Districts losing billions in contract breaches

A road in Karamoja washed away by rains a few months after it had just been upgraded. The government is to release the names of construction firms that will set up 2,000 kilometres of new roads following completion of the tender process. FILE PHOTO.

What you need to know:

Almost all cases in court on contract breach are against the Attorney General and Local government with the tax payer coughing billions of shillings in compensation to contractors and yet no contractor is being sued.

Kampala- In the Financial Year 2011/2012, Wakiso District procured a contractor to construct the speakers’ chambers. A bid offer of Shs1.8 billion was revised to Shs2 billion but the revision of Shs200 million was not approved by the Contracts Committee and neither were the other competitors informed of the revision.

Two weeks after the close of bid, another bid document was presented to the district Procurement and Disposal Unit (PDU) and the bidder was to later be awarded the contract without presenting the performance security guarantee of Shs590.7million.

The Auditor General in his audit of the project, also indicated that retention of Shs197 million was not withheld as was specified in the contract.

The district lost a total of Shs174 million in advance payment (Shs130 million) and retention fee (Shs44million), contrary to the contract which did not require an advance payment or retention fee. The contractor finally abandoned the project and the building was left incomplete.

The Wakiso Chief Administrative Officer (CAO), Mr David Naluwayiro, says, the district took pity on the contractor who had inadequate working capital.

“A performance security guarantee of Shs590,784,818, which is 33.7 per cent of the contract price could not be effected as would leave the contractor with no working capital,” Mr Naluwayiro says.

Other oversights
There was no clearance got from the Solicitor General despite the contract being above Shs50 million and the CAO dismissed the error as an oversight on the side of the district.

In this case, the contract was breached by both the Local Government, which failed to apply the requirements of the contract on the contractor; and the contractor, who later abandoned the project without completing it despite receiving advance payment and a retention fee.

This is just one of the more than 50 contracts breached annually in each district with no action being taken by the district management.

Ms Getrude Gamwera, the general secretary of the Uganda Local Government Association (ULGA), says: “One hundred per cent of contracts in local governments are breached by the contractors and no action is taken against the contractors by the local governments.”

Action taken
In Lira District, the head of the Procurement and Disposal Unit (PDU) was interdicted following increased loss of tax payers’ money in contract breach in 2012.

The Deputy CAO Nebbi District, Mr Mark Tivu, says a lot of contracts have been terminated after reports being received from the Resident District Commissioners (RDC), the auditors or even the councillors that a contractor is working in breach of the contract.

“We have been terminating contracts which are being breached once we get the reports. For example, the contracts to work on Erussi and Wadelai roads were terminated after the contractors failed to finish in time,” he says.

However, the problem with termination of contracts has been that by the time it is done, advance payments and some retention fee has been paid, thus making the tax payer lose billions in the processes.

Ms Winfred Kiiza, the chairperson Parliamentary Local Governments Account Committee, says: “There must be a way through which these funds can be refunded and compensation paid through the judicial system.”

Almost all cases in court on contract breach are against the Attorney General and Local government with the tax payer coughing billions of shillings in compensation to contractors and yet no contractor is being sued.

Mr Robert Ochan, a physical planner and contractor in Arua District argues that the reason Local governments never sue contractors for contract breach is because they breach their own contracts first before the contractors breach them.

Ms Kiiza also wants local governments to effect black listing of contractors who breach contracts to ensure discipline by the companies applying for contracts.

“The central government has been blacklisting companies but Local governments have not yet taken up the action which could help show the contractors how serious the issue of contract breach is,” she says.

Why the breach of contracts?

Most of the contractors operating in Local governments lack enough working capital, with most presenting loan money as their performance security guarantees.

Unlike the central government which has prequalified companies listed, the Local governments’ tenders are open for any company.
The chairman Nebbi District, Mr Robert Okumu, says most of the companies operate on loans from banks and brokers.

Their financial capacity being lacking, they end up doing shoddy work or abandoning the contract. They are most of the time unable to sustain a project before government can pay for the first stage of the contract.

“Most contractors do not have the finances to fund a project entirely as they wait for government fund. They do not have a bank overdraft and most of the time do not really know what they are going in for, anticipating huge profits,” Mr Okumu says.

However, Mr Chris Ochieng, a contractor in West Nile region with UNIFA Investment Uganda, attributes the failure by the contractors to comply with the contract requirements to the high level of corruption at district Local governments.

“Everyone at the district, including the politicians, the engineers, auditors, heads of departments, among others, want some money before your bid can pass through. If the contract is of Shs90 million, by the time it is awarded to you, 10 per cent of it has been consumed in corruption,” Mr Ochieng says.

He adds: “When you realise that there will be no profit at the end of the project, you either use poor quality materials, reduce the size of construction or abandon the project.”
While the breaches are visible from the onset of the project, the Local governments seem not to notice until the tax payer’s money has already been spent on the shoddy works.

Ms Gamwera says the weak oversight role by the council is due to the poor qualification issue in most councils with councillors unable to read or even understand the contracts.

Recentralising procurement of contracts

Authority of tendering was initially derived from the Tender Board Regulations of 1977 established under the Public Finance Act Cap149 and procurement of contractors was entirely under the central government with ministries procuring goods and services and sending them to respective departments in districts.

However, following the introduction of a decentralised system of governance, the Local Government Act Cap 243, was amended, putting in place Local Governments councils and creating District Tender Boards in 1997.

In 2003, a PPDA Act was enacted, putting in place an authority, which is an autonomous body, whose objectives were to handle the procurement of goods and services for government.

The Local Governments (PPDA) Regulations 2006, the Local Governments Financial and Accounting Regulations of 2007, Local Governments (PPDA) Guidelines 2008 were also put in place to help effect the PPDA Act in local governments.

Procurements and Disposal Units and District Contracts Committees composed of civil servants, principally drawn from the procuring entity, replaced the District tender boards thus recentralising the procurement process and leaving the district councils with the role of supervision of contracts only.

Currently, the contracts committee handles contracts below Shs50million entirely and only needs the approval of the Attorney General and Solicitor General in those exceeding.