Developing successful labor-based contractor programs : lessons from Ghana

2111 1 Infrastructure Notes ; ;>,4 L8l} lXer~~~~~~~~.bveWos August 1996 ( The World Bank Transport No. I)D-21 Developing Successful Labor-Based Contractor Programs: Lessons from Ghana Elisabeth A. Stock The use of labor-based methods for road works has been an important aspect of the strategy to improve rural transport infrastructure in Africa for the past 25 years. These methods not only produce gravel roads of equal quality to equipment-based methods, but can be used to generate rural employment in a cost-effective manner. The benefits of labor-based methods will not be realized unless programs are designed to make the working environment favorable to their use, recognizing that contractors base financial comparisons between labor- and equipment-based methods on a variety offactors. A recent case study on the Ghanaian experience attempts to identify these factors and provide program designers with lessons for developing successful labor-based programs. BACKGROUND Bank's National Feeder Roads Rehabilitation and Since the 1970s donors and international organizations Maintenance Project (NFRRMP). Since the program's have promoted labor-based methods for road inception, The Ghanaian wage has remained at a level of rehabilitation as one means of mitigating rural approximately US$1 a day. The main elements of the unemployment in developing countries. These methods program include: not only produce gravel roads of equal quality to equipment-based methods, but can be used to generate * contractor training (at subsidized rates for the rural employment, save on foreign exchange, inject cash contractors), into the local economy, transfer knowledge of road works * the introduction of a task-rate system for paying to the local community-a knowledge that will be useful labor, for later maintenance-and reduce damage to the * the protection of labor-based contractors by creating a environment. In addition, unlike some other employment- special registration category in which only they can generating programs, labor-based road rehabilitation compete, and programs can be justified on financial grounds and, * the provision of bank loans of up to US$160,000 for therefore, appear to combine the employment-generating the purchase of the necessary light equipment. benefits of public works with the efficiency benefits of private sector delivery. The program has been successful: between 1986 and 1994 the program created about 2.6 million person-days of THE PROJECT employment, paid US$1.4 million in wages, and In 1986 Ghana became the first Sub-Saharan African rehabilitated 1,190 km of gravel roads. In addition-and country to launch a program introducing labor-based most importantly-during the pilot phase, labor-based methods in the local road contracting industry. The methods were shown to cost approximately program was initiated as a component of the World US$12,035/km with an average rate of completion of 1.4 Bank's Fourth Highway project funded by IDA and the km/month per contractor while equipment-based methods United Nations Development Program; the International cost approximately US$19,463/km with an average rate of Labour Organization (ILO) provided technical assistance. completion of 2.1 km/month. Although evidence from the Later the program was funded by the Ghanaian pilot appears to prove the competitiveness of labor-based government, USAID and DANIDA as part of the World compared with ui sed methods in terms of both  August 1996 Page 2 cost and quality, this evidence fails to capture other The promptness of government payments. factors contractors consider when making financial Late government payments bias firms toward using _ comparisons between these methods. A recent case study equipment-based methods. When government payments of the Ghanaian experience attempts to identify and are prompt, labor-based methods can be cheaper per km understand these factors. and can be more profitable for a firm than equipment- based methods. When government payments are delayed, THE FIELD WORK however, labor-based contractors must pay their laborers The study's findings are based on two months of late (since they often have no access to bridging finance), fieldwork during the summer of 1994 and two missions in and this often results in strikes. These strikes, which not 1995. The work included interviews with labor-based only delay work but often result in damaged property or contractors, supervisors, and laborers in five regions of life threatening situations, discourage contractors from Ghana where labor-based firms were equipped with light using labor-based methods. Even in cases where small equipment. Firms obtained equipment through local bank contractors can access bridging capital to pay laborers, loans at commercial interest rates. In addition, two late government payments increase the cost of labor-based unequipped labor-based road contractors and one methods more than they increase the cost of equipment- prominent building contractor were interviewed as were based methods primarily because equipment-based Department of Feeder Road (DFR) officials, an opinion contractors face lower wage bills. leader at the district level, and inhabitants in three villages where gravel roads had been rehabilitated using labor- LESSONS based methods. The study suggests four lessons that can be applied when designing labor-based programs in other countries: THE FINDINGS This study demonstrates that when firms make financial Before initiating a program, assess the second-hand comparisons between labor- and equipment-based equipment stock and the competitiveness of the sector. methods, they do not use unit rates alone (the standard If there is a large supply of second-hand equipment in the engineering costs for undertaking specific work items), as sector, labor-based methods may be less attractive than governments and donors do. Instead firms consider: equipment-based methods. To assess this, program designers must determine whether this secondary market W The stock of second-hand equipment in the sector. is temporary or likely to provide a permanent flow of A large quantity of second-hand equipment can enable suitable equipment for road works. The competitiveness firms using equipment-based methods to underbid those of the market will also affect the differential cost between using labor-based methods because it provides suitable labor- and (secondary) equipment-based methods. Even if equipment at a lower cost. Although sometimes there is not a significant secondary equipment market and unreliable, the rental fee for such equipment often the sector is highly competitive, medium-scale includes the provision of a mechanic on site to fix any equipment-based contractors will likely underbid labor- problems that might develop. This secondary equipment based contractors by lowering their bid prices to their market is often overlooked by project designers. variable (marginal) costs, at least in the short term. In either of these cases, the road agency can decide to protect Tlh e size and specialization of the firm. labor-based contractors from competition with equipment- Small-scale contractors find labor-based methods more based firms. competitive than medium- and large-scale contractors who already own heavy equipment. For small-scale In Ghana, contractors were protected during the initial contractors, labor-based methods avoid the costs of years of the program (i.e., during the Fourth Highway renting equipment or repairing their own old or poorly project) with the justification that the program was in a maintained equipment. Large equipment-based firms, in pilot stage. By 1991, however, when the Fourth Highway contrast, have higher fixed costs and lower variable costs. project closed, the Bank felt such protection corresponded They would sooner underbid a labor-based firm and keep to reserved procurement which was not allowed under their equipment employed, than switch to labor-based Bank procurement rules. Thus, it was agreed during the methods and leave their equipment idle. Although large- NFRRMP appraisal mission that USAID and DANIDA scale firms would only be able to underbid labor-based would fund labor-based works as co-financiers. These firms for a short time (or they would be unable to replace donors periodically reviewed the relative costs and quality their equipment), this ability to do so gives them little of labor- and equipment-based methods and demonstrated incentive to learn how to use labor-based methods. that protection was achieved without making sacrifices to _ either.  August 1996 Page 3 Transport No. RI)-21 . Ensure timely payments to contractors. difficult to set up a competitive environment for The first criteria for guaranteeing timely payments to tendering, which is crucial for efficiency. contractors is ensuring timely funding to the labor-based program. In the case of Ghana, the first few years of the For example, in Ghana, the bank administering the hire- program (the pilot stage) was funded by IDA and purchase arrangement required an assurance from the contractors payments were timely. When this project government that labor-based contractors would be closed in 1991, the Government of Ghana became the sole provided with four years of continuous work to permit financier of works completed, and government payment to them to repay their loans. To provide continuous work, contractors became erratic. During this time, contractors the DFR needed to tender the same number of contracts as found labor-based methods less profitable and many there were contractors in each region. This led to considered leaving the program. In 1993/94, USAID and collusion among the participating firms when contracts DANIDA began funding works and payments became were tendered in one region. After this experience, the timely once again. Thus, programs that rely on DFR returned to its system of awarding contracts based government funding to finance labor-based works must be on fixed rates instead of tendered bids. The DFR sure to set up mechanisms to ensure timely payments. A negotiated these fixed rates with the contractors' well-functioning road fund, for example, can provide a association and awarded and continue to award contracts sustainable non-donor driven solution. on a rolling basis as long as performance is satisfactory. Although both USAID and DANIDA, the present In addition, financing for road works must be provided to financiers of this component, support a shift to the department administering the contracts before works competition among the labor-based firms, they accept are tendered, and payment procedures for contractors that, to allow firms to establish themselves and to prevent must be streamlined. The study of the Ghana program non-payment of loans, competitive bidding cannot yet be found that contracts administered at the local level and introduced. Therefore, in countries where light equipment paid out of a local account were paid more promptly. For cannot be rented locally, program designers should keep example, when payments for work completed were loans and guarantees as small as possible while still administered by the DFR's regional offices and audited enabling contractors to produce quality results. ex-post, contractors' invoices required vetting by only two levels before they were paid, whereas at the central level, The bottom line: Labor-based methods are a technology invoices had to be vetted and signed by at least twelve to be reckoned with in the road sector. They not only government officials. Another institutional arrangement rehabilitate roads in a cost-effective manner but they can for expediting payments to contractors in Africa is the be used to achieve poverty reduction benefits as well. AGETIP. a nonprofit agency that has a streamlined Whether or not labor-based methods will be sustainable administration and a special account audited ex-post to depends upon the conditions of the working environment ensure the timely flow of donor funds to local contractors. in which they are introduced Although the working environments in many developing countries are currently Develop an enabling environment. biasedtoward the use of equipment-based methods, these Program designers should develop an enabling biases can be effectively removed through carefully environment in which small-scale contractors can operate; designed programs. that is, win acceptance for reforming minimum wage legislation to reflect the market wage, reduce the bias TO LEARN MORE against small-scale contractors by slicing works into many small contracts, and provide small-scale firms with access Stock, Elisabeth. 1996. "The Problems Facing Labor- to working capital. Based Road Programs and What to Do About Them: Evidence From Ghana." SSATP Working Paper No. 24. Equip contractors with care. March. When light equipment cannot be hired locally, labor- based programs will have to include measures to equip Stock, Elisabeth A. and Jan de Veen. 1996: "Expanding contractors. How this is done is of great importance. The Labor-based Methods in Roads Programs." SSATP provision of large-size equipment loans can make it Working Paper No. 18. June. 0  LEVIS. Laura Staff Assistant S6-ll3x