In the last volume, Kenya Engineer asked readers to contribute to its debate on the role which the Kenyan government should play in fostering the construction sector’s growth. I firmly believe that the government must play an active role by using set asides, also known as affirmative action, to support this sector, and I advocated for this approach at the Presidential Roundtable on 14 February 2014. President Kenyatta, Deputy President Ruto, some Cabinet Secretaries, the Chief of Staff and the Head of the Civil Service were present at the Roundtable. The Government of Kenya (GoK) must first set aside some contracts for Kenyan firms then set aside some contracts for joint ventures between Kenya and foreign firms and finally require international donor organizations to award contracts to Kenyan-foreign joint ventures as opposed exclusively to foreign companies. These measures are necessary because increasing the number of Kenyan and Kenyan-foreign joint venture contracts is essential to building capacity in Kenya. It also develops the construction sector and related sectors of our economy.
Recently, Kenya has seen the commencement and, in some cases, completion of important mega-projects such as the Thika Superhighway, the Athi River-Namanga Superhighway, the Nairobi-Mombasa Railway Project, and the Greenfield Terminal at Jomo Kenyatta International Airport, but Kenyan firms have little or no involvement in these projects. As a result, our firms are missing out on essential opportunities to build capacity which could strengthen their ability to execute similar projects in the future. Sadly, also, our university and college graduates are missing out on critical on-the-job training opportunities.
What type of capacity must Kenya build in its construction sector? We already have considerable capacity for constructing these mega-projects. Over the last fifty years, our consultants and contractors have been handling small to medium-sized projects which have given them excellent technical preparation. The key areas for capacity building pertain to the financial muscle and organizational skills necessary to win big contracts. As a result of this financial and organizational paucity, Kenyan firms lack the necessary experience for winning big contracts. Furthermore, the eligibility requirements to undertake such projects are fixed at levels which lock them out.
Also problematic is the fact that Kenyan firms and the nation, as a whole, are missing out on revenue and the chance to participate in creating more employment. While foreign firms create some employment, the benefits of awarding them contracts are inadequate considering that the country will struggle for years to repay the loans which finance the projects.Also, foreign firms extradite large portions of the mega-projects’ profits out of the country, thereby, denying the exchequer finances.
Joint ventures will increase the exchequer’s purse, because a certain portion of the money will remain in Kenya where it will be taxed. For example, the Nairobi-Mombasa Railway Project, the Greenfield Terminal at Jomo Kenyatta International Airport and the Lapsset Pipeline Project cost a total of around Ksh. 1.088 trillion. If 30% of the contracts for these projects went to Kenyan firms, Ksh 300 billion would go to Kenyans and be taxed in the forms of corporate tax and VAT. Assuming that the total tax would be 25% of Kenyans’ income on these projects, the exchequer would benefit by Ksh 75 billion within three years!
The absurd reality is that in all the construction sectors, e.g. roads, water, building, energy, etc., foreign firms compete unfairly as these firms are largely not profit making companies. Their advantage is due to the fact that their governments support many of them.
Even on Government of Kenya contracts, Kenyan firms face unfair competition from Chinese contractors. Currently, as per the procurement law, the government sets aside projects valued at less than Ksh one billion for Kenyan firms. The current legally stipulated margin of preference for Kenyan firms on tenders is not helping, because foreign firms’ quotes are so low, and they are even lower than the real market value or project cost. In Kenya, foreign firms have virtually taken over the building industry, and if something does not change, our situation will be like that of Angola, Zambia, Zimbabwe, Malawi and the Democratic of Congo where construction capacity building is all but over.
A global perspective provides positive as well as negative examples. China, India and Korea were very poor countries thirty to forty years ago. In order to come out of poverty, they identified infrastructure development as a key pillar of economic growth. At that time, these countries had little or no capacity to develop infrastructure, and therefore, depended heavily on Western nations. China, India and Korea made sure, however, that they developed their capacity by ensuring that their firms invested in human resources and took on joint ventures with foreigners. Today, these Asian nations can rely on their own capacity for infrastructure development and are far ahead of Kenya in terms of development despite that they were more or less at par with Kenya fifty years ago.
The current laws which regulate construction set asides include the Public Procurement and Disposal Act of 2005; the Engineers Act of 2012; the National Construction Authority Act of 2012; and the July 2013 Presidential Directive on procurement. These laws only apply to government-funded projects not to multilateral and bilateral donor-funded projects. They have not been sufficiently effective in ensuring local content in projects, and therefore, are not contributing to capacity building in Kenyan firms.
Either the government must amend these laws or pass completely new laws so that there is local content in all Kenyan development projects regardless of whether or not the projects are government or donor-funded. The most important action is for the government to craft a law that mandates Kenyan content in at least 30% of all construction projects and at least 51% of all engineering consulting. One of our representatives needs to draft a new bill and table it in parliament as soon as possible. Furthermore, during loan negotiations, government officials need to advise donors that the government of Kenya stipulates that a minimum percentage of all contracts must be set aside for Kenyan firms or Kenya-foreign joint ventures.
I commend President Kenyatta for setting aside 30% of government tenders for youth, women, and people with disabilities. The Treasury Cabinet Secretary issued a circular (Treasury Circular No. 14 2013) to ministries and parastatals informing them that the President Kenyatta directed them to award 30% of their contracts to youth, women and persons with disabilities, but some ministries and parastatals are still not complying. In regard to construction, Kenyan firms could benefit from a similar Presidential directive assuming that ministries and parastatals implemented the directive.
While currently Kenyan companies are losing out due to unfair competition from foreign firms, we don’t need to compete against foreigners. We want to build capacity by working with them in joint ventures. The country will benefit from these joint ventures significantly. We will create the right environment for retaining construction professionals who are currently finding better and more lucrative opportunities in foreign countries. Technology foreign to Kenya will spur industrial growth and catalyze innovation; lead to stronger Kenyan organizational skills; and the work ethics necessary to provide world class services. Entrepreneurs will establish industries to provide construction materials and, thereby, create jobs. Kenyan firms will have more opportunities whereas they currently rely heavily on government of Kenya contracts which are limited by the available budget. Lastly, the country will develop its own capacity and be able to successfully compete throughout East Africa for infrastructure projects.
It is imperative that this government focus on capacity building in regard to infrastructure construction to ensure that Kenyans benefit as much as possible from infrastructure projects. Set asides are the best way to establish this focus. When it comes to roads, airports and railways, for example, Kenyans should be able to benefit during the construction of the projects in terms of economic growth and capacity building opportunities just as we benefit after the projects’ completion when we are enjoying more efficient transport. A country which allows others to use it as a dumping ground for old technologies, materials and equipment may find itself left with a huge infrastructure and no capacity or finances to maintain that infrastructure.