Zimbabwe government in state of flux in respect of USD 200 million debt owed to road contractors

Harare Road construction 

THE government is in a quandary over the payment of companies working on Harare’s critical inner roads linking the new Parliament Building in Mount Hampden and the Beitbridge-Harare-Chirundu highway project amid fears such payments would increase inflationary pressures and erode the newly introduced ZiG currency.

On the other hand, the government does not have the forex to settle its obligations to the firms in hard currency.

The companies have not been paid for their current work. The government fears that contractors will offload their ZiG payments onto the black market to buy forex, increasing inflationary pressure at a time efforts are being made to prop up the currency.

As seen in the past, the flooding of local currency on the parallel market puts pressure on the exchange rate and accelerates the depreciation of the local currency relative to the US dollar. With the supply side of local currency booming, the rate shifts fast due to the scarcity of forex.

The demand for forex increases with increased money supply. Milton Friedman famously said “inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output”.

Friedman was an American economist and statistician who received the 1976 Nobel Prize in Economics for his research on consumption analysis, monetary history and theory and the complexity of stabilisation policy.

When undertaking public works, Treasury provides funding in cash (local currency transfers), instead of long-term financing models such as private-public partnerships or build-operate-transfer.

Suppliers in 2022 were paid in bulk and that took half of government’s monthly budget, which was between ZW$95 billion and ZW$100 billion. Owing to the inflationary environment, the government suppliers did forward pricing or forward rate benchmarking of the exchange rate.

As they mopped up the forex market, they put pressure on the official exchange rate as well as the parallel market rate.

This resulted in a phenomenon bordering on hyperinflation for the third time in just over a decade. As public procurement suppliers and contractors drove the exchange rate, inflation climbed to 256.9% in July, from 191.6% in the prior month.

Responding to questions at a breakfast meeting in Mutare on Thursday which was organised by the Zimbabwe National Chamber of Commerce, Reserve Bank of Zimbabwe governor John Mushayavanhu however said paying government contractors does not fuel volatility in the parallel market exchange rate.

“Contractors are paid by government mostly in US dollars. If they are paid in ZiGs, it is from the stock of ZiGs in the market and not from printing. If (government) is using money already in circulation which is controlled, I do not see how that can cause ripples,” Mushayavanhu said.

Companies implementing the roadworks on Harare’s critical inner roads linking the new Parliament Building in Mount Hampden and the Beitbridge-Harare-Chirundu highway project are owed a total of over US$200 million for different construction work which will cover 255 kilometres.

The government pays contractors in local currency and in United States dollars. It is supposed to have paid part of the total cost to enable them to do their work and meet timelines, but it has not yet done so.

Treasury fears paying the companies will fuel parallel market foreign exchange trade and stoke inflation.

The government’s failure to pay on time has left construction firms struggling without adequate working capital to finance day-to-day operations. As a result, the companies are already behind schedule.

In the current situation, informed industry sources told The NewsHawks that the five contractors involved in the inner Harare road networks rehabilitation project linking to the Beitbridge-Harare-Chirundu highway – Bitumen World, Fossil Contractors, Exodus Company, Masimba Construction and Tensor Systems – have not been paid.

The five companies involved in the Beitbridge-Harare-Chirundu highway project, initially estimated to cost US$2.7 billion, are collectively rehabilitating the whole stretch, spanning 935km.

The government says it is almost done with the 580-kilometre Beitbridge-Harare section and has now embarked on the 355km stretch which will cost US$550 million. Authorities now say the Beitbridge-Harare road will cost US$1 billion. There has not been a consistent costing of the project. It was split into sections.

One contractor told The NewsHawks last week: “All companies which are involved in the Beitbridge-Harare-Chirundu project are also working on sections within the Harare City precincts and the linkages. But then the problem is that we haven’t been paid for current works. So we are struggling to pay for supplies of materials and other costs.”

“We have to pay engineers. Laying out a road project requires finding an area with the right infrastructure in place to support the weight of heavy equipment. The cost of building a road depends on the materials used. For example, asphalt is a softer material that takes longer to level and requires greater maintenance.”

Added the contractor: “And the cost of building a road also depends on the distance. There are also labour costs which vary depending on the location and the number of workers. We also have to pick up the tab of equipment such as dump trucks, bulldozers, and earthmovers. There are many things involved. There are costs of design and planning. The cost of designing and planning a road project can vary depending on the complexity of the project and the number of professionals required.”

Contractors say they are struggling without working capital as it is the money needed to finance the day-to-day operations and expenses of a project.

These projects are important for President Emmerson Mnangagwa, particularly due to the upcoming Southern African Development Community (Sadc) summit to be held in August in Harare. The authorities are desperate to impress visiting leaders.

At least 40 greater roads in and around the city have been lined up for massive construction and maintenance ahead of the 2024 Sadc summit.

The Sadc preparatory mission engaged the government technical team in terms of preparations for hosting the 44th summit in August.

Cabinet also resolved to prioritise the rehabilitation and maintenance of Harare’s road network in preparation for the Sadc summit.
The resolutions include:

Declaration of state of disaster: Cabinet declared the state of Harare’s roads a state of disaster, enabling the ministry of Transport and Infrastructural Development to expedite the rehabilitation process.

Emergency road rehabilitation: It approved the emergency rehabilitation of 40 selected roads in Harare, focusing on high-traffic areas and major routes.

Prioritisation of urban roads: The ministry of Transport was directed to prioritise the urban section of the Harare-Chirundu Road project, ensuring completion by 31 July 2024;

Additional funding: Cabinet approved additional funding for the road rehabilitation programme, ensuring adequate resources for the project’s completion;

Inter-ministerial committee: An Inter-ministerial committee was established to oversee the road rehabilitation programme, ensuring coordination and expediting the process;

Private sector involvement: The authorities encouraged private sector participation in the road rehabilitation programme through public-private partnerships;

Community engagement: The ministry was directed to engage with local communities and stakeholders to ensure minimal disruptions and maximum cooperation during the rehabilitation process.

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