Distorting the Construction Market Place

It is generally agreed that many Caribbean economies are in crisis.  Economists normally view activity in the construction industry as a reliable indicator of the state of the economy.  However, the market place in which the construction industry operates is distorted to the point where it may not be an indicator that economists can confidently base their assessments.  There are two principal reasons for this distortion and they will be described in two articles, this being the first.

The construction industry is special.  It is a diverse sector that allows persons to enter at any skilled or unskilled level and progress as far as they are willing to go.  Conscientious unskilled labourers can become skilled artisans and technicians.  Artisans can become foremen, site supervisors, and contactors.  Technicians can become surveyors, architects, and engineers.  I have seen this progression happen with others and it is wonderful.

I started at the unskilled labourer level, wielding a cutlass to cut sight lines through dense vegetation, and holding the measuring tape and surveyor’s staff for the land surveyor when required.  The work was exhausting, the sun was merciless, and the weeks were long, but I was enthusiastically grateful for the opportunity.  I then took the technician route and worked as a draughtsman, then progressed to become an engineer-in-training, consulting engineer, director/employer, and now president of Walbrent College.  The construction industry is very special indeed.

The construction industry operates in a competitive market place of consultants, contractors, and equipment and material suppliers.  Each player has the opportunity to improve the quality of their work with each new project.  Government has one critically important role in the competitive construction industry, and that is to regulate a fair market place.  This includes ensuring that contracts are fairly awarded – much like how a referee regulates a fair competitive game of football or basketball and awards the game to the winning team. 

When the market place is fairy regulated, small players can become better as they compete with bigger players in the local market.  Big players have the capacity to compete regionally and internationally, but they must qualify by wining contracts.

The market place becomes distorted when the Government no longer regulates a fair market place, but instead selects favoured consultants and contractors, and shields them from competition by awarding them contracts.  This is equivalent to a referee awarding a game to their favoured team without even allowing the ball on the field of play.

During economic recessions, smart governments tend to spend money on construction projects for two principal reasons.  First, construction projects have significant multiplier effects (many people benefit from each project).  Second, local players can remain competitive and qualify for regional projects as soon as the regional economy improves.  Therefore, the most efficient use of these funds is to clearly define the work to be done, and then invite companies to fairly tender or bid for the work.  Simply awarding consultancy and construction contracts without fair competition not only distorts the market, but significantly harms the national economy.  Let me explain.

Simply awarding a contract eliminates the incentive to provide a competitive cost, and the accountability to do quality work.  Preliminary audits of recently uncontested projects suggests significant functional over design resulting in unnecessary costs in the order of 40%, and/or significant safety under-design to the point where the buildings are expected to collapse in an earthquake.

We had previously estimated approximately 75% of building losses during a major earthquake in Eastern Caribbean countries, mostly due to substandard designs that resulted from decades of poor competition practises.  In its latest assessment report (GAR 2013), the United Nations has determined that Antigua and Barbuda, Barbados, Dominica, Grenada, and Trinidad and Tobago are expected to suffer over 80% GDP losses from a moderate earthquake.  Yet, despite the evidence of wasted money, substandard designs, and independently projected catastrophic losses, these market distorting practises continue.

The real damage to the national economies of some of these countries is expected to be realised in 2014, which represents 5 years of the practise of awarding practically all contracts in certain categories to the government’s favoured consultants and contractors.  This practise of consistently picking undeserved ‘winners’, automatically disqualifies the most competent companies from competing in the regional and international arena.

The questions that many Caribbean governments need to consider are:  Why are you artificially propping up your least capable companies, and purposefully disqualifying your most competent companies?  If you think your favoured consultants and contractors are competent, then why shield them from competing with others in the market place?  Do you honestly expect these artificial ‘winners’ to successfully compete regionally and internally when you have harmed their development by protecting them from being tested locally for so long?

 

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