Background of Vinnadornic

Vinnadornic is a developing country in southern Europe with a population approximately 17 million. Thus, development is one of the most important tasks to be carried out by the government to ensure the wellbeing of its residents while procurement is an important aspect in engaging contractors in delivering the development projects. Each year, the Vinnadornic government spends more than RM100 billion in procuring goods, services and works. This amount is equivalent to almost one-fourth of the country nominal gross domestic product (GDP). Therefore, an official procurement system had been established by the Vinnadornic government to enable an effective, efficient and transparent procurement process. To a certain extent, this system conforms to the international standards. However, over the years, the Auditor General Reports by the Auditor General of Vinnadornic kept highlighting issues on procurement such as purchases made above the market price, under-utilizing the official procurement system and substandard materials were bought. The procurement for construction, or known as procurement for work in Vinnadornic, was handled by the Public Construction Department (PCD).

PCD was established in Vinnadornic in 1949. This department is responsible for the construction and maintenance of the public infrastructures in Vinnadornic such as main roads, bus stops and railways. For more than 50 years, PCD has been involved in many aspects of nation building by providing necessary infrastructures such as highways and water supplysystems. Its functions are to plan the development of the federal road networks nationwide, coordinate and monitor the implementation of the federal road projects and other projects, as well as to regulate the privatized maintenance work for federal roads which are highly used by the public. In short, its main goal is to ensure that the road system/network in the country is efficient, comfortable, safe to use, easily accessed and subsequently contribute to the nation's economic growth.

Construction of the Broomhill Highway from Drumraighland, a small city in Vinnadornic, and upgrading the highway from Drumraighland to Moss Side, Silverbridge, is a project under the Tyrone Plans with the government's intention to shorten the driving distance from Drumraighland with a ceiling cost of Ringgit Malaysia (RM) 170 million. The project's objective is to overcome the traffic overcrowding in Tuffaild, Port Hill, which is the capital city of Vinnadornic, which tends to be overcrowded during festive seasons and school holidays as Port Hill is a major tourist centre. In addition, local residents use the same path to Krocs and Moss Side due to the non-existence of alternative roads. PCD under the Ministry of Works (MOW) of Vinnadornic was appointed as the implementing agency of this project whereby it would engage contractors through an open tender system.

Efficiency and quality of work are of the utmost importance for PCD. The project had started in early March 2006 and it was estimated to be completed by end of June 2008 (two years four months) in conjunction with Vinnadornic's Independence Day. The contract was signed within the stipulated time, advance payment was in order and the performance bond had complied with the terms of the contract. The construction had also started on time and everything went smoothly for the first six months. This was a highly anticipated project as it would ease the travelling time within the cities.

Tender procurement system

Before the construction of the Broomhill Highway Project which started in March 2006, no tender was opened to local contractors even though the project costed more than RM500,000. GEC was selected by PCD as the contractor of the project through direct negotiation. According to the tender procurement system in Vinnadornic, if a project costs more than RM500,000, an open tender is needed, whereby the ministry or department in charge of the particular assignment needs to first prepare the tender specifications with the help of the Quantity Survey Committee, who would prepare the bill of quantity that states the quantities of items or materials needed to carry out a construction according to the project's specifications. Only then the ministry or department is able to advertise and sell the tender documents to the contractors that fulfil the local registration requirements to bid for the project.

After all the tenders are collected within the specified time, the Tender Management Committee will open and schedule those tenders and prepare a schedule of the prices quotedas well. To preserve objectivity and transparency, all tenders are accorded a serial number and the name of bidders are omitted. Both the Quantity Survey and the Financial Assessment Committees then evaluate, rank and apply predetermined weightages to the tenders for final evaluation. This tender evaluation report is passed to PCD for consideration and selection purposes. Since Broomhill Highway Project's value is more than RM100 million, the tender should have been sent to the Ministry of Finance (MOF) for final decision, as it involves a huge sum of money.

Apart from that, Vinnadornic's procurement system consists of an e-procurement system that eases the transactions between suppliers or contractors and the various government agencies through one single platform. Vinnadornic's e-procurement modules include supplier registration, central and ministry contracts, direct purchases, quotations, tenders and e-bidding. This system has successfully improved the communication between the government and contractors as both parties can contact each other anytime and anywhere without limitations.

Supposedly, before GEC could be selected as the contractor for this project, PCD needed to ensure that GEC had registered itself through the e-procurement system. Not only that, PCD must also open its tenders and carry out e-bidding through the system to select the most suitable and qualified contractor. However, the use of the system was ignored at that time and the head of PCD had directly negotiated with the directors of GE. Thus, no comparisons with other contractors were made throughout the selection process. Later on, it was found out that GEC was not registered in the system and the director is actually kin to the head of PCD. The whole project was handled by the head of PCD himself without referring to MOF for the approval of GEC to become the contractor.

Construction process

During the construction of the Broomhill Highway, poor planning and monitoring by PCD on the construction had caused delay of more than five years where the initial plan was completion within two years and four months, but this project was only completed over nine years with a total of seven extensions of time (EOT) given to GEC. This delay had directly increased the construction cost. The actual cost for this project was only V$123 million but the cost increased by approximately another RM234 million.

Nevertheless, PCD Director Sir Bruno Kenns stated during an open interview:

'Previously, the initial cost for this project was RM123 million. The main reason that had caused the cost to increase was the time delay. We tried to urge the contractor to finish the project as soon as possible but the delay in this project was due to land acquisition, delays in the transfer of utility work and bad weather conditions. Another cause would be the increase of the price of raw materials as it used high quality material from Jungamon. All these were out of the contractor's control and thus it could not finish the project on time. We have given the contractor extra time to complete the project. Hopefully it can be done in another 12 months.'

He had further stated that the slope damage at the construction site had affected the construction of drainage and the laying of the subbase and road base layers, causing the process unable to be implemented according to the original design table. GEC had spent extra time redesigning the highway to ensure it was safe for road users. Besides, the construction site was prone to landslides and floods, so heavy rains had disrupted the road construction work, especially work on the premix which could only be carried out when the road surface was completely dry. Additional works were required to repair an existing bridge which would be connected to the new highway because of the wear and tear that was discovered during on-site inspections.

Vinnadornic's annual Audit Report stated:

"There is a delay in land acquisition for the project, including land acquisition No 456 (Thoray Junction). The delay in land acquisition started from EOT No 10 to EOT No 15 and the paperwork was approved only after three months"

Due to the delay, PCD needed to analyse the project again to prevent the cost from increasing and there had been words flying around, asking PCD to change the contractor. The country's opposition had used this delay to attack the government and asked the director of PCD to step down due incompetency. Somehow, the Opposition had also found out that GEC got the job through direct negotiation instead of going through the e-bid. It had created chaos in Vinnadornic and the people started to lose hope that the new highway would ever be completed. Rallies had been held explanation asking Sir Bruno to step down from his position and provide a through explanation to the citizens as the taxpayers were not satisfied with the government.

Sir Bruno had a press conference to clarify the issue:

The direct negotiation was done because this is a very costly project and the open tender would only consume more time. When we have too many options, we would not be able to make an excellent choice. GEC has built a few infrastructures in Vinnadornic and it also has some buildings overseas, I have faith in GEC to complete this highway project. Please do not listen to stupid allegations about this project. The Auditor General had also clarified the delay was the land acquisition matter. If GEC is proven to be not up to par, I will personally terminate its contract in this project.

Reappointment of the same contractor

As GEC had failed to complete the project on time by 2008, one notice had been issued by PCD to terminate GEC from continuing the project. After two years, it had only completed approximately 44.6% of the construction. PCD had also sued GEC for its failure to complete the project on time and demanded for a compensation of RM70 million. The termination and lawsuit had impacted GEC and its share price had dropped tremendously. GEC wanted to secure the project, so it made an appeal to continue the contract and pursue the remaining works since it had already purchased all the necessary raw materials. However, the appeal was rejected by MOF. PCD's Consulting Committee issued a list of 12 contractors registered in the e-procurement system to be picked as the new contractor. Surprisingly, the PCD's Consulting Committee's decision to select a contractor from those candidates was cancelled after it received a letter saying that GEC's appeal to continue with the project had been approved.

One of the PCD staff said the reappointment of GEC was unfair. It should be removed and blacklisted from this project since it had already breached the contract. However, the director of PCD mentioned that the decision to retain the previous contractor was to prevent more delays and to complete the project quickly, and since GEC had already bought most of the raw materials, it would be able to complete the project faster this time around. Also, the process of finding a new contractor would be time consuming due to complicated procedures and procurement practices.

Besides, if the project were to be given to another contractor, the new contract price would increase according to the market rate. After much consideration, it was decided that the best option was to return the project to GEC as it was more cost effective. Once again, this had enraged the citizens. To quote the netizens on Facebook:

"How can the government approve the appeal from GEC? Is it stupid? It's already been proven that the company isn't doing a good job and yet it still wants to reappoint this company. I guess I don't have any chance of using the highway."

"How can it be cost effective when the project has been delayed for so long? The additional cost is just going to be the same as the current market rate. The government is just beating around the bush and I'm sure it has something to do with GEC. The termination is just part of an act. Let's see how long they can continue this act."

The director of GEC said that he was thankful to the government for giving GEC a second chance. He promised that he would deliver the project on time this round. He said there were some misunderstandings previously and that this time, he would visit the construction site more often to ensure that there were no delays. GEC would also hire morelabourers to work at the construction site. Everything seemed to be quite promising when GEC continued to construct the highway. The project was estimated to be completed in another 15 months' time which would be in 2011.

Coincidentally, in 2011, there was an economic crisis in Vinnadornic, thus GEC had to stop the construction and the date of completion was delayed again. Up until 2013, there was not much progress at the construction site. The finance minister was agitated by this so he fired the director of PCD and terminated the contract with GEC immediately.

An interview was done with the director of GEC, Mr Evans.

Journalist: Mr Evans, what is your view on the termination of the contract?

Mr Evans: Since the government is going to terminate the contract once again, we cannot make any appeal as it is the instruction from MOF. It is a waste that we cannot collaborate with the government anymore.

Journalist: The termination is due to the failure of your company to complete the project after so long. A second chance was given to you as well.

Mr Evans: Of course, the public is going to blame us for delaying the project. I understand that it has been quite some time, but the construction is not as easy as you think. A lot of difficulties occurred when we tried to speed up the work. First of all, that area is not suitable for building a highway due to the terrain. Then, the approval of certain items from PCD is rather slow. I do not want to comment much.

Journalist: Do you know that SWD will be taking over this project? Also, the government will be suing you and it is demanding a compensation of RM210 million. Do you think it is reasonable for the government to do so?

Mr Evans: Yes, I am aware that SWD will be taking over the project. I wish them luck collaborating with the government. It is not easy to do so. As for the amount of compensation, I have no comment. I will wait for the letter from the court and the decision from the judge. That's all. Thank you.

GEC was removed from the project with the work progress of only 58.4% after seven years. The government also sued GEC for breach of contract and it demanded RM210 million in compensation. Further investigation would also be carried out by the Auditor General on this matter. The compensation amount would then be used to fund the remainder of the project. The new PCD director had appointed a new contractor according to the procurement procedure. Silver West Development (SWD) was appointed on 27 March 2014 as the new contractor for the project.

The government had won the lawsuit and GEC was declared bankrupt after paying the compensation. The investigation had also disclosed that the former director of PCD was related to the director of GEC and they had colluded to delay the construction in order to hike up the price. A total extra of RM234 million was forked out due to the delay by GEC. SWD had successfully completed the project on 28 December 2015, thus the project had taken about nine years to complete. During the launching ceremony, the director of PCD apologized.

"This project was supposed to be completed by 2008 but its completion was delayed until now. We went through a series of unfortunate events with the landslides, floods and the delay from GEC. It's a shame that the previous director had conspired to scheme with GEC to delay the project and it had cost the government hundreds of millions."

He went on to express the following:

"I will ensure that future projects will be done according to the procedures and I will not allow anyone trying to cheat to get the tender."

Construction not in accordance to specifications

Vinnadornic has another department, the Clerk of Works (COW), which provides independent assessment on the quality of the construction, mechanical and electrical systems, and structural and architectural works of a project. It is to ensure that a project was done according to specifications and it would be safe to be used by the citizens. After the completion of the highway, COW found that the construction was not in accordance to the construction drawings and the quality of the materials used in the construction did not follow the specifications even though they were bought at market price. Overall, the highway was deemed safe to be used with a lot of maintenance needed to be done.

Nevertheless, it was told by GEC that throughout the construction process, problems occurred due the delay of relocation of utilities, which had caused the compaction of the subgrade layer of the road not carried out according to specifications. There was a comment about the quality of materials used. According to PCD's policy, payment to subcontractors who were appointed by main contractors are made directly by PCD. So, the payment to suppliers for the acquisition of materials used in this project was done by PCD with the approval from the former director. However, the deficiency in the quality of materials was still a question to the public. According to SWD, it had used the materials bought by PCD and was not aware that the materials were of low quality. Since the materials were bought' by PCD, SWD thought it would be safe to use them.

Plus, the prime coat spraying of this highway was also not carried out in accordance to specifications that required the rate of spraying to be in between 0.5 to 1 litre for every squaremetre. This had reduced the function of the prime coat as an adhesive premix and as a waterproof layer on the surface of the road. Not only that, there was also a problem at the road intersection of the project where it was not built according to the road technician's instructions. This had caused a failure to build road dividers and traffic lights at the intersection, which would be hazardous to the road users in the future. SWD was instructed to repair the intersection so that road dividers and traffic lights could be installed for the road users' safety.

Apart from that, Vinnadornic's Environmental Impact Assessment policy stated that the contractor should ensure the construction complied with the proposed measures which are to be taken to prevent adverse impacts on the environment. However, GEC did not take this into consideration and PCD also turned a blind eye on that matter. This had caused protests from the local residents who were fed up when they had to confront mudflows, dust and sound pollution from the highway. When SWD took over, it was already too late to make any changes as almost half of the project had been completed. If it were to remove the first half of the highway, additional time and cost would be incurred. To overcome the environmental impacts, mons0on drains had been built so that there would not be excessive mudflow into the residential area. Noise barriers were installed around the neighbourhood to reduce noise pollution from the highway. The residents were quite satisfied when the Vinnadornic government reacted quickly towards these environmental issues.

Final certificate for termination of contract

GEC's contract was first terminated at the end of 2008. It was then reappointed to build the highway, with another termination of the contract in the middle of 2013 upon the instruction of the finance minister. There was a delay up to one year and seven months in preparing the Final Certificate for Termination of Contract (FCTC) when the second termination was done. The notice of FCTC was released in 2008 for the first-time termination which was then cancelled as GEC was reappointed.

The notice for the second termination was released in 2013. The FCTC had not been issued to GEC when SWD had been appointed as the new contractor in 2014 to continue the project. The delay of issuance of the FCTC was because PCD needed to have the bill of quantities (BQ) from WD to clearly define the remaining work items that were abandoned by GEC and the repairs on the work performed. Without the FCTC, GEC was still legally the contractor for the project and SWD could not proceed with the construction.

Below is the conversation between the secretary of PCD, Ms Cathy, and an executive from SWD, Mr Rowls:

Mr Rowls: Ms Cathy, it seems that there's a delay in preparing the FCTC. May I know the reason behind this? Without the notice, we cannot begin the construction and the materials are all under the GEC's name. We cannot even touch them.

Ms Cathy: Yes, sorry for the delay. This is due to the BQ from SWD that is yet to be finalized as the remaining work items have been abandoned and the repairs on the work performed under the last contract have not been clearly identified yet.

Mr Rowls: Okay. I will rush them to provide you with the finalized BQ so that we can start with the construction.

Required:

a) Identify issues raised in the above case. (10 Marks)

b) Discuss the action that should take to the contractor. (5 Marks)

c) Explain the actions that can be taken by the government of Vinnadornic in order to improve the overall procurement system and to avoid the issues mentioned from happening again in the future. (18 Marks)