While the previous Part dealt with the inputs and outputs of the construction industry, this Part starts examining the industry itself; that is, how industry entities act on the resources between input and output. With an economic perspective, a useful insight can be gained by looking at the construction market since this plays a major role on decision-making by entities therein as signalled by market prices, though such decisions may be circumscribed by events in the wider economy.
In local parlance, the “market” is a municipal location where buyers and sellers meet, but already many of us have been exposed to online buying and understand that a market can take various forms. For example, the government recently announced an online farmers’ market. Textbook wisdom is that market forces are the supply and demand factors that determine prices (and corresponding qualities) and the quantities which are exchanged. An efficient market is one where prices reflect all available information about the asset concerned. An inefficient market is one where prices do not reflect social cost and benefits; this might be due to a number of reasons, such as lack of information or to a monopoly.
Construction, however, has a sealed-offer reverse-auction pricing mechanism, where bidders each submit a single price sealed from other participants until a certain time (the bid opening) when the lowest price disclosed, rather than highest, is held to be the best acceptable to the owner-buyer; each bidder prices and submits an owner-supplied tender document and, whilst anticipating the price response of the other bidders, seeks to submit the lowest bid. The market itself for a particular project can commence from an invitation for expressions of interest or a contractor’s request to get onto a tender list, as these are normal for owner-buyers and contractor-sellers to meet or exchange information. Straight-faced ‘meet and treat’ promises are not confined to municipal markets.
The demand side
Public sector buyers in Guyana are apparent from publicised invitations to bid: government ministries and agencies, local government bodies, and state owned enterprises. Together, these dominate the market, by far. To these must be added private sector owners whose bids are frequently not publicised; but whose interactions may be inferred from observation of construction output in the townscapes. They include owners of beverage and fast-food outlets, petrol stations, commercial banks, houses, and so on; and some who may not be highly visible at all, but who are nevertheless financially active, like investors in the mineral and looming petroleum sectors.
Due to the heavy costs involved, infrastructure in both the public and private sectors is generally dependent on long-term loans. Where international development agencies are involved, they exercise a level of technical supervision of loan disbursement. Even so, a feature of construction is that the majority of owners are not informed about how their needs are met through the technical design and construction process. Such buyers have a ‘high level of imperfect knowledge’ of the market. It has been suggested by Danny Myers (‘Construction Economics: a new approach’, Routledge 2008) that this is how independent consultants have developed within the industry, providing advice and management support to buyers through plans, tender documents and so on, as well as contractor supervision (with various levels of efficiency). Generally consultants work on the demand side with buyers, but it must be noted that consultants can also work with, or provide essential advice to, contractors. In Guyana, as elaborated below, many contractors lack managers of various types vis-à-vis the buyers and their consultants, and this too constitutes ‘imperfect knowledge’ of the market. This state of affairs is an entrenched cause of inefficiency in the local construction market.
However the construction sector in Guyana, as well as elsewhere, is characterised overwhelmingly by the features on the supply side.
The supply side
The names of some building and civil engineering contractors who make up the supply side of the industry may be seen from tender lists publicly announced by the National Procurement and Tender Administration Board (NPTAB) as part of the transparency aspect of the public procurement process. The majority of these contractors are unincorporated entities, carrying no requirement to disclose on the administration or the financial state of their businesses, and operating informally in other ways. For example, in May 2018, of 32 tenderers announced as having submitted bids for construction of a police station at Parfait Harmonie, 30 are shown by their names as being unincorporated. It is submitted here that this informality is generally carried over into other areas of operation, due partly at least to scarcity of specialist management skills, sometimes not available to contractors at any cost. These include accredited skills in health and safety, supervision and quality control (submitted, the greatest area of contractor risk exposure), contract pricing, and contract administration. Imperfect knowledge on the part of contractors also extend to lack of knowledge of the number of other tenderers and their various positions on pricing: how many bidders at the Parfait Harmonie bid considered there were 31 other bidders?
In a construction market, at the stage of tender, a single owner-buyer and multiple contractor-bidders interact to set (a) the identity of the contractor and (b) a price for the work, as the quantity and quality are already set in the priced tender document: this is important to note. Hence, a price (as well as a successful bidder) is selected unilaterally by the buyer from prices tendered by contractor-bidders. This puts the buyer in an inherently advantageous position, as all price information is available to the buyer but not to the bidders. In public tenders, that is under NPTAB, the selection must be on the basis of lowest price tendered, all other things being equal. However, in reality this is subject to the capacity of losing bidders (or taxpayers) to enforce legal review that all discretion of NPTAB is exercised rationally, so that the lowest bidder (all other things being equal) is in fact selected. In the private sector, where there is no prescribed tender procedure, buyer advantage is increased as an owner may negotiate a final price with a particular bidder, using information from others.
Buyer dominance inherent
The buyer’s advantageous position is one of monopoly or near-monopoly, whereby it can act to drive prices downwards, while maintaining quantity and quality of construction. This can be contrasted with a sellers’ monopoly where producers or sellers could drive prices up, while maintaining the same, or even lowering, quality. This tender pricing system has at least three weaknesses in regard to construction:
● Contractor-bidders do not know particulars of competitors’ pricing and gain little experience for improving future bids (this applies to the successful bidder also), thereby creating a syndrome of inadequate knowledge.
● When selecting the lowest price the purchaser acts without knowledge of the price that is in fact too low and unsustainable for any particular contractor. A bid-winning contractor led into insolvency on any project could leave the purchaser with an uncompleted facility, to be completed with even greater difficulty and cost. This is also detrimental to the buyer.
● Final quality is, in practice, dependent on adequate specification, the contractor selected and adequate supervision. A price near or below contractor-cost commercially motivates the contractor to cut corners and cut quality. If supervision is inadequate, these combine to produce low quality construction output as a general pattern.
Needed – rebalancing action
Buyer monopoly also occurs in the labour market when dominant employers set pay and conditions of work that suit themselves, and can require institutional and legislative measures to be corrected. Two historical episodes can help illustrate. In ‘History of the People of Trinidad and Tobago,’ Dr Eric Williams narrates how colluding planters and lawmakers in the late-19th century maintained low wages for Indian indentured labour by procuring further Indian immigrants despite a limit on numbers sought by rules under a current Ordinance. Various plantations kept wages low, not by necessarily paying below the minimum wage, but by actively expanding the percentage of new immigrants at the lowest wage, thus making it difficult for workers to demand more.
In ‘A History of the Guyanese Working People,’ published posthumously, Dr. Walter Rodney records how around 1905, in Georgetown, stevedores rebelled in the streets against stagnant wages. Shipping firms employed a small core of permanent stevedores, then hired casual workers who, when work ran out before the day, were only paid a proportion of daily wages. Adults, even amongst the permanent stevedores, were often categorised as “boys” and paid less on this account. The resolution in both Trinidad and Guyana was legal formation of trade unions, with bargaining power to re-balance affairs. It is arguable that buyer monopoly in construction requires similar institutional and legislative changes for re-balancing.
It is not suggested here that construction owners in Guyana have created the imbalance and market weaknesses in the sector; rather the social and economic framework has been inherited by all. The challenge is how to correct the inefficiencies.
The next Part will continue on the Industry itself.
