Burundi - Local Construction Industry Pilot Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 3343-BU BURUNDI STAFF APPRAISAL REPORT OF A PILOT PROJECT TO ASSIST THE LOCAL CONSTRUCTION INDUSTRY March 25, 1982 Eastern Africa Projects Department Industrial Development and Finance Division This document has a restricted distribution and may be used by recipients only in the performance oet their official duties. Its contents may not otherwise be disclosed without Worid Bank authorization.  CURRENCY EQUIVALENTS Currency Unit Burundi Francs (BuF) US$1.00 = BuF90 US$0.0111 BuFl BuFl million US$11,111 WEIGHTS AND MEASURES (metric system) 1 cubic meter 35.31 cubic feet (cu ft) 1 meter (m) 2 39.37 inches (in) or 3.28 feet (ft) 1 square meter (m ) = 10.9 square feet (sq ft) 1 kilometer (km) 0.62 milrs (mi) 1 hectare (ha) 10,000 m or 2.471 acres 1 kilogram (kg) 2.2 pounds (lbs) 1 metric ton = 1,000 kgs or 2,204 pounds GLOSSARY OF ABBREVIATIONS BANCOBU - Banque Commerciale de Bujumbura BCB - Banque de Credit de Bujumbura BNDE - Banque Nationale pour le Developpement Economique (Development Bank) BRB - Banque de la Republique du Burundi (Central Bank) CADEBU - Caisse d'Epargne du Burundi (Savings Bank) CAMOFI - Caisse Centrale de Mobilisation et de Financement (National Bank for Savings and Investments) DETN - Direction des Etudes et Travaux Neufs (New Works Directorate) EDF - European Development Fund EEC - European Economic Community EIB - European Investment Bank ENACCI - Entreprise Nationale de Chaux et de Ciment IDA - International Development Association ILO - International Labor Organization MTPEM - Ministere des Travaux Publics, de l'Energie et des Mines (Ministry of Public Works, Energy and Mining) OCIBU - Office des Cultures Industrielles du Burundi ONABOIS - Office National du Bois ONIMAC - Office National d'Importation et de Commercialisation des Materiaux de Construction et d'Equipement Domesti- que (National Office for the Import and Marketing of Construction Materials and Domestic Equipment) ONL - Office National du Logement (National Housing Office) REGIDESO - ("Regie des Eaux") National Water and Electricity Authority  FOR OFFICIAL USE ONLY SOMIBUROM - Societe Mixte Miniere et Industrielle Burundo - Roumaine (Burundo-Rumanian Mining & Industrial Company) SIP - Societe Immobiliere Publique (Public Housing Corporation) SSE - Small Scale Enterprises g UNCDF - United Nations Capital Development Fund UNDP - United Nations Development Programme UNIDO - United Nations Industrial Development Organization UPRONA - Union pour le Progres National (Union for National Progress) GOVERNMENT OF BURUNDI FISCAL YEAR January 1 - December 31 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  I f0 I tr  BURUNDI APPRAISAL OF A PILOT PROJECT TO ASSIST THE LOCAL CONSTRUCTION INDUSTRY *~~~~~~~~~~~~~~~~~~~~~~~~~~ Table of Contents Page No. I. INTRODUCTION ...... - .......... ...... 1 II. THE LOCAL CONSTRUCTION INDUSTRY ........... ....... - 2 A. Construction Activities. 2 B. Construction Materials. 8 C. The Financial Framework of the Construction Industry. 13 III. THE PROJECT ................. . 17 A. Background and Objectives ....................... 17 B. Detailed Features .................. 19 C. Terms and Conditions Specific to the Credit Component .23 D. Project Cost ............... 24 E. Financing Plan .26 F. Project Management and Implementation 28 IV. PROJECT JUSTIFICATION .32 A. General Justification and Project Benefits 32 B. Benefits from Specifie Project Components 33 C. Risks Associated with the Project .35 V. RECOMMENDATIONS AND CREDIT CONDITIONS .36 This report was prepared by Messrs. Philippe Beuzelin, Michel Cramer, Ms. Fatoumata Sylla, Mrs. Fernande Lancksweirt (Consultant) on the basis of an appraisal mission which visited Burundi in September 1980.  List of Annexes Page No. 1. Selected Major Investment Projects to be Implemented in 1981-1984 .................................... 39 2. The Main Imported Construction Materials in Burundi (1977-1979) ................................................. 40 3. The Production of Local Construction Materials (1979) ....... 41 4. Staffing of the Project Unit ................................ 42 5. Selected Documents and Data Available in the Project File ... 43  BURUNDI STAFF APPRAISAL REPORT OR A PILOT PROJECT TO ASSIST THE LOCAL CONSTRUCTION INDUSTRY I. INTRODUCTION Project Background 1.01 The proposed project is the first systematic effort by the Bank to assist in the development of the local construction industry in a country of the Eastern Africa Region. The idea of providing assistance to the sector was prompted by a growing recognition by the Bank of the significance of the construction industry in the development process. Furthermore, the implemen- tation of Bank-financed projects have, in many instances, been hindered by weaknesses of the industry. Typically, this occurred on projects involving construction works not large enough to be of interest to the large construc- tion enterprises and which small local firms were not technically nor finan- cially equipped to carry out. 1.02 Burundi was selected for an initial effort because of the strong iiuterest which the Governnent showed toward Bank assistance to the sector and also in view of the acute needs of the local industry: the local construction industry, which is largely foreign-controlled, is overstretched and cannot meet the demand and, furthermore 90%, by value, of the materials used by the formal sector are imported. 1.03 Being experimental in nature, this project does not purport to address itself to all the needs of the construction industry but only to those which have been identified as priority or those where something effective could be done within the framework of a relatively small operation. On that basis the following components have been included in the project: (1) develop- ment and improvement of the local production of construction materials; (2) assistance to the Ministry of Public Works, Energy and Mining; (3) assis- tance to the local enterprises to expand their activities in the building sector where their share is still relatively small; it does not aim at promoting their role in road construction nor maintenance which most of the local firms are not prepared to tackle.  - 2 - II. THE LOCAL CONSTRUCTION INDUSTRY A. Construction Activities 1/ The Demand for Construction 2.01 Overall Volume of Investment in Burundi. In recent years, the Government has engaged in important efforts to mobilize external aid financing to step up Burundi's investment rate, which had long been one of the lowest in the world, averaging about 7% of GDP in 1960-76. Gross fixed investments have increased in real terms by 47% in 1977, 15% in 1978, 4% in 1979; and reached s BuF11.5 billion in 1980, representing still a moderate share of about 14% of GDP. During 1977-80, 91% of investments were made by the public sector; 57% were financed by external grants and soft-term loans. 2.02 Future investments are mostly constrained by the implementing capa- city and financial condition of the country. Burundi continues to have a low external debt and has secured donors commitments for many multi-years investment programs, particularly for roads, education, power and housing (para. 2.04). Since 1978, however, it has been affected by large trade deficits and increased budgetary constraints, like many other African countries. In the medium term, Burundi may have to call upon some general external financing for balance of payment support, probably accompanied with conditions limiting investments. Although the Planning Ministry has revised downwards the level of the investment program in the 1978-82 Plan, it continues to project an investment growth of 12% per year in real terms through 1984. In view of th- abave. < ie findings of IDA's economic mission in December 1979 also suggest a concinued but more moderate investment growth in a range of 5%-8% per year (Economic Memorandum No. 3071-BU). 2.03 The Demand for Construction Investment. Construction investments which have accounted for a fairly stable proportion of 52% to 60% of total investments in the years 1977-79, would thus be expected to increase from the actual amount of BuF5.5 billion in 1979 to around BuF7-8 billion at 1979 prices in 1984. In 1980, however, the large majority of locally based con- struction enterprises were found to be already working at almost full capacity, and major obstacles, such as shortages on construction materials, were prevent- ing further increase in construction output. Clearly, the capacity of the construction industry is likely to become a serious cause of delays in the implementation of major investment programs, and a significant constraint to economic development in general. The Government needs therefore to promote the rapid development of domestic contractors. 2.04 Structure of the Demand. Based on the investment projections of the Planning Ministry for 1980-1984, it may be estimated that the future demand for construction works will be composed of: 20% for roads, 17% for energy, 1/ Defined to include both buildings and civil work.  - 3 - 15% for the rural sector, 13% for education, 8% for manufacturing, 6% for housing, and 21% for investments in other sectors. Annex 1 presents the construction costs of some 15 major investment projects in various sectors, for which preparation is well advanced and financing appears assured; these projects alone require construction expenditures of up to BuF3.8 billion per year in 1981/82. The Producers of Construction 2.05 Following the upsurge of national investment the value of total construction output in constant prices increased by 96% in 1977 and 20% in 1978, but decreased by 9% in 1979, mostly due to the shortages in construction materials. In 1979, construction work still represented only 4.9% of Burundi's GDP, but accounted for 52% of total investments and approximately 20% of employment in the formal sector. Based on the limited data available, the table below provides an estimate of the distribution of the employment and output value in 1979 among the main producers in the formal sector: Number of Employees Estimated Share (%) Construction Producers in Construction _/ of Output Value 2/ Government, 3/ 1 Parastatal (REGIDESO) 6,200 10 National Housing Agency (ONL) 600 3 Private Enterprises: Burundi-Owned 4/ 3,000 13 Foreign-Controlled 7,100 70 Religious Missions 1,100 4 Total 18,000 100% 1/ Source: "Statistiques du Travail," UNDP/ILO Project, April 1980. 2/ Main Source: World Bank/UNIDO Cooperative Program, March 1979 Mission Report. 3/ Excluding the undetermined proportion of the 15,000 day-laborers employed by the Ministries of Agriculture and Defense who are partly involved in construction work. 4/ Excluding artisans and owner-builders (para. 2.18).  -4- Government and Parastatals 2.06 The Ministry of Public Works, Energy and Mining (MTPEM) 1/ is the public agency most active in the construction sector. It is composed of a Roads Directorate, a Buildings Directorate and a Directorate for the planning of energy, infrastructure and housing programs. The Roads Directorate executes all maintenance and small new works (below BuF50 million) for roads with its own construction staff including more than 3,000 laborers, and supervises the preparation and the execution of the larger road projects by contractors. 2.07 The Maintenance Department of the Buildings Directorate executes all maintenance for the 1,500 Government buildings and houses with its limited staff including about 7 professionals and 90 skilled workers. The Studies and New Works Department (DETN) of the Buildings Directorate is in charge of policies regarding the construction industry (e.g. contract conditions, cons- truction standards) and generally assists in the preparation and supervision of major Government building works with a staff of about 20 construction technicians including 5 expatriates. 2.08 Other ministries (particularly Agriculture, Army and Education) do some construction work on force account, mostly for building maintenance and generally under MTPEM's supervision, but their joint construction output is notably smaller. However, the Project Implementation Unit (PIU) of IDA's First Education Project, set up in 1977 under the Ministry of Education has undertaken a large construction program for 100 primary schools with its own departmental force including 5 professionals; in 1979, it succeeded in parti- cular in importing cement directly at prices about 30% below local market rates. 2.09 REGIDESO, the parastatal for water and power development, executes all maintenance and some new works in the water sector, and all maintenance and about 25% of new works in the power sector. It is subcontracting all the larger or technically complex new works solely to foreign contractors, as it does not consider the local contractors qualified for them. REGIDESO's staff includes 28 engineers and technicians, 35 skilled workers, and about 1,400 laborers, who are mostly involved in civil works. 2.10 National Housing Agency (ONL) 2/ is a parastatal created in 1974 to complement the small capacity of the private sector in the construction of Government housing. Following poor financial management, it is now being reorganized to become a profitable construction enterprise, with Dutch Aid providing two management staff. The Dutch construction enterprise providing two project managers and an accountant might eventually become a minority shareholder. Aside from Government housing, ONL produces bricks (para. 2.42) and intends to engage in small road maintenance. In 1980, ONL had 15 profes- sional staff and 430 skilled workers. 1/ Ministere des Travaux Publics, de l'Energie et des Mines. 2/ Office National du Logement.  Private Construction Sector 2.11 Foreign Contractors. These contractors include 7 subsidiaries or branches of large foreign companies, mostly Belgian and Italians, and about 10 smaller enterprises owned and managed by expatriate individuals. The largest foreign subsidiary has in Burundi a total staff of 3,500 and has been producing about a third of contract value in the formal sector, with a quasi-monopoly in new road construction. 2.12 The remaining 6 foreign subsidiaries each have a total staff of 200 - 1,000 and net fixed assets of BuF20 - 200 million; and may thus be defined as medium-scale enterprises (MSE). These MSEs generally have ade- quate equipment and qualified staff, with the management and about a third of professional positions held by expatriates. They benefit from the parent company-s technical and commercial assistance, particularly for the direct importation of raw materials in periods of shortages. The foreign subsidiaries generally have the monopoly for civil works, technically complex works (e.g., high buildings, new roads, new power plants works) and larger contracts (above BuF300 million); they have little interest and activity in the smaller building and housing construction works. 2.13 The about 10 expatriate-owned firms are small-scale enterprises (SSEs), each w