Rethinking infrastructure contracts

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 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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amwenda@independent.co.ug

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