Thanks to big corporations and financial companies, Addis is becoming a city with a high number of buildings compared to east African cities. Many of these buildings were constructed by local contractors that were able to learn fast in the past two decades, though not free from flaws. Majority of buildings constructed by local contractors lack quality and basic infrastructures and have very similar designs. Frustrated, many builders are now turning their backs on local contractors, while strengthening their ties with the foreign ones, particularly those from China. Almost all big buildings, roads and dam projects throughout the country are being handled by Chinese contractors. EBR’s Ashenafi Endale investigates.
In the past, domestic contractors used to involve immensely in the construction sector. From roads, buildings to real estate development projects, local contractors had the upper hand. But this trend seems to running out of the magic that has propelled it for the last 15 years and is now shrinking. While the sun sets on domestic contractors, the construction sector is opening its door wide to Chinese contractors. Almost all capital and technology intensive construction projects ranging from airports, highways, railways, to building construction projects above 20 storeys are now awarded to Chinese contractors.
Of course, construction works that demand large labor numbers like foundation works, as well as the supply of metal and building blocks are still dominated by local contractors. However, the consequential player in Ethiopia’s construction sector is shifting from domestic and non-Chinese actors to Chinese contractors. The recent decision by the Ethiopian government to award a portion of the 12-kilometer-long Addis Ababa riverside development project, previously given to Geom Luigi Varnero, to First Highway Engineering Group, a subsidiary of China Communications Construction Company (CCCC), speaks volumes of how cozy and comfortable the country is becoming with Chinese contractors. The government also recently awarded a new and complex 3.4-kilometer-long road project stretching from Pushkin Square to Gotera Interchange, to the same Chinese contractor.
Just 15 years ago when close to ten giant domestic contractors like TACON, Sunshine, Sur, Afrotsion and few others were emerging as leading local contractors, the first Chinese contractor built the Addis Ababa Ring Road and firmly set its foot by erecting the Ethio-China monument in front of the Bole International Airport afterwards. Their participation eventually started to increase but at slow pace. According to Ethiopian Roads Authority (ERA), 22 Chinese contractors built 68 road projects between 1997 and 2016 at a cost of ETB38 billion. But this has started to change in recent years.
Out of the 32 major international contractors in Ethiopia working in 2017, for instance, 80Pct were Chinese, completely outplaying domestic and European contractors, according to the report ‘Chinese Overseas Contracted Projects and Economic Diversification in Angola and Ethiopia between 2000 and 2017,’ which adds that at least six of the top ten international contractors in Africa since 2014 are Chinese, with the rest from France, Italy, Turkey, Brazil and UAE.
Revenue from finalized engineering contracts by Chinese contractors in Ethiopia stood at USD2.3 billion in 2012 alone, with the value of newly signed contracts topping USD5.2 billion during the same period, according to the Chinese Chamber of Commerce. The figure was an aggregate of USD686 million between 1998 and 2007. This has now reached an estimated more than USD10 billion.
“I do not know much about the industry but our market in Ethiopia is growing very fast. We do not have much competition in Ethiopia,” says Li Xiu Dong, a project manager at CCCC Ethiopia office, which was opened in 2018 to closely handle its increasing projects in the east African nation. CCCC is now finalizing the second-phase expansion project of Bole International Airport, financed by China Exim Bank, with great zeal and efficiency. Including these, CCCC is now undertaking seven large projects in Ethiopia.
CCCC is one of three leading global contractors, ranking 91st out of the top 500 enterprises in 2018. The Company first set its foot in Ethiopia in 1998 when it built Addis Ababa’s first ring road project. This was followed by many projects including the construction of Bole Road. Since then, it has efficiently finalized highways, airports, railways, industrial parks, and real estate development projects. Commercial Bank of Ethiopia’s 52-storey building is CCCC’s largest project in Addis Ababa, and will be the tallest building in east Africa once finalized.
Chinese CGC Overseas Construction (CGCOC) also has a reputation across Africa, including in Ethiopia where it has constructed the Ethiopian Glass Factory and the Nile River bridge project. Currently, it is constructing the Addis-Africa International Convention and Exhibition Center (AAICEC), which it won out of ten shortlisted firms, including the local giants Tekleberhan and Afrotsion. CGCOC is also constructing Ethiopia Electric Power’s 34-storey headquarters at a cost of ETB2.4 billion, adding to its road construction projects which it received from ERA.
“Domestic contractors lack the capacity to execute complex projects demanded at this economic stage. We could not even find a local contractor on subcontracting terms for the airport expansion project, so even the subcontract work is given ti foreign contractors,” says Niguse Tekle (PhD.), Project Manager of the Airport Expansion Project at Ethiopian Airport Enterprise.
Currently, there are over 1,300 projects being constructed by Chinese contractors in Ethiopia, up from 415 in 2011, according to Liu Yu, Minister Councilor at the Chinese Embassy in Ethiopia.
China’s modern times’ engagement in Ethiopia particularly started when China dispatched medical doctors and agricultural experts in the 1970s. “At this moment, the relationship is more of a brotherly friendship and development partnership. It is beyond treaties, providing support and the diplomatic relationship is a model for all African countries,” Yu adds. “Various outstanding projects in infrastructure and urban development in Ethiopia are accomplished by Chinese firms. Chinese firms are heavily investing in industrial parks, airports, railways, highways, and modern building complexes to contribute to the development of the country.”
Close to half of the 70 Chinese contractors in Ethiopia are state-owned, according to Wen Yingzheng, Head of Chinese Chamber to Ethiopia. “The big ones are state-owned. But all Chinese contractors are successful in many sectors. They have the quality, efficiency and track record,” explains Yingzheng.
Besides road and building projects, as well as developing a number of industrial parks like the iconic Hawassa Industrial Park, Chinese firms also built the Tekeze, Gibe IV and Halele Warabesa dams. This is in addition to their contributions in transport infrastructure, including railway, which is critical for landlocked Ethiopia.
Globally, China is also outmaneuvering international competitors in the areas of transport and logistics, housing, electricity, telecommunications, and the construction of chemical, industrial, sewerage and irrigation facilities. The expansion of Chinese contractors into sub-Saharan economies is a recent phenomenon. Since the Belt and Road Initiative was unveiled in 2013, Chinese contractors exponentially increased in the non-oil economies of east Africa. Showing a decline, on the other hand, in oil-based economies like Angola, Nigeria and Equatorial Guinea, following their recessions induced by a fall in oil prices. Close to 80Pct of Chinese financing in sub-Saharan Africa goes to road and railway projects, according to Engineering News Record. The share of Chinese contractors of the total construction projects given to foreign companies in sub-Saharan Africa topped to 60Pct in 2017, up from 15Pct in 2004.
China is currently implementing resource for infrastructure (RFI) in Ghana and Angola, a trend Japan implemented in China in the 1970s. African economies that have oil and minerals, supply the resource to Chinese companies as debt settlement for infrastructure developed by China. This is because they cannot pay the debt due to raw mineral price fluctuations. Its RFI policy has helped the far eastern giant increase its influence in Africa.
Ethiopia is the leading country in sub-Saharan Africa with the highest number of Chinese contracted projects worth close to USD6 billion, up from USD3.56 billion in 2013. Chinese projects in Ethiopia constitute 50Pct of public, 17.5Pct of energy and water, 16.3Pct of manufacturing, and 13Pct of telecommunication projects. On the other hand, revenue from Ethiopia has been consistent with the peak of Chinese contracts worth USD6.8 billion finalized in 2014, constituting 7.7Pct of Ethiopia’s GDP, higher than the 6.1Pct in Angola.
This is not surprising for Birhan Kassa, Founder and General Manager of BKGC and Loza Construction, and who has 25 years of experience in Ethiopia’s construction sector, before giving it all up two years ago. “Local contractors mushroomed in Ethiopia over the past two decades by winning and executing projects unprofessionally. Most of them have been enjoying favors from the political regime,” Birhan says. “Major projects from public university buildings to district-level projects were given directly to local companies affiliated with the ruling party.”
Many contractors that failed professional qualifications and bid requirements have survived till date, simply because they are run by people involved with ‘back-scratching’ with officials while many professional and genuine contractors are pushed out of the market and exit the industry, as they are eliminated from bids and deliberately levied with higher taxes, according to Birhan. “Genuine contractors who do not use the backdoor are lucky if they win a project within four years. Currently, those contractors that were politically oriented and are still active in the industry have been busy stashing their money after the political shift of April 2018. They are currently caught up in suspicion with a government unable to draw a definite line between corrective action or pardon,” he says. “They have amassed a significant portion of the economy in the past. An asset not only of theirs, but also of the country’s. But they do not have full confidence in the new administration, so they refrain from taking on new construction activities. Some of them have already dissolved their companies, stashing even the advance capital they took for projects.”
For Birhanu, most of the new projects are being awarded to Chinese contractors, partly to fill the vacant space created by the local contractors. The Chinese contractors also have another opportune advantage. They have ample subsidies from the Chinese government, and their bankers at home supply loans directly, giving them up to four years to repay, according to him. “Further, the government’s preference in awarding road and condo subcontract projects for small and medium enterprises totally killed our working culture, besides not being successful.”
Many industry insiders argue that picking Chinese contractors over domestic contractors is like choosing efficiency and faster development over the delaying of projects and poor quality. Some also blame domestic contractors for not upgrading themselves within the time and preference which they were afforded. This is also linked to the political dynamism in Ethiopia and economic diplomacy with China, according to insiders. “Chinese contractors have all the capacity and deliver any project on time. Ethiopian contractors, however, lack technology, coordination, capacity and skill. Local contractors usually delay projects and make unnecessary price revisions, forcing project owners to incur huge additional costs,” argues Sileshi Zegeye, Director of communication at the Ministry of Urban Development and Construction. “So, the preference towards Chinese contractors continues until local contractors manage to improve in every aspect.”
Tsedeke Yihune, Founder and Manager of Flintstone Homes, disagrees. For him, it is a problem in policy and corruption that is allowing the Chinese to dominate rather than the weakness of local contractors. “Officials even officially prefer Chinese contractors, even though the law does not allow it. They think locals cannot and the Chinese can, a perception which is biased and should also be legally punishable,” he says.
The construction industry is currently filled with a new type of corruption and the market is controlled by few groups, who have replaced older looters and corrupts, according to Tsedeke. “The construction sector has never been free of corruption. In the past, it was local companies that were involved in corruption acts and now they are replaced by Chinese contractors. The corrupt older contractors now have no projects and say that construction industry is slowing down, which it is not. The new group is also inflating project prices illegally. They are also inflating prices of rebar, cement and all other inputs.”
Public projects in Ethiopia partially involves a political decision since the Ethiopian government guarantees the loans. For now, Chinese contractors and the backing business diplomacy have become a perfect solution for the Government of Ethiopia, which is struggling with postponing essential projects and keeping the fiscal deficit below three percent of GDP. However, the Ethiopian government is also worried of bad debt ratings. The Ministry of Finance announced that it stopped commercial loans since 2018, after its external debt alarmingly climbed to USD30 billion, half of which is owed to China. Considering China’s reputation of supplying excessive loans to African nations that cannot return then claiming major stakes in that economy—like China’s claim to overtake Mozambique’s national carrier or Djibouti’s airport—experts stress that the rosy business partnership can turn bad anytime and put the country under a debt trap.
Others argue Ethiopia’s dependency on China as a result of a single-direction foreign policy, which can drain away at once, in any case of change in the global political arena. The fact that foreign contractors takeout their profits whenever possible is another disadvantage for Ethiopia, according to observers. Other critics argue China’s vast investment in developing nations like Ethiopia is not a debt trap but part of its own foreign policy strategy. Economic dominance is China’s ultimate target in the far future, as opposed to political dominance perpetuated by its western rivals, according to studies. The increasing Chinese investment in Africa and other developing economies is also part of the Belt and Road Initiative (BRI), which is more beneficial to China than the hosting countries. The World Bank estimated the BRI can cost China USD575 billion, of which 18Pct is destined to sub-Saharan Africa. Other estimations put the figure at over USD1 trillion.
Although the official discourse that the BRI is open for contractors from all over the globe, the reality is the contrary. The initiative is dominated by Chinese contractors at the expense of domestic ones, according to researches. Chinese contractors have already amassed construction contracts worth USD340 billion, owing to the initiative, which touches close to 70 economic corridors. Critics conclude that the initiative is rather looking to reduce excess capacity at home in China, just like it pushed out its small and medium level industries in order to create space for technology-intensive industries at home. But this comes at a cost, adversely impacting local contractors and it is no different in Ethiopia.
One of the major problems for Ethiopian contractors is the lack of domestic financial arms, like specialized banks in infrastructure and housing project financing. The construction industry is usually financed by the government or with inconsistent flying money from the commercial side. Relatedly, because the link between local contractors and conventional banks is weak, the banks tend to give the contracts of their headquarters’ construction unanimously to Chinese contractors, though awarded through proper tendering processes, according to industry insiders. Birhanu hopes that there are possibilities to resurrect local contractors. “I am sure local contractors have not totally submitted to Chinese dominance. There are local contractors who learn the hard way and still have the gut to contest the Chinese contractors,” Birhanu says. “We do not need favors but it will be great if government removes the shackles that are hindering us from working.”
However, for Abebe Dinku (PhD.), a Professor of civil engineering and Head of civil engineering department at Addis Ababa University Institute of Technology, the whole problem emanates from the weaknesses of local contractors and loopholes in the Ethiopian procurement system. “Ethiopia’s construction sector has reached a new chapter where financial muscle, quality, and higher capacity are required to efficiently and swiftly undertake huge projects the economy is demanding in all aspects. Unfortunately, there are no local contractors that are ready to do so,” he explains. “Designs are getting complicated and projects becoming machinery-intensive. All big projects are being awarded to foreign contractors since our contractors do not have the required capacity. The technological, skill and financial capacity of our contractors is limited to less than 20 storeys and foreign companies have a better track record and profile to beat locals in bids,” says Abebe.
However, there are more reasons why locals are failing in road and building projects, in which they have at least 20 years of experience. The major problem to this end is local contractors cannot commence a project unless the client provides initial working capital upfront in international bids, which is not possible for local companies. This weakness is the biggest door-opener particularly for Chinese contractors, which can access finance from their banks at home. This is reality is especially true for public projects in Ethiopia.
Abebe, who has witnessed this, says the Ethiopian government is reluctant to enforce the recommendation to ensure subcontracts for local contractors of up to 40Pct mandatory and also to engage small and medium enterprises in the value chain. “We have also advised the creation of joint venture enterprises for all new projects, at least under a 70/30 arrangement, between the foreign and local firms, or even to establish a totally new company. But there is no such culture.”
Dong from CCCC disagrees. “We have 800 local engineers and thousands of local workers. We have created over 5,000 job opportunities. We have close to six subcontractors, particularly in road, building and finishing works. We usually work hand-in-hand with local grade-one contractors. If we win bids, we subcontract part of the project to them. If they win, they subcontract it to us because they need knowledge and technological capacity.”
Be that as it may, two scenarios define what put Ethiopia’s construction industry off-track over the past three years, down from the most expansive boom stayed for fifteen years, according to Abebe. The first is the deterioration of peace and security in the country. Secondly, demand for construction has increased exponentially, while the supply side constraints particularly upon domestic contractors have significantly increased. Additionally, the reluctance of Ethiopian firms to invest in research and development (R&D) is the main reason for the inability of local contractors to equally bid with foreign contractors, stresses Abebe. Adding that “if local contractors could commit themselves to invest at least one to two percent of their annual profit in R&D, they could find ways to throw themselves back in the business.”
But for Tsedeke, what is more important is the opening up of the financial sector and the relaxing of the foreign exchange regime, if domestic contractors are to compete with foreigners on an equal footing. “We can catch-up only if we can access foreign currency and freely import inputs, machineries, and experts as well as access loans from foreign banks.”
8th Year • Dec.16 – Jan.15 2020 • No. 81