outside the tax net or formal reporting. Suppliers of gravel, sand, earth, clay, machinery rental, haulage are typical examples of materials and services in this category. Therefore, with the extent of expenditure that remain unsupported with proper documentation and would stand rejected from tax admissibility, the real cost of 6 percent tax on billings (or turnover) is seen by the contractor as being the same as 35 percent applicable to assessed and agreed final profits. This assumes that 10 to 12 percent is the net profit (after tax) on construction projects, as generally stated. On a project worth sales of value of Rs100, 6 percent or Rs6.00, equates with approximately 35 percent (Rs6.00) of Rs20.00, (i.e. profit before tax to arrive at the same net profit, after inadmissibility of a percentage of the expenditure). With 6 percent deduction at source, the contractor pays the amount as the final tax liability, foregoing lower cost of tax on projects that do not yield the expected profit or indeed on projects which incur a loss. No provision for carry forward of taxes deducted at source (for set- off or relief in subsequent tax years) exists. Therefore, tax, when applied in the existing environment, can be viewed as a direct cost rather than related to level of profits, or indeed to losses. For smaller construction contractors, which may fall in the lower tax brackets of 7.5 percent~30 percent of profits – the cost of 6 percent on turnover is effectively much higher. There are other taxes which have a similar impact, i.e. a direct cost of business (or cost to 14 the project). Sales Tax (ST) (the overall administration of which remains flawed and unsolved, as accepted by CBR) or taxes which the contractor is obliged to deduct at source (as the collecting agent for the Income Tax Authority) from payments to suppliers for materials and services have an effect of direct cost in the current environment. The tax of 2.5 percent to 5.0 percent is generally deducted from payments made to such suppliers of materials and services that remain outside the tax net and avoid documentation. In cases where the contractor insists on a tax invoice (rather than a plain slip of paper and receipt) the supplier requires the contractor to add on the tax (to gross up the value of invoice) before the same amount is deducted and shown as tax at source deducted on behalf of the supplier. While the contractor acts as an agent for the I.T. Authority by deducting and paying the tax on behalf of the supplier, the supplier on the other hand (wishing to remain unregistered and undocumented) does not claim adjustment of the tax so deducted. This is the reason why the amount of tax is added on the actual value of materials and services rather than being deducted from the actual value. Therefore, this is again, effectively, a direct cost of materials and services rather than the tax at source which could bring the supplier into the documented tax net; the latter being the rationale intended by the CBR. Taxes paid at the point of importation, (income tax and ST) on imported plant & machinery or construction materials also have a direct cost effect, when the option of taxes deducted at source as final tax liability is the only option applicable to the contractor. Taxes on construction contractors are therefore, working as “capacity” tax, applied through turnover and import of capacity enhancing equipment and materials, rather than a “tax on business profits”. The current budget has proposed the removal of customs duty on a new plant and machinery for the construction industry. However, other taxes payable on imports do not appear to have received any special treatment, in the context of direct cost effect of the taxes as mentioned above. In the current budget, there does not appear to be any other tax related announcement that can significantly impact the promotion or encourage the construction contracting industry. Construction contractors have for some time now gladly accepted the presumptive tax method (i.e. taxes deducted at source being treated as the final tax liability6). It provided the relief that the contractor sought, i.e. avoiding an interface with the tax department and the uncertainties it involved. However, as a result of the presumptive tax method, the business to a great extent no longer saw the need for maintaining proper accounting records. Maintaining books and accounts are the basic tools for reliable costing, sound project management, and overall efficient management of revenues, expenditure, receivables, payables and cash flows. The absence of accounting systems creates inherent disadvantages. Contractors cite the lack of facilities from banks as one of the reasons that stunts business growth and limits execution capacity, while perhaps failing to recognize that with inadequate accounting and reporting systems, banks cannot be expected to take a positive view of construction contractors and their specific business needs. Self assessment – based on documentation – is the long term recommended strategy charted by the government and the Federal Board of Revenue (FBR). A self assessment 6 For contractors tax deducted at source @ 6 percent of gross payments is the final tax liability. Other presumptive taxes are for services (consultants) 6 percent, on supply of goods 3.5 percent & Sales Tax (ST) 15 per cent. 15 environment, backed up by sound accounting practices and systems negates the very reasons that created the presumptive tax environment in the first place. It is not recommended for the construction contractors to continue under presumptive tax, when a self assessment environment is evolving, however, both options, presumptive taxation and self assessment, should be available to the construction contractor. As self assessment proves to be the better taxation option, it would propagate the need for maintaining proper accounting systems, and provide the basis for banks to focus on this sector and look at ways to provide financial and technical assistance. Workforce and Payroll Related Contributions & Levies In addition to direct and indirect taxes, calculated on the revenues and profits, or on the basis of presumptive taxes, various other employee welfare and payroll related contributions, under different schemes and related laws, also apply to construction and engineering consulting organizations as shown in Table 2. Construction contracts stipulate and suggest compliance. The extent, to which there is actual compliance by construction contractors and accordingly the cost impact, is probably minimal. Table 2: Employee Welfare and Other Schemes Name of Scheme Cost/Funding Source Applicable To Workers Welfare 2 percent of Taxable Income of the Workers of Registered Organizations Fund Enterprise earning less than Rupees 5,000 per month Education Cess Rs100 per worker, per year Workers in establishments with more 10 workers and earning below Rupees 3,000 per month Provincial Social Employers contribution, based on 7 All workers of the enterprise, falling in Security percent of the wages of workers the category of wages less than Rs5,000 (Employees Social earning less than Rs5,000 per per month Security Institution) month. Group Insurance Approximately 2-3 percent of gross All employees of the enterprise, covered wages of the enterprise for a minimum of Rs200,000 as life insurance Employees Old Age 6 percent of minimum wage of Rs Workers in establishments with 10 Benefits Institution 3,000 per month workers or more Workers Profit 5 percent of the annual profits after All employees falling in the category of Participation Fund tax of the enterprise workers of the enterprise, with a (WPPF) maximum amount of Rs5,000 to be paid to a worker 10C Bonus One month gross payroll, in case of All employees entitled to annual bonus profit being declared by enterprise equal to one month gross salary Gratuity 30 days wages for each completed All employees year of service of the employee after 6 months of regular employment to be paid by the employer at the time of end of service of the employee Many loopholes are available to the contractor. Inspection and verification methods are weak and the nuisance of local inspectors visiting the project is solved through ‘gratification payments’ for certifying that the books and returns are correct. A large part of the work force are shown on the records as part time workers or employed for a short-term by falsifying records to show intervals between employment and re-employment periods, giving an employee different names on the payroll records. The process of registration of an employee with the institutions, 16 such as with Employees Old Age Benefits Institution (EOBI), Social Security among others is carried out by the employer, with employees in this sector remaining largely unaware of their rights or of the benefits and facilities available. A difficult operating environment is created by the absence of an effective regulatory mechanism, a weak administrative capacity, prevalent corruption and a plethora of taxes besides those mentioned above, such as mining and quarrying laws, district and local government rulings and taxes, General Sales Taxes (GST),7 professional taxes and others. In such an environment costs for compliance remain undocumented to a great extent and go unrecognized by the client agencies. Because of the use of the lowest bid selection procedures, such costs are not recovered through the standard overheads and profits used by client agencies in their project estimates and consequently, the progress and quality are likely to suffer. The overall regulation of employment, wages and benefits are expected to undergo amendments and revisions, through the following, proposed improvement of conditions and benefits for employees and better compliance from employers: i). Industrial Relations Ordinance, 2002 – amendment act proposed ii). Employment and Services Conditions Act – To make amendments in current laws relating to payment of wages, minimum wages level, cost of living, child labour, conditions of work and employment iii). Occupational & Safety Health Act – To make amendments in work and safety conditions iv). Human Resources Development & Control Act v). Labour Welfare & Social Security Act – Revising laws and regulations relating to social security, workers welfare, workers’ children education, old age benefits and pensions Bid Bonds & Performance Guarantees Bid bonds of 1 percent to 2 percent, obtained from scheduled banks generally against cash collateral (unless the contractor or consultant has a portfolio of other facilities approved by the banker), is the norm. Insurance guarantees and corporate guarantees are not generally acceptable to the client with the law and prudential regulations of the State Bank of Pakistan (SBP) being cited as the reason. Performance bonds are required upon award and signing of the contract. The value assured is up to twice the contract value. While bank and insurance instruments are both available depending on the client’s preference, insurance guarantees are generally difficult to invoke in the client’s experience as these are not backed by realizable or easily convertible collateral placed by the contractor. In fact, insurance guarantees are generally based on a premium cost, of 1 to 4 percent of the total value of the bond, which also the contractor and consultant view as an unnecessary cost for an instrument which offers the client no assurance, a fact of which the client is fully aware. Standard formats for performance bonds are not being adopted. Guidance from banks and insurance companies in this area is weak, with a format from a previous instrument issued by the bank/insurance company generally being suggested, without regard to the specifics of the 7 GST is to be collected from suppliers, however in the construction industry most materials and carriage suppliers are a part of the undocumented economy, and ST becomes a direct overhead cost for the contractor. 17 project or details of the contract document. Mobilization Advance & Retentions The client retains 5 percent from payments made to the contractor. These retentions generally get stuck up with client for longer than the contract stipulates. Regulation that obliges the client to release retentions within a reasonable time is ineffective. The contractor and consultant view retention as a sizeable part of the profit which remains unfairly stuck with the client. The client generally releases mobilization advance of 10 percent of the contract value, with 6 percent tax at source also being deducted from the amount. However, the client does not strictly follow the rationale for mobilization advance. If the process for release of the mobilization takes longer than that agreed in the project plans, the client expects and insists that the contractor should start work, i.e. mobilize. As the first step of the contract relationship between contractor-clients, the contractor generally obliges and shows good faith by mobilizing. The client against a mobilization advance guarantee, issued against 100 percent cash collateral or up to 75 percent non-cash collateral pledged by the contractor provides mobilization advance. There is no interest payable by the contractor on such mobilization advances, although auditors have at times asked for recovery of profit from contactors on this account. While the client adjusts the mobilization advance against running bills and progress payments, the release of the instrument enabling the contractor to obtain timely retirement of the mobilization advance guarantee is neglected and unnecessarily delayed by the client. Interim and Progress Payments Release of payments to contractors and consultants are generally late, as clients are often under no compulsion or external pressure (through regulation) to release payments on time. Reasons that cause delay in payments made to contractors generally hinder in timely certification of work measurements and progress reports and clearance by the client’s internal audit procedures. Pre-payment audits are not clearly addressed in the contract documents, and invoked by the client under other government rules, which weakens payment clauses in the contract. In cases where payments are released against materials delivered at the project site, up to 75 percent of the interim bill is released, but the balance 25 percent remains further delayed. Reasons for the delay in payments made to consultants are generally a result of lack of acceptance by the client of deliverables, mainly relating to content of reports and outputs specified in the contract. Understanding of contract clauses that specify penalties and additional costs of delayed payments are weak and are applied with a bias. It takes a long time for basis and calculations of delayed payment claims to be processed, in most instances as long as after the project has been completed. A lack of sound project management methods and documentation which can establish clearly the trigger for a delayed payment claim, and provide the basis for clear calculations of the delayed payment claim is one of the reasons for weakness in regulation in this area. Legal processes, commencing with arbitration and escalating to the higher courts of law (a costly process) is the final recourse available to contractors. This in itself not being a time efficient 18 process is seldom resorted to by the contractor. Project Management Contracts specify that project management plans would be prepared and followed by the contractor and the client. Large projects even specify that advanced IT based project management tools (such as Primavera) are to be used and project management plans prepared using such tools. However, beyond submitting the initial project plan prepared by utilizing third party services, the project management plan is of no value. Generally, neither clients nor contractors and consultants deploy advanced project management software and IT tools as a practice. The level of expertise across the construction industry is low and the implementation considered costly. Therefore, the interface between client, contractor and consultant relies on traditional practices, mainly periodic work progress reports. The role of the consultant is mainly of a technical nature. Even when the consultant is designated as a project management consultant, the role remains biased towards technical monitoring rather than project management functions that can enable monitoring and facilitating both the client’s and contractor’s respective roles and responsibilities. Quality and Standards The laws and regulations relating to construction standards, quality of construction methods and materials are dispersed and mostly outdated. The laws and bye-laws that have been evolved by local development authorities are technically deficient in content and coverage. Construction laws and regulations, which were historically contained and inherited from pre- partition (before 1947) days of the British rule, such as those contained and regulated by Public Works Department (PWD), MES (mainly road works and buildings) and Cantonment Boards are outdated and inadequate, even if updated, in the context of infrastructure and large projects of today. An overall umbrella, under which the laws and regulation can be framed and regulated, does not appear to exist or if it does, it is non-functional. The general inadequacy of regulation of construction standards, specifications, quality (covering both methods and materials) became most apparent in any work and studies taken up as an aftermath of the 2005 earthquake. After the earthquake, there is urgency to construct and fragmented efforts have started, but an integrated approach for evolving standards and regulations covering all aspects of construction (design, construction methods, and construction materials) do not have a clear direction. An attempt to examine how new construction materials are catalogued, tested and minimum standards of the materials and its usage specified reveals that no such process exists or is regulated. Recognized materials and quality testing organizations like Pakistan Council of Scientific and Industrial Research (PCSIR) exist but are not part of an overall regulatory framework which regulates and ensures construction quality. Notwithstanding the current emphasis on quality and standards from the World Trade Organization (WTO) perspective and quality of products and services (including IT) that current government policy pronouncements indicate, some of the bodies and organizations that exist and can be viewed as possibilities for giving a direct or indirect role in regulation of construction standards and materials quality are as shown in Table 3: 19 Table 3: Regulatory Organizations for Standards and Materials Quality Organization Stated Mandate Pakistan Standards and Pakistan Standards and Quality Control Authority (PSQCA) has been Quality Control Authority established through the merger of Pakistan Standards Institute, Metal (PSQCA) Industry Research and Development Centre and National Physical and Standards Laboratory. The Ministry of Science & Technology is working closely with industry to introduce quality standards for industrial products and processes so that they meet the demands of high standards and increasing competitiveness of the global economy, especially with enhanced role of the WTO. Pakistan Standards The PSI is being provided proper infrastructure for enhancement of Institute (PSI) quality of products and services in the country and to gain the requisite comparative advantage for exports National Physical and The NPSL is responsible for maintenance of national reference standards Standards Laboratory of measurements and materials in conformity with international (NPSL) standards and their dissemination in the country. It aims to upgrade the present facilities of calibration, standardization and measurement at NPSL. Central Testing The main objective of CTL is to test government supplies and assist Laboratories (CTL) other departments in the scientific assessment of exact quality of raw materials and finished products and grade them according to national and international standards specifications. Stated Mandate Organization Pakistan National A national campaign is being undertaken to raise awareness among Accreditation Council exporters, industrialists and suppliers of services about the WTO’s (PNAC) policy and regulations. PNAC plans to organize 400 seminars/workshops and 400 training courses in all major cities in the fields of quality, environment, product certification and testing and calibration within 2 years. Industrial Analytical Industrial Analytical Centers are being established so that the industry Centers could be provided analytical facilities for their products and processes. A program for strengthening 8 laboratories of R&D organizations located in major industrial cities has been initiated. For example the H.E.J. Research Institute of Chemistry, University of Karachi. RECOMMENDATIONS: REGULATORY FRAMEWORK Documentation Construction contractors have accepted the presumptive tax method (i.e. taxes deducted at source being treated as the final tax liability) as it provided the relief that the contractor sought, i.e. avoiding an interface with the tax department and the uncertainties it involved. However, the result of the presumptive tax method, especially for the small and medium size contractor, is that over time the business no longer saw the need for maintaining proper accounting records. Maintaining books and accounts are the basic tools for reliable costing, sound project management, and overall efficient management of revenues, expenditure, receivables, payables and cash flows. The absence of accounting systems creates inherent disadvantages. Contractors cite the lack of facilities from banks as one of the reasons that stunts business growth and limits execution capacity, while perhaps failing to recognize that with inadequate accounting and reporting systems, banks cannot be expected to take a positive view of constructing contractors 20 and their specific business needs. Self assessment, based on documentation, is the long-term recommended strategy charted by the government and the Central Board of Revenue (CBR). A self assessment environment, backed by sound accounting practices and systems negates the very reasons that created the presumptive tax environment in the first place. It is not recommended for the construction contractors to continue under presumptive tax, when a self assessment environment is evolving. To the contrary, it is recommended that both options, presumptive taxation and self assessment, should be available to the construction contractor. As self assessment proves to be the better taxation option, it would propagate the need for maintaining proper accounting systems, and provide the basis for banks to focus on this sector and look at ways to provide financial and technical assistance. The Client Organization and its Business Processes In the current environment the client plays the role of a regulator. It is also perhaps the client that can, in the short to medium term and until such time that an effective overall regulatory environment develops, play its de facto role of a regulator in a more positive manner, provided that the relationship between client, “the engineer” (consultant), and the contractor is honored as laid down in the FIDIC contract documents in letter and spirit. The client’s working methods and practices do not provide for an environment, which enables management and accountability, where the client itself is the direct cause of delays in project execution. The reasons, as cited in this report are many, some of them more complex than simple solutions can address. However, the fact that individuals, sections, departments and the client organization as a whole, are not equipped with even simple mechanisms which can highlight a delay caused at the client’s end, when a process takes too long or stops completely, is an area which can be addressed. It is recommended that a pilot project in a typical client environment is taken up to demonstrate the merit of basic work and process flow systems. The objectives of such a pilot project should be to create the awareness and merits of workflow and document management systems. It should aim to highlight the advantages of IT systems available today, which enable tasks and processes to be administratively managed and followed up efficiently. Project Management The current environment clearly lacks project management methods, tools and best practices. Beyond the initial project plan that is submitted as part of the contract requirements, there is no mechanism which ensures a common interface for the client, contractor and consultant. Project management methods and tools entail utilizing the advantages of IT and project management software such as Primavera or Microsoft Project Enterprise in a manner which enables the client, contractor and consultant to interface and provide their respective updates. Best practices involve recognizing the role of the project management consultant, as distinct from the role of the engineering consultant that currently plays the role in the void that exists. 21 Annexure A: Participation Process for Firms in Large Infrastructure Projects The following diagram depicts the major stages involved in the participation process of large infrastructure projects, for new engineering/construction or consulting organizations. Figure 1: Major stages involved in participation of large infrastructure projects 2. RECOGNITION & 3. WINNING 4. EXECUTING 1. PRE- CONTRACTS CONTRACTS PREQUALIFICATION REQUISITES TO • Introduction & • Tender Participation • Mobilization START Recognition • Import of Machinery • Business • Arranging Bid Bonds • Profile • Site Access & Registration Development Handover • Permissions • Tax • Listing • Arranging granted by Registration Performance Bonds External Agencies • Work required by • Professional • Pre-qualifying • Finalizing Contracts External Agencies Registrations • Certifications • Business • Payment Releases Body Dependencies: Dependencies: Registrations • Client Dependencies: • Client • Funding Agencies • Client • Consultants Dependencies: • Funding Agency • Customs / CBR Consultants • Banks • Lawyers & • District Governments • State Bank Accountants • Own Capacity • Provincial • GOP Governments • Own efforts • Consultants • Registration Bodies New Organizations Established & Recognized Organizations • For a newly formed organization, all 4 stages apply and at the initial stage processes 1 and 2 apply repeatedly until the organization becomes successful in being recognized and pre-qualified for the first time. • For an established entrant, i.e. one that is already participating in projects locally – stages 2 to 4 apply frequently. 22 2.0 1. Legal Formalities to Register Business 1.5 2. Registrations with Trade & Professional Bodies 2.0 3. Registration with Taxation Authorities .5 4. Selecting & Locating Principal place of Business 10 percent Annexure B: 5. Obtaining Telephone, Electricity, Gas Connections 1.5 1.0 6. Setting up Office & Work Environment 1. PRE-REQUISITES TO START 1.0 7. Initial Mobility & Communication 9.0 1. Introducing the Organization & Seeking Recognition 3.0 2. Developing Marketing oriented Materials & Brochures 5.0 3. Getting listed with the Client Organization 23 4.0 4. Teaming up with existing players as an organization 40 percent 6.0 5. Getting support from Funding Agencies 7.0 6. Participating to Pre-qualify & obtaining feedback 2. RECOGNITION & PREQUALIFICATION 6.0 7. Pre-qualification based on composite skills (Mainly applying to New Entrants and Small Sized Firms) 1. Preparing Tender Responses 10.0 3.0 2. Arranging Bid Bonds 3. Negotiating Revised Terms , Specifications & Scope Relative Time & Effort involved In Processes of Pre-Execution Stage 50 percent 4. Finalizing Contracts 15.0 15.0 3. WINNING CONTRACTS 7.0 5. Release of Bid Bonds – Weak Intensive Governance in Client Organizations – Weak A. General Information and SLOW PROCESSES Facilitation – Inadequate B. Time & Repeated Efforts – C. Corporate Responsibility & D. Rules & Regulation – Weak FACTORS RESPONSIBLE FOR E. Skills of Bidding Organizations 1 Legal Formalities to Register Business 2 Registrations with Trade & Professional Bodies 3 Registration with Taxation Authorities 4 b b b b Selecting & Locating Principal place of Business START 5 b b b b b Obtaining Telephone, Electricity, Gas Connections 24 6 Setting up Office & Work Environment 1. PRE-REQUISITES TO 7 Initial Mobility & Communication 1 Introducing the Organization & Seeking Recognition 2 b b b b Developing Marketing oriented Materials & Brochures 3 b b b Getting listed with the Client Organization 4 b Teaming up with existing players as an organization 5 b b b b Getting support from Funding Agencies 6 2. RECOGNITION & PREQUALIFICATION b b Participating to Pre-qualify & obtaining feedback 7 (from Pre-requisites to Starting a Business to Winning Contracts) b b Pre-qualification based on composite skills 1 b Preparing Tender Responses Annexure C: Evaluation of Major Factors Involved In Inefficiency of Processes 2 Arranging Bid Bonds 3 Negotiating Revised Terms , Specifications & Scope 4 3. WINNING CONTRACTS Finalizing Contracts 5 b b b b b b b Release of Bid Bonds 1. Arranging Performance Bonds from Banks 2 2. Agreeing on harmonized Project Management systems & methods 3 3. Arranging Mobilization Advance Guarantees 2 Annexure D: 4. Importing Plant and Project Execution Machinery & Equipment 3 5. Obtaining Possession & Physical Access to Project Site 5 6. Approvals & Permissions from Local & Provincial Governments 3 7. Negotiating and obtaining consent of local license and right holders 3 8. Inter District Movement of Natural Physical Resources 6 9. Compliance with GOP Audit Procedures applied by Client 5 10. Work Progress Measurement & Certification by Client & Consultants 4 11. Completion of Work by External Agencies (WAPDA/PTCL/SNGPL) 5 25 12. Release of Payments 5 100 percent 13. Obtaining time extensions for delays due to factors not caused by Contractor 5 14. Obtaining Cost Escalations for factors cited in Contract 4 15. Final Completion Certification 4 16. Agreement on Changes and Modifications 3 Agencies – during Execution Stages 17. Handover to Client 4 18. Release of Final Payments 4 19. Warranty Terms Interpretation & Disputes Resolution 5 20. Arbitration and Conflicts Resolution 6 21. Closure 6 22. Legal Issues & Litigation Procedures 7 Relative Time & Effort of Processes involving Interface with External 23. Release of Performance Guarantees 7 Annexure E: Graphical Representation of Business Processes ANNEX E: GRAPHICAL REPRESENTATION OF BUSINESS PROCESSES (Established Firms) START UP PRE-REQUISITES & PREQUALIFICATION EXECUTING PROJECTS KEY Registering with Trade & Obtaining Possession to Completion Cretification Releasing Bid Bonds on Locating & Establishing Participating in Tenders Release of Performance Participating to get pre- Arranging Performance Obtaining Mobilisation Obtaining Government GOP Audit Procedures Registering with Tax & Forming & Registering Arbitration & Conflicts Recognition & Listing Compliancenace with Agency Permissions Finalising Contracts Professional Bodies Release of Progress the Business Entity Handover to Client Residents & Right Arranging Plant & Legal & Litigation Warranty Delivery Principal Place of unsuccesful Bids Consent of Local Work by External Work & Progress Cost Escalations with Client Orgs. Time Extensions Release of Final Communication Project Closure Modifications Other Deptts. Certification Project Site Changes & Resolution Machinery Guarantee Mobility & Payments Payments Business Agencies Advance qualifies Holders Closure Bonds Main Process Flow Players & Stakeholders Chtd.Acctts. PEC Tax Deptt Premises Vehicles WAPDA Client Client Client Client Banks Client Customs Local Auth Distt Govt Residents Client Client Client Client Client Client Client Client Client Client Client Client Client Client Client Main Processes Lawyers Ch. of Comm EOBI/SocSec Set up Access NHA Consultant Client Gov.Treasury CBR Land Rev.Deptt Prov Govt Police/Patwari Consultant Consultant WAPDA/PTCL/ Consultant Consultant Consultant Consultant Consultant Consultant Consultant Consultant Consultant Consultant Consultant Consultant Independent Processes CLA /SEC Associations Accountants Elec & Gas Lawyers Bank Banks Politician SNGPL/etc. Main Requirements Distt Courts Lawyers Telephone Introductory Bid Bonds Project Plan Cash Collateral Cash Collateral Presentations Bids Prep Contract Doc Bond Format Guarantee SROs Progress Report GOP Rules GOP Audit Warranty Terms Negotiations Rented Mach. Measurement Bk. & Scope Pre-Reqs Execution Relative Time & Effort - Normal % 100 100 2.0 1.5 2.0 2.5 1.0 17.0 17.0 13.0 7.0 37.0 4.0 3.0 3.0 7.0 3.0 6.0 4.0 5.0 5.0 5.0 5.0 4.0 4.0 3.0 4.0 4.0 5.0 6.0 6.0 7.0 7.0 Variance as a %age of Normal % - - - - - - - - - - - - - 300% 300% 500% 300% 400% 300% 300% 200% 500% 500% 500% 400% 600% 400% 300% 400% 600% 300% Relative Time & Effort - Experienced 100 371 2.0 1.5 2.0 2.5 1.0 17.0 17.0 13.0 7.0 37.0 4.0 3.0 12.0 21.0 9.0 30.0 12.0 20.0 15.0 15.0 10.0 20.0 20.0 15.0 16.0 24.0 20.0 18.0 24.0 42.0 21.0 DEFINED CORE PROCESSES ZONE 1. Lack of Centralised Information 1.Repetitive 1.Repetitive 1.Repetitive Repeated Efforts & Coercive Continuous Poor Project Poor Project 2.Experience Corrupt Practices Methods FollowUp Mngmnt & Mngmnt & Documents Documents Interaction (Initial & Continuous Followup) Documentation (Application & Support Info) Verification (Physical, Approvals) Correspondence (Additional Info. Follow up, etc.) OUTER PROCESSES ZONE External Verification (PPRA) Government Procedures (GOP Audit) Local Government Procedures (Distt. Gov.) UNOFFICIAL PROCESSES "Dark Zone" Corruption (Fixed Methods & Commissions) Enforcement (Distt, Local Auth, Police, Patwari) 26 Annexure F: Impact of Delays on Project Cost – Water Reservoir Project ANNEX F: IMPACT OF DELAYS ON PROJECT COST - WATER RESERVOIR PROJECT Release of Final Payments Obtaining Time Extension Handover of Project Site Release of Delay Claims Arranging Performance Owners & Rightholders Release of Mobilisation Obtaining Approvals of Work Progress Stage 1 Work Progress Stage 2 Work Progress Stage 3 Work Progress Stage 4 Negotiating with Local Escalation Agreement Release of Payment 1 Release of Payment 2 Release of Payment 3 Release of Payment 4 Obtaining Delay Cost Local Gov.& Deptts Obtaining Physical Handover to Client Finalising Project Final Completion Posssion of Site Worm Progress Work Progress Work Progress Work Progress Certification 1 Certification 2 Certification 3 Certification 4 Certification Acceptance Schedule Advance Bond Activities Months 1 1 1 2 2 2 3 4 6 7 9 10 11 13 14 15 16 16 18 19 20 21 22 23 24 Project Value 271,000,000 Delay factor - months 0 0 2 12 6 0 3 3 0 2 4 0 2 3 8 0 2 2 6 7 10 36 Planned Duration 24 Months Executed Duration 72 Months Capital Inputs A. CASH OUTFLOWS Plant & Machinery 25,000,000 25,000,000 6,000,000 12,000,000 7,000,000 Site Buildings 200,000 200,000 200,000 Motor Vehicles 2,500,000 2,500,000 1,500,000 1,000,000 Computer & Office 200,000 200,000 200,000 Equipment Performance 500,000 500,000 500,000 Guarantees 28,400,000 28,400,000 Direct Materials 150,000,000 150,000,000 20,000,000 10,000,000 10,000,000 10,000,000 30,000,000 5,000,000 5,000,000 5,000,000 20,000,000 5,000,000 5,000,000 15,000,000 10,000,000 Cement, Sand, Steel. Clay, Steel Piping Direct Overheads 50,000,000 50,000,000 100,000 300,000 700,000 2,500,000 1,500,000 1,500,000 3,500,000 2,500,000 3,500,000 4,500,000 5,500,000 5,000,000 3,000,000 4,500,000 3,500,000 3,000,000 3,000,000 1,000,000 500,000 200,000 200,000 Salaries, Wages, Labour. POL, Haulage, Plant Rental Fixed Overheads 10,000,000 10,000,000 100,000 100,000 100,000 200,000 200,000 200,000 300,000 300,000 300,000 500,000 500,000 500,000 800,000 800,000 800,000 800,000 600,000 600,000 600,000 500,000 500,000 500,000 200,000 Rent, Admin Salaries, Utilities, Project Cost 238,400,000 238,400,000 500,000 6,200,000 1,700,000 300,000 100,000 20,500,000 1,900,000 12,700,000 11,800,000 11,800,000 45,800,000 8,000,000 9,000,000 10,000,000 33,300,000 10,800,000 8,800,000 20,300,000 14,100,000 3,600,000 3,600,000 1,500,000 1,000,000 700,000 400,000 Dark Zone - 6,719,000 - 675,000 - - - - - 100,000 - 300,000 - - 200,000 600,000 1,000,000 1,000,000 - - - 100,000 - - - 1,600,000 1,144,000 Corruption Expenses Tax Deducted at 19,752,000 - 1,620,000 - - - - - 300,000 - 900,000 - - 600,000 1,800,000 3,000,000 3,000,000 - - - 300,000 - - - 4,800,000 3,432,000 Source (Final Total Project Cost 264,871,000 500,000 8,495,000 1,700,000 300,000 100,000 20,500,000 1,900,000 13,100,000 11,800,000 13,000,000 45,800,000 8,000,000 9,800,000 12,400,000 37,300,000 14,800,000 8,800,000 20,300,000 14,100,000 4,000,000 3,600,000 1,500,000 1,000,000 7,100,000 4,976,000 B. PROJECT CASH INFLOWS Mobilisation Advance @ 10% 27,000,000 27,000,000 Progress Payments1 5,000,000 5,000,000 2 5,000,000 5,000,000 3 10,000,000 10,000,000 4 10,000,000 10,000,000 5 30,000,000 30,000,000 6 50,000,000 50,000,000 7 50,000,000 50,000,000 8 50,000,000 50,000,000 9 5,000,000 5,000,000 Final Payment 10 30,000,000 30,000,000 Release of Retentions Project Claims paid (Claim Rs. 100 M) 30,000,000 30,000,000 302,000,000 - 27,000,000 - - - - - 5,000,000 - 15,000,000 - - 10,000,000 30,000,000 50,000,000 50,000,000 - - - 5,000,000 - - - 80,000,000 30,000,000 LESS: Deductions Retentions & Other Deductions - (2,700,000) (500,000) (1,500,000) (1,000,000) (3,000,000) (5,000,000) (5,000,000) (500,000) (8,000,000) 27,200,000 - - (2,700,000) - - - - - (500,000) - (1,500,000) - - (1,000,000) (3,000,000) (5,000,000) (5,000,000) - - - (500,000) - - - (8,000,000) 27,200,000 CASH BOOK Cash Inflows 302,000,000 - 24,300,000 - - - - - 4,500,000 - 13,500,000 - - 9,000,000 27,000,000 45,000,000 45,000,000 - - - 4,500,000 - - - 72,000,000 57,200,000 Net Cash Inflows (500,000) 15,805,000 (1,700,000) (300,000) (100,000) (20,500,000) (1,900,000) (8,600,000) (11,800,000) 500,000 (45,800,000) (8,000,000) (800,000) 14,600,000 7,700,000 30,200,000 (8,800,000) (20,300,000) (14,100,000) 500,000 (3,600,000) (1,500,000) (1,000,000) 64,900,000 52,224,000 Month Opening Cash Balance - (500,000) 15,305,000 13,605,000 13,305,000 13,205,000 (7,295,000) (9,195,000) (17,795,000) (29,595,000) (29,095,000) (74,895,000) (82,895,000) (83,695,000) (69,095,000) (61,395,000) (31,195,000) (39,995,000) (60,295,000) (74,395,000) (73,895,000) (77,495,000) (78,995,000) (79,995,000) (15,095,000) Month Closing Cash Balance (500,000) 15,305,000 13,605,000 13,305,000 13,205,000 (7,295,000) (9,195,000) (17,795,000) (29,595,000) (29,095,000) (74,895,000) (82,895,000) (83,695,000) (69,095,000) (61,395,000) (31,195,000) (39,995,000) (60,295,000) (74,395,000) (73,895,000) (77,495,000) (78,995,000) (79,995,000) (15,095,000) 37,129,000 UNCOMPENSATED ADDITIONAL COSTS OF DELAYS 1. Avg fixed overheads, during sl ow down, 150,000/month for 48 months (7,200,000) 2. Delayed major procurements @ 10%/annum (2,000,000) (6,000,000) (5,000,000) (5,625,000) 3. Fiinancing costs on capital invested (@10%/annum) (4,167) - - - - (60,792) (76,625) (148,292) (246,625) (242,458) (624,125) (690,792) (697,458) (575,792) (511,625) (259,958) (333,292) (502,458) (619,958) (615,792) (645,792) (658,292) (666,625) (125,792) - 4. Opportunity costs machinery & equipment (@ 20%/annum for 32 months) (13,333,333) 5. PV of delayed project claims - released 3 yrs after project close (9,000,000) (4,167) - - - - (2,060,792) (76,625) (148,292) (246,625) (242,458) (6,624,125) (690,792) (697,458) (575,792) (5,511,625) (259,958) (333,292) (6,127,458) (619,958) (615,792) (645,792) (658,292) (666,625) (125,792) (29,533,333) TOTAL FINANCIAL COST OF DELAYS (56,465,042) LOSS ON PROJECT (19,336,042) 27 Abid Abrar Hussain, Amer Zafar Durrani, Aized H. Mir, Hasan Afzal Zaidi, Dr. Zafar Raja, Hiam Abbas, Huma Waheed, Ermeena Malik, Mehreen Tanvir, Nazifa Sheikh, Shaukat Javed, Unjela Siddiqi, Huma Ajam and all Stakeholders who participated in this study