ECONOMICS MADE SIMPLE: Selected economic issues in TZ’s construction sector

Honest Prosper Ngowi

Construction is one of the most important sectors in economies globally. It contributes substantially in economic development in various direct and indirect ways. It does so through creating employments, central and local government revenues through different kinds of taxes, fees and even fines.

Through inter sectoral linkages that take the form and shape of inputs–outputs relationships, it contributes in the development of many other sectors. They include industrial sector, education, transport, agriculture and finance.

Let’s outline some economic issues in Tanzania’s construction industry. These are partly derived from and based on my training of, and interactions with contractors for one week per year for a number of years. The training has been in the context of Contractors Registration Board sustainable structured training programme. The 2018 version of this training took place in Arusha from February 12 to 16.

Understanding the sector

The sector is large and diverse. It includes among other things real estate in its various forms and sizes; transport infrastructure including roads, ports, airports and railways. It also includes water harvesting and supply infrastructure, electricity and telecommunication infrastructure construction, maintenance and repair. It also includes designing various construction works. In terms of size, the Tanzanian construction industry has been changing over years. In terms of Gross Domestic Product (GDP) it was 13.6 per cent of Tanzania’s GDP in 2015. In monetary terms in that year it was about $6 billion. In 2010 it was just 7.8 per cent of the country’s GDP or $1 billion. This suggests a good growth in the intervening year between 2010 and 2015.

The sector’s growth was 4.3 per cent in the first quarter 2016 compared to a whole 23.2 per cent in the same period in 2015. This is a dramatic decline within a year. It is attributed to reduced investments in construction. In terms of budgetary allocation, the sector got a total of Sh5.47 trillion (25.4 per cent of the total budget) in the 2016–2017 fiscal year. These funds were committed to infrastructure development projects. It implies great seriousness and focus in the sector by the government.

Projects examples

There are a number of construction projects in Tanzania. These include micro, small, medium and large projects in the public and private sector spaces. Public construction projects include but are not limited to housing projects such as those by National Housing Corporation and Tanzania Public Servants Housing Scheme. Transport network construction projects include the famous and much talked about Standard Gauge Railway (SGR), Intermodal and Rail Development Project; airports constructions and expansions, water projects, ports development projects such as the Bagamoyo and Mwambani ports projects.

Nature of the industry

As is the case with many other industries, business in the construction sector is very complex, risky and unpredictable. Complexity is due to a number of issues including colossal sizes of some projects and design complexities. Risks in the sector include weather, inflation, exchange rate, accidents and many related risks. This makes insurance important and by extension it increases costs and therefore sales prices.

The sector is under stiff competition from both local and foreign contractors. They also include formal and informal contractors. This calls for building and maintaining competitiveness of contractors if they are to grow and survive in the turbulent market place. Competitiveness can be based on price, cost, quality, service and most importantly ideas.

Capacity issues

From economics standpoints, these and other projects stand to stimulate the economy if and only if a number of conditions are fulfilled. These include having more local content in these projects. The local content can be in forms and shapes of materials and labour supply by local firms including execution of these projects by local contractors. Local content calls for capacity of local contractors to compete and deliver in these projects successfully. Capacity issues for contractors in Tanzania include technical and financial capacities. Part of solution includes forming joint ventures that would help them to pull resources and expertise together thereby increasing their competitiveness and by extension capacity win bid bids.

Strategic issues

Given the nature of the industry, there are a number of strategic issues that contractors must note. They have to be strategic in the very dynamic and complex construction business environment. This is a business faced with a situation of ever-changing business environment. Among others, there are new entrants in the market both local and foreign, public and private. There are as well new clients and new technologies. For contractors to at least survive let alone to prosper and grow, they have to be very strategic in their actions and omissions.

Challenges

Key challenges tend to include lack of adequate capital, corruption in the tendering and bidding processes, delayed payments, tax issues--number and rates of taxes and competition. It is very important for stakeholders in the sector to only lament on challenges but also propose actions to address them including taking initiatives to solve those challenges that are within their powers.