Past Reconstruction to Constructing Rwanda

Twenty years after the genocide in Rwanda, things seem to be looking a bit brighter. With an average annual growth rate of eight percent since 2001 and over one million people lifted out of poverty, Rwanda is poised to continue growing by leaps and bounds. Even so, 20% of Rwanda’s economy comes from foreign aid, only trailing its exports of coffee and tea. As with most developing countries, one of the most visible signs of growth is the new buildings sprouting from the ground around the capital of Kigali. As impressive as office buildings and shopping malls are, it remains to be seen how beneficial these structures are to the economy and people of Kigali and other developing cities.

Construction workers in Kigali

The benefits of the construction industry in developing countries is clear. The global construction industry was approximately $1.7 trillion in 2007, and typically accounts for 5-7% of each country’s GDP. Jobs in the construction sector tend to be low-skill jobs, something that most developing countries, and especially Rwanda, have in abundance. A report by the International Labor Organization (ILO) found that workers in places as diverse as India, Brazil, and China were significantly more likely to be illiterate and have few years of schooling. Construction is also an investment, as there are roads, buildings, and other structures that can be used to house offices, transport goods, and improve the human and business capabilities. Kigali is already one of the most urbanized cities in Africa, and is expected to grow by 79.9% by 2025. Construction in Kigali and satellite cities is meant to ease congestion of an already dense capital of a densely-populated country.

Map of Rwanda

There are some issues with the construction industry in the developing world. The first one involves property rights. Large amounts of people in cities in the developing world don’t have a title or ownership to the land that they live on, especially in slums. Hernando de Soto, president of the of the Institute for Liberty and Democracy in Peru, has referred to slums as “dead capital”, alluding to the idea that people make improvements by building shantytowns but are not able to use it for collateral due to red tape. The perniciousness of not actually owning the land that one’s house is built on is even worse. In Kigali, 70% of housing is informal, with the government proposing to demolish that housing and creating more high-density areas and rent-to-own schemes. However, housing in the suburbs of Kigali currently typically costs 25,000 francs ($36.87) a month in a country where 45% of people still live below the poverty line. There’s a fear that parts of Kigali could end up like Nova Cidade de Kilamba, a suburb of Luanda that is a ghost town built and funded by the Chinese.

Developing countries, and Africa in particular, have been raising questions about who benefits from the construction industry. Recent reports by investigative journalists from the Forum for African Investigative Reporters (FAIR) in Kigali have found that foreign firms, notably the Chinese, have done a substantial portion of construction. The Chinese are able to undercut local firms by using Chinese contractors backed by subsidized loans provided by the Chinese state. An operations engineer at a Chinese company working in Rwanda stated that his company could get loans with an 8% interest payment while Rwandan companies could only obtain loans with 17-18%, if they could even get a loan at all.

The view of Kigali’s town center and surrounding areas

There is a final concern about construction and corruption. Since construction contracts tend to be a fee and cost of materials, construction companies tend to be implicated more frequently. They overstate the amount of labor used on a project, pocketing the difference. One field experiment in Indonesia found that an increase in official audits of construction projects reduced missing expenditures of labor, ie nonexistent workers, by between 14 and 22%. Construction and engineering companies dominate the current World Bank list of debarred firms, the largest of which was SNC-Lavalin, a Canadian firm, which was debarred over bribery charges around the $1.2 billion funding of the Padma bridge in Bangladesh. Because of these troubling factors, questions, concerns, and confidence over construction in cities like Kigali will continue to surface.

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New and Improved: Top Economies for Business Reform in 2012/2013

The World Bank’s Doing Business Index measures the ease of doing business in countries around the world. The highest-ranked countries have the simplest regulations on businesses and the strongest protections of property rights, which together enable a thriving private sector. A country’s ranking is based on its scores in ten areas: ease of starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency. The World Bank scores countries in these areas by studying laws and regulations and consulting with in-country government officials and professionals. The recently-published 2014 index ranked Singapore as best in the world, followed by Hong Kong, New Zealand, the United States, and Denmark.

Since the first Doing Business index was released in 2004, countries have made an effort to reform their regulations and remove the “bureaucratic obstacles to private sector activity” to improve their rankings on the index. The “most-improved” countries that best reformed their regulatory systems between 2012 and 2013 were Ukraine, Rwanda, the Russian Federation, the Philippines, and Kosovo. While these countries are still generally ranked low on the Doing Business index, they were able to improve their scores and their business climates in the past year.

Top Reforming Countries

Country

2013
Ranking

2014
Ranking

Ukraine

137

112

Rwanda

52

32

Russian Federation

112

92

Philippines

138

108

Kosovo

98

86

“Most Improved” Countries, 2014 v. 2013 rankings

This is not the first time Ukraine and Rwanda have been on the “most-improved” list; Ukraine placed second between 2011 and 2012, and Rwanda was ranked the second-best reformer in the six-year period between 2005 and 2011. In the past five years, the two countries have implemented reforms in every area measured in the Doing Business index.

Between 2012 and 2013, Ukraine simplified many of its complicated procedures, making many aspects of doing business in the country easier. It streamlined procedures for registering businesses and obtaining construction permits, simplified tax forms, implemented a new customs code which makes it easier to import and export, and changed the bankruptcy laws so that insolvency can be resolved easier.

During the same period, Rwanda made it easier to obtain a registration certificate for a business, streamlined the processes to obtain construction permits and transfer property, and strengthened protections for investors. Rwanda has also been using technology to streamline its business processes, implementing the online Land Administration Information System for processing land transactions, rolling out an electronic tax filing system for businesses, and introducing an electronic single-window system at the border to make cross-border trade easier.

Ukraine and Rwanda are still hardly the best places in the world to conduct business; Ukraine is ranked 112th overall, and Rwanda is ranked 32nd. Nevertheless,  these countries have been making a serious effort to improve their business environments, because doing so can lead to huge payoffs.

International businesses entering new markets look to the World Bank’s Doing Business index to determine whether they should invest in or move into a country. A good score, especially compared to a country’s regional neighbors, can help that country attract foreign direct investment, bringing capital and employers into the country. The Doing Business index is not only providing incentives for improvements in regulations and property right enforcement, but is also making it easier to track such reforms in countries like Ukraine and Rwanda.   

UK’s “Volatile” Aid Policy to Rwanda

After suspending aid to Rwanda for the second time in 2012, UK’s Department of International Development (DfID) controversially restored its aid package in early March.

UK’s aid to Rwanda was said to be “funding a dictator” by a former aide to the President of Rwanda.

Tracing back to UK’s first halt on the Rwanda-destined aid in last July, it’s clear that DfID’s aid policy to Rwanda can be inconsistent. The first halt was announced due to an interim UN report that unveiled Rwanda’s military involvement in the DRC conflict, according to the Guardian. Contentiously, DfID resumed the aid, claiming that Rwanda was shown to have ended its support of rebels in DRC. Roughly two months later, the new DfID Secretary, Justine Greening made the decision of suspension again because of the international criticism and subsequent evidence from the UN. But now, DfID presents the world with a “reprogrammed” aid plan to the same Rwandan government.

Based on Greening’s statement on March 1st and the Guardian’s report, UK’s “reprogrammed” funding enjoys the following “advantages” that target on the needy Rwandans directly while bypassing the Rwandan government:

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Giving Aid an X-Ray

As evidenced by its extremely low GDP per capita and high poverty rate, Rwanda is a poor nation. The country has hence received a substantial amount of foreign aid from a variety of sources. Though still impoverished, Rwanda has actually managed these resources quite well, somewhat recovering from a devastating civil war that only ended about 15 years ago. On the surface, Rwanda looks like a success story and a model for other underdeveloped nations to follow. If looked at closely, however, it is immediately apparent that things could be much better.

Though Rwanda has a decent infrastructure of receiving and disbursing aid, the information that the country collects varies greatly, depending on the agency receiving it. Numerous government agencies are involved in the aid process, and at least six of them receive different sets of data. Additionally, the different information is rarely shared between groups. This wild variance of facts and statistics often leads to differing plans of actions from the agencies, and the lack of transparency and commonality between the data causes confusion and frustration. Continue reading