Govt must rescue construction sector

Govt must rescue construction sector

The outbreak of Covid-19 and consequently the measures various governments around the world put in place to prevent its spread, led to big challenges in many sectors and world economy.

Uganda has not been spared the challenges, most especially in the construction sector, keeping in mind that the sector is an essential asset of any country’s economy.

Although President Museveni put a halt to most sector operations not long after the first case of Covid-19 was reported in Uganda, he allowed construction works to continue. But there was a shortfall in this directive because of restricted movement of workers, disrupted supply chains and non-payment of arrears, among others.

Need for support. Even prior to Covid-19, Uganda’s construction sector faced significant challenges, including lack of a regulatory framework, lack of work, difficulty in accessing finances, delayed payment to contractors, as well as foreign dominance of the sector. Most contractors were burdened by non-payments of arrears by government ministries, departments, and agencies.

This situation was worsened by the prioritisation of resources to finance activities related to Covid-19 control, which resulted in non-payment of certificates due to contractors thus accumulation of arrears.

Subsequently, delayed contract payments have led to delayed/default on financing obligations by service providers with financial institutions, which are now risk averse, especially when financing government-funded projects.

The unfair tendency by Uganda Revenue Authority (URA) of charging Value Added Tax (VAT) on contractors’ certificates, even before they are paid, has further affected business cash flows.

The restriction on movement of labour even within projects such as roads led to slow and uneconomical work output rates leading to contract delays and cost overruns, which are potential contractual dispute areas that will need to be resolved. Besides, closure of hardware shops meant that certain construction activities could not proceed.

In addition to these, all procurement processes, which had started prior to the onset of Covid-19 measures, were interrupted leading to delays and increased costs to the contractors, especially on bid security. All these disruptions, which led to stoppage of works, loss of income and manpower, may lead to potential litigation issues and business uncertainty, among others.

It should be noted that any construction firm that is not assured of business cannot sustain itself. Therefore, in order to build sustainable capacity in the construction sector, government must support the industry. And this is how.

Government should move to reduce the cost of financing capital, which is now at more than 20 per cent. This is neither affordable nor sustainable for local content policy.

Local service providers accessing financing at such a cost cannot compete with foreign providers who access similar financing at cheaper rates from their countries of origin.
Government should establish a construction industry development fund in Uganda Development Bank dedicated towards the development of the local construction industry and support the economic empowerment of domestic contractors undertaking government projects.

Government should also prioritise payment of all outstanding domestic arrears to contractors to enable continuity of ongoing projects, which will help improve liquidity, alleviate failed contracts arising out of insolvencies of service providers, as well as keep hundreds of business alive and Ugandans in employment.

URA should relax her punitive measures on tax defaulters, giving a grace period within which, the outstanding taxes shall be paid and waive penalties, notwithstanding the need to amend the tax laws to allow VAT be remitted when payments have been received by the contractors.

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