The Case Journal

Construction Contract Disputes in Pakistan: The Case of

Journal: The Case Journal

Manuscript ID Draft

Manuscript Type: Compact Cases

Construction Projects, Contract disputes, Developing countries,

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3 CONSTRUCTION CONTRACT DISPUTES IN PAKISTAN: THE CASE OF LAHORE
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ORANGE LINE METRO PROJECT
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9 It was a typical warm day in July 2016 in Lahore, the megacity of 110million people in Punjab, Pakistan.
10 Yet for Uzair Shah, Project Manager of the Orange Line Metro Project and GM Operations of of the
11 project owner, Punjab Metrobus Authority (PMA), it felt warmer still. As he sat down in the board room
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of PMA’s headquarters in Lahore, he looked at Saeed Akhtar, Project Manager at Lahore Development
14 Authority’s (LDA) Project Management Unit (PMU) who looked solemnly back at him. For the past
15 three years, Pakistan’s first modern rail-based mass transit system project in Lahore had seen setback
16 after setback. The 27.1 km (16.8 mi) rail line running through the heart of Lahore had been planned to
17 serve the city through 26 stations, expected to handle 250,000 passengers daily. From adjustments to
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19 technical plans to difficulties with heritage sites across the city, issues with city residents along the route
20 and contractor problems, the project had had more than its fair share of difficulties. The main contractor
21 for Package 2 of the project had been behind schedule, had remained non-responsive to formal cajoling
22 and threats from LDA and today Uzair Shah and Saeed Akhtar were considering making a
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recommendation to Lahore Development Authority (LDA), the executing body of the project, to
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25 terminate the contract with the non-performing contractor Maqbool-Colson JV (MCJV) with immediate
26 effect.
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28 The decision, they both knew, would have several ramifications, first and foremost being the effect on
29 the already lagging schedule. Project closure in December 2017, prior to the upcoming July 2018
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general elections was vital and could not be reconsidered. MCJV, the package 2 contractor, was one of
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32 two primary civil works contractor handling Orange Line Metro’s civil works. If a decision was to be
33 taken to remove them, then procurement for the next contractor would have to begin pre-qualification
34 notice onwards- each step taking off valuable time. Considerable work remained from Chauburji to Ali
35 Town amounting to approximately 11,000 million rupees (USD 89.3 million). The project had already
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37 been subject to criticism regarding transparency and environmental sustainability. Newspapers, both
38 knew, would soon be filled with further criticism of the project one the decision became public. There
39 was sufficient a hue and cry over the schedule delays already and the rise in cost by approximately
40 another 2 billion rupees due to the dismissal of the non-performing contractor Maqbool-Colson JV
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(MCJV) would not go down well with the public and the media. Delays in work completion on an
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43 already time-constrained project would lead to a worsening image of the mass transit program and the
44 Punjab Government itself.
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46 Should they terminate the contract or try to renew their relationship with MCJV? What could they have
47 done to create partnering with the contractor to begin with?
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Page 3 of 20 The Case Journal

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3 LAHORE URBAN TRANSPORT MASTER PLAN 2011: THE MASS TRANSIT SYSTEM IS
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BORN
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7 Lahore was the second-largest urban center of Pakistan with a population Lahore, with a population
8 exceeding 70 million in 2010. The capital of the populous and wealthy province of Punjab, Lahore
9 covered an area of about 700 square miles and was one of the largest cities in the world. With increasing
10 population, however, came pollution, poor public transport, congestion, and ever-increasing traffic.
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While urbanization increased, Lahore still had no public transport system, relying essentially on the
13 informal transport sector and selected public bus routes. To address these transport issues, studies
14 conducted in the 1990s by the Government of Punjab had identified the need for a mass transit system
15 in the city to meet future public transport demands. Initial feasibility recommended Ferozepur Road
16 (the city’s primary traffic artery dividing Lahore precisely into two halves) as the priority corridor.
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18 However, despite various attempts, no transport project could come off the ground. In 2005-06, the
19 Transport Department, Government of the Punjab commissioned MVA Asia Ltd to undertake a detailed
20 Feasibility Study on a Rapid Mass Transit System (RMTS) for Lahore. This study covered the
21 development of a long term RMTS network for Lahore and drew the viability of the priority lines, based
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on identification of potential mass transit corridors, followed by a broad assessment of engineering
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24 constraints in those corridors. The order of priority for implementing these lines was then determined
25 based primarily on forecast passenger demand. The four RMTS corridors were ranked in following
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28  Green (Bus) Line – Ferozepur Road/Mall Road/Ravi Road/Shahdara. (Gajju Matta To
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30 Shahdara; 27 km in length)
31  Orange (Train) Line – Raiwind Road/Multan Road/MacLeod Road/ Railway Station/GT
32 Road (Ali Town to Dera Gujran; 27 km in length)
33  Blue Line – Township/Gulberg Boulevard/Jail Road
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35  Purple Line – Bhatti Gate/Allama Iqbal Road/Airport
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38 Again, deadlock remained for several more years wherein the lack of public mass transport saw a sharp
39 rise in ownership of motorized vehicles including cars, rikshaws and motorbikes in the city. The number
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of vehicles (per 1000 population) registered in Lahore increased sharply from 95 vehicles in 2001 to
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42 238 vehicles in 2008. The deadlock was finally broken when the Japanese International Co-operation
43 Agency (JICA) undertook a detailed transport demand estimation for Lahore in 2011. It estimated that
44 transport demand in the city was 12 million trips. This included 4 million short walking trips and 8
45 million motorized trips, on a usual weekday.
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The resultant Lahore Urban Transport Master Plan 2011, prepared by JICA, recommended seven Bus
49 Rapid Transit (BRT) corridors in Lahore. In the same year, the Government of Punjab, with a mandate
50 to make infrastructure provisioning in Punjab better than anything seen before in the country, appointed
51 Ulasim-Istanbul1 for the preparation of a preliminary design of the first Metro Bus System (MBS). The
52 MBS was planned as an in integrated network of bus and rail with Multi-Modal Intercity Bus Terminals
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54 (MIBT) with one terminal to be established on either side of the corridor, accompanied by Park and
55 Ride plazas. The overall transportation map hence developed for Lahore included and integrated the
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59 1Ulasim-Istanbul was a Turkish company established in 1988 as a subsidiary company of Istanbul Metropolitan
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3 MBS with public transport routes, sub-urban railway, RMTS (orange and other lines), and the taxi
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system in Lahore.
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7 The Metro Bus System Line-1, a bus service running from the Gajjumata area in the south to Shahdara,
8 the north precinct of the city was initiated immediately after and was jointly inaugurated by the then
9 Turkish Deputy Prime Minister Bakir Bozdage and Punjab’s political lead, Chief Minister Shahbaz
10 Sharif in February 2013. This became the country’s first modern bus system, owned and operated by
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the Punjab Metrobus Authority (PMA). As envisaged in the MVA Asia study, MBS Line-1 was
13 approximately 27km long. The Green (Bus) line thereafter became the blueprint for Punjab
14 Government, which proposed similar Metrobus projects for Rawalpindi, Faisalabad and Multan in the
15 2013-14 development program. Metrobus Islamabad/ Rawalpindi was inaugurated in June 2015 by the
16 Prime Minister. Multan Metrobus was due for completion in January 2017.
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19 The orange Train line was expected to be the seminal project for the country on similar lines- to be
20 replicated across the country as the means to bringing about much-needed modern public transport
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DEVELOPING THE ORANGE LINE
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28 The Orange Line was to provide a rapid mode of rail transport that was safe, comfortable and reliable
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30 the single line would reduce traffic load on roads adjacent to it by taking on a load of about 30,000
31 travellers per hour (at peak).
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This first RMTS line (Orange Line) was to commence from the main depot in Dera Gujran in eastern
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35 Lahore along the Grand Trunk Road on towards the Main Railway Station, then proceed across the city
36 center via Lakshmi Chowk, McLeod Road and Lake Road to Chouburji. From Chouburji, it would head
37 south-west via Multan Road and Raiwind Road, to a stabling yard and terminal at Ali Town (Appendix
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41 According to the project’s PC1 approved in April 2015, the project would cost 162.6 billion Pakistani
42 Rupees (equivalent to USD 1.63 billion), a huge amount by Pakistani standards. This made it one of the
43 largest transport megaprojects to be undertaken in the country. Orange Line Metro Project involved
44 several complex design and construction (civil works) zones, the most important one being the double
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storied central station at Mall Road and the underground station at Anarkali Bazaar.
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48 Despite fulfilling a dire public need, Orange Line remained a financially, politically and technically-
49 risky project for the Government of Punjab to undertake. The project route involved 25.4 km (15.8 mi)
50 of the line on elevated platforms through the city besides 1.72 km (1.1 mi) of underground coverage.
51 Opposition to the project came from several directions. Many questioned Pakistan’s ability to repay the
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Chinese soft loan that was being used to finance a transport system that further needed to be subsidized
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54 throughout its life, while there were concerns over the route, land acquisition, population displacement
55 and the affects on hundreds of heritage sites dotted across historic Lahore, several of which needed to
56 be outrightly dismantled to make way for the train. All these had ramifications for the city government
57 and especially the Punjab Government wanting to ‘reap’ the benefits from the completion of this
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‘impressive’ project in the upcoming 2016 general elections.
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Page 5 of 20 The Case Journal

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3 PROCUREMENT METHOD- EPC AND CIVIL WORKS
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The project was divided into four packages. Package 1 and 2 divided civil works and associated
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7 development across the 27km route into near equal work packages, while the other two packages
8 comprised of the rail depot and the stabling yard for maintenance. Separate tenders were commissioned
9 for Package 1 and 2, the depot and yard, and multiple others for associated works including rebuilding
10 of mosques, demolition, clearance of debris and various consultancies. Package 1 from Dera Gujran to
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Chouburji and Package 2 from Chouburji to Ali town were the largest civil works contracts, each
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15 Lahore Development Authority (LDA) remained the project’s executing body on behalf of the
16 Government of Punjab and PMA. Project’s PC-12 preparation as well as the bidding documents (for a
17 two stage, two envelope procurement design) were drafted by The National Engineering Services,
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19 Pakistan (NESPAK)3 led Joint Venture (NESPAK-CEC JV), who had won the contract for the project’s
20 technical oversight. This also included geotechnical investigations, Environmental Impact Assessment
21 (EIA) and the implementation of Health, Safety and Quality Plans. The Lahore Development Authority,
22 as the project’s executing body, had only come on board only after the PC 1 was approved. This was
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because at the time, LDA had been given a stay order by Lahore High Court (LHC) pertaining to its
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25 conduct over the development of the signal free corridor at Jail Road, Lahore. The stay order had
26 prevented LDA from taking on another developmental project in the city.
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28 While project financing was provided by the Export-Import (Exim) Bank of China, tenders needed to
29 be floated for the EPC contract, and later civil works and dozens of associated, smaller contracts. The
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first leg of the procurement process began in 2014, when PMA invited interested parties through a
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32 Request for Proposal (RFP) for the Engineering, Procurement and Consultancy (EPC) of Orange Line.
33 An international tender for this contract was circulated internationally for this primary EPC contract.
34 While initial interest was received by 16 international firms at the pre-bid stage, final bids were
35 submitted by two Chinese firms, CINO-rail and CR Norrinco only. Meanwhile, a framework agreement
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37 was signed between the Chinese and Pakistani governments whereby the international tender was
38 closed, and the Chinese government offered proposals under the new framework agreement from the
39 same two companies that had initially bid for the project. CR-Norrinco came out as the company with
40 the lowest evaluated bid and was therefore selected. Negotiations over cost and specifications
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continued for a further eight months.
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44 For civil and associated works, LDA advertised for and awarded contracts to two construction
45 companies for each of the two packages (Package 1 and 2). The contract of package 1, from Dera Gujran
46 to Chouburji, was rewarded to Habib Construction Service (HCS) while Maqbool Colson JV (MCJV)
47 was awarded the contract for package 2, from Chouburji to Ali Town. Both packages represented
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roughly the same amount of work amounting to PKR 25 billion each.
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56 2 PC-1 is the primary planning and approval tool used for the development and execution of projects in the
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59 3 NESPAK a state-owned technical corporation providing consulting, construction, and management services in
60 several countries. NESPAK’s JV with the Chinese CEC (NESPAK-CEC JV) had secured
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3 PACKAGE 1, DERA GUJRAN TO CHOUBURJI
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The Package 1 contract had been secured by Habib Construction Services, a JV formed between Habib
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7 Construction (a company that held a good reputation with the then Chief Minister, Muhammad Shahbaz
8 Sharif). The firm had provided performance guarantees, had brought shuttering and casting sheds near
9 Mehmood Booti on time and was performing according to specifications and expected quality. Due to
10 the complexity and novelty of the project undertaking, change requests, initiated by LDA, started
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coming in from LDA. Despite frequent change requests and a somewhat haughty attitude from LDA,
13 Habib Construction remained supportive of the project’s objectives. This was probably because Habib
14 Construction was keen to maintain the excellent relationship with the Punjab Government (which was
15 developing a myriad of infrastructure projects across Punjab) while building its reputation of success
16 across the largest construction projects across Pakistan. The company was eyed long-term profits and
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18 reputational advantage (rather than financial gains from the Orange Line civil works alone) through
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23 DIFFICULT DECISIONS PACKAGE 2, CHOUBURJI TO ALI TOWN
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Change requests in Package 2, however, and the very interpretation of the contract soon became an
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27 issue with the construction partner for the package - Maqbool Colson JV (MCJV). The contractor was
28 non-too-happy about the treatment meted out to it, the fact that changes were eating through its margins
29 and the general apathy of LDA towards the needs of the contractor itself. The interpretation of the
30 contract in terms of what needed to be delivered and to what quality became a sore point, with neither
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LDA nor the contractor budging from their respective positions. The contractor demonstrated its
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33 resistance in the form of slower work leading to a considerable overall delay in the project timeline for
34 Package 2. Its ‘non-performance’ (as LDA called it) ‘began to take enormous proportions’ and LDA
35 personnel felt that no amount of cajoling by themselves appeared to work with the contractor. According
36 to a senior team member at LDA, for example, “…the contractor liked his own way…”. Surprisingly,
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38 the same contractor had also been selected for the Multan Metro Bus as well as Karachi Metro Bus
39 projects. However, Lahore Metro appeared to be the only project where its performance remained
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42 Like Habib Construction, MCJV had also given performance guarantees but according to LDA,
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appeared not to be concerned with output, arguing that LDA had been incorrectly interpreting the
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45 clauses of the contract, thereby acting illegally. The clauses of the contract also incorporated financial
46 penalties on the contractor for poor performance. It had already been almost 8-9 months since contract
47 award. By the middle of 2016, however, MCJV had completed approximately 52% of the total work
48 only, remaining far behind schedule. Some of the delay had been justified as the contractor struggled
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with material supply issues, especially with the U-Tub girders, whose procurement from China had
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51 been delayed. Nonetheless, the contractor also stated contractual ambiguities as reasons to stall work.
52 LDA felt that the contractor was in no hurry to compete the remaining 48% of the work within stipulated
53 time. This was putting LDA and MPA on edge.
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55 On one instance, for example, LDA (as the primary oversight agency) had requested the contractor to
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fix dug up roads surrounding the various piers in Package 2. This was an important task as the piers had
58 been constructed within heavily populated areas and the roads around them had been dug up. These
59 holes were creating a public nuisance, as well as turning into a safety hazard. After several requests to
60 fix the roads next to the piers, the contractor had remained unresponsive. Shortly after, people from a
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resulting in a huge uproar and backlash in the media. Not only were people who fell in hurt, so was the
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6 image of the project which was branded as irresponsible and uncaring.
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8 LDA had been trying to engage with the contractor for Package 2 to make the complex and strategically-
9 important project a win-win situation for both, but its leads felts that the contractor had a clear focus on
10 profitability alone. On some occasions, the contractor had even wanted to get higher rates than in the
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BOQ (bills of quantity) initially agreed upon through the contract. In an effort to bring this battle to a
13 close and move the project forward, LDA had requested the removal of MCJV from Package 2.
14 However, the Punjab Chief Minister, when informed of the recommendation, wanted to give the
15 contractor another chance to perform. Since Package 2’s fixed cost offered by the contractor had been
16 almost 12-13% below initial estimates4, it was not likely that any new contractor brought on now would
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18 be able to match these either. Also, change in the contractor would take time and was likely to lead to
19 further delay because of the necessary procurement formalities.
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21 Construction work continued in Package 2, albeit slowly, apart from the 11 sites where work had been
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based on cultural heritage preservation needs. However, as the project schedule suffered continued
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25 delays that were beginning to put the final completion date into jeopardy, Uzair Shah and Saeed Akhtar
26 wanted to make a final case to issue a final notice to the contractor- the prequel to contract termination
27 and encashment of the one-billion-rupee non-performance guarantee. Adding to the existing knowledge
28 held by LDA, the case was now strengthened by evidence provided by the Chinese inspection team that
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found the contractor to have compromised on quality and ignored standard procedures.
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34 CHALLENGES OF A NEW CONTRACT
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36 Despite poor performance and badass attitude of the contractor, the decision to terminate the contract
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40 Replacing MCJV would not be a straightforward act. While LDA was not considering arbitration (the
41 arbitration process could take very long) but was considering blacklisting the contractor for its
42 unprofessional behavior. The contractor was likely to take LDA and PMA to court for violating the
43 clauses of the contract (the contractor had seemed very confident in its claims that LDA had
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misinterpreted contract clauses). NESPAK would then need to be asked to calculate the balance of
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46 works. Thereafter the project office would have to go into re-tendering for the balance work. As per the
47 contract, LDA could take control of various items of Maqbool-Colson JV’s machinery and its stable
48 yard (Exhibit 5). This machinery and property could then be utilized by the new contractor and their
49 cost would be deducted from the cost estimates submitted by the new contractor. However, this did not
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mean that the new contract would be cheaper, as work would have to be run in parallel now, fast tracking
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52 costing understandably more. This was necessary for catching up on the schedule and reducing the
53 nuisance that civil works were causing to the general public. This meant even less time to form a
54 working relationship with the new contractor, and little room for any changes to design and execution-
55 something MCJV had accused LDA of doing before dismissal. The learnings from the last fiasco had
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to be learnt and built into the project’s procurement and contract management structure. LDA would
58 also need to develop a working relationship with the new contractor afresh. The contractor may face its
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60 4 Contractors routinely tend to keep 20-25% margin (10% overheads, 10% margin). MCJV’s had been lower.
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3 own set of difficulties given its lack of organizational memory and an understanding of its objectives
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and obstacles so far. Did that mean that the best option would be to make up and make-do with MCJV?
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7 It was also, perhaps the time for the project team consider why Package 1 with Habib Construction had
8 run smoothly, while Package 2 had not. It was important to identify the contextual underpinnings that
9 fed into the general adversarial relationships that existed in construction engineering and design
10 services, as evidenced with the contractual relationship with MCJV. What could change the relationship
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to more cooperative? Less adversarial?
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3 Exhibit 1: Lahore Mass Transit Sytem Route Plan
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Exhibit 2: Orange Line Metro Package 1 and 2 Construction
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3 Exhibit 3: Orange Line EPC Tender for primary contract- April 2014
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3 Exhibit 4: Original Package 1 and 2 prequalification notice July 2015
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41 Exhibit 5: MCJV property and machinery to be left with LDA if contract was terminated
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