Construction sector reels from crisis: Mangwendeza

THE construction sector in Zimbabwe has not been spared the currency volatility in the market as the economic crisis deepens. Companies in the sector are complaining that the government is side-lining them in favour of foreign firm. Zimbabwe Independent business reporter Kudzai Kuwaza (KK) spoke to the Zimbabwe Building Contractors Association (ZBCA) president, Francis Mangwendeza (FM), over the challenges facing the sector and alleged neglect by the government, among other issues. Below are excerpts of the interview:

KK: How has been your term of office as president of the ZBCA?

FM: Difficult is the shortest answer. The ZBCA was formed to foster, promote and protect the interests of indigenous contractors in Zimbabwe.

On formation of the organisation in the 1980s, there existed in the industry largely foreign companies such as Sisk, Costain and Gullivers. These companies and others like them dominated the construction industry with the support of the pre-independence government to the exclusion of the indigenous contractors.
Today the same situation subsists, but only to the extent that the companies mentioned above have been largely replaced by companies predominantly from China and, just like in the pre-independence era, these companies enjoy support from government.

It has not been easy given the current econo
mic situation, corruption, favouritism and lack of committed substantial support from government.

We have however managed to engage government at various levels and continue to do so. In particular, we are pushing for the regulation of the construction industry through the Contractors Bill.

KK: What impact has the influx of foreign contractors had on local players in the sector?

FM: It is sad that all major projects in the country are being undertaken by foreigners, which include: Robert Gabriel Mugabe International Airport Expansion, Kariba South Extension, Hwange 7 and 8 and Victoria Falls Airport, all carried out by the Chinese.

Now it is common knowledge that there is nothing that the South African company Group Five did on the Plumtree-Mutare project that local contractors could not have done. Much the same on the other projects like the airports and power stations.

This is a proven fact, if you look at the work that has been or is being done on our national, rural and urban roads by local contractors. Examples are: Joshua M Nkomo Airport in Bulawayo (which) was built by a local joint venture; rehabilitation of national roads in major cities such as Harare and Bulawayo is being done by local contractors and the dualisation of the Harare-Norton and the Harare-Marondera road currently underway under the auspices of the Ministry of Transport using local plant and equipment.

All this work is being or was done by local contractors. So, it is very disappointing that all major works in the country are being given to foreign contractors on the pretext that Zimbabwe has no money and is therefore unable to negotiate better terms on financing arrangements.

The companies being engaged from China or wherever else are companies that were groomed and nursed by their own governments to be the companies that the Zimbabwean authorities admire today.

We don’t deny that there may be a need for the engagement of international players in areas where Zimbabwean companies lack the requisite experience and knowledge.

However, there are issues like the Victoria Falls Airport where not even local labour was engaged and it took the intervention of the then minister of Transport, Obert Mpofu, to get locals employed. There were no local subcontractors used in that project and it is the same contractor undertaking works at the Robert Gabriel Mugabe International Airport.

Already, there are worrying signs that the Chinese contractor there does not have any intention of engaging local contractors. Around the Harare Airport there are more than five asphalt plants that belong to local players that are lying idle. The Chinese have set up their own asphalt plant there and obviously have no intention of using local asphalt plants.

In Hwange, the Chinese have set up a quarry next to the existing quarry for the (Zesa) Hwange 7 and 8 project despite the fact that there is already an existing quarry there.

Let me use the example of Zambia. In terms of the National Council for Construction Act No. 13 of 2003 of the Laws of Zambia, it is mandatory that any international company subcontracts at least 20% of the work it has to companies owned by locals. Payments are made directly to the subcontactors by the engaging authority at the same rates as those being paid to the main contractor.

Zimbabwean contractors are capable of much more than they are currently being credited for.

KK: What should government do to protect local players in the sector?

FM: There is so much that government can do to protect the local industry. The first step is a change in attitude and the promotion of a desire to build our own strong and resilient construction industry.

Legally, the government has to enact the Contractors Bill to regulate the industry. This Bill has been with the parent ministry for over 10 years now and its stalling is evidence of lack of commitment on the part of government.

Financially, the government needs to help capacitate the industry. Construction equipment is largely imported and therefore needs foreign exchange. Allocation of local RTGS facilities as announced in the Monetary Policy Statement, while appreciated, will not assist much. Again, we view this as evidence of lack of commitment on the part of government.

Local contractors cannot compete against any international company that has access to equipment and cheap financing with old, dilapidated plant and expensive money.

Thirdly, government needs to simplify tendering procedures and decentralise the procurement process. The procurement regulations need to reflect a desire to protect the local industry, not expose it to international competition. There is too much bureaucracy in the system and the ease of doing business must first apply to and be appreciated by Zimbabweans.

Lastly, there is need to review the engineering procurement contract conditions of contract government is entering into as part of “mega deals”. There is need to involve the local construction industry, including consulting engineers, quantity surveyors and financial engineers, in the negotiations for these deals so that Zimbabwe benefits much more than it is now.

It is not that government is not capable of supporting and growing the sector. In fact, it has done so as in the case of one company which now dominates road construction projects countrywide. It is the selective support of companies through tender awards and foreign currency allocation that is the problem.

KK: How have the foreign currency shortages and volatile exchange rates affected the construction industry?

FM: As I have alluded to, the industry is largely dependent on imported plant and equipment. Inputs such as electrical components, steel, bitumen and other inputs are also imported.

The shortages of foreign exchange have therefore restricted the industry from recapitalising and stalled projects where imported components are required.

On the other hand, the industry can only thrive in a stable economic environment. Foreign currency rate instability has caused a lot of pricing distortions in pricing contracts and within running contracts.

Most construction work is undertaken under contract and these contracts spell out the terms under which contracts are to be implemented including payment terms and price increases. During the US dollar era from 2009, contracts were priced in and paid in US dollars. This is the time when the industry was revived and managed to recapitalise to some extent. Generally, most post-2009 contracts specified payment in US dollars and were at a fixed price.
When the rate was subsequently fixed at 1:1, prices of imported inputs rose in tandem with the parallel market rates due to shortages of forex on the formal market. Maintenance and repair costs for equipment prices rose, driven by the prices of spares, tyres, batteries and so on.

During this era of 1:1 (official exchange rate), contractors were facing costs based on parallel market rates and being paid in RTGS money disguised as US dollars. This caused a lot of work stoppages and retrenchments in the industry as contracting was no longer viable.

So when the rate was “liberalised” and RTGS dollars formalised, the US dollar contracts were resuscitated.

Justifiably, contractors who had US dollar-denominated contracts resumed work based on the fact that payments, if made in RTGS dollars, would be multiplied by the ruling rate of the day. On the other hand, clients — mostly government and local authorities — now faced the prospect of a threefold increase in project costs. This was unaffordable given these entities work on pre-approved budgets. Because of this, a substantial number of contracts have been cancelled, leading to further job losses and company closures.

The situation has been made worse by the now widening gap between the inter-bank and parallel markets rates which are returning the few remaining contractors back to unprofitability.

KK: How much is needed to revitalise the construction sector?

FM: It is a difficult question to answer because the sector is dependent on the volume and nature of work that needs to be undertaken. Giving a figure seems to suggest that the sector needs an allocation from Treasury to be able to work. What the sector needs is work opportunities, a stable economy and access to foreign exchange to import requirements.

Remember the sector by and large is not a foreign exchange earner but has the potential to export services. If the Chinese can travel thousands of kilometres into Africa and be competitive in construction projects, we can also do the same, but the key ingredient is government support.

KK: What is the current capacity utilisation of the sector?

FM: Below 30% and progressively getting worse.

KK: What is the construction sector’s outlook for 2019?

FM: As long as the economy is unstable, the outlook for the industry remains gloomy. We are experiencing a downturn in construction activities linked to the shortages of foreign exchange and volatile economy. At the same time, we have dilapidated infrastructure that requires rehabilitation and expansion. Government has committed to investing in infrastructure but its actions are divorced from its commitments.

In my view, we did see a flicker of the light at the end of the tunnel, unfortunately the tunnel has collapsed. It will need the construction sector to remove the rubble and revive the economy.