WIDER Working Paper 2018/180

Construction and public procurement

in Uganda

Emanuele Colonnelli1 and Nicole Ntungire2

December 2018
Abstract: As it transitions to an oil-producing country, Uganda’s investments in infrastructure and
physical capital will increasingly depend on the ability of the construction sector to respond to
surges in demand and transform investment effort into outcomes. Using administrative and survey
data, this paper sets out to examine the current bottlenecks to production faced by the construction
sector in Uganda and identifies possible policy remedies to relieve them. A secondary point of
emphasis in the paper’s analysis is the interaction between government and construction firms
through public procurement, and the instrumental role procurement plays in the efficient
development of the industry.

Keywords: construction, procurement, natural resources, Uganda

JEL classification: L74, H57, O13

Acknowledgements: We thank Francesco Loiacono, Edwin Muhumuza, Richard Newfarmer,

John Page, Edoardo Teso, and Yan Wen for comments and assistance in the data collection and
analysis. We also thank the International Growth Centre, Uganda, and the Centre for Economic
Policy Research, London, for its Private Enterprise Development in Low-Income Countries
Initiative, the Stanford Center for International Development, Cambridge, Massachusetts, and the
Abdul Latif Jameel Poverty Action Lab for financial support.

1The University of Chicago, Booth School of Business, Chicago, IL; 2 The International Growth Centre (IGC), London School of
Economics and Political Science, London; corresponding author: [email protected].
This paper has been prepared as part of a series of studies on ‘Natural resources, structural change, and industrial development in
Africa’ which is part of a larger UNU-WIDER research project on ‘Jobs, poverty and structural change in Africa’.
Copyright © UNU-WIDER 2018
Information and requests: [email protected]
ISSN 1798-7237 ISBN 978-92-9256-622-7 https://doi.org/10.35188/UNU-WIDER/2018/622-7
Typescript prepared by Ayesha Chari.
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1 Introduction

The construction sector represents the backbone of most developing economies, as it provides
the foundation for infrastructure development, and it is therefore thought to act as a multiplier for
all other economic sectors that rely on such infrastructure. Uganda is no exception, with
conservative estimates from the Uganda Bureau of Statistics (UBOS 2018) suggesting the
construction sector directly contributes to approximately 7 per cent of gross domestic product
(GDP). As shown in Figure 1, the construction sector has been growing rapidly over the past
decade, in contrast to the declining trend observed in some key traditional sectors such as
manufacturing. This growth in the construction sector is largely attributed to an accelerated rate
of execution of public investment in energy and infrastructure. The upward trend in public
investment is consistent with the country’s strategy, as outlined in the National Vision 2040 and
the second National Development Plan, to focus on building its capital stock, as a way to address
Uganda’s infrastructure deficits and to build production facilities to prepare for exploitation of the
country’s oil resource.
Figure 1: Contribution of construction sector to GDP (constant 2009–10 prices)
9
Percentage share (%)
8
7
6
5

2008q1 2010q3 2013q1 2015q3 2018q1

Construction Manufacturing

Source: Authors’ compilation based on UBOS (2018).

With respect to the growth of the natural resource sector, the importance of the construction
sector is self-evident, more so with the recent discovery of an estimated 3.5 billion barrel oil
reservoir in Uganda’s western and north-western Albertine Graben which has attracted
considerable investor attention and signals strong potential for Uganda’s previously nascent
extractive industry to transform livelihoods and raise the productivity of its largely agrarian-based
economy. Estimates from the Petroleum Authority of Uganda (2018) put the value of total
investments that will be made over the next three to five years, as Uganda transitions to an oil-
producing country, at over USD 20 billion. Expectedly, a key portion of these planned investments
will involve the construction sector, including the construction of an oil refinery (USD 4.5 billion),
the construction of a 1,445-km East African crude oil export pipeline to the port of Tonga in
Tanzania (USD 3.55 billion), the construction of a new international airport in Kabaale, Hoima
District, and the construction of regional road networks (USD 1 billion). Despite the promising

1
prospects, the construction sector faces several bottlenecks, and the risks of failing to successfully
convert investment opportunities into new job creation and national productivity growth are high.
These new opportunities and challenges raise several questions: how much of the increased
economic activity will be passed to the domestic private sector? Will these opportunities motivate
efficiency—and transparency—enhancing regulatory changes? Will the influx of foreign capital
increase or limit competition in the sector? Would corruption and inefficiency in public
procurement still play a major role as a barrier to industry development?

These questions are especially important in light of the many challenges that have limited sectoral
growth among construction firms and other stakeholders in their supply chains. These challenges
range from difficulties in accessing finance to the endemic corruption and limited competition in
public procurement, from the challenges of local firm capacity development to the information
asymmetries about market prices and subcontractors’ quality, and the list goes on. We aim to shed
light on these issues in various ways, acknowledging that these challenges are difficult to tackle
from a policy perspective, but that several incremental steps could be taken, and that Uganda is on
an upward and promising trend.

We approach this study starting from the assumption that data are key to enlighten the policy
debate. Unfortunately, the construction sector is notoriously opaque, and data on construction
projects for most Sub-Saharan countries tend to be limited only to a subset of the very largest ones
from international donors. Nevertheless, we are able to provide novel quantitative evidence from
a unique database on the universe of public procurement contracts, which allows us to study the
market structure and several issues that are specific to the construction sector. The emphasis in
this paper is therefore on the interaction between construction firms and government spending.
We further complement the analysis with an original survey of more than 600 construction firms,
and with a number of focus groups and structured interviews conducted with several public and
private sector organizations and officials.1

The paper is organized as follows. First, we provide an overview of the construction sector, and
we illustrate its market structure using the micro-data on procurement contracts and firm-level
surveys. Second, we discuss the basics of the regulatory framework, with a focus on public
procurement and the primary stakeholders. Third, we argue about the importance of specific
challenges to the growth of the sector and their relationships with policy. We then conclude.

2 Overview and market structure of the construction sector

The UBOS defines the construction sector as covering activities that include ‘construction of
buildings, civil engineering and specialized construction activities’, with examples of the latter
being ‘plumbing, heat and air conditioning installations, plastering and glazing, activities related to
clearing of building sites, demolition of wreckage of buildings and repair of buildings’ (UBOS
2010–11).

According to data from the latest Census of Business Establishments, collected in 2010–11 by
UBOS, there are 458,106 businesses in the country, of which only 653 (0.14 per cent) are in
construction (see UBOS 2010–11). However, this number may vastly underestimate the
importance of construction. First, when looking at the employment share, construction accounts
for 1.3 per cent of all employment. Second, construction tends to be characterized by firms that
mostly operate in specific but constantly changing construction sites, rather than their

1
Unless otherwise specified, all statistics in this paper refer to authors’ calculations based on the original administrative
from the Procurement and Disposal of Public Assets Authority and survey data collected.

2
headquarters, which makes them less likely to be identified and to respond to census-like surveys.
A better estimate is the contribution of the construction sector to national GDP, which saw the
sector account for between 7 per cent (Figure 1) and 13 per cent of GDP according to UBOS
(2018), where the latter considers a broader definition of the construction supply chain.
Furthermore, government contracts involving construction account for 57 per cent of the total
value of public procurement, or a staggering total of 8,451 billion Ugandan shilling (UGX), during
the period 2010–15.

Lack of micro-data on both the demand and the supply side of the construction sector makes it
difficult to provide a comprehensive picture of this market, especially from a time-series
perspective.2 Additionally, both demand and supply sides of the construction sector are extremely
complex, with several key stakeholders involved.

Fortunately, Uganda’s primary public procurement regulatory agency, namely the Public
Procurement and Disposal of Public Assets Authority (PPDA), collects rich administrative data
on all government contracts. The data are directly obtained from all central and local government
agencies through a compulsory mix of paper document submissions and the completion of online
data systems, which are regularly checked for accuracy by PPDA officials.3 We partner with PPDA
to fully digitize and harmonize these datasets, which gives us the possibility to analyse, to the best
of our knowledge, the most comprehensive dataset to date on public procurement for an African
country. Below, in Sub-section 2.1, we focus on such new data to provide a deeper overview of
the demand side for construction sector services.

Additionally, in 2016, we conducted an original survey of 664 construction sector firms, by means
of face-to-face 90-minute-long surveys of local owners and managers. These firms were identified
as a stratified sample of firms that have ever done business with government agencies in 2014–
15.4 The surveys include sections on basic business and owner/manager details, management
practices, employment composition, supply chain linkages, expectations, and the importance of
various challenges to doing business in the sector. In Sub-section 2.2, we focus on these novel
surveys to shed more light on the supply side of the construction sector.

Naturally, all datasets have a specific focus, and ours is biased towards the relationships between
construction and public procurement. This caveat should be kept in mind, because we cannot go
into details of specific sub-sectors that are less dependent on government spending, such as
residential construction, where households and other private sector firms play the major role as
clients. Similarly, we are limited in our analysis of subcontracting among firms, as usually these
data are subject to less strict disclosure and reporting requirements. Nevertheless, what is
unquestionable is that the government plays a central role in the Uganda construction sector, as
the largest projects are fully or partially run by government agencies, with local firms reporting
that government contracts regularly account for more than 70 per cent of their total volume of
business. Importantly, public procurement plays the leading role in construction sector activities
not only in Uganda, but in all other East African countries as well.

2
The last two full Censuses of Business Establishments took place in 2001–02 and 2010–11, with a partial update of
the dataset in 2006–07.
3
Until 2015, the online system was named Procurement Performance Measurement System. Starting in 2015, the
system was vastly changed and streamlined, and is currently named Government Procurement Portal.
4
For more information on the sampling frame and other survey details, please contact the authors.

3
2.1 Demand side: The role of government contracts

A total of 221 public bodies, or procurement and disposal entities (PDEs), have engaged in public
procurement activity in the period 2010–15.5 Of these, 143 PDEs (65 per cent) have contracted at
least one construction sector firm, which is the focus of the analysis sample used in the text. In
Table 1, we list the top 25 PDEs by number of construction contracts, where we can see the
dominant role played by the Uganda National Roads Authority (UNRA) and the National Water
& Sewerage Corporation (NWSC); however, local governments also clearly play an important role
for the dispersion of economic activity across geographical regions.
Table 1: Number of contracts by the top 25 procurement and disposal entities (PDEs)
PDE Contracts
Uganda National Roads Authority 2,002
National Water & Sewerage Corporation 1,257
Mukono District Local Government 731
Gulu District Local Government 608
Arua District Local Government 437
Iganga District Local Government 367
Lira District Local Government 350
Uganda Revenue Authority 327
Soroti District Local Government 277
Kampala Capital City Authority 273
Kayunga District Local Government 270
Mbale District Local Government 265
Mpigi District Local Government 239
Mbarara District Local Government 233
Civil Aviation Authority 232
Masaka District Local Government 206
Kamuli District Local Government 206
Makerere University 204
Entebbe Municipal Council 174
Gulu Municipal Council 162
Wakiso District Local Government 148
Soroti Municipality 135
National Agricultural Research Organization 131
Mubende District Local Government 130
Uganda Electricity Distribution Company 120
Source: Authors’ compilation based on administrative and survey data collected for this study.

We further disaggregate the importance of these demand-side agents in Figure 2, where we report
the splits of PDEs into central versus local governments (Figures 2a and 2d), by region (Figures
2b and 2e), and by type of government agency (Figures 2c and 2f). Not surprisingly, we find that
while there are more local (88) than central (55) PDEs, the latter account for 47 per cent of all
contracts, and for 94.5 per cent in terms of the total value of contracts. This is informative of the
highly skewed distribution of public buyers in the market, which is value-wise dominated by a few
large government agencies engaging in extremely high-value contracts with construction firms. In
terms of regional dispersion, we see that the majority of PDEs (84) are located in the central region,
which is also the area with the dominant PDEs (such as UNRA), thus accounting for the majority
of contracts (57.6 per cent) and almost the entirety of contract value (94.3 per cent). On the other
hand, the PDEs in the northern, eastern, and western regions account for 16.4, 17.1, and 8.9 per
cent of the contracts, and 2.4, 2.0, and 1.3 per cent of contract values, respectively. Finally, when
looking at the classification by PDE type, we find that statutory bodies (such as UNRA, Uganda

5
All our analysis in this sub-section refers to the period 2010–15, and all numbers are expressed in 2015 Ugandan
shilling, unless we specify otherwise.

4
Revenue Authority, National Agricultural Research Organization, among others) play a crucial
role, as they account for 21.5 per cent of the contracts and 76.4 per cent of contract values. Most
small and medium contracts are instead contracted to firms by the local districts, which cover 46.3
per cent of all contracts but only 6.2 per cent of the total value.
Figure 2: Contracts and contract values by (a, d) category, (b, e) region, and (c, f) type of institutions
(a) (b) (c)

(d) (e) (f)

Source: Authors’ compilation based on administrative and survey data collected for this study.

Moving to the time-series dimension of the data, we can observe the evolution of public
procurement activity over time, which is reported in Figure 3. We observe that while the number
of active PDEs playing the role of buyers of construction firms’ services has been increasing since
2010, reaching a peak of 121 PDEs engaging in at least one public procurement contract in 2015,
the total number and value of contracts show a more nuanced pattern. This is true both when
looking at the total number of contracts and total contract values.

5
Figure 3: (a) Total contract value (billions) and (b) total number of contracts, 2010–15
(a) (b)

Source: Authors’ compilation based on administrative and survey data collected for this study.

We conclude the depiction of the demand side for public procurement with Table 2, where we
report various summary statistics on construction contracts. First of all, most construction
contracts are labelled as ‘macro’ (a total of 11,791, or 83.6 per cent); that is, contracts that broadly
require higher levels of documentation, stricter regulatory requirements, and minimum contract
sizes. In comparison, only 28.2 per cent of non-construction contracts are classified as ‘macro’
across the other sectors, a clear indication of the importance of government contracts for firms in
the construction industry. The largest construction procurement contract in the data is a contract
of UGX 315 billion, while the median macro contract is of UGX 300 million; we also observe a
high level of dispersion in contract value, indicative of the dominant role played by large outliers
for aggregate economic dynamics. In terms of sources of financing for construction contracts, we
find that the vast majority of contracts (10,118 out of 14,110, or 72 per cent) are funded by the
central government, while a smaller set is funded by the specific PDE (1,805), and only 560
contracts have been funded by international donors. However, the donor-funded contracts are the
largest, with a median of UGX 61 million and a mean of UGX 2.1 billion, compared with a mean
of UGX 32.7 million and a median of UGX 0.7 billion for central government-funded contracts,
and UGX 18.5 million and UGX 0.2 billion for self-funded contracts. We finally observe the
distribution of contracts by allocation method: only 32.1 per cent of contracts are based on fully
competitive procurement allocation methods (such as open domestic or international bidding),
while 23.5 per cent require a request for quotations, 6.5 per cent follow a direct procurement
method, and 37.9 per cent are allocated through various ‘restricted’ methods, with a number of
them requiring pre-selection by the Evaluation Committee from a small set of firms, as discussed
later. While the primary determinant of the contract allocation method is the size of a contract, as
we can see from the summary statistics, these data also indicate that there is considerable discretion
involved in public procurement, an important topic we return to in later sections.

6
Table 2: Statistics for value of contracts (UGX, billions), by contract type
Type of contract N Mean Median SD Maximum
Macro 11,791 0.716 0.301 8.400 315
Micro 2,319 0.002 0.001 0.002 0.025
Open bidding 3,787 1.980 0.105 14.200 315
Restricted 4,466 0.067 0.016 0.887 28.400
Request for quotations 2,768 0.041 0.021 0.181 4.570
Direct procurement 770 0.716 0.050 8.230 160
Government funding 10,118 0.699 0.033 8.460 315
Donor funding 560 2.100 0.061 13.600 134
Self-funding 1,805 0.231 0.019 1.550 28.400
Note: SD refers to standard deviation in all tables, unless specified otherwise.
Source: Authors’ compilation based on administrative and survey data collected for this study.

2.2 Supply side: Firm-level evidence

A primary challenge in studying the construction sector in developing countries is the paucity of
comprehensive data sources on the firms operating in this sector. We conduct a novel survey of
664 firms operating in the construction sector in Uganda, interviewing firm owners with the goal
of collecting information on their firm balance sheet, management and personnel structure,
experience in doing business with the government, and self-reported challenges in operating their
business.

The firms entering the sample are geographically dispersed, with 37 per cent firms located in the
central region of the country, 31 per cent located in the eastern region, 22 per cent in the northern
region, and 10 per cent in the western region. As we can see from Figure 4, the firms are relatively
young, with 65 per cent of them having started operations after 2004 and only 10 per cent of firms
founded before 2000.
Figure 4: Firm age in the sample

250

200
Number of firms

150

100

50

0
before 1990 1990-1999 2000-2004 2005-2009 after 2009
Year of creation

Source: Authors’ compilation based on administrative and survey data collected for this study.

7
Almost all firms (94 per cent) are male-owned and all but six owners were born in Uganda. The
average age of the firm owner is 41 years, with about 10 per cent of firms having an owner younger
than 30 years. Interestingly, the majority of owners (62 per cent) also own or run an additional
business.

Table 3 reports descriptive statistics about the characteristics of the labour force of firms. The
average firm has about 10 full-time and 15 part-time employees, while the median is 5 employees
for both variables, a result of the fact that the distribution of these variables is highly right-skewed,
with a right tail of very large firms. The surveyed firms are highly reliant on the employment of
casual employees, with the median firm employing 16 casual workers over the month before the
survey was conducted, with an average of 26 workers. On average, firms have about 2 people as
managers. The median firm does not employ any foreign worker, although a small number of firms
are heavily reliant on foreign workforce.
Table 3: Labour composition
Mean Median SD Maximum
Full-time employees 9.82 5 29.09 635
Part-time employees 15.07 5 42.84 820
Casual employees 26.34 16 45.13 820
Managers 2.29 2 1.96 26
Foreign employees 0.35 0 2.26 35
Total family employment 1.25 1 1.73 15
Family managers 0.85 0 1.14 6
Family top manager 0.30 0 0.46 1
Source: Authors’ compilation based on administrative and survey data collected for this study.

Table 4 describes some key balance sheet variables. There is sizeable variation in both profits in
the past 12 months as well as in the number of contracts that the firms currently have. The median
firm had about USD 2,300 of profits in the last year, while the overall average profit was about
USD 13,000. The breakdown of business costs highlight that firms’ greatest expenses are on labour
costs, costs to buy stock and inputs in production, and the costs of renting or buying equipment.
Table 4: Balance sheet
Mean Median SD Maximum
Number of contracts 1.22 1 1.69 14
Profits (USD) 13,024 2,320 32,422 232,000
Costs (USD): Vehicles/transport 2,458 870 5,429 37,700
Costs (USD): Labour 3,374 1,305 6,784 43,500
Costs (USD): Machines 1,972 290 4,953 33,640
Costs (USD): Rent land/buildings 204 45 550 43,50
Costs (USD): Taxes 1,164 174 3,035 22,040
Costs (USD): Security 85 0 293 2,320
Costs (USD): Stock/input 13,098 4,350 25,385 145,000
Source: Authors’ compilation based on administrative and survey data collected for this study.

The typical firm currently has only one contract. Importantly, as is evident from Figure 5, there is
large variation in the share of business revenue that typically comes from procurement: we see a
bimodal distribution, with about 28 per cent of firms that usually have close to zero reliance on
government contracts, and about 42 per cent of firms that are completely reliant on procurement
as a source of business. Similarly, about 64 per cent of firms in the sample have more than half of
the value of their contracts coming from the public sector. The first two rows of Table 5 confirm
the importance of the public sector as a major source of business for construction firms in Uganda,
with the average firm having less than one private buyer (the median firm has zero) and 2.7
different public sector bodies with which they do business. The sector seems highly concentrated,
as the self-reported average number of competitors of a firm is three. Similarly, a firm does not
8
typically obtain inputs and supplies from a large number of suppliers. Interestingly, the last row of
Table 5 reveals that on average a large share of these firms’ production is outsourced or
subcontracted (close to 20 per cent). This is relevant in the context of procurement, as the
government may find it more difficult to monitor execution and quality of work in the presence
of complex supply chains.
Figure 5: Firm dependence on public procurement

300

250

200
Number of firms

150

100

50

0
0 0-0.2 0.2-0.4 0.4-0.6 0.6-0.8 0.8-1 1
Share of procurement for firm revenues

Source: Authors’ compilation based on administrative and survey data collected for this study.

Table 5: Network linkages

Mean Median SD Maximum
Number of private buyers 0.69 0 1.27 5
Number of public buyers 2.77 3 1.67 5
Number of suppliers 3.19 3 1.45 5
Number of competitors 3.00 3 1.74 5
Percentage production 19.32 10 26.52 100
outsourced/subcontracted
Source: Authors’ compilation based on administrative and survey data collected for this study.

The first three rows of Table 6 describe the safety standard of firms in the sample. While 97 per
cent of firms say that they comply with basic safety standards, only 26 per cent of them report
keeping a list of hospitals for cases of emergency, and 28 per cent of them report having a report
of past injury cases. The rest of Table 6 focuses on self-reported management practices in these
firms. Most of the firms have some standard management practice in place, with 71 per cent of
them having a performance-based reward system for managers, and close to 100 per cent of top
managers regularly holding meetings to discuss efficiency and quality expectations with their
construction teams. Similarly, close to 100 per cent of firms keep track of transaction records. In
terms of monitoring, 96 per cent of firms report checking the quality of materials before using
them in production, and more than two out of three firms have systems in place to track inventory
of inputs, performance of past contracts, or the quality of business partners. However, more than
one out of three firms lack on-the-job training for new hires, and only 23 per cent of firms have a
website (although 83 per cent of firms have internet access at the business premises).

9
Table 6: Management practices
Mean SD
Comply with safety standards 0.97 0.18
Have written list of hospitals 0.26 0.44
Record of injury cases 0.28 0.45
Performance-based reward system managers 0.71 0.45
On-the-job training for new hires 0.67 0.47
Meetings to discuss efficiency with workers 0.95 0.23
Record energy/fuel use 0.86 0.34
Quality control of materials 0.96 0.18
Meetings to discuss quality expectations 0.97 0.18
Have website 0.23 0.42
System to track inventory 0.74 0.44
System to track performance: Past contracts 0.85 0.36
System to monitor quality of partners 0.71 0.45
Access to internet 0.83 0.37
Keep transaction records 0.98 0.13
Source: Authors’ compilation based on administrative and survey data collected for this study.

As can be seen from Table 7, when it comes to the perceived challenges in doing business, firms
believe that a large number of competitors engage in unfair business practices, like avoiding or
underreporting taxes, selling below market prices, avoiding labour regulations and health and safety
regulations, and engaging in collusion. Importantly, the average firm owner believes that 71 per
cent of competitors engage in corrupt or unfair practices to win contracts. Even among the local
firms with which the owners report doing business, 40 per cent on average are believed to be
corrupt, while the share is much lower for international firms. A good reputation is thought to be
an important determinant of the likelihood of doing business with a firm for all owners, and 70
per cent of firms state they have some internal control mechanisms to monitor corruption cases
inside their firm. Finally, while firm owners seem to be very concerned about corruption cases in
their sector, only 40 per cent of them believe that court enforcement works well in Uganda, and
the share decreases to 22 per cent when it comes explicitly to corruption cases.
Table 7: Statistics for value of contracts (billions), by contract type
Mean Median SD
Avoid taxes/underreporting profits 40.42 30 28.51
Sell below market price 44.61 40 27.18
Avoid labour regulations 37.38 30 28.41
Do not obey health and safety regulations 43.10 40 30.12
Collude 32.15 25 30.27
Use corrupt/unfair methods to win contracts 71.36 80 23.62
International firms: business corrupt (%) 11.52 0.00 23.27
Local firms: business corrupt (%) 40.27 40.00 28.65
International firms corrupt (%) 37.00 30.00 26.63
Local firms corrupt (%) 51.88 50.00 26.79
Reputation matters 0.99 1 0.10
Corrupt reputation of some firms 0.90 1 0.30
Internal mechanisms to control corruption 0.70 1 0.46
Report corruption to authority 0.42 0 0.49
Report corruption to other firms 0.41 0 0.49
Enforcement works 0.40 0 0.49
Corruption enforcement works 0.22 0 0.41
Source: Authors’ compilation based on administrative and survey data collected for this study.

10
3 Regulatory framework and main stakeholders

In this section, we discuss the regulatory framework of the construction sector and the role of
public procurement in Uganda, with a focus on the main stakeholders in both the public and
private sector. The information in this section is mostly based on the regulations and guidelines
contained in the Public Procurement and Disposal of Public Assets Act 2003 and the subsequent
2014 regulations, as well as on various other guidelines published online by the regulatory agencies
discussed in the following sections. We refer the readers to the original text for more details and
specific exceptions.

3.1 Public procurement and the central role of PPDA

Part II, Section 5 of the Public Procurement and Disposal of Public Assets Act 2003 (henceforth
the ‘Act’) established an autonomous regulatory body called the Public Procurement and Disposal
of Public Assets Authority (henceforth, the ‘Authority’ or PPDA) (see Public Procurement and
Disposal of Public Assets Authority 2003). It can be argued that the Authority represents the key
player in the construction sector in Uganda, as public procurement plays such a central role as
discussed in the previous section. The Authority is also seen as the main anti-corruption and
transparency agency in the country.

The objectives of the Authority can be summarized as follows:

• set the standards and practices for public procurement and disposal systems;
• monitor and ensure compliance to these standards and practices;
• advise the government and public entities involved in procurement on procurement and
disposal policies;
• build procurement and disposal capacity in Uganda (Part II, Section 6 of the Act).

Part II, Section 7 of the Act outlines the functions of the Authority. Besides policy functions (such
as, for example, advising government and public entities on best practices and capacity building)
and regulatory ones (which include, among others, issuing guidelines and regulations, investigating
breaches of the law, and carrying out performance audits of government contracts and public
bodies’ performance), PPDA also collects data on management functions and the allocation of
government contracts. Some of the rich data that PPDA manages were illustrated in the previous
section; additionally, it oversees the maintenance of databases of providers and of online systems
for publishing notices of procurement opportunities and awards.

As for the organizational structure, the Authority is governed by a Board of Directors appointed
by the Minister of Finance, which consists of between six and eight members, including the
Executive Director of the Authority, who is an ex officio member and who does not vote, and the
Secretary to the Treasury or a person nominated by him or her (Part II, Section 11 of the Act).
The Board appoints the Executive Director, who is responsible for the management and
operations of the Authority, as well as for the management of its funds and property, and is in
charge of the officers and staff of the Authority (Part II, Section 17 of the Act). Finally, officers
and staff operate in six different departments: Executive Director and Corporate Office,
Procurement Audit and Investigations, Finance and Administration, Internal Audit, Legal and
Advisory Services, and Compliance and Training and Capacity Building.

3.2 Doing business with the government

The Public Procurement and Disposal of Public Assets Act of 2003 provides rules governing all
public procurement (defined as any procurement that is funded by public funds and by funds
11
generated by a PDE) and public disposal activities (defined as the disposal of government assets).
Furthermore, 11 regulations, which were drafted by the Authority in 2014, provide a
comprehensive set of rules governing all procurement and disposal activities. In this sub-section,
we illustrate the main components of these regulations.

3.2.1 Choice of procurement method

The first step in the process for the award of a procurement contract is the selection of the
procurement method. Smaller contracts qualify for micro procurement, which is subject to specific
(simplified) regulations. Specifically, for the case of construction projects, this method can only be
used for contracts with a value lower than UGX 10 million. The micro procurement requires no
written disclosure or bid; the only requirement is that the PDE evaluates a minimum of three
quotations from different providers.

Additionally, as briefly seen in the previous section, there are various other procurement methods,
each subject to different regulations:

• Open bidding (domestic and international)

• Restrictive bidding (domestic and international)
• Request for quotations and proposals
• Direct procurement

The choice of which method to use depends on guidelines set forth in PPDA Regulation 6 and,
for each contract, PDEs must detail the reasons that justify the use of a specific method. In the
following paragraphs, we describe the details of each method. Importantly, while simplified
compared with the specific details in the law, it is evident that a considerable degree of discretion
is left in the hands of public officials, as will be discussed in more details in the next section.

Open bidding (domestic and international): This is the most transparent and preferred method, since it
involves maximum competition. The PDE must publish a bid notice offering the opportunity to
participate in the auction to all interested bidders. However, a request can be made to the Contracts
Committee (discussed later in this section) to use a pre-qualification screening to obtain a shortlist
of potential bidders. This is allowed if the project is highly complex, if the detailed nature of the
evaluation implies that evaluating several complex bids would require a significant amount of time,
or when the costs of preparing a detailed bid would strongly discourage competition.

This method should be used when the contract value for the construction project exceeds UGX
500 million. The minimum bidding period is 30 days for international bidding (open also to foreign
providers) and 20 days for domestic bidding (open only to providers from Uganda).

Restricted bidding (domestic and international): This method is similar to open bidding, except that there
is no publication of a bid notice. Instead, the invitation to bid is restricted to a limited number of
potential providers included in a shortlist. Shortlisted firms can come from the Register of
Providers (a database maintained by PPDA with information on firms interested in doing business
with the government), officials’ market knowledge, previous experience of providers, or a previous
pre-qualification.

For construction contracts, this method can be used when the value of the contract lies between
UGX 200 million and UGX 500 million. Alternatively, the method can be used if there is a limited
number of potential providers, or in cases of emergency when there is insufficient time for an
open bidding procedure.

12
A minimum of three bidders must be invited to bid or, in case the justification for using a restricted
bidding method is the limited number of potential providers, all available potential providers. The
minimum bidding period is 20 days for international bidding (open also to foreign providers) and
12 for domestic bidding (open only to local providers).

Request for quotations and proposals: This is a simplified method compared with open and restricted
bidding, as it requires quicker and simpler procedures and documentation. Similar to restricted
bidding, the invitation to bid is restricted to a limited number of shortlisted bidders, which can
come from the Register of Providers, officials’ market knowledge, or previous experience of
providers.

This method can be used when the construction project’s value lies between UGX 10 million and
UGX 200 million. Alternatively, the method can be used in cases of emergency when there is
insufficient time to use other, more competitive methods. A minimum of three bids must be
obtained from potential providers.

Direct procurement: This method can only be used in an emergency situation, when there is
insufficient time to use any other procedure, or when the construction project can only be carried
out by one single provider or, in some instances specified by the regulations, when an original
contract needs to be extended. This method can be used for any contract value, provided that the
PDE justifies its use in light of the above conditions.

3.2.2 Evaluation phase

The evaluation criteria must be clearly specified in the solicitation documents, together with a
statement of requirements, which clearly defines the quantities and specifications of what is to be
purchased. Evaluations must be conducted by a team of at least three staff, who are approved by
the Contracts Committee. All evaluations must be based on criteria pre-specified in the solicitation
documents.

There are three stages of evaluation:

1. Preliminary examination: At this stage, unsuitable bidders and incorrect bids are eliminated.
Unsuitable bidders are companies that are not registered or that are not compliant with the
legal requirements listed in the Public Procurement and Disposal of Public Assets Act.
Incorrect bids are mostly those that are not accompanied by a bid security and those where
not all submission requirements are correctly followed.
2. Detailed evaluation: At this stage, the technical quality of the bids is assessed. Depending on
which of the five evaluation methodologies (described in stage 3) is used, this is done either
by comparing the documentation provided in the bid with the specifications in the
solicitation documents or by awarding merit points to each bid.
3. Financial comparison: At this stage, the best evaluated bidder is determined, following one of
five evaluation methodologies, which must be specified ex ante in the tender or solicitation
documents, and which are reviewed by the Contracts Committee to verify they are well
suited for each given contract:
a) Quality- and cost-based selection: This evaluation methodology considers both the
technical quality of the bid and its cost. This is done in two steps. First, the
technical quality of bids is evaluated, assigning merit points to each bid and
eliminating bids below a certain predetermined score. Then, the remaining bids are
awarded points based on cost. The best evaluated bid is the one with the highest
weighted technical and cost scores (with weights predetermined in advance).
b) Quality-based selection: This evaluation methodology considers only the technical
quality of the bid, by assigning merit points that determine the best evaluated
bidder.
13
 c) Fixed-budget selection: This evaluation methodology considers the technical
quality of the bid, but ensures that the cost of the bid is within a pre-specified
budget. For bids within this budget, merit points are awarded to determine the best
evaluated bidder.
d) Least-cost selection: This evaluation methodology considers the cost of the bids,
provided that the technical quality of the bids meets the minimum technical
standard required. In order to determine which bids meet the standard, merit
points are assigned to the technical quality of each bid, and bids below the
minimum standard are eliminated. For bids that meet this standard, the best
evaluated bidder is the least costly one.
e) Technical compliance selection: A methodology similar to the least-cost selection
one, except that in the first step there is a simpler pass/fail decision to determine
whether a bid meets the technical standards, instead of the assignment of merit
points.

3.3 Stakeholders in the construction sector

3.3.1 Main stakeholders in public procurement

The process of procuring government contracts involves several agencies, units within agencies,
and a number of specific public officials. In this section, we list the main such stakeholders, their
functions, and how they are organized.

PDEs: All procurement and disposal activities are carried out by procurement and disposal entities,
or PDEs, as also extensively discussed in Section 2. A PDE refers to a ministry or department of
the government, a local government, or any other body established by the government or intended
to carry out public functions (such as a public university or a public hospital).

Entities must plan their procurements at the beginning of each fiscal year, with the goal of
aggregating requirements into larger contracts, gaining economies of scale, and avoiding
emergency procurement whenever possible.

Each PDE is composed of an Accounting Officer, a Contracts Committee, a Procurement and

Disposal Unit (PDU), a User Department, and an Evaluation Committee, which must act
independently and not interfere unduly in the operations of others. Next, we discuss these other
stakeholders.

Accounting Officer: The Accounting Officer is the person with the overall responsibility for
procurement and disposal within the PDE, although s/he is not involved in detailed procurement
or disposal work or in making official contract allocation decisions. S/he appoints members of the
Contracts Committee and staff in the PDU.

Before the procurement process starts, the Accounting Officer commits funds to specific
contracts; s/he undertakes assessments of market prices and the unit costs for each construction
project and s/he advertises bid opportunities. Additionally, s/he authorizes payments to providers,
signs contracts, communicates decisions to successful bidders, and ensures that contracts are
implemented in accordance with the award. In emergency situations, the Accounting Officer can
sign contracts without the approval of the Contracts Committee. S/he is also in charge of
investigating complaints from bidders and of submitting the procurement plans to the Secretary
of Treasury and to PPDA at the beginning of each fiscal year. In sum, accounting officers hold a
considerable share of power in the procurement process.

Contracts Committee: The Contracts Committee consists of up to five members: a chairperson, a

secretary, and a maximum of three other members (including a lawyer). Neither the Accounting
14
Officer nor a member of the PDU may be members of the Contracts Committee. Its main
responsibility is to ensure that procurement and disposal activities are conducted in compliance
with the Act and additional regulations. This is done by approving or rejecting recommendations
from the PDU.

Specifically, the Contracts Committee has the power to authorize the choice of procurement and
disposal procedures, evaluate the contract documentation through various evaluation reports, and
make amendment to awarded contracts. Finally, and importantly, it approves the Evaluation
Committee.

Procurement and Disposal Unit (PDU): The PDU manages all procurement and disposal activities of
the PDE (except adjudication of awards), working in conjunction with the User Department and
seeking approval of the Contracts Committee where appropriate.

In particular, the PDU plans the procurement and disposal activities of the PDE, recommends the
procedures to follow, prepares statements of requirements, prepares and issues the bid documents
and the contract documents, and maintains a list of providers in archive records.

In addition, it recommends the members of the Evaluation Committee.

Its size and structure and the number and grades of staff are determined by the procurement
workload of the PDE.

User Department: The User Department works under the PDU. Its responsibilities include the
preparation of the annual procurement plan, providing technical inputs to the procurement
process, and managing contracts once placed.

Evaluation Committee: Members of the Evaluation Committee conduct all evaluations. The members
are recommended by the PDU and approved by the Contracts Committee. The committee has a
minimum of three members, and must include at least a person representing the User Department
and a member of the PDU. Some members may be external, if the required level of skills and
seniority are not available within the PDE.

3.3.2 Additional stakeholders

Several other private and public sector stakeholders play an important role for the functioning of
the construction sector. The following is a list of the main such stakeholders:

• Uganda National Association of Building and Civil Engineering Contractors (UNABCEC): This is
a professional association that gathers local civil work firms. It advocates and lobbies for
policy change, with a special interest in improving the landscape for domestic construction
firms engaging in public procurement contracts. UNABCEC has more than 300 members,
who benefit through access to data, newsletters, and other activities such as networking
events among firms and public officials.
• Inspectorate of Government (IGG): This is a government agency that plays a fundamental role
in the enforcement of regulations and in ensuring transparency in the interaction between
the private and the public sector. It works in close collaboration with PPDA, and its role
in ensuring efficient public procurement is clearly summarized in its mission to ‘promote
good governance, accountability and the rule of law in public office’ (see Inspectorate of
Government 2018). Together with PPDA, the IGG is among the primary anti-corruption
agents in the country.
• PPDA Appeals Tribunal: It reviews PPDA decisions when a public procurement bidder is
aggrieved by a decision made by the PPDA, when a bidder alleges that PPDA has a conflict

15
 of interest, or when a PDE or any person’s rights are adversely affected by a decision made
by the PPDA.
• Africa Freedom of Information Centre (AFIC): This is a non-governmental agency with a
primary goal of improving transparency in public procurement, so as to increase value for
money in government spending. It plays an important role in anti-corruption monitoring
and is at the forefront of the open contracting advocacy, operating across multiple regions
in Sub-Saharan Africa.
• Uganda Revenue Authority (URA): This is a government agency responsible for tax collection
and compliance among both firms and individuals. It plays an important role for
construction firms, as the reliance on government contracts for firms in this sector makes
them especially relevant targets of tax audits.
• Uganda National Bureau of Standards (UNBS): While not its primary function, it stipulates
standards for materials and techniques used in construction, therefore playing a crucial
role for construction sector firms.
• Uganda Bureau of Statistics (UBOS): This is the government agency responsible for the
Census of Business Establishments, which aims to provide a comprehensive picture of
private sector activity across all Uganda regions and sectors.
• Architect Registration Board: It controls the registration and certification of architects.
• Uganda Institute of Quantity Surveyors: It regulates the professional practices and registrations
of quantity surveyors in Uganda.
• Uganda Institute of Professional Engineers: It regulates the certification and practices of
professional engineers as well as all matters concerning civil engineering. Set up by the
parliament, it has the goal of streamlining qualifications of engineers and practices in the
country.
• Engineers Registration Board: This is a statutory body with a mission to regulate and control
engineers and their profession.

4 Challenges to sector development and efficiency

As for every other emerging economy in the world, there are several frictions to the functioning
of private sector activities in Uganda. The construction sector is an especially challenging one in
this regard, as it possesses several backward and forward linkages with other sectors and is strongly
interconnected with the rest of the economy. For example, high levels of policy uncertainty and
unplanned government expenditure limit growth of the sector, especially given the fact that it faces
significant sunk costs and large, often irreversible, firm investment in fixed capital. Similarly,
macro-economic fluctuations and currency devaluations can be a drag on construction firms who
are typically dependent on bank financing. While these are all first-order important issues, they are
also extremely hard to tackle from a policy perspective. Therefore, in this section we focus on
specific key issues we think act as barriers to firm and industry development in the Ugandan
construction sector, and where incremental policy improvements may be easier to achieve.
Furthermore, our emphasis is on local small and medium firms, which are in a weaker bargaining
position and hence stand the most to gain from efficiency-enhancing reforms.

16
4.1 Corruption and inefficiency in public procurement

Corruption is often seen as the leading friction to doing business (Mauro 1995), with costs being
highest for government-dependent firms in developing countries. Recent evidence further shows
that the negative link between corruption and economic growth is arguably causal (Colonnelli and
Prem 2018). The reasons why sectors like construction are so prone to corruption are several.
Obviously, as is evident from our previous discussion, construction is the economic sector most
dependent on public procurement. This, coupled with typically sizeable average contracts, gives
public officials and politicians many lucrative opportunities to illegally extract rent from the private
sector. These concerns are magnified when we consider that the government plays not only the
role of client but also that of regulator. Another reason is that, by its very nature, construction
costs are difficult to measure, as construction involves complex non-standard processes with high
degrees of asymmetric information between buyers and sellers (Kenny 2007). Relatedly, output
quality is even harder to observe. For example, the quality of a billion-dollar road may only be
accurately assessed years after the contract has been paid out, when potholes and other damages
due to sub-par quality construction materials and processes become apparent to the public. Finally,
construction also involves an intricate supply chain, multiple inter-sector linkages, and a number
of different private sector agents, which lead to difficulties for regulators to track illegal activity
and take proper enforcement actions.

Anecdotal evidence on corruption cases in construction abound. As a large-scale example, a few

years ago a special government commission was set up to study the misuse of funds by the UNRA,
after several scandals in the construction of roads by international firms were uncovered. The
commission estimated that over a period of approximately seven years, an astonishing UGX 4
trillion had likely been misappropriated. However, that corruption is widespread in the Uganda
construction sector is a fact that is also backed by several hard data points. For example, in a recent
report, the IGG uncovered (through investigations and complaints) the presence of 1,399 cases of
abuse of public office, which mostly involved corruption and embezzlement in the public
procurement process (see Kahungu 2018). In Figure 6, we report new data we digitized from all
PPDA anti-corruption and performance audits they performed during the period 2010–16. As the
figure shows, only 37 per cent (less than half) of the audited procurement contracts were found to
be fully satisfactory in their allocation and execution, with a significant chunk of them (26 per cent)
qualified as ‘high risk’, namely subject to severe violations including fraud and corruption, among
other irregularities. An additional piece of evidence comes from the suspension (or blacklisting) of
156 providers from participating in public procurement due to corruption violations verified after
prosecutorial actions. Administrative data from PPDA also shows that about 20 per cent of
blacklisted firms are still selected for government contracts during the suspension period.
Figure 6: Audited share of contracts by risk type

Source: Authors’ compilation based on administrative and survey data collected for this study.

17
Of course, corruption per se is not the sole problem in public procurement, as more benign forms
of inefficiency are also widespread. Moreover, it is often difficult to distinguish between corruption
and inefficiency, as many cases fall into the grey areas in between. For example, the administrative
data from PPDA shows that a significant share of construction projects exceeds the original
proposed costs or is completed with significant delays compared with expectations, or both. While
corruption may be a reason behind such efficiency-reducing renegotiations of contract terms, other
explanations have simply to do with limited capacity on the government’s or provider’s side, who
may have each been unable to accurately predict the project’s difficulty. An additional example
relates to the interpretation of discretionary procedures, where officials may simply lack the
necessary skills to make the most efficient decisions. There are also a host of other cases of
seemingly pure inefficiencies and red tape, such as the widely cited issue firms face in waiting for
government payments for already executed contracts, which disrupts their cash flows and
adversely impacts their credit repayment ability as well as relationships with finance providers.

When it comes to policy implications, it is crucial to aim for big picture changes aimed at addressing
both corruption and inefficiency in the interactions between firms and government agencies. Anti-
corruption and performance audits of the types performed by PPDA and mentioned earlier, for
example, are a well-suited policy tool. As we can see from Figure 7, due to budget limitations, these
audits cover a subset of the PDEs only, and a few thousand government contracts are audited
every year. While there is not enough data to evaluate how successful they are in the Uganda
context yet, such audits, especially if randomized, have been shown to be quite effective in other
contexts (e.g. see Avis et al. 2017); providing more resources for such activities that combine
capacity building with monitoring is likely a productive way forward. The spike in auditing activity
in the last year of the figure can be interpreted as a positive step in that direction.
Figure 7: Anti-corruption and performance audits over time: (a) Number of audits; (b) number of audited contracts

(a) (b)

Source: Authors’ compilation based on administrative and survey data collected for this study.
Figure 7.1 The Evolution of Number of Audits Figure 7.2 The Evolution of Number of Audited Contracts

Transparency is also of paramount importance for the construction sector, and these views are
widely shared by all stakeholders we interviewed in both the private and the public sector. Indeed,
one of the primary challenge firms face is that of obtaining timely and relevant information on
available tenders. Such opacity in the disclosure of tender opportunities is therefore seen as a major
limitation to competition, as only the largest and well-connected firms may end up bidding for a
contract. While private and non-governmental agencies like UNABCEC and AFIC play an
important role in trying to increase transparency and awareness among local firms, more efforts
from the government are needed. The creation of the Government Procurement Portal in 2015,
which provides timely, online information on all government procurement activities with the goal
of achieving a full-fledged e-procurement system, is the right approach. However, many firms and
stakeholders complain about the limited effectiveness of the current system, due to
implementation shortcomings. Hence, newspapers and local associations still remain the prevalent
source of information about tenders for small local firms, and competition remains limited. One
18
of the reasons why implementing e-procurement has been challenging is that several public
agencies lack the technology or the skills to do so. This indicates the need for the central
government to increase efforts towards capacity building of the most remote and less-skilled
agencies, which to date remain too sporadic. Transparency is also an issue on the government side,
as our interviews show that officials are often unaware of sources of data they can use in the phase
of bidders’ screening for example. A practical next step in this direction is that of improving the
communication and information flows across public sector agencies; such a policy offers great
potential and likely relatively low costs, but is currently hindered by large amounts of red tape. An
example are the high costs associated with the presence of opaque informal firms that engage in
public procurement as main providers or sub-contractors, which could be addressed by a tighter
collaboration and a joint plan of action and data sharing by agencies like the URA and PPDA.

The issue of transparency is directly linked to regulation. As described in Section 3, procurement

regulations leave an excessive amount of discretion in the hands of public officials, which can
often find easy justifications for the use of non-competitive methods to allocate procurement
contracts. We find evidence for this both in the data, where open bidding systems remain the
exception rather than the rule, and through a number of qualitative field interviews. This is not
surprising considering, for instance, the presence of vague statements in the key metrics of
selection for pre-screened firms, such as the reliance on ‘officials’ market knowledge’ or the weight
on a provider’s ‘previous experience’, without further details or directions. There are countless
examples like this. The language of these regulations must then be tightened, and officials must be
subject to more severe monitoring (and potentially more severe follow-up penalties) in cases in
which they abuse such vague regulations for private gains. Regulation is often also discussed in
relation to local capacity building, with a first-order example being that of schemes to help local
firms compete with international ones. The two main such schemes are the preference scheme and
the reservation scheme, which in sum attempt to subsidize local firms’ bids in open bidding
auctions, and to prioritize specific local sectors and groups of small local firms. 6 While these
schemes are in place, the widespread view of the local construction sector is that enforcement of
such schemes is currently largely lacking, due in part to the vague or non-existent regulations on
follow-up activity in case of schemes’ violations. Regulation alone per se is however likely not
sufficient to improve local firms’ abilities to compete, and there is uncertainty over the
effectiveness of such local schemes (which some argue may even ultimately reduce competition
and efficiency by disincentivizing large productive firms to participate in the sector). Other
initiatives, such as enterprise development schemes and skills-matched internships, though long-
term oriented, should also allow local firms to develop the necessary skills and to be able to attract
the talent needed to compete with their international counterparts.

Finally, Uganda’s construction sector lacks the necessary regulatory framework to enforce
compliance to standards and quality, which has led to a consistent low quality of skill and labour
inputs and therefore low productivity of the sector. Currently, the mandate for quality assurance
of the construction sector falls under the Construction Standards and Quality Assurance
Department, Ministry of Works and Transport; however, for a more coordinated and
comprehensive approach the Government of Uganda should consider a national body or
programme that would work closely with the existing private sector structures (e.g. UNABCEC
and the Uganda Institution of Professional Engineers) to enforce and reward quality.

6
For the sake of brevity, we refer the reader to the following guidelines and regulations for more information on such
schemes: PPDA Act 2003, Sections 50(1), 50(2) (see Directorate of the First Parliamentary Counsel 2003); Local
Governments (PPDA) Regulations 2006, Regulation 53 (see Public Procurement and Disposal of Public Assets
Authority 2006); PPDA Guidelines on Reservation Schemes 2018 (see Public Procurement and Disposal of Public
Assets Authority 2017); ‘Buy Uganda Build Uganda Policy 2014’ (see Ministry of Trade, Industry and Cooperatives
2014).

19
4.2 Access to finance

The construction industry is a high-risk sector for financers, especially in relation to the extractive
sector, as it often requires significantly high fixed capital investments and incurs huge sunk costs.
The lack of access to finance is especially acute for local construction firms whose ability to borrow
is limited by rigidities in the domestic financial market and a lack of adequate collateral. A survey
of local and foreign construction firms executing work on donor-financed road projects in Uganda
found that the typical amount of credit obtained by a foreign construction firm was 20 times larger
than that obtained by a local construction firm (Balimwezo 2009). This sharp contrast in access to
financing for the domestic construction industry puts local firms at a disadvantage, restricting their
ability to undertake new projects, recruit skilled labour, or even manage current projects. These
issues are more and more salient to firms, as the influx of international firms, primarily from China,
using considerable cheap credit from their original countries strongly limits national firms’
competitiveness for the same contracts.

Currently, the lion’s share of financing to the domestic construction sector in Uganda has been
undertaken by commercial banks; but banks have mostly short-term liabilities and are therefore
not well placed to hold long-term assets on their balance sheets, which further hinders borrowing
especially for long-term construction projects. In addition, nominal and real interest rates are high
(nominal interest rates have remained over 20 per cent for the past ten years), making it very costly
for firms to borrow from the domestic market. Interviews with several construction sector firms
reveal that most small and medium local firms therefore rely on money lenders (who charge a
premium over the average market interest rates), as the flexibility they provide is essential for firms,
and partly justifies the exorbitant associated costs. Other alternative sources of funding often
include family and friends, while development finance institutions seem to have very limited
traction in Uganda due to perceived excessive bureaucracy. All these challenges become
particularly relevant for local firms tendering for public work contracts. To finance equipment and
large contract tenders, and in the absence of access to credit, such companies often resort to their
own savings or hire used equipment from the local market, further undermining their
competitiveness and quality of work produced.

A further hindrance to financing for small- and medium-sized construction firms is the bid security
requirements to deal with government contracts, which are often too demanding for these firms.
Firms argue that even if they are able to obtain the bid security from a bank, typical delays in
dealing with government agencies make it too costly for them. On the one hand, while the bid
security must be submitted before the evaluation phase, firms pay significant interest fees, which
are magnified if the government delays the contract evaluation (which firms argue is typically the
case, with delays taking up to several weeks or months). On the other hand, similar extra interest
costs are incurred if the government delays the actual payments for work performed (which again
firms argue is typically the case and consider these delayed payments to be the primary challenge
in public procurement). All firms interviewed emphasized how strong a barrier to directly
participating in public procurement and sector development the issue of bid security and delayed
payments is.

Finding possible solutions for these access to finance challenges is no easy task, in Uganda or other
emerging economies in the region. Here, we focus on one possible solution that can help bridge
the financing gap for domestic contractors and that has had success in similar contexts, namely
‘lease financing’. Financial leasing is a contractual arrangement that allows one party (the lessee) to
use an asset owned by the leasing company (the lessor) in exchange for specified periodic payments
(lease rentals). During the lease period, legal ownership of the asset is retained by the lessor. An
advantage of this mode of financing is that the lessee need not provide collateral, provided s/he
has sufficient cash flow from core operations to cover the lease rentals. While financial leasing was
only introduced to the Ugandan financial market in 1994, the market has witnessed significant

20
growth over the past decade with potential for rising demand. To date, 11 companies offer
financial leasing as a product, of these only three are independent while the remaining eight are
ring-fenced divisions of commercial banks. A key constraint to further growth of the sector,
however, is a less than enabling policy environment: Uganda has no legislation that regulates the
business and practice of leasing; while a bill has been submitted to the Minister of Finance,
Planning and Economic Development it is yet to be signed and there is no indication of the bill
being signed soon. Moreover, the construction sector remains a less favoured sector for this mode
of financing compared with other economic sectors such as agriculture and transport, owing to
several risks, foremost of which is the fact that, as already mentioned, construction contracts are
usually dependent on untimely government disbursements that make regular lease payments
difficult. Not surprisingly, the firms we interviewed were not optimistic about the current
framework on lease financing, which remains as of now a largely unexplored financing avenue.

4.3 Marginal costs of construction

Addressing the bottlenecks to supply in the construction sector before the onset of investments
associated with the transition to commercial oil production will be critical, as any constraints to
supply may likely translate to higher marginal costs and prices, thereby reducing the physical output
for a given amount of nominal investment.

There is some evidence that marginal costs of construction (particularly for public investments)
are already rising in Uganda. Construction costs, particularly for civil works and non-residential
buildings, have outpaced overall inflation significantly and appear to be accelerating. Figure 8
shows the index of construction costs compared with the consumer price index for the period
2008–18. Whereas prices for the construction sector as a whole fell by 0.4 per cent between
December 2016 and December 2017 (dampened by a slump in residential housing prices), the
prices for civil works rose by 3.1 per cent, reflecting a surge in public investment.
Figure 8: Construction price index versus consumer price index in Uganda

Source: Authors’ compilation based on UBOS (2018).

To ensure that demand matches supply, the government needs a better understanding of local
supplier capacity as well as a steady flow of information to suppliers on its investment plans.
Botswana provides a successful case study of this engagement: According to Henstridge and Page
(2012), when the government of Botswana noticed that construction costs and prices were
21
accelerating on account of a surge in public investments in its extractive sector, it created a separate
annual plan for the construction sector within its overall five-year development plan (similar to
Uganda’s Five-Year National Development Plan). In drawing up the plan, the government
discussed its planned construction projects with the construction firms, identified any existing
bottlenecks to supply and consequently adjusted the phasing of its plans.

5 Conclusion

In this work, we rely on administrative micro-data and new survey evidence, combined with
structured interviews of local firms and both private and public sector organizations, to describe
the role of the construction sector in Uganda. Construction is by many considered to be the central
sector to focus on for countries like Uganda that aim to make efficient use of the recent wave of
natural resource discoveries.

The emphasis of this analysis is on the interaction between government agencies and local firms,
as public procurement plays the crucial role of main driver of industry growth. The data point to
a market structure that is rather concentrated. On the one hand, a few government agencies are
responsible for the vast majority of government procurement and the largest contracts. On the
other, the supply side of the market sees the presence of a right tail of large firms accounting for
most of the economic activity. Unsurprisingly, the largest firms tend to be the foreign ones.

We then illustrate the regulatory framework for public procurement in Uganda, with a focus on
the organizational structure of the supervisor agency, namely the PPDA. We also expand on
various other players, in both the private and the public sector, that can be instrumental in the
efficient development of the construction sector.

In the last section, we provide an in-depth analysis of some of the main challenges local
construction firms face in Uganda. In particular, we discuss the role of corruption and inefficiency
in public procurement as the leading issue to address. Higher levels of transparency and more
streamlined regulations are the way forward, and Uganda is on a positive trend, but there is a long
road ahead. A second key channel is the frictions in accessing finance that local firms face, which
we argue can be alleviated by regulatory changes more favourable to lease financing and related
tools. We conclude by briefly discussing the importance of tracking construction costs and prices
at such a time of increasing demand.

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