THE WORLD BANK POLICY PLANNING AND RESEARCH STAFF Infrastructure and Urban Development Department Report INU 6 A Review of Bank Assistance to the Construction Industry in Developing Countries Syed S. Kirmani November 1987 Discussion Paper This is a document published informally by the World Bank. The views and interpretations herein are those of the author and should not be attributed to the World Bank, to its affiliated organizations, or to any individual acting on their behalf. The World Bank A Review of Bank Assistance to the Construction Industry in Developing Countries Discussion Paper The World Bank 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First Printing August 1987 Discussion Papers are not formal publications of the World Bank. They present preliminary and unpolished results of country analysis or research that is circulated to encourage discussion and comnent; citation and the use of such a paper should take account of its provisional character. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. Any maps that accompany the text have been prepared solely for the convenience of readers; the designations and presentation of material in them do not imply the expression of any opinion whatsoever on the part of the World Bank, its affiliates, or its Board or member countries concerning the legal status of any country, territory, city, or area or of the authorities thereof or concerning the delimitation of its boundaries or its national affiliation. 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The latest edition of each of these is available free of charge from Publications Sales Unit, Department F, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publication, The World Bank, 66, avenue d'Iena, 75116 Paris, France. Syed Salar Kirmani is a consultant in the Infrastructure and Urban Development Department of the World Bank. ABSTRACT This report defines the dimensions of the construction industry, traces the events leading to establishment of the Bank's policy, and reviews the effectiveness of Bank assistance for promoting the industry in developing countries. In the early years of its operations, the Bank's philosophy of lending only for infrastructure projects, financing only the foreign exchange cost and procuring goods and works on the basis of international competitive bidding (ICB), virtually eliminated the need to focus on the construction industries in developing countries and the problems of their growth. The concept of the construction industry as an essential contributor to the process of economic development did not exist. However, the rapid expansion of lending in the agriculture, education and industry sectors in the late 1960s, followed by the development of new fields of lending in population planning, health and urbanization, had an important impact on procuremenit. The nature of goods and works to be procured for Bank/IDA projects changed from major civil works to widely dispersed small works in most projects and the Bank recognized that application of ICB procedures for such works was neither economical nor efficient. The increasing volume of local procurement in Bank-financed projects and the concern about the capacity of domestic construction industries to implement the projects efficiently and economically led to the establishment of an explicit Bank policy in 1973 for fostering the growth of the construction industry in developing countries. By the end of FY86, the Bank had financed 169 operations in 74 countries, mostly in the form of project components, for supporting the construction industry. They covered a broad range of activities such as studies of the construction sector, technical and financial assistance to contractors, and assistance for introducing labor-intensive construction practices. However, repeated reviews carried out by the Bank on the effectiveness of its assistance indicated that while the operations were useful in addressing specific difficulties of individual contractors at particular points in time, they have not succeeded in fostering the growth of the construction industry. The reviews also indicated that the Bank's policy of allowing 7 112 per cent preference to domestic contractors in poor countries did not achieve its intended purpose of increasing domestic contractors' participation in Bank-financed procurement. Thus, despite an explicit policy and a decade-and-a half of operational experience, the Bank's goal of promoting the construction industry in developing countries is still elusive. The report concludes that, given the importance of the construction industry for ensuring the efficiency of investment programs and enhancing the pace of economic development, the Bank should review the adequacy of its current strategies, identify the major barriers affecting the construction industry and develop a viable strategy for achieving the objectives of its policy for promoting the construction industry in developing countries. ACKNOWLEDGEMENTS The author is grateful to the guidance and assistance provided by Messrs. Louis Pouliquen and Curt Carnemark throughout the preparation of the report. The author is also indebted to Messrs. Esra Bennathan, Jeffrey Gutman, Gregory Ingram and Donald Strombom for their extensive review and comments and to Messrs. John Blaxall, Francis Colaco, David Cook, Jean Doyan, Per Fossberg, Ernesto Henriod, Tariq Hussain, Richard Johanson, Martin Karcher, Kudlapur Krishna, John Lethbridge, 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 and G. Tharakan for their assistance in preparing the statistical tables in the annexes; Mrs. Gisela Minke deserves special thanks for her patience and excellent secretarial assistance during preparation of the initial drafts. GLOSSARY OF ABBREVIATIONS AND TERMS CR Credit by the International Development Association (IDA). FA Financial Assistance FIDIC Federation Internationale des Ingenieurs - Conseils FY Fiscal Year of the World Bank GDFCF Gross Domestic Fixed Capital Formation GDP Gross Domestic Product ICB International Competitive Bidding LCB Local Competitive Bidding LN Loan by the International Bank for Reconstruct4,on and Development (IBRD) OMS Operations Manual Statement OPN Operations Policy Notes OPS Operations Policy Staff SAL Structural Adjustment Loan TA Technical Assistance Informal Sector - includes all construction activities carried out by individuals or groups on self-help basis without a regulated process of contracting. These activities are usually not recorded in National Accounts. Formal Sector - includes all construction activities carried out by enterprises and organizations through a regulated process of contracting or force account. Force Account - involves construction carried out by an enterprise's or organization's own personnel and equipment with or without the use of labor-supply contracts. A government-owned construction unit that is not managerially and financialify autonomous is also considered as force account unit. Vl A REVIEW OF BANK ASSISTANCE TO THE CONSTRUCTION INDUSTRY IN DEVELOPING COUNTRIES TABLE OF CONTENTS Page I. Introduction and Sumnary 1 The Construction Industry 1 Role of Construction Industry in Economic Development 2 Purpose and Scope of the Report 3 Main Findings of the Review 3 Need for a Viable Strategy 4 II. Evolution of Bank Policy on Construction Industry 4 Bank Interest in the 1950s and 1960s 4 Evolution of Bank Policy 9 Approval of Bank Policy on Construction Industry 10 Guidelines for Implementing the Policy 11 III. Bank Operations 13 Size and Coverage of Operations 13 Nature of Assistance 13 Free-Standing Projects 14 IFC Operations 15 Economic and Sector Work 15 IV. Review of Bank Experience 17 Findings of the 1980, 1983 and 1985 Reviews 17 Views of the Regions 18 Experience of 7-1/2% Preference Policy 20 OED's Reviews of Project Performance 22 V. Need for a Viable Strategy 23 TABLE OF CONTENTS (Continued) Annexes Annex 1: Countries Associated with Bank Operations in Construction Industry 26 Annex 2: Countries, Sectors and Types of Assistance (FY74-FY86) 27 Annex 3: Recent Operations (FY 1983-86) 29 Annex 4: Construction Industry Projects/Project Components 31 Annex 5: Free-Standing Bank Projects in Support of Domestic 40 Construction Industries Annex 6: Reviews of Effectiveness of Bank Assistance to the 41 Construction Industries Annex 7: Views of the Regions on Effectiveness of Bank 45 Assistance to the Construction Industry Annex 8: Construction Sector Issues 49 Annex 9: Bidding Experience with Preference for Domestic 52 Contractors Bibliography 54 A REVIEW OF BANK ASSISTANCE TO THE CONSTRUCTION INDUSTRY IN DEVELOPING COUNTRIES I. Introduction and Sumary Construction Industry 1. The construction industry is a sector of the economy which transforms various resources into constructed economic and social infrastructure and facilities. It embraces all phases of the process of transformation - plai.ning, designing, financing, procuring, constructing, maintaining and operating. The constructed facilities range from residential and nonresidential buildings to dams, power plants, roads, irrigation works and other infrastrucutre. The participants in the construction industry business include planners, designers, contractors, sub-contractors, material and equipment suppliers, owners, construction workers, supervisors, financiers, accountants, lawyers, insurers and operators. The government is involved in the industry as purchaser, financier, regulator and adjudicator. The business environment of the industry consists of systems which regulate the relations, actions and interactions of all the participants. The regulatory environment includes procurement policies and procedures, budgeting systems, disbursement procedures, licensing requirements, codes and practices, safety legislation, tax structure, credit systems, import policies, customs procedures, contract laws and several other requirements of the regulatory systems. 2. Given its extreme fragmentation, the heterogenous nature of its products and the wide variety of its participants and end-users, the dimensions and boundaries of the construction industry are not as obvious as those of other industries. Some define the construction industry very narrowly to include only contractors, others tend to extend its scope widely to cover the construction and building materials industries. There are problems with boch definitions. Contractors play an important role in the construction industry, but they cannot succeed unless the policies are right, th- systems are sound, the institutions are strong, and all the participants observe the rules of the game. Moreover, a substantial part -2- of the construction work takes place in the informal sector of the construction industry; it includes works carried out by individuals and groups on a self-help basis without contracting. A definition that includes only contractors, therefore, fails to recognize the roles of other participants in the construction industry and the policies, systems and practices which govern their relations with the contractors. As regards construction and building materials industries, it is true that the availability, quality and prices of materials have an important effect on the economy and efficiency of construction. However, in order to avoid diffusion of focus, this report defines the scope of the construction industry to include the suppliers of construction and building mateirals as important participants, but excludes the materials and their manufacturing policies, strategies and processes. Role of Construction Induztry in Economic Development 3. Studies carried out by UN Agencies, universities and research institutions underline the importance of the construction industry in the process of development.!/ As an industry promoting growth and capital formation, construction plays a key role in economic development. More than half of annual capital formation in both developed and developing countries involves construction. The expansion of capital is a function of the rate at which the construction industry is developed and expanded; conversely, the lack of construction capacity is a major constraint to expansion of capital. The studies have also established that: * construction typically contributes 5 to 9 percent to GDP in developing countries; * 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 in the construction itself; according to a study of eleven developing countries E18], the value added by backward linkages was as much as 55% of the value of construction purchases of materials and services. o the construction industry is an important source of employment in developing countries and, on average, accounts for approximately 5 percent of total employment; * employment in construction is often a stepping stone to work in manufacturing; 1/ See Bibliography [6, 11, 12, 17, 18, 21, 28 and 39]. -3- * since the construction industry as a whole is largely made up of small firms, it provides enterepreneurial opportunities for many small businesses and plays an important role in the distribution of income. 4. In brief, all the studies recognize that as an industry promoting growth and capital investment programs, construction is an important contributor to economic development. Growth of the construction indlustry has an important multiplier effect. It stimulates industrialization through strategies favoring investment, providing basic needs and creating employment-generating projects. The growth of the building materials industry, which contributes about 59 percent of construction output, is directly linked to t e growth of the construction industry. The construction and building materials sectors have enormous potential for fulfilling the development needs of poor countries by enhancing the productivity of investments and increasing the efficiency of resource use. There is both the need and the opportunity for the Bank to develop this potential. However, this report deals only with the construction sector. Purpose and Scope of the Report 5. This report reviews the current status of the Bank's assistance2/ to the construction industry in developing countries. It presents the initiatives taken by the Bank for fostering the construction industry, discusses the strategies and directions of the Bank's interventions, reviews the progress made in promoting the industry, and presents the assessments .nade from time to time of the effectiveness of Bank assistance. The report is based largely upon the available literature on the subject, the appraisal and supervision reports relating to the construction industry, and the reviews carried out by the OPS and Regional Staff of the effectiveness of Bank assistance. This report is intended mainly as a status report. Issues such as the problems of the construction industry, the strategies for addressing them, U, role of the industry in economic development and the need for the Bank to assist its borrowirg countries to develop their construction industries, are discussed in a separate report, namely, "The Construction Industry in Development - Issues and Options". [42] Main Findings of the Review 6. The Bank's interest in fostering the growth of domestic construction industries in developing countries was slow to evolve. In the early years of its operations, the Bank's philosophy of lending only for infrastructure 2/ The word "Bank", as used in this report, means the International Bank for Reconstruction and Development (IBRD) and its affiliates, the International Development Association (IDA) and the International Finance Corporation (IFC). -4- projects, financing only the foreign exchange cost and procuring goods and works on the basis of international competitive bidding (ICB), virtually eliminated the need to focus on the domestic construction industry in developing countries and the problems of its growth. The concept that construction industry was an essential contributor to the process of economic development did not exist. However, the policy on the construction industry finally approved by the Bank in 1973 and the guidelines (OPN 7.8) issued for its implementation provided a comprehensive framework for fostering the growth of the industry in developing countries. Since that time, there has been a Bank-wide surge of operational activities for supporting the industry. By the end of FY86, the Bank financed 169 operations in 74 countries, mostly in the form of project components, for developing the construction industry. These operations covered a broad range of activities such as studies of the construction industry, technical assistance to contractors, education and training of contractors' personnel, credit to contractors for purchasing equipment, assistance for promoting labor-intensive construction practices, and encouraging borrowers to change the force account system to contiacting. However, the reviews carried out by both the Bank's Operations Policy Staff (OPS) and the Regions indicate that while the Bank's operations were useful in addressing specific difficulties in the countries at particular points in time, they have not succeeded in fostering the growth of the construction industry in those countries. The reviews also indicate that the Bank's policy approved in 1974 of allowing 7-1/2 % preference to domestic contractors in poor countries did not achieve its intended purpose of encouraging domestic contractors to increase their participation in Bank-financed procurement. 7. The events to date show that despite a clear policy, comprehensive guidelines, extensive studies, numerous operations and almost a decade-and-a-half of operational experience, the Bank's goal of developing the construction industry in developing countries is still elusive. Obviously, there is something missing in the Bank's efforts; something which is vitiating all its undertakings; and something which is a major barrier to achievement of its goal. Need for a Viable Strategy 8. It is important to know: Why the current strategies for developing the construction industry have not been sucessful despite numerous operations? What are the rmiajor barriers to achievement of the Bank's goals? What should the Bank do to overcome them? Will the Bank be able to address them? What are the Bank's comparative advantages? What are the prospect, of its success? What happens if the Bank does not address them? The OPS and Regional reviews reflect frustration of the Bank staff over the fact that the efforts to date have not produced the expected results. Some regions have questioned whether the Bank should be involved in construction industry operations. At the same time, many borrowing countries are seeking the Bank's assistance for developing their constr. ction industries. In an effort to increase their participation in - 5 - Bank-financed procurement or to economize on their own procurement, these countries are following procurement procedures which arF hurting, instead of helping, the growth of the domestic construction industry. Obviously, there is an urgent need for a more effective approach for addressing the main barriers to the growth of the industry. Given the importance of the construction industry for ensuring the efficiency of investment programs and enhancing the pace. of economic development, the Bank should review the adequacy of its current strategies, identify the major barriers affecting the industry and develop a viable strategy for achieving the objectives of its policy for fostering the construction industry in developing countries. II. Evolution of Bank Policy on Construction Industry Bank Interest in the 1950s and 1960s 9. After its initial lending for general reconstruction in C'he late 1940s, the Bank made its first loans for specific projects in 1948. Since then, Ban'. lending for projects has reached impressive proportions. Over the years, the Bank continually revised its policies and procedures of project lending and became closely involved in all stages of the project cycle - from economic and sector work and project identification, preparation and appraisal to completion of the projects and evaluation of the results. The Bank also broadened the concept of the project to include not only capital investment for procurement of goods and civil works, but also for provision of services for engineering, supervision, maintenance and operations, improvement of policies, development of institutions and other actions necessary for achieving the development objectives. Thus, over the years, the Bank's approach to project lending has proved to be an effective instrument for developing institutions and promoting economic development. The Bank recognized at the outset that the development objectives of a project are realized only when it is successfully implemented. Although the borrower is responsible for implementing the project, OMS 3.50 is explicit in emphasizing the Bank's poliry that "an adequate level of supervision should be the first priority ot" Bank staff in order to ensure that the maximum benefits are derived from the resources already committed." The Articles of Agreement require the Bank to ensure that the proceeds of the loan are used only for its specified purpose "with due attention to economy and efficiency." Procurement, therefore, has become an important aspect of the Bank's supervision work and a critical element of project implementation. OMS 2.40 emphasizes that "unless it is carried out efficiently and promptly, the full benefits of the project will not be realized." The Bank has developed comprehensive Guidelines for Pro- curement, which are periodically revised in the light of experience. The Guidelines describe the Bank's policies and procedures for procurement of goods and services for Bank financed projects and provide guidance for preparing, submitting and opening bids for awarding of contracts and addressing contractual issues during implementation. -6- 10. Given the key role of construction in economic development and the need for an efficient construction industry for successful implementation of development projects, the Bank has an obvious interest in fostering the growth of the construction industry in developing countries. The Bank's development objectives include assisting borrowing countries in establishing sound policies, procedures and institutions for developing their domestic construction industries. The Articles of Agreement require the Bank to ensure adequate supervision of the projects, achieve maximum benefits from the resources already comnitted, and arrange procurement of goods and works with due diligence for economy and efficiency. By doing so, they emphasize, albeit implicitly, that it is important to develop the construction industry in developing couintries to achieve the desired results. However, the Bank's interest in the construction industry was slow to develop, and it took almost three decades to establish an explicit policy for promoting the construction industry in developing countries. The reasons behind the apparent lack of attention to the construction industry in the 1950s and 1960s are not only of historical interest, but they also provide valuable insights into the Bank's concept of development and the financing and procurement policies which inhibited its involvement in those years. 11. In the 1950s and 1960s, the Bank financed large infrastructure projects in the transportation, power, telecormnunication, and irrigation sectors. These projects were constructed mainly by expatriate contractors because the domestic construction industry in developing countries was not sufficiently developed to qualify for such large construction jobs. 3/ Moreover, the Bank's emphasis in project development was on identifyi g alternatives, studying their feasibility, and deciding on a particular set of investments without taking into account the capacity of the domestic construction industry to execute them. Its focus on project implementation was limited to selecting the mechanisms for procurement and construction and making arrangements for supervision by the consultants and the implementing agency. The Bank did not consider the domestic construction industry, because it assumed that deciding the size and scope of contracts, following internationally-accepted standards for preparing contract documents, inviting bids from contractors specially qualified for the job, and awarding contracts to the most responsive lowest bidder would meet the objectives of efficiency and economy and ensure successful implementation. 12. During this time, the Bank adopted four key measures for implementing projects. First, it followed the policy of procurement "with due attention to economy and efficiency", and providing member countries with the opportunity to compete for goods and works financed by the Bank. 31 For example, in the 1950s, most of the public works in India and Pakistan were constructed on force-account using contractors mainly for providing labor; at the time of its independence in 1945, Korea had only two small domestic construction firms. -7- Second, it adopted the FIDIC contracting system which protected the rights of the "Employer" as well as the "Contractor" and gave certain quasi-judicial powers to tthe "Engineer" for administering the contract. Third, it prescribed international competitive bidding (ICB) for procurement of goods and works. Fourth, it required that, within the validity period of the bids, the borrower should award the contract to the bidder whose bid has been determined to be the lowest evaluated bid and who meets the appropriate standards of capability and financial resources. The Bank followed these procedures quite rigidly and specified them in the loan documents as conditions for implementing the project. It refused to finance expenditures for goods and works which were not procured in accordance with the agreed procedures, and cancelled that portion of the loan allocated to the goods and works which was "misprocured." 13. The Bank's philosophy of lending only for infrastructure projects, financing only the foreign exchange cost of projects and procuring goods and works only on the basis of international competitive bidding virtually eliminated the need to consider the capacity of the domestic construction industry in developing countries and the problems of its arowth. The concept of the construction industry as an essential contributor to the process of development did not exist. Even the few domestic contractors in some developing countries who had the potential for implementing Bank-financed works found it virtually impossible to cross the barriers of prequalification procedures which required evidence of previous experience in constructing similar works and sound financial standing. However, given the policies of those times and the fact that Bank financing and procurement procedures assured quality goods and efficient construction, there was hardly any need for the Bank to get involved with the problems of construction industries in the borrowing countries. 14. In the late 1950s and early 1960s, however, certain events influenced the Bank's appreciation of the development process. Despite its strong belief that investment in infrastructure was a prerequisite for economic development, Bank lending increased very slowly. At first the Bank attributed this to the limited capacity of underdeveloped countries to absorb capital quickly for really productive purposes. However, there was a great deal of criticism, both inside and outside the Bank, that the absorptive capacity of developing countries for external assistance could not be satisfied by a few loans for financing the foreign exchange cost of specific infrastructure projects; and that there were other equally important aspects of the development process to which the Bank could lend and achieve its lending objectives effectively. Although the Bank was slow to break away from its devotion to capital infra-structure, it recognized that the opportunities for effective use of external assistance were much larger than it had conceived earlier. These and other considerations (such as recognition of the need for balanced growth, development of human resources, financing of local currency costs and the proper role of both the public and private sector enterprises in the development process) led to the broadening of the Bank's concepts of development. -8- 15. The scope of Bank lending was enlarged during President Woods' administration with increased emphasis on agriculture, education and industry. Under President McNamara, the Bank not only followed the initiatives of President Woods in greatly expanding lending to agriculture, education and industry, but also developed new fields of lending in population planning, health and urbanization. President McNamara also spelled out the Bank's philosophy that bringing about social transformation and improving the quality of human life were essential for economic development. Thus, the Bank's country studies and project work reflected the needs of poverty alleviation, income distribution, family planning, improved nutrition, unemployment, and a much wider sharing of the benefits of agricultural and industrial development. 16. The rapid expansion of lending in the agriculture, education and industry sectors, followed by the development of new fields of lending in population planning, health, and urbanization, reduced the shares of the traditional sectors of transportation and power in total lending and opened up opportunities for local expenditure financing. There were debates on the interpretation of the "exceptional circumstances" referred to in the Articles of Agreement, which stated that "the Bank may, in exceptional circumstances, when local currency required for the purposes of loan cannot be raised by the borrower on reasonable terms, provide the borrower as part of the loan with an appropriate amount of that currency." Eventually, the Bank shifted significantly from its early policy of financing only the foreign exchange cost of projects. The establishment of the International Development Association (IDA) in 1960 and the provision in its Articles of Agreement that "The Association, in special cases, may make foreign exchange available for local expenditures," further increased the opportunities for reducing the restrictions on local expenditure financing. 17. These events had an important impact on procurement; the nature of ';:Dods and works to be procured changed from major civil works and equipment for transportion and power projects to an increasing volume of minor civil works, land clearance, simple irrigation works, school buildings, furniture, laboratory equipment, secondary roads, rural roads and health clinics. The appropriateness of ICB for procuring such goods and works was seriously questioned. Borrower countries felt that such goods should be procured locally and that the bidding procedures should also allow a sizeable margin of price preference to local bidders competing for ICB procurement. The major share-holders and suppliers of Bank/IDA capital argued, however, that any change in procedures which reduced their share in total procurement below their share of subscriptions in the capital resources would be unfair and un1esponsive to political realities. 18. The Bank did not accept the "fair share" argument, which it saw as analogous to "tied procurement" and contrary to its objectives as an international development institution. It recognized that applying ICB -9- procedures4/ for goods and works, which were too small and too dispersed to be of interest to foreign suppliers and contractors, was neither economical nor efficient. Consequently, the Bank agreed to finance local procurement whenever it was economically justified. Mexico was the first developing country to receive local expenditure financing; in 1958, the Bank provided $2.5 million to Mexico for domestic procurement of some inputs for a power project. Until that year, local expenditure financing was reserved entirely for projects in the developed countries; these countries were already industrialized and were capable of producing goods in competition with outside suppliers, without too high a level of protection to domestic suppliers to jeopardize competition. 19. Because the Bank was interested in promoting industrialization, it recognized the need for some protection to the "infant" industries in developing countries. In 1962, it adopted the policy of providing 15 percent preference in evaluating bids of domestic manufacturers competing with foreign firms for ICB contracts. The margin of preference would be limited to the existing tariff, if it were lower. This policy represented a reasonable compromise between the Bank's objectives of developing local industries and the need for ensuring economy, efficiency and fairness in international procurement. However, a similar preference was not given to domestic construction contractors for procuring works because it was thought unnecessary in view of the natural advantages they already enjoyed. Of course, the policy of financing local expenditure enabled the domestic contractors to participate in procurement of works which were too small to attract foreign contractors; but where ICB procurement of works was feasible, domestic contractors had no preference. In fact, the procurement guidelines required that the works should be grouped, wherever possible, to permit participation of foreign contractors. 20. The evolution of the concepts of economic development, the broadening of lending to other sectors, the decision to finance local currency expenditure, the provision for a margin of preference to domestic manufacturers, and the revisions in the procuremenit policies clearly demonstrated the Bank's strong comnitment to development and its flexibility in adjusting its policies to achieve that objective. However, aside from accepting domestic procurement of small and widely dispersed civil works which were unattractive to foreign bidders, the Bank had little interest in promoting the construction industry in developing countries. On the contrary, it continued to maintain that a margin of preference to 4/ ICB procedures require wider circulation of the notice for bidding, longer time for preparing bids and packaging works to increase the size of contracts to make them sufficiently attractive for foreign contractors. They also differ from local competitive bidding (LCB) procedures in other respects such as place of arbitration, currency provisions, language of bidding documents and provisions relating to customs duties and sales taxes. - 10 - domestic contractors on the lines approved for domestic manufacturers was not necessary because both foreign and domestic contractors would use the same construction materials, the same local labor, and the same construction plaFit for building the works and that the difference in domestic value added between the local and foreign contractors would be small. [16) Evolution of1Bank Plicy 21. The oil crisis of the early 1970s caused momentous changes in the international economy and created a major upheaval in global economic relationships. Although the implications of these changes were still unfolding, the Bank was concerned that the prospects for the economic and social progress of a large number of developing countries, particularly the poor ones, would be seriously jeopardized. This concern led to a further increase in the priority of agriculture and rural development projects in Bank operations. As a consequence, Bank lending expanded at a phenomenal rate - from $1,323 million for 58 projects in fiscal year 1965 to $5896 million for 190 projects in 1975. The growth in lending to agriculture was particularly dramatic - from a total of about $27 million during 1964-68 to $1,858 million in 1975. Lending in the "traditional" sectors - power, transportation, and telecomnunications - continued to decrease from an average of 79 percent in 1964-68 to only 29 percent in 1975, while the share of agriculture lending accounted for a record 32 percent of all cormitments in 1975. Rural development received high priority; a rural development project was defined as one in which more than 50 percent of the benefits would accrue to the rural poor. The share of agriculture, education and urban development projects in the Bank's portfolio increased rapidly and it was clear that this trend would continue in future operations. Because these projects included relatively small and widely scattered works, their procurement under ICB procedures was seriously questioned. Many borrowers, particularly India, were critical of the Bank's procurement policies. They were concerned that their traditional labor-intensive methods of construction through local- contractors would be replaced by mechanized construction techniques introduced by foreign contractors, and this would create unemployment and disrupt domestic construction industries. In the early 1970s, India refused to accept ICB for procuring such works; therefore, the Bank had to stop lending for civil works in India. However, there was increasing support within and outside the Bank for the concerns of the borrowers. The Bank recognized the need for more exceptions to the ICB procedures, since it was not economical and efficient to insist on ICB for works which were too small and too dispersed to attract foreign contractors. The Bank also agreed that on-lending operations of agriculture credit banks and DFCs financed from Bank loans were so small, varied, and extended over time that it was not practical to use ICB procedures. The exceptions to ICB, therefore, became more cormmon and extensive over time. Gradually, LCB - local competitive bidding advertised locally and carried out in accordance with local procurement procedures acceptable to the Bank - became an accepted practice for small civil works. 22. The increasing volume of local procurement in Bank-financed projects and the concern about the capacity of domestic contractors to execute works efficiently necessitated a fresh look at the Bank's policy on the domestic construction industry in developing countries. The Bank's interest in the development process as a whole and the construction industry's important role in economic development further underlined the need for a review. The Bank was aware that Bank-financed civil works represented a small proportion of total construction activity in most borrowing countries and that the governments' efforts to promote domestic construction industry were more important than those of the Bank. However, it also recognized that the Bank's technical and financial assistance to the domestic construction industry in borrowing countries was important for efficient execution of both the Bank-financed projects and the investment programs of the borrowers. Approval of the Bank Policy on Construction Industry 23. On July 12, 1973, Mr. McNamara submitted a Memorandum entitled "Promotion of Domestic Construction Industries in Developing Countries" [32] to the Board of Directors. The Memorandum outlined the essential features of the construction industry, the major ways in which national governments might promote its development, and the ways the Bank's policies and operations might be formulated to complement the national efforts. The Memorandum also recommended that the Bank's procurement policies be modified to afford a reasonable level of preference to domestic contractors in the award of Bank-financed civil works contracts. 24. At a meeting on August 7, 1973, the Board of Executive Directors approved the Bank's proposal to support development of the construction industry in developing countries. The Board's resolution reads as follows: "The Bank should address the problems of promoting efficient domestic construction industries in developing countries. These problems should be assessed and diagnosed in the course of the Bank's general economic and sector work. Emphasis should be placed on providing technical assistance in support of these industries through training and education, analysis of existing government procedures and institutions, and appropriate research into construction design and technology suited to local conditions. Bank-financed civil works, education and DFC projects should be used as the major vehicles for providing this technical assistance and training. In addition, where required, the Bank Group should provide financial assistance to the industry through suitable local intermediaries." 25. There was considerable debate, however, on the proposal that procurement policies should be modified to afford a reasonable level of preference to domestic contractors. Board members representing the developing countries argued that fostering domestic industries was an essential component of economic development, and that this objective should - 12 - not be ignored in pursuing the principles of economy and efficiency. They also pointed out that it would be inconsistent to provide a margin of preference to domestic manufacturers in Bank-financed procurement, but not to domestic contractors. Others thought the difference in value added between the domestic and foreign contractors was too small to justify a margin of preference for domestic procurement of works. Moreover, the domestic construction indLustry already had a substantial degree of "natural protection" against foreign competition due to its "site-bound" advantages and its knowledge of local conditions such as the legal and administrative systems, the market for materials and labor, and other socio-political factors. [16, 24] 26. At a subsequent meeting on January 22, 1974, the Board approved specific proposals for providing financial support to construction industries through improved arrangements for contract advances and payments. These arrangements, which were applicable to both foreign and domestic bidders on a "non-discriminatory basis", provided equal access to domestic contractors for working capital and enhanced their ability to compete. The Board also approved, as an "experiment", a 7-1/2 percent preference in the evaluation of bids for "bonafide, qualified, domestic contractors" in poor countries with a per capita income of $200 or less. Under this criteria, only 40 countries - including some large countries like Bangladesh, India, Indonesia, Nigeria and Pakistan - were qualified to receive the benefits of preference. The scope of the experiment was initially limited to projects approved by the Board during a one-year period ending in January 1975. 27. These events were a landmark in the evolution of the Bank's procurement policies. For the first time, the Procurement Guidelines included "encouraging the development of local contractors and manufacturers in the borrowing countries" as a specific objective in addition to the previous objectives of ensuring economy and efficiency and providing opportunities to all member countries to compete in Bank-financed procurement of goods and works. The revised Guidelines also described, for the first time, procedures for achieving economy and efficiency when the advantages of ICB would clearly be outweighed by the administrative or financial burden involved in its procedures. Guidelines for Implementinq the Policy 28. On July 12, 1974, the Bank issued comprehensive guidelines for "Technical and Financial Assistance to the Construction Industry in Developing Countries" (Operations Policy Notes - OPN 7.8). The guidelines describe what the Bank can do through economic and sector work and special studies to assess the potential of the domestic construction industry in selected countries; diagnose the problems of the industry; and develop technical and financial assistance programs for Bank financing. For purposes of operational work, the guidelines define the construction industry as "the bu"ilding and civil contracting industry, that is, the collection of enterprises private or public, which are engaged in all - 13 - manner of infrastructure construction as contractors, or sub-contractors on the basis of competitive or negotiated contracts."5/ The guidelines also include an "Aide Memoire"l for sector work on construction industry which requires sector missions to follow a "problem-oriented approach to the industry," identify the major problems affecting its growth, suggest solutions to address them, and delineate areas where the Bank could play a useful role. Because the construction sector impinges on all sectors of the economy, the guidelines specified the following arrangements for implementing and coordinating the Bank's supporIt to the construction industry: "The multisectoral and technical nature of the problem and its resolution suggest that the Regional Projects Directors should take the leading role in initiating, coordinating, implementing and monitoring the related Bank program of sector work, studies and project assistance. Regional Frogram staff will normally play a major role in the initial contacts with government and with economic missions. Regional Projects staff will mainly be concerned with further diagnosis of the specifir problems through sector work, special studies, and appraisal mis'tions, and then applying appropriate remedial measures by way of technical assistance, education and training." 29. The events leading to the evolution of the Bank's concept of economic development and the broadening of its financing and procurement policies dramatize the Bank's commitment to development and its remarkable ability to maintain the objectivity of its mission in an environment of conflicting interests. Bank policies on procurement have an impact on the growth of construction industries in developing countries. Procurement is also an area where the interests of developed and developing countries often clash. Given the growing size of Bank-financed procurement and the increasing competition from both developed and developing countries, procurement was, and would continue to be, a sensitive area. Member countries, both developed and developing, have a legitimate interest in competing for Bank-financed procurement. Competition is also important for ensuring efficiency and economy of Bank-financed projects. Given these circumstances, it is not surprising that Bank policy for promoting the construction industry in developing countries was slow to evolve. However, the policy finally approved by the Board in 1973 and the guidelines (OPN 7.8) issued in 1974 for its implementation provided a comprehensive framework for fostering the growth of the construction industry in developing countries. 5/ The implications of this narrow definition are discussed in a separate paper. [42] - 14 - III. Bank Operations Size and Coverage of Operations 30. With the establishment of an explicit Bank policy on domestic construction industry, there was a Bank-wide surge of operational activities to support the industry in developing countries. By the end of FY86, the Bank financed 169 operations in 74 countries (Annexes 1 to 5). The total volume of lending was not large (about US$140 million for project components and U.S. $184 million for free-standing projects), but the number of activities averaged almost 13 per year. The Bank was involved in a broad range of countries - from large countries like India and Indonesia to small ones like Lesotho and Congo, and from upper mid'!7e-income economies like Korea and Trinidad to low-income economies like Ethiopia and Bangladesh. The Bank also provided technical assistance to three high-income oil exporting countries, Kuwait, Libya and Saudi Arabia. The geographical coverage of the countries was also extensive. They include 33 countries in East and West Africa, 15 in EMENA, 15 in LAC, and 11 in the South and East Asia regions (Annex 1). Nature of Assistance 31. Annex 2 shows that 56 out of the 169 operations involved studies for assessing the size, characteristics, and problems of the construction industry in various countries. In some countries, separate studies wore carried out by different sector divisions of the Bank. A large number of studies - 45 out of 56 or 80 percent of the total - were carried out by the Transportation divisions; they also provided most of the technical assistance to the industry and were involved in 52 out of 84 or 61 percent of all technical assistance operations. The studies carried out by the IDF divisions rank next (8 out of o6 or 14 percent of total studies). The IDF divisions were most active in providing financial assistance to the industry and were responsible for 22 out of 33 (or 66 percent) financial assistance operations. The Education divisions played a role in the training programs -- 12 out of 15 or 80 percent of project components for training -- while the activities of the Urban and Water Supply divisions, although quite sizeable in the informal sector of the construction industry, were limited in the formal sector. 32. The above statistics are impressive. However, most operations were small in terms of lending amounts. Of the 169 operations, 163 were in the form of project components involving an average lending of less than $500,000. Project components involving studies and technical assistance to contractors seldom exceeded $200,000. However, project components involving financial assistance to contractors for purchase of equipment were, in some cases, as large as $5 million. Consultants were extensively used for studies and technical assistance, and a large part of the loans and credits was used for this purpose. - 15 - 33. Annex 3 gives the components included in the projects approved during the last four years (F'Y83-FY86) for supporting the construction industry. The trend in recent years seems to be toward larger size components. However, except for the free-standing projects in Indonesia and Sri Lanka, which were devoted to the construction industry sector as a whole, all operations involved providing technical assistance and supplying equipment to local contractors, or for studies of the industry. The number of operations reduced substantially in recent years, from an average of 13 per year during 1974-86 to about 10 per year during FY83-86. The Transportation divisions continued to be the most active organizational units of the Bank for assisting the industry; they were responsible for 26 out of 47 (or 55 percent) operations during this period. 34. It is difficult to predict the size and pattern of assistance to the construction industry in future years. However, a comparison of the types of projects financed since 1973 (Annex 4) with those financed during the last four years (Annex 3) indicates that the focus, design, and nature of assistance to the construction industry remain the same. Future operations will probably follow the past pattern if the Bank's strategy for developing the construction industry remains unchanged. The Transportation divisions will continue to remain most active in the field; most of the operations will be in the form of project components; the coverage of countries will remain broad; and the support to the industry will be in the form of studies of the construction sector, technical assistance for training, and credit to contractors for purchase of equipment. Frez Standing Projects 35. During more than a decade of operations relating to the construction industry, only six free-standing projects were planned, appraised ano financed by the Bank (Annex 5). Given the relatively large size of these projects, their exclusive focus on the construction industry, and the fact that they had the benefit of reviews, quality controls and approvals, they represent full-scale models of the Bank's strategies for developing the construction industry. Four of the six free-standing projects, namely, the ones in Sri Lanka (FY81), Burundi (FY82), Burma (FY82), and Egypt (FY84), were specifically called "construction industry projects"; the one in Indonesia (FY83) was called the "Public Works Manpower Development Project", and the second project in Sri Lanka (FY86) was called the "Second Vocational Training Project". It is interesting to note that all free- standing projects were processed during the past six years, and three of these six projects - one in Indonesia and two in Sri Lanka - were designed by the Education divisions for fostering the growth of the industry as, a whole, instead of providing technical or financial assistance to individual contractors. The Transportion divisions were most active with a major share of project components relating to the construction industry, but they were responsible for only one of the six free-standing projects. - 16 - 36. The projects designed by the Education divisions in Indonesia and Sri Lanka aimed at strengthening the institutions for training skilled workers and construction managers for the construction industry sector. These projects are addressing an important constraint and the institutions will provide continuing benefits to the industry. Their potential benefits would have been further enhanced if 2omplementary actions such as improving the business environment of the industry were also taken. The projects designed by the IDF divisions in Burundi and Egypt, and the one by the Transportation division in Burma, have different scopes and objectives. The scope of the Burundi project was relatively broad; althougn its main component was financing equipment for the local contractors, it included features such as improving production of materials and technical assistance to the Ministry of Public Works. However, the project faced considerable difficulties during implementation due to lack of interest of the contractors in purchasing equipment. The Burma project did not aim at addressing the problems of the construction industry, although it was called a construction industry project. Its objective was limited to improving the management of a single public construction corporation which was responsible for a major part of the highways and other public works construction in the country. The Egyptian project aimed at addressing the inefficiencies of the large number of public construction enterprises through provision of new equipment and technical assistance. The project, however, became effective in FY87 although it was approved in FY84. Thus, all the three projects providing direct assistance to individual contractors withou. complementary actions for building the institutions for improving the business environment of the industry had limited success. They were useful in addressing specific problems of project implementation at particular points of time, but they were not effective in developing the construction industry. IFC Operations 37. During the past decade, the IFC has helped fifteen countries to establish and promote their leasing industries. It has also invested in nineteen private-sector leasing companies and was a founding shareholder in the first leasing company in Bangladesh, the Dominican Republic, Jordan, Korea, Pakistan, Peru, Sri Lanka, Thailand and Tunisia. In other countries, such as Brazil, IFC encouraged specialized leasing companies. A number of international companies participated in the IFC operations. IFC's total investment during the past decade amounted to $108 million, including syndicated loans amounting to $47 million. 38. Leasing companies are useful for development of construction industry because they provide specialized medium to long-term equipment financing. The main advantages of leasing stem from its basic concept, the separation of the legal from the economic ownership of the equipment. The contractors benefit from the availability, coverage, lower cost, cash flow and tax benefit advantages which the leasing system often provides. Although the leasing companies deal with a variety of equipment besides construction equipment, the availability of construction equipment for - 17 - leasing would facilitate development of the construction industry, particularly in situations where opportunities exist for rapid growth of small and medium-sized contractors. Economic and Sector Work 39. Country economic and sector analysis is intended to provide a thorough knowledge and analytical diagnosis of the development problems and policies of member countries (OMS 1.11). Basic economic reports examine the long term development of the economy from boLh a backward and forward perspective, and provide an integral analysis of the major macro-economic and sectoral issues; special economic reports deal with special development problems; and sector reports examine and analyse the development problems, policies, institutions and investment prioritsies of the major sectors and sub-sectors of the economy. The Bank attaches high priority to the quality, soundness and relevance of economic and sector work, and regards it as an essential intellectual foundation for a sound design of its country assistance strategies and lending programs and for aid coordination among donors. To this end, it has provided detailed guidelines to the staff for programming, preparing, reviewing, clearing, and publishing the economic and sector reports. The Bank is recognized as the world's leading institution for country economic and sector analysis; its economic and sector reports are widely used by member countries and international institutions to understand the economic situation and development prospects in the developing countries. 40. Given the crucial role of the construction industry in economic development, the economic and sector work activities of the Bank should adequately provide the knowledge and analytical diagnosis of the construction industry in developing countries. The guidelines (OPN 7.8) for implementing the Bank's policy on construction industry also require that in countries where the development of the domestic contracting industry appears to have potential economic significance, and where governments are responsive, the Bank's economic and/or sector missions should, in appropriate cases, include studies of the industry in their terms of reference. However, none of the economic and sector reports prepared since the establishment; of the Bank's policy in 1973 addressed the issues relating to the construction industry. A few country economic reports and memoranda included brief reviews of the construction industry, but they were intended more to improve the coverage of the reports than to address the issues of the construction sector. Some transportation sector reports also referred to the problems of the construction industry and discussed the actions needed for addressing them, but the construction industry was not the central issue of those reports. Of course, construction industry studies carried out by consultants and financed through components of Bank projects (para 28) were sector studies of sorts. However, they lacked the discipline of the Bank's sector work operations in terms of systematic planning, programming, preparation, field investigations, reviews, clearances, approvals and publication. They fall more under the category of "project financed studies" than "sector work." - 18 - The guidelines on sector work (OMS 1.13) are only concerned with sector work carried out by Bank staff, supported by individual consultants when necessary. They do not discuss the studies carried out by consultants (whether financed from Bank loans and credits), by the UNDP with the Bank acting as the executing agency, or by other agencies of the United Nations with whom the Bank has cooperative agreements. 41. These coments are not intended to imply that the construction industry studies financed by the Bank through project components were not useful. On the contrary, they have proved useful in providing basic information on the status of contruction industries in various countries and the problems affecting their growth. However, they have not achieved some of the important objectives of sector work stated in OMS 1.13 such as to form the basis for consideration of the overall development prospects, problems and strategies in a country, and to establish the framework for the Bank to deve\op a lending program and to carry out its project work in the construction sector. The staff reviews (para. 43) indicate that the studies were not adequately designed and supervised, and, in most cases, the quality of the reports was below the standards acceptable to the Bank. More important, the studies were not planned as sector work and did not, therefore, benefit from the discipline of the Bank's sector work. Indeed, unlike the sector reports, project-financed studies on construction industry have hardly been seen by the Bank staff, with the exception of the few individuals who supervised the concerned projects. It is also difficult to know after a few years whether these studies exist. This is generally a problem with all project-financed studies in the Bank; the studies of the construction industry are no exception. IV. Review of Bank Experience Findings of the 1980, 1983 and 1985 Reviews 42. Since 1973, when the Bank established an explicit policy for fostering the growth of the construction industry, the staff carried out three reviews of the experience of the Bank's operations in support of the industry. The first review was presented in a pa-.r entitled "Domestic Construction Industries in Developing Countries", published in the Journal of the American Society of Civil Engineers in May 1981. It reviewed the experience of the Bank's operations during the period 1974-80. The second review was included in a paper on "The Construction Industry - Issues and Strategies in Developing Countries", published by the Bank in 1983. [39) It covered the experience of operations during the 10-year period 1974--83. The third, a draft paper [30] entitled "A Review of Bank's Operations Related to Construction Industry", was prepared in January 1986; it assessed the Bank's operations to date. Although the three papers were prepared by the staff of the Construction Industry Unit of the Bank's Tranisportation Department, they were written and reviewed by different staff members and managers at different times. They provide a valuable assessment of the effectiveness of the Bank's construction industry - 19 - operations in achieving the objectives of the policy approved in 1973. The main findings of these papers on the effectiveness of Bank assistance to the construction industry are given in Annex 6 and are summarized below: o the Bank's interventions have proved helpful in easing specific difficulties, but they are not comprehensive enough to address the full range of institutional, financial and administrative problems constraining development of the construction industry; * governments dominate the construction industry as the principle regulatory authority, but they do not have institutional arrangements for promoting the industry; a technical and financial assistance to contractors would be effective only if it is reinforced with improvements in governments' administrative, budgeting and procurement procedures and practices; continuing work opportunities for the contractors are important for their development; * in many cases, improvements achieved with Bank assistance to contractors did not last long because they were not supported with the required policy reforms; * a comprehensive approach is a prerequisite for development of the industry; a in several cases, the performance of consultants in providing technical assist-nce to contractors was unsatisfactory; * the commitment of government is essential for developing the construction industry. The Bank has not taken a lead role in improving the systems and institutions in the countries through its economic and sector work. 430 The reviews seem to be unanimous in concluding that although the Bank's technical and financial assistance to construction industries in developing countries has been useful, it has not produced the expected results. Indeed, it is difficult to identify a country where the Bank's assistance has led to a sustainable growth of the construction industry. The reviews also agree on the reasons for failure to achieve the expected results. These include lack of a comprehensive approach, lack of commitment on the part of the governments and inadequate local contracting policies and procedures. The 1985 review [36] discussed the results achieved by the construction industry project components financed by the Bank and the lessons learned from their successes and failures. The review was particularly critical of the organizational arrangements in the Bank and "the low-profile approach" for supporting the industry. It pointed out that nearly three-quarters of all Bank interventions were components of transportation projects focussing mostly on small-scale road gravelling and - 20 - routine maintenance contractors, or on improving force account operations for such work, without really addressing the problems of the construction industry sector. Commenting on the Bank staff's concerns with the construction industry, the review stated that: "Bank staff concern with the construction sector has usually arisen in response, firstly, to their own perception of the inefficiency of a domestic construction industry and the potential risk that it posed for the execution of project works; and secondly, to needs identified by member governments, usually in the course of preparation of infra- structure projects. The bulk of Bank interventions in support of domestic construction industries has therefore taken the form of components of operations primarily addressed at other economic sectors, particularly Transportation. The exceptions are the Education and IDF projects and project components, which have addressed the needs of the construction industry directly." Views of the Regions 44. In April 1985, the Director of the Transportation Department requested the Regional Projects Directors to review the progress made on development of construction industries in the countries of their regions and to report, inter alia, on their experience of construction industry related operations, sector work and dialogue with the countries. The Regional Directors described their experiences in various countries, commented broadly on the effectiveness of construction industry related operations, and suggested certain actions for improving the Bank's assistance. Relevant extracts from the Regional reports indicating the experiences of the regions are given in Annex 7 and their main findings are summarized below: * construction industry issues have not been the subject of the Bank's dialogue with the countries; * the cype of Bank assistance to the construction industry varied from project to project, but it has not been comprehensive in any project; a despite many constraints, the building construction contractors have been more successful than civil works contractors; e procurement procedures, payment to contractors and access to credit are the main problems; policy reforms and effective dialogue with the countries are essential to address these problems; - 21 - S construction industry is a complex sector; it requires an effective framework of policies and strong cormitment of the government; Bank assistance would not be effective unless these requirements were met; o the Bank's country sector work has not covered construction industry issues. 45. The Regional Directors were also requested to respond to a comprehensive questionnaire on the problems of the construction industry. Annex 8 gives the major problems identified by the Regions in response to the questionnaire. The survey indicated that: a in 70 out of the 79 countries for which information was supplied, the domestic construction industry was facing the problems listed in Annex 8s; and in 64 of these countries, the problems were serious; * in all countries, the problems in small and medium-size contracts were more serious than in large contracts; * the problems are more serious in civil engineering contracts than in building contracts; * Bank-financed studies of the construction industry in various countries were conducted mainly by the consultants, but Bank staff also carried out an equal number of studies as a part of their operational work; only 46 percent of the studies led to technical and financial assistance to the industry through project components of on-going projects; * piublic enterprises in the construction sector are inefficient; e of the many problems affecting sound development of the construction industry in the borrowing countries, the most serious are procurement procedures; delays in payments to contractors; difficulties in importing equipment, spare parts and construction materials; lack of adequate institutional arrangements for credit, bonding and insurance; and lack of government interest in addressing the problems of the industry. 46. The Regional overviews and the results of the survey based on the questionnaire clearly indicate the increasing concern of Bank staff with the adverse business environment of the construction industry and the many policy and procedural barriers affecting its growth. It is also clear that the large contractors are able to overcome these constraints in various ways without too much difficulty, but the small and medium contractors are facing great hardships. Because more than 95 percent of the contractors in developing countries are small and medium contractors and because they are - 22- also the ones who are most adversely affected by the existing business environment, it is not possible to implement the Bank's policy of developing the construction industry effectively unless the major constraints imposed by the business environment are adequately addressed. Both the OPS reviews and the Regional reports indicate that the Bank's construction industry operations have not addressed these constraints. This conclusion is also supported by the assessment in the Initiating Brief of the Construction Industry Policy Paper which was reviewed at the Operational Vice President's meeting on February 11, 1981. The Initiating Brief included the following comnents on the effectiveness of the Bank's construction industry operations-, "Special components were added to regular lending operations (in highway, IDF, and other projects) with a view to strengthening individual elements of the construction process. Although these components relieved specific difficulties at particular points in time they were not comprehensive enough to address the full range of inter-related administrative, technical, financial and manpower-skill problems that a well-based construction industry must resolve to ensure its balanced growth and expansion. Rather than a coordinated approach, the practice has been to confront these problems one-by-one with the result that physical implementation of many projects in all sectors, including Bank-assisted ones, has suffered from weaknesses in the domestic construction industry and related Government policies and procedures." Experience of 7-1/2 Percent Preference Policy 47. In January, 1974, the policy of allowing 7 1/2% preference to domestic contractors was approved on an experiemental basis for one year operating the preference policy during the full 5-year period was reviewed in a report submitted to the Board in January, 1979. [34) The main findings of the review were: * the number of countries eligible for preference declined from 40 in 1974 to 34 in 1979; * during the trial period, domestic and foreign contractors were in competition on only 25% (65 in number) of the total contracts procured by ICB with provision for 7-1/2% preference. On the balance 75% (195 in number) of the total contracts procured by ICB with provision for preference, there was no competition because only domestic or foreign firms participated in the bidding; * of the 65 contracts (totalling $253 million in value) on which both domestic and foreign contractors competed, only 6 (total value $26 million) were won by domestic contractors following the application of preference. - 23 - a the higher-income countries on the list of eligible countries tended to benefit more from the preference policy because they had a relatively more developed construction industry than the lower-income countries. However, several of the higher-income eligible countries graduated from the list without benefitting from the policy. o overall, the 7-1/2% preference policy has been a minor factor in the award of contracts to domestic contractors in competition with foreign firms; nevertheless, the policy was appreciated by the eligible borrowers. 48. The preference policy was further extended for a three-year period ending in January, 1982 and reviewed in a paper submitted to the Board on February 4, 19829 [35] The review covered the full 8-year period from 1974 to 1981. The conclusions of the review were similar to those of the 1979 review. During that 8-year period, 500 contracts (total value $1252 million) had provisions for preference; domestic and foreign contractors were in competition in 141 contracts (total value $475 million). Of these 141 contracts, only 8 contracts (total value $44 million) were won by domestic contractors as a result of application of the preference. On the remaining 359 contracts procured by ICB and provid'ing for preference, either domestic firms or foreign firms only participated in the bidding. Details of the bidding experience during the years 1974 through 1981 are given in Annex 9. The review again concluded that the preference policy was a minor factor in the award of contracts to domestic contractors and reconmmended that the 7-1/2% preference be made standard practice. The Board approved the recomTnendation. 49. A recent review by the Procurement Advisor's Office of contracts awarded in FY 85 further confirmed that there have been no significant changes in the patterns of awards to domestic contractors competing with foreign firms. Only 6.3% of ICB contracts by number (2.9% by amount) included the preference provision in FY 85, and in only three cases (total value $5.3 million) the application of preference affected the award in favour of domestic contractors. The review also indicated that the domestic contractors probably did not need the preference because in 79% of the cases (82% by amount) they were able to win the contracts without invoking the provision for preference. Thus, over the years, the preference was hardly used by the borrowers. OED's Reviews of Project Performance 50. In addition to evaluating individual projects, the Operations Evaluation Department (OED) prepares an annual report on the experience of all projects whose performance was evaluated in that year. The annual reviews also extend the perspective farther back into the past to look at the trends and patterns of experience not only for the group of projects evaluated during the year but also for the groups reviewed earlier. OED's - 24 - annual reviews provide both the overall results and a synthesis of performance results by sectors. OED's annual reports cover the review of the construction industry operations in the Transportation sector only, although other sectors such as Education, IDF, Urban and Water Supply also include a significant number of operations. 51. OED's reviews of the construction industry operations are very brief. Its report (dated August 30, 1984) on the "Tenth Annual Review of Project Performance Audit Results" included only one paragraph on the construction industry. It pointed out that promotion of the construction industry emerged as a significant concern in many transportation projects, but the impact of the project components was quite limited. OED's next Annual Report dated September 27, 1985, included two paragraphs on the subject. OED's views on the performance of construction industry components in the transportation projects reviewed in 1984 are surrrrarized below: a the 1984 group of cases shows that six projects included components for supporting the construction industry, nearly all in relatively small countries; a of the six project components, four provided for a study of the construction industry problems; three of these included follow-on technical assistance to the industry, but in no case did this come about; * the studies made certain recommendations concerning the environment of the contractors, but only limited change occurred; * the fifth project (Ethiopia Fifth Highway Project - Cr332, 1972) had no study but included training for contractors in costing and bidding; this project component had little impact because the contractors were unwilling to spare personnel for training; * the experience on these projects shows that an effective program for developing the construction industry has not been fully explored. V. Need for a Viable Strategy 52. The events to date show that despite a clear policy, comprehensive guidelines, extensive studies, numerous operations and almost a decade-and-a-half of operational experience, the Bank's goal of developing the construction industry in developing countries is still elusive. Obviously, there is something missing in the Bank's efforts; something which is vitiating all its undertakings; and something which is a major barrier to achievement of its goal. Perhaps there is more than one barrier. What are those barriers? What should the Bank do to overcome - 25 them? Will the Bank be able to address them? What are the Bank's comparative advant,ges? What are the prospects of its success? What happens if the Bank does not address them? 53. These questions are relevant. It is important to know what is missing in the Bank's efforts to date and whether there are reasonable prospects of its success. The OPS and Regional reviews reflect frustrations of the Bank staff over the fact that the efforts to date have not produced the expected results. Some regions have questioned whether the Bank should be involved in construction industry operations. At the same time, many borrowing countries are seeking the Bank's assistance for developing their construction industries. In an effort to increase their participation in Bank-financed procurement or to economise on local procurement, these countries are following procurement procedures which are hurting, instead of helping, the growth of the domestic construction industry. For example: They are using contract conditions which are unfair to contractors. They blame contractors for delays that are due to their own failure to meet their contract obligations. They delay payments with impunity and do not compensate contractors for adverse physical constraints and other events beyond the control of contractors. Of courses, they stress the need for promoting the domestic construction industry, but they use strategies which are counterproductive such as prequalifying domestic con'.ractors before they are ready to handle the jobs and opposing participation of foreign contractors instead of using them to develop the capacity of the domestic construction industry through technology transfer and management training. Obviously, there is an urgent need for a more effective approach for addressing the aLin barriers to the growth of the industry. Given the importance of the construction industry for ensuring the efficiency of investment programs and enhancing the pace of economic development, the Bank should review the adequacy of its current strategies, identify the major barriers affecting the industry and develop a viable strategy for achieving the objectives of its policy for fostering the construction industry in developing countries. 54. As stated earlier, this report is intended to serve mainly as a status report on the progress made by the Bank in fostering the growth of the construction industry in developing countries. The issues raised in this report and the options for addressing them are discussed in a separate report, namely, "The Construction Industry in Development - Issues and Options"', [42] which suggests an approach for achieving the objectives of the Bank's policy on construction industry. - 26 - Annex 1 Countries Associated With Bank Operations in Construction Industry East Africa West Africa EMENA LAC East Asia South Asia Botswana Benin Algeria Argentina Indonesia Bangladesh Burundi Burkina Cyprus Belize Korea Burma Ethiopia Cameroon Egypt Brazil Malaysia India Kenya C.A.R. Hungary Colombia PNG Nepal Lesotho Chad Iran Dominican R. Philippines Pakistan Malawi Congo Jordan Ecuador Sri Lanka Madagascar Cote d'Ivoire Kuwait Haiti Rwanda Gambia Libya Honduras Somalia Ghana Morocco Jamaica Sudan Liberia S. Arabia Mexico Swaziland Mali Syria Paraguay Tanzania Niger Tunisia Peru Uganda Nigeria Turkey Suriname Zaire New Guinea Yemen PDR Trinidad Zambia Senegal Yemen AR Tobago Zimbabwe Sierra Leone Togo 16 17 15 15 5 6 Source: Construction Industry Group Records - 27 - Annex 2 Page 1 of 2 BANK ASSISTANCE TO CONSTRUCTION INDUSTRY TYPES OF ASSISTANCE BY REGIONS (FY74-FY86) PROJECT COMPONENTS___________________________ Technical Assistance Free- Labor-based Financial Standing Region Studies- Contractors Construction Training Assistance Projects Total East Africa 13 9 11 2 4 1 40 West Africa 16 9 3 - 11 - 39 EMENA 7 4 - 10 5 1 27 LAC 15 5 6 1 3 - 30 East Asia 3 6 2 1 6 1 19 South Asia 2 4 - 1 4 3 14 Total 56 37 22 15 33 6 169 Source: Construction Industry Group Records. - 28 - Annex 2 Page 2 of 2 BANK ASSISTANCE TO CONSTRUCTION INDUSTRY TYPES OF ASSISTANCE BY SECTORS (FY74-FY86) PROJECT COMPONENTS Technical Asssitance Free- Labor-based Financial Standing Sector Studies Contractors Construction Training Assistance Projects Total Transportation 45 33 17 2 10 1 108 Education 2 1 - 12 1 3 19 Urban - 2 - - - - 2 Development IDF 8 - - 1 22 2 33 Other 1 1 5 1 1 - 7 Total 56 37 22 15 33 6 169 Source: Construction Industry Group Records. - 29 - Annex 3 Page 1 of 2 Bank Assistance to Construction Industry Recent Operations-(FY 1983-86) Regions! FY of Loan/ Loan/Credit Country Sector Approval Credit Anount($1000s) Project Component East Africa Burundi EDT 1983 Cr. 1358 1,610 T.A. to Contractors. TRP 1985 Cr. 1583 690 Labor intensive methods. Ethiopia TRP 1983 Cr. 1404 3,400 T.A. to parastatal. EDT 1984 Cr. 1522 320 T.A. to parastatal. IDF 1983 Cr. 1275 1,000 F.A. to contractors. Kenya TRP 1984 Ln. 2409 1,300 T.A. to contractors. Lesotho TRP 1984 Cr. 1481 70 Study of construction industry. Madagascar WUD 1984 Cr. 1497 -- T.A. to contractors. Malawi TRP 1983 Cr. 1423 1,970 T.A. to small road gravelling contractors. WUD 1984 Cr. 1528 -- T.A. to contractors. Rwanda TRP 1985 Cr. 1641 510 Labor intensive methods. Somalia AGR 1985 Cr. 1538 10 Labor-based construction. Tanzania TRP 1986 Cr. 1688 1,810 T.A. to contractors. Uganda TRP 1984 Cr. 1445 1,600 Equipment to contractors, T.A. and F.A. to contractors. Zaire TRP 1985 Cr. 1608 -- Study of construction industry. Zimbabwe IDF 1985 Ln. 2533 900 Study, T.A. and F.A. to construction industry. West Africa Cote d'Ivoire SAL 1983 Ln. 2332 -- Study of construction industry. Gambia TRP 1986 Cr. 1682 40 Study of construction industry. Ghana TRP 1985 Cr. 1601 700 T.A. and F.A. to contractors. Guinea TRP 1984 Cr. 1457 276 T.A. to parastatal. Mali PHN 1983 Cr. 1422 -- T.A. to contractors. Niger TRP 1986 Cr. 1706 100 Study of labor-based methods. Nigeria IDF 1984 Ln. 2376 600 Equipment loan to contractor. TRP 1986 -. 50 Study of maintenance by contract and force account. Abbreviations: Transportation (TRP); Education (EDT); Industrial Development Finance (IDF); Agriculture (AGR); Urban Development (WUD); Structural Adjustment Loan (SAL) Population and Health (PHN); Country Economic Memorandum (CEM); Technical Assistance (TA); Financial Assistance (FA). - 30 - Annex 3 Page 2 of 2 Bank Assistance to Construction Industry Recent Operations (FY 1983-86) Regions/ FY of Loan/ Loan/Credit Country Sector Approval Credit Amount($1000s) Project Component EMENA Egypt IDF 1984 Ln. 2458 T.A. to small contractors. IDF 1984 Ln. 2460 100,000 Credit to contractors foi, purchase of equipment. EDT 1983 Ln. 2264 15,900 Training of construction trades. Jordan EDT 1985 Ln. 2633 - Training of construction trades. Saudi Arabia TA 1984 - -- Study of construction industry. Turkey IDF 1984 Ln. 2399 - Vocational training. EDT 1985 Ln. 2536 -- Vocational training. Algeria CEM 1985 -- -- Study of construction industry. Hungary CEM 1985 - - Study of construction industry. LAC Argentina TRP 1983 Ln. 2296 -- Study of construction industry. Belize TRP 1983 Ln. 2273 30 T.A. to contractors. Brazil TRP 1984 Ln. 2446 15 Study of construction industry. Haiti TRP 1986 Cr. 1756 - T.A. for labor-based methods. Mexico TRP 1985 Ln. 2525 - Study of labor-based methods. South Asia Nepal TRP 1984 Cr. 1515 300 T.A. to parastatal. Sri Lanka TRP 1985 Ln. 2517 1,500 Equipment loans to contractors. EDT 1986 Cr. 1698 15,000 Vocational training. East Asia Indonesia EDT 1983 Ln. 2258 30,000 Training of employers and contrac. TRP 1986 Ln. 2717 2,500 T.A. to contractors. Malaysia TRP 1984 - - Study of construction sector. Papua NG TRP 1983 Ln. 2265 60 T.A. to contractors. Philippines TRP 1984 Ln. 2418 200 T.A. to Construction Industry Authority of Philippines. TRP 1986 Ln. 2716 685 T.A. for labor-intensive methods. Abbreviations: Transportation (TRP); Education (EDT); Industrial Development Finance (IDF); Agriculture (AGR); Urban Development (WUD); Structural Adjustment Loan (SAL) Population and Health (PHN); Country Economic Memorandum (CEM); Technical Assistance (TA); Financial Assistance (FA). 31 - Annex 4 Page 1 of 9 Bank Assistance to Construction Industry Construction Industry Projects/Project Components Country/Main Project Ln/Cr Year Project Component EAST AFRICA REGION BOTSWANA IDF Study - 1973 Study of building industry Road III Ln 1176 1974 Labor-intensive methods Highway IV Ln 1408 1977 Labor-intensive methods Highway V Ln 1941 1981 Labor-intensive methods Setting construction standards BURUND I Study - 1978 Review of construction industry Study -- 1979 Review of building materials manuf. and building contracting Education III Cr 1358 1983 TA to contractors. Construction Industry Cr 1230 1982 Free-standing project for: Financial and technical assistance Development of materials production New conditions of contracts Highway IV Cr 1583 1985 Use of labor-based methods ETHIOPIA Highway VI Cr 552 1975 Financial assistance to contractors Highway VII Cr 708 1977 Financial assistance to contractors Industrial Development Cr 1275 1983 Financial assistance to contractors Highway Sector II Cr 1404 1983 TA to parastatal Technical Assistance Cr 1522 1984 TA to parastatal KENYA Rural Access Road Ln 1305 1976 Study of construction industry TA to contractors Use of labor-based methods Highway Sector II Ln 2409 1984 TA to contractors LESOTHO Highway II Cr 619 1976 Use of labor-based methods Highway IV Cr 1481 1984 Review of construction industry Education II Cr 748 1977 Training for construction workers Education III Cr 1148 1981 Training .for workers and managers MADAGASCAR Study -- 1979 Review of construction industry Urban Development Cr 1497 1984 TA to small contractors - 32 - Annex 4 Page 2 of 9 Bank Assistance to Construction Industry Construction Industry Projects/Project Components Country/Main Project Ln/Cr Year Project Component EAST AFRICA REGION MiALAWI Highway II Cr 523 1974 Labor-based pilot scheme Highway IV Cr 1099 1981 Use of labor-based methods Highway V Cr 1423 1983 TA to contractors Urban I Cr 1528 1984 TA to contractors RWANDA IDF Study -- 1978 Preparation of construction indust-y project (not accepted) Highway IV Cr 769 1978 Use of labor-based methods TRP BMG II Feeder Roads Cr 1283 1982 Use of labor-based methods Highway VI Cr 1641 1985 Use of labor-based methods SOMALIA Education IV Cr 1105 1981 Study of construction industry NW Region Agricultural Cr 1538 1985 Use of labor-based methods SUDAN IDF Study -- 1981 Review of construction industry SWAZI LAND IDF Study -- 1979 Review of construction industry TANZANIA Highway VI Cr 1688 1986 TA and training for contractors UGANDA Highway III Cr 1445 1985 TA to contractors Equipment for contractors ZAIRE Highway VI Cr 1608 1985 Review of construction industry ZAMBIA Education IV Ln 1356 1976 Study of construction industry ZIMBABWE Small Scale Enterprises Ln 2533 1985 Review of construction industry Financcial assistance and training for small contractors - 33 - Annex 4 Page 3 of 9 Bank Assistance to Construction Industry Construction Industry projects/Project Components Country/Main Project Ln/Cr Year Project Component WEST AFRICA REGION BENIN Feeder Roads Cr 717 1977 Use of labor-based method Burkina faso Highway III Cr 653 1976 Study of construction industry (not impl emented) Highway IV Cr 1164 1981 TA to contractors CAMEROON Small Enterprises Cr 575 1975 Equipment loan to contractors Small Enterprises II Ln 1920 1980 Equipment loan to contractors Highways III Ln 1515 1978 Review of construction industry Highways IV Cr 926 1979 TA to road maintenance contractors CENTRAL AFRICAN REPUBLIC Highways IV Cr 1258 1982 Purchase of tools for contractor TA to small contractors CHAD Agriculture Sategui Irrigation Cr 489 1974 Use of labor-based methods CONGO Highways III Ln 2227 1982 TA to contractors (not implemented) COTE D'IVOIRE Study -- 1983 Review of construction industry Highway Sector Ln 1914 1980 TA to small contractors (not impl emented) Financial assistance to contractors (not implemented) SAL II Ln 2332 1983 Study construction industry GAMBIA Education Cr 792 1978 Financial assistance to contractors Highway Maintenance II Cr 1682 1986 Study of construction industry Use of labor-based methods GHANA IDF National Investment Bank Ln 1080 1975 Equipment loans to contractors Highways II Ln 1182 1975 TA and FA to contractors Study of construction industry Highways III Cr 1029 1980 Equipment loans to contractors - 34 - Annex 4 Page 4 of 9 Bank Assistance to Construction Industry Construction Industry Projects/Project Components Country/Main Project Ln/Cr Year Project Component WEST AFRICA REGION GHANA Highways IV Cr 1601 1985 Equipment loans to contractors Training for contractors GUINEA Highways III Cr 1457 1984 TA to parastatal OPR Use of labor-based methods LIBERIA Highways II Cr 395 1973 Review of construction industry LDB III Ln 1323 1976 Equipment loans to contractors Highways IV Ln 1573/ 1978-82 TA to contractors (not implemented) Cr 1311 Feeder Roads Ln 1664 1979. TA to contractors ' IDF Study -- 1978 Study of construction industry Small Medium Enterprises Cr 1076 1980 Financial assistance to contractors MALI Road Maintenance Cr 1104 1981 Use of labor-based methods Health Development Cr 1422 1983 TA to small contractors NIGER Highway III Cr 612 1976 Review of construction industry Feeder Roads Cr 886 1979 TA to small contractors Industry Development Cr 1225 1982 Financial Assistance TA to small contractors Transport Sector Cr 1706 1986 Study labor-based methods NIGERIA IDF Study - 1980 Review of materials manufacturing Study -- 1980 Review of contracting for federal highways IDr Ln 2376 1984 Subloans for construction materials producti on Study - 1986 Study of road maintenance costs by contract versus force account SENEGAL Highway III Ln 1222 1976 Study of construction industry TA and training to contractors (not implemented) .~~~~ , I . .S......- - - 35 - Annex 4 Page 5 of 9 Bank Assistance to Construction Industry Construction Industry Projects/Project Components Country/Main Project Ln/Cr Year Project Component WEST AFRICA REGION SIERRA LEONE Highway II Cr 1129 1981 Study of construction industry TOGO Highway III Cr 693 1977 Study of construction industry SOUTH ASIA REGION BENGLADESH Study -- 1977 Review of construction sector Technical Assistance Cr 622 1977 Review of construction industry Technical Assistance II Cr 872 1978 Review of construction industry BURMA Construction Industry Cr 1253 1982 Free-Standing project: TA to parastatal Financial assistance to parastatal INDIA Bihar Rural Roads Ln 1072 1982 Loan for equipment NEPAL Highway II Cr 730 1977 Equipment rented to contractors Training for contractors Education II Cr 1198 1981 Training for construction workers Highway III Cr 1515 1984 TA to parastatal PAKISTAN Flood Rehabilitation Cr 466 1974 Study of construction industry Highway III Cr 974 1980 Equipment loans to contractors Irrigation Rehab. Cr 1239 1982 TA to contractors Renting equipment to contractors SRI LANKA Construction Industry Cr 1130 1981 Free Standing Project for: Training and promotion of construction industry Second Vocational Cr 1698 1986 Free Standing Project: Large training program Assistance to const. association Roads II Ln 2517 1985 Equipment loan to contractors - 36 - Annex 4 Page 6 of 9 Bank Assistance to Construction Industry Construction Industry Projects/Project Components Country/Main Project Ln/Cr Year Project Component EAST ASIA REGION INDONESIA Highway IV Ln 1236 1976 Study of construction industry Highway V Ln 1696 1979 TA to road contractors Man Power Development Ln 2258 1983 Free-standing project for: Training of employers Contracting industry study Training for contractors Assist. to contractors assoc. Highway Maintenance Ln 2717 1986 TA to contractors KOREA Small Medium Industry Ln 1175 1975 Equipment loan to contractors Long Term Credit Bank Ln 1461 1977 Equipment loan to con-cractors Small Medium Industry II Ln 1507 1977 Equipment loan to contractors KDB III Ln 1574 1978 Equipment loan to contractors Small Medium Industry III Ln 1749 1979 Equipment loan to contractors Small Medium Industry IV Ln 2004 1981 Equipment loan to contractors Provincial County Roads Ln 2228 1982 Tech. training for contractors MALAYSIA Study - 1984 Study of road construction sector PAPUA N.G. Highway II Cr 677 1977 TA training and study Road Improvement Ln 2265 1983 TA to contractors PHILIPPINES Development Bank Ln 1514 1978 Equipment loan to contractors Rural Roads Ln 1860 1980 Use of labor-based methods Highway V Ln 2418 1984 TA to const. Industry Authority Rural Roads II Ln 2716 1986 Use of labor-based methods EMENA REGION ALGERIA Education III Ln 1378 1977 Training in building trades Jigel Port Ln 1427 1977 Equipment loan to parastatal Technical assistance to parastatal Highways IV Ln 1892 1980 TA to parastatal Study CEM 1985 Review of construction industry - 37 - Annex 4 Page 7 of 9 Bank Assistance to Construction Industry Construction Industry Projects/Project Components Country/Main Project Ln/Cr Year Project Component EMENA REGION CYPRUS Development Bank Ln 1278 1976 Equipment loan to contractors EGYPT Technical Assistance Cr 1162 1981 Study of construction industry Education I Cr 681- 1977 Training for construction trades Education II Cr 868 1978 Training for construction trades Education III Cr 1069 1980 Training for construction trades Vocational Training Ln 2264 1983 Training for construction trades DIB IV Ln 1804 1980 Equipment loan to construction SME DIB V Ln 2074 1981 Equipment loan to construction SME Small Medium Industry Ln 2458 1984 Equipment loan to construction SME Construction Industry Ln 2460 1984 Free Standing Project for: TA to contractors Financial assistance to contractors HUNGARY Study -- 1985 Study of investment issues JORDAN Manpower Development Ln 2633 1985 Training for workers and managers KUWAIT Study -- 1979 Review of construction industry LIBYA Study -- 1980 Review of construction industry MOROCCO BNDE VII Ln 1061 1974 Equipment loan to contractors SAUDI ARABIA Study -- 1984 Study of condition of contracts SYRIA Study -- 1977 Review of construction industry TUNISIA Urban Sewerage Ln 1088 1975 Study of construction industry Education IV Ln 1961 1981 Training for construction workers ._________________ .___-__,__-__.__ ..__.- - 38 - Annex 4 Page 8 of 9 Bank Assistance to Construction Industry Construction Industry Projects/Project Components Country/Main Project Ln/Cr Year Project Component EMENA REGION TURKEY Industrial Credit Ln 2399 1984 Training for construction workers Industrial Schools Ln 2536 1985 Training for construction workers YEMEN PDR Education II Cr 865 1978 Training for construction workers Highway III Cr 1144 1981 TA to parastatal LAC REGION ARGENTI NA Highway Sector Ln 2296 1983 Survey of road maint. by contract BELIZE Road Maintenance Ln 2273 1983 TA to contractors Development of material manuf. BRAZIL Federal Highway Sector Ln 2446 1984 Survey of road maint. by contract COLOMBIA Study 1975 Review of construction industry Rural Development Ln 1352 1976 Use of labor-based methods Study -- 1979 Review of construction industry Highways VII Ln 1471 1977 Review of construction industry Training for contractors Highway Sector Ln 2121 1982 Training for contractors Study of financial assistance DOMINICAN REPUBLIC Road Maintenance II Ln 1784 1979 TA to contractors Use of labor-based methods Road Reconstruction III Ln 2605 1985 Case study of labor-based methods (not implemented) ECUADOR Highway IV Ln 1231 1976 Review of construction sector TA to industry Study -- 1981 Use of labor-based methods - 39 - Annex 4 Page 9 of 9 Bank Assistance to Construction Industry Construction Industry Projects/Project Components Country/Main Project Ln/Cr Year Project Component LAC REGION HAITI Highway III Cr 478 1974 Review of construction industry Highway IV Cr 556 1975 TA to contractors (not implemented) Highway VI Cr 1220 1982 Study for training to contractors Highway VII Cr 1756 1986 Use of labor-based methods HONDURAS Highways VI Ln 896 1973 Use of labor-based Methods Highways VII Ln 1341/ 1976 Study of construction industry Ln 1342 Use of labor-based methods Highways VIII Ln 1901 1980 Use of labor-based methods Industrial II Ln 2075 1981 Equipment loans to contractors Study -- 1985 Substitution of labor JAMAICA Study -- 1976 Study of construction industry MEXICO Study -- 1984 Study of labor-based methods Chiapas Rural Roads Ln 2525 1985 Study of labor-based methods PARAGUAY Highway IV Ln 1059 1974 TA to contractors Review of construction induatry PERU Lower Piura Irrigation Ln 1771 1979 Use of Labor-based methods Industrial Credit II Ln 1968 1981 Equipment loans to contractors Small Scale Enterprises Ln 2064 1981 Equipment loans to contractors Power VI Ln 2179 1982 Use of labor-based methods SURINAME Study -- 1980 Study of construction industry TRINIDAD-TOBAGO Study -- 1978 Review of construction industry Highway II Ln 1235 1976 TA to contractors (not implemented) Source: Construction Industry Group Records. - 40 - Annex 5 Freestanding Bank Projects in Support of Domestic Construction Industries Loan/Credit Country Sector Project Loan/Credit No. Anount ($m) Sri Lanka EDT Construction Industry Project (FY81) Cr. 1130-SRI 13.5 Sri Lanka EDT 2nd Vocational Training Project (FY 86) Cr. 1698-SRI 15.0 Burundi IDF Construction Industry Project (FY82) Cr. 1230-BUR 5.2 Burma TRP Construction Industry Project (FY82) Cr. 1253-BUA 20.0 Indonesia EDT Public Works Manpower Development Project (FY83) Ln. 2258-IND 30.0 Egypt IDF Construction Industry Project (FY84) Ln. 2460-EGT 100.0 Source: Construction Industry Group Records - 41 - Annex 6 Page 1 of 4 Reviews of Effectiveness of Bank Assistance to the Construction Industry Since 1973, when the Bank established an explicit policy for fostering the growth of the construction industry, the staff carried out three reviews of the experience of the Bank's operations in support of the construction industry in developing countries. The first review was presented in a paper entitled "Domestic Construction Industries in Developing Countries", published in the Journal of the American Society of Civil Engineers in May 1981. It reviewed the experience of the Bank's operations during the period 1974-80. The second review was included in a paper on "The Construction Industry - Issues and Strategies in Developing Countries," published by the Bank in 1983. It covered the experience of operations during the 10-year period 1974-83. The third, a draft paper entitled "A Review of Bank's Operations Related to Construction Industry", was prepared in January 1986; it assessed the Bank's operations to date. Although the three papers were prepared by the staff of the Construction Industry Unit of the Bank's Transportation Department, they were written and reviewed by diffe,rent staff members and managers at different times. They provide a valuable assessment of the effectiveness of the Bank's construction industry operations in achieving the objectives of the policy approved in 1973. The main findings of these papers relevant to issues of effectiveness of tile Bank's assistance to the construction industry are summarized below: First Review - 1980 * "The implementation of the policy to promote domestic construction industries in developing countries, by providing technical and financial assistance, has resulted in various activities in all six geographical Regional Offices within the Bank in project lending as specific components. Transport projects most frequently contain such components." * "The efforts made by the Bank's sector divisions such as Highways, Education, and Industrial Development and Finance have proved helpful in easing specific difficulties but, in general, are not comprehensive enough to address the full range of administrative, technical, financial and training measures needed to produce balanced growth of a domestic construction industry." a "In many poor countries, Government dominates the business environment both as the principal regulatory authority and as the main client of the domestic construction industry." - 42 - Annex 6 Page 2 of 4 a "To make governments more aware that the construction industry is an important economic sector, institutional arrangement should be made to assign the responsibility for the development of this industry to a specific office in Government." * "In addressing the task of strengthening these domestic construction industries a multisectoral approach is necessary and, as the basic prerequisite, a government commitment to resolve the issues hindering the industry's development is needed." Second Review - 1983 e "The most tangible contribution the Bank has made to date has been its emphasis on fair contract procedures in procurement under all its loans and its willingness to allow slicing and packaging of larger projects." a "Another area of Bank's assistance that is clearly visible is in labor-intensive construction projects. However, a considerable amount of work remains to be done to spread the use of labor-intensive techniques to a wider range of projects and economic sectors." * "The Bank has also made a considerable impact by helping in the improvement of the industry's human resources." * "However, the improvements in procurement procedures, the development of labor-intensive technology, and training of human resources have upgraded discrete facets of the construction industry. What is needed is a strategy that has a wider scope for the organic development of the industry." 8 "The need for an integrated strategy to develop the construction industry is illustrated by many well-intended but dispersed efforts which have not yielded the expected results. For example, some studies of domestic construction industries have not resulted in follow-up actions, in part because government commitment to the development of the industry has been insufficient. In other cases, studies were inconclusive because they were launched with weak terms of reference." - 43 - Annex 6 Page 3 of 4 * "Efforts have been made to support road building contractors by providing them funds to purchase construction equipment. But in the absence of technical assistance to improve their engineering and management proficiency, the results have been short c'r expectations." a "Frequently, technical or financial assistance for the industry is not reinforced with continuity of work opportunities for the contractors or with necessary improvements in administrative practice (to ensure the timely payment of progress certificates, for instance)." * "Elsewhere, cases have been recorded of improvements which did not last long after their introduction because they were not backed with the necessary policy reforms; these cases involve, in particular, the timely payment of progress certificates." Third Review - 1985 * "Although the review records many useful interven- tions and initiatives in support of domestic construction industries, there is also evidence that the potential for Bank assistance is not being fully realized." * "The industry, and any interventions designed to support it, cannot prosper without a sustained demand for construction services. This is one of the strongest lessons that emerges from the review, in turn, it suggests the need for a careful evaluation of the demand before designing the project or project component." a "The performance of consultants in providing technical assistance has often been unsatisfactory. In several cases, the consulting firms have been unable to field suitably qualified teams; in others, the de-phasing of the programs for acquisition of equipment and of the arrival of the consultants' staff has reduced the latter's effectiveness." * "Finally, the review confirms that Government commitment is an essential requirement for the development of construction capacities in member countries. Goverment must not only have a general objective of developirg a domestic construction industry; it must be prepared to support a nascent - 44 - Annex 6 Page 4 of 4 or ailing industry through responsible financing and contracting of its public works construction and maintenance, and through the intr'-r-, tion of policy and procedural reforms to remove L', ,traints whilch affect the industry." "In this respect, the Bank is not taking a leading position in encouraging those reforms, for instance through the economic dialogue with its member countries or project conditionality." - 45 - Annex 7 Page 1 of 4 Views of the Regions on Effectiveness of Bank Assistance to the Construction Industry In April 1985, the Director of Transportation requested the Regional Directors of the Projects Departments to review the progress made on development of construction industries in the countries of their regions and to report, inter alia, on their experience of construction industry related operations, sector work and dialogue with the countries. The Regional Directors were also requested to respond to a comprehensive questionnaire on this subject. The Regional Directors described their experiences in various countries, commented broadly on the effectiveness of construction industry related operations, and suggested certain actions for improving the effectiveness of the Bank's assistance. The following extracts from the Regional reports indicate the experiences of the regions: Eastern and Southern Africa * "As you will note from the completed question- naires which are annexed to this memorandum, LCI issues have not been at the forefront of the dialogue between ESA and our member countries." * "ESA's direct support to LCIs has been very small when compared, for example, to its level of corrmitments during FY 78-86 period. Specifically only 11 of the 365 projects approved/envisaged during the period (or 3 percent) were designed to provide any support to LCIs." o "The type of Bank Group assistance provided to LCIs varies greatly from project to project but has never, with the exception of the Burundi pilot project, purported to be comprehensive." * "We suggest that the Bank-wide review of the experience with assistance to LCIs focus not only on the implementation of LCI projects and of LCI components in transportation projects (and projects in other sectors), but also on the effectiveness of other types of assistance (e.g., sector work and follow-up dialogue on policies vis-a-vis LCIs, financing of equipment through DFCs, etc.)." - 46 - Annex 7 Page 2 of 4 Western Africa * "The Region has been developing means of promoting the Construction Industry mainly within the context of ongoing or proposed highway projects in Benin, CAR, Guinea, Ghana, Nigeria, Liberia, Sierra Leone and the Ivory Coast." * "Depending on specific country conditions, the main issues have become clearer as a result of studies undertaken last year. The trend seems to indicate that despite many chronic problems, the building construction sub-sector is in better condition than civil and road conc,truction.'" a "The kinds of issues which need to be solved within and outside the transport sector to help promote the construction industry in Western African are mainly: access to credit for purchase of equipment and spare parts, provision of guarantees, improvement of procurement and bidding procedures. Appropriate action, including policy measures, should be taken under sector projects and through economic dialogue." EMENA * "Many ongoing projects include components related to DCI such as manpower training (for manager, engineer, technician, mechanic, machine operator, skill worker), provision of construction equip- ment, and spare parts and consultants for construction management, supervision and the preparation of bidding documents." * "'DCI is an unusually complex sector. For it to grow and prosper, several factors have to be tackled simultaneously or in appropriate sequence." * "To tackle such an agenda require a suitable framework of policies in contracting and in the financial sector and a sensible definition of the role of Government in DCI. Furthermore, the Government should have a strong and sustained commitment and definite goals for the development of DCI. Without it, Bank assistance cannot be fully effective and Bank intervention should be limited to promote and elicit an appropriate policy framework." - 47 - Annex 7 Page 3 of 4 a "What makes the development of DCI especially difficult is that for it to achieve reasonable good progress, many, if not all, of the above factors/activities should be orchestrated. Therefore, several Ministries and Departments in the Government must be mobilized concurrently. There is rarely a focal point (Ministry or Department) which can act effectively as coord- inator or prime mover in the development of DCI." L.A.C. * "The relatively limited scope and success of Bank assistance to the construction industry in the Region so far may be traced to a number of factors. In most countries the slowing down of economies followed by the declining level of investment in infrastructure had a destabilizing effect on the industries." a "Although from the overall economic viewpoint the efficiency of the domestic construction industry is of great importance, the Region, in the course of project processing has been able to pay only limited attention to concentrating on the main project components. It appears that the present practice of reviewing construction industry related problems as part of project preparation has not a;en quite satisfactory. The Region, therefore, in the future, will attempt to pursue alternative approaches. One avenue would be through the extension of the scope of sector work to include construction industry reviews in greater depth and identify the agencies through which any assistance could be most efficiently channel l ed." East Asia * "In our region, the issues and problems of the domestic construction industry differ from country to country; they are acute in Indonesia, the Philippines and Papua New Guinea, less pressing in Malaysia and Thailand, growing but still relatively minor in Korea, and quite dilfferent in China." - 48 - Annex 7 Page 4 of 4 a "We found that formation of ad hoc regional work groups, consisting of project staff representing different sectors, served best our needs and such groups have thus been formed to coordinate our assistance in Indonesia and the Philippines." * "We financed, so far, three construction industry studies, namely in Indonesia and the Phillipines in 1981, and in Malaysia in 1984. All these studies have been completed but would have benefited from more precise terms of reference and closer supervision of consultants. In our view, comprehensive technical programs to carry out an in-depth review of a wide range of construction industry issues are, however, expensive, time consuming and difficult to administer. A more promising approach is to selev a few key issues in each country (e.g., contracting procedures, access to credit, etc.) and try to address them." South Asia a "Although the basic requirements for sustaining a domestic construction industry are common to most countries (a dependable expectation of work in the medium term; veasonable access to equipment, financing and to the extent possible freedom from excessive bureaucrdcy) the nature of our support of the domestic construction industry in each of our countries differ." * "Generally our country sector work so far has not included specific coverage of the construction industry. As a first step towards better coverage, we have instituted the review of the Bangladesh construction industry, which we hope to replicate in other countries." - 49 - Annex 8 Page 1 of 3 Construction Sector Issues Constraints Freguently Encountered in the Construction Sector 1. Human and Material Resources * Restrictions/regulations affecting the supply of labor and materials. o Protectionism of domestic materials manufacturers. a Protectionism of publicly-owned manufacturers and transporters. - Exchange rates, import duties, fuel prices, and/or minimum wage rates inducing a preference for equipment in labor-surplus countri es. a Procurement/importation/foreign exchange restrictions affecting the supply of materials, equipment, spare parts and consumables, or handicapping the domestic entrepreneur vis-a-vis foreign competi tors. o Availability of suitable education/training facilities/programs. 2. Financial/Bonding/Insurances * Government's record as a prompt payer of contractors' certi f i cates. * Payment of appropriate interest on delayed payments. a Availability of financing from comnercial banks and other sources to domestic contractors. a Possibility of discounting contractors' certificates at fair commercial rates. * Availability of bonds and guarantees. Stringency of collateral requi rements. * Availability of foreign exchange. * Availability of suitable insurance cover. * Availability/legal viability of equipment leasing. - 50 - Annex 8 Page 2 of 3 Taxation * Taxation on gross income or on net income on project completion. * Profit/loss carry-over. a Deductibility of sub-contractor/supplier/lessor cost/profits. a Tax holidays during formative years. * Accelerated depreciation of equipment (relative to the norms for other industries). O Revaluation of assets to avoid decapitalization (as affecting price/taxable profits). 4. Contracts o Open competitiveness in procurement. * One-sided contract documents. * Excessively complex documents, archaic language. * Access to contracts, prequalification r-equirements. * Excess or lack of competition. * Preference for domestic contractors. * Protectionism of publicly-owned construction enterprises or force account operations. a Obligation of foreign firms to associate with domestic enterpri ses. o Planning/budgeting procedures leading to responsible, well-financed contracts. O Onerous procedures for starting up work, adjusting variations, collecting monthly certificates, certifying completion, and collecting final payments/guarantee deposits. e Excessive bonding/guarantee requirements. - 51 - Annex 8 Page 3 of 3 Insti tuti onal * Responsibility within Government for the construction sector. a Representative institution for the industry. a Existence of dialogue/collaboration between the above in formulation of national policies/legislation affecting the construction sector. * Regulations affecting joint ventures/joint operations with foreign contractors. Source: Draft Report entitled "A Review of Bank Operations Related to the Construction Industry", January 1986, Transportation Department, The World Bank. [30] -52 - Annex 9 Page 1 of 2 BIDING EXPERIENCE WITH PREFERENCE FOR DESTIC CN TRPCORS (TOTALS FOR CALEN)R YEARS 1974 1981) !/ Totals for Period: Average Contract Size: Total 1974-78 1979-81 1974-81 1974-78 1979-81 Total ICB contracts with 7-1120! preference in bid docurents No. (hnount US$ million) 500(1,252) 260(817) 240(435) 2.5 3.1 1.8 BIDDING PARTICIPATION & AWA.RD 1. DaestiLc only 307(365) 155(179) 152(186) 1.2 1.2 1.2 2. Foreign only 52(412) 40(385) 12(27) 7.9 9.6 2.3 3. Danestic and Foreign 141(475) 65(253) 76(222) 3,4 3.9 3.0 3.1 rad te foreign after preference applied 28(163) 15(90) 13(73) 5.8 6.0 5.6 3.2 Aerd to dacestic with- out preference apolied 105(268) 44(137) 61(131) 2.5 3.1 2.2 3.3 Mrd to danestic after preference applied 8(44) 6(26) 2(18) 5.5 4.4 9.0 I/ Totals gay differ because of round ing: data on saTe contract awards were not fully available for the latter part of calendar 1981. Source: World Bank. Report on the 7-1/2 Preference for Darestic Contractors. [35] - 53 - Annex 9 Page 2 of 2 AWARDS TO DOMESTIC CONTRACTORS AFTER APPLYING 7-1/2% PREFERENCE (1974 through 1982 ,Contract Arnount Country Date (US$000) Works Project Loan/Credit Lesotho 1976 200 Buildings Education Cr 497 Indonesia 1976 11,700 Road Highway Ln 1236 Indonesia 1977 10,500 Irrigation Jatiluhur Cr 514 Tanzania 1977 1,300 Irrigation Kilombero 1041/513 Sugar Swaziland 1977 80 Buildings Education Cr 518 Tanzania 1089 2,300 Building Shoe Factory Ln 1385 Indonesia 1980 11,600 Land clearing Transmigration Ln 919/ and roads Cr 1707 Indonesia 1980 6,380 Power house Semarang Ln 1513 building Source: Draft Report entitled "A Review of Bank Operations Related to the Construction Industry", January 1986, Transportation Department, The World Bank. [30] - 54 - Bibl i ography Page 1 of 3 Bibl iography 1. Abbott, Philip G.. Technology Transfer in the Construction Industry, Infrastructure and Industrial Development. 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Construction and Building Materials Industries in Developing Countries, Technology Adaptation Progrdm, M.I.T., Cambridge, Massachusetts, prepared for U.N.I.DGO. Vienna, August 1983. 19. Moavenzadeh, Fred, and Sanchez, Ronald A. Buildinq Materials in Developing Countries, Research Report No. R72-64, M.I.T., Department of Civil Engineering, Cambridge, Massachusetts. August 1972. 20. Moavenzadeh, Fred. The Building Materials Industr in Developing Countries: An Analytical Appraisal, Technology and Development Program, M.I.T. Cambridge, Massachusetts, prepared for U.N.IoD.O. Vienna, January 1985. 21. Riedel, Jurgen & Schultz, Siegfried. The Role of the Construction Industrv in the Developing Countries' Economic Growth Process, Deutsches Institut, fur Wirtschaftsforschung. Berlin, September 1977. 22. Rossow, Janet Ann K. & Moavenzadeh, Fred. Technology and Productivity in Highway Construction, Technology Adaptation Program, M.I.T. Cambridge, Massachusetts, prepared for the U.S.A.I.D. Spring 1977. 23. Sassoon, David M. Procurement: FED and World Bank Practice, The Consulting Engineer, Vol. 40, No. 7. July 1976. 24. Sasoon, David M. Monitoring the Procurement Process, Finance and Development, IMF, June 1975. 25. Kim, Sooyong. The Korean Construction Industry as an Exporter of Services, Paper presented at the World Bank's Conference on Developing Countries' Interests and International Transactions in Services, Washington, July 1987. 26. United Nations. Construction Industry, Proceedings of the International Symposium on Industrial Development (Athens, November-December 1967), UNIDO Monographs on Industrial Development, Monograph No. 2. New York, 1969. 27. United Nations. Construction Statistics Yearbook 1983. New York, 1985, 28. Wells, Jill. The Construction Industry in Developing Countries, Alternative Strategies for Development, Croom Helm, London, 1986. 56 - Bibl iography Page 3 of 3 29. World Bank. 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