Loan plan for contractors will punish home owners

 

Construction of an overpass road interchange in Kisumu being done by a Chinese company Synohydro. Photo/FILE 

Opinion and Analysis

Home builders will struggle to understand the rationale of offering cheap loans to contractors from a kitty funded by charging them a 0.5 per cent levy on the value of new projects.

The National Construction Authority wants to build a fund capable of generating Sh1.7 billion annually and offer loans of up to Sh5 million with interest rates of between four and six per cent.

The big question is why the authority is punishing home owners instead of reviewing its procurement laws to provide for partial upfront payment to small contractors unable to raise funds to kick start work on state tenders.

 

The upfront payment has worked best in the private sector and should be emulated in selective tenders where the state is pursuing affirmative action instead of calling on the private sector to plug this void.

Such funds have had a poor performance including high rates of non-performing loans or cash sitting in commercial banks and not benefiting their targeted recipients.

For the housing levy, there is an added burden bearing that the kitty is being funded by private sector and not the Treasury as is the case with funds like Uwezo.

Already, there are fears that the 0.5 per cent levy will slow down supply of homes in an economy gripped by a deficit following decades of underinvestment in the property market.

Coming days after the Treasury more than doubled duty on iron and steel imports, this construction levy will erect an additional hurdle to home ownership.

The National Environment Management Authority (Nema) demands a minimum charge of Sh10, 000 or 0.1 per cent of project cost for environment impact assessment.

The Mining ministry, from last September, started collecting a two per cent royalty on construction materials — increasing the cost of quarry stones, concrete blocks, hardcore, ballast and sand.

This is clear that the levy will hit large scale developers hard. At the entry level figure of Sh5 million, a contractor has to pay an additional Sh25, 000 or face the law.

But what’s the point of drafting regulations that do not take into account their impact on the building industry or the effectiveness of the fund?

First the fund can advance loans of up to Sh5 million, which is a measly figure compared to the average construction contract in government.

Then, the kitty looks set to be exhausted by a few contractors in what will defeat the purpose of having a broad swath of investors ride on the cheap loan.

We, therefore, urge the government and its agencies to rethink the levy and the construction fund plan as well consider alternatives including creating partial upfront payment for tenders