Student Identity Number: 1309308
EBU5002 - DISSERTATION
RESEARCH REPORT
An Investigation of causes and effects of Delayed Payments to Road Contractors in Malawi for Public Funded Road Projects
Marking Tutor:Ron Smith
Submitted in partial fulfilment of the requirements for the Degree of
MSC IN PROJECT MANAGEMENT
The University of Bolton
Date:23 APRIL 2015
Student Identity Number: 1309308
ABSTRACT
Malawi is a landlocked country and roads are an integral part of the transportation system, therefore it is Government of Malawi’s priority that the road network is efficient so that it achieves both social and economic benefits to the country. Currently, the road network in Malawi is underdeveloped and the roads are not of international standard compared to neighbouring countries in the Southern African Development Community (SADC) and Common Market for Eastern and Southern Africa (Comesa) regional trading blocks to which Malawi is a member. Every year, the Government of Malawi commits substantial sums of money in the national budget to ensure development of the Road network and maintain the current roads to good standards to ensure continued and uninterrupted access to all corners of the country by all sectors of the society.
This effort by government to develop the road network is not without challenges. Delayed payments to road contractors have been a serious bottleneck in the successful implementation of road projects in Malawi. This is despite the reforms which were carried out in the Malawi Road Sector in 2005 which saw the creation of two separate bodies, the Roads Authority and the Roads Fund Administration with separate roles of administering the road network and managing funds for the road sector respectively.
This paper seeks to explore the causes and effects of delayed payments to Road Contractors in Malawi and has been confined to exploring the causes of delayed payments to only those projects which are funded from public coffers, using fuel levy by the Roads Fund Administration and appropriations from the government annual budgetdue to time constraints presented for carrying out the research.
Various findings have arisen from the research project and recommendations have been made accordingly to improve the current challenge of payment delays and mitigate resulting effects experienced by contractors and the general public.
Key words: the key words which are often encountered in this research paper include: payments, contractors, and road construction sector.
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Student Identity Number: 1309308
TABLE OF CONTENTS
ABSTRACT
ACKNOWLEDGEMENTS
CHAPTER 1 - INTRODUCTION
1.1Background
1.2Problem Statement
1.3Research Aim and Objectives
1.4Research Questions
1.5Justification for the Research
1.6Limitations of the Study and Areas for Further Research
1.7Structure of the Dissertation
CHAPTER 2 – LITERATURE REVIEW
2.1Introduction
2.2Main organisations involved in the road construction sector in Malawi
2.3Successful project execution
2.3.1The delayed payment concept
2.3.2When does late payment occur?
2.3.3Contributing factors to delayed payments to road contractors
2.3.4The effects of delayed payments to road contractors
2.3.4.1Solutions to the problem of delayed payments to road contractors
CHAPTER 3 – Research Design
2.1Introduction
2.1.1Research Philosophy
2.1.2Research Approach
2.1.3Research Strategies
2.1.4Research Choice
2.1.5Time Horizons
2.1.6Techniques and Procedures
CHAPTER 4 - DATA COLLECTION, ANALYSIS AND INTERPRETATION
4.1Data Collection
4.1.1Questionnaire Administration
1.Road Contractors
2.Roads Fund Administration
3.Roads Authority
4.Consultants
4.2Data Analysis
4.2.1Causes Of delayed Payments
4.2.2Effects of Delayed Payments
4.2.3Solutions to delayed Payments
CHAPTER FIVE – CONCLUSION AND RECOMMENDATIONS
REFERENCES
Table of Graphs
Graph 1- Causes of delayed payments (Contractors’ perspective).
Graph 2 - Causes of delayed payments (RFA’s perspective).
Graph 3 - Causes of delayed payments (RA’s perspective).
Graph 4- Causes of delayed payments (Consultants’ perspective).
Graph 5 - Causes of delayed payments to road contractors (all respondents)
Graph 6 - Effects of delayed payments (Road Contractors’ perspective).
Graph 7 - Effects of delayed payments (Consultant’s).
Graph 8 - Effects of delayed payments (RA’s perspective).
Graph 9 - Effects of delayed payments (RFA’s perspective).
Graph 10 - Effects of delayed payments to road contractors (all respondents)
Graph 11 - Solutions to delayed payments to road contractors (all respondents)
Table of Figures
Figure 1 - Structure of Dissertation
Figure 2- Players involved in payment of certificate
Figure 3- Research Concept Map
Figure 4- Research “Onion” as adopted from (Tosey & Saunders, 2012)
Figure 4- Data Entry for received questionnaires
Figure 5 : Illustration of part of excel worksheet depicting how data was manipulated
Figure 6 - Dissertation Work Plan
List of Tables
Table 1- Analysis of arrears owed to road contractors
Table 2 - Summary of Sample Sizes
Table 3- Sample Size Calculation Worksheet
Table 4 - Scale of questionnaire responses
Table of Appendices
Appendix 1 – Sample Research Questionnaire
Appendix 2: Excerpts of Interview with Roads Authority Senior Engineer
Appendix 3: Excerpts of Interview with Head of Finance for RFA
Table of Keys
Key 1 - Legend to Graph 1
Key 2 - Legend to Graph 2
Key 3 - Legend to Graph 3
Key 4 - Legend to Graph 4
Key 5 - Legend to Graph 6
Key 6 - Legend to Graph 7
Key 7 - Legend to Graph 8
Key 8 - Legend to Graph 9
Student Identity Number: 1309308
ACRONYMS
RFA - Roads Fund Administration
RA – Roads Authority
NCIC – National Construction Industry Council
Government of Malawi – GoM
IPC – Interim Payment Certificate
HoA – Head of Audit
HoF – Head of Finance
NRA – National Roads Authority
PPP – Public Private Partnership
ANRP – Annual National Roads Programme
SE – Senior Engineer
COMESA – Common Market for Eastern and Southern Africa
SADC – Sothern Africa Development Community
Student Identity Number: 1309308
ACKNOWLEDGEMENTS
To come up with this paper, I am indebted to various people and organisations who provided me with the necessary assistance during the course of the research.Special mention should go to my supervisors, Ron Smith and Peter Chiligo who provided the necessary guidance during the course of the research.
Special recognition should go to all Road contractors, Consultants, the Roads Authority and Roads Fund Administration staff who took time to respond to the questionnaires and provided time for interviews.
To my wife Blessings and daughter Joan, they deserve my sincere and heart felt appreciation for the moral and physical support rendered to me during the time they sacrificed the usual family union that coexists on a daily basis to give me free and uninterrupted time to concentrate on the dissertation.
Last but not least, I would like to thank my Lord and saviour Jesus Christ for the spiritual inspiration provided to me throughout the period of the research. This helped me to conquer all hurdles experienced on the way.
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Student Identity Number: 1309308
AN INVESTIGATION OFCAUSES AND EFFECTS OF DELAYED PAYMENTS TO ROAD CONTRACTORS IN MALAWI FOR PUBLIC FUNDED ROAD PROJECTS
CHAPTER 1 - INTRODUCTION
1.1Background
Malawi is a landlocked country and heavily relies on road transportfor both internal access between the country’s three regions and external access to itsneighbouring countries of Zambia, Mozambique and Tanzania. The official road network for Malawi covers a total distance of 15,451km.
This road network is not fully developed, with only 4,045 km i.e. twenty seven percent (27%)of the total network being paved (Road Network, n.d).
To this end, Malawi government has focused on road network expansion as a national public sector investment program. This is backed by the Malawi Growth and Development Strategy (MGDS) which identifies transport infrastructure as a priority area for public investment, (Government of Malawi, 2010).
Critical to this road network development is the effectiveness of the construction industry in carrying out its functions. One key player in the construction industry is the road contractor. To ensure effective delivery of projects, and for good health of the contractors business, it is imperative for contractors to have smooth cash flow(Hunter, 2012). Good cash flow is fundamental in the development and sustainability of a healthy and competitive construction industry (Robertson & Maritz, 2012).
Amongst other initiatives to improve service delivery in the road sector in Malawi, reforms were carried out in the year 2006 which saw the creation of two bodies, the Roads Fund Administration (RFA) and Roads Authority (RA) with two separate roles of managing funds for roads and maintaining the road network respectively. The main reason for the reforms was to enhance efficiency and accountability of public funds meant for roads as opposed to the previous set up where funds management and road network maintenance were in the hands of one body, the National Roads Authority.
Apart from the Roads Fund Administration and the Roads Authority, the other key player in the road sector is the government of Malawi which provides funding for road constructions through parliamentary appropriations.
1.2Problem Statement
Despite the well set up arrangement in the Malawian road construction industry, there are many challenges which are faced and need to be overcome. One of the problems is delayed payment to contractors. Many contractors in Malawi experience delays in getting paid for work done (Mazengera, 2009).
According to Gara & Hawkins, (2014), as at 30 June 2014, the Malawi government owed road contractors and other players in the industry for work done, a total sum of Twenty Seven Billion, Four Hundred Twenty Million Kwacha(MWK27.42Bn) , an equivalent of Six Eight Million, Five Hundred and Fifty Thousand Dollars ($68.55Mn), where 1USD=MWK400. The sum includes actual amounts claimed for work done plus interest charged on the delayed payments.
An analysis of the evolution of the arrears as at 30 June 2014 revealed that the amount outstanding dated as far back as the fiscal year 2009/2010 as depicted in the table below:
Financial Year / Amount of Arrears2009/2010 / $13,073,119
2010/2011 / $28,673,435
2011/2012 / $27,477,520
2012/2013 / $21,256,107
2013/2014 / $68,550,400
Table 1- Analysis of arrears owed to road contractors (Gara & Hawkins, 2014))
A review of selected 50 contractor certificates for major road projects for the five year period between 2009 and 2014 showed that 25% of the certificates were delayed by exceeding the agreed contract payment period of 45 days from date of logging a certificate by the contractor to payment date by the Roads Fund Administration.
Late payment challenges are considered to affect many players in the local construction industry and are referred to as financial problems by those affected by it, whether in public or private funded projects (Abdul -Rahman et al. 2006).According to Huse, 2002, timely payment of contractor certificates ensures the well being of contractors.It is therefore imperative to ascertain the key factors causing delays in payments to contractors in the context of public funded projects and establish the resulting effects of these payment delays.
1.3Research Aim and Objectives
The research seeks to investigate the causes contributing to the delayed payments to road contractors in Malawi and the resulting impact of this delay and develop solutions to address the causes of delayed payments.
Specifically, the research will address the following two objectives:
- Establish the causes of delayed payments to road contractors in Malawi
- Establish the effects of delayed payments
1.4Research Questions
In order to realise the specific objectives of the study, the following questions will be answered:
- What are the causes of delayed payments to road contractors in Malawi?
- What are the effects of delayed payments to road contractors in Malawi?
1.5Justification for the Research
The research on delayed payments to road contractors and the effects this brings is an important element of project management in the implementation phase of the project life cycle. The research therefore has an important bearing to the academic field for the students learning project management because it will increase their knowledge of the challenges of project management implementation and how to deal with them in relation to payments to contractors.
Practically, the research will help the road construction industry players; RA, RFA, Contractors and consultants to resolve current concern of delayed payments to contractors being experienced in Malawi which has led to the Roads Fund Administration and the Government of Malawi paying huge sums of money in interest to road contractors for delayed payments, monies critical to national road network expansion as well as for maintenance and rehabilitation of roads. From the results of the research and its recommendations, it is hoped that all parties in the road construction sector will take necessary strides to eliminate the factors causing the payment delays.
1.6Limitations of the Study and Areas for Further Research
The constraints encountered when undertaking the research are as follows:
- Limited finances to carry out the research, with every resource being financed by the researcher resulting in limiting the tests to only a sample of a population of current contractors carrying out works;
- Limitation to information accesses as some institutions did not cooperate to provide institutional information for privacy reasons and lack of trust on the use to which the research findings would be put. Therefore information was only sought from institutions which were readily available and were willing to give the information.
- Longitudinal effects: Time available to investigate the research problem was constrained by the fact that this is an academic research and formed part of an assignment to attain an academic qualification therefore it had adue date and the researchcould only be conducted within this time to meet the deadline. It is also worth noting that the research was conducted within the researcher’sfree time as he is fully employed and fully attending to work at the time of doing the research.
- There was a limitation in the required number of qualifying personnel to do the field work. The people approached to do the field work to administer questionnaires were expensive as such supplementary methods such as emails were used to administer questionnaires.
- The research approach use of mixed methods using questionnaires and interviews to collect both quantitative and qualitative data but the questionnaire fell short of collecting qualitative data, with most of the respondents only tackling the quantitative questions and not providing qualitative information in the sections provided for this.
Although the research only concentrated on causes and effects of delayed payments to contractors, this does not exhaust possible research areas relating to the road construction industry. There is potential for further research on other areas in the sector such as investigation into factors leading to high rate of project success for donor funded road projects compared to public funded road projects in Malawi.
1.7Structure of the Dissertation
This paper has been structured in such a way that it has various chapters with particular subheadings within them. The reason for this structuring is to enhance clarity of the important issues discussed in the paper. These chapters are linked to one another and should be read as such throughout this report.
Figure 1below depicts the dissertation structure which will be followed in the subsequent sections of the dissertation. This has been included to give the researcher advance knowledge of the framework of the research.
Chapter 1 – Introduction1.1.Background
1.2.Problem statement
1.3.Justification for the research
1.4.Purpose of the study
1.5.Specific Objectives
1.6.Limitations of the study and areas for further research
1.7.Structure of the dissertation
Chapter 2 – Literature Review
2.1 Summary of general theory
2.2Review of previous work
Chapter 3 – Research Design and Methodology
3.1 Research philosophy
3.2 Research Approach
3.3 Research Strategies
3.4 Research Choice
3.5 Time Horizons
3.6 Techniques and Procedures
Chapter 4 – Data Analysis and Findings
1.1.Questionnaire Administration
1.2.Data Entry and Analysis
1.3.Causes of Delayed Payments
1.4.Effects of Delayed Payments
1.5.Solutions to Delayed Payments
Chapter 5 – Summary, Conclusions, Discussion, and Recommendations
Figure 1 - Structure of Dissertation
CHAPTER 2 – LITERATURE REVIEW
2.1Introduction
The following chapter critically reviews the existing literature related to the research topic of delayed payments to road contractors undertaken by other researchers. A literature review is an evaluative report of information found in the literature related to a selected area of study(unknown, n.d). The concept map for the research formed a guide in the literature review section of the research project. Refer to Figure 3 for the research concept map.
The literature review was carried out through books, Project management and engineering journals, conference papers, academic and masters theses, internet, newspapers and books in order to identify factors which are responsible for causing delays in making payments to road contractors and the effects the delayed payments have on the contractors and the construction industry as a whole. The sources used are secondary because of their ease to locate (Saunders, et al., 2009).
A wide range of studies on problems facing contractors in the construction industry have been undertaken in several countries, with some researchers specifically tackling the issue of delayed payments in the construction industry in their countries, emphasizing that this challenge is not only in Malawi but spread throughout the world.
2.2Main organisations involved in the road construction sector in Malawi
To ensure the understanding of the payment system in the road construction industry, below is a summary of the brief roles of the main players in the industry:
- The Roads Fund Administration
The Roads Fund Administration is a statutory organisation established by the Roads Fund Administration Act of 2006 for purposes of raising, administering and accounting for funds for the construction, maintenance and rehabilitation of public roads in Malawi (RFA Act, 2006).
The organisation is responsible for making all payments to contractors for road works and reports to the minister of finance. The sources of revenue for the Roads Fund Administration are road tolls levied on international transit vehicles for using Malawi Roads, fuel levy paid by all fuel buyers as a percentage of the fuel pump price, and parliamentary appropriations through the national budget. The Roads Fund Administration, together with the Roads Authority, as explained below, is the client in the road construction projects in Malawi.
- The Roads Authority
The Roads Authority (RA) is a statutory body which was formed in 2006 through an Act of Parliament no.3 of 2006 as a direct result of the road sector reforms in Malawi as highlighted above. Its function is to manage the road network in Malawi. The Roads Authority reports to the ministry of Transport and Public Infrastructure.