Chinese firms edging out local contractors

Chinese companies have been accused of biding low to edge out local contractors. JOEL OGWANG examines the impact of the way the firms do business on the economy

Uganda has seen an influx of contractors, many of them foreign, in the last five years, leading to a stiff competition for the available contracts.

A number of factors are responsible for this, among them, the recovery of global economies from the melt down of the 2008, a drop in the cost of construction materials and labour and confidence in the local procurement system.

“When we advertised a project five years ago, we would get five bids,” notes Dan Alinange, the Uganda National Roads Authority (UNRA) head of corporate communications.

“Today, for every (road development) project advertised, we get over 30 bids, many of which are foreign contractors.”

Influx of foreign contractors

When UNRA advertised tenders for the construction of 1, 900kms under the Contractor Facilitated Financing (CFF) mechanism on July 12, 2012, a total of 46 international companies bid.

Sixteen were from China, India (9), Turkey (5), South Africa (3), USA (2), Spain (2), while Egypt, France, Portugal, Israel, Ireland, Netherlands, Malaysia, Switzerland and UK had one each.

The growing competition has cut down on the unit costs of roads development from the $1.2m and $1.5m range to between $700,000 and $800,000 now, says Alinange.

Chinese companies storm Uganda

There are 45 new Chinese companies with niches in infrastructure development in Uganda today, according to the Chinese Embassy. This was not the case a few years ago, but the growth is following the increasing bilateral relations between the Ugandan and Chinese governments.

The increasing presence of Chinese companies here is partly because of their government’s willingness to offer cheap credit and heavy long-term investments, which gives them a soft-landing in Uganda.

The Matugga-Ssemuto-Kapeeka road was constructed by CICO, a Chinese company

A case for low bid costs

UNRA welcomes the competition, saying it will lower costs and increase quality, but there are also growing fears of over-reliance on foreign companies to do mega roads development works and creation of monopolies and eventual cartels.

This could compromise works eventually. The fears are heightened by the fact that Uganda is a free-market economy with minimal government intervention in price ceilings.

A highly placed source in UNRA says: “Some of the Chinese companies tender bids of as low as $500,000 even when the unit cost per kilometer is $700,000. We fear that this could compromise the quality of their works and in the long-run, it will chase away other contractors and create a monopoly, perpetrating a cartel that will control the economy.”

The fears grew out of the unprecedented award of five contracts for the upgrading of 450kms of roads, estimated at sh500b, to only Chinese contractors.

The roads are; Kanoni- Ssembabule- Villa Maria (135km) awarded to China Railways No. 3 Engineering Group, 70km Olwiyo- Gulu (Zhonmei Engineering Group), 73km Gulu-Acholibur (China Railway No.5 Enginnering Group), 80km Acholibur- Musingo (Chongqing International Corporation and 104km Musiita-Lumino-Busia (China Railway 18th Bureau Group) to be constructed over the next three years.

China, the source adds, has a well-developed construction industry laden with competitive contractors, but most of those that undertake development projects in developing countries are questionable.

“If a local construction company wants to learn the trade, Chinese companies are not the best teachers.”

Bruhan Nassur, the Turkishbased Kolin construction company country director, admits they are having problems.

“We are facing challenges with the pricing of our competitors, especially Chinese companies, whose bids are questionably very low. It becomes hard for others to put up better prices to get the worth for a project we intend to do.”

But Alinange says tendering low bids is not a problem for UNRA as long as the contractor delivers on an assigned project. He adds that the competition is causing a price war, which could eventually benefit UNRA.

“Often, we have our own estimation for each job. When a contractor bids low, we look at their technical and financial proposal closely so that they don’t leave out vital issues,” he says.

Prime Minister Amama Mbabazi (centre) during his tour of the Kampala- Entebbe expressway project recently

UNRA’s only fear is the possible compromise on environmental and safety standards to cut down on operational costs.

“We may have a situation where such companies don’t provide workers with safety gears such as gloves, gumboots and clothes,” says Alinange.

“The company may also have a quarry but doesn’t relocate families around or compensate them ably, which are all risks. These are issues our funders like the World Bank and European Union are strict on when we seek funding.”

York Wu, the China State Construction Engineering Corporation overseas operations senior manager for Africa region, says most Chinese companies are certified and not quacks.

“The focus shouldn’t be so much on the bid costs of some Chinese companies, but on quality,” he says.

“The cost depends on their management scope, cost of materials and manpower, which may be low. The key point should be on whether they can do a job according to the employer’s needs.”

PPDA take

The Public Procurement and Disposal of Assets Authority (PPDA) acting executive director Patricia Asiimwe advises UNRA to establish a bid cost threshold beyond which a contractor is not allowed to bid when undertaking financial evaluation.

“When the Chinese companies bid and win tenders, do they deliver on quality works that offer value for money?” she asks.

“However, under the amended PPDA law, one of the issues that came out was the need to promote local companies, especially for high value roads development projects. This will build their capacity and enable them to undertake jobs currently going to foreign contractors.”

Alinange agrees with Asiimwe on building local capacity.

He says government is amending the PPDA Act to provide for local companies getting at least 20% of public works contracts. Among the benefits, he notes, is minimizing capital flight.

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