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Pay More Attention to Construction Firms in Africa

Homi Kharas's picture

Maseru Maqalika Water Intake System The emergence of local capacity in the construction sector has long been regarded as critical for economic development. Indeed, since the early 1970s, the World Bank has provided a “civil works preference” for low income countries in Bank-financed projects in order to foster the expansion of domestic construction industries. In most regions of the world, the emergence of domestic capacity in civil works goes hand-in-hand with regional development trajectories. Large construction companies bid for, and win, contracts in their own and neighboring countries.
 

Measuring the capacity to undertake civil works is not easy, but one useful indicator is to look at the composition of firms winning contracts in World Bank projects that have been submitted to international competitive bidding. The World Bank Summary and Detailed Borrowing Reports are an unlikely but salient source for this information by region, with transaction-level data on procurement under Bank-financed contracts. The chart below summarizes this data for 1995 and 2013. During this two-decade span, most regions have seen high and rising shares of contracts won by firms from the region – look at the East Asia column, where about 95 percent of all ICB civil works transactions in the region are now won by regional firms. But Sub-Saharan Africa is the exception – not only does it have the lowest share of any region (and the only region where the share is less than 50% in 2013), but this share actually experienced a decline between the two periods. The only other World Bank region where this is the case is Europe and Central Asia (ECS), but this region is a bit of an anomaly – the central Asian states actually border countries from another region (Asia), and the decline in the share of regional firms winning bids is probably reflected in an increase in the share of winning bids from neighboring Asian countries.

Share of Regionally Supplied Civil Works Transactions, FY 1995 vs. FY 2013

Source: World Bank Summary and Detailed Procurement Reports, Civil Works prior-reviewed contracts tendered through International Competitive Bidding.   Our data covers transactions bid out under about 500 contracts in 1995 and 330 in 2013.

This finding should be a concern for policymakers focused on the process of economic transformation in Africa.  As others, notably the excellent 2014 African Transformation Report, have noted, this is one more piece of evidence to suggest that the “growth without transformation” storyline for sub-Saharan Africa is something to worry about. The region is actually less industrialized today than it was in the 1980s, despite a decade of rapid growth.
 
Why this is happening in sub-Saharan Africa remains a mystery. Systematic reports on the development of the construction and engineering industries for the region are virtually nonexistent. Those who study these issues qualitatively attribute the lack of domestic capacity in the region to factors ranging from government underinvestment to educational system deficiencies to recent developments in Sino-African relations. Another possibility relates to donor agency and government public procurement procedures themselves, perhaps in the form of risk aversion in the bid and award stage. This is an aspect that deserves attention as the development community seeks to modernize procurement policies and guidelines.
 
Whatever the underlying reasons for sub-Saharan Africa’s civil works stagnation, two things are clear. First, microeconomic data from projects support the more general macroeconomic conclusion that there has been limited structural change in Africa and that this is a cause for concern about the sustainability of growth and development.  Second, we need much more evidence on firm capability and how that develops and evolves over time. Analysis of productivity growth in the construction sector in Africa is very limited, despite the fact that construction is a critical element of almost every investment. Investment in Africa, at less than 23 per cent of GDP last year, is half that in developing Asia (43 per cent). There is a logic to thinking that economic transformation depends on investment, which depends on efficient, low-cost construction, which in turn depends on capable local firms. Maybe donors should pay more attention to how procurement rules affect firm capacity-building and provide more support to the development of a competitive, quality construction sector in the region.

Comments

Submitted by JC on

This is very interesting report. The analyses from the report are from different perspectives by using the data to outline the issues. I am specifically impressed that authors mentioned the role of sino-Africa relations. Very high quality article which we are unable to see many in these days.

Submitted by Sushil KUMAR on

The decline in share of the regional construction firms in civil contracts in SSA are largely driven by the lack of adequate construction equipment and machinery and the absence of plants manufacturing steel and cements in a large swath of the region. Based on my experience of executing EPC contracts in the region, I can safely say that once these issues are addressed, the region will offer very competitive bids and their overall share in award in civil works contracts will go up.

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