Chinese firms bid low to win contracts, but performance is problematic

CA - Stories in Dan Tri and Thanh Nien newspapers suggest that sentiment is growing against low-cost Chinese contractors’ dominance of power sector projects.

Chinese contractors have been regularly winning bids to provide EPC (engineering, procurement, construction) packages in Vietnam. According to Ta Van Huong, Director of the Ministry of Industry and Trade’s Energy Department, Chinese contractors are the general contractors or play other key roles in 80 percent of the coal-fired power plant projects in the industry’s development plan (there are some 40 projects in the plan, including ones which are still being negotiated).

Under Vietnam’s procurement law, only cost matters

Huong judges Chinese monitoring, management systems and technology far inferior to the technologies of G7 countries. However, Chinese contractors are consistently able to enter lower bids than G7 contractors.

“In some projects, the price offered by Chinese contractors is only half of that bid by other contractors. Our procurement law does not differentiate among the origins of equipment. Therefore, when Chinese firms enter the low bid, they easily win,” the Industry Ministry official said.

The low costs offered by Chinese contractors were important factors that led to the Government’s decision to allow to expand the Duyen Hai and Vinh Tan power plant projects. A Chinese contractor that has fallen way behind on the Hai Phong 1 project still was awarded the contract to build Duyen Hai 1 and got the right to join the bidding for the Duyen Hai 3 project.

The Procurement Law, Nguyen Van Thu, Chairman of the Machine Industry Association (VAMI) points out, is heavily biased to lowest cost contractors and takes little account of quality or prior performance. Consequently, many European and Japanese contractors don’t bother to bid if they hear Chinese contractors will participate.

Ngo Ngoc Quy, Deputy Director of the Ministry of Planning and Investment’s Bidding Department, says a lot of big projects are reliant on commercial loans from China, and therefore are compelled to choose Chinese contractors

Huong adds that in some projects, it is clearly stipulated that those who win bids must arrange capital for projects. Many power projects have used the loans provided by Chinese banks (Vinh Tan 2 thermopower project is 85 percent funded by loans sourced from the China Import-Export Bank and Chinese ODA capital).

G7 contractors can arrange financing too, but their bids are not competitive.

Some consequences

On August 3, a chemical explosion occurred at the Hai Phong thermal power plant which killed two workers and injured four. EPC for the project is provided by a Chinese contractor.

The Quang Ninh 1 and Hai Phong 1 plants, both projects entrusted to Chinese contractors, have been operating unstably. There have been equipment failures.

At Hai Phong, unit #1 was put into operation in September 2009, but it experienced troubles after just one month.

Thu of the Machine Industry Association says Vietnam needs to set up technical standards to screen technologies and equipments used by Chinese contractors.

When Chinese contractors win EPC bids, Vietnamese enterprises are unable to become sub-contractors, it is said, because Chinese contractors always try to bring to Vietnam everything they can, especially untrained labourers. That’s despite Prime Ministerial Decision 87, which clearly stipulates that foreign contractors can only bring to Vietnam high qualified experts and skilled workers that Vietnam does not have.

Vietnamese contractors have called on the State to reconsider the Procurement Law’s strong bias to those contractors which offer the lowest costs.

Huong, the Industry Ministry official, agrees that stricter standards are needed to ensure the quality of projects. For example, if project specifications were to require that the technologies and equipments used for the projects must be the ones used in G7 countries, or else “technologies recognized in the world,” very few Chinese contractors would be able to qualify.