Performance guarantees a bone of contention in construction industry

Home Business Performance guarantees a bone of contention in construction industry

WINDHOEK – The Namibia Chamber of Commerce and Industry (NCCI) is appealing that the government urgently remove the requirement for only commercial bank-issued performance guarantees in the construction industry and to allow contractors to source performance guarantees from the Development Bank of Namibia as well as licenced insurance companies. This appeal is supported by the Construction Industries Federation (CIF). 

The National Union of Namibian Workers (NUNW) has taken the issue a step further, calling for a total abolishment of performance guarantees in construction, saying the requirement is crippling the local industry which has a detrimental effect on workers.  

Performance guarantees are required in the construction industry to ensure that contractors honour their contractual obligations and in cases where their performance falls below agreed standards and timelines, such performance guarantees could be called up for compensation to clients. 

According to the NCCI’s chief executive officer, Charity Mwiya, the Chamber has learnt from a number of its members in the construction sector about the stringent requirements for performance guarantees which have affected a number of small and medium enterprises (SMEs) in this sector.

Mwiya is concerned that most public institutions and state-owned enterprises demand performance guarantees issued exclusively by commercial banks for services procured from the private sector. This requirement, said Mwiya, has disqualified any performance guarantees issued by the Development Bank of Namibia (DBN) or insurance companies which are considered easier and cheaper by SMEs.

“There is absolutely no reason to believe that it is only commercial banks which have the ability to avail financial resources when such performance guarantees are called up, or that neither DBN nor reputable non-banking financial institutions would not be in a position to honour performance guarantees they have issued to public institutions. We see this requirement as a deliberate move to favour more well-established companies with assets which they can use to raise performance guarantees from commercial banks and lock out SME players. Public institutions should not be bothered by where performance guarantees are sourced but rather whether issuing institutions, regulated by the Namibia Financial Institutions Supervisory Authority (Namfisa), are in a position to honour such performance guarantees,” said Mwiya. 
She added that the NCCI is extremely concerned that in the current economic environment, where most businesses find it difficult to survive, such conditions which make it harder for local SMEs to supply goods and services to public institutions will only worsen the already difficult business environment. 

Weighing in on the discussion, consulting general manager at the CIF, Baerbel Kirchner, noted that the Federation actually met with the Minister of Finance, Calle Schlettwein, earlier this month and proposed that government reviews and changes the demand guarantees which normally are not accepted by financial service providers other than the commercial banks. 
“Instead, payment guarantees are more likely to be issued by insurance companies and DBN. The CIF encourages that. We need to increase access. In the current state of the economy, where most construction businesses are struggling, this would be advantageous for everyone needing a guarantee, but especially also the SMEs,” said Kirchner. 

Meanwhile, the secretary general of the NUNW, Job Muniaro, has taken the appeal a step further and called for the total abolishment of performance guarantees in construction. Muniaro argues that because construction firms provide collateral to commercial banks, the guarantee is actually provided by the relevant firm. 
“Even the new proposal for extended performance guarantees should be abolished. If I can provide my own guarantee in the form of collateral then why should I get a guarantee from a financial institution? That guarantee itself has no value,” Muniaro contested.