Mergers for Bigger and Stronger Contractors

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Mergers for Bigger and Stronger Contractors

The overall performance of our contractors (construction companies) is so poor that it would be naive to believe that the country's ambition for development is possible from their existing capacity. While some contractors have done extraordinary construction works in the country, the overall industry's capacity is still below par. Many factors contribute to the woefully low capital expenditure. But our contractors' weak capacity is also to be blamed for the failure to complete a development project on time. Nearly 15,000 contractors are registered in the country. Barring a handful of big contractors, most of them lack capacity to undertake mega development projects.

To meet technical and financial criteria like minimum turnover requirements to bid big government contracts, contractors form joint ventures. Bilateral or multilateral partners turn reluctant to grant development projects to domestic contractors, citing their lack of capacity and qualification. Constrained by the capacity, some resort to unscrupulous business practices, tarnishing the reputation of the entire business. Cases of bribing officials to bag a public contract are often reported in the media. Smaller contractors pay extra to big contractors just to count them as a partner in the joint venture. The poor capacity of contractors also gets directly reflected in the projects that they execute.   

To overcome the malaise, it's high time that the contractors consider pursuing a merger policy. Not only for them, but such an amalgamation would also give a much-needed boost to the construction sector which is crucial for the country's development. The consolidation makes contractors better, bigger and stronger financially. Above all, it helps in bringing much-needed efficiency and quality to their works when their capacity in terms of technology, human resource and equipments will grow.

If the government really wants to bridge the yawning infrastructure gap and materialise its development ambitions, it should promote the policy of mergers between contractors. From amendments in the laws and regulations to incentives, the government should encourage mergers. It must factor in the combined work experience and turnover of the merged entities for technical and financial assessment to bid a public contract.

Contractors must be ready to go public if they are really serious about becoming bigger. Becoming public would also call for greater scrutiny and transparency --something that contractors largely loathe. Not only smaller contractors, but bigger firms also stand to benefit from the consolidation. The merger enables them to gain footholds abroad. In addition to the huge potential that Nepal's development ambition offers, big contractors can gradually seek business abroad. The government must allow contractors to bid for procurements in foreign countries. In addition to the international experience they will bring back, their participation in foreign markets will also become a source of foreign currency earnings for Nepal.

Becoming rich by exporting manufactured products remains a far-fetched dream for Nepal. However, the export of services is a viable alternative route to prosperity. Hydropower and tourism are the service sectors that have been much discussed. The export of construction services is something that Nepal can also seriously consider. For that to happen, our contractors have to raise the bar to a level that is competitive in the international market.

The merger of contractors is definitely a right step towards that end.

Madan Lamsal
[email protected]

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