Spending cuts and delays in approving contractors’ claims pushed government arrears to more than Ush800 billion ($208 million) last year in a sign of tougher times faced by local engineering contractors.

Domestic arrears accumulated by the Uganda National Roads Authority (UNRA) rose from Ush471.827 billion ($122 million) in financial year 2021/22 to Ush621.496 billion ($161 million) in financial year 2022/23.

Domestic arrears accumulated by the Ministry of Works and Transport grew from Ush75.367 billion ($19.6 million) in financial year 2021/22 to Ush215.418 billion ($56 million) in financial year 2022/23, according to findings contained in the Auditor General’s report dated December 2023.

Consequently, total domestic arrears accumulated by the two institutions-the country’s largest road sector management entities stood at Ush836.914 billion ($218 million) by end of June 2023.

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Crippled operations

Unpaid invoices held by UNRA, and the Ministry of Works and Transport have reportedly crippled local contractors’ operations amid severe cashflow constraints reflected in settlement of routine expenses such as employee wages, rent, bank loan repayment obligations, tax bills and construction material costs, The EastAfrican has learnt.

Recent budget cuts by various government ministries and departments are cited for the massive arrears incurred during the previous financial year in spite of huge budget allocations made to the works and transport sector.

For example, Uganda’s overall arrears against international organisations amounted to Ush41 billion ($10.6 million) by close of June 2023 amidst significant funding cuts implemented last year, according to the Auditor General’s report.

Despite severe challenges caused by delayed payments in the construction industry, UNRA sounds dismissive over the impact of huge arrears on future contract valuations.

“The economy has not fully recovered from the Covid-19 pandemic lockdown period. This has led to huge arrears incurred against local contractors, a slowdown in existing road construction projects and delays in launch of new road construction projects. But we are engaging government on how to sustain some of our critical projects that are under implementation inspite of budget cuts,” noted Allan Sempebwa, UNRA’s communications manager.

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“Government usually takes six months to pay a contractor for civil works done. This creates huge negative pressures on one’s cash flows because of significant running costs incurred by engineering contractors during the waiting period. I would, therefore, add a 20 percent risk premium on my contract for any government infrastructure project in order to protect my profit margin from excessive working capital maintenance pressures.

Due to delayed government payments, some contractors have opted to undertake construction projects belonging to private organisations that offer a revenue margin of around 25 percent per project. Small construction projects financed by experienced individual investors in the housing sector usually offer a profit margin of five percent because of tight budgeting habits.

Some local government projects that involve construction of schools are accompanied by advance payments which do not materialise on time. This is because local government officials take long to issue payment and by the time they are delivered to us, the quarterly budget cycle is over and money has got to be returned to the Treasury,” explained Andrew Nsereko, a civil engineer.

Despite severe challenges caused by delayed payments in the construction industry, UNRA sounds dismissive over the impact of huge arrears on future contract valuations.

“The economy has not fully recovered from the Covid-19 pandemic lockdown period and government has been forced to implement budget cuts in many sectors in order to make ends meet.

This has led to huge arrears incurred against local contractors, a slowdown in existing road construction projects and delays in launch of new road construction projects. But we are engaging government on how to sustain some of our critical projects that are under implementation inspite of budget cuts.

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Anyone that bids for a road construction project must remember that they are dealing with a competitive situation and one must stand out in order to win. One must focus on cost variables related to different inputs and not matters of delayed payments,” noted Allan Sempebwa, UNRA’s Communications Manager.

Whereas loan restructuring appears convenient for local banks that lend to construction firms, signs of unease and jitters over delayed payments to local contractors have crept into banking industry circles.

“We handle a few construction sector clients. But dealing with government usually creates risks of delayed payments and this problem also affects some donor funded infrastructure projects. We try to structure loan facilities for local contractors that help capture various commercial risks that they face in this market. There are ongoing discussions between us and government that are meant to enlighten government on the dangers of delayed payments to local contractors and the financial sector as well,” said Sam Ntulume, Executive Director at I&M Bank Uganda Limited.

“We usually offer short term facilities of six months to contractors that are awarded government projects for execution. In case government pays at the end of a given quarter, we call up the contractor and advise them on how much money to deduct for debt servicing purposes and how much to leave on their bank account.

But in case government fails to pay after six months, we restructure the credit facility for another six months. Delays in payments due to government contractors tend to raise the risk premium attached to infrastructure development contracts. There is a client who won a contract to do geophysical mapping for certain mining areas in Northern Uganda on behalf of the Energy Ministry and was required to submit an engineer’s evaluation report to the client ministry.

Though he submitted the report sometime back, that document is still stuck on someone’s desk in the Ministry of Energy awaiting approval almost one year down the road,” observed a financial analyst at Absa Bank Uganda Limited who requested anonymity, citing confidentiality obligations.

An increase in arrears is likely to escalate financial risk premiums attached to government infrastructure projects by affected contractors- a scenario that translates into higher project investment costs for taxpayers, local sources claim.