Financial Times
Negotiating
loan agreements for the construction industry
By Eddie de Zylva,
Chairman, SAARC - Construction Industry Council
Undoubtedly a large percentage
of the donor aid pledged at the Tokyo conference would be diverted to construction
related activities. It is common knowledge that the disbursement of these funds
has to be done consequent to project related Loan Agreements which in turn follow
the guidelines of these agencies. In as far as the development activities in the
north and east, it is reported that the funding would be administered by the World
Bank. If this is so, it is indeed very heartening to those in the construction
industry who know precisely the objectives and commitment of both the World Bank
and the Asian Development Bank. It is also known that what goes into the Loan
Agreement holds fast during the execution of the related project. These agencies
have a mandate and a commitment to the development and strengthening of the domestic
operators as a priority, in the process of the utilizing the funds for development
purposes
However, our past experiences
have shown, beyond doubt, that our negotiators are either ignorant of this fact,
or prefer to act indifferently. The result being that this most important aspect
and commitment of the funding agencies are glossed over during negotiations.
I think it is opportune to
publish vital considerations that our negotiators should be fully aware of and
introduce these into loan agreements.
Principals of
international
funding agencies
Apart from the directed funding
from the World Bank and ADB, as the World Bank is to administer the funding package
it is prudent to be aware of the bank's policies.
Both banks recognize that the
private sector contributes substantially to the growth of national income, investment,
employment, export earnings, and transfer of technology. The sector is seen by
the banks as the main vehicle for the economic growth of developing countries.
A priority objective of the banks is to help its Developing Member Countries (DMCs)
to establish a healthy environment for private sector growth.
The banks perceive that the
only way to achieve this goal is mainly by engaging in policy discussions and
dialogues with DMC governments, on various aspects of policy, and the statutory,
regulatory and fiscal framework that has a bearing on the growth and development
of the private sector.
Resident missions
The Banks' Resident Missions
are mandated to facilitate the bank operations in the respective countries they
represent. These offices are delegated with the task of strengthening the working
relationship between the banks and governments in processing and implementing
projects and programmes funded by them.
They maintain dialogues with
the authorities on policy and other issues and even coordinate with other bilateral
and multilateral donor agencies, and are responsible for developing operational
strategies, with associated economic policy issue analyses, developing country
programmes of assistance, project formulation and implementation.
They also undertake economic
reporting and data collection and assist governments in aid consideration in order
to enable the bank to respond better to the changing needs in operational policies.
It identifies new directions in terms of their impact vis-à-vis the bank's objectives
and the need of the developing countries.
Eventually it is the Resident
Mission Offices that significantly contribute in the formulation of policies,
strategies and approaches in relation to capacity building and acts as a focal
point.
Construction
contracting sector
Construction, if measured accurately,
contributes 8 - 10% to the GDP and absorbs 40 - 70% of the Gross Fixed Capital
Formation. These monies will increase significantly with the most recent pledges
at the Tokyo conference. Therefore the country needs to ensure that all the opportunities
are provided to develop this sector through the private sector, who in turn will
be the major contributor to the country's economic growth and stability.
Sri Lanka's development programmes
are diverted largely to infrastructure development, rehabilitation and reconstruction
and new construction. This by itself is a clear indication of the role the private
sector constructors can play to accomplish such programmes, develop the private
sector and enhance the economy and its growth.
The main source of funding
for this purpose is derived from external funding sources, whose presence in Infrastructure
Development, Rehabilitation and Reconstruction has been very significant and will
continue to increase significantly.
These funds are obtained through
the usual several sectoral loan agreements, drawn up between the government and
funding agencies, within the macro funding made available from time to time. It
is in this context and, it is well within the underlying policies of these funding
agencies, that this paper is documented for serious consideration of both the
government and these agencies.
Domestic inputs
We are very fortunate that
construction has been recognized in Sri Lanka by these agencies as a major economic
growth sector. It is with this conviction that the banks are steadily increasing
their loan allocations to construction related activities.
Substantial allocations are
set aside for road rehabilitation, reconstruction and other infrastructure development.
The banks, in appropriate cases,
have just begun to permit the procurement of domestic construction services without
always going through International Competitive Bidding (ICB) procedures.
It is most gratifying that
the banks have realized and accepted the growing domestic construction capacities,
and recognizes the regulatory framework that our country adopts such as the registration
of contractors in appropriate grades, in the relevant field of construction that
they are competent in, by the Institute for Construction Training and Development
(ICTAD). The brief outline on the banks policies, indicate they are all fast moving
in the desired direction. Yet it must be admitted that all of us, i.e. the banks,
the government and the constructors, have still to stabilize themselves through
more intensive dedication and commitment, if the forward march is to achieve the
desired results within the desired time.
There seems to exist a great
void that continues to slow down domestic growth in the construction sector. This
paper highlights the need for increased domestic inputs to this sector, for which
prudent, employment of Loan / Grants from the banks should be judicially addressed.
If one measures the total volume
of loan / grants provided by the banks to the construction sector, it is seen
as significant; likewise if we examine the mix of its distribution between the
domestic and the expatriate, it is seen as dangerously unbalanced. The scale is
tilted heavily to the expatriate side.
Flexible guidelines
It is not uncommon, for us
to hear from our government, that the domestic inputs are subjected to rigid bank
rules. The government does not seem to realize that banks convey their policies,
not by rigid rules but by flexible guidelines.
On the other hand, we learn
from the banks that it is the government who is responsible in tightening the
rules, rather than being flexible with the bank guidelines. It is timely now for
all of us to put the records straight, and we do hope that this paper will serve
the purpose. We are all more than aware that the large funding packages will come
from several industrialised countries, and therefore, by all means, such countries
must reap some benefit. Yet we all must realize that the cornerstone of the approach
of the bank is factoring of the DMC's priorities and preferences, which will achieve
its development objectives and thematic priorities.
I will now prioritize the key
areas where remedial action has to be taken.
Flexibility
We clearly see a flexible approach
of the banks in encouraging and accommodating Domestic Contracting Procedures.
We are encouraged that the government is moving towards the understanding and
recognition of the economic benefits by promoting the domestic construction sector
in principle. We see ourselves joining hands with the government and improving
productivity, quality and enhancing employment with a commitment to nation building.
Yet it is quite evident that
both the government and the bank must convince themselves that operational flexibility
must necessarily be intensified and applied to meet the fast changing environment
and philosophies.
Traditional mix
The present mix between domestic
and foreign is unbalanced. The government seems complacent with this situation.
The domestic constructors are being driven to the wall.
This sees the straining economy
being aggravated and would continue further unless the banks and the government
take meaningful steps to gainfully use the construction sector by supporting and
strengthening domestic inputs.
Recommended considerations
to be addressed by negotiators:Thematic priority
In order to achieve our common
objective we need the combined support of the banks and the government to:
- Increase and improve on the
newly emerging Procurement Procedures for the construction sector.
- Suggested mix: 30% ICB, 40%
LCB and 30% LBP (Limited Bidding Procedures)
Limited bidding procedures
that are provided under the Bank Guidelines, to be made more flexible to accommodate
and limit civil works to be procured from Domestic Contractors who are registered
with the ICTAD.
Define "LCB Procedures" more
precisely
Increase LCB Procurement Procedures.
- Ensure the realization of
the philosophy of the term "Competition on the same level playing field".
For which local conditions
that govern LCB Procedures, should, inter-alia, include :
- Packaging of projects to
reasonable sizes to provide local competitive participation
- Restrictions that govern
the number of packages that could be awarded to a contractor should be applicable
to all bidders
-Local Taxation and Customs
Systems should be applicable to both the domestic and foreign organizations, and
their personnel alike. Organizations and their personnel should be made liable
for payment of all taxes in Sri Lanka.
Foreign organizations and their
employees should strictly abide by the Inland Revenue Act including maintaining
records, observing Sri Lankan accounting standards and filing returns.
-Complete ban on employment
of foreign unskilled labour. EPF, ETF payments and other local labour regulations
should be strictly enforced irrespective whether the contractor is foreign or
domestic. All payments on the contract to be in Sri Lanka Rupees only, for all
contractors.
Borrowing of working capital
should be only from local banks in Sri Lanka and at local interest rates.
-Expatriate professionals should
meet the recognition criteria prescribed by the Sri Lanka professional bodies.
-Expatriate skilled workers
to be permitted only if local parallel skills are not available and they should
meet the Sri Lanka Trade Testing Standards.
-Expatriate organizations should
meet the same grading criteria set for domestic organizations (temporary registration
with ICTAD should be a requirement).
-Expatriate organizations competing
on LCB Projects should join the local contracting community by joining the National
Contractors' Association as temporary or expatriate members
-All laws of Sri Lanka to be
applicable including arbitration.
-All insurance to be taken
in Sri Lanka from domestic insurers.
Conclusion
The development of the domestic
construction sector is an integral part of the process for the growth of our national
economy.
International funding agencies
play a significant role, in contributing through various strategies, towards the
growth process. Resident missions are mandated to make every effort to assist
the governments of the DMCs in the promotion of the development policies, which
are sound, and serve the long-term needs. These missions are also expected to
study recommendations and make whatever changes necessary to their own operating
procedures and programme priorities.
It is with this background,
and in this context that the banks and the government are requested to examine,
support and adopt these recommendations within the framework of the broad policies
of the bank, but with adequate flexibility to meet the needs of the country.
One specific purpose of this
paper is for all concerned parties to collectively understand their mandates and
priorities.
It is also meant to explore
the recommendations and adopt appropriate methodologies, with sufficient flexibility
to maintain a long-term equilibrium to the construction sector, which is often
defined as the "Barometer for measuring the economy of a country".
(Note by author - This paper
has been prepared with experiences not only in Sri Lanka, but also in the South
Asian Region. Thus the underlining principles positioned in this paper are common
to all developing and under-developed countries in the South Asian Region.
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