Watching buildings turn into decks of cards after an earthquake leaves one facing pain and many questions. Especially if the hospitals, where we entrust our lives, and schools or dormitories, where we entrust our beloved children, were the first to collapse in every earthquake… It is tough to accept that we prepare graves for ourselves and our loved ones with the taxes we pay!
In such days filled with pain, it might be considered inappropriate to associate a natural disaster like an earthquake with “competition,” or writing about it may even be perceived as “opportunism.” Nevertheless, in the hope of not facing such disasters in the future and to do my part, I felt obliged to write this essay. So, let’s check how people relate competition and earthquakes almost after each instance.
Earthquake and Competition
There is no way to prevent an earthquake, but as we remember from the cliche, “Earthquakes don’t kill, buildings do.” To minimize casualties and property damage after each earthquake, we must ensure the construction of earthquake-resistant buildings. The state has two duties in this regard: on the regulatory side, it is necessary to determine minimum building standards for each region to prevent buildings from collapsing in an earthquake. We also know that after the 1999 earthquake, various regulations were introduced. However, despite all these regulations, we still see some of the buildings constructed recently falling apart, indicating that there have been multiple disruptions in the inspection process.
The inspection aspect can also be evaluated from two perspectives: public and private buildings suffer from “greedy contractors” who steal materials during construction, and inspectors who turn a blind eye to this for one reason or another. In this case, the builder and the inspector’s financial and criminal liability must be pursued; there is no doubt about that.
However, from another perspective of the audit process, we see that a path paved with good intentions leads to these kinds of disasters. Because the buildings that suffer the most damage during earthquakes are public buildings, the blame for public tenders usually falls on the public procurement system. There is no problem until here; this is what it should be. However, the contractor who won the tender must “cut” the materials or “use lower-quality materials” to deliver the building at this indicated cost. In this case, we are talking about those still well-intentioned but somehow “miscalculated” the costs or “overbid/underbid” to win the tender due to competition. Therefore, because the system is not considered as a whole, the blame falls on “competition in the tender,” and a quick but incorrect solution is reached: “Let’s eliminate the lowest bidder in the tender because the lowest bidder cannot finish the job, or a poor-quality work will be produced!”
Let’s analyze this “solution” more carefully, asking the right questions: “Since competition is a dynamic that ensures the most cost-effective production of the highest quality product, (a) why are we facing this kind of result, and (b) what is the solution to this problem?”
We can answer the first question: Tenders’ competition process differs from the competition process in a regular market. Nevertheless, unless a severe design flaw exists, a product, building, or service of the specified standard will still be offered at the most reasonable price for each region. When it is known that compliance with the standard will be thoroughly checked, the bidders must meet these standards, and if they do not meet these standards, their deliveries will not be accepted; then the bidder will make sure it calculates its costs accordingly without compromising the standards. Based on these calculations, the bidders will either go for the tender or refrain from it if they think the price does not justify the costs. Even if there were miscalculations on the bidder’s side, the bidder will still meet the standards, even if they lose money. Therefore, the problem is not in the tender process or the low price in the tender; it arises from the lack of control over the receipt of the “product.”
The answer to the first question also reveals what cannot be the answer to the second solution: The elimination of the lowest bidder in the tender process indicates that the relationship between “quality and competition” has not been fully understood:
When considering the quality of the materials used in the product, the quality of the workmanship, the availability of services and maintenance, and the preservation of the brand image, it is clear that a quality product can be produced at a higher cost than a lower-quality product and, therefore, must be sold at a higher price to generate profits. Therefore, quality products are generally more expensive than their lower-quality counterparts. However, this relationship is not bi-directional:
In other words, a product’s quality may make it expensive, but this does not mean that every expensive product is of high quality.
For the reasons mentioned above, even if the lowest bidder is eliminated in tenders, this situation does not guarantee that the highest bidder will produce a quality and standard-compliant product. If there is insufficient control at the end of the work, the winner can still complete the work without respecting the standards, using low-quality inputs, etc., and then putting the difference in his pocket. Therefore, instead of intervening in the tender system from this perspective, it is better to improve the inspection function.
Earthquake and Inspection
If we consider the inspection issue theoretically, we need to evaluate both parameters that are valid for the effective application of any regulation. One of these parameters is the probability of being caught, and the other is the magnitude of the penalty to be imposed. The product of both parameters will express the deterrence of the rule. Therefore, a person who thinks the risk of being caught in inspections is low will not be careful. If he believes he will not face a significant penalty even if caught, he will focus on his profit instead of complying with the rules.
Given that buildings go through routine inspections from various angles before they are occupied, particularly by local governments, it is understood that the problem does not arise from the frequency of inspections but from their quality. This situation indicates that the person responsible for the inspection does not do his job correctly. The reason is the absence of a party liable for the damages since many construction firms change their names frequently or “prefer” to go “bankrupt” to avoid paying penalties! Similarly, construction inspection firms taking this responsibility are usually small-scale firms and cannot afford to pay the penalty. Thus, a gap arises in this area. It is also understood that no deterrent penalty is given based on the follow-ups of the “negligence” of the individuals responsible for the inspection.
Earthquake and Regulations
For the reasons mentioned above, increasing the penalties, reassigning the criminal responsibilities, and adding another parameter to the inspection function may be essential components of the solution to the problem.
We can make a regulation covering the following points when a public building’s construction is put out to tender:
- Determining a specific life span for the standard-compliant building (e.g., 30-40 years).
- Making it mandatory for the construction firm to work with a financial institution, such as a bank or insurance company, as a guarantor alongside the construction firm at the tender stage (please note this would be like insurance specifically for the liabilities and responsibilities which may arise starting with the delivery stage of the building, and covering the lifespan of the building for certain aspects – as mentioned in points 3 & 4 below; thus radically different for the standard letter of guarantee which is received in most tenders.)
- In the event of an inspection after the construction is received, if it is understood that the construction does not meet the specified standards, (a) the contractor and the guarantor financial institution are jointly responsible for (a) the demolition and reconstruction of the construction, (b) the lease and improvement of a temporary building for public services during the reconstruction process so that public services are not disrupted.
- Given the earthquake risk and other features in the region where the construction will take place, the mutual responsibility of the contractor and the guarantor financial institution (a) for rebuilding the building in the same way, (b) paying a large amount of compensation per person that the state will determine and update for possible casualties, (c) reimbursing the equipment in the collapsed building, (d) the rental and improvement of a temporary building for public services to continue without interruption during the reconstruction of the building.
To some extent, this regulation’s purpose is to place the burden of risk on financial institutions to ensure that the construction is conducted in the best possible way through rigorous inspection during the construction process. However, unlike a system designed for compensation when risks materialize, as seen in traditional insurance systems, this regulation aims to minimize the occurrence of risks. Therefore, as a result of such regulation, it is expected that guarantor companies, particularly during the construction process, will conduct strict inspections to avoid paying a substantial amount after the building is delivered. Such a system will likely deter the production and delivery of buildings below the standard.
In broad strokes, for the completion of this system’s other components, various details need to be defined for the shifting of complete or partial liability from the contractor and guarantor to the relevant individuals if deviations from the standard occur due to usage after the delivery, such as the cutting of load-bearing columns or lack of necessary maintenance, leading to losses.
Such regulation to be introduced for the tendering of public buildings may be extended to the construction of any private building (or buildings in certain regions, or passing certain thresholds in terms of area, height, etc.) by private constructors, thus making financial guarantors obligatory for any construction project.
On the other hand, introducing such an “extra safety” element into the system will entail various costs: foremost, “guarantor financial institutions” will demand a specific premium from contracting firms due to the risk they undertake, requiring more rigorous inspections of constructions, which will increase construction costs. Additionally, relatively small enterprises that cannot find a “guarantor financial institution” may find it difficult to survive in the market, putting them at a disadvantage compared to larger firms.
Is it challenging to establish such a system? Yes. Is it costly? Yes. But can it be considered worthwhile when human life is at stake? Absolutely. Is it impossible? No.
With such a regulation in place, constructing buildings that are unlikely to collapse quickly and cause loss of life over 30-40 years is possible. To discuss alternatives to this type of regulation, rather than looking for faults in the tender system or competition, would, I believe, be a deviation from the goal and a waste of time.
* The first version of this essay was published on the Competition Authority’s website in the section “Competition Writings” on 22.12.2011.
** This essay is also published in Gayrimenkul ve Enformasyon Dünyası Dergisi (Journal of Real Estate & Information World )(Sayı:04 / Eylül-Ekim 2012; s.78-80).
*** The views expressed in the article belong to Barış EKDİ and do not bind any institution or organization.
