THE WORLD BANK

POLICY PLANNING AND RESEARCH STAFF

Infrastructure and Urban Development Department

Report INU 6

A Review of Bank Assistanceto the Construction Industry

in Developing Countries

Syed S. Kirmani

November 1987

Discussion Paper

This is a document published informally by the World Bank. The views and interpretations herein are those of the author andshould not be attributed to the World Bank, to its affiliated organizations, or to any individual acting on their behalf.

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The World Bank

A Review of Bank Assistanceto the Construction Industry

in Developing Countries

Discussion Paper

The World Bank1818 H Street, N.W.Washington, D.C. 20433, U.S.A.

All rights reservedManufactured in the United States of AmericaFirst Printing August 1987

Discussion Papers are not formal publications of the World Bank.They present preliminary and unpolished results of country analysis orresearch that is circulated to encourage discussion and comnent; citationand the use of such a paper should take account of its provisionalcharacter. The findings, interpretations, and conclusions expressed inthis paper are entirely those of the author and should not be attributed inany manner to the World Bank, to its affiliated organizations, or tomembers of its Board of Executive Directors or the countries theyrepresent. Any maps that accompany the text have been prepared solely forthe convenience of readers; the designations and presentation of materialin them do not imply the expression of any opinion whatsoever on the partof the World Bank, its affiliates, or its Board or member countriesconcerning the legal status of any country, territory, city, or area or ofthe authorities thereof or concerning the delimitation of its boundaries orits national affiliation.

Because of the informality and to present the results of researchwith the least possible delay, the typescript has not been prepared inaccordance with the prozedures appropriate to formal printed texts, and theWorld Bank accepts no responsibility for errors. The publication issupplied at a token charge to defray part of the cost of manufacture anddistribution.

The most recent World Bank publications are described in thecatalog New Publications, a new edition of which is issued in the springand fall of each year. The complete backlist of publications is shown inthe annual Index of Publications, which contains an alphabetical title listand indexes of subjects, authors, and countries and regions; it is of valueprincipally to 'ibraries and institutional purchasers. The continuingresearch progra' is described in The World Bank Research Program:Abstracts of Current Studies, which is issued annually. The latest editionof each of these is available free of charge from Publications Sales Unit,Department F, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433,U.S.A., or from Publication, The World Bank, 66, avenue d'Iena, 75116Paris, France.

Syed Salar Kirmani is a consultant in the Infrastructure andUrban Development Department of the World Bank.

ABSTRACT

This report defines the dimensions of the construction industry,traces the events leading to establishment of the Bank's policy, andreviews the effectiveness of Bank assistance for promoting the industry indeveloping countries. In the early years of its operations, the Bank'sphilosophy of lending only for infrastructure projects, financing only theforeign exchange cost and procuring goods and works on the basis ofinternational competitive bidding (ICB), virtually eliminated the need tofocus on the construction industries in developing countries and theproblems of their growth. The concept of the construction industry as anessential contributor to the process of economic development did notexist. However, the rapid expansion of lending in the agriculture,education and industry sectors in the late 1960s, followed by thedevelopment of new fields of lending in population planning, health andurbanization, had an important impact on procuremenit. The nature of goodsand works to be procured for Bank/IDA projects changed from major civilworks to widely dispersed small works in most projects and the Bankrecognized that application of ICB procedures for such works was neithereconomical nor efficient. The increasing volume of local procurement inBank-financed projects and the concern about the capacity of domesticconstruction industries to implement the projects efficiently andeconomically led to the establishment of an explicit Bank policy in 1973for fostering the growth of the construction industry in developingcountries.

By the end of FY86, the Bank had financed 169 operations in 74countries, mostly in the form of project components, for supporting theconstruction industry. They covered a broad range of activities such asstudies of the construction sector, technical and financial assistance tocontractors, and assistance for introducing labor-intensive constructionpractices. However, repeated reviews carried out by the Bank on theeffectiveness of its assistance indicated that while the operations wereuseful in addressing specific difficulties of individual contractors atparticular points in time, they have not succeeded in fostering the growthof the construction industry. The reviews also indicated that the Bank'spolicy of allowing 7 112 per cent preference to domestic contractors inpoor countries did not achieve its intended purpose of increasing domesticcontractors' participation in Bank-financed procurement. Thus, despite anexplicit policy and a decade-and-a half of operational experience, theBank's goal of promoting the construction industry in developing countriesis still elusive.

The report concludes that, given the importance of theconstruction industry for ensuring the efficiency of investment programsand enhancing the pace of economic development, the Bank should review theadequacy of its current strategies, identify the major barriers affectingthe construction industry and develop a viable strategy for achieving theobjectives of its policy for promoting the construction industry indeveloping countries.

ACKNOWLEDGEMENTS

The author is grateful to the guidance and assistance provided byMessrs. Louis Pouliquen and Curt Carnemark throughout the preparation ofthe report. The author is also indebted to Messrs. Esra Bennathan,Jeffrey Gutman, Gregory Ingram and Donald Strombom for their extensivereview and comments and to Messrs. John Blaxall, Francis Colaco,David Cook, Jean Doyan, Per Fossberg, Ernesto Henriod, Tariq Hussain,Richard Johanson, Martin Karcher, Kudlapur Krishna, John Lethbridge,Kenichi Ohachi, Inder Sud and Izzet Zincir for their useful suggestions.

The author also wishes to express his thanks to Messrs. J.M. Lantran,J. Mathai and G. Tharakan for their assistance in preparing the statisticaltables in the annexes; Mrs. Gisela Minke deserves special thanks for herpatience and excellent secretarial assistance during preparation of the initialdrafts.

GLOSSARY OF ABBREVIATIONS AND TERMS

CR Credit by the International Development Association (IDA).FA Financial AssistanceFIDIC Federation Internationale des Ingenieurs - ConseilsFY Fiscal Year of the World BankGDFCF Gross Domestic Fixed Capital FormationGDP Gross Domestic ProductICB International Competitive BiddingLCB Local Competitive BiddingLN Loan by the International Bank for Reconstruct4,on and Development

(IBRD)OMS Operations Manual StatementOPN Operations Policy NotesOPS Operations Policy StaffSAL Structural Adjustment LoanTA Technical Assistance

Informal Sector - includes all construction activities carried out byindividuals or groups on self-help basis without aregulated process of contracting. These activities areusually not recorded in National Accounts.

Formal Sector - includes all construction activities carried out byenterprises and organizations through a regulated processof contracting or force account.

Force Account - involves construction carried out by an enterprise'sor organization's own personnel and equipment with orwithout the use of labor-supply contracts. Agovernment-owned construction unit that is notmanagerially and financialify autonomous is alsoconsidered as force account unit.

Vl

A REVIEW OF

BANK ASSISTANCE TO THE CONSTRUCTION INDUSTRY

IN DEVELOPING COUNTRIES

TABLE OF CONTENTS

Page

I. Introduction and Sumnary 1

The Construction Industry 1Role of Construction Industry in Economic Development 2Purpose and Scope of the Report 3Main Findings of the Review 3Need for a Viable Strategy 4

II. Evolution of Bank Policy on Construction Industry 4

Bank Interest in the 1950s and 1960s 4Evolution of Bank Policy 9Approval of Bank Policy on Construction Industry 10Guidelines for Implementing the Policy 11

III. Bank Operations 13

Size and Coverage of Operations 13Nature of Assistance 13Free-Standing Projects 14IFC Operations 15Economic and Sector Work 15

IV. Review of Bank Experience 17

Findings of the 1980, 1983 and 1985 Reviews 17Views of the Regions 18Experience of 7-1/2% Preference Policy 20OED's Reviews of Project Performance 22

V. Need for a Viable Strategy 23

TABLE OF CONTENTS (Continued)

Annexes

Annex 1: Countries Associated with Bank Operations inConstruction Industry 26

Annex 2: Countries, Sectors and Types of Assistance(FY74-FY86) 27

Annex 3: Recent Operations (FY 1983-86) 29

Annex 4: Construction Industry Projects/Project Components 31

Annex 5: Free-Standing Bank Projects in Support of Domestic 40Construction Industries

Annex 6: Reviews of Effectiveness of Bank Assistance to the 41Construction Industries

Annex 7: Views of the Regions on Effectiveness of Bank 45Assistance to the Construction Industry

Annex 8: Construction Sector Issues 49

Annex 9: Bidding Experience with Preference for Domestic 52Contractors

Bibliography 54

A REVIEW OF

BANK ASSISTANCE TO THE CONSTRUCTION INDUSTRY

IN DEVELOPING COUNTRIES

I. Introduction and Sumary

Construction Industry

1. The construction industry is a sector of the economy whichtransforms various resources into constructed economic and socialinfrastructure and facilities. It embraces all phases of the process oftransformation - plai.ning, designing, financing, procuring, constructing,maintaining and operating. The constructed facilities range fromresidential and nonresidential buildings to dams, power plants, roads,irrigation works and other infrastrucutre. The participants in theconstruction industry business include planners, designers, contractors,sub-contractors, material and equipment suppliers, owners, constructionworkers, supervisors, financiers, accountants, lawyers, insurers andoperators. The government is involved in the industry as purchaser,financier, regulator and adjudicator. The business environment of theindustry consists of systems which regulate the relations, actions andinteractions of all the participants. The regulatory environment includesprocurement policies and procedures, budgeting systems, disbursementprocedures, licensing requirements, codes and practices, safetylegislation, tax structure, credit systems, import policies, customsprocedures, contract laws and several other requirements of the regulatorysystems.

2. Given its extreme fragmentation, the heterogenous nature of itsproducts and the wide variety of its participants and end-users, thedimensions and boundaries of the construction industry are not as obviousas those of other industries. Some define the construction industry verynarrowly to include only contractors, others tend to extend its scopewidely to cover the construction and building materials industries. Thereare problems with boch definitions. Contractors play an important role inthe construction industry, but they cannot succeed unless the policies areright, th- systems are sound, the institutions are strong, and all theparticipants observe the rules of the game. Moreover, a substantial part

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of the construction work takes place in the informal sector of theconstruction industry; it includes works carried out by individuals andgroups on a self-help basis without contracting. A definition thatincludes only contractors, therefore, fails to recognize the roles of otherparticipants in the construction industry and the policies, systems andpractices which govern their relations with the contractors. As regardsconstruction and building materials industries, it is true that theavailability, quality and prices of materials have an important effect onthe economy and efficiency of construction. However, in order to avoiddiffusion of focus, this report defines the scope of the constructionindustry to include the suppliers of construction and building mateirals asimportant participants, but excludes the materials and their manufacturingpolicies, strategies and processes.

Role of Construction Induztry in Economic Development

3. Studies carried out by UN Agencies, universities and researchinstitutions underline the importance of the construction industry in theprocess of development.!/ As an industry promoting growth and capitalformation, construction plays a key role in economic development. Morethan half of annual capital formation in both developed and developingcountries involves construction. The expansion of capital is a function ofthe rate at which the construction industry is developed and expanded;conversely, the lack of construction capacity is a major constraint toexpansion of capital. The studies have also established that:

* construction typically contributes 5 to 9 percent to GDPin developing countries;

* construction provides critical backward and forwardlinkages to the rest of the economy. Backward linkages,or derived demands, represent a value which, in mostinstances, exceeds the value added in the constructionitself; according to a study of eleven developingcountries E18], the value added by backward linkages wasas much as 55% of the value of construction purchases ofmaterials and services.

o the construction industry is an important source ofemployment in developing countries and, on average,accounts for approximately 5 percent of total employment;

* employment in construction is often a stepping stone towork in manufacturing;

1/ See Bibliography [6, 11, 12, 17, 18, 21, 28 and 39].

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* since the construction industry as a whole is largelymade up of small firms, it provides enterepreneurialopportunities for many small businesses and plays animportant role in the distribution of income.

4. In brief, all the studies recognize that as an industry promotinggrowth and capital investment programs, construction is an importantcontributor to economic development. Growth of the construction indlustryhas an important multiplier effect. It stimulates industrializationthrough strategies favoring investment, providing basic needs and creatingemployment-generating projects. The growth of the building materialsindustry, which contributes about 59 percent of construction output, isdirectly linked to t e growth of the construction industry. Theconstruction and building materials sectors have enormous potential forfulfilling the development needs of poor countries by enhancing theproductivity of investments and increasing the efficiency of resource use.There is both the need and the opportunity for the Bank to develop thispotential. However, this report deals only with the construction sector.Purpose and Scope of the Report

5. This report reviews the current status of the Bank'sassistance 2 / to the construction industry in developing countries. Itpresents the initiatives taken by the Bank for fostering the constructionindustry, discusses the strategies and directions of the Bank'sinterventions, reviews the progress made in promoting the industry, andpresents the assessments .nade from time to time of the effectiveness ofBank assistance. The report is based largely upon the available literatureon the subject, the appraisal and supervision reports relating to theconstruction industry, and the reviews carried out by the OPS and RegionalStaff of the effectiveness of Bank assistance. This report is intendedmainly as a status report. Issues such as the problems of the constructionindustry, the strategies for addressing them, U, role of the industry ineconomic development and the need for the Bank to assist its borrowirgcountries to develop their construction industries, are discussed in aseparate report, namely, "The Construction Industry in Development - Issuesand Options". [42]

Main Findings of the Review

6. The Bank's interest in fostering the growth of domestic constructionindustries in developing countries was slow to evolve. In the early yearsof its operations, the Bank's philosophy of lending only for infrastructure

2/ The word "Bank", as used in this report, means the International Bankfor Reconstruction and Development (IBRD) and its affiliates, theInternational Development Association (IDA) and the InternationalFinance Corporation (IFC).

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projects, financing only the foreign exchange cost and procuring goods andworks on the basis of international competitive bidding (ICB), virtuallyeliminated the need to focus on the domestic construction industry indeveloping countries and the problems of its growth. The concept thatconstruction industry was an essential contributor to the process ofeconomic development did not exist. However, the policy on theconstruction industry finally approved by the Bank in 1973 and theguidelines (OPN 7.8) issued for its implementation provided a comprehensiveframework for fostering the growth of the industry in developingcountries. Since that time, there has been a Bank-wide surge ofoperational activities for supporting the industry. By the end of FY86,the Bank financed 169 operations in 74 countries, mostly in the form ofproject components, for developing the construction industry. Theseoperations covered a broad range of activities such as studies of theconstruction industry, technical assistance to contractors, education andtraining of contractors' personnel, credit to contractors for purchasingequipment, assistance for promoting labor-intensive construction practices,and encouraging borrowers to change the force account system tocontiacting. However, the reviews carried out by both the Bank'sOperations Policy Staff (OPS) and the Regions indicate that while theBank's operations were useful in addressing specific difficulties in thecountries at particular points in time, they have not succeeded infostering the growth of the construction industry in those countries. Thereviews also indicate that the Bank's policy approved in 1974 of allowing7-1/2 % preference to domestic contractors in poor countries did notachieve its intended purpose of encouraging domestic contractors toincrease their participation in Bank-financed procurement.

7. The events to date show that despite a clear policy, comprehensiveguidelines, extensive studies, numerous operations and almost adecade-and-a-half of operational experience, the Bank's goal of developingthe construction industry in developing countries is still elusive.Obviously, there is something missing in the Bank's efforts; somethingwhich is vitiating all its undertakings; and something which is a majorbarrier to achievement of its goal.

Need for a Viable Strategy

8. It is important to know: Why the current strategies for developingthe construction industry have not been sucessful despite numerousoperations? What are the rmiajor barriers to achievement of the Bank'sgoals? What should the Bank do to overcome them? Will the Bank be ableto address them? What are the Bank's comparative advantages? What arethe prospect, of its success? What happens if the Bank does not addressthem? The OPS and Regional reviews reflect frustration of the Bank staffover the fact that the efforts to date have not produced the expectedresults. Some regions have questioned whether the Bank should be involvedin construction industry operations. At the same time, many borrowingcountries are seeking the Bank's assistance for developing theirconstr. ction industries. In an effort to increase their participation in

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Bank-financed procurement or to economize on their own procurement, thesecountries are following procurement procedures which arF hurting, insteadof helping, the growth of the domestic construction industry. Obviously,there is an urgent need for a more effective approach for addressing themain barriers to the growth of the industry. Given the importance of theconstruction industry for ensuring the efficiency of investment programsand enhancing the pace. of economic development, the Bank should review theadequacy of its current strategies, identify the major barriers affectingthe industry and develop a viable strategy for achieving the objectives ofits policy for fostering the construction industry in developingcountries.

II. Evolution of Bank Policy on Construction Industry

Bank Interest in the 1950s and 1960s

9. After its initial lending for general reconstruction in C'he late1940s, the Bank made its first loans for specific projects in 1948. Sincethen, Ban'. lending for projects has reached impressive proportions. Overthe years, the Bank continually revised its policies and procedures ofproject lending and became closely involved in all stages of the projectcycle - from economic and sector work and project identification,preparation and appraisal to completion of the projects and evaluation ofthe results. The Bank also broadened the concept of the project to includenot only capital investment for procurement of goods and civil works, butalso for provision of services for engineering, supervision, maintenanceand operations, improvement of policies, development of institutions andother actions necessary for achieving the development objectives. Thus,over the years, the Bank's approach to project lending has proved to be aneffective instrument for developing institutions and promoting economicdevelopment. The Bank recognized at the outset that the developmentobjectives of a project are realized only when it is successfullyimplemented. Although the borrower is responsible for implementing theproject, OMS 3.50 is explicit in emphasizing the Bank's poliry that "anadequate level of supervision should be the first priority ot" Bank staff inorder to ensure that the maximum benefits are derived from the resourcesalready committed." The Articles of Agreement require the Bank to ensurethat the proceeds of the loan are used only for its specified purpose "withdue attention to economy and efficiency." Procurement, therefore, hasbecome an important aspect of the Bank's supervision work and a criticalelement of project implementation. OMS 2.40 emphasizes that "unless it iscarried out efficiently and promptly, the full benefits of the project willnot be realized." The Bank has developed comprehensive Guidelines for Pro-curement, which are periodically revised in the light of experience. TheGuidelines describe the Bank's policies and procedures for procurement ofgoods and services for Bank financed projects and provide guidance forpreparing, submitting and opening bids for awarding of contracts andaddressing contractual issues during implementation.

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10. Given the key role of construction in economic development andthe need for an efficient construction industry for successfulimplementation of development projects, the Bank has an obvious interest infostering the growth of the construction industry in developing countries.The Bank's development objectives include assisting borrowing countries inestablishing sound policies, procedures and institutions for developingtheir domestic construction industries. The Articles of Agreement requirethe Bank to ensure adequate supervision of the projects, achieve maximumbenefits from the resources already comnitted, and arrange procurement ofgoods and works with due diligence for economy and efficiency. By doingso, they emphasize, albeit implicitly, that it is important to develop theconstruction industry in developing couintries to achieve the desiredresults. However, the Bank's interest in the construction industry wasslow to develop, and it took almost three decades to establish an explicitpolicy for promoting the construction industry in developing countries.The reasons behind the apparent lack of attention to the constructionindustry in the 1950s and 1960s are not only of historical interest, butthey also provide valuable insights into the Bank's concept of developmentand the financing and procurement policies which inhibited its involvementin those years.

11. In the 1950s and 1960s, the Bank financed large infrastructureprojects in the transportation, power, telecormnunication, and irrigationsectors. These projects were constructed mainly by expatriate contractorsbecause the domestic construction industry in developing countries was notsufficiently developed to qualify for such large construction jobs. 3/Moreover, the Bank's emphasis in project development was on identifyi galternatives, studying their feasibility, and deciding on a particular setof investments without taking into account the capacity of the domesticconstruction industry to execute them. Its focus on project implementationwas limited to selecting the mechanisms for procurement and constructionand making arrangements for supervision by the consultants and theimplementing agency. The Bank did not consider the domestic constructionindustry, because it assumed that deciding the size and scope of contracts,following internationally-accepted standards for preparing contractdocuments, inviting bids from contractors specially qualified for the job,and awarding contracts to the most responsive lowest bidder would meet theobjectives of efficiency and economy and ensure successful implementation.

12. During this time, the Bank adopted four key measures forimplementing projects. First, it followed the policy of procurement "withdue attention to economy and efficiency", and providing member countrieswith the opportunity to compete for goods and works financed by the Bank.

31 For example, in the 1950s, most of the public works in India andPakistan were constructed on force-account using contractors mainly forproviding labor; at the time of its independence in 1945, Korea hadonly two small domestic construction firms.

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Second, it adopted the FIDIC contracting system which protected the rightsof the "Employer" as well as the "Contractor" and gave certainquasi-judicial powers to tthe "Engineer" for administering the contract.Third, it prescribed international competitive bidding (ICB) forprocurement of goods and works. Fourth, it required that, within thevalidity period of the bids, the borrower should award the contract to thebidder whose bid has been determined to be the lowest evaluated bid and whomeets the appropriate standards of capability and financial resources. TheBank followed these procedures quite rigidly and specified them in the loandocuments as conditions for implementing the project. It refused tofinance expenditures for goods and works which were not procured inaccordance with the agreed procedures, and cancelled that portion of theloan allocated to the goods and works which was "misprocured."

13. The Bank's philosophy of lending only for infrastructureprojects, financing only the foreign exchange cost of projects andprocuring goods and works only on the basis of international competitivebidding virtually eliminated the need to consider the capacity of thedomestic construction industry in developing countries and the problems ofits arowth. The concept of the construction industry as an essentialcontributor to the process of development did not exist. Even the fewdomestic contractors in some developing countries who had the potential forimplementing Bank-financed works found it virtually impossible to cross thebarriers of prequalification procedures which required evidence of previousexperience in constructing similar works and sound financial standing.However, given the policies of those times and the fact that Bank financingand procurement procedures assured quality goods and efficientconstruction, there was hardly any need for the Bank to get involved withthe problems of construction industries in the borrowing countries.

14. In the late 1950s and early 1960s, however, certain eventsinfluenced the Bank's appreciation of the development process. Despite itsstrong belief that investment in infrastructure was a prerequisite foreconomic development, Bank lending increased very slowly. At first theBank attributed this to the limited capacity of underdeveloped countries toabsorb capital quickly for really productive purposes. However, there wasa great deal of criticism, both inside and outside the Bank, that theabsorptive capacity of developing countries for external assistance couldnot be satisfied by a few loans for financing the foreign exchange cost ofspecific infrastructure projects; and that there were other equallyimportant aspects of the development process to which the Bank could lendand achieve its lending objectives effectively. Although the Bank was slowto break away from its devotion to capital infra-structure, it recognizedthat the opportunities for effective use of external assistance were muchlarger than it had conceived earlier. These and other considerations (suchas recognition of the need for balanced growth, development of humanresources, financing of local currency costs and the proper role of boththe public and private sector enterprises in the development process) ledto the broadening of the Bank's concepts of development.

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15. The scope of Bank lending was enlarged during President Woods'administration with increased emphasis on agriculture, education andindustry. Under President McNamara, the Bank not only followed theinitiatives of President Woods in greatly expanding lending to agriculture,education and industry, but also developed new fields of lending inpopulation planning, health and urbanization. President McNamara alsospelled out the Bank's philosophy that bringing about social transformationand improving the quality of human life were essential for economicdevelopment. Thus, the Bank's country studies and project work reflectedthe needs of poverty alleviation, income distribution, family planning,improved nutrition, unemployment, and a much wider sharing of the benefitsof agricultural and industrial development.

16. The rapid expansion of lending in the agriculture, education andindustry sectors, followed by the development of new fields of lending inpopulation planning, health, and urbanization, reduced the shares of thetraditional sectors of transportation and power in total lending and openedup opportunities for local expenditure financing. There were debates onthe interpretation of the "exceptional circumstances" referred to in theArticles of Agreement, which stated that "the Bank may, in exceptionalcircumstances, when local currency required for the purposes of loan cannotbe raised by the borrower on reasonable terms, provide the borrower as partof the loan with an appropriate amount of that currency." Eventually, theBank shifted significantly from its early policy of financing only theforeign exchange cost of projects. The establishment of the InternationalDevelopment Association (IDA) in 1960 and the provision in its Articles ofAgreement that "The Association, in special cases, may make foreignexchange available for local expenditures," further increased theopportunities for reducing the restrictions on local expenditure financing.

17. These events had an important impact on procurement; the natureof ';:Dods and works to be procured changed from major civil works andequipment for transportion and power projects to an increasing volume ofminor civil works, land clearance, simple irrigation works, schoolbuildings, furniture, laboratory equipment, secondary roads, rural roadsand health clinics. The appropriateness of ICB for procuring such goodsand works was seriously questioned. Borrower countries felt that suchgoods should be procured locally and that the bidding procedures shouldalso allow a sizeable margin of price preference to local bidders competingfor ICB procurement. The major share-holders and suppliers of Bank/IDAcapital argued, however, that any change in procedures which reduced theirshare in total procurement below their share of subscriptions in thecapital resources would be unfair and un1esponsive to political realities.

18. The Bank did not accept the "fair share" argument, which it sawas analogous to "tied procurement" and contrary to its objectives as aninternational development institution. It recognized that applying ICB

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procedures 4 / for goods and works, which were too small and too dispersedto be of interest to foreign suppliers and contractors, was neithereconomical nor efficient. Consequently, the Bank agreed to finance localprocurement whenever it was economically justified. Mexico was the firstdeveloping country to receive local expenditure financing; in 1958, theBank provided $2.5 million to Mexico for domestic procurement of someinputs for a power project. Until that year, local expenditure financingwas reserved entirely for projects in the developed countries; thesecountries were already industrialized and were capable of producing goodsin competition with outside suppliers, without too high a level ofprotection to domestic suppliers to jeopardize competition.

19. Because the Bank was interested in promoting industrialization,it recognized the need for some protection to the "infant" industries indeveloping countries. In 1962, it adopted the policy of providing 15percent preference in evaluating bids of domestic manufacturers competingwith foreign firms for ICB contracts. The margin of preference would belimited to the existing tariff, if it were lower. This policy representeda reasonable compromise between the Bank's objectives of developing localindustries and the need for ensuring economy, efficiency and fairness ininternational procurement. However, a similar preference was not given todomestic construction contractors for procuring works because it wasthought unnecessary in view of the natural advantages they alreadyenjoyed. Of course, the policy of financing local expenditure enabled thedomestic contractors to participate in procurement of works which were toosmall to attract foreign contractors; but where ICB procurement of workswas feasible, domestic contractors had no preference. In fact, theprocurement guidelines required that the works should be grouped, whereverpossible, to permit participation of foreign contractors.

20. The evolution of the concepts of economic development, thebroadening of lending to other sectors, the decision to finance localcurrency expenditure, the provision for a margin of preference to domesticmanufacturers, and the revisions in the procuremenit policies clearlydemonstrated the Bank's strong comnitment to development and itsflexibility in adjusting its policies to achieve that objective. However,aside from accepting domestic procurement of small and widely dispersedcivil works which were unattractive to foreign bidders, the Bank had littleinterest in promoting the construction industry in developing countries.On the contrary, it continued to maintain that a margin of preference to

4/ ICB procedures require wider circulation of the notice for bidding,longer time for preparing bids and packaging works to increase the sizeof contracts to make them sufficiently attractive for foreigncontractors. They also differ from local competitive bidding (LCB)procedures in other respects such as place of arbitration, currencyprovisions, language of bidding documents and provisions relating tocustoms duties and sales taxes.

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domestic contractors on the lines approved for domestic manufacturers wasnot necessary because both foreign and domestic contractors would use thesame construction materials, the same local labor, and the sameconstruction plaFit for building the works and that the difference indomestic value added between the local and foreign contractors would besmall. [16)

Evolution of1Bank Plicy

21. The oil crisis of the early 1970s caused momentous changes in theinternational economy and created a major upheaval in global economicrelationships. Although the implications of these changes were stillunfolding, the Bank was concerned that the prospects for the economic andsocial progress of a large number of developing countries, particularly thepoor ones, would be seriously jeopardized. This concern led to a furtherincrease in the priority of agriculture and rural development projects inBank operations. As a consequence, Bank lending expanded at a phenomenalrate - from $1,323 million for 58 projects in fiscal year 1965 to $5896million for 190 projects in 1975. The growth in lending to agriculture wasparticularly dramatic - from a total of about $27 million during1964-68 to $1,858 million in 1975. Lending in the "traditional" sectors- power, transportation, and telecomnunications - continued to decreasefrom an average of 79 percent in 1964-68 to only 29 percent in 1975, whilethe share of agriculture lending accounted for a record 32 percent of allcormitments in 1975. Rural development received high priority; a ruraldevelopment project was defined as one in which more than 50 percent of thebenefits would accrue to the rural poor. The share of agriculture,education and urban development projects in the Bank's portfolio increasedrapidly and it was clear that this trend would continue in futureoperations. Because these projects included relatively small and widelyscattered works, their procurement under ICB procedures was seriouslyquestioned. Many borrowers, particularly India, were critical of theBank's procurement policies. They were concerned that their traditionallabor-intensive methods of construction through local- contractors would bereplaced by mechanized construction techniques introduced by foreigncontractors, and this would create unemployment and disrupt domesticconstruction industries. In the early 1970s, India refused to accept ICBfor procuring such works; therefore, the Bank had to stop lending for civilworks in India. However, there was increasing support within and outsidethe Bank for the concerns of the borrowers. The Bank recognized the needfor more exceptions to the ICB procedures, since it was not economical andefficient to insist on ICB for works which were too small and too dispersedto attract foreign contractors. The Bank also agreed that on-lendingoperations of agriculture credit banks and DFCs financed from Bank loanswere so small, varied, and extended over time that it was not practical touse ICB procedures. The exceptions to ICB, therefore, became more cormmonand extensive over time. Gradually, LCB - local competitive biddingadvertised locally and carried out in accordance with local procurementprocedures acceptable to the Bank - became an accepted practice for smallcivil works.

22. The increasing volume of local procurement in Bank-financedprojects and the concern about the capacity of domestic contractors toexecute works efficiently necessitated a fresh look at the Bank's policy onthe domestic construction industry in developing countries. The Bank'sinterest in the development process as a whole and the constructionindustry's important role in economic development further underlined theneed for a review. The Bank was aware that Bank-financed civil worksrepresented a small proportion of total construction activity in mostborrowing countries and that the governments' efforts to promote domesticconstruction industry were more important than those of the Bank.However, it also recognized that the Bank's technical and financialassistance to the domestic construction industry in borrowing countrieswas important for efficient execution of both the Bank-financed projectsand the investment programs of the borrowers.

Approval of the Bank Policy on Construction Industry

23. On July 12, 1973, Mr. McNamara submitted a Memorandum entitled"Promotion of Domestic Construction Industries in Developing Countries"[32] to the Board of Directors. The Memorandum outlined the essentialfeatures of the construction industry, the major ways in which nationalgovernments might promote its development, and the ways the Bank's policiesand operations might be formulated to complement the national efforts. TheMemorandum also recommended that the Bank's procurement policies bemodified to afford a reasonable level of preference to domestic contractorsin the award of Bank-financed civil works contracts.

24. At a meeting on August 7, 1973, the Board of Executive Directorsapproved the Bank's proposal to support development of the constructionindustry in developing countries. The Board's resolution reads as follows:

"The Bank should address the problems of promoting efficientdomestic construction industries in developing countries. Theseproblems should be assessed and diagnosed in the course of theBank's general economic and sector work. Emphasis should beplaced on providing technical assistance in support of theseindustries through training and education, analysis of existinggovernment procedures and institutions, and appropriate researchinto construction design and technology suited to localconditions. Bank-financed civil works, education and DFCprojects should be used as the major vehicles for providing thistechnical assistance and training. In addition, where required,the Bank Group should provide financial assistance to theindustry through suitable local intermediaries."

25. There was considerable debate, however, on the proposal thatprocurement policies should be modified to afford a reasonable level ofpreference to domestic contractors. Board members representing thedeveloping countries argued that fostering domestic industries was anessential component of economic development, and that this objective should

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not be ignored in pursuing the principles of economy and efficiency. Theyalso pointed out that it would be inconsistent to provide a margin ofpreference to domestic manufacturers in Bank-financed procurement, but notto domestic contractors. Others thought the difference in value addedbetween the domestic and foreign contractors was too small to justify amargin of preference for domestic procurement of works. Moreover, thedomestic construction indLustry already had a substantial degree of "naturalprotection" against foreign competition due to its "site-bound" advantagesand its knowledge of local conditions such as the legal and administrativesystems, the market for materials and labor, and other socio-politicalfactors. [16, 24]

26. At a subsequent meeting on January 22, 1974, the Board approvedspecific proposals for providing financial support to constructionindustries through improved arrangements for contract advances andpayments. These arrangements, which were applicable to both foreign anddomestic bidders on a "non-discriminatory basis", provided equal access todomestic contractors for working capital and enhanced their ability tocompete. The Board also approved, as an "experiment", a 7-1/2 percentpreference in the evaluation of bids for "bonafide, qualified, domesticcontractors" in poor countries with a per capita income of $200 or less.Under this criteria, only 40 countries - including some large countrieslike Bangladesh, India, Indonesia, Nigeria and Pakistan - were qualifiedto receive the benefits of preference. The scope of the experiment wasinitially limited to projects approved by the Board during a one-yearperiod ending in January 1975.

27. These events were a landmark in the evolution of the Bank'sprocurement policies. For the first time, the Procurement Guidelinesincluded "encouraging the development of local contractors andmanufacturers in the borrowing countries" as a specific objective inaddition to the previous objectives of ensuring economy and efficiency andproviding opportunities to all member countries to compete in Bank-financedprocurement of goods and works. The revised Guidelines also described, forthe first time, procedures for achieving economy and efficiency when theadvantages of ICB would clearly be outweighed by the administrative orfinancial burden involved in its procedures.

Guidelines for Implementinq the Policy

28. On July 12, 1974, the Bank issued comprehensive guidelines for"Technical and Financial Assistance to the Construction Industry inDeveloping Countries" (Operations Policy Notes - OPN 7.8). The guidelinesdescribe what the Bank can do through economic and sector work and specialstudies to assess the potential of the domestic construction industry inselected countries; diagnose the problems of the industry; and developtechnical and financial assistance programs for Bank financing. Forpurposes of operational work, the guidelines define the constructionindustry as "the bu"ilding and civil contracting industry, that is, thecollection of enterprises private or public, which are engaged in all

- 13 -

manner of infrastructure construction as contractors, or sub-contractors onthe basis of competitive or negotiated contracts." 5 / The guidelines alsoinclude an "Aide Memoire"l for sector work on construction industry whichrequires sector missions to follow a "problem-oriented approach to theindustry," identify the major problems affecting its growth, suggestsolutions to address them, and delineate areas where the Bank could play auseful role. Because the construction sector impinges on all sectors ofthe economy, the guidelines specified the following arrangements forimplementing and coordinating the Bank's supporIt to the constructionindustry:

"The multisectoral and technical nature of the problem and itsresolution suggest that the Regional Projects Directors shouldtake the leading role in initiating, coordinating, implementingand monitoring the related Bank program of sector work, studiesand project assistance. Regional Frogram staff will normallyplay a major role in the initial contacts with government andwith economic missions. Regional Projects staff will mainly beconcerned with further diagnosis of the specifir problems throughsector work, special studies, and appraisal mis'tions, and thenapplying appropriate remedial measures by way of technicalassistance, education and training."

29. The events leading to the evolution of the Bank's concept ofeconomic development and the broadening of its financing and procurementpolicies dramatize the Bank's commitment to development and its remarkableability to maintain the objectivity of its mission in an environment ofconflicting interests. Bank policies on procurement have an impact on thegrowth of construction industries in developing countries. Procurement isalso an area where the interests of developed and developing countriesoften clash. Given the growing size of Bank-financed procurement and theincreasing competition from both developed and developing countries,procurement was, and would continue to be, a sensitive area. Membercountries, both developed and developing, have a legitimate interest incompeting for Bank-financed procurement. Competition is also important forensuring efficiency and economy of Bank-financed projects. Given thesecircumstances, it is not surprising that Bank policy for promoting theconstruction industry in developing countries was slow to evolve. However,the policy finally approved by the Board in 1973 and the guidelines (OPN7.8) issued in 1974 for its implementation provided a comprehensiveframework for fostering the growth of the construction industry indeveloping countries.

5/ The implications of this narrow definition are discussed in aseparate paper. [42]

- 14 -

III. Bank Operations

Size and Coverage of Operations

30. With the establishment of an explicit Bank policy on domesticconstruction industry, there was a Bank-wide surge of operationalactivities to support the industry in developing countries. By the end ofFY86, the Bank financed 169 operations in 74 countries (Annexes 1 to 5).The total volume of lending was not large (about US$140 million for projectcomponents and U.S. $184 million for free-standing projects), but thenumber of activities averaged almost 13 per year. The Bank was involved ina broad range of countries - from large countries like India and Indonesiato small ones like Lesotho and Congo, and from upper mid'!7e-incomeeconomies like Korea and Trinidad to low-income economies like Ethiopia andBangladesh. The Bank also provided technical assistance to threehigh-income oil exporting countries, Kuwait, Libya and Saudi Arabia. Thegeographical coverage of the countries was also extensive. They include 33countries in East and West Africa, 15 in EMENA, 15 in LAC, and 11 in theSouth and East Asia regions (Annex 1).

Nature of Assistance

31. Annex 2 shows that 56 out of the 169 operations involved studiesfor assessing the size, characteristics, and problems of the constructionindustry in various countries. In some countries, separate studies worecarried out by different sector divisions of the Bank. A large number ofstudies - 45 out of 56 or 80 percent of the total - were carried out by theTransportation divisions; they also provided most of the technicalassistance to the industry and were involved in 52 out of 84 or 61 percentof all technical assistance operations. The studies carried out by the IDFdivisions rank next (8 out of o6 or 14 percent of total studies). The IDFdivisions were most active in providing financial assistance to theindustry and were responsible for 22 out of 33 (or 66 percent) financialassistance operations. The Education divisions played a role in thetraining programs -- 12 out of 15 or 80 percent of project components fortraining -- while the activities of the Urban and Water Supply divisions,although quite sizeable in the informal sector of the constructionindustry, were limited in the formal sector.

32. The above statistics are impressive. However, most operations weresmall in terms of lending amounts. Of the 169 operations, 163 were in theform of project components involving an average lending of less than$500,000. Project components involving studies and technical assistance tocontractors seldom exceeded $200,000. However, project componentsinvolving financial assistance to contractors for purchase of equipmentwere, in some cases, as large as $5 million. Consultants were extensivelyused for studies and technical assistance, and a large part of the loansand credits was used for this purpose.

- 15 -

33. Annex 3 gives the components included in the projects approvedduring the last four years (F'Y83-FY86) for supporting the constructionindustry. The trend in recent years seems to be toward larger sizecomponents. However, except for the free-standing projects in Indonesiaand Sri Lanka, which were devoted to the construction industry sector as awhole, all operations involved providing technical assistance and supplyingequipment to local contractors, or for studies of the industry. The numberof operations reduced substantially in recent years, from an average of 13per year during 1974-86 to about 10 per year during FY83-86. TheTransportation divisions continued to be the most active organizationalunits of the Bank for assisting the industry; they were responsible for 26out of 47 (or 55 percent) operations during this period.

34. It is difficult to predict the size and pattern of assistance to theconstruction industry in future years. However, a comparison of the typesof projects financed since 1973 (Annex 4) with those financed during thelast four years (Annex 3) indicates that the focus, design, and nature ofassistance to the construction industry remain the same. Future operationswill probably follow the past pattern if the Bank's strategy for developingthe construction industry remains unchanged. The Transportation divisionswill continue to remain most active in the field; most of the operationswill be in the form of project components; the coverage of countries willremain broad; and the support to the industry will be in the form ofstudies of the construction sector, technical assistance for training, andcredit to contractors for purchase of equipment.

Frez Standing Projects

35. During more than a decade of operations relating to the constructionindustry, only six free-standing projects were planned, appraised anofinanced by the Bank (Annex 5). Given the relatively large size of theseprojects, their exclusive focus on the construction industry, and the factthat they had the benefit of reviews, quality controls and approvals, theyrepresent full-scale models of the Bank's strategies for developing theconstruction industry. Four of the six free-standing projects, namely, theones in Sri Lanka (FY81), Burundi (FY82), Burma (FY82), and Egypt (FY84),were specifically called "construction industry projects"; the one inIndonesia (FY83) was called the "Public Works Manpower DevelopmentProject", and the second project in Sri Lanka (FY86) was called the "SecondVocational Training Project". It is interesting to note that all free-standing projects were processed during the past six years, and three ofthese six projects - one in Indonesia and two in Sri Lanka - were designedby the Education divisions for fostering the growth of the industry as, awhole, instead of providing technical or financial assistance to individualcontractors. The Transportion divisions were most active with a majorshare of project components relating to the construction industry, but theywere responsible for only one of the six free-standing projects.

- 16 -

36. The projects designed by the Education divisions in Indonesia andSri Lanka aimed at strengthening the institutions for training skilledworkers and construction managers for the construction industry sector.These projects are addressing an important constraint and the institutionswill provide continuing benefits to the industry. Their potential benefitswould have been further enhanced if 2omplementary actions such as improvingthe business environment of the industry were also taken. The projectsdesigned by the IDF divisions in Burundi and Egypt, and the one by theTransportation division in Burma, have different scopes and objectives.The scope of the Burundi project was relatively broad; althougn its maincomponent was financing equipment for the local contractors, it includedfeatures such as improving production of materials and technical assistanceto the Ministry of Public Works. However, the project faced considerabledifficulties during implementation due to lack of interest of thecontractors in purchasing equipment. The Burma project did not aim ataddressing the problems of the construction industry, although it wascalled a construction industry project. Its objective was limited toimproving the management of a single public construction corporation whichwas responsible for a major part of the highways and other public worksconstruction in the country. The Egyptian project aimed at addressing theinefficiencies of the large number of public construction enterprisesthrough provision of new equipment and technical assistance. The project,however, became effective in FY87 although it was approved in FY84. Thus,all the three projects providing direct assistance to individualcontractors withou. complementary actions for building the institutions forimproving the business environment of the industry had limited success.They were useful in addressing specific problems of project implementationat particular points of time, but they were not effective in developing theconstruction industry.

IFC Operations

37. During the past decade, the IFC has helped fifteen countries toestablish and promote their leasing industries. It has also invested innineteen private-sector leasing companies and was a founding shareholder inthe first leasing company in Bangladesh, the Dominican Republic, Jordan,Korea, Pakistan, Peru, Sri Lanka, Thailand and Tunisia. In othercountries, such as Brazil, IFC encouraged specialized leasing companies. Anumber of international companies participated in the IFC operations.IFC's total investment during the past decade amounted to $108 million,including syndicated loans amounting to $47 million.

38. Leasing companies are useful for development of constructionindustry because they provide specialized medium to long-term equipmentfinancing. The main advantages of leasing stem from its basic concept, theseparation of the legal from the economic ownership of the equipment. Thecontractors benefit from the availability, coverage, lower cost, cash flowand tax benefit advantages which the leasing system often provides.Although the leasing companies deal with a variety of equipment besidesconstruction equipment, the availability of construction equipment for

- 17 -

leasing would facilitate development of the construction industry,particularly in situations where opportunities exist for rapid growth ofsmall and medium-sized contractors.

Economic and Sector Work

39. Country economic and sector analysis is intended to provide athorough knowledge and analytical diagnosis of the development problems andpolicies of member countries (OMS 1.11). Basic economic reports examinethe long term development of the economy from boLh a backward and forwardperspective, and provide an integral analysis of the major macro-economicand sectoral issues; special economic reports deal with specialdevelopment problems; and sector reports examine and analyse thedevelopment problems, policies, institutions and investment prioritsies ofthe major sectors and sub-sectors of the economy. The Bank attaches highpriority to the quality, soundness and relevance of economic and sectorwork, and regards it as an essential intellectual foundation for a sounddesign of its country assistance strategies and lending programs and foraid coordination among donors. To this end, it has provided detailedguidelines to the staff for programming, preparing, reviewing, clearing,and publishing the economic and sector reports. The Bank is recognized asthe world's leading institution for country economic and sector analysis;its economic and sector reports are widely used by member countries andinternational institutions to understand the economic situation anddevelopment prospects in the developing countries.

40. Given the crucial role of the construction industry in economicdevelopment, the economic and sector work activities of the Bank shouldadequately provide the knowledge and analytical diagnosis of theconstruction industry in developing countries. The guidelines (OPN 7.8)for implementing the Bank's policy on construction industry also requirethat in countries where the development of the domestic contractingindustry appears to have potential economic significance, and wheregovernments are responsive, the Bank's economic and/or sector missionsshould, in appropriate cases, include studies of the industry in theirterms of reference. However, none of the economic and sector reportsprepared since the establishment; of the Bank's policy in 1973 addressed theissues relating to the construction industry. A few country economicreports and memoranda included brief reviews of the construction industry,but they were intended more to improve the coverage of the reports than toaddress the issues of the construction sector. Some transportation sectorreports also referred to the problems of the construction industry anddiscussed the actions needed for addressing them, but the constructionindustry was not the central issue of those reports. Of course,construction industry studies carried out by consultants and financedthrough components of Bank projects (para 28) were sector studies ofsorts. However, they lacked the discipline of the Bank's sector workoperations in terms of systematic planning, programming, preparation, fieldinvestigations, reviews, clearances, approvals and publication. They fallmore under the category of "project financed studies" than "sector work."

- 18 -

The guidelines on sector work (OMS 1.13) are only concerned with sectorwork carried out by Bank staff, supported by individual consultants whennecessary. They do not discuss the studies carried out byconsultants (whether financed from Bank loans and credits), by the UNDPwith the Bank acting as the executing agency, or by other agencies of theUnited Nations with whom the Bank has cooperative agreements.

41. These coments are not intended to imply that the constructionindustry studies financed by the Bank through project components were notuseful. On the contrary, they have proved useful in providing basicinformation on the status of contruction industries in various countriesand the problems affecting their growth. However, they have not achievedsome of the important objectives of sector work stated in OMS 1.13 such asto form the basis for consideration of the overall development prospects,problems and strategies in a country, and to establish the framework forthe Bank to deve\op a lending program and to carry out its project work inthe construction sector. The staff reviews (para. 43) indicate that thestudies were not adequately designed and supervised, and, in most cases,the quality of the reports was below the standards acceptable to the Bank.More important, the studies were not planned as sector work and did not,therefore, benefit from the discipline of the Bank's sector work. Indeed,unlike the sector reports, project-financed studies on constructionindustry have hardly been seen by the Bank staff, with the exception of thefew individuals who supervised the concerned projects. It is alsodifficult to know after a few years whether these studies exist. This isgenerally a problem with all project-financed studies in the Bank; thestudies of the construction industry are no exception.

IV. Review of Bank Experience

Findings of the 1980, 1983 and 1985 Reviews

42. Since 1973, when the Bank established an explicit policy forfostering the growth of the construction industry, the staff carried outthree reviews of the experience of the Bank's operations in support of theindustry. The first review was presented in a pa-.r entitled "DomesticConstruction Industries in Developing Countries", published in the Journalof the American Society of Civil Engineers in May 1981. It reviewed theexperience of the Bank's operations during the period 1974-80. The secondreview was included in a paper on "The Construction Industry - Issues andStrategies in Developing Countries", published by the Bank in 1983. [39)It covered the experience of operations during the 10-year period1974--83. The third, a draft paper [30] entitled "A Review of Bank'sOperations Related to Construction Industry", was prepared in January 1986;it assessed the Bank's operations to date. Although the three papers wereprepared by the staff of the Construction Industry Unit of the Bank'sTranisportation Department, they were written and reviewed by differentstaff members and managers at different times. They provide a valuableassessment of the effectiveness of the Bank's construction industry

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operations in achieving the objectives of the policy approved in 1973. Themain findings of these papers on the effectiveness of Bank assistance tothe construction industry are given in Annex 6 and are summarized below:

o the Bank's interventions have proved helpful in easingspecific difficulties, but they are not comprehensive enoughto address the full range of institutional, financial andadministrative problems constraining development of theconstruction industry;

* governments dominate the construction industry as theprinciple regulatory authority, but they do not haveinstitutional arrangements for promoting the industry;

a technical and financial assistance to contractors would beeffective only if it is reinforced with improvements ingovernments' administrative, budgeting and procurementprocedures and practices; continuing work opportunities forthe contractors are important for their development;

* in many cases, improvements achieved with Bank assistance tocontractors did not last long because they were not supportedwith the required policy reforms;

* a comprehensive approach is a prerequisite for development ofthe industry;

a in several cases, the performance of consultants in providingtechnical assist-nce to contractors was unsatisfactory;

* the commitment of government is essential for developing theconstruction industry. The Bank has not taken a lead role inimproving the systems and institutions in the countriesthrough its economic and sector work.

430 The reviews seem to be unanimous in concluding that although theBank's technical and financial assistance to construction industries indeveloping countries has been useful, it has not produced the expectedresults. Indeed, it is difficult to identify a country where the Bank'sassistance has led to a sustainable growth of the construction industry.The reviews also agree on the reasons for failure to achieve the expectedresults. These include lack of a comprehensive approach, lack ofcommitment on the part of the governments and inadequate local contractingpolicies and procedures. The 1985 review [36] discussed the resultsachieved by the construction industry project components financed by theBank and the lessons learned from their successes and failures. The reviewwas particularly critical of the organizational arrangements in the Bankand "the low-profile approach" for supporting the industry. It pointed outthat nearly three-quarters of all Bank interventions were components oftransportation projects focussing mostly on small-scale road gravelling and

- 20 -

routine maintenance contractors, or on improving force account operationsfor such work, without really addressing the problems of the constructionindustry sector. Commenting on the Bank staff's concerns with theconstruction industry, the review stated that:

"Bank staff concern with the construction sector hasusually arisen in response, firstly, to their ownperception of the inefficiency of a domesticconstruction industry and the potential risk that itposed for the execution of project works; andsecondly, to needs identified by member governments,usually in the course of preparation of infra-structure projects. The bulk of Bank interventionsin support of domestic construction industries hastherefore taken the form of components of operationsprimarily addressed at other economic sectors,particularly Transportation. The exceptions are theEducation and IDF projects and project components,which have addressed the needs of the constructionindustry directly."

Views of the Regions

44. In April 1985, the Director of the Transportation Departmentrequested the Regional Projects Directors to review the progress made ondevelopment of construction industries in the countries of their regionsand to report, inter alia, on their experience of construction industryrelated operations, sector work and dialogue with the countries. TheRegional Directors described their experiences in various countries,commented broadly on the effectiveness of construction industry relatedoperations, and suggested certain actions for improving the Bank'sassistance. Relevant extracts from the Regional reports indicating theexperiences of the regions are given in Annex 7 and their main findings aresummarized below:

* construction industry issues have not been the subject of theBank's dialogue with the countries;

* the cype of Bank assistance to the construction industryvaried from project to project, but it has not beencomprehensive in any project;

a despite many constraints, the building constructioncontractors have been more successful than civil workscontractors;

e procurement procedures, payment to contractors and access tocredit are the main problems; policy reforms and effectivedialogue with the countries are essential to address theseproblems;

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S construction industry is a complex sector; it requires aneffective framework of policies and strong cormitment of thegovernment; Bank assistance would not be effective unlessthese requirements were met;

o the Bank's country sector work has not covered constructionindustry issues.

45. The Regional Directors were also requested to respond to acomprehensive questionnaire on the problems of the construction industry.Annex 8 gives the major problems identified by the Regions in response tothe questionnaire. The survey indicated that:

a in 70 out of the 79 countries for which information wassupplied, the domestic construction industry was facing theproblems listed in Annex 8s; and in 64 of these countries, theproblems were serious;

* in all countries, the problems in small and medium-sizecontracts were more serious than in large contracts;

* the problems are more serious in civil engineering contractsthan in building contracts;

* Bank-financed studies of the construction industry in variouscountries were conducted mainly by the consultants, but Bankstaff also carried out an equal number of studies as a part oftheir operational work; only 46 percent of the studies led totechnical and financial assistance to the industry throughproject components of on-going projects;

* piublic enterprises in the construction sector are inefficient;

e of the many problems affecting sound development of theconstruction industry in the borrowing countries, the mostserious are procurement procedures; delays in payments tocontractors; difficulties in importing equipment, spare partsand construction materials; lack of adequateinstitutional arrangements for credit, bonding and insurance;and lack of government interest in addressing the problems ofthe industry.

46. The Regional overviews and the results of the survey based on thequestionnaire clearly indicate the increasing concern of Bank staff withthe adverse business environment of the construction industry and the manypolicy and procedural barriers affecting its growth. It is also clear thatthe large contractors are able to overcome these constraints in variousways without too much difficulty, but the small and medium contractors arefacing great hardships. Because more than 95 percent of the contractors indeveloping countries are small and medium contractors and because they are

- 22-

also the ones who are most adversely affected by the existing businessenvironment, it is not possible to implement the Bank's policy ofdeveloping the construction industry effectively unless the majorconstraints imposed by the business environment are adequately addressed.Both the OPS reviews and the Regional reports indicate that the Bank'sconstruction industry operations have not addressed these constraints.This conclusion is also supported by the assessment in the Initiating Briefof the Construction Industry Policy Paper which was reviewed at theOperational Vice President's meeting on February 11, 1981. The InitiatingBrief included the following comnents on the effectiveness of the Bank'sconstruction industry operations-,

"Special components were added to regular lending operations(in highway, IDF, and other projects) with a view tostrengthening individual elements of the constructionprocess. Although these components relieved specificdifficulties at particular points in time they were notcomprehensive enough to address the full range ofinter-related administrative, technical, financial andmanpower-skill problems that a well-based constructionindustry must resolve to ensure its balanced growth andexpansion. Rather than a coordinated approach, the practicehas been to confront these problems one-by-one with the resultthat physical implementation of many projects in all sectors,including Bank-assisted ones, has suffered from weaknesses inthe domestic construction industry and related Governmentpolicies and procedures."

Experience of 7-1/2 Percent Preference Policy

47. In January, 1974, the policy of allowing 7 1/2% preference todomestic contractors was approved on an experiemental basis for one yearoperating the preference policy during the full 5-year period was reviewedin a report submitted to the Board in January, 1979. [34) The mainfindings of the review were:

* the number of countries eligible for preference declined from40 in 1974 to 34 in 1979;

* during the trial period, domestic and foreign contractors werein competition on only 25% (65 in number) of the totalcontracts procured by ICB with provision for 7-1/2%preference. On the balance 75% (195 in number) of the totalcontracts procured by ICB with provision for preference, therewas no competition because only domestic or foreign firmsparticipated in the bidding;

* of the 65 contracts (totalling $253 million in value) on whichboth domestic and foreign contractors competed, only 6 (totalvalue $26 million) were won by domestic contractors followingthe application of preference.

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a the higher-income countries on the list of eligible countriestended to benefit more from the preference policy because theyhad a relatively more developed construction industry than thelower-income countries. However, several of the higher-incomeeligible countries graduated from the list without benefittingfrom the policy.

o overall, the 7-1/2% preference policy has been a minor factorin the award of contracts to domestic contractors incompetition with foreign firms; nevertheless, the policy wasappreciated by the eligible borrowers.

48. The preference policy was further extended for a three-yearperiod ending in January, 1982 and reviewed in a paper submitted to theBoard on February 4, 19829 [35] The review covered the full 8-year periodfrom 1974 to 1981. The conclusions of the review were similar to those ofthe 1979 review. During that 8-year period, 500 contracts (total value$1252 million) had provisions for preference; domestic and foreigncontractors were in competition in 141 contracts (total value $475million). Of these 141 contracts, only 8 contracts (total value $44million) were won by domestic contractors as a result of application of thepreference. On the remaining 359 contracts procured by ICB and provid'ingfor preference, either domestic firms or foreign firms only participated inthe bidding. Details of the bidding experience during the years 1974through 1981 are given in Annex 9. The review again concluded that thepreference policy was a minor factor in the award of contracts to domesticcontractors and reconmmended that the 7-1/2% preference be made standardpractice. The Board approved the recomTnendation.

49. A recent review by the Procurement Advisor's Office of contractsawarded in FY 85 further confirmed that there have been no significantchanges in the patterns of awards to domestic contractors competing withforeign firms. Only 6.3% of ICB contracts by number (2.9% by amount)included the preference provision in FY 85, and in only three cases (totalvalue $5.3 million) the application of preference affected the award infavour of domestic contractors. The review also indicated that thedomestic contractors probably did not need the preference because in 79% ofthe cases (82% by amount) they were able to win the contracts withoutinvoking the provision for preference. Thus, over the years, thepreference was hardly used by the borrowers.

OED's Reviews of Project Performance

50. In addition to evaluating individual projects, the OperationsEvaluation Department (OED) prepares an annual report on the experience ofall projects whose performance was evaluated in that year. The annualreviews also extend the perspective farther back into the past to look atthe trends and patterns of experience not only for the group of projectsevaluated during the year but also for the groups reviewed earlier. OED's

- 24 -

annual reviews provide both the overall results and a synthesis ofperformance results by sectors. OED's annual reports cover the review ofthe construction industry operations in the Transportation sector only,although other sectors such as Education, IDF, Urban and Water Supply alsoinclude a significant number of operations.

51. OED's reviews of the construction industry operations are verybrief. Its report (dated August 30, 1984) on the "Tenth Annual Review ofProject Performance Audit Results" included only one paragraph on theconstruction industry. It pointed out that promotion of the constructionindustry emerged as a significant concern in many transportation projects,but the impact of the project components was quite limited. OED's nextAnnual Report dated September 27, 1985, included two paragraphs on thesubject. OED's views on the performance of construction industry componentsin the transportation projects reviewed in 1984 are surrrrarized below:

a the 1984 group of cases shows that six projects includedcomponents for supporting the construction industry, nearlyall in relatively small countries;

a of the six project components, four provided for a study ofthe construction industry problems; three of these includedfollow-on technical assistance to the industry, but in no casedid this come about;

* the studies made certain recommendations concerning theenvironment of the contractors, but only limited changeoccurred;

* the fifth project (Ethiopia Fifth Highway Project - Cr332,1972) had no study but included training for contractors incosting and bidding; this project component had little impactbecause the contractors were unwilling to spare personnel fortraining;

* the experience on these projects shows that an effectiveprogram for developing the construction industry has not beenfully explored.

V. Need for a Viable Strategy

52. The events to date show that despite a clear policy, comprehensiveguidelines, extensive studies, numerous operations and almost adecade-and-a-half of operational experience, the Bank's goal of developingthe construction industry in developing countries is still elusive.Obviously, there is something missing in the Bank's efforts; somethingwhich is vitiating all its undertakings; and something which is a majorbarrier to achievement of its goal. Perhaps there is more than onebarrier. What are those barriers? What should the Bank do to overcome

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them? Will the Bank be able to address them? What are the Bank'scomparative advant,ges? What are the prospects of its success? Whathappens if the Bank does not address them?

53. These questions are relevant. It is important to know what ismissing in the Bank's efforts to date and whether there are reasonableprospects of its success. The OPS and Regional reviews reflectfrustrations of the Bank staff over the fact that the efforts to date havenot produced the expected results. Some regions have questioned whetherthe Bank should be involved in construction industry operations. At thesame time, many borrowing countries are seeking the Bank's assistance fordeveloping their construction industries. In an effort to increase theirparticipation in Bank-financed procurement or to economise on localprocurement, these countries are following procurement procedures which arehurting, instead of helping, the growth of the domestic constructionindustry. For example: They are using contract conditions which areunfair to contractors. They blame contractors for delays that are due totheir own failure to meet their contract obligations. They delay paymentswith impunity and do not compensate contractors for adverse physicalconstraints and other events beyond the control of contractors. Of courses,they stress the need for promoting the domestic construction industry, butthey use strategies which are counterproductive such as prequalifyingdomestic con'.ractors before they are ready to handle the jobs and opposingparticipation of foreign contractors instead of using them to develop thecapacity of the domestic construction industry through technology transferand management training. Obviously, there is an urgent need for a moreeffective approach for addressing the aLin barriers to the growth of theindustry. Given the importance of the construction industry for ensuringthe efficiency of investment programs and enhancing the pace of economicdevelopment, the Bank should review the adequacy of its current strategies,identify the major barriers affecting the industry and develop a viablestrategy for achieving the objectives of its policy for fostering theconstruction industry in developing countries.

54. As stated earlier, this report is intended to serve mainly as astatus report on the progress made by the Bank in fostering the growth ofthe construction industry in developing countries. The issues raised inthis report and the options for addressing them are discussed in a separatereport, namely, "The Construction Industry in Development - Issues andOptions"', [42] which suggests an approach for achieving the objectives ofthe Bank's policy on construction industry.

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Annex 1

Countries Associated With

Bank Operations in Construction Industry

East Africa West Africa EMENA LAC East Asia South Asia

Botswana Benin Algeria Argentina Indonesia BangladeshBurundi Burkina Cyprus Belize Korea Burma

Ethiopia Cameroon Egypt Brazil Malaysia IndiaKenya C.A.R. Hungary Colombia PNG NepalLesotho Chad Iran Dominican R. Philippines PakistanMalawi Congo Jordan Ecuador Sri LankaMadagascar Cote d'Ivoire Kuwait HaitiRwanda Gambia Libya HondurasSomalia Ghana Morocco JamaicaSudan Liberia S. Arabia MexicoSwaziland Mali Syria ParaguayTanzania Niger Tunisia PeruUganda Nigeria Turkey SurinameZaire New Guinea Yemen PDR TrinidadZambia Senegal Yemen AR TobagoZimbabwe Sierra Leone

Togo

16 17 15 15 5 6

Source: Construction Industry Group Records

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Annex 2Page 1 of 2

BANK ASSISTANCE TO CONSTRUCTION INDUSTRY

TYPES OF ASSISTANCE BY REGIONS (FY74-FY86)

PROJECT COMPONENTS___________________________Technical Assistance Free-

Labor-based Financial StandingRegion Studies- Contractors Construction Training Assistance Projects Total

East Africa 13 9 11 2 4 1 40

West Africa 16 9 3 - 11 - 39

EMENA 7 4 - 10 5 1 27

LAC 15 5 6 1 3 - 30

East Asia 3 6 2 1 6 1 19

South Asia 2 4 - 1 4 3 14

Total 56 37 22 15 33 6 169

Source: Construction Industry Group Records.

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Annex 2Page 2 of 2

BANK ASSISTANCE TO CONSTRUCTION INDUSTRY

TYPES OF ASSISTANCE BY SECTORS (FY74-FY86)

PROJECT COMPONENTSTechnical Asssitance Free-

Labor-based Financial StandingSector Studies Contractors Construction Training Assistance Projects Total

Transportation 45 33 17 2 10 1 108

Education 2 1 - 12 1 3 19

Urban - 2 - - - - 2Development

IDF 8 - - 1 22 2 33

Other 1 1 5 1 1 - 7

Total 56 37 22 15 33 6 169

Source: Construction Industry Group Records.

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Annex 3Page 1 of 2

Bank Assistance to Construction Industry

Recent Operations-(FY 1983-86)

Regions! FY of Loan/ Loan/CreditCountry Sector Approval Credit Anount($1000s) Project Component

East Africa

Burundi EDT 1983 Cr. 1358 1,610 T.A. to Contractors.TRP 1985 Cr. 1583 690 Labor intensive methods.

Ethiopia TRP 1983 Cr. 1404 3,400 T.A. to parastatal.EDT 1984 Cr. 1522 320 T.A. to parastatal.IDF 1983 Cr. 1275 1,000 F.A. to contractors.

Kenya TRP 1984 Ln. 2409 1,300 T.A. to contractors.Lesotho TRP 1984 Cr. 1481 70 Study of construction industry.Madagascar WUD 1984 Cr. 1497 -- T.A. to contractors.Malawi TRP 1983 Cr. 1423 1,970 T.A. to small road gravelling

contractors.WUD 1984 Cr. 1528 -- T.A. to contractors.

Rwanda TRP 1985 Cr. 1641 510 Labor intensive methods.Somalia AGR 1985 Cr. 1538 10 Labor-based construction.Tanzania TRP 1986 Cr. 1688 1,810 T.A. to contractors.Uganda TRP 1984 Cr. 1445 1,600 Equipment to contractors, T.A.

and F.A. to contractors.Zaire TRP 1985 Cr. 1608 -- Study of construction industry.Zimbabwe IDF 1985 Ln. 2533 900 Study, T.A. and F.A. to

construction industry.

West Africa

Cote d'Ivoire SAL 1983 Ln. 2332 -- Study of construction industry.Gambia TRP 1986 Cr. 1682 40 Study of construction industry.Ghana TRP 1985 Cr. 1601 700 T.A. and F.A. to contractors.Guinea TRP 1984 Cr. 1457 276 T.A. to parastatal.Mali PHN 1983 Cr. 1422 -- T.A. to contractors.Niger TRP 1986 Cr. 1706 100 Study of labor-based methods.Nigeria IDF 1984 Ln. 2376 600 Equipment loan to contractor.

TRP 1986 -. 50 Study of maintenance by contractand force account.

Abbreviations: Transportation (TRP); Education (EDT); Industrial Development Finance (IDF);Agriculture (AGR); Urban Development (WUD); Structural Adjustment Loan (SAL)Population and Health (PHN); Country Economic Memorandum (CEM);Technical Assistance (TA); Financial Assistance (FA).

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Annex 3Page 2 of 2

Bank Assistance to Construction Industry

Recent Operations (FY 1983-86)

Regions/ FY of Loan/ Loan/CreditCountry Sector Approval Credit Amount($1000s) Project Component

EMENA

Egypt IDF 1984 Ln. 2458 T.A. to small contractors.IDF 1984 Ln. 2460 100,000 Credit to contractors foi, purchase

of equipment.EDT 1983 Ln. 2264 15,900 Training of construction trades.

Jordan EDT 1985 Ln. 2633 - Training of construction trades.Saudi Arabia TA 1984 - -- Study of construction industry.Turkey IDF 1984 Ln. 2399 - Vocational training.

EDT 1985 Ln. 2536 -- Vocational training.Algeria CEM 1985 -- -- Study of construction industry.Hungary CEM 1985 - - Study of construction industry.

LAC

Argentina TRP 1983 Ln. 2296 -- Study of construction industry.Belize TRP 1983 Ln. 2273 30 T.A. to contractors.Brazil TRP 1984 Ln. 2446 15 Study of construction industry.Haiti TRP 1986 Cr. 1756 - T.A. for labor-based methods.Mexico TRP 1985 Ln. 2525 - Study of labor-based methods.

South Asia

Nepal TRP 1984 Cr. 1515 300 T.A. to parastatal.Sri Lanka TRP 1985 Ln. 2517 1,500 Equipment loans to contractors.

EDT 1986 Cr. 1698 15,000 Vocational training.

East Asia

Indonesia EDT 1983 Ln. 2258 30,000 Training of employers and contrac.TRP 1986 Ln. 2717 2,500 T.A. to contractors.

Malaysia TRP 1984 - - Study of construction sector.Papua NG TRP 1983 Ln. 2265 60 T.A. to contractors.Philippines TRP 1984 Ln. 2418 200 T.A. to Construction Industry

Authority of Philippines.TRP 1986 Ln. 2716 685 T.A. for labor-intensive methods.

Abbreviations: Transportation (TRP); Education (EDT); Industrial Development Finance (IDF);Agriculture (AGR); Urban Development (WUD); Structural Adjustment Loan (SAL)Population and Health (PHN); Country Economic Memorandum (CEM);Technical Assistance (TA); Financial Assistance (FA).

31 -

Annex 4Page 1 of 9

Bank Assistance to Construction IndustryConstruction Industry Projects/Project Components

Country/Main Project Ln/Cr Year Project Component

EAST AFRICA REGION

BOTSWANAIDF Study - 1973 Study of building industryRoad III Ln 1176 1974 Labor-intensive methodsHighway IV Ln 1408 1977 Labor-intensive methodsHighway V Ln 1941 1981 Labor-intensive methods

Setting construction standards

BURUND IStudy - 1978 Review of construction industryStudy -- 1979 Review of building materials

manuf. and building contractingEducation III Cr 1358 1983 TA to contractors.Construction Industry Cr 1230 1982 Free-standing project for:

Financial and technical assistanceDevelopment of materials productionNew conditions of contracts

Highway IV Cr 1583 1985 Use of labor-based methods

ETHIOPIAHighway VI Cr 552 1975 Financial assistance to contractorsHighway VII Cr 708 1977 Financial assistance to contractorsIndustrial Development Cr 1275 1983 Financial assistance to contractorsHighway Sector II Cr 1404 1983 TA to parastatalTechnical Assistance Cr 1522 1984 TA to parastatal

KENYARural Access Road Ln 1305 1976 Study of construction industry

TA to contractorsUse of labor-based methods

Highway Sector II Ln 2409 1984 TA to contractors

LESOTHOHighway II Cr 619 1976 Use of labor-based methodsHighway IV Cr 1481 1984 Review of construction industryEducation II Cr 748 1977 Training for construction workersEducation III Cr 1148 1981 Training .for workers and managers

MADAGASCARStudy -- 1979 Review of construction industryUrban Development Cr 1497 1984 TA to small contractors

- 32 -

Annex 4Page 2 of 9

Bank Assistance to Construction IndustryConstruction Industry Projects/Project Components

Country/Main Project Ln/Cr Year Project Component

EAST AFRICA REGION

MiALAWIHighway II Cr 523 1974 Labor-based pilot schemeHighway IV Cr 1099 1981 Use of labor-based methodsHighway V Cr 1423 1983 TA to contractorsUrban I Cr 1528 1984 TA to contractors

RWANDAIDF Study -- 1978 Preparation of construction

indust-y project (not accepted)Highway IV Cr 769 1978 Use of labor-based methodsTRP BMG II Feeder Roads Cr 1283 1982 Use of labor-based methodsHighway VI Cr 1641 1985 Use of labor-based methods

SOMALIAEducation IV Cr 1105 1981 Study of construction industryNW Region Agricultural Cr 1538 1985 Use of labor-based methods

SUDANIDF Study -- 1981 Review of construction industry

SWAZI LANDIDF Study -- 1979 Review of construction industry

TANZANIAHighway VI Cr 1688 1986 TA and training for contractors

UGANDAHighway III Cr 1445 1985 TA to contractors

Equipment for contractors

ZAIREHighway VI Cr 1608 1985 Review of construction industry

ZAMBIAEducation IV Ln 1356 1976 Study of construction industry

ZIMBABWESmall Scale Enterprises Ln 2533 1985 Review of construction industry

Financcial assistance and trainingfor small contractors

- 33 -

Annex 4Page 3 of 9

Bank Assistance to Construction IndustryConstruction Industry projects/Project Components

Country/Main Project Ln/Cr Year Project Component

WEST AFRICA REGION

BENINFeeder Roads Cr 717 1977 Use of labor-based method

Burkina fasoHighway III Cr 653 1976 Study of construction industry (not

impl emented)Highway IV Cr 1164 1981 TA to contractors

CAMEROONSmall Enterprises Cr 575 1975 Equipment loan to contractorsSmall Enterprises II Ln 1920 1980 Equipment loan to contractorsHighways III Ln 1515 1978 Review of construction industryHighways IV Cr 926 1979 TA to road maintenance contractors

CENTRAL AFRICAN REPUBLICHighways IV Cr 1258 1982 Purchase of tools for contractor

TA to small contractors

CHADAgriculture Sategui Irrigation Cr 489 1974 Use of labor-based methods

CONGOHighways III Ln 2227 1982 TA to contractors (not implemented)

COTE D'IVOIREStudy -- 1983 Review of construction industryHighway Sector Ln 1914 1980 TA to small contractors (not

impl emented)Financial assistance to contractors(not implemented)

SAL II Ln 2332 1983 Study construction industry

GAMBIAEducation Cr 792 1978 Financial assistance to contractorsHighway Maintenance II Cr 1682 1986 Study of construction industry

Use of labor-based methods

GHANAIDF National Investment Bank Ln 1080 1975 Equipment loans to contractorsHighways II Ln 1182 1975 TA and FA to contractors

Study of construction industryHighways III Cr 1029 1980 Equipment loans to contractors

- 34 -

Annex 4Page 4 of 9

Bank Assistance to Construction IndustryConstruction Industry Projects/Project Components

Country/Main Project Ln/Cr Year Project Component

WEST AFRICA REGION

GHANAHighways IV Cr 1601 1985 Equipment loans to contractors

Training for contractors

GUINEAHighways III Cr 1457 1984 TA to parastatal OPR

Use of labor-based methods

LIBERIAHighways II Cr 395 1973 Review of construction industryLDB III Ln 1323 1976 Equipment loans to contractorsHighways IV Ln 1573/ 1978-82 TA to contractors (not implemented)

Cr 1311Feeder Roads Ln 1664 1979. TA to contractors 'IDF Study -- 1978 Study of construction industrySmall Medium Enterprises Cr 1076 1980 Financial assistance to contractors

MALIRoad Maintenance Cr 1104 1981 Use of labor-based methodsHealth Development Cr 1422 1983 TA to small contractors

NIGERHighway III Cr 612 1976 Review of construction industryFeeder Roads Cr 886 1979 TA to small contractorsIndustry Development Cr 1225 1982 Financial Assistance

TA to small contractorsTransport Sector Cr 1706 1986 Study labor-based methods

NIGERIAIDF Study - 1980 Review of materials manufacturingStudy -- 1980 Review of contracting for federal

highwaysIDr Ln 2376 1984 Subloans for construction materials

producti onStudy - 1986 Study of road maintenance costs by

contract versus force account

SENEGALHighway III Ln 1222 1976 Study of construction industry

TA and training to contractors(not implemented)

.~~~~ , I . .S......- -

- 35 -

Annex 4Page 5 of 9

Bank Assistance to Construction IndustryConstruction Industry Projects/Project Components

Country/Main Project Ln/Cr Year Project Component

WEST AFRICA REGION

SIERRA LEONEHighway II Cr 1129 1981 Study of construction industry

TOGOHighway III Cr 693 1977 Study of construction industry

SOUTH ASIA REGION

BENGLADESHStudy -- 1977 Review of construction sectorTechnical Assistance Cr 622 1977 Review of construction industryTechnical Assistance II Cr 872 1978 Review of construction industry

BURMAConstruction Industry Cr 1253 1982 Free-Standing project:

TA to parastatalFinancial assistance to parastatal

INDIABihar Rural Roads Ln 1072 1982 Loan for equipment

NEPALHighway II Cr 730 1977 Equipment rented to contractors

Training for contractorsEducation II Cr 1198 1981 Training for construction workersHighway III Cr 1515 1984 TA to parastatal

PAKISTANFlood Rehabilitation Cr 466 1974 Study of construction industryHighway III Cr 974 1980 Equipment loans to contractorsIrrigation Rehab. Cr 1239 1982 TA to contractors

Renting equipment to contractors

SRI LANKAConstruction Industry Cr 1130 1981 Free Standing Project for:

Training and promotion ofconstruction industry

Second Vocational Cr 1698 1986 Free Standing Project:Large training programAssistance to const. association

Roads II Ln 2517 1985 Equipment loan to contractors

- 36 -

Annex 4Page 6 of 9

Bank Assistance to Construction IndustryConstruction Industry Projects/Project Components

Country/Main Project Ln/Cr Year Project Component

EAST ASIA REGION

INDONESIAHighway IV Ln 1236 1976 Study of construction industryHighway V Ln 1696 1979 TA to road contractorsMan Power Development Ln 2258 1983 Free-standing project for:

Training of employersContracting industry studyTraining for contractorsAssist. to contractors assoc.

Highway Maintenance Ln 2717 1986 TA to contractors

KOREASmall Medium Industry Ln 1175 1975 Equipment loan to contractorsLong Term Credit Bank Ln 1461 1977 Equipment loan to con-cractorsSmall Medium Industry II Ln 1507 1977 Equipment loan to contractorsKDB III Ln 1574 1978 Equipment loan to contractorsSmall Medium Industry III Ln 1749 1979 Equipment loan to contractorsSmall Medium Industry IV Ln 2004 1981 Equipment loan to contractorsProvincial County Roads Ln 2228 1982 Tech. training for contractors

MALAYSIAStudy - 1984 Study of road construction sector

PAPUA N.G.Highway II Cr 677 1977 TA training and studyRoad Improvement Ln 2265 1983 TA to contractors

PHILIPPINESDevelopment Bank Ln 1514 1978 Equipment loan to contractorsRural Roads Ln 1860 1980 Use of labor-based methodsHighway V Ln 2418 1984 TA to const. Industry AuthorityRural Roads II Ln 2716 1986 Use of labor-based methods

EMENA REGION

ALGERIAEducation III Ln 1378 1977 Training in building tradesJigel Port Ln 1427 1977 Equipment loan to parastatal

Technical assistance to parastatalHighways IV Ln 1892 1980 TA to parastatalStudy CEM 1985 Review of construction industry

- 37 -

Annex 4Page 7 of 9

Bank Assistance to Construction IndustryConstruction Industry Projects/Project Components

Country/Main Project Ln/Cr Year Project Component

EMENA REGION

CYPRUSDevelopment Bank Ln 1278 1976 Equipment loan to contractors

EGYPTTechnical Assistance Cr 1162 1981 Study of construction industryEducation I Cr 681- 1977 Training for construction tradesEducation II Cr 868 1978 Training for construction tradesEducation III Cr 1069 1980 Training for construction tradesVocational Training Ln 2264 1983 Training for construction tradesDIB IV Ln 1804 1980 Equipment loan to construction SMEDIB V Ln 2074 1981 Equipment loan to construction SMESmall Medium Industry Ln 2458 1984 Equipment loan to construction SMEConstruction Industry Ln 2460 1984 Free Standing Project for:

TA to contractorsFinancial assistance to contractors

HUNGARYStudy -- 1985 Study of investment issues

JORDANManpower Development Ln 2633 1985 Training for workers and managers

KUWAITStudy -- 1979 Review of construction industry

LIBYAStudy -- 1980 Review of construction industry

MOROCCOBNDE VII Ln 1061 1974 Equipment loan to contractors

SAUDI ARABIAStudy -- 1984 Study of condition of contracts

SYRIAStudy -- 1977 Review of construction industry

TUNISIAUrban Sewerage Ln 1088 1975 Study of construction industryEducation IV Ln 1961 1981 Training for construction workers

._________________ .___-__,__-__.__ ..__.-

- 38 -

Annex 4Page 8 of 9

Bank Assistance to Construction IndustryConstruction Industry Projects/Project Components

Country/Main Project Ln/Cr Year Project Component

EMENA REGION

TURKEYIndustrial Credit Ln 2399 1984 Training for construction workersIndustrial Schools Ln 2536 1985 Training for construction workers

YEMEN PDREducation II Cr 865 1978 Training for construction workersHighway III Cr 1144 1981 TA to parastatal

LAC REGION

ARGENTI NAHighway Sector Ln 2296 1983 Survey of road maint. by contract

BELIZERoad Maintenance Ln 2273 1983 TA to contractors

Development of material manuf.

BRAZILFederal Highway Sector Ln 2446 1984 Survey of road maint. by contract

COLOMBIAStudy 1975 Review of construction industryRural Development Ln 1352 1976 Use of labor-based methodsStudy -- 1979 Review of construction industryHighways VII Ln 1471 1977 Review of construction industry

Training for contractorsHighway Sector Ln 2121 1982 Training for contractors

Study of financial assistance

DOMINICAN REPUBLICRoad Maintenance II Ln 1784 1979 TA to contractors

Use of labor-based methodsRoad Reconstruction III Ln 2605 1985 Case study of labor-based methods

(not implemented)

ECUADORHighway IV Ln 1231 1976 Review of construction sector

TA to industryStudy -- 1981 Use of labor-based methods

- 39 -

Annex 4Page 9 of 9

Bank Assistance to Construction IndustryConstruction Industry Projects/Project Components

Country/Main Project Ln/Cr Year Project Component

LAC REGION

HAITIHighway III Cr 478 1974 Review of construction industryHighway IV Cr 556 1975 TA to contractors (not implemented)Highway VI Cr 1220 1982 Study for training to contractorsHighway VII Cr 1756 1986 Use of labor-based methods

HONDURASHighways VI Ln 896 1973 Use of labor-based MethodsHighways VII Ln 1341/ 1976 Study of construction industry

Ln 1342 Use of labor-based methodsHighways VIII Ln 1901 1980 Use of labor-based methodsIndustrial II Ln 2075 1981 Equipment loans to contractorsStudy -- 1985 Substitution of labor

JAMAICAStudy -- 1976 Study of construction industry

MEXICOStudy -- 1984 Study of labor-based methodsChiapas Rural Roads Ln 2525 1985 Study of labor-based methods

PARAGUAYHighway IV Ln 1059 1974 TA to contractors

Review of construction induatry

PERULower Piura Irrigation Ln 1771 1979 Use of Labor-based methodsIndustrial Credit II Ln 1968 1981 Equipment loans to contractorsSmall Scale Enterprises Ln 2064 1981 Equipment loans to contractorsPower VI Ln 2179 1982 Use of labor-based methods

SURINAMEStudy -- 1980 Study of construction industry

TRINIDAD-TOBAGOStudy -- 1978 Review of construction industryHighway II Ln 1235 1976 TA to contractors (not implemented)

Source: Construction Industry Group Records.

- 40 -

Annex 5

Freestanding Bank Projects

in Support of Domestic Construction Industries

Loan/Credit

Country Sector Project Loan/Credit No. Anount ($m)

Sri Lanka EDT Construction IndustryProject (FY81) Cr. 1130-SRI 13.5

Sri Lanka EDT 2nd Vocational TrainingProject (FY 86) Cr. 1698-SRI 15.0

Burundi IDF Construction IndustryProject (FY82) Cr. 1230-BUR 5.2

Burma TRP Construction IndustryProject (FY82) Cr. 1253-BUA 20.0

Indonesia EDT Public Works ManpowerDevelopment Project (FY83) Ln. 2258-IND 30.0

Egypt IDF Construction IndustryProject (FY84) Ln. 2460-EGT 100.0

Source: Construction Industry Group Records

- 41 -

Annex 6Page 1 of 4

Reviews of Effectiveness of Bank Assistanceto the Construction Industry

Since 1973, when the Bank established an explicit policy forfostering the growth of the construction industry, the staff carried outthree reviews of the experience of the Bank's operations in support of theconstruction industry in developing countries. The first review waspresented in a paper entitled "Domestic Construction Industries inDeveloping Countries", published in the Journal of the American Society ofCivil Engineers in May 1981. It reviewed the experience of the Bank'soperations during the period 1974-80. The second review was included in apaper on "The Construction Industry - Issues and Strategies in DevelopingCountries," published by the Bank in 1983. It covered the experience ofoperations during the 10-year period 1974-83. The third, a draft paperentitled "A Review of Bank's Operations Related to Construction Industry",was prepared in January 1986; it assessed the Bank's operations to date.Although the three papers were prepared by the staff of the ConstructionIndustry Unit of the Bank's Transportation Department, they were writtenand reviewed by diffe,rent staff members and managers at different times.They provide a valuable assessment of the effectiveness of the Bank'sconstruction industry operations in achieving the objectives of the policyapproved in 1973. The main findings of these papers relevant to issues ofeffectiveness of tile Bank's assistance to the construction industry aresummarized below:

First Review - 1980

* "The implementation of the policy to promotedomestic construction industries in developingcountries, by providing technical and financialassistance, has resulted in various activities inall six geographical Regional Offices within theBank in project lending as specific components.Transport projects most frequently contain suchcomponents."

* "The efforts made by the Bank's sector divisionssuch as Highways, Education, and IndustrialDevelopment and Finance have proved helpful ineasing specific difficulties but, in general, arenot comprehensive enough to address the full rangeof administrative, technical, financial and trainingmeasures needed to produce balanced growth of adomestic construction industry."

a "In many poor countries, Government dominates thebusiness environment both as the principalregulatory authority and as the main client of thedomestic construction industry."

- 42 -

Annex 6Page 2 of 4

a "To make governments more aware that theconstruction industry is an important economicsector, institutional arrangement should be made toassign the responsibility for the development ofthis industry to a specific office in Government."

* "In addressing the task of strengthening thesedomestic construction industries a multisectoralapproach is necessary and, as the basicprerequisite, a government commitment to resolve theissues hindering the industry's development isneeded."

Second Review - 1983

e "The most tangible contribution the Bank has made todate has been its emphasis on fair contractprocedures in procurement under all its loans andits willingness to allow slicing and packaging oflarger projects."

a "Another area of Bank's assistance that is clearlyvisible is in labor-intensive constructionprojects. However, a considerable amount of workremains to be done to spread the use oflabor-intensive techniques to a wider range ofprojects and economic sectors."

* "The Bank has also made a considerable impact byhelping in the improvement of the industry's humanresources."

* "However, the improvements in procurementprocedures, the development of labor-intensivetechnology, and training of human resources haveupgraded discrete facets of the constructionindustry. What is needed is a strategy that has awider scope for the organic development of theindustry."

8 "The need for an integrated strategy to develop theconstruction industry is illustrated by manywell-intended but dispersed efforts which have notyielded the expected results. For example, somestudies of domestic construction industries have notresulted in follow-up actions, in part becausegovernment commitment to the development of theindustry has been insufficient. In other cases,studies were inconclusive because they were launchedwith weak terms of reference."

- 43 -

Annex 6Page 3 of 4

* "Efforts have been made to support road buildingcontractors by providing them funds to purchaseconstruction equipment. But in the absence oftechnical assistance to improve their engineeringand management proficiency, the results have beenshort c'r expectations."

a "Frequently, technical or financial assistance forthe industry is not reinforced with continuity ofwork opportunities for the contractors or withnecessary improvements in administrative practice(to ensure the timely payment of progresscertificates, for instance)."

* "Elsewhere, cases have been recorded of improvementswhich did not last long after their introductionbecause they were not backed with the necessarypolicy reforms; these cases involve, in particular,the timely payment of progress certificates."

Third Review - 1985

* "Although the review records many useful interven-tions and initiatives in support of domesticconstruction industries, there is also evidence thatthe potential for Bank assistance is not being fullyrealized."

* "The industry, and any interventions designed tosupport it, cannot prosper without a sustaineddemand for construction services. This is one ofthe strongest lessons that emerges from the review,in turn, it suggests the need for a carefulevaluation of the demand before designing theproject or project component."

a "The performance of consultants in providingtechnical assistance has often been unsatisfactory.In several cases, the consulting firms have beenunable to field suitably qualified teams; in others,the de-phasing of the programs for acquisition ofequipment and of the arrival of the consultants'staff has reduced the latter's effectiveness."

* "Finally, the review confirms that Governmentcommitment is an essential requirement for thedevelopment of construction capacities in membercountries. Goverment must not only have a generalobjective of developirg a domestic constructionindustry; it must be prepared to support a nascent

- 44 -

Annex 6Page 4 of 4

or ailing industry through responsible financing andcontracting of its public works construction andmaintenance, and through the intr'-r-, tion of policyand procedural reforms to remove L', ,traints whilchaffect the industry."

"In this respect, the Bank is not taking a leadingposition in encouraging those reforms, for instancethrough the economic dialogue with its membercountries or project conditionality."

- 45 -

Annex 7Page 1 of 4

Views of the Regions on Effectiveness ofBank Assistance to the Construction Industry

In April 1985, the Director of Transportation requested theRegional Directors of the Projects Departments to review the progress madeon development of construction industries in the countries of their regionsand to report, inter alia, on their experience of construction industryrelated operations, sector work and dialogue with the countries. TheRegional Directors were also requested to respond to a comprehensivequestionnaire on this subject. The Regional Directors described theirexperiences in various countries, commented broadly on the effectiveness ofconstruction industry related operations, and suggested certain actions forimproving the effectiveness of the Bank's assistance. The followingextracts from the Regional reports indicate the experiences of the regions:

Eastern and Southern Africa

* "As you will note from the completed question-naires which are annexed to this memorandum, LCIissues have not been at the forefront of thedialogue between ESA and our member countries."

* "ESA's direct support to LCIs has been very smallwhen compared, for example, to its level ofcorrmitments during FY 78-86 period. Specificallyonly 11 of the 365 projects approved/envisagedduring the period (or 3 percent) were designed toprovide any support to LCIs."

o "The type of Bank Group assistance provided toLCIs varies greatly from project to project buthas never, with the exception of the Burundipilot project, purported to be comprehensive."

* "We suggest that the Bank-wide review of theexperience with assistance to LCIs focus not onlyon the implementation of LCI projects and of LCIcomponents in transportation projects (andprojects in other sectors), but also on theeffectiveness of other types of assistance (e.g.,sector work and follow-up dialogue on policiesvis-a-vis LCIs, financing of equipment throughDFCs, etc.)."

- 46 -

Annex 7Page 2 of 4

Western Africa

* "The Region has been developing means ofpromoting the Construction Industry mainly withinthe context of ongoing or proposed highwayprojects in Benin, CAR, Guinea, Ghana, Nigeria,Liberia, Sierra Leone and the Ivory Coast."

* "Depending on specific country conditions, themain issues have become clearer as a result ofstudies undertaken last year. The trend seems toindicate that despite many chronic problems, thebuilding construction sub-sector is in bettercondition than civil and road conc,truction.'"

a "The kinds of issues which need to be solvedwithin and outside the transport sector to helppromote the construction industry in WesternAfrican are mainly: access to credit forpurchase of equipment and spare parts, provisionof guarantees, improvement of procurement andbidding procedures. Appropriate action,including policy measures, should be taken undersector projects and through economic dialogue."

EMENA

* "Many ongoing projects include components relatedto DCI such as manpower training (for manager,engineer, technician, mechanic, machine operator,skill worker), provision of construction equip-ment, and spare parts and consultants forconstruction management, supervision and thepreparation of bidding documents."

* "'DCI is an unusually complex sector. For it togrow and prosper, several factors have to betackled simultaneously or in appropriatesequence."

* "To tackle such an agenda require a suitableframework of policies in contracting and in thefinancial sector and a sensible definition of therole of Government in DCI. Furthermore, theGovernment should have a strong and sustainedcommitment and definite goals for the developmentof DCI. Without it, Bank assistance cannot befully effective and Bank intervention should belimited to promote and elicit an appropriatepolicy framework."

- 47 -

Annex 7Page 3 of 4

a "What makes the development of DCI especiallydifficult is that for it to achieve reasonablegood progress, many, if not all, of the abovefactors/activities should be orchestrated.Therefore, several Ministries and Departments inthe Government must be mobilized concurrently.There is rarely a focal point (Ministry orDepartment) which can act effectively as coord-inator or prime mover in the development of DCI."

L.A.C.

* "The relatively limited scope and success of Bankassistance to the construction industry in theRegion so far may be traced to a number offactors. In most countries the slowing down ofeconomies followed by the declining level ofinvestment in infrastructure had a destabilizingeffect on the industries."

a "Although from the overall economic viewpoint theefficiency of the domestic construction industryis of great importance, the Region, in the courseof project processing has been able to pay onlylimited attention to concentrating on the mainproject components. It appears that the presentpractice of reviewing construction industryrelated problems as part of project preparationhas not a;en quite satisfactory. The Region,therefore, in the future, will attempt to pursuealternative approaches. One avenue would bethrough the extension of the scope of sector workto include construction industry reviews ingreater depth and identify the agencies throughwhich any assistance could be most efficientlychannel l ed."

East Asia

* "In our region, the issues and problems of thedomestic construction industry differ fromcountry to country; they are acute in Indonesia,the Philippines and Papua New Guinea, lesspressing in Malaysia and Thailand, growing butstill relatively minor in Korea, and quitedilfferent in China."

- 48 -

Annex 7Page 4 of 4

a "We found that formation of ad hoc regional workgroups, consisting of project staff representingdifferent sectors, served best our needs and suchgroups have thus been formed to coordinate ourassistance in Indonesia and the Philippines."

* "We financed, so far, three construction industrystudies, namely in Indonesia and the Phillipinesin 1981, and in Malaysia in 1984. All thesestudies have been completed but would havebenefited from more precise terms of referenceand closer supervision of consultants. In ourview, comprehensive technical programs to carryout an in-depth review of a wide range ofconstruction industry issues are, however,expensive, time consuming and difficult toadminister. A more promising approach is toselev a few key issues in each country (e.g.,contracting procedures, access to credit, etc.)and try to address them."

South Asia

a "Although the basic requirements for sustaining adomestic construction industry are common to mostcountries (a dependable expectation of work inthe medium term; veasonable access to equipment,financing and to the extent possible freedom fromexcessive bureaucrdcy) the nature of our supportof the domestic construction industry in each ofour countries differ."

* "Generally our country sector work so far has notincluded specific coverage of the constructionindustry. As a first step towards bettercoverage, we have instituted the review of theBangladesh construction industry, which we hopeto replicate in other countries."

- 49 -

Annex 8Page 1 of 3

Construction Sector Issues

Constraints Freguently Encountered in the Construction Sector

1. Human and Material Resources

* Restrictions/regulations affecting the supply of labor andmaterials.

o Protectionism of domestic materials manufacturers.

a Protectionism of publicly-owned manufacturers and transporters.

- Exchange rates, import duties, fuel prices, and/or minimum wagerates inducing a preference for equipment in labor-surpluscountri es.

a Procurement/importation/foreign exchange restrictions affectingthe supply of materials, equipment, spare parts and consumables,or handicapping the domestic entrepreneur vis-a-vis foreigncompeti tors.

o Availability of suitable education/training facilities/programs.

2. Financial/Bonding/Insurances

* Government's record as a prompt payer of contractors'certi f i cates.

* Payment of appropriate interest on delayed payments.

a Availability of financing from comnercial banks and othersources to domestic contractors.

a Possibility of discounting contractors' certificates at faircommercial rates.

* Availability of bonds and guarantees. Stringency of collateralrequi rements.

* Availability of foreign exchange.

* Availability of suitable insurance cover.

* Availability/legal viability of equipment leasing.

- 50 -

Annex 8Page 2 of 3

Taxation

* Taxation on gross income or on net income on project completion.

* Profit/loss carry-over.

a Deductibility of sub-contractor/supplier/lessor cost/profits.

a Tax holidays during formative years.

* Accelerated depreciation of equipment (relative to the norms forother industries).

O Revaluation of assets to avoid decapitalization (as affectingprice/taxable profits).

4. Contracts

o Open competitiveness in procurement.

* One-sided contract documents.

* Excessively complex documents, archaic language.

* Access to contracts, prequalification r-equirements.

* Excess or lack of competition.

* Preference for domestic contractors.

* Protectionism of publicly-owned construction enterprises orforce account operations.

a Obligation of foreign firms to associate with domesticenterpri ses.

o Planning/budgeting procedures leading to responsible,well-financed contracts.

O Onerous procedures for starting up work, adjusting variations,collecting monthly certificates, certifying completion, andcollecting final payments/guarantee deposits.

e Excessive bonding/guarantee requirements.

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Annex 8Page 3 of 3

Insti tuti onal

* Responsibility within Government for the construction sector.

a Representative institution for the industry.

a Existence of dialogue/collaboration between the above informulation of national policies/legislation affecting theconstruction sector.

* Regulations affecting joint ventures/joint operations withforeign contractors.

Source: Draft Report entitled "A Review of Bank Operations Related tothe Construction Industry", January 1986, TransportationDepartment, The World Bank. [30]

-52 -

Annex 9Page 1 of 2

BIDING EXPERIENCE WITH PREFERENCE FOR DESTIC CN TRPCORS(TOTALS FOR CALEN)R YEARS 1974 1981) !/

Totals for Period: Average Contract Size:Total 1974-78 1979-81 1974-81 1974-78 1979-81

Total ICB contracts with 7-1120!preference in bid docurentsNo. (hnount US$ million) 500(1,252) 260(817) 240(435) 2.5 3.1 1.8

BIDDING PARTICIPATION & AWA.RD

1. DaestiLc only 307(365) 155(179) 152(186) 1.2 1.2 1.2

2. Foreign only 52(412) 40(385) 12(27) 7.9 9.6 2.3

3. Danestic and Foreign 141(475) 65(253) 76(222) 3,4 3.9 3.0

3.1 rad te foreign afterpreference applied 28(163) 15(90) 13(73) 5.8 6.0 5.6

3.2 Aerd to dacestic with-out preference apolied 105(268) 44(137) 61(131) 2.5 3.1 2.2

3.3 Mrd to danestic afterpreference applied 8(44) 6(26) 2(18) 5.5 4.4 9.0

I/ Totals gay differ because of round ing: data on saTe contract awards were not fully availablefor the latter part of calendar 1981.

Source: World Bank. Report on the 7-1/2 Preference for Darestic Contractors. [35]

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Annex 9Page 2 of 2

AWARDS TO DOMESTIC CONTRACTORS AFTER APPLYING 7-1/2% PREFERENCE(1974 through 1982

,ContractArnount

Country Date (US$000) Works Project Loan/Credit

Lesotho 1976 200 Buildings Education Cr 497

Indonesia 1976 11,700 Road Highway Ln 1236

Indonesia 1977 10,500 Irrigation Jatiluhur Cr 514

Tanzania 1977 1,300 Irrigation Kilombero 1041/513Sugar

Swaziland 1977 80 Buildings Education Cr 518

Tanzania 1089 2,300 Building Shoe Factory Ln 1385

Indonesia 1980 11,600 Land clearing Transmigration Ln 919/and roads Cr 1707

Indonesia 1980 6,380 Power house Semarang Ln 1513building

Source: Draft Report entitled "A Review of Bank Operations Related tothe Construction Industry", January 1986, TransportationDepartment, The World Bank. [30]

- 54 -Bibl i ographyPage 1 of 3

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