Monday February 13 2017

Are Ugandans ready to cash-in from the Standard Gauge Railway project?

Setting up. Managers of the Tian Tang Steel

Setting up. Managers of the Tian Tang Steel Factory take the Uganda Manufacturer’s Association Executive director Sebagala Kigozi (Right) on a guided tour of their factory in Mbalala Mukono district recently. Steel manufacturers are among the expected beneficiaries of the railway. PHOTO BY STEPHEN OTAGE 

By Frederic Musisi & Mark Keith Muhumuza

They call it local content. It is a sticky subject which in Uganda was first coined within the confines of the nascent oil industry but has since been stretched to every big infrastructural project funded with borrowed money or undertaken by foreign contractors. In short, it refers to what it is that Ugandans benefit from the project during its construction.
Put simply, local content is “value addition by Ugandans using Ugandan materials, with services produced by Ugandans and Ugandan firms” with the aim of keeping business within the country while at the same time promoting local industries. It is partly compounded in the Public Procurement Disposal of Public Assets Authority Act, which provides for preference to be given local goods and services.

The usual question is, “how ready are Ugandans?”
Yet again, debate on the question is back in regards to SGR, the $12.8b (Shs46trillion) railway project conceived six years ago by President Museveni, Kenya’s Uhuru Kenyatta, South Sudan’s Salva Kiir and Rwanda’s Paul Kagame to facilitate economic integration. The project is facilitated by a “cheap/soft” loan from the Chinese government but which money future tax payers have to repay.
The SGR team has since been in overdrive mode in order to present the opportunity for local enterprises to benefit from the project.
Works and Transport minister Monica Azuba, last month, assented to the SGR local content strategy, which officials say, is for ensuring that “value” is brought to the country through competitive and gainful participation of citizens and the Ugandan private sector from the railway project. The strategy provides that up to 40 per cent of supplies for works come from local entities while out of every 10 employees, nine should be Ugandans and foreign skills should be sourced only if such skills cannot be found locally.

It is understood that President Museveni issued a directive just when the SGR contracts were being signed that cement and steel companies had to benefit from the project.
Notwithstanding the local content strategy in place, the SGR project coordinator, Mr Kasingye Kyamugambi, told this newspaper “we are aware there are things that cannot be made locally and have to be imported.”
“It is only for those that there will be exception to import but only after we have fully established that they cannot be sourced locally,” he explained. “But otherwise we target to devote 40 percent of the contract value to local content.”

The multi-billion dollar project will mainly use steel and iron, at least nine types, Engineer Kyamugambi explained, but only two [types] can be manufactured locally. The two steel types that can be made locally, he said, they had engaged a consortium of three local firms—Roofings, Madhvani and Steel & Tubes, with each agreeing to invest an estimated $2m (Shs7b) into production that matches quality.
“This they agreed to undertake—a manufacturing system that meets requirement—but on condition that government buys from them and gives them tax rebates. In addition he said, government had agreed to invest up to $2.3m (Shs8b) in technical testing laboratories and capacity of the standards body, Uganda National Bureau of Standards (Unbs), to be able to test the locally manufactured raw materials such as steel and cement.

Are local manufacturers ready?
Uganda has learned the hard way when it comes to local content in the large public investments. The notable examples, in recent times include the Karuma and Isimba dam projects, also being constructed using soft loans from Exim Bank. These opened a can of worms after it was revealed their contractors were using imported steel and cement because Uganda’s did not meet the required standards.
The other equally big infrastructure is the $130m (Shs390b) cable bridge over the River Nile in Jinja whose construction is also ongoing. Besides cement, which was ordered as placed as a special order from Lafarge [formerly Hima Cements), the project contractors are equally importing almost 70 percent of the remaining materials after running into several problems with local manufacturers.
One of the firms engaged by SGR to provide steel, sources familiar with the Nile bridge, was initially one of the local firms courted when the project was initially starting but only on one condition that they “produce steel that is up to standard.”

Sometime early last year, the said contractor supplied seven trucks of steel as per to earlier bargain of putting local content at the centre. Despite UNBS certifying the steel in question, sources said “luckily the Japanese operate an independent test laboratory” at the site where they subject every raw material including water used in the cement mixture are tested before used on the bridge and when additional tests were undertaken on the steel “it failed four out of the three.”
Consequently, sources narrated further, all the steel of the consignment that had been used as tests were being carried out was ordered off the site and returned to the producer. Desperate for a solution to have the steel given second consideration on grounds that it had been certified by UNBS, the top executive of the company in question engaged MPs who visited the site and castigated the Japanese for ignoring local content and even further unsuccessfully wrote to among others the Works minister and Uganda National Roads Authority (Unra) which oversees the bridge, to have the decision taken by the strict managers to reevaluate their earlier decision.

These are some of the problems foreign contractors face when dealing with local contractors. The Oil sector, which is known for high quality standards and popularized the whole concept of local content, has had to forcefully import both contractors or expatriate workers because either there is no local capacity, when it is available usually there is a lot of backhand methods and or there is outright disregard of standards.
Engineer Kyamugambi, however, said they signed a Memorandum of understanding (MoU) with local firms with clear terms, one of the stipulating that failure to meet the set standards will automatically lead to revocation.
“We are building a railway to last 100 years plus, so quality is something we have to take very seriously and won’t even compromise on.” Asked about the specific tonnage to be produced, he explained that the “tonnage will be determined by their production capacity. We want them to make reinforcement bars mainly and hot rolled plain bars.”

Uganda‘s SGR, officials and available documents show, will be a Class One Chinese Classification “a replication of the Chinese Class One based on their standards despite of the fact that Class One SGR’s due to their high cost of operation and maintenance are only operated by developed countries. According to the Chinese standards pamphlet, Class One railway is one that “plays the backbone role in railway network, or its annual passengers/freight traffic volume for near-term is more than or equal to 20 metric tons.
The trouble for companies is that they have to produce products for the SGR and also separate ones for the market. That according to several sources requires increased the capacity of producers especially those with economies of scale. Producers, according to one of the steel manufacturers who did not want to be identified, said that at some point, he would have to put up an entirely new production to produce the quality of steel that the SGR contractor requires.
To put that into perspective, Lafarge’s chief executive, David Pettersson explained that while the cement on the market conforms to UNBS standard and European standards, the cement for the SGR project will conform to the Chinese standard.”

“We take the approach of catering to the clients’ expectations by drawing on our local and global expertise in supplying a wide variety of infrastructure projects (Bamburi Cement, which is our sister company in Kenya is successfully supplying SGR in Kenya).”
Lafarge/Hima cement, the second largest cement producer in the country insists it has the capacity, in part because of it being part of the broader Lafarge-Holicm Group that is located in 90 countries across the world. This leverage comes in handy for Hima Cement because they have access to the financing and technical capacity to produce for just the SGR as they also produce for the local market.
This is however, not the case with several other local manufacturers who want to partake of the several lucrative contracts on the SGR project.

Chinese steel has been one of the reasons cited for the drop in global prices of steel in the last one year. The Chinese producers have built up capacity to produce several types of steel – because they have been doing massive infrastructure projects – meaning that their steel comes in cheap. The steel market is currently facing a glut because of the existence of so much steel from China.
The government does know that not all if none at all of the steel produced locally is actually made in Uganda, which explains why they have been hesitant to be too restrictive on the SGR contractor.
Mr Sinkander Lalani, Chairman, Roofings Group, at the signing of the SGR local content strategy last month plainly noted that they were ready to supply the SGR. However, he also knows that he has to produce steel that adheres to contractor specific standards.

The government opting not to go all the way to be too restrictive is also commended in several circles because there are things Uganda does not just manufacture. Additionally, the broader definition of local content for the steel and cement sectors has been considered to be a locally registered company that employs and pays taxes in Uganda. This according to some experts is considered a good move.
“Local content is about local enterprise development, local raw materials, use of local services, technology transfer and basically promoting enterprise development and economic activity in the country” explained Francis Kamulegeya, the senior country partner PriceWaterHouse Coopers (PWC).
“When the government is taxing you they don’t ask for your passport or nationality, if anything when they are out and about encouraging foreign direct investment to come in and invest locally, they ask you to register in Uganda.”

Enter the jobs
Besides the 16,000 jobs to be created directly, SGR officials say, “trickle down employment will rise to over 100,000 jobs in associated sectors.”
Mr Kyamugambi, explained that jobs will be available in all sectors, not limited to engineering, from the white collar to menial jobs.
However, a report released last week by the Parliamentary committee on physical infrastructure on the project, drawing on the Ethiopian experience, which made a deliberate effort to build the capacity of their railways body (the equivalent of Uganda’s dying Uganda Railways Corporation) through first establishing an institutional framework for management of the railway, training 603 young trainee technicians in China, launching a railway engineering education programme spread out to 500 students, and enhancing capacity to manage procurements and the railway line, Uganda has not even moved a step in that direction apart from available plans on paper to build capacity of the UPDF in railway engineering, construction and maintenance.

“There is no capacity building programme for Ugandans who shall be responsible for managing the SGR in Uganda,” the committee noted. “Uganda is currently in advanced stages of implementing the SGR yet there has been no deliberate effort to build the capacity of local engineers and other required personnel. The UPDF is expected to offer labour to the project contractors and is expected to learn construction and supervision processes in course of implementation.”
Mr Kyamugambi confirmed that President Museveni had directed the UPDF to be part of the project, especially during construction by China Harbour Engineering Corporation (CHEC), but said they will continue expanding and boosting Uganda’s capacity “step by step.” He revealed that CHEC, as part of the contract, will later build a training school where Ugandans will be trained in railway management.