This paper is prepared for staff use and is not for publcation. The views are those of the authors and not necessarily those of the Bank. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Bank Staff Working Paper No. 168 November, 1973 A FRAMEWORK FOR THE PROMOTION OF CONSTRUCTION tNDUSTRIES IN THE DEVELOPtNG COUNTRIES The study was prepared for the Bank by a team of consultants, John C. de Wilde & Associates, on the basis of visits to a number of developing countries to explore ways in whtch the Bank can assist the development of a domestic contracting industry. The report suggests a num- ber of approaches for tarkling the economtc and Instttu- tional problems facing th growth of this industry in developing countries. Transportation and Urban Projects Department Prepared by John C. de Wilde & Associates (Lonsultants) This report was prepared by a. special mission of consultants, comprising: John C. de Wilde - Chief of Mission and Economist Marvin Gates - Engineering Adviser on Construction Economics and Contracting Procedures Nikolaus Werth - Civil Engineering Adviser Charles Cockburn - Architect and Adviser on Training A FRAIMEWORK FOR THE PROMOTION OF CONSTRUCTION INDUSTRIES IN THE DEVELOPING COUNTRIES TABLE OF CONTENTS Page No. SUIVIARY AND CONCLUSIONS ,......................e.o..............*.eeaaax* i - x CHAPTER I - TERMS OF REFERENCE AND THE ANALYTICAL APPROACH ........ 1 A. Introduction ..*...............a....................aa a*a The Mission's Terms of Reference ..e..c,..............aa 1 Definitions . . . . .. . . . . . . . . . . . . . . . . . . . a . . a . a a . * a . . a a 1 Scope of the Construction Industry e........@...e...... 1 Inclusion of Both Building and Civil Construction ......o.... 3 The Domestic Construction Industry ............ 4 B. Characteristic Features of Construction ....e.5 C. Costs and Benefits of Developing Domestic Construction Capacity a . ..........a . ................ a a * a . 7 The Benefits . ............. . . . a a a a a a ...............a a a a a a a a a a 8 Greater Local Employment o..aaa.,aaa a0..41 ....... 8 Sccio-Political Benefits . o.............. e a. a.a 9 Lower Construction Costs ...........0. ... ,.....* 10 Foreign Exchange Savings 10 Costs and Cost-Benefit Comparisons .aa.-0aa,.aaa11 D. Findings of the Country Studies eaeaaaaa.aaa..a.aaaa.aaa. 12 Importance of the Market ... ............a... ..... a.aa. a a .... 13 Opportunities for"Learning Experience". a........... a..a.... 13 The Entrepreneurial Spirit aaaa.a.aa..0aa.aaaa......aa.aa lL12.4 Achievement of the Korean and Iranian Construction Industriess oaa.a .a. Is I.a......a..a. . .aaaa a. a a . 14 Competition a a .a.a.a.a..a . .a e . . a . a . . . 0 . a . . . . . * a a a a *a a a e a a a a . 15 Classification and Qualification of Contractors ...*oo..aaa. 16 The Role of Education and Training ....aaa....... aaaaaaa 18 Contract Documents and Contract Execution aeaaaaaaa*a.aa 20 Financing of Contractors a*.......*.......aaaa a.. aa** 20 Lack of Planning .a.a.......*aae*aaaaaaa*a*.*laaa.,aaaa.a* 21 E. A Framework for Planning Development aaaaaaaaaaaaaaaaaa.aaa 22 Essential Features of a Development Program The Time Frame of Development .aaaaaaaaaaaaa*.. 25 F. Organization of the Report a. ..a.... a a a a a... . a. a a a 28 & ~~~~~~~~~. ........ ..-...--........ .- Table of Contents (Page 2) CHAPTER II - ASSESSMENT AND PLANNING OF CONSTRUCTION DEMAND IN RELATION TO DOMESTIC CONSTRUCTION CAPACITY ....., 29 A. Introduction ..**..*........... ...*. *..*........... c *a*.eoeo0 29 B. The Assessment of Demand ..........,.....,...... ...,..eo 29 C P Planning of Construction e . . . . . . . . . . . . . . . . e. . . . . . . e o *. . . . . . . . 32 D. Supply: Number and Capacity of Domestic Contractors ........ 34 Criteria for Assessing Contractors' Capacity and Potential ................. . . e 34 E. Collection of Data on Construction .......................... 37 CHAPrER III - DESIGNS, PLANS, SPECIFICATIONS AND TECHNOLOGY *.... 39 A. The Relevance of Design . . . . . . . . . . . ...... . .0 39 Value Engineering . . . ....*....... .....*..********** 39 .B. Appropriate Technologies ............. * J 40 Evolution of Technology . . ......**.....* ..... ..... . 42 C. Drawfings and Specifications ....................... 43 Method and End-Result Specifications ................... 43 Simplification of Specifications ...................... 44 Role of Drawings in Contractor Development .............. 45 CHAPTER IV - METHODS OF DIVIDING CONSTRUCTION WORK AND AWARDING CONTRACTS .................... *. ... . 47 A. The Division of Work into Contracts and Subcontracts ........ 47 Division of Work in Relation to Contractors' Capacity ... 48 Measures to Develop Subcontractors ....... .*090.. ......* 49 Factors Governing Division of Construction Work e....... 50 B. Methods of Awarding Contracts ... ........ 52 Advantages of Competition ......O.** e ........@........ .. 52 Disadvantages of Competition in the Early Development Stage ..***... . e*s**ee*e o * * *geegegge 53 Allocation of Work on a Cost-Plus Basis with a Ceiling ....*o******* . ......e.. 55 Progressive Introduction of Competition ....... .......... 56 C. A Program Modpl for Development of Road Contractors ...e.... 57 CHAPTER V - ASPECTS' OF CONTRACT EXECUTION: DIVISION OF RESPONSIBILITY BETWEEN CONTRACTOR AND EMPLOYER . ... 59 A. Information and Guidance Required by the Contractor ........ 59 Cost Estimates D ....* . * * ..................* 59 Work Plans ...... * rer................ 60 Field Engineering Data .1 ............ @ .*.... 60 Table of Contents (Page 3) B. The Terms of Construction Contracts e 61 The Contractor's Responsibility for Negligence e....... 62 Responsibility for Damage Caused by Natural Forces *. . 62 Respon3ibility for atra Work Due to Unanticipated Subsurface Conditions *. ...e.e . s 0**,*** * 63 Responsibility for Verifying Drawings s **. . * .. . . e . . 63 Provisions for Escalation of Prices ........ 0.....o*.'o*0 63 Penalties for Delays in Work Completion *.c..... ....*10 9.. 64 Settlement of Contract Disputes e 64 C. Supervision and Enforcement of Construction Standards ........ 65 CHAPTER VI - EDUCATION AND TRAINING FOR THE CONSTRUCTION INDUSTRY *,**e*,*,,,**,******eeeoeeoe......o 67 A. Introduction *. ...........- ...*....* ** * *-*** * 67 B . Education ....... * * *..........e .*e*..*e** *** 67 General Education .. .. *.*o ....oee*oees.** . 67 Technical and Professional Education 6..................o. 63 C. Reorientation of Education 00000 e. . * 69 D. Training ............ . Is. 0.e. . .. ... e. . a. * .e . in...... 70 The Mission's Observations in the Field ....."*64.. ....o 70 E. The Mission's Proposals for a Training Program .............. 74 Training for Government Personnel ............o..e.. 74 Training for Contractors .......... * * .*...* 0094000 74 Training in Relation to the Experience and Background of the Contractor .*.....*.* . ..e* *e*.* 77 The "Existing" Contractor ..............o.......... 77 The "New" Contractor **000000 eeoo* .* * .*... ..* 77 The Artisan and Engineer or Technician-Contractor *e-...,. 78 The Businessman-Contractor . ** 79 Progressive Changes in the Subject Matter of Training .... 79 Informal Training and Individual Advice .................. 81 Formal Group Training *,.........*0*0 . .***......*ee.e*...* 82 Evaluation of the Training Program *....e............ 83 Sources and Recruitment of Training Staff ............... 84 The Number of Staff *.................. ** ,* .......oe 85 Orientation of the Training Staff ............e....... 86 CHAPTER VII - FINANCIAL AND FISCAL PROVISIONS RELATING TO CONSTRUCTION * *.**o**e06oOS 00c0 00Z 87 A. Financing ***...e ...000 * ..ee0.eoe-O* 06* e.eoe*eoe 87 Requirements for Bonds or Guarantees ** 87 Requirements for Equity Capital ......... ee*..ee.e.e 89 Measures to Reduce Borrowing *..eee.e.....e.o........e 89 Equipment Pool1 g .......... *.............. ....... .... 90 Employment of Uc d Equipment *.................. 91 Terms of Financing . ............*..00000000000 ...... 91 Special and Normal Financing Methods *.................... 92 Establishm.znt of Contractors' Accounts ................... 93 B. Fiscal Treatment of Construction Enterprises .*.*00........... 93 Table of Contents (Page 4) Pag NO. CHAPTER VIII- A SUIGE,STD FUTURE COURSE OF ACTION ........ 0.0,0,e 95 A. Additional Reaearoh ,,,e,o,.o,oee,.e e e> e 9 ,.* - . S 0 95 B. The Bank'e Role in Developing Construction.Industries ........ 96 Definition of the Bank's Interest * *.,.,...,.. 96 Possible Approaches to Development .o.,*...o. .*....*" 97 Types of Bank-Sponsored Development Exercises .....Qe...,. 98 Selection of Countries for Pilot Development Program *... 99 C. Planning of Pilot Programs *00***e ee*o0ee g**0e.....e 100 De. Imlementing the Program ....***.... eee.*.g..o*s*-oo.e.o. 103 Bank Responsibilities ........... . c 103 Government Responsibilities .....,,.....,..,...C.,.e... 105 E. Concltiding Observations . - . -.. . .... .......... *-e*-*-** 10.5 ANNEX Development of the Contractor in Terms of his Qualificaitons, Capability, Capacity to Bear Rtsk over the Development Time Frame. A FRAMEWORK FOR THE PRCMOTION OF CONSTRUCTION INDlUSTRI?E IN TIM DEVEOPING COUNTRIES SUMARY AND CONCUJSIONS i. The Mission visited four countries - Korea, Iran, Ethiopia and Kenya. In the first three it sought to diagnose the problems encountered in the evolution of domestic construction industries and the various factors which had contributed or inhibited development of these industries. In the fourth it examined a special government program for the promotion of iindigenous contractors. (On the basis of these studies and drawing also on the previous experience of its members, the Mission has devised a set of guidelines which might be applied by the Bank and relevant governments in working out programs for developing domestic construction industries in particular countries. In this context it defined a "domestic construction industry" as one comprising enterprises owned in whole or in major part by residents of local nationality or citizenship. ii. The Mission did not consider itself competent to determine what priority should be accorded to the development of domestic construction industries. Since 50 to 60% of gross fixed capital investment in develop- ing countries usually goes into construction, the efficiency with which construction is carried out is unquestionably important. However, this is not necessarily relevant to a determination of the proportion in which domestic and foreign contractors should meet the demand for construction. Most countries have developed, or find it necessary to develop, a domestic industry capable of doing most building work because foreign contractors are usually available only for large building projects. Frequently, how- ever, it may not be economic to develop a domestic capability for a broad range of civil works. There may not be enough demand for civil works construction to permit sufficient work for domestic enterprises. Even if existing or prospective demand is sufficient, the timing of efforts to promote the domestic capacity to meet it may well be critical. When there is little indigenous business enterprise in general and the level of educational and technical skills is low, the costs of special programs to develop civil works contractors are likely to be out of proportion to the possible long-tenm benefits that might conceivably accrue. Initial Requirements iii. The first step in determining the justification, scope and nature of any program to develop the domestic construction capacity in a particular country should be to assess the current and prospective demand for various types of construction work and at the same time to appraise the actual or i,'tential capacity of domestic enterprises to meet this demand. The state *' development and the particular problems of building the civil works contractors must be carefully analyzed. In Chapter II the Mission has indicated what should be done in these respects. Once this initial survey and analysis has been completed it will be possible to determine the size and structure of the domestic construction industry that might be developed and the progressive steps by which this might be accomplished. iv. If a promotion program is deemed feasible, the next step is to make sure that the government is prepared to make the construction indus- try the object of coherent and conscious planning and development. In the past the measures which governments have taken to promote this industry have usually been ad hoc in character. Government economic planning agencies have >-id little or no attention to the implications of general development plans for the construction industry. The possibilities of planning public construction industry have hardly been examined. Manpower planning and education have in many respects failed to cater effectively for the requirements of the construction industry, so that the latter has usually had to train its own skilled labor on the job and has often suffered from critical manpower shortages, particularly at the subprofession- al level. In general. governments have provided no special facilities for financing construction enterprises and have frequently aggravated the financing problems of contractors by delays in payment. The conditions of contract, specifications and construction standards which have usually, been modeled on those in advanced countries have not been well adapted to the requirements of developing countries. The Mission noted that the provisions of construction contracts governing settlement di;sputes and responsibility for extra or additional costs arising out of variations and unanticipated conditions were often excessively weighted in favor of the public employer and tended to force new and relatively inexperienced contractors to assume risks which they wre really incapable of bearing. While literal compliance with such contract stipulations has often been waived, the amount of discretion that can be exercised in this respect by government officials has exposed the construction industry to arbitrary and capricious action and provided ample opportunities for corruption. The Content of Development Programs v. The third step is to determine the cantent of an appropriate development program. The Mission has worked out a method of approaching this problem by setting forth all the component elements which it believes should be considered and suggesting how. each of these might be handled. Its recommendations have been devised with particular reference to: (a) the special risks and features of the construction industry; and (b) the need to adapt any program to the changing problems and require- ments of domestic contractors as they progress through successive develop- ment phases to a final stage at which their efficiency approximates that of foreign contractors. vi. The construction industry is characterized by certain special features which enhance the risks and complicate the management problems of contractors. The demand for construction is subject to greater dis- continuities and fluctuations than the demand for manufactured products, especially consumer goods. Since such demand in developing countries is largely determined by public sector outlays, it is usually dependent on fluctuations in government financial resources, changes in the composition of public investm6nt and delays in public project preparation. Construc- tion projects are nearly all custom-built to the requiremeats of the user and usually at prices agreed at the time of the contract. The fact that construction takes place at many sites increases possible variations in conditions and costs and complicates the managerial task of mobilizing and supervising men, materials and equipment. Construction is subject to delays and damage owing to exposure to the elements. Changes in the cost of labor and materials that may intervene before construction is completed, are often considerable and difficult to anticipate. Under all these conditions, the contractor runs not only the risk of periodic unemployment but also the risk arising out of his difficulty in making cost estimates that will adequately safeguard him against a broad range of adverse contingencies. The Mission has therefore addressed itself particularly to ways and means of mitigating these risks for the neophyte or inexperienced contractor and of bringing about a more equitable apportionment of risks and responsibilities between the two parties to the construction contract, namely the employer and the contractor. vii. Recognizing that the problems and requirements of a domestic construction industry will change as it evolves, the Mission has related its recommendations on the content of a promotional program to the succes- sive phases of development which contractors in the various branches of construction might be expected to experience. A time £rame comprising an "early," '1intermediate" and "late" phase of development has accordingly been envisaged, although these are assumed to merge gradually into each other without clear-cut lines of demarcation. The essential characteristics of each of these phases are given in paragraphs 56-63 of Chapter I. Separate time frames may be appropriLte for the development of building contractors on the one hand, the civil works contractors on the other hand. viii. The various measures which we believe should be adopted in each phase of our time frame are set forth succinctly and in tabular form in Annex I of this report, and the reader is strongly advised to give careful consideration to this Annex before pursuing the whole report. It shows: (a) the criteria recommended for qualifying contractors for participation in a development program and for eliminating those failing to perform; (b) the methods proposed for facilitating procurement of work for develop- ing contractors and for protecting such contractors against some of the risks of competition; (c) the kinds of information that the government might provide contractors to assist them in costing and carrying out their construction work; (d) the changes in contract terms that would bring about a more appropriate apportionment of risks between government and the corntractor; (e) the nature and focus of technical assistance and training that might be made availab.i to developing contractors; and (f) the special financing facilities that c ild usefully be developed fcr such contractors. Qualification of Contractors for Develo ment ix. A central feature of our proposals is that existing and aspiring contractors should be carefully screened or qualified for participation in a development program. A careful reoord of their subsequent performance should then be kept so that those failing to demonstrate their capacity can be dropped. Tn Kenya,0 the program which the government had launched to promote African contractors has failed in part because it did not concentrate on entrepreneurs with a real capacity. ELsewhere the Mission found that government systems for classifying contractors in terms of their eligibility to carry out various types of construction work were seldom strict enough, and tended to result in an "overcrowding" of the industry in relation to demand. The Mission has suggested that the task of qualifying contractors and their continuing evaluation be entrusted to an autonomous public con- tractor development and agency which would be as immune as possible to political pressure and which would also be responsible for helping the contractors in the program to procure work, provide them with training and advice and recommend them for special financial assistance0 The criteria whdch this agency might apply in qualifying and screening contractors are set forth in paragraphs 16-18 of Chapter II. Procurement of Construction Wrk X. Work experience and some continuity of work are essential to the sound development of a domestic construietion industry. In Korea and Iran., where the indigenous construction industry has made rather rapid progress, the Mission found that the government had disposed of resources which enabled. them to reserve a substantial part of construction to domestic enterprises. Under these conditions emstruction firms had been enabled to gain a volume and range of work experience which would have been impossible to achieve if they had been exposed to competition from more experienced foreign firms at all times. Subsequently, the experience thus gained enabled them increasingly to meet competition from foreign enterprises. At the same time Korean and Iranian construction firms both benefited from a rapid and continuing ex%pansion of the construction market which provided a continuity of work that permitted many of them to develop their resources and theix capacity gradually to cope with the risks of competition (see paragraphs 31-32, Chapter I). xi. The various measures which might be taken to provide a larger and contXiuing volume of work to developing construction enterprises are set forth in the paragraphs below. Reservation of Constru-tion Work xii. Onie of the Mission's most important recommendations is that in the early phase of development construction work be reserved to the developing group of ~ ontractors and awarded among them without competition but within certain price ceilings set by the government (see Secticn B, Chapter IV). -v- The Mission does consider that contractors should ultimately be expected to operate under comrpetitive conditions, and that competition among experienced and reasonably well-financed contractors will generally tend to lower construc- tion costs. It believes, however, that competition will not yield such cost- benefits in the early phase of development and that competition is incompatible with the overriding need to give neophyte and relatively inexperienced con- tractors the continuity of work that will enable them to acquire experience and build up the personnel and financial resources which they will eventually need if they are to survive the risks of comnpetition. Such contractors wri:ll for the most part be unable to prepare sound cost estimates. For them the competitive method of awarding contracts is largely a lottery. If one of them is able to prepare a correct tender and is prudent enough to raise his bid to take into account all the risks to which he will be exposed, others will not have the same capacity and may, therefore bid well below probablp costs. IC the successful bidder runs into insuperable difficulties because he has been unable to anticipate his costs correctly or encounters un- expected problems at the site, he will be unable to complete the job and his performance guarantees will probably prove inadequate to permit the completion of the work by another contractor at the same cost. Under these conditions, the contractor will either be "bailed out" through price adjust- ments, or he may fail simply because he has been unable to cover his costs. There m,y well be successive series of "fly-by-night" contractors who will have a high rate of attrition but who will at the same time prevent the prudent, cost-conscious contractor from thrivTng and building up his business. The economy will in the last analysis have to pay the cost of a high rate of failures or for the inevitable periods of idlenez; from which surviving contractors will suffer. If a civil works contractor invests in equipment for the purpose of carrying out a single contract, but then cannot get another job because the market affords comparatively few work opporbunities or because another either intentionally or unintentionally bids below costs, it will be not only the contractor but also the economy that will havcr to bear the cost of idle equipment. Competition is likely to encourage over- investment in. equipment which a develcping country will firnd difficult to support. The civil works contractor who has substantial f:ixed costs as the result of investment in equipment will quicicly go under unless he is ensured the continuity of work that will enable him to uti-lize that equip- ment more or less continuously over its life. However, continuity of work is important to the construction industry and to the econorry of a developing country, not simply because it promotes fuller utilization of scarce capital assets. The development of effective enterprises where managers and personnel have become an efficient "production team" by working together over a considerable period is just as important. And enterprises in this sense cannot be created unless there is sufficient continuity of work that will ensure the acquisition of collective experience and the income essential for maintaining and expanding this production team. Project Desig and Specifi itions xiii. The possibilities of designing construction projects to take into accouint the capacity of indigenous construction enterprises should be vi - carefullyr explored. The design should, of course, always be consistent with the realization of the basic purpose that the project musst serve, but within this limitation there are often alternative designs, some of wlich may be within, and others oiitside of, the capacity of the domestic enterprises. There is often a tendency' in developing countries to over- design a project in relation to its purpose and desirable life, and this tendency may not only result in unnecessary increases in cost, but also in specifications with which domestic construction firms cannot cope. In this connection, the Mission would stress the imortance of value engineer- ing in determining the most economical project design and in making a comparative assessment of the marginal costs and benefits of insistinig on higher standards of construction and perfection. 'kWere possible, design shouLld take Lnto accoun-t the technological level of existing contractors. Both teclnolog and the related design concepts should evolve with the groWin.ig capabilities of domestic contractors. Ihitially, efforts may wel have to concentrate on the more efficient application of tools, matearials and methods wahich such contractors are already using, but as these improve- ments yield progressively- diminishing returns, new technologies, involving more advanced design concepts, management and construction techniques, can and should be progressively introduced (see paragraphs 1-11, Chapter III). Division and Subdivision of Construction Work xiv. In Annex I and Sectiorn A of Chapter IV the Nission has exmnianed, though not exhaustively, to what extent public construction programs and projtects might be divided and subdivided, both horizontally and vertically, and phased over time in order to increase the possibilities of participa- tion by domestic contractors and subcontractors. The Mission has made a number of suggestions on methods of doing this and has drawn up, as an illustration, a model of a five-year road construction program which could be used as a vehicle for the development of domestic road contractors. The Mission realizes, of course., that considerations of cost and feasibility impose certain constrainks on the extent to which construction programs and projects can be divided and phased in practice. Fh.asing~ of Government Construction Demand xv. On a continuing basis the goavernment should consider what can be done to phase its construction work in such a wy as to provide more continuous en?loyment for the construction industry. We do not suggest, of course, that the phasing of such work should be dictated by the require- ments of the industry, but simply that the latter's needs be cornsidered as one of the factors in determining when projects are to be started and completed. The economic need of a project, and its relationship to other projects that may contribute to the satisfaction of this need, will generally be the principal, if not the sole factor In deciding the con- struction schedule. However, the timing of many projects in developing countries is oftein determined not so much by economic requirements as by purely adventitious circumstances. The Mission is persu&aded that the scheduling of developmemt projects can often be changed in the interest of providing more stable employment to the construction industry without adversely affecting general economic development (see paragraphs 11-14, Chapter II). Protection Against Risks xvi. There are two types of risks which should be considered. One is the risk of competition. i have already suggested that im the early phase of development competition be ruled out for the purpose of giving the neophybe or inexperienced contractor adequate work experience and employment. However, we propose that he be subjected to progressively more competition in the succeeding phases, subject only to protection agai.nst the risks of excessive underbidding in the intermediate phase. The justification for our position is given in paragraphs 20-22 of Chapter IV. xvii. The other category of risks includes al1 those which can in principle be assumed in varying proportions by either the contractor or employer. These are the risks arising out of errors in bidding, inter- rtuption of,, and damage to, work in progress, unexpected subsurface conditions, changes in design, failure to verif:r designs, escalation in costs of materials and equipment, etc. The Mission found that contractual arrangements governing the responsibility for extra costs (or penalties) arising ouit of these risks were often unduly weighted in favor of the employer. The Mission feels strongly that any development program should provide for an appropriate revision of these arrangements along the lines indicated in Chapter V and summarized in Annex I. In general the Mission believes that the new and developing contractor will not have the re- sources and experience that will enable him to bear much risk. It is therefore considered appropriate to keep both his responsibilities and his risks at a minimum duing the development phase, and to provide that he should gradt'ally assume a greater degree of risk as he gains in experience and resources. Supervision and Acceptance of Construction Projects xviii. The government as employer must, of course, supervise the work of the contractor and make sure that the work is properly completed. However, the way in which this responsibility is carried out often has a critical bearing on the success of contractors. The government inspec- tor is frequently the undisputed "king" of the construction site. His actions can be arbitrary and capricious. In many cases he has little appreciation of the practical problems of the contractor and insists on literal and detailed compliance with all specifications without regard to their relevance to the achievement of the basic purpose the project must serve. The Mission therefore believes that a development program may well have to provide t some retraining and reorientation of govern- ment, supervisory staff and or a careful consideration of the standards which the government as employer should apply in supervising and accepting constr-action projects. A government miay excessively discourage the development of iidigenous construction enterprises by insisting on -too exacting standards. In the initial developmenit phase it should generally be conten-t with a project that will function satisfactorily even thougl it may be crudely executed by western standards. The quality of worlanai- ship., insofar as it affects the anticipat;ed maintenance and replacement outlays during the life of the project, can obviously not be ignored but will still be less vital. Appearance, n1 terms of aesthetics and qualities of fiiiishi, will usually be of only tertiary importance during the early phase. However, as contractors move inlto the intermediate and late phase of develop- ment, thev can and should be exoected to conform to progressively hiigher standards of ;orkmaanship and development. Direct Assistance to Develoin Contractors xix. The Nission recormiiends that specicil assistance be extended to l-eveloping contractors in various forms as outlkied below. Information anrd Guiid-ance on Contracts cX;. The Government in its capacity as emplayer should help the neophyte and inexperienced ccnbractor by providii,g him with certain types of information and guidance. The emloyer should fuznish the contractor at all tines with detailed project designs, drawings, speci:fications and bils of quantities, Specifications should be simplified and standardized as far as possible and be given in the form of "method" specifications *wiich -ill give the contractor exact instruction how to achieve the standards or "end-results" desired by the employer. The Mission believes that corntrac- tors camnot generally be expected to conform to "end-result" specifications until the late prase of development. The detailed draw-ings that should be furnished to the contractor should cover during the early develoment phase also the tenporary wrorks,,such as shattering, bracing, coffer dams and the like which contractors must construct to carry out the project. The government's own cost estimates should be given to the contractor to help him control his costs during the early phase; and at least partial cost estimates,such as those relating to major or difficult items of wlork might usefully be given to the conitractor during the intermediate phase so as to help him in preparing his tender. The employer should also pxrovide much of the field engineering,su.ch as the surveying for horizontal and vertical controls and the determination of to;nkLag points. The contractor should, however, be expected to develop the necessary capacity for setting out the work some time during the intermediate phase. Finally, the government should provide the developing contractor with work plans and schedules that would assist hit inx planning his work (see paragraphs l4-21, Chapter III and paragraphs 1-6, Chapter V)0 Technical Assistance and Training xxi. R3 envisage that the proposed contract development agency would have a staff., both foreign and indigenous, wlth practical experience of ~. . : -ix - construction who can advise developing contractors out in the field on their technical and management problems and also organize brief train- ing seminars for contractors and their personnel. Annex I summarizes the suggested nature and scope of this type of assistance through the successive development phases, and Section E of Chapter VI sets forth the Mission's proposals in greater detail. Kenya was the only country in which the lission found a program of technical assistance and train- ing for indigenous contractors in operation. In practice, this program has had certain deficiencies (see paragrRph 46, Chapter I), which, how- ever, are not necessarily insuperable. Unquestionably, it is difficult to find experienced staff to provide such assistance. Paragraphs 36-39 of Chapter VI deal with -this problem. Financial Facilities xxii. The Mission found that inadequate access to financing - for the provision of bid, performance and maintenance bonds, and of working and equipment capital - often hamqpers the development of contractors who otherwise appear to have the potential or actual qualifications for success. Contractors who have had the advantage of previous success in some other business or have inherited wealth are not, of course, seriously handicapped, but by no means all promising contractors fall in this category. Normal financing institutions are generally reluctant to finance conastruction enterprises owing to the considerable risks involved, and are particularly wary about financing contractors who have not yet moved themselves and who can put up only a modest amount of capital of their own. The Mission has worked out a number of recormnendations onl contractor-financing, which are summarized in Annex I and elaborated in Chaptier VII. We have suggested that financing in the early development phase can only be provided from public funds administered under proper safeguards, but that this responsibility should be shifted as soon as possible to normal financial constitutions with the proviso that the latter be insured by a public fund against part of the risks involved. The Mission also examined briefly fiscal provisions governing the con- struction industry and has suggested that., if the promotion of this industry is considered really important, it might be appropriate to accord new construction enterprises temporary profits, tax exemptions or concessions as is often done in the case of new manufacturing ventures. Final Remarks: Suggestions for Pot Programs xxiii. The Mission has made its recommendations on the various factors or elements that may be relevant to the development of domestic construc- tion industries in the full realization that: (a) alternative methods of dealing with the development problems it has emphasized may well be ad- vanced and tested; (b) development programs worked out for particular countries will presumably not always need to be as comprehensive as the Mission has indicated; and 'c) in view of the fact that there is little or no experience with progr-ns to develop domestic construc-oion enterprises, it is important to test the feasibility of any set of measures first in a limited number of pi-lot programs. The PUlsmion has also listed in paragraph 2 of Chapter VIII, a niunber of: topics relevant to the develop- ment of construction industries that might be the subject of further examination and research. xxiv. In paragraphs 11-20 of Chapter VEII the Mission has indicated how aid wider what conditions a small number o-f pilot programs might be framed and carried out,. Such programs should be unidertaken only in counbries where the government evinces a real interest in the prcmotion of a construction industry and understands what is involved and where the demand for construction is sufficiently large and dynamic to offer significant Opportwuities for the development of a reasonably diversified construction industry. In addition, it would probably be instructive to selectD one or two countries where the domestic construction industry can be said to be alreadyr in the intermediate phase of development as wll1 as a few where the industry is only in its early phase. XXcv. Such pilot programs should preferably be carried out in partnier- ship between the Bank a-nd the government concerned. Each would have to assume certain responsibilities and obligations as outlined in Chapter VIII of this report. The Bank should be fully aware that its responsibilities for the effective planning and execution of such programs would be con- siderable. It woul.d have to malce sure that the agencies charged with the financing of contractors and with contractor development are given the authority and independence that would enable them to operate in accordance with objective criteria. It should be prepared to assist actively in the task of staffing the contractor development agency on w1-.iose -erson.nel the success of a development program will significantly deoend. If the Mission's recommendations regarding contract reservation and contract awarding during the early develcpment phase are adopted, this would entail, at least in principle, some modification of its in- sistence on coipetitive bidding. However, this modification may not be very significanrt in practice, since it would be needed only to the exteit that an adequate volume of work would not otherwise be available and only a few types of construction work financed by the Bank Group, such as school construction, small and simple road contracts and other minor civil works of thisi nature, are likely to fall within the capacity of contractors who are iLn the early stage of development. xxvi. In view of the novel and experimental character of such pilot programs, it is important that the comnitments by the Bank and the govern- ment involved should not exceed five years. Such a period should be long enough to provide a more adequate basis for appraising both the costs and benefits of efforts to promote the construction industry. It should be suJ.icient, too, for testing the effectiveness of various elem3ents in the pro- gram. The Bank and the government concerned will, of course, need to carry out periodic evaluations of the results achieved and to consider possible modifications in the light of their findings. A FRAMEWORK FOR THE PROMOTION OF CONSTRUCTION INDUSTRIES IN THE DEVELOPING COUNTRCES CHAPTER I TERMS OF REFERNCE AND THIE ANAITICAL APPROACH A. Introduction The Mission's Terms of Reference 1. The Mission was given-the mandate to study the construction industries in three countries - Korea, Iran and Ethiopia - to which a fourth, Kenya, was later added for certain purposes. This study was to facilitate a diagnosis of the problems encountered in the development of domestic construction industries and of the various factors which over time had contribuled to, or inhibited, the development of such industries. On the basis of these studies, the Mission was to devise as far as possible a set of guidelines providing a coherent framework within which the task of developing the construction industry in an individual country might be approached. In r-dition, it was to recommend what further research work might be undertaken in this field in the form of additional country studies, examination of particular problems, or pilot development programs. Definitions Scope of the Construction Industry 2. It is important at the outset to define certain terms as wiell as the scope of our work, First of all, what is the "construction industry" and to what extent have we concerned ourselves with the whole of the construction process? The construction industry can be defined broadly to include maintenance, as well as new works. TAile maintenance is unquestionably important and can, in particular, provide learning experience for all contractors in the early stages of their development, the Mission has almost entirely focused on "new works." Eveen with res- pect to the latter, however, the industry can be defined to embrace the whole of the construction process from the design of the project to its final acceptance by the client, or more narrowly to include only enterpriso, engaged in the procurement and execution of construction contracts. For the purpose of this report we have defined the construction industry as the collection of enterpiises, private and public, which are engaged in actual construction work as contractors or subcontractors. 3. At the same time, however, we have constantly kept in mind that construction is a process involving many parties whose actions must be properly coordinated. FL -t, there is the "user" who must determine, in a design brief, the purl se which the project is to serve and the general requirements which it is to meet. Second. is the "employer" or -2- "client" of the contractor. Frequently he is also the "user." He is generally responsible for designing the project, preparing the specifica- tions and drawings, estimating the cost of construction., drawing up the tender documemts, concluding the necessary contracts for construction, supervising the work as it progresses, making the necessary payments to the contractor, and, finally, for deciding on the provisional and final acceptance of the construction work. He commands a design team comprising engineers, architects, quantity surveyors, topcgraphic surveyors and drafts- men; and he has a corps of inspectors to check on the progress and quality of the construction work, to measure the work done and to certify it for payment. For the preparation of designs., specifications and cost estimates, as well as for the supervision of the construction contract:, the employer may rely not only on hlis own staff., but on xthe services of consulting engineers and architects. Finally, there are the contractors who must tender or negotiate for the work and carry it out, and the subcontractors who are usually selected by the prime contractor but are also occasionally "designated" by the employer. Mention may also be made, if only for the record, of the role played, principally by local authorities, in the granting of building permits and in inspecting work for conformity to any building codes that may exist. 4.˘ The employer may, of course, be either public or private. However, the Mission has not significantly concerned itself witii private enmloyers. Th the aggregate, these have an important impact on the volume of construction demand, but they do not either collectively or individually play a significant role in determining the conditions under which the construction industry works. On the other hand, the public employer, by virtue of the volume of work he commissions, decides to a large extent the conditions under which contract,rs operate - the allocation of work, the types and content of contract documents, the standards of construction, the conditions and methods of payment, etc. At the same time, it is well to recognize that there is not a single., but rather a number of public employers in every country. While a substantial part of the work may be designed, awarded and supervised by a government's Public Works Department, Ministry of Works or Ministry of Construction, there are a variety of other public employers, including other ministries, public enterprises and autonomous public agencies, municipalities and other local authorities. The contracting procedures and the general specifications and conditions of contract on which they insist may or may not be identical. In our field work we have indeed noted at times a considerable variety of practices in these respacbs. Even systems for licensing and classifying contractors by the type and amount of work they are' qualified to perform are often not uniformly binding on all the employers in the public sector of a country. 5. Quite apart from its role as an employer or as employers of construction enterprises, the government has a significant effect on the construction industry in other ways. The size, composition and phasing of the government's development plan, and the extent to which the govern- ment carries out construction on its own account, largely determine the 3 volume and continuity of wiork available to the private constructiona industry4 The government's finandal and economic policies significantly affect private investment and thereby the amount cf private investment in construction. It can influence the amount and terms of mortgage financing for private construction and the availability of credit to contractors for equipment a-d working capital. Through the way in which it exercises its responsibility for education and training, it can also have an important impact on the professional, technical and labor skills available to the construction industry as a whole. 6. Of necessitty, therefore, we have given much consideration to the role of government as employer, generator of demand and policy-maker, but always in terms of its potentialities for decisively influencing the attairnment of the objective on which we sought to center our attention, namely the development of domestic contractor-entrepreneurs and their enterprises. Inclusion of Both Building and Civil Construction 7. Our originial tenns of reference asked us to consider ways and means of expanding domestic capability in the field of civil works, with particular attention to road construction. The emphasis on civil engineer- ing works was due presumably to the fa.ct that the Banik/Association has been engaged primarily in financing civil engineering contracts. While wa did give considerable attention to road construction within the field of civil engineering, it was agreed early in our work that we should consider also the development of building. This seemed desirable for a number of reasons. While there are certain significant differences between building and civil engineering in tonns of the techniques em- ployed, the extent of equipment required, and,, in so.ae degree, in terms of scale of operations, there are also certain elements common to the two. Both involve rather similar management problems. The more comple- building operations, involving framed construction, the use of reinforced ,concrete, and excavation and foundation work, comprise civil engineering elements. Moreover, as is illustrated by the experience in many developed countries, the evolution of the construction industry generally starts wiith building and at least some of the building contractors subsequently develop a capacity for civil engineering work. In Korea and Iran we noted that most of the larger contractors were engaged in both building and civil engineering, partly, no doubt, because they were thus able to exp'oi,1 the opportuunities of a wider market. ainally, we took note of the fact that the Bank Group itself was already to some extent directly or indirectly involved in financing the construction of schools and factories and might in the future also become more heavily involved in the financinig of housing through its interest in urban development. S. We have not considered, within either the broad or narrow defini.- tion of the construction 'idustry, the production, supply and transport o. building materials. This s not to say that constraints on the supply of building materials with respect to price, volume and quality may not have important implications for the construction industry and for the cost of' construction in terms of foreign exchange. In general, however, we found that such constraints did not have an effect on the local contractor different from that on the foreign cointracto' 6except, perhaps, in outlying areas far frorn ma-4or urban cente.rs where limnitations on supply are often more severe and where only local building contractors are activE. TAile the production of building materials did not Pall within our terms of reference, we did note that suppliers and transporters of materials sometimes become construction contractors. In Korea, for example, a number of larxge con trac- tors were originally ma mfacturers and traders in building materials. Elsewhere, individials engaged in quarrying and supplying crushed stone and aggregate have become mirnor civil works contractors. We have recognized also the importance of the role of building materials merchants in determin- ing the availability of credit. Doestic Constructio dust °. Since we were asked to devise ways and means of developing a "domestic" construction industry., the word "domestic" requires definition. "Domestic" may be defined in terms of both ownership and residence. We were concerned with the development of "domestic" industry in terms of owner- ship, i.e. with construction enterprises owned by one or more individuals of local nationality or, if in corporate form, owned in major part by nationals of the country. The "local" construction industry defined in terms of residence may be much broader. It includes local resident firms of foreign ownership which fall into two rather distinct categories: (1) enterprises owned by foreigrn nationals who are resident in the country and who carry on no business activity outside the country; and (2) enter- prises which are local branches or affiliates of construction entexprises doing business on an international scale. Finally, there are the nonresident contractors who occassionally enter the count.i; to carry out specific work but who, because they have no equipr ent or staff permanently in the country, have rather heavy mobilization costs which tend to make them competitive only for major or specialized jobs. In Korea and Iran we found no resident foreign contractors in the first of the two categories mentioned above. On the other hand, this type of contractor is particularly prominent in most African countries. In Kenya and Ethiopia., for example, Asians and Italians have long dominated the local construction industry; and elsewhere in Africa many resident foreign nationals - Lebanese, French, Asians and Italians - are also engaged in construction. Thus in Africa it is the competition from suclh resident foreign nationals that the emerging domestic contractor must be enabled to meet in the early' stages of his development. This is not to say that the elimination of this type of foreign contractor should be anl objective of government pulicy. lihile a governmenrt may well wish to accord special promotional assistance to its owJn nationals, it may at the same time have an interest in retaining local foreign contractors whose construction business is confined to the country and whose operations do not entail a significant drain on foreign exchange resources through the remittance of profits and overheads. In fact, a goverrment may find it desirable t.o include with the scope of a conbractor development program those enterprises owned by local foreign residents which are not fully qualified by virtue of their size and experience to undertake a wide range of construction work. -5 - B. Characteristic Features of Construction 10i In considering the problems of devreloping a construction industry, we found it necessary to examdne at the outset the peculiar features of this industry which are different in nature or degree from., say;, those encoun- tered in manufacturing and which accordingly must be taken into account. Among these features ares (1) the high proportion of demand that originates in the public sector; (2) the discontinuities and fluctuations in the demand for construction; (3) the variations in technology and degree of capital intensity; (4) the lack of standardization of the product; (5) the geographic dispersion of construction activity; and (6) the special risks inherent in the duration of contracts, the exposure of construction to damage or interruption by the natural elements, and the difficultios caused by unanticipated site conditions and changes in the client's demands. Each of these will be briefly examined. 11. Most of construction demand in develcping countries originates in the public sector, with the government and various public agencies and authorities. This is particularly true where, as in Korea, Iran and Ethiopia, the greater part of residential building does not fall within the purview of the organized construction industry but is carried out by prospective home owners who act as their own contractors, employing artisans and furnishing them with the necessary materials. After eliminat- ing this type of residential building, we found that in Korea, Iran and Ethiopia the public sector accounted for between 70 and 80% of total construc- tion demand. This preponderance of public demand has both advantages and disadvantages for the construction industry. As the principal generator of demand the government has the potentiality for guiding and influencing the construction industry in a positive sense. It also makes the industry less susceptible to variations in'private demand. On the other hand, it does make the industry extremely dependent on the government. The total volume of public demand or ita composition may vary considerably in accordance with the effectiveness with which public outlays on construction are planned,, the availability of external aid and the fluctuations in government resources arising from such factors as the country's dependence co relatively few expert commodities. The dependence of the construction industry on public demand tends to create an unequal partnership in which the government largely dictates the terms and conditions under which the construction industry has to work. Under these circumatan.ces political favoritism and corruption often affect the allocation and enforcement of contracts. 12. Construction demand is subject to disccntinuities and fluctua4ions. Demand consists of a number of discrete jobs. The inoividual contractor conpeting, in the market has no assurance of finding new work when he finishes his existing contract or contracts. He may well experience a period of complete or partw. 1 idleness between contracts even under condi- tions where total construct..on demand is steady or is rising. Investment activity as the determinant of aggregate construction demand tends to fluctuate more widely than the demand for manufactured consuwer goods. In small and relatively poor countries, where the volume of construction is usually very limited, a few major projects may cause a rapid and temporary increase in construction followed again by a sharp decline. Even countries, such as Korea and Ethiopia where we noted a rather steady increase in the volume of puUilic construction, the construction industry was affected by considerable variations in the volume of private cormnercial building. Under these conditions construction enterprises are subject to considerable market risks which often make it difficult for them to obtain necessary financing, to develop and maintain permanent construction staffs and to meet depreciatimn costs on their equipment. 13. Constructiom still provides opportunities f or a considerable choice of technology involving various combinations of the factors of prAduction, particularly capital (equipment) and labor. This choice has be -n illuminated in an ongoing IEBRD Stud of the Substitution of Labor for -fiuipment in Road Construction. Governments therefore have opportuni- ties to promote more labor-intensive technologies whnere these are necessary to cope with severe unemployment and undereMployment problems. It should be noted, however, that the construction industry as a whole is considerably less capital-intensive than the manufacturing industry. This is particularly true of building. Civil works construction, on the other hand, usually involves, at least in practice, the use of a considerable amount of machinery and equipment. In this field, there is accordingly a great need to consi- der ways and means of economizing on equipment outlays and of obtaining a fuller utilization of such equipment through greater continuity of work. 14. The construction industry, unlike most of the manufacturing industry, does not produce a standardized product. Nearly all construc- tion projects are custom-built, that is, tailored to the particular reouirements of the user. To some extent, to be sure, there are programs calling for the construction of a number of more or less standardized units, but even in those cases designs often have to be adapted to different sites and costs vary in accordance with the cost of materials and the wages and productivity of labor that can be mobilized at such sites. Since most projects have special characteristics and specifications, past exerience is not always an adequate guide to the estimation of costs. This again increases the risks involved. 15. rBy its very nature construction is geographically dispersed. Plant, materials and labor must be brought to the site, and special care must accordingly be taken to price these factors of production at the sitce The problem of management is more complicated because the contractor's office is some distance removed from the site and supervision must often be provided on a number of sites at the same ti-me. The geographic dis- persion of construction also produces a large number of small contractors whose activity is confined to a particular locality. This is particularly true of building. Thus even in developed countries the building industry -7- is characterized by the existence of many small conu.ractors.!/ This fact must be taken into account in any efforts to develop a domestic building industry. 16. Apart from the risks inherent in the market, the ccnstruction industry is exposed to a variety of other risks. Although most small building jobs need take only a short time, major building and construction works may take two or more years during which prices and wages may well increase significantly,, particularly under inflationary conditions. Construction is subject to interruption and damage by rain, storms, floods, droughts and freezing, and it is difficult in such cases to anticipate the duration and extent of the interruption or damage. Unexpected soil or ground conditions may be encountered, labor difficulties may arise, deliveries of equipient and materials may be delayed, and the client ma.y change his requirements and design. The impact and degree of probability of many of these contingencies, as well as the respective responsibilities of the employer and contractor for the additional or extra costs involved are difficult to determine in advance except as they are defined in the contract documents or dictated by law. C. Costs and Benefits of Developing Domestic Construction Caacity 17. Before addressing ourselves to the various elements of a program for developing a domestic construction industry, we need to examine the importance a developing country should attach to the construction industry and the potential costs and benefits of develcping a domestic construction capability. 18. There is little doubt that the construction industr is of crucial importance to economic development. Previous studies& have dir- 3losed that new construction usually accounts for between 45 and 60% of fixed capital investment. Our own findings in the countries we visited have confirmed this. In Korea, Iran and Ethiopia the proportion in each case averaged about 60% during the last five years for wh'ch estimates were available. Any developing country thus has an important stake Lii ensuring that construction is carried out at the lowest possible cost, -], therefore in improving the efficiency of the construction industry as fac as possible. The lack of effective indigenous building capacity often 1/ Thus in the United Iingdom there were still 73,248 construction enter- prises in 1970. Of these, 33,118 employed seven persons or less a-nd accounted for about 9% of the total work, while 70,821 firms employed 50 or less persons and accounted for almost 35% of the volume of con- struction business. D e Department of Environxment, Annual Balletin of Construction Statistic. 1970: Tables 20 and 23. 2/ See D.A, Turin, The Construction Indus~aj-ts Economic Sinificance and Its Role in Development (London University College, Environmental Research Group, June 1969), p. B7. -8- seriously limits the success of efforts to stimulate in localities remote from the main urban areas -iwere resident and nonresident foreign contrac- tors are primarily active at the local level. Construction can also generate considerabLa employment and make a significant contribution to national output. Ih the majority of developing countries construction accounts for betiween 2 and 6% of all employment and contributes between 3 and 5c of gross domestic productl!- proportions that become substantially higher when the employment and the contribution of the subsistence agricultural sectors a,re disregarded and only the modern sector of the economy- is included.2X 19. These indications of the role that construction plays in econo- mic development do not, of course, necessarily i-mply that efforts to promote an in,digenously-owned construction industry should result in the progressive replacermnt of all foreign contractors. At the local level small domestic building contractors can often be developed to meet a demand that is not yet being adequately satisfied. Moreover., in virtually all countries some domestic construction capacity already exists, particularly with respect to small jobs in the so-called conventional building field in which even resident foreign cont3'actors may not be interested either because of the size or because of the location of the job. Under circumstances this type of conventional building activity may already attain a considerable total volume, and the government of the country may well find it advantageous, in the first instance, to concentrate on improving the standards and lowering the costs of construction at which domestic contractors active in this field are working. Sooner or later, however, the question of developing domestic construction capacity in tUhe fields now largely or exclusively dominated by resident and nonresident foreign contractors will arise. At that stage the question of the comparative cost of having the work done by domestic contractors as against foreign contractors becomes relevant; and in launching a program for developing donestic contractors capable of doing this work9 appropriate attention has to be paid to the potential benefits and costs involved and methods of appraising these. The Benefits 20. What can be said of the potential benefits of developing a domestic construction industry in this sense? The types of benefits that might accrue can bediscussedunder various headings. Greater Local EnlyMent 21. Tli general the displacement of foreign contractors with domestic contractors calmot be expected to generate a significant increase in local 1/ See D.A. Turin, The Construction Indust; Its Eonomic-Significance and Its Role in Development (London University C)ollege, Ehvirormental Research Group, June 1969), pp. Bll and B4. 2/ For example, if agriculture is excluded, construction in Africa employs generally from 8 to 14% of the economically active popuLlation. 9- employment unless it can be demonstrated that the latter will and should employ a more labor-intensive technology than the former. In the cointries we visited we found little or no evidence that dornesbic contractors were delibErately choosing a technology di:fferent from that of the foreign contractor; and where they were working with less equipment than a foreign contractor would normally employ-, they appeared to be doing this largely because fina-ncial and other constraints beyond their control dictated this course of action. However, it is not inconceivable that construction technologies better adapted to the relative real cost of the factors of production - capital and labor - canl and will be devised; and, indeed a study explor-ng the relative merits of alternative technologies of carrying out various types of construction activ:ities is currently being pursued i the Bank. If such a particular tiechnology adapted to the needs of a coutlryr can be worked out, the government of that cou-ntry can probably exert a greater influence to secure the adoption of such a technology by local contractors (both domestic contractors and resident foreign contrac- tors) than in the case of nonresident contractors wiho are active in a number of countries and are probably relucta-nt to change their technology from one couwtr7y to another. 22. In the absence of a differeinbiatled teclnology, foreign contrac- tors are likelv to employ about the same amount of labor as domestic contractors. However, the development of a domestic construction industryv will provide additiolal opportunities for indigerious enterprise in general. Moreover, it is likely to create more employment opporbtunities and some- what more permanenlt opportunities for high-level manpower of local nationalit-y (engineers, technicians and ot,her supervisory personnel) thaLn in the case of foreign contractors wh1o, if they are locally resident, are inclined frequently to employ their own resident fellow-nationals, or, i.E they are nonresident, may not wish to rely entirely on such local man- -oower and will, in any event, be unable to assure it permanent emplojment. F;nal:c, it is probable that irn the long run domestic con bractors wldi.l l..: a stronger interest than foreign contractors (although not necessaril.- locall;, residenL foreign contractors) in eaploring local subcontrac o s and develooing a local pool of trained manpower in view of their con;inuous s bake in cons bruc tion. How-fever, during the early stage of their develop- ment, it is possible that the domesl;ic contractors will have a lesser appreciation of the need, and a smaller capacity, for traini!ig local manpower thaan foreign colibractors. In the last analysis it musb be con- ceded that such employment or manpower benefits as may flow from tihe developmen-t of a domestic consti-ucetion industry may nob be very great aw.i will in any event be difficult to quanti:fl. Socio-Political Benefits 23. Such benefits are likely to exert a strong atltraction for coun- tries, such as bhose in "black"l Africa where modern private business eniterprise is still largei. dominated by foreign nabionals and foreign firmns. It may welll be dif., cult for such countries bo achieve a stablle political-economic system or society unless they make progress in the 10 - direction of giving their nationals a greater stake and participation in economic life. They may thus find it necessary to promote a domestic construction industry as part of a general program for promoting more indigenous business enterprise in all fields of econcuic endeavor. While the resulting benefits may be considerable in terms of their contribution to politIcal and economic stability, it is obviously dif- ficult to quantify them. Lower Construction Costs 24. The domestic construction industry when properly developed may ultimately be able to achieve lower costs than the foreign nonresident contractor. However, the factors that may make ultimately for lower costs will apply probably as much to the resident foreign contractor who remains in the country a very long time as to the domestic contractor. The local contractor may obtain cost advantages vis-a-vis the nonresident foreign contractor through his: (1) superior ability to handle local labor; (2) greater knowledge of relevant local conditions, including knowledge of the local language; (3) greater effectiveness in handling relations with clients, particularly the government and public agencies; (4) lower overhead costs owing to the continuity of his activities in the country; and (5) ability to extend depreciation of equipment over a longer period of time because such depreciation can be charged to a series of projects rather than to one project alone. Here again it is not easy to determine when and to what extent these factors, operating in conjunction with the reduction of inefficiency due to inexperience in the early peoriod of development, may actually reduce the cost of local contractors below those ol nonresident foreign contractors. In Korea and Iran we found evidence that domestic contractors had made considerable Drogress in lowering their costs and becoming more competitive and that some, at least, were apparently achieving lower costs of construction than Loreign contractors, although the standard of their work was prob- ably not comparable. These findings, appropriately qualified, will be discussed in somewhat greater detail later in this chapter. Foreign Ecchange Savings 25. The employment of domestic contractors in preference to foreign contractors also results in sone foreign exchange savings. If nonresident foreign contractors do the construction work, certain additional foreign exchange costs are incurred even when they do not use more imported equipment than domerstic contractors. Their net profits, which may contain a considerable allowance for the risk of doing business abroad, must be remitted in foreign exchange. Those overhead expenses of their central office which are charged to the project, and that part of local or site overheads which represents the salaries of foreign supervisory personnel are also incurred in foreign exchange. In many cases virtually the entire cost of the imported equipment employed is charged to the construction project. The Mission was unable, within the time and wihl the data at its disposal, to estimate the extra costs incurred as the result of these factors. Further investigation of this subject might well be rewarding. Provisionally,, one may hazard the guess that such extra costs may range between 15 and 25% of the original price of the contract. It should be emphasized, however, that such additional foreign exchange outlays are incurred only when nonresident foreign contractors are employed. Thus, construction enterprises which are owned by foreign nationals who carry on all their business activity in the country and -who consider the country as their permanent home are unlikely to remit their profits abroad unless they begin to feel that their continuation in business is jeopardized by the policies of the government. 26. It may be assumed that the vast majority of developing coun- tries will continue to suffer for a considerable time from a more or less acute shortage of foreign exchange and that a premiuim must there- fore be attached to the saving of foreign exchange. The value of this premium can be assessed only in terms of some divergence between the official rate of exchange and the "shadow" ("real'i or "equilibrium") rate of exchange. If we assume, for example, that the official rate is at least 25% overvalued and that nonresident contractors remit 20% of their contract payments at the official rate, we can conclude that the real cost of this foreign exchange component is 125/100 x 20 or 25. Thus, if a nonresident foreign contractor had obtained a contract at 100 cost units in terms of the local currency of the country as compared with an offer by a local contractor at 105 cost units, the actual real Drice of the former would have to be figured at 80 + 125/100 of 20 or 80 + 25 = 105. Under these circumstances the real cost of the foreign contractor would not be less than that of the domestic contractor. Costs and Cost-Benefit Comparisons 27. The potential benefits of developing domestic contractors will, of course, have to be compared with the costs of development. These costs may consist of: (1) higher initial costs of construction; (2) possible initial sacrifices in "he quality or standards of construc- tion; (3) the cost of providing training and technical assistance inputs; and (4) probably, losses on finanicial assistance given to developing contractors. 28. The cost-benefit ratio for any program to develop domestic construction enterprises will be difficult to compute in advance. The v,arious cost and benefit elements are not only hard to assess in quantita- tive terms, but also difficult to project over the whole development period. The time required to achieve cost levels comparable to and below those of foreign contractors is obviously critical, because the present value of benefits achieve- after a long time, when discounted at an appropriate rate, may well lie negligible and thus tend to be more than offset by the costs of achiaving them, particularly since the costs of development may be heavy in the early stages of a development program. - 12 The length of time required to develop an efficient domestic cozistruction industry within wlhatever market constraints that maqy obtain is likely to vary considerably. Ih Ethiopia and Ken;ra it may well take a minimum of two to three generations to develop a diveraftied efficient industry. On the other hand, we noted that in Kcrea and Iran the domestic industries had made great strides in a comparatively short time. The rapidity of developmenbt will depend on a large number of factors: (1) the entre- preneurial talent, vritality, business skills and educational qualifica- tions of the country's population at the inception of a development program; (2) the opportunities available for learning through experience, training and technical assistance, and the ability to respond to these opportunities; and (3) the extent and effectiveness of various measures of government and external assistance to the construction industry, etc. Some of these factors will in turn be influenced by the social structure of the country and the value standards of its people. 29. The difficulty of calculating cost-benefit ratios in advance of a development exercise need not be such a serious handicap in practice as in theory. There are various ways of reducing the risks arising from this difficulty. A development program can be projected as a series of sequential phases, with each limited to a comparatively short duration, say, five years, and the commitment to go from one phase to the next can be conditioned on the results obtained during the prior phase. Develop- ment programs can be conducted on a trial basis to determine what benefits they might yield in relation to costs. Such programs can be launched in the first instance in countries or states (i.ee provinces in large coun- tries with a federal structure) where the number of contractors who would be capable of development on the basis of their actual or potential capacity would be fairly modest. The types and total amount of construc- tion work which would need to be given to such a group of contractors could be limited to a relatively small percentage of the total construction work in the country, a-nd ceilings could be placed on the price at which contracts are awarded to this group. For such initial tesb programs of modest size., the cost of other inputs, such as financial., training and technical assistance can be correspondingly lmited. Experience with these initial programs should provide a more adequate basis for an approxImnate estimate of the costs and benefits that might be involved in continuing and more extensive development exercises of this sort. D. Fiisf ountry Studies 30. The countries which -were the subject of field investigations by the Mission exemplified a wide range of conditions encompassing a rather advanced stage of development in Korea and Iran arnd a very early stage of developmenb in Ethiopia and Kenya. 'While the Mission was considerably lhandicapped by limitations of time and data, it was nonebhleless possible bo identify some of the critical factors that had stimulated or inhibited development and to diagnose some of the more important problems tha-t had - 13 - arisen in the course of development. The Mission's findings in each of the countries are given in some detail in appendices to this report. Here we shall attempt only to sum up the conclusions considered relevant to t he elaboration of a framework within which the development of domes- tic construction i-ndustries may be planned. IEn this connection it should be noted, however, that we did not attempt to examine the construction industry as a whole in Kenya, but confined our attention to the efforts of the Nat;ional Construction Company to assist African contractors. Importance of the Market 31. Our findings indicate that the size of the construction market and the rapidity at which it expands are of great importance. In 1969 gross fixed capital formation in the form of consbruction amounted to US$l,25l4 million and UTJ1,080 million in Iran and Korea respectively, but to only US$103 million in Ethiopia. Obviously the opportunities for developing an efficient and diversified local construction industry have been far greater in the first two countries than in Ethiopia. Moreover., irn Ethiopia the volume of investment in construction and the contribution of construction to gross domestic product increased, but slowly - probably at an average annual rate not exceeding 5 or 6% in th6 period 1961-1969. On the other hand, investment in construction and the volume added by construction in Korea are estimated to have risen at rates of 20% and 19%, respectively during the same period, and in Iran, at rates which averaged nearly 11% and 8% in the 11 years ended 1960-1971, but were considerably higher in the period since 1963/1964. The rapid expansion in demand in these two couLntries afforded considerable opportunities for local firms to particioate in construct-.on. %oortunities for "Learning bperience" 32. In bo-th Korea and Iran the government disposed of substantial funds which it was free to utilize in such a way as to reserve, in prac- tice, a considerable and growing share of construction for indigenous contractors. Korea received from the United States large amounts of non- project or commodity assistance the proceeds of which it could use to finance construction work without any obligation to employ foreign contrac- tors. In addition, it was able to increase its own public savings dramabically with the rapid growth in its economry. In Iran oil revenues quintupled from 1963/1964 to 1970/1971 and made it possible for the Plan Organization to finance most development projects under conditions which protected domes-tic contractors from foreign competition. Thus, developing Korean and Iranian contractors were probably able to get considerably more work than would have been possible had they in all instances encoun- tered cormoetition from more experienced foreign firms; and since ac-tual experience in carrying out construction has invariably proved the best teacher, we believe that this did help to accelerate development of construction industries iħ these two countries. In Ethiopia we found a quite different situation. Ethiopia is a much poorer country, with a far lower rate of economic growth. Since its public savings have been modest, - 14 - it has been much more dependenit on ex.ternal aid for finanicing of major construction projects. Local construction enterprise-s. including resident Italian firms, have therefore had much greater difficulty in acquiring the experience, particularly in civil works, that would qualify them to compete with foreign contractors in carrying out constructiorn projects financed with external assistance. 33. Our findiLngs indicate, nowever, that the development of domestic construction industries is a function not only of opportunities for gaining experience, but also of the availability of enterprise to take advantage of these opportunities. Korea and, to a large extent, also Iran have been characterized by a spirit of vigorous private enterprise. In Korea business- men, labor unions and the government have all worked since the early sixties under a strong, national discipline which has emphasized initia- tive, hard work and achievement. In both countries the govermnent has encouraged private enterprise, and educated people w..,ere attracted to business careers. In ithiopia, on the other hand, the prevailing culture did not luntil recently accord a high standing to businessmen. In Kenya Africans were long confined to agriculture and the service trades, and the modern sector of the econonmy was dominated by expatriate firms and locally resident Asians. While there has been a considerable bur('eoning of African entrepreneurship over the last decade, African businessrmen in Kenya for the most part stiŽJ.! operate at a very low level of educational and technical qualifications. Achievement of the Korean and Iranian Construction Industries 34. Under these cirXcumstances the domestic construction industries in K(orea and Iran have made rapid progress. In Korea the domestic con- struction industry has become capable of meeting virtually all the demand. Foreign firms are now employed only for specialized jobs, particularly in the field of heavy industrial construction. The range of civil work carried out by the Korean construction industry is very wide, comriprising express highways, as well as other roads and bridges, flood control and irrigation, water suppl;y nd sewerage, dam construction and even port work of consider- able cormplexity and sophis tication. Korean contractors have been able to obtain a growing amount of business abroad, although with the help of some subsidies from the government. The volume of contract work completed abroad, which was initially confined to Vietnam, but extended to nine countries or areas by 1271, rose from US$11,003,000 in 1966 to US$56,139,000 in 1971. In Iran, too, the indigenous construction industry has become largely self-sufficient. The share of foreign contractors in the con- struction market has significantly diminished. Foreign contractors are now for the most part employed only for major dam and port works. During the third and fourth Plans all road contracts, including those financed bry the Bank, were awarded after competiLive bidding to Iranian firms with only one exception; and that exception was due to the fact that foreign firms were allowed, in contrast to Iranian contractors, to bid on more - 15 - than one "road lot" ard to offer a discount if they were awarded more than one "lot." Of the two major irrigation anid road contracts awarded in the Khuzestani area under Bank financing, the first was awarded to an Italian contractor largely because no Iranian firms were qualified for bidding, but the second was awarded to an Iranian contractor who won out over five foreign competitors and submitted unit prices 20% below those in the first contract. 35. There is little doubt that Korean and Iranian contrac-tors have become increasingly competitive with foreign firns. However, the data made available to the Mission did not make *t possible to reach really valid and conclusive judgments on the comparative costs of indigenous and foreign contractors. The stanidard of construction of these two types of contractors are often not comparable. We found, for instance, that the quality and finish of the work carried out by Korean and Iranian contractors were in many oases not up to international s-tandards. UAile Korean and Iranian firms often bid lower than their foreign competitors, this is not entirely conclusive evidence that their costs are lower. Underbidding is often the result of excessive competition or of failures to make accurate cost estimates. The final price at which a contract is completed is in many cases higher than the price at which it was awarded; and this final cost, is not easy to compare with the cost at which a foreign contractor might have completed the job because it is difficult to determine wiether the foreign contractor would have been entitled., oni objective grounds, to claim the same price adjustments as the domestic contractor was able to obtain. For example, in Iran it is estimated that the final price of completing six road con-tracts financed by Bank Loan 411 and carried out by Iranian 2irms is likely to be 30% in excess of the total original contract bprice. On five contracts the final cost is expect-ed to ranige from 30% to 63.5% above the original contract price; and on only one contract is the final price estimated to be below the amount at which it was awarded. kile the Ministry of Roads claims that the final cost will still be below that at which foreign contractors would have been willing to do the work, the data available to the Dfissioll did not permit it to verity the validity of this claim. Despite the difficulties of making cos3t, comparisons, the Mission believes that the experience of Korea and Iran does demonstrate that domestic construction industries do have the potential of achieving cost levels lower bhan thoso of nonresident foreIgn conbractors. Under favorable conditions, such as those in Korea an. IDran, this potential can probably be realized in a comparatively shorb time, say, in 10 to 20 years. On t,he other hand, in a country like Kenya, which is handicapped by a very low level of etrxve- preneurial and technical skills, it may take fowu or five decades to develop a domestic industry capable of carrying out complex building aind civil construction projects and of meeting foreign comEpetition in this field. CoEnpeti tion 36. In all the countries visited the Mission examined the role of competition in the development of the construction industry. Everywhlere - 16 competition was restricted in varioius wtnys. lihave already inoted that in Korea and Iran competitbion for construction work firaniced from local resources was to a large exteent limited to local. contractors. In Ken,,y-a the National Construction Conlppy has actively procured contracts to give African contractors practical work experience, and it has let most of suchi contracts without competitive tendering. In Korea we found thatz, a considerable part of the total value of contracts - 39.9j% in 1969 arid 36.5% in 1970 - have been awzarded through negotiation with desipiated contractors. In the case of large conistruction contracts it is also a widespread practice i-n Korea to confine cormpetitive bidding to the initial part of the construction work and to negotiate subsequentt conrtracts with the firrn which was successful in obtainiLng the first conitract. In both Korea and Iran tiie mos-t preva-lenll- practice, except ;in the case of small conistruction projects, has been to award public contracts after competi- tion among a selected group of firms. While this procedure is prompted principally bj;r a desirLe to limint bidding to enterprises qualified to do the particuliar work put out to tender, it has also been motivated by a concern to "rotate"amiiolng con-tractors the opportiu-ities to bid for, and s:iare iin, the available volume of work. In this conanectioi wve have noted that some degree of conbinuity of work is essenttial to the developmentr of a sound construction enterprise. WithoutL this it is extremely dif- ficult to build up apermanent staff wibh the requisite managerial and technical experience a-nd to obtain necessary financing. Continuity of work is especially important for civil works contractors who must make conasiderable investments in equipment and canno-t bear the cost of amor- tizing this equipment during prolonged periods of idleness. 37. { * In all the countries we visited, except in Ethiopia, competition h1as also been restricted by limiting the practice of. accepting the lowest bid. To the extenit that works had been awarded to African contractors in Kenya after comrpetitive tendering, bids that have appeared excessively low in relatioln to the government's own cost estimates have usually been ignored on the ground that the contractor would only get into difficulty if he were given the work on the terms preferred. In Korea there wiere nio safeguards against- excessively low bidding wutil quite recently. In the last fewv years, however, the increase in the total volume of con- struction deanwid has levelled off and demand for certainl types of con- struction work has actually declined, thus greatly increasing competition for the available work. Beginning in 1972 the goverrment, accordingly put a "floo1r unider bids. The Ixanian government has experimented with a succession of measures to prevent the award of contracts to low bidders who have of tian beenr unable in the past to complete work within the price they bid irithotut substantial adjustmenrts in the original price of the contract. The adoption o!' such devices has been occasioned partly; bIyr iniadequate cperience in the preparabioni of cost estimates and partly b,y the licensing or qualification of contractors well in excess of the available volwne of work. Classification and Qualification of Contractors, 38. li found, indeed that the problem of classifying or qualifrying contractors by the *type and amount of work they could perform had not been - 17 - satisfactorily resolved. In practice it is difficult to devise a classi- fication system flexible enough to meet the fluid requirements that characterize development. Such a system must provide, on the one hand, for the emergence of new contractors with an appropriate background of experience and education, and, on the other hand, for continuous screen- ing of existing contractors on the basis of their performanlce. While it can license a number of contractors somewhat in excess of the market in order to allow both for attrition (i.e. failures) and some measure of competition, some control over the total number must be maintained. V3 found that- the existing systems of classification could, not generally be fauilted for their failure to admit new contractors. in fact there is a tendenc,y to be excessively liberal in this respect. In Kenya, for instance, the NIational 2onstruction Company has qualified, under political pressure, far too manr,r African "would be" contractors for ibs assistance program wi;thout screening them adequately on the basis of their motivation, their appreciabion of construction problems and their technical and managerial qualifications. In Iran the principal deficiency of the classificaUion system has been its failure to alter the classification of existing contractors on the basis of their performance and changes in their maniagement'u and organization. Firms in the higher classes have been allowed to retain their rating even when their performance has been poor, and they no longer have capable management. This has prevented newer and professionally better qualified fijrms from achieving higher classifications in many cases, and has occasionally compelled such firms to resort to the illegal expedient of buying contracts from others who had more work than they could handle or who had obtained work they were no longer capable ol performing because they had been allowed to remain inl a class which they no longer merited. 39. One of the problems of classifying contractors has been the diC- ficullty of devisinig and applying adequate and objec-tive criteria. We founi that the criteria applied and the degree of weight given to each were ol'f not clear. In va-rying degrees the size and qualifications of the contrac- tor's permanent staff, the financial resources of the firm, the volume of work done in the past., the ownership of equipment and even the possession of an office and teleplhone may all be taken into account. 40. In general it seems to us thab too much emphasis has been -nut on the ownership of equiprent. While civil works contractors in particulir must be able to demonstrate their ability to utilize and mnaintain equip- ment, a requirement that a contractor possess adequate equipment even to, qualifxr for bidding excessively,r militates against new construction firms with limited fLiancial resources and tends to encourage overinvestment in equipment by the cornstruction industry-. The recent attempt of bhe Ministr-T of WJorks in tl'liopia to introduce a new system of classification requir- ing a contractor to own enough equipment to enable him "to adequatel. perform works at the level at which he is applying" appeared to us partic- ularly ill-advised, considL ing the severely limited total demand for ciril works and the lack of any special financing arrangemenbs that would enable contradtors wibh relatively modest financial resources to buy the required plant. - 18 41. Even if new contractors are adequately screened on the basis of previous tecluical or business experience, educational qual:ifications, motivation, etc. befor9e being licensed, only their actual performance is likely to demonstrate their capacity for development. In the classifi- cation systems with which we became familiar, the performance criteria which were supposed to govern the reclassification and, in theory at least, also the disqualification of licensed contractors impressed us as inade- quate in several respects. Little or no enmphasis is usually paid, for ex- ample, to the extent to which the construction fim has demonstrated its capacity to expand and iumrove its organization and management in terms of the experience, technical qualifications and size of its permanent staff and of a wider sharing of management responsibility among top personnel. Firms are generally classified only on the basis of the maximum size of contract they are deemed capable of handling in the light of past experience and with little regard to the quality of their work and their demonstrated capacity to manage several or more oonstruction jobs simultaneously. In assessing the financial qualifications of firms insufficient weight appears to be given to the progress made by these firms in improving their net worth and their creditworthiness with established financial irLstitutions. In Iran the Plan Organization is now making a constructive attempt to introduce a new classification system designed to remedy the deficiencies me2ntioned above and to give maximum weight to the capacity shown by firms in h.mvroving their technical staff, organization and management, the quality of their work and their financial and credit standing. For details of this new scheme the reader is referred to Appendix 2 of this report. The Role of Education and Traii 42. The Mission was interested in determining the role of education and training in the development of construction industries in th@ four countries it visited. In Korea the comtparatively high educational level of the entrepreneurs, professional and technical personnel, and even of the labor engaged in construction, has apparently been a positive factor in the development of the construction industry in that country. In Iran entrepreneurs have also had the benefit of rather high level of formal education, but construction labor is still largely illiterate and for the most part incapable of reading blueprints. In Kenya relatively few African contractors, were found to have more than an elementary education, and construction labor is handicapped by the same deficiency as in Iran. While a high level of formal education is not essential for small contrao- tars and subcontractors, our observations indicate that poorly educated entrepreneurs are seriously handicapped in aoquiring the business and man- agerial skills and in employing the professional and technioal personnel that are required for carrying out major building and civil works, 43* The Mission also found that government educational planning to meet the manpower skills required for construction has in several respects been inadequate.. The number of engineers has generally been sufficient except in Kenya where the limited supply of African engineers presumably accounts for the fact that at best only one or two of them have gone into 19 the construcbion business. In athiopia, in contrast to Kenya, many more trained engineers are available so that a considera-ble proportion of the admittedly limited number of Ethiopian construction firms have been latunched byr engineers. Every-where the education of engineers has been excessivelgy design-oriented with consequen-t neglect of the problems involved in construction. The most serious manpawer deficienc-y we noted was at the intermedia.'e skill level, namely technicians and foremeni. This was most marxked in Lrai where relativel\r highlyr paid engineers often have to do the wTork normally carried out by such personnel who really should be the backbone of the construction industry. Only in Ethiopia has rmuch attention been paid to the training of technicians; and there, indeed., bhe number of building technicians turned out has been well in excess of the enmloyment opportunities avvailable in the small-scale local construc- t'ion industry. lW. It, was noteworthy that cornstruction labor has been almost entirely trainied in the job. Technical and vocational schools have apparently made libtle or no contribution to the available pool of labor skills iln spitLe of sulbstantinl expenditures on these institutions. The Hission w,*s urn.0able to examiine adequately the causes of this failure. It was app-aren', however, that technical and vocational schools often lacked instructors wi-th practical experience in industry ad that cur:-icula were poorly adapted to the practical requirements of industry. 45. Informal training experiences have been of considerable vallue in the developnment of construietion enterprises. This is particularly true of Korea. Ir that countryr emerging Korean contractors learned a great deal in the period immediately after the IKorean War from their association with defense anad post-war reconstruction work financed by the United States and carried out under the directionA first of the US Ariny Engineers .and later of bhe US Corps of Engineers. Initially they worked. primarily as subcontractors to American firms and, at a later stage, in joint ventures with such firms. In this way they first learned how to work with equipment and in accordance with specifications. The Korean Arnr, working in close cooperation with the US armed forces in Korea, trained marlyr Koreau's in a wide range of skills, including the operation and mzaintenance of eqiuipmenb. Many Korean aumy engineers and nonengineer officers belnefited from supplementary technical and management training in the United States and subsequently became active in the construction industi7r. In otlher countries, wie found no evidence that training provided by the armiied forces had any significant impact on the development of indigenous construction capacity. In Iran the init-ial group of construc- bion entrepreneurs acquired experience by first working as subcontractors to foreign fCir-Ts carr-ing out railway construction; and -the foreign consulbing engineering firms long active in that country have made a considerable contribubion to the practical. training of engineers and dr-aftsmen. 46 Kenya is the onlyl country in which we found a program to provide training and advice to indigenous contractors. This pogram, administered - 20 b;r the National Construction Company (NCC) and carried out largely with Norwegian building supervisors and training officers, has had only limited success. There has not been sufficierntly close cooperation alnd coordina- tion between the building supervsors who have been responsible for advis- ing contractors and the training officers who have organized short-term courses and seminars for contractors and their personnel. The buildinig supervisors have been primarily technical in bheir orientation and have for the most part not been adequately equipped to advise on the business artd management aspects of construction in which African contractors have generally beena most deficient. FXforts to make contractors aware of their serious limitations have been only partially successful, so that insufficient advantage has been taken of the opportunities for obtaining advice and brainiing. breover, as the IiCC accepted an increasing measure of responsibility for construction programs amd projects obtained for allocation to individual contractors, the basic task of assisting selected contractors to develop their enterprises has been neglected owing to the growina preoccupation of building superviscrs with the proper completion of individual contracts. Finally., the trairing and advisory activities have been dispersed over too many contractors and have accordingly failed to focus on those who have demonstrated real potential for development. Contract Documents and Contract xbecution 47. Li our field work we were impressed by the fact that the contrac- tors have had little or no say in determining the terms and conditions under which they carry out public works. The public authorities as "employers" have virtually dictated the forlm and content of contract documents apart from the price. The specific terms of the contract, supplemented by general conditions of contract, general specifications and codes of construction standards, have been strongly influenced by those prevailing in developed countries and are often not fully understood by local contractors. In their provisions for the settlement of disputes and for the allocation of responsibility for variations and unanticipated conditions contracts have in many cases been heavily weighted in favor of the public employer, thereby forcing the new and relatively inexperienced indigenous contractor to assume risks which he is rea-lly incapable of bearing. The inspectors used by the public employer also tend to create problems for the contractor by insisting on literal compliance with all specificationis without regard to their relevance to the achievement of thle basic piurpose the project must serve. The government inspector is generally the undisputed "king" on the construction site. Finally, delays in payment by the employer have frequently aggravated the financing prob- lems of the contractor, Financing of Contractors 48. k found thab many developing -zontractors have had cohsiderable difficulty in obtaining the guarantees or sureties required for bidding., periformance nxud mainteniance and the requisite financing for workinig capital anid equipment. At best the normal investmenl and cormmercial bankcs - 21 anld the insurance companies are wary about financing contractors in view of the unusual risks to which the construction business is exposed. I:n Iran it was only after a number of the leading construction enterprises had established a special institution to provide financing for contractors that other banks began to evince much interest in providing loans and guarantees. In Korea the government has assisted contractors to form a financial cooperative, but the resources of this cooperative have never been sufi'icient to provide a significant amount of working capital. 'ile the. larger and long-established contractors for the most part experience no serious financing problems, new or relatively new enter- prises are severely handicapped by a shortage of financial resources. Their capacity to provide initial equity capital is often very limited, as is their ability to furnish property as security for loans and guaran- tees. Under these conditions financing is usually available only in inadequate volume and on rather onerous terms. LWe found no government facilities for financing contractors or underwriting at least a portion of the credit risk except in Kenya where the Kenyan and Norwegian governments have cooperated to establish a special public fund from which contractors could obtain loans. However, the management of this fund has been open to serious criticism; losses have been excessive, principally owing to inadequate screening and supervision of borrowers. Lack of Planning Finally, it is important to note that Kenya is the only country where we found that the government had launched a more or less comprehensive prorarra for the edevelopment of an indigenous construction industry. This program in principle contains most of the essential ingredients - reservation of contracts to provide work experience, advice and training, and special financial assistance - but, as we have alretady had occasion to observe, it has not been carried out very effectively.!/ Elsewhere, the c instruction industr;y, unlike the manufacturing indU3tr, has ewh.r, been the object of coherent government planning despite its critical role in development. True, measures that have contributed to the promotion of the industxry have been taken, but generally only on an aa- hoc basis. We found that government economic planning agencies have paid little or no attention to the implications of geAieral development plans for the construction industry. With the limit,ed exception of Keny,a,, none of the countries visited had a single ministry or agency responsible for look;ing after the interests of the construction inidustry. The lack of centralizc. responsibilit,y for this industry was undoubtedly the principal cause of the dearth of reliable statistical data and documentation, on constructioin which seriously rlandicapped our field investigatiorns. This situation is by no means unique. A study' carried out in 1966 by the Economic Commissionl for Africa concluded, for example, "that the role of the public authorities 1/ For a fuller analysis of his program, see Appendix 1. - 22 - in the field of construction is limited in scope and extent and that there is a lack of a clear and coprprehen8ive policy of action in the construc- tion sector. _'1/ E LraoforPaninDevelment 50. The Mission will now indicate how in its otinion the task of developing a domestic construcbion industry might be approached and what might be the general content and scope of such a developing program. For this purpose wle have drarwn in the first instance on our field studies. However, in view of the serious inadequacies of data encountered in the field and the limited time we could devote to the coun-try case studies, wre also found it necessary to draw heavily on our individual experience clnd knowledge both of the technical and management problems of construc- tion and of the general development process and the factors which affect it. 51. It should be emphasized at the outset that no development program can succeed unless there is a clear-cut commitment by the govern- ment to the basic principles involved in the promotion of a domestic construction industry. Lip service to the promotion of such an industry will not be sufficient. The government will have to create a climate conducive to the development of private construction enterprise though this need not preclude the participation of public enterprises in coonstruction on the same terms as private individuals and firms Contrac- tors must be given opportunities to carry out work in accordance with their capacity and under terms that are not unduly weighted in favor of the government as employer. They must be enabled to carry out their work without arbitrary interference from government inspectors and supervisors and under conditions ensuring that disputes between the two parties to the contract are settled equitably and speedily. It will be necessary to vest responsibility for coordinating all policies and measures relating to the development of the industry in a single agency under appropriate institutional arrangements which will ensure that the favoritism and corruption which often characterize the relations between the construction industry and the public authorities are kept at a minimum consistent with the objective administr&tion of the program. Such an agenicy should be staffed with capable people who are dedicated to the efficient promotion of the consbruction industry rather than simply to its control. Promotional measures should not be confined simpl,y to those that would pro-bect the industry against foreign competi- tioll through price preferences or the reservation of construction contracts 1/ The Construcbion Industries in Development Proramnmes: A Techno- Economic Review in the West African Sub-Region I(N Economic & Social Council,, ECN. I 107, July7 6. 23 - to domesbic enterprises. Vigorous steps must be taken to ensure progressive improvement in the efficiency of the domestic industry by providing effec- tive training and technical assistance and by weeding out contractors who fai:L to demonstrate their capacity for development. Special finalncial assistance wiill have to be furnLshed on a discriminating basis. The government must take measures to assess and,, as far as possible, plan construction demand in order to determine the limits within which the construction industry can develop and to ensure the industry some conti- nui'tr of work. Finally, the government must realize that any develap- ment program will of necessity be rather experimental in character and Uherefore require periodic revision in the light of experience, and that s;ch a program will entail costs both for the econornr and for public budget. 52. The first step in working out a development program should be to project the volunme and nature of the demand for construction and to assess the actual and potential capacity of the domestic industry to meet this demand. This will help to determine the size and structure of the domestic construction industry that can be developed within the parameters of potential demand and supply. Chapter II of this report will deal with these questions as well as the desirability and feasibility of planning construction for the purpose of ensuring greater stability in the demand for construction and therefore in the volume of work available to the industry. 53. It should be emphasized that we have not devised a general presc-ription for the developmrant of domestic construction industries. In the last analysis programs must be framed for particular countries and their specific content muolt be adapted to the special requiremen-ts and circumstances of these countries - the socio-political conditions, the insbitutional framework, the market constraints, and stage of develop- ment of the construction industry. Our suggestions must therefore be primarily considered as guidelines to be applied in planning programs for particular cowutries. However, we do believe it possible to make certain recommendations on the scope and content of any development program and on methods for handling the various types of problems that will arise in the course of the development of a domestic construction industry. Essential Features of a Development Proram 54.e The t,ype of program we envisage, within the framework of govemi- ment policies and commitments outlined previously, would focus on a new and existing but relatively inexperienced contractors who are deemed to have a capacity for development but are as yet incapable of standing on their own feet without out-side assisbance. Not everyone with aspirations to be a contractor irrespective of his qualifications would be allowed to benefi' from a developmer,t, program. An autonomous public agency in charge of ccntractor development ould qualify- already active contractors on the basis of their past perfor. ince and admit new entrants into the industry on evidence of their commitment, their entrepreneurial skill and their educationalj technical and professional qualifications.l/ The total nwnber thus qualified would need to be fixed in relation to the availabilitty of the types of construction work of which they would be capable, but with ain appropriate allowance for inevitable attrition. The object would be not to set up an elite group from which qualified or potentially qualified members would be excluded, but rather to improve the prospects for develop- ment of successful, contractors by eliminating those with little or no promise. The size and composition of the group of developing countractors would not be static. Those failing to respond to assistance and to make progress would be eliminated or would be allowed to fail. Others who make sabisfactoory progress would progressively need less atssistance and would finally "graduate" from the group. New members who appear promisinig on the basis of their background and prior experience would from time to time be admitted. The program would focus not simply on the entrepreneur, buto also on the construction firm so that the technical and managerial organization and financial resources of the enterprise as a whole would be developed to enable it to expand its capacity to undertake work. Eventually the contractors developed in this manner byv the contractor development agency would presumably be qualified to carm:r out all types of construc- tion work for which there would be an adequate demand. 55. The group of contractors would benefit from various kinds of assistance. Some construction work suited to their capacity would be reserved to the group, subject to certain conditions, in order to provide opportunities for "learning experiences" and the degree of continuity of employment required for developing the staff and the financial strength of the enterprise. Thc contractors of the group would be exposed only gradually to the risks of competition. Their practical work experience would be supplemented by individual advice and group training provided by a group of experts qualified to assist contractors on their business and management problems as well as on their technical problems. Special financial assistance would be provided 'until the conitractors have developed their creditworthiness sufficiently to enable them to obtain credit from the normal finaincial institutions. Measures would be taken to break do-n construction work as far as feasible into individual contracts and sub- conzJracts so as to increase the opportunities of domestic enterprises to participate in such construction. Similarly, efforts would be made to adapt the design, specifications and standards of construction of indivi- dual projects to the capacity of the contractors consistent with the achievement of the basic purposes which such projects are intended to serve. The terms and conditions of construction contracts would provide for an appropriate division of responsibility and risks between the public authori- ties in their capacity as emplayers and the contractors. Thus the res- ponsibility for risks arising out of errors in bidding, failure to conplete contracts in time and additional or extra costs caused by such factors as contractor s negligence, weather conditions, failure to verify designs and 1/ See Section D of Chapter II. drawings and escalation of the cost of materials, labor and equipment; would be fixed in such a waty as to limit the conbractor's liability initially but gradually accustom him to assume the risks normally borne by the experienced c ontrac tor. The Time Frame of Developmnent 5'6. The progressive development of domestic construction capability inevitably entails a rather long period of time. We therefore found it necessary to adopt some form of time frame and to relate the development program in terms of its cormposition and the methods of dealing with various problems to the successive phases of development which contractors and the domestic conistruction industry as a wiole might be expected to experience. hS have someshat arbitrarily and schematically divided this time frame into a-n "earl-, S" "intermediate" and I'latell phase of development. Obviously there can be no clear-cut lines of demarcabion between these phases. Development is a continuum; and one phase will accordingly merge into the next without any, perceptible transitlon.. Even within each phase the situation will clearly not be static. Nevertheless, we believe that this division into successive phases is a useful conceptual device, for "on the average" the state of development,, prablems and needs of: domesti. cont>rac- tors will be different in each phase, anad the degree of enphasis put on various lorms of development assistance will have to chamnge accordingly. In Annex I to this report we have given a summaxy of the comnonent. elements of our prcp.:se!d development program aind of the change,s we envisage in deal- ing with these elemenlts over the entire time frame. In this connect.ion lwe want to e-iVhasize that we have not attempted to. estimate the duration of the whole time frame since, as our field experience indicates, this is likely to vary considerably from country to country. 57. An assistance program launched in the "early phase"' of the develcp- ment wil1 have to deal primarily with conLGractors wiith little or no, or at best limited, experience. This is not to szV. that all of those seleca-d Lor the "d0eveJLopme1t eoxercise" wiMl necessarix2y all -have the r ne back- grounds in te~i>s of prior experience, educabion anda tech1nical or profes- sional trainin-g. Some may be qualified to carry out. only simple, conventional building; others may already be capablie of more adcvanced, tyoes of building; ald a few ma~r have the professional arld educaviongL qualifications that m eniable them to carry ouit civil w;lks of a relatively simple character an.d modest size. Some will probably be able to work initially only as sub- contractors to resident or nonresidernt foreiEp contractors, whiLe others wi:ll be capable of operating as prime conbtracbors. They will all, howevez, be deficient in actual construction experience, financial resources and the abilit:.tr to bear all the risks normally i-nvolved in construction. To tllis end, certain corntracts ard suboon-tracts of appropriate size and type would be reserved for them within defined price ceilings; intensive training and advice would be provided; the apportionment of risks anid responsibilities between contractor alnd enpl. ter would be biased deliberately in favor of the contiractor; and special Inancial assistance would be accorded from public funds. In this early phase contractors would already be screened - 26 progressively for their developmenL capacity on the basis of their cunula- tive performanie record. In this phase T3he rolaative ef.icaoy- of various methods of de'velopment a.ssisbance would al`so'be tested and revised ill the lidTi o.f experience. ie estimate tha. this; "'erlya " phase might in most cases last about five years. Th3e "intermediate phase is likely to be of rabher indeterminate duration. In this phase a growing difference in the capacity of existiLng con bractors would become evident. Some contractors miglht develop rather rapidly-; others would be rather static; alnd still others would fall by the wayside. Wit.h suitable encouragement t.here might well be an increasing teindency- of individual contractors to cornbine' and form partnerships or companiies. Some enterprises would probably develop to a stage where they could beniefit :from the formation of joint venttures with foreigrn firms. WithLn the limits imosed by the development of construction demand and 'o allow for attrition among existirng contractors, new entrants into the "development group" would be admitted. Considering, however, that exist- inE contractors would have presumably- advanlced bey-ond the "earl- phase" of development, the minimum educational qualification for new entrants il'Vo the construction industry- might well be raised. Training and techni- cal assisbance would focus on existing contractors who had demonstrated a capacity for progress, and on new entrants; and the nature of this assistance would be adjusted to the stage of development and educational and occupational background of the contractor. Some of the responsibili- ties and risks which are normally borne b-,r a contractor but which in the "early-" period were shifted to the ouwer would during the "intermediate" stbge be transferred to the contractor. The developing contractor would be exposed to certain risks of compeetition, but would be protected a-gainst the risks of excessively low bidding. He would be forced increasing'.lyr to turn to norinal profit-making financial institutions for .ee+tin his financial requirements, but to encourage these institutions Xo assume progressivel;,- the risks of such finaincing a government- sponsored uhnd might be set up to insure these institutions at first again-st a major, and subsequently against a declining, proportion of the credi t risks. 5$'. In the "final" period dompstic contractors would approach "aI'tuity."1 They would be active in a wide ranlge of construction activity., always withi; prevailing marke-t constraints which mighft prevent the emer- gence of domestic conbtractors for highly conplex and specialized construc- tion work of which domestic contractors might not be capable or for which demand is not sufficiently- large and continuous to warrant the development oC domestic construction capability. During this period domestic contrac- tors would be expec bed to achieve a capacity to operate under the snUie (oermls and condibions as foreign contractors and to shoulder bhe same risks a7nd responsibilities. Special financial, training and technical assistance would be phased out. - 27 - 60. The object of such an "exercise" in a developinig country would be to develop domestic construction entrepreneurs and their "enterprises" over the different periods of the time frame into self-reliant contrac- tors capable of' capturing, by virtue of improvements in the quality and cost of their performance, an increasing share of the domestic construc- tion market. While the program would concentrate on the development of domestic contractors, we do not nile out the possibility of including, in agreement with the government of a country where such a program might be launched, resident foreign contractors who can be assimilated to the status of domestic contractors on the basis of their "identification" with the country as evidenced by their intention to make that country their permanent home and whose capacity could be developed by the type of assistance provided by the program. Under such circumstances, however, this type of contractor might need less intensive training and technical assistance, and perhaps, less special financial assistance than the less experienced contractors of local nationality. 61. We do not want to imply that a development program should be launched alway,s in the initial developmental phase of a domestic con- structicn program. It might well begin in some cases in the intermediate phase. In such an event the program would consist of those measures that we consider appropriate for this phase. 62. In the preceding paragraphs we have referred to a time frame for the development of the construction industry as a whole. It should be pointed ouit, however, that new contractors will emerge in each of the -ohases of this time frame and that these will in turn undergo successive phases of development. The same may be true of groups of contractors engaged in different types of construction. Thus, within the time frame for the construction industry as a whole we may find, in the early phase, contractors primarily engaged in simple, conventional building operations; in the tintermediate"l phase, an increasing number of contractors capable of complex building construction entailing elements similar to civil engineering, as well as civil engineering work; in the "late" phase, a balaniced group of contractors capable of a broa'1 range of constructiori work wihin the limitations of market demand. Separate time frames i>n terms of the nature of construction activity might exist (1) for simple, conventional building activity, and (2) for more complex building construction (multistorey construction and more complex factory build- ings) and civil engineering work; and in the case the "early" period for the second might be more or less coterminous with the "intermediate" period of the first. 63. Over the whole time frame we would expect the domes-tic con- struction industry to increase progressively its share of the total construction market. One can roughly project the changes in the division of the total market among (1) domestic prime contractors, (2) joint foreign-domestic contracti2 ventures,j (3) resident foreign contractors, and (4) nonresident foreigni contractors. Each of these-types of 28 - coiitractors could be expected to work rnueasingly with domestic sub- contractors. The share of the first co4ld be expected to increase from tlhe beginning. The second type of cont4ractor might first emerge duiring the "intermediate" period when domestic contractors have reached a stage of development at which it migt be advantageous to both the domestic contractor and the foreign contractor to form a joint venture to which each could make a contribution and in which there would be no unldue risk that one partner would dominate the other; and the share of such joint ventures in the market might well continue to expand. The development of the share of the resident foreign contractor would be less easy to anticipate, since it will depend particularly on the relationship between the government and such contrac tors. The share of the nonresident foreign contractor will presumably diminish, beginning in the "intermediate" period; and the extent to which he shares his business with local sub- contractors will presumably increase. Even in the late period, however, the nonresident contractor wrill probably continue to play a role, as already indicated, in the execu-tion of contracts entailing conplex and specialized works. If total construction demand increases at a fairly rapid rate over the time frame, the diminishing share of foreign contrac- tors in the total market will not, of course, be fully reflected in thne absolute amount of business they will continue to carry out in the c untrY. F. Organization of the Report 64. Having outlined our basic approach to the development of domestic construction capability, we shall now proceed with a more detailed consideration of the various elements of a program which in our view are relevant to this development and which, for the most part, will have to be treated differently in the successive phases of the pro- jected time frame. Chapter II, as already indicated, will deal with demand and supply, namely the projection and planning of construction demand on the one hand, and the appraisal of the existing and potential capacity of domestic contractors on the other hand. Chapter III will consider questions of project design, standards of construction and technolonr and their relevance to development. Chapter IV will deal with the possibilities of ensuring greater participation of domestic contractors in construction through appropriate division of work and methods of awarding contracts. Chapter V will discuss various aspects of contract execution in relation to the respective responsibilities of the employer and contractor. Chapter VI will deal with the educational, training and technlical assistance inputs of a development program. Chapter VII will examine the contractor's requirements for various types of finanicin'g facilities and deal briefly with fiscal provisions relevant to development of the construction industry. Finally, Chapter VIII will discuss the advisability and methods of drawing up pilot development programs for selected countries and the role which the Bank Group and the government of these countries might play in framing and carrying out such programs . - 29 - CHAPTER II ASSESSMENT AND PLANNING OF CONSTRUCTION DEMAND IN RELATION TO DOMESTIC CONSTRUCTION CAPACITY A. Introduction 1* An examination made by Prof. Turin of the economic plans of more than 40 countries concluded that "very few of the development plans... single out the construction industry as one of the sectors for whi4ch targets are defined and whose rela,tionship with other sectors of the economy is examined in detail-It The Mission certainly found 'this to be true of the countries it visited. Only in Korea had an atteirpt been made to analyze the current five-year plan in terms of the volumve and types of construction activity involved; and in this case we found the projections to be incomplete and difficult to relate to the constra>vtion which had taken place in the past 2/ 2. A projection of the composition and total volume of construction demand is needed not only to indicate the ultimate limits within which a local construction industry can be developed, but also to assess the man- power requirements of the industry in terms of necessary training and educational facilities, and to determine the volume and types of building materials that may be required and the extent to which their production right be undertaken in various parts of the country in the light of economies of scale and transport costs. B. The Assessment of Demand 3. Construction demand can usually be assessed in some lietail only for the rather limited period, normally five years, covered by the country's general development plan. Even within this period demand can often not be readily forecast. Initially development plans are fTrequently drawn up only in mscroeconomic terms, and their detailed content in the form of specific projects or groups of projects is determined only after a considerable lag and then only imperfectly even for the public sector. J- the past project planning has tended to be sporadic, accelerating after - macroeconomic plan has been adopted and declining again with the approac:i of the end of the current development plan. Now, however, progressively 1/ Turin, The Construction Indust-: Its Economic Significance and Its Role in Develo2ment, op. cit X B22. 2/ See paragraph 11 and Tables 4 and 8 of Appendix 1 in Vol. III of this report. - 30- more attention is being paid to working out specific projects and programs, and if this trend continues and becomes more independent of the duration of any particular plannJng period, it should provide a better basis for the determination of future construction demand. 4. A breakdown of construction demand by types of projects and of construction activities can probably be made only for the comparative- ly short period for which detailed planning can be undertaken with some degree of confidence. For longer periods it should be possible, as a minimum, to project aggregate dexand in relation to the anticipated growth in gross domestic product. A study of the experience of a large number of developed and developing countries has shown that gross fixed capital formation and value added by construction are closely correlated with the rise in gross domestic product per capita. 1/ Thus, if the latter can be projected on the basis of the past trends and future prospects of the economy, the rate at which construction demand is like- ly to develop can also be determined. Within this global projection, the approximate share cf building and civil works can also be forecast on the basis of past experience, though with a lesser degree of accuracy. 5. By no means all of the projected volume of construction will represent effective demand for the services of the organized construction industry defined in terms of all the construction enterprises active or likely to be active in the country. To arrive at effective demand, construction in the subsistence sector must first of all be disregarded. In Ethiopia, for example, 'This was estimated to have been almost 27% of total construction in the three-year period 1967-1969. Secondly, that part of residential construction undertaken by prospective home owners acting as their own contractors should be eliminated. While giving employment to artisans and groups of artisans, it does not really provide work for construction enterprises. In Korea, Iran and Ethiopia the major part of housing demand is met in this way, and the contracting industry by and large undertakes the construction only of apartment houses and large housing complexes. Finally, the construction work normally carried out by government and government agencies themselves should not be included in effective demand. In Ethiopia a considerable, though apparent- ly diminishing, volume of new construction has in the past been 'done by public authorities on their own account. In cases of this type, however, it would be desirable for public agencies to consider carefully to what extent a transfer of construction to the private sector might result in a reduction of costs, and give greater scope for the development of a private domestic construction industry. 1/ See Construction and Development: A Framework for Research and Action (London University College,v Environmental Research Group, Building Econqomics Research Unit, May 1972). - 31 - 6. Construction should as far as possible be disaggregated into various types classified in accordance with the demands they make on the technical and managerial capacity and on the financial resources of contractors. Large or complex construction projects will need to be identified separately whenever these are beyond the capacity of the domestic industry, although it may be possible in such cases to segregate elements of such projects which, by virtue of their size or relative simplicity, can be carried out by domestic contractors or subcontractors. As a minimum, a distinction should be made between building on the one hand and civil works on the other hand. Building generally requires little equipment and therefore little investment. Much of the building demand consists of simple, small, and in geographic terms, widely distributed projects which provide numerous opportunities for domestic enterprise and make relatively modest demands on technical and managerial skills. Civil works, on the other hand, usually entail the use of much more equipment and therefore require contractors capable of mobilizing the requisite capital and marshalling the skills needed to operate and maintain such equipment. Their execution often demands an ability to deal with technical problems wider in range and more complex in character than those encountered generally in building. The average size of civil works contracts is substantially bigger than in the case of building, and this factor, coupled with the need for more plant and equipment, makes it necessary for prime contractors in this field to command a larger organization, better manage- ment and greater financial resources. The larger scale of operations involved in civil works are likely to make market constraints a more serious limitation on the number of contractors that can be developed in this field. In nany small developing countries the aggregate denand for civil works is likely to be very small in relation to the number of prime contractors that can be kept more or less continuously employed, and much of this demand may consist of a comparatively few major projects the completion of which may result in an abrupt decline in demand. In Ethiopia we found the total annual demand for civil works constrction was only about US$30-40 million.* It is obvious that in a market of this size the opportunities for the development of domestic civil works capacity are rather severely li2rted. In contrast, the volume of civil works construction in Korea amounted to almost US$610 million in the year 1970. 7. In assessing demand, it is important, however, to go beyond a simple classification into building and civil works. In each of these fields there is a range of construiction activities with widely varying demands on technical and managerial capacity. In building a distinctioii should be made between: (1) one and two storey structures with load-bearing walls and simple foundations; and (2) multistorey buildings using a structural framework of steel or reinforced concrete and involving excavation and more complex foundation work. Even in the first of these two subcategories the contractor who can build structures designed to serve simply as shelters fox housing, for ofiices, foor goods or for light nachinery used in manufactur,.,g often does not have the capacity to construct lux-ury or semi-luxury houses with more complex wall systems and higher-grade finishes and fittings, or single storey factories and stores which must have overhead facilities for the transmission of power or the conveyance of goods and materials. - 32- 8. In civil works, construction demand is often broken down into road construction, irrigation and land reclamation, dam construction, power transmission, water supply and seweragej airport and harbor facilities, etc. While each of these fields undoubtedly calls for certain special skills and techniques, this breakdown is not in all respects meeningful. Certain types of work such as excavation and earth-moving may be conmon to many of them. In each there is usually some work whichi can be carried out by contractors and subcontractors with limited means or of relatively unsophisticated skills. In road works there is obviously a great difference in the demands placed on the contractors between the construction of a new high-standard road involving many difficult operations such as rock cutting and rock excavation and the construction of complete pavements on the one hand, and the upgrading of an existing road involving shaping and compaction of a relatively simple embankment and a topping of gravel. 9. In general civil works can offer opportunities for the develop- ment of a considerable number of small contractors or subcontractors who are capable, without possessing high technical qualifications, of constructing small bridges and drainage structures and carrying out simple earth-moving jobs. In Iran particularly we were impressed with the large number of small subcontractors who, starting originally as skilled or semi-skilled equipment operators and maintenance men, had acquired bulldozers and dump trucks and were doing, apparently quite efficiently, much of the earth- moving work for prime contractors. C. Planning of Construction 10. Attention should focus not only on the assessment of construction demand, but also on the planning of such demand. A study prepared by INIDW stressed the importance of such planning in these terms: "Construction, instead of being a haphazard operation, must be the subject of conscious rational programmLing, in respect to both demand and supply, within the framework of the economic plans of .the developing countries. Public invest- ment (dams, irrigation schemes, transport systems, large industrial and residential projects, etc.) must be carried out on the basis of long-term programming. Construction objectives should be coordinated with the planning of the supply of materials. Public investment has to be carefully dovetailed with private investment, not only to ensure continuous activity within the construction industry itself, but also to ensure hamony with the desired levels of regional and local economic activity_ / 1/ Construction Industry (Monograph No. 2, UNIDO Monographs on Industrial Development, United Nations, New York 1969), p. 81. 33 - 11. In Chapter I we have already stressed the importance of stability and continuity of work volume to the development of the construction industry. Lhe possibilities of improved phasing to achieve this objective merit serious examination. Planning is also necessary to determine how large construction projects and programs can be divided into jobs of varying sizes and degrees of complexity in such a manner as to maximize the opportunities available to domestic enterprises to participate in their construction either as prime contractors or as subcontractors. In Chapter IV we shall examine how and within what limits this might be done. 12. We are not, of course, suggesting that the phasing of the construction work included in development plans be dictated by the requirements of the construction industry, but simply that the latter's needs be coinsidered as one of the factors in determining when projects are to be started and completed. The ecbnomic need of a project, and its relationship to other projects that may contribute to the satisfaction of this need, will generally be the principal, if not the sole, factor in deciding the construction schedule. The benefits foregone if a project is delayed (or, conversely, the cost of locking up capital in a project which is completed too soon in relation to other elements which are essential to the realization of its economiic benefits) must always be considered. However, there are circumstances which may make it possible to change the timing of construction projects without serious economic disadvantages. Sometimries, for instance, it may not make much difference whether a road is completed one or two years later or earlier, particularly when the projected benefits accrue over a long period and most of these are likely to develop in the later stages of the life of the project after a substantial increase in traffic is generated. Moreover, the timing of many projects in developing countries is often determined not so much by economic requirements, as by other considerations and purely adventitious circumstances. In Korea, for example, we found that the construction schedule of the largest and most important road project - the Seoul-Pusan express highway - was strongly influenced by considerations of national prestige and that the compression of construction within a com.paratively short period had necessitated heavy additional investments in equipTnent which proved diffiQult to amortize. 13. The usual practice of planning within five-year time frames has often led to the "bunching" of project starts in the middle years of the plan and in a decline of new commitments toward the end of the old, and at the beginning of the new, planning period. The start of a new project may be dictated simply by the completion of all the preparatory planning work. For example, if and when the feasibility studies, designs and specifications for all the projects in a five-year road program are finished, all of the necessary construction work may be put out to tender and awarded wi.thin a short period even though the phasing of construction starts over a longer perioQ may economize on the use of equipment and facilitate greater particip,uion by domestic construction firms. - 34 - 4. :Py and large, considerable iijprpvements an the planning and phasing of constructipn work can probably bp made without adversely affecting economic development. In countries where development projects are heavily dependent on external financing, efforts to make such improve- ments can generally be carried out orily in cooperation wit.h the agencies providing such financing. Constr-uction required for particular sector programs may be especially well suited to such cooperative planning. In Chapter V and Annex II we have shown, in the forn of an illustrative model, how a five-year road construction program might be planned as a proving ground for domestic contractors and under conditions that would ensure continuity of work and minimize the amount of investment participating contractors would require. ID. Spl: Number and Capacity of Domestic Contractors 15. In our discussion of the assessment and planning of construction demand we have already stressed the importance of identifying, by type and amount, the construction work that is likely to be suited to the capacity of domestic contractors. The determination of this capacity, to which we now turn, is undoubtedly very difficult. Equipment, however important in carrying out specific civil works projects, can hardly be regarded as a critial determinant of the capacity of contractors. Capacity is determined rather by the entrepreneurial talent, managerial and technical skills, and experience of the existing and "would-be" contractors, and these factors are difficult to quantify in terms of a given volume and type of work. NIoreover, capacity so defined will undergo continuing changes in a developing situation. Criteria for Assessing Contractors' Capacity and Potential 16. For existing contractors the best yardstick for measuring capacity is past performance. An adequate record of past performanne can help to answer many relevant questions. What type of construction work has the contractor carried out? What is the maximum volume of work he has handled, and how many contracts has he been able to carry out at one time? Has he been able to complete contracts on time, and has the quality of his work been questioned at the time of the provisional or final acceptance of the construction jobs for which he was responsible? Above all, what does the record of his performance over time show about his capacity to make progress in terms of the types and volume of work of which he is capable, the timely completion of contracts, the quality of his work and his ability to increase his staff and his financial resources and creditworthiness? Satisfactory answers to all these questions can only be given, of course, if the appropriate agency of the government has tz:ken steps to establish and maintain the necessary records on contractors' performance. The importance of this to the continuing process of contractor selection can hardly be overerphasized. 17. The most difficult problems arise in connection with the selection and the assessment of the potential capacity of those who want to become contractors but who have no previous experience in contracting. Since the number of such individuals is likely to be considerable despite the risks involved in the construction business, it is important to develop and apply some criteria to screen such applicants. For this purpose it is necessary to determine what qualifications new entrants into the construction industry should possess and what methods can be used to establish whether or not the applicant possesses these qualifications. We have listed these qualifications in Annex I under heading I and we shall attempt to outline below the tests that might be applied: a) Motivation - By motivation we mean the degree of commitnent by the "would-be" entrepreneur and his capacity to think in terms of concrete personal goals and of objectives for achieving his goals. Commitment can be tested in various ways.- for example, by his willingness to risk a certain amount of capital which, while not large in absolute terms, is still significant in terms of whatever resources he does possess; and also by his willingness to give undivided attention to the new business he proposes to undertake. New methods for testing, and perhaps even develop- ing, achievement motivation have been developed by Prof. David C. McClelland and his associates at the Behavioral Science Center of Harvard University 1/ These employ a variety of means - competitive games, simulations, case studies, group discussions, tests and questionnaires - to bring out and pronmote an understanding of behavior under given situations, to clarify and define motivations and to appreciate the factors conditioning achievement. Such techniques, while by no means fool-proof, have been tested sufficiently to warrant the conclusion that they can be helpful in determining whether individuals do have the commitment essential to success in business. b) Entrepreneurial skill - Entrepreneurial talent we woul.d define as the ability to assess and take risks, to innovate in terms of responsive- ness to new opportunities and new methods, and to organize and plan the factors of production. This entrepreneurial capacity is difficult to assess. Where an individual has previously engsaged in business, his record of performance in that business may well be the critical test. In other cases in-depth interviews with the individual miy be a useful device of testing his responsiveness and his appreciation orf the risks involved in contracting. The techniques for assessing motivation which have been mentioned will also help in discerning talent for entrepreneurship. 1/ See David C. McClelland and David G. Winter, Motivating Economic Achievement (The Free Press, New Yo-'k,1971). A brief summary of the techniques employed is given in Jo, - C. de Wilde, The Development of African Priv-ate Enterprise (IBRD, Decenijer 10, 1971), Vol. I, P. 40. - 36- c) Education&l qualifications - The degree of formal education that should be required will depend on (1) the general educational level in the country, (2) the education of already existing contractors wath whom the new entrant into construction will have to compete, and (3) the typoe of construction work for which the new contractor wants to qualify. While relatively uneducated individuals of great energy, entrepreneurial skill and managerial talent can and do succeed in the construction business, the chances of success are likely to be considerably greater for individuals who have the formal education that enables them more readily to achieve the ability to calculate costs, to understand specifications and drawings, to keep or supervise accounts and to deal with financial problems. In a country like Kenya, where the general educational level is still rather low, one probably cannot, however, expect the small building contractor to have very high educational qualifications. On the other hand, where a considerable number of existing contractors have had the benefit of a certain amount of formal education, it would probably be a mistake to admit new entrants with lower educational qualifications. An individual who expects to qualify as a small contractor undertaking simple conventional building projects can presumably manage with less education than an individual who wants to qualify for civil works which demand considerably greater technical and managerial skills. Civil works contractors, except those qualified to work only, in essence, as labor contractors or as small earth-moving contractors, should generally as a minimum be expected to have a secondary education. d) Technical and professional qualifications - Such qualifications ir-11 not invariably be necessary. A businessman-entrepreneur can become a successful contractor capable of hiring the necessary technical or professional personnel. Hawever, an individual who has neither the technical qualifications, nor a record of success in some business other than contracting, is unlikely to prove successful. Some technical or professional qualification should be demanded of the individual without significant relevant business experience. For the small building contractor demonstration of experience as a competent building artisan may be sufficient. The individual who aspires to be qualified for modern buil.ding or civil works will, in the other hand, need to be a technician or engineer. If there are already a considerable number of domestic contractors active in these fields, additional qualifications can be demanded of new entrants, particularly in the form of prior experience as employees of existing construction or consulting engineering firms or in government as inspectors or supervisors of construction. 18. One can expect that the application of various methods for testing the qualifications of new entrants into construction will at best somewhat reduce the potential risks of failure. However, some control should be exercised on the number of new individuals or firms permitted to enter the construction industry. Otherwise there is a tendency, as we observed in the countries we visited, for the industry to become overcrowded and characterized by a high rate of failurez A limi.tation of numbers is all the more necessary if new contractors are to enjoy special developmental help in the forrm of training, advisory and financial assistance. The - .37 - eyperience of the NCC in Kenya shows that such help can be effective only if it can focus continuously on a limited number of contractors. Once new individuals or firms are admitted, continuous screening on the basis of their cumulative performance record and their response to advice and training becomes critically important. Performance on a few contracts will not necessarily be relevant because, owing to the nature of the construction business, this may well be affected by adventitious factors over which the contractor has little or no control. However, the contractor ts performance over a series of contracts should demonstrate whether or not he has the capacity for growth. 19. It is important to keep in mind that these potentialities for growth will vary with the qualifications of the contractor. It is doubtful, for example, that the kind of contractors whom we found in Kenya and who in most cases have extremely modest technical and educational aualifications will for the most part develop a capacity to undertake any construction work other than the conventional building operations in which they are already engaged. They could, however, be assisted to expand their volume of business, reduce their costs and improve the quality of their work. On the other hand, some of the Ethiopian firms started in recent years by civil engineers might, with appropriate assistance, be enabled to extend the scope of their operations from building to civil works and to undertalce works of progressively greater size and complexity. E. Collection of Data on Construction 20. If there is to be an effective and continuing assessment and planning of construction demand in relation to the actual and potential capacity of the domestic construction industry, a considerable effort must be made to remedy current deficiencies in data. 21. On the demand side records should be kept on the total number and value of contracts awarded, classified by (a) size of contwract, (b) type of building (residential, commercial, industrial and public; single store- and multistorey) and civil works (roads, bridges, ports and harbors, irrigation and land reclamation etc.), and (c) type of contractor (domestic, resident foreign, and nonresident foreign). Public sector authorities slhould be excpected to report the contracts thenr award, and registered contractors could be required to report contracts awarded to them by the private sector. The public agency responsible for development planning should issue instructions that the construction component of projects and sector programs included in the development plan be segregated, and should also try to project construction demand over a period longer than the duration of the current economic plan. The agency charged with the preparat-on of national accounts should seek to determine cost breakdowns for repres- 'tative samples of contracts reported in order to develop a more reliable asis for estimating value added by constructioti. - 38- 22. On the supply side comprehensive reqords shpuld be maintained for each contractor so that his, progress could pe quickly evaluated and his classification revised in accordance With performance. For public contracts records should be kept to facilitatp a comparison of the original cost estimates prepared, by or for the pibjic agencies which let the contract, the price at which the contract was awarded, and the price at which the contract was completed. The factors responsible for any adjustments in the original price of the contract should as far as possible be identified. Progressively comprehensive information should be developed both on the prices tendered for various items in construction contracts and on actual prices and costs in such way as to facilitate improvements in the estimation and control of costs and to permit the construction of cost indices that might be used in making adjustments for escalation in the prices of labor and materials. - 39 - CHAPTER III DESIGNS, PLANS, SPECIFICATIONS AND TECHNOLOGY A. T lanceo Dsi 1. Design is the first stage in the realization of a construction project; and the design of the project largely determines whether or not domestic contractors are capable of carrying it out. The approach of the design engineer and architect to their task can either inhibit or promote the growth of an indigenous contracting industry. If the encouragement of this industry is a government objective, then the engineer and arclhtect must keep in m:nd the need to adapt their designs as far as possible to the capabilities of developing domestic contractors. In a sense the design engineer and architect should play the role of educators to such contractors, not demanding more than the latter's current performance makes possible but introducing, as their capacity grows, design standards requiring more advanced construction techniques. The design and specification writer can and should initiate advances in techniques, but only after the old ones have been effectively mastered. 2. We obviously are not suggesting that all projects be designed to bring them within the capacity of the local industry. At any particular stage of the developrent of a domestic construction industry there will manifestly be projects that are too large or too sophisticated for domestic contractors. But where ani alternative design of the project may bring it within the competence of such contractors, this alternative should certainly be seriously considered. Any design should, of course, be compatible with the basic purpose that the project is to serve, and the comparative costs of alternative designs must be taken into account. 3. Since the purpose of the project is likely to govern the design, the requirements that must be met in this respect should be carefully considered. "Overdesign" in relation to requirements may not only increase cosJs unnecessarily but also lead to the prescription of standa-c' of construction that are beyond the capability of domestic contractors. When a simiple gravel road will economicallJy serve the needs of the projc growth in traffic, it would obviously be undesirable to construct a road ..'.J an asphalt concrete or Portland cement wearing course that would normally require tuhe use of much more costly and sophisticated equipment and entail far greater skill in the manufacture and laying down of the materials. Value Engineering 4. The concept of " lue engineering" seems to us to be particularly imiportant in this connectioi Value engineering is concerned with the choice, among a number of alternatives, of the most economical means of achieving a determined objective. It seeks to determine the level of design and the degree of perfection in execution that is most appropriate in the - 40 liglt of a countryls capacity to support the costs of construction involved, and in this process it assesses the marginal cost of raising standards and degree of perfection in relatioii to their marginal value. For instance, with an insistence on a progressively higher degree of perfection, the marginal cost of achieving perfection will tend to go up rapidly while the marginal value of progressive steps toward perfection will diminish. The point where the curves depicting the development of such marginal costs and values intersect wi3l thus determine the optimum degree of perfection for which a project should be designed. When housing is to be provided as a basic shelter for large numbers of people in a poor country, the design should not provide for complex wall systems and expensive installations which would on2y have the effect of reducing the number of units that the country could afford. Nor should there be an insistence, in the course of construction, that the walls be absolutely plumb and the floors perfectly level, for this might well entail marginal costs out of proportion to the marginal value of such precision. Moreover, the higher design standard and the insistence on precision might together operate to disqualify many domestic contractors from participating in the construction. 5. Value engineering is also concerned with the appropriate design of a project in terms of both its life and its ability to meet peak demands. In a country where capital is scarce and therefore costly, the capital investment required can be considerably reduced by designing the project for a shorter life. Under such circumstances a road with low- standard of pavement designed to fail after a relatively limited nunber of years may prove more economic. even after taking into account recurring maintenance costs, than a road with a high standard of pavement designed to last a long time. When the real cos t of capital is high the present value of the "distant" benefits of a long-life project may well be negligible or nil. The cost and value of meeting the peak demands that may be made on a project also need to be carefully weighed. A project may or may not be designed to meet such contingencies as extraordinary floods or earthquakes or to meet peak demands for water, transport or any other need that it is to seirve. The cost and value of the extra features of project design that will be needed to cope with such demands and emergencies will then have to be examined. All these factors will affect decisions on standards of construction which in turn may liave an important bearing on the capacity of the domestic construction industry to carry out the project. B. Appropriate Technologies 6. It is undoubtedly important to devise a construction technology appropriate to the conditions in each country. Construction technology can be defined in terms of the amount, cost and sophistication of tools - 41 - and equipment employed and of the demands made on technical and managerial skills. A technology may be ",appropriate" in economic terms, in the sense that it results in an optimum relationship of costs to benefits, or in terms of its suitability to the skills of local entrepreneurs and labor. These criteria for determining an appropriate technology will often be difficult to reacncile. 7. The Mission did not consider in detail the factors determining an appropriate combination of equipment ai labor in the light of the relative economic costs of the factors of prod-action, since this is the subject of another IBRD study.1/ Such combinations can, of course, range from manual labor employing only a few hnd implements at one extreme to the use of the most advanced and productive equipment with little labor at the other extreme. In theory it is possible to achieve high standards of construction without the use of much equipment. However, the use of machinery has important advantages. With machinery work of a higher degree of uniformity and with smaller tolerance can be achieved. The work can also be completed more rapidlyr, thus reducing the cost of interim f:inancing required, diminishing the risk of the exposure of the incompleted work to damage by natural elements or to inflationary increases in costs, and permitting an earlier realization of the benefits of the project. Finally, the introducticn of a new technology may be a challenge and stimulus to the development of managerial and technical skills. 8. With appropriate economic pricing of the factors of production it is possible in theory to determine the combination of labor and equioment that will yield the lowest possible cost of construction. However, when this involves the use of a considerable amount of expensive equip;Ment, costs will be significantly affected by the efficiency with which this equipment can in practice be used, and particularly by the extent it can be fully employed during its entire life. 9. The construction technology that is adapted to the limited capacity of developing local contractors may not always be the lowest-cost technology. It is necessary, easng other things,, to compare tDhe advantages and disadvantages of (a) investing in equipment of different capacities for doing the same work, and (b) investing in equipment capable, with appropr)l te attachments, of performing a wide variety of the tasks on the one hand, in various types of specialized equipment, each capable of performing ne(. thse tasks very efficiently but incapable of other work., on the other her 1/ See C.G. Harral et. al., &t udy.of the Substitution of Labor for Equipment in Road Construction - Phase I: Final Report (IBRD, 1971). - 42 - 10. The relationship between design and technology cm be illustrated by an exsmple. An optimal bridge design is usually one in which the superstructure costs (less the cost of pavement and Sidewalks) equals the substructure costs. However, the bridge can be designed with shorter than optimal spans in order to take into account a contractor's limited capacity to construct, hoist and erect the necessary superstructure. Tn that event additional piers that will tend to raise total cost will be necessary. In any such case,, therefore, the adjustment of technology to the capability of contractors could entail extra costs which would have to be weighed against the eventual benefits of developing a domestic construction industry. E oof Technol 11. Technology and the related design concepts will need to evolve with the growing capabilities of domestic contractors. In the initial development phase efforts may well have to be concentrated almost entirely on the more efficient application of tools, materials and methods which such contractors are already using. For example, if bricks and concrete blocks are readily available and local contractors and laborers are famili- with masonry crafts, building projects might well be designed around the use of these materials and skills rather than around the use of unfamiliar substitutes. One of the authors of this report once noted, during a visit to the Malagasy Republic, that a skilled indigenous building industry had developed there in the past on the basis of locally-manufactured bricks, but that the recent, comparatively sudden, introduction of new imported building materials and the associated construction techniques had led to a rapid decline of the local industry and the craft skills it utilized. 12. However, when improvements in existing tools, skills and materials yield progressively diminishing returns, new technologies, involving more advanced design concepts, management and construction techniques and the use of new types of equipment and materials, diould be progressively introduced. Throughout this process the designer and specification writer will need to be familiar with the capacity of the domestic contractor and the rate at which he is advancing so that they can discern when it will be appropriate to introduce him to new technologies. -43- C. e B y 13. The appropriate method of handling contract drawings and specifications will now be considered. Contract drawings tell the contractor in diagrammatic form what needs to be built and the shape, size, dimensions and relationship of the p.hysical components of the construction work. The contract specifications give the detailed require- ments with respect to materials and methods of construction. Mlethod and End-Result Specifications 14. Specifications can be written in either of t;wo forms or a combination of both. The first form is the method specification. It provides the contractor with detailed direc-tions on how to do the work. For example, in the case of concrete, the specification spells out the recipe (i.e. the number of sacks of cement, the number of pounds of coarse aggregate, the nwuber of pounds of fine aggregate, the number of gallons of water and the amount of admixture, if any). The method specification also describes at length the chemical and physical composition of each of the ingredients and then goes on to prescribe how the ingredients should be combined, transported, and placed into the formwork. The method specification continues withl the description of the tools and methods that should be used to finish and treat the concrete. The second type is the end-result specification. It is relatively silent about most of the aforementioned details but emphasizes, instead, the salient attributes of the finished product. Thus, to use concrete again as an example, the end-result specification requires that the concrete should, after a certain period - usually 28 days after it has been insballed, conform todesignated standards with respect to: (1) compressive and flexural strength; (2) porosity as measured by the amountsof water that a dried specimen of concrete will absorb; and (3) resistence to wear as measured by abrasion tests and wetting and drying cycles or freezing and thawing cycles and so forth. Such end-result specifications leave the means of achieving these standards to the contractor. 15. Domestic contractors in the early development phase will no. possess the necessary engineering or construction skills required to cope with end-result specifications. The method specification will be more appropriate. It will give the employer greater assurance of an acceptable finished product and provide the developing contractor with indispensable guidance in proper construction methods. It will not only help to ensure construction of uniform quality, but also give the employerl"- supervising engineer a greater degree of control and the right to monitor the construction process from inception to completion. 16. While properly prepared method specifications si-iould, in principle, achieve the desired end-re-lilts, we realize that all too frequently this does not happen in practice It is therefore usually the custom, even where method specifications are provided, to hold the contractor accounta'bTh. for the end-result. We doubt, however, that the neophyte contractor should be expected to assume the obligation for producing according to end-result expectations in the early phase of his development. The method specification which guides his work and is, in essence, a manual of instruction on the best construction methods, implicitly assures such a contractor that, as long as he follows these detailed instrctions, he has performed his contractual obligations satisfactorily. If there is any doubt in the engineer's and the designer's mind thab this will indeed be the case, adequate provision can be made in the plans and in the specifications to cover this possibility. For example, if the engineer is concerned that the method specification fir concrete may not yield the required compressive strength of 3,000 lb per sqtuare inch because of the general inefficiencies inherent in the neophyte contractor's operations, then the specification writer should increase the cement content by, say, one sack of cement per cubic yard. While this may raise the cost of concrete by about US$1.50 per cubic yard, it will provide additional insurance that the neophyte contractor working under a method specification will achieve the desired end-result. 17. To sun up, we consider that metlhod specifications should be used in the early and intermediste phases of the development program and in n,any cases even into the late phase of the development program. End-result specifications should not be introduced untl3. the latter part of the inter- mediate phase of the development program and even then in combination with the method specification. The responsibility for achieving end-results should initially be assumed by the employer, but as the development program progresses through the intermediate phase, this obligation should increasingly be transferred to the contractor. It should be noted that in the United States, where method specifications are widely used buit where contract terms make the contractor also responsible for failure to achieve the end-result, the courts have frequently ruled that, notwithstanding the provisions of the contract, the contractor is not liable for the achieve- ment of the desired end-results. Simplification of Specifications 18. If domestic contractors are to be effectively developed, it is inmportant that design drawings, specifications and the accompanying bills of ouantities be simplified and standardized as far as possible. In the countries visited we frequently noted that evern for more or less identical projects there was often a lack of uniformity in the specifications and a resulting absence of uniformity in the bills of quantities. Every consulting engineer has a tendency to develop his own specifications format, and even when the same firml is engaged in designing successive extensions of the same project specifications may be altered as different project maniagers or specification writers are employed. In design drawings simplification can be most readily achieved by adopting standard details wherever possible. The more standardization, the more repetition. The more repetition, the more efficacious is the learning process. This unifornity should extend not only to sizes,. shapes, materials and methods of construction, but also to the design of the major components of the structure itself. -45 19. Appropriate examples of design standardization can be cited. One relates to the design of storm sewers. This remains basically an empirical art. In the United States and in Western Europe, the design of pipe culverts remains grossly imperfect despite the existence of voluminous historical records relating to rainfall, snow melt and run- off. To design pipe culverts for a remote part of an underdeveloped country where relevant data on run-off are lacking or undependable is an incomparably more difficult task. Under these conditions it may prove to be almost useless to specify in a highway construction job the use of pipe culverts of different capacities ranging from 12"1 in diameter to 6011 in diameter. In other words, instead of designing for 12", 18", 24" and 30" concrete pipe, it might be more advantageous to standardize around, say., 24' diameter pine and use multiple culverts when increased capacity is desired. Similar design simplifications are probably applicable to box culverts, minor bridges and retaining walls. The rein-forcing steel renuired might also be standardized. It is commonly used in sizes ranging from 3/8" diameter tolV" diameter (#3 bars through #12 bars). However, in designing a minor bridge it mighlt be better to require the use of reinforcing bars of a uniform diameter (say, 5/8"1) than to specify the use of various sizes ranging from #3 bars to #9 bars. Similar possibilities for standardization should be explored in the building industry. For instance, doors and windows might well be standardized. Role of Drawings in Contractor Development 20. In the early phase of a contractor development program, it is important that the contract drawings furnished to the contractor should nol, only clearly delineate the entire facility in its finished form, but should also show pertinent details of every step in the operationr and include detailed designs of any temporary work that may be neceFs-:y. For example, an indigenous contractor who undertakes, in the early developmient phase, uc. construct a small bridge cannot be expected to devise an economical fordn-n.- system for the concrete work. The contract drawings should therefore giVE him the complete designs for the concrete.forming system. Sirilarly, wix. reinforcing steel is to be used, the drawings furnished to the contracuor should include detailed bar bending schedules and setting plans. The importance of providing the .neophyte contractor with adequate gaidance in design of temporary work was strik.ngly demonstrated by an example we ob: , in Kenra. There we found a contractor using a shuttering system for a concrete floor slab that was so overdesigned that the shuttering system itself could have been used as a floor! In this case there was no one 4t' point out his mistake and to show him how the work might have been more economically carried out. He would have learned how to do this job properly had the contract drawings shown him how to construct a better shuttering system. 21. The responsibility for project designs and drawings should almost always be vested in 'he empJoS-r and his staff, or in his Eippointoc, agents such as consulting e. >ineering £iirms. However, as the contractor progresses through the various phases of a development program he should be encouraged and expected to innovate and develop his own construction techniques and designs for temporary work except, perhlaps, for the more complicated construction processes such as trench supports for deep excavations and cofferdans in deep water. In the late phase he should develop considerable inhouse designing capacity. In Korea, where the construction industry is already rapidly approaching the late phase of developnent, we found that a number of large Korean contractors already had a sizeable staff of engineers capable of design work. Firis participating in the construction of a new subway system for Seoul by the cut-and-cover method had themselves designed the heavy sheeting and bracing system necessary to support the deep excavations and to permit the continued movement of the heavy traffic in the streets above. Even in Korea, however, we found the indigenous capacity for overall project design still very limited. 47 - CHAPTER IV NETHCDS OF DIVIDING CONSTRUCTION WORK AND AWARDING CONTRACTS 1. In the last chapter we discussed the relevance of design, drawings and specifications to contractor development. In this chapter we shall show how the construction work might be divided into various types of pri-me contracts and subcontracts and then awarded in a mnarner that would effectively promote the domestic construction irldustry.r A. The Division of Work into Contracts and Subcontracts 2. The work involved in carrying out a single project or a construc-tion program may be divided horizontally and vertically. The opportunities for such vertical and horizontal division or "slicing" are outlined under Item A of Subject V in Annex I of this report. In building, vertical slicing will be possible only in the case of programs calling for the construction of a number of discrete units each of which can be used by itself. Instances are programs for the construction of a number of schools or separate housing units. Such construction programs might be awarded to a sirngle contractor or, at the other extreme, to a rlumber of contractors equal to the number of units to be built. Individual building projects can only be divided horizontally to segregate the type of work that might be subcontracted by the prime contractor for the building as a whole. In simple conventional building projects the opportunities for such subcontrating are rather limited, but in large modern buildings they can be numerous, coveriri! such items as site work, structural work, roofing, drainage, plumbing, electrical work, heating, ventilation and air-conditioning, vertical transportation etc. Subcontractors for such work may them-selves subcontract parts of their jobs. In civil works both vertical and horizontal slicing are possible. Road construction programs can be divided into a number of projects each of which could be completed and used independent of the oth'rs- and each road can be segmented in s-tretches which can be entrusted to sepaibLte contractors but which carnnot be . 'ectively or fully used until they are all completed. The work on eacl. _,;ad can also be horizontally divided ir.bo a number of sequential operations ranging from clearing and grubbing to the final laying of a wearing course and including the installation of drainage facilities and construction of bridges. Each of these may, at least in theory, be the subject of separate prime contracts or subcontracts. 3. Construction wo. 1 may also be divided over time. For instance, the contracts under a part -ular schc,ol building or road building rrc-graim may all be let more or 1.s simultaneously or may be phased over a lornger period of time. In the first case a larger number of contractors r.ay be necessary; in the second case fewer contractors will be needed and thus may have the opportunity of carrying out several consecutive jobs included in the same program. h. zIf a government is comritted to the promotion of domestic conbractors,j it will need to give considerable attention to appropriate and feasible ways of dividing public sector construction work into contracts and subcontracts classified by size and degree of complexity so as to increase the opportunities for participation by domestic enterprises. The extent to which this can be done will, of course, be governed by a number of constraints which we shall examine later in this chapter. Here we will first consider how this division of work might be infEluenced by the way in which the pattern and structure of a domestic industry can be expected to develop. Division of Work in Relation to Contractors-Capaity 5. In the early stages of the development of a construction industry, domestic contractors will be primarily capable ofL simple Projects or types of work that can be caf'ried out more or less economically with a low-level technoloMr, Examples of the type of worl that they can do would include repair and maintenance of existing facilities, construction of simplfarm-to-market roads without high- standard pavements, and conventional building such as single storey houses and similar comnercial indusbrial and institutional structures. Domestic enterprises would presumably be unable to undertake, as prime or general contractors, the construction of modern buildings that are structurally framed and call for more or less complex wall and roof systems. They should, however, have opportunities to work as subcontractors responsible for roofing, glazing3 carpentry and mill-work, painting and decorating, tiling and other similar jobs. In Kenya, for instance, the National Construction Company is giving attention to the development not only of general building contractors, but also of specialty subcontractors capable of installing electrical and plumbing systems. 6. In the early phase of development, domestic contractors will presumably be unable to build high standard highways. These usually call for a horizontal and vertical alignment which necessitate a large volume of earthwork and rocl; excavation and for advanced pave- ments involving the production and laying of Portland cement concrete or hot asphalt concrete. In view of the skills and the considerable amount of equipment recuired, domestic contractors are unlikely to develop the capacity for such work until well into the intermediate phase of our ti:me frame for the development of the dolmestic construction industry. Nevertheless, there will be certain types of work for which a domestic construction capability can be developed, particularly in the form of subcontracting. Local contractors or subcontractors can be qualified for the construction of small bridges and the installation of pipe and box culverts. The experience of Iran demonstrates the feasibility of developing small etberprises to which simple earth- excavation and movement and the transport of materials can be subcontracted. It may be possible also to develop local entrepreneurs specialized in drilling, blasting and stone crushing. - 49 - 7. In the early and intermediate phase there are likely to be a growing nunber of entrepreneurs operating as subcontractors, either to foreign prime contractors or to more or less experienced domestic contractors. Though there will obviously be a permanent and even growing need for specialized subcontractors as the ccnstruction market develops, a number of subcontractors will develop -.nto prime contractors or general contractors. Some of these will in turn enter into joint ventures with foreign firms. This develop- ment, however, is unlikely to take place before the intermediate phase of development. As we have already indicated in Chapter I, suclh a partnership can hardly thrive except on the basis of equality. Each party will have to be able to contribute something of value. The local partner, once he has gained experience, may contribute an intimate knowledge of local conditions, including the ability to deal with local labor and suppliers of materials and to handle relations winth the government, while the foreign partner may provide needed teclnical and managerial skills and financing. Such a joint venture might initially be formed to carry out a particular construction project but might later be transformed into join-t companies, committing the partners to a more permanent, continuing business enterprise. 8. As domies tic contractors go from the intermediate into the final phase of development, they will presumably be capable of a progressively broader range and also more specialized types of construction work. In t!he final phase we anticipate that it will no longer be necessary fcr the government to make special efforts to divide construction work for the special purpose of providing more opportunities for domestic contractors. Apart from sharing in joint ventures with local firms, foreign contractors will probably still be active in several capacities. On some projects they may in essence act only as construction managers, "orchestrating" the activities of many- local subcontractors. In other cases they will still be required to carry out work whlich is extremely specialized or very complex or for which there is not sufficient continuing demand to warrant the development of local construction capability. TIl4easures to Devo contractors . Tn view of the potential importance of subcontrating in th. progressive evolution of' a domestic construction indust-ry, the deve2op- nent of this type of enterprise merits special consideration. In particular, subconitractors to foreign firms, as indeed domestic partnecrs in joint ventures with such firms, can gain much practical experience from their association with foreign contractors. One must reckon, however, with certain obstacles to the development ol subcontracting. In K.orea, Iran and Ethiopia we noted that subcontracting was seriously limited by the lackl of trust among local contracting enterprises und an almost fierce spirit of independence. Man%y firms do not want to rely on others for subcontracting, and othe7 are raluctant to engage in subcontracting for fear that they will not get paid by tne prime contractor. Foreign firms in turn are disinclined to employ local contractors of whose work they have no experience, particularly when the employer holds the prime contractor completely responsible for the quality and timeliness of work performance. 10. We would suggest a number of measures to encourage sub- contracting during the early and intermediate stage of development0 First of all, we would have the government a;s the employer single out parts of construction projects that wouild be suitable for subcontracting and designate appropriate subcontractors on the recommendation of the contractor development agency that we believe should be established. Secondly, we suggest that both the employer and the prime contractor be protected against the risks involved by requiring the subcontractor to furnish a performance bond in favor of both the employer and the prime contractor. 1/ If the subcontractor fails to perform, the emrployer and prime contractor would jointly fix the liability and assess the damages or would undertake to submit these questions to arbitration should they fail to agree. The employer would guarantee the payment of damages insofar as the performance bond might prove inadequate. Thirdly, we suggest that suppliers and subcontractors be assured regular payment by contractors through arrangements conditioning the employer's periodic payments to the prime contractor on presentation of evidence that the latter had honored his own obligations to pay for work performed or supplies delivered. We would emphasize that these arrangements for promoting subcontracting are intended to operate within the framework of the development program we have outlined and would thus apply only to subcontractors irncluded in the selected group of contractors that would receive various forms of special assistance, including technical advice and training. This would further operate to reduce the risks involved. Finally, we would not expect that the device of designating sub- contrac'1.tors to be used in all contracts, but only in those above a certain size. Factors Governing Division of Construction Work 1l. Previously we recognized that the division or slicing of construction projects and programs for the purpose of bringin.g a larger volume of work within the capacity of domestic contractors cannot be carried out without reference to practical limitations. Without seeking to be exhaustive, we shall enumerate below some of the more important constraints which have to be taken into account and which in large part are so interdependent that they have to be considered in conjunction with each other: 1/ In Chapter VII, where financing is discussed, we have indicated that it will be necessary, In the early development phase, to establish a public fund that would provide all the financing facilities, including performance guarantees, to domestic contractors. While the government as employer cannot, under these co;ditions, escape the risk of non- performance by the subcontractor in the last analysis, we still think it important to insist on the principle that the subcontractor should be liable. - 51 - a) Productivity of the contractor - Expectations about the level of efficiency of the domestic contractor will be an important consideration. At what cost is he likely to be 8ble to perform? How rapidly will he be able to learn and how much experience and time will he reauire to achieve a desired or tolerable level of productivity? b) Duration of the construction work - To phase the construction work under a given program over time will involve extra costs in terms of delays in the accrual of benefits, and these may at times be a serious constraint. Similarly, if a domestic contractor requires more time to carry out a specific job, this entails costs in terms of both delays in benefits and a larger commitment of capital during construction. c) Size of the construction 2job - Economies of scale will have to be considered, particularly in civil works involving the use of much equipment. In the model road program to which we have already alluded, we calcul.ated the minimum spread of equipment that a contractor would need to carry out a series of five-mile road contracts. However, an increase in the size of such contracts would permit the use of equipmenit with a larger capacity capable of achieving lower unit costs. d) Logistics - This may be an im'rportant factor in determining the feasible division of work. If Ihighway work is split into many small contracts, mobilization costs may easily become excessive. If the construction of a single road is divided into a number of contracts, each handled by a different contractor, the contractor involved may experience great difficulty in getting their equipment in place and their materials transported. If one section of a highway is short of earthwork for fills while an adjacent section has an overabundance of excavated earth, allocation of the work on these two sections to separate contractors would manifestly create almost insuperable problems. e) Coordination and Supervision - If a number of contractors are employed on a project which will yield little or no benefit until the whole of it is completed, the work of all the contractors involves will have to be coordinated so as to ensure that they will all complete the work in time. The greater the division of work and the larger the number of contractors, the heavier will be the burden of supervision resting on the employer. When horizontal slicing of construction work is practised, as for example in road construction, tihe employer will be required to exercise closer supervision over the execution of each "contract sliice" and even then may have difficrlty in assessing liability for any failures in the project as a whole that may sul-equently come to light. - 52 These constraints shouild discouwage any open-ended co;7dnitent simply to maximi.ze work opportunities for doetic contractqra. On Ihe other hand, they should not be invoked to negate all pospibilitips for an appropriate divisiop of work. Xt will haye to be recognized that in any set of mneasures desined to promote the domestic construction industry, there will be a tride-off between the costs involved and the potential benefits. We suggest that the possibilities and constraints of vertical and horizontal slicing be studied more carefully. Pilot contractor development programs will have to experiment with various methods of work division or slicing in order to test the feasibility and cost of various approaches to this problem. B. Methods of Awarding Contracts Advantages of Competition 12. We now come to a consideration of appropriate methods of awarding contracts. The award of work to the lowest bidder after competitive tendering has normally been deemed to be the best method. The principal benefits usually attributed to competitive bidding are three. One is that it provides an impartial criterion for the allocation of work that is relatively free of bias and tplitical favoritism. The second is that it enables the employer to get the work done at the lowest possible cost. And the third, closely related to the second, is that it may encourage the survival of the most efficient contractors, thereby lowering the general cost level of construction. These benefits undoubtedly account for the fact that governments almost everywhere require competitive bidding before awarding public contracts. However, we have also noted that this practice was not universally followed in all the countries we visited and that even where colmipetitive bidding is the rule contracts are not invariably awarded to the lowTest bidder. 13. The fact that competitive tendering appears to offer an impartial, objective basis for allocating work is particularly important in the public sector where the award of contracts might otherwise be determined by corruption and favoritism. Unfortunately, competition does not always ensure this impartial allocation of contracts in practice. A distinction must be made between the appearance and the reality of competition. In the course of our field investigations we learned of cases where evidently the contractor had been selected in advance and the bidding was in fact Ilarranged" to confirm this choice. Nevertheless, it must be admitted that competitive bidding does reduce the danger of corruption and favoritism; and if any alternative method of contracting awardi.ng contracts is to be adopted, special precautions will need to be taken to make sure that contractors are selected on the basis of their actual performance or potential capacity, and not on the basis of other considerations .eL 1/ Institutional arrangements that would help to ensur'e this objective are discussed in the final chapter of this report. - 53 - 1). The cost advantages of the competitive method of awarding contracts are likely to be realized most fully when there are a large number of experienced contractors and the size and composition of the ccnstruction market offer marn opportunities to obtain work. In Chapter I we emphasized the special risks that characterize the construction business and the difficulties of anticipating and assessing these risks. Estimating the cost of a construction project is at best an art. Even an experienced contractor may make serious and evren disastrous mistakes, but his experience will at least give him a better basis for maaking cost estimates. His financial resources are likely to be considerable. He wil11 be able to post a sizeable performance bond that will provide a reasonably good guarantee that the contract will be carried out at the original price even if he should fail. He will have the reserves that will probably enable him to survive losses that he may incur on some contracts or periods during which he may not have enough work to cover his fixed costs. If he is reasonably efficient, he will presumably be able to avoid prolonged periods of idleness or underem,ployment in a construction market which is large and diverse. UJnder ell these conditions competition is likely to lower costs of conrstructic,n1. DaEadvEantages of Competition in the Early Developmenr Stage In a country where the domestic construction industry is only in the early phase of development, we question that cQmpetitive bidding will yield these cost advantages. The new and relatively inexperienced con'tractors in this industry will for the most part be unable to prepare sound cost estimates. For them the competitive method of awarding contracts is largely a lottery. If one of then, is able to prepare a correct tender and is prudent enough to raise his bid to take into account all the risks to which he will be exposed, others will not have the same capacity and may therefore bid well below probable costs. If the successful bidder runs into insuperable difficult.1 s because he lhas been unable to anticipate his costus correctly or bncountE:rs unexpected problems at the site, he w.`:11 be unable to complete the job an,d his perforinance guarEntees will probably prove inadequate to permiit the cormpletion oi the work by another contractor at the same cost. Unader these conditions, the govermnent as the employer may well prefer to give vthe contractor the additional compensation that will kfeep the contractor from fai.ling and enable him to complete the contract. This has, indeed, often beeni the cese in Iran. Only the rare contractor who happens to come fromi a wealthy family is likely to have the resources which will enable hin to L:ar the periodic losses and unemployment that will unavoidably occur if contracts are awarded by competitive bidding. 16. Under these conditions it is doubtful that low cosbs of construction will be nchie rd. Ur.-(-- they are "bailed out" through price adjustmients, many of he successful low bidders will tend to fail because they have been unable to cover their costs. There may well be 54 - successive series of "fly-by-night' contractors who will have a high rate of' a3ttrt.`Iron but who will at the same time prevent the prudent, ccst-conscious contractor fromp thriving and building up his business. The econroy will ir the last analrysis have to pay the cost of a high rcte of failures or for the inevitable periods of idleness from which surviving contractors will suffer. If a civil works contractor invests in equipment for the purpose of carrying out a single contract but then cannot get anotlher job because the market affords comparatively few work opportunities or because another either intentionally or unintentionally bids below costs, it will be not only the contractor but also the economy that will have to bear the cost of idle equipment. Competition is likely to encourage overinvestment in equipment which a developing country will find difficult to support. The civil works contractor who has substantial fixed costs as the resul-t of investment in equipm,ent will quickly go under unless he is ensured the continuity of work that will enable hirnm 1; utilize that equipment more or less continouously over its life.- However, continuity of work is important to the construction industry and to the economy of a developing country not simply because it promotes fuller utilization of scarce capital assets. The development of effective enterprises wrhere managers and personnel have become an efficient "production team" by working together over a considerable period is just as important. And enter- prises in this sense cannot be created unless there is sufficient continuity of work that will ensure the acquisition of collective experience arid the income essential for maintaining and expanding this production team. The importance of continuity of work has been stressed even in developed countries. Thus a special committee enquiring into building and civil works contracting in the United Kingdom strongly recoirmended the adoption of serial-tendering because it offered "great possibi].ities for continuity of employment, the development of experienced production teams, etc.; and the bending together o-f those who have suitable work in prospect is to be encouraged." 2. 17. In the light of the considerations set forth in the preceding paragraphls we consider competitive bidding inappropriate in the early phase of the development of domestic construction industries. It may be objected, of course, that there are ways of overcoming some of the disadvantages of 1/ See Annex II for an illustrative calculation of his "break-even"point. 2/ Ministry of Public Building and Works, The Placing and Management of Contracts for Building and civil Engineering Work (TLondon, Her Majesty's Stationery Office, 1964), P. 35. competitive bidding without abandoning the practice itself. Why not concentrate, for example, on helping contractors to prepare proper cost estimates? Our proposals do envisage the provision of training on this subject during the early development phase. We also suggest that the employer provide the con;tractor with cost estimates and bills of quantities so that the latter can, with the help of the adviser of the contractor development agency, assess and control his costs in relation to this information. But while it is possible to make contractors conscious of some of the elements of cost estimating in a classroom, only experience is likely to give them the proper basis for calculating costs; and the necessary continuous experience will be difficult to acquire when contracts are awarded to the lowest bidder, all the more because the prudent bidder may lose out in the process. It can also be contended that the adoption of procedures to protect contractors against the consequences oi excessively low bidding might be adequate. This course has, indeed, been followed in Ir2n. Yet the adoption of such measures would still fail, as in the case of instruction in the preparation of cost estimates, to ensure the continuity of work that we believe essential for the development of domestic contractors in the early phase. Allocation of Work on a Cost-Plus Basis with a Ceiling 18. We therefore propose that in the early phase the contractors who are selected for a development group and who are assisted by a contractor development agency should be ensured continuity of work under a system which would reserve for them a certain amount of work suitable to their capacity and would allocate the work among them in accordance with their estimated capacity and on a cost-plus basis. We do not suggest, however, an open-ended cost-plus arrangement but would provide a ceiling. This ceiling would be set by the employer on the basis of the latter's estimate. The employer would prepare a detailed estinmate of the contractor's direct costs in carrying out the work, together with a generous allowance for oierheads and profit. The contractor would be reimbursed for all his direct costs as disclosed and verifi.ed by vouchers and payroll records presented to government inspection, but only up to the ceiling. He would be given an incentive to reduce costs by allowing him to share in any savings in direct costs. An example will help to illustrate our proposal. Let us suppose that the ceiling on a contract is US$100,000 and that the employer has estimated direct costs at us$80,000. If the contractor's actual direct costs equal or exceed the total of US$80,000 but fall below US$100,000, he would obtain a total payment of US$100,000. If his actual direct costs exceed US$100,000, he would still not receive more than US$100,000. And if his direct costs are below US$80,000, say, US$60,000, he would receive as a bonus one quarter of the difference or US$5,000, as well as the US$20,000 which the elployer originally es 'mated as his overhead and profit. 19. The proposed system would not, of course, guarantee the contractor a profit. Whether he makes a profit or suffers a loss would depend on how well he manages his business and masters the skills involved. '.br would he be guaranteed work irrespective of his per'ormance. His continued participation in work would be determined by his progress as measured by his ability to complete work in time,, to improve the lu2ality of his worklmanship, to build up a competent staff and strengthen h.s financial resources. The contractor development agency would drop him. from the rolls if he failed to demonstrate a capacity for progress. Progressive Introduction of Competition 20. The contractor should gradually be exposed to competition. In the intermediate development phase we envisage that domestic contractors would compete with each other. On contracts above a certain size or of considerable complexity, foreign firms should also be invited to bid; and this would, of course, have to be done in the case of all contracts financed by foreign or international agencies insisting on such a requirement. However, since many of the developing contractors will need considerable experience to avoid the principal pitfalls of competitive tendering, we believe that they should be protected against the consequences of excessively low bids. Instead of awarding the contract to the lowest bidder,l/ we suggest that the successful bid be the one that is closest to the average of all the bid prices submitted after discarding both the lowest and the highest bids. 21. Finally, in the late phase of development we see no need for any limits on competition except through appropriate measures of prequalifying bidders. By this time the detailed records on contractor perfcrmance which we believe should be instituted from the very beginning should have provided an adequate basis for classifying contractors by the size and type of work of which they are capable. Provided the standards of classification are sufficiently strict to prevent an "overcrowding" of the construction market, the practice of awarding the contract to the lowest bidder should not impair the continued sound develop- ment of the construction industry. 22. Once competitive bidding is introduced, the question arises whether a contractor who is awarded the work should be allowed under any conditions to decline the contract without incurring a penalty. Normally, of course, a bid bond or guarantee is required and is forfeited if the successful bidder declines to accept the contract. However, mistakes are made in the submission of bids. Two cases merit attention. In one cese arithmetic errors may have been made in the preparation of the bid which are not apparent in the actual tender submitted. In the second case, the bidder may want urgently to reconsider his bid because he finds that he has not reckoned with certain adverse site conditions or because his bid is so far below that of his nearest competitor, as to convince him that he has seriously underestimated his cost. In general we do not l/ By "lXowest bidder" we mean the bidder wh1o, after an evaluationi of the bids, is judged to have submitted the lowest bid responsive to the invitation to tender. believe that he should be permitted to escape his-obligation to do the work without incurring the penalty of having his bid guarantee forfeited. At the same time we recognize that the possibilities of making mistakes in preparing cost estimates are legion and we do not believe that the employer has an interest in forcing the contractor to perform work on term.s that are likely to bankrupt. him. Some consideration might accordingly be given to measures falling short of the forfeitures of the bid bond. In the first case, for example, the contractor might be allowed to withdraw his bid without penalty if he can demonstrate that arithmetic errors have been committed in the bid preparation sheets. In the second case, there would be no reason to release the bidder from his obligation to perform the work, but the contract price might be adjusted by some percentage of the difference between his bid and the second lowest bid. In the intermediate phase, when contracts would not, under our proposals, be awarded to the lowest bidder, the need to withdraw a bid would presumably seldom arise. In the late phase of development, however, this option would be more important. C. A Program l4odel for Development of Road Contractors 23. To illustrate our approach to the development of the domestic construction industry in its early phase, we have given in Annex II a model of a road construction program that could be used to provide work experience and training for a group of civil works contractors. Other construction work such as school bui.;ding programs might also be utilized as a vehicle for developing contractors and might, as a matter of fact, often be more suitable in countries where building must in the first instance be developed. We chose a road program to illustrate our approach primari.ly because we were asked to give special attention to the development of domestic road construction capacity. 24. Our model program would be phased over five years ( d involi. the construction of 500 miles of roads. The greater part of the program - 350 miles - would consist of rolled bank-run gravel roads with a singL.e bitumllinous surface treatment. However, the balance would be built to higher standards - 75 miles with dry-bound macadam and a bituminous surl treatment, and 75 miles with an asphalt concrete wearing course. It in quite possible of course, that domestic contractors with a potentil't capacity to construct roads to these higher standards would not be folC. and that the number of contractors potentially capable of building the gravel-type road might not even be sufficient. For the purpose of our illustration, however, we have assumed that the whole of this program would be carried out by domestic contractors. For this purpose the program has been divided into 100 five-mile contracts spaced evenly over' five years. We realize, a.& already indicated in the earlier part of this chapter, that in pr itice such an arbitrary and uniform division would hardly be possible. We have selected a five-mile contract in this case simlply because it would be just large enough to permit a contractor to invest in a ninimum spread of equipw,lent and achieve a volume of business adeouate to test his managerial and technical capacity. 25. The specifications of the component parts of this program have been outlined in the form of method rather than end-use specifications. Unit costs have been calculated on the basis of equipment, labor and material requirements, and an allowance added for overhead and profit to arrive at the total cost of the program. To reduce the financing needed by the participating contractor, his investment in equipment has been kept modest. Thus, certain operations have been reserved for manual labor, though the methods of construction do not envisage extensive substitution of labor for equipment normally employed. An equipment pool from which the contractor could rent machinery that he would need only for specialized tasks or during peak work loads is also provided. The individual contractor's requirements for commnon labor, skilled labor and higher level personnel have also been worked out in such a way as to facilitate the planning of anr training program. Finally, his cash flow has been projected to indicate his financing requirements and the possible financial results. The breakdown of his costs shows that, despite efforts to keep down the contractor's own investment in equipment, his fixed costs would still be such that he would fail to break even unless he were employed for at least 80, of the time. 26. The contractors participating in such a program would be given appropriate financial assistance and would have the benefit of continuing advice and training from a contractor development agency. Some of them would nonetheless fail and would then be replaced if possible by others. We would expect, however, that the practical ex.perience obtained by carrying out a series of contracts, supplemented by training and advice, would permit a nurnber to succeed and to qualify themselves subsequemtly for larger contracts. The ultimate aim would be to develop a number of contractois that would have sufficient cappscLty, after taking into account some inevitable attrition, to meet the continuing demand for road construction of this type. 59 - CHAPTE V ASPECTS CF C(TRACT EZECUTION: DIVISIONOF RESPONSIBILTY BrAfE: C QThTC at AND Y 1. Once a contractor is allocated work, the degree of his progress will be affected in no small measure by the amoant of information and guidance he receives from his client or employer, by the terms of the contract which define his obligatians and responsibilities to the employer, by the way in which the employer or the employer's representative inter- prets the contract and enforces conpliance with specifications, and, finally, by the operation of provisions governing the settlement of dis- putes arising out of the contract. In this chapter we shall examine how these aspects bearing on the execution of the contract work might be handled in the successive phases of our development time frame. Our recomendations have, an usual, been devised to taake into account the capacity o> capabilities of developing contractors in each of these phases. A. Information and Guidance Re--ired by the Contractor 2. In Chapter III we emphasized that the employer should be respon- sible throughout for furnishing the contractor with detailed specifications, drawings and bills of quantities. 1b indicated that method specifications should be provided, and that the cantractor should gradually be held res- ponsible for "end-results" only beginning sometime in the intermediate phase of development. Detailed drawings should be supplied also for temporar,- work.3, with the understanding that this responsibility should be increasingly shifted to the contractor during the intermediate phase and assumed entirely sat e ir exceptional cases, by the contractor in the late phase of development. Cost Estimates 3. 1b also stressed the impoikvance of giving contractors detailed cost estimates during the early phase. These will serve not only as the basis for determining the price at which the contract will be awarded, but will also give the neophyte contractor information on unit costs, the number, types and sizes of equipment required and target productlion rates, all of which he can use in planning his work, controlling his co.t- and meavuring his performance. In the intermediate phase, when the contrac- tor, will be preparlng his own tenders, we envisage that the contractor will be furnished progressively less comprehensive information on the employer's cost estimates in order to encourage the contractor to make his own inde- pendent cost calculations. The extent of such information might vary with the capability of the con ^actors and the degree of difficulty of the work. In some cases the employ-ex night iurnish his estimates of the cost of major items of the work, or of the most difficult items of the work. In other cases he might simply supply his estimate of unit prices without any supporting calculations. In still others he might provide no cost -6 o estimates relating to the particular project, but publish detailed infor- ma.tion on average unit prices based orl experience with maniy projects. In the late or final phase of the development program contractors should have gained sufficient experience to enable them to make their own in-house cost estiimates without guidance from the employer. Work Plans 4. The contractor will need guidance in planning hi, work for a long time. Proper planning may in theory entail the application of sophis- ticated techniques, such as the use of network analysis for proper sequenc- ing of operations, resource levelling (i.e. scheduling the demand on resources so as to utilize them as fully as possible) and optimizing cash flow and profits, and the use of other linear programming methods for optimizing the haulage of materials, the blending of aggregates and determining the proper mix of construction projects that will maximize profits within given resource constraints. In practice, however., proper planning can be accomplished without recourse to such advanced techniques. It does require conceptional thinking in a mathematical framework, albeit elementary in form. While some of the concepts of work planning can be inculcated through classroom exercises, the neophyte contractor will master planning techniques primarily by example and by application. In the early phase of the development program the employer should furnish the contractor with a complete plan for carrying out the project. The type of plan we have in mind is that which we have worked out in conjunc- tion with the model road program included in Annex II. This detailed plan for a single road contract is cast, with one or two exceptions, only in arithmetical terms anad involves no techniques more sophisticated than a simple bar chart. 5. Wile detailed work plans should continue to be furnished -to the contractor in the intermediate phase, we anticipate that in the late phase he will have acquJred an appreciation of planning and will have the capacity to devise his owtn planning techniques. However, even though the employer will no longer need to supply him with detailed plans for carry- ing out a particular project, the contractor should havre the opportunity to learn about modern construction planning methods. Such techniques are undergoing a rapid evolution and even an experienced contractor in the United States has difficulty in keeping abreast of developments. It is therefore prudent to plan for the continuing education of the contractor in this field. This may take the form of furnishing the contractor ad- vanced planning information, such as PERT diagrams or of familiarizing contractors with new planning techniques through seminars conducted by experts in this field. Field Ibgineerig Data 6. An important issue is the responsibility for field engineering or surveys, especially with respect to vertical and horizontal controls. Determination of working points - i.e. points for line and grade - and the - 61 - setting out of the work with batter boards, slope stakes, string and chalk :lnes, all require a combination of knowledge in the fields of surveying, matheratics, plan reading and5 of course, construction practice which developing contractors will take a long time to master. In the early part of the constructior. development program the employer should accordingl'y Drovide these services to the contractor. Government agencies will have no problem utilizing the full-time services of a field surveyor who should be permanently attached to the engineering staff. Since private engineer- ing companies, especially smaller ones, will probably not have need for the full-time services of a field surveyor, the formation of private com- Danies specialized in furnishing these services should be encouraged. Succh firms could also offer quantity surveyinrg services. While the enployer should continue to exercise some responsibility for necessary field surveyrs even beyond the initial phase of development, contractors should be expected to acquire during the intermediate phase staff which will be qualified to set outu the work. B. The Terms of Construction Contracts 7. The termns or content of the construction contract may have a significant bearing on the prospective success of the contractor. In Chapter I we noted from -our field experience that the contractor usually has little or no say- in determining the content of the contract apart from the price of the work. Government agencies which employ contractors generally dictate these terms, and the form and conditions of the contract in marny cases follow models which are used in developed countries and assume that contractors are experienced and have considerable resources, or in some cases have been determined long ago for conditions which are no longer relevant. 8. In defining the respective responsibilities and obligations of the contractor and the employer, contract-s largely debermine the degree of risk to which the contractor will be exposed whaile carrying out his work. It is understandable that the public employer with his superior bargaining power will usually seek to transfer as much of the risk as possible to the coz.tractor. EHowever, such an attitude is inappropriate in a developing country where the contractor does not have bhe resources and experience that would enable him to shoulder considerable rislks. 9.. Amoing other things the cons-truction contract determines the res- ponsibilitr for tard; completion of work and for additional or extra wiork That5 may be caused by a variety of factors, iTncluding interruptions of work, weat1her conditions, inaccuracies in contract drawings, changes in design and specifications, unanticipated subsurface conditions, increases in the cost of equiLpment, labor nd materials, etc. 10. Li general our rocommendabions on the terms of constructioln coritracts ar-e designed to keep the contractor's responsibilities and risks - 62 - at a minimum during tlhe early development phases and to provide for a gradual transfer of responsibility from the enmployer to the contractor as the latter gains experience and develops the resources of his enterprise. rhe Contractor Is Resonsibilit for Nlegligence 11. A:Eter much careful thought, the Yission has come to the conclu- sionl that neophyte or inexperienced contractors should not even be held liable in the early phase for the cost of extra or additional work that may be caused by their own negligence. We noted that in the countries we visited relatively mature contractors were often generously treated in this respect, notwithstanding contrary provisions in the contract. It should be recognized that the early phase of a development program is basicall- a learning experience. Contractors included in such a program must be expected to stumble. As long as their negligence is not wilfull but stems from well-intentioned but ill-advised actions, we believe that the employer should be prepared to pay them for extra or additional work caused thereby. Such liability should, however, be limited to the price ceili.ng .agreed upon in each contract. Moreover, instances of negligence should be recorded, and a failure to improve over a series of contracts should be grournds for dropping the contractor from the program. In the intermediate phase, which will be a period of transition, responsibility for the consequences of negligence should gradually be transferred to the contractor. This will have to be governed largely by the circumstances, and we ',herefor-e do not feel able to devise a general formula. In the late phase of development the contractor should, of course, be eapected to bear the full responsibility for his actions. Re i 12. The longer the construction period, the greater will be the dan- ger that, it wvill be exposed to damage by natural forces, such as floods, earbhouakes ald the like. Even when insurance is available, the cost of insuring the wor1s against such risks may well be prohibitive for the devlop- ing coritract,or.l/ The employer should accordingly be willing to accept responsibilitr for the damage. The best way in which he can probably do Tihis in the case of civil works contracts is to accept completed portions or ph'n-ases of a project before all of the work is completed. 13. We do not suggest, however, that the employer should ever be liable for interruptions in work which are caused by tlnormaltt weather 1/ The contractor can, of course, include the cost of such insurance (if available) in his bid, but this may place him at a disadvant age with respecu to a less prudent contrac-bor who elects to gamble -that tlle daL',.e wiJl rJot occur. If the premium is high, the contractor will have to finance the cost iutil he has received adequale progress pay- meai,,s on his worlk. Moreover, if the insurer assesses the risks of damage as 1iigh, he may be unwilling to write a policy wkich will ensure the contractor co3rpensation for all the damage sustained. . . . . . -j - 63 - conditions. F-rom the very beginning the contractor should learn to take into account the effect of 'weather on his planning and on his fortunes. Mforeover, the cornsequences of such interruptions are unlikely to be serious, awd it would be unreasonable to expect the employer to quantify the effect of normal weather conditions on the progress and costs of the work. -2 onsibi-litv for Etra Work Due to Unanticiated Su:bsurface Conditions 14. In civil worlcs unanticipated subsurface conditions often invcl.ve Uhe contractor in considerable extra and costly work. In many countries tie is expected to pay for such work. In Ethiopia, for example, the general conditions of contract make the contractor responsible for "having as- certained the nature and condition of the ground to be excavated as no clain for blasting of rock or for ally other extra ill be entertained on this account."1 1b strongly doubt that any contract, let alone the in- exoerienced contractor with slender resources, should be required to assume such a rislk. li believe the emrloyer must at all times shoulder the res- ponsibility for thoroughly investigating subsurfaeq conditions and for alerting The contractor to these findings and their, implicatiols for the construction work to be undertaken. 'eg sbilit-- for Ve 15. Not infrequently the employer's engineer or architect tries to make the contractor responsible for deficiencies in his plans or designs. An instanrce in point is the stipulatioln contained in many contracts that the contractor must verify all the dimensions in the drawings and promptly notit. the engineer or architect of any mistakes if he is to escape liability for incorrect work. It seems to us especially inappropriate to impose such - obligation on the neophyte contractor. Even the experienced contractor should not be held responsible for errors made by the employer's agent. Provisions for Escalation of Prices 16. Contractors cannot be expected to develop if they are not pro- Zected in some measure against escalation in the cost of materials, labor and equipment. Such protecbion is particularly important in developing countries which are often characterized by chronic inflation. Contractors should be reimbursed for such cost increases which they cannot be expected ,o predict or to control. In the early development phase the originally fixed price ceiling will probably noot need to be altered to cover the possibility of cost inflation in cases of building contracts which are usually completed within a short time. However, for civil works, which takce longer to complete, the price oeiling may have to be adjusted to take into accounlt significant cost increases. In the intermediate and late phases, wheni contracbs al awarded ,fbter comqpetitive bidding, a uniform policy goveruing cost esc. ation wili need to be adopted. It will be pre- ferable for this purpose to develop apprcpriate construction cost indices that can serve as yardsticks for determining contract price au.dsLnfents. Normally it should be the practice to appl3y aniy suoh adjustt:Uent's only to 90% of the value of the contract on the ground that the remainder repre- sents the contractor's allowance for profit. Penalties for DelaYs Work 0nletion 1I. The provisions of the contract setting penalties forr failure to complete work on time should also be considered. In the hountries we visited we found that government agencies were generally lenien t in en- forcing the penalties for late completion that could be exacted under the terms of the catracts. The Mission itself beLieves that. allawances should be made in this respect for the relative inexperience of the con- tractor. We suggest that liquidated damages be applied only beginning with the intermediate phase and then mnly in amounts smaller than those normally assessed against experienced contractors. At, the same tim we recognize that time is of the essence in almost aUl construction contracts, and that the employer should be able to apply some sort of sanction to contractors failing to conmplete their work in tme. Such faflures should be recorded as debits in the contractor's "ledger of performance." If he fails to conplete a contract in time, the size of the contract for which he is deemed qualified in accordance wibh the prevailing classification system might be reduced; and if this failure is repeated over a series of contracts, he might be disqualified altogether for work durimng i specified period. The ultimate sanction for chronic and serious tardiness would be loss of membership in the assisted group of contractors. These provisions, which we envisage for the early develcpment phase., could also be applied in the intermediate phase, with the addition, as we have already indicated, of a modest monetary- penalty. In the late phase the liquidated damages normally assessed against experienced contractors in the event of late completion would apply. Settlement of' Contract Disputes 18. In the execution of construction work, disputes regarding the interpretation of contract documents and the respective obligations of the contractor and employer frequently arise. It is important to include in all contracts provisions for the expeditious settlement of such disputes. In developing countries the government often tends in practice to act as the final arbiter of disputes to which a government agenicy is itself a party. In Ethiopia, for exaqile, the Minister of Works in essence makes the final decisions, for, although the contractor has the right to appeal to the courts under certain conditions, this remedy is seldom effective. Developing ccntractors simpl.y do not have the resource, or the access to lawers which permit them to engage in protracted court, proceedings. An appropriate provision for arbitration strikes ts as the most rapid and least costly method of settling contract disputes. C. Supervision and Erior cement of Construction Standards Our final recomaendations in this chapter are addressed to questions relating to the supervision of constrwution work by the employer and his representative. The contractor is often at the meicay of the employerts agent who mw be an engineer, an architect or a lower-levil supervisor or inspector. Under the law prevmiling in,most countriesj an agent has only limited powers. Thaus, if the agent orders the contractor to do something that is not clearly specified in the con,tract documents, and if the contractor subsequently bills the employer for the extra or addi- tional work, the employer can refuse payment on the groi:nd that the agent was not empowered to order such changes. Under such conditions the caa- tractor is obliged himself to determine the extent of the agent's power. In our opinion an inexperienced contractor can hard.ly be expected to do this. It may accordingly be necessary to make appropriate changes in the law if the developing contractor is not to be unjustly victimized. 29. The employerls field represenbative is responsible for ensuring that the contractor adheres to specificatiorns in terms of the standards and quality of construction. His responsibility is great. His duty to the employer is obviously to require proper performance from the contractor. In the interpretation and discharge of this duty, he may harass and make unreasonable demands on the contractor. He often tends to insist on literal conformity to all specifications irrespective of the relevance of such detailed compliance to the purposes the project is d.ssigned to serve. If a program is to be launched for the development of domestic contractors, a reorientation of government supervisors or inspectors will be necessary. They will have to be given a better understanding of the criteria or stand- ards they should apply in judging the adequacy of the contractor's per- formance and under what conditions the relative importance given to each of the criteria should change. 21. An example of the application of different standard, inw be cited. In one country we inspected a large stadium that had recently been conpleted. It had undoubtedly been difficult to construct, and it im- pressed us as convincing evidence that the local construction industry horl mastered the capability of building huge reinforced cast-in-place concret. monoliths. At the same time there were obvious (deficiencies in the trunrm,2- 'f the surface and the quality of the concrete finish which in western coun tries would not be tolerated. Yet these defects in appearance manifestly did not affect the soundness of the structure or serviceability of the stadium and appurtenant facilities in terms of their basic purpose. In another country we saw a number of luxury condominium apartments being built by a large local contractor working under the supervision of US construction firms. Here, the contractor and subcontractors were being held to strict requixemern - with rE;ipect to appearance and quality of finish, and, considering t 3 purpose of the project, this standard of supervision seemed entirely justified. :66- ', A inex I (see subject '71II) tied to n ate t stanld ards whieh shoiild govern the supervLsion of. projects and the strictness with which each should be applied during the suiccessive phases of the tia frame of development. Three questions should be considered relevant. First, is the standard of construction such that the project will effectively serve itus intended purpose or function? Second, is the quality of work- mansliip adequate in terms of the anticipated maintenance costs during the life of the project? Third, what value must be atteahed to the ; ,pearance of the project? The ability of the project to serve its intended function should alwas be of vital importance. In the early development phase the employer should generally be content with a finished project that will f>unction satisfactorily even though it may be crudely executed by western standards. Quality of workmanship should not be ignored, but will be leess vital. Appearance, ini terms of aesthetics and quality of finish, will usually be of tertiary iMortance except in cases of luxury housing and important public buildings which may need to be impressive as well as utilitarian. Howver,, as contractors move into the intermdiate and late phase of development, they can and should be expected to conforma to pro- gressively higher standards of workmanship and appearance. - 67 - CHRA.TR VI EDUCATION AND TRAINING FCOR THE CCNSTRUCTICN ID:USTRY A. Introduction . In this chapter we will deal wit,h the role of education and trainng in the development of the construction industry. Education, we define as formal schooling prior to employTent with special reference to that provided for skilled workers, technicians and professionals. A shall make suggestions far its reorientation. designed to serve the needs of a growing domestic construction industryr Training, we define as the means of providing guidance for people already employed and givern in the form both of group instruction and discussion and of individual advice. We shaUl distinguish between formal and informal training. The former generally consists of instruction given in a "1classroom"' situation far groups of people and uses a range of teaching/learnLig methods, while the latter is informal training we associate with on-the-job instruction and advice given to individuals. In the case of contractors, for instance, informal training woald be provided on the site and in the office. Finally, we shall exenine education and training with reference to the construction industry as a whole, including the public employer as well as the contractor and their respective staffs. B. Education General BEducation 2. In Chapter II, we have already discussed the appropriate educational qualifications for entrepreneurs in the construction industry and expressed our doubt that, save in exceptional cases, people with poor formal educa- tion can ever become more than petty building and civil works contractors. We would stress, for exaiiiple, that a diversified construction industry capable of carrying out a wide range of work may not, in the last analysis, develop in such a country as Kenya, unless the educational qualifications of succe6sldve generations of contractors can be improved. 3. Educational qualifications should, of course,, be judged in terms of quslity as well as quantity. Our observations in the field brought to our attention deficiencies in general education that have often been em- phasized. We were impressed with the need to reorient education, and particullaxly the content of curricula, in such a way as to make students more recaptive to occupat. ns invcTh-7 ig practical and business skills, such as those important to Jhe construction industry. At the primary level, more emphasis should be given to practical exercises, such as mak- ing things with materials like paper, clay and wood or those that are most - 68 readily to hand. Painting and poster making would be a usefal preliminary experience to the understanding of technical illustrations. ;veryday examples of appropriate technology could be us-fully demnonstrated and studied, including those cacerning building. The same kind of reorieita- tion is needed in secondary and higher educatim but at a m:ore sophisticated level. WiLthout necessarily educating students for specific careers or professions, curricula could make students more aware of the various career opportunities open to them and motivate them to develop their skills in the context of jobs available to them on "graduation.' Technical and Professional Bducation 4. At the professional and technician level, the construction industry needs skilled personnel of many kinds, including engineers, architects, quantity surveyors and other surveyors, draftsmen, building technicians, etc., to carry out the design, supervision and erection of projects in both the civil woks and building fields. Also vital to the growth of the industry are properly t*-ained skilled workers, such as car- penters, joiners, bricklayers, concrete workers, painters and plasterers, plumbers., mechanics, electricians, equipment operators, etc. In many developing countries there is a chronic shortage of technically educated people at all levels. Where, as in the case of engineers in India and building technicians in Ethiopia., there is a surplus, this is often the result of iuproper planning in relation to the market or of deficiencies in the orientation and content of technical education. 5. At present there tends to be a gulf between those responsible for design and supervision on the one hand and for actual construction work on the other. This gulf can best be bridged if education to produce these various skills can be more effectivel;y integrated by making at least part of it commuon to all in such a way that designers, construction super- visors and cont,ractors would have a better appreciation of each other's roles and responaibilities. Engineers., architects and the various types of technicians of subprofessional grade should also have some education in the practical problems of construction, including the problems of manage- ment and administration relevant to implementing projec bs on the ground. Furthermore, since the government is often a major client for construction services and employs large numbers of people to design, administer and supervise the industry, they, too, would benefit from this reorientatior of technical education. The expansion of tecahnical education for professionals, tech- nicians and skilled workers has in general followed, rather than kept pace with, the increasing investment in industrial development. Manpower shortages are created and the gaps are often filled by ad hoc and im- provised educational "solutions.9' Often, as the Mission found in Iran, a variety of institutions, each endowed with a large an l often excessive cooiplement of machine tools and equipment emanating frosi different over- seas countries, have been established for educating technicians and skilled - 69 - work4rs with little or no coordination of their objectives and curricula. FrequentlyZ, foreign teachers who are not cognisant of local needs and oondi- tions are employed. At the professional level university courses are not only too design-orientated, but generally suffer from the "ivory tower" syndroms, and thus fail to prepare the students to cope with the practical problems they will face when they obtain jobs in industry. This has been a serious handicap to the effective promotion of a domestic construction industry capable of undertaking the building and civil works Bo essential to general economic development. The type of education which engineers and technicians receive oftenl does not prepare them for practical work in the cknstruction industry, either as entrepreneurs or employees. That this state of affairs has continued so long is due in part to the fact that engineers and technicians in many developing countries can still find employment in some sort of executive or administrative capacity in govern- ment ministries or agencies, such as the Ministry of Works, where they have no direct responsibility for carrying out construction works or for training and adv- sing those who are engaged in construction., Moreorer, the ministries oi agencies responsible for technic-aL and professional education often do not have personnel of the technical background and practical experience required for planning relevant curricula and for effective teaching of engineering and technical subjects. C. Reorientation of Education 7. Greater coordination among the many relevant ministries con- cerned with professional,technical and vocational education must be achieved. The appointment to senior positions in these ministries of at least some individuals oriented towards,9 and experienced in,_ the construction indus- try, should be considered. One of their tasks would be to coordinate the supply and integrate and upgrade the training of personnel necessary to the future develcpment of the industry. In Iran, a newly appointed team of experts from the Federal Republic of Germany (the country witY, the longQis > record in technical education in Iran) is now to coordinate and rationalize all secondary-level technical education. The educational institutions themselves, and particularly those concerned with technician and skilled workers for industry., should, as a matter of priority, reorient their cut ricula and teaching methods in the light of the practical needs and condi*- tions of the construction industry. Cormion course material and work projects should be introduced for all levels of personnel who are involve ! in designing, eiecuting and supervising construction and must therefore be regarded in essence as members of a construction team. Education establish- m}nts Whould use experienced men ;fom the industry in their teaching pro- grams and devise., in cooperation with industry, schenes for students to participate in various t3--es of on-the-job apprenticeship training. 8. In support for t,e introduction of these new meaares, we may cite the general lack of enthusiasm on the part of employers to use the - 70 - "products" of technical institutions. They cowplain, and in our view with some justification, that their prospective employees are not suitably trained. In fact, they contend that such mm are the least satisfactory to employ since they end to be more demanding and less adaptable in their work., However, we also noted that many firms show an inadequate apprecia- tion of the need to employ properly trained staff. They are often reluc- tant to pay the higher vages that trained people demand and prefer to employ, wherever possible, those with the least qualifications in order to use them in the roles and at the wage levela they consider appropriate. This attitude tends, on the one hand, to limit opportunities for tech- nically trained personnel and, on the other, to force firms to train people themselves on-the-job, often to carry out very specific and limited tasks 9. In swmmary-, we found little evidence to suggest that technical education was making anything other than a marginal contribution either to equip the student for a job in his chosen field or to meet the-contrac- tor's needs in trying to find suitable employees. For Instance, the Mission found that construction labor skills were, in practice, virtually all developed on-the-job. IL addition., we noted insufficient liaison between the technical school system and industry and little recognition by- either party of the need to improve this situation. The Mission came across two exceptions to this general rule. The first was at Ulsan Technical institute., which was recently established in the industrial southeast of Korea and where attempts were being made to contact and place students in industry for a part of their training, though not, umfortunately,; in construction. The second was the Industrial Training Board in Iran which functions under the Joint auspices of the government and industry. This Board has taken the initiative to develop better training programs for the specific needs of 26 industries. Construction was one of the first industries to be included in this program, and efforts are now being made to increase the quantity and quality of training available for skilled wrkers, technicians and technical instructors. Sensibly, the industries themselves have been given the principal responsibility for carrying out the program, thus ensuring appropriate emphaois on in-plant training courses, D. T The Mission' s Observations in the Field 10. In Korea, where the standard of formal technical education is generally poor., the Mission fobt,nd a number of constructive approaches to job-oriented teaching Ty both the industry and government. The construc- tion industry itself '.as taken the initiative to upgrade existing workers to supply the required personnel at middle management levels, such as foremen and supervisors. The Contractors' Asociation of Korea , gIO) established a Construction Wmlcern Training Center (C013lu) in l,967. z m.e;k ultimate control of both organUlatios l2.oVo mLa -e 0iirsbtry o: t f - tiol, the cpntractor members of the C0A r7,[toy,, i : *G ; ^ 2?1; - 71 - methods of the Center. The latter is situated in downtown Seoul with sufficiernt adjacent land for future expansion. The major responsibility for the financing, borne hitherto by the Government, is to be assumed by the industry in the future. Though the results to date are well below the original expectations, the industry has recognized, at least on paper, the magnitude of the training problem. Thus. the Center plans to provide six-month upgrading courses for 23,000 people aid one-year courses for 8,000 new recruits over the next four years. So fa only 550 trainees have attended courses and these have been limited to training wood-workers and heavy-equipment operators. While the courses are rather arbitrarily divided into three equal periods for classroom, workshcp and site training, this division does recognize the value of practical and on-the-job training. The content of the courses arid methods of teaching as well as the workshop facilities are sti1l in many respects deficient. The teachers, however, are drawn from the industry and bring with then the practical orientation we believe to be essential to technical train- ing. Above all, this effort by the industry to meet its own pressing training needs recognizes two important principles. One is that contrac- tors themselves and the associations that represent them should play a major rcle in the training required for develcpment of their own enter- prises. The other is that the industry can and should through its owl exanple help to ixprove the policies and practices of technical education. 11. In Iran, the initiative to rationalize and upgrade the manipower needs of the construction industry comes from the government which estab- lished the Industrial Training Board (ITB) in 1971. This Board is financed from the proceeds of an industrial training levy of 2% on turnover, and thus has sufficient financial autonomry to be independent of government. It promotes formal and informal industrial training in two ways. The first is through the establishment, throughout the country, of a range of public and private vocational training centers which are to provide nume- rous industry-based in-service training courses. In this conrnection the ITB is seeking to persuade industry to make available experienced men who would be tested and qualified to become training off ic' X, in tvAir own firms,and to institute appropriate in-service courses for upgrading, skilled workers. While progress in this respect has been slow owing to tlie reluctance of management to invest in training, cooperation with the Board's activities is gradually increasing. Secondly, the TIB is plannin., to establish a Staff College which, in the first instance, will focus on the training of persons designated by particular firms to become tr,Xd.L'L. officers but is ultimately to be developed into a center for the develop- ment of a corps of people who want to take up industrial training as a career. The course material and teaching methods are based on the UK Training-in-Industry prograns, but are specially adapted and translated to suit the needs and conditions of Iran. The fITB's organization and opera- tions are characterized by certain features vhich deserve particular emphasis in terms of thei. relevanice to similar programs that might be initiated elsewhere: - 72 - a) the )3B,D though established by an Act of Parliament, is financially independent and able to work directly with industry on a national scale; b) its staff has been selected for their practioal experience in the Industries for which training in provided; c) the work of the Board has been carefully scheduled and programmd to reach stated objectives, thus asoisting in the evaluation of its progress; d) it has been able to carry out its activities of research, publication, teaching and consultancy with its own persomel and resources; e) it is directed by a dynamic management with sufficient status; and f) its management and staff, consisting of 50 persons, are all Iranian except for one adviser who has considerable experience in the country. 12. In Ethiopia the Imperial Highway Authority (IRA), a para-statal organization charged with planning, maintaining and in some cases building roads, has a Training and Testing Branch for upgrading its own force of skilled workers and supervisors. This Training Center is on the site of the MIRA's plant maintenance yard situated 20 iles out of Addis Ababa at Alemgena. Since it was started in 1956 training courses have been pro- vided for some 2,800 equipment and motor vehicle operators and mechanics. In addition about 1,000 road superintendents, foremen- and other supervisors have attended co-irses there. Great emphasis is given to training on-the- job, particularly to skills in equipment operation and actual road1 con- struction. It is interesting to note that thin Benter has combin6d train- ing with trade and skill testing and has thus been able to adjust its teaching program and curricula accordingly. The Mission was impressed with the Wsyematic and well-organized approach to the teaching of courses and the general sense of purpose and care given to their execution. The teaching materials and aids are of a relatively high standard but need to be brought up-to--date, as many were introduced 8hen the Ia A was established some 20 years ago. At the tim of our visit 32 IRA supervisors were in residence on a refresher course in general construction management and technologyr covering a variety of subjects from surveying to maintenance of wage recordcs. Tthese refrobher courses, lasting from a week to three months, are an attempt to rejuvenate the flagging interest of the provin- cida branches of the IRA who gradually stopped sending people to the Center in the late 1960's. The Directorp, who was appointed two years ago, and is a graduate from the College of 3lilding in Addis Ababa,* attended a three-month course at the International Labor Qrganization (I1L) vocational training center at Turin, Italy. This experience has showwn him how to rationalize and reorient the training provided by the Genter andl thus renews the interest and support of the provincial barahes, The -UL ior. b'alieve that many directors engaged in technical eduoation and trj;dh.inng -61"Crougouut, t,he developing countries mould greatly benefit f-rom sio-mar - 73 136 Another examle of a constructive approach to training is the Construction Officials Training Institute (0CO'I) of the Ministry of Construction (MOC) in Korea. It is designed in particular to instill in the bnistrys officials an appreciation of each othergs responsibilities and a positive attitde e-um;rd cooperation, whiah in the past has often been lac,Uig in the construction Industry. Personnel in MOC and in other "client" ministries and governmemt coxporations (including those in provincial office;j) are required to attend courses. These last four weeks are designed for senior officials and corporation managers. provincial engineers and 4dministrators, and also for specialists and new recruits. Relevant curricula and current texts have been prepared to enable person- nel in each staff grade to improve their management skills and their appreciation of their particular roles and duties within the overall context. The emphasis is not only on the introduction of modern manage- ment techniques and improvements in construction technologr, but also on the motivation of officials to relate their work to socio-economic devlop- ment activity both at the local and national levels. The Mission considers the inclusion of this motivational and contextual orientation in training particularly valuable for a growing construction industry in a developing society. 14. Through the activities of the Construction Workers Training Center in the private sector and of the Construction Officials Training Inbstitute in the public sector, Korea is well served. However, the Mission considers it desirable to make the training in these two sectors a joint exercise. A brief exeriment was attempted along these lines in northern Nigeria in 1970, wh&en a series of four-day constrction management courses were arranged for contractors and government officials. It was generally agreed by the participants from both the private and public sectors that they had learned more. about each otherIs problems in four days than had been possible in the past. 15. All the examples of on-the-job training mentioned in the pre- ceding paragraphs have focussed on training and upgrading the ..ndividual skilled worker and technician employed either in government or in the construction ind4stry. Kenya is the only country where we found a train- ing scheme focussed entirely on the development of the contractor- entrepreneur and his enterprise. In Chapter I we have already comrinted on this scheme which has been administered by the National Construction Corporation (NCC) as part of a more comprehensive program providing work and finanrcing as well as supervision and training for African contractors. Here, we need only recapitulate the principal shortcomings and dif- ficulties of the NCC's training program which sought to give con- tractors both individual advice and opportunities to participate in brief training courses. Among these were: (1) the rather low educa- tional levels of the contra,. ors wh:T.c'I seriously limited their ability to absorb advice; (2) the exces; ve emlpi1asis on technical problems arising largely from the fact that the Norwegian personnel concerned with training - 7?4 - were primarily technical in their orientation; (3) the failLre to relate organized training courses effectively to the concrete problems encountered by advisers in the f ield; (L) the excessive reliarnce in such courses on lectures rather than on discussion of specific problems and situations as illustrated by case studies, role playing games, etc.; and (5) the in- ability to focus advice and group training continuously on a limited num- ber of contractors who., on the basis of their performance, had demonstra- ted a capacity for development. E. The Mission's Proposals for a Trainin ram Tran1rfoLforve vnment rsonnel it,. Government officials concerned with construction will need in- service training as well as contractors and their personnel. The focus of this training should, in the first instance, be on government person- nel responsible for project desigr and specifications, e'ontracting procedures and contract administration and be designed to acquaint them with the objectives and elements of the proposed contractor development program. Following this, training should be directed towards the concepts of value engineering and the criteria and standards that should be applied in the supervision and acceptance of construction work. Furthermore, those government staff particularly concerned with designing and specifica- tion writing should be made familiar with the capabilities of cxntractors .nd the resources of the local industry as a -whole. In addition to this specially devised training, construction officials should be enabled to obtain a better appreciation of the contractor's problems by lsitting in," from time to time, on organized training courses for contractors and by accompanying the personnel assigned to advise contractors in the field. 1a. It is undoubtedly vital that all government personnel concerned with project design and supervision should be given., through in-service training, a better appreciation of the contractor's problems and require- ments. In many respects the development of a domestic construction uindustry depends on the development of a better understanding and knowledge on the part of the employer of the contractor's problems. Training, for Contractors 18. The Mission would likti to emphasize that contractor-training should complement his work experience. A contractor will learn principally by "doing," but he will not know how to effectively correct his mistakes unless he has the benefits of construc tive suggestions given through advice and training. Thus, primary focus of our proposed development exercise will be directed towards training for the contractor and the personnel that go to make up hi.s enterprise. This training wilI be made available irn two ways: primarily through informal training or operational 'on-the- job" advice, but also through complementary farmal training given in. a - 75 - "classroom" situation. Both types of training should cover a variety of subjects in a manner relevant to the proper management of the development, of a contracting enterprise. These would include: a) General orientation in al- problems involved in construction. In the beginning this should, perhaps, put a special emphasis on the contractual relations between the employer and the contractor and their respective responsibilities. The contractor should be given an idea of the part he play's in the construction process, as a member of the construc- tion team., comprising employer, contractor and suppliers. b) Estimatin and ricin of construction work. From the outset the contractor should be made conscious of the relative costs of various elements of the work on the site, particularly of' labor and materials. Later, as the contractor's ability grows, training wil1 be needed to ac- quaint him thoroughly with the means of pricing detailed bills of' quantities to enable him to tender for contracts. c) ecrkenfor cost control (in association with subject b) above) and documentation of all receipts and expenditures. This would include the keeping of appropriate books of accounts.;L/ d) Understanding drawings and specifications. The contractor usually experiences difficulty in understanding these because in ma:ny instances the infarmation is presented in a manner unfamiliar to him. He often needs assistance in interpreting three-dimensional objects that are presented in two dimensions on paper and also with the unfamiliar language that is used to write specifications. e) Programming and scheduling of work. This should focus, in the first instance, on the phasing of the construction works and the labor, materials and equipment required for carrying out a single cmtract and should help him not only to plan his work and anticipate his P :iancial needs, but also to measure actual work progress against the prugram. A recent stud;y carried out by Building for Development on the Work of the National Construction Corporation in Kenya statos:, "The k.iy to building up a contracting business...lies in the installation of... a suitable but effective budgetary control system... and the salient factors affecting the progress of the business should be on paper rather than in the proprietor's head. It is this st1c'p to a written system of controls that most contractors find hardest to make." See Buildin for DevelopmentInformationPerNo., "!ITi. National Construction CorporatAlon, Kenya; Study of an Arican Contractor Trainming Organization, April 19',Y2. At a more advanced stage, when the conttractor becombs capabJe of carrying out a number of jobs at the same i4n,j it shoulid be relatedmore to the planing of all of his operations and 'the development of hi:s enterprise as a whole. f) Financial ilanning_ fo both specific projects and the con- tractor's enterprise as a whole. In the early stages training for finaxi- cial planning for a job will be done in conjunction with subjects b) and e) above. Financial plaining, including budgetary control for the contrac- tor's enterprise, is most important and should from the beginning be s bressed in all aspects of training. Later, appropriate financial manage- ment techniques can be introduced to assist the contractor to effectively plan, and manage the growth of his company on a sound business basis. g) Personnelmanaement and tragin This wuld aim to develop on the part of the contractor-entrepreneur, a consciousness of the need to employ properly qualified personnel and to gi.ve appropriate attention to their training and supervision. 19. No doubt there will be other subjects under the broad headings of construction and business management for which -training will be neces- sary. We have listed those that the Mission found contractors were most in need of. The degree of enphasis given to each of these and other subjects, as well as the methods cnf imparting the training will depend on: a) The previous e erience and educational backgound of the entrepreneur. Depending on his background the focus may have to be either on management of the bisiness aspects of construction or on technical problems. For instance, training for the artisan-entrepreneur in the building field, who has some technical skills but relatively little formal education, must in the first place inculcate some elementary knowledge of the business aspects of construction management. The engineer or technician- entrepreneur, who has a good general and technical education, has the same requirement, but at a higher level of sophistication. On the otfier hand, the businessman-entrepreneuur in cons t,ructionl who knows something about business will. need, in the first instance, to acquire a proper appreciation of the technical aspects of construction and of a need to employ the requisite technically tridned people. b) The natutre of the conrstruction work w-hi.h the eonbra(Aur is carrying oub or ects -to under bake. Ib have classified this work into two broad categories - IIconvLai',z.c-ual".l single storey buildings., and "modern"l imultistorey buildings and civil works - which impose different demands on the technical skills and., to some exteIt, on the managerial capacity of the contractor. c) The sta of develo ment of the conbraetor. The latter's problems ancd need for guidance will obvIrously depend on w;:. t,her he is in - 77 - what we have called the "early phase" of development or in the "intermediate phase. " The detailed conclusians of the Mission on the primary and secondary focus of training for various types of contractors are given below. in this con- text we have also distinguished between "existing" and "new" contractors. Tr_aining in Relation to the ERxerience and Background of the Contractor 20. The orientation of the training should vary in accordance w-ith the background and prior experience of the contractors. Thus.s one must distinguish between the "existing" and the "new" contractor and between the contractor who has a background only in business and the one who has only- some technical qualifications. The "Existing"f Contractor 21. Contractors who are already in business will obviously- be the primary concern of any training program. However$ the practising contrac- tor may initially be unresponsive. Having had some practical experience, he is likely to be skeptical of the value of assistance preferred by out- siders whom he does not know and of whose capacity he is not conrlnced. In particular he will probably not be receptive toward suggestions that he take the time to attend formal training courses. His confidence must first be won, and this can be done only if the persons concerned with train- ing can, through visits and discussion on the site, tender advice on concrete problems that will result in tangible improvements in the way in which he is carrying out his work. Initially-, this advice may have to focus on changes in construction techniques and procedures that will expedite the work and lower costs. Once the contractor appreciates the value of such advice, he will be amenable to other suggestions relating, for instance, to record-keeping., improvements in the ordering of materials or the hiring of more competent personnel. Gradually he will then become receptive to proposals that participaticn in formal training courses or sem' iars wiJ1.1 give himn the opportunity to master more systematically certain subjects vital to effective construction management. The "New" Contractor 22. For the "new" contractor, however, participation in a short tr. ing course might well be required at the beginning, in order to help tho contractor development agency to determine whether he has the qualificationas., apart from certain technical skills, for the construction business. Such a course, lasting three or four days, would be designed to test his otivation and his general appreciation of the management problems involved ½n the construction business. The training staff will need to be familiar with certain techniques 2/ for testing and, to some extent, developing achievemen-t motivation in the would-be entrepreneur. Properly applied, such techniques can help to determine to what degree he is motivated by testing his interpretation of illustrated material depicting certain situa- tions, his reactions to, and behavior during, the playing of specially devised "games.," and his response to specific case study material suitably presented. They wrill indicate to what extent and under what conditions the individual is prepared to take risks and has a commitment to certain personal goals and the capabil4#ty to translate these goals into practical means for achieving them. The Artisan and Engineer or Technician-Contractor 23. The methods and cont-ent of traixing nust be adjusted to the educational qualification-s and previous experience of the trainee. The artisan-entrepreneur in the building field, who has some technical skills but relatively little formal education, must, in the first instance, be given some elementary knowledge of the business aspects of construction management. in the beginning, the contractor with a primary level of education may well be reluctant to reveal his ignorance or be fearful that he cannot master the techniques recommended by the training personnel, particularly if he left school 10 or 15 years ago. The training taff wil have to gain his confidence in direct discussions with him. The contractor will be more encouraged to speak frankly and be less inhibited about dis- playing his own ignorance if he does not have to do so in front of his fellow contractors. Discussions conducted on the site might cover such topics as record-keeping, including elementary accounting, ordering and, purchasing materials and requirements and sources of credit. The t:aining staff will need to cultivate a sympathetic understanding of the contractor's problems and a capacity for devising practical solutions that are within his competence. They will need to help him in establishing relations of trust and confidence with his slppliers and with the bank, in which he keeps an account and which should be able to assist him with the financial manage- mnent of this buBiness.2/ Constructive advice on how to deal with the demands and requirements of the client, who has awarded him the construction work iill also Me needed, Through sustained contact with the contractor' on a regular basis, the training staff will be able to prepare suitable teaching/ learning course material. Such material will need to be devised to catch the imagination of the contractor and encourage his maximum participation in organized training courses by using well illustrated practical exercises 1/ Referred to previously in Chapter IJ, paragraph 17. 2/ See Chapter VII for the Nissionts recomendations on the role of bankcs in the development of contractors. - 79 - and business games, devised in such a way that he will appreciate their relevance to hie own busines. However, the artisan-entrepreneur -iUll almost certainly also need additional train1ing in construction techniques and technology during the Ilearly" development phase; and this wouLd be provided on the construction site In the fcrm of individual advice and group demonstrations. This type of training might be carried out in con- junction with a local education institute with the necessary workshops and equipment. lAile training should at first focuis primarily on the contractor-entrepreneur himself, more attention will graduaLly have to be ,oaid to instruction of his staff, e.g. of' clerk-bookkeepers in the mainte- nance of records, and oflforemen in tho proper supervision and training of workers employed on the site. Informal training of such personnel in the office and on the site should progressively be supplemented by short formal courses using teaching/learning "'models" derived from actual case material. The Businessman-Contractor 24. A third category of contractor, apart from t-he artisan and engineer or technician-entrepreneur is the businesmnan-contractor. He is attracted to construction not because he has any special skills in this field but because he sees it as an opportunity to make money and perhaps to diversify his business interests. If he is well educated and has considerable capital and prior business experience, he may overcome his lack of technical knowledge by employing experienced staff. This staff should be knowledgeable and experienced in construction methods and site management, particularly in superrising and training labor on the site. Frequently, hiowever, the business type of contractor will have only a low level of educatUion and an inadequate appreciation of the technical prob- lems involved in construction. He may therefore not be conscious of the need for trained staff and therefore reluctant to pay adequate wages or salaries, or he may be suspicious that personnel of superior skills will cheat him. Thus, jn the first instance, training will have to FL.ve him a prcper appreciation of the technical aspects of constructi n _cI the need to employ the requisite technically trained and experienced people, This will not be an easy task, particularly if success in a prior business has given him an exaggerated idea of his capacit-y to undertake any sort of business venture. Great care will have to be taken by the training staff to present the technical material in such a way as to awaken in him its value in terms of sound business practice. Preferably he should bo persuaded to enter into a joint venture or partnership with another firr. or individual who does possess technical qualifications. Progressive Changes in the Subject Matter of TAiin 25. As and when the contractor progresses, the trainilig program should focus increasingly on more ipecialirad subjects and explore these in greater depth. More attention will have to be devoted to the type of management techniques, including financial planning the contractor wi need to adopt in order to achieve an expansion of his enterprise. If the contractor is - 8o - relatively new to const;ruction but is progressing well, further inforral training will be needed in construction methods, probably including the correct use of concrete x6:ers,3 scaffolding and other elemventary items of equipment used on a building site. Group demonstrations, visits to other construction sites and special instruction by equipment suppliers should be arranged by the training staff both for building and civil works contrac- tors. In preparation for the 11intermediatel phase, a wide range of construc- tion management subjects., with special enphasis on more advanced programming and scheduling for a number of jobs and financial planning of the enter- prise as a whole., will be necessary. Since the contractor will be exposed to competition in the "intermediate" phase9 training should gradually pre- pare him to deal with the problems of tendering, estimating and pricing with which he w-11 have to cope. 26. As the contractor achieves a certain standard of proficiency in the "inter)wdiatell phase, the conditions under which he operates Vill be altered.: "'o the extent that special training programs may still be neces- sary, they will have the same general focus and content as mentioned above. Contractors ith a growing volume of business (measured by the number and size of contracts in the "lpipelixie') and with jobs of an increasingly sophisticated type (assessed by the level of technologr) may require further training and advice on estimating And tendering, contract procedures, advanced cost adounting and budgetary control, personnel management and training, as well as construction technology and techniques. This wJ1l1 be particularly true for contractorsf, who may have started out building "conventional" single storey structures but who, due to their high stan- dard of general education, have been able to progress to "modern" (multi- storey) buildings, involving the use of reinforced concrete frames and more complex installations and fittings. In this intermediate phase the number of specialist subcontractors and civil works contractors may well increase significantly, and these wil need specially devised training and advice. Typically-, special attention might have to be given to electrical., plumbing and air conditioning equipment installation and maint .ance3, and an the selections maintenance and operation of equipment for road construction and other civil works jobs. 27. As and when contractors show signs of progress, training should increasingly be directed toward building up and improving the technical and office personnel of their enterprises, Special group training courses, including site and office demonstrations,, wil probably have to be arranged for such staff which, broadly speaking, will fall in two groups: (1) per- sonnel working on the constrixetion site, including the various levels of site raanagement staff from gang foremen to site agents and managers en- gaged in different types of construction work; and (2) personnel working in the head office, including accountants, draftsmen, estimators., surveyors, record keepers for labor and wagesj contract administrators and planners, superintendents, motor vehicle and equipment staff and mechanics, materials storemen, and clerical filing staff. To meet these nieeds the training staff should consider enlisting the assistance of various organizations that may -/ See Item III of Annex I. - 81 - be locally & oKLcP such as 'C'1 c cornsd :i;h buoL.wiou and *3UpOi. ory tanrar t tra-zin and and tB1:niJ. colleges. Frofls;ional -'scici ' .m3 conld bi a)2:'-c2d to p-rtipde thrwni it,ir-z ierbrrhipp on-the- job ;;raini.-1g for drafti;b -cct Qft!s and T3itors{ fradet aaooa.,tionis concerned with promoting certain building materials, equipment and -1T-nt could be presszol into providing specialist instruction in the use of their products. In the "intermdiate"' phase training would generally be provided only for contractors who require special assistance on particular subjects, such as advanced business management techniques. 28. Though partnerships between businessmen and technically qualified people have often been promoted and attempted in the past, they have seldom succeeded. Two factors have beenprincipallyresponsible for their failure. One is the difficulty of finding two partners who are willing to trust each other and who are convinced that each can make a special and equal contri- bution to the success of the enterprise 'without the fear that one will eliminate or exploit the other. The second is the fact that impartial advice on the establishment and management of such partnership arrangements is seldom available. There is often little knowledge and understanding of the methods and procedures for establishing joint ventures, partnerships and limited liability companies. The training staff should be in a position to provide such imartial and practical advice and to assist in lnnovating different and more appropriate types of business arrangements. In provid- ing such advice, *hawever, the staff will have to be cognizant of the social environment in which they are operating and take steps to avoid being the target of blame, should such ventures prove unsuccessful. Informal Training nd Individual Advice 29 The principal advantages of individual advice are that it can: (1) concentrate on the practical problems and deficiencies of the contrac- tor; (2) take and guide him through all of the successive steps of the construction process; and (3) produce the practical experience,, case material and knowledge of critical problems which will help tc determine the content and focus of organized formal training courses. 30. The training staff should, however, be aware of the difficultie- of providing infcrmal training on the site and in the office. The workint, environment is not ideal for absorbing information and advice other than on very specific problems and points of detail. It does not provide favorable opportunities for systematic training in any one subject. Thei e is also a danger that the adviser on the site may in essence become simply a building inspector interested only in ensuring that the contractor works in accordance with specifications. However, the adviser can play a useful role in guiding the contractor and his staff on each successive step in the whole sequence of operations involved in carrying out a single contract. Thus, for each contract I e adviser can prepare a checklist on the timing, nature and methods involvi ' in easlh jequential step of the construction process. After each visit to the work site and observation of the work in 82 - hand, the adviser and contractor (or his superintendent) can then discuss, an the basis of the checklist, the progress of the work and the necessary action that needs to be taken to remedy any differences which have been observed. Appropriate notations on the checklist will provide a useful record of the progress of the contractor and his responaiveness to advice. Formal Gro!R- Training 31. Formal group training is important not only because it is more economicalfor training personnel but also because certain subjects lend themselves more readily to systematic exposition than to ad hoc advice. Organized training should focus primarily on problems relatjng to construc- tion management, including contract ternms and procedures, methods of estimating and tendering, cost control systems and budgeting, job program- ming and labor and materials scheduling and record keeping, particularly accounting. At a more advanced stage, such training could be broadened to include marketing, insurance, plant management, measurement and invoicing of conpleted work, borrowing money and banking practices, work study, personnel managemnt and training, and site safety and welfare. Certain technical subjects can also be covered by organised training. Training courses should be designed to promote a proper understanding and interpre- tation of specifications and dravings and to explore specific technical subjects, such as methods for producing and using concrete, roofing problems involving the use of different materials and methods, road construction techniques, etc. The "classroom" work in sach courses, which would have to rely heavily on technical illustrations, would in most cases be usefuy supplemented by visits to construction sites. 32. In general, the subject matter of training coIrses must be determined in light of the current needs of the contractor and the constraints governing the number, location, length, and timing of such courses. Their detailed content can be prescribed only in the context of a particular country,, taking into account the type and level of contractors to be trained and their special needs. *1hen considering the structure of formal training courses, the training staff should: (1) limit their duration to not more than a week, so that contractors and their personnel will not be deterred from attending; (2) group participants as far as possible by level of their prior education and experience so that their capacity to learn will be more or less uniform; (3) proceed as soon as possible from general courses to more specialized courses; (4) structure the course content to practical problems identified by experience in advising and observing contractors in the field; (5) encourage "learning" as far as possible through discussion of case material and actual examples rather than by lecturing; and (6) make sure that the training personnel concerned with advising the contractor in the field participate also in the organized courses. 33e Formal training carried out with groups of 10 to 15 people will need to use a wide range of modern adult education tecluiquees. Maxinum - 83 - partic.ipatlion by `C,ia-s i n t h eLearnJg"t proceai~ should be encouraged by the use of Juii:viduc1 or group exercises and business gmes0 Theco would involve theus6 UG of ri-tt ,rcises in conjunction with "role playing" techniques to demonstrate,s for inatan˘ca, the working relation- ship between the different partiaa involved in a amistruction contract. To be effective and worthwhile, in-class learning mst be an integral part of the whole develupment process. Evaluation of the Trni Frogram 34. At the outset the Mission emphasized the need for measures that would kee,p the cost of a contractor development program within reasonable bounds. 1Measures to evaluate the impact of the training on the capacity of developing contractors are particularly important in this connection. Previous experience with this kind of development training aimed at the emerging contractor i.s severely limited. In fact, Kenya appears to be the only country where training of this type has been carried on for some years, but where necessary improvements in training methods have been delayed by the lack of continuing or periodic evaluation. 35. The Mission believed that such an evaluation can best be made on the basis and with the help of: (A) contractors' work performance records; (b) a charted development "path;" and (c) a clear definition of train- ing objectives. a) CoWtractors, Work Performance Records.- Careful and realistic records should be kept on the performance of contractors in executing constructicn work and on the development of their enterprise over a period of time. The Mission has already indicated the types of information that should be recorded for this purpose./c tE sutae these should reveal the degree of progress that contractors make in (i) carrying out their contracts an time, (ii) completing their contracts within the original cost estimate, (iii) meeting the standards for provisional and final acceptance of the job by the client, (iv) building up their staffs, (v) 'nereasing their financial resources and creditworthiness, and (vi) expanding the number of contracts &nd total volume of business they can handle. b) Chartered "Development Path" - This performance should be measured against a set of targets that each contractor might reasonably be expected to attain over time. Such targets, worked out jointly by the contractor and his adviser, might take the form of a "development path" extending initially over one year and later over a progressively longer period. This would help to motivate the contractor to reach certain objectives in the growth of his business within a set time frame and would &/ See paragraph 29, Chap )r I. 2/ See paragraphs 16-19, Chapter IIL enable the training staff to plan the st.ep-y->atsp application of both formal and informal traininig and advice Unt-il sufficient experience has been gained by the traini-Ing atafk, it wil, of course, be difficult to chart an appropriate and realistic "developwrnt path" for the par- ticipating contractors. Experience should, howver, make it possible to perfect this technique and thius, to measure tlhe adequacy of the contrac- tor's progress. The emergonce of serious discrepancies between the contractor's performance ar:d the projected developmnt path can then be used as a device for screening out contractors on the grounds of their inability or unwillingness to learn. c) Tra njctives - Such objectives should be clearly defined in advance so that the value of the actual training process i.t- self to the contr:actors can be properly assessed. In discussing training with officials, the MissionI found that they were primriUy concerned with what to teach and how to teach, rather than with efforts to obtain evidence o 'learning" by the trainees. Wb would stress that the object of learning through training (both formal and informal) is to influence and try to change the behavior and working methods of contractors. Particular train- ing objectives should therefcre specify what the "'learner" could be ex- pected to know and do at the end of training courses or periods. In the light of these objectives, training can be planned on a step-by-step basis and the contractors can also be better motivated to achieve certain targets and to develop the confidence, knowledge and ability necessary for the growth of his enterprise to its optimum level. Sources and Recruitment of Training Staff 36. The size, composition and orientation of the training staff re- quired will have to be determined in the light of conditions in the country where a development program is undertaken and wil involve a proper assess- ment of the actual capacity of domestic contractors and their personnel and of the number of entrepreneurs that wi eventually be needed to match, at least in part, -the construction demand in that country. In many cases, it will be necessary, at least initially, to recruit the training staff from outside the country. A careful and thorough exploration of the pos- sible aources of recruitment should be undertaken, Men with a broad experience of both the technical and business aspects of construution wil be needed. This type of experience is most likely to be fond among people who have been successful as entrepreneurs or as managers in the large number of small- and medium-sized construction firms that can stll be found in the US, the UK, or eort-iental Europe. However, in addition to the necessary practical, techmical and business experience, they also must have the patience, interest and ability to coxmunicate which are needed, if they are to work in the socio-economic eavirmurmt of a developing country. Candidates with such qualifications can probably best be found with the help of representative bodies of contractors in the countries mefnt-i.LOvs above. The experience -with the Norwegian personnel of the Natiuonl Con struction Corporation in Kenyra 1ll.untratos the i.portarice of tvoidirg re- cruitment of experts who are too ,tpalIalized2 which is ivallUy the case of personnel working in large companies. Such men are often too technically oriented, lacking knowledge of the vital "business aspects of contracting, including organization and management, financial planning and record keep- inz and accounting."1/ so essential to the proper functioning of a small construction enterprise. Nor is it desirable to recruit management "experts," who will have difficulty in addressing themselves to the relatħvely low-level managEment problems encountered in developing countries. 37. Another poterntial source of personnel may be found among people, especially from the UK and PFlance, who have apent a considerable time over- seas as construction works supervisors in government service. Some of these have been exposed to the problems of local contractors and will be able to give practical, down-to-earth advice, though principally on technical matters. They will need careful screening, as their local experiernce may be more of a handicap than an advantage. Depending on the level of development of the country seeking assistance, it may often be more appropriate to recruit experienced people from the more developed of the so-called developing countries or from the less well-developed European countries, such as those bordering on the Mediterranean0 The candidates from such countries may find the problems with which they will have to deal more similar to those in their own countries. 38. Local staff should be recruited in the expectation that they will replace as soon as possible all permanent foreign staff, with the exception of those that may need to be retained for certain special tasks. However, local staff should not be recruited simply as counterparts or "understudies" to the expatriate staff with a virtually automatic right to succeed them. They should be promoted only as and when they acquire the requisite ex- perience and competence to handle particular assignments. It will not be easy to find people with the required actual or potential qualifications. Some may be recruited from indigenous personnel who lhave had some technical and business experience working with i-sident foreign construction enter- prises. Persons with considerable experience as supervisors in ministries and departments of public works may also be qualified. Adequat3 induce- ments in the form of salaries and other conditions of employment will have to be offered. The Number of Staff 39. It should be kept in mind that the basic functions of the persc nel of a contractor development agency will be to: (1) determine which contractor, new and existing, have a potential for development and need assistance; (2) help to procure for such contractors construction work that will provide suitable work experience; (3) devise and conduct formal and informal training programs; and (4) recommend financing for par- ticipating contractors. In discharging these functions during the "early phase" of developmen;, thL staff wvill have to spend considerable time with each contractor in the dev -opment groutp. We envisage that on the average 1/ See Armex IV, paragraph 14 of this report. one day a wek should be spent with each contractor on hi& site or in his office. A training beam of two people, probabl;y one expatriate and one local, could thus work with five or s:ix contractors. Thus. if the number of contractors in the development group totaled 50 or 60, the traix:ing staff required would be about 20. In addition, there will need to be a director to give overall guidance, probably a specialist in adult educa- tion techniques, who can advise on methods cf training, and perhaps, nsomeone specially qualified ru help contractors with accounting and record-keeping. At some stage other experts might be needed to advise, for example, on construction plaxnt and equipment. FAther support staff will be needed to provide clerical services for the agency itself. Altogether, a total stafr of 4o to 50 people might be required for a contractor development agency dealing with 50 or 60 contractors in the early phase of develop- ment, but the number of staff needed in relation to the number of contrac- tDrs is likely to be much less if contractors are already more advanced. -of the Trainin Staff 40. Candidates for the expatriate training staff will need to be sublected to a carefully devised program of orientation on the nature and scipe of the development exercise, the conditions under which they will be working and the roles they will be expected to play. It would be desirable to have at least same preliminary orientation outside the country where they would serve. This should help to determine whether candidates have the patience and perseverance, the capacity to innovate and to communicate in a "leariAng" situation and, thereby., reduce the risk of Jeopardizing the whole project by selecting the wrong people. 41. In the chosen country itself members of the team should receive orientation on the state of the country's development, the status and problems of the existing domestic construction industry and the general institutional and socio-economic framework in which they wil be working. The team should,as soon as posaible, tackle the task of selecting and training local staff who will gradually, and certainly by the end of the early phase., replace expatriate staff. The aim of the contractor develop- ment agency should be to achieve a completely local staff within a reason- able period of time preferably not exceeding five years. The agency should, of eourse, be able to offer local staff more permanent employment opportunities that would help them in the development of their careers. In this connection, it can be envisaged that the agency might at some stage be transformed into a consulting organization that would provide ii* services against payment. - 87 - CH{APTER VII FINANCIALANDF1-3CAPROVISICKS RTWING TO CONSTRCTIC A. Financing 1. The financial facilities provided for domestic contractors included in a development program should be devised with a nmber of considerations in mind. First, most of these contractors are unlikely to have significant financial resources of their own during the initial and early stages of their business. While they therefore canot be expected to invest much capital in absolute terms, they should be re- quired to furnish equity capital sufficient to serve as an earnest of their commitment and their willingness to assume risks. Secondly, most contractors wI. not, during the early stages of the development.of their business, be sufficiently creditworthy to obtain credit from normal financial institutions which at best are willing to assume the considerable risks involved in financing construction only forpientre- preneurs with an established record of performance. Public funds will according,ly have to be made available to finance contractors for some time. However, provision should be made to transfer this responsibility as soon as possible to the institutions normally providing such business finance. Thirdly., the contractorst capacity to service loans is likely to be severely restricted during the initial stages of their development. Means must therefore be found to limit their need to borrow for working capital and equipment, and the terms on which they obtain financing will have to be determined in the light of reasonable expectations of their income. Fourthly, the majority of domestic contractors are likely to be deficient in the management of their financial resources. They will accordingly require considerable supervision and guidance in this res- pect. To provide the means for exercising this supervision, it would be advisable to make arrangements for channeling ttheir receipts and disbursements as far as possible through a siiigle account. Finally, the contractors should progressively develop the net worth of their enterprises, i.e. increase their equity in the business. Financing arrangements should accordingly be used to provide incentives for saving and for reinvestment of profits. 2. The financial requirements of contractors fall into two cate- gories: sureties or guarantees for bidding, contract performance and contract maintenance; and capital required for working funds and for acquisition of necessary equipment. Each of these will be examined in turn. Requirements for Bonds o. Guarante'.s 3. In the course ol our field investigations we found that bid security ranged from 5% of the teodered price ,n Iran and Ethiopia to 10% in Korea. In Iran the performiace gaarantee or bond required aixountit to 5% of the contract price, in Korea and Ethiopria to 10% and 15%., red- pective2ly. Maintenance i.e. the remedying of defects rfter the comple- tion of the work - is enstUred in Korea by a bond equal to 2% to 5% of the contract price. In the other two countries part of the progress paymnts due to the contractor is retained for this purpose. In Korea the necessary bonds or guarantees are provided by the Korean Contractors Financial Cooperative, but only in proportion to the shares of each contractor in this cocperative. I-n fTran guaratees are for the most part provided by banks; in Ethiopia., by insurance companies. We found that many new or relat,ively new construction enterprises had considerable cifficulty in obtaining such bonds or guarantees except at the cost of very high premiums. 4. There wi be no need for bid bonds in the early development phase of our time frame if, as we envisage., contracts to members of the proposed "development group'" of contractors are awarded without competitive tendering. However, in the intermediate phase,, when competitive bidding is introduced, bid security will become relevant. In this phase the creditworthiness of the developing contractor will probably still be rather limited, and will accordingly have to be carefully husbanded. Bid guarantees should not be required in excess of the minimi amount sufficient to dis- courage ccntractors fram bidding without a sericus commitment to undertake the work if it is awarded to them. We believe that a bid bond of around 1% or 2% of the tender price would be a sufficient guarantee of serious bidding. since the forfeiture of this amount would be a ser:ious loss for most developing contractors. 5. Contract performance and "maintenance" can be ensured both by bonds or guarantees and by a system of retention payments. We believe that such guarantees or retentions should preferably be no more than 5% or, at most, 10% of the contract price. While the contractor should be allowed to opt either for a guarantee or for retention, we consider that retention of a percentage of the progress payments would on balance be more to the interest of contractors. A systea under which half of the amounts retained would be returned to the contractor on the completion of the contract, and the balance on the expiration of the maintenance period, would in essence provide for "forced"t savings. It would put at the dis- posal of the contractor at the times indicated fairly large amounts hich, after provision for residual axpenditures and debt service, would provide a "nest egg" for the financing of his continuing business. 6. We have given some crrisideration to the need for payment bonds. Such bonds are sometimes required of contractors to ensure that sub- contractors are paid and that the employer, does not become liable for such payimnts. Since we want to encourage the use of subcontractors, same provision for ensuring that these are paid prompptly may well be necessary. However, bonds or guarantees need not be required for this purpose. Monthly progress payments to prime contractors can be made conttngent on the - 89 - ,resonta-tion of svid Lano that all ouppliara and subcontractcQrs have been paid in the preceding dod, This is .n i a&' , the practi ce in a xiwuber u.f countries. u~iremaents for &qutZ,Capital_ Before discussing the borrowing requirements of contractors, a -wcnnents should be made on equity financing. 1b have alread one oLt' that new or relatively new contractors wil generally- not have the ptrto put up a large amount of equity capital. This does not mearn t:iatt tl-.y should not be expacted to provide scne ini1tial capital. No contracei.or can qualify- as an sntreprer-eur unless he is willing to risk ieown money,, He c-an and should be expected to raise some money from ..IJ own resources and t-hosa of his extended fainily- and friends. In each -,Xmtry where a development program is undertaken,the anmount of i-nitial U~kcz~alrequired of a contractor will have to be carefully- considered in Vhs light of local aonddtions. In any event the amount should be large snough to serve a3 an earnest of the seriousness of purpose of the co-ntrac~- tor. This can only be the case if its loss in the event of failure would be keenly felt by the contractor,. In addition., we recommend that arrange- ments for financing the contractor provide him with an incentive to raise equity capital. This can be done by- providing a portion of the financing in the form of "quasi-equity" capital., i.e.~ in the form of a loan that would, not need to'be repaid before the expiration of a, defined period of, say., five years. Such "quaei-equity" financing could be provided in an amount matchied to the volume of equity capital raised by the contractor himself. Borrow-ing and debt service requirements during the contractort'a initial development phase would thus be reduced in proportion to the amount of equity and "quasi-equity4' capital mobilized in this 'way. 8. O?ver time contractors should be expected to increase their own capital resources. In classifying contractors by the volume of work they are qual ified to undertake., one of the criteria should certainly be their net assets as reflec-ted by the growth in the net worth (capital plus reserves) of their enterprises. Their liquidity or ability to mobilize cash necessary for their business should also be a factor. The "current ratio" (the ratio of current assets to current liabilities) or "net quick assets" (excess of quickly realizable assets over short-term liabilities) will be the best indicators of liquidity. Measures to Reduce Borrow-ing 9. Various measures can be taken by the government,, in its capacity- as emp~loyer, to reduce borrowing requirements, and, thereby, the debt service burden of the developing contractor. The governmentt can furnish- some of the materials required in large quantities for carrying out the contract; and., indeed., we ~'ound thai-. this has often been the practice in Korea. It can make arrangt ants., or iLiberalize existing arrangements., for paying contractors for materials alread~y delivered on the site but not yet 90 irco.rocrated 1i &he .iLtt.l- , thi's practice is cpen to :ibus. by the unscrupulows contral. 'xr aiid can be nc1opt.3d onl-l urħde2(l conditions D:r close surpervision of thwe wvork site by a governri-ent inspnerur. A more important way o:t alleviain-ig the contractor's financing problem is to ensure that monthly progress pyuents are made promptly. Even a delay of one or two months can make a serious difference to a contractor with slender financial resources. We heard complaints about delays in payment everywhere. Frequently municipalities and other local authorities are the worst sinners in this respect. Government inspectors often do not act promptly to measure the work completed and certify it for pazyment, and the request for payrment must p: ,s through several ministries and agencies before it is honored. Equipment Pooling 10. It is particularly important to reduce the need for investment in equipment, especially for contractors engaged in civil works. Our recommendation to allocate contracts in the initial phase without competi- tive bidding is prompted in large part by our desire to obviate or reduce excessive investment in equipment which is likely to be idle for a consider- able part of the time. For the same reason we have deplored the exaggerated emphasis often put on the possession of equipment in the classification and qualification of contractors. It is envisaged that contractors should themse:Lves invest only in equipment which could be more or less fully utilized and would rent the balance of equipment, including that needed only during peak work loads and that required for specialized work during only a limited time. This presupposes, of course, the existence of facili- ties for renting equipment. 11. Several types of equipment rental arrangements can be envisaged. Tt is possibl.e to establish a government equipment pool or to broaden the functionls of an equipment pool already maintained by a public agency for its own operations (for instance, the Imperial Highway Authority equipment pool in Ethiopia) to include rental, Efficient management of such a pool is likely to be the critical problem. Private management of a nublicly-owned pool may be the best solution. The possibility of establishing private leasing companies should also be explored. Govern- ments might encourage the establishment of such companies through a variety of incentives, including exemption of equipment from all import taxes2i and exemption of the company from profits taxes for defined period. Finally, arrangements can be iaade for the partial pooling of equipment owmed by contractors and subcontractors. Special measures can be taken to finance equipment for small contractors who can carry out much of the L/ See, however, the caveat in paragraph 17 below. 91 - earth-woving work for larger prime contractors. In Ian we were told 6hat the existence of many small allrth-moving aubcontractors had contributed considerably to the fuller utilization of available equipment and had re&--id the need of prime contractors to invest in such equipment. It is possible also to institute a system under which contractors wouild register, at some aort of central exchange, equipment whch is teiiporarily idle a-nd which they would be prepared to rent for a stated period of time ~loysent oħ' Used qupent 12. The ployment of used equipment as a means of reducing invest- ment requiremnts should also be explored. % noted that toreign contrac- tors may have an incentive to repatriate equipment after completing a construction job. They are usually permitted to bring in equipment free of duty but have to pay any applicable duties if -hey want to sell such equipment on leaving the country. When these daties are significant, we suggest that the government consider waiving them to provide an incentive to sell the equipment in the country9 Appropriate safeguards to prevent abuse of this privilege might, of course, be necessary. Used equipment can a-lso be bought abroad. However, domestic contractors will in general be unable themselves to determine -the quality or r6maining life of such equipment. The government might therefore examine the possibility of designating, on behalf of domestic contractors, reputable dealers who could be used as agents for the purchase and reconditioning of used equipment. Tem f aFinak 13. Itat should be the terms on which financing is extended to contractors included in the development group? Normally, although not invariably, the government as the enployer makes an inte: nst-free advance to the contractors for working capital. However, this is seldom enough, so that the balance, as well as the greater part of working capital re- quired for carrying out private contracts, has to be borrowed. Advances and interest-bearing loans for working capital should normally be given for the execution of individual contracts and should provide for the recovary of principal and interest from the progress payments made to the contractor9 Haoever, the duration of loans for capital equipment should be related to the life of such equipment. In general, it would be advisable to make such loans somewhat shorter than the life of the equipment in order to induce the contractor to acquire an equity interest in the equipment that- /In India a somewhat similar arrangement is being tried to encourage the fuller utilization of capacity in smal industries. Subcontract ex- changes have been estalblished. Small plants register with these exchanges the idle mach -.ing c&3aearty they have and the types of com- ponents they can product, and larger manufacturers are encouraged, similarly, to register with the exchanges their requirement8 for com- ponents the manufacture of which they are prepared to subcontract. -92 would exceed its "salvage" or "residual" value after it has been fully depreciated. This again would be desigrned to "force" some savings on the part of the contractor. The interest rate on all borrowing should, in our view, conform to the rates normally charged by existing banking institutions. The adoption of lower interest rates would make difficult the gradual transition to financing by such institutions which we envisage within the framework of our proposed development plan. 14. The primary security for all loans would be the contractor's payments for the work that he has been awarded. There is, of course, the danger that he may be unable to complete the contract or may experience cost overruns impairing his capacity to repay. The fact that the con- tractor will have the benefit of continuing advice and training should, to some extent,diminish these risks. In any event, few contractors are likely to have, in the early development phase, significant property to pledge as security. In this phase we do not believe.therefore that such security should be required except in cases where the contractor can clearly furnish it. However, when equipment is financed we recommend that the financing agency retain ownership of the equipment until all payments have been completed. Even under these conditions repossession of equipment is often difficult because the equipment cannot be located. Annual licensing of all motorized construction equipment, which is now seldom the practice, would help to overcome this difficulty. It would have the additional advantage of enabling the government to determine more accurately the number of various types of equipment available in the country. Special and Normal Financing Methods 15. We have already indicated that the risks of financing relatively new and inexperienced contractors are such that the banking institutions normally engaged in financing business are unwilling to assume them. We therefore believe that public funds should be made available tc; finance contractors during the early development phase. This has indeed been done in Kenya,, but under conditions that have failed to ensure efficient management. While the agency in charge of contractor development is in the best position to assess the capacity of contractors which it is assisting, and loans therefore should be made only on its recommendation, we believe that the actual adanAnistration of loans should be handled by a separate, independent institution. As and when contractors develop and become more creditworthy, responsibility for their financing should be transferred gradually to the establishee', profit-making, banking institutions. We envisage that this should take place during the inter- mediate development phase. To make possible such a transfer the govern- ment will need to provide facilities for ensuring such institutions - 93 - against the credit risks involved. Initially, the proportion of risks so covered will probably have to be quite large - say, 70 or 80% - but it should diminish progressively as the banks develop confidence in their clients. Provisions for public insurance of credits have been successfully introduced in a number of countries, but generally apply only to credits extended to manufacturers. We believe it appropriate to provide similar in6urence for credit granted to construction enterprises. Establishment of Contractor's Accounts 16. In order to provide the requisite supervision of a contractor's financial management, we believe it important to require that all his receipts and expenditures be channeled through a single account in his name. Under such an arrangement all cash loans and advaneys and all receipts for work completed would be credited to this account. Dis- bu7i sements for wages, salaries and materials from this account would be made only on the basis of payroll records and time sheets and of orders for materials certified by the supplier. Loan service would also be aur1omatically debited to the account. In this way a comprehensive pic- ture of the contractor's financial position would be available at all times. Such accounts couald be kept with the agency charged with the administration of the public loan fund we have proposed for the initial development phase. However, for a number of reasons we consider it preferable that these accounts be opened in, and be administered by, regular commercial banks. Such banks would be more conveniently located in relation to the contractor's place of business. The contractor would become accustomed, at an early stage, to dealing with banks from which ultimately he should be able to obtain credit. He would become familiar -with banking rules and practices. The banks in turn would be able to familiarize themselves with the development of individual con- tractors from the very beginning and to determine when and under what conditions they might be prepared to provide credit from their own re- sources. The banks would also be in a better position to advise contrac- tors on problems of financial management and on the establishu ent and maintenance of records essential for cost control and financial planning. Initially, banks would probably have to be paid a small fee for the management of such accounts, but such a fee would presumnably no longer be necessary as and when they themselves assume responsibility for financing the contractors. At that time, of course, the contractors would have to meet the normal security requirements of banking institutions, with sucl modifications as the availability of credit risk insurance may make possible B. Fiscal Treatment of Construction Enterprises 17. In the course oa our field work we were unable to give much atten- tion to tax measures relax ng to the construction industry. However., a few comments on this subject can be made. In general, we did not find the level of import duties and taxes on equipment unduly Ligh, excepts occasionally, in the case of spares6 We believe that imported equipment should normally be either exempt from., or subject to low duties. However, when the foreign exchange rate ovorvalues the currency, such a practice would excessively encourage the use of eqjuipment at the expense of labor. In the taxation of profits,suitable allowances should be permitted for depreciation of equipment in accordance with its anticipated life. The rates of profits taxation should encourage the organization of construc- tion enterprises as companies in which several or more partners would participate both in the share capital and in the management. This could be one way of discouraging "one-man" enterprises and of promoting the development of firms in which management responsibility is shared. In this context, consideration should also be given to the possibility of taxing retained profits at a lower rate than distributed profits. In many developing countries special tax concessions are made to new manufacturing ventures, usually in the form of profits tax exemptions or reductions of a predefined period. If a government really attaches importance to the promotion of a domestic construction industry, it should be prepared to extend the benefits of such concessions also to domestic construction enterprises. CHAPrER VIII A SUGGSTED FUTURE COURSE OF ACTION A. Additional Research 1. Our terms of reference required us to make recommendations on additional research that might be undertaken on the various problems rele-vant to the development of domestic construction capacity and to suggest in particular what,, if any, additional country case studies mJit usefully be made. 2. W make no pretension that we have thoroughly examined all the pertinent problems. Wk have tried only to identify and diagnose the key problems and to suggest how these might be dealt with in a general developmental framework. No doubt research on additional subjects would be valuable. Contintation of the research now under way in the Bank on alternative technologies of construction,, with special reference to road construc,t,ion, will be particularly useful. This research, focusing on methods and possibilities of achieving optimwn combinations of equipment and labor, should help to determine the technology that might be appro- priate for a particular country in the light of the actual prevailing relationship of the costs of labor and capital. Means of economizing investment in equipment might be further explored through research on various types of equipment pooling arrangements and on possibilities of employing used equipment. Wb have already mentioned the need for further study of the practical and economic limits within which construction work can be divided or "sliced1' to bring it within the capacity of available domestic contractors. Similarly, we have indicated a need for more precise estimates of the foreign exchange savings that might be realized from the replacement of foreign contractors by domestic contractors and suggested that a thorough examination of the information bearing on this question might prove worthwhile. In the preceding chapter we also stressed the need to undertake a thorough canvass of possible sources of recruit- ment of personnel with the qualifications required for advising and training contractors in developing countries. Finally, in view of our finding that technical and vocational education has largely failed to meet the manpower requirements of the construction industry., it might be advisable to undertake a thorough investigation of the ways and means for making such education more relevant to the needs of industry. 3. We question, however, the usefulness of undertaking studies on the construction industry in additional countries. It is true, of course, that the limited number of countries in which we were asked to make studies can hardly be sai- to constitute a representative sample. The inclusion of additional co itries., p&ticularly those where domestic con- struction industries might oe said to be in the intermediate phase of development, mighb therefqre be justitiqd ipn primsiple. IS might aloo Pe argued that the rank Group shou-ld wicl'ertaike a go'i puraber of co=tvy studies for the purpose of familia.rizir4gl itself with the capacity oR domeeitic construction enterprises tp par7r out Bank-finaziced contrpcts. In the past, the Bank has often lacked suificient information to Verig claim that certain domestic contractors are qualified to tender for Bank- financed contracts. However, in view of the considerable amount of per- sonnel and time involvwd, we doubt that additional country studies woud be justified on either or both of these grounds. Tiiile it would be desirable for the Bank to improve its knowledge of the capacity of domes- tic construction enterprises in all developing countries, the requisite information can be built up more economically through the cumulative work of successive project missions, particularly if such missions focus at least part of their attention on this subject, and if the information they bring back is systematically recorded. Nor do we think that studies on the development of construction industries in additional countries wuld make more than a marginal contribution to a better diagnosis of the' problems involved and of the ways in which these midght be approached. More benefit is likely to be derived from a practical testing of the approaches we have suggested. b believe accordingly that major emphasis in the future should be placed on the elaboration and execution of few pilot development programs in carefully selected countries. B. The Bank's Role in Developing Construction Industries 4. Before embarking on further steps, however, the Bank G(roup should consider carefully (1).l what interest it has in the development of domestic construction capacity in the countries where it is doing business, and (2) what precisely should be its own role in developing domestic con- struction industries in such countries. Definition of the Bank's Interest 5. The Bank Group can be said to have both a narrow and a broad interest in the development of domestic construction industries. Its narrower, but more specific,, interest is derived from the fact that it finances several thousands of construction contracts each year. It is understandable that developing countries should want a growing proportion of such contracts to be awarded to their domestic construction enter- prises and should accordingly press the Bank to adopt measures that would make this possible. The Bank, in turn, is seeking ways and means of achieving this objective without, however, a significant derogation of the principle that all counitries, membere of the Bank or contributing to its financirng,should be permitted to compete for Bank-financed oontracts, or of its interest, which it believes identical with that of the developing countries., in ensuring that such contracts are carried out economically and efficiently. 97- 6. The Bank's broader interest in the development of domestic construction industries axises from its status as a development institu- tion whose concern is not confined simply to the financing of a series of projects. It comprises the development process as a whole and all economic activities which may contribute to economic development. How- ever., the constraints under which the Bank operates, particularly with respect to the availability of personnel, set a limit to the extent to iwhich it can, in practice, concern itself with all sectors and problems of development. Priorities must therefore be determined, and only the Bank can determine what priority should be accorded to efforts to promote domestic construction industries. Here we have assumed, however, that the Bank will want to make such an effort. Possible Approaches to Development 7. In theory, the Bank can promote the develcpment of domestic construction capacity in two ways: (1) by adopting certain generally applicable policies permitting, for exaVle, price preferences for domes- tic contractors; and (2) by assisting in elaborating and carryIng out programs for the development of this industry in selected countries. 8. In principle, two types of price preferences are possible. One would be designed solely and specifically to offset the lower ef- ficiency and higher cost from which a domestic construction industry might suffer in the initial stages of its development. Such a price preference would be akin to a protective tariff accorded to an "infant" manufacturing industry. The objective would be to shelter the industry in some degree from foreign competition until it has gained sufficient experience and has been able to achieve standards of productivity com- parable to those of foreign construction enterprises. Another type of preference may be accorded to compensate for the fact that market prices of the various factors of production in a country may diverge from their real or opportunity cost. Such a divergence may arise in the pricing of the foreign exchange component of construction when the exchange rate is overvalued, or in the pricing of labor and equipment when market prices do not truly reflect the cost of these to the economy. If real (or "shadowr") prices were used to cost labor and/or capital, this would, of course, not necessarily result in a price preference for domestic con- tractors unless labor and equipment were used in different proportions by domestic and foreign contractors. On the other hand, the pricing of the foreign exchange component in terms of "real' rather than market costs would give domestic contractors some price preference since contracts awarded to foreign firms would involve extra foreign exchange outlays for the remittance of at least part of profits and overheads. 9. The Mission understands that the Bank has been under consider- able pressure from some c intries to concede a general price preference to domestic contractors un )r one guise or another. However, we have 98 - not considered the advantag.es or d.isadvanll'ages of eit.her of the price preferencee mentioned in the preceding paragraph. In theory* we can see no objection to the use of Oshadow-pricinglt even where this results in some market price preferences for domestic contractors. In our View, the only question in such a case is whether the determination and application of shadow prices are feasible. However, a general price preference specifically designed to protect developing contractors is open to more serious objection. To be sure, the Missim has repeatedly emphasized that construction enterprises must be given adequate work experience during the initial stage of their development and that this cannot be done if, from the start, they have to compete on an equal plane with more experienced foreign construction firms. At the same time we recognize the danger that any measure of protection, whether through price pre- ferences cr through partial reservation of construction work to develop- ing contractors, may become more or less permanent and Mny perpetuate in- efficiency. We have tried to provide against this danger in two ways. First., we have stipulated that protection against foreign competition be limited to the early phase of development. For this phase we have chosen limited reservation of construction work rather than price preferences as a protective device. In the intermediate phase, we-envisage the introduc- tion of competition. We do not specifically recommend price preferences for domestic contractors during this phase, although mod6st price pre- ferences might in our view be awarded during the period of transition to competition with foreign firms. Secondly, we have recommended that any measures to protect the domestic construction industry should never be adopted in isolation but only as part of a more comprehensive program, which would provide various forms of assistanice and provide the means for raising the efficiency of the industry. The Mission therefore believes that the Bank would be ill-advised to agree to price preferences without an assurance that at the same time other measures are taken to tackle all the critical problems that inhibit the growth of an efficient domestic construction industry. In other words, if the Bank considers the promo- tion of domestic construction industries worthwhile, it should be prepared to help devise and apply a comprehensive approach. TZpes of Bank-,onsoed Develoment Exercise& i O . The Bank might get involved in a "development exercise" of the type we envisage in two ways. One would be through the utilization of a Bank-financed construction program or series of projects as a vehicle for developing domestic contractors who are qualified or might be qualified to participate in the construction involved. This has, in fact, been the course adopted in the recent (June 1962) IDA Credit for financing the Fifth Highway Program in Ethiopia. Under this Credit, financial and training assistance will be provided to local contractors, but no contracts will be specifically reserved to them since the principle of competitive bidding has been retained. Other Bank-financed projects or p;o:grams, such as school construction program might also lend themselves to this approach. The other method of providing Bank assistance would be to .~~ ~ ~ ~ .I . - 99 - sponsor, and participato in, a program for daveclping, in a particular country and for a dcaincod period, the conatruction industry as a whole. each ethod has sc-ie adntuag.s and d- SkadvantaSgs. The first has the advantage of a zpecifLc Locus on a series of constrution projects in which the Bank Croup has a financial stake. The Bank's commitment would be automatically limited in scope and in time. However, this very limita- tion is also a disadvantage in that it would exclude from the scope of the development exercise most of the construction work that domestic contractors might actually or potentially be qualified to perform. The second method would be more comprehensive and, if successful, would therefore have a greater impact. It could be applied to the development of a domestic construction industry even when the latter is only in the early stages of development and has as yet little or no capacity for participating in Bank-financed construction work, However,, the very scope of the second mathod of approach carries with it its own difficulties, and the extent of Bank involvement would inevitably be greater. 1liile the Bank Group itself must take the necessary decisians, the Mission would recouind that it test the feasibility of both approaches in a few care- fully selected countries. Selection of Countries for Pilot Development Pro ams II. The countries which are singled out for a development exercise or pilot program should be selected onl the basis of (1) the commitmelt of the government to the promotion of domestic construction capability, (2) an assessment of the construction market., and (3) the current state of development of the construction industry. The comnitment of the government would be a particularly important test, it a more general development program in accordance with the second method of approach mentioned in the preceding paragraph is to be launched. The government would have to provide evidence that it understood the implications of such a program in terms of construction planning and phasing, in terms of changes in contracting procedures and contract administration, and in terms of its share in any financing and training inputs that may be involved, An assessment of the actual and future constructionr market would be highly desiraole as a means of selecting countries qualified for the second and broader approach. The projected market should be large enough to provide sufficient scope for the development of a domestic construction industry. On the other hand, it would be difficult to under- take a pilot program in a country that is large in terms of both its market and area unless in that case,, the p ogram could be confined to a more limited province or state or could focua on the employment of a defined construction program as a vehicle for developing domestic con- tractors. In principle, it would be preferable to select countries where construction demand is growing rather rapidly and opportunities for greater participation by domestic contractors can be develcped without seriously affecting, in t, period 1=nimsdiately ahead, the possibilities of further development of asiness by P.reign contractors who are more or less permanently resident in the country. The ourrent state of development - 1po - of the domestic industr might alqo be . eloeva4t crtrioQri The experience gained from pilot programns would be more p.seful if' the count1ries selected included construction industries at different stages of development, including both the "early phase" and t4he "iJntermadiate phaae." C. Planning of Pilot ProEams 12. Once the countries have been selected by agreement between the Bank and the government involved, the pilot development program will have to be carefully prepared. The Bank will have to organize a mission for this purpose, again in agreement with the government. Such a mission will first of all need to make an assessment of the construction market and its prospective evolution. Construction demand will have to be ana- lyzed in considerable detail, with a proper disaggregation of demand into various types of construction activity, for a limited period of', say, five years, and in terms of a broader, global perspective over a longer period of time. If this assessment cannot be made in sufficient detail for the limited period by the mission itself, the mission wil have to prescribe guidelines which will enable the authorities responsible for planning investinent to arrive at the necessary assessment as soon as possible. The mission's next task would be to analyze the scope and capacity of the domestic industry in terms of the actual and potential capability of domestic contractors for undertaking certain types and amounts of construction work. The market constraints will then have to be related to the possibilities of developing a domestic industry of a given size and structure. The third task will be to determine the nature and content of the development program. This can be developed with the aid of the general framework of approach we have outlined in this report, with the explicit understanding, however., that the suggestions we have made about methods of handling the various elements of the program should be adapted and changed to suit the specific conditions and problems and the institutional structure found in the country. 13. With reference to this third task, the mission might well group its recomnenndations in two categories. One could relate specifi- caXlly to the criteria under which contractors iwould be qualified for an integral program of special assistance, and to the specific types of assistance which might most appropriately be provided to such contractors under the auspices of an autonomous public contractor development agency. Within the framework of the guidelines we have provided, the mission could indicate the forms such assistance should take, including provision of work experience, advice and training, and firnancing. Another set of recomnendations could focus on the policies and measures which the govern- ment should take with respect to the construct,ion industry as a whole. Phese would relate to planning and phasing of public constructicn, modifi- cations in the terms of government construction contracts, possible improve- ments in project design and specifications, the applicat@ion of more - 1ol - equitable criteria for government supervision of construction work, the adoption of more appropriate means for resolving contract disputes, the institution of mere effectuive arrangements for preemployment training and education of the professional, subprofessional and skilled labor personnel required for the construction industry, and the like. Such measures could in large part be implemented independent of the special assistance to be given directly to the prequalified group of developing contractors, though, as we have indicated elsewhere, changes in the terms of contracts, particularly as they bear on the risks to be assumed by the contractor, should be adjusted to the development status of the contrac- tors who are being aided. 1L. The final task would be to devise methods for implementing the program and to estimate its cost. Discussions will have to be held with the various ministries and agencies that will *be involved in execution of the program. Ways of allocating responsibilities for interrelated parts of program - construction planning and phasing, contract allocation and administration, fiinancing, and training - and of enlisting organized participation by the contractors themselves will have to be considered. It would manifestly be undesirable to vest all these responsibilities in a single organization. However, it will be necessary, in our view, to provide for a separate agency that would be in charge of contractor devel- opment. This agency should be responsible for (1) selecting the contrac- tors that would be included in the assistance program, (2) procuring construction work suited to their capacity, (3) providing the necessary formal and informal training, (4) recommending contractors for financing, and (5) assisting participating contractors to form an association that could take an active part in carrying out the program. The economic planning agency of the government will presumably be responsible for assessing and planning construction demand in collaboration with all governmemt agencies and public authorities initiating construction projects. The Ministry of Works or a similar agency might be charged with the advance preparation of annual construction plans on the basis of which it would, in cooperation with the contractor development organization, select the amournt and type of work best suited to the capacity of the contractors included in the programs. The Ministry of Works and the contractor development agency would probably also have to be given joint responsibility for working out in detail the content and terms of the contracts under which work would be awarded, and the appropriate provisions for administering and supervising such contracts. Suitable arrangements Aill also need to be devised for the administration of "he special fund or funds that may be necessary for financing contractors or for insuring credits to contractors. 15. The role which the contractors themselves should play in carrying out the pilot program merits serious consideration. Much of the program's success will depend on th extent to which contractors develop a strong s3nse of participation anc involvement. An association comprising all the contractors included in the program will probably be the best vehicle for - 102 ensuring this. Initially, such an association should probably only have a consultative role. It would be a forum in which the contractor develop- ment agency would explain its plans and methods for the purpose of obtain- ing the cooperation and reaction of the members, and in which the contrac- tors should be encouraged to express their response to the program and make proposals to improve its relevance to their needs. Gradually, as and when the association demonstrates its competence and sense of responsibility, it might be given a greater share in the determination and execution of> the program. The past experience with contra-Itors' associations indicates that they often become a group interested simpl.y in presenting demands to, and obtaining favors from the government rather' than in playing a construc- tive role in improving the standards and performance of the construction industry. Whether this danger can be avoided will in practice depend largely on the skill with which the contractor development agency will handle its relations wit.h the contractors involved. 16. Careful attention will have to be given to the organization and staffing of the contractor development agency. The latter must be enabled to determine which contractors merit assistance, and to eliminate those who fail to demonstrate their capacity for development on the basis of objective criteria. To this end it must have the appropriate degree of administrative and financial autonomy. The size and composition of its staff will have to be determined. For this purpose the preparatory or planning mission will have to estimate how the number of assisted con- tractors and the type and amount of work they might be exper-tpd to under- take are likely to develop over the period of the pilot prograrm, and to determine the kinds of problems on which development assistance will have to focus. Staff requirements will have to be phased in accordance with the projected development of the assistance program. The availability and qualifications of local personnel will need to be investigated in order to determine the type and number of staff members that will have to be recruited abroad. 17. The preparatory mission must prepare an estimate of the costs of the pilot program in terms of a budget projected over the proposed duration of the program. The largest outlays will presumably be for per- sonnel of the contractor development agency and for the funds required to finance contractors. The amount of personnel expendituxres will depend not only on the size and qualifications of the staff, but, above all, on the extent to which staff will need to be recruited abroad. The volume of contractor financing will be determined by the value and typ.e of work the contractors are expected to handle and the form which the financing is expected to take, i.e. whether the financing will be provided directly from a special fund or indirectly through the insurance of bank credits. It is difficult to give an advance indication of the average annual budget that might be required, since this will obviously be determined by such factors as the number of contractors to be assisted, the amount and types of assistance they will need and the proportion of personnel that will have to be recruited abroad. The National Construction Company in Kenya, 103 which has on the average been woridng with about 40t-50 small contractors, has an anual operating budget equivalent to about US$460,000, including the con- tributions from the Norwegian Government to the salaries of 11-14 Norwegians. This excludes, however, the rather heavy losses in loan funds that have been sustained owing to shortcomings in the administration of the program. 180 Finally, the preparatory mission should make recommendations on the duration of the pilot program. In this connection twio considerations should be kept in mind. A pilot program is by its very definition experimental in character. Its efficacy, particularly in terms of the benefits it might yield in relation to costs, cannot be accurately pre- dicted. A long-term commitment to such a program would accordingly be inadvisable. On the other hand, it must be realized that significant results cannot be achieved in a short time. The contractor development agency will probably need an initial period of 6-12 months to work ou-t a detailed plan of action, select the first group of contractors and initiate its deveLopmental assistance. An additional period will be needed to test and revise the methods initially employed. In the light of these consider- ations we are inclined to believe that a five-year program will probably be appropriate. 19. If the preparatory mission is to do its work adequately, it must be prepared to spend a minimum of three months in the field. Much of its time will have to be devoted to gathering data which are not readily available. To become familiar with the capacity problems and limitations of existing contractors, many time-consuming discussions with contractors and visits to construction sites will have to be undertaken. The views of government agencies and ministries concerned with economic planning, with financing and with the various aspects of the whole construction process will have to be considered. A wide range of problems will need to be explored. D. Implementing the ramogram 20. After the mission has completed its work and presented its recoln mendations, the Bank and the government will have to consider the report and their respective responsibilities for its implementation. The two parties will then have to enter into discussions for the purpose of agree- ing on the program and any modifications, and on the contributions which each would make to its realization. Bank Responsibilities 21. The contributio.n that the Bank Group might be expected to make to the program can be list I under the following headings: - 14 a) Administration - The need to protect any program against political pressures that will interfere- with its objective administration has been repeatedly. stressed in this report. The Bank should accordingly insist that the agencies charged with financing and with contractor devel- opment are given the authority and independence which would enable them to operate in accordance with objective criteria. The Bank may also have to require that the director in charge of contractor development be named in agreement between itself and the government. b) Financial assistance - The Bank Group's contribution to the cost of the program might cover all of the foreign exchange cost of the foreign personnel req.;ired and part of the funds needed for financing contractors participating in the development program. c) Technical assistance - While the Bank Group has been generally reluctant to assume responsibility for firlding and making available foreign personnel required for technical assistance functions, particularly in view of the activities of other UN agencies in this field, we believe that it should in this case carefully canvass itself the possible sources of recruitment and make every effort to ensure that personnel of the right caliber are found. The success of any pilot program will in considerable measure depend on the qualifications of the foreign personnel assigned to it. d) Modification in Bank policies and practices - If, as we recom- mend, a pilot program should provide that construction work of a certain type and volume should be reserved to the selected group of contractors and awarded without competitive bidding in order to provide them with the requi:site lNearning experience and continuity of work in their early de- velopmenti phase, the Bank Group should be prepared to agree to the inclusion of Bank-financed contracts of the appropriate size and type in the reserved category. This will entail, of course, an exception to the principle of competitive bidding. However, this exception is unlikely to be very signi- ficant in terms of the amount involved. It wil1 need to be made only to the limited extent that an adequate volume of work will not be available otherwise. Only a few types of construction work financed by the Bank Uroup, such as school construction, small and simple road contracts and other minor civil works of this type, are likely to fall within the capacity 32 contractors who are still in the early phase of their development. As c.)ntractors move into the intermediate development phase, we do not expect thato contract reservation will be necessary. In this phase we expect contracts to be let after competitive tendering which would be open also to foreign contractors whenever the construction project is financed from external sources. The Bank Group can then make a contribution by dividing the construction work involved in any development projects it finances as far as feasible into separate parts that would be within the capacity of developing domestic enterprises to construct, It might also consider whether, during this phase, it could agree that a modest price preference be given to domestic contractors in awarding work by comapetitive tendering. 105 - e) Periodic evaluation - Since it is assumed that the Bank Group wil in essenceibe a partner in carrying out a pilot program, it will need to participate also in periodic evaluations of the program and in the formulation of any modifications th4at may as a :result prove to be neces ary Government Responsibilities 22. The responsibilities which the government would presumably have to assume under a pilot program can in turn be summed up under the follow- ing heads: a) Administration and financing - The government would need to agree to the arrangements for ensuring effective autonomous administration of certain critical parts of the program as outlined in the preceding paragraph, and commit in advance its share of the financiixg required. It will have to provide facilities for recruiting the qualified local person- nel needed to staff the contractor development agency, including long-term secondment of appropriate government personnel to this agency. b) Construction planning and continuity of work - The govern- ment will have to take the measures for planning and phasing construction work and for reservation of contracts that are recommended as necessary to ensure developing contractors continuity of work and learning experience. c) Project design and specifications - Efforts will need to be made to modify and simplify design standards and specifications in accord- ance with concepts of value engineering. Similarly, methods of supervi- sion may have to be revised to ensure substantial rather than literal conformity to specifications. d) Contractual arrangements - The government should undertake to modify the content and terms of construction contracts to accord with the recommendations on the appropriate division of risks and responsibili- ties between the employer and contractor, and to provide for rapid and equitable settlement of disputes regarding contract performance and execu- tion. It should conunit itself also to expedite as far as possible proce- dures for measuring, certifying and paying for construction work completed. e) Contractor performance - The government should help the contractor development agency to compile adequate records of contractor performance and to support this agency's efforts to enforce adequate performance standards by refraining from awarding contracts to contractors whom the agency considers unqualified. E. CudinObservations 23. The Mission would like to emphasize once more the experimental character of any programs designed to develop domestic construction indus- tries. The problems involved are not dlifficult to identify and diagnose. 106 - Sound prescriptions, however, are difficult, since there is little ex- perience of deliberate and coherent effoxrts to develo' this industry. -c our knowledge, only Kenya has had a program fQcusing specifically on the development of domestic contractors; and while this program has by no means been entirely unsuccessful, it provides a better guide to the pit- fa7ls that should be avoided than to the choice of measures likely to prove successful. The need Lor testing and evaluating approaches to the development of the construction industry under various conditions is therefore clear; and a number of pilot programs would provide the means for meeting this need and assessing the costs and benefits which at this Junc- ture are difficult to predict. 24. One final observation must be made. Even if pilot programs demonstrate the feasibility and benefits of the approach to the promotion of construction industries outlined in this report, this does not mean that conprehensive development programs of this type can and should be launched in man;y developing countries. Since considerable resources are required for such a development effort, it must be demonstrated that the developmenit of a domestic constructjion industry merits sufficient priori-ty. Tn many cases such a priority may be difficult to justify. In small and poor countries the limited demand for construction will not warrant efforts to develop a diversified construction industry. At best, a limited effort to improve the efficiency of the existing indigenous building industry (as distinct from the broader construction industry) may prove worthwhile. In other countries measures falling considerably short of the comprehensive program we have elaborated may suffice to provide the necessary stimulus to the development of the construction industry. For example, there may already be a more or less adequate number of contractors who are inherently capable of doing a large volume and broad range of construction work, but who are denied sufficient opportunities for development by factors beyond their control. Such contractors would presumably have no urgent need of a program of special assistance administered by a contractor development agency. What may be required instead are new government policies and measures. Perhaps the government has permitted the industry to become overcrowded by failure to maintain a strict system of prequalification and classification of contractors, thus making it extremely difficult to obtain the continuity of work essential for the development of sound cona- struction enterprises. Or the government may have discouraged the industry by insisting on unreasonable contract terms, by maintaining arbitrary standards of supervision, by denying contractors access to needed financing, etc. The Mission stressed at the outset that it was not attempting to write a general prescription for the promotion of construction industries in all countries. It has sought Lo consider in an integrated fashion all the elements that should be considered in the development of such indus- tries. But that does not mean that all of these elements will require attention in each country or that they will all, be of equal relevance. The focus and scope of a program or set of measures in a specific countr:y can only be determined in the light of a detailed analysis of the partic- ular conditions and problems of such a country. Abbreviation. sXloyed E - Eploy-r or Client of Contractor C- Contractor SC- Subcontractor PC - Pris Contractor LC - Local Contractor PC Forign Contractor C - Foreign ias.ideot Contract.- LSC - Local Subcontractor ( of local na.titoality) LPC - Local Prime Contractor FAtC - Forign ;.n-Resident Contractor JYV- Joint Foreign-Local Vonture (either PC or SC) lNNlSi DEVELOPMDI OF THE CONTRACTCE IN TEHIS or HIS QUALIFiCATIHNS, CAPABILITY, CAPACITY TO BEM RISK OVEtR THE DEVELOPMEN( TINE FRAME DEVELOPMENlT PHASE Early Tntermediate Late SubJit of Qua,ificatitions Itanlrgalof alificatilos Ranidngof Qualificatr's iiin TAIiIAof Re'tivs Ipoortance in Tea' ti o e in rti- f1ThtHive Ii nco 1. Q.I,ifi-ai-onn ;f Contra-tor - Ehitreprensur 4otkmr 1. Motivation (B) 1. Performance record (E) 1. Performance record (E) thre pduri.al and a. gitreprnrial end anagerial skill. (A) 2. Intropreneurial and -snogerial okill- (BH) Financial otrength (D2) &xtrp-urlal id *illa 3. Financial tre-ngth (D0) 2. Qualificationo nid siue of otaff ichsaracter of entrap-esmor) 2. Willingness to rink own reoDorces ( ) lt. Concentration n contracting (C) (F) Under-tarajing of, -ud vilti1Ugsn-s to undertake 3. Concentration on contranting boniness (C) 5. Qoalificatione ard sine of staff (F) 3. EIOtr-preneurial and managerial rink i:. Qualification. and nine of staff (F) 6. Poese..sion of plant ard eqoipont (a) akills (A) Ability to innovate ireceptimity ant 5. P-rfornanca record (El 7. Mti-ation (B) h. Concentration on contracting re-pon-ivanno3 to new sth.oda) 6. Financial. s1rength (D2) 8. Willingness to rlsk o -n reeourcao (DI) boolnens (Cl rganieatisnai ability -(capacity to o1bil- 7. Posse.sion o. plant ani equipcint (O) 5. Posoe.s.on of plant aid equip- ito and plan factors of prodmotion) 6 nt (a) CoB. attitent 6. Willingn.. to risko Ability to define abjecti-en ani -nana of 7. Motivation (B) attaiing then C. Concentratino of -str-eprenaa- on contracting D. Financial capacity 1. Williagnas- to .sk own resources -oaners money or owner's equtty) 2. Development of financial strength or oredltwo-thaw sro Performance (work his,tory or expeience of contracta-entrnpre,ecr- and his fin) F. rofosional qonlificati.na -ad s-an of entrn- preneur' s staff G. Possession of plant and equipm-rt :I. ?Wie˘ Aduacatiosal Qualifications for New Entrants into Co-ntruction ntracting A. Cnvectional building 1. f-l .h ingP Priqary school Secondary school 2. prtil Practical experience an art.ian or as Sane as early phase Same as intermediate phase businessma S. Modern buildirn and ciil engineeriug I fomlchoigSecondary school with conplenuntao-y train- (Sa- a early phase, with a. technician or engineer-entrepreneur ing as tchnician tSa-e as ealy phn ( ter ephasis on eginering b. huxiuiess-type entrepreneur Secondary school ( equplifications for technically- practical expe-riene (trained entrepreneu a. tzc.hixian or engineer-entrepreneur P-evious oonstruction-related experience *a aeplayec in govrecuent or in co.rtruction or consulting engineer- 1Sam- an early phase (Sm as erly ph... b. bsinso~.ypeentrpreeuring firm b. buaincas-type etpn Previous experience in medium or large buainesa ente-priae. III. Developenp t of the Contra-tc--Entrepreneur and hi. PriC o b Senter nda and Staff through Training .-t..1 it Degree of focus in trairing on: BIV n mi A- Methnd of trainig HjS Focus on Forml traini-ng To the extent that special training program Specia~l training progra . nform (nan-to-an adice) Contractor infora - focsued on on- continu, sans genera ephasis ith rspect presumebly discontinued, facilities F.Frmal or etrecturd trining k(short ilass- traiig of tra..to-a.ntrs. to fgce and con tent of training; for cntrac- for upgrading husines, management roecussor sesinrar ad grop con tractor on pr.neur with prin- tms with growing volum of buotn... (increasing skills presumably aalbe demonstrations) conre site ipa1 tres in nbr of contracts) special eMhais on H3a., 1. S ct matter problems subject matter on Bib., B3e.(2) and W11. I.Achievemet otisation (B3b,, His,, Hi aid B? & grow- 2. C-neral appreciation of management probles B3d., & B3i., ing attention to 3. Special probleim of conatruction -nagement with some atten- B. & BH7 (1). a. esti-ating saD pricing tion to Mue.) Irasing emphasis b. record-keeping (for cost control & docunen- ontroaining of tation of receipts and expenditures) tff, -.h n. c. understanding of drawings and speifica- frk-bomkkucph a tionoe cler-bokeee d. po-graing cr scheduling of wrk s. finanlini planning for "Ne., Focu.aon forml As contractnr start (1) prSojct Contractors training of work, c.-bimntisn f 2I enterprise c. otractor formal and informal pesnnlmnagemet -do training with stress in training with greater 4. -tructton technques or technolog subject matter emphan.s, in terms of o nstruc.tion mthode 00 BI & B2. subject motter, to b. equipment proble Hi BHa. . Lu of pobi.e. Mod3- Supplementary focus 2 f.feld r it. ei g. on contractor 'nataff D. Persos to who trainng should be0 direcoted FptTna o *nus * 2. t.il or. ste nahul .dr.td fiti~ OU n in- Supplementary To the extent tiat special trining progran Special training program ,1 Contraotor,sntrep--nur Contractors formal training formal training on con tinues, same geera1 emphasis with rempect presumbly discontinued; facilities 2,Contractor's staff of contractor e range of prob- to focus an,d content of training; for con,- for upgrading boiness manageent equally on office lens included tractors wit ms -leng volum of business (in skills presumably ailble. aid sits probl.m. under HI, terms of subtr so- otis of contracts), is- id mtraer, with creesed attention to B3ia B3b, B3H (2), respect to sub- If, end Bhbt. Sect matter, on B3, nad Wli. Contractors Focus on formal As contractor training of ntarte work, foc. contractor-n on i trinig treprenour on 1' subjeots BH. and subjects BH. & Bl. both an site B2. primerilF nsd In office as scresmieg denires. E.' 0 . / S Soo .a o3 o 23g T ° -4.4 . °3 S 0 4 Ha>a.444 f f 0 a .0a .O4 0.; ..~. .| - HO g f -4 4. D 0 4. .- -4- 0. H I 0 ^ ° 0 . 05 3 . 4 a. a. 3 9 : e O O X > Xt D a * 2'' 0 tgt S ° S t 34 4 - i K4. 0 K . 4 40.C E : t q G F ° " g ° ^ ^ 04 0. HfO 444t I .S0 : L0 ., ., ht ° hC 4 0 . 2 i h . i4 00 p 9 f 44. 8g ,,g 3~ 9Wa! a "7g-tg 0.e g sD , ' g* H H 4004 004-HP H a -5,2 .44. e 3as tb+-Hg Do 0 - ;r˘gasDo3t X. * 0 ;JtO*V- --C-t ) > D40~0.0# 4- t-,U; HO *,Bo- e°o°> 4° tO3.cr--!- ° t90 s ;- cS 2~* C 4 : .0 h jH:t Cd( , ; 0 , Gt :f '",E.cn~~Dt .. 0~' 0*..0 4 0''..r rs s n - SUBJECT --DEMPEIPM1 FHASH ~fAZIntrmedatsLat. B. Ylethods of awrdin contracts (including subcotracts to employer-noito.td otretr oand condtions of comptition by MCsIvtto t edrt aooo atatr iI. Suildi, .Jt. . .drt alod.t-r a,Type of cnrtand method of awrd for Coat pi.. fixed foe vithin overall price with award of co.tract to terderer whose bid iC's ,electad for deelo.pment ceiling fixed by owne; inc...tive to co- 1 cl.onet to neo after elimintion of highest Awerd of lomp-e O nt-rc)cn tractor in form of sh-arng in savings ad lowet bids. Guidac totOd'r b rato copeit r -tendriopen to arising frau differe... in actual co.ot espl.yor through publication of pyrs nlfedotrtc!wihurfrne and ceiling. estimates of coete of ",Jor item or work. q-lf. to to nationality. b. Type of protection againt capetition Roer-ation to domestic contractors of LC'e protected only against cosqecsof contracts (by type, nin ad total extremely low bidding Discretionaryinlu volum of contracts, tking into acc.ont sian of PC's in list of invi.ted con trac.tors in results of slicig) detersicod to be within case of contracts financed from local financil. actual or nea-Ca",cabltorCs resures , splooy ioclonio of foreignon whose develpment is being promoted. No tractore in etn ivaht of inv,ited bidders competition by other LC's or 7Cm for thia in case of externlly-financd cnro reevdgroup of contracts. Rthod of awrding contracts identical for foreign nd local bidders. a.Type of contract a.J ethd of award Unit-price contract concluded with daaig- Unit-price ;ontract conc luded on baoi of ten- Award of unit-price contract votin for LC's selected for devlalpserd notd local contractor on basis of prices ders by invite.d grop aid a..arded by sane basis of competitive tender ,p-n to oat by- nar. method as in the! case of building in inter- all qualified contractors without mediate stage. Sun guidanc to tenderers referenc to nationality. thrcugh publ,icti.. of employer's estimate of coot of maJor it-.s of work. b. Type of protection against comptition Identical as in thi. case of building. Identical as in tin case of bLuidIng. vI. Displyer's B-ponsibility for Giving Certain Types of Informtio nad Guidance to Tend.erero/Contractors .f. .Bt -Ah A. Bills of quatities g ta furn:his. tofiiihEtouri. E. Etimate of unit cos ts E to furnish iorder to help on.tractors C to estinats thongh employer might furnish C to estimate. to control c. osts. cot esinates on major items of work in guide C in preparing his hid. C. Detailed projeot designs aid specifintions 1. Form of specifictions E to furnih. E to furnish. H to furnish. a. y g tin-porito of C to follow snr-.prescoribed. sthodt or C to follow owner-prescibed -sthod or reipe. meip t for of -rhvtgn resulngt suha ecp.)In most cases, C expected to achieve, b reoipe- forconret bacig.)nd resulte eve.n if H indic.ate b. e:nd-result spciitiun.s-prescription C not responsible for -id result. C not respons.ible for end result. )method. .__.of andreut to O IbtkTod, sucha cot-ld -ncret of peific strength. D. DealddrBrg to Prepare. E to Propere. B to prepare. S.Design of temporary work, (e.g. shattering) B to prepare E still to Prepar in sony cases; transtion C to prepere. F- Wrk l- o rha. in fr. f breh.t,,to C responsibility. d. Wor pla orschudul p(in form ofbrchrs E ta furn-ish for guidonc of c. H to furnish for gui unce of C. C'Isa responsibility. 0.Field -sginaering-_ suvying WVrticag aE oiana otrl ' responsibility. 0's responsibility. 0's responsibAlity 2.Wrkn taken-- points for line aid grads E's responsibility. 's responsibility. 0's responsibility. 3. Setting out of wok kbattr beards, slops stak.s, strings & chalk ines., peint, for grade ) E'. responsibility. Transition of responsibility from 0 to C, C'. responsibility VII. APPortoime-It Of Rasponsibtlity Betwee 0naDcr aid iLo.a Contrator for Risks Other then Those of Competition A. Error in bidding (w.itbd_awa by, contractor of low bid on basisg of aritimetic errr ar rev,ised Judgment on difficulty or cost of contract) Penalty to be paid by cntractor InaPPlicable because on omptitive bid- Inapp.icable to low bidder, but applied to Exce Pt in case of demnstrated ding, contractor awarded contract in case of fail- arithmetic error, forfeitur of bid are to . accpt contract (unlikely evetuality). bond, but with option (1) by low bidder to accePt contract at price3 set by predetermined percentage of difference bstween. lowet bid and seod highest bid, (2) by owne to accPt sec ond highest bid. B. Penalty for contractor's faiure to oplt contract in time liquidatsd damges following accePtanc of work) 1. in case of single cntract a application of monetary peouty Not applied. Applied, hut li-tidated, damage assesse..d at Liquidated deeges assesse..d at rate somewhat lower rate, tInn generally applicable prevailing for all contractors b.in the case of experience d F0's. irrespective of nationality. b. PPlication of cn-monetary penalty AppliedJ in form of lowring contractor's Sam as to early phase. VIsnetary penalty only. qualification by aize of contract one step. 2. in case of dafin_d seies of contrats APPlied in form of lo.s of qualifica.tion Salmntr eat n niiulcnrcs oetr eat nidvda -ai where contractor1 is lte in Oopleting for work for defined period, plus lossro qualfctis far workd fotrdefine contract Past obey. id- pie-deter.ined oustr of onntracta pero.. ..o -ii.i. o kfrW.d otat .b- C. Respons,ibility for psyments for additional.r.d costs incrrd before acceptance of work dun 1. Contractor's nglig.nce a.etra a- additisonl work Contractor is not held liable. Increas.ing shift of responsbility to contrac- Contractors responslibility. t r. b. interruption of work Contractor's responsibility. Contrator's responsibility. Contractor's responsibility. 2 N. oma or usual weather onditions aaeig,- a. interruption of wrk Contrac.t-'s responsibility. Contractor's responibility. Contractor's responsibility. b. extra or additional work Contractor is cot held responible. Increaing shift of responsibility to cotra- Contractor's responsibility. tor j.Absormal or unusul wathe,r-.dtsies- (sari, Contrator not responsible. Contractor not responsible. Contractor not responsible, interrspticsa ad etra or additionaI .ar) i.Sub.-surac conditions not clealy indicated Contra..t-s not reponsible. Contractor cot responsible. Contractor not responsihle.. by menr (extra or additional work) 5. Changs in design od spsfstosby, hntrant,. 'ot responsible. Contractor not responsible. Contractor not respnsible. ownr r or nr' gent (contractor not responsible for determining whether changes by ownr's agent are properly authorined 6. Contrar-tor's failure to verify designs arC Contractor cut responsible. Contractor not responsible. Contractor not responsible. daig,i-cluding dimensions supplied by 7. EsalaUtion of cas t of materiale, labor and equipment b. i bcviide'cisei No rvson f ceiling. Escalation to be allowd on appropriate bes,i Same.a intermdiate phas.. 'b 11Re-ision Of ceiling to. a.ke io,taaccout suc ha .onstruction moot indices. esca lation. SUB*S -e- Eal ssrnditereta *te Tr jjC Appropriate St.ards of COver -urrds-ios Ln Enf orcasnt ci Conformity La Castnt3fetr llaadtiont, F o'traaks at D!Afro u nt btam4ada tar m"aoure tye seialS rangirg iba . .*a.s; t., 5; viny 4. strit't) with rspm:t to! A 1 peara far- Z-Z : los-starsiard construrtioa 1-22- '- ; high os.darc han.viru.rtton 2-~3 1 b. ~a.Itof a i hi (l.a Lart e at anticipated magnitade at repairs ama repla"aeanrt Is re lat Ioc t. proJeced life of prujeot) 2-3 3-)s . abIlLy of -aspIe.ao aoaxtroctios proJect l. ae i- tntended puxpaae) 3^1 45 :X. Tinoial Prodiions far Contracting 1. Bidao Not applirsblf. Bond or arat.. to be furnihd in sunt Bid bonds same as those required of FC's. sufficient to diacourage contraotors fro. bidding without real coaidtaent to accept w.ck at bid Price. - 2. Perfbrance Required, but with contractor1s option to Sam so in early phase. agree to retentions of part of progre.s 1 Uainten rice p"rt. to i.-.r p.rfor.-n snd in tonance. I,. Paysr.t a. by contractor to ptt employer aginst)Not required. Po sible institution of the.o requirement Remodred of employr subject ta doubte liability latterl' p proteib ct e double libil- aif pIloyar oxpos6d by lae to double liability. urder laY. ity far payment ti bath prime ontrac- ter and subcontractors and suppliers b. by contractor to protect subcontractors Not required, subject to presontation of Sass as it early phase. S-e am in early -nd intermediate phases. and auppliars against non-pyent evidence by contractor in conteitton with qualification for progress payments that aubcontractors and suppliers have been paid in accordance with legal obligations in prMo.eding period. 9. Requiremnts for wrking apital and equipment capital 1. financial eootribution required from Contractor to -obilice sufficient cash Introduction of reqrirrm-nt that tat toick as- Net quick .ssets ret. rement. contractor (rik or equity capital: resources to gnify wilingness to take sets of contractors bear same reletionship to financil capacity) risks. annual contract volume for -idh he is quali- fi.d. Methods of reducing financing requirements a. for working cepit-. through: (1) contract adtanc. by macor Contract advances or provision for all S-ase as in early phase. Contract advance working capital noeds through ingle (2) p.A.i.n of mtriel. by ownr working capital l o. as in ..rly ph.... Identical provisinna for all contractoro ucder terms of contract, comes- etaranardised mterials required in large irrespectiv of nationality. pondingly red-oing price of nan- quantities, such as ement and reinforce- thraCt ment bars. (3) pyment by owner for materials Eeployer responsible for ouch payments under Sane as in early phase. Identivea proidons for all contraftors (other than in (2), abaTe) on site conditions of strict site superviion. irmapaoti- of ntion.lity. but cot yet incorporated in project (4) propt progress pa ments by oawer ARloyer responsible for setting up efficient(Sa as in early phase. Same as in early phase. sastem for measuring and certifying work completed and for payment; employer to pay interest on overdue payments at ratr exceeding that at which contractor borrows. b. for aeqipsnt capital through (1) guidcnce to contractor in select- Early eph.sia on aouisition of multi- Same as early phase, but with contractors Same so in intermediate phase. ing r-t appropriate and econmeic purpose equipant, with leasIng of gradually .o.uiring broader range of eoudp- aquipinnt specilised equipnent. nemt with expanding business volr-o. (2) use of second-hand quipment Possible establishment by goversaent of Same as in early phase. No speciAl provision. agency for purhase of second-hand equip- Aent abroad urri contract with foreign agents respoible for purchase and recon- ditioning of such equipment adoption of incentives to FNRC to leave equipment in co onAry. (3) encourag-ent of eqripmentlaslng Adoption of acy or all of following: Se as in early phase. Combined emphasi on (1), (r). and (5). to meet need for qpeoialised equip- (1) Oo_ersment encouragement of pri-ate sent and pexks in demand for gemrerl leasing compigiee. aquip.eat. (2) Establishmnt of ioverseent-orned but privately-managed eouipment pool. (3) Proviston of acce. s to governnt- morud maintenance pool for -sa11 civil eagina.ring contractors and aubeontrac- tore. (Zr) Financing of earth seeing-equipment for equipment operators eapable of becos- ing earth-maying subcontractors. 1Prosurag-mant of equlpment leasing ewong contractors through system providing for registretioD of temporarily idle equipxent avilable for rent. a. sour˘e of finantau To simplify finanoing for contractor and Transition to financing by e-tabliahed bank- Relience on ordinary banking and insuranc- inet., to "socialite risks of contractor financ- ing or iaourence institutions serIng gen- without special credit risk insurance. Ing establilhmnt of public fond (in er-1 business comsrAity: establishment of swtoro,oe public entity or *ntrusted for specia1 scheme, financed largely by g,verm- menagesent to banking institution) which sent but with poasible ccntributi .n- from would be source of a11 financing, including contractors,to insure such financial instito- contract advancas (if asn) nd provision tiona againLt meJor, but gradually declining of banking or guarantee facilities and portion of risks irmlved in making financial would serve as chan.l for employer payarts facilities available to ontrectore. to contractor, with appropriate retentions for loan servce, repayment of contract advance, and insurance of performnc and meintenance of contract. D. Ters of financing 1. Intereat rate Application of rates practiaed by comercial Applicetion at ommercial rates of interest. Application of cof -erci1l rates of interest. bdnking institutions with publiC fund fare- gping higher interest rate that would mar- maly be justified by higher risk of finnc-n. tog contractors. 2. Aaorti-ation pariod for a working capital loans -enerally geared to duration of contract,but Ulder terms sornally set by erieting co. rciel Under terms ormaIlly set by e.disting financial with possible provision of some quasi- financial institutiors as conditioned by avail- institutions, equity capital in amount matching contrac- ability of crudit risk insurance. tar's own risk capital and in for of long-term loan with grace period for interest and principal peysents up to five b. equip-ent loans Estoblishment of artiatio period of Under terms normally pet by existtng osmer.ie' Under trm n-lly set by ecisting firuncial aomehat shorter duration than life of finannial institutions I. conditioned by tuze institution.m equipment in order to Iforcee savings by a oaidlity of credit riak insurance. contractor in fom of eocdsition of eouit, interest in esuievent. SUBJECT DSVELCOPMER PHASE lntermediate Iste 3. Security required (1I Pri.ary relevance on .ssigrosent by Some asin early phase, with part of security Requiremnts normally imposed by existing contractor to financing icetitution of prcvided through credit risk insurance. comcercial flnaneial inotitution. payments due under contract or eontracte, supplemented In U.e case of equipment by financrng institution until equipment is tolly paid. (2) Secondary reliance on (a) co-signero or co-guarantors (b) mortgages on real property if avail- able. Fiocal provisions applicable to contracting busire uS . Taxation of proi'ito Poosible tax exemption of profits during Same as in early phase. No special provision. first five years of contracting business. Provision for ca;rry-over of loss in bhere profits are taxed, geerous provision Same as in early phase. Possible continustion of some provision. taxation of pro-'its for carrying for.ard losses as offset to future profits. 3. Tmport dutieo and taxes on equipment Low or no duties on imported equipment end Some as in early phase. Sane as in early phase. spares unless foreign exchange rats is deemed overvalued.