‘Foreigners crowding out local contractors’

The Zimbabwe Building Contractors’ Association (ZBCA) held its congress last week to interrogate various issues affecting the construction sector. Business reporter Kudzai Kuwaza (KK) spoke to ZBCA president Ransom Nherera (RN, pictured) to discuss challenges facing the sector, influx of foreign contractors and expectations from the national budget. Below are excerpts:

Ransom Nherera

KK: ZBCA held its congress last week, what issues did you discuss?

RN: ZBCA has just come out of congress that was held from November 8 to 10 2017. The issues that were discussed at the conference are as follows:

Contractors Bill: The Ministry of Local Government, Public Works and National Housing gave feedback to the effect that the minister had signed the memorandum of principles to launch the Bill in the legislative process. The ministry assured participants that the Bill should become law during the first half of 2018. It was emphasised that there was need to provide for the regulation of the construction sector. Contractors also affirmed the need to self-regulate as a measure to provide quality services to customers;

Opportunities for the ZBCA in the construction of schools through joint venture partnerships: The Ministry of Primary and Secondary Education was represented by the deputy minister, Professor Paul Mavima, who informed the congress that there was a backlog of 2 056 schools that needed to be built throughout the country. He called on the association to partner government through public-private partnerships (PPPs), especially joint ventures, to construct and rehabilitate school infrastructure such as classrooms, laboratories, power infrastructure, ICT infrastructure for connectivity, water provision and housing for teachers. The ministry had signed a loan facility that hopefully would see the process of constructing the 2 056 schools beginning in 2018; and
Prioritisation of the construction sector in the allocation of foreign currency: The Reserve Bank of Zimbabwe (RBZ) representative informed the gathering that banks were holding 60% of foreign earnings as the RBZ would hold on to 40% of the earnings. Contractors that would have earned foreign currency should approach their banks for allocation. The central bank informed congress that the explanation by banks that they would be waiting for forex allocation from the central bank was not true. Contractors were urged to get in touch with the central bank where their bank would give excuses especially when they would have earned foreign currency. The central bank informed the gathering that they were supporting the importation of steel and bitumen. The contractors felt that the importation of bitumen should be handled in the same manner as the importation of fuel and edible oils. It was agreed that this should be a lobby issue with the RBZ:

Proposed construction industry taxation policy: Given the complexity of the construction sector, it was noted that the current tax laws that calculate value-added tax on the basis of an invoice was not suitable to the construction sector. Instead, tax in the sector should accrue on the basis of payment received by the contractor for work done.

A draft policy paper will be presented to the ministry of Finance in the course of 2018 in order to lobby for tax law reform in relation to the construction sector;

Effects of anti-competitive behaviour in the construction sector: The Competition and Tariff Commission (CTC) made a presentation on the need to detect tendencies towards collusion and creation of monopolies in the sector. These tendencies are anti-competitive and should not be allowed to take shape in the economy; and

Dispute resolution in the construction sector: It was noted that by its very nature the construction business was prone to conflicts. However, contractors were encouraged to desist from taking the legal route but instead seek arbitration as an alternative dispute resolution mechanism. The legal route creates a win-lose situation as opposed to arbitration which creates a win-win situation that leads to co-operation in future.

KK: What challenges are you facing as the construction sector?

RN: The construction sector has been in steady decline since 2000. This was evidenced by the complete disappearance of cranes as very little in terms of projects came up. Construction activity has dwindled to low levels that has seen many contractors competing for the few opportunities available, leading to under-pricing. This habit has created a situation that has compromised quality and has seen many contractors closing down their businesses. One other indicator that shows the bad shape of the construction industry is the large number of incomplete projects due to the spiralling costs of building materials. The biggest employer is Government and when Government catches a cold the whole industry sneezes.

The advent of foreign contractors has brought about unfair competition for the local construction industry as many of the foreign companies, some believed to be backed by their governments, have tended to tender far below cost, giving them unfair advantage over local companies.

Foreign contractors tend to be backed by their national governments, they bring in cheap building materials from their countries and do not abide by the Zimbabwean building and construction laws. They ill-treat the local labour as well as underpay the labour. This means that in terms of costing the bill of quantities there are two scenarios.

One scenario is that of a local contractor who uses the price structure in the country which is high. The foreigner benefits from low-cost structures from their country and win the tender.

KK: What mechanisms have you put in place to address the challenges?

RN: The mechanisms we have adopted to address the challenges, given the scenario outlined above, include lobbying government to reserve a certain percentage for locals in the infrastructure deals that they make with other governments and financiers. We are pushing through our parent ministry (Local Government, Public Works and National Housing) the Contractors Council Bill which, if enacted, should be able to regulate the construction industry and put in place a level playing field.

We have also encouraged our members to pool resources through the formation of consortiums when tendering for the large contracts. The consortiums have been formed at both national and regional levels. We have also organised the built environment to speak with one voice through the banner of the Zimbabwe Construction Industry Council (ZCIC) which brings together players in the construction industry such as architects, engineers, quantity surveyors, contractors and real estate agents.

We remain hopeful that the economy will soon turn around and when that happens we should be ready for immediate take off.

KK: How has your sector been affected by the liquidity crunch and foreign currency shortages?

RN: In terms of how the sector has been affected by the liquidity crunch and the shortage of foreign currency in the market, contractors have also been affected. Steel is a major input into the construction business and following the closure of Ziscosteel this has to be imported. Bitumen is a crucial ingredient in the construction of roads and is also imported. Aluminium and fuel are also major inputs that are imported.

The shortage of foreign currency has led contractors to source foreign currency from the parallel market, leading to increases in the price of construction services while the contractor becomes uncompetitive compared to foreign contractors. The Reserve Bank of Zimbabwe has called for dialogue on this matter so that the forex needs of the sector could be prioritised. Construction needs to be financed from cheap long-term loans as opposed to the available short-term expensive loans that are available on the local market. The association shall be lobbying government to normalise its relationships with the World Bank and the International Monetary Fund so that cheap finance can be accessed by Zimbabwe.

KK: There have been complaints about delays by the RBZ in allocating foreign currency. How has this affected you?

RN: It has since been clarified that the Reserve Bank of Zimbabwe retains 40% of foreign currency earnings and that the exporter through their banks retain 60% of the foreign currency earned. So, the notion that the Reserve Bank of Zimbabwe is responsible for delays in the allocation of foreign currency is not true. It is the banks themselves that are engaged in selective allocation of foreign currency at the detriment of some of their clients. Armed with this knowledge, the association shall be educating their members that earn foreign currency to demand from their banks to be allocated what is due to them.

Regarding inputs like steel and bitumen that are imported, the association shall be engaging the central bank in order to come up with mechanisms that foster accountability. The obsolete equipment in the sector cannot be pinned down to shortages of foreign currency. The association shall be taking a value chain spatial approach in lobbying for the retooling of the sector. Most contractors have not been able to replace their equipment over the last 20 years. Technology has moved on and, to remain competitive, contractors needed to keep pace with those developments. It becomes difficult for the contractors to match efficiency and competitive levels achieved by those companies that have been able to keep pace with those developments.

KK: What are your expectations from the national budget?

RN: As the minister presents the 2018 national budget, we expect him to increase allocations to the Public-Sector Investment Programme (PSIP) component of the budget. The allocation to the PSIP should allow for uncompleted government projects to be completed before new ones are started. The budget should at least follow the Pareto principle where 20% is reserved for recurrent expenditure and 80% for capital expenditure.

We also propose that all construction equipment be duty-free for registered companies that are complying with national statutory requirements. Soon after independence the national budget met the expectations of the construction sector since a large chunk went into the PSIP. Through time we saw the prioritisation of recurrent expenditure at the expense of capital expenditure.

KK: Which sector of your industry has attracted the most in terms of business volumes?

RN: Although major projects are not available, the housing sector has kept contractors busy and we would like to thank government for embarking on the housing delivery programme as provided for in ZimAsset. The housing sector has also sustained suppliers and manufacturers of building materials. It has also kept the SMEs in the sector with work to do.

KK: There have been misgivings over the influx of foreigners in your sector that has said to have crowded out local players. What is your view on this?

RN: The local contractors have been crowded out by foreign contractors who have the backing of their governments in terms of access to cheap finance and inputs. Struggling local contractors are therefore being subjected to unfair competition and a playing field that is not level. In terms of bids, it becomes impossible for the local contractors to be competitive.

KK: How is the sector faring in keeping up with global trends and what can be done to improve the adaptation of modern models of construction?

RN: The sector needs to have a stake in major government projects so that they benefit from technological transfer from the main contractor.

Many Zimbabweans are working for companies domiciled in economies that are working well and there is need to harness such experiences for the benefit of the local construction industry.

Fact File: Ransom Nherera

  • Earned a degree in engineering at the University of Zimbabwe;
  • Worked for Grinaker Construction;
  • Was employed at FMI Construction, which was later rebranded FMI Costain; and
  • Founder of Mutual Construction.