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Rethinking infrastructure contracts

On-going construction of the Entebbe-Express Highway.
On-going construction of the Entebbe-Express Highway.

THE LAST WORD: By Andrew Mwenda

Why East African governments need to involve local firms in big infrastructure projects

The East African nations of Kenya, Uganda, Tanzania and Rwanda are involved in massive investments in infrastructure. They are contracting companies to build roads, railways, bridges, airports, seaports, dams, electricity lines, oil pipelines, refineries, water systems, etc. Between 2010 and 2020, the value of these contracts exceeds $100 billion in nominal dollars. Our nations have never seen anything like this before. Given that the combined nominal GDP of these countries is $145 billion, this is big business.

Infrastructure is vital for growth. Growth, especially when it is broad-based and sustained over a very a long period, is the only road out of poverty and misery that many of our people live in. Poor infrastructure has been a major constraint on investments in our region, making it expensive to produce and transport goods to markets. This reduces the rate at which our economies can grow. Therefore, we need to celebrate our governments for this vision.

Yet as we celebrate this commendable effort, we should also pause and reflect on the structure of contracting. Almost without exception, the companies taking these big contract jobs are foreign, largely Chinese. This is not an entirely bad thing. Foreign companies may bring better technology, technical and managerial skills into the local economy. Because of a rich experience and economies of scale, foreign firms are also more likely to deliver high quality work at low prices compared to local firms.

However, when we look at the history of economic development in the nations of Western Europe, North America and East Asia, we see that during their intense period of investment for growth and transformation, they relied largely on their own people and companies to build infrastructure.

So why are we in East Africa almost entirely contracting foreign firms to do this work for us, leaving our own firms with almost nothing to contribute and our people to do manual jobs on these projects? Is it because we lack the technical skills to do it ourselves? If yes, what are we doing to acquire these skills so that in future we can do this work by ourselves?

I know that President Yoweri Museveni has asked the army to work with the Chinese in building the Standard Gauge Railway so as to build local capacity. But this is one out of many contracts.

Kenya under Mwai Kibaki made it a condition that foreign firms subcontract up to 30% of the works to local construction firms in order to allow the diffusion of technical and managerial skills into the country. Rwanda, perhaps the most nationalistic of the four countries, has local construction firms that are beginning to take big road construction contracts. However, it is also not as aggressive in insisting on local content as it should.

The African intellectual is waiting for the mythical neutral state that will allocate lucrative rights over scarce resources purely on technical grounds. 

The high priests of development tell us that “good governance” requires open and competitive international bidding. Local firms lack experience, financial resources, economies of scale, technology and technical and managerial skills to do better quality work at lower prices. So they are not competitive in international bidding. These priests also tell us that if you deliberately favour local firms, only those that are politically well connected will get the jobs. This will eliminate more technically efficient local firms, leaving the market to those owned by “regime cronies”.

I will criticise this reasoning with the humility of experience because for very long I was also its high priest. Nowhere is an argument more compelling (and dangerous) than when it makes use of (and abuses) obvious truths. Any attempt to give preferential treatment to local firms will inevitably lead to political favouritism. Yet, although the risk is real, its costs are always overstated and historical experience ignored. All the rich nations of today extended preferential treatment to regime cronies, not the most technically deserving. It did not stop their transformation.

The African intellectual is waiting for the mythical neutral state that will allocate lucrative rights over scarce resources purely on technical grounds. Yet all governments are always afraid to place resources in the hands of those who could use them against incumbents.

Cronyism is the way the capitalist system has grown; stories of a technically competent state blindly allocating such lucrative rights to the most technically deserving are fiction. It is not always the case that politically favoured firms are necessarily technically weak; favouritism and competence can go hand in hand.

Our governments need to accept to suffer the short-term cost of high prices for low quality work in order to allow local firms to acquire experience, technical and management skills, economies of scale, etc. to produce high quality work at a cheap price over the long term.

The short-term benefits of relying on foreign firms to do our work are realised at the price of either killing local firms or undermining their emergence. Yet international firms will not give us badly needed local capacity over the long term. This is largely because they will not transfer the activities that help them to develop better technologies, technical and management skills from their home countries to East Africa. Instead, they will be buying technology and other inputs from their home country and also remitting profits to their shareholders at home.

As I write this article, East African currencies are depreciating against the dollar. This is because of low export earnings, as commodity prices have plummeted. But it may also be because our massive infrastructure projects are sucking dollars out of our economies to pay shareholders of contracted foreign firms. These firms also rely largely (and often unnecessarily) on imported inputs (think of the Chinese at Karuma and Isimba dams rejecting local steel and importing it from China). Hence only about 30% of the contract value of our infrastructure projects is remaining in the local economy; the rest is being taken away.

Even a fool will tell you that to grow your economy or company over the long term, you need to plow back a significant share of your surplus (profits). Foreign companies have to pay dividends to the shareholders abroad and, therefore, take a significant share of that surplus out of the local economy.

East Africa is going to benefit a lot from the current infrastructure investment. Yet a significant share of these benefits has been taken away because of relying on foreign firms. This has significantly reduced the multiplier effects of such public spending. I really hope our leaders in this region appreciate this problem.

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12 comments

  1. Mwenda, if you are not paying lip-service, how many companies have you fronted that are local? Please shame the devil. Otherwise, this is a good read. Thanks

    • Rajab, Mwenda used to preach no government intervention in business until recently, so it is possible that he only fronted foreign companies (like u suggested) but has changed? Besides, there is a reason the Baganda called capitalism ”ani akalyako ani”. Bino ebintu biba byakwebba bubbi

      • I like your mastery at Luganda. Tell them its not “imperialism” it is rather, “acculturation” the free adoption to a culture. I am afraid you are suggesting Mwenda has changed,- not a bit, it is his interests that have changed. My guess is that he is scheming for a local firm (probably his own) and only using this platform to loud his bid. As you right put, ‘anakalyako ani?’ Its selfishness and bordering on one’s sense of self importance. It is sad.

        • Nze ndi mwana Muna Buddu. I grew up in Masaka/Kyazanga. I speak better Luganda that many Baganda I have met. Back to the article. I don’t know Andrew personally to judge him beyond his writings. You may be qualified to punch holes in his writings based on your knowledge of what you know him to be in practice and you would be absolutely right. However, evenif Andrew wrote this with selfish goals, don’t you believe in the principle that more local participation is needed and would be beneficial to Uganda? KACITA, UMA and others have been crying for this for years. If we agree on principle, I would leave the practice to Kagina to smoke out local but unqualified firms in the road sector that would like only to ride on their closeness to powers that be to fleece the Country. So far Kagina has shown her ability to kick their butts. In the worst case scenario, if this practice was only to benefit the connected like the Andrew’s leaving the rest of us to admire their wealth like we have no brains, as is the case even today, don’t you agree with me that it benefits Uganda to create more rich Andrews in Uganda who might employ my son to clean their compounds and mow their lawns? Compare that with the Chinese who are awarded Karuma hydropower plant construction with the argument that they do qaulity work but we have cracks developing now and all the money is in China. This is a bigger loss. If Andrew had profiteered from this deal, who knows, he might have reinvested part of it here to benefit us. So, even the worst case scenario has benefits to the Country and yet with improving capacity of these government agencies, may be performamce of even local connected companies will improve. Do you agree?

          • Nice to meet you Musinguzi. My dear wife is from Kyazanga and so by “association” you’re my “muko” (in-law). “don’t you agree with me that it benefits Uganda to create more rich
            Andrews in Uganda who might employ my son to clean their compounds and
            mow their lawns?” At a glance I thought you were being cynical, however, when you stated this, “Compare that with the Chinese who are awarded Karuma hydropower plant
            construction with the argument that they do qaulity work but we have
            cracks developing now and all the money is in China” has squelched my mind. I will give you my bad example. When I was still at Uni, I thought that immediately after I would get a job but that never happened. My family urged me to do a post-graduate and after my masters I thought I had clenched the job, however, two years down the road nothing came my way. I traveled to the UK to try my luck. after six months at the job, I was made manager of a financial organisation. I was a popper in my country yet I became somebody in a foreign land. The point I am raising is that, in this day and age (globalisation), home is where and when you feel “happy” and “dignified.” A Chinese, a Briton, an Idian or an Arab may prove to be a better Ugandan than any “Mwendas” one could come close to. Apparently, I have a grim look at the current contracts awarded to the Chinese companies. I strongly believe they are ill crafted. The rush is to have “something” done and not how that “something” is being done. And someone will be quick to put the blame to the masses and not to those that the masses gave powers to lead.

          • Muko wange, enkoko yange gisindike oba sekyo mwanyinaze njakumukyima :-). Your plight of finding opportunity beyong your borders applies to many. I am an economic migrant too. But you are overstating the concept of global citizenship. My dear, u are Ugandan first and foremost and u will agree with me that if you had found a job here, you would probably not have gone out. Because of your high qualification, may be you would have but think of majority of your countrymen and women who are not as qualified, majority of whom are being shipped for enslavement in the Mid east because of lack of options. Think of many suicide cases which have their background in economic hopelessness. I like what Nabagereka once said when Uganda and Buganda had frictions: she said she was a proud African of Ugangdan descent and she was a proud Ugandan who is a Muganda. Uganda is your building foundation and you will agree with me that the more developed your Country of origin is, the easier the global systems open doors for you. By all means my muko, development and good management of Uganda benefits your global citizenship aspirations. Please do send back all the money for if we develop Uganda, UK will easily give you visas and work permits. Beware of Brexit effects too.
            Localisation of contracts doesn’t mean black.Sudhir who invests here means better than a local Ugandan who invests all the money outside. The concept of origin is so crucial. Imagine Kenyan banks in the region making so much money that is sent back to kenya. Now Kenyan banks have so much money that they are using to invest in building houses for most people who have empty land at very low interest rates. Compare that with Uganda. Brother, yours is yours and ours is ours. Don’t undermine yours (Uganda) over ours (globe).

          • Unfortunately, that event (Kwanjula) went unannounced but from now on, I will treat yours with utmost courtesy. Of course ‘East or West, home is best.’ But maybe we have to “redefine” what “Ugandan” means.

            If “Ugandan” means: attaining leadership through the barrel, if it means: levying taxes yet government withdrawing from its responsibilities, then it becomes less of an “association” I wouldn’t like to be part of. Policies impact on daily businesses. For instance, Uganda is the world’s youngest nation. 65% of Ugandans are below the age of 35yrs. Of these, more than 80% are unemployed. What age focused policy has this government got for the youths? I was involved in a DFID (NU-TEC) programme that was meant to find ways and means of adding value to the food chain of cereals grown in the eight districts of West Nile. One of our findings were that government hadeliminated the youths and women from the agricultural sector replacing them with veteran soldiers who are currently running the ‘wealth creation programme.’ One can shout ‘hoarse’ but are those in control ready to listen. Societies change if there is always a sense of humility in the leadership which I find to be a rare resource in ours.

          • There are many negative reasons to be angry at ourselves and our leadership but there is a difference between leadership and Uganda. are Uganda and Uganda is you; the current leaders are temporary but only you can ensure that the new ones are not replicas of the current. when the Britons got annoyed with their government, they didn’t run to Uganda, they expressed their dissatifaction in a manner appropriate to their circumstances. The biggest betrayal is turning your back on a Country your father contributed to its creation inspite of its leadership deficit. Not all is doom btw, come and at least enjoy the sun and the fresh fruits plus genuine smiles and happiness :-).That said, hey enjoy your stay wherever you feel comfortable. Great talking to you

          • If I were to shout on top of my lungs that: “I am a Ugandan” x 3, would you believe me? But if I walked towards you and silently whispered in your ear that: “I am a Muganda”, would you doubt me? Let us be honest first to ourselves then we shall be “true” to Uganda. You always make it pleasurable sharing with you.

  2. 1.There is little a poor nation can do regarding contracts 1st of all the loans/grants have conditions am sure govts agree to these terms coz we r broke.
    2. I dont know why most Engineers are shady people(we all saw how they were sweating before Justice Catherine B. they will never tell the truth whether its a Mechanic,Electrician,surveyor or Civil Engineer they normally take advantage of our ignorance about engineering concepts to exploit & confuse us .
    3. Prices of building materials could have tripled had some contracts been awarded to Ugandan firms.Shrewd businessmen would collude with our local industries to inflate prices of building materials.
    4.There are just few African companies patterning with international firms e.g Reynolds of Nigeria with SBI of Switzerland, Davis & Shirtiff of Kenya they have earned the trust of some international firms coz of good reputation & great service delivery.
    5.Our Engineers lack exposure you think they can design roads with intersections?they are used to designing feeder roads you think they can build Hydro Electric Dams no may be boreholes.
    6. Construction of Huge projects like Roads,Dams Railways don’t need jokers.
    7.These days when one visits newly constructed houses, you find the walls peeling off for me when iam invited to a home i eat from the compound coz i know any time the house may collapse.
    8.What do the Engineers from Ministry of Works do the whole day if all contacts are handled by foreign firms?Why does UNRA have few technical staff like engineers and more support staff like procurement officers,accountants,lawyers?

  3. One, I must congratulate Andrew for the change in tone. He has greatly improved as he no longer name-calls the anticipated opposers of his views. His emotional intelligence has greatly improved for he tries to present and acknowledge with humility the arguments against his stance. That is the way of the civilised my man. Two points on the article, this cry has been on since the contracts started being awarded but the question is why hasn’t government changed course? In trying to answer this question you will come face-to-face with the fact that the chinese mobilise their own resources and with many priorities, these governments find this relieving. Unfortunately, beggars are not chosers, the chinese once they give you their funds, they will seek to return back whatever they can to the detriment of the local industry growth. In there lies the connondrum. The second and most important for me is the issue of corruption. Local firms have to line pockets of local officials before contracts are awarded to a point of running broke. You might want to revisit the contribution of corruption in exacerbating this situation/scenario as government try to minimise, not eliminate, this practice. But whatever the reasons, we are breedding and solutions to address this heamorhage must be quick and accurate if we are not to lose the victim

  4. I agree, we need to take over and take control of our problems both in technology and management. Hiring neighbors to cook for us will never improve our cooking but rather it shall under mine our growth and development. We need to make mistakes and learn from them. East African companies can now work for east africa

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