The problems facing labor-based road programs and what to do about them : evidence from Ghana

Sub-Saharan Afiica Transport Policy Program The World Bank and Economic Commnission for Africa 9 A SSATP_Working_Paper_No.24~~ ~@ 27235 The Problems Facing Labor-based Road Programs and What to Do About Them: Evidence from Ghana Elisabeth A. Stock March 1996 Environmentally Sustainable Development Division Technical Department, Africa Region World Bank _ _ _ _ _ F lPs  Foreword Poverty in Africa is essentially a rural phenomenon, with around 70 percent of the poor living in rural areas and engaged in agricultural activities. Improving rural transport infrastructure is, therefore, an essential component of agricultural development and poverty reduction. The World Bank has been working with other bilateral donors and African governments to address these issues through the Rural Travel and Transport Program (RTTP). This program is a component of the Sub-Saharan Africa Transport Policy Program (SSATP), which is a collaborative framework set up to improve transport policies and strengthen institutional capacity in Africa. 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 quality equal to roads made by equipment-based methods, but can be used to generate rural employment in a cost-effective manner. In addition, labor-based methods save on foreign exchange, inject cash into the local economy, transfer knowledge of road works to the local community-a knowledge that will be useful for later maintenance-- and reduce damage to the environment. Although the benefits of labor-based methods are now widely recognized, contractors have been reluctant to use them. The work presented in this report was motivated by an interest in understanding why. The answer to this question is critical for the future rural development of Sub-Saharan Africa: utilizing local resources to improve rural transport infrastmcture is essential for developing strong rural economies, increasing incomes, and facilitating access to mnarkets and social services. This study challenges conventional wisdom in this area and shows that the success of labor-based programs hinges on the existence of a conducive market structure, targeting small contractors for training and paying them on time. Unless these requirements are addressed, the use of labor-based methods is likely to be unsustainable. This report is being issued as a Sub-Saharan Africa Transport Policy Program (SSATP) Working Paper since its findings are relevant to many African countries. SSATP papers are addressed to policy-makers and to managers and planners attempting to improve the performance of the transport sector in Africa. They are also intended to facilitate consensus building among the donor community and key policy-makers in Sub-Saharan Africa. ean H. Doyen, Environmentally Sustainable Development Division Technical Department Africa Region  i i i i ti i i I  Acknowledgments This study was prepared by Elisabeth A. Stock, Rural Transport Specialist (Africa Technical Department). The study was initiated to satisfy the degree requirements for an M.C.P. and M.Sc. (in Technology and Policy) at the Massachusetts Institute of Technology. It has since been reviewed and reworked as part of the Rural Travel and Transport Program (RTTP), under the overall direction of Jean H. Doyen (Division Chief, AFTES) and Snorri Hallgrimsson (Infrastructure Advisor, AFTES). The RTTP is a regional initiative to improve rural transport services. It is financed by the governments of Switzerland, Norway, Sweden, and by the World Bank. Substantive inputs to the initial report were made by Judith Tendler (MIT), Richard Tabors (MIT), Bish Sanyal (MIT), Anu Joshi (MIT Ph.D. student), Meenu Tewari (MIT Ph.D student), Stefano Pagiola (World Bank), Howard Stock, and Evelyn Stock. The report was reviewed by staff from the Bank including Jean-Marie Lantran, Ian Heggie, Christina Malmberg Calvo, G6rard Paget, and Thor Wetteland. Substantive inputs to this final version were made by Jan de Veen (ILO Geneva), Kwaku Osei Bonsu (Chief Technical Advisor, ILO), Charles Williams (Advisor, DFR), Gary Taylor (Director, IT Transport Ltd.), and Opoku Mensah (OPM Construction Works Ltd., Ghana). A number of other people also made important contributions including colleagues and technical staff from the ILO, and Snorri Hallgrimsson (World Bank). Special thanks is extended to the interviewees in Ghana, especially Mr. Antwi-Boasiako and his family (of Gabasan Construction Works), Mr. Arthur (of Knatto Complex) and Mr. Mensah (OPM Construction Works Ltd.). In addition, thanks is extended to the engineers and quantity surveyors at the Department of Feeder Roads in Ghana. The report was edited by Ilyse Zable and formatted by Leita Jones, Senior Staff Assistant, AFTES.  I I i I i I I  Acronyms AGETIP Agence d'execution des Travaux d'inter& Public Contre le sous-emploi ASIST Advisory Support Information Services and Training for Labour-Based Road Programmes BHC Bank for Housing and Construction COSATU Congress of South African Trade Unions DANIDA Danish International Development Agency DFR Department of Feeder Roads GDP Gross Domestic Product GTZ Deutsche Gesellschaft fur Technische Zusammenarbeit ILO International Labour Organization MIT Massachusetts Institute of Technology RTTP Rural Travel and Transport Program SSATP Sub-Saharan Africa Transport Policy Program UNDP United Nations Development Program USAID United States Agency for International Development  i I i i I I I I  Contents Executive Summary .....................................................................i 1. Introduction ...................................................................... 1 1.1 A Brief History of Labor-based Methods ......................................................................1 Economic and Social Justification ...................................................................... 1 Resistance to Labor-based Programs ......................................................................2 Promoting Labor-based Methods ...................................................................... 3 Introduction in Ghana ...................... ................................................4 1.2 Principal Findings ......................................................................6 1.3 The Labor-based Road Rehabilitation Program in Ghana ................................. .......................7 The Program's Emergence .............................. ........................................7 Main Characteristics of the Program ......................................................................8 1.4 Methodology .....................................................................9 2. Are Smaller Firms Better at Managing Labor Than Large Firms? ............... ........................ 11 2.1 Why Large Contractors are Not as Successful at Managing Large Labor Forces as Small Contractors ..................................................................... 12 2.2 Small Contractors' Strategies for Raising Worker Productivity .............................................. 14 2.3 Small Contractors' Strategies to Control Truancy .................................................................. 16 Difficulties Specific to Supervisors ..................................................................... 16 Difficulties Specific to Laborers ..................................................................... 18 Difficulties Common to Both Laborers and Supervisors ....................................... 19 3. Do Delayed Payments Favor Labor-Based Methods Over Equipment-Based Methods? ...... 20 3.1 Why Small Labor-Based Contractors are More Sensitive To Delayed Payments Than Small Equipment-Based Contractors ..................................................................... 21 3.2 Contractors' Strategies for Coping with Payment Problems ......................... .......................... 23 Speeding up Government Payments ..................................................................... 23 Keeping the Site Moving when Payments are Delayed .......................................... 23 Paying Laborers in a Particular Order ................................................................... 24 Handling Strikes ..................................................................... 25 Having a Last Resort ..................... ................................................ 25 3.3 Central Versus Regional Government and Timely Payments ....................... .......................... 25 4. Lessons for Future Labor-Based Programs ..................................................................... 27 Bibliography ..................................................................... 30  Appendix 1: Wage Rates for Casual Labor .............. ........................................ 35 Appendix 2: Comparing Equipment-Based and Labor-Based Contractors ................................. 36  Executive Summary Since the 1970s donors and international organizations have promoted labor-based methods for road rehabilitation as one means of mitigating rural unemployment in developing countries. Labor-based methods create around 15 times more employment per km than equipment-based methods. Unlike other employment-generating programs, labor-based road rehabilitation programs can be justified on financial grounds and, therefore, appear to combine the employment-generating benefits of public works with the efficiency benefits of private sector delivery. Why, then, do private contractors continue to prefer equipment-based methods? This study offers an explanation by drawing on the experiences of a labor-based road program in Ghana. The literature gives two explanations for contractors' reluctance to adopt labor-based methods. First, contractors believe the cost of learning this new technology is high. Programs designed to promote labor-based methods have always included subsidized training to address this problem. This study argues that focusing on training often diverts attention away from more substantive problems inherent in adopting labor-based methods. Second, and more fundamental, some have argued that the cost of managing large labor forces, which is difficult to quantify in unit-cost comparisons, makes labor-based methods less competitive than equipment-based methods. This study shows that although labor-based methods can be financially more attractive to Ghanaian contractors, market-structure conditions thwart their use. Unit-rate cost comparisons of labor-based and equipment-based methods, therefore, cannot predict firm behavior. In particular, there is a very important distinction between small and large contractors. Labor-based methods are more attractive to small firms than to large firms. Small firms, because they are small, can supervise their sites themselves and thus find it easier to develop strategies to increase worker productivity and control truancy. Moreover, unlike large firms, small firms who wish to use equipment-based methods face high variable costs: they either own older, less-efficient equipment-with high maintenance costs-or must rent equipment at a high cost. Large firms, in contrast, find labor-based methods much less attractive. Large firms have high monitoring costs because of their size and because they often undertake many projects simultaneously. In addition, large firms have lower variable costs than labor-based firms which must make wage payments of up to 40 percent of their total costs. Thus, if large firms experience a lull, they can underbid small firms for small contracts ("fill in" work) and use their otherwise idle equipment. Thus, while small firms have the incentive to supervise their sites closely and learn to manage large labor forces, large firms have little incentive to do so. Market structure clearly has a strong influence on the adoption of labor-based methods. The other factor that makes firms resist using labor-based methods is the government's habitual delay in payments. If payments are late, small labor-based firms are unable to pay their laborers and strikes ensue. Although donors often create mechanisms to ensure timely payments during the pilot phase, these mechanisms are often temporary; and delayed payments once again become common in the program phase. Prompt payments are less critical for large equipment-based firms because their wage bill is lower and because they undertake many  projects at once and can thus "swap" payments from one project to another to help fill the gap. Prompt payments, surprisingly, are also less critical for small equipment-based firms because, in Ghana, contractors are able to obtain supplies on credit (without paying interest in some cases) and can pay suppliers late if they are paid late. Thus, payment delays in Ghana make labor-based methods less competitive than equipment-based methods for both large and small firms. Although Ghana's experience with labor-based methods is recent, it provides important lessons. Labor-based rehabilitation programs can be useful for generating rural employment and promoting private sector delivery. However, the previous framework for comparing labor- and equipment-based methods-using unit rates-is not sufficient for determining the competitiveness of labor-based methods in the private sector. nstead, this study proposes a framework based on market structure and also emphasizes the importance of timely payments to contractors. The findings indicate that although program designers focus predominantly on training, the success of labor-based programs actually hinges on paying contractors promptly and addressing problems in market structure.  1. Introduction Employment in Sub-Saharan Africa has become an ever-increasing concem for African governments and intemational organizations. For the last five years the population in Sub- Saharan Africa has grown at an annual average rate of 3.2 percent, while the economy's ability to absorb labor has grown at only 2.2 percent (Gaude and Watzlawick 1992). Since the early 1970s the World Bank and the Intemational Labour Organization (ILO) have proposed labor- based road rehabilitation as one method to deal with the growing unemployment problem. For example, in Ghana labor-based methods employ more than 150 laborers a day to produce 1.4 km of rehabilitated gravel road per month, which is 15 times more labor than is needed for equipment-based methods. In addition, studies have shown that labor-based methods not only produce gravel roads of equal quality than those produced with equipment-based methods, but in most developing countries, they are economically and financially less costly. Why then have labor-based programs been so difficult to expand? 1.1 A Brief History of Labor-based Methods The World Bank and the ILO were among the first international agencies to encourage developing countries to adopt a labor-based technology in the road sector. Although labor-based methods were used in the colonial era, by the 1960s most government officials and private firms in developing countries had a distinct capital-intensive bias. This had occurred even though these countries were labor-abundant and capital-scarce. The ILO and the World Bank blamed this bias on government policies that subsidized the cost of imported equipment and set wages above the marginal productivity of labor (Sadli 1974:368). These policies, they explained, made equipment-based methods appear cheaper than labor-based methods. The ILO and the World Bank argued that labor-based methods were justified on social and economic grounds and, later, that under certain conditions they were actually more competitive financially. Economic and Social Justification Labor-based methods were justified socially because they would reduce rural unemployment by providing jobs on the road sites. The need to address unemployment had become critical in the 1960s and 1970s. In 1971 widespread unemployment in Sri Lanka was linked to an eruption of violence; in Tanzania urban migration caused social unrest, leading the government to forcefully remove unemployed workers from the cities. Researchers blamed this unrest on the migration of the rural underemployed to the cities, which were not capable of absorbing them into the labor force (Edwards 1974:4). Two factors made rural areas less attractive than urban areas: the increasing population growth in rural areas and the tendency of government to concentrate infrastucture and industry in cities. Labor-based road rehabilitation was one means of resolving both the need for rural employment and the urban bias in infrastructure investment. In Kenya,  for example, between 1986 and 1993 the Minor Roads Program rehabilitated 3,240 kms of gravel roads and in fiscal 1990 alone, employed 20,300 casual laborers.' Labor-based methods were economically justified because, when the financial prices for labor and imported equipment were replaced with their shadow prices, labor-based methods were shown to be less costly than equipment-based methods.2 Shadow prices were used during the early 1970s because distortions in wages, caused by minimum wage legislation and in equipment costs caused by artificially low foreign exchange rates, made labor-based methods appear more costly than equipment-based methods. In addition, labor-based methods reduced a country's expenditures on imported equipment, therefore reducing dependence on scarce foreign exchange (Department of Feeder Roads 1989), and avoided delays in procuring imported spare parts (World Bank 1991). Based on these social and economic justifications, the World Bank and the ILO designed labor- based programs for public sector force account units. These organizations initially focused on the public sector rather than the private sector because distorted factor prices in the economy made equipment-based methods financially cheaper than labor-based methods for private sector firms, and many African countries had not yet developed local private sector capacity for contracting road works. For example, in Botswana, Kenya, Lesotho, and Malawi the government road agencies carried out all aspects of construction, rehabilitation, and maintenance themselves. Resistance to Labor-based Programs Despite World Bank and ILO arguments that these methods had both social and economic benefits, few governments showed interest in introducing labor-based methods into their road programs. Initially, most government officials and engineers held the common misconception that labor-based methods were a "backward" technological alternative that used no equipment. But the ILO did not propose that African roads be built using no equipment. Rather, it encouraged governments to use the most cost-effective combination of labor and equipment for gravel road rehabilitation. In most countries, this advice translated into using labor and light equipment principally for haulage and compaction. Yet even after these misconceptions were corrected, developing countries still resisted adopting labor-based methods. A review of the experience in countries such as Bangladesh, Botswana, Brazil, Colombia, Guatemala, Haiti, Kenya, Mexico, and Thailand reveals many reasons why government officials might prefer equipment-based methods to labor-based methods. To begin with, gravel road rehabilitation is comparatively faster using equipment-based methods than using labor-based methods. For example, in Ghana equipment-based rehabilitation is l The 3,240 km of gravel roads represent 5 percent of the total kilometers of classified road network based on figures from the Republic of Kenya Roads 2000 Program Objective Brochure (1994). The 20,300 casual laborers is based on figures from the Kenyan Rural Access Roads Program and Minor Roads Program Progress Report No. 11 (November 1991). The 20,300 casual laborers represent 0.18 percent of the total labor force based on figures from the World Development Report 1994. The total labor force is the "economically active" population, including the armed forces and the unemployed. 2 See Coukis (1983:33-34) for an example. 2  approximately 1.5 times faster than labor-based rehabilitation (Ashong 1994).3 Equipment-based methods, when properly executed, also are capable of achieving a better riding surface than labor-based methods, which is important for heavily trafficked roads. Equipment-based methods minimize labor management problems because these methods typically require about ten permanent laborers per gravel road while labor-based methods require more than 100 casual laborers per gravel road (Edwards 1974; Edmonds and Miles 1984:30). Experiences with labor-based programs in Asia have shown them to be plagued by problems of poor supervision, corruption, and low worker motivation (Riverson and others. 1991). Government officials who supervise the sites have added phantom workers to the payroll in some cases, and many projects have been referred to as "make-work" projects because worker productivity has been so low (Gaude and Watzlawick 1992; Bruton 1974). Equipment-based methods may also have political benefits because government officials can quickly mobilize equipment to do work for their supporters, whereas labor is more difficult to mobilize. Before elections, top government officials in one Southern African country used government tractors to plow farmers' fields and thus gamer votes.4 In addition, equipment-based methods offer more opportunities for rent-seeking since engineers and other civil servants have more contact with established contractors and can gain the benefits of such a relationship. Equipment-based methods also require less working capital, which is a concern for most cash- poor governments. Finally, equipment-based methods can command more funding than labor- based methods if donors will only finance the foreign exchange costs of a project (Tendler 1979a). Therefore, governments that are aiming to maximize donor contributions will find labor- based projects less attractive than equipment-based projects. Promoting Labor-based Methods To develop stronger arguments for using labor-based methods, the World Bank and the ILO evaluated a number of projects to examine their costs. Whereas labor-based methods had earlier appeared more expensive in cost per kilometer than equipment-based methods, extensive studies based on unit rates for equipment and labor showed the reverse to be true in low-wage countries (less than US$2.50 a day). For example, in the mid-1970s the World Bank used a unit-rate analysis to reevaluate a road construction project that had been completed using equipment-based methods in Kenya, a low-wage country. This analysis showed that the roads could have been built more cheaply using labor-based methods (Tendler 1979a). Because this framework demonstrated that labor-based methods were cheaper then equipment-based methods in most of Sub-Saharan Africa, the World Bank and the ILO began to justify using labor-based methods on financial and not just economic grounds. 3The comparative speed of labor- and equipment-based methods depends upon the quantity of work to be executed. The longer the length of road to be rehabilitated, the faster equipment-based methods will be relative to labor-based methods. 4 In contrast to force account units, contractors using equipment-based methods often require a longer mobilization period than contractors using labor-based methods. 3  Suprisingly, even though labor-based methods were shown to be financially cheaper, private finns in Africa continued to use equipment-based methods. The literature suggests two reasons for this behavior. Contractors accustomed to using equipment-based methods assigned a cost to leaming labor-based methods. Although this cost was not quantified, they viewed it as prohibitive (Tendler 1979a). Also, the contractors saw the cost of managing a large labor force (that is, supervision to increase labor productivity and reduce worker truancy) as making labor- based methods uncompetitive with equipment-based methods. Although the competitiveness of labor-based works depends critically on labor productivity, the cost of managing labor is difficult to calculate (Sadli 1974; Hirschman 1958; de Veen 1994).5 The ILO used targeted program interventions to address the problems stated above. They trained contractors, thus subsidizing their cost of adopting this new technology, and the ILO promoted the task-rate payment system-a system that pays laborers according to output rather than time-to increase worker productivity. Studies have shown that laborers are motivated to work harder when their wages are tied to output rather than to time.6 In some developing countries, instituting such a system is difficult because labor unions view it as exploitative. For example, in South Africa in the early 1990s, the Congress of South African Trade Unions (COSATU) initially opposed the use of a task-rate system which tied wages to productivity.7 Introduction in Ghana In 1986 Ghana became the first Sub-Saharan African country to launch a program introducing labor-based methods in the local road contracting industry. The government established a labor- based road rehabilitation pilot project in the Sefwi Wiawso district of the Western region. The World Bank and the United Nations Development Program (UNDP) provided financial assistance for the project; the ILO provided technical assistance. The program designers decided to target contractors rather than government force account units because, at that time, Ghana appeared to have an ideal environment for introducing labor-based methods into the local contracting industry. Unlike many other African countries, a private road-contracting industry had existed in Ghana since the late 1950s, after independence. By 1986 Ghana's local road-contracting industry was already well developed with private firms capable of executing road works of more than US$2 million and the public sector capable of administering the contracts. In addition, the Ghanaian wage rate was less than US$1 a day-below the World Bank and the ILO's stated threshold. Because the program targets private firms, it subsidizes the cost of learning labor-based methods by training contractors, and it introduces a task-rate system for paying labor. In addition, until 1994 the program allowed only program participants to execute labor-based contracts, which s Unit-rate build-ups account for the cost of managing large labor forces through a provision in overheads or through an increase in the number of supervisory personnel. 6 World Bank (1974) and Horton and King (1981) cite ILO (1963). 7 In June 1993, COSATU finally agreed to using a task-rate system as part of a framework agreement between three major actors: COSATU, the South African Federation for Civil Engineering Contractors, and the South African National Civic Organization. The agreement says that public works projects will in future, wherever possible, employ people, using a "task rate" system, instead of machines for construction work. 4  were awarded based on engineers' fixed rates, and not tendered bids. In this way the program protected its contractors from equipment-based contractors outside the program and placed them in a "cost-based" market. At first glance the program seems to have been very successful: between 1986 and 1994 the program created about 2.6 million person-days of employment, paid US$1.4 million in wages, and rehabilitated 1,190 km of gravel roads. In addition-and most importantly-labor-based methods were shown to cost approximately US$12,035/km with an average rate of completion of 1.4 km/month while equipment-based methods cost approximately US$19,463/km with an average rate of completion of 2.1 km/month (DANIDA 1995).8 Thus, not only are labor-based methods one third as expensive as equipment-based methods, but they are more profitable in a cost-based market, even though equipment-based methods are faster. This can be demonstrated by calculating and comparing the theoretical monthly profit for both types of contractors assuming they are both paid the equivalent sum of US $21,000/km.9 In this case a small contractor using labor-based methods will make approximately three times more profit per month than a small contractor using equipment-based methods (Table 1). Table 1: Monthly Profitfor Equipment-Based and Labor-Based Contractors Measure Equipment-based Labor-based payment/km (US$/Im) 19,500 19,500 cost / kma (US$/km) 17,694 10,941 profit / km (US$/km) 1,806 8,559 speed (km/month) 2.1 1.4 monthly profit (US$/month) 3,793 11,983 Monthly profit ratio I1 3 a. The cost for equipment-based contractors was calculated by assuming that they tender for works with a 10 percent profit margin. The cost for the labor-based contractor was calculated the fixed rate of US $13,500, which includes a 10 percent profit margin. Yet although the labor-based methods appear to be more competitive, many contractors were still averse to using labor-based methods. For example, by 1994 many of the labor-based contractors wanted to leave the program or use equipment-based methods on their sites if they were allowed. This paper attempts to answer why. 8The cost per km of labor-based rehabilitation is based on contracts from 1987 to 1994. The cost per kn of equipment-based rehabilitation is based on contracts awarded in July 1993 and July 1994. 9In reality, both types of contractors do not receive the same payment per km. Labor-based contractors are paid at a rate calculated by the govemment while equipment-based contractors tender their rates. No labor-based contractors have been paid US $21,000. 5  1.2 Principal Findings Although managing large labor forces is a substantial problem for large firms (as was thought), it is not for small firms.'