THE WORLD BANK POL ICY PLANNING AND RESEARCH STAFF Infrastructure and Urban Development Department /W%U -,-0 0 Report 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 ard shiC.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 Wne W erd_ in The Construction Industry in Development Issues and Options D -aj Paper The World Bank 1818 H Street, N.W. Washinyt.n, D.C. .0433, U.S.A. All rights reserved Manufactured in the United States of America First Printing Discussion Papers are not formal publications of the World Bank. They present preliminary and unpolished results of country analysis or research tiat 4s circulated to encourage discussion and conrnent; citation and the u,e ,f .;ch a paper should take account of its provisional character. 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The latest ea.ition of each of these is available tree of chargejf-m Publicat cns Sales UJnit, Department F, The World Bank, 1613 H Street, N;W.W, Washi-gton, D.C. 20433. U.S.A., or from OublcaElon, ThL World Bank, 66, avenue dilena, 75116 Paris, France. Syed Salar Kirmani is a consultant in the Infrastructure and Urban Development Department of the World Bank. ABSTRACT ihis report describes the scope of the construction industry and the role of the contractors. It explains the close relation between income, investment, construction and growth and demonstrates that the construction sector contributes, directly and through its backward linkages, more to GDP Ind employment than most other sectors of a country's economy. The report enphasizes that the value-added In construction, quality of work, cost-effectiveness and completion time are important criteria for judging the ceficiency of the industry; its development requires improving the policies, reforming the systems, building the institutions, and 'mrproving its business environment rather than assisting individudl contractors. The report analyzes past Bank strategies fcr developing the industry and derfnstrates that th:y were not effective. It identifies the major barriers constraining the industry,explores the options, and recorrmen:s 'the basic strategy for promioting the industry. Tht-. i dsic strategy calls i;^ a comprehensive program for developing the construction sector which inter alia includes: zstablishing the rector policy, designating the Implementing ministry, reforming contracting practices, establishing training programs, improving credit facilities, strengthening contractors 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 effective instrument for Bank assistance to the industry. The report argues that the considerations which led to the establishment of the Bank policy in 1973 for promoting the industry are more compelling today than at the time of its approval. At that time, the Bank was launching a major effort to increase its lending to projects in the new sectors (agriculture, education, urban, population, etc.) and recognized the need for developing the domestic construction industries for implementing those projects. Today,;-ending to the new sectors has'reached hinh levels and domestic contractors are implementing most Bank-finarWced projects, but their ability to achieve -the Bank's objectives of e'f-flciency and economy is seriously constrained by inefficient practices and the adverse business environment of- the industry. !Consequently, delays in project 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 have 1ncrtased 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 industry for Increasing the efficiency of investments ind enhancing the pace of development is substantial and there is both the need and the opportunity for the Bank to develop this potertial. Tne Bank's credit lity will be judged by the quality and efficiency of its projects, not only as approved by Its Board but a.so as implemented. As a Levelopment institution, it is also concerned with the efficiency of the country's own investments.- The report concludes that the rat;onale for Bank assistance to the construction industry is strong ar,d it has ccimparative advantage in terms of its experience and opportunities for developing the industry and demonstrating once again Its leadership in economic development. ACKNOWLEDGEMENTS The author is grateful to the guidance and assistance provided by M4essrs. Louis Pouliquen and Curt Carnemark throughout the preparation of the report. The author is also indebted to Messrs. Es-a Bennathan, Jeffrey Gutman, Gregory Irngram and Donald Strombom for their extensive review and comments and to Messrs. John Blaxall, Francis Colaco, David Cook, Jcae Doyan, Asif 7aiz, Per Fossberg, Ernesto Henriod, Tar'i Hussain, Richard Joharson, Martin Karcher, Kudlapur Krishna, John Lethoridge, Kenichi Ohachi, 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 statistical tables; Mrs. Gisela Minke and Ms. Yolanda Arellano deserve special thanks for theli patience and excellent secretarial assistince during preparation of the report. In developing the stra.gy suggested in this repcrt, the author benefitted from his dircussions w'th the President or FIDIC, the pertners of several consulting engineers, oarticularly Harza Engineering International (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 Caterpillar Tractor Co. (USA) and the Associated General Contractors cf America also made- 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 - Conseils FY Fiscal Year of the World Bank GDFCF Gross Doa estic Fixed Capital Formation GDP .iross Domest!c Product ICB International Competitive Blidding LCB Local Competitive Bidding LN Loan by the international Bank for Reconstruu-tion &nd Deve^oment (IBRD) OMS Operations Manual Statement OPN Operations Policy Notes OPS Operations Policy Staff SAL Structural Adjustment Loan TA Technical Assistance VAc Value-added in Construction Informal Sector - Includes all construction ectivitles carried out by individua,s or groups on se f-heip b3sis without a regulated process of contrac 1ng. These activities are usually not recorded in NaticAal Accounts. Formal Sector - includes all construction activities carried out by enterp,ises and organizativns tnrc,ugh a regulated process cf contracting or force account. Force Account - involves construction,carried out by an enterprise's oe oroanization's own personnel and equipmen,t with or - witho.jt the use-of labor-supply contracts. A government-owned construction unit that is not managerially and financially autonornous is also ccon!,ldered as force account unit. THE CONSTRUCTION INDUSTRY IN DEVELOPMENT - ISSUES AND OPTIO1NS - TABLE OF CONTENTS Paqe I. Introduction and Summary .1 Introduction. 1 Scope and Purpose of the Repcrt. 2 Main Findings of the Report. 3 Surmmary of the Results of Analysis of Issues aind Opti.n. 6 A. T;ie Scope and Role of the Construction Industry.. 6 B. Major Issues in Past Operations ................. 9 C. Major Barriers and the Basic Strategy ..... ...... 11 D. Instruments for Implementing the Basic Strategy.. 13 E. Rationale fnr Ran' inwolvemenc ................ .. 16 II. The Construction Industry ......... ...................... 18 Scope of the Construction Industry ...... .............. 16 tfhe Contractors ................ ....................... 20 III. Ral'e of Construction' Industry in Economic Development ... 23 Income, Investment, Construction and Growth ..... ...... 26 Efficiency of Investmernts .............................. 28 Value-added in Construction .......................... 29 Employment in Construction ........................... 31 Relative Contribution of the Construction Industry to GOP ......................... 32 IV. Objectives and Performance Criteria .of Construction Industry ..........................5......, 35 Perfcrmance Criteria .36 . 4; ,. . , . t.. / _.Q t,E* V. Najor-Issue:i in Past Dperati.ns- ...................... 36 Bank Policy on Constructlon>Industry ..... ............. 36 Scope of Past Operations .......................... 39 MWnagemenL Information System ........................ 40 C nstruction Industry is not n- the Main-stream of Bank Activities. . 4; Reasons for the Lack of Focus on'Construction Industrv. 44 Bank zotrategy in Past Operations .. 45 VI. Financing Construction Equipnent .46 Hazards of Financing Construction Equipment .46 Institutional Finance .49 Experience Bank Operations .50 Viable Strategies for Financing Equipment. 52- Equipment Leasing Ccmpan!-s .56 Financing Government Equipment for Hiring to Contractors .57 Construction 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 9 Large Contractors .................. .................. 'iO Needs of Construction Industry are Different ........ . ( f2 Views of ILO .......... ............................... 92 Viable Strategies for Trainiog .............. ... . 53 VIII. 4ain, Barriers to Development of the Industry .... ...... 66 Protection Against Unfair Acts of Employers ........ .. 69 Prequalification of Contractors ........ .. ............ 70 Equltable'Contract Documents .......... .. ............. 73 Fairness In Competition ............. .. ............... 74 Payments and Compenatlion ...... ...................... 76 Protection Against Adverse Environment .......8........ s Responsible Government Institution for Promoting the 'ndustry ..... .................................. 81 Contractors' Associatiuns ........... .. ............... 81 Consulting Firms .................. ................... 82 Building Codes and Standards .......... .. ............. 83 Construction Materlals ............................... 84 Public Image of Contractors ... . 84 State-Oaned Construction Enterprises . . 86 Opinion Survey ................ ...................... 89 IX. Suggest-d Strategy .. 91 Basic Strategy ..... .. .... 91 X. Im;,lementing the Basic Strategy .. 94. Policy Lending 94 Economic and Sector Work . . 95 Implementing Agency .......................; 96 Cont~ractors Association . ............. 97 Consulting 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 .104 Basic Strategy for Small Countries. 107 XI. Rationale for Bank Involvement .109 Adverse Effects of an Undeveloped-Construction Industry .112 Prob?n.s in Project Implementation .112 Delays in Project Coinpletion . ......................... 116- Involvement of Domestic Construction Industry In Bank Projects ....... ............................ 122 Cost of Delays in Completing Projects ................ 125 The Bank's Comparative Advantage ........ ............. 131 TABLE OF CONIENTS (Continued) - i11 - 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 GOP and GDFCF ...... ............... 137 Table 3: Characteristics of the Construction Industry ......... ....................... 13B Table 4: Trends in Construction Value-Added per Capita ... 139 Table 5: Job Creation per Investment Unit: Different Types of Public Projects ...... 140 Table 6: Relative Size of Construction's Contribution 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 DQaestic Contractors .................'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 in Bank Projects - Planned Procurement of Goods and Works in 165 FY86 Projects - Tables 1 and 2 ............... 1 .55 - Planned Procurement of Civil Works in 165 FY86 Projects - Tables 3 and 4 ..: .................. 166 - Actual Procurement of Civil Works in Bank Projects 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 -2- 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 which transforms various resources into constructed economic and social infrastructure and facilities. The participants in the construction industry bu.iness include the planners, designers, emplcyers, contractors, material and equipment suppliers, constructioi workers, financiers, accountants, lawyers, insurers and operators. The regulatory environment of the industry Includes procurement policies and procedures, budgeting systems, disbursement procedures, licensing requirements, codes and oractices, 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 which dlsjt1luish it f.rom other i'ndustries. Most construction demand is 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 greater rmarket risks. They face difficulties In borrowing investment capital, retaining permanert staff and skilled workers, and investing in basic equipment. Moreover, almost all construction products are custom-made to meet the particular needs of the cwners; they are location-specific, thereby requiring movement of all materials, equipment, staff and labor to the site of each job. The products also vary widely in terms of materials, level of technology required, mix of lrputs and met;ods of constructior. O These features provide opportunities for innovation and flexibility in the use of technology. I)e industry is, therefore, vEry ."petitive but it is also exposed to high risks. Construction jobs extend over long oericds, prices change, labor difficulties arise, and the probability of facing -7- adverse weather conditions increases. The impact of these facto-s on costs and completion time is ifficult to estimate. O The most striking feature of the industry is the! division of production respcn. bility among many participants -- the owners, designers, contractors, subcontractorb, material suppliers, equipment dealers, funding institutions and services such as transport, electricity and water. These participants perform various functions and belona to different organizations with different policies, objectives and practices. In this situation, the contractor is primarily a resource ;nanager of men, materials, equipment, money and time, and a coordinator of the activities of many participants who are not directly responsible for the final product and over whom he has little control. e Contractors who execute construction contracts play an important role in the industry, but they will not be able to produce 'he expected results unless the policies are right, the systems are sound, 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 improvirg policies and practices, reforming the systems, building the institutions, and improving the business environment of the industry. (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 and inc:reasing,,,a large part of the.,income is devoted to iiestnient. Moreover, high-nncome countries save more than low-income countries and are able to invest more. Analysis of the sharre.0o,f constructionroutput.>inJ the gross domestic fixed capital formation (GDFCF)^,f b-othideveloped and developing ; ro nitries shows that constructionqconrstitutes 50 to 70 percent of GDFCF. - * Construction is a rajor sectorotie economy. Its direct and indirect contributions to-GOP and:-employ7ent rank second to agriculture in most developing countries and next or,ly to agriculture and manufacturing'.in others. Because 50 to 70 percent of a country's investments 4nvolve construction, the efficiency of investment programs and' the pace of economic growth depend on the efficiency of the construction industry. Even the best conceived development program could be stalled by the high costs, completion delays and poor quality work of an iriefficient construction-industry; the loss resulting from deferred benefits and slower growth would be enormous. O Erployment in construction is often a stepping stone to work in manufacturing. * Construction provides critical backward and forward lirkages to the rest ol the economy. Bac!,iard liniages, or derived demands, represent a value *h,ch, in most instances, exceeds the value added by the ccnstruction industry itself. O Since the construction industr-y as a whole is laigely made up of small firms, it prov;ies entrepienieui-la1 c;)portunrties for many small businesses ard pleys ar rrpcr trln rit,e in the distribution of income. c '!.nfciL unately, public awareness ur trrt 2: ' construction is lacking a,d research rn its place In developr,rent is virtually neglected. National planners focus orn agriculture and manufacturing as t,e engines of develcpment. but pay little attention to tl- construction industrv that produces those engines. e There is a ser o- ga- in the knowledge of the construction sector and its place in the develo;in,ent process. Ihe Bank has a unique advantage in terms of its experience and opporturities for carrying out the needed researcth a:d incteasing the awareness o! developing countries of thie crucial iole of construction ir, economic develoci:errt. (c) Construction Industry Project - UIjectives arid Cr-teria o The main objective of a constructioni il`du'try projeCt is to develop t.h :apacit- a-I efficiency of a ccurt,y's construction industry for implementing its livestirrer,t programns effectively. The programs include investments In both oublic and private sectors. -They include investments- for- cie.ting new infrastructire as well as for rnaintaillning existing facilitles. a Oeveloping.the capdcity of the irpdustry,requiree enhancing its ab6tlity,to 'mplement the invetrrnelft .pprams with as much o- the local resources (men, materiels, -rnThi'nes and methods) as possible so that the value-added lri constructlon is optimum. The value-added s a se,ul rneasure, for1ev-iua.irg the capacity of the indlustry. The etficiency of thelrindustry depends on the effectiveness 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) most productively. Cost-effectiveness, completion time and qua!ity of construction are measures of the efficiency. It is the capacit.y and efficiercy, not the ru,U;be, of contractors and the size of constructior, output, that indicate the stage of growth of the industry. - 9 - B. Palor Issues in Past ODeraticns (a) Bank's Pollcy and Guidelines e The Bank's policy paper dated August 7, 1973. rz.ugnized the broad scope of the construction industr-, d.O emphasized the need fnr improving the policies, procedures and institutions relating to the industry. However, it defined t e construction industry as "the b0llding and civil works contracting industry, that is. the colle,:tion of enterprises, private or public, which are enqa_ed in new construction of all sorts as contractors or sub-cont actors'. (underlining supplieJ). * The guliJelines (OPN 7.8) also followed the narrow definition In the policy paper. This was probaibly the reasnn why the Bank's constriction industry operations focussed almost exclusively on individual contractors rather thar on the industry. (b) Cons'ruction Industrv Operations o During the past decade-and-a-half, the Bank has financed 169 construction industry projects, mostly in the form of project coimponerts. They include 56 studies of the industry In various c.ountries, 85 ooeraticns for tralning and financial assistance to individual cont+actors, 22 operations for piumi:it'ing labor-based construction and 6 free-standing projects for technical and finaricial assistance.for promoting the industry. 'h The Bank conducted-three seoarati reviews in 1981, 1983 and 1985 to assess the effectiveness of its assistance to the constructJon industry. These reviews indicated that while tthe opera-tins were usZful ifnaddressing-specific problems at particular points of time.-`their impnct on development of the industry was limited. Ttie 'prolif'rat,ion of project cwmponeats labelled as construction industry projects arid tilE many purposes for inich they w,. e introduced, oft4h at the last stage o processing the loans,indicated thc lack of a corimon perception of the objective,, and scope of a construction industry project. The strategy of tocussing on individual contractors, instead of addressing the problems of the industry, proved ineffective. (c) Corstruction Industry was Not in the Mainstream of Bank Activities a Unlike other sectors, the concerns of the construction industry were 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 adequate attention frcon management, their objectives remained vague and they lacked the quality and discipline of the Bank's review system. o The apparent lack of attention was due to the fact that construction industry was neither in the Bank's lending strewi nor In tne 3ank's tIst of priorities, such as poverty alleviation, income distribution, environment protection and debt nanag=ent. O It is unrealistic to expect more than a cursory coverage of the construction industry in the Bank's aLtivities, unless its importance for economic development is recognized, both by the borro'wers and the Bank, and full-scale operations are launched for fostering its growth. (d) Financinq Construction Equipment a Contractors need financing to purchase equipment, but institutioaal finance is not easily available In developing countries. a The Bank financed several construction industry projects for providing equipment to domestic c'-itractors, but they were not effective because they did not adequately address the problenM affecti-, the contractors' costs and returns. Contractors need a job to use equipment productively and earn as much return and as quickly as possible to pay back the loans. Moreover, the choice of-equipment should be based on the needs of the job in * order to achieve optimum efficiency and,prcJuctivity. Adequate attention was not given to these retn-irements.' o T,he strategy used in the FIDIC Conditicns of Contract (making advances t6 contractors for purrhafseof'materials, plant-and'7~ equi;ment) is viable because it-satisfies the requirements descrite,a above. The 6dnk folloss this-strategy for iCB contracts, but seldorn uses it in LCO contracts. o* Establishing private enterprises for hiring and leasing equipment 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 construction industry. (e) Training Kanaqers and Workers o The Bank financed many construction industry project components for training contractors, but they have not proved effective because they focused mainly on formal training. It is difiicult to 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 conwiltants who lacked the experience in this field. O Construction is a complex industry requiririq man/ skills. Contractors hire skilled workers from the mndrket according to Liale needs and train them on the iob as necessary. This type of training has proved effective. Providing adeqUate capacity and facilities in vocational training schools to train the skilled workers required by the construction sector has also proved 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 construction industry; some relate to the inadequacies of contractors while others pertain to unsound policies, inefficient systems, weak institutions and the undeveloped environment of the industry. Given the opportunities, contractors can address their inadequacies, but they have no contrcl over the barriers imposed by inefficient policies and practices, weak Institutions and the adverse business env' onmen of the Industry. 6 Of all the barriers affecting the industry, the most pervasive are: inequitable contracting practices, failure of employers to meet their obligations under the contract, and the adverse conditions of the Industry's business environment. The most effective strategy is the-one that addresses these constraints; it is,basic.and an essential1-foundation for develop'ng the Industry. - - -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-the industry are lack of efficient preju"alification standards, inequitable contract documents,,delay-s In paynients, lack cf credit facilities and oroblems'ln importing spare parts. The Survey also identifled lack of standardization of local - materials and their high transportation costs as serious bottlenecks. (b) The Basic Strategy Improving tte Efficiency of Contracting and Contract Administration Practiccs * Develop efficient prequalification procedures which eliinate incompetent contractors, reward competency and provide opportunities for fair competition. * I? - Establistr equi.abie cO.-tract documents which define the responsibilities of emrployers and contractors; treat employers and coritractors as partriers for achieving the goals of the project; comrens at 2 (ctiacta rs for delayed payments and other acts of non-pei cr:'Ke. protect contractors against adverse phy'.icaI conz t,rrIs I5 .; hfr eseen events such as price and e>.change :e-e r IUC-ua ; O;;provide contractors with facilities SUTI as edva-es for I:1ii i7ation and purchase of materlals rn'd equinient to ensvie eff icient, economical and timely c:n,pletion of the pro)>: erJ rnsure fair and expeditious ,ettler:ent of : * !l;troduie scunci lr iter ia for aw2rding contracts which encourage l.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 provisions ani provide iiice:li.es to both ermployers and contractors to it.eet their oil igit ;r'w * Establish tr inirig p:c7ran- for reorienting the attitudes of goiernmen, officials (e;-ployers) towar-ds contractors, treating conttactcrs 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 contractors or,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 for tft'-ig :naterEu!c au-d es-3nli5>: -1esea reters for - develop,in and Vro:i3Ltinj the use of local materials; encourage production and use of iocal rmaterials,which are competitive in quality 4nd nrice; disker inate-infcrrTation on the avallability locdtlon ano qualitvyofitAocal materials. * improve the effrciercy and compet iveness of state-owned enrterprises; 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 inefficient practices, inequitable contract adminis.tration and the adverse conditions 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 In ccnsu!ta ic.. ,it;, 6he contractors association to develop co::,etent con,rarA est;-iish a system for monitoring per forrr,.ance. - 13 - o Assess the needs of the construction Industry for trained managers and workers and develop the insUitutions for meeting tho-e needs. a Encourage and promote sub-contracting to provide opportunities to small cTntractcrs both for getting employment and gaining experience by workir3 with the more experierced lcrie contrec ;. a Encourage :o.riestic ccntractors to collaborate with experienced foreign c-rtractcrs on a long-term basis to ensure transfer of technlo I ocv. GevelOnG 'n _th Institutions o Establish an organi;:ation in the governrent with defined objectivei. resporsitilities and accountability for promoting the construction in:iustry. * Encouragf and assist contractors to form contractors' associat'ons and ersLre high professionral and ethical standard; 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: about the ;o;.struction industry's rtle ir economic dPvlnoo-re;t. * Inst:itute research to develop ways and means to lniprove the capacity. arn efficiency of the 'industry in terms of value'-7ad'ded, cost-effactiveness, qualty of work and tinely completion 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 the business environment of the industry. it invoives supporting a progra- of reforms rather than financing specific investments. o The pol -y-intensive and institution-building nature of the system cf reforms call for a program rather than a project approach for implementing the strategy. Sector adjustment lending s;ll be more appropriate than project lending. CESW is essential for providing the analytical basis for designing the adjust.--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 to the objectives of promcting the construction industry, has the ability and willingness to make and implement difflcult - decisions, and has an adequate construction demand to provide continuing work opportunities to domestic contractors. a A policy statement by the Governmnent expressing its corrmitment to develop the construction industry and its determination to implement the basic strategy is an essential first step for Bank's assistance. * Establ.shing an organization ia the country with defined objectives and responsibilities for developing the Industry is essential for implementing the tasic strategy. Because the strategy involves nationwide reforms, a ministry of the national government. would be more appropriate for handling this responsibility. a The program should include: building the institutions to desig.a, ii, c,nitor and evatuate the system of reforms and the program of activities outlined in the basic strategy; Introducing the reforms through appropriate legislative, admininstrative and legal actions; and ensuring countrywide acceptance. 0 Contractors associations should be developed to provide services such as disseminating information on coces and practices, safety regulations and contract law. They should liaison with the government an issues affecting the industry, maintain professional and ethical standards and promote the public image of contractors. * Development of- the consulting engineer.ing profession is a necessary part of the process of promotir.g the construction industry and sl-ould receive adequate priority In the proqram. * It will tade rTdr tOo long ror- On.t.acLors in ceveioping countries to learn improved constructlon management and technology on their own. they 'can dodit a great deal more - quickly and at far less cost by collab;orating on projects with foreign 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 to relin-quish their tradit'on. vf acting as the undisputed masters in admiriistering contracts, it is necessary to establish Lraining programs fcr "employers". e The principles of the basic strategy and the criteria for measuring performance of the construction industry apply to large countries with substantial investments in nev construction and maintenance programs as well as to s4rall countries where investments are mainly devoted to maintenance - 15 - of existing facilities. In both cases, the domestic construction industry should have the capacity and the efficiency to implement the country's investment programs effectively. a 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 is small and infrequent and the demand consists mainly of maintenance of existing facilities, the program should focus on increasing the capacity for maintalnino existing facilities, constructing small new works, and sub-ccntracting works from contractors handling large works. O When the construction demand In a csuntry is small and F uctua:iag, the oequirements of construction materials will also be small and fluctuating; in such conditions, the oroduction and supply of the materials to the industry pose major problems. However, basic construction materials like stone, bricks, sand, cement and construction lumber are essential for the industry; their production should be encouraged and the producers should be protected against undue risks. O Whether a country is large or small, the program for developing its construction industry should be specifically desigried to suit the nature and size of its construction market and Its special economic, administrative and political circum0,-c;E,. a As with other types of adjustment lending, the Bank will have to devote considerable st:f resources for preparing the adjustment ;rogram and for demonstrating, through its CESW, the Inportance 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 need for developing the domestic construction industries. Borrowers agree with the basic strategy, but their problem is how to Implement the strategy. The construction sector adjustment program is intended to address this problem. a The core ministries, the contractors, the public and the business cormunity are frustrated by the inefficiency of the construction industry and would welcome improvements. O The approaches aiia in!truments outlined for implementing the haslc strategy provide reasonable prospects for success because there is no conflict with the countries on the objectives, the program has no inherent political risks, the credibility of the Bank is not in question and the elements of the basic strategy are well tested. Construction sector adjustment lending, - 16 - therefore, involves less risks than other types of 3dJustment lenci.g. * The ccntractors associations and the consulting firms have a self-interest in supporting the lm?lernenting ministry to pursue the basic strategy; the business community and the public will welcome improvements in the efficiencv of the industry.. e The clifticulties in c0anging the deep-rooted attitudes and practiices of government officials admiristering civil works contracts, however, should not be underestimated. The pro osed training of the employers is essential for overco,11inq thi problem. E. Rationale for Bank Involvement (a) ?,ar, Po3iv e The Bank established the policy for promoting the construction industrY in 1973, issued de tailed guidelirnes (OPN 7.8) for implementing it and financ2d 169 projects, ms Ily in the forr, of project component!. to su,,port the industry. fhe ratior,ale for Bank involvement, -nerefc.ea, already exists. * The andlysis presented in this report cornfirms the rationale of the Bank's policy. It demonstrates tnat construction is a rnajcrr sectcr cf the economy# and its ccrtributlons to GOP and employmnent rank high in reiatlon to most economic sectors. The analysis also underlines the close relationships between income, investment, construction and growth and shows how a developed construction industry enhandes the efficincy of investments directly as well as through its backward and forward linkages. (b) involvement of Domestic Constructlon tlndustrv in Bank Projects o Th,e Haik's policies, economic and sector work, appraisal reports, supervision work and evaluation reports are the processes and the tools to plan, design, build and ensure the quality of its Oultimate products",-namely, the economic infrastructure it helps to build and the institutions it helps to dlevelop. The quality and sophistice.tions of these processes (the internal products of the Bank) are of little value if the quality of its Oultimate productsa is less than what they are designed to be. o In the early years of its operations,'the Bank was able to ensure efficiency and economy more effectively because the projects were built under ICB procedures, contractors from developed construction industries won the contracts and they were protected from iret ficiernt ;.rot-f;s o, t,'e t;.iole s and the adverse conditions of nie bt:us^ess Enl ir,nOr,eit. O However, when the scope of 2en' l-dvrr was enlargen, with increased emphasis on ayriculture, -a.uation and ind,'jntry projects, and further ex,-anc!ed to- -.cude rur-al development, population planning, hedIh ano '.-zn '.evalpopmnent pro3ects, t',e nature of the Bank proje,ts cl,a,-,-o - lfo. these sectors requ'red financing of an ir.cre_si nj o-lbm ot ofminor civil works spree,d over widE areas suct, as ;- ri :rr,cjt;0,, facIlitIes, schools, rural rcads arid hel'h cl %rYe number of contracts, the study was confined to !ctUdl Z.ards of rivil works cont-acts during FY84. FY85 and FhS5 in 17 countries, which accounted for almost tw:-thirds .f total Bank/IDA lending in FY85. The analysis showea t:s ,e cenact of all civil works contracts in Bank/L.A orojezts d Fi-r'g F'a4, FY35 and FY86 were awarded to dome3tic cont2acturS. fha snar-e of tile latter in the 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; the iisue-is whether the drc'stic ccistrquccon lrdustr;, which is called upon to handle most cf t!,e jv,I %-wor ks In Dank-financed projects, is sufficlently develc to er,sure the objectives of efficiency and economy speci'ieJ in tne Articles of Agreement. Although tnere are some nctabl exIcep>ions, lt is clear that the domestic crnstruction ino,str- is -not developed and that it is severely constrai:2et by t::e Ine,'"icieat policies and practices, weak i!stitutisns a:~ dhe aiversc tbusiness environment of the deselopin- :ojntries. O There is little prospect of ac.,e';-Ji the obJectives of efficiency, economy and Lirrely co pieticn of nrojecZs unlil the 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 of management talents and skills which,.are adaptable to other Industries. Successful constructionmanagement 'requires an6ther quality - 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 GDP in developing countries; a construction provides critical backward and forward linkages to the rest of the economy. Backward linkages, or derived demands, represent a value which, in most instances, exceeds the value added by the construction industry itself; o the construction industry is an important source of employment in both developed and developing countries, accounting for approximately 5 percent of total employment in many countries; moreover, direct and indirect employment created by the backward and forward linkages with the construction sector is substantially higher than emrployment in construction; a employment in construction is often a stepping stone to work in manufacturing; o since the construction industry as a whole is largely made up of small firms, it provides entrepreneurial opportunities for many small businesses and plays an important 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 broad definition. It can include the full range of activities from architectural desin and engineering survey through maintenance operations on completed structures. It can include the production, supply and transport of building materials, and everyth4ng from residential and commercial buildings to major civil works. It can include activities undertaken on a contractual basis and also those performed by departmental forces -- i.e. by Oforce account". However, for the purooses of this discussion the industry is defined as the building and civil works contractino industry, that is, the collection of enterprises, private or public, which are engaged in new construction of all sorts as contractors or sub-contractors. iorce account activity and the problems involved in defining its role and developing it along efficient lines are beyond 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 histories make colorful monuments to their ingenuity. Many, starting from scratch without money or training, climbed to the top by sheer courage and hard work, learning as they went along. Some were shovel 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 and exciting cousin. Even a few lawyers, timekeepers, and accountants took to the construction field and became outstanding contractors. 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 industry components in projects emerged somewhat late in the project cycle from negotiated compromise to resolve issue: between Bank and Government concerning: protection of local contractors beyond Bank Guidelines; resistance to use of contractors for maintenance activities versus continuation of force account, etc. Lack of lasting 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 of service and work schedules, quality of equipment and delivery dates), indicating major problems or shortcomings, and whether they could have been avoided" e "Assess borrowers' technical and managerial competence during implementation, the overall control exercised on the project, and the type of relalionship It established with the consultant:, contractors and suppliers" * "How does the actual operating perfomr,ance compare with the estimated, or with the tender specification?" o "What are the reasons for deviation and what steps were taken by the suppliers, contractors, consultants and the borrower to put the 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. - 46 - 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 - 49 - 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. - so - 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 - 51 - 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, - 52 - 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 - 55 - 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. - 56 - 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 - 58 - 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 - 59 - 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 - 60 - 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 - 61 - 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 without training a large workfcrce; the contractor, therefore, had a strong ircentive to invest in training. o the workers had the potential to learn and the incentive to learn quickly to increase their earnings. o the training sFas relevant to the job; there was opportunity to apply it a.d improve ;he skills. o the training staff worked full time; their success was judged by the production efficiency of the trainees, not bv the number of workers trained. - 62 - 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. - 63 - 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: - 64 - a Vocational training schools are the main institutions w:here skilled workers required by various construction trades are tritined; higher levels of knowledge and skills are provided through the post-secondary vocational schools and colleges. a Contrac' rs' and workers' associations participate in the deve&upment of training programs offered by vocational training F chool S. 0 Some countries (e.g., Belgium, France, Germany and Italy) require employers to pay part or full renumeration to workers whoD take leave for further training; obviously, without such renumeration, workers will be reluctant to devote their time to training. 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. - 69 - 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-of the domestic construction industry -s, through the adoption of efficient and equitable contracting systems and procedures. The contrector should have full responsibility for the labor, materials, workmanship, programmrning, management and all logistics of the construction operations. He should be paid promptly on portions of work done and measured according to specifications and terms of contract and should have access to mechanisms which allow prompt and fair settlement of disputes. In short, the contractor should be a full partner In the contract with clearly defined obligations, responsibilities and rights. Unless this basic requirement is met, efforts to develop a domestic industry as defined 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 the largest national or international diversified constructor, face from time to time a dearth of work to bid or propose on, with consequent increase of competition to the point where the low bicddr is almost sure co lose his money and the others are spending theirs in order to prepare proposals 'hat have no chance. Under these circumstances the 'ow bidder, who is probably already in financial difficulty, may nave bid in desperation just to keep going until he can 'grab a good one'. Also, in cases where there are ten or fifteen bidders, there is always one who falls to analyze exactly what he has to Jo. Occasionally, In these circumstances, the low bidder may have made a more careful analysis of 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-Month Effect on Delay Delay Delay Delay Contractor's Finances A B A B A B A B Reduction in Profits (X) Case 1 -15 -130 -27 -150 -43 -180 -60 -207 Case II +15 -70 + 5 -90 -10 -117 -25 -145 Case III +120 +105 +107 --82 +92 +55 +78 +25 Time when Negative Cash Flows Start (Months) Case I 30 24 23 19 18 17 17 16 Case II 33 29 27 24 21 18 19 17 Case III 29 28 25 24 21 21 19 19 Period of Necative Cash Flows (Months) Case 1 26 36 36 41 42 45 45 47 Case II 21 30 30 36 39 44 43 46 Case 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 dishoneemploye'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'tt4tions 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;_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 desigi Project awera sare catractor - ttio strt a period for st.des PPR 2571 OGi2/79 and toornt -poor pri Alift1cation - shrtA of labor 6 ThihA: Sirikut On 12 - late start - teierng p.rbler Project cy PP&R MM - dwrne in desin tbut - 9rlogical prcblws 02/14/8 sLccesful ard trely - clatm carplet10n by foreign 7 TFAILA41: wo Pta 24 - eniges in dsigW - ladc of rmintnsncie IrrTigalorl l,lrtmts - proauw_ Project (30 form aocaint) PPM 2B5O 02/14/8 8 MIO1A: ra Irrigtin 36 - octractor's Ccault - poor pr1.al1fication Project - geolugical prble - poor plamrnng - P5 cntiruiity in oormintion - pcor detign - lac of local ftnrs 9 InWtIL: SW SIt=o O - n prOleI jV.roelec-trc PVjPct P __ 3500_06i_7;81_ - 145 -AT 3 Fage 2 of 6 Delys in ftsical Carpletici of Wirks Extract fran PCRs Fd I~ Oelay in Rsilal h o Iajor su of ditical Cal Of Project Cplcti Delays Delays _ ~ ~ ~ ~ ~ nf~ __ _ __ _ __._ _ o0 rjbTy: Irrigiition 60 - awx start - Pg yreluctant to RFablitatial 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 gert PPM S33 06/21/82 force accoi.nt 12 INDIA: GxSvan Barrae 48 - averse conditions - cllapse of an old wir Project - raptable constnuctitn PPMR 40)0 06/21/2 ffetho - dely for accopting ICB prohues 13 lRnEY: First EUat1o 10, - late start -lack of caordinat1cui beb ' Prmject - aderse crnditions ministries PPR 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 I Urban eelqxwer.t Project agcy - lrwrplete design PPM 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 sevisi1n PCR 4254 12t30182 - lac of rmterials lf : Forth V1g y 37- -poordesign - poor design (local) Project - poor'ctruction - poor sWervision PC 4477 Vt09/83 nethods - bad veathr 17 INIA: C-ata1 (R) 21 - agmcy reornization - lac of ftis for nmintewce cammzrd ai dey. project - ladc of sport 'ran PPPM 4570 03/20/83 famers (Rajastan) - nr pthl em with ocal cmtractors 18 id (H.P.) D id Id (%&f Pradeshl) - ' 46 - ke3 4 6 - ~~~~~~~~Page 3 of 6 Delkys 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 s8 Services Project - urclear definition of ard Agicy PC 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 csultant PRAR 4E3 01/04/84 agency - lack of coordiration bebee agaKies - ctwges in desig, 21 B: XADESH: Coast Area - adverse conditions - par Rehabilitation Project 90 - lnstitutional weakness - difficulty of access PPYR 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 cotractors Project coTpleted - porr perfonrmwce by - good perfomnm mce by fanmers PCR 5S 06/11184 12 m delay force account cmmunities 23 ETICPIA: Fifth Hilvay - desig, caes - excessive workload to the saTe Project 20 - rain contractor Sixth Highway rDjEc - shortage of equiprent -4 local contractors wet ttarnpt FM 5168 06/24/84 - adverse ecacrnic ard despite achievirg, wo1t on political orditions sdcdule 24 GWAH#0 First Highly 66 - lncreased soope of - por design Project st>-s - delay for starting wcrks PM 519 06/D'/84 - contractors bankrt - por preualification - lack of foreign - unremlistic asses3mrnt of Qhano currecy financial reservEs 25 G*A. Second ,1Himy 53- sortage of Trterlals -need for training for contractors Project - ine)periencBd - Lrnmlistic asseswret of Ghana KR 5L9 06/Z/84 cV1tractors fitwical resairces - adve-se ecorcnc - cntractors bett,er than for conditions account. 25 LE9JTHO: Secord HYghsiy 12 - slot constnuction - poor design Project - s tractor's defau't PP?R 5214 O6/01/84 - s9rtages of e.Vlosives, nrterals aid labor V PARGJAY: Fifth Higway 24 - contractor's failure - poDr pralification Project - use of prr nmterials - poor supervision _ 5451 OV0B/8 - 1 4 7 - Page 4 of 6 Delays in Piysical Carpletion of Wbors Extracts fran PCRs ard PPARs Delay in Physical Pajor Calses of Additional Causes of Project Catpletion Delays Delays (onuths) 2B PNG: Secord H1ighlands 15 - soil corditions - unrealistic design Row Irprovent Project - cotractor stopped wrks - slod settleient of PCR 5488 02J25/85 cntractor's clatn (foreign) 29 MRP1L: Seco.d Educaticn 0 - iatisfactory constriction - change in project Project - lack of raintenance - adverse conditicns PPM 5554 04/03/85 - lack of cooirdiaticn bebween agerxi es - delays in lard acQlsition 30 T1HAJLM: Pz.ttani Fciro- 0 - N prble s Good perforncr electric Pro,ect PCR 56U7 04/17/80 31 IN1OIAfA: Fourth Highey 30 - mnrgent weakness of G - one contractor detaultad Project H lgSys - freqJent chnes in desIgn PCR 5624, 04130/85 - iMageTet Weakness of Inrxesian ccnt.-actors 32 ITIA: ryma Irrigation 0 - well-kncu technology Project - na t of trk related to PPAR 60 W 17/85 capacity of ageny 33 NTA*: Third ard 49 - additonal wrks - poDr design Fourt.i Road Project (3) wether - financial contractor's PR 5793 06/28/85 - ocntractor's failure problem (foreign) - por design 36 - poor contractor rennagent (4) (foreig) 34 INDC 3IA: Seventh - delay in design - poor prequalificat1on criteria Irrigation Project 24 - cr ontractor - lack of fanrer's piat1ciption PPAR 5881 10/04/85 (9OX) performnce - lack of furds for neinterance 35 PHILLIPINE5: Tarlac 46 - coatractxr's detault - delays in land acqilsition Irr1gdtion Systen lncove- - adverse clietick axditicns nEt Project - 62X by force account PPPR 5969 1211285 j - poor design 36 VI ULLPINES: Jalaur 18 - contractor's default - shortage of oil ard ceent Road !rprovenent ProJect - cuTbersare procedires PPAR 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 Wbfs Extracts f ran P5 sad PPfs Delay int Rrisical major Cau oi Addiltlmal Causes of Project CaYpletlon Delays Delays (lnths) 37 TIKILAJ: Nrtheast bril 39 - di%xfte vith cosltant - agency reluctant to fol1V Develcprent ProJect - bad relatimship with ICB procedures PPA 5990 WD185 c8ntrctors - agmcy reluctance to use consultant - inarwlate packagirg (splittirg into sraller cntracts resolve tte prcbl em) 3B RHILPIPS: 36 - &tese coditlons - poor design Develmpent PrTject (I=plete) - contractor's failure - lneerenced contr!ctors PC 6141 04/11/86 - lroprrrate packaging - caTTrity disntlios - poor sevision 39 TVULAND: Baurkc Site ard 3 - cmtrctual diute - irJnqate cntract doozrnt Irwvces 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 praration Dewelinent Project estm - lar of canm1brent from PC 6197 6/ZIL/86 - lack of fuds farmers for contructlon carporent 41 : Third Yrong Saq 72* - hsges in design Irrigatlon Project - lack of fnts PM 6197 0EJ21/86 42 IXSLA: Sixth P<*er- 20 for unit 4 - lack of access - delays finalizirg contracts Project 12 for unit 5 - misalig'np t of aer - IQRess In construction Paz 53 02/(t7M hkse buildirg supervision - usatistactory perforBanc* of contractor 43 KEA. NirdDl Site and 30 - contractor's failure - procuralet, rkload Services Project - self-elp delay erg cctracto PPAR 272, (17117186 capacities - nreallstic forecast-rice- schelle-for self-he,p constnrction - 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 Wbrs Extracts ftran s ad Ms Delay in Rysical Vajor Causes of kiitioa1l Causes of Project CaTpletion Delays Delays (mmths) 44 KPOL: Secoi Hilgwy 24 - mixed contractor - poor pre.allfication Project perfomnce - poor sWervision ard PC 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 starndrd Project - apporWIate packaging PPAR 6329 -6I27/86 46 XDRfAk Pyontae KurWrng 12 - contractor's failure - por desige Irrigatilun Froject - change in design - poor pre iatfication :rpact eval Peport - good organization - poor eupipTent nmnagent by 07/28185 (draft) rmintenance ageXcy (for rent to fanrers) 47 ThAIL*CN Fifth Edurstion 12 - Lard Ackuisition - construction design Project funding selection of local PCR 09/30/85 (draft) consultants 48 WLAYSIA: National STmll- 36 - staff sIowtage for agewcy - lard accuisition delays scale Irrigation Project - staff s&1rtage PCR 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 acquisition Irrigation Project - slod desig, revia PCR 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 design Irrigation Project - omtractors perfomed wsll - lard ayisitimn delays PC% 04/CBJSB (draft) (except one) - shortage of frus - s9ortage of naterrals L - 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 be used oy local contractors who were awarded contracts for project roads. A subsidiary loan agreement allowed contractors to borrow at comnercial rates from AINB (Agriculture and Industrial Development Bank). Fifth Sixth Prolect Project Total project cost US$m 22.0 54.7 Construction Industry Component U 1.5 2.0 Closing date appraised Dec 31 1976 Dec 31 1979 actual Dec 31 1980 Dec 31 1981 Implementation The four domestic conitractors involved in the project, including the 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 1975 PCR June 27, 1985 The construction industry component includes loans to domestic contractors for road maintenance equipmeit and spare parts, and to domestic quarry operators for equipment and spare parts, through BHC (Bank of Housing and Construction). Total project cost US$m 35.8 Conistruction Industry Component 9.115 Closing date appraised Dec 31, 1980 actual March 31, 1983 - 151 - Annex 4 Page 2 of 4 Lmpleementation Protect funds were channelled through BHC to 28 private domestic contractors. BHC created a subsidiary, Plant-Pool, as a comnercial-run firm leasing equipment to contractors. To speed up procurement, the choice of equipment was often made by BHC rather than by contractors. Sufficient weight was not given to the need for agent and servicing facilities. Advant3ge of standardization ordering was lost due to delay in procuring equipment (World Bank partly responsible). Contractors failed to comply with the terms of their purchase contracts, perhaps because they had to bear the exchanqe risk. 3. Morocco: Seventh loan to BHDE. Ln 1061. Oec 1974 Eighth loan to BNDE. Ln 1428. May 1977 PPAR 6058 Feb 10, 1986 BNDE - Banque Nationale de Developpem.:nt Economique The purpose c" the project was to assist BNKE's financing of the industrial sector. The eighth loan also included a pilct project to assist developing small-scale contractors and industries. Seventh Eigtk Loan Loani Total loan amount U.S.Sm 30 45 Closing date appraised 12/31/78 09/30/81 actual 12/31/81 03/21/83 Implementation 7th Loan The loan helped 38 projects with an aggregate investment cost of US$ 115 m. Host projects have been operated successfully. More than one third of the $'0m loan was used to finance four large cement projects. One of them had financial difficulties. Five other small construction-related projects were in arrears. 8th Loan Ten of the problem projects were related to the construction sector, including four brick-production projects. 4. India: Bihar 'ural Road Project, Cr. 1072-IN, Dec 1980 Supervision Feb 5, 1986 The construction industry component was for purchasing equipment for hiring to small contractors involved in the project. Total project cost appraised US$m52.9 Construction Industry Component US$m 3A4 Closing date appraised June 31, 1986 revised June 1987 - 152 - Annex 4 Page 3 of 4 Implementation Rural Engineering Organization (REO) of Bihar, part of PWD, procured the equipment and hired it to contractors. Most of the equipment was delivered by June, 1982. Some changes in numbers and types were agreed upon in December 1982 for the equipment. Procurement was done under LCB procedures as well as by bulk purchase by Government. The project performed quite well because small contractors were unable to afford equipment purchase. It is nr: known, however, whether the PWD's operations were financia,ly viable. 5. Nepal: Second Highway Project Cr. /30-NEP (Oct 1977) PCR June 20, 1986) Project irncluded provision for the purchase of road construction equipment and spare parts for hire to local contractors engaged in feeder road construction. Total project cost appraised US$m 20.0 Construction Industry Ccmponent * 1.32 Closing date appraised Dec 31 1982 actual Dec 31 1984 Irplemeritat ion Delays of about two years occurred In procurement and delivery (5 years for tractors). It was fortuitous that all the construction contracts were also delayed by about one year, otherwise the non-availability of construction equipment would have severely hampered construction activities. Most of the equipment was used by contractors but less extensively than expected (hire charges amount to 13% of purchase price). Contractors were reluctant to use water tankers. graders, and vibrating rollers. Equipment procurement by the PWD was too ~'ow. In addition, contractors were not trained to use equipment. 6. Pakistan: Third Highway Project Cr 974-PAK, September 1980 Supervision Rfeport Dec. 23, 1985 The project included funds to Industrial Development Bank of Pakistan (ICBP) for on-lending to contractors. Total project cost U.S.$m 93.17 Construction Industry Component * 5.14 Annex 4 - 153M Page 4 of 4 Impl ementation A UNOP funded consultant assisted IDBP for 3.5 years. By fall 1982, two loans to contractors had been granted totaling U.S.$m 1.3. Unused funds were reallocated to works. Procedure for processing loan applications was very cumbersome and collateral requiren,ents were difficult for contractors. Contractors involved in highway project could not obtain loan in time for purchasing equipment required for the works. 7. PhilipDines: Kiab 1514-PH, 1979 Information provided by IDF Division's East Asia Region A small part of the Fifth Bank Loan (Loan 1514-PH) to the Private Development Corporation of the Philippines (PDCP) was used for providing financial 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 and Industrial Corporation $0.40 m. Implementation Sub-projects A-1 and e-4 were quite successful and the contractors paid back the loans. However, the contractor for the sub-project B-21 became bankrupt. Overall, the operations of the PDCP were successful. - 154 - Annex 5 Page 1 of 2 Training Strategy of Large Contractors The contract for the civil works of the Mangla Darn Project in Pakistan was awarded in January 1962 to a consortium of contract(ors led by Guy F. Atkinson Company, one of the large contractors of the USA. At that time, it was the largest single civil engineering contract ever let on the unit 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 be required. It was clear that all the skills in Pakistan, assuming they were available anl acceptable, would not be sufficient to meet this requirement. The option of getting skilled foreign workers was ruled out in view of the exorbitant cost.. The contractor recognized that training workers would be one of the most important factors for completing the job successfully. Ar extensive training program was, therefore, designed.l/ "As an example, the training of an equipment operator began after he had been interviewed by the employment office and was determined to be a possible candidate. At this time the man was hired and entered on the payroll at a trainee's rate - generally half of the rate for a beginning operator. Initial training sessions consisted of verbal instruction along with the use of small-scale models to illustrate how the units should be manoeuvered into the proper positions during the work cycle." "Following this initial Indoctrination, the man was placed on a piece of equipment with an instructor at his side and given the opportunity 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, any useful work accomplished resulted in some return from the offort. If the man exhibited an aptitude, the traininc; continued until he couldt qualify for the starting rate of pay, or If he could not, he was tried on another type of machine or terminated." "Other portions of the programme were devoted to training mechanics, welder,, carpenters, pipe-fitters. painters, steel erectors and reinforcing steel setters, with the major proportion consisting of mechanics and carpenters. This programme proved to be quite successful for two prime reasons: the desire on the part of the trainees to learn, and the skill and patience of the training staff." 1/ The Mangla Dam: Proceedings of the Institution of Civil Engineers, England, November 1967 and September 1968. - 155 - Annex 9 Page 2 of 2 "One of the early efforts at the site was the introduction of a strong safety programme for all the workers. Each employee was given Initial indoctrination in the subject of safety at the time he was employed and each man attended a safety meeting conducted weekly by his own supervisor. At these meetings, the actual experiences of the past week were aiscussed and ways of preventing accidents brought to the attention of the men. In addition, a force of safety supervisors was in the field at all times to assist In eliminating potential dangurs and assistina In the weekly meetings. This programme has produced good results with an overall record of only 23 lost-time accidents per 1,000,000 man hours of work." 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 without trai.'nig the workers; the contractor, therefore, had a strong incentive to invest on training. o the workers were hired after careful selection and were paid lower wages as trainees; wages were increased gradually as the workcrs were trained and became more productive; the workers had the potential t. learn, and were given an incentive to learn quickly and earn more. o the training was relevant to the job and there was opportunity to applv the training innediately and Improve efficiency cnd productivity; o the training staff of the Contractor were working full time throughout the construction period and the training process was continuous and relevant tc the needs; the success of the trainers and the trainees was measured by the physical results which were monitored; there was the feedtack and the opportunity to Improve, as needed. Guy F. Atkinson Company used this successful training strategy subsequentlj on the Gurl Dam Project in Venezuela. A detailed description of the training program for the Guri Da.n is attached. - 156 - Annex 6 Page 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 payment procedures on contractors' cash flows and profitability, 12 possible scenarios 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 other combinations of circumstances, the 12 scenarios provide a broad enough picture to illustrate the nature and severity of contractors' financial problems and their potential effects on their perlormance. The following assumptions 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 certificates subject to an aggregate maximum of 100 CU. Payment provision: Contractor submits monthly bills. Employer is expected to pay withi 30 days, but the contract does r-t stipulate interest on delayed payments. Contractor's initial working capital requirements: 100 CU Contractor's investment capital requirements: 100 CU for purchase of equipment. Centr-actor's net profit: 40 CU. It amounts to 4 percent of the total contract a- unt of 1000 CU over a period of t've years. Alternatives Considered Casc I: (a) Working capital is assumed to be -i interest-only loan from cocrrnercial banks at 10 percent interest (Alternative A) or 15 percent interest (Alternative B). The loan is due for payrnret at the end of the contract period of five ye?r . (b) Investment capital is assurmed to be an lnterest-only loan from commercial banks at 10 percent interest (Alternative A) or 15 percent intirest (Alternative B) in the first year cr the contract. The loan is then paid back in eq.al monthly Installments, of principal and interest, over the remaining contract period of four ye rs. 1 157 - Annex 6 Page 2 ef 3 Case II: (a) Same as case I (a). ib) Employer provides an interest-free advance of ;00 Cu for the contractor's insestment capital requirements. No payments are due on the advance for the first year; the ad:ance is then paid back in equal monthly installments over the reiaining contract period of four years. Case III: (a) Employer pr .vldcs irterest-free mobilL aticn advance (working capital) of IOr CU. No payments are due for mobilization advance for the first sear. The advance is then paid back in equal mcnthly instalments (principal only). (b) Same as Case II ,). For each of the three Cases mentionel above, four possible variationis of the employcr's payment performan:e were examined. They included: payment after 1 month, payment after ? months (2-month delay), payment after 3 month: (3-month delay), and payment alter 4 months (4-month delay). These delays represent the average for- each monthly payment. Of course, the delays vary in practice, but it Is assumed to be uniform for purposes of computing. Given the large number of cases and alternatives and the long time series (60 months) of the events and effects, the study was carried out using a Lotus 1-2-3 computer model. The model was programmed to compute, for various cases ind payment performances, contractors' net profits, interest expenies on Laorrowinqs, the maxImum amount of regative cash flows, the time when ne5qtive cash Iow occurs and the pe-lod regative flow remains. Each of these factors has an impact on the contractor's financial vlabilit; and his motivatton for doing qiuality work on or ahead cf the contract completion schedulle. The results of the study are swmmarized in the table in tne following page. The above results show that in Case I, with a 1-month delay in p:innents and a borrowing rate at 10 percent interest (Alternative A), the assuned net prcfit of 40 CU will be reduced to 33.8. The borrowing burden is 187 CU, which is almost five times his profit. This is indicative of the less favorable borrowing terms tor working capital and investment loans. It is also noteworthy that his maximum cash deficit will be 50 CU; It w;ll start after 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 borrowings which 'impose an Interest-b,urden of 187 CU. Obviously the amount and the long period of negative cash flows are unacceptable. The contractor will surely bid higher to avoid this situation. For example, if he allows for a profit of 90 CU (40 + 50) in his bid, the cash flow daficit will disappear and the Inte,-est burder will also decrease substantially. The Contractors' net proftts, Interest expenses and cash flow situations beccne worse if the borrowing rate of interest is !.5 percent (Alternat'-e B). Annex 6 Page 3 of 3 Effect on Contractor'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) 1 Case 1 34 -11 29 -20 23 -32 16 -43 Case 11 46 12 42 4 36 7 30 -18 Case XII 88 82 8J 73 77 62 71) 50 Interest Expenses (CU) Case 1 187 244 192 254 199 165 205 276 Case II 153 188 157 196 163 106 170 218 Ca:e III 111 118 116 126 122 136 129 142 Maximum Hegative Cash Flows (CU) Case I -50 -83 -67 -103 -86 -125 -108 -146 Case li -38 -64 -55 -03 -74 -102 -96 -125 Case 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 16 Case II 3 29 27 24 21 18 19 17 Case III 2S 28 25 24 21 21 19 19 Period of Ne3jat1,e Cash Flows (lonths) Case I 6 36 41 42 45 45 47 Case II 21 J 30 30 36 39 44 43 46 Case IlI 31 32 37 37 40 40 42 42 In Case III, the contractor gets advances for both working capital and equipment. Although, with a 1-month delay in payments, his profits increase and his interest burden decreases, he will have a more adverse maximum cash flow deficit because he tias to pay back both advances in equal installments after the first ye3r. This probleam can be reduced if the grace period is more than one yaar or the repayments are related to the size of his monthly bills ...;tead of in fixed equal installments. As in other cases, the sev2rity of the contractor's problems increases rapidly ehen payments are delayed further. - 159 - Annex 7 Page 1 of 3 Typical Project Completion Time (Years) By Regions and Sectors Specific Investment East West East South Loans/Credits Africa Africa EMENA LAC Asia Asia Bank Agriculture 8.5 7.5 8.5 8.5 8.5 9.5 8.5 Area Developmert 8.5 7.0 8.5 8.0 8.0 10.0 8.5 Irrigation & 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 the loan/credit is disbursed. Source: Bank's Standard Disbursement Profiles, October 1985. - ISO - Annex 7 Page 2 of 3 Typical Project Completion Time (Years) Selected Countries All Specific All All All Investment Agriculture Transportation Country Loans Loans Loans Loans East Afric! Bostwana 7.5 7.0 Ethiopia 8.0 8.5 9.5 Kenya 9.0 10.0 10.0 Madagascar 7.5 8.0 8.0 Malawi 5.5 5.0 Sudan 9.0 9.5 10.0 Tanzania 8.0 8.5 9.5 Zaire 6.5 7.0 Zambia 8.0 10.0 West Africa Cameroon 6.5 6.0 6.5 5.5 Ghana 7.5 8.5 Ivory Coast 8.0 7.0 8.0 Liberia 6.5 6.5 Nigeria 8.5 8.5 7.5 Senegal 7.5 7.5 8.0 EMENA- Egypt 7.5 8.5 10.0 Morocco 8.5 9.0 10.0 Romania 5.0 5.0 Tunisia 8.5 9.0 Turkey 7.0 8.0 9.0 Yugoslavia 6.5 6.0 7.5 5.0 East Asia Indonesia 8.0 8.5 8.5 7.i Korea 4.5 6.0 6.0 Malaysia 8.5 8.5 8.5 Phillippines 8.0 8.5 9.0 Thailand 7.5 8.5 9.0 - 161 - Annex 7 Page 3 of 3 Typical Project Completion Time (Years) Selected Countries All Specific All All All Investment Agriculture Transportation Country Loans Loans Loans Loans South Asia Bangladesh 7.5 9.5 10.0 Burma 8.0 8.5 10.0 India 7.5 8.0 8.5 Pakistan 7.5 9.0 9.5 Sri Lanka 9.5 10.0 10.0 LAC Brazil 7.5 7.5 7.5 Colombia 7.0 7.5 Jamaica t.5 7.0 Mexico 6.5 7.5 7.5 Peru 7.1. 8.5 Note. A project is assumed to be completed when 95 percent of the loan/credit Is disbursed. Source: Bank's Standard Disbursement Profiles, October 1985. - 162 - Annex 8 Page 1 of 3 OFO's Analysis of Delays in Project Completion Distribution of Prolects Evaluated bv Sectors Through 1979 1980-1981 1985 Ho. 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 8 Page 2 of 3 OED's Analysis of Delays in Project Comoletion Distribution of Projects by Size of Time Overrun or Underrun Percentage e Overrun/Underrun Through 1979 1980-84 1985 Overruns No. % No. % No. % 200% or more 13 2.9 30 4.6 8 4.4 100-199.9%t 53 12.0 129 19.6 34 18.6 59- 99.9% 118 25.8 176 26.8 57 31.1 20- 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 8 Page 3 of 3 OED's Analysis of Delays in Project Completion Estimated and Actual Completion Times, by Sector, 1985 No. of Average Estimated Average Actual Sector Projects Completion Times ComDletion Times Average Overrur (months) (months) (months) X (i) by Sector Agriculture 54 56 81 25 45 Education 15 57 88 31 54 Population 7 46 84 38 83 Industry 13 38 68 30 79 Public Utilities 23 45 73 28 62 Transportation '5 45 81 36 80 DFCs 16 51 73 22 43 Others 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 9 Tables 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 64 347 834 West Africa 31 613 198 652 1463 East Asia and Pacific 35 1,959 1.095 1,157 4,211 EMENA 21 1,394 205 912 2,511 South Asia 23 1,657 1,045 691 3,393 LAC 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. of Region Countries ICB LCB Other Total East Africa 28 281 55 180 516 West Africa 31 303 63 184 550 East Asia and Pacific 35 1,142 425 352 1919 EMENA 21 691 82 247 1020 South Asia 23 1,074 377 386 1837 LAC 27 492 464 464 1420 Total 165 3,983 1,466 1,813 7262 Percent 55 20 25 100 - 166 - Annex 9 Tables 3 and 4 Planned Procurement of Civil Works in 165 FY86 ProJects Table 3. Financed from all Sources No. of Region Countries ICB LCB Other Total East Africa 28 176 47 43 266 West Africa 31 224 96 157 477 East Asia and Pacific 35 1,247 813 295 2,355 EMENA 21 967 132 210 1,309 South Asia 23 203 645 152 1,000 LAC 27 271 586 418 1,275 Total 165 3,088 2,319 1,275 6,682 Table 4. Financed bY Bank/IDA only No. of Region Countries ICB LCB Gther Total East Ai,rica 28 119 27 16 162 West Arrica 31 122 21 17 160 East Asia and Pacific 35 619 365 28 1,012 EMERA 21 514 44 101 659 South Asia 23 143 262 42 447 LAC 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 by All Contracts Domestic Foreign Contractors Contractors - ~I. ._____ _ _ ICB LCB Total ICB LCB Total 1CB LCB Total Africa Regions Kenyae Contracts (No.) 7 9 16 6 9 15 1 - 1 Amount ($m) 20 7 27 19 7 26 1 - I Tanzania Contracts (No.) 10 9 19 8 9 17 2 - 2 Amount ($m) 12 6 18 8 6 14 4. - 4 Nigeria Contracts (No.) 4 2 6 2 2 4 2 - 2 Amount (Sm) 35 3 38 19 3 22 16 - 16 Sub-Total Contracts (No.) 21 20 41 16 20 36 5 - 5 Amount (Sm) 167 15 83 46 16 62 21 - 21 East Asia and_ Pacific Region Indonesia Contracts (No.) 121 31 152 99 30 129 22 1 23 Amount (Sm) 420 57 477 199 28 227 221 29 250 Korea Cont.racts (No.) 73 55 128 73 55 128 - - - Amount (Sm) 390 190 580 390 190 580 - - - Hal avsa Contracts (No.) 23 94 117 22 93 115 1 1 2 Amount (Sm) 62 69 129 61 56 127 1 1 2 Philippines Contracts (No.) 42 45 87 41 45 86 1 - 1 Amount (Sm) 22 31 53 21 31 52 1 - 1 Thailand Contracts (No.) 60 62 122 60 62 122 - - - Amount (Sm) 122 31 153 122 31 153 - - Sub-Total Contracts (No.) 319 287 606 295 285 580 24 2 26 Amount (Smi) 1,016 376 1,392 793 346 1,139 223 30 253 - 168 - Annex 9 (Table 5) 2 of 3 Actuall Procurenent of Civil Works in Bank Prolects in Selected Countries (FY84-86) EMENA Region Turk !y Contracts (No.) 15 35 50 11 35 45 4 - 4 Amount ($m) 91 60 151 72 60 132 19 - 19 Contracts (No.) 33 14 47 21 14 35 12 - 12 Anount ($m) 251 13 264 2!5 13 228 36 - 36 Yugoslavia Contracts (No.) 23 1 24 22 1 23 1 - 1 Amount (Sm) 108 3 111 107 3 110 1 - I Sub-Total Contracts (No.) 71 50 121 54 50 104 17 - 17 Amount ($m) 450 76 526 394 76 470 56 - 6 South Asia Regian l Pakistan Contracts (No.) 8 28 36 3 27 30 5 1 6 Amount ($m) 17 36 53 3 34 37 14 2 16 India Contracts (No.) 55 536 591 48 536 584 7 - 7 Amount ($m) 478 465 943 311 465 776 167 - 167 Bangladesh Contracts (No.) 6 19 25 4 19 23 2 - 2 Amount (Sm) 18 8 26 8 8 16 10 - 10 SuL-Total Contracts (No.) 69 583 652 55 582 637 14 1 15 Aiount ($m) 513 509 1,022 3'22 507 823 191 2 193 - 169 - Annex 9 (Table 5) 3 of 3 Actual Procurement of Civil Works in Bank ProIects in Selected Countries (FY84-86) LAC Bra7il Contracts (No.) 19 36 55 19 36 55 - - - Amount ($m) 35 32 67 35 32 67 - - - Mexi co Contracts (No.) 67 33 100 67 33 100 - - - Amount ($m) 294 17 311 294 17 311 - - - Colombia Contracts (No.) 66 14 30 61 14 75 5 - Amount ($m) 161 17 178 136 17 153 25 _ 25 Sub-Total Cont.racts (No.) 152 83 235 147 83 230 5 _ 5 Amount ($m) 490 661 556 465 66 531 25 - GRAND TOTAL: Contracts (No.) 632 1,023 1,655 567 1,020 1,587 65 3 68 Amount ($m) 2,536 1,043 3,579 2,020 1,011 3,031 516 32 548 - 170 - Bibliography Page 1 of 3 Bibliography 1. 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