The World Bank has issued a new procurement rule mandating that, for Bank-financed civil works contracting, bidders must allocate 30 percent or more of the total labor cost under the contract to employ local staff, unless otherwise agreed in project negotiations. The rule isn’t likely to have much effect on contracting decisions or employment, nor any on broader development outcomes. But it does add unnecessary bureaucracy to an already burdensome process.
Notably, the World Bank’s advertising materials for the new rule don’t provide any data on how often less than 30 percent of labor costs on internationally awarded World Bank-financed civil works contracts have been spent on local hires in the recent past. My guess would be “not very often.” And where it did happen, it would be in smaller projects, usually in small borrower countries, with weak local construction markets. Those, of course, are the kind of projects where you’d probably hope for an exception to the new policy for the sake of development impact.
The likely targets of the new rule are Chinese firms, which dominate when it comes to World Bank-financed construction contracts awarded to companies outside the borrower country. But stories of Chinese workers doing all of the jobs on construction sites are both outdated and exaggerated. Gross annual revenues of Chinese firms engaged in engineering and construction projects in Africa, for example, peaked in 2015 and have been slowly declining since then. But, perhaps connected to rising Chinese labor costs and greater knowledge of local labor markets, the number of Chinese construction workers in Africa, which peaked in 2015 as well, at around 275,000, has declined far more rapidly: it is now below 100,000. (The global total of overseas Chinese construction workers fell from 520,000 in 2017 to 260,000 in 2022.) Meanwhile, surveys suggested that in 2017, 90 percent of workers employed in Chinese firms in Ethiopia were local, and 74 percent in Angola. Across Chinese-managed projects in Africa in 2010, an estimated 87 percent of jobs went to locals.
In terms of overall development impact, it is hard to underestimate the likely effect of the policy, not only because it will probably not be relevant or binding in most cases, but also because World Bank projects that use Chinese contractors get similar World Bank development outcome ratings to projects using local contractors (and slightly better ratings than projects that use French contractors). And looking at employment, what evidence there is suggests Chinese-financed projects in Africa are associated with rising local employment in part through an impact on industrialization.
But more to the point, both World Bank-financed international construction contracts and Chinese international construction labor account for a tiny percentage of the global construction market, while Chinese contractors receive a very small amount of total World Bank financing. From FY20 to FY24, the Bank financed on average $5.3 billion of international works procurements yearly. For comparison, global construction spending is about $13 trillion annually, so Bank financing accounts for 0.04 percent of the total. There are roughly 230 million people employed in construction worldwide. Chinese construction workers overseas account for around 0.1 percent of that workforce. And Chinese firms have been winning about $1.4 billion a year in World Bank-financed contracts outside China, or about 2 percent of World Bank lending. This policy is aimed at an extremely small subset of extremely large markets.
There are still costs to the red tape that this policy will impose. Until earlier this year (when we saw unfortunate new mandates around procurement scoring rubrics), the Bank’s direction in procurement policy had been toward greater flexibility for clients—more choices in approaches and the ability to use their own rules, for example. And World Bank procurement regulations already allowed for borrowers to use domestic preference provisions to give a price advantage to local bidders if they wanted to.
When it came to local labor requirements, procurement rules could have followed this earlier pattern and given clients the option to add them. The Bank provides a number of reasons why local labor sourcing might add to the national economic impact of a Bank-financed project. If borrowers found these reasons compelling, under an optional strategy, they could have decided to use local labor requirements. If they didn’t in particular cases—perhaps because the needed skills weren’t available locally, or simply because they believed in the benefits of open international exchange that the World Bank usually promotes in its policies—they could have decided not to use the option.
But instead, under the new policy, all borrowers contemplating international civil works contracting will be required to develop a comprehensive assessment of the capacity and availability of the local labor market and develop indicators to track compliance. All bidders on internationally advertised works contracts will be required to outline the roles to be filled by local personnel and their hiring strategy alongside proposals to develop skills, all to be scored by the borrower as part of the evaluation process. All contractors on those works projects will then have to provide monthly reports, and borrowers quarterly reports, on compliance. Notably, there is no evidence that local firms will be excluded from any of those requirements, and they are likely to be the majority of both bidders and contractors (even) on internationally bid procurements.
This added bureaucracy is a problem, especially given the recent World Bank Independent Evaluation Group report on procurement which highlighted the urgent need to further simplify the Bank’s rules and procedures. It noted that project-level procurement strategy documents that borrowers fill out aren’t actually helpful to borrowers, nor are more complex procurement approaches. And 58 percent of World Bank project managers reported borrowers have difficulty providing procurement tracking information (while only 18 percent of project managers said that the system helps borrowers). Direct surveys of the World Bank’s borrowers rate the complexities and delay of the institution’s processes as one of the Bank’s greatest weaknesses.
That all suggests that even if the new 30 percent rule is rarely binding on procurement outcomes, it will still add considerable further sludge to the process of working with the Bank, and make the institution less attractive to clients.
Why this recent shift away from a years-long process of making procurement rules more responsive to client needs? It smacks of pandering to stakeholders concerned about optics around China rather than outcomes for World Bank clients. I hope if those stakeholders approach other multilateral development banks, the regional banks show a bit more backbone: allow countries to use local employment minima or quality-weighted scoring rubrics if they think it makes sense and might make a difference. But make it optional and cut the red tape.
