Infrastructure projects: Lowest bid = Highest risk?

Lowest bid, contractor goes bust, delay in road or rail project - the Government should investigate if these are linked, in the light of the latest stalled project in Braddell


The stalling of a major project to improve traffic flow along Braddell Road raises disturbing questions about why such hiccups occur despite Singapore's reputation for stringent processes.

The $29 million contract to widen Braddell Road between Toa Payoh Lorong 1 and the Braddell flyover from dual-three lanes to dual-five lanes was clinched by home-grown contractor Hexagroup in late-2012.

It was scheduled to be completed by the end of this year but work has ground to a halt, after two years.

The Land Transport Authority (LTA), which picked Hexagroup to do the job out of six bidders, will probably have to find another contractor to finish the job.

If so, it would be the second time in two years that the authority has had to do this.

In mid-2013, Austria's Alpine Bau, which was building three MRT stations on the Downtown Line Stage 2, went broke.

McConnell Dowell South East Asia and SK E&C (Singapore) were appointed to take over the job. As a result, the line will open in the first quarter of next year, instead of December this year.

There are similar examples from recent years. One of them is the Bartley viaduct project, which opened in 2010 after a five-year delay because its original builder, L&M Prestressing, encountered financial difficulty, and another company had to be roped in to complete the project.

In the previous decade, a viaduct project in Pasir Panjang, to be delivered by L&M Prestressing in 2003, was delayed for close to three years.

And in 2004, LTA had to do the same for a flyover in Keppel Road when the builder, Wan Soon, floundered. That was not long before it had to rope in a new contractor to finish an underpass project at the Queensway/ Commonwealth junction after original builder Chew Eu Hock Holdings had money problems.

Value for money

INDUSTRY watchers often wonder if the Government's penchant for awarding contracts to contractors with the lowest bid is an underlying problem.

Most, if not all, the above contracts were the lowest bids.

Critics point out that the lower a bid is, the less room there is to manoeuvre when things go awry, like when costs of raw materials rise or there is a labour crunch or when progressive payments come a little later than expected.

To make things worse, contractors who make so-called "suicide bids" are forced to cut corners to make ends meet, they say.

The Government, however, defends its tender process as one that ensures "value for money".

In the aftermath of the fatal Circle Line Nicoll Highway station collapse in 2004, then National Development Minister Mah Bow Tan dismissed assertions by MPs that the tender system compelled contractors to make unrealistically low bids.

(The Nicoll Highway station contractor Nishimatsu submitted the lowest bid, which was a whopping $70 million less than the next lowest submission.)

Mr Mah said tenders were given to contractors who offered the best value for money in terms of performance and quality, and not necessarily to the lowest bidder.

But in 2008, after a long and costly public inquiry into the tragedy that claimed four lives and delayed Singapore's rail expansion programme, the LTA said it was reviewing its tender process to embrace the two-envelope system more.

Under such a system, the envelope containing the monetary value of a bid is opened only if the authority is satisfied with proposals made in the first envelope.

Yet, a random check of major construction projects the authority awarded since then has revealed that more than nine out of 10 were clinched by companies which had submitted the lowest bids. Leading contractors also find this to be the case.

Is it purely coincidental that companies with the lowest bids also had the best proposals?

Defenders of the "lowest bid" system will of course say it instils fiscal discipline and ultimately protects the interest of taxpayers. In other words, it saves the country money.

In principle, that thinking is sound - provided the tender evaluation committee of every government department is able to differentiate between a competitive bid and a "suicide bid".

Costly delays

TAKE the case of Hexagroup. According to the Accounting and Corporate Regulatory Authority, the company had total assets of $1.26 million and total liabilities of $946,725 as of 2007 (its last declaration to Acra). Hence its net worth at the time could be interpreted to be around $300,000 - or just 1 per cent of the value of its stalled Braddell Road project.

It is possible that Hexagroup's financials had improved dramatically by the time it secured the project in 2012, but the LTA refused to shed more light on how the seemingly modest company could have clinched such a sizeable project.

"We have nothing more to add beyond what we have already shared with you," a spokesman said in response to a request by The Straits Times for an interview regarding the case.

In fact, the firm was authorised by the Building and Construction Authority to bid for projects of up to $40 million in value.

The LTA said it saw no sign that Hexagroup was in financial difficulty. Alas, it has said the same for all the other firms which have failed to complete projects.

While it is commendable that the LTA wants to save taxpayers' money, it should also realise that delays are also costly. The cost of hiring another builder to finish the job is easily quantifiable.

But the cost of prolonged congestion that an uncompleted road poses, or the opportunity cost of a new viaduct or underpass is harder to assess. Yet, to say that such costs add up to tens of millions per year (of delay) would not be an exaggeration.

Defenders of the lowest bid regime may argue that hundreds of other projects have been completed without a hitch under this system.

But that would be like saying a motorcyclist who died of head injuries in a crash had been riding without a helmet for years without incident.

In any case, whether the lowest bid regime is really the root cause of problems needs to be studied carefully, and not dismissed.

Scrutinise tender process

AND while we are at it, perhaps there are other areas in the tender process that bear scrutiny. The way project specifications are determined, for instance.

A couple of glaring cases point to the need for this. One, the Bukit Panjang LRT, which broke down no fewer than 150 times between 1999 and 2012 (or an average of once every month). Two, 120km of the Circle Line's power cables had to be replaced at a cost of $15 million just three years after the MRT line opened.

While the Bukit Panjang system is said to have been difficult to build because the line had to weave through an already built-up estate, former SMRT chief executive Saw Phaik Hwa highlighted some fundamental design flaws, such as a complicated power system and a "badly commissioned" train location system.

As for the Circle Line cables, they were exposed to water seeping into the tunnels. Despite this well-known fact, more water-resistant cables were not specified in the first place.

Whatever the causes of problematic projects, they need to be identified and addressed. Otherwise, they will slowly but surely chip away at Singapore's reputation for being efficient, dependable and transparent.


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