THE WORLD BANK

POL ICY PLANNING AND RESEARCH STAFF

Infrastructure and Urban Development Department

/W%U -,-0 0Report INU 10

The Construction Industry in Developmenit

Issues and Options

Syed S. Kirrrani.

February 1988

Discussion Paper

Th.as i a domnen pvimhed rdyrno r bvy rb Vod Ur* The veaas and rywe.aW-4 heregi are trose of ee aunhor ardshiC.j~ -t b4e a1rL-xjtW 'o r*e World Bank, to r~s affdLatDd or arizziorts, ox to arny rwdivsdua. aclv'i orn Veve te.en

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Wne W erd_ in

The Construction Industry in Development

Issues and Options

D -aj Paper

The World Bank1818 H Street, N.W.Washinyt.n, D.C. .0433, U.S.A.

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Syed Salar Kirmani is a consultant in the Infrastructure andUrban Development Department of the World Bank.

ABSTRACT

ihis report describes the scope of the construction industry andthe role of the contractors. It explains the close relation betweenincome, investment, construction and growth and demonstrates that theconstruction sector contributes, directly and through its backwardlinkages, more to GDP Ind employment than most other sectors of a country'seconomy. The report enphasizes that the value-added In construction,quality of work, cost-effectiveness and completion time are importantcriteria for judging the ceficiency of the industry; its developmentrequires improving the policies, reforming the systems, building theinstitutions, and 'mrproving its business environment rather than assistingindividudl contractors.

The report analyzes past Bank strategies fcr developing theindustry and derfnstrates that th:y were not effective. It identifies themajor barriers constraining the industry,explores the options, andrecorrmen:s 'the basic strategy for promioting the industry. Tht-. i dsicstrategy calls i;^ a comprehensive program for developing the constructionsector which inter alia includes: zstablishing the rector policy,designating the Implementing ministry, reforming contracting practices,establishing training programs, improving credit facilities, strengtheningcontractors associations, fosterii.g the growth of conisulting profession,Jeveloping construction rrmaterials and promoting research and developrent.The report recoamer,ds construction sector adjustment lcans as an effectiveinstrument for Bank assistance to the industry.

The report argues that the considerations which led to theestablishment of the Bank policy in 1973 for promoting the industry aremore compelling today than at the time of its approval. At that time, theBank was launching a major effort to increase its lending to projects inthe new sectors (agriculture, education, urban, population, etc.) andrecognized the need for developing the domestic construction industries forimplementing those projects. Today,;-ending to the new sectors has'reachedhinh levels and domestic contractors are implementing most Bank-finarWcedprojects, but their ability to achieve -the Bank's objectives of e'f-flciencyand economy is seriously constrained by inefficient practices and theadverse business environment of- the industry. !Consequently, delays inproject ip)1ementation have become endemic.-

The report examines the extent of delays in completing projects'and demonstrates that they are not only unduly long, but they have1ncrtased nver the vears. The analysis also shows that Lie delays awre:'largely due to the undeveloped construction industries and that the-economic cost of delays to the countries is enormous.

The report argues that the potential of the construction industryfor Increasing the efficiency of investments ind enhancing the pace ofdevelopment is substantial and there is both the need and the opportunityfor the Bank to develop this potertial. Tne Bank's credit lity will bejudged by the quality and efficiency of its projects, not only as approvedby Its Board but a.so as implemented. As a Levelopment institution, it isalso concerned with the efficiency of the country's own investments.- Thereport concludes that the rat;onale for Bank assistance to the constructionindustry is strong ar,d it has ccimparative advantage in terms of itsexperience and opportunities for developing the industry and demonstratingonce again Its leadership in economic development.

ACKNOWLEDGEMENTS

The author is grateful to the guidance and assistance provided byM4essrs. Louis Pouliquen and Curt Carnemark throughout the preparation ofthe report. The author is also indebted to Messrs. Es-a Bennathan, JeffreyGutman, Gregory Irngram and Donald Strombom for their extensive review andcomments and to Messrs. John Blaxall, Francis Colaco, David Cook, JcaeDoyan, Asif 7aiz, Per Fossberg, Ernesto Henriod, Tar'i Hussain, RichardJoharson, Martin Karcher, Kudlapur Krishna, John Lethoridge, KenichiOhachi, Inder Sud and Izzet Zincir for their useful suggestions.

The author also wishes to express his thanks to Messrs. J.M. Lantran,J. Mathai andl G. Tharakan for their assistance in preparing the statisticaltables; Mrs. Gisela Minke and Ms. Yolanda Arellano deserve special thanksfor theli patience and excellent secretarial assistince during preparationof the report.

In developing the stra.gy suggested in this repcrt, the authorbenefitted from his dircussions w'th the President or FIDIC, the pertnersof several consulting engineers, oarticularly Harza EngineeringInternational (USA), Binnie ard Partners (UK), NESPAK (Pakistan) and REMCO(Fakistan), and also with several contractors, specially Guy F. Atkinson(USA), Impregilli (Italy) and Nazir & Co. (Pakistar). The CaterpillarTractor Co. (USA) and the Associated General Contractors cf America alsomade- us.eful corments on the suggested strategy.

GLOSSARY OF ABBREV!A1IONS AND TERMS

CR Credit by the Int .'ional Development Association (IDA).FA Financial Assistanc-FIDIC Federation :nternationale des Ingenleurs - ConseilsFY Fiscal Year of the World BankGDFCF Gross Doa estic Fixed Capital FormationGDP .iross Domest!c ProductICB International Competitive BliddingLCB Local Competitive BiddingLN Loan by the international Bank for Reconstruu-tion &nd Deve^oment

(IBRD)OMS Operations Manual StatementOPN Operations Policy NotesOPS Operations Policy StaffSAL Structural Adjustment LoanTA Technical AssistanceVAc Value-added in Construction

Informal Sector - Includes all construction ectivitles carried out byindividua,s or groups on se f-heip b3sis without aregulated process of contrac 1ng. These activities areusually not recorded in NaticAal Accounts.

Formal Sector - includes all construction activities carried out byenterp,ises and organizativns tnrc,ugh a regulated processcf contracting or force account.

Force Account - involves construction,carried out by an enterprise'soe oroanization's own personnel and equipmen,t with or -witho.jt the use-of labor-supply contracts. Agovernment-owned construction unit that is notmanagerially and financially autonornous is alsoccon!,ldered as force account unit.

THE CONSTRUCTION INDUSTRY IN DEVELOPMENT

- ISSUES AND OPTIO1NS -

TABLE OF CONTENTS Paqe

I. Introduction and Summary .1

Introduction. 1Scope and Purpose of the Repcrt. 2Main Findings of the Report. 3Surmmary of the Results of Analysis of Issuesaind Opti.n. 6

A. T;ie Scope and Role of the Construction Industry.. 6B. Major Issues in Past Operations ................. 9C. Major Barriers and the Basic Strategy ..... ...... 11D. Instruments for Implementing the Basic Strategy.. 13E. Rationale fnr Ran' inwolvemenc ................ .. 16

II. The Construction Industry ......... ...................... 18

Scope of the Construction Industry ...... .............. 16tfhe Contractors ................ ....................... 20

III. Ral'e of Construction' Industry in Economic Development ... 23

Income, Investment, Construction and Growth ..... ...... 26Efficiency of Investmernts .............................. 28Value-added in Construction .......................... 29Employment in Construction ........................... 31Relative Contribution of the Construction Industryto GOP ......................... 32

IV. Objectives and Performance Criteria .of ConstructionIndustry .......................... 5......, 35

Perfcrmance Criteria .36. 4; ,. . , . t.. / _.Q t,E*

V. Najor-Issue:i in Past Dperati.ns- ...................... 36

Bank Policy on Constructlon>Industry ..... ............. 36Scope of Past Operations .......................... 39MWnagemenL Information System ........................ 40C nstruction Industry is not n- the Main-streamof Bank Activities. . 4;

Reasons for the Lack of Focus on'Construction Industrv. 44Bank zotrategy in Past Operations .. 45

VI. Financing Construction Equipnent .46

Hazards of Financing Construction Equipment .46Institutional Finance .49Experience Bank Operations .50Viable Strategies for Financing Equipment. 52-Equipment Leasing Ccmpan!-s .56Financing Government Equipment for Hiringto Contractors .57Construction Equipment Financing by DFCs .57

TABLE OF CONTENTS (Continued)- ii - Pane

VII. Tra,.aing Kanagers and Workers in Construction Industry 513

Small Contractors ................. 9......... c 9Large Contractors .................. .................. 'iONeeds of Construction Industry are Different ........ . ( f2Views of ILO .......... ............................... 92Viable Strategies for Trainiog .............. ... . 53

VIII. 4ain, Barriers to Development of the Industry .... ...... 66

Protection Against Unfair Acts of Employers ........ .. 69Prequalification of Contractors ........ .. ............ 70Equltable'Contract Documents .......... .. ............. 73Fairness In Competition ............. .. ............... 74Payments and Compenatlion ...... ...................... 76Protection Against Adverse Environment ....... 8........ sResponsible Government Institution for Promoting the'ndustry ..... .................................. 81

Contractors' Associatiuns ........... .. ............... 81Consulting Firms .................. ................... 82Building Codes and Standards .......... .. ............. 83Construction Materlals ............................... 84Public Image of Contractors ... . 84State-Oaned Construction Enterprises . . 86Opinion Survey ................ ...................... 89

IX. Suggest-d Strategy .. 91

Basic Strategy ..... .. .... 91

X. Im;,lementing the Basic Strategy .. 94.

Policy Lending 94Economic and Sector Work . . 95Implementing Agency ....................... ; 96Cont~ractors Association . ............. 97Consulting Firms ........................ 99"Sub-ContracG1ng and Joint Ventures ...................Traininr otf EmployersH .....................-....... 103)Selection of Countries for Sector Adjustment Lending 104-Feasbillity of Implementing the Basic Strategy .104Basic Strategy for Small Countries. 107

XI. Rationale for Bank Involvement .109

Adverse Effects of an Undeveloped-ConstructionIndustry .112Prob?n.s in Project Implementation .112Delays in Project Coinpletion . ......................... 116-Involvement of Domestic Construction IndustryIn Bank Projects ....... ............................ 122

Cost of Delays in Completing Projects ................ 125The Bank's Comparative Advantage ........ ............. 131

TABLE OF CONIENTS (Continued)

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Annexes Page

Annex 1: Ccntractors in Developing Countries ..... ........... 133

Annex 2: Construction's Role in Economic Development

Table 1: Inccome, Crowth and Investment .... ........ 136

Table 2: Contribution of Construction Sector to GOPand GDFCF ...... ............... 137

Table 3: Characteristics of the ConstructionIndustry ......... ....................... 13B

Table 4: Trends in Construction Value-Added perCapita ... 139

Table 5: Job Creation per Investment Unit:Different Types of Public Projects ...... 140

Table 6: Relative Size of Construction'sContribution to GUP ...................... 141

Table 7: Employment by Sectors ..... ............... 143

Annex 3: Delays in Physical Cor.Netion of Works .... ......... 144

Annex,4: Experience of Financial Assistance to DQaesticContractors ................. 'O150

Annex S. Training Strategy of Large Contractors .... ......... 154

Annex 6: Effect-of Delays in Payment,on,,Contractor's Cash- -Flows and Profitability .................. 156

Annex 7: Typicdl Project Completion Time (Years) .... ........ 159

Annex 8: OED's Analysis of Delays in Project Ccrpletion .... 162

Annex 9 : Involvement of Domestic Construction Industry inBank Projects

- Planned Procurement of Goods and Works in 165FY86 Projects - Tables 1 and 2 ............... 1 .55

- Planned Procurement of Civil Works in 165 FY86Projects - Tables 3 and 4 ..: .................. 166

- Actual Procurement of Civil Works in BankProjects in Selected Countries - Table 5 ...... 167

Bibliography . .................................................. 170

THE CONSTRUCTION INDUSTRY IN DEVELOI'9ENT

- ISSUES AND OPTIONS -

1. Introduction and Sunmary

Introduction

1. The report entitled "A Review of Bank Assistance to the

Construction Industry in Developing Countries" [45] traced the events leading

to establishment of the Bank's poli-y and guidelines cn the construction

industry, discussed the operations finarnced by the Bark for developing the

industry, and described the varicus r7evieWs conducted by OPS (Operations

Policy Staff) and the regions on the effectiveness of Bank assistance. These

reviews lndicated that 'although Bank 6&era,tIonrs-were useful in address1ing ,

specific problems at particular polrts~in' tIme6, thelr impact on development

of the construction industry was limr ;ed. The report concluded that despite

a sound policy, comprehensive guidelines, numerous operations and almost a

decade-and-a half of operational experience, the Bank's goal of promoting the

construction Industry in developing count7ies was still elusive. Obviously,

there was sofmething missing in the past operations - something whicn was a

major barrier to achieving the Bank's objectives. Given the importance of

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he construction industry for ensuring the efficiency Of investment programs

and enhancing the pace of economic development, the report recommended that

the Bark review the adequacy of its current strategies, identify the major

barriers affecting the industry dnd develop a viable strategy for promoting

the industry in developing countries.

Scope and Purpose of the Report

2. This report presents the results of follow-ui research on the above

recormendation. It deals with five principal themes. First, it defines the

scope of the construction industry, discusses its role in economic

development, outline. 'he main objectives of a constructicn industry project

and sets out the criteria for its success. Chapters It, III and IV address

this theme. Second, it identifies sonie major Issues ir the past Bank

operations for developing the industry, analyses the prevailing concepts,

stratagies and ,practices, discusses their merits, and suggestss the preferred

concents, itrategies ind practices. Chapters V, VI and VII deal with this

theme.. Third, tne r'eport identifies theUnajoruba'r'riers affecting the yrowth

of the construction industry, explores the opt.ons for addressing them, and

recormends the basic strategy for overcoming' the' barriers. Chapters VIII and

IX are devoted to thiis theme. Fourth, the'reportCexarmnes the instruments

for implementating the basic strategy and the prospects of success. Chapter

X deals with tli¶s theme. Fifth, the report discusses the rationale for eank

involvement and explains how its objectives of promoting economic

development, the raiscn d'etre of the Bank, will be a:versely affected if it

does not play a major role in fostering the growth of construction industries

in developing countries. Chapter XI deals with t-1s theme. This chapter

also addresses the question whether the Bank has the ability and the

comparative advantage in this field.

3. The main objectives of this report are to develop a comon

understanding of the issues affecting the constriction industry ar, the

options for addressing them. It is impcrtant to emphasize that this report

is not concerned with the often debated issue of foreign versus domestic

contractors, or of ICB (international rompetitive bidding) versus LCR (Iccal

coinpeticive bidding), nor does it suggest concessions and su3sidies to

domestic contractors using the infant industry argurtents. The critical issue

for this report is whet0er the policies, practices znd institutions relating

to the construction industry in Jeveloping countries are developed enough to

implement the investment programs efficiently and econcoically. The report

concludes that: adQressing the problems of the construction 'ndustry and its

environment is essertial for ensuring the efficiency of in-iestmaents and

,enhancing the p.:e of economic development. The report ilso provides the

analysis and building blocks for reinforr ng the,8ank's policy and program of

assistance to the construction industry in developing countries.

Mda1n Findings of the Report

4. It is useful to underline at the outset the three main findings of

this report: First, the scope of the construction industry is broad; it

includes many participants, systems and practices. Contractors play an

important role, but it is the systems and practices that gxern the capacity

and efficiency of the industry. Development of the constructior, industry

requires improving the pelicies and practices, refortinj the systens,

building the *n.t`- ---^, ,nd irprovlr.g the business envirorrent Lf the

industry. Reco;.. cf tnese fact, is lnport-nt for focussing on the

construction IlOUiry w.cter than cr inaividual contractors.

5. Sece,, : ,- S cosnirms that the ele.ments of a viable

strategy for deve c -.j .he Lcostructicn industry already exist. Thcse

elements are dec- f in most ccnstruction industrY publications; the Bank's

polAcy paper of 97J T)h] h?as unterlined their importance; the contract

conditions of the e.er'a.lon lnternati,nai des Enginieurs-Conseils (FIDIC)

are based on the s^r, Vil.Aes; and t-e Bi'nk has followed them in its

procuren,ent po1ivz-s. Somre ele'nerts of the strategy, such as efficient

prequalificaticn pr- e1ures, equil-atle contract documents, fair conpetitlon,

prompt payments To contractors, srotectin7 contractors against adverse

conditions of the --nvironrnent, e,Jd folIoding effective procedures for

srttling disputes are rot rew. lzoeever, they are enf^rced in IC3 contracts,

nct in LCB. Neither ttie hankr n.r 'he borrowers have made a serious effort to

use them {or local Droouremer.t. Wnile the ele.-ents of the strategy for what

to do for promotir-g the constructicn iraustry are known, a successful

strategy for how 1toVc i' hK-s r. t been'deveLoped in most cevelopir'g

countries. Ih i revurt fo:usses on *r.e eesen,t,al elements of the strategy,

Integrates tthem rto a coherent iasic strategy, identifies t'e instruments

for implementing tre nasic stratea:y and examires its feasibility in

developing countries.

6. Third, thr nature cf Eark-financed orojects, the ulciriate products

of the Bank, has charoel so muroh over )e years tnat the Baik is now

depending lncreas;ir.,ly cn aomCst-: construction industries for lmplementing

the projects. .. . -- nstruction industries in developing

countries are plaqueo t. i c.: . ;u i c es ara practices w:ak

institut-,ons and - :e .... : e.: r,'ronments. tNeither t . borrowers nor

the -ank have taken :-. ic . .u-es for improving their capacity and

efficiency in --.- -;a r , . on' and timely completion cf projects.

Consequentl", de :... e : '..etion .eve become endemic and the

resulting ecco'D.c e The lack of competent construction

industries in s e :. .. :c:. - -eriously affecting tne efficiency or

investmerts and e e- .-.'.c development. Many countries are

perceiving Bank l)-ces : to; .ostly in titne. While the pr'spects of

reducing delays -n a t 11.I s -;e (ldentification to approval) of the

project ty;e cre l. ,t;- : suLstantial scope for reducing delays in

the lmple.entdt7 n s:Se - .m:' to completion).. However, reducing the

delays in the iinple.e- S1C s,. .e reouires improving the capacity and

efficiency of tr:e ast;c c ttC,n inr2ustrie¢. 7.e Bank can no onger

afford, 'herefcr-. -c. . -rr:. r i 'asor role in promoting domestic

construction -n rm . s; : s5r ,; Ii. -; .;.e .leading developnent

instititicn w7tl e .c w I .y and efficiency of its projects, not

only' as a proved :j s. -;a : te s as io -emented. More Important as a

developmen. ir.st::.: . tc :.: s eao co.nzerned wit: the ouality and

efficien:y of fe c e:;s i. :J b y its bor-rowers. Trese proiects often

fdce mcre seticus - 'r -ei d:o not.as well prepared and supervised and

their fundiinr is s:'ec to crea:er uncertainties. The pote.ntial of the

consltruct4cn ii4%f; o en. air the productivity and efficiency of

investmer.t is ei.: . There is both the need and the opportunity for the

Bank to ce.ei: t enflz . it has a unisue position and a corparative

advanta.c in th s "I- ) .: f e:perience, expertise ard opportunities.

Sunmary of the Results of Analysis of Issues ano Options

7. The results of the analysis of issues and options relating to the

five principal themes discussed in this report, namely, the scope and role of

the construction industry, the major issues in the past Bank operations, the

rr.ain barriers and the basic strategy for addres,ing them, the instruments for

implerenting the basic strategy, and the ratior,dle for dank involvement in

the industry, are surrmarized below:

A. The Scope ai,d Role of the Con,struction Industry

(a) Construction Industry and the Contractors

o The construct' s industry is a sector of the economy whichtransforms various resources into constructed economic andsocial infrastructure and facilities. The participants in theconstruction industry bu.iness include the planners, designers,emplcyers, contractors, material and equipment suppliers,constructioi workers, financiers, accountants, lawyers, insurersand operators. The regulatory environment of the industryIncludes procurement policies and procedures, budgeting systems,disbursement procedures, licensing requirements, codes andoractices, credit system, tax structure, import policies,contra'ct taw oa cther reqAirements of the regulatory systrems.

s:;The&c`bbstruct,ion industry has certain specl features whichdlsjt1luish it f.rom other i'ndustries. Most construction demandis in-the public sector, particularly in developing countries.-:Tne volume and compcsition of demand vary considerably from year-to year. Consequently, contractors are subjected to greaterrmarket risks. They face difficulties In borrowing investmentcapital, retaining permanert staff and skilled workers, andinvesting in basic equipment. Moreover, almost all constructionproducts are custom-made to meet the particular needs of thecwners; they are location-specific, thereby requiring movementof all materials, equipment, staff and labor to the site of eachjob. The products also vary widely in terms of materials, levelof technology required, mix of lrputs and met;ods ofconstructior.

O These features provide opportunities for innovation andflexibility in the use of technology. I)e industry is,therefore, vEry ."petitive but it is also exposed to highrisks. Construction jobs extend over long oericds, priceschange, labor difficulties arise, and the probability of facing

-7-

adverse weather conditions increases. The impact of thesefacto-s on costs and completion time is ifficult to estimate.

O The most striking feature of the industry is the! division ofproduction respcn. bility among many participants -- the owners,designers, contractors, subcontractorb, material suppliers,equipment dealers, funding institutions and services such astransport, electricity and water. These participants performvarious functions and belona to different organizations withdifferent policies, objectives and practices. In thissituation, the contractor is primarily a resource ;nanager ofmen, materials, equipment, money and time, and a coordinator ofthe activities of many participants who are not directlyresponsible for the final product and over whom he has littlecontrol.

e Contractors who execute construction contracts play an importantrole in the industry, but they will not be able to produce 'heexpected results unless the policies are right, the systems aresound, the institutions are strong, and all the participants in+he construction business observe the rules of the game.

o Development of the construction industry requires improvirgpolicies and practices, reforming the systems, building theinstitutions, and improving the business environment of theindustry.

(b) R.& e o- -ons-ruction in Economic DeveloPment

e There is a close relationship between income, Investment,construction and growth. When national income is high andinc:reasing,,,a large part of the.,income is devoted toiiestnient. Moreover, high-nncome countries save more thanlow-income countries and are able to invest more. Analysis ofthe sharre.0o,f constructionroutput.>inJ the gross domestic fixedcapital formation (GDFCF)^,f b-othideveloped and developing ;ro nitries shows that constructionqconrstitutes 50 to 70 percentof GDFCF. -

* Construction is a rajor sectorotie economy. Its direct andindirect contributions to-GOP and:-employ7ent rank second toagriculture in most developing countries and next or,ly toagriculture and manufacturing'.in others. Because 50 to 70percent of a country's investments 4nvolve construction, theefficiency of investment programs and' the pace of economicgrowth depend on the efficiency of the construction industry.Even the best conceived development program could be stalled bythe high costs, completion delays and poor quality work of aniriefficient construction-industry; the loss resulting fromdeferred benefits and slower growth would be enormous.

O Erployment in construction is often a stepping stone to work inmanufacturing.

* Construction provides critical backward and forward lirkages tothe rest ol the economy. Bac!,iard liniages, or deriveddemands, represent a value *h,ch, in most instances, exceedsthe value added by the ccnstruction industry itself.

O Since the construction industr-y as a whole is laigely made upof small firms, it prov;ies entrepienieui-la1 c;)portunrties formany small businesses ard pleys ar rrpcr trln rit,e in thedistribution of income.

c '!.nfciL unately, public awareness ur trrt 2: ' construction islacking a,d research rn its place In developr,rent is virtuallyneglected. National planners focus orn agriculture andmanufacturing as t,e engines of develcpment. but pay littleattention to tl- construction industrv that produces thoseengines.

e There is a ser o- ga- in the knowledge of the constructionsector and its place in the develo;in,ent process. Ihe Bank has aunique advantage in terms of its experience and opporturitiesfor carrying out the needed researcth a:d incteasing theawareness o! developing countries of thie crucial iole ofconstruction ir, economic develoci:errt.

(c) Construction Industry Project -UIjectives arid Cr-teria

o The main objective of a constructioni il`du'try projeCt is todevelop t.h :apacit- a-I efficiency of a ccurt,y's constructionindustry for implementing its livestirrer,t programns effectively.The programs include investments In both oublic and privatesectors. -They include investments- for- cie.ting newinfrastructire as well as for rnaintaillning existing facilitles.

a Oeveloping.the capdcity of the irpdustry,requiree enhancing itsab6tlity,to 'mplement the invetrrnelft .pprams with as much o- thelocal resources (men, materiels, -rnThi'nes and methods) aspossible so that the value-added lri constructlon is optimum.The value-added s a se,ul rneasure, for1ev-iua.irg the capacityof the indlustry. The etficiency of thelrindustry depends on theeffectiveness of the industry's participants (contractors,owners, consultants, niaterial suppliers. etc.) and its business -environment (policies, procedures, incertives, facilities, et)in using the resources (men, materi?ls, m,ethods and time) mostproductively. Cost-effectiveness, completion time and qua!ityof construction are measures of the efficiency. It is thecapacit.y and efficiercy, not the ru,U;be, of contractors and thesize of constructior, output, that indicate the stage of growthof the industry.

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B. Palor Issues in Past ODeraticns

(a) Bank's Pollcy and Guidelines

e The Bank's policy paper dated August 7, 1973. rz.ugnized thebroad scope of the construction industr-, d.O emphasized the needfnr improving the policies, procedures and institutions relatingto the industry. However, it defined t e construction industryas "the b0llding and civil works contracting industry, that is.the colle,:tion of enterprises, private or public, which areenqa_ed in new construction of all sorts as contractors orsub-cont actors'. (underlining supplieJ).

* The guliJelines (OPN 7.8) also followed the narrow definition Inthe policy paper. This was probaibly the reasnn why the Bank'sconstriction industry operations focussed almost exclusively onindividual contractors rather thar on the industry.

(b) Cons'ruction Industrv Operations

o During the past decade-and-a-half, the Bank has financed 169construction industry projects, mostly in the form of projectcoimponerts. They include 56 studies of the industry In variousc.ountries, 85 ooeraticns for tralning and financial assistanceto individual cont+actors, 22 operations for piumi:it'inglabor-based construction and 6 free-standing projects fortechnical and finaricial assistance.for promoting the industry.

'h The Bank conducted-three seoarati reviews in 1981, 1983 and 1985to assess the effectiveness of its assistance to theconstructJon industry. These reviews indicated that while ttheopera-tins were usZful ifnaddressing-specific problems atparticular points of time.-`their impnct on development of theindustry was limited. Ttie 'prolif'rat,ion of project cwmponeatslabelled as construction industry projects arid tilE many purposesfor inich they w,. e introduced, oft4h at the last stage oprocessing the loans,indicated thc lack of a corimon perceptionof the objective,, and scope of a construction industry project.The strategy of tocussing on individual contractors, instead ofaddressing the problems of the industry, proved ineffective.

(c) Corstruction Industry was Not in the Mainstream of BankActivities

a Unlike other sectors, the concerns of the construction industrywere not reflected in tne malnstream, activities ef the Bank,

- 10 -

such as CESW, PIRs, PCRs and OED r^~views. Consequently,construction industry operations did not receive adequateattention frcon management, their objectives remained vague andthey lacked the quality and discipline of the Bank's reviewsystem.

o The apparent lack of attention was due to the fact thatconstruction industry was neither in the Bank's lending strewinor In tne 3ank's tIst of priorities, such as povertyalleviation, income distribution, environment protection anddebt nanag=ent.

O It is unrealistic to expect more than a cursory coverage of theconstruction industry in the Bank's aLtivities, unless itsimportance for economic development is recognized, both by theborro'wers and the Bank, and full-scale operations are launchedfor fostering its growth.

(d) Financinq Construction Equipment

a Contractors need financing to purchase equipment, butinstitutioaal finance is not easily available In developingcountries.

a The Bank financed several construction industry projects forproviding equipment to domestic c'-itractors, but they were noteffective because they did not adequately address the problenMaffecti-, the contractors' costs and returns. Contractors needa job to use equipment productively and earn as much return andas quickly as possible to pay back the loans. Moreover, thechoice of-equipment should be based on the needs of the job in

* order to achieve optimum efficiency and,prcJuctivity. Adequateattention was not given to these retn-irements.'

o T,he strategy used in the FIDIC Conditicns of Contract (makingadvances t6 contractors for purrhafseof'materials, plant-and'7~equi;ment) is viable because it-satisfies the requirementsdescrite,a above. The 6dnk folloss this-strategy for iCBcontracts, but seldorn uses it in LCO contracts.

o* Establishing private enterprises for hiring and leasingequipment to contractors is important, although it will take a-long tia4e before adequate facilities can be established. Much'depends on the pace of developiment of the constructionindustry.

(e) Training Kanaqers and Workers

o The Bank financed many construction industry project componentsfor training contractors, but they have not proved effectivebecause they focused mainly on formal training. It is difiicultto provide effective formal traini.q to contractors who are busy

- 11 -

on site anr have little time to devote to such training.Moreover, in most cases, training was provided by conwiltantswho lacked the experience in this field.

O Construction is a complex industry requiririq man/ skills.Contractors hire skilled workers from the mndrket according toLiale needs and train them on the iob as necessary. This typeof training has proved effective. Providing adeqUate capacityand facilities in vocational training schools to train theskilled workers required by the construction sector has alsoproved successful in both developed and developing countries.This strategy is strongly supported by the contractors.

C. P-alor Barriers and the Basic Strategy

(a) Major Barriers

e There are rnany bar,iers to sOLnd development of the constructionindustry; some relate to the inadequacies of contractors whileothers pertain to unsound policies, inefficient systems, weakinstitutions and the undeveloped environment of the industry.Given the opportunities, contractors can address theirinadequacies, but they have no contrcl over the barriers imposedby inefficient policies and practices, weak Institutions and theadverse business env' onmen of the Industry.

6 Of all the barriers affecting the industry, the most pervasiveare: inequitable contracting practices, failure of employers tomeet their obligations under the contract, and the adverseconditions of the Industry's business environment. The mosteffective strategy is the-one that addresses these constraints;it is,basic.and an essential1-foundation for develop'ng theIndustry. - - -5

o Olscusslon.sEwith contract-ors-assoctiatlons In selected countries(incl-uding9 an Opinion Surve`y:rcd'Lcteri by the qarik in Pakistan).confirmedxthat the- five most ̀ ze"rou-s-problems affecting-theindustry are lack of efficient preju"alification standards,inequitable contract documents,,delay-s In paynients, lack cfcredit facilities and oroblems'ln importing spare parts. TheSurvey also identifled lack of standardization of local -

materials and their high transportation costs as seriousbottlenecks.

(b) The Basic Strategy

Improving tte Efficiency of Contracting and ContractAdministration Practiccs

* Develop efficient prequalification procedures which eliinateincompetent contractors, reward competency and provideopportunities for fair competition.

* I? -

Establistr equi.abie cO.-tract documents which define theresponsibilities of emrployers and contractors; treat employersand coritractors as partriers for achieving the goals of theproject; comrens at 2 (ctiacta rs for delayed payments and otheracts of non-pei cr:'Ke. protect contractors against adversephy'.icaI conz t,rrIs I5 .; hfr eseen events such as price ande>.change :e-e r IUC-ua ; O;;provide contractors with facilitiesSUTI as edva-es for I:1ii i7ation and purchase of materlalsrn'd equinient to ensvie eff icient, economical and timelyc:n,pletion of the pro)>: erJ rnsure fair and expeditious,ettler:ent of :

* !l;troduie scunci lr iter ia for aw2rding contracts which encouragel.eprn competitio'. nnr,is,e far e'aluation and reward efficiency.

* Establish -'fficient :r'cedures for administerlng contracts:;nich ensure ef fe2 I.e in,;elnerltation of contrdct provisionsani provide iiice:li.es to both ermployers and contractors toit.eet their oil igit ;r'w

* Establish tr inirig p:c7ran- for reorienting the attitudes ofgoiernmen, officials (e;-ployers) towar-ds contractors, treatingconttactcrs as pe2itiers fcr achieving the objectives of projects,?Cil ad'Eninistrat I. i: ccntracts onl a.fair- and equitable basis.

Err>. c e the .s ness E'i.r--nment of the Ir.dustry

* Ercourace re1t in;r:t;Lions to provide credit to contractorsor,r .escr, Ile tet:irs; -a.eIop schenes to protect credit

n >i~tuti5 ?; -i',st ;r:d.ue risks in lending to contractors.

* De Je I op nati ona I tli ; n- codcs _.provi[de facilities fortft'-ig :naterEu!c au-d es-3nli5>: -1esea reters for -develop,in and Vro:i3Ltinj the use of local materials; encourageproduction and use of iocal rmaterials,which are competitive inquality 4nd nrice; disker inate-infcrrTation on theavallability locdtlon ano qualitvyofitAocal materials.

* improve the effrciercy and compet iveness of state-ownedenrterprises; t iot ta r.Iate and state-owned contractors equally,adnd apply the sa-e standards-of-e ficiency and fairness to them;DroteCt state-n-.ned contractors aliso agalnst inefficientpractices, inequitable contract adminis.tration and the adverseconditions of thie ervircnrment. 7

* Irnpro/a the puhl ic im.ge oftne contractors.

Delieloo-ln t.se Cevcrty 2ng Efficiency of Contractors

* Introduce an app i ia e reoistratioiri. -arnd licensing system Inccnsu!ta ic.. ,it;, 6he contractors association to developco::,etent con,rarA est;-iish a system for monitoringper forrr,.ance.

- 13 -

o Assess the needs of the construction Industry for trainedmanagers and workers and develop the insUitutions for meetingtho-e needs.

a Encourage and promote sub-contracting to provide opportunitiesto small cTntractcrs both for getting employment and gainingexperience by workir3 with the more experierced lcriecontrec ;.

a Encourage :o.riestic ccntractors to collaborate with experiencedforeign c-rtractcrs on a long-term basis to ensure transfer oftechnlo I ocv.

GevelOnG 'n _th Institutions

o Establish an organi;:ation in the governrent with definedobjectivei. resporsitilities and accountability for promotingthe construction in:iustry.

* Encouragf and assist contractors to form contractors'associat'ons and ersLre high professionral and ethicalstandard; in the con!truction industry.

* Encourace and ass It dev210opment of the consulting profession.

?esearch and Deve'opment

o Increase t-e awareness of the government and the puhIl: aboutthe ;o;.struction industry's rtle ir economic dPvlnoo-re;t.

* Inst:itute research to develop ways and means to lniprove thecapacity. arn efficiency of the 'industry in terms ofvalue'-7ad'ded, cost-effactiveness, qualty of work and tinelycompletion of projects. u

D.. Irist'.runents for-l1nplment ha the Basic Strategy

(a) _m ene- ino th 813,'.c Strategy

o because :re basic strategy calls for improving policies,reformi.n: systems, building institutions and improving thebusiness environment of the industry. it invoives supporting aprogra- of reforms rather than financing specific investments.

o The pol -y-intensive and institution-building nature of thesystem cf reforms call for a program rather than a projectapproach for implementing the strategy. Sector adjustmentlending s;ll be more appropriate than project lending. CESW isessential for providing the analytical basis for designing theadjust.--nt program and for an effective policj dialogue.

- 14 -

e In selecting the countries for construction sector adjustment.ending, the Bank should ensure that the country is ccrrnitted tothe objectives of promcting the construction industry, has theability and willingness to make and implement difflcult -decisions, and has an adequate construction demand to providecontinuing work opportunities to domestic contractors.

a A policy statement by the Governmnent expressing its corrmitmentto develop the construction industry and its determination toimplement the basic strategy is an essential first step forBank's assistance.

* Establ.shing an organization ia the country with definedobjectives and responsibilities for developing the Industry isessential for implementing the tasic strategy. Because thestrategy involves nationwide reforms, a ministry of the nationalgovernment. would be more appropriate for handling thisresponsibility.

a The program should include: building the institutions todesig.a, ii, c,nitor and evatuate the system of reforms andthe program of activities outlined in the basic strategy;Introducing the reforms through appropriate legislative,admininstrative and legal actions; and ensuring countrywideacceptance.

0 Contractors associations should be developed to provideservices such as disseminating information on coces andpractices, safety regulations and contract law. They shouldliaison with the government an issues affecting the industry,maintain professional and ethical standards and promote thepublic image of contractors.

* Development of- the consulting engineer.ing profession is anecessary part of the process of promotir.g the constructionindustry and sl-ould receive adequate priority In the proqram.

* It will tade rTdr tOo long ror- On.t.acLors in ceveiopingcountries to learn improved constructlon management andtechnology on their own. they 'can dodit a great deal more -quickly and at far less cost by collab;orating on projects withforeign contractors who have the experience. To this end,sub-contracting and joint ventures shduld be promoted.

* Because it will not be easy for g.vernlment offirlIls torelin-quish their tradit'on. vf acting as the undisputed mastersin admiriistering contracts, it is necessary to establishLraining programs fcr "employers".

e The principles of the basic strategy and the criteria formeasuring performance of the construction industry apply tolarge countries with substantial investments in nevconstruction and maintenance programs as well as to s4rallcountries where investments are mainly devoted to maintenance

- 15 -

of existing facilities. In both cases, the domesticconstruction industry should have the capacity and theefficiency to implement the country's investment programseffectively.

a It is the nature and size of the construction market, not thesize of the country, that determines the content of the programfor developing the industry. For countries where the volume ofnew construction is small and infrequent and the demandconsists mainly of maintenance of existing facilities, theprogram should focus on increasing the capacity for maintalninoexisting facilities, constructing small new works, andsub-ccntracting works from contractors handling large works.

O When the construction demand In a csuntry is small andF uctua:iag, the oequirements of construction materials willalso be small and fluctuating; in such conditions, theoroduction and supply of the materials to the industry posemajor problems. However, basic construction materials likestone, bricks, sand, cement and construction lumber areessential for the industry; their production should beencouraged and the producers should be protected against unduerisks.

O Whether a country is large or small, the program for developingits construction industry should be specifically desigried tosuit the nature and size of its construction market and Itsspecial economic, administrative and political circum0,-c;E,.

a As with other types of adjustment lending, the Bank will haveto devote considerable st:f resources for preparing theadjustment ;rogram and for demonstrating, through its CESW, theInportance of the industry for economic development.

(b) 1easibilitvof Implementing the Basic Strategy

a Th-ere is no conflict between the Bank and bDrruwers on the needfor developing the domestic construction industries. Borrowersagree with the basic strategy, but their problem is how toImplement the strategy. The construction sector adjustmentprogram is intended to address this problem.

a The core ministries, the contractors, the public and thebusiness cormunity are frustrated by the inefficiency of theconstruction industry and would welcome improvements.

O The approaches aiia in!truments outlined for implementing thehaslc strategy provide reasonable prospects for success becausethere is no conflict with the countries on the objectives, theprogram has no inherent political risks, the credibility of theBank is not in question and the elements of the basic strategyare well tested. Construction sector adjustment lending,

- 16 -

therefore, involves less risks than other types of 3dJustmentlenci.g.

* The ccntractors associations and the consulting firms have aself-interest in supporting the lm?lernenting ministry to pursuethe basic strategy; the business community and the public willwelcome improvements in the efficiencv of the industry..

e The clifticulties in c0anging the deep-rooted attitudes andpractiices of government officials admiristering civil workscontracts, however, should not be underestimated. The pro osedtraining of the employers is essential for overco,11inq thiproblem.

E. Rationale for Bank Involvement

(a) ?,ar, Po3iv

e The Bank established the policy for promoting the constructionindustrY in 1973, issued de tailed guidelirnes (OPN 7.8) forimplementing it and financ2d 169 projects, ms Ily in the forr,of project component!. to su,,port the industry. fhe ratior,alefor Bank involvement, -nerefc.ea, already exists.

* The andlysis presented in this report cornfirms the rationale ofthe Bank's policy. It demonstrates tnat construction is arnajcrr sectcr cf the economy# and its ccrtributlons to GOP andemploymnent rank high in reiatlon to most economic sectors. Theanalysis also underlines the close relationships betweenincome, investment, construction and growth and shows how adeveloped construction industry enhandes the efficincy ofinvestments directly as well as through its backward andforward linkages.

(b) involvement of Domestic Constructlon tlndustrv in Bank Projects

o Th,e Haik's policies, economic and sector work, appraisalreports, supervision work and evaluation reports are theprocesses and the tools to plan, design, build and ensure thequality of its Oultimate products",-namely, the economicinfrastructure it helps to build and the institutions it helpsto dlevelop. The quality and sophistice.tions of these processes(the internal products of the Bank) are of little value if thequality of its Oultimate productsa is less than what they aredesigned to be.

o In the early years of its operations,'the Bank was able toensure efficiency and economy more effectively because theprojects were built under ICB procedures, contractors fromdeveloped construction industries won the contracts and they

were protected from iret ficiernt ;.rot-f;s o, t,'e t;.iole s andthe adverse conditions of nie bt:us^ess Enl ir,nOr,eit.

O However, when the scope of 2en' l-dvrr was enlargen, withincreased emphasis on ayriculture, -a.uation and ind,'jntryprojects, and further ex,-anc!ed to- -.cude rur-al development,population planning, hedIh ano '.-zn '.evalpopmnent pro3ects, t',enature of the Bank proje,ts cl,a,-,-o - lfo. these sectorsrequ'red financing of an ir.cre_si nj o-lbm ot ofminor civil worksspree,d over widE areas suct, as ;- ri :rr,cjt;0,, facIlitIes,schools, rural rcads arid hel'h cl <Ics.

o The Bank recognized Ltat a'-,;-r 'C;- e c cedu'res tor wo kswhich were too smal' ariJ to: oi-:ersi to be of lntere_ toforeign contratnro, wes e,-'. cienten ntior conu,,1cal anddecided to use LC9 prcceL;res TC. - r wB W, notappropriate. loday, tne c-vc '.-ee ; d3.estIc coiy :catcts inimplementing Bank prolect. is c * s., nc; dometicconitractors are winnino mr.y .- n;-cts in acddit-oi tosecuring virtually all !'C c-n. ac:..

O In order to determine the sht,re oEf d estnc cconsL'tict nindu5try in civil works prot,cre.ent tie com,puterized data ofForm:i 334 was analyzed. GIven the >%rYe number of contracts,the study was confined to !ctUdl Z.ards of rivil workscont-acts during FY84. FY85 and FhS5 in 17 countries, whichaccounted for almost tw:-thirds .f total Bank/IDA lending inFY85. The analysis showea t:s ,e cenact of all civil workscontracts in Bank/L.A orojezts d Fi-r'g F'a4, FY35 and FY86 wereawarded to dome3tic cont2acturS. fha snar-e of tile latter inthe total amour,t of contracts raS C percent.

o It is important to ernphas L that L thr S>ue here IS noL!C8-versus LCB or foreign vers:.; docmesLic contractors; theiisue-is whether the drc'stic ccistrquccon lrdustr;, which iscalled upon to handle most cf t!,e jv,I %-wor ks In Dank-financedprojects, is sufficlently develc to er,sure the objectives ofefficiency and economy speci'ieJ in tne Articles of Agreement.Although tnere are some nctabl exIcep>ions, lt is clear thatthe domestic crnstruction ino,str- is -not developed and that itis severely constrai:2et by t::e Ine,'"icieat policies andpractices, weak i!stitutisns a:~ dhe aiversc tbusinessenvironment of the deselopin- :ojntries.

O There is little prospect of ac.,e';-Ji the obJectives ofefficiency, economy and Lirrely co pieticn of nrojecZs unlilthe above problems are effectively ae ressed.

Conclusions

13. The endemic problems of project implementation and their adverse

effects on the quality of projects, efficiency of investments and pace ef

economic development and the growing perception of borrowers that Bank

projects are too costly in tire are compelling reasons for the Bank to give

high priori:y to development of the construction industry. No other

institu ion is as uniquely placed as the Bank in terms of its experience,

expertise and opportunities for fostering the growt; of the construction

industry. The Bank has the challenge dS well as the opportunity to 2xploit

its comparative advantage in this field and demonstrate once again its

leadersn,p in deve Pmrent.

II. The Construction Industry

ScoDe of the Constructlon Industry

9. Jhe :-jostruction,industry Is.-a sector of the economy which trans-

form.s various r4sources into economic and sociall infrastructure and

facilities. It embraces all phases of the process of transformation, namely,:

planning, designing, financing, procuring, constructing, maintaining and

operating. The constructed facilities range from residential and

non-residential buildings to dam.s, power plants, roads, irrigatioii works and

other Infrastructure. The participants in the construction industry business

include planners, designers, contractors, sub-contractors, material and

equipment sunpliers, owners, construction workers, cupervisors, financ.Iers,

- 19 -

accountants, lawyers, Insurers and operators. The goverrnment is involved ln

the industry as purchaser, financier, regulator and adjudicator. The

business environment of the industry consists of systems which regulate tne

relations, actions and interactions of all the participants. The regulatory

environment includes procurement policies and procedures, budgeting systems,

disbursement procedures, licencing requirements, codes and practices, safety

legislation, tax structure, credit systems, import policies, customs rules,

contract laws and seyeral other requirements of the regulatory systems.

Developing the construction industry involves focusing on all of its

participants and Irnoroving the policies, reforming the systems and building

the institutions which promote and regulate the systems in which the

participants operate. Contractors are only one of the many participants.

Although they play an important role in the construction industry, they

cannot produce the expected results unless the policies are right, the

systems are sound, the institutions are strong, and all the participants

observe th2 rules of the gwne.

10. The construction industry has certain special features which

distinguish it.from other irdustries.4,Most.constr ction demand is in the

public sector, particularly in developing countriles 4,^re the public sector

accounts for over 70% cf total construction demand [22j. Thc volume and

composition of denard vary considerably from year to year. Consequently,

contractors are subjected to greater market risks and face difficulties in

borrowing investment capital, retaining permianent staff and skilled woPkers,

and investing in basic equiprnent. Moreover, almost all construction products

are custom-made to rneet the particular needs of the owners; they are

location-specific, thereby requiring movement of all materials, equipment,

- 20 -

staff and labor to the site of each job. The products also vary widely in

terms of materials, level of technology required, rix of inputs and methods

of construction. These features provide opportunities for innovation and a

high degree of flexibility in the use of technology. The industry is,

therefore, very competitive, but it is also exposed to high risks.

Constructicn jobs extend over long periods, prices change, labor difficulties

arise, and the probability of. facing adverse weather conditions is high. The

impact of these factors on costs and completion time is difficult to

estimate. The most striking feature of the Industry Is the division of

prodwc,. *'n responsibility amcng many participants -- owners, designers,

contratccors, subcontractcrs, materials suppliers, equipment dealers, finding

institutions and services such as transport, electricity and water. These

participants perform various functions and belong to different organizations

with different policies, obJectives and practices. In this situation, the

contractor is primarily a resource manager of men, materials, equipment,

money and time, and a coordinator of the activities of other participants who

are not directly responsible for the final product and over whom he h&s

little control.

The Contractor's

11. Contractors in developing countries face' a more dif,ficult growth

path than their colleagues In developed countries because they and their

business envirorvnent are both underdeveloped. Given the opportunity, they

can overcome their inadequacies, but they cannot change the environment.

Indeed, it is the adverse environment that is perpetuating their

underdevelopment. Annex 1 gives some basic facts about the background of

- 21 -

contractors in developing countries and the environment in which they

operate. Most contractors begin as trade apprentices, go on to become

foremen, and eventually gain sufficient experience and confidence to become

small, medilm andi large contractors. Their training is based on the

experience gaineJ on jobs within the construction industry. Some contractors

fail early on in their ventures; others give up when the risks of continuing

are unacceptable; while some advance to higher levels of growth. There are

also the large public construction enterprises in many countries which

continue to survlive even when they fail financially because they are

subsidized by the government in one form or another. The large turnover

among contractors, particula,ly the small ones (who constitute more than 95

percent of the contractors in developing countries), indicates the highl risks

inl,erent in lhe construction business. Contractors need manager-s who are not

just supervisors but managers who can manage risks. This expertise is very

limited in developing countries. Edgar F. Kaiser, former Chairman of the

Board of Kaiser Industries, made the following observation on successful

construction management:

bIn our experience, no other,business demands such a broa'd range ofmanagement talents and skills which,.are adaptable to otherIndustries. Successful constructionmanagement 'requires an6therquality - the 24-hour approachto p'robl'em solving.0 [3]

12. In developed countries, the systems and institutions concerning the

construction industry are weal established. The parties to the contract know

their respective obligations and the legal system is strong in protecting the

rights of the parties. Moreover, they are well organized and powerful enough

to ensure that their contractual relations with the employers are regulated

on an equitable basis. This is not the case in developing countries. The

governments often prepare one-sided contract documents making the contractors

- 22 -

responsible for all events; they push contractors to reduce their prices even

after competitty. t1ds are received; they mask their inefficiencies by

blaming the contractors for every setback; they delay payments with impunity;

and they do not ccapensate contractors for adverse physical condil'ions and

other acts of government such as changes in exchange rates, interest struct-

ure and import and taxation policies. Moreover, contractors in developing

countries do not enjoy the same status in society as other professions; they

are often viewed as dishonest businessmen who do a poor-quality job, delay

completion of worlks and try to maximize their profits at all costs.

13. These and many other constraints in the business environment of the

construction industry cripple the productivity and financial soundness of

contractors in developing countries. The business environment Is harsh to

all contractors, but harsher to small contractors than to large contractors;

and more so to domestic contractors than to foreigrn finms. Contractors

competing under local procurement procedures face more problems than those

competing under ICB because ICB procedures are wel'l established and closely

monitored whereas local procedures are either poorly developed or frequently

misused. Contractors in developing countries have few options in such

situations. Building contractors who deal mostly'with the private sector are,

relati%ely more successful than civil works contractors because thev are able

to regulate their contractual relations with the owners on a more erjitable

basis. Moreover, the owner in the orivate sector, whether he is building a

house or a factory, is too conscious of the cost of delays to let events take

their own course. Consequently, he makes payments promptly, provides

Incentives for early completion and assists contractors in overcoming their

problems by paying in advance, g2tting permits and assisting in many other

- 23 -

ways even though he may not be required to do so under the contract. Civil

works contractors have to deal with the government. They cannot change the

construction environment in developing countries which is dominated by

diffused responsibilities, cumbersome procedures and the undisputed power of

the government bureaucracies. Unless they are pushed to the brink of

bankruptcy, they cannot afford to go to courts or protest too loudly because

they are afraid that they may be disqualified for future contracts.

14. In these circumstances, an effective strategy for developing the

construction industry requires addressing the problems of its business

environment. Because the construction demand in developing countries is

mostly in the public sector, the strategy shuuld focus on reforming the

policies, establishing the systems, building the institutions and developing

the environment to ensure the efficiency, productivity and financial

soundness of the industry. Obviously, it is not easy to develop the

construction sector, but It is no more difficult than deve,oping other

sectors of the economy. The process will be slow, and will require

consistent efforts and continuing commitment.

III. Role of Construction Industry-in Ecunomic Development

15. Studies carried out by UN Agencies, universities and research

institutions underline the importance of the construction industry in the

process of development.1/ As an industry promoting gr:vth and capital

formation, construction plays a key role in economic development. More

1/ See Bibliography [6, 7, 9, 13, 14, 20, ? 23, 24, 31 and 42].

- 24 -

than half of annual capital formation in both developed and developing

countries cornssts of w^rk ir, construction. The expansion of canital

requires development of the construction industry; conversely, the lack of

construction capacity is a major constraint to expansion of capital. The

studies have also established that:

o construction typically contributes 5 to 9 percent to GDPin developing countries;

a construction provides critical backward and forwardlinkages to the rest of the economy. Backward linkages,or derived demands, represent a value which, in mostinstances, exceeds the value added by the constructionindustry itself;

o the construction industry is an important source ofemployment in both developed and developing countries,accounting for approximately 5 percent of totalemployment in many countries; moreover, direct andindirect employment created by the backward and forwardlinkages with the construction sector is substantiallyhigher than emrployment in construction;

a employment in construction is often a stepping stone towork in manufacturing;

o since the construction industry as a whole is largelymade up of small firms, it provides entrepreneurialopportunities for many small businesses and plays animportant role in the distributijn of income.

.16. Although construction plays a vital role in economic development,

few national development plans explicitly consider the construction sector

In terms of defining objectives, setting goals and evaluating the impact of

construction on other sectors of the economy. There is insufficient

recognition of the fact that construction is an important contributor to

development and the lack of construction capacity is a major hindrance to

economic progress. Research on the role of construction is limited. There

are many publications on the role o' other sectors such as agriculture,

education, industry, energy and transport, but there are few on the role of

- 25 -

construction in the economy. The Bank has also not considered construction

an im.portant development issue. Indeed, compared to research activities and

nublications of the International Labor Organization (ILO), the Massachu:etts

University of Technology (MIT) and others, the Bank has done little, even

though it is a leading international institutior in development research and

is more directly involved in the construction sector in developing oountries

than other 1nstitut1ons.

17. Perhaps the lack of attention is due to the fact that construction

is present in all sectors and is not seen as a separate sector. 't is

regarded as an Investment or capital goods industry because its products are

wanted, not for their own sake, but on account of the goods and services they

create. For example, an irrigation dam is built to develop agriculture, a

school is constructed to educate people and a factory is built to produce

goods. The focus is on the purpose of construction, not on construction and

its contribution to development. Moreover, tne assessment of the

contribution of construction to the GDP is difficult. Because the

value-added of an enterprise is defined as the difference between the market

vSilue7'of tte:'gbods9,Tt 'produced and-the value of all the goods It purchased

from other nurces,'the value-addedt b'y construction is the net contribution

of the construction enterprise (contractor) to the total value of the works

and excludes the value of purchases such as bu11ding materials, fuel,

electricity, transport, and other goods and services. This is difficult to

measure because accounts of the values of various inputs and outputs are not

adequately prepared, particularly in developing countries. The problem is

comp-ounded by the fact that a iarge percentage of construction activity takes

place in the informal sector, sometim.;s by self-help or unpaid labor, and is

- 26 -

not accounted for in the material statistics. In addition, construction

activity in developing countries fluctuates from year to year and its

contribution to the economy is subject to wide variations. These features of

the construction sector probably led to the lack of adequate focus on its

role in economic development.

18. Because the products of construction (dams, highways, ports,

et'c.) have a long life, the stock of products is large in relation to

annual productionr and requires continuous maintenance and repairs. In many

countries, the value of maintenance and repairs amounts to as much as

one-third of the total amount of construction output [21]. In poor

countries, where new construction is limited and infrequent, maintenance of

existing facilities constitutes a major part of the construction output.

However, the national accounts of many developing countries do not adequately

reflect these activities.

Income, Investment. Construction and Growth

19. Tr rh'ere A'i" cl'ose relationship between . tincome, investment,

construction and g'rowth"'; When national income'1ist'high and increasing,

large part of thc income is devotee to investment (Annex 2, Table 1). When

the increase in income (GOP growth) is reduced, -the growth ot investmenrt also-

decreases. Moreover, higher income countries save'more than lower income

countries-and are able to invest more. Annex 2, Table 2, gives the

value-added by construction as a percentage of GDP-and the share of

construction in the Gross Domestic Fixed Capital Formation (GDFCF) for

selected countries. The data shows that construction constitutes 50 ti 70

- 27 -

percent of GDFCF. Because a country's investment is mostly devoted to fixed

assets, (e.g., dams, roads, factories, schools, housing, etc.), a large part

of its investment program involves construction. Thus, the higher the

national income, the greater the size of investment, the volume of

construction activity, the increase in GDFC (productive capital stock) and

the growth in GOP. This chain of relationships underlines the Important

place of the construction sector in economic development.

20. Wells [31] analyzed the statistical data of a large number of

countries and demonstrated a positive relationship between GOP per capita

and the three separate measures of construction's contributions, namely,

value-added by construction as a percentage of GDP, gross construction

output as a percentage of GDP and construction employment as a percentage

of total EAP (economically able populationl. The results of the analysis

given in Annex 2, Table 3A show that all three contributions of construction

increase with increase In income. A similar study reported by ILO [14] shows

that the higher the income (GNP per capita), the higher the VAc (value-added

in construction) per capita, VAc as a percentag e of GDP, GFCFc (gross fixed

capital formation i eonstructlon) -per 'c6,Ita:4np employment per 1,000

population (Annex 2, Table 3B). ILO has also reported [13] the results of a

study by Cochrane,and Wall which describes the trends in GDP growth per

capita and valLe-added in construction per capita in three income-groups of

countries during a 22-year period (1960-81). The results (Annex 2, Table 4),

indicate that the annual increase of both GDP per capita and value-added in

construction per capita of rich countries is substantially higher than that

of poor countries.

- 28 -

Efficiency of Investments

21. The pace of a country's economic grodth depends on its ability to

mobilize its domestic resources most effectively and to utilize them most

productively. A country can achieve this objective if the quality of its

investment program is sound, both in terms of choice of priorities and

efficiency of implementation. Because the construction industry is the main

instrument for implementing the irivestment program, the efficiency of

investments is determined by the capacity and efficiency of the Industry.

The capacity of the construction industry can be measured by the value-added

in construction and its efficiency is indicated by the quality, cost-

effectiveness and conmpletion time of the constructed facilities. The

performance of the industry in each of these areas -- value-added in

construction, cost-effectiveness, completion tim.e and quality of construction

-- affects the efficiency of investments. Thc four criteria are so closely

inter-related that it is not possible to achieve one effectivcly without

achieving the others. For example, a low value-added means high import

content, higher 'costsband longer completion time;-a low cost-effectiveness.

means-lower productivity, increased costs; 'inefflclency and possibly longer-

completion timXe; poor construction quality means shorter economic life,

higher maintenance costs, reduced benefits and lower value-added from forward

linkages to construction; and a longer completion time means higher costs,

deferred benefits and slower growth. These relationships underline the

dynamic effects o' the construction industry on the efficiency of investments

and the pace of economic development.

- 29 -

Value-added In Constructi0n

22. The value-added in construction includes only the net value added

during tne proce- of transforming resources into constructed facilities,

not the value-added by other industries and services which supply inputs to

construction. For a given work, the value-added in construction depends on

many factors, such as design, construction technology, use of equipment and

labor, equip-ent performance, price and wage levels, temporary works and

processing of materials during construction. A contractor who carries out a

highly mechani2,ed construction operation using expatriate personnel and

imported equipment and materials r,lay be able to achieve high quality and

complete the job on time, bu: the the value-added in construction as well as

the value-adced by local industries supplying construction inputs will be

low. Moreover, the work may not be cost-effective because imports are

inherently costly. Rich countries like Saudi Arabia can afford to follow a

high import-content construction strategy because their construction

industries do not havu the capacity to implement the investment programs.

However, developing-couhtr1es-with -l'imited-.lihcome cannot afford to import

constrLction resources on the-scale required -for continuous growth. They

need t) optimize the value-added in-construction-as well ai the value-added

by the industries supplying inputs to construction in order to 2nhance the

efficiency of their investments.

23. Consulting engineers often tend to design works with high

import-content when local building materials industries are not adequately

developed, when the quality of materials is uncertain and when local labor

- 30 -

is scarce or not willing to work at remote work sites. These features

indicate the undeveloped environment of the cons'truction industry. In such

cases, the value-added in construction, as well as through its backward

linkages with industries supplying construction inputs, will be low. While

it may be necessary to adopt such designs to cope with short-term

difficulties, developing countries cannot afford to import basic

construction resources,over an extended perioi of t'ime. ILO's analysis £14)

of input-output tables for the EEC countries shows that a construction

cutput ef 1,003 units will induce between 500 and 800 add'tional units of

output in the industries supplying inputs to the construction industry. A

similar study of eleven developing countries [21] shows that the

value-added through backward lirkages could be as much as 55 percent of the

value of construction's purchases of matc-lals and services from cther

Industries. A construction industry cannot be considered adequately

developed if the Industries supplying basic construction inputs are wea'k and

the sun of the direct and indirect value-added from construction is not

optimum.

24. ' - Construction industriesin-mnany:Afr1icz countries are undeveloped.,

because they rely heavily on imported resources ts&execute their investment

programs. They require basic infrastructure for 'rural development, but.

the foreign contractors do not find these work's financially attractive and..

the domestic firrns lack the capacity to execute them efficiently,

economically and on time. The lack of competent domestic construction

ir -stries is constraining the ability of these countries to maintain the

facilities built by foreign contractors. A recent study by the Bank. Stafft

[18] showed that unit costs of construction in Sub-Saharan countries are, on

- 31 -

average, about 45 percent higher than in Asian countries. ILO [13] also

reported that it was not able to implement the proposed expansion of its

vocational training center in Sudan during "he past eight year' because

foreign contractors were either not interested or too costly and the

construction capability In the country was limited. Case studies of

constri,cti0n ilrdvZries in Kenya and Tanza.iia [}.] demons,-rate th.at the

real ;roblems ccri?ranting the construction sector in these ,ountries lie,

not in contracting, but in the factor markets. Severe shortages of skilled

labor and locally produced materials have led to over-dependence on imports,

especially of materials. The fluctuatinCj coistruction demand and the

inefficient systerns of contract adminiistration further aggravate the adverse

conditions of the construc.icn envirorment. It 's Ironic that the

development process has become more costly to the poor countries despite the

availability of cheap lsbor and the simple nature of their bas;r

infrastructure needs.

Employment in Constru5tion

25. The figures, of empicyment presented-nAnnex 2, Tables' .A and B, .show

that employment In construction increases with growth of CPSP. Because t,.

construction indu;try purchases goods dnd services (e.g., building materials,

transport, electricity, gas, et'.) from other sectors of the, economy, an

increase in annual con:truction output increases construction's purchases-

from, the other sectors and provides additional employrent in those sectors.

ILO (14] described a number of studies that evaluated the employment effects

of such backward linkages. According to a 1974 Swedish study, employment In

construction %arnounting to 6 percent of total employrment) induced an

additional 8 percent of total employment in the related building materials

Industries. This gives a 1:1 ratio of direct and indirect employmer. in the

construction Industry. Similar studies Indicated that the ratio of direct

and indirect employment in the constru-tion industry was 1:0.85 in Canada,

1:0.9 in Czechoslovakia, 1:0.7 in Yexic- and 1:0.4 in Costa Rica. The

reduced indirect esfplcyment In developing countries (Mexico ar.d Costa Rica)

ir.oicates the industries supplying goods to the construction industry were

rot Ldequately developed.

2c. In addition to its Obackwari linkages' to the building materials and

servi--c industries, the construction Industry generates "forward linkagesO

to econrcmic activities which use the ccnstructed facilities. Based on a

stu;v of Investments in Latin Anerican c'untries, ILO [14; analyzed the

relat1icnship between emnoluyment in -enstruction and the direct and indirect

employment ge.nerated In the sectors using the constructed facilities . The

results given In Arnnex 2, Table 5, show that employment of about 840 people

ir constauction of irrigat1on projects would create some 300 direct

permanent jcbs fcr operating the irrigation facilities and nearly 3000

Vncieilt perarfent. lot s in agri-cultural.actlviti,es using the irrigation

facilities. Tht ligures vary considerably-with-the type of constructed

, ilities. but except for housing. the employment created by fc-ward

linkages is higher thar, employnent in construction.

Relative Contributions of the Con5truction Industry to GDP

27. The construction industry is a majsr industry in both developed and

deweloping countries. Annex 2, Table 6, presents constructionls share in the

- 33 -

GOP of selected countries and its size in relation to other sectors. In the

United States, the share of construction in GOP 4n 1931 (excluding the

value-added by the building materials and service industries providing inputs

to construction) was nearly three-fourths that of transportation and

communication, 19 percent of mat',ufacturing and one-and-a-half times that of

dgriculture. In Korea, it was almost equal to the combined shares of

transportation, cotmunications, electricity, gas and water, 26 percent of

manufacturing and 43 percent of agriculture. Even in a low-income country

like Tanzania, ccnstruction's contribution to GDP in 1981 was rmore than five

times the combined contributions of electricity, gas and water, 50 percent of

manufacturing and 9 percent of agriculture despite the fact that the

construction sector in Tanzania Is undeieloped and its value-added is low.

28. Construction uses huge quarn:,Ites of certain materials (such as

stone, bricks, cenent, structural steel and construction lumber) which are

manufactured and used exclusively for the construction Industry. However,

the national accounts include the value-added by such materials Industries in

the manufacturinq sector, not in construction. Whether this account1ng

practite l's appropriate"or'not, the fact remains that thesp materialsKare

manufactured and used solely for construction. For Purposes of analyzing the

place of the construction industry in the econohiy, it is appropriate to

consider the *alue-added by those backward linkages which are solely linked

tC construction. Or this basis, the contributions of construction to GDP

will be substartially higher than those shown in Annex 2, Table 6, and

construction will rank as the second large.- sector In the economy of most

countries.

- 34 -

29. Construction's share in employment is also large (Annex 2,

Table 7). For exanple, in the United States and Turkey, employmert in

construction is second only to manufacturing; in Korea and Tanzania, it ranks

third after agriculture and manufacturing; and in most countries it is higher

than transportation and conmunications and several times larger than the

aggregate shares of electricity, gas and water. If employment in those

materials industries which are solely meant for construction 4s also taken

into account, construction will rank second only to agriculture in most

developing countries.

I1.- A significant part of construction in developing countries takes

place in the informal sector on a self-help basis and its contributions to

GOP and employment are not fully accounted, particularly in the national

statistics of developing countries. Moreover, construction is more

labor-intensive than other industries and provides jobs for a large number

of unskilled and semi-skilled labor. Compared to developed countries, the

proportion of casuLal labor in corss-uction is very high in developing

countries. According to one study in renya [6], about a third of those

employed in construction';were hired on a'-asual' basi-s. The large variety, cGf

Jobs in construction, wide choice of technolcgy,' flexibil1ty in

equipment-labor mix and the fluctuating construction demand, provide

opportunities for hiring i large numbar of unskilled rural workers who use

their construction experience to migrace to and work in urban areas.

Employment in constructien is often a stepping stcne to work in

manufacturing.

- 35 -

IV. Objectives and Performance Criteria of Construction Industry

31. The main objective of a construction industry project is to develop

the capacity and efficiency of a country's construction industry for

implementing its investment programs effectively. The programs include

investments in both public and private sectors. They include investments for

creating new infrastructure as well as for maintaining existing facilities.

Developing the capacity of the industry involves,enhancing its ability to

implement the investment programs with as much of the local resources (men,

materials, machiries and methods) as possible so that the value-added in

construction and its backward linkages is optimum. The value-added is a

useful measure for evaluating the capacAty of the industry. The efficiency

of the industry depends on the effectiveness of the industry's participants

(contractors, os*ners, consultants, material suppliers, etc) ana its business

environment (oolicies, procedures, incentives, facilities, etc.) in using the

resources (men, materials, methods and time) most productively. Cost-

effectiveness, completion time and quality of cdnstruction are useful

measures-of efficiency. It is the capacity and efficiency, not the number of

contractors and the size of construction output-4-that indicate the stage of

growth of the industry. Projects which address isolated problems of

individual contractors, without improving the efficiency of other

par.icipants of the industry, will not be fully productive. ihe scope of the

industry is so wide, its participants so numerous, and the institutions so

deeply entrenched in their existing practices that it would take a series of

projects spread over a sufficiently long time to achieve improvements.

Development of the construction inoustry is not an easy task; it will require

- 36 ..

consis.ent efforts and continuing com1itment on the part of the borrowers as

well as the Bank.

Performance Criteria

32. The performance of a country's construction industry can be judged

by the level of its capacitv and efficiency in absolute terms as well as in

comparison with construction industries in countries with similar resources.

The performance of the construction industry in the countries 'with large

investments in new construction and maintenance should be judged by their

capacities and efficiencies in both types of activities. However. in the

countries where the investment programs cover mainly maintenance and

rehabilitation works, tte construction industry should have the ceoacitv and

efficien:y to carry out such works effectively.

V. Major Issues in Past Operations

Bank Policy on Constructi'n Industry

33. The Bank's policy paper, which-was revieved by the Board of

Executive Directors on August 7, 1973, E35] described the structure of the

construction industry, underlined its contribution to economic development,

identified the barriers to its growth, and emphasized the need for improving

the policies, practIces and institutions for developing an efficient

industry. However, while recognizing its broad coverage and dir&ensions, the

policy paper defined the construction industry as follows:

- 37 -

"The constructlon industry is susceptible to very broaddefinition. It can include the full range of activities fromarchitectural desin and engineering survey through maintenanceoperations on completed structures. It can include the production,supply and transport of building materials, and everyth4ng fromresidential and commercial buildings to major civil works. It caninclude activities undertaken on a contractual basis and also thoseperformed by departmental forces -- i.e. by Oforce account".However, for the purooses of this discussion the industry isdefined as the building and civil works contractino industry, thatis, the collection of enterprises, private or public, which areengaged in new construction of all sorts as contractors orsub-contractors. iorce account activity and the problems involvedin defining its role and developing it along efficient lines arebeyond the scope of this paper." (underlining added).

34. The abcve definition raises many issues. The use of the term

mcontracting industryn Is confusing, although it has been used synonymously

with "construction industry in some publications. Contracting is a

process, not an industry. A contract is an agreement between two parties:

one party (employer) specifies what it wants, the other party (contractor)

offers to meet the specified requirements for a given price, and a contract

Is executed when the employer accepts the offer. The contracting process

prcduces an agreement, whereas construction produces a physical product,

something which is lasting ar,d provides benefits to its users. Defining the

construction industry as a contracting indus'try focuses attention on a narrow

area instead ,of cov.ering the full range of activities in the, construction,

sector. Similarly,, limiting the definition'odf contractors only to

enterprises engaged in new construction ignores the large number of small

contractors engaged in maintenance and repair work who are contractors-

in-making and the backbone of the construction industry for ,uture works.

The definition also excluies the informal construction sector, which is

large, labor-intensive and the seedbed of skills and future entrepreneurs.

The informal sector relies heavily on self-employed and family labor and

contributes significantly to development of the industry. Jack Boony,

- 38 -

former President and Chairman of Morrison-Knudsen Company, described the

origins of contractors as follows:

uSuccessful contractors are a breed apart and their historiesmake colorful monuments to their ingenuity. Many, starting fromscratch without money or training, climbed to the top by sheercourage and hard work, learning as they went along. Some wereshovel runners, cat skinners, carpenters, steel tiers, plumbers,or concrete workers. Some were civil or mechanical engineers,attracted from a safe profession to its more dangerous andexciting cousin. Even a few lawyers, timekeepers, andaccountants took to the construction field and became outstandingcontractors. They all, however, shared the same characteristics:optimismn, courage, basic good Judgement, and willingness to

work.n [3]

35. It is not clear why the policy paper defined the construction

industry so narrowly in one paragraph when it clearly described its broad

scope throughout. The recormendations of the paper as well as the Board's

resolution on the policy refer to promotion of the construction Industry but

do not mention the Ocontracting industry". Because the policy paper also

dealt with the much-debated issue of providing a 7-1/2 percent preference to

domestic cont.-actors competir.g for ICB contracts, whict, invariably involved

new construction, the definition was probably llmited to include only

contractors engaged in new construction. The issue of preference had been

under debate since 1962, when the Board approvedAthe policy of providtng a

15-percent preference to domestic manufacturers but refused to approve a

similar preference to domestic contractors. The; controversy cn this issue

was evident from the fact that the Board approved the policy paper's

recortnendation for prcmotino the domestic construction industry, but deferred

its decision on tne preference policy.

- 39 -

36. The guidelines (OPN 7.8) followed the definition given In the

policy paper, but further confused the issue by introducing an additional

term, namely, athe construction contracting industry". The title of the

guidelines (OPN 7.8) - 'Technical and Financial AssIstance to the

Construction Contracting Industry in Developing Countries" - was also

inconsistent with the title of the policy paper -- "Promotion of Domestic

Construction Industries in Developing Countries". The new term,

"construction contracting industry", was not even mentioned in the policy

paper. Whatever the reasons for limiting the scope of the construction

industry, its narrow definition clouded the main objectives of the Bank's

policy and led to an overemphasis on assistance to individual contractors In

past construction industry operations. This report proposes that the

definition of the construction industry should include its scope and

dimensions as described in Chapter II and should not be limited to

contractors engaged in new construction.

Scope of Past Operations

37. Some free-standing Bank-financed construction industry projects and

a few of the larger project components may come close to meeting the criteria

outlined in Chapter IV, but the bulk of the project components, many of which

were not even labelled as construction industry projects in the appraisal

reports, do not meet the criteria. For example, project components fGi'

promoting labor-intensive construction metl,ods, providing equipment and

technical assistance to individual contractors, and changing force account

work to contracting, should not be reaarded as construction lndu-try

- 40 -

projects. This is not to say that such projects are not useful or that they

should not be financed. They should not be called construction industry

projects because they address the needs of individual contractors, not of the

construction sector. The objectives and perfonrmnce criteria of a

construction industry project outlined in Chapter IV requires significant

sector work, substantial institution-building effort, and continuing dialogue

with the country. Most projects labelled as construction Industry projects

in the past, however, were components designed to address specific problems

of the main project. One division chief in the Bank made the following

comment cl how construction industry components were added to projects in

many cases:

"Part of the rationale for in:luding construction industrycomponents in projects emerged somewhat late in the project cyclefrom negotiated compromise to resolve issue: between Bank andGovernment concerning: protection of local contractors beyondBank Guidelines; resistance to use of contractors for maintenanceactivities versus continuation of force account, etc. Lack oflasting inoact in such cases is not surprising."

Management Infoimation System

38. During'the pist decade-and-a--half,.the.Bank has financed 169

operations - 56 st:diles'and 113 technical and financial assistance loans

and credits, including 22 operations for using labor-intens!ve construction

methods. However, Information on these operations is fragmentary. Much less

is known about the objectives of these operations, particularly of the

project components, the rationale of their design, the experience of

implementation and the lessons learned. There 's a. need for instituting an

adequate information system for monitoring the progress of construction

industries and testing strategies for improving their performance.

- 41 -

Construction Industry is not in the Kain-stream of Bank Activities

39. Ouring the early years of its operations, the Bank was lending

mainly for Infrastructure projects and its financing was limited to foreign

exchange cost. The works were procured under ICB and they were implemented

by foreign contractors. There was little incentive, therefore, for the Bank

to get involved in the problems of the domestic construction industries in

developing countries. When the scope of Bank lending was enlarged during

President Wood's administration, with increased empha2is on agriculture,

education and tndustry projects, and further expanded by President FcNamare

to include rural development, family planning, health and urban development

projects, the nature of Bank-financed works changed considerably. A

substantial part of the lending was devoted to works which were too small and

too scattered to attract forelgn.contractors. In 1973, the Bank established

the policy for promoting the domestic construction industry in developing

countries to ensure efficient implementation of such works. Howev'r, the

concerns of the construction sector did not recelve adequate attention of the

management, the objectives of construction industry projects remained vague

and the proJects were often included as.componen,ts late in the projc.t

cycle. This is probably the reason why past operations were not too

effective in achieving the objectives-of the Bank policy.

40. Eccnoric ar.d Sector Work. The Bank gives high priority to economic

and sector work and regards it as an essential underpinning for a sound

design of its country assistance strategies, lending programs, dialogue with

the countries and aid coordination among the donors. However, despite the

- 42 -

crucial role of the construction industry in economic development, the Bank's

economic and sector reports have seldom addressed the Issues relating to the

construction industry. Previous reviews [45] have also pointed out that the

Bank has not taken a lead role in improving the systems and institutions for

developing the construction industry through its research activities,

e:onomic and sector work and dialogue with the countries ac senior level.

Of course, construction industry studies carriad out by consultants and

financed by the Bank through project components were a sort of sector work,

but they lacked the quality and discipline of the Bank's sector work

operations in terms of systematic planning, programning, preparation, field

work, reviews, clearances, approvals, publication and follow-up actions.

41. Prolect Implementation Reviews (PIR). The Bank's PIR system is an

important instrunent for monitoring the progress of its operations and

reviewing the effectiveness of its strategies. In adaition to the

statistical study cf the supervision portfolio and reviews of individual

projects, the PIR assesses some special aspects of the portfolio every year.,

Among the objectives of the PIR stated in OMS 3.51, two are particularly

relevant to development of the construction industry: first, to ensure that

appropriate action is being taken to address implementation problems; and

second, to know how the Bank's policies and procedures are working in

practice. However, construction industry projects have not been, a subject of,

special study in the PIRs, nor have they benefited from the intensive i'ucus

and dialogue that the PIR generates at all levels in the Operations Complex.

Neither the annual statistical study nor the supervision reports are designed

tt focus attention on the problems of the construction industry during the

PIR reviews. In the absence cf such focus, it is difficult to identify the

- 43 -

real causes of the implementation problems. A study of the PIR Overviews

prepared oy the OPS for the years 1981 to 1986 suggests that, In most cases,

the failure of the employers to meet their obligations under the contracc and

the adverse environment of the construction industry are the main causes of

the problems encountered during project implementation.

42. Prolect Completion Re2orts (PCR). One of the primary objectives of

the PCR system is to assess the experience of Bank operations and disseminate

the lessons learned for improving future operations. OMS 3.58 specifies that

the following topics be covered in the PCR:

* "Assess contractors' ard suppliers' perfonmance (e.g. quality ofservice and work schedules, quality of equipment and deliverydates), indicating major problems or shortcomings, and whetherthey could have been avoided"

e "Assess borrowers' technical and managerial competence duringimplementation, the overall control exercised on the project,and the type of relalionship It established with theconsultant:, contractors and suppliers"

* "How does the actual operating perfomr,ance compare with theestimated, or with the tender specification?"

o "What are the reasons for deviation and what steps were taken bythe suppliers, contractors, consultants and the borrower to putthe matters right?"

43. If the OMS guidelines are followed,'the problems causing

implementation delays,can be adequately analyzed and information on the

itrengths and weaknesses of the construction industry will be known. Such

assessments are crucial for addressing the pervasive problems so frequently

referred to in the supervision reports and PIRs as rznagement problems,

financial problems, lack of corrmitment of the borrower, and over-extension of

the local construction industry. A review of 50 PCRs selected at random

(Annex 3) shows that, in most cases, delays In completion of physical works

- 44 -

were largely due to problems relating to inefficient policies and practices,

weak Institutions and adverse business environment of the construction

industry. Although PCRs refer to such problems,-they seldom present an

adequate analysis of their causes, the lessons learned and what the Bank

should do to avoid them. Given the budgetina constraints, it may not be

possible to fully meet the OMS requirements in all cases. However, if the

analysis is done on a selective basis -- for instance, in the PCQs of

projects with major problems --- the Bank will have adequate inferrr2ticn to

address the Implementation protlems more effectively.

44. OED Reviews. The Operations Evaluation Department (OED) has not

reviewed the construction industry components in sufficient detail, perhaps

because the components were too small for its review znd the problemr were

not fully identified In the PCRs, or because its primary focus was on the

main projects. Construction industry projects also were not covered

adequately in OED's annual reviews.

Reasons for the Lack of Focus on Construction Industry

4>. ,ne construction incustry fas neitner been in the Bank's lending

stream nor in the Bank's list of priority objectives such as poverty

alleviation, income distribution, environment protection and debt

manaaement. The number of construction industry operations may appear

impressive, but, with thc exception of six free-standing projects, all

operations are in the form of small project components. Any topic which does

r,ot lead to country assistance operations is seldom covered adequately in the

economic and sector work, the dialogue with the countries, the PIRs, the

- 45 -

PCRs, and the OED reviews. Of course, the Bank's economic and sector reports

discuss development-related issues, all of which may riot result in lending

operations, but the Bank's advice to the countries is effective only when it

Is reinforced by financial support. The development of the construction

industry will remain an unrealized goal unless its importance for improving

the efficiency cf economic development is recognized, both by the borrowers

and the Bank, and full-scale operations are launched for fostering its

development. In the absence of the 3bove actions, it is unrealistic to

expect more than a cirsory coverage of the construction industry in the

Bank's operations and reiiew activities.

Bank Strategy In Past Operatirns

46. Of the 169 construction industry operations financed by the Ba,:

during the past decade-and-a-nalf, 56 operatlions related to studies of the

irdustry, 85 included training and financial assistance to contractors, 22

focussed on labor-based construction and the remaining 6 were full scale

free-standing projects for training and financial assistance to contractors.

'Given the predominznce of training and finAncial assistance to contractors

and the unfavorable commrer.ts on the effectiveness of past strategies [4q], i

i' important to analyze why the Bank's assistance was nitt successful and wha.

should be done to rnsire its success. This analys4s Is also important for

understanding borrovers' cosplaints that lscal -s.z.ac.t^rs a,-e not able to

corpete with foreign contractors because they laclk construction equI'ment

and trained stalf. Chapters VT and VII have, therefore, been specifical!y

devoted to discussion of the strategies for financing constructioni equ.n1c1rnt

and training of managers and ;rkers in the construction industry.

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VI. Financlnt Construction Equipnent

Haz! ds of Financinq Construction Equipment

7. Construction equipment is, an import,-:t determinant of a

contractor's ability to perform well and compete successfu,ly. Even small

conti,actors with a few pieces of equipment -an increase their productivity

Creatly, particularly when the jcb can be (,:ne more efficiertly and ciuickly

wltri equipment than with labor. Contra,tors have to finance the work until

the7 arz paid; the progress oa;ments they receive seldom cover their

operating costs, let alone leave enough margin to buy ecjipmnent. They need

!inancing to purchase equipmert; adequate financing on reazonable terms is

important for their success.

48. Constructicn financing has long been considered hazardous for rrmiy

reasons. First, contracto.-s face many risks during the long con3truction

period - adverse weather, labor str1ies, irflation and non-performance by

other oadtles are conditiens over hhich they have little or no control.

Second, their product belongs to the owner and cannot be used as collateral.

Third, the unsecuied loans to a contract stand *last in line' for pzylpent in

the event of trouble. Despite these problems, ccntractors in developed

countries are able ts get financing from the banks, equipment dealers and

other credit institutions without much difficulty. They often pay higher

interest for constrLction loans than for coTmerciel loans, but tne tax

deduction facillties make repayrnents less onerous. Hodever, these facilities

are not easily available to ':ontractors in developing countries. They are

required to pay heavy down-payments, high irnterest rates and also to

- 47 -

pledge their personal assets as collateral. Consequently, construction

financing in developing countries is extremely expensive.

49. Lack of adequate financing is not the only problem. Unlike their

colleagues in developed countries, contrac- rs in developing countries face

serious problems in managing their ? 1 , achieving optimum productiv1.

and realizing high returns on thei:- -:nv:..tments. They lack the experience

and the tradition of good maintenance;their cost accounting practices are

poor; they face difficulties. in getting spare parts; they lack adequate

support from equl1xnent dealers; and they sannot get enough experienced

operators to use the equipment most productively. Consequently, equipment

breakdowns are frequent, resultirg In expensive repair and downtime costs.

50. The market value of equipment decreases with time even when the

contractor does not use the equipment. The loss in value reflects not cnly

the physical condition but also the obsolescence of the equipment model. It

is imperative, therefore, that the contractor uses the equipment productively

and earns as much and as quickly as possible.. He will be able to do so only

when he has a job. A contractor without work will be losing money

continuously, bath on his equipment and-on:.hIs:overheads. His frustration

Increases as the time without work increases and, in desperation, he tends to

bid low to get the job. In such situations, the risk of losing money

increases even further.

51. Haintenr-.ce of ccnstruction equipment is a major operating

expense. Depending on the operating conditions, efficiency of use and

quality of rmaintenance, this expense could amount to 100 percent of the price

- 48 -

of the equipment in 5 to 8 years. Under severe operating conditions, the

expense could reach this amount in 3 to 4 years. The cost of maintenance and

repair depends on the model cf the machine, operating conditions, operating

skills, efficiency and quality of servicing and many other factors. Unless

the contractor maintains his equipment well and ensures 100-percent

availability for productive use, his risks of equipment breakdown and the

consequent repair ard downtime costs (costs of time lost due to breat'down

which results in the equipment not being available for work) will increase

substantially. Contractors in develcping countries are more vulnerable to

these risks.

52. Contractors in developing countries also face problems in selecting

equipment because construction demand is usually uncertain and the jobs are

of varied sizes ana types. It is not easy to select equ pment 'which provides

optimal productivity and returns under such conditions. If the production

requirement and operating conditions are known, it is possible to select the

best size and type of equipment at the lowest cost. This can be done more

easily when the contractor purchases the equipment after get.ting the

contract. On the other hand, if he buys the equipment in advance, either

because credit Is available or hocause he is keen to meet the prequalifica-

tion requirement of owning some equipment, he runs the risk of purchasino

equipment which does not provide optimum results. Cperatlng ccnditions have

a substantial affect on machine productivity. For example: wheel tractor-,

scrapers are more productive on a flat haul road than on an uphill winding

road; they can be loaded faster with sone materials than others; some

,..dterials are difficult to erect and spread on the fill, whereas others dump

clean and fast. The contractor has to take all conditions into account in

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selecting equipment. Contractors in developing countries are not very

experienced in this area. rhey also lack opportunities to trade-in equipment

from the dealers If they find it less suitable for a given job. It is not

uncomon, therefore, to see contractors using large size equipment for

smaller jobs, or vice-versa. Smiall contractors face more problems of this

kind than large contractors because their equipment spread is very limited.

Institutional Finance

53. Institutional firiance for construction equipment is extremely

limited in developing countries. Connercial banks and development finance

companies (DFCs) do not have experience in lending for construction

equipment. They have no way of knowing whether a contractor will be able to

win the contract, whether the equipment he proposes to buy is appropriate for

the work, and, if he does get the contract, whether he will be able to

execute it successfully. They know, however, that the construction equipment

they finance can be confiscated by the employer in the event of

non-performance; Its market value at the end of the work will be too low to

cover the arrears; and, given the nature of construction business, it 1ill be

difficult to verify much of the financial Informnation provided by the

contractor. The banks, therefore, appraise the loan applicaticns mainly on

the experience o' their past dealings with the contractor, their evaluation

of his success in previous projccts and thei1r assessment of his motivation

and honesty in seeking the loan. Obviously, it will take e decade or more

for the tanks to develop the experience. and the confidence to provide

adequate financing for construction equipment on tems which are not too

unfavorable in comparison with cor,nercial credit.

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Experience of Bank Ooerations

54. The Bank h-s financed several project comnponents for providing

equipment to domestic contractors. It has also financed three free-standing

projects in Burundi, Burna and Egypt for providing c-edit to contractors for

purchasing equipmentt. A review of some typical operations shows that

different strategies have been followed for financing equipment (Annex 4).

In the project cowponents for Ethiopia, Ghana, Pakistan and the Philippines

financial assistance was provide- through DFCs. In India and Nepal, the

project components involved procurement of equioment by government

departments for hiring to the contractors engaged for soecific projects. In

Korea, the DFC project envisiged on-lending to leasing companies for leasing

equipment to contractors. The free-standing projects in Burundi and Egypt

were designed to provide loans to contractors through the DFCs for purchasing

equipment, while the one in l3urma involved direct assistance to the single

public constructicn enterprise in the country for procuring an agreed list of

equipment under IC3.

55. The experience In Ethiopia was disappointing because the

contractors b...anie bankrupt and did not repay the loans. To speed up

procurement, the OFC in Ghana selected the size and type of equipment without

considering the nature of work for which it would be used. This procedure

proved inefficient. Moreover, sufficient attention was not gjven to the need

for servicing facilities. The DFC in Pakistan was able to lend only $1.3

million against tthe total allocation of $5.13 million; the unused funds were

re-allocated to other purposes of the main project. In the Philippines, the

general line of credit provided to the DFC did not specify on-lending to

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contractors for purchase of equipment, nor was there any restriction on such

lending. The DFC made three sub-loans to contractors; two contractors used

the credit productively, but the third became bankrupt and could not repay

the loan. The loan to the EDFC in Korea included a provision for on-lending

to leasing companies, but the DFC had the freedom for leasing equipment to

various industries includingi the construction industry. The leasing

operations were successful. Different procedures were followed in India and

tlepal for financing eouipment, although in both cases the PWDs procured the

equipment for hiring it to contractors working on the projects. In India,

the PWD procured the equipment partly under LCB and partly through bulk

purchase from local dealers. The equipment was delivered in reasonable time

and used on the works. However, it is not clear from the completion report

whether the PWD maintained the equipment well and whether the renting

operations were financially successful. In Nepal, although the design for

financing equipment was similar to that in India. the equipment was purchased

under ICB procedures. Equipment delivery was delayed by two years (five

years in the case of tractors), and, when it did arrive, it was not fully

used and only 13 percent of its cost was recovered from hire charges.

Moreover, the contractors were reluctant to hire some equipment such as water

tankers and vibrating rollers purchased under the project.

56. In the Burundi Project, due to lack of demand, only 16 percent of

the amount allocated for purchase of equipment by. domestic contractors was

utilized; the unutilized arnount of the loan was cancelled. Although the

Burma Project was called a construction industry project, it was not too

different from a normal road project with provision for financing the

construction equipment required for the p-oject. However, the contractor,

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a government construction enterprise, was not given the freedom to select the

equipment and its timing according to his needs; instead the list of

equipment was agreed in advance and procured under ICB. The procurement was

delayed by one year due to bureaucratic procedures and the technical

assistance team finarced undler the project for training the contractors'

personnel was not able to utilize its time fully as envisaged In the

project. The loan to Egypt for financing the equipment required by the

public construction enterprises was si9ned recently after a delay of almost

two years. It is, therefore, premature to conment on its experience.

57. The nunribr of projects discussed above is not large enough to draw

firm conclusions, but it is clear that the strategies followed for financing

equipment did not address the issues affecting contractors' costs and

returns. Needless to say, government departments and public construction

enterprises have seldom been able to use construction equipment efficiently

and their standards of mairitenance are generally too poor to get full return

on investment.

Viable Strateqies for Financing-Equipment

58. A viable strategy for financing ,quipment should take into account

three important requirements. First, the contractor should have the work to

use the equiprent. This requirement will be satisfied when he gets the

contract or receives the letter of intent from the employer for award of the

contract or if hie already has an ongoing project for which he needs the

equipment. In all these cases, he will be able to procure the size anr type

of equipment which is most economical and productive for the given type of

- 53 -

work - its operating conditions. Second, the terms of financing should be

attractive and the time for processing the request for financing should be

short. If this requirement is not met, the contractor will either have to

delay the work or start it through some interim arrangements which may not be

as efficient and productive. Moreover, he may not be able to use the

equipment fully on the work when it is finally delivered. Third, the

procedures for procuring equipment should be efficient in terms of time and

provide long-tei-m benefits to the co,ntractor. Yhe long-temin benefits include

establishing business a&dtionships with equipment dealers for getting spare

parts and servicing facilities as needed, standardiz1iri3 equlnment spread and

improving the efficiency cif operators.

59. The strategy recormended in the FIDIC (Federation International des

Engenleurs-Conseils) Conditions of Contract, which are followed by tie 63rk

in its procurement policies, meets the above requirernents most effectively.

Clause 60(2) of the FIDIC Conditions provides for advances to contractors ror

purchasing construction plant and matcrials. The advances are interest-free

and usually amount to 15 percent of the value of the contract. The

contractor 'is free-to selec't -the si-ze 'and type -of equipment, but since the,

engineer hasM to approve the proposal,' the employer is protected agains-t

inappropriate selection. Because the contractotr Is solely responsible for

procuring the equipment from any source he likes (locally or through,

imports), he can avoid procurement delays, get the best price and establish

business contacts with the dealers. Under Clause 60(2), the contractor is

also eligible to receive payment in the currencies required for procurement

and, if he wants, the payment can be made directly to the supplier. This

provision helps him to get foreign exchange as required and also reduces his

- 54

need for working capital. T'he equipment advances are recovered in

installments from monthly payment certificates according to an agreed

,ecovery plan which takes into account the time for deliverv of the equipment

at site e.nd the rate of progress on works. No other financing strategy

provides so many advantage, to the contractor.

60. But these advantages are not one-sided. The employer also gains a

lot from this procedure. The equipment belongs to the employer until the

advances are fully paid and. it cannot be removed from the site for some other

work without the written approval of the engineer. These conditions provide

adequate security for the advances. Moreover, if it becomes necessary to

rescind the contract and make alternative arrangements for completing the

works, the availabi1ity of the equipment at the site will avoid delays in

completion. Because the equiment has been approved by the engineer before

making the advance, it meets the requirements of the job and ensures optimal

efficiency for the given conditions. The contract also empowers the employer

to require the contractor to maintain the equipment in good condition.

This is useful to both the contractor and the enployer. Moreover, the

employer c:es not lose anything I,. providing an 'interest-free advance because

its benefits to the contractor are reflected?i1n'the competitive bid prices;

in fact, the employer saves money by avoiding the high cost of financing from

other sources wthich would be reflected in the bids.

61. The above strategy of providing advances to contractors for

purchasing equipment is followed in Bank-financed ICB contracts, but it is

seldom applied to LCB contracts even though the objectives of the Bank's

procurement policies are the same. The most effective way of financing

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contractor's equipment neecLs is to include these provisions in LCB contracts

and to implement them in the same way as ICB contracts. These procedures

were followed by the Bank tn Pakistan for implementing the Indus Basin

projects and proved very effective. They shot-Id be followed ior

Bank-financed LCB ccntracts as well as for contracts financed by the country

itself.

62. The application of the above strategy to small contracts should

reflect the special characteristics of such contracts and the limitations of

the small contractors. For example, advances could be counter-productive if

the volume of work is not large enough to get a reasonable return on the

equipment, if the equipment is needed only for a short time, or if the

procurement period is too long to use the equipment fully. However, advances

could still be made to snill contractors under Clause 60(2) for purchase of

tools and plant (such as small concrete mixers) ard also for materials

required for the vorks, following procedures similar to those applied for

purchasing equipment. The short-term needs of unall contractors for

equipment can be met if facilities for renting equipment are available. Some

government departments.and public enterprises rent the equipment from their

equiprment pools' to contractors engaged-on'thelr works. The main contractors

on large jobs also rent equipment to sub-contractors for expediting their

work. Thcse arrangements, should be encouraged; they benefit both parties,

ensure ef'ectlve utilization of equipment and reduce the financial burden on

small contractors.

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Equipment Leasing ComDanies

63. Equipment generates profits only when it is used productively.

When a contractor needs a piece of equipment for a short tine, it does not

pay to buy it becausc the market value of the equipment continues to reduce

with time and the earnings from occasional use may not be adequate to cover

the investment cost. In such cases, hiring equipment is financially more

attractive. However, facilities for hiring equipment in developing countries

are extremely limited. Even large contractors would benefit from such

facilities, but the small contractors need them desperately. The latter have

neither enough capital to purchase equipment nor enough work to recover its

cost; moreover, because they usually work on small jobs in rural areas,

hiring and transporting equipment from the cities may be prohibitive.

64. Leasing is different from hiring. The lessor (leasing company)

purchases the equipment ancl leases (sells) it to the contractor on lease

payments (installments). The leasing company remains the 'legal owner" of

the equipment until'the contractor makes all lease payments, but the latter,

as the "economic owner", is free to use the equipment as needed. Leasing

companies lease equipment required by industries.-Their activities in leasing

cons.truction equipment are limited because of the low demand.

65. Establishing private enterprises for hiring and leasing equipment

to contractors is importanl; for developing the construction industry.

However, it will be a long time bef6re adequate hiring and leasing companies

are established to meet the needs of the construction industry. Much depends

on the pace of development of the construction iodustry itself, because it is

- 57 -

the dez,and from the construction sector that stimulates the growth of the

hiring and leasing business.

Financing Government Equixment for Hiring to Contractors

66. The strategy fo'llowed in some E3nk projects for financing

government equipment (e.g., in India and Nepal) for renting to contractors

will be successful only if the government departm,ents can recover the

investment from the rents. Given their general inefficiency and low

standards of maintenance, it is doubtful whether government departments would

succeed In making 'these c,perations financially viable. Of course, if they

have purchased t'ie equipnient for other justifiable purposes, renting it to

contractors will lncreasct its utilization, provide additional revenues and

also help the contractors in completing the works expeditiously. The main

consideration in financilig equipment is that the equipment should be used

fully and productively and that it should earn adequate revenues to recover

the investment cost. Many government departments carry a large inventory of

equipment which remains idle most of. the time. Often, the equipmTent is old

and is not used eOther because it needs repairs or because the department has

acquired tiew equipment. Such equipmernt should be sold to small enterprises

at whatever price it car, fetch (t!he book value may be too high) so that the

small enterprises can u!e or rent it for productive purposes.

Construction Equipment Financing by DFCs

67. Lending for construction equipment by the PrivAte Deielopment

Corporation of the Philippines (PDCP) illustrates the good results as well as

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the problems (Annex 4). The good feature of Bank financing in this case is

that the Bank neither allocated a specific amount In the loan to PDCP for

financing construction equipment nor required PDCP tc do so. PDCP financed

construction equipmnent as a part of its normal policy to diversify and

improve its portfolio. The DFCs In Korea have also been successful in

lending to contractors for purchasing construction equipment and, as in the

case of PDCP, the! Bank did not impose any conditions. This policy has worked

well in practice. However, Bank-financed project components using the DFCs

as the channel for lending to contractors for purchasing equipment have not

been too successful (Annex 4). The demand from the contractors was poor;

some contractors became bankrupt and could not pay; and In some cases, the

DFCs followed overly lengthy procedures for processing loans and specified

difficult conditions for collateral and procurement. Obviously, the strategy

followed by the PDCP in the Philippines and the DFCs in Korea is preferable;

it avoids the problems menl:ioned above and also enables the DFCs to exploit

opportunities for lending t:o the construction sector on the merits of eac,

case.

VII. Traininq Manailers and Workers in the Construction Jr istry

S8. This chapter discusses the adequacy of various strategies followed

by the Bank tor training contractors and workers in the cc-istruction

industry. Specifically, it iddresses the issue of whet-er, and to what

extent, the strategy of financing formal trainlng prcgrams is effective in

irproving the efficiency aind productivity of managers and workers in the

construction industry. Judgements or, this iss. should nut be based merely

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on what tne governments andc financing agencies think, but also on what the

contractors believe. The term fornal training includes academic training in

schools as wo!ll as trainincg courses, seminars and workshops designed by the

government and the financing agencies to help contractors and their personnel

Improve their knowledge and performance. Informal training includes

on-the-job training given by contractors, learning by workinig and observing

how other co&itractors work.

o9. Construction is a complex industry requiring many skills. The

problem of how to build different types of works under dieferent so11 and

weather conditions at minimum cost and max,murn speed is difficult enough; the

problems of managing the workforce, dealing with the employer's bureaucracy,

and handling a multitude of issues ccncerning the public, the local

authorities, lawyers, banikers and othtirs, are no less formidable. As Edgar

Kaiser, former Chairman of the Board of Kaiser Industries, [3] said:

*Successful contra;tors need a 24-hour approach to problem-solving". The

cuntractors' need for upgrading thelr kncwledge constantly and enhancing

their abil,itles to cope with problerrs, therefore, hardly requires emphasis.

However, there are nidny contra.tors who did not receive formal training but

achieved outstanding success in the construction business. They were able t

hire the required skills frcu the rmrket without investing in formal training

for their workforce.

Small Cortractors

70. A typical small contractcr is a sole cwner and manaqer who controls

most of the dctivities himself and gets his basic traininig through many tYpes

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cf jobs. He is rarely willing] or able to employ qualified personnel and

remains too busy Wi-.h the problens of getting jobs, startIng work, getting

payments and a host of other problems, to take time for for,nal training. The

origin of contractors and their growth path (Anmlex 1) show that most

construction managers and workers acquire their skills on the jobs. Their

trainirng extends over many years and covers many construction jobs of variolis

types. It Is a slow and gradual orocess which involves learning by doing one

thing at a time and starting the next task oniy when sufficient expertise is

gained on the first. There is practically no additional cost to the

cont.acto;s on such trait.ing. The unskilled ard semi skilled trainees earn

while they learn and the contractor p-duces while he trains. Of coi se, the

productlvity of the trainees is low in the beginning, but the contractors do

not lose much because they pay lower wages to the workers until they are

fully trained. These are the reaso,,s why contractors do not invest much in

formal trainina oitside theii- rbs. Perhaps they think they are experienced

enough to do the kind of jobs the' are undertaking; perhaps they do not see

the merits Cf forrnal trainin3g in the same light as the novernments aiia

financing ayenciEs do, or t,,ey 6,0 not consider it 'mpoitant encugh to disrupt

the continuing opportunities of earning from construction.

Large Contractors

.1. Large contractors employ a variety nf personnel on their management

teams, sucn as policy-makers (board of dirpctors), managers of construction

programs (engineers, financial rranagers, legal coursels, personnel managers),

site managers, foremen and trainers. They recruit workers according to the

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needs of the job cnd give them irtensive training on the job, as necessary,

to make them fully productive as early as possible. The foremen and .rainers

are the key staff for ensuring nign levels of productivity from the

workforce. Tney are usually retained on a permanent basis unless the

company's ousiness declines significantly. Large contractors view fonnal

training progrars sponsored by government and financing agencies with

skepticism, bJt they strongily support the establishment of vocatioral

training schools and technical institutions for providing their needs of

managers and workeis.

72. Annex 5 illustrates the stratEyy followed by Guy F. Atkinson

Company, a large contractor from the United States, for training some 20,000

skilled workers for the Mangla Dam Project "1 Pakistan. The key elements of

the strategy were - selection of workers with potential, entering them on

payroll at a trainee's rate, initial briefings on the project and the goals

of the Cor pany, Instructions using small-scale models, field training with

instructcr, production-cum-training with instructor, and finally, production

under normal supervision. The training strategy was a great success and was

subsequently used by the Ccmpany on the Gurn Pioject in Venezuela. The

factors contribut1ng to success were:

O there was work to be done: it was not possible to do it withouttraining a large workfcrce; the contractor, therefore, had astrong ircentive to invest in training.

o the workers had the potential to learn and the incentive tolearn quickly to increase their earnings.

o the training sFas relevant to the job; there was opportunity toapply it a.d improve ;he skills.

o the training staff worked full time; their success was judged bythe production efficiency of the trainees, not bv the number ofworkers trained.

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Needs of Construction Industry are Different

73. The needs of the construction industry for training are different

from the2 of other industries and government departments. In the

manufacturing industry, for instance, the factory and the people (management

and workers) are site-bound. The raw materials are brought to the factory,

transformed into products, and the products are moved out for distribution to

consumers. Because the people are virtually permanent and site-bound and

their jobs are repetitive, training programs (before the Job, on the job and

outside the job) can be planned in advance and implemented effectIvely. The

factory management sees the advantages of increased productivity and is

willing to invest in both formal and informal training. In the construction

industry, however, the contractor moves his people, the equipment and the

materials to the worksite (factory), transforms the resources into

constructed facilities (product), leaves the product at the site and moves

the plant and people out. Because the contractor moves tne people - offering

them new jobs, or laying them off, his incentives for investment in formal

training, except for on-the-job training,-are not'great. Moreover, his

requirement of skills and their composition may be different for different

jobs. If the new job is far away from the previous job, he wou,ld prefer to

recruit the skills from neighbouring towns instead of moving the workers rar

away from their home and incurring additional expenses on their housing and

other allowances. The size and composition of the contractor's workforce

also varies from time to time even on the same job. In the beginning, the

job may involve preliminary works such as camps, access roads, and power

lines which require a different set ef skills than for the main works.

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because the contractor needs to start production from the very first day he

gets a job, he often looks at the time spent on fonmal training as time lost

on production.

Views of ILO

74. The ILO [11] has described the practical difficulties in providing

effective training services to an amorphous group of contractors and their

personnel. Trairnng progranis of the type designed for training the staff of

government departmnents and industrial enterprises are not suitable for

contractors who are busy on site and have little time to devote to formal

training programs. In view of the difficulties of providing effective

training, the lack of interest in formal training, and the absence of

successful models, the cost of providing formal training to contractors would

not be J"stified. The best approach would be to develop a comprehensive

program wnich includes assessing the needs of contractors for trained

personnel, reviewing the capacity of existing Institutions and facilities for

providing the required skills and developing the Institutions for meeting

those needs.

75. ILO has documented £10] the information from member countries on

how the needs of the construction lndustry for trained managers and workers

are determined in various countries, how the training needs of the industry

are met and how they are coordinated in the system of general education and

training. The key practices followed by most countries Qand of particular

interest in considering the Bank's strategy) are outlined below:

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a Vocational training schools are the main institutions w:hereskilled workers required by various construction trades aretritined; higher levels of knowledge and skills are providedthrough the post-secondary vocational schools and colleges.

a Contrac' rs' and workers' associations participate in thedeve&upment of training programs offered by vocational trainingF chool S.

0 Some countries (e.g., Belgium, France, Germany and Italy)require employers to pay part or full renumeration to workerswhoD take leave for further training; obviously, without suchrenumeration, workers will be reluctant to devote their time totraining.

Viable Strategies for Training

76. Among the ccnstruction induscry projects financed by the Bank, only

the education projects in Sri Lanka and Indonesia were designed to develop

the institutions for meeting the construction industry's needs for skills and

trained personnel. All other projects focussed on trainlng individual

contractors rather than developing the required institutions. Consultants

were used in most cases for training contractors although their expertise in

bol.h construction skills and delivery of training was rather limited. In

some cases consultants were appointed to advise contractors intending to bid

on Bank-financed works (on a take-it-or-leave-it basis without assuming

responsibility for the results) on how t6 estimate costs and prepare bids.

It is not surprising, therefore, that such technical assistance has not

proved very useful.

77. The Bank has been finarcing technical and vocational education and

training programs In its member countries. Lending for technical and

vocational studies ircreased substantially in recent years--from 58 percent

of total lending for the education sector in FY82 to 68 percent in FY85.

Although the Bank-financed programs provide many of the skills required by

- 65 -

the construction industry, they have not been desioned specifically to

address the needs of the industry; nor has any effort been made to examine

whether the capacity of existing institutions was adequate to meet those

needs. The ILO report [10] on the practices followed in various countries,

particularly in developing countries, indicates that the needs of the

construction industry for trained managers and workers are estimated on a

rather broad basis and not enough attention is given to coordinating the

system of general education and vocational training to meet those needs.

Future prcgrams for Bank assistance to the construction Industry should

address these issues.

78. The Bank's guidelines for developing the construction industry (OPN

7.8) describe the broad range of managerial and technical skills required by

the industry and emphasize that the country's basic educational and training

facilities should be capable of meeting these needs. The guidelines also

suggest that "wh2re these needs are not being met, the Bank and government

should develop a strategy and program of remedial measures including, as

appropriate, projects in the general educa_tfon sector, supplemented by

projects, or-elements of projects, directed-specifically toward the technical,

and vocational training heeds of the construction industry". This report

supports the above approach. However, the guidelines also suggest that the

Bank should finance the services of expatriate technical advisors to instruct

and advise contractors on estimating costs, pricing bids, including risk

analysis, cost control, work scheduling, equipment rralntenance and material

purchase. The guidelines fur-ther suggest that, in providing this advice,

discrimination among individual contractors should be avoided. This report

questions the strategy of financing consultants to advise individual

- 66 -

contractors. Experience has shown that many of the project components

providing such technical assistance to the contactors have not been

effective. Sub-contracting and joint-ventures with experienced contractors,

both foreign and local, are effective instruments for transfer of technology.

VIII. Main Barriers to Development of the Construction Industry

79. Studies conducted by the Bank and other institutiens provide a long

list of constraints affecting the growth of the construction industry in

developi.g countries: lack of adequate education and training, lack of

government commintment, fluctuations in work-load, defective contract

documents, corrupt contracting procedures, lack of protection against adverse

physical conditions, delays in payments to contractors, problems of bonding

and insurance, lack of adequate credit, restrictions on imports, foreign

exchange constraints, unfair competition from state-owned contractors, and

problems relating to availaoillty of equipment, materials and spare parts.

One can add a dozen or more constraints to this list. However, the critical

issues are: how should a developing country address these constraints and

what should the Bank do to assist the country? The studies *on the subjec.

provide a wide range of solutions. Some studies suggest that facilities such

as tax holidays, duty-free imports and subsidized financing be provided to

domestic contractors; some assume that contractors do not khow how to do

their job and emphasize the need for training them; others underline the

importance of planning investments to avoid undue fluctuations in the

work-load of contractors. Many countries contend that more drastic measures

- 6D -

are needed. They propose that a substantial part ef the construction work be

reserved for domestic contractors; that the works be phased over time to

increase their participation; that certain works be assigned to them without

competition; and that foreign contractors be obligated to sub-contract work

to domestic contractors. One report goes to the extent of suggesting that

the supervisors should not discourage domestic contractors by overly exacting

standards of construction quality. Obviously, the thrust of the solutions is

to treat the construction industry as an "infant industry", to protect

domestic contractors against competition and to nurture them with concessions

and subsidies. Previous studies oi the construction industry also emphasize

the need for improving contracting procedures, ensuring prompt payment to

contractors and protectIng them against adverse physical conditions, but they

point out that it will be difficult to change the deep-rooted bureaucratic

practices In developing countries.

80. It is true that the barriers to development of the construction

industry are numerous. The rationale for treating it as an "infant industryu

is also persuasive. However, is it a--sound-strategy to subsidize and proQtect

an industry which typically consumes 50 to 70 percent of public investment

and transcends. all sectors of the economy? Wi it foster sound development

of the capacity and efficiency of the industry measured in terms of value

added in construct'on, cost-effectiveness, quality of work done, and time

taken for completion? The experience of state-owned contractors is.a useful

guide on the issue. They are pampered with subsidies and concessions, but

remain notoriously inefficient.

- 68 -

81. This report argues that subsidies, concessions and protections of

the type mentioned above are not effective instruments for promoting the

construction industry. The employer engages a contractor in view of his

experience and skills for completing the work efficiently, economically and

on time. Assigning work to contractors who are not competent enough to meet

these requirements will be counterproductive. Successful contractors are

those who develop the ingenuity, the skills, the ability to manage risks, the

courage to innovate and the willingness to work hard and to do a good job

efficiently, econo>mically and on time. True, they need the opportunities,

but they also need the challenge to develop these qualities. True, they need

protection, but the protection they need most is against unfair acts of the

employers and against the adverse business environment, not against fair

competition. Any amount of concessions, subsidies and other forms of support

will not be an adequate substitute for the lack of protection avainst unfair

acts of the employers and the adverse effects of the business environment.

Contractors working for private clients (e.g., on housing) are more fortunate

than contractors working for government because private clients are more

concerned with the benefits of early completion and cannot afford to act

unfairly. However, they also suffer from the adverse business environment of

the ind'ustry'(e.g., shortage of materials, difficulties of importing

equipment and spare parts, poor transportation services, etc). This report

maintains that thie strategy of protecting the rights of contractors end

ensuring a business environment which contributes to rather than constrains

their success is a basic and essential prerequisite for promoting the

construction industry in developing countries.

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Protectiorl Against Unfair Acts of Employers

82. Contractors get professional satisfaction from achieving the goals

of quality, efficiency, econoxy and speed in their work. They talk with

great pride about projects in which they achieved these goals. Surely, as in

other business, they work to earn profit, but the pride of performance is as

powerful a motivation as profit. Good performance qualifies them for more

work and bigger Jobs and guarantees growth of their business. The most

difficult barrier against good performance is the lack of an equitable

contracting system - a system which specifies the responsibilities of the

employer as explicitly as those of the contractor, treats the employer and

the contractor as partners for achieving the goals of the project, and

penalizes the employer for non-performance in the sare way as it does the

contractor. An equitable contracting system also recognizes that the project

cannot be executed successfully if the contractor loses money on the job, No

report underlines the irmportance of these requirements for successful

development of the construction industry as explicitly and forcefully as the

Bank's policy paper, dated July 12, 1973, which states:

*The single most important means of promioting the development-ofthe domestic construction industry -s, through the adoption ofefficient and equitable contracting systems and procedures. Thecontrector should have full responsibility for the labor,materials, workmanship, programmrning, management and all logisticsof the construction operations. He should be paid promptly onportions of work done and measured according to specifications andterms of contract and should have access to mechanisms which allowprompt and fair settlement of disputes. In short, the contractorshould be a full partner In the contract with clearly definedobligations, responsibilities and rights. Unless this basicrequirement is met, efforts to develop a domestic industry asdefined in this paper will not be effective." t35]

- 70 -

83. Contractors need protection against unfair treatment throughout the

construction cycle. They need efficient prequalification procedures,

equitable contract documents, fair criteria for award of contracts, equitable

administration of contracts and effective procedures for settling disputes.

These requirements are fundamental. The Bank's procurement policies satisfy

these requirements, but they are applied, operated and monitored almost

exclusively for IlB procurement. If the Bank's procedures are designed,

which they are, to procure goods and works "with due attention to economy

and efficiencyu as required by the Articles of Agreement, they should apply

as much to Bank-financed works procured under LCB as to works procured under

ICB. However, a substantial number of Bank-financed works are being procured

and implemented under local procedures which are unfair, inefficient,

uneconomical and not conducive to development of the construction industry.

The Bank has not made a serious effort to improve the efficiency and economy

of Bank-financed local procurement. Appraisal reports do not say much about

LCB procurement beyond corrrnenting that the works will be procured under

procedures which are satisfactory tr. the Bank,.although it Is widely known

that satisfactory procedures for local procurement do not exist. Some

elements of the Bank's procedures are vital for promoting the construction

industry in developing countries, They Include.: -prequalification of

contractors, sound contract documents, fairness in competition, and payments

and compensation to contractors.

Prequalification of Contractors

84. Prequalification is necessary to determine the capability of

prospective bidders to implement the works economically, efficiently and on

- 71 -

time. It is an effective process for eliminating incompetent bidders who

jeopardize the entire project by quoting low to win the contract without

being able to execute it successfully. Contractors are prequalified on the

basis of their experience and past performance on similar contracts, their

financial soundness and their capability with respect to personnel, equipment

and plant. Various procedures are used to prequalify contractors. For large

and complex works, the Bank requires that prospective bidders be invited to

apply for prequalification. For smaller works, various systems of

classification and registration of contractors are followed. However, the

criteria for prequalification remain essentiallj the same in all cases.

85. A good preoualification system should provide for emerging

contractors, screen existing contractors on the basis of their past

performance and limit the selected contractors to a manageable nu,mber. In

practice, it is difficult to achieve these objectives fully. Sometimes,

overemphasizing ownership of equipment or financial assets could eliminate

bidders who may be miore competent to do the jcb. Pressures from lobbies to

prequalify contractors who do not meet prequaliticatlon criteria may distort

decisions. Many developing countries insist that the most effective way of

promoting the construction Industry is-to prequalify domestic contractors

even when they do!not meet the criteria fully. Some degree of subjectivity

in selection is, therefore, unavoidable. However, while there may be some

justification for providing opportunities to domestic contractors to bid for

ICB contracts, or allowing small contractors and minority interests to

participate in LCB, the critical issues are - to what extent should the

requirements of efficiency, economy and timely completion of works be

compromised? Is prequalifying corntractors who are not competenit to complete

- 72 -

the works successfully an effective way of promoting the construction

industry?

86. This report nvintalns that the requirements of efficiency, economy

and timely completio:n of works should not be compromised. Opport.unities

should be provided to contractors who have the potential to meet these

requirements, although they nay not meet certaln prequalification criteria

(e.g., financial and equipment assets) fully, but contractors who do not have

the capability to meet then should not be prequalified. In such cases, it Is

better to split the works into smaller-sized wcrks than to risk the

objectives of quality, efficiency, economy and timely completion of works.

This report also contends that prequalifying lncompetent contractors destroys

fair competition, inhibits competent contractors from bidding, and retards,

rather than promotes, the growth of the construction lncustry. Korea

provides a good example tc emulate. Seventeen years igo, when its

construction industry was still in the early stages of Its growth, Korea

followed strict procedurcs for licensing contractors. Each construction firm

was ass1gned a contract limit according to its capability, thereby fixing the

maximum size of a contract it was qualified to perform. Moreover, che

licenses were renewed every year based on perf'ormance of the firms. Korea

was as harsh In eliminating incompetent contractors as it was generous in

reward'ng competent contractors with incentives to succeed. This is the way

to develop a sound construction industry.

- 73 -

Equitahle Coltract Documents

87. Few developing countries have comprehensive standare ^ontract

documents which clear;y specify the obligations of the parties to the

contract, e.isure efficient rontract administration and avoid potential

disputes. All too often, government authoritie,, as "employers", virtually

dtctate the content and terms of the contract, heavily weighting the

provisions in their favor and adding clauses that shift all the risks to the

ontractor. They also try to protect the KengineerO against liab'lity by

making the contractor responsible for pointl ng out deficiei!cies in the

construction drawings. In a wide array of such cases, tihe courtsa 'n the

United States have held that one-sided idisclaimerb t(r "exiL-pato.p; cliuscs

will not relieve the employers c.f theIr reigonsibitities. In st deye' ,pilg

countries, however, thers is neither a strong legal systvn to protect

contractors against such unfairness, nor do the contiactors dare to figyt

with the government authorities who wiold the no(yor to disqualify thenm for

future contracts. The lack of ar. P^.1.able contract document which has the

force of law-and serves as a standard for procurement of works by all public

agencies is a serious bWrrier to the growth of the construction industry.

d8. Recently, the Bank has prepared sample bidding docum!nts Jointly

with the InterlAmerican nevelopment Bank (IDB) and the Asian Development Bank

(AOuj for procuring civil engineering works through ICB. Intended as a model

for contracting works financed by the Bank, 1DB and ADB, these dccument! are

of Irmense help to borrowers and their consultants in preparing contract

documents expeditiously and economically. Moreover, the sample documents

avoid errors, simplify reviews and reduce potential disp: tes. The Bank

- 74 -

should prepare *1r.;ilar sample documents for procurement of works through

LCB. No institution In the world has the knowledge and experience of the

Bank, the ID3 and the AL3 about local competitivf bidding in develcping

countries. Local biddir.g procedures in borrowi!ig countries vary consIderably

and ail aspects of the FIDIC clauses may not be appropriate for LCB.

Powever, the basic objectives of efficiency and economy would remain

uncoanged. Borrowers and thei. procurement agencies should be required to

lndicate any cianges or alternative provisions in the sample LCB documents so

trat the review by linancing agencie; can be simplified and expedited. The

sample LCB documents w1ll allow Bank-financed LCB procurement .o be monitored

rmre effectively and will also allow the 3ank staff to provide a more

rreanin''ul ap- *i of local procurement procedures. More important. the

sample LCB docume.t: wili lacilitate the procpss of standardizing the

procedures -or local procurrement of works financed by the governments

ttheisc-lves, there"y laying a strong fnundation for the growth of the

constructIon industry.

Fairnes; in Comwe1ition

89. lScctssfill 'sidding requirres souid analysis of the work,

determinaticn of t * mus: efficient and econc(ical method of coistruction,

judgement on -4 mach risk o take and when (uvercaution may re.,t in losing

the job). It also r2quiree krowledge of the &ttitudes and practices of the

?.mployer and the engineer, anci ability to evaluate the potentials of

z-mpeti ors. All contractors, tig or small, have to consider these i'pectr

In the1r oidding strategy. jack Boiny, F resident of Mcrrison Knud oi

Comoany, made the foilowin comrnments on the questions which hn-; er

contractors in forfMulat1ng a succjssf:!! bIod!rg strat' g':

- 75 -

"All contractors, from the local or regional house builder to thelargest national or international diversified constructor, facefrom time to time a dearth of work to bid or propose on, withconsequent increase of competition to the point where the lowbicddr is almost sure co lose his money and the others are spendingtheirs in order to prepare proposals 'hat have no chance. Underthese circumstances the 'ow bidder, who is probably already infinancial difficulty, may nave bid in desperation just to keepgoing until he can 'grab a good one'. Also, in cases where thereare ten or fifteen bidders, there is always one who falls toanalyze exactly what he has to Jo. Occasionally, In thesecircumstances, the low bidder may have made a more careful analysisof the true conditions and come up with a more workable rmethod."[3]

90. Successful contractors are those wihc have the experience and thie

skills .o outbid their competitors without compromising the requirements of

the job or destroying their profitdbillty. Promoting and protecting fair

competition are effective measures for fosterlng these talents.

Unfort.nrately, manv oeveloping countries dest oy fair competition and stifle

these talents by pressuring the lowest bidder to reduce the price further or

by encouraging and entertaininy price reductions from bidders after the bids

are opened. Ostensibly, they do this in the belief that they are saving

money, but they do nct appreciate that the savings are not real. No

contractor can win in compedltion without reducing his prices to the minimum

and no contractor can implement the work successfully and survive without

earning a reasonable profit. It is also unfor-tunate that, in almost all such

cases, the hlghor echelons in the government indirectly encourage and support

such practicestby intervenir.g only when prices are increased, an.d remaining

silent when the prices are reduced. The issue here is not merely ethics,

although that is also lmportant; the issue is encouraging practices which

cripple th2 growth of the construction industry.

- 76 -

Payments and Compensation

91. Contractors have to finance the work until they are paid. Their

inital expenses in arranging for labor and materials, procuring equipment,

building camps and providing access to work sites are heavy. Developing

countries seldom ma.e advances to contractors for mobilization and purchase

of equipment, except in ICB contracts. Even in ICB contracts, the

contractors incur substantial expenditure on preparatory worK which is not

covered by pay-items in the bill of quantities. The contractors also

continui to incur expenditures during the time lag b!tween submnission of

bills and payment by the employer. ICB contracts voecify the period wlthin

which the employer should pay contractors' bills (rionthly certificates).

They also require that the employer pay interest at a specified rate on

paymcnts delayed beyond a certain period. LCB contracts seldom include such

provisions. Payment procedures In develcping countries are notoriously slow

and cumbersome. Contractors become desperate when payments are delayed

inordinately. Some contractors are driven to bankruptcy by inordinate delays

in payment, some try to recover their losse'; through poor workmanship, and

others stop work or slow down cperatinns until they are paid. Delaving

payment Is the one act of the employer that drives contractors to

desperation, ruins their profitability, crippies their professional intpqrity

and inhibits their zeal for doino a aood job on time. Yet. virtualIv all

employers in developing countries delay payments with impunity. Civil works

contractors are affected more by t'.is practice than building contractors

because government departments, th- sole employers for civil works are

payments. Employers in the privatmt sector pay the contractors promptly.

They know too well that delays in payments not only hurt the contractors but

also lead to poor-quality work and delays in completion.

- 77 -

92. Tne pervasive practice of delaying paYments to contractors is

unfair and destructive. It is one of the main causes of poor-quality work,

corruption and delays in completion. It is futil to talk about developinig

the construction industry without eradicating this practice. LC3 contracts

should specify the period within which contractors' bills (monthly

certificates) must be paid by the employer. They should also include a

provision requirinig the employer to pay interest charges on delayed

payments. The provision for Interest payment may not compensate tt,e

contractors fully, but it is a powerful discipline and est3blishes

accountability. These provisions were used in the contracts of the Indus

Basin Project in Pakistan successfully. All contractors were paid within the

period specified in the contracts because no government official wanted to be

identified as the cause for the penalties paid by the goverrnment under this

provision. Howevet-, developing countries do not like this provision. They

agree it is fair, but they do not like the government to be penalized. The

Bank's sample docurrents for ICB contracts require the employer to pay the

monthly certificate within a specified period and, in the event of

non-payment, to pay interest at the rate stipulated in the contract. The

Bank's _ delines on the construction industry (CPN 7.8) provide that

'Employers should be pelalized under the contract conditions for non-payment

of dues to the contrictor within a period of, say, 30 days". Tney also

support payment of advances to domestic contractors for mobilization and for

purchase of equipment and materials. However, in practice, t'iese prov,sions

are included in ICB contracts, but they have seldom been used in LCB

contracts.

- 78 -

93. While everyone agrees that payment procedures and financing

provisions in contracts have a major impact on contractors' cash flows and

profitability, the severity of the impact is often not appreciated. To

obtain a broad picture of the affects of payment procedures on contractors'

cash flows ard profitability, a hypothetical contract was analysed under 12

possible scenarios relat:ng to various contract provisions and payment

performance by the employer. The 12 scenarios included various combinations

of advances for mobilization and purchase of equipment and varying degrees of

delays in payment by the employer. It was assumed that the contract for

civil works amounted to 1,000 currency units (CU) with a completion schedule

of five yaars. The 12 scenarios involving three cases with different

financial provisions in the contracts and four alternative payment

pcrrormances are described in Annex 6. The assumptions in were:

Case I: No advances for mobilization and equipment purchases.

Case II: Advances for equipment purchases only.

Case III: Advances for both mobilization and equips.ent purchases.

Alternative A: Contractor borrows from commercial banks at 10%Interest.

Alternative 8: Contractor borrows from comnercial banks at 15%interest.

94. Given the large number of altr,-natives and the long time series (60

months) of the events and effects, the study was carried out using a Lotus

1-2-3 model. The results are summarized below.

- 79 -

1-Month 2-Month 3-Month 4-MonthEffect on Delay Delay Delay Delay

Contractor's FinancesA B A B A B A B

Reduction inProfits (X)Case 1 -15 -130 -27 -150 -43 -180 -60 -207Case II +15 -70 + 5 -90 -10 -117 -25 -145Case III +120 +105 +107 --82 +92 +55 +78 +25

Time when NegativeCash Flows Start

(Months)Case I 30 24 23 19 18 17 17 16Case II 33 29 27 24 21 18 19 17Case III 29 28 25 24 21 21 19 19

Period of NecativeCash Flows (Months)

Case 1 26 36 36 41 42 45 45 47Case II 21 30 30 36 39 44 43 46Case III 31 32 37 37 40 40 42 42

95. The implications of the results are discussed in detail in Annex

6.- The result demonstrates the drastic effects of the terms of contract, the

interest charges of commercial banks, and the employers' performance in

paying monthly certificates, on contractors,' profitability, cash flows and

the duration of these problems. They show that an average delay of one month

will reduce contractor's profit by 15% under A and 10% under B; the negative

cash flow occurs after the first 30 months under A and 24 months under B; and

the negative cash flow continues for 26 months thereafter under A and 36

months under B. His finances deteriorate rapidly with further delays.

- 80 -

P-ayment of advances for mobilization and equipment purchases improve his

finances considerably but they will not be adequate substitutes for prompt

payments.

Protection Against the Adverse Environment

96. There are two types of constraints in the business environment,

those which are cornmon to all sectors including :he construction industry,

anc those which are specific to the construction ind:stry. The formr.r

include, for example, restrictions on imports, cumbersomie customs procedures,

foreign exchange limitations, lack of a strong legal system, unreliable power

supplies and inefficient public transport. These constraints can be

addressed more effectively through Bank assistance for economic and

administrative 1mprovements than through construction industry operations.

There are many constraints that are specific to the business environment of

the construction industry. This report discusses only a few which are

particularly adverse to sound development of the Industry. They include, for

example, lack of appreciation of the construction sector's role in the

economy, absence of a responsible government institution for developing the

industry, lack of an effective contractors association, a,sence of a well

developed consulting profession, dearth of institutional finance tc

contractors, scarcity of trained managers and workers, inadequate building

codes and standardis, shortage and poor quality of local construction

materials, poor public image of contractors and unfair competition from

state-owned construction enterprises. The issues relating to the role of the

construction sector in the economy have been discussed in Chapter III an!

- 81 -

those relating to institutional finance and training of managers and workers

are covered in Chapters VI and VII. The other issues are discussed below.

Qespon;ible Government Institution for Promoting the Industry

97. Every country has ministries and departments for managing various

sectors of the economy. Major sectors like agriculture, industry, education,

energy and coamnuntcations are often assigned to separate ministries, which

are respons'hle for formulating policies, preparing development plans,

deciding priorities, implementing projects and monitoring and evaluating

progress. Few developing countries, however, have ministries or departments

for managing the construction sector. Development plans for agriculture,

industry and other sectors describe the technical, financial, and economic

aspects of the projects in great detail, but seldom discuss the capacity andl

efficiency of the construction industry for Implementing the planned

projects. Construction is an inherent and necessary activity in all

projects, but since it is cv.-non to all sectors, it does not Obelongn to

any sector ministry. Consequently, it is difficult to identify a ministry

which is accountable for analyzing the problems of the construction Industry

and formulating the required pulicies and plans. E:tablishing an

organizarion witth defined objectives and responsibilities is e-sentiai for

developing the industry.

Contractors Association

98. Contractors in developed countries have formed associations for

promoting the Interests of the construction industry, appr4sing the

- 82 -

government, the consulting engineers and other agencies about their needs and

problems, and providing services to the members such as disseminating

information on codes and practices, safety regulations, and contract law.

The associations also maintain close relations with training inst1tutions,

promote research on construction materials, encourage high levels of

professional standards and business ethics, and improve the public image and

social status of the c.intractors. Properly organized, contractors

associations can play an important role in promoting the industry. They can

assist the government in formulating equitable contract documents, designing

appropriate packages of reforms and institutional changes, and providing

effective cormunications bstween the government and the contractors. The

lack of effective contractors' associations is a serious constraint to the

promotion of the construction industry in developing countries.

Consulting Firms

99. Countries with competent domestic construction industries also have

competent domestic corsulting firms. Sound'feasibility studies, efficient

designs, timely supply of construction drawings and equitable administration

of contracts are important for developing an efficient construction

industry. These services are provided more effectively by consulting firms

than by government departments. Moreover, consulting firms spearhead the

initiatives on adaptation of modern technolocy, improvements in design

practices and eflective use of local materials. Government departments lack

the competition and the challenge to excel in these fields. Developing

countries can use foreign consultants or large and more complex projects,

but they have to depend on their own resources for engineering most of their

- 83 -

works. Consulting firms provide opportunities for developing equitable

contract documents ar.d ensuring fair contract administration. The FIDIC

conditions were developed, and are continually updated, by consulting

engineering firms in cooperation with contractors, not by government

departments. The 'Employer', the 'Engineer', and the 'Ccntractor' have

specific responsibilities under the FIDIC conditions of contract. The

efficiency of the 'Engineer', who has certain quasi-judicial responsibil1ties

In addition to his designing and supervising functions, is crucial for the

success of the 'Contractor'. A consulting firm will be more effective in

discharging the resp*nsibilities of the 'Engineer' than a government

department operating as both the 'Employer' and the 'Engineer'. A well

developed consulting profession is essential for promoting the construction

i ndustry.

Building Codes and St!ndardsi

100. Most developing countries lack adequate national building codes

which specify acceptable standards for the size, quality and performance of

materials. Some countries have adopted the standards of their former

colonial rulers; others use more than one standard, depending on the source

of financing or the country of the consultants. More important, there is a

lack of standard. for local construction materials. In the aLsence of such

standards, forein consultants tend to use the standards of their own

countries, thereby increasing the need for imported materials. the lack of

standards inhibits contracto.s -- particularly foreign contractors -- from

using local materials; when local materials are used, contractors f3ce the

risk of not meeting the specified performance standards whiich are based on

- 84 -

foreign codes. Many developing countries do not have adequate facilities for

testing materials. They also lack research facilities for promoting the use

of local materials and disseminating technical information pertaining to the

quality, size, performance, availability and location of local materials.

Construction Materials

101. Construction materials contribute more than 50 percent of

construction output and influence the technology and levels of capital and

labor that will be used in construction. The availability cf basic

construction and building materials (e.g., stone, bricks, sand, cement,

construction lumber, etc.) of the quality an' quantity required by the

construction Industry is essential for the growth of the industry. It is

also an important determinant of the capdcity of the industry to imolement

the national Investment programs. Shortage of local materials increases the

need for imports, adds to the cost, and delays the completion of works.

Developing national codes and standards for construction materials,

establishing testing facilities, promoting reseerch and disseminating

information on the location, quality and availability of iocal materials are

important elements of the program for dOveloping the construction industry.

Public ImaQe of Contractor;

102. Farmers, the entrepreneurs producing rood, are held in high esteem

tecause their work promotes eccnomic develcwent, generates employment and

contributes to human welfare. Industrialists, the entrepreneurs producing

goods, are also highly regarded for the same reasons. However, contractors -

- 85 -

the entrepreneurs producing constructed facilities - do not enjoy similar

status in society although their work also promotes economic development,

generates employment and contributes to human welfare. On the contrary, they

are cften viewed as dishone<t businessmen who delay projects, do a poor-

quality job and try to maxim!ze their profits.

103. Improving the public image of the contractors and increasing the

awareness of the governments about the crucial role of the construction

Industry in econornic development are important steps in the program for

developing the construction industry. it is rutile to expect the employers

to treat contractors as equal partners if they do not respect the

professional experience, skills and integrity of the latter for doing a

good-quality job economically, efficiently and on time. It is also

unrealistic to expect strong commitmant from a government th3t does not

appreciate the importance of the construction inaustry for economic

development, employment generation and social welfare. Increasing goverrnment

and public awareness of the construction Industry's role in national

development will require hard analysis, not only of what the construction

industry is currently contributing to GDP, employment and human welfare, but

also of the waste, Inefficiency and sub-optimal utilization of resources that

iwill result from, lack of development of thei industry. Thrcugh its economic

and sectc,r work and its ccntinuing dialogue with the countries, the eank can

help increase the awareness of the countries about the role of the

construction indu!try. Within the countries, the contractors associations

can improve the image of contractors, not merely through their research,

publications and representations to the government, but, more important,

through malataining high professional and ethical standards in the

construction industry.

- 86 -

State-Owned Construction Enterprises

104. The construction industry in many developing countries is dominated

by public construction enterprises. Some countries, such as China and

Burma, established public construction enterprises on the tasis of their

political ideology tha; all economic activities should be state-owned; some

countries, such as Indonesia, created them after independence from colorinl2

rule when the lack of competent dom'estic contractors constrained their

development programs; others, such as Egyp., nationalized private

construction enterprises 'ollowine establishment of revolutionary

goverrnments. Whatever the circumstances which led to creation of public

construction enterprises in developing courtries, onze they were in the

public sector, they tended to remain there regardless of their performance.

105. Public constructi'n enterprises are not expect' to work like

governnent departments although they are government-owned. Their charter

requires them to operate like private concractors with a strong bias for

efficiency and profitability, and gives them a wide range of powers for

managing their affairs. However, in practice, public construction

enterprises are a hyprid sharing the characteristic'i of both government and

privute contractors. They enjoy the privilege ef getting work without

serious competition and they get priority in allocation of foreign exchange,

import permits and other concessions. However, they also suffer from

frequent intervention by the government bureaucracy in ,ecruitment of staff,

selection of key managers, procurement and other issues which are critical

for efficiency. Consequently, public construction enterprises tend tc

- 87 -

operate as bureaucracies contrclilng processes instead o- as enterpr1ses

focussing on products. It Is not surprislig, therefore, that they are often

accused of inea?icien:y.

106. Private contractor, in developing countries complain that they ar:

discriminated against in the construction business because state-owned

contractors are assigned work without competition and treated favorably in

all iatters desuite their inefficient performn'.ce and high cost of

operation. Tne Bank stift are generally sympachetic to. these views, nc

because they have an obviCL0 bias in favor of private enterprise but al

because they ace frustrated with the inefficiency of state-owned contractors

who are assfigned ar mrJo. part uf civil works ir, the public sector although

they delay completion of works with impunity and are not financlilly viable.

I,7. The critical issue is not vhather private co1tr:.ctors are better

than public contractors or vice versa. In a country where contractors are

not protected against the unfair acts of employers and the adverse

cnvironment of the constructicn u'isiness, bn:h public dnd private enterprises

will be seriously handicapped in achieving hc fjoa:s of quality. !ff1c:ncy.

economy and timely completion of works. In the:e c4rcumstances, the

construction ind..sbry cannot deve.oo unless the major barrlers affecting the

efficiency of both public and private cor.tractors are addres5ed. When Whe

systeans for effective prequalification procedures, sound contract docLments,

fair comnpetitior, and protecting contractors against the unfair acts of

empioyers "nd the adverse efiects of the environment are established, both

public and private contractors can succeed only on the basis of their

performance. ko country can tcptally ignore economic facters and continue tO

- 88 -

support puhlic contractors if it finds them non-viable ane If private

contractors provide a viable alternative.

108. Many countries, where the construction industry is dominated by

pu.lic contractors, do not have a viable alternative. They recognize the

ineffi, ency of public enterprises, but they also know that private

contractors will not be ready to replace them for a long time. The

cor,struction ic1:zr1 in Egypt, which is dominated by public sA'tor

companies, lllustraest the problems faced by many countries. In 1981-8?, the

cublic construction companies received 70 percent of the valac of new

contracts. Private contractors received the balance J0 percent, but nearly

half of these contracts was due to sub-contracting work from the public

companies. Moreover, almost all the major civil works were awarded tc the

public companies. The problems faced by the public construction companies of

EgyFt in managing tt.eir affairs, training workers, purchasing and maintaining

equipm-ent, getting Institutional finance and receiving payments for work done

are so serious that It Is unrealistic to expect them to achieve the goal,s-of

efficiency and econory and remain financially viable. These problems affect

private cor,tractors -qualiy, 1. not more ser1ouslj. In such situations,

debates over public versus private enterprises are unproductive; the need for

imprcving the existing systems and practices is more urgent and should

receive priorl'.y in the program for develo-,ing the construction industry.

- 89 -

Opinion Survey

109. The Bank organized three seminars in Pakistan to know the views of

the employers, engineers and contractors on the main barriers 'o development

of the construction Industry. The comments of top government officials,

managers, senior and junior engineers, large and small contrictors,

state-owned arid private consulting firms, DFCs and commer'ial banks, and the

professionl engineering associations, who participated in the seminars,

represented a wide range of experiences and views. The participants

identified several barriers to the growth of the industry, but when they were

asked to limit the number to five which were most serlous, they identified

the following

e Lack of efficient prequalification standards and fairprocedures for awarding contracts.

a One-sided contract documents.* Delay in payments.e Lack of institutional cre6it on reasonable terms.O Problems in importing spare pu-ts.

All the five major barriers are outside the control of contractors.

Governmert officials at the seminars also agrced that these barriers were

most serious. Contrary to general .irprcss16n of,government officials, lack

of concessiens'and subsidies to contractors was not identified as a meJor

problem affecting the construction industry.

110. In order to know the severity of the problems, an opinion survey

was conducted following the seminars. A questionnaire, which included 47

questions covering various issues relating to the construction industry, was

issued to the contractors in Lahor. and Karachi. Of the 42 contractors who

submitted their answers in sealed envelopes, 13 percent were small

- 90 -

contractors (annual output up to US$F -.nillion), 62 percent were medium-size

contractors (annual output nTiore than US$5 million). The survey confirmed

that the five problems listed above were the most serious. The consensus was

also strong on the following problems:

Percent of Respondents WhoCateoorized the Problems as

Most Moderately NotProblemrs Serious Serious _ Seriou5

1. One-sided contract documents &3 11 62. Unfair evaluation ol' bids 64 21 153. Unfair admin'lstration of contracts 77 23 -4. Delays in p;Xynients 73 19 85. Delays in su;plying drawings 41 44 156. Poor qual'ity of consultants 33 30 377. Unrealistic completion schedules 51 33 68. Lack of credit facilities 81 10 99. Problems in getting import permits 62 15 2310. Lack of experienced operators 37 4 5911. Lack cf spare parts 60 33 712. Lack 'o standardization of materials 81 19 -13. Problems In importing goods 67 33 -14. Poor quality of local materials 61 39 -15. Shortage of construction materials 58 42 -16. Hich transpDrtation cost of materials 66 34 -

111. 'The Surdey also showed that more'than C0 percent of the

contractors' skilled workers (masons,.carpenters, ,electricians etc.) got

their training on L...; ju<a-d ve,y few jlad 'rtor formal training., As,

regd-u5 lnstltutllnna; finance, 77 percent-of the contractors said the banks,

required more than 50 percent of the loan amc"nt as co',ateral, 8 percent

sa1d it amounted to 30 percent of the loan amount and the remaining

contractors said it was up to 20 percent of the loan amount. The survey

also indicated that small contractors are required to pay a higher

percentage of the loan as collateral than large contractors.

- 91 -

i ,1. Suggested Strategy

Etasic Strategy

112. Of dli the barriers affecting the industry, the most difficult

a-e those caused by unfair acts of the employers and the adverse conditions

ofi the Industry's buslna5s environment. They are Lne sour.,e of all

problems and are so pervasive in developing coun;ties that it will take a

strong commiinent and relentless efforts to correct them. The main

e!ements of the basic strategy for addressing these barriers are outlined

below:

Improving the Efficiency of Contracting and Contr?~ct Administrat,or.Practices

o Develop efficient prequalification proccdures which eliminateincocmpetent contractors, rrward competency and provideopportunities for fair con-petition.

s Establish equitable contract documents which define theresponsibilitle-.of employers and contractors; treat employersand contractors as partners for achieving the goals ot tneproject; compensate contractors for delayed payments and othe'racts of non-performance; protect contractors against adversephys'ical conditions and'unforeseen events such as price andexchange rate fluctuations; provide contractors with facilitieg-such as advances for mobilization and Durchase of materialsand equipment to ensure efficient, economical and timely .

completion of the project;,and 6nf'Gure fair and expeditioussettlement of d¶3putes.

e Introduce sound criteria for awarding contracts whichencourage keen competition, ensure fair evaluation and rewardefficiency.

o Establish efficient procedures for administering contracts whichensure effective implementation of contract provisions a6Ld

- 92 -

provide incentives to both employers and contracto,s to meettheir obligations.

a Establish training programs for reorlenting the attitudes ofgovernment officials (2mployers) towards contractors, treatingcontractors as partners for achieving the objectives of projectsand administratin, contracts on a fair and equitable basis.

Improve the Business Environment of the Industry

a Encourage credit institutions to provide credit to contractorson reasonable terms; develop scheines to protect credit!',stitutions against undue risks in lending to contractors.

a Develop national building codes, provide facilities fortesting materials and establish research centers fordeveloping and prrmoting the use of lo .i materlals; encojrageproduction and ise of local materials ;which are competitite inquality and price; disseminave information on theavailability, location and ouality of local materials.

* Improve the eff :cency ano competitiveness of state-ownedenterprises; .reat private and state-owned contractors equallyand apply the same standards of efficiency and fairness tothem; protect state-owned contractors also against inefficientpractices, inequitable contract adninistration and adverseconditions of the environment.

* Improve the public image of the contractors.

Developing the Capacity and Efficiency of Contractors

o Introduce an appropriate registration and licensing system inconsultatlion with the contractors' association to develop

; tent contractors; establish a sysfen for monitoringperformance.

9 Assess th'ie needs of the constr.ct10in1iidustry for trainedmanagers and workers and develop the institutions for meetingthose needs.

* Encourage and promote sub-conWracting to prov.de opportunitiesto s-:l, contractUrs both for getting employment and gainingexperience by working with the rore experie.iced largecontractcrs.

s Encourage domestic contractors to collabcrate with experiencedforeign contractors on a long-tecm basis to ensure transfer oftechnology.

Developing the Institutions

e Establish an organization in the government with definedobjectives, responsibilities and accountability for promotingthe construction industry.

- 93 -

o Encourage and assist contractors to form contractors'associations and ensure high profess.onal and ethical standardsin the construction industry.

a Encourage and assist development of the consulting profession.

Research and Development

a Increase the awareness of the goverrment and the public aboutthe cornstruction industry's role in economic developmen .

* Institute research to develop ways and means to irnp,ove thecapacity and efficiency of the ineustry in terms ofvalue-added, cost-effectiveness, qualitv of work and timelycompletion of projects.

113. The: basic strategy is simple, fair and incisputable, and provides

'he foundation for building a sound construction industry. It has been

tested for many decades and has proved effective in surmounting the major

barriers to g;owth of the industry. Develuped countries have made rapid

advances by using the basic strategy. Their construction industries have

achieved high levels of efficiency, economy and innovative technology. The

FIDIC conditions are bhsed on this strategy, and the eank uses it for ICB

corKrdcts. However, developing countries have not followed t e basic

strategy for promotinq their domestic construction industries. Although

the Bank supports the basic strategy and apolids it to ICB procurement, it

has not used it for LCB contracts. All efforts to develop the industry

wil, reana.. un:.cccs.,ul unless the inequitable contracting anG contract

administration procedures of the employers and the adverse conditions of the

industry's business environment are effectively addressed. The basic

strategy is an effective means for addressing this need.

- 94 -

X. ImplemsentinQ the Basic Strate-y

114. The program for successful implernentat'on of the Basic Stiategy

should include: building the institutions to design, operate, monitor and

evaluate the system of reforms outlined In the strategy; introducing the

system of reforms through appropriate legislative, administrative and leqal

actions; and ensuring countrywide acceptance and oper& 1on of the systern.

Obviously, the design of the reforms and institutions and the instruments for

impiementing thean should be tailored to the needs of each country. For

example, rJuntries such as India and Indonesia, whi.h have large investment

programs and a la.-ge number of contractors, will require a different approdch

compared to countries like Laos and Lesotho, where construction activity is

limited to small works. Similarly, the approach to contracting and contract

administration of 'arge and small works will be different; the 1nstruments

for small works should be simple and should ensure expeditious actions.

However, despite ;iriations in country conditions and contract sizes, the

lnstruments should achieve the objectives of the besic strategy: namely, to

S protect contractors against unfair acts o,1">employe'rs and adverse conditions

of the industry's business environment.

Iolicy Lending

115. The experience of past operations has shown that Bank assistance

for developirig the construction industry will be effective only %hen the

importance of the industry for economic development is recognized both by the

borrowers and the rank and when full-scale lending operations are launched

- 95 -

for fostering its development. Lending Is the key lnstrument to ensure

recognition of the construct4'n industry and bring it into the Bank's

mainstream activities such - -onomic and sector jork, country dialogue,

project formulation, supervision, PIRs, PCRs and OED work.

116. Because the basic strategy calls for improving policies, refori.lng

systems, building inst'tt4 tions and improving the business environment of tht

industry, its implementation involves supporting a program of reforms rather

than financing specific investments. The policy-intensive and

institution-building nature of the activities and the continuous dialogue

required for mobilizing zommitment of the countries underline the need for a

program that can change the deep-rooted practices of the bureaucracies and

address the country-wide problems inhibiting the growth of the Industry. The

program shcuid define the specific policy objectives, the proposals for

reforms, the required institutional changes and a plan for improving the

business environment of the industry. It should also include a schedule for

implementing these activities. The Bank's role in helping to folTnulate the

program will be based on its analysis of the construction sector. These

requirements Indicate that sector adjustment ler W will be. more appropriate

for implementing the basic strategy than project lending.

Economic dnd Sector Work

II;. Se-ctor adjustment lending has much in common with structural

adjustment loans (SALs). The experience with SALs shows that it generally

takes a long time to formulate, legislate and implement reform measures.

Even wnen thIe countries are fully comnitted to the policy measures, improving

- 96 -

existing practices and bringing about institutional changes is pairticularly

time-consuming. OED's review [39] of SAL experience shows that a 'longer

period and perhaps even more than five SALs may have to be considered for

achieving the desired results.T Adjustment of the construction sector will

probably require a sim1i1l. p^er'^d to achieve sustained growth of the

industry. The SAL experience also underlines the fact that adequate ccuntry

economic and sector work (CESW) is essential for an effective design of

adjustment programs. It provides the ana!yta,'1 basis for policy dialogue

arid ensures successful implementation of the proposed reforms. CESW also

helps to establish whether the macro-policy environment is conducive to

sectoral adjustment and whether the country has the commit-rent and ability to

sustain the reform proresz CESW is an important instrument for Implementing

the basic strategy.

Implementinq Aqency

118. -Construction is an inherent and necessary activity in projects of

all sectcr-s, but siince.it is co,nmon to all s^ctors, it does not "belong" to

any .sector ministry. -Consequently, it is difficult to identify a ministry

which Is accountable for analyzing the problems of the construction Industry

and formulati i the required policies and plans. Establishing an

organization with defined objectives and responsibilities is essential for

irnple'nenting the basic strategy for developing the construction Industry.

Because the basic strategy is policy-intensive, a ministry of the government

would be more appropriate for handling this responsibility. Many countries

prefer the ministry of public xiorks, because it handles a large part of the

public constriction programs. However, the ability of the ministry to

formulate the required policy improv2rents and institutional changes and its

- 97 -

influence in the government hierarchy to process and implement them effectiv-

ely are more lmpcrtant than the volume of its construction ?ctivity. A

country's :ccmitment to the adjustment program and its ability to sus-ain .he

reform process are demonstrated by the qualities of the ministry it seleccs

to implement the basic strategy.

Contractors Associations

119. The lack of competent and effective cor,tractors associations is one

ef the major barriers to development of the industry. Unlike other

industries, whose interests are representcd by well estabHlshed chambers of

comnerce in the countries, the construction Industry does not have the i1istl-

tutionis for representing its interests tc the government and the public.

Consequently, it 1i often left out when the gc\ernment prevides special

incentives to industries for overcoming their difficulties. Developing

countries need institutions like the Association of General Contractors in

the United States for promoting the interests of the construction industry,

maintaining professIonal di-scipline<,setting, standards of ezhics, and

providing the services whi,: can be 'endered~moreeffectively through

collective rather than, individual efforts.

120. Several ceveloping countries have contractors iissociations; some

have separate associations for large and small contractors. The latter are

often concerned that large co,;tractors will be too dominating and will fail

to protect their Interests. However, most contractors associations in devel-

oping countries are weak; their objectives are not well formulated; and they

appear more concerned with getting concessions from the governrient and

- 98 -

sefeking protection from foreign competition than with developing the industry

and making it more efficient and competitive. Unlike the associations of

professional engineers, most contractors associ;itions are not cohesive enough

to en.orce good professional and ethical standards a3ong their members. Ihey

seldom have a voice in the cesign and operation of the government's

regulating procedures or In the planning of vocational training schools that

provide trained workers for the industry.

121. Some contractors associatiois in develop;ng countries are

efficient. For example, the Contractors Association of Korea (CAK) is very

active in performing the functions outlired above. CAK established a

Construction Workers' Training Center (CWTC) in 1967. The training staff of

CWTC is recrulited from the industry itself. CAK also took the initiative to

establish facilities for upgrading personnel at middle-management levels,

such as foremen and supervisors, for meeting the x.eds of the Industry.

Although these ormtniz!tions are contro' Xd-by the Ministry of Construction

(MOC), CAK determines the training policy and methods. Contractor financiny

in Korea is prov1ded by the Contractors' F-Ananc,ial Cooperative of Korea

(CFCK), established lin 1963, and by the regular banking system. The

participating members of CFCK belong to the CAK and subscribe shares in

accordance with their financial resources. The CFCK is the main provider of

bid and performance bonds for construction contracts awarded to Korean

contractors working In Korea.

122. This report does not discuss how the contractors associations

should be organized In developing countries. There are many successful

models o, such associations in developed countries. The CP.K in Korea also

- 99 -

provides a good model. It is important to point out, however, that the

contractors associations are institutions of the contractors and their

conduct is an internal matter to be regulated by the members of the assc,c'at-

ions. The policies and objectives of the associations must reflect the

intirests of their members. However, the governments, as the biggest clients

of the contractors, are interested in the quality, economy, efficiency and

timely completion of projects. Unless the associations also respond to

governmrents' interests, they will not be effective in representitg their

members. The governments, through the ministries responsible tor developing

the construction industry, should encourage and promote the contractors'

associations to. serve the interests of both the contractors and the

employers.

Consulting Firmfs

123. The lack of a well developed consulting profession In a country Is

a serious constraint in the-program for'developing the construction

Industry. Consulting firms spearhead the initiatives on adaptation of modern

technclogy, improvements in design practicesiand effective use of local

materials. Developing countries w'il need foreign consultants for large and

more complex projects, btt they heve to depend on their own resources for

engineering most of their works. Consulting firms provide opportunities for

developing equitable contract documents and ensuring fair contract administr-,

ation. A consulting firm will be more effective in discharging the responsi-

bilities of the 'Engineer' than a government departmert operating as both the

'Emflcyer' and the 'Engineer'. It is beyond the scope of this report to

discuss the strategies for promoting the consulting profession in developing

- 100 -

countries, bu' it is important to emphasize that development of the

consulting profession is a necessary part of the urocess of promoting the

construction industry and should receive adequate attention In the program.

Sub-Contractinc and Joint Ventures

124. Contractors need two types of training for developing their

capacity and efficiency: technical skills and management skills. Technical

skills such as doing masonry work, placing cor,crete, erecting forrwork,

building power distribution lines, repairing vehicles and the like, are

usually acquired through informal training on successive Jobs. Vocational

training schoo'ls, Ahich essentially involve training in techniques, also help

to develop these skills. Small ccntractors are expected to have the

expertise in techniques. Manageme,.t skills and technologicai im,,ovation are

required when the business grows; as contractors take up bigger and more

complex jobs, they need expertise in risk management, marketing, financial

control, comoetitlve bidding, training the workforce, labor re'.tions and-

related skills. Contractors in developing countries lack the type of

experience'that fosters such Akills. They'gai,n such experience by working,

with contractors from developed countries who have acquired extensive

experience over the years. Most technological innovations originate in

developed couritries where more than 90 percent of the world expenditure on

reseA-cn and ievelopment is incurred. Ic wi11take far too long f'or

ccntractor. in developing countries to learn improved construction rranagement

anG technology on their own. They can do it a great deal more quickly and at

far less cost by collaborating on projects with foreign contractcrs who have

the experience. Such collaboration provides an efficient vehicle for

transfer of technoloay.

- 101 -

125. The Korean experience illustrates the benefits of collaborating

with experienced foreign contractors. After the Korean war, the emerging

Korean contractors learned a great deal from U.S. contractors erigaged on

defence and post-war reconstruction programs. The uElnployeru was the U.S.

Corps of Engineers, the contract documents were equitable and t,le contractors

we!e protected against adverse conditions of the construction iidu:try's

business ervironment. Initially, the Korean contractors worked pr-arily aS

sub-contractors to U.S. firms. At a later stage, they became partners in

joint ventures with U.S. firms. The collaboration provided a unique

opportunity for transfer of technology ard training in construction manage-

ment. The comparatively hih educational level of Korean entrepreneurs,

technical personnel, and even labor, expedited the transfer of technology.

126. Governments and financing agencies should encouraga collaboration

betseen domestic and foreign contractors should be promoted. Unfortunately,

the lack of trust among the concerned parties prevents the effective use of

this Important Instrument for developing the construction industry. Most

domestic contractors aspire to becomeCrmin tontractors or sponsors In joint

ventures even though they lack adequate experience I- assume such

responsibilities. Governments tupport their aspirations as a national

policy, thereby compromising the goals of developing a sound construction

industry. Foreign contractors are also reluctant to take domestic

contractors as partners, particularly when they are required to assume full

responsibility for their performance without knowing how they will perform.

They seen to believe that such collaboration adds a time and cost nuisance

- 102 -

factor to the already difficult ana highly competitive international

construction business. Although the Bank supports collaboration between

domestic and foreicn contractors, it does not approve conditions of bidding

which require manoatory joint ventures or other forms O' association between

local and foreign firms. As one staff member put it, "the Bank wants that

marriages should take place, but it does not believe in forced marriages".

127. As a consequence of these controversies, the opportunities for

sub-contracting and joint ventures are nr' being exploited fully and the

domestic and foreign contractors are both 1csing the benefits of collabor-

ation. Sune foreign contractors are forced to accept domestic contractors as

partners, and some, fear'ng that they may be discredited in bid evaluation,

are taking domestic partners on a notional basis. In both cases, the foreign

firms are only paying lip servile to technology transfer. The Bank's

guidelines are correct In theory, but they are not operating effectively in

practice. Foreign contractors complain that, in the scramble for getting

partners, the lowest foreign bidder sometimes ends up with a less efficient

domestic partner in the joint venture. rThis is neither in the interest of

the construction ir.ldustry nor for the efficiency of the project. it is also

importa'nt to explore the possibilities of longer-term collaboration between

domestic and foreign contractors through equity investment. The longer-tern

relationship In joint ventures provides an opportunily to gain experience

over an extended period and makes technology transfer more effective.

Foreign contractors favor this arrangement provided that the laws of the.

country encourage such collaboration and offer appropriate Incentives for its

proot'oon.

- 103 -

Traininq of "Emoloyers

128. It will not be easy for officials of the goveri-nint and

government-owned enterprises, the sole aemployersu in civil works contracts,

to relinquish their tradition of acting as the undisputed masters in

administtring contracts. Despite the development of equitable contract

docuincits, they will find it difficult to treat contractors as equal partners

and to accept the fact that they are as accountable for meeting their

contractual obligations as the contractors. Training programs for

reorientating the attitudes of government officials are an 'mportant part cf

the program for developing the construction industry. In fact, training

esiployers is more essential and urgent than training contractors. Korea

foresaw this need in the 1960s and started training government officials at

the Construction Officials Training Institute (COTI) u* tra Ministry of

Construction (MOC), which was responsible for developing the construction

industry. The training was designed to instill in government officials an

appreciation of theirespertive responsibilities of tie *Employer", the

"Engineer", and the 'Contractor". The staff of MOC and other ministries and

government corporations were required to_take training courses at the COTI.

Senior of-ficials, corporation managers and provIncial administrators were

also required to undergo four weeks of training at the COTI. The emphasis at

the COTI was on motivational training which was particularly valuable for a

growing construction industry.

- 104 -

Selection of VX''-t,or Sector AdJustment Lending

129. There are three important considerations in selecting countries for

construction sector adjustment lending: First, adjustment lending will not

be successful In countries that lack the corrmitm-.t to promote the industry,

the will to make hard decisions and the ability to implement them

effectively. Second, development of the industry cannot be sustained in

countries where construction demand is not large enough to provide continuing

work opportunities to doneeltic contractors. Third, the current state of the

industrv is also a relevant factor itt selectinn a country for construction

sector adjustment lend4!it. The Bank should rigidly follow the criteria of

the country's cormitment and its capacity to implement the adjustment

program. Initially, It would also br prudent to concentrate efforts in a few

countries where commitment to development of the industry is strong and the

environment for success ;s favorable.

Feasibility of Implementing the Basic Strategy

130. Two of the approaches and instruments discu:.;'d in this chapter are

cruc1al: the selection of the country and Vhe'ades1gnation of the ministry

for implementing the strategy. It Is Important to ensure that the country is

connitted to the objective of developing the construction industry and the

designated ministry has the capacity to implement difficult decisions. If

these two requirements are adequately met, the success of the adjustment

program will be assured. There are reasons for expecting the Bank to be

successful in policy-based lending for the construction industry. First,

there is no conflict between the Bank and the borrowers on policies for

- 105 -

developing the industry. Construction industry policies dOffer from

macr -economic: oolicies such as trade policy, tariff reforms, Import

liberalization and interest rates. All borrowers agree t;at contract

documents should be equitable, and that contractors should be paid on time

and be protccted against the adverse affects of the environment. They also

a: ee that efficiency and economy in procurement is important and that

conpetition is necessary to achieve these objectives. Indeed, the

regulations and constitutional provisions of tile countries require that these

policies be followed. Their problem is how to 1molement these policies, not

the policies themselves. This is precisely the problem that the ccnstruction

se:t.r adiustment program is interded to address.

131. Second, in its dialogue with core ministries (e.g., Finance.

Planning, and Central Bank) who are responsible for macro-economic policies

and nationa; Ceveioa.p2nt programs, the Bank will find the core ministries

very supportive because they are interested in Improving the efficiency of

investments. The executing ministries and .elated agencies (e.g., the public

works depa-tients and government-owned ente-rprises) who implement projects,,

however, 'nay have difficulties in making tne adjustments. As "employers",

they may have vested interests, but they cannot oppose the reforms openly.

However, the success of the basic strategy %!ll depend on the progress made

by these organizations in changing their attitudes and practices. The

proposed training of the employers is crucia. for facilitating t,ie process of

change. If the core ministries, the contractors (through their issociat-

ions), the public and the business coffmunity play their respective roles

effectively, the prospects of implementing the adjustment program improve

substantialty.

- 106 -

132. The third reason for e,pecting the Banlk to be more successful with

policy-based lending lies in tht fact that the contractors association has a

self-interest in supporting the implementing ministry to pursue the basic

strategy which is designed to protect the contractors. The association of

consulting engineers will also support the reforms because consulting

engineers are often frustrated by the unfair acts of employers in awarding

and administering contracts. The combined efforts of the implementing

ministry and the associations of centractors and consultirg engineers augur

well for the success of the basic strategy. This feature does not Pxist in

other adjustment programs. For example, in the prcgrams seeking

liberaflzation of imports, domestic industries enjoying subsidies and

protection exert pressure on the government to maintain the status quo. They

also try to mislead the public by accusing the Bank of ulterior motives in

funding these reforms.

133. The feasibility of implementing the basic strategy also depends on

the Eank's con.itment 'to promoting the construction industry. As with other

types of adjustment lenoing, the Bank will have to aevote considerable staff

resources to assist the country in preparlig-the adjustment program. The

Bank should also demonstrate, through its economic and sector work, the

importance of an efficient construction industry for ensurling the efficiency

of investments and enhancing economic development. It is also necessary to

assure the country that Bank assistance will not bc a one-shot operation but

will continue until success is achieved. This is particularly important In

view of the general impression of the borrowers that the Bank is more

concerned with the interests of foreign contractors than with promoting

the construction industry in developing countries.

- !07 -

Basic Strateqg for Small Countries

134. The principles of the basic strategy and the criteria for

measuring performance of the construction industry ^^ y to large countries

w;t,h sb:t':t.,tial investments in new construction and maintenance programs as

well as to snall countries where investments are mainly devoted to

maintenance of existing facilities. In both cases, the domestic construction

industry should have the capacity and the efficiency, (as defined in

Chapter IV) to irnpler-eent the country's i,vestment prosrams effectiveiy. It

is the nature and size of the construction market, not the size of the

country, that determines the content of the program for developing the

industry. For countries where the volume of new construction activities is

small and infrequent and the constructloni demand consis mainly of

maintenance and rehabilitat1ion of existing facilities, the pr-ogram for

,Jevelopin- the industry may not include all the actions included In the basic

strategy. For example, It is not prudent to develop domestic capacity for

large civil engineering works because there wil1- not be adequate demand for

sustain-ing such capacity. These countrics may not need a sophisticated

consulting,industry, a contractors' association or a facility for, hiring

equipment to contractors. Of course, semi-1ndustriallized snmall countrils.,

suc,1 as Singapore, are an exception. They have a large domestic construction

market and 3, relatively developed construction industry which is also active

in the export market. However, small Pacific Island countries like Western

Samoa and Fiji and many of the poor African countries pose a different set of

problems. They cannot sustain a domestic con,struction industry for large

works which are few and far between, but they need to develop a construction

- 108 -

industry that is adequate for marnta,ning existing facilities, constructing

small works and sub-contracting works from foreign contractors handling large

works. Whether a country Is large or small, the program for developing its

construction industry should be specifically designed to stult tne nature arid

size of its construction market and its special econon,lc, administrative and

political circumstances.

135. When the construction demand in a country is small and fluctuating,

the~ production and supply of construction materia,s required by the industry

often poses major problems. Raterials such as steel and glass and finished

goods such as hardw2re and sanitary fittings could be imported. Their prices

may be high, but the quantities required will oe small. However, basic

construction materials like stone, bricks, sand, construction lumber and

cement, which are bulky ano required in large quantities will be too

expensive to import and transport and will ,s: 'involve longer time to

deliver at site. They should be produced locally in order to improve the

ucapacity" and nefficiencyn of the construction industry. However,

production of such materials will be unattrdCtive to private enterprises in

view of the low and fluctuating demand from.the construction industry.. Wells,

[31) describes the problems faced by constoruction industries in many Afrlir.!

countries in such situations. Thero seenmeo to be no shortage of contractors.

particularly European and Asian-owned f1ims, willing and able to bid for

construction jobs in these countries, but the !:arcity of skilled labor and

shortage of locally produced basic materials have increased the construction

costs very substantially. According to a recent Bank study, unit costs of

construction in Sub-Saharan countries are 45 percent higher than In Aslan

countries and 25 percent higher than in Europe. The problems of high costs

- 109 -

and long delays caused by the undeveloped basic materials industries are more

serious in smiall towns and rura' tr^s h:. . a,gc tv,-",, oecause

transportation is often a bottleneck and contractors are less willing to bid

for small jobs in renote areas. The few quarries for stone and sand that

exist are under-capitalized with a low level of Investment which is more

appropriate for short-term profits than for long-term efficiency. Moreover,

quarry-owners, enjoyir.g a position of monopoly, are able to determine both

output prices In their own Interests. In these countries where construction

demand is small, rational planning and production of basic construction

materials appropriate for the size of the construction market is essential

for development of the construction industry.

XI. Rationale for Bank Involvement

:36. Banrk policy for promoting the construction industry in developing

countries already exists. The considerations which led to its establishment

are more compelling today than at the time of its approval in 1973. At that

ti1r., the Bank recog.nized the need for;_<ostar,rn the ind'..3ry in view of two

impending changes, namely, the launching of a major effort to Increase

lending to projects in th2 new sectors (agriculture, education, population,

etc.) and the consequent neod for involving domestic contractors for

implementing those projects. Today, these changes have already occurred; the

volume of lending to new sectors has increased many-fold and domestic

contractors are irvolved in most Bank-Olnanced civil works. However, the

domestic construction Industries are not sufficiently developed to ensure

efficiency and econory in project completion.

- 110 -

137. Construction is a major sector of the economy and its contributions

to GDP and employment rank high in relation to most economic sectors. There

is a close relationship between income, investment, construction and growth.

A developed construction industry is e powerful engine of growth; it enhances

the effici2ncy of investments and acce;erates the pace of economic

development directly as well as through its backward and forward linkages.

138. As a development institution, the Bank does not merely finance a

series of projects; it is concerned with the whole process of economic

development -- the .'aison d etre of the Bank. Its policy nitiatives,

economic and sector work, appraisal analyses, supervision assistance and

evaluation techniques are of little value if the quality of Its projects (the

ultimate products of these processes) is less than what it Is designed to be

in termn of value-added, cost effectiveness, quality of work and completion

time. The founders of the Bank specified in the Article; of Agreement that

the projects financ,ed by the Bank should be implemented with due diligence

for economy and efficiency and that optimum berefit! should be realized from

the resources coniThtted to the proJects. Thes;;objectives cannot be achieved,

if the construction Industries implementing the.projects are lnefficlent.

139. In the early years of its operations, when it was lending to,

traditional sectors (e.g., transportatior, power and cornunicatlons), the

Bank was able to ensure the efficiency and e:cnomy of its projects more

- ill -

effectively because they were buir. under ICB procedures, contractors from

i veloped construction industries of industrial countries won the contracts

and they were protected from inefficient contract practices and the adverse

conditions of the business environment in the develop1ng countries. However,

when the scope of Bank lending was enlarged during President Woods'

administraticin with increased emphasis on agriculture, education and industry

projects, ancl further expanded by President McNamara to include rural

development, population planning, health and urban developrent projects, the

nature of the Bank's projects changed rapidly. The expansion of ending in

these sectors with special emphasis on poverty alleviation, income

distribution and employment, inevitably required financing an increasing

volume of minor civil works spread over wide areas such as simple irrigation

facilitAes, schools, rural roads and health clinics. These works require

Increasing irvolvement of domestic contractors. Today, the Involvement of

dz-nestic contractors in shaping the Bank's ultimate product is overwhelming;

they are winning many iC8 contracts in addition to securing virtually all LCB

contracts. However, the weaknesses of the policies, practices, systems and

business environment of the construction industry in developing cou,itries are

seriously constraining their performance and affecting the Bank's objectives

of economy and efficiency. The Bank's internal processes Gnd tools are

improving in sophistication, but the domestic construction industries

building the projects, the products ot those processes, remain undeveloped.

Consequently, delays in project Implementation have become endemic and the

effectiveness of the Bank's assistance remains less than optimal.

- 112 -

Adverse Effects of an Undeveloped Constructicn Industry

140. The adverse effects of an undeveloped construction industry are

indicated by Its value-added to the econom'y, cost-effectiveness, quality of

construction and completion time. The value-added of individual projects is

seldom estimated and recorded, but the aggregate value-added by the

construction sector is available from national statistics of each country.

Adequate data for evaluating the effects of poor quality construction is also

not available. Some effects of poor quality work %'ili be seen In the form of

damages to works under corstruction, but they are reflected more often in

future maintenance costs and the economic life of the works. It is

unrealistic to expect good quality work from an undeveloped construction

industry of a country where contracts are one-sided, payments to the

contractors are delayed and the employers do not carry out their obligations

under the contracts. There is also a lack of adequate data for evaluatirng

cost-effectiveness, but competitive bidding under a system of sound

prequalification procedures, equitable contract documents and fair-,

administration of contrasts provide the best assurance for cost-effectiveness

of the industry. As regards completion time,ithe Bank's PIR, PCR and OED

reports provide adequate information for analyzing the effects of an

undeveloped constrIuction Industry.

Problems in Prolect Imolementation

141. Projects are delayed for a variety of reasons. Some projects are

delayed due to factors beyond the control of both the employer and the

contractor. They include extraordinary events such as wars, revolution and

- 113 -

insurrection or exceptional climatic conditions and disasters such as 1.gh

floods and earthquakes. A fair contract (e.g., the one based on FIDIC)

protects the contractor against the adverse effects of such events anud

tncludes prcvlsions for expeditious completion of projects. Projects are

also delayed sometimes due to default of the contractor: for example, if he

becomes bankrupt (for reasons other than non-performance by the employer, and

abandons the job. The FIDIC conditions of contract describe the remedies

available to the employer for expenditing thc project in such cases. These

types of events, however, are rather exceptional and an equltable contract

helps to reduce the delays caused by such events. The main focus of this

report, however, Is on causes of delays which are experienced most freqluently

in project implementation, which are the rnajor causes of delays An most

projects and which can be addressed effectively if the construction industry

is developed.

142. Project supervision reports attribute the delays in project

implementation to various types of proie.rns, such as management, financlal,

political and technical. Lack of borrowers' corrmitinent to projects is a;so

often reported as a major cause of delays. However, the problems ide'rt.1fiC

in the reports are often too broad to identify the real causes. This issue

was in fact raised in the OPS overview of the Fall 1981 PIR, as quoted below,

but it was not followed up.

"In most cases, the problems of implementation cited in the pdpersare familiar ones and similar: inadequate government comnitmentand excessive 'ntcrvertion, lack. of managers and skilled p.?rsonnel,cost overruns ana lack of funds, poor financial management, etc.Sonet,mes, ,ore specific ones are mentioned, such as the over-extension of the construction industry and the shortages ofmaterials in East Asia and Pacific. No doubt these are alllegitimate causes, but after .everal years of seeing them presentedin these reviews in much thz same way one wonders whether the real

- 114 -

causes are being considered or only the proximate ones, andwhether the approaches being followed are the right ones under thecircumstances."

143. A study of the specific problems reported in the PCRs has indicated

that, in most cases, the problems are related to failure of ,he employers to

meet their contractual obligations and the adverse conditions of th

construction industry's environment. This is not to say that all conti,actors

are efficient but to underline the fact that even an efficient contractor

will not be able to perform well under sucn adverse circumstances. The

following excerpts from the OED's study of 250 conoleted projects support the

above observations:

_ED ILeport 2946 - Apri 11, 1980

e Complex contracting procedures of the borrower contributed todelays: cumbersome preoualification methods, bidding systems,and clearance processes emerged as main factors. Financialproblems, resulting from under-estimation of costs or priceincreases, contributed to delays in letting contracts and, insome cases, to retendering. The situation was aggravated in thesample reviewed for this study, which was affected by sharp andunforeseen price increases in the early 1970s. Given thefinancial stringency of many borrowers, an inter-acting spiralof time and cost overruns can have serious implications forproject implementation, especially',in, inflationary tirres."

o 'Institutional problems were second only to the letting ofcontracts for civil works and equipment and affected 55: of oursample during start-up. Institutional problems included theorganizational structure of the project unit and its fit withinthe borrower's bureaucratic structure, staffing problemsconcerning initial recruitment for the project unit as well asits maintenence during implementation, and delay in the hiringof consultants."

a 'A shortage of qualified local staff ias a major problem,exacerbated by non-competitive salary structures in the publicsector organization. Project units were sometimes incorrectlylocated and often did not possess sufficient autonomy to beeffective.'

- 115 -

144. In the Bank's reporting system, problems such as cumbersome

procedures, unfiirn,ss in prequalification, restrictive regu,atb.os, lack of

qualifled staff ano delays in land acquisition are classified as mvnaqement

or procurement problems; problems relating to budget, delays in payments and

price increase3 are reported as financial problems; and mistakes in design,

delays in supplying drawings and adverse physical conditions, are categorized

as technical oroblems. If the work is held uP due to political strikes or

conflicts In the governrments' power structure, the problems are considered as

polltical problems. A detailed analysis of the event; causing these problems

shows that most of ther managemrent, procurement, finar,rJl:, techni 'al and

political problems are related to the actions, or lack of actions, of the

erployer or to the adverse conditions o' the Industry's busir,ess

environment. The Contractor has no control over these problems. If payments

to a contractor are delaycd due to buzgetary constraints, or due to failure

of the project manaSLr to make adequate provisions In his budget request, the

result n- inefficiencies and delays in project implementation are oue to

non-performance of the employer. Super%ssion reports may identify them as

*financial Droblemst and, in some cases, they may be due to the econ,mnic ,

situdtlon ln the country, but as far as the contract is concerned, the

emphNyer is responsible for the delays resulting from his failure to make

payments for the work done by the contractor. If this analysis is extended

to other events, it will be seen that most of the delays in project

comoletion are due to weak policies, inefficient practices and adverse

ousiness environment of the construction industry. In developed countries,

tre fact that tne goverr.ment has bAdgetarX constraints, or that the project

- 116 -

manager made a mistake in preparing the budget, does not justify delays In

payments to contractors; if delays do occur, the contractors are

compensated. This is nct the case in developing countries where employers

delay paynents and cause financlal hardships to contractors with impunity.

The analy5is shows that most of the problems identified in supervision

reports as umanagerial1, Ofinanclalm, technical and political problems are

the problems caused by an unde%eloped construction industry.

Delays in Prolect C'.et1in

145. Three 5ources of data are used for analyzing the causes of delays,

namely, the PIR Standard Tables prepared by OPS which provide information on

delays by sectors, countries and Regions, the Standard Disbursement Profiles

which give profiles of actual six-,onthly disbursements for loans and credits

Ir. each country and sector, and the OED reports on the analyzer of delays in

prcject conpletion. Tha OED analysis provides an accurate measure of overal1

delays in project implementation because it is based on the PCRs.

146. PIR Standard Tables: The Standard Tables provide interim estirnates

of ccopletion delays at specific points of time during project

imolementation. Information on final delays is available only after the PCRs

are prepared. The estirmated completion delays based on StandarJ Tables fcr

the period P182-86 are niven below:

- 117 -

Comp!etion Delays (Bank-Wide)

FY82 FY83 FY84 FY85 FY86

Total number of projects 1548 1701 1729 1688 1773

Average original completiontime (months) 52.0 51.8 51.7 53.0 56.7

Average latest completionestimates (months) 64.5 65.0 65.3 66.0 66.9

Estimated delay (months) 11.5 13.2 13.6 13.0 10.2

Distribution o1' projects (:)Less than 10% time overrun 48.6 47.6 45.8 47.8 60.810-30% time overrun 16.5 16.1 16.7 16.1 10.7over 30% time overrun 34.9 36.3 37.6 36.1 28.5

The above data shows that the average origitial cor,mpletion schedule, which is

based on appraisal reports, has increased over the years. The average

estimated completion time, which is based on superv1sion reports, has also

increased. These delays are understated because delays in projects in the

first and second year of implementation are not recorded in most cases.

147. Standard Disbursement Profiles: The disbursement schedules given

In appraisal reports allow for some time lag, usually ibout six months,

between expenditure and disbursement. A comparison of the actual disburse-

ments with the appraisal disbursement schedule gives an approximate measure

of the delays In project implementation. This is not an accurate method for

measuring delays, but it is useful and convenient. The Bank was csnt:erne,i in

.ecent years with the increasing difference between estimated and ac'cual

disbursemerts and developed Standard Disbursement Profiles using the data of

actual disbursements. The staff follow the Standard Profiles for preparing

- 118 -

the expenditure and disbursement schedules In appraisal reports. ihe

Completion time based on the Standard Profiles are given in Annex 7.

Agriculture, education, population, urban and water supply projects have

longer completion time compared to industry, pow:r and transportation

projects. They usually include small widely disparsed works which are

inlemented by dornestic contractors. They can also be usliced and packagedu

into a number of ccntracts for execution by small contractors. The long

implementation period of the agriculture, education, population and urban

projects is partly due to the large number of small contracts, but it also

Indicates the weakness of the LCB practices and the adverse environment of

th --nestic construction industry.

148. Annex 7 also gives the completion time for specific investment

loans and agriculture loans. Specific investment loans include agriculture

loans but exclude program loans such as SAL, DFC and agriculture credit

loans. The data shows that agriculture loans take longer time to Implement

than specific investment loans. Some countries take longer time to conplete

projects than others; it indicates the relative strengths and weaknesses of

their respective construction industries.

149. OED Analvis: OED uses the PCR data for evaluating delays in

project completion. Its findings are more accurate because they are based on

the actual time taken for completing projects. OED's Report No. 2946 dated

April 11, 1980, entitled "Delays in Project Implementation", analyzed de'ays

in completing the 250 projects audited during 1975 through 1978. The

analysis Indicated that the average time to complete the projects exceeded

the estimated time by over 40% despite a reduction in the scope of a number

- 119 -

of thaese projects. The Tenth Annual Review of Project Performance Audit (OED

Report No. "48, dated August 30, 1984) covered a larger number of completed

projects and reported the following on delays in completing projects:

'Of the B68 projects with clearly defined physical content, 741(85%) required more time to complete than had been estimated atappraisal. Seven projects were completed on time while for 120projects the date of completion could be auvanced. The averagecompletion delay for all 868 projects was 61%."

150. OED's Report No. 5248 also gives a detailed analysis of completion

time o1 155 projects in various sectors excluding the DFC and non-p,oject

loans. The results of the analys1s are suwmaried below:

Projects Cumulative

DelaNs Nurber Percent Number Percent

4 years or more 32 21 32 213-4 years 27 17 59 382-3 years 28 18 87 561-2 years 39 25 126 81Up to one year 21 14 147 95No delays 8 5 155 100

Total 155 100 155 100

151. OED's analysis also shows that projects in the "new sectors" (e.g.,

agriculture, education, population and urban) are taking longer time to

complete than projects In the "traditional sectors" (e.g., transportation,

power and heavy Infrastructure). The following data for education and

agriculture projects indicates that the average time for completing projects

Is Increasing.

- 120 -

Completion Time (Months)

Agriculture Projects Education Projects

Evaluation No. of Appraisal Actual No. of Appraisal ActualYear Projects Average Average Projects Average Average

1979 43 48 68 - -

1980 30 49 70 11 45 891981 3i 56 81 11 48 841982 53 58 78 5 45 1101983 43 58 74 11 48 931984 - - 33 53 94

152. OED analyzed the causes of delays and concluded that delays due to

changes in scope and design occurred in 38 percent of the projects; 63

percent of the projects experienced delays due to work-associated problems

such as technical problems and contractors' performance; 45 percent were

affected by delays due to inefficient bidding procedures and procurement of

equipment and materials; and 54 percent of the projects were delayed due to

administration and management problems of the borrowers including lack of

competent staff. A review of the problems causing delays indicated that more

than 90 percent were related to the failure of the employers to carry out

their explicit and implicit obligations under the contracts aid their

inefficient systems and practices.

i53. OED's recent report entitled "the Twelfth Anrl.al Review of Project

Performance Results" t46] further confirms the conclusions of its previous

reports. It states that the average completion time of project! has been

increasing steadily over the whole series of annual reviews, fromn 5 years in

the mid-1970s to over 6 years in the last three years. Annex 8 gives the

results of OEO's analysis. The report give; the following reasons for

completion delays:

- 121 -

oThe principal reasons for completion delays were the same as Anthe past--inadequate project preparation, changes in project scope,administrative constraints within the country and the unfamiliarityof the borrower with Bank procurement procedures, delays in theappointment cf staff or consultants, and lack of financial supportfor the project by the borrower. The latter factor was ofparticular importance to the 1985 projects, as many borrowers faceddifficulties in providing counterpart funds; this caused delays inprocurement and recruitment of staff, and led to design charnges allof which tended to spreaa implementation over a longer period.These factors more than offset the favorable effects on averageproject completion time of the greater proportion of quick-disbursing SALs, the operation of the Special Action Program andthe closing of a number of projects, particularly in EasternAfrica.0

154. Review of Fifty PCRs: A special study of 50 projects selected at

ranoom was carried out to review the extent of delays in physical completion

of the project works rather than of the projects as a whole. The results of

the study are given in Annex 3 and are surm.arized below:

ProJects CummulativeDelays in Completion Number Percent Number Percent

More than 4 years 11 22 ii 223-4 years 9 18 20 402-3 years 11 22 31 621-2 years 13 26 43 88Up to one year 2 4 46 92No delay 4 8 50 100

Total 50 100 50 100

155. The results show that over 60 percent of the projects experienced a

delay of more than 2 years and 40 percent were delayed for more than 3

years. The causes of delays described in Annex 3 also confirm that failure

of the employers to meet their obligations under the contracts and the

adverse conditions of the construction industry's environment were the main

constraints to timely completion of the works.

- 122 -

Involvement of Domestic Construction Industry in Bank Prolects

156. Planned Procuremetrt. The procurement plans given in the appraisal

reports of FY86 projects were reviewed to detrmnine the planned share of

domestic contractors In :he procurement of works. Although the Bank approved

$16.3 billion in loans and credits for 228 projects in FY86, appraisal

reports of some projects such as SALs, DFCs and agriculture credits do not

Include procurement details. Excluding these projects, there were 165

projects in FY86 for which procurement plans wvre given in appraisal

reports. Annex 9 gives the analysis of the planned procurement. The results

are suTmarized below:

Mode of Procurement and Amount (US$ billion)

ICB LCB Others Total

1. Total procurement (Annex 3, 6.8 3.7 4.7 15.2Table 1)

2. Cank/IDA financed totalprocurement (Annex 9, Table 2) 4.0 1.5 1.8 7.3

3. Total civil works procurement(Annex 9, T'able 3) 3.1 2.3 1.3 6.7

4. Bank/IDA financed civil worksprocurement (Annex'9, Table 4) 1.6 1.0 0.5

The analysis shows that:

- The planned civil works procurement in the 165 Bank-financedprojects in FY86 amounted to $6.7 billion, or 44 percent ofthe total procurement cf $15.2 billion

- Bank-financed civil works procurement amounted to $3.1billion, or 46 percent of the total civil works procurement of$6.7 billion

- 123 -

ICB procurement of civil works amounted to 46 percent of totalplanned civil works procurement while ICS procurement ofBank-financed civil works amounted to 52 percent of totalBank-financed civil works procurement.

15?. If all of the planned ICB civil works contracts amou,iting to $3.1

billion were won by foreign contractors and all the planned LCB and aothern

types of contracts amounting to $3.6 billion were obtained by domestic

contractors, then the share of domestic contractors in building Bank projects

would be 54 percent. The source of financing is not relevant in this case.

Thus, according to the appraisal plans of FY86 projects, the economy and

efficiency of a major part of the Bank projects depended on the efficiency of

domestic construction industries. The figure of 54 percent is an under-

estimate because many ICB contracts would be won by domestic contractors.

Moreover, some parts of the Bank-financed projects, which are constructed

separately by the borrowers, are often not included In the procurement tables

of appraisal reports. Sometimes, the Bank staff also limit the definition of

the project to include only the part relevant to Bank financing. Domestic

contractors' share In Bank-projects, therefore, would be substantially higher

than 54 percent even on a planned basis.

158. Actual71Procurement. In order tc determine the extent of civil

works procurement actually secured by the domestic construction industry, the

computerized data of Forms 384 was analyzed. Given the large number of

contracts awarded each year, the study was confined to procurement of civil

works in 17 countries from the six regions during the three years FY84, FY85

and FY86. The countries selected are large borrowers of the Bank and IDA.

They accounted for almost two-thirds of total Bank/lDh lending in FY86.

Moreover, of the total planned procurement of $15.2 blillon In FY86 projects,

- 124 -

$10.9 billion (72 percent of the total) was related to these countries. The

selected countries, therefore, provided a large and representative sample of

actual procurement. The results of the study are given in Annex 9, Table 5

and are sumearized below.

Actual Procurement of Civil Works in 17 countries during FY84-86

Mode of ProcurementContracts and Contractors

ICB LCB & Other Total

All Civil Works ContractsNumber 632 1,023 1,655Amount (US$ million) 2,536 1,043 3,579

Contracts Won by Local ContractorsNumber 567 1,020 1,587Amount (US$ iiiillion) 2,020 1,011 3,031Percentage

by number 90 100 96by amount ao 97 85

Contracts Won by Foreign ContractorsNumber 65 3 68Amount (USt million) 516 32 548Percent

by number 10 - 4by amount 20 3 15

159. The results show that 96 percent of all civil works contracts in

Bank/IDA projects during FY84, FYU5 and-FY86 were awarded to domestic

contractors. The share of the latter in the total amount of contracts was 85

percent. Dumestic contractors won 90 percent of ICB cortracts (80 percent by

amount) and virtually 100 percent of LCB contracts. Thei- increasing share

in civil works procurement is due to the increase in Bank/1IA lending to

projects in 4new sectorsu. Their share is actually larger than Indicated In

the abovn table because Fonm 354 does not include civil wsrks contracts below

$200,000 ($700,000 in FY86) which are captured by domestic contractors.

- 125 -

Annex 9, (Table 5) also gives the shares of domestic contractors in various

countries and regions. Domestic contractors in Korea, Thailand, Brazil and

Mexico have won 100 percent of both ICB and LCB contracts. The overall s;are

of dco,aestic contractors in Africa is the lowest, but it is quite high in

absolute terms -- 88 percent of contracts and 75 percent by amount. The high

share of domestic contractors In Africa may be partly due to the fact that,

for purposes of Form 384, domestic contractors include foreign contractors as

well as joint ventures established and registered in a country as domestic

contractors.

160. It is important to emphasize again that the issue here is not ICB

versus LCB or foreign versus domestic contractors; the issue is whether the

domestic construction Industry, which is getting a very large share of the

civil wcrks procurement, is sufficiently developed to achieve the Bank's

Gbjectives of efficiency and economy as required under the Articles of

Agreement. Although there are some notable exceptions, these objectives are

not being achieved because the efficiency of domestic contractors in most

developing countries is severely constrained by the adverse policies,

practices and environment of the construction industry.

Cost of Delays in C'ynpletinq Prolects

151. Although the Bank and the borrowers are concerned with the delays

In completing projects, they have not been able to take effective measures to

address the problem. Of course, the Bank's supervision reports, PIRs and OED

reports have been flagging the problems of implementation continuously and

fellow-up actions have led to solution of some project--specific problems, but

- 126 -

the overall picture of delay. in completing projects remains unchanged. The

Bank tends to blame the borrowers for tneir inefficiency and the latter

complain about the Bank's lengthy procedures. Despite this finger-pointing,

there seems to be a growing acceptance that delays are inherent in the

procedures on both sides, that it is not easy to change the procedures and

that delays of the magnitude currently experienced are inevitable. The

implicit acceptance of the "inevitability" of delays is apparent from the

fact that the Bank has tended to attribute the delays to unrealistic

estimates in appraisal reports and to accept the actual completion time as

standard. Similarly, the borrowers, having failed to improve the completion

time despite numerous studies and actlon plans, have tended to live with the

status quo as unavoidable. In fact, the borrowers are accepting lower

efficiencies and longer periods of delays in implementing their own

investment programs than in the Bank-financed programs. The implicit

acceptance of the current levels of delays is inhibiting the search for

effective solutions. There are four compelling reasons for changing this

situation: first, delays in project irnplementstlon are becoming increasingly

costly to the Bank in terms of the quality of its products; second, they are

seriously affecting the rate of physical and human capital formation in the

countries; third, they are constraining the Bank's objectives of optimizing

the productivity and efficiency of investments,; and, fourth, they are

contributing to the borrowers' perception that the Bank's products are too

costly.

162. Although everyone agrees that delays In completing projects are

hurting the countries, both in terms of increased investment costs and

deferred benefits, a satisfactory methodology for estimating the cost of

- 127 -

delays has not been developed. The impact of delays in project Implement-

ation on the f'uture of the Bank has also not been a subject of study In the

Bank. The Bank has been the leader in establishing the criteria for compar-

ing economic costs and benefits and for developing the methodology for

selecting priority projects. OMS 2.21 describes the Bank's approach to

economic analysis of projects and OPN 2.01 discusses the investment criteria

and the concepts o' Discount Rates, Net Present Value Criterion (NPV),

Cost-Benefit iratio (CB) and the internal Economic Rate of Return (ERR).

These approaches and methodologies are used more for eYmininng alternatives

and optimizing project design than for quantifying the costs of delays. Of

course, the sensitivity and risk analyses given in appraisal reports show the

effects of changes in prices and other variables, including project delays,

but the results are expressed in terms of changes In ERRs or net present

values. Managers responsible for executing projects and the officials in the

ministries who decide project issues do not fully understand the concepts of

ERR. They do not know how their decisions change ERR values or what-those

changes really mean. However, if they know that their actions in appointing

consu'tants, awarding contracts, making payments to contractors, acquiring

land and providing budget are causing delays that cost so much to the

government initerms of completion time and loss of benefits, they would dc

their utmost to avoid delays.

163. Government officials may appear indifferent, slow, uncommitted and

inefficient when the responsibility for the rcsults of their actions is too

diffused to hold them accountable. But when they know they could be Identif-

led as the ones responsible for delays and the consequent loss to the govern-

- 128 -

ment, they act efficiently and expeditiously. This is the wpy bureaucracies

work. The borrowers' failure to act promptly on prolect issues is not due to

"lack of commitment, as reported frequently in supervision reports and PIRs;

it is due to lack of a system for establishing accountability. The prospect

of prompt decis1ons during project implementation will be greatly enhanced if

the cost of delays is quantified and those who make decisions are made aware

of those costs. It will also provide the superv.sion staff an effective tool

for expediting projects.

164. The East Asia and Pacific Region carried out a study in 1986 to

estimate tnt cost of 4elays in completing Bank-financed projects in

Indonesia. It was recognized at the outset that measuring the costs

(economic losses) entails making a number of difficult assumptions about the

streams of project-related costs and benefits and the alternative uses of the

funds. It also 'Involves addressing questions such as: What is the profile

of the delaved investment expenditures? If the project is delayed, does it

mean that disburset.*nts simply shift over time, or do they stretch out too

long to tie up resources unoroductively? To what extent do investment costs

Increase as a result of a longer implementation period? What is the impact

of delays on benefits? If a project is completed before the demand for its

output or services has developed, then delaying the project may in 'act lead

to a higher net present value. Conversely, in the case of severe and growirg

demand, which is often the case in developing countries, benefits foregone

due to delays in ccrQnletion may be very high.

165. Obviously, It IS not easy to address these questions. The East

Asia Region 'ollowed a simple method for estimating the cost of delays. It

- 129 -

analyzed all Bank-financed projects in Indonesia approved in FY85, estimated

the total investment on these projects (US$1.6 billion, including counterpart

funds), and worked out the 'weighted average ERR for these projects, using the

ERR values in appraisal reports, or the estimated opportunity cost of

capital.. IF- weighted average ERR for the approved FY85 program in

Indonee1'a, w!'ich 'ircluded projects in several sectors, amounted to 15

percent. Si.ire, in many projects, benefits build up gradually over time and

start materIalIzIng even beFore the projects are fully completed, It das

assumed that the benefits foregone due to completion delays would amount to

either one-fourth (low case) or one-half (high case) of the return on

investments during the period of deLiy. On this basis, it was estimated that

the economic benefits foregone by Indcnesia would exceed US$50 million (low

case) or USSIOO milllon (hiSh case) per year of delay in the Bank-financed

FY85 projects. Tnis estimate doe: not include the effects Cf Ceiays on

investment costs.

166. Of course, there will be many questions on the methodology used by

the East Asia Region for estimating the costs of delays. But the issue which

is important at this stage Is the magnitude of the cost of delays. Given the

fact that a two-year delay i norrral for most projects, the loss of benefits

to Indonesia would amount to US$100 million under the low-case assumption and

US$230 million under the high case. Moreover, Indanesia would pay additional

commitnent charges amounting to about US$7.5 million for a two-year delay.

This is a huge loss for an investment program of US$1.6 billion. Assuming

tDat Irdonesia's total investment program (financed from all sources) of

USSIC bi'loton In FY85 Is delayed by two years (a conservative assumption

given the higher inefficiencies in non-Bank projects), the loss to the

- 130 -

country would amount to one billion dollars under the low-case assumptions

and two billion dollars under the high-case. These losses are more than the

annual Banv lending to Indonesia. The figures may change if the assumptions

are altered, b-ut they will still be too large to ignore. The East Asia

rmethodo!ogy may not be perfect, but it appears conservative because it does

not 1nclude many factors such as the increase in investment costs resulting

from delays and the loss of benefits -,rom thf nultiplier affects of timely

ccmpletion of projects. Needless to say, neither the Bank nor any other

Institution in the world has developed a methodclogy to fully comprehend the

dynamic effects of delays In project completion nn the development process.

It was not ,ecessary for the Bank to pay much attention to the cost of delays

in .he past hecause, in the early years of its onerations, the projects were

executed bv efficient constructicn industries fro, developed countries. The

rature of Ednk projects has now changed and the efficiency of the domestic

construction Industries that are increasingly involved In implementing Bank

projects is severely constrained inefficient practices, weak institutions and

the adveree business environment of the construction industry. There are

ccmpellirg reasons, therefore, for the Bank to address the problems of

dornestic construction ind.stries; the quality of Its products and the

efficiency of its investments are increasingly dependent on their

perforniance.

167. A brcac Idea ^f the potential effects of delays on the efficiency

of Bank-financed investments is obtained by considering the projects uncer

implementation. In FY85, the Bank's supervision portfolio included 1776

projects, with a total investment cost of US$254 billion, including Benk-IDA

financing of about JS$94 billion. If this portfolio of projects is delayed

- 131 -

on the average by two years, the loss of benefits to the countries, using the

Indonesian analogy, would ainount to about US$16 billion under the lew-case

assumption and US$32 billion under the high case. These losses are hLige.

Given the fact that the total investment programs of the countries are 10 to

15 times the Bank-financed programs, the potential cost of delays to the

economies of the countries is colossal. The East Asia Region's attempts to

quantify the cost of deldys in completing projects may be crude, but it

provides the beginnings of what could become a relatively new area of

research for improving che efficiency of investments, increasing the Bank's

effectiveness as an econon,ic development institution and enhancing its

ability to meet the requirements of economy and efficiency specified in the

Articles of Agreement. The enormous loss of benefits due to delays in

completing projects clearly demonstrates that development of the construction

industry is essential for achieving the above objectives.

The Bank's Comparative Advantaqe

168. There is a general perception in the Bank that the construction

Ind_stry is a technical subject which is related more to engineering than to

economics. Although the Importance of the construction industry to economic

developmen' is not questioned, construction has not been viewed as a

developmert sector. This is probably the reason why the construction

industry staff in the Bank has been selected from the engineering profession

and ccnstruction industry has not been the subject for economic and sector

work. This report has underlined the fact that construction is one of the

major development sectors. Its development requires improving the policies,

building the institutions and addressing the constraints imposed by the

- 132 -

industry's business environment; that policy-lending is a more appropriate

Instrument for prcooting its growth than financing specific Investments; and

that the performarice of the industry should be based on its capacity and

efficiency to implement the investment programs most cifectively.

Obviously, the Bank has a comparative advantage in addressing these issues.

No other institutlon has such exposure to the problems of the domestic

construction industries as the Bank; and no other Institution has such

opportunities as the Bank has for addressing them. The Bank, therefore, has

a unique position and a clear advantage in terms of its experience, expertise

and opportunities for fostering the growth of domestic construction

industries in developing countries and dernonstrating, once again, its

leadership in economic development.

Annex I- 133- Page I of 3

Contractors In Developing Countries

The Contractors

1. The training of most contractors in developing countries is basedon the experience gained within the construction industry itself. Acontractor often begins as a trade apprentice, goes on to become a foreman,and eventually develops sufficient experience to start on his own. Somecontractors begin their career as labor suppliers, progress to the level oflabor contractors for large works, then purchase some basic equipment andbecome sub-contractors, and eventually get the experience and confidence tobecome small, medium or large contractors. Others inherit the enterprisefrom the family or take up the construction business after working withconstruction firms as engineers and site managers. There are also publicconstruction enterprises specially organized by the government forconstructing public works. Ihese enterprises are supposed to operate likeprivate contractors, but In practice most of them are extensions of thegoverrw.ent bureaucracy.

2. Contractors undertake different sizes of jobs according to theirresources and experience, and achieve varying degrees of success. Some failearly on in their ventures; some give up when the profits are too low tojustify continuing the risks; some are forced into bankruptcy; and someadvance to higher lrvels of growth after each successful cperation. Thesmall contractors' orowth paths are more difficult and risky because they areaffected the worst ty the adverse business environment. They constitute anoverwhelming majority among the contractors in a country. For example, ofthe 52,350 contractors in Indonesia In 1985, only 250 (0.5 percent) werelarge contractors capable of constructing works costing more than $0.5million; 13,500 (26 percent) were experienced enough to undertake works inthe range of $0.1 to $0.5 million; and the remaining 38,600 (73.5 percent)were small contractors at various stages-of development. The 250 largecontractors include the nine state-owned enterprises whict handle almost 40percent of the total value of construction in the country.

Construction

3. Construction involves more risks thari many other Industries.Constructicn sites are often located In remote places; materials have to betransported to the site from long distances; labor has to be housed and fed;and many unknown and unpredictable events have to be managed - weatherconditions, breakdown of equipment, difficulties in getting spare parts,adverse physical conditions and delays caused by the owner, engineer andother agencies. In thase circumstances, contractors need r,sanagers who canmanage :he risks. The lack of this talent in developing countries isparticularly serious.

4. Before starting work, a contractor has only a contract agreement,work specifications and some blueprints. Based on these documents, he isrequired to create a permanent facility that meets the quality, safety andfunctional requirements specified in the contract. His job requires setting

- 134 - Annex 1Page 2 of 3

up a new organizationl of many types of people -- people who probably have notworked together before but are expected to produce the desired results inaccordance with a specified schedule. The size of the organization and themix of its skills will be changing constantly in relation to the progress ofthe project and the needs of the works; in effect, the people in theorganization will be virtually working themselves out of the job as rapidlyas the job is progressing. The contractor and his nucleus permanent staffplan the work, conceptualize potential difficulties and options andconstantly worry about cash-flow problems, unmet schedules and potentiallosses. In tendering for the job, they have already cut the prices to theminimum compared to their competitors, although the design is fixed and thecost of materials and equipment is much the same for all bidders. In thesecircumstances, the contractor can make a profit only by limiting overheads,increasing the productivity of labor and equipment, and innovatingcost-effective methods of construction. He will be able to do this only inan environment which encourages initiatives and rewards his efforts - anenviro.unent in which the employer meets his obligations at all stages ofconstruction by providing the site (acquired land) on time, paying promptlyfor the work done and compensating the contractor for the delays caused byhim and nis agents. Such environment does not exist In developingcountriEs. On the contrary, It Is harsn to contractors. Small contractors,especially, have very few options in such situations.

Business Environment of the Industry

5. In developed countries, the contracting procedures are sound andwell establishedi. The parties to the contracts know their respectiveobligations and the consequences o! failing to meet them. The legal systemIs strong and effective in protecting the rights of both the employer and thecontractor. Moreover, contractors are well organized to protect their rightsand ensure that their relations with the employers are regulated on anequitable basis. In developing countries, however, the contractingprocedures are weak. The employers try to protect themselves by includingclauses in the contract which make the contractors responsible for virtuallyeverything. Government officials often mask their inefficiencies by blamingthe contractors for lack of progress or failure to complete the job on time.The legal systems have not developed enough to protect the rights of thecontractors. Moreover, contractors in developing countries do not enjoy thesame status in society as cther professions; they are often viewed asdishonest businessmen who delay completion of works, do poor-quality jobs,and try to naximize their pro-lts.

6. The development of the construction industry requires strengtheningthe institutions, establishing systems for Improving efficiency and providingthe incentives for promoting the growth of the industry. It cannot beachieved merely by providing technical and financial assistance to individualcontractors here and there, because first, it is not possible to extend suchassistance to all contractors; second, the benefit of assistance toindividual contractors may not last long in all cases; and third, theassistance will not be fully productive unless the business environment isalso improved.

Annex 1Page 3 of 3

7. Competitive bidding is intended to select the most competent andresponsive contractor. Prima facie, the system is simple, but it is not assimple for the cont;actor as it is for the owner. The decision to bid is amajor financial decision for the contractor. He assumes significant costsfor preparing the estimates and the tender at the risk of not recovering themif he is not awarded the job. At the same time, he commits himself to investin the project and construct the works if he wins the contract. Ccmpetitivebidding requires preparing accurate estimates which are low enough to get thejob and high enough to get reasonable profits. The contractor's ability toprepare such estimates depends on his expertise in predicting future costs oflabor, materials and equipment, his ability to foresee problems that mayaffect costs, his skills in predicting their probability and frequency, andhis experience in finding cost-effective solutions to address them.

B. Contractors in developed countries have sophisticated estimatingand forecasting methods for pricing unit cost, but contractors in developingcountries have neither the tools nor the experience to orepare accurateestimates. Consequently, their estimates often result in unrealistically lo1bids which they find difficult to live with during construction. Theirdifficulties are compounded when the employer does not pay them on time anddoes not compensate them for delays caused by him. High interest rates, lackof adequate credit and foreign exchange facilities for purchasing materialsand equipment, lack of facilities for renting equipment, and the practice ofwithholding part of the payment as a guarantee against poor workmanship,further exacerbate their financial problems. Unless these constraints areadequately addressed, the construction industry cannot be developed on asound basis.

- 136 -Annex 2Table 1

Construction's Role in Economic Developrnent

Income, Growth and Investment

Average Annual Growth Rates (percent)GPN per Gross

Low-Income Capita 1984 GDP Domestic InvestmentCountries $ 1965-73 1973-84 1965-73 1973-84

Low-Income CountriesEthiopia 110 4.1 2.3 1.5 2.6Bangladesh 130 5.0 -6.4 4.7Tanzania 210 5.0 2.6 9.6 -India 260 3.9 4.1 3.9 4.2Kenya 310 7.9 4.4 15.9 1.2China 310 7.8 6.6 12.9 8.0Sudan 360 0.2 5.5 0.2 3.2Pakistan 380 5.4 5.6 0.4 5.4Senegal 380 1.5 2.6 8.1 -0.7

Middle-Income CountriesLiberia 470 5.5 0.2 5.6 1.5Indonesia 540 8.1 6.8 17.5 11.3Cote d'Ivoire 610 7.1 3.7 10.2 2.9Philippines 660 5.4 4.8 4.4 4.3Morrocco 670 5.7 4.5 11.0 1.6Egypt 720 3.8 8.5 -1.5 10.3Nigeria 730 9.7 0.7 15.2 -2.0Cameroon 800 4.2 7.1 8.6 10.6Thailand 860 8.8 6.8 7.6 5.3Jamaica 1150 5.4 -1.4 7.5 -5.8Turkey 1160 6.5 4.1 9.7 2.3

Upper-Middle CountriesChile 1700 6.3 0.4 1.0Brazil 1720 7.3 3.1. 11.3 -Malaysia 1980 6.9 10.0, 9.1 11.4Mexico 2040 8.7 6.8 8.4 3.3Korea 2120 7.3 5.4 19.7 8.8Yugoslavia 2120 2.2 2.8 4.8 3.9Argentira 2230 2.4 -- 6.7 -3.4Venezuela 3410 6.8 4.5 11.1 -1.4Singapore 7260 16.3 6.5 22.7 9.5

High-Income CountriesUnited Kingdom 8570 2.1 1.4 3.1 -1.0France 9760 3.9 2.7 6.9 0.4Japan 10630 5.3 3.9 14.1 3.0Germany 11130 4.0 2.2 4.4 1.3Australia 11740 4.8 4.3 3.7 0.7Canada 13280 6.2 1.4 3.8 0.1Uiited 3tates 15390 1.8 2.5 2.7 1.5

Source: World Bank, World Development Report 1986.

- 137 - Annex 2Table 2

Construction's Role in Economic Development

Contribution of Construction Sector to GDP and GDFCF

GDP per Construction value Construction as aCapita added / GDP percentage of

Countries (US dollars) (percent) GDFCF

Developing Countries 1983 1982 1983 1982 1983

Tanzania 219 3.4 2.4 46.8 47.5

India 229 5.2 5.0 55.6 55.8

Kenya 261 5.8 6.1 55.6 50.7

Pakistan 289 5.0 4.7 60.1 60.1

Sri Lanka 310 8.4 8.6 57.2 55.9

Philippines 665 . 8.6 8.0 59.7 57.1

Nigeria 690 7.3 6.1 66.3 73.2

Thailand 822 5.1 5.0 54.3 53.7

Colombia 1,284 5.5 5.8 56.9 57.6

Ecuador 1,305 9.0 6.1 65.5 70.6

Paraguay 1,441 6.7 6.7 65.4 78.0

Korea 1,916 8.0 8.3 62.4 64.5

Mexico 1,935 6.3 .5.1 50.0 63.3

Greece 3,140 6.6 6.9 57.5 59.0

Ceveloped Coujntries

United Kingdom 8,084 3.7 - 54.1 53.7

Japan 8,909 8.6 7.9 65.9 65.1

France 9,492 3.7 - 53.5 53.2

Ger-nany 10,637 6.0 5.9 61.7 60.3

Canada 13,012 9.4 8.7 62.9 64.0

USA 13,969 4.1 - 55.5 56.0

Source: 1. Wcrld Bank (EPD) Computerized data2. U.N. Construction Statistics Yearbook, 19833. U.N. National Accounts Statistics, 19834. World Development Report 1985

GDFCF : Gross domestic fixed capital formation

- 138 -Annex 2Tables 3 (A and B)

Construction's Role in Economic Development

Characteristics of the Constru:tion Industry, circa 1979

Table 3A

Groups f Countries with GDP P r CaoitaVariables Below $350 5350-700 S700-2000 Over $2.000

1. Value-added in 3.6 5.2 5.4 7.3constructiorn asa % of GDP

2. Capital fornation 8.9 10.6 13.6 13.5in constructionas a % of GOP

3 Jmployment In 3.1 3.4 6.6 8.1construction as a% of EAP

4. Cvnstruction as a 56.0 53.0 55.4 57.5X of GDFCF

Source: Wells, Jill. The Construction Industry in Developing Countries,Alternative Strategies for Development, Croom Helm, London, 1986.

Table 3B

GNP Av. GDP VAc Investment per Jobper Number per as X GFCFc As Multiple Employment

Capita of capita of as X of GDP per 1,000(US$) Countries (US$) GDP of GDP (US$) per Capita Populatlon

Belov 500 30 279 4.66 7.0 6,518 23 3.6500- 999 23 783 5.62 12.7 10,974 14 9.!

iOOO-1999 22 1,431 6.08 13.1 15,437 11 15.32000-3999 15 3,191 7.49 15.4 23,571 7 25.24000-8999 14 6,332 7.36 13.6 33,787 5 25.4

Abov'. SOOO 12 11,782 7.80 14.2 57,489 5 26.9

VAC - value added in construction. GFCFc gross fixed capital formation inconstruction.

Source: ILO: EMIIloyment Policy and Job Creation in and through the ConstructionIndustry, Building and Public Works Comnittee, Eleventh Sessions,Geneva, 1987. (Columns 3 and 5 reconstructed and colum 7 added).

- 139 - Annex 2Table 4

Construction's Role in Economxc Development

Trends in Construction Value-added oer Capita - 1970-81

Value-added in ConstructionGOP per Capita (1975 dollars) per Capita (1975 dollars})

Annual Annual1960 1981 Increase 1960 1981 Increase

Group I Countries

USA 5113 7965 182.2 390 327 -3.3Japan 1492 5684 207.8 82 440 21.7UK 3024 4486 80.4 154 242 4.5Germany 4508 8112 183.4 37'7 554 7.1Austria 2782 5990 163.9 211i 463 12.7Group Average 3384 6469 161.2 254 418 8.9

Group 2 Countries

Greece 947 2664 93.7 84 140 4.2Portugal 727 1994 62.3 39 86 2.5Cyprus 732 1874 52.0 83 205 4.8Ireland 1662 3181 64.2 102 253 6.1Spain 1182 3101 99.1 64 188 6.6Group Avera9e 1050 2563 75.2 74 176 5.1

Group 3 Countries

Ethiopia 75 117 1.7 3.0 4.0 0.3Botswana 131 568 30.0 3.9 32.2 1.6India 120 164 2.0 5.2 6.7 0.1Egypt 277 A67 7.2 6.9 23.4 0.5Sierra Leone 213 286 1.7 4.6 10.7 0.2Group Average 163 332 9.1 4.8 15.3 0.5

Source: ILO C13].

- 140 -Annex 2Table 5

Construction's Role in Economic DeveloDrnent

Job Creation per Investment Unit: Different Types -if Public Projects

PermianentDirect Indirect eaployment

Employment in permanent penmanent (direct plusType of Proiect construction employment employment Indirect)

Airports and ports 54 43 299 348Water and sewace 784 171 - 171Roads 44 35 165 200Rural development 37 387 - 387Education and schools 183 676 23 699Electrification andtelecormiunications 25 2 7 9

Industry and tourism 243 243 350 59'Irrigation 841 306 2,868 3,174Health and othersocial services 111 88 - 88

Housing 839 - - _

Total 100 1/ 45 85 130

1/ Index of man-years per investr;ent unit.

Source: International Labour Office. Employment Policy and Job Creation inand through the Construction Industry, Building and Public WorksCommittee, Eleventh Sessions, Geneva, 1987.

Based on Regional Employment PrograTmme for Latin America andthe Caribbean (PREALC), International Labour Office.

Annex 2- 141 - Table 6

Page I of 2

Construction's Role in Economic Develooment

Relative Size of Construction's Contribution to GOP

ConstructionValue-addedin GOP (1981) Ranking of Construction in Relation to

Country (US$ million) Other Sectors

Senegal 142 Nearly 3/4th of Trp and Com; 30% of Agr; 44% of Mfc.Ethiopia 149 Nearly 3/4th of Trp and Com; 8% of Agr; 35% of Mfc.Tanzania 204 More than 5 times the size of Elc, Gas and Water; 9%

of Agr; 50% of Mfc.Cameroon 272 More than 3/4th of Trp ard Com; 17% of Agr; 56% of

Mfc.Kenya 288 More than Trp and Com; 18% of Agr; 43% of Mfc.Sudan 316 Almost equal to Mfr; 16% of Agr; 54% of Trp ana Corn.Sri Lanka 341 Almost equal to Trp and Com; 33% of Agr; 54% of Mfc.Paraguay 371 More than Trp, Corn, Elc, Gas and Water put together;

24% of Agr; 39% of Mfc.Cote d'Ivoire 657 Equal to Trp and Ccrn; 30% of Agr; 65% of Mfc.Egypt 1/ 1,087 More than 1/2 of Trp and Com; 15% of Mfc; 22% of

Agr.Ecuador 1,104 More than 3/4th of Trp and Com; 71% of Agr; 74% of

Mfc.Pakistan 1,350 Nearly 3/4th of Trp and Com; 18% of Agr; 32% of Mfc.Colombia 1,755 More than 3!4th of Trp and Com; 21% of Agr; 27% of

lAf C.Thailand 2,065 Nearly equal to Trp and Com; 24% of Agr; 30% of Mfc.Turkey 2,134 Nearly 1/2 of Trp and Corn; 21% of Agr; 22% of Mfc.Greece 2,370 Almost equal to Trp and Com; 38% of mrc; 43% of Agr.Philippines 3,200 Nearly equal to Trp, Com, Min, Elc, Gas and Water

put together; 35% of Mfc; 38% of Agr.Indonesia 4,635 More than Trp, Co.n, Elc, Gas and Water put together;

23% of Agr; 48% of Mfc.Korea 4,694 Nearly equal to Trp, Com, Elc, Gas and Water put

together; 26% of Mfc; 38% of Agr.Brazil 1/ 5,036 Nearly equal to Trp, Comn, Elc, Gas and Water; 22% of

Mfc; 45% of Agr.Nigeria 6,283 Nearly equal to Mfc, Trp and Com put together; 40%

of Agr.India 6,847 Nearly equal to Trp and Com; 13' of Agr; 28% of Mfc.China 8,823 More than Trp and Corn; 6% of Mfc; 10% of Agr.Australia 2/ 8,963 Nearly equal to Trp and Com; nearly equal to Agr;

almost equal to Min.Mexico 15,605 Nearly equal to Trp, Com, Elc, Gas and Water put

together; 31% of Mfc; 86% of Agr.Canada 15,981 Nearly equal to Trp and Com; 29% nf Mfc; 1-1/2 times

the size of Agr.United Kingdom 25,890 Nearly equal to Trp and Com; 28% of Mfr; nearly 3

times the size of Agr.

Annex 2- 142 - Table 6

Page 2 of 2

Constructi0n's Role in Economic DeveloPment

Rel:tive Size of Construction's Contribution to GDP

ConstructionValue-addedin GDP (1981) Ranking of Construction in Relation to

Country (US$ million) Other Sectors

France 34,656 Nearly equal to Trp, Comn, Elc, Gas and Water puttogether; 25% of Mfc; more than 1-1/2 times the sizeof Agr.

Germany 59,214 Nearly equal to rrp, Com, Elc, Gas and Water puttogether; 21% of Mfr; more than 3-1/2 times the sizeof Agr.

Japan 97,681 Nearly equal to Trp, Com, Elc, Gas and Water puttogether; 30% of Mfc.

U'A 127,400 Nearly 3/4th of Trp and Com; 19% of Mfc; 1-1/2 timesthe size of Agr.

I/ 1980 figures.Z/ 1979 figures.

Source: World Bank World Tables, Third Edition, Volume I, Economic Data, 1984International Financial Statistics, Supplement on Exchange Rates,Supplement Series No. 9, International Monetary Fund, 1985, used toconvert national currency units Into United States dollars.

Abbreviationsi Agr: Agriculture, Trp: Transport, Com: Cormunications, Min:Mining, Mfc: Manufacturing, Elc: Electricity.

- 143 - Annex ITable i

Construction's Role in Economic Development

Employment by Sectors(in thousands)

Elc, TrpGas, Construc- and 1/

Country/(Year) Total Agr Min Mfc Water tion Com Others

Senegal (1977) 107 10 6 30 5 5 18 33Cote dllvoire (1975) 331 72 2 71 13 30 40 103Cameroon (1981) 381 80 1P 104 20 37 19 '10Tanzania (1980) 607 135 6 105 20 49 58Kenya (1982) 1,038 224 3 147 14 61 53 536Paraguay (1982) 1,039 455 3 152 5 65 35 324Sri Lanka (1980) 1,078 537 5 180 5 98 92 161Turkey (1982) 2,264 45 87 1,028 94 467 109 434Ecuador (1982) 2,346 787 7 287 13 158 101 993Colombia (i984) 3,4:8 47 14 887 26 200 208 2,076Yugoslavia (1982) 5,980 302 134 2,211 116 622 459 2,136Australia (1982) 6,347 410 90 1,193 128 472 503 3,551Egypt (1983) 12,338 4,722 32 1,697 100 619 571 4,597Canada (1985) 12,639 659 210 2,203 131 733 821 7,882Korea (1985) 15,554 3,722 154 3,500 41 908 698 6,531Philippines (1978) 21,643 10,085 129 1,926 79 678 913 7,833Mexico (1980) 22,066 5,699 477 2,575 115 1,296 672 11,232Thailand (1980) 22,523 15,942 37 1,789 60 436 45b 3,804UK (1982) 23,221 632 328 5,897 340 1,447 1,509 13,068France (1984) 23.573 1,659 122 4,991 217 1,579 1,370 13,635Germany (1985) 27,862 1,"16 330 8,480 239 1,870 1,561 15,191Bangiadesh (1984) 28,493 16,448 46 2,483 64 487 1,088 7,877Pakistan (1985) 28,596 14,490 27 3,693 311 ! 319 1,261 7,504Nlgeria (1983) 29,453 9,297 103 1,243 318 909 1,123 16,...Indonesia (1980) 51,190 28,050 358 4,351 735 1,587 800 15,3 1 9Japan (1982) 56,380 5,480 100 13,800 340 5,410 3,490 27,760USA (1985) 117,167 3,603 1,036 22,587 1,549 7,848 6,387 74,177India (1981) 244,605 153,015 1,264 25,143 974 3,565 6,069 54,575

I/ Others include: Trade, Financing, Insurance, Eaucatlon. Health, SocialServices, Public Adrninistration, etc.

Abbreviations: Agr: Agriculture; kin: Mining; Mfc; Aar.ufactliring; Elc:Fcc:tricity; Trp: Transportat4 n.-. a. Ccrt Communications.

Source: ILO Yearbook of Labor Stat::tIcs - 1983 and 1986.

141 - rex 3Page 1 oA 6

Delffy In Pslcal OrMletion of WExtrsc tnm PM are FM

De1ey intRsi¶cal CID of At1tal Caules of

Projet Corpletion Delays Delays4-ttu)I

1 kAYSIA T IOA By 42 - lard cqi,ha. - Catractorfallure'rojet (60 on lot 3) - dela in cormtrtct1in - rtn gerin ard polntrmntKRn 075B 05/5 8 of red ctrco.

2 CXDIA: Atlantico 36 - pxor desigi -poor pfl Ificat1inIrr1gatio Project - mat.-ctor's df=I1t -exmss1n slicirgPMA 1841 L2J?J77 - pr cordiration of uarks.

3 ENiNk 5erx1 Hig1wmy '2 - wers ^ .ditiorts - 1lr,-t sttUeProject - chr In design -l 1te firwial >acity

IP)Ak 255 36 S79 - cntractor's ditfault of cwtractors-irnflatbioo- delays in pkwwnt- lhor tmbles- wvarimm gtag

AWllt: Third Higwy 11 - poor des3in - inrte site imestigation:'. r3ject aver'g - ade.ze Pwmic -pcor citractor nfl Tt;rtly)PPM 2571 OG/2B/79 coritions -ilniedJ.ate esalation irdices

-sWtoae of irmterials- heavy rairn

5 aWPiIL: Fctar: H1ighkV 14 - bad perfor,r of - pcor desigiProject awera sare catractor - ttio strt a period for st.desPPR 2571 OGi2/79 and toornt

-poor pri Alift1cation- shrtA of labor

6 ThihA: Sirikut On 12 - late start - teierng p.rblerProject cy PP&R MM - dwrne in desin tbut - 9rlogical prcblws02/14/8 sLccesful ard trely - clatm

carplet10n by foreign

7 TFAILA41: wo Pta 24 - eniges in dsigW - ladc of rmintnsncieIrrTigalorl l,lrtmts - proauw_ Project (30 form aocaint)PPM 2B5O 02/14/8

8 MIO1A: ra Irrigtin 36 - octractor's Ccault - poor pr1.al1ficationProject - geolugical prble - poor plamrnng

- P5 cntiruiity in oormintion- pcor detign- lac of local ftnrs

9 InWtIL: SW SIt=o O - n prOleIjV.roelec-trc PVjPctP __ 3500_06i_7;81_

- 145 -AT 3Fage 2 of 6

Delys in ftsical Carpletici of WirksExtract fran PCRs Fd

I~ Oelay inRsilal h o Iajor su of ditical Cal Of

Project Cplcti Delays Delays

_ ~ ~ ~ ~ ~ nf~ __ _ __ _ __._ _

o0 rjbTy: Irrigiition 60 - awx start - Pg yreluctant toRFablitatial Project - Le, orf ce acaxnt out and to use ICB.PPAR 3515 OI23/81 -lac of interest fror feimrs

11 WGM: Mile Delta 60 - - slortage of tiles ard csTent Dra1reW I PioJect - oor efficlency of - poofr r gertPPM S33 06/21/82 force accoi.nt

12 INDIA: GxSvan Barrae 48 - averse conditions - cllapse of an old wirProject - raptable constnuctitnPPMR 40)0 06/21/2 ffetho

- dely for accopting ICBprohues

13 lRnEY: First EUat1o 10, - late start -lack of caordinat1cui beb 'Prmject - aderse crnditions ministriesPPR 40 07J2V182 - poor r yment - ciVl w

- Irnati1n- slc proorant- irsiate 5LteYi5sin- poor cntrctor perforance

14 INDIA: First Cal;otta 35 - delays in setting ip - GI dIsagree vltih IUrban eelqxwer.t Project agcy - lrwrplete designPPM 4l0Z /30/82 - iredeate pr.tion - xesive centralization

of deig

1' PAWrGY: Fourth H1iey 2B- poor rrnm o t by - por design (rnterial)Project contractor - uek sevisi1nPCR 4254 12t30182 - lac of rmterials

lf : Forth V1g y 37- -poordesign - poor design (local)Project - poor'ctruction - poor sWervisionPC 4477 Vt09/83 nethods

- bad veathr

17 INIA: C-ata1 (R) 21 - agmcy reornization - lac of ftis for nmintewcecammzrd ai dey. project - ladc of sport 'ranPPPM 4570 03/20/83 famers(Rajastan) - nr pthl em with ocal

cmtractors

18 id (H.P.) D id Id(%&f Pradeshl)

- ' 46 - ke34 6 - ~~~~~~~~Page 3 of 6Delkys in Rysical Conpletion of Wr1s3

Extacts frtma WPCRs a

Delay in I*ysical )Ajor Causes of Adlitiona, Causes of

Project. Carpletion Delays Delays(nomths)

19 SErk: Sites ard 48/60 - inadacate institution - misuErstarding bebtee s8Services Project - urclear definition of ard AgicyPC 4768 1031/83 incoTplete policy but succss in - por plamnlrq

p.lic - lack of local tutis

20 ll EY: Istarbul - adverse corditions - proa.r t prtl em%ter- Sply Project 60 - poor ffnm nt by - reluctance to use csultantPRAR 4E3 01/04/84 agency - lack of coordiration bebee

agaKies- ctwges in desig,

21 B: XADESH: Coast Area - adverse conditions - parRehabilitation Project 90 - lnstitutional weakness - difficulty of accessPPYR 50E2 06/l!i/84 r(90%) - Baik procxx jres' rigidity

- lack of nuintenance

22 SE%E2 L: Secon-d Sedhio. 20% - contractor's failure - lack of interest fran cotractorsProject coTpleted - porr perfonrmwce by - good perfomnm mce by fanmersPCR 5S 06/11184 12 m delay force account cmmunities

23 ETICPIA: Fifth Hilvay - desig, caes - excessive workload to the saTeProject 20 - rain contractorSixth Highway rDjEc - shortage of equiprent -4 local contractors wet ttarnptFM 5168 06/24/84 - adverse ecacrnic ard despite achievirg, wo1t on

political orditions sdcdule

24 GWAH#0 First Highly 66 - lncreased soope of - por designProject st>-s - delay for starting wcrksPM 519 06/D'/84 - contractors bankrt - por preualification

- lack of foreign - unremlistic asses3mrnt of Qhanocurrecy financial reservEs

25 G*A. Second ,1Himy 53- sortage of Trterlals -need for training for contractorsProject - ine)periencBd - Lrnmlistic asseswret of GhanaKR 5L9 06/Z/84 cV1tractors fitwical resairces

- adve-se ecorcnc - cntractors bett,er than forconditions account.

25 LE9JTHO: Secord HYghsiy 12 - slot constnuction - poor designProject - s tractor's defau'tPP?R 5214 O6/01/84 - s9rtages of e.Vlosives,

nrterals aid labor

V PARGJAY: Fifth Higway 24 - contractor's failure - poDr pralificationProject - use of prr nmterials - poor supervision_ 5451 OV0B/8

- 1 4 7 - Page 4 of 6

Delays in Piysical Carpletion of WborsExtracts fran PCRs ard PPARs

Delay inPhysical Pajor Calses of Additional Causes of

Project Catpletion Delays Delays(onuths)

2B PNG: Secord H1ighlands 15 - soil corditions - unrealistic designRow Irprovent Project - cotractor stopped wrks - slod settleient ofPCR 5488 02J25/85 cntractor's clatn (foreign)

29 MRP1L: Seco.d Educaticn 0 - iatisfactory constriction - change in projectProject - lack of raintenance - adverse conditicnsPPM 5554 04/03/85 - lack of cooirdiaticn bebween

agerxi es- delays in lard acQlsition

30 T1HAJLM: Pz.ttani Fciro- 0 - N prble s Good perforncrelectric Pro,ectPCR 56U7 04/17/80

31 IN1OIAfA: Fourth Highey 30 - mnrgent weakness of G - one contractor detaultadProject H lgSys - freqJent chnes in desIgnPCR 5624, 04130/85 - iMageTet Weakness of

Inrxesian ccnt.-actors

32 ITIA: ryma Irrigation 0 - well-kncu technologyProject - na t of trk related toPPAR 60 W 17/85 capacity of ageny

33 NTA*: Third ard 49 - additonal wrks - poDr designFourt.i Road Project (3) wether - financial contractor'sPR 5793 06/28/85 - ocntractor's failure problem (foreign)

- por design36 - poor contractor rennagent(4) (foreig)

34 INDC 3IA: Seventh - delay in design - poor prequalificat1on criteriaIrrigation Project 24 - cr ontractor - lack of fanrer's piat1ciptionPPAR 5881 10/04/85 (9OX) performnce - lack of furds for neinterance

35 PHILLIPINE5: Tarlac 46 - coatractxr's detault - delays in land acqilsitionIrr1gdtion Systen lncove- - adverse clietick axditicnsnEt Project - 62X by force accountPPPR 5969 1211285 j - poor design

36 VI ULLPINES: Jalaur 18 - contractor's default - shortage of oil ard ceentRoad !rprovenent ProJect - cuTbersare procediresPPAR 5969 12/12/855 - poor escalation fomrula

- 53X force account- poor equipTent mnag8mnt

krx 3- 148 - Page S of 6

Delays in FVsical Carpletion of WbfsExtracts f ran P5 sad PPfs

Delay intRrisical major Cau oi Addiltlmal Causes of

Project CaYpletlon Delays Delays(lnths)

37 TIKILAJ: Nrtheast bril 39 - di%xfte vith cosltant - agency reluctant to fol1VDevelcprent ProJect - bad relatimship with ICB proceduresPPA 5990 WD185 c8ntrctors - agmcy reluctance to use

consultant- inarwlate packagirg

(splittirg into srallercntracts resolve tteprcbl em)

3B RHILPIPS: 36 - &tese coditlons - poor designDevelmpent PrTject (I=plete) - contractor's failure - lneerenced contr!ctorsPC 6141 04/11/86 - lroprrrate packaging

- caTTrity disntlios- poor sevision

39 TVULAND: Baurkc Site ard 3 - cmtrctual diute - irJnqate cntract doozrntIrwvces Project - inra 1ate tedmwlo of

PCR 6174, C4CV/86 preast systae- ire¢qerlence of N.H.A In

cxbitract administratlon

40 KEA: I4ih Aitersd Area 84* - chages in design - initnte desigl prarationDewelinent Project estm - lar of canm1brent fromPC 6197 6/ZIL/86 - lack of fuds farmers for contructlon

carporent

41 : Third Yrong Saq 72* - hsges in designIrrigatlon Project - lack of fntsPM 6197 0EJ21/86

42 IXSLA: Sixth P<*er- 20 for unit 4 - lack of access - delays finalizirg contractsProject 12 for unit 5 - misalig'np t of aer - IQRess In constructionPaz 53 02/(t7M hkse buildirg supervision

- usatistactory perforBanc*of contractor

43 KEA. NirdDl Site and 30 - contractor's failure - procuralet, rkloadServices Project - self-elp delay erg cctractoPPAR 272, (17117186 capacities

- nreallstic forecast-rice-schelle-for self-he,pconstnrction

- nees for trainlri'The Korn timent fdecidE to suss construction in view of bugt

constraints.

kriex 3- 14 - Page 6 of 6

Delays In Romical Carpletirn of WbrsExtracts ftran s ad Ms

Delay inRysical Vajor Causes of kiitioa1l Causes of

Project CaTpletion Delays Delays(mmths)

44 KPOL: Secoi Hilgwy 24 - mixed contractor - poor pre.allficationProject perfomnce - poor sWervision ardPC 6Z6 06/12/86 - poor coordirntion col ination

(wrizontal slicing) - delaye pkyents- late purdse of eJ1pi nt

45 INXtOlA: Secord Urban 6/12 - successful muren t - apppriWate design starndrdProject - apporWIate packagingPPAR 6329 -6I27/86

46 XDRfAk Pyontae KurWrng 12 - contractor's failure - por desigeIrrigatilun Froject - change in design - poor pre iatfication

:rpact eval Peport - good organization - poor eupipTent nmnagent by07/28185 (draft) rmintenance ageXcy (for rent to fanrers)

47 ThAIL*CN Fifth Edurstion 12 - Lard Ackuisition - construction designProject funding selection of localPCR 09/30/85 (draft) consultants

48 WLAYSIA: National STmll- 36 - staff sIowtage for agewcy - lard accuisition delaysscale Irrigation Project - staff s&1rtagePCR 01/24/86 (draft) - lack of funds

- lack of sqpport by famei-s- wNk by force acccant

49 INDX(SIA: Eleventh 20 - pr design capacity - slow lard acquisitionIrrigation Project - slod desig, reviaPCR 04/C0/86 (draft) - poor prelVmrinary desigi

- tractors o.k. - lack of furds for ramnterawce(by fo-ee accunt)

50 INOXN5IA: Eighth 24 -lae start - late corpletion of designIrrigation Project - omtractors perfomed wsll - lard ayisitimn delaysPC% 04/CBJSB (draft) (except one) - shortage of frus

- s9ortage of naterralsL - lack of tanmers participation

Annex 4- 150 - Page 1 of 4

Experience of Financial Assistance to Domestic Contractors

1. Ethiopia: Fifth Highway Project Cr. 332-ET (September 1972)Sixth Highway Project Cr. 552-ET (June 1975)PCR June 24, 1984

Both projects included financing of construction equipment to beused oy local contractors who were awarded contracts for project roads. Asubsidiary loan agreement allowed contractors to borrow at comnercial ratesfrom AINB (Agriculture and Industrial Development Bank).

Fifth SixthProlect Project

Total project cost US$m 22.0 54.7

Construction IndustryComponent U 1.5 2.0

Closing date appraised Dec 31 1976 Dec 31 1979actual Dec 31 1980 Dec 31 1981

Implementation

The four domestic conitractors involved in the project, includingthe two who benefitted from the financial assistance for equipment purchase,failed to repay the related loans and other advances.

2. Ghana: Second Highway Project Cr. 594-GH Ln. 1181-lH Dec 1975PCR June 27, 1985

The construction industry component includes loans to domesticcontractors for road maintenance equipmeit and spare parts, and to domesticquarry operators for equipment and spare parts, through BHC (Bank of Housingand Construction).

Total project cost US$m 35.8

Conistruction IndustryComponent 9.115

Closing date appraised Dec 31, 1980actual March 31, 1983

- 151 - Annex 4Page 2 of 4

Lmpleementation

Protect funds were channelled through BHC to 28 private domesticcontractors. BHC created a subsidiary, Plant-Pool, as a comnercial-run firmleasing equipment to contractors. To speed up procurement, the choice ofequipment was often made by BHC rather than by contractors. Sufficientweight was not given to the need for agent and servicing facilities.Advant3ge of standardization ordering was lost due to delay in procuringequipment (World Bank partly responsible). Contractors failed to comply withthe terms of their purchase contracts, perhaps because they had to bear theexchanqe risk.

3. Morocco: Seventh loan to BHDE. Ln 1061. Oec 1974Eighth loan to BNDE. Ln 1428. May 1977PPAR 6058 Feb 10, 1986BNDE - Banque Nationale de Developpem.:nt Economique

The purpose c" the project was to assist BNKE's financing of theindustrial sector. The eighth loan also included a pilct project to assistdeveloping small-scale contractors and industries.

Seventh EigtkLoan Loani

Total loan amount U.S.Sm 30 45

Closing date appraised 12/31/78 09/30/81actual 12/31/81 03/21/83

Implementation

7th Loan The loan helped 38 projects with an aggregate investment cost ofUS$ 115 m. Host projects have been operated successfully.More than one third of the $'0m loan was used to finance fourlarge cement projects. One of them had financial difficulties.Five other small construction-related projects were in arrears.

8th Loan Ten of the problem projects were related to the constructionsector, including four brick-production projects.

4. India: Bihar 'ural Road Project, Cr. 1072-IN, Dec 1980Supervision Feb 5, 1986

The construction industry component was for purchasing equipmentfor hiring to small contractors involved in the project.

Total project cost appraised US$m52.9

Construction IndustryComponent US$m 3A4

Closing date appraised June 31, 1986revised June 1987

- 152 - Annex 4Page 3 of 4

Implementation

Rural Engineering Organization (REO) of Bihar, part of PWD,procured the equipment and hired it to contractors. Most of the equipmentwas delivered by June, 1982. Some changes in numbers and types were agreedupon in December 1982 for the equipment. Procurement was done under LCBprocedures as well as by bulk purchase by Government. The project performedquite well because small contractors were unable to afford equipmentpurchase. It is nr: known, however, whether the PWD's operations werefinancia,ly viable.

5. Nepal: Second Highway Project Cr. /30-NEP (Oct 1977)PCR June 20, 1986)

Project irncluded provision for the purchase of road constructionequipment and spare parts for hire to local contractors engaged in feederroad construction.

Total project cost appraised US$m 20.0

Construction IndustryCcmponent * 1.32

Closing date appraised Dec 31 1982actual Dec 31 1984

Irplemeritat ion

Delays of about two years occurred In procurement and delivery (5years for tractors). It was fortuitous that all the construction contractswere also delayed by about one year, otherwise the non-availability ofconstruction equipment would have severely hampered construction activities.Most of the equipment was used by contractors but less extensively thanexpected (hire charges amount to 13% of purchase price). Contractors werereluctant to use water tankers. graders, and vibrating rollers. Equipmentprocurement by the PWD was too ~'ow. In addition, contractors were nottrained to use equipment.

6. Pakistan: Third Highway Project Cr 974-PAK, September 1980Supervision Rfeport Dec. 23, 1985

The project included funds to Industrial Development Bank ofPakistan (ICBP) for on-lending to contractors.

Total project cost U.S.$m 93.17

Construction IndustryComponent * 5.14

Annex 4- 153M Page 4 of 4

Impl ementation

A UNOP funded consultant assisted IDBP for 3.5 years. By fall1982, two loans to contractors had been granted totaling U.S.$m 1.3. Unusedfunds were reallocated to works. Procedure for processing loan applicationswas very cumbersome and collateral requiren,ents were difficult forcontractors. Contractors involved in highway project could not obtain loanin time for purchasing equipment required for the works.

7. PhilipDines: Kiab 1514-PH, 1979Information provided by IDF Division's East Asia Region

A small part of the Fifth Bank Loan (Loan 1514-PH) to the PrivateDevelopment Corporation of the Philippines (PDCP) was used for providingfinancial assistance to contractors for purchasing construction equipment.Three sub-loans were given to contractors as follows:

Sub-Prolect Number Contractor Amount

A-1 Hydro Resources Contra:tors $4.50 m.

B-4 DMC Construction Equipment $0.11 m.

B-21 Philippine Development andIndustrial Corporation $0.40 m.

Implementation

Sub-projects A-1 and e-4 were quite successful and the contractorspaid back the loans. However, the contractor for the sub-project B-21 becamebankrupt. Overall, the operations of the PDCP were successful.

- 154 -Annex 5Page 1 of 2

Training Strategy of Large Contractors

The contract for the civil works of the Mangla Darn Project inPakistan was awarded in January 1962 to a consortium of contract(ors led byGuy F. Atkinson Company, one of the large contractors of the USA. At thattime, it was the largest single civil engineering contract ever let on theunit price basis. The coiitractor estimated that, at the peak of construction,some 20,000 workers of various skills - mechanics, electricians, V.?lder,,equipment operators, maintenance workers and other skills - would berequired. It was clear that all the skills in Pakistan, assuming they wereavailable anl acceptable, would not be sufficient to meet this requirement.The option of getting skilled foreign workers was ruled out in view of theexorbitant cost.. The contractor recognized that training workers would beone of the most important factors for completing the job successfully. Arextensive training program was, therefore, designed.l/

"As an example, the training of an equipment operator began afterhe had been interviewed by the employment office and was determinedto be a possible candidate. At this time the man was hired andentered on the payroll at a trainee's rate - generally half of therate for a beginning operator. Initial training sessions consistedof verbal instruction along with the use of small-scale models toillustrate how the units should be manoeuvered into the properpositions during the work cycle."

"Following this initial Indoctrination, the man was placed on apiece of equipment with an instructor at his side and given theopportunity to learn under actual conditions. The 'training units'were never worked in an area where major operations were going on,but were used in areas requiring work in the future; thus, anyuseful work accomplished resulted in some return from the offort.If the man exhibited an aptitude, the traininc; continued until hecouldt qualify for the starting rate of pay, or If he could not, hewas tried on another type of machine or terminated."

"Other portions of the programme were devoted to trainingmechanics, welder,, carpenters, pipe-fitters. painters, steelerectors and reinforcing steel setters, with the major proportionconsisting of mechanics and carpenters. This programme proved tobe quite successful for two prime reasons: the desire on the partof the trainees to learn, and the skill and patience of thetraining staff."

1/ The Mangla Dam: Proceedings of the Institution of Civil Engineers,England, November 1967 and September 1968.

- 155 -Annex 9Page 2 of 2

"One of the early efforts at the site was the introduction of astrong safety programme for all the workers. Each employee wasgiven Initial indoctrination in the subject of safety at the timehe was employed and each man attended a safety meeting conductedweekly by his own supervisor. At these meetings, the actualexperiences of the past week were aiscussed and ways of preventingaccidents brought to the attention of the men. In addition, aforce of safety supervisors was in the field at all times to assistIn eliminating potential dangurs and assistina In the weeklymeetings. This programme has produced good results with an overallrecord of only 23 lost-time accidents per 1,000,000 man hours ofwork."

The training strategy followed at the Mangla Project was a great success.The main factors contributing to success were:

o there was work to be done and it was not possible Lv du it withouttrai.'nig the workers; the contractor, therefore, had a strongincentive to invest on training.

o the workers were hired after careful selection and were paid lowerwages as trainees; wages were increased gradually as the workcrswere trained and became more productive; the workers had thepotential t. learn, and were given an incentive to learn quicklyand earn more.

o the training was relevant to the job and there was opportunity toapplv the training innediately and Improve efficiency cndproductivity;

o the training staff of the Contractor were working full timethroughout the construction period and the training process wascontinuous and relevant tc the needs; the success of the trainersand the trainees was measured by the physical results which weremonitored; there was the feedtack and the opportunity to Improve,as needed.

Guy F. Atkinson Company used this successful training strategysubsequentlj on the Gurl Dam Project in Venezuela. A detailed description ofthe training program for the Guri Da.n is attached.

- 156 - Annex 6Page 1 of 3

Effect of Delays in Payments on Contractor's

Cash Flows and Profitability

ror purposes of obtaining a broad picture of the effects of paymentprocedures on contractors' cash flows and profitability, 12 possiblescenarios of working capital and equipment purchase loans to contractors,employers' advarices for mobilization and equipment purchases, and employers'payment performances were studied. While there would no doubt be many othercombinations of circumstances, the 12 scenarios provide a broad enoughpicture to illustrate the nature and severity of contractors' financialproblems and their potential effects on their perlormance. The followingassumptions were made for examining the potential effects:

Assumptions ccAnon to all secenarios

Value of the contract: 1000 currency units (CU)

Contract perlod: 5 years

Retention amount: 10 percent of monthly certificatessubject to an aggregate maximum of100 CU.

Payment provision: Contractor submits monthly bills.Employer is expected to pay withi30 days, but the contract does r-tstipulate interest on delayedpayments.

Contractor's initial workingcapital requirements: 100 CU

Contractor's investment capitalrequirements: 100 CU for purchase of equipment.

Centr-actor's net profit: 40 CU. It amounts to 4 percent ofthe total contract a- unt of 1000CU over a period of t've years.

Alternatives Considered

Casc I: (a) Working capital is assumed to be -i interest-onlyloan from cocrrnercial banks at 10 percent interest(Alternative A) or 15 percent interest (AlternativeB). The loan is due for payrnret at the end of thecontract period of five ye?r .

(b) Investment capital is assurmed to be an lnterest-onlyloan from commercial banks at 10 percent interest(Alternative A) or 15 percent intirest (AlternativeB) in the first year cr the contract. The loan isthen paid back in eq.al monthly Installments, ofprincipal and interest, over the remaining contractperiod of four ye rs.

1 157 -

Annex 6Page 2 ef 3

Case II:

(a) Same as case I (a).

ib) Employer provides an interest-free advance of ;00 Cufor the contractor's insestment capital requirements.No payments are due on the advance for the firstyear; the ad:ance is then paid back in equal monthlyinstallments over the reiaining contract period offour years.

Case III:

(a) Employer pr .vldcs irterest-free mobilL aticn advance(working capital) of IOr CU. No payments are due formobilization advance for the first sear. The advanceis then paid back in equal mcnthly instalments(principal only).

(b) Same as Case II ,).

For each of the three Cases mentionel above, four possiblevariationis of the employcr's payment performan:e were examined. Theyincluded: payment after 1 month, payment after ? months (2-month delay),payment after 3 month: (3-month delay), and payment alter 4 months (4-monthdelay). These delays represent the average for- each monthly payment. Ofcourse, the delays vary in practice, but it Is assumed to be uniform forpurposes of computing.

Given the large number of cases and alternatives and the long timeseries (60 months) of the events and effects, the study was carried out usinga Lotus 1-2-3 computer model. The model was programmed to compute, forvarious cases ind payment performances, contractors' net profits, interestexpenies on Laorrowinqs, the maxImum amount of regative cash flows, the timewhen ne5qtive cash Iow occurs and the pe-lod regative flow remains. Each ofthese factors has an impact on the contractor's financial vlabilit; and hismotivatton for doing qiuality work on or ahead cf the contract completionschedulle. The results of the study are swmmarized in the table in tnefollowing page.

The above results show that in Case I, with a 1-month delay inp:innents and a borrowing rate at 10 percent interest (Alternative A), theassuned net prcfit of 40 CU will be reduced to 33.8. The borrowing burden is187 CU, which is almost five times his profit. This is indicative of theless favorable borrowing terms tor working capital and investment loans. Itis also noteworthy that his maximum cash deficit will be 50 CU; It w;ll startafter the first 30 months of the contract and %ill continue for 26 months.These l"gures are also indicative of the unfavorable terms of his borrowingswhich 'impose an Interest-b,urden of 187 CU. Obviously the amount and the longperiod of negative cash flows are unacceptable. The contractor will surelybid higher to avoid this situation. For example, if he allows for a profitof 90 CU (40 + 50) in his bid, the cash flow daficit will disappear and theInte,-est burder will also decrease substantially. The Contractors' netproftts, Interest expenses and cash flow situations beccne worse if theborrowing rate of interest is !.5 percent (Alternat'-e B).

Annex 6Page 3 of 3

Effect onContractor's Finances 1-Month 2-Month 3-Month 4-Month

Delay Delay 01.lay Delay

A B | A B A B A B

Net Prol'its (CU) 1Case 1 34 -11 29 -20 23 -32 16 -43Case 11 46 12 42 4 36 7 30 -18Case XII 88 82 8J 73 77 62 71) 50

Interest Expenses (CU)Case 1 187 244 192 254 199 165 205 276Case II 153 188 157 196 163 106 170 218Ca:e III 111 118 116 126 122 136 129 142

Maximum HegativeCash Flows (CU)

Case I -50 -83 -67 -103 -86 -125 -108 -146Case li -38 -64 -55 -03 -74 -102 -96 -125Case IiI -77 | ' -94 -93 -112 -119 -130 -139

Time wi,en Negative Cash |Flows Start (Months) I

Case I 301 24. 23 19 18 17 17i 16Case II 3 29 27 24 21 18 19 17Case III 2S 28 25 24 21 21 19 19

Period of Ne3jat1,eCash Flows (lonths)

Case I 6 36 41 42 45 45 47Case II 21 J 30 30 36 39 44 43 46Case IlI 31 32 37 37 40 40 42 42

In Case III, the contractor gets advances for both working capital andequipment. Although, with a 1-month delay in payments, his profits increaseand his interest burden decreases, he will have a more adverse maximum cashflow deficit because he tias to pay back both advances in equal installmentsafter the first ye3r. This probleam can be reduced if the grace period ismore than one yaar or the repayments are related to the size of his monthlybills ...;tead of in fixed equal installments. As in other cases, thesev2rity of the contractor's problems increases rapidly ehen payments aredelayed further.

- 159 -

Annex 7Page 1 of 3

Typical Project Completion Time (Years)

By Regions and Sectors

Specific Investment East West East SouthLoans/Credits Africa Africa EMENA LAC Asia Asia Bank

Agriculture 8.5 7.5 8.5 8.5 8.5 9.5 8.5Area Developmert 8.5 7.0 8.5 8.0 8.0 10.0 8.5Irrigation & Draina§e 8.5 8.0 8.0 9.0 8.5 9.5 8.5

Education 8.0 7.0 9.0 9.0 7.5 10.0 8.5

Industry 6.0 - 6.0 6.0 7.5 5.0 6.0

Power 4.0 - 6.5 6.5 6.5 8.5 6.5

Transportation 10.0 6.0 8.0 6.5 7.0 7.5 6.5

Urban 8.0

Water Supply & Sewerage - 7.0 10.0 8.5 8.0 8.0 8.0

Note: A protlect is assumed to be completed when 95 percent of theloan/credit is disbursed.

Source: Bank's Standard Disbursement Profiles, October 1985.

- ISO -

Annex 7Page 2 of 3

Typical Project Completion Time (Years)

Selected Countries

AllSpecific All All

All Investment Agriculture TransportationCountry Loans Loans Loans Loans

East Afric!Bostwana 7.5 7.0Ethiopia 8.0 8.5 9.5Kenya 9.0 10.0 10.0Madagascar 7.5 8.0 8.0Malawi 5.5 5.0Sudan 9.0 9.5 10.0Tanzania 8.0 8.5 9.5Zaire 6.5 7.0Zambia 8.0 10.0

West AfricaCameroon 6.5 6.0 6.5 5.5Ghana 7.5 8.5Ivory Coast 8.0 7.0 8.0Liberia 6.5 6.5Nigeria 8.5 8.5 7.5Senegal 7.5 7.5 8.0

EMENA-Egypt 7.5 8.5 10.0Morocco 8.5 9.0 10.0Romania 5.0 5.0Tunisia 8.5 9.0Turkey 7.0 8.0 9.0Yugoslavia 6.5 6.0 7.5 5.0

East AsiaIndonesia 8.0 8.5 8.5 7.iKorea 4.5 6.0 6.0Malaysia 8.5 8.5 8.5Phillippines 8.0 8.5 9.0Thailand 7.5 8.5 9.0

- 161 -

Annex 7Page 3 of 3

Typical Project Completion Time (Years)

Selected Countries

AllSpecific All All

All Investment Agriculture TransportationCountry Loans Loans Loans Loans

South AsiaBangladesh 7.5 9.5 10.0Burma 8.0 8.5 10.0India 7.5 8.0 8.5Pakistan 7.5 9.0 9.5Sri Lanka 9.5 10.0 10.0

LACBrazil 7.5 7.5 7.5Colombia 7.0 7.5Jamaica t.5 7.0Mexico 6.5 7.5 7.5Peru 7.1. 8.5

Note. A project is assumed to be completed when 95 percent of theloan/credit Is disbursed.

Source: Bank's Standard Disbursement Profiles, October 1985.

- 162 -

Annex 8Page 1 of 3

OFO's Analysis of Delays in Project Completion

Distribution of Prolects Evaluated bv Sectors

Through 1979 1980-1981 1985Ho. X No. X No.

Agriculture 129 25.1 231 34.3 55 28.6

Human Resources 37 7.2 87 12.9 22 11.5(Education,Population, 4ealth)

Urban, Tourism 2 0.4 15 2.2 7 3.6

Sub-Total 168 32.7 333 49.4 84 43.7

Industry 13 2.5 27 4.0 13 6.8

Public Utilities 118 23.0 111 16.5 28 14.6

Transportation 142 27.6 125 18.5 38 19.8

Sub-Total 273 53.1 263 39.0 79 41.2

Others

DFCs 50 9.7 53 7.9 16 8.3

Program Loans, T.A. 23 4.5 25 3.7 13 6.8

Sub-Total 73 14.2 78 11.6 29 15.1

Total 514 100.0 674 100.0 192 100.0

Source: OED's Twelfth Annua, Review of Project Performance Results [46]

- 163 -Annex 8Page 2 of 3

OED's Analysis of Delays in Project Comoletion

Distribution of Projects by Size of Time Overrun or Underrun

Percentage eOverrun/Underrun Through 1979 1980-84 1985Overruns No. % No. % No. %

200% or more 13 2.9 30 4.6 8 4.4100-199.9%t 53 12.0 129 19.6 34 18.659- 99.9% 118 25.8 176 26.8 57 31.120- 49.9 116 26.4 172 26.2 49 26.8

Undler 20% 61 13.9 77 11.7 17 9.3

361 82.0 584 88.9 165 90.2

Implemented on time 44 10.0 31 4.7 _12 6.5

Underruns 35 8.0 42 6.4 6 3.3

TOTAL a/ 400 100.0 657 100.0 183 100.0

a/ Excluding 9 projects for which no data are available.

Source: OED's Twelfth Annual Review of Project Performance Results [46]

- 164 -

Annex 8Page 3 of 3

OED's Analysis of Delays in Project Completion

Estimated and Actual Completion Times, by Sector, 1985

No. of Average Estimated Average ActualSector Projects Completion Times ComDletion Times Average Overrur

(months) (months) (months) X

(i) by Sector

Agriculture 54 56 81 25 45Education 15 57 88 31 54Population 7 46 84 38 83Industry 13 38 68 30 79Public Utilities 23 45 73 28 62Transportation '5 45 81 36 80DFCs 16 51 73 22 43Others 14 39 63 24 62

a/ Excluding 9 projects for which data were unavailable.

Source: OED's Twelfth Annual Review of Project Performance Results [46]

- 165 -

Annex 9Tables I and 2

rInvolvemprit of Domestic Construction Industry in Bank Prolects

Planned Procurement of Goods and Works in 165 FY86 Projects

Table 1. Financing from all Sources

Planned Procurement (USS million)Region No. of

Projects ICB LCB Other Total

East Africa 28 423 64 347 834West Africa 31 613 198 652 1463East Asia and Pacific 35 1,959 1.095 1,157 4,211EMENA 21 1,394 205 912 2,511South Asia 23 1,657 1,045 691 3,393LAC 27 777 1,100 910 2,787

Total 165 6,823 3,707 4,669 15,199

Percent 45 24 31 100

Table 2. Financed by Bank/IDA on1y

No. ofRegion Countries ICB LCB Other Total

East Africa 28 281 55 180 516West Africa 31 303 63 184 550East Asia and Pacific 35 1,142 425 352 1919EMENA 21 691 82 247 1020South Asia 23 1,074 377 386 1837LAC 27 492 464 464 1420

Total 165 3,983 1,466 1,813 7262

Percent 55 20 25 100

- 166 -

Annex 9Tables 3 and 4

Planned Procurement of Civil Works in 165 FY86 ProJects

Table 3. Financed from all Sources

No. ofRegion Countries ICB LCB Other Total

East Africa 28 176 47 43 266West Africa 31 224 96 157 477East Asia and Pacific 35 1,247 813 295 2,355EMENA 21 967 132 210 1,309South Asia 23 203 645 152 1,000LAC 27 271 586 418 1,275

Total 165 3,088 2,319 1,275 6,682

Table 4. Financed bY Bank/IDA only

No. ofRegion Countries ICB LCB Gther Total

East Ai,rica 28 119 27 16 162West Arrica 31 122 21 17 160East Asia and Pacific 35 619 365 28 1,012EMERA 21 514 44 101 659South Asia 23 143 262 42 447LAC 27 96 339 263 698

Total 165 1,613 1,058 467 3,138

Percent 51 34 15 100

- 167 -

Annex 9 (Table 5)1 of 3

Actual Procurement of Civil Works in Bank Projects in Selected Countries(FY84-86)

Contracts won by Contracts won byAll Contracts Domestic Foreign

Contractors Contractors- ~I. ._____ _ _

ICB LCB Total ICB LCB Total 1CB LCB Total

Africa RegionsKenyaeContracts (No.) 7 9 16 6 9 15 1 - 1Amount ($m) 20 7 27 19 7 26 1 - I

TanzaniaContracts (No.) 10 9 19 8 9 17 2 - 2Amount ($m) 12 6 18 8 6 14 4. - 4

NigeriaContracts (No.) 4 2 6 2 2 4 2 - 2Amount (Sm) 35 3 38 19 3 22 16 - 16

Sub-TotalContracts (No.) 21 20 41 16 20 36 5 - 5Amount (Sm) 167 15 83 46 16 62 21 - 21

East Asia and_Pacific Region

IndonesiaContracts (No.) 121 31 152 99 30 129 22 1 23Amount (Sm) 420 57 477 199 28 227 221 29 250

KoreaCont.racts (No.) 73 55 128 73 55 128 - - -

Amount (Sm) 390 190 580 390 190 580 - - -

Hal avsaContracts (No.) 23 94 117 22 93 115 1 1 2Amount (Sm) 62 69 129 61 56 127 1 1 2

PhilippinesContracts (No.) 42 45 87 41 45 86 1 - 1Amount (Sm) 22 31 53 21 31 52 1 - 1

ThailandContracts (No.) 60 62 122 60 62 122 - - -

Amount (Sm) 122 31 153 122 31 153 - -

Sub-TotalContracts (No.) 319 287 606 295 285 580 24 2 26Amount (Smi) 1,016 376 1,392 793 346 1,139 223 30 253

- 168 -

Annex 9 (Table 5)2 of 3

Actuall Procurenent of Civil Works in Bank Prolects in Selected Countries(FY84-86)

EMENA RegionTurk !yContracts (No.) 15 35 50 11 35 45 4 - 4Amount ($m) 91 60 151 72 60 132 19 - 19

Contracts (No.) 33 14 47 21 14 35 12 - 12Anount ($m) 251 13 264 2!5 13 228 36 - 36

YugoslaviaContracts (No.) 23 1 24 22 1 23 1 - 1Amount (Sm) 108 3 111 107 3 110 1 - I

Sub-TotalContracts (No.) 71 50 121 54 50 104 17 - 17Amount ($m) 450 76 526 394 76 470 56 - 6

South Asia Regian lPakistan Contracts (No.) 8 28 36 3 27 30 5 1 6Amount ($m) 17 36 53 3 34 37 14 2 16

IndiaContracts (No.) 55 536 591 48 536 584 7 - 7Amount ($m) 478 465 943 311 465 776 167 - 167

BangladeshContracts (No.) 6 19 25 4 19 23 2 - 2Amount (Sm) 18 8 26 8 8 16 10 - 10

SuL-TotalContracts (No.) 69 583 652 55 582 637 14 1 15Aiount ($m) 513 509 1,022 3'22 507 823 191 2 193

- 169 -

Annex 9 (Table 5)3 of 3

Actual Procurement of Civil Works in Bank ProIects in Selected Countries(FY84-86)

LACBra7ilContracts (No.) 19 36 55 19 36 55 - - -

Amount ($m) 35 32 67 35 32 67 - - -

Mexi coContracts (No.) 67 33 100 67 33 100 - - -

Amount ($m) 294 17 311 294 17 311 - - -

ColombiaContracts (No.) 66 14 30 61 14 75 5 -

Amount ($m) 161 17 178 136 17 153 25 _ 25

Sub-TotalCont.racts (No.) 152 83 235 147 83 230 5 _ 5Amount ($m) 490 661 556 465 66 531 25 -

GRAND TOTAL:

Contracts (No.) 632 1,023 1,655 567 1,020 1,587 65 3 68

Amount ($m) 2,536 1,043 3,579 2,020 1,011 3,031 516 32 548

- 170 - BibliographyPage 1 of 3

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