Will the exemption from bank guarantees solve Uganda’s construction woes?
For years, contractors in Uganda have been required to present bank guarantees as a security measure for government projects. This system often pushed local contractors into difficult financial situations, forcing them to stake property and other assets to secure loans.
When President Yoweri Museveni announced the removal of bank guarantees for local contractors, it sparked a wave of reactions across Uganda’s construction industry.
While many welcomed the move as a relief for local contractors burdened by stringent financial requirements, experts caution that the policy alone may not address the sector’s long-standing issues. The question remains: will this change solve Uganda’s construction challenges, or are there deeper issues that need attention?
The Bank Guarantee Burden
For years, contractors in Uganda have been required to present bank guarantees as a security measure for government projects. This system often pushed local contractors into difficult financial situations, forcing them to stake property and other assets to secure loans.
However, delayed payments by the government made it challenging for contractors to meet their obligations, leading to defaults and lost property. Museveni’s recent directive aims to remove this burden and level the playing field for local businesses.
“The guarantee system was a double-edged sword for many contractors,” says Patrick Amanya, a financial analyst with extensive experience in Uganda’s construction sector.
“While it was meant to ensure contractors were capable of delivering on projects, the reality was that many couldn’t keep up, especially with delays in payment from government contracts. Removing this requirement could provide significant breathing room for smaller firms.”
The Relief for Local Contractors
For local contractors like Simon Okello, the move is long overdue. Okello, who owns a mid-sized construction company in Kampala, says that he often struggled to secure bank guarantees due to limited assets and unfavorable loan terms.
“Every time we got a government contract, we had to put up our properties just to get the bank to issue a guarantee,” Okello explains. “It was a huge risk, and many times, the payments from the government came late, putting us in a very tight spot. This new policy will make things easier for small and medium-sized contractors like us.”
Indeed, for many contractors, the exemption from bank guarantees will reduce financial stress and allow them to focus on executing projects without the constant worry of losing their assets. However, experts like Amanya warn that this change might not be enough to address the underlying challenges facing the sector.
Addressing Delayed Payments
One of the major issues that local contractors continue to face is delayed payments. Even without the pressure of securing bank guarantees, contractors remain vulnerable if government payments are not made on time. The delays can disrupt cash flow, affect project timelines, and impact the quality of work.
“While the exemption is a step in the right direction, the real problem lies in how quickly the government can pay contractors,” says Amanya. “If payments continue to be delayed, contractors will still struggle, regardless of whether or not they need a bank guarantee.”
Amanya suggests that the government should implement policies to streamline payments to contractors, such as introducing penalties for delayed disbursements or setting up a dedicated fund to ensure timely payments.
Another concern raised by critics of the new policy is the potential for decreased accountability and project quality. The bank guarantee system, while burdensome, acted as a form of insurance to ensure contractors completed their work as agreed. Without it, there may be less oversight and increased risk of project failures.
Amanya suggests that alternative mechanisms, such as performance bonds or phased payment structures tied to project milestones, could be introduced to maintain accountability. “We need to strike a balance between making it easier for local contractors to access projects and ensuring that those projects are completed on time and to the required standards,” he adds.
The Long Road Ahead
While the exemption from bank guarantees is a positive step for Uganda’s local contractors, it is not a silver bullet for the sector’s challenges. Issues such as delayed payments, project mismanagement, and corruption remain significant barriers to the successful completion of infrastructure projects.
Amanya believes that the government must address these issues comprehensively if the construction sector is to truly thrive. “The policy is a good start, but we need to see a broader reform of the contracting process. This includes ensuring that payments are timely, introducing better oversight mechanisms, and providing technical support to local contractors to help them meet project requirements.”
In the meantime, local contractors like Okello remain hopeful. “This is a chance for us to compete on a more level playing field,” he says. “If the government can also address the payment delays, we’ll be in a much better position to deliver on the projects that are essential to Uganda’s growth.”
As Uganda embarks on a new chapter in its construction journey, the future of the sector will depend not just on policy changes but on the collective effort of all stakeholders to ensure that projects are delivered efficiently, effectively, and with lasting impact.
