This year sees the incorporation of the Real Estate Committee into the Infrastructure and Engineering Committee, with the newly enlarged committee focusing mainly on full implementation of suggestions made in previous White Papers. We have also proposed two new suggestions to enhance fairness and create greater balance in the risk-and-reward equation that contractors must consider when deciding whether to participate in government procurement projects.
We once again strongly urge the government to adopt a consultative approach to the issues we are raising, seeking input from third-party market professionals. For example, the application of alternative methodology is a complex subject for which it would be worthwhile to obtain advice from experts in the field. Our member companies would be happy to share their expertise on the use of alternative methodologies.
The Committee was pleased to learn that use of alternative methodology is being given a trial for the Taoyuan Airport Terminal 3 project. Given the delays and obstacles related to Terminal 3, we commend the government for using alternative methodology as a potential solution to advance the project. It is not clear to us, however, how that approach is being implemented and whether it is suitably robust to deliver maximum benefits.
The Committee also requests that government agencies strictly adhere to the 60-day notice-and-comment period for any proposed changes in law (or implementation rules) made relating to government procurement or to the Committee’s White Paper suggestions. This will allow the Committee to provide its feedback on the suitability of the proposed change and whether the change is likely to meet the full intent of the Committee’s suggestions.
One of our suggestions – amending the Model Contract Terms and Conditions to enable contractors to request an adjustment in the contract due to changed conditions – was partially implemented last year when the Public Construction Commission (PCC) amended the Model Contract for Technical Service Agreements. The Committee greatly appreciates that development and hopes the same can be done for all PCC model contracts as first requested in our 2017 White Paper.
The purpose of the Committee’s suggestions is to bring innovation and fairness to Taiwan’s construction and engineering market to support the government’s ambitious development plans. Creating opportunities for both domestic and international companies to introduce alternative and/or innovative approaches will result in shorter completion schedules, safer working conditions, and more reliable and cost-efficient results. A fair and transparent procurement process will encourage greater participation by international companies, which will expand and enhance the capabilities of the local supply chain. Taiwan benefits when there is robust participation by both domestic and international contractors.
Two of the suggestions below repeat issues raised in previous White Papers by the former Real Estate Committee in the interest of creating a more transparent real estate market. Taiwan continues to lag significantly behind neighboring countries in attracting foreign investment. Greater transparency in real estate transactions could help turn around the trend of the past 20 years for foreign investment in the property market to average less than 7% of the total.
Suggestion 1: Improve the terms and conditions in model contracts for public projects.
1.1 Remove the reference to Article 227, paragraph 2, of the Civil Code from the model contracts. A key theme in previous White Papers has been the need for fair and balanced terms and conditions, aligned with standard international practices, in the PCC’s model contracts to create a healthy commercial structure for both foreign and local companies participating in tenders for public projects in Taiwan.
The Committee has noted that of the 12 types of model contracts, 11 now have newly added text under the “Rights and Liability” clause to exempt injurious performance from the normal liability limit along the lines stipulated in Article 227, paragraph 2, of the Civil Code.
This added text is inappropriate, and especially so in the clause where it has been inserted. In using Article 227, paragraph 2 as a carve-out to a contractually agreed upon total liability cap (TLC), the new text is contrary to the intent of the original language of the “Rights and Liability” clause. The original wording was designed to exclude from the TLC only “willful misconduct or gross negligence, or torts against a third party” – not the broad conditions set out in Article 227, paragraph 2.
The relevant text of Article 227 is set out below for reference:
“If a debtor incompletely performs his obligation by reason of a circumstance to which the debtor is imputed, the creditor may execute his right according to the provisions of the default or the impossibility of the performance.
“In addition to the injury arising from the incomplete performance in the preceding paragraph, the creditor may claim compensation for other injuries arising therefrom, if any.”
The second paragraph does not provide the grounds to warrant an exception to the TLC. In addition, the added text is vague and is also a departure from the conditions found in international model contracts such as the NEC or FIDIC templates. This deviation from standard international practice will only discourage foreign participation in public tenders in Taiwan. That result would be especially regrettable considering Taiwan’s need for greater participation by international engineering and construction contractors to help complete its ambitious forward-looking infrastructure and energy programs.
We strongly recommend that the government remove this newly added text from the 11 revised model contracts.
1.2 Amend the model contract terms and conditions to allow contractors to submit change notifications. As stated in the introduction above, the Committee greatly appreciates the PCC’s amendment to the Model Contract for Technical Service Agreements to incorporate this suggestion. We hope the same can be done for all PCC model contracts, particularly the Model Contract for Construction Agreements.
As explained in past White Papers, the government’s set of model contracts (except the one for the technical service agreements) fail to include a provision enabling the contractor to request an adjustment in the contract due to changed conditions. The government procurement entity, however, can call for such an adjustment from the contractor. This unilateral approach is both unfair and contrary to international practice.
The Committee requests that the other model contracts be revised accordingly with priority given to the Model Contract for Construction Agreements.
Suggestion 2: Revise the design consultancy fee guidelines.
Taiwan has a substantial number of infrastructure and energy projects planned or underway, requiring a large amount of experienced and qualified engineering resources to support the projects’ timely and successful completion. However, Taiwan has experienced a significant brain drain as engineering and technical talent frequently look to international postings for better salaries and more stimulating work to develop themselves professionally. Most of those who stay in Taiwan gravitate to the high-tech industry because of the higher salaries in that field and the perception that construction engineering jobs are monotonous. The result has been a considerable shortage of experienced and capable construction industry-related design engineering talent in Taiwan.
Exacerbating this problem is the allocation by most government procurement entities of unreasonably low budgets for front-end design phase services such as preliminary or detailed design engineering, as well as for other technical services such as owner’s engineer or construction management services. This factor makes it even more difficult for the industry to recruit and retain construction engineering talent.
Since 1980, the PCC has established various guidelines for engineering and technical services, including one in the year 2000 that called for a 10% fee increase. There has been no further increase since then, despite the increasingly demanding nature of the work as government procurement entities expand the scope of the design services to be performed as part of the design services (for example, the incorporation of “green and sustainable” design elements, stakeholder engagement and management, enhanced reporting, as-built drawing updates, clash detection reporting, etc.).
Further, in most cases design must now be performed on some form of 3D Building Information Modeling (BIM) platform, for which monthly software licenses can be quite costly. The design effort within a BIM platform is also significantly more labor-intensive than performing the work on a conventional 2D platform. However, the PCC fee guidelines have not reflected the increased costs experienced by design firms to meet the ever more demanding requirements imposed upon them.
The Chinese Association of Engineering Consultants (CAEC) in 2015 requested an increase in design fees, which was rejected. Last year, it again requested an increase – of 48.2% – which has also gone unheeded. The use of unreasonable budgets based on the PCC guidelines results in a lack of participation in government procurement projects for design services, stifles competition, and discourages innovation. Worse, it discourages Taiwanese engineering graduates from pursuing careers in the industry.
The recent Wanda and Circle Line MRT projects are examples of unreasonable budgets resulting in minimal participation from the engineering consulting industry. In both cases, there was only one bidder, even though the Wanda project issued three detailed-design tender packages and the Circle Line issued two such packages. The Committee notes that the only two bidders – one for each project – were government-owned design consultancies.
Design quality is critical to the success of a project, and the design phase is the point where the greatest influence can be exerted to optimize the project cost and schedule. Inferior designs result in costly projects, which are often prone to schedule delays. Once construction begins, changes in design are costly and time-consuming. Because government procurement entities set such low design budgets, design consultancies able to secure work are discouraged to innovate and optimize designs, since that requires more time and thought, as well as the engagement of high-salary, senior-level personnel or subject matter experts. Given the low margins, the priority is to finish the design deliverables in the least amount of time, using the lowest cost-design resources, rather than developing an innovative and well-crafted design.
Efficacious designs not only support safe and efficient construction, but also enhance operation and maintenance (O&M) of the project once completed. For example, adopting a whole-life design approach in the selection of materials and equipment, and configuring plant operations in a thoughtful manner, can lower O&M costs over the life of a project and make it safer for the O&M people to perform their work. But that kind of design thoroughness can be undertaken only when there is sufficient budget.
Some of the PCC guidelines link fees to a percentage of the constructed cost of the works. Under that approach, the designer may not be motivated to develop a design that would result in a lower cost of construction, as that would also reduce the design consultant’s fee. In addition, it needs to be recognized that each project by nature is different from others. Its unique requirements and objectives will affect the type and amount of design services required and therefore the cost of performing them. The Committee therefore believes it is improper to use a percentage of the construction cost as a guideline in setting design budgets both for the initial award and for the costing of legitimate scope changes issued by the government after award.
We strongly recommend that the government conduct a comprehensive review of its guidelines for setting design fees for public projects, with the aim of bringing them more in line with international practices and making them fairer for the industry.
Suggestion 3: Encourage the use of alternative methodologies in public infrastructure projects through a systematic approach.
The Committee is pleased to know that the use of alternative methodologies will be permitted on a trial basis for the Taoyuan Airport Terminal 3 project, adopting a suggestion from the past three annual White Papers. Proper implementation of this suggestion will greatly benefit the government and the local engineering and construction industry. It encourages innovation, value engineering, and access to international lessons learned – all resulting in potential project schedule and cost savings. However, the Committee is unclear how the alternative tendering approach is being applied.
Although gratified that the approach is being tried, we regret that the Committee or other third-party experts have not been consulted to support the effort as we had suggested. Following positive feedback from the various government procurement entities to our Committee’s presentation to the National Development Council (NDC) in 2018 on the use of alternative tendering, we understood that the government was developing a “cookbook” (templates and guidelines to facilitate implementation of alternative methodology) as reference. Our Committee requested an opportunity to review the cookbook and our member companies offered to share their expertise in this field with the government, since “alternative tendering” is a nuanced process and the cookbook needs to be carefully drafted if alternative methodologies are to really provide benefits.
As we comprehensively laid out in our 2019 White Paper (and in earlier editions), the entire tendering cycle must be structured to accommodate an alternative tendering process; it cannot be a “bolt-on” afterthought. For example, certain elements of the project should be set out as performance requirements rather than being fully specified, especially when the tender is a design-build (DB) package. Foundations are an example where the DB contractor can innovate and meet the performance requirements though its own approach.
And it is not only technical alternatives that can provide benefits. Acceptance of alternative means and methods and even commercial terms can also provide cost and/or schedule benefits. To gain the full benefit of alternative tendering, it should be well-thought-out, planned for the specific tender package, and embedded from the beginning as part of the overall tendering strategy. It is not simply a pre-tender peer review activity to solicit comments or a post-award activity with the sole successful tenderer, as some agencies mistakenly consider alternative tendering to be.
Alternative tendering is common in the international market, and it fosters innovation. Adopting this process in Taiwan will enable the local market to benefit from the lessons that international and domestic contractors have learned from their global experience.
The Committee suggests that the state-owned CPC Corporation’s Taichung Phase 3 liquid natural gas (LNG) storage facility would be a good choice for a trial of the alternative tendering approach. We understand the conceptual design for this project is introducing alternative LNG storage solutions. LNG supply is critical to Taiwan’s energy transition, which calls for natural-gas-fired energy to represent 50% of the country’s power mix by 2025. CPC Taichung Phase 3 will be a DB tender package and is the type of scope and project that would benefit greatly from an alternative tendering approach that is properly structured and planned.
Accordingly, we recommend that the government create a task force to support: (i) pre-tender activities (development of tender package plans and specifications, tendering instructions, tender solicitation forms and evaluation process, etc.), and (ii) the tendering process (clarification, evaluation, negotiation, and award) – and that the task force include the same third-party consultant that helps in development of the cookbook. The consultant can help the task force and CPC in devising the tendering strategy and the proper formation of the DB tender package, evaluation, and award of the project.
We also request that the government share its current implementation plan (template and guidelines) with the Committee so we can provide feedback before final procedures are put in place.
A detailed overview of the nuances and approach of alternative tendering was set out in our 2019 White Paper.
Suggestion 4: Revise the Real Estate Appraiser Act to allow legal corporation entities to provide valuation services.
The Committee requests early action by the government to amend the Real Estate Appraiser Act to allow valuation services to be provided by legal corporations in addition to the currently permitted accredited individuals and partnerships. This change will bring Taiwan more in line with global practices. It would also attract companies of a larger scale, enhance the professionalism of appraisal organizations, and increase their ability to manage risk, thus enhancing appraisal organizations’ ability to safeguard their clients’ interests. Ultimately, the change would benefit the real-estate market and Taiwan economy overall by helping to attract more foreign investment to the Taiwan property market.
The Committee expresses its appreciation to the NDC and Ministry of the Interior (MOI) for the support they have provided in moving this suggestion forward. According to our understanding, the government has agreed in principle with the recommended direction and is now waiting for suggested wording from the National Association of Real Estate Appraisers before presenting a formal bill for legislative consideration.
In a survey of its members last year, the Association found that a majority of its member appraisers favor the proposed change. The organization says it expects to submit its suggested amendments to the law to the MOI by the third quarter of the year for review.
We thank the government for its support and urge it to seek early completion of the amendment process.
Suggestion 5: Require banks to charter professional valuation professionals for transactions involving mortgage loans.
As the Real Estate Committee has previously pointed out, domestic banks currently rely on in-house valuation teams when reviewing mortgage applications, while foreign banks in Taiwan appoint a licensed appraiser to provide an independent opinion on the property value. The practice adopted by foreign banks ensures that they receive professional and objective advice on property conditions in line with global standards. On the other hand, undertaking valuation work internally may lead local banks to encounter problems such as conflicts of interest and bad debts.
We suggest that the Financial Supervisory Commission (FSC) require banks, when extending credit on collateral, hire an independent licensed appraiser to conduct an appraisal report to determines a fair market value. Requiring performance of the valuation services by independent appraisers prevents conflicts of interest and protects the interests of the banks – and more importantly, the depositors – by reducing the risk of valuations being subject to manipulation.
Both the NDC and FSC have issued letters to the Bankers Association encouraging the use of independent real estate appraisers. We thank them for doing so, but such a letter is merely advisory and not legally binding. Most banks continue to use an internal valuation to decide the amount of a mortgage loan. The Committee therefore suggests that the government issue a change in regulation or some form of binding guidance to banks, requiring them to obtain an independent real estate appraisal report for mortgage loans exceeding a certain amount, in order to address the financial and reputational risks caused by conflicts of interest arising from the current approach. We suggest NT$30 million as an appropriate threshold for such loans.
Implementing this change will enhance transparency and the operation of financial institutions in Taiwan. It will also help support greater sustainable economic development in Taiwan and in the financial industry.