Firms sign Shs7b deal to fund constructions

National Social Security Fund building under construction. Under the arrangement, CrossRoads guarantees 50 per cent of the performance bond required from a firm awarded a contract. PHOTO BY FAISWAL KASIRYE.  

By FARIDAH KULABAKO

In Summary

Prior to this, contractors would go to banks to get the money and banks would ask for security before awarding the contract.

Kampala

Excuses for delayed construction projects are likely to reduce as the project owners benefit from guarantees that enable the selected bidder complete specified work without any cash flow constraints.

This has been made possible by affordable bid and performance bond guarantees following the signing of £2 million (Shs7.6 billion) fund by Housing Finance Bank, Agribusiness Initiative (aBi) Trust and CrossRoads (Creating Opportunities for Sustainable Spending on Roads), a five year Department for International Development 9DFID) project that seeks to improve the quality of Ugandan road network.

A contractor is by law required to produce a performance bond before they are given any construction contract to ensure that the project will be successfully completed, and this is usually 10 per cent of the value of the contract.

Prior to launching the facility in Uganda last year, contractors would go to banks to get the money and banks would ask for security before awarding the contract. The firms inked a deal that is expected to reduce the cost of bid and performance bonds by 50 per cent, according to Mr Alex Mugova, the CrossRoads market systems specialist.

Mr Mugova said on the sidelines of the signing ceremony last week that under the arrangement, CrossRoads guarantees 50 per cent of the performance bond required from a firm that has been awarded a construction contract, and the contractor only produces the remaining 50 per cent.

A bid bond is a cash deposit paid by a party seeking to undertake a construction project on behalf of a third party and it guarantees that the winning bidder will undertake the contract under the terms at which they bid.

A performance bond on the other had is a surety bond issued by a bank to guarantee satisfactory completion of a project by a contractor.

Mr Mugova added that the facility seeks to address the challenge of access to finance, which is a major constraint to contractors in Uganda. “We have created a sustainable mechanism for stimulating development in the country,” he said.

Mr Mugova said as at December last year, the facility which was launched in January 2012 had enabled contractors to access performance bonds and bid securities valued at about £14.8 million through local banks.

aBi Trust, an initiative supporting agribusiness development in the private sector manages the construction fund on behalf of CrossRoads.

Housing Finance Bank managing director Nicholas Okwir said the guarantee will strengthen institution’s ability to finance the construction sector by increasing it’s offering in bid and performance bonds for road construction and maintenance projects. The facility which is expected to run until January 2015, will enable Housing Finance Bank issue bid and performance bond guarantees to contractors to stimulate growth.