Consultants inflate project cost in DPR

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    consulting-services-img1Consultant Snowy Mountain Engineering Corporation (SMEC) prepared the detailed project report (DPR) for West Seti Hydropower Project. The Australian company wasted one and half decades assuring it will develop the project after making financial arrangements but did not give full details of the DPR to the government. SMEC then claimed it had spent Aus$ 31 million (almost Rs 3 billion) in preparing the DPR and demanded the amount from the government.

    German consultant Lahmeyer International prepared a report stating that around Rs 45 billion will be needed for Upper Tamakoshi Hydropower Project. But the Nepal Electricity Authority (NEA) disagreed on the estimated cost and reduced it to Rs 35.29 billion. The cost may rise beyond that projected by the NEA due to delay in construction but that will still be less than that projected by Lahmeyer.

    South Korean company Landmark has prepared a DPR putting cost of the proposed Nijgadh International Airport at Rs 670 billion. The company has also withheld the DPR and is bargaining that it should either be allowed to construct the project at a cost almost Rs 150 billion higher than the country’s annual budget or be paid for the expenditure incurred while preparing the DPR.

    These are just a few projects stalled due to conditions and problems after preparation of DPR by foreign consultants that usually inflate the estimated project cost due to their interest. Cost of even the projects being developed with assistance of the World Bank (WB) and the Asian Development Bank (ADB) are inflated. There is compulsion to implement the projects at the cost projected by foreign consultants with technicians and financial analysts in the government bodies not fulfilling their responsibilities.

    “We can guess about the cost to be quoted by a private company that has been asked to prepare DPR despite demanding Rs 300 billion for the Kathmandu Tarai Fast Track with estimated cost of Rs 100 billion,” former finance secretary Rameshwore Khanal had said during the meeting held by the Development Committee of the parliament on March 15 to discuss about the Nijgadh International Airport and the Fast Track.

    “The model of private investment in big projects in Nepal has failed until now while we also do not have the necessary human resources to manage that model. We should, therefore, construct projects big on the basis of cost and management ourselves,” he had reasoned.

    Physical Infrastructure and Transport Minister Bimalendra Nidhi had signed agreement with International Leasing and Financial Services Limited of India for preparing DPR for the Fast Track on the day experts including Khanal had claimed that the two projects can be constructed with domestic investment.

    “There is risk of inflating project cost and later hiding the DPR when the private sector is asked to prepare DPR,” transport engineer and policy analyst Dr Surya Raj Acharya says. “The government must prepare DPR for projects with conditions irrespective of the model to be adopted for construction. Only projects like cable car, where the government does not have any responsibility, should be given to the private sector,” he reasons.

    He argues the private sector inflates estimated cost, while preparing DPR, by including the interest for the loan that has to be acquired and management of risks of construction. He explains that the interest rate for loan received by the private sector is higher than that by the government, and big international contractors fear of risk in constructing projects in the least developed countries.

    “Dependent consultancy service is also a reason for inflated project cost. We have found that we should make a provision to do the work through the government mechanism. The government mechanism should be competent enough to examine if the DPR is right or not even if the private sector were to be asked to prepare the DPR,” Chairman of the Development Committee of the parliament Rabindra Adhikari, who organizes discussions about moving development projects forward, says.

    Nepal has been currently mobilizing foreign consultant for the majority of big infrastructure projects. “The cost projected by these consultants, which have in/direct connection with big construction companies, is more favorable for those companies than being actual,” a consultant says requesting anonymity. “The construction companies compete in influencing us to inflate the estimated cost when we are studying for DPR. The government has to contract the project accordingly after we inflate the cost,” the consultant concedes.

    Reason for inflated cost in DPR

    • The consultant itself can construct the project if the build-own-operate-transfer (BOOT) model is adopted, and can claim for funding gap with the government
    • Loan with high interest rate and fear in risk management
    • Relation with construction companies
    • Profit motive

    Source : Karobar Daily