Written by Steve Mbogo

With Sh65 billion earmarked for reconstruction of roads in this financial year, local contractors are moving to address capacity challenges that have made them spectators and ball boys in recent big sum engagements.

Faced with the difficulty of raising pre-contract performance bonds from the outset, they have been reduced to relying on subcontracts from the main contractors of Chinese and Middle East origins.

The options open to them involve some identity loss and include partnerships and outright mergers to pool resources and enable them compete with foreign contractors. Another option is to enter into consortia with foreign firms when bidding for contracts. In addition to facilitating skills transfer, this would ensure adequate resources to meet the contractual terms.

"They will be able to learn the ways of the giants in addition to technology transfer," said Haron Nyakundi of Harconsult, a quantity surveying company. The idea is already gaining currency among local contractors, with their lobby proposing that foreign companies bidding for long term contracts be required to have a local partner.

The Kenya National Association of Master Builders (KNAMB) is encouraging partnership among local firms to ensure they have enough technical and managerial skills under one roof.

Local contractors also want the National Construction Corporation, which collapsed in the late 1980s, revived under a new name, National Construction Development Authority, with the mandate of enhancing the capacity of local contractors.

Moses Muhia, the coordinator of Kenya National Association of Master Builders which is leading efforts to form the new authority, said the Ministry of Public Works had already drafted a Bill for the association's formation.

The authority will set out rules for the registration and operations in the country as proposed by Finance minister Amos Kimunya during the 2008/09 budget presentation.

In the Philippines, Malaysia and South Africa, national construction firms owned fully or partially by the government have succeeded in construction of infrastructure at lower costs. Eddy Kimemia of Kimemiah Engineering, a road construction company currently finishing the rehabilitation of the Karura-Wangige-Mwimuto-Westlands road, said the requirement for provision of bank guarantees as performance bonds has been a key handicap.

Bank bid security
The ministry requires contractors to first provide bank bid security of two per cent of the contract value. Then once the company is picked, it is required to give a performance bond of 10 per cent of the contract value. The contractor then starts to look for mobilisation money, some of which can be provided by the ministry, but again with guarantee from banks.

Local contractors said banks usually end up eating into the mobilisation fee through service charges. "We would request that banks at least wait until the contractor has done about 60 per cent of the work and then start recovering this money," said Mr Kimemia.

Spencon Holdings chief executive Boniface Kamau said servicing bonds was a business challenge. "For each contract you have to raise a percentage specified by the contract before hand." The contractors propose acceptance of insurance bonds as performance bonds in place of bank guarantees. Previously, the government used to accept insurance bonds from contractors, but the practice was stopped because of rising cases of fraud.

The Public Procurement Oversight Authority is currently considering reviving the system by appointing a panel of insurance companies to issue project bonds. While these measures will improve liquidity, contractors will be left grappling with suppliers who ask for upfront payments for raw materials.

"This creates an indirect impact on business. The cost of fuel has a knock on effect on our operations, from transportation, to price of materials, wages coupled with the increasingly high rates of inflation", said Mr Kamau.

Delayed payments, said Mr Muhia, was a major problem. "Some times payments take between six months and one year." Roads and Public Works ministry communications manager Richard Abura said this would be rectified by paying contractors directly through their bank accounts and clamping down on bureaucracy.

Though the ministry bought machinery for lease by local contractors at a cost of Sh2 billion, contractors said the units were few and priced at a premium above market rates.

Source: Business Daily