Local content in the construction industry in Uganda

OCAL CONTENT IN THE CONSTRUCTION INDUSTRY  IN UGANDA

Michael Moses Odongo Okune, PhD, FUIPE, FICE

Practicing Engineer

March 2022

1. Introduction

Public Procurement and Disposal Authority (PPDA) guideline 1/2008 seeks to promote local content in public procurement, through increased input of local labour, goods and services. It reserves to national and resident providers: roadworks not exceeding UGX45bn, other public works not exceeding UGX10bn, consultancies/supplies each not exceeding UGX1.0bn, non-consultancy services not exceeding UGX200m. Local firms also benefit from subcontracting at least 30% of the value of works contracted to foreign providers. The underpinning legal framework for the guideline is S.50 of the PPDA Act 2003, PPDA Regulation 29 (2014) and “Buy Uganda Build Uganda (BUBU)” policy issued by Ministry of Trade, Industry and Cooperatives (MoTIC) in 2017.

On average Uganda expends up to UGX 6.0 Tr. annually on public procurement, most of which flows to the national construction industry (NCI). The equivalent amount for the Works and Transport sector is UGX 2.0Tr. Due to the NCI’s heavy reliance on foreign firms, the benefits to local companies are not visible.

1. Purpose of the paper

Uganda’s NCI constitutes about 12% of GDP. Its dominance by foreign well-endowed companies is a cause for concern, especially in respect to loss to the economy in terms of repatriated capital, which can be as high as 70% of earnings. A solution lies in having robust, well-developed NCI and so far government has taken some basic but credible steps to that goal; public contracting in shillings since 2016 and Cabinet approval of the NCI Policy in 2010 (FY 2010/11-14/15 at USD 4.0m). The key constraints to growth of the NCI remain lack of credit, few work opportunities/equipment and exclusion of local companies from some construction works in preference for the army. The paper has examined the reservation scheme and made proposals towards growth of the NCI.

1. State of readiness of MDAs for the reservation scheme

PPDA has routinely monitored MDAs on their state of implementation of the scheme and issued reports such as that of February 2020, pre-COVID. The Authority is now transforming the guideline into regulations. The construction industry regulatory role envisaged under the NCI Policy did not materialise save for the establishment of the Contractors Registration and Classification System (CRCS) in Ministry of Works and Transport, though yet partially implemented. In the Petroleum industry, the National Content Regulations, 2016 No. 34 and 44 has been launched to provide for affirmative actions for local Ugandan professionals and firms in the construction industry, amongst others. The impact is yet to be felt given the opportunities to local companies presented by the recent signing of the Final Investment Decision (FID), which will unlock substantial fraction of the USD 10 billion investments to the petroleum sector. In the electricity sector, there are constraining conditions attached to externals loans that limit participation of local firms to only peripheral works, services and supplies. In these and many sectors/industries the NCI is yet to take hold and grow.

1. Key issues in the implementation of the reservation scheme
   1. Overview

The reservation been has been implemented to various degrees by MDA’s. In FY2018/19 substantial fractions of contractual awards were made to national and resident companies by: Uganda National Roads Authority – (UNRA, UGX 700bn), Kampala Capital City Authority – (KCCA, UGX200bn), Uganda Electricity Distribution Company Limited – (UEGCL, UGX38bn of which UGX2.9bn was for local supply of cables and conductors). Coincidentally, Roofings Limited, a local steel manufacturing industry reported a 5% increase in capacity utilization in the same period attributable to higher demand of its steel products by players in the construction industry. However these apparent successes mask deep-seated policy issues across the sectors that still blunt the impact of policies aimed at promoting local content in the construction industry. These are discussed surveyed here below:

1. 1. Loophole in definition of national and resident providers

According to PPDA guidelines, a national provider is a firm registered in Uganda and wholly owned and controlled by Ugandans while a resident provider is one incorporated in Uganda for at least two years at the time of submission of bids and is not a national provider. Accordingly resident providers, which may be subsidiaries or branches of parent international firms, register locally as independent companies to benefit from the reservation scheme in competition with less-well resourced national providers. Local contractors through their umbrella association UNABCEC have raised this issue as effectively disempowering local contractors, more so being a conduit for repatriation of earnings and profits to external economies.

1. 1. Relegation of local providers in the processes of the subcontracting option of the reservation scheme

The subcontracting option of the reservation scheme provides for subcontracting to national and resident providers of up to 30% of contracts undertaken by foreign firms. The main drawback is that the PPDA guidelines have not regulated the option. The (foreign) provider discretionarily chooses who to subcontract to and what to subcontract. Naturally profit maximisation is prioritized at the expense of training or transferring technology to national/resident providers. The few numbers in the Contractors Registration and Classification System (CRCS) in the Ministry of Works and Transport is testimony to the paucity of well-established local companies.

1. 1. Constraining conditionality in some foreign-funded projects

Some projects funded by foreign governments/multilateral agencies do not provide for affirmative action to local providers especially when they are of turnkey nature. Cases in point include the World Bank-funded rural electrification projects being undertaken by the Rural Electrification Agency (REA) and the Chinese-funded Entebbe Expressway of 2014-2018. In these cases the foreign funding agreements did not explicitly provide for involvement of local subcontractors right from the onset. However, cases where deliberate efforts were made to support local providers, visible successes have been noted. These include the recently completed Jinja Cable-stayed Bridge co-financed by Japan International Cooperation Agency (JICA) at USD145million loan where eight local contracting firms and three local consulting firms participated in the project. UNRA is replicating the same approach in the Oil Roads Project in Albertine region. Post-FID announcement of February 2022, CNOOC, a major partner in the Uganda Oil and Gas sector, sub-contracted civil works to a local company Excel Construction Limited in pursuit of local content enhancement.

1. 1. Low capacity of local providers

Low capacity is a major impediment to growth of local providers hindering them to consummate subcontracting opportunities in the scheme. In the electricity sector, local providers failed to supply the right transformers and cables for works such as on the Lira-Gulu, Karuma-Kawanda and the Kapeeka power lines. Some local providers reportedly supplied imported transformers and cables, in essence defeating the very purpose of the reservation scheme. In the considered opinion of the Ministry of Energy, the reservation scheme can only be successfully applied on low voltage lines including for routine civil works. This perpetuates the vicious cycle of low capacity-limited opportunity-low income to the detrimental growth of local providers. Low capacity of local providers could also partly explain the reason why Government in 2014 opted to reintroduce force account in road-works in preference over local contractors. Up to USD150million was spent on procurement of government-owned equipment for the purpose.

1. 1. Lack of business acumen, growth-retarding attitude

There is high mortality rate amongst local contractors despite the many affirmative actions by the Government since the 1990’s. The Ministry of Works applied the Fixed Unit Rate (FUR) approach in that period to ensure roadwork availability all year-round to local contractors on its register. To date, 20 years later, only about 20% of contractors that benefitted from the scheme still, albeit with gaps in governance, tax/reporting compliances and performance capacity. They are yet to build strong supply chain networks, reliable credit lines and operational resources to challenge the dominance of foreign providers. Crucially they need pursue growth such as through pooling resources and forming larger units to be competitive. Unethical practices such as selling to foreign contractors their rights under the reservation schemes rather than working to get experience should be avoided.

1. 1. Policy implementation deficiency

There have been many policies, guidelines and plans issued by various MDAs about the subject matter but to little effect. As stated, both the PPDA guidelines and BUBU lack operational frameworks; overlapping status of national and resident providers clouds the threshold option of the scheme. The USD4.0million National Construction Industry (NCI) policy launched in January 2010 was never operationalized. Similarly strategies proposed in the MoWT concept paper of September 2017 remained unimplemented. These inactions stifle progress in achieving local content in public procurements.

1. 1. Disjointed institutional housing of various policy initiatives towards reservation scheme

This is a recipe for conflicting definitions, approaches and interpretations of policy objectives and intended actions. PPDA continues to monitor performance of MDAs on implementation of the scheme as per its report of February 2020. The Works and Transport sector has the sector-centric NCI, the Concept Note of 2017 and others all providing variously for reservation-like schemes. The petroleum sector has the two regulations, also providing for local content in the petroleum value-chain. The Health sector likewise has that for procurement of medicine and medical supplies whilst KCCA has another for engagement of vulnerable groups in city cleaning. MoTIC has BUBU. There is need to harmonise and/or unify all these disparate measures into a single system that caters for all sector needs for ease of setting targets and tracking/monitoring performance.

1. 1. Unique challenges to local consultants

The local consulting industry is organized under their umbrella trade body, the Uganda Association of Consulting Engineers (UACE), which is a member-subscription body. To date membership stands at 33 comprised of a mix of national and resident firms as per PPDA definition in the reservation guidelines. National/resident firms cannot easily afford the 3% professional indemnity insurance and are constrained to front expensive experienced international personnel thus getting disadvantaged against strong international competitors. For high value consulting assignments where ordinarily local firms would benefit from the 30% sub-contracting, an appearance of compliance is made by engaging up to 90% local staff on an assignments, yet in actual fact they are assigned peripheral positions on teams with few man-months. Resultant earnings translate to a figure as low as 1% of the fees of the entire assignment. The situation in the petroleum sector is even direr. 

1. 1. Delayed payment and its impact on local providers

The issue of delayed payment to providers to government is long standing and has contributed enormously to the high mortality rate amongst local firms, who are doubly hit; high cost of capital compounded by high interest rates on delayed servicing of borrowings. Various reasons have been adduced for this delay but what stands out is its negative impact not only on the project objectives but also on the ability of the affected enterprises to grow and mature into competitive undertakings. 

1. Conclusions and recommendations
   1. Conclusion

Reservation scheme in whatever form/name across various sectors are aimed at deepening local content in public procurements. Previous policy initiatives launched in this respect met with major hiccups thus not fully meeting set objectives. In the construction industry, local contractors are relegated to the periphery of high value procurements in favour of foreign firms due to lack of capacity compounded by limited access to capital, skills and technology. They are not competitive and lack business acumen. Even then allowing resident providers to benefit equally with national providers from the reservation scheme is unfair to local providers. Most times resident providers are camouflaged yet in actual sense are simply branches/subsidiaries/units of foreign companies some of which are state companies in their countries. All previous efforts at nurturing the NCI have not resulted into significant growth of the industry across major sectors. The relevant policies are housed in disparate institutions without central coordinating institution. There is need for a one-stop operational framework applicable to all sectors if the scheme is to have the desired effect. 

1. 1. Recommendations
      1. Streamline regulation of the construction industry

The NCI Policy launched by MoWT in 2010, amongst other recommended establishment of the Uganda Construction Industry Commission (UCICO) as regulator of the construction industry. The Commission would be able to carry out many of the actions enunciated in the NCI (and related policies) such as training, registration/classification of providers, establishing plant hire pool and guarantee fund, monitoring the industry, strengthening and liaising with professional associations, policing the reservation scheme and others. The recent moratorium on establishment of government agencies stopped progress towards UCICO establishment but given the urgency of its need, it can be made an exception so that Parliament may enact the necessary legislation to birth it. In the interim, MoWT is strengthening and empowering its Quality Management department to play this role.

1. 1. 1. Establish government engineering corporations 

The construction industry is a high risk, capital-intensive industry that most times overwhelms the capacity of the private sector especially in a developing economy like for Uganda. Government is better placed to shoulders such high value risks. As such government of Uganda should review its privatization policy critically with a view to launching public sector engineering companies (State-owned enterprises) operating purely on business principles and able to offer competition to international firms in the local market. Egypt has a number of state firms so has China and lesson could be drawn from them. Locally we have a pool of well-trained and experienced engineers and technologists to man the enterprises. Such SOE would not only provide employment opportunities but also would significantly contribute to stemming capital flight and earn foreign exchange when they break into regional and international markets.  To avoid the pitfalls previous state corporations faced which led to their demise, these later-day versions would be set up and managed on sound business principles with strict adherence to corporate governance requirements.

1. 1. 1. Review the PPDA reservation scheme and fine-tune implementation framework and unifying with other schemes   

For the reasons already stated, the PPDA guidelines needs to be revised, updated and transformed into regulations and unified into one instrument. Providers’ trade associations and Uganda Revenue Authority (URA) need to be key players in the revision process. Specifically the revision should ensure that International firms and resident companies surmount higher bars in order to access the local market and strictly for only high value, technologically demanding projects. For instance routine and periodic maintenance of all classes of roads should be a preserve of local companies and labour.

1. 1. 1. Coalescing of small private firms into large firms to achieve scale 

The many contractors and consultants in the construction industry are small sized players that individually cannot beat competition of international firms in the job market. A government affirmative action for merging of firms should be launched with proper incentives and assurance of work continuity for the merged firms. If carried successfully these can mutate into national champions at some point in time and will provide bedrock for the industry in terms of capacity, technological ability, financial muscles and manpower pool. Examples exist in the legal and medical professions where some local providers banded together to form big local behemoths that now aspire to dominate the market and keep foreign competition at bay.

1. 1. 1. Training, skilling and empowering 

This would be one of the key deliverables of the proposed UCICO. It will require imparting skills that are demanded by the market especially for technicians, technologist, machine operators and the like. Lately the Ugandan education system has churned out more degree holders than technicians. There is thus a yawning skills gap in the middle and lower professional ranks of engineering professionals. For instance, paucity of local professional welders for oil industry has ensured that foreign welders fill the gap. In the road sector, the ranks of tradesmen, road overseers, inspectors and technicians have been so depleted such that the titles are slowly disappearing from the lexicon of road management. Therefore, a skills audit of the industry is required to guide an appropriate strategy that responds to the need of the industry.

1. 1. 1. Mainstreaming scheme implementation into annual targets of Accounting Officers of MDAs 

The huge amounts of annual funds dedicated for procurements are controlled by Accounting Officers (AOs) as per the mandate conferred by Public Finance and Accountability Act 2015. As such each Accounting Officers should be an action centres for the reservation schemes and BUBU Policy, with clear targets in the annual procurement plan and unambiguous monitoring and reporting frameworks. This would be an addition to the annual performance contract of each Accounting Officer with the Permanent Secretary/Secretary to Treasury. In this way it would be easy coordinate the implementation of the reservation scheme across all sectors and particularly to track and stem capital flight.

1. 1. 1. National Register of Reservation scheme/BUBU compliant firms

Promotion of local content through reservation scheme and BUBU have reportedly been beset by some undesirable practices such as high prices for low quality goods and services, collusions to cheat procurement systems, backdoor importations while claiming to be as national/residential player and others as reported in the PPDA Monitoring report of February 2020. Accordingly to enforce discipline and order in the construction industry, it’s important to create a national register for providers who would be allowed to participate in public procurement under the scheme. The list would be updated annually and one remains on it after satisfying certain conditions in the pervious year. 

1. 1. 1. 5.2.8.Establishment of a National Content Fund (NCF)

A national content fund is a prerequisite for availing resources for financing the programme to develop the local providers as desired in the various initiatives that have been launched. The fund would finance training, technological acquisition, bailouts especially to address effects of COVID-19 lockdown, guarantee schemes, operational advances, and others. The source would be a levy on every public contract, government subventions, loans, donations, penalties and investments. For such a fund to be effective a parliament needs to pass the necessary law. Already the Oil and Gas sector has established something similar.

Sources:

1. Guidelines 1/2018 of 15 February 2018 issued by PPDA to guide on reservation scheme to promoter local content in public procurement;
2. PPDA Monitoring report on the implementation of guidelines on reservation scheme in selected entities – February 2020;
3. UNABCEC letter to UNRA of April 2, 2019 on mandatory subcontracting policy being piloted on oil roads projects;
4. MoWT, Concept paper on promotion of local content in the Works and Transport sector – 8 September 2017
5. MoWT, The National Construction Industry Policy – January 2010
6. MoWT/PwC, Consultancy services to develop a government of Uganda (GoU) Road contractor registration and classification system (CRCS) Register, October 2018;
7. MoWT/PwC, contractor registration and classification system (CRCS) Register, October 2018;
8. UEGCL, Local companies on IUEGCL Projects, 2020;
9. Statutory Instrument 2016 No.34: the petroleum (refining, conversion, transmission, and mid-stream storage (National content) Regulations, 2016;
10. Statutory Instrument 2016 No.44: the petroleum (exploration, development and production) (National content) Regulations, 2016;
11. Telephone conversations with Ministry of Energy and Mineral Development (PS) – 10.8.2020;
12. Uganda Electricity Generation Company (UEGCL) (ED) –  10.8.2020;
13. UNRA (Director Planning and Engineering and Head of Bridges) – 13.8.2020;
14. Uganda Electricity Transmission Company (UETCL) (Director) –  13.8.2020;
15. Uganda Association of Consulting Engineers (Chairperson) – 14.8.2020;
16. Paper tilted: An analysis of the competitiveness of Local Construction Contractors in Uganda by Ocen, Alinaitwe and Tindiwensi – internet source;
17. MoWT, Commissioner Quality Standards, 14.8.2020
18. The Roads Act, 2019