ASIAN DEVELOPMENT BANK

PROJECT PROCUREMENT-RELATED REVIEW REPORT

Loan 2092-NEP(SF): DECENTRALIZED RURAL INFRASTRUCTURE AND LIVELIHOOD PROJECT

(DRILP)

This report has been redacted in accordance with Asian Development Bank’s Public Communications Policy (PCP) issued in 2011. In particular, it excludes confidential and other information in accordance with paragraph 70 of the PCP.

Office of Anticorruption and Integrity Issued 23 April 2012

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A Project Procurement-Related Review (PPRR) is

a review undertaken by OAI on ongoing ADB-financed projects, to confirm compliance with applicable ADB’s policies, guidelines, and the loan agreement, with a focus on preventing and detecting integrity violations (http://www.adb.org/Integrity/integrity-violations.asp) involving ADB-related activities or ADB staff as defined under ADB’s Anticorruption Policy as amended (http://www.adb.org/Anticorruption/policy procedures.asp) and ADB’s Integrity Principles and Guidelines (http://www.adb.org/Documents/Guidelines/Integrity-Principles-Guidelines/2010/integrity-guidelines-procedures-2010.pdf). ADB’s Anticorruption Policy requires all parties, including staff, borrowers, beneficiaries, bidders, consultants, suppliers, and contractors to observe the highest ethical standards when participating in ADB-related activities. The Policy supports ADB’s obligation, in accordance with Article 14(xi) of the Agreement Establishing the Asian Development Bank, to ensure that the proceeds of ADB financing are used only for intended purposes. The PPRR assesses internal controls in place, identifies irregularities and instances of noncompliance, inspects the project outputs, and recommends enhancements to mitigate or eliminate opportunities for fraud, corruption, or abuse of resources and to help improve development effectiveness of future projects.

A Project Procurement-Related Review is not an evaluation to assess development effectiveness of ADB’s ADB-funded projects. It does not review project outcomes or development impact, which can only be assessed after the finalization of a project.

CURRENCY EQUIVALENTS (as of 28 February 2010)

Currency Unit = Nepalese rupee/s (NRe/NRs) NRs1.00 = $0.0135560138

$1.00 = NRs73.767998 For calculations in this report, the exchange rate of $1.00 = NRs73.767998 is used, the rate prevailing as of the PPRR cut-off date.

ABBREVIATIONS

ADB - Asian Development Bank BG - building group BOQ - bill of quantity DDC - District Development Committee DISC - district implementation support consultants DOLIDAR - Department of Local Infrastructure Development and

Agricultural Roads DPO - District Project Office DTO - district technical office(r) DRILP - Decentralized Rural Infrastructure and Livelihood Project EA - executing agency ICC - Implementation Coordination Committee IPC - interim payment certificate LDO - local development officer MLD - Ministry of Local Development NCB - national competitive bidding NRM - ADB Nepal Resident Mission OAI - ADB Office of Anticorruption and Integrity PCU - Project Coordinating Unit PPRR - project procurement-related review PSC - Project Steering Committee SARD - ADB South Asia Department SOE - statement of expenditure TDS - tax deducted at source VDC - Village Development Committee VWRCC - Village Works Road Construction Committee

NOTE

In this report, $ refers to US dollars.

CONTENTS

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EXECUTIVE SUMMARY i I. PROJECT BACKGROUND 1 II. REVIEW OBJECTIVES, SCOPE, AND METHODOLOGY 3 III. REVIEW FINDINGS AND RECOMMENDATIONS 5

A. Project’s Procurement Process 5 B. Asset Verification 15 C. Financial Management System 17 D. Internal Control Weaknesses 23

IV. CONCLUDING COMMENTS 27

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EXECUTIVE SUMMARY

1. The Office of Anticorruption and Integrity (OAI) conducted a project procurement-related review (PPRR) on Asian Development Bank (ADB) Loan 2092-NEP(SF): Decentralized Rural Infrastructure and Livelihood Project (DRILP, the Project) in Nepal (NEP) jointly with Nepal’s Auditor General’s Office.1

This report presents findings and makes recommendations as a result of the PPRR.

2. The overall goal of the Project is to reduce rural poverty in 18 very poor remote hill and mountain districts affected by the conflict in Nepal. The purpose is to achieve sustainable increased access to economic and social services, and to enhance the social and financial capital for people in the project area, particularly the poor and disadvantaged groups. The Project addresses two key causes of slow agricultural growth and limited rural jobs, including (i) lack of an effective and properly maintained rural transportation network; and (ii) weak institutions, constrained government service delivery, and lack of beneficiary participation. The Project comprises four components:

• Component 1: Community Development and Rural Livelihood Restoration; • Component 2: Capacity Building and Decentralized Governance; • Component 3: Rural Transport Infrastructure; and • Component 4: Project Management Services

3. Entrenched social discrimination and marginalization hampered Nepal’s inclusive development. Service delivery presents an additional challenge in the rugged topography of the country. Although Nepal is passing through a difficult phase of political transition, all of Nepal’s major political parties are committed to the objectives of reducing poverty; addressing the wide social, economic, and regional disparities; and establishing lasting peace and stability. ADB supports the country’s development priorities through its Country Partnership Strategy 2010-2012, which is focused on promoting inclusive and broad-based economic growth; inclusive social development; and governance and capacity building, among others. DRILP is expected to improve access to social and economic services in 18 poor and remote hill and mountain districts.2

4. The PPRR team examined the Project’s procurement and disbursement documentation of sample contracts in six of 18 districts, inspected selected goods and civil works subprojects, and performed a review of the financial management system. The main PPRR objective is to identify and reduce internal control weaknesses that may impair development effectiveness and that may allow integrity violations to occur in ADB-financed projects as defined under ADB’s Anticorruption Policy, as amended, and ADB’s Integrity Principles and Guidelines (May 2010).3

Major Recommendations 5. For the remaining life of this project under Loan 2796-NEP(SF)4

1 Members of the PPRR team comprised OAI staff members, OAI-engaged consultants and representatives from

Nepal’s Auditor General’s Office.

and future decentralized projects in Nepal, the key recommendations are for Ministry of Local Development (MLD)

2 ADB. Development Effectiveness Brief – Nepal: Addressing the Root Causes of Conflict. 3 ADB. 1998. Anticorruption Policy. Manila. para. 67. 4 While Loan 2096-NEP(SF) financially closed in January 2012, a subsequent Loan 2796-NEP(SF) amounting to

approximately $17.7 million was approved on 31 October 2011 to address scaling up of project scope.

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through the Department of Local Infrastructure Development and Agricultural Roads (DOLIDAR), in coordination with ADB South Asia Department (SARD) through ADB Nepal Resident Mission (NRM) to:

• revisit the methodology used in preparing and updating the cost estimates for their appropriateness, and ensure that these cost estimates are realistic;

• step up project supervision and monitoring mechanisms for this type of highly decentralized project implementation, especially prone to potential integrity violations infiltrating the procurement process ;

• provide project staff in all districts covered by the decentralized project sufficient training on ADB’s procurement and disbursements guidelines and procedures ;

• reinforce the evaluation process to ensure transparency and integrity in the procurement of goods and services, and conformity with ADB’s Procurement Guidelines;

• establish and/or strengthen required internal controls and financial management systems over project funds across all levels of project implementation; and

• work together to ensure that procurement integrity and transparency are established at the commencement of every development project, and observed throughout implementation.

6. Strong procurement and internal controls mitigate the risk of improper use of Project funds and assets, maximize development effectiveness, and deter fraud and corruption. The Borrower is encouraged to continue taking the lead in addressing this promptly, and collaborate with ADB to strengthen Nepal’s capacity to manage for development results. Results in Brief 7. Of the 28 contracts reviewed, the PPRR team noted 216 procurement-related findings.5

Figure 1 illustrates the breakdown of these findings.

Figure 1: Nature of Findings Profile

5 A finding refers to non-compliance or deviation from ADB’s Procurement Guidelines, Loan Disbursement

Handbook, or Loan Agreement; and irregularities noted.

6% 9%

10%

13%

21%

15%

5%

21%

Bid Opening Issues

Cost estimate issues

Internal Control Weaknesses

Missing Original Docs

Non-Compliance

Bid Evaluation Issues

Possible Forgery/MisrepresentationPossible Collusion

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8. Among the 216 procurement-related findings, the PPRR team noted a number of instances that ADB’s Anticorruption Policy may have been violated. OAI is in the process of investigating some of these indicators in relation to possible misrepresentation and collusion in accordance with ADB’s Integrity Principles and Guidelines, and seek the cooperation of the executing agency and Project staff at all levels in this effort.

9. Procurement. 96% of sample contracts reviewed for supply of goods and civil works awarded in six districts, were found to have deviations from ADB’s Procurement Guidelines and Loan Agreement. These contracts found vulnerable as far as procurement is concerned amounted to approximately NRs157 million (or approximately $2.13 million). These include, among others (i) significant variances in estimated quantities per bill of quantities vis-à-vis final quantities, (ii) substantially higher/lower unit rates of winning bidders vis-à-vis unit rates in the cost estimates; (iii) lack of due diligence in bid evaluation, (iv) inconsistencies and irregularities in bid evaluation, and (v) signing of a contract with a contractor who submitted deficient performance security. 10. Asset Inspection. The PPRR team inspected goods procured by the Project Coordination Unit (PCU) and 15 civil works subprojects amounting to NRs 90.60 million (or approximately $1.23 million) that were completed or were in progress.6

Civil works were determined to be generally delayed in construction, no test reports were provided for materials to provide assurance that these conformed to technical specifications; and defects were noted which included (i) absence of gabion boxes in critical curves and other portions, which may have caused landslides and erosions to block masonry drains; (ii) poor workmanship resulting to defective gabion boxes; (iii) weak and broken drainage; and (iv) poor compaction resulting to large potholes in roads. Most of these deficiencies may have been caused by contractors’ lack of capability in terms of equipment and skills and/or lack of on-site supervision of the works. Physical inspection of goods purchased by the PCU and issued to the districts disclosed some of these goods have been stolen. Recommendations to improve controls over assets purchased for future projects are provided in this report.

11. Financial Management. The PPRR Team examined the financial management system at the PCU and district level, and concluded that lack of controls over financial management may have exposed the Project to situations where funds were not used for intended purposes, or that the Project was vulnerable to loss and/or improper use of its funds. There is a need to strengthen and strictly implement fiduciary controls at all levels of funds management, especially in future highly decentralized projects such as DRILP. Concluding Comments 12. The PPRR team recognizes the challenges faced by the EA inherent in decentralized projects implemented in poor remote and conflict-affected districts. Preliminary PPRR results were shared during the 2010 Country Portfolio Review Mission as it is our sincere hope that lessons learned from this PPRR would benefit the remaining life of the Project, especially future similar projects in the pipeline. Strong project supervision is crucial especially in far flung areas where a number of civil works subprojects are implemented by contractors who may not be technically qualified. Greater collaboration may be required between SARD, NRM and MLD/Government of Nepal to establish and implement an effective monitoring mechanism between the different stakeholders in project implementation for future decentralized projects in Nepal to ensure transparent procurement and financial management capacity at all levels. 6 The PPRR Team included a quantity surveyor to inspect subprojects.

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13. Despite the weaknesses noted, there were positive indications that the Project delivered expected outputs to improve the efficiency of service delivery, now with the motorable road being upgraded by DRILP, and the road has also made it possible to market other produce in Baglung and, via Baglung, even as far as Kathmandu.7

Implementation of recommendations in this report can only augment results achieved to date.

14. Firms or individuals who violated ADB’s Anticorruption Policy by engaging in corrupt, coercive, collusive, or fraudulent practices are not eligible to participate in ADB-financed, administered, or supported activity during their sanction period. The PPRR team encourages the EA, MLD/DOLIDAR, to sign up for access to ADB’s full sanctions list (http://sanctions.adb.org) and check the sanctions list before engaging any entities to protect project funds and project outcomes. 15. The PPRR team thanks Project management and staff, especially the PCU, DDCs and DPOs for their cooperation and assistance to the PPRR requirements, and ADB NRM for the valuable inputs to the PPRR team. ADB values the courtesy and support that Project officials extended to the PPRR team, including the contribution from Nepal’s Auditor General’s Office who jointly conducted this PPRR and shared their experience and insights.

7 ADB. Development Effectiveness Brief – Nepal: Addressing the Root Causes of Conflict.

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I. PROJECT BACKGROUND 1. Asian Development Bank (ADB) Loan No. 2092-NEP(SF): Decentralized Rural Infrastructure and Livelihood Project (DRILP, the Project) was designed to reduce poverty in 18 very remote hill and mountain districts affected by the conflict.8

The purpose of DRILP was to achieve sustainable increased access to economic and social services and enhance social and financial capital of the people in the project area, particularly the poor and disadvantaged groups in conflict areas.

2. ADB approved the Project loan on 24 September 2004, and the loan became effective on 31 October 2005. The Project costs approximately $62.3 million equivalent of which ADB financed $40 million equivalent (64% of total project cost) from its Special Fund Resources.9

The balance of $62.3 million equivalent were provided by the Swiss Agency for Development and Cooperation ($1.9 million), Gesellschaft fur Technische Zusammenarbeit (GTZ) ($0.7 million), Government of Nepal ($14.7 million), local Government ($4.2 million) and beneficiaries ($0.8 million). As of 28 February 2010, the current value of the ADB loan amounted to $41.138 million equivalent. The loan allocation as of 28 February 2010 (the PPRR cut-off date) follows. While the loan was financially closed in January 2012, a new loan [Loan 2796-NEP(SF)] amounting to approximately $17.7 million was approved on 31 October 2011 to address scaling up of project scope. Table 1 below shows the cost allocation of the loan funds as of 28 February 2010 (the review cut-off date).

Table 1: Cost Allocation of Loan Funds

Category Name

Category Ref.

Loan Allocation

(In $ million)

% FX Financing

% Local Currency Financing

Civil Works – Transport Infrastructure 01A 25.581 4 53 Civil Works – Supplementary Investment 01B 3.487 4 53 Vehicles & Equipt. – Vehicles & Motorcycles 02A 0.172 100 100* Vehicles & Equipt. – Office Equipt. & Furniture 02B 1.103 100 100* Consulting Services 03 0.797 100 100* Technical Services 04 4.927 - 100* Training 05 1.027 - 100* Surveys and Studies 06 0.411 - 100* Implementation Supervision 07 1.026 100 17 Interest Charge 08 1.285 100 Unallocated 09 1.259 Imprest Account 99 0.063 Total 41.138

Basis: ADB Loan & Grant Financial Information System * Exclusive of local taxes. 3. The Department of Local Infrastructure Development and Agricultural Roads (DOLIDAR) was the Project executing agency (EA) and was responsible for the overall Project management and implementation. The Ministry of Local Development (MLD) had a joint coordination committee for all rural transport projects, which served as the Project Steering Committee

8 The districts covered by DRILP are Taplejung, Solukhumbu, Okhadhunga and Ramechhap (Central and Eastern

Districts), Gorkha, Lamjung, Myagdi and Baglung (Western Districts), Jajarkot, Bajura, Bajhang, Baitadi and Darchula (Mid and Far Western Districts), Dolpa, Jumla, Kalikot, Mugu and Humla (Karnali Districts).

9 Exclusive of local taxes. ADB to finance 100% of foreign exchange costs amounting to $5.3 million and $34.7 million equivalent of local currency costs.

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(PSC). The PSC (i) reviewed the progress under the Project; (ii) resolved policy issues; (iii) coordinated sector activities; and (iv) guided DOLIDAR. 4. The Implementation Coordination Committee (ICC), established within DOLIDAR was chaired by the Director General of DOLIDAR and consisted of representatives of rural infrastructure projects in the Project area as well as of the head of every District Project Office (DPO). The ICC was responsible for (i) addressing and resolving implementation issues, (ii) advising on technical matters, and (iii) advising the PSC on policy matters. 5. The Project Coordinating Unit (PCU), established within DOLIDAR was responsible for (i) detailed planning of Project implementation, (ii) guiding and monitoring District Development Committees (DDCs)10

that participate in the Project, (iii) allocating and disbursing Project funds in accordance with mechanisms and processes established in the Borrower’s Local Body Financial Administration Regulations, 2056 (2000), (iv) liaising with other donor-funded Projects in the rural infrastructure sector on day-to-day implementation matters; (v) preparing consolidated annual workplans, (vi) ensuring satisfactory implementation of the gender action plan and the resettlement frameworks and plans, and (vii) preparing necessary progress reports as well as the Project completion reports.

6. The District Project Office (DPO), established within the district technical office of each DDC was responsible for (i) preparing district annual work programs based on agreed subprojects, (ii) coordinating the application for and selection of supplementary investments in Village Development Committees (VDCs)9 in subproject areas, (iii) coordinating the implementation of livelihood activities through local NGOs, (iv) procuring services, (v) organizing community level training, and (vi) monitoring the implementation of works. Each Project district has a district road coordination committee, as a subcommittee of the DDC, responsible for planning and overseeing roads subprojects. 7. The Project was located in 18 districts, including 14 districts in the Western, Midwestern, and Far Western, regions that are among the poorest in the country and most affected by the conflict. The districts were selected on the basis of their high incidence and intensity of poverty, need to address causes of the conflict, need for improved access and enhanced livelihoods, and implementation manageability considerations. The Project will also contribute to building capacity at the national level and in the project area.11

10 Committees formed under the Borrower’s Local Self Governance Act, 2055 (1999). 11 ADB 2004. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and

Technical Assistance Grant to Nepal for the Decentralized Rural Infrastructure and Development Project. Manila.

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8. The Project supported the poverty reduction objectives and development policies of the Asian Development Bank (ADB) and the Government of Nepal, enunciated in its poverty reduction strategy. The Government regards this as a flagship project that addresses development challenges posed by the conflict and that will contribute to the operational strategies for poverty reduction in the Government's Tenth Five-Year Plan. The Project was designed to address two key causes of slow agricultural growth and limited rural jobs, including (i) lack of an effective and properly maintained rural transportation network; and (ii) weak institutions, constrained government service delivery, and lack of beneficiary participation.12

II. REVIEW OBJECTIVES, SCOPE, AND METHODOLOGY 9. The overall PPPR objective is to prevent and detect fraud and corruption as defined under ADB’s Anticorruption Policy.13 Corrupt behavior is a serious impediment to the development process, severely reducing development effectiveness and jeopardizing successful delivery of development benefits. The Anticorruption Policy, alongside with the ADB Procurement Guidelines14 and Guidelines on the Use of Consultants by Asian Development Bank and its Borrowers15 require all parties, including borrowers, beneficiaries, bidders, consultants, suppliers, contractors, and ADB staff to maintain the highest ethical standards for ADB-financed activities.16

10. To ensure such ethical standards, ADB’s Anticorruption Policy prohibits fraudulent and corrupt practices in ADB-financed, administered or supported operations, and defines the following as integrity violations:

• a fraudulent practice as any action or omission, including a misrepresentation,

that knowingly or recklessly misleads, or attempts to mislead, a party to obtain a financial or other benefit or to avoid an obligation,

• a corrupt practice as the offering, giving, receiving or soliciting, directly or indirectly, anything of value to influence improperly the actions of another party,

• a collusive practice as an arrangement between two or more parties designed to achieve an improper purpose, including influencing improperly the actions of another party, and

• a coercive practice as impairing or harming, or threatening to impair or harm, directly or indirectly, any party or the property of the party to influence improperly the actions of a party.

11. In addition,

• abuse is theft, waste, or improper use of assets related to ADB-related activity, either committed intentionally or through reckless disregard,

• a conflict of interest is any situation in which a party has interests that could improperly influence that party’s performance of official duties or responsibilities,

12 ADB 2004. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and

Technical Assistance Grant to Nepal for the Decentralized Rural Infrastructure and Development Project. Manila. 13 Paragraph 67, ADB’s Anticorruption Policy (2 July 1998). Manila. 14 Paragraph 1.06, Guidelines for Procurement Under Asian Development Bank Loans (November 2004); Paragraph

1.14, Procurement Guidelines (February 2007 and April 2010). Manila. 15 Paragraph 1.23, Guidelines on The Use of Consultants by Asian Development Bank and Its Borrowers (February

2007 and April 2010). Manila. 16 Paragraph 14(iii), ADB’s Anticorruption Policy (2 July 1998). Manila.

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contractual obligations, or compliance with applicable laws and regulations, and that such conflict of interest may contribute to or constitute a prohibited practice under the anticorruption policy, and

• an obstructive practice is (i) deliberately destroying, falsifying, altering, or concealing of evidence material to an ADB investigation; (ii) making false statements to investigators in order to materially impede an ADB investigation; (iii) threatening, harassing, or intimidating any party to prevent it from disclosing its knowledge of matters relevant to the investigation or from pursuing the investigation; or (iv) materially impeding ADB’s contractual rights of audit or access to information.

12. Other integrity violations include:

• violations of ADB sanctions, • other violations of ADB’s Anticorruption Policy, including failure to adhere to the

highest ethical standards, and • retaliation against whistleblowers or witnesses, which is any detrimental act,

direct or indirect, recommended, threatened, or taken against a whistleblower or witness or person associated with a whistleblower or witness in a manner material to a complaint because of the report or cooperation with an ADB investigation by the whistleblower or witness, which shall be investigated in accordance with Administrative Order 2.10.17

13. The PPRR also:

• identifies whether the procurement of project goods and services complied with ADB’s Procurement Guidelines, Guidelines on the Use of Consultants and the Loan Agreement;18

• determines whether project contracts were implemented according to the terms;

• ensures ADB’s funds were used for their intended purposes; and • recommends improvements to internal controls that mitigate opportunities for

fraud, corruption or abuse in this project and future ADB-financed projects. 14. PPRRs are conducted in line with ADB’s efforts to manage for development results. Effective internal control mechanisms enhance the assurance that project funds are directed towards its intended purpose and targeted beneficiaries. This PPRR thus contributes to ensuring ADB-financed projects are managed to produce intended development results. 15. To achieve the review objectives, the PPRR Team conducted fieldwork at the PCU, and DDCs and DPOs at the five districts, and undertook the following19

:

• reviewed the Project’s procurement and disbursement documents; • evaluated the Project’s procurement processes, internal controls, and financial

management practices; and

17 Paragraph 2, Integrity Principles and Guidelines (May 2010). Manila; and ADB Administrative Order 2.10:

Whistleblower and Witness Protection. 18 The Project’s Loan Agreement between the Kingdom of Nepal and Asian Development Bank was dated 23

December 2004. 19 The PPRR Team conducted reviews at Baglung, Ghorka, Lamjung, Myagdi and Ramechap districts from May to

July 2010. Procurement documentation of two contracts of Solukhumbu were reviewed at the PCU in Kathmandu.

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• inspected the Project’s goods procured and works performed at selected Project sites.

16. The PPRR Team examined the procurement documentation and processes for 28 contracts awarded as of 28 February 2010 relating to six districts, amounting to a total of NRs171.6 million (approximately $2.3 million). These comprised 14 national competitive bidding (NCB) contracts, 13 shopping contracts and 1 contract on Building Groups (others). 17. The PPRR Team also examined the financial management system at the five districts visited, including that at the PCU, and all disbursements on 15 contracts (14 NCBs and 1 building group contracts), amounting to about NRs60 million (approximately $0.81 million). Review of Statement of Expenditures (SOEs) as of 28 February 2010 amounting to a total of NRs161.4 million (approximately $2.18 million) at the PCU was also undertaken. 18. During site visits to 15 construction sites in five districts visited, the PPRR Team inspected and assessed the progress and quality of works, including assets purchased. The PPRR Team also inspected sample assets purchased by the PCU. 19. The PPRR Team conducted profile checks on contractors and vendors awarded contracts under review to determine any conflict of interest between Project key personnel and listed owners and directors of these companies.

III. REVIEW FINDINGS AND RECOMMENDATIONS

20. The PPRR findings are categorized as follows: (a) project’s procurement process; (b) asset inspection; (c) financial management system, and (d) internal control weaknesses. A. Project’s Procurement Process 21. The following sections describe observations made during the PPRR which indicate that ADB’s Anticorruption Policy may have been violated during procurement process for 19 of the 28 contracts reviewed amounting to NRs111.82 million (or approximately $1.52 million). To determine if this is so, the ADB’s Office of Anticorruption and Integrity (OAI) initiated inquiries to investigate these irregularities in accordance with ADB’s Integrity Guidelines and Procedures (2010). Violations to the Policy invariably results in ineffective and/or improper use of aid funds, thereby reducing development effectiveness.

1. Potential Collusion 22. Collusive bidding among bidders tends to drive up prices, defeats the competitive process and poses a risk to quality of the output. The PPRR Team observed a number of irregularities indicating that potential collusion among contractors/vendors, including officials of the DDC or DTO, and even Evaluation Committee members may have occurred in 18 of the 28 contracts reviewed amounting to NRs109.992 million (or approximately $1.491 million). This may have led to predetermination of winning bidders. Syndicated Bidding 23. The PPRR Team noted indications of syndicated bidding where several bidders appeared to have made some arrangements among themselves before submitting bids. Of the 14 sample NCB contracts reviewed, there were 10 instances where more than 20 contractors

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(ranging from 20 to 34) purchased bid documents. However, in these cases, the level of participation was very low, (i.e., bidders’ participation rate ranging from 9% up to 22% only). In Gorkha for example, while the PPRR Team reviewed only three NCB contracts, it was observed that only 1 bidder participated out of a number of bidders who purchased the bid documents for Lots 1-14. 24. While advertisements for tender indicated dates and venues of pre-bid meetings for NCB civil works contracts in each of the sample districts, the PPRR noted no pre-bid meetings were held. The PPRR team was made to understand by the DDCs that no pre-bid meetings were held as none of the bidders turned up. Pre-bid meetings are avenues where bidders understand the requirements, both mandatory and optional to participate in the tender. Non-attendance of bidders in pre-bid meetings is an indicator of collusion among bidders and that winning bidders may already have been predetermined. 25. The PPRR Team also noted that in all 6 NCB contracts reviewed for Myagdi where 3 to 5 bidders participated, and 1 contract for Baglung where 3 bidders participated, none of these participating bidders attended the bid opening.

26. In one of the NCB contracts in Myagdi where there were three participating bidders, the two losing bidders did not submit mandatory requirements i.e., financial and equipment information in their bid responses, which caused their disqualification. Given the circumstances identified, it appeared that the bids were manipulated to ensure the contract was awarded to the intended contractor. Similarities in handwriting, text, format and unit prices 27. Similarities in bid submissions indicate potential collusion among bidders in Myagdi’s NCB contracts. The PPRR Team noted that in one of the contracts, the bid forms, including the BOQs of the winning bidder and one of the losing bidders, appeared to have been filled out by the same person as manifested by similarities in handwriting style and script. 28. In another contract, all three participating bidders quoted similar unit prices for 18 of 25 bill of quantities (BOQ) items. In addition, for the two losing bidders, three of the remaining seven BOQ items had the same unit prices.

29. The PPRR team also noted that in another contract, the certifications on availability of certain equipment to be hired pertaining to the winning bidder and one of the losing bidders were identical in terms of text and format – although written on different letterheads.

30. The PPRR team observed during its review of payment vouchers in Myagdi that all contractors’ invoices supporting payment were prepared on red colored papers of similar quality and similar formats. Preparation of similar invoices by these different contractors is highly irregular, which indicated the lack of due diligence on the part of the DDC in reviewing documentation to support payments and possible collusion among bidders.

Competing bidders may be related parties, and use of phantom bidders 31. Related bidders participating in the same procurement process increases the risk of bid suppression and market allocation. This raises the amount of the contract, which would potentially include a profit to be apportioned and distributed by the winning bidder among the conspirators. The PPRR found instances where participating bidders may be related parties. In

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addition to related parties, use of phantom bidders may have occurred to make the process appear to be competitive. 32. Myagdi. In two shopping contracts for supply of goods won by the same vendor the PPRR team noted quotations were sought from related companies to make it appear that there was competition. In one shopping contract, the awarded vendor and one of the three losing vendors that submitted quotations were affiliated companies, with the same owners and the same office addresses. Of the 13 line items, seven items quoted by the winning bidder were identical to that of the cost estimates.

33. In both shopping contracts, the PPRR team found that the address of one of the losing vendors pertain to that of a travel agency, which indicates the existence of a possible phantom bidder. Other losing vendors had similar quotations to that of the cost estimates for some items. It is worth noting that differences in unit rates between the cost estimates and quoted rates among vendors were minimal ranging from Nrs10 to Nrs50. These indicate that the concerned vendors may either be related, belong to the same vendor, or have colluded among themselves and/or with the DDC.

34. The registered address and telephone number are the same for the winning and losing bidders of a NCB civil works contract. Also, the PPRR team found that the registered address and directorship details of the winning bidders for three NCB contracts were the same. These indicate that these contracts were awarded to the same bidder or bidders under one holding company. It appears that the same contractors under different company names win a number of contracts, promoting unfair competition.

35. Quotations from three vendors were received for two shopping contracts for goods, with the same winning vendor. Review of quotations disclosed that the winning and one of the losing vendors had the same telephone numbers and address. Site visits and inquiries by the PPRR team disclosed that these companies were owned by the same family. In another visit to the address of the third and losing vendor, the PPRR team noted that the address was non-existent. This is another indication of a phantom bidder to make it appear that the procurement process was competitive. 36. Lamjung. Two out of 22 entities that purchased the bid documents for an NCB civils works contract submitted bids. None of these entities’ representatives attended the bid opening. The PPRR team noted that the bid prices of both contractors were very close, and with the same unit prices for eight of 18 BOQ items. Inquiries made by the PPRR team disclosed that the directors of both firms are related, with the managing director of the winning bidder as the uncle of the director and uncle-in-law of the managing director of the losing bidder.

37. Gorkha. In a shopping for goods contract where three suppliers submitted quotations, the PPRR team noted that the winning and one of the losing suppliers had the same telephone numbers. Inquiries by the PPRR team disclosed that these firms share the same shareholders. The quotations provided by the two losing suppliers were not signed but rubber stamped with their respective company names. Furthermore, the quotation of the third and losing bidder did not have any contact number. These indicators shed doubt on the veracity of the submitted quotations. The PPRR team was made to understand by the DDC that the quotations, all dated on the same date, were submitted personally by the representatives of the bidders.

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2. Potential Misrepresentation by Bidders 38. The PPRR Team noted instances of potential misrepresentations of credentials and addresses in the bid submissions of bidders relating to 9 of 28 contracts reviewed amounting to NRs50.992 million (or approximately $0.691 million). These included the following: 39. Myagdi. Credentials on past experience submitted by the winning bidder for two NCB civil works contracts included a transmission line project executed at a certain location. However, the PPRR Team’s visit to the specified address in the credential disclosed that it was an office of a pharmaceutical company.

40. In another civil works contract, the winning contractor misrepresented its capacity to perform the contract. The bid required for roller equipment having a capacity of 10-12 tons. The bidder declared to compliance with stated capacity in its bid form, however, the supporting documentation for the said equipment indicated the roller’s capacity to be only 2 tons. For the same contract, the winning bidder’s contact details pertained to that of a savings bank. The PPRR Team was advised during a visit to the office address that no such contractor was located in the specified address.

41. Baglung. In a NCB civil works contract one of the two losing bidders submitted a general construction experience of more than 21 years when the firm was only six years per its certificate of incorporation. In the same contract the winning bidder may have misrepresented the availability of its proposed site manager and site technician. The names proposed in the bid documents submitted were different from those in the bid evaluation report. The PPRR team found out during inquiries that the names proposed in the bid documents were not associated with the firm.

42. Ramechap. In a supply of goods contract, the winning bidder provided in its bid submission a letter from the manufacturer certifying that the winning bidder was their authorized dealer for the sale of the specific goods. This letter was a mandatory condition specified in the advertisement and invitation for bids. Confirmation by the PPRR team with the manufacturer disclosed that the winning bidder was not its authorized dealer and that no letter in any form was issued to the winning bidder.

3. Potential Fraudulent Letter of Withdrawal of Bid Submission

43. In one of the contracts in Baglung, there were three bidders that submitted bids out of 20 who purchased bid documents. Only two bids were evaluated. The PPRR team noted the existence of a bid document of the third bidder which was excluded from evaluation on account of a letter of withdrawal purportedly submitted by the bidder. On PPRR team’s inquiry, the third bidder denied issuing the letter of withdrawal from the bid, citing that the letter was fraudulent manifested by fake signature, stamp of the company and letterhead. 44. This questionable withdrawal of bidder, and all potential integrity violations noted not only raised doubts on the integrity of the bidding process in these districts, but also provided strong indications of the practice of awarding contracts to predetermined winners. It is crucial for SARD, Nepal Resident Mission (NRM) and DOLIDAR to ensure that procurement integrity and transparency are established at the commencement of every decentralized project being administered and implemented, and observed throughout implementation.

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Recommendations 45. The PPRR Team recommends that DOLIDAR continue to assist and support OAI in investigations on possible integrity violations committed by contractors identified through this PPRR. 46. It is strongly recommended that SARD and NRM step up project monitoring mechanisms for this type of highly decentralized project implementation, especially with potential integrity violations infiltrating the procurement process, which can be mitigated through strong project monitoring by ADB.

4. Significant variances Estimated quantities per BOQ vis-à-vis final quantities 47. The Loan Agreement provides for the borrower to carry out the Project with due diligence and efficiency and in conformity with sound administrative, financial, engineering, environmental, rural development and infrastructure, gender equity and labor-based, environmentally-friendly and participatory practices. The PPRR team noted instances when the estimated quantity had significant variance (some higher; some lower) over the final quantity, some of which led to the final value of the subproject being lower than the contracted price. For instance, in a Gorkha civil works contract, the analysis of estimated quantity vis-à-vis final quantity indicated that out of 43 BOQ items, 40 had quantity variance, some very significant ranging from -100% to 346% of estimated quantities. This indicated that the cost estimates were not prepared with care, which may have provided the opportunity for integrity violations. 48. In a Lamjung civil works contract, the PPRR team noted that the locations, quantities and sizes of gabion boxes specified in the engineer’s estimates were significantly changed in comparison with those in the final bill. It appeared that the estimates were not carefully drawn, and the final implementation was left to the contractor’s decision as long as cost stayed within the contract price. The PPRR team emphasizes the importance of proper planning to ensure realistic cost estimates and no wastage of resources, and calls on SARD and NRM to strengthen procedures on project design when cost estimates are drawn.

Unit cost estimates vis-à-vis contractor’s unit rates 49. The Public Procurement Act 2063, Section 65(1) requires the Bid Evaluation Committee to perform a rate analysis for the high/low rates submitted by the bidders. The ADB Procurement Guidelines indicates that the purpose of the bid evaluation is to determine the cost to the borrower of each bid in a manner that permits a comparison on the basis of their evaluated cost, and that the bid with the lowest evaluated cost but not necessarily the lowest submitted price, shall be selected for award.20

50. The PPRR team noted in a number of civil works NCB contracts where participating bidders’ unit rates were closer to each other, but majority of the winning bidders’ unit rates were substantially higher/lower than the schedule of rates in the cost estimates.

20 ADB Procurement Guidelines (February 2007) and (April 2010), paragraph 2.49.

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51. The bid evaluation committee did not perform rate analysis, which posed risk in awarding contracts to those who were not necessarily the lowest evaluated bidders. This could have caused waste of resources or even loss of project funds.

5. Inconsistencies and inadequacies in bid opening records 52. The Procurement Guidelines indicates that the time for the bid opening shall be the same as the deadline for receipt of bids or promptly thereafter, and shall be announced, together with the place for bid opening, in the invitation to bid.21

All bids submitted for a particular contract are opened at the stipulated date, time and location. A bid opening sheet is used to document bid opening information (i.e., name of bidder, bid security, bid amount, availability of mandatory information, etc.).

53. In Ramechap’s NCB procurement of goods, the PPRR team noted that while the bids were submitted on the bid submission deadline on 25 January 2010, the bid opening sheet was dated 26 December 2009. Moreover, the bid opening time was also not documented in the bid opening sheet. This gave the impression that the bid opening sheet was created prior to the deadline of bid submission and bid opening date.

54. The bid opening forms of participating bidders in six Myagdi civil works contracts were not appropriately accomplished, especially for items to assess completeness of bids. Some items were not filled out (e.g., bid amount, average annual construction turnover, bid validity, signing of bid form, and filling of BOQ). This renders the assessment on completeness of bids and integrity of procurement questionable.

55. The bidders for civil works NCB contracts were required to submit original bid and two copies, duly marked as such.22

In one of the contracts in Baglung the winning bidder submitted three copies without marking which one was original and copies. One of the two losing bidders submitted only original without any copy. These were not noted in the bid opening record and minutes.

56. The PPRR team also noted that the bid amounts were not recorded in the bid opening records pertaining to three civil works NCB contracts in Gorkha. Non-disclosure of bid amounts not only reflects lack of transparency in the procurement process but increases the chances of manipulation in the bid amounts quoted by bidders.

6. Letters of bid and other bid forms not appropriately accomplished 57. The Letter of Bid is one of the required forms to be completed by the bidder and submitted as part of the bid. This letter includes, among others, the undertaking by the bidder to execute the contract in conformity with the bid documents, and should indicate the total price of the bid discounts offered and methodology for their application, validity of the bid, commitment to obtain a performance security if bid is accepted, etc. 58. The PPRR team noted a number of instances where Letters of Bid for civil works NCB contracts were not appropriately accomplished by the bidders. There were instances where bid responses were not dated. Most Letters of Bid were not fully accomplished, with a number not indicating the bid amounts. Some did not bother writing the grand total of their bids in the BOQs.

21 ADB Procurement Guidelines (February 2007) and (April 2010), paragraph 2.45. 22 Instruction to Bid and Bid Data Sheet, Section 20.1

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59. Inadequate accomplishment of Letter of Bid increases the risk of manipulation in the bid amounts after submission. The PPRR team recognizes the lack of capacity by the bidders in the districts to accomplish the bid forms, and as such emphasizes to the PCU and DDCs the importance of encouraging the bidders to attend pre-bid meetings to discuss, among others, appropriateness of filling out forms and understanding of bid requirements by bidders.

7. Bid submitted not registered and considered

60. ADB Procurement Guidelines requires the borrower to, among others, employ acceptable management procedures to establish date and time of submission of bids. The bids received after the time stipulated, as well as those not opened and read out at bid opening shall not be considered.23

61. During the review of bid documents in Myagdi, the PPRR team found the bid with company profile of “Company XXX”, with bid price of NRs9,323,561 for package 03. The bid qualification document indicated that this was submitted for package-04. The PPRR team noted that this submission was not in the bid register for either package 03 or 04, nor included in the bid opening records. The PPRR team was made to understand by DDC and DISC officials that they were not aware of any bid submitted by “Company XXX.”

62. If the bid submission was determined as not in accordance with the Instructions to Bid, the receipt of the said bid documents should have been documented in the bid register and returned to the bidder. The lack of knowledge on the part of the DDC officials and district implementation support consultants (DISC) on the existence of the documents pertaining to “Company XXX” and the absence of appropriate documentation on the disposition of the bid submission raise questions not only on how bids were received, but also the legitimacy of the bidding process.

8. Lack of due diligence by the bid evaluation committee 63. The ADB Procurement Guidelines require the borrower to ascertain whether the bids (a) meet the eligibility requirements specified in the Guidelines, (b) have been properly signed, (c) are accompanied by required securities or required delegation signed as specified in the Guidelines, (d) are substantially responsive to the bidding documents, and (e) are otherwise generally in order. Any conditions for participation shall be limited to those that are essential to ensure the bidder’s capability to fulfill the contract in question. The Guidelines also require the borrower to carry out due diligence on the technical and financial qualifications of bidders to be assured of their capabilities in relation to the specific contract. The borrower should ask bidders for clarification needed to evaluate their bids.24

64. There were a number of cases when the bidders did not provide information about their existing commitments, and the PPRR team could not ascertain if the bid evaluation committee sought clarification from the bidders in this regard as no documentation seeking clarification was found. There were also cases when the participating bidders indicated availability of equipment as required by the bid documents, however, the capacities of these equipment were not indicated in the bidders’ submissions. The PPRR team also noted an instance when the bidder’s share of construction experience in a joint venture (JV) could not be determined. In addition,

23 ADB Procurement Guidelines (February 2007) and (April 2010), paragraphs 2.44 - 2.45. 24 ADB Procurement Guidelines (February 2007) and (April 2010), paragraphs 2.48, 1.6, 1.7 and 2.46, respectively.

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computations done by the bid evaluation committee to assess the bidders’ financial capacity to carry out the contract were inconsistent with what were submitted by the bidders.

65. Lack of due diligence by the bid evaluation committee can result to awarding of contracts to unqualified contractors or vendors – and may encourage extensive sub-contracting that will ultimately affect the progress and quality of the works. 9. Questionable evaluation 66. The ADB Procurement Guidelines require the bidding documents to specify the relevant factors, in addition to price, to be considered in bid evaluation, and the manner in which they will be applied for the purpose of determining the lowest evaluated bid.25

67. The bid document requires all bidders to meet the turnover criteria to be eligible to compete for the award of the contract. There were only two participating bidders in a civil works NCB contract reviewed in Lamjung. The PPRR team noted that the losing bidder did not qualify with respect to the required turnover criteria but was evaluated as qualified, and lost the contract on account of a higher price offered.

68. For compliance requirements, for a joint venture, all partners combined must meet requirement, each partner must meet 25% of the requirement, and one partner must meet 40% of the requirement. In a Gorkha civil works NCB contract, the PPRR team noted that one of the joint venture partners of the winning bidder participated in two other contracts, and won all contracts. Based on the documents submitted by the bidder, the total combined turnover to qualify as joint venture partner was lesser than the aggregate requirement for three contracts.

69. The winning bidder of a civil works NCB contract in Myagdi was given seven days to submit its joint venture ratio document for projects executed in the past to facilitate computation of the average annual construction turnover. However, the losing bidder in another civil works NCB contract was disqualified for non-availability of roller-related documents, without the bid evaluation committee seeking clarifications from the bidder. The same evaluation committee evaluated bids for both contracts. It appears that the evaluation committee exercises favoritism when evaluating bids, again a strong indication that winning bidders are predetermined. 70. Section 3 – Evaluation and Qualification Criteria of the bid document provides the computation for average annual construction turnover.26

Review of bid evaluation documents disclosed that in Myagdi the bid evaluation committee computed for average annual construction turnover based on the year of completion of contracts. For example, if a firm completed two projects in 2009, which started in 2007, valued at NRs20 million, the total amount was taken as construction turnover for 2009. The deviation from calculation definition of the average annual construction turnover in the bid document poses a risk of awarding contracts to ineligible/unqualified contractors.

71. A losing bidder in a Myagdi NCB civil works contract was disqualified due to non-submission of documents relating to availability of an equipment. However, the PPRR team found documents submitted by the bidder in support of such equipment. On another contract in Myagdi, the winning bidder indicated availability of an equipment but capacity was not

25 ADB Procurement Guidelines (February 2007) and (April 2010), paragraph 2.52. 26 Minimum average annual construction turnover is calculated as total certified payments received for contracts in

progress or completed, within the last xx (e.g., three) years.

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appropriately supported. In another contract the winning bidder claimed having met the equipment requirement when in fact the supporting document indicated a lower capacity. These were not noted in the evaluation documents.

72. The bid document requires bidders to submit the company/joint venture experience. In a Baglung NCB contract, the PPRR team noted that one of the joint venture partners of the winning bidder had only completed one project in construction of a bridge in joint venture with others. Its share in the completed project did not satisfy the criteria required in the bid. 73. The use of an evaluation method that is inconsistent with that in the bid document indicates questionable evaluation processes. This may result in complaints from losing bidders on the appropriateness of the evaluation process and more importantly, contracts being awarded to unqualified bidders. In most cases, it appeared that winning bidders may have been favored to be awarded with more than one contract. Favoritism could lead to poor quality works, low morale of other bidders, and promotion of unfair practices.

10. Expired bid validity not extended

74. The ADB Procurement Guidelines require bidders to submit bids valid for a period specified in the bidding documents which shall be sufficient to enable the borrower to complete the evaluation of bids, review the recommendation of award with ADB (if prior review is required), and obtain all the necessary approvals so that the contract can be awarded within that period. The bid security should be valid for a period of four weeks beyond the validity period of the bids in order to provide reasonable time for the borrower to act if the security is to be called. If the borrower requires an extension of bid validity, it should seek ADB’s prior approval for the first request of extension, if it is longer than four weeks, and for all subsequent requests for extension, irrespective of the period.27

75. The PPRR team noted a number of instances in Lamjung, Myagdi and Gorkha where bid validity period expired prior to contract signing, but documentation on extension of bid validity periods, if any, were not made available. Noncompliance to bid validity extensions exposes the project to risk when there is the need to call in the bid securities, leading to project delays and waste of resources.

11. Non-compliant performance security

76. The bidding documents for works shall require security in an appropriate form and amount sufficient to protect the borrower in case of breach of contract by the contractor. A portion of this security shall extend sufficiently beyond the date of completion of works to cover the defects liability or maintenance period up to final acceptance by the borrower. In contracts for supply of goods, suppliers or manufacturers may be required to provide a guarantee in an appropriate amount to protect against nonperformance of the contract and may also cover warranty obligations.28

77. The PPRR team noted instances in Ramechap, Lamjung, Myagdi and Gorkha, where performance securities of suppliers and contractors were deficient in terms of validity and required format. This exposes the project to risk in case material supplied is of lower and lesser quality and quantity or in case of breach of contract by the contractor.

27 ADB Procurement Guidelines (February 2007) and (April 2010), paragraphs 2.13-2.14, and 2(d), respectively. 28 ADB Procurement Guidelines (February 2007) and (April 2010), paragraphs 2.39 – 2.40.

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12. No insurance coverage for laborers

78. The standard bid document stipulates that the “employer shall provide group personal accidental insurance cover from the start date to the end of the defects liability period for the labourers employed by the contractor only for the works under the contract.”29

The PPRR Team found that DDCs did not provide insurance coverage for laborers employed by the contractors for all NCB civil works contracts reviewed.

13. Non-publication of award of contract 79. The ADB Procurement Guidelines requires publication of results of evaluation and the award of contract and provisions for bidders of NCB procurement mode to protest.30 The Guidelines require the following information to be published within two weeks from contract award, or no later than the date of contract award if the contract is subject to post review, in an English language newspaper or a well-known and freely accessible website: (i) bid and lot numbers, (ii) name of each bidder who submitted a bid; (iii) bid prices read out at bid opening, (iv) name and evaluated prices of each bid that was evaluated; (v) names of bidders whose bids were rejected and reasons for rejection, (vi) name of the winning bidder and price offered, and (vii) duration and summary of scope of the contract award.31

80. The PPRR team noted that results of bid evaluation for all reviewed NCB contracts for this Project were not published. The PPRR team noted that losing bidders were not notified about the results of the evaluation. The PPRR team was made to understand that intimation of bid evaluation to losing bidders is not required per provisions of Nepal’s Local Body Financial Administration Rules. 81. Non-publication and non-notification to losing bidders of evaluation results loses transparency in the procurement process, and increases the risk of procurement malpractices. Recommendations 82. Strong project supervision is crucial in implementing highly decentralized projects. Deviations from ADB guidelines may result in unfair procurement practices and non-competitive bidding. Non-compliance may also increases incidents of undetected integrity violations. For the remaining life of this project under Loan 2796-NEP(SF) and future development and decentralized projects in Nepal involving the same ministry, the PPRR team strongly recommends that DOLIDAR ensure:

• due care is exercised when preparing subproject designs and cost estimates. The cost estimates developed during the Project design stage should be reviewed and updated if design has changed before the bidding process begins;

• proper bid procedures as required by ADB are initiated and managed to ensure competitive process, and maximize the effective use of project funds;

• evaluation committee exercises due diligence in evaluation of the bid proposals, and consistently observes applicable evaluation procedures especially on required supporting documents;

29 Section 8 of Standard Bid Document, Particular Conditions of the Contract, clause 13. 30 ADB Procurement Guidelines (February 2007) and (April 2010), paragraph 3.4. 31 ADB Procurement Guidelines (February 2007) and (April 2010), paragraph 2.60.

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• the bid evaluation committee perform rate analysis of prices to ensure contracts are awarded to the lowest evaluated substantially qualified bidder bidders;

• steps are taken to encourage participating bidders to attend pre-bid meetings to ensure that bid requirements are understood;

• appropriate bid records are accomplished and maintained by all participating districts to ensure transparency in the procurement process;

• compliance to bid requirements in regard bid validity and performance security; • insurance requirement for laborers of contractors are adhered to; • that the importance and ADB requirement of publication of the results of the bid

evaluation, including notification to losing bidders are considered in future procurement processes for transparency and good governance; and

• concerted efforts among DOLIDAR, the PCU, and relevant districts are taken to comply with ADB’s requirements and effectively implement the Project.

83. The PPRR team also recommends that SARD and NRM:

• establish if there were any special circumstances leading to these deviations, and institute appropriate checks and balances as necessary;

• ensure reliability and reasonableness of cost estimates prior to commencement of every Project, and updates of these cost estimates are undertaken, as applicable prior to commencement of every procurement process;

• ensure that for decentralized projects, capacity of the executing agency, PCU and the districts participating in project implementation, are evaluated in terms of procurement and project supervision and monitoring to ensure similar findings do not occur in this project and future ADB-financed projects in Nepal; and

• take steps to identify and augment appropriate training on procurement matters directed toward key procurement staff, including bid evaluation committee members.

B. Asset Verification 84. The PPRR team inspected 15 construction sites in five districts to assess the progress and quality of construction works. The team also inspected sample assets purchased by the PCU in Kathmandu. Missing assets 85. A camera valued at NRs25,150 and motorcycle valued at NRs156,400, with helmet valued at NRs1,011 were missing at the time of asset inspection in Gorkha’s DPO. The details of the camera, except for the date of purchase were in the asset register duly signed by Gorkha’s DPO Engineer and the storekeeper. The PPRR team was made to understand that the camera was issued to the DPO Engineer who had already left his job without returning the camera. The motorcycle and helmet were issued by the PCU to Gorkha’s DPO through a letter dated 21 July 2009 and sent through Gorkha’ DPO Engineer who subsequently left his job. The PPRR team noted that no entry was made in the asset register in regard to the motorcycle and helmet, and was informed that these were not received by Gorkha’s DPO.32

32 Camera (Konica Minolta) and motorcycle “Discover 135 CC”..

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86. The PPRR team also noted that two other motorcycles issued to staff in DOLIDAR were stolen. However, the PPRR team only saw the police report on the theft for one motorcycle. Unrecovered assets result to ineffective use and waste of Project funds. Civil works 87. The PPRR team noted that all 17 civil works reviewed were not completed as scheduled. Seven Baglung and three Gorkha civil works contracts that were scheduled for completion in September or November 2009 were still ongoing during the PPRR inspection in June 2010. Six Myagdi civil works contracts were completed but incurred delays ranging from 9 to 11 months. Delays in completion of civil work invariably delay the benefits that should have been due to the intended beneficiaries. 88. There were no test reports on whether the gabion wires and geo textile materials procured conformed to the technical specifications as required by the bidding document. Payments were made to vendors without these test reports, which was a requirement for disbursements. There is therefore no assurance that the materials supplied met the technical specifications.

89. During site inspection, the PPRR team found civil works of good quality, however there were quality issues noted, specifically in roads and drains. These include:

• blocked masonry drains caused by landslides and erosions, which may have

been caused by the absence of gabion boxes; • poor workmanship resulting to defective gabion boxes; • weak and broken drainage; • lack of compaction resulted to large potholes in roads; • critical curves did not have gabion boxes, which could result to roads being

unpassable should landslides occur. 90. These observations may have been the results of irregularities in the procurement processes, where contracts may have been awarded to unqualified contractors. The PPRR team calls on DOLIDAR, PCU and the districts involved in the project implementation to assess the extent and quality of implementation of the subprojects by the contractors to ensure that these subprojects could be effectively used by beneficiaries. Recommendations 91. To ensure the physical existence and status of the assets purchased out of Project funds, the PPRR team recommends that the PCU conduct a physical inventory of all assets, including those issued to the Project districts, and document their status in the asset register. SARD and/or NRM should determine through their review missions if these assets are used for the purposes intended. 92. To ensure that construction contracts are implemented efficiently and maintained properly after completion, it is recommended that DOLIDAR:

• determine if completed construction works are in accordance with contract

specifications, and if those with defects are still under their warranty period. If so, ensure these are corrected by the contractors concerned;

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• penalize contractors for contract delays; • hold contractors accountable for poor performance; • ensure closer supervision of construction works by the district assigned

engineers; and • implement periodic inspection of the Project and effect immediate repairs, as

necessary. 93. To ensure problems noted in civil works contracts are appropriately acted upon, it is recommended that PCU require the district offices to submit on a periodic basis, a listing of works in progress, including status of their progress, and related issues if any. PCU should accordingly advise the district offices of appropriate actions to take to remedy the situation and document the same in progress reports submitted to ADB. 94. To ensure materials received conform to the required technical specifications, it is recommended that the district offices strictly enforce the vendors to provide the test reports. Payments should not be made to vendors who do not comply with the required documentation. C. Financial Management System 95. The PPRR team examined the financial management system at the PCU in Kathmandu and sample districts, including the Project’s financial accounting, internal controls, and disbursement processes. The PPRR Team noted internal controls over financial management to be significantly weak, which may have exposed the Project to possible loss and waste of project funds.

1. PCU

SOE Claims included local taxes 96. The PCU in Kathmandu processes withdrawal applications for the project expenditures, which are approved by the Ministry of Finance. The Loan Agreement indicates that no withdrawals from the Loan account shall be made in respect of any local taxes.33

In the review of supporting documentation pertaining to statement of expenditures (SOEs), the PPRR team noted that claims on four withdrawal applications amounting to NRs5.72 million included taxes deducted at source (TDS), the local country tax. The invoices indicated the total invoice amount, which includes details on VAT and TDS portions. Based on the SOEs, it appears that only the VAT portions were excluded from the amounts claimed from ADB. As such ADB paid TDS, the local country tax, which is an ineligible expense.

97. The PPRR team also noted that in withdrawal application 20, a total amount of NRs3,955,182.71 for transport infrastructure in Lamjung by a supplier, which included VAT of 13% was claimed from ADB through SOE. As these were claimed under SOEs, supporting documents were not seen by ADB, and thus local taxes included in claims could not have been determined. As such, ADB made payments for claims that included ineligible expenditures. There may be the need for PCU to revisit SOE claims and supporting documents therefore, and advise ADB of those that included TDS portions.

33 Loan Agreement, Schedule 3, paragraph 2.

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Lack of supporting documents for some SOE claims 98. The Loan Disbursement Handbook provides the list of documents to support payments above US$50,000. The PPRR team noted instances where SOE claims lacked the requisite supporting documents. 99. Payments made against inadequate supporting documents raise questions on the eligibility of expenditures.

2. District Level

Lack of technical team’s concurrence in making payments 100. The Public Procurement Manual, Section 7 provides that bills for payments are checked by DISC and forwarded to DTO for approval. Payments are made to suppliers once materials are received, tested and recorded in the stores. Based on the measurement book and approvals from the technical team, comprising DTO, DPO engineer and DISC, payment is processed by the accountant and LDO. 101. For two supply of goods contracts in Ramechap and one in Gorkha, the PPRR team noted the absence of the technical team’s concurrence before making payments to the suppliers. This exposes the Project to risk on waste of resources should the material received not in the desired quantity, quality and useable form. The importance of check and balance in payment procedures is being emphasized. Advance payments without supporting documentation 102. The General Conditions of the contracts for civil works require that advance payments should be substantiated by relevant documents supporting that the contractor has utilized the advance money for mobilizing the works.34

Advance payment should only be used to pay for equipment, plant, materials and mobilization expenses required specifically for the execution of the contract. The contractor should demonstrate that advance payment has been used in this way by supplying copies of invoices or other documents to the Project Manager.

103. The PPRR team noted that advances to contractors for seven civil works contracts in Baglung, two in Myagdi, and a contract each in Lamjung and Gorkha were not substantiated. Unsubstantiated advance payments pose risk that these may not have been used by the contractors as intended. Inaccurate or non-levy of liquidated damages for delayed contract completion 104. ADB Procurement Guidelines indicates that provisions for liquidated damages or similar provisions in an appropriate amount shall be included in the contract when delays in the delivery of goods, completion of works or failure of the goods or works to meet performance requirements would result in extra cost, or loss of revenue or loss of benefits to the borrower.35

34 Section 7, Clause 48.2 of the standard bid document.

The civil works contracts require the contractor to pay liquidated damages to the employer at

35 ADB Procurement Guidelines (February 2007) and (April 2010), paragraph 2.41.

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the stipulated rate per day for each day that the completion date is later than the intended completion date.36

105. The PPRR team noted that while the delay in completion of the works relating to a Myagdi contract was 16 days from intended completion date, the liquidated damages charged against the contractor was only for 10 days. The PPRR team was advised that the remaining liquidated damages will be deducted from the retention money. Works relating to two contracts in Gorkha and one in Baglung were also not completed within the scheduled time. The PPRR team noted that apart from not having seen any documentation of extension of the works, no liquidated damages were levied on both contractors for the delay. Erroneous claims 106. Nepal’s Project Procurement Act 2067, Clause 54(1) provides that unless otherwise provided by the procurement contract, if the circumstances that could not be foreseen at the time of signing of contract arise in the course of implementation of the contract, the competent authority may, by stating clear reasons thereof, issue as prescribed, a variation order for a variation of up to 15% and for a variation order above it, a variation order may be issued as per the decision made by the Government of Nepal Council of Ministers by complying with prescribed procedures. 107. The PPRR team noted that in one of the civil works NCB contracts reviewed in Gorkha expenses amounting to NRs99,001 relating to a contract was being claimed through an invoice of another contract. During the PPRR fieldwork in 2010 the invoice was not yet paid. The PPRR team was made to understand that this was done by the contractor to avoid exceeding the 15% threshold for contract variations so as not to require higher approvals. Review of the contract’s documentation disclosed that the original contract amount would have increased by 21% if the variation of NRs99,001 was considered. While both contracts have different contractors, these had the same authorized representative, who signed the bills for both contracts. The same authorized representative is also the representative of the contractors for two more contracts in Gorkha. This further strengthens PPRR team’s views on potential collusion among bidders in the Project.

108. The first interim payment certificate (IPC) of one of the drainage works contracts in Baglung was in the name of another contractor for civil works contract. In another civil works contract in Baglung, the PPRR team noted overpayment of NRs60,800 to the contractor in the fifth IPC. This pertained to furnishing the project manager site office and laboratory for material testing. This was purportedly adjusted on the eighth IPC, which was not made available to the PPRR team for review.

109. Claiming expenditures for one contract through another contract is a malpractice and presents a risk for project funds being siphoned out of the project. Strict monitoring of contractor’s work and changes in quantity of BOQ items is being called for to ensure project funds are appropriately spent. 110. In another Gorkha civil works contract, review of the bills disclosed differences in quantities of two BOQ items claimed in running bill 1 and final quantity reflected in the final bill. The details are presented in Table 2. 36 Section 7, clause 46 of the standard bid document.

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Table 2: Quantity Variance between Running and Final Bills BOQ no. Description Unit Quantity

Per BOQ Claimed in

IPC-1 Quantity per

Final Bill 3.5 Hard rock by machines m3 58.84 294.60 211.41 9.1 Assembling of gabion basket

(3x1x1) from outside m3 8.4 48.75 37.50

111. As the quantity claimed during the first progress payment was higher than that reflected during final payment, the contractor was overpaid for these BOQs. In this context, the PPRR team found the conduct of measurement of works for progress and final payments questionable. Inaccuracies in deduction of retention monies and payments to contractor 112. ADB Procurement Guidelines provides that in addition to performance security, retention money to ensure compliance by the contractor of its warranty or maintenance obligations may be required in an amount not to exceed 10% of payments. Such retention money will be withheld until the expiration of the warranty or maintenance period.37

The General Conditions of the Contract of the standard bid document requires retention of 5% from each payment due to the contractor until the completion of the works.

113. The PPRR team noted certain inconsistencies in the computation of retention money deducted from the interim payments of the contractor for one of the civil works contract in Gorkha, as presented in Table 3 below.

Table 3: Inaccurate Computation of Retention Money (in NRs)

IPC Gross Bill

(before VAT – basis of 5%)

Retention Money to be

deducted

Retention Money Actually

Deducted Difference

1 1,087,584 54,379 54,381 (2) 2 415,011 20,801 23,405 (2,604) 3 711,827 35,591 34,619 972

114. The PPRR team further noted computation errors in the IPCs of the same contractor in Gorkha above, resulting to underpayment by NRs33,304 as presented in Table 4 below.

Table 4: Computation Errors in IPCs (in NRs)

IPC Gross Bill (per PPRR)

Gross Bill (as approved & paid Difference

1 1,228,970 1,229,000 (30) 2 470,092 468,106 1,986 3 723,745 692,397 31,348

Total Shortfall 33,304

3. Building Groups

115. A “building group” (BG) means a group of about 15-25 unskilled laborers, both men and women, identified from the poor and disadvantaged households to participate in construction and related works under the Project, in compliance with the Project’s participatory approach. As of 28 February 2010, contracts for BGs amounted to $4.6 million or one fourth of the value of

37 ADB Procurement Guidelines (February 2007) and (April 2010), paragraph 2.39.

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total contracts awarded. The PPRR reviewed 23 BGs in Myagdi for Beni-Dharbang Road, with contracts amounting to approximately $0.9 million.38

116. BGs were formed based on the survey conducted by the DISC on households in every village development committee (VDC). The PPRR team compared the original lists of members pertaining to ten BGs maintained by the district implementation support consultants (DISC) against the payroll sheets for these BGs and noted that there were names in nine BGs that were substituted by other names. According to DISC, some BG members either refused to continue to work or have found work overseas or somewhere else, and workers are usually replaced by close relatives. Table 5 below presents a summary of the substitution details.

Table 5: Summary of Substitutions in BG Members

BG No. No. of Members No. Substituted % Substituted

10 25 4 16% 11 25 0 0% 12 25 1 4% 13 25 4 16% 14 25 10 40% 15 25 2 8% 16 24 4 17% 17 19 5 26% 18 24 19 79% 22 25 3 12%

117. Village Works Road Construction Committee (VWRCC) maintained the BGs records, including preparation and endorsement of the BGs’ payroll sheets. Each BG member was given a labor card where daily attendance was recorded by the BG leader, and which formed the basis for computing the BG members’ payroll.39

Disbursement for each BG was based on the running bills on the work output computed by DISC, done through work measurement. The DDC disbursed check payments to BGs in the name of the VWRCC Secretary or Treasurer, based solely on the work output computed by DISC. VWRCC distributed the payroll to BG members based on their attendance, and each member acknowledged receipt by affixing either their signatures or thumb marks on the payroll sheet.

118. Documents other than the running bills with work measurement computed by DISC, work completion reports and drawings, to appropriately support payments to BGs were not required to be submitted to DDC or DPO. These included labor cards of BG members, attendance sheets and payroll registers. However, the PPRR team observed that while copies of some attendance sheets and payroll sheets were found in DISC’s files, neither did these pay periods match nor were information complete such as BG numbers, pay period covered, or totals.

119. For some payroll registers and attendance sheets pertaining to three BGs which were signed by the BG members for receipt of a payroll for a particular pay period found at DISC, the PPRR team tested the accuracy of person days from attendance sheet forwarded to the payroll

38 The PPRR had limited access to records of BGs as these involved the village development committees (VDCs)

that are geographically dispersed in Myagdi. This also restricted reconciling DDC’s disbursements on BGs with VDCs’ payroll records.

39 Total attendance for each BG member shall be multiplied by a rate (derived by dividing the value of work output by the total person-days).

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register. The PPRR team noted that in all three cases, the person days forwarded to the payroll register were generally accurate. However, the total disbursed payroll amount by DDC was lesser than the total payroll paid to BG members, as acknowledged in the payroll registers. While these variances were minor, e.g. NRs348 for BG23, NRs34 for BG3 and NRs9 for BG4, this raises the question on how these BG members were paid fully when the total check received was lesser than required.

120. The PPRR team was able to reconcile DISC’s valuation of work output of BGs with bills prepared and DDC’s disbursements for fiscal years 2009/2010 and 2008/2009. DDC maintained one BG account for all BGs, where all transactions such as advances, settlements and payments were posted. As no separate ledgers for each BG were maintained by the DDC, the PPRR team was not able to validate the accuracy of disbursements pertaining to each BG.

121. BG members were provided with advances by DDC based on requests from the VDC. The PPRR team could not ascertain the adequacy of controls over accounting of advances and advance settlements at DDC. There was no existing procedure at DDC to capture receipt of advances by each BG member. While DDC was assured that advances were settled based on the running bills prepared by DISC with deductions representing the advances, there was no assurance that the advances were indeed received by the BG members.

122. The PPRR team was made to understand that each VDC keeps its own records. There was no reconciliation done for VDC and DDC accounts as DDC handled about 25 donor projects and 17 government programs at the same time. Furthermore, DDC explained that banks did not provide bank statements and bank reconciliations were done manually by going to the bank and ticking off DDC transactions records against bank records.

123. The PPRR team visited the site of two BGs, namely BG no. 4 and BG no. 18 to verify the existence and presence of BG members on the field. The PPRR team confirmed all members in the list pertaining to BG no. 4. However, for BG no. 18, the BG leader only knew 17 of the 25 names in the list of BG members shown by the PPRR team, and claimed that he never saw other than the 17 members working in the BG’s area. It is worth noting that the PPRR team observed that BG members wore safety gears in the construction area in compliance with safety standards.

124. The PPRR team noted that based on the estimates there were 20 BGs envisaged for Beni-Dharbang Road. However, this increased to 23 BGs, including one BG for construction of a road channel. There were no documents made available to the PPRR team which justify the increase of three BGs, e.g., request for additional work or road channel, and approval of increase in the number. The PPRR team noted that cost estimates had risen from NRs8.4 million to Nrs14.5 million (or 73%). The DPO explained that there was no approval from the PCU on the increase in number of BGs from 20 to 23, adding that estimates were made in May 2007 and which were revised using 2009 district rates. The PPRR team was made to understand that BG23 was established at VDC’s request for a road channel. The PPRR team was, however, not provided with any documentation to support the increase in BGs.

125. Clearly, there were significant lapses in internal controls as far as monitoring of BGs was concerned. Inadequate internal controls exposed the project to risks of manipulation and misappropriation of funds. Based on the observations noted, the PPRR team is of the view that DDC and DPO, and ultimately ADB, could not be assured that funds disbursed to BGs were indeed received by the intended recipients.

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Recommendations 126. Lack of basic controls over financial management may have exposed the Project to situations where funds were not optimally used for intended purposes and beneficiaries, and leaves the Project vulnerable to loss and/or improper use of its funds. There is a need to strengthen and strictly implement fiduciary controls at all levels of funds management to ensure transparency and accountability, especially in a decentralized project such as this one, and to minimize risks of misuse. It is recommended that the financial management system of this project and future development projects be strengthened by ensuring that:

• prudence is exercised at all times in reviewing payment claims to ensure payments are made for legitimate expenditures only;

• all relevant supports such as test reports, bank guarantee (for advance payments), and invoices are submitted as part of the claims ;

• requests for payments are duly endorsed by recommending and approving authorities;

• accurate computations of retention monies and liquidated damages are made; and

• no payments are made if not all requirements are complied with. 127. To achieve effectiveness on the use of building groups in subprojects, more rigorous and internal checks and balances will lessen the risk of improper use of Project funds. For decentralized projects using building groups, it is recommended that DDC and DPO of each district participating in the Project:

• strengthen subproject supervision and coordination with the VDCs to ensure legitimacy of each BG member;

• maintain appropriate records for each BG to facilitate tracking of each BG’s transactions such as payroll, advances, and settlement of advances;

• ensure due diligence is performed and clearly documented before payroll payments to ensure that payroll processed based on the request of the VDCs and endorsed by the DISCs, are appropriately received by each BG member;

• require VDCs to submit periodic reports on progress of works by BGs, including submission of acknowledged payroll by BG members; and

• exercise good records management in regard to BG accounts, including maintaining records on justification and approvals for increase in the number of BGs

128. For future decentralized projects, DOLIDAR in coordination with SARD and NRM should assess the capacity of the districts in managing and accounting for Project funds, and provide the relevant training, as necessary. D. Internal Control Weaknesses 129. The PPRR Team also assessed the Project’s internal controls and identified the following areas for improvement. Strong internal controls significantly reduce the risk of undetected fraud and corruption, and are vital in ensuring Project funds are directed towards stated objectives, for intended beneficiaries.40

40 Note that this section does not include controls already referred to previously in this report.

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Requests for quotations for shopping contracts not documented 130. The PPRR team noted that four shopping contracts for goods in Myagdi did not have any documentation or register on transmittal of requests for quotations to ascertain when and who these were sent. In Gorkha, the PPRR team could not ascertain the quantity ordered, technical specifications requested and delivery schedule for a shopping contract as DDC’s requests for quotation to vendors were not available. The DDC explained that quotations were requested through telephone. For a sample shopping contract in Baglung, the dispatch register showed that quotations were sent to three vendors, however, the PPRR team noted that six quotations were received. Baglung’s DDC explained that the dispatch register was only for reference and may not be comprehensive, and updated the same to add the other three quotations. Inadequate complaints management procedures 131. ADB Procurement Guidelines provide that if the borrower receives protests or complaints from bidders after publication of results of evaluation, a copy of the complaint and a copy of the borrower’s response shall be sent to ADB for information.41

132. The PPRR team noted that no documented complaint management procedures exist at the PCU. However, complaints received at the district level are registered, addressed and closed by the DDC only. There exists no procedure which mandates reporting of complaints to PCU for notification, record keeping or obtaining advice. In the absence of documented complaint handling procedures, complaints from bidders and disposition therefore, if any may not be made known to ADB. The PPRR team emphasizes the importance of maintaining documented complaints procedures to ensure transparency and good governance in the procurement process. Lack of management information system 133. The Loan Agreement provides for the borrower to, among others, maintain records and accounts adequate to identify the goods and services and other items of expenditures financed out of the proceeds of the Loan.42

134. The PPRR team noted that there was no management information system, which recorded the details and status of the overall project, including each subproject at the district level. Records that appropriately reflect the contracts and their status, e.g., completed or in progress, per district were not readily available at the PCU. These were requested by the PCU from each district during the PPRR, and the PPRR team also noted that the DDCs did not also maintain this type of documentation for their respective contracts.

135. Effective project management is critical to the success of the project, especially for highly decentralized projects. Monitoring the status of subprojects on a regular basis is a key component of project management. Without adequate documentation on the progress of each contract being implemented, the overall progress of the Project could not be ascertained. Any

41 ADB Procurement Guidelines (February 2007) and (April 2010), Appendix 1, paragraph 2(e). 42 Loan Agreement between the Kingdom of Nepal and Asian Development Bank dated 23 December 2004, Section

4.06.

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indicators of slow performance or implementation problems by contractors cannot be readily determined, and risks cannot be identified immediately and appropriately mitigated. Weak capacity at the PCU and DDCs 136. The Loan Agreement provides that the PCU is responsible for, among others, guiding and monitoring DDCs that participate in the Project. Also, the DPO of each DDC, which is responsible for, among others, procuring services and monitoring the implementation of works shall comprise a full-time engineer, sufficient overseers and an accountant.43

137. At the time of the PPRR, the PCU only had one engineer to assist 18 Project districts in technical matters. The PPRR team was informed that the position of the second engineer had been vacant for the last 6-7 months. Similarly, at Ramechap district the PPRR team noted that the DPO did not have an accountant but had sufficient number of overseers. At DDCs, the PPRR team observed lesser number of Project staff, who are also responsible for implementing other foreign funded projects apart from ADB’s. This effectively reduced the efficiency and effectiveness of Project implementation, which was manifested by weak project and financial management, and inadequate records management and maintenance.

138. While the DDC personnel supporting the project are qualified engineers and accountants, they did not have any training on ADB procurement and loan disbursements procedures. Lack of ADB-specific procurement and disbursement knowledge and understanding increases the risk of non-compliance. Well trained personnel on ADB procedures and processes facilitate smooth and timely execution of contracts, thereby reducing the risk of integrity violations in ADB-financed projects.

Inadequate segregation of duties 139. The Loan Agreement provides for the borrower to cause the Project to be carried out with due diligence and efficiency and in conformity with, among others sound administrative and financial practices.44

140. Inadequate segregation of duties was observed at the district level. The accountant who also assisted in project-related financial activities prepared accounting books and checks, performed bank reconciliations, and signed checks as well. An environment with weak or non-existing segregation of duties (i.e., maker/checker principle) presents a window of opportunity for integrity violations.

Inconsistencies in bid evaluation reports 141. The ADB Procurement Guidelines requires the borrower to prepare a detailed report on the evaluation and comparison of bids setting forth the specific reasons on which the recommendation is based for the award of the contract.45

43 Loan Agreement between the Kingdom of Nepal and Asian Development Bank dated 23 December 2004,

Schedule 6.

ADB provided no objection for procurement in this Project prior to contract award based on the evaluation report. DDC sent the bid evaluation report to PCU for concurrence, and PCU sent the same to ADB to obtain no objection.

44 Loan Agreement between the Kingdom of Nepal and Asian Development Bank dated 23 December 2004, Section 4.01.

45 ADB Procurement Guidelines (February 2007) and (April 2010), paragraph 2.54.

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142. The PPRR team noted instances when the bid evaluation reports contained inaccurate details. In a Ramechap supply of goods contract the report indicated that only one bid was received, when in fact two bids were received, with one having been rejected. The bid evaluation report for drainage works in Baglung indicated that one of the losing bidders did not win the contract in package 2 as the bid was not the lowest responsive. However, the PPRR noted that the losing bidder submitted inadequate bid security and should have been disqualified on that basis.

143. Inaccurate information made available to ADB affects the basis on which decisions are taken in awarding contracts. The PPRR Team calls on DOLIDAR to, in future, strengthen review procedures of procurement reports to ensure accuracy of information and integrity in the procurement process.

Documents not made available 144. DDCs maintained bid registers that recorded contractors/suppliers who purchased bids, including the date of purchase and official receipt reference numbers. The original receipt pertaining to a contractor that purchased bid documents after the second advertisement for two NCB civil works packages in Gorkha was not made available to the PPRR team. 145. Receipts on the sale of bid documents for the six contracts relating to drainage works and a civil works contract in Baglung were not presented to the PPRR team for review. Also, copies of performance securities for the three contracts relating to drainage works were not made available for review. Bid registers lack adequate information 146. ADB Procurement Guidelines provide for the borrower to, among others, employ acceptable management procedures to establish date and time of bid submission.46

Bid registers were maintained at the district DDCs, which recorded the details of bid submission. The PPRR team noted that for all NCB civil works contracts reviewed in Myagdi (6) and Gorkha (3), while the bid registers recorded the name of the firm, firm’s address, package number, date and time of bid submission, the names and signatures of persons submitting the bids were not captured.

147. In Myagdi, the PPRR team observed that the DDC, after discussions of the finding, obtained the signatures of persons submitting bids for subsequent NCB procurement exercises (NCB packages 7 to 10). Bid securities not returned to unsuccessful bidders 148. ADB Procurement Guidelines require the borrower to release the bid security to unsuccessful bidders once the contract has been signed with the winning bidder.47

The PPRR team noted that bid securities of losing bidders in Myagdi’s six NCB contracts were not returned. The PPRR team was informed that none of the losing bidders contacted DDC to obtain their bid securities.

46 ADB Procurement Guidelines (February 2007) and (April 2010), paragraph 2.44. 47 ADB Procurement Guidelines (February 2007) and (April 2010), paragraph 2.14.

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Recommendations 149. The PPRR team recommends the following to DOLIDAR, PCU, and DDCs to strengthen controls for this project and future development projects:

• strengthen PCU’s personnel by ensuring vacancies are accordingly filled up by qualified personnel;

• establish an effective management information system at the PCU to facilitate monitoring of subprojects implemented by all districts participating in the Project;

• establish complaints management procedures at the PCU to monitor and assist in addressing complaints filed by bidders at the district level;

• implement segregation of duties in project’s financial activities; • remind all DDCs of their responsibilities in project administration; • accurately document all procurement-related activities; review procurement

registers, reports and minutes (e.g., evaluation reports, bid opening minutes and bid opening sheet); and ensure reports contain accurate information prior to their issuance;

• exercise good records management to ensure completeness of audit trail of procurement-related activities; and

• promptly return bid securities of unsuccessful bidders as soon as the contract is signed with the winning bidder;

IV. CONCLUDING COMMENTS

150. The PPRR Team recognizes the challenges inherent in the Project design considering that this Project is highly decentralized across the far-flung and remote districts of Nepal. Numerous smaller-sized civil works subprojects were implemented by mostly incapable local contractors available within the area. Strong indicators of systemic collusion among bidders in some subprojects are a concern. Greater collaboration may be required between SARD, through NRM and MLD/DOLIDAR/Government of Nepal to establish and implement a more effective review and monitoring mechanism for future decentralized projects in Nepal to ensure transparent procurement and financial management, and contracts execution capacity at all levels. 151. The PPRR team reiterates the importance of maintaining sufficient and appropriate documentation of the procurement process and evaluation process decisions, and good financial record management. It is important that procurement, financial management, asset management, and internal control weaknesses identified here do not recur in this project and similar projects in Nepal. It is crucial that bidding integrity and transparency are established at project commencement, and observed throughout project implementation in order to maximize development effectiveness. 152. While the remoteness of the districts implementing the Project is a challenge, more comprehensive review/inspection missions at remote sites will be helpful to provide on-site guidance to Project officials. OAI encourages SARD, in coordination with NRM to conduct spot reviews during review missions to help ensure procurement integrity and transparency; funds are used as intended; and project outputs are in accordance with contract terms. OAI is prepared to assist SARD on this type of review.

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153. The PPRR team thanks Project management and staff, especially the MLD, DOLIDAR, PCU, and DDCs at the district level for their assistance and cooperation and assistance to the PPRR requirements. The PPRR team acknowledges the participation of the then NRM’s Procurement Officer during the PPRR team’s fieldwork, and appreciates the valuable inputs to the PPRR. ADB values the courtesy and support that Project officials extended to the PPRR team, including the valuable participation of the Auditor General’s Office of Nepal who jointly conducted this PPRR and provided the PPRR team with valuable insights.