The year 2019 has been difficult for various sectors of the economy due to the continued decline characterised by foreign currency shortages, prolonged power outages and runaway inflation estimated at more than 400%. Construction has been one of the hardest hit sectors. Zimbabwe Independent business reporter Kudzai Kuwaza (KK) spoke to Zimbabwe Building Contractors Association president Francis Mangwendeza (FM) on the challenges faced by the sector and the outlook for 2020.
KK: How did the construction sector fare in 2019?
FM: The current state of the construction industry can best be described as an industry in a coma with the doctors on strike.
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 fixed price.
During this era of 1:1, contractors were facing costs based on parallel market rates and being paid in Real-Time Gross Settlement 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 face the prospect of a 15-fold increase in project costs. This is unaffordable given these entities work on pre-approved budgets. Because of this, a substantial number of contracts have been cancelled leading to job losses and company closures.
Thus, I refer to the industry being in a coma with no doctor in sight.
But there is more to this. Contractors are frustrated and the economic situation has not made the situation any better.To understand the frustration of contractors and line procurement entities, one needs to have an understanding of the background of the relevant issues at stake.
During the period prior to the abolition of the US dollars, contracts were denominated in US dollars. Treasury argues that contractors factored in parallel market rates into their pricing. That is true but only to a certain extent. Contracts priced in 2017 or earlier are more than likely to have been priced in US dollars than contracts priced in 2018.
Because of delays occasioned by various factors including non-payment of claims, lack of forex to import critical inputs and other technical factors, most contracts were lagging behind schedule. As such, a substantial number of contracts were priced before 2017. Over and above this are issues to do with other contractual claims including retention. A two-year contract priced in 2015, commenced in 2016 and completed in 2017 now has retention due in 2018.
We have taken legal opinion on this issue and have tried to engage the Ministry of Finance, without success. We are now therefore contemplating a class action [lawsuit] as an industry to challenge the said directive and relevant Act.
It is our view that the application of this particular directive from Treasury is ultra vires one of the principles upon which law is enforced: that you cannot apply the law in retrospect. This statutory instrument also contradicts the contract conditions which cannot be changed in retrospect. What we mean is that where work has been undertaken and certified based on a set of conditions and legal provisions you cannot then apply a law in retrospect that changes those conditions upon which work was undertaken.
As such, it is our contention that all payments due for work done prior to the promulgation of the Treasury circular should be treated as intended in the contract. It is therefore only fair that work done and claims due prior to February be paid at the interbank rate.
KK: Statutory Instrument 142 of 2019 banned the use of the multicurrency regime. How has this impacted the construction sector ?
FM: The banning of the multicurrency regime has had effects as highlighted above given that contracts were denominated in various currencies other than the Zimdollar. The transition from foreign currency-denominated contracts to Zimdollar contracts has not been handled well enough and has threatened the viability of the industry. The change has also caused economic instability. This makes it difficult for the industry to function. Construction has a long payment cycle from inception of a project to its final payment to recouping investments. This necessitates a stable economy upon which certain predictions can be made. Where the predictions and/or assumptions are adversely affected due to external factors it brings uncertainty into the project and affects:
l The viability of the project itself;
l Financial capacity to fund the project, e.g. local authorities now face a 15-fold increase In project costs not allowed for in their budgetary provisions;
l Profitability of the project for both the contractor and project initiator, e.g. in housing projects; and
l Skills and competency retention as employees seek greener pastures.
So what we need is economic stability and predictability. The currency which is used is not critical as long as it is stable and exchangeable.
KK: Has there been any movement on the Construction Bill?
FM: Lately there has been some movement. Sadly, this has been the movement of the proposed Bill from the Ministry of Local Government to the new Ministry of Housing.
However, we do hope that the new Housing Minister, having been a contractor and been involved in the initial drive towards the Contractors Bill, understands the need to have this Bill enacted. However, we still doubt the sincerity of the government at large which is what worries us.
Because of this, we are also pursuing introducing a private member's Bill in parliament and other alternatives should the current initiative fail.
Interestingly, I attended the Namibian Construction Industry Federation Congress in November this year. The Namibian government has committed to enacting the Construction Bill by March 2020.
The rest of Sadc have enacted construction industry regulation Bills including Zambia, South Africa, Mauritius, etc. However, what is interesting is that we were the first country within Sadc to lobby for this Bill and we are still to enact it, over 20 years later.
KK: How have power cuts affected the sector?
FM: Like all other sectors, we have been adversely affected. We can no longer plan production schedules for those tasks and processes that require power.
Secondly, we are unable to get raw materials as we need them as suppliers' production, for example in cement and other products, is hampered by the lack of power.
The lack of power also lowers investor confidence which impacts on confidence and investment in the construction sector.
Interestingly though, the shortages have led to a growth in the alternative energy sector, particularly solar and some companies are doing very well because of this.
KK: Did the 2020 budget meet any of your expectations as a sector?
FM: Yes and No. Yes, to the extent of commitment to various projects financing including the Beitbridge road. No in that the need to stabilise the economy does not seem to be adequately addressed and my view is that we will continue to have an unstable economy with adverse effects on the sector.
It is evident from economic history that the construction industry and infrastructure provision are key to economic recovery efforts.
KK: You have complained as a sector that you are losing out to foreign contractors. What have you done to reverse this trend?
FM: Unfortunately, there isn't much we can do as an industry, particularly where government continually awards all major projects in the country to the Chinese and continues to ignore our pleas.
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. We know our leaders can be far better negotiators than that.
Let me give examples of simple issues we could have negotiate around:
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 Hwange 7 and 8 project despite the fact that there is already an existing quarry there.
There is insufficient employment of our college graduates by these foreign companies as they bring even drivers, technicians, foreman, surveyors, engineers etc. Yet we have thousands of graduates coming out of our universities yearly.
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. But let it be that local companies are involved in these contracts such that at the end of the project a Zimbabwean company has or is building the capacity to do the next Kariba South Extension.
Let me also 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 citizen-owned companies, whether the contract is financed by grant or otherwise.
Payments are made directly to the citizen-owned sub-contactors by the engaging authority at the same rates as those being paid to the main contractor.
The National Council for Construction Act No. 13 of 2003 of the Laws of Zambia is what the contractors Bill is to Zimbabwe.
We will engage government at various levels and encourage them to create capacity in the sector given the current economic situation, corruption, favouritism and lack of committed substantial support from government.
In particular, we continue to push for the regulation of the construction industry through the Contractors Bill. Once enacted, we would want to see progression to cooperation among the Sadc construction bodies.
This is why we are also spearheading regional integration of construction companies to create larger capacity and financial muscle.
We have already signed a memorandum of understanding with the Namibian Construction Industry Federation. Our objective is to cause amalgamation and share ideas amongst the various bodies. We realise that as Zimbabwe alone it is difficult to fight off foreign competition, particularly Chinese, but as a region we can.
We would like to complement the political unity that is being fostered by our governments into the construction sector. Just like we have preference for local contractors on tenders, we would also like to have regional preference.
For example, if a company from Botswana combined with a company from Zimbabwe to tender on a Zimbabwean project, they should receive preference over other international companies.
This is one way in which we can counteract the infiltration of our sector by foreigners as well as at the same time grow our companies into regional giants that can then compete on the international stage
KK: What is the outlook for the sector in 2020?
FM: The outlook is bleak as long as the economic fundamentals continue in the current state. We need stability to enable project planning and budgeting and access to foreign exchange to import plant, equipment and other raw materials.
There has been some activity on the Beitbridge Road with local contractors now awarded work on the project.
Our view is that government seems to treat local indigenous contractors as an afterthought, for example the Beitbridge Harare road, where only after several dances with foreigners, Government finally recognised the contribution or capacity that local contractors can bring to the table.
Secondly, where local contractors are engaged there seems to be favouritism as we tend to see the same companies being involved in almost all projects countrywide.
We are not asking for any handouts or direct financial input from government or anyone else for that matter. What we are asking for is what government is already doing with a few selected companies in terms of contract award, speedy payments and access to foreign exchange.
We have seen what can happen with this kind of support as these companies have experienced phenomenal growth in a relatively short space of time. We need this favouritism to be applied to all citizen-owned local contractors.
This will grow the industry phenomenally with direct benefits to our country in terms of bridging the infrastructure gap.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 are the will and commitment from government in particular.