Beyond Efficiency
The Cost of Ethiopia’s Reliance on Foreign Contractors
Ethiopia has seen rapid industrial growth in recent years, facilitated by the construction of new industrial parks by Chinese multinational firms. While the government initially sought to involve local contractors in building these parks as part of a capacity-building initiative, the local firms needed help with infighting, delays, and poor-quality work. In contrast, the Chinese firms completed projects on time and with reasonable quality. As a result, the construction of significant infrastructure projects in Ethiopia, from industrial parks to government buildings, has increasingly been dominated by foreign contractors, especially Chinese ones. This reliance on foreign firms highlights the shortcomings of the local construction sector in Ethiopia, which has yet to demonstrate the expertise and reliability required for such large-scale, high-profile projects. However, this has its dents on the economy as the country spends meagre foreign currency on contractors, writes EBR’s Samuel Getachew.
With a fast-growing economy and a spike in foreign investment, Ethiopia saw a potential to accelerate that momentum by building industrial parks, which started at the dawn of the millennium more than two decades ago.
The move was ideal for creating much-needed jobs for the young population and bringing scarce foreign currency to government coffers by building the country’s industrial capacity to export light manufactured goods. The massive expansion of the textile and apparel industries was meant to generate considerable foreign currency and serve as the country’s take-off plan towards becoming Africa’s hub for light manufacturing.
With financing from the World Bank and the Development Bank of Africa, Chinese multinational firms were considered reliable for building industrial parks in a shorter period. Local contractors’ participation in the process has been decimal as the government doubted their competence and reliability.
The industrial parks have been crucial to Ethiopia as they have been to South Asian nations for the last fifty years, helping create thousands of jobs as some of these nations aspired to join the middle-income ranking. Ethiopia aspired to pursue the development path of the Asian tigers and wanted to reach the lower-bottom middle-income category in 2025. This ambition for Africa’s second most populous nation was a guiding principle for the government’s massive investment in public infrastructure projects, in which the Chinese were at the forefront as financiers and project developers.
To achieve that feat, the Horn of Africa Nation was beginning to replace its old image of famine and a prized destination for charity organizations with one that understood the wisdom to offer green pasture for foreign investment and job creation and one 3that is building the ecosystem with supportive infrastructures and policy regimes a rapid growth necessitates.
Indeed, the government considered industrial parks an effective catalyst for Ethiopia’s economic revival, focusing on building manufacturing capacity for light industrial products. The period, under the duo leadership of the then Prime Minister HaileMariam Desalegn and Arkebe Oqubay (PhD), the Prime Minister’s Special Advisory Minister, indeed saw rapid industrialization in which the share of industry to the GDP increased 9.48% in 2012 to 27.31 in 2018 according to statista.com. This German online platform specializes in data gathering and visualization. Agriculture gave way to the service sector during the period, with a share in GDP declining to 31.22% in 2018 from 44.33% in 2012.
With no child labour laws or minimum wage protection mechanisms and a young population willing to work in harsh conditions, Ethiopia appeared as the next frontier for developing industrial parks, and the country was in a rush to accommodate them by constructing infrastructure.
However, senior-ranking government officials lingeringly wondered who could build the parks meant to change the narrative of a nation grappling with famine and civil strife.
Should it be the Chinese who had earned accolades for delivering such projects on time and within budget or Ethiopian contractors with little experience as part of a transfer capacity mantra that was then popular among local citizens?
Arkebe Oqubay, the then chair of the Industrial Parks Development Corporation board and a one-time maverick Addis Ababa mayor, attempted to give local contractors a chance at building those signature government projects.
The Bole Lemi Industrial Park, Ethiopia’s specialized hub for textile, garment, and leather products, was inaugurated in 2014. It was to be the first locally constructed park. Six local contractors were awarded the chance to develop the mega industrial zone.
Ultimately, infighting, low standards, constant delay and financial overruns delayed the project, whose completion extended beyond set timelines.
A Chinese lone contractor tasked with building such an industrial park in another part of the nation could finish the project ahead of schedule under a reasonable budget backed with Chinese loans.
That move impressed the then-federal government. The government suspended the construction of Bole Lemi Park and handed over the project to a Chinese company for completion. However, due to the substandard work by the local contractors, the government was again able to demolish parts of the park and finish it, once again within budget and ahead of schedule.
From then on, foreign constructors, especially Chinese multinationals, have been tasked with constructing mega projects in Ethiopia, such as roads, airport expansion, parks, the government’s infamous palace project on the Yeka Hills, and the skyscrapers in Addis Ababa, the Ethiopian capital, among many other government priority mega projects.
Nowhere is that truer than in the Senga Tera business district in Addis Ababa, Ethiopia’s version of Wall Street. This district is now home to the headquarters of banks and cash-rich financial institutions.
“While we wanted to promote and support local contractors for our headquarters, there are few who are able to accomplish what we want and according to schedule,” a senior banking executive who asked to stay anonymous said.
Many are ambitious, and they want to do the work, but ultimately, it is wishful thinking, and we don’t want to be experimented on”, added the executive from a local bank which recently inaugurated its headquarters at Senga Tera business district.
GIZ, the development arm of the German foreign ministry, started helping the Ethiopian government to construct affordable homes at the beginning of the millennium.
The gesture was to help a growing population needing homes in a fast-changing Addis Ababa that was also starting a concurrent private real estate enterprise.
With its first housing project completed, the then-Ethiopian government pressured the agency to be in charge of construction. That partnership ended when the government began using substandard products to cut costs.
Today, while the first GIZ housing project in the Gerji neighbourhood in Addis Ababa appears as an exemplary piece of affordable construction of reasonable quality, much of the work done since has been of low standards, which have now extended to many private real-estate companies involved in for-profit housing development.
With low standards, delayed work and poor artistry, many developers are starting to turn to Indian, Chinese and Turkish workers to help them finish their projects and deliver homes to the fast-growing middle-class population with disposable income to spend. But that has not been enough.
Earlier this year, Prime Minister Abiy Ahmed announced that the government would change legislation again to open its real estate sector to foreign investors, retailers, and exporters for the first time.
The move is a massive relief to many people who have invested in local real estate but, despite paying in full, have waited many years to deliver homes. Henok Ammanuel, 44, has been waiting for years after signing on to one of the planned skyscrapers in 2007. Not only has it not been delivered to him until now, but he thinks he will never get to see it in his lifetime. The sluggish progress of construction by local builders has made him lose hope.
“I was excited to purchase such a unit long ago and the construction stopped midway, the owners fled and I have no mechanism to get any of my investments back”, he said.
Henok thinks foreign investment can be part of the solution, comparing the hospitality sector’s experiences to local real estate and the value and professionalism they can bring locally.
“Look at what the brand name hotels have done to the local economy and the hospitality sector. They came with standards and they exemplify themselves with the work they do, they are accountable and they are a hallmark of what should be done in the real-estate sector”, he reflected.
There are more than 640 licensed real estate companies in Ethiopia, but the vast majority has complained about them. Ethiopian law needs more protection for buyers. For instance, if a buyer has yet to be handed a promised housing unit, that person can only claim the principal paid and interest. The law does not factor in inflation, which builds dwindling confidence among local clients.
Solomon Assefa, a local entrepreneur with experience in the construction sector, is aware of its pitfalls.
“Execution of big projects needs expert project management. Ethiopian firms have yet to demonstrate such a skill on an appreciable scale apart from a few new players”, Solomon told EBR.
“Until then, they will always do sub-contract work under the management of bigger and more robust Chinese firms”, he added.
However, the government is conducting business as usual. The latest Adwa Victory Memorial Museum, the airport expansion and the newly planned airport city in Modjo, 70km southeast of Addis Ababa, major highways, and the local Abrehot library are some public works entrusted to Chinese contractors. Indeed, the massive greenery projects in the capital have made Addis Ababa a workshop for Chinese contractors.
Indeed, Ethiopia’s construction sector throbs with an undeniable dynamism. However, a closer look reveals vulnerability – a dependence on foreign contractors. While these companies deliver projects efficiently, dominance comes at a cost. Local contractors struggle to keep pace, often marred by delays and substandard quality. The situation calls for intervention, as fostering a robust domestic construction industry is paramount for Ethiopia’s long-term economic health. There is a need for a two-pronged approach – government policy interventions and proactive measures by local contractors themselves. By drawing inspiration from successful models like China and South Korea, Ethiopia can empower its local players to become the bedrock of its construction boom.
The current scenario presents a double-edged sword. Foreign currency used to pay these contractors strains Ethiopia’s reserves. Additionally, the limited knowledge transfer from foreign companies hinders the development of a skilled local workforce. This reality impedes Ethiopia’s ability to meet its growing construction needs sustainably.
The government has a crucial role to play in nurturing domestic capacity. Implementing mandatory skills transfer programmes within contracts awarded to foreign firms can be highly beneficial. These programmes can ensure foreign companies train local workers in advanced construction techniques, project management, and quality control. Strengthening vocational training centres focusing on construction trades can equip Ethiopians with technical expertise. Financial incentives, such as tax breaks and subsidized loans, also empower local companies to invest in acquiring cutting-edge technology and equipment. This approach improves project quality and positions them to compete more effectively for larger projects locally and further aspire to foreign markets.
Local contractors should also embrace a proactive approach. Even though they have industry associations, the platforms need boosting and reactivations so that they become one that facilitates knowledge sharing, collaboration on complex projects, and collective bargaining for better deals on materials and equipment and favourable policy. Investing in research and development can lead to the creation of innovative, locally adapted construction methods that are cost-effective and sustainable. A strong emphasis on quality control throughout the construction process will enhance the reputation of local companies and foster trust with potential clients.
Developing nations offer valuable insights here. In the early 1980s, a deliberate policy of prioritizing domestic companies fueled the Chinese construction boom. The government mandated technology transfer from foreign contractors and invested heavily in vocational training. South Korea’s success story involved a similar approach, focusing on developing a highly skilled workforce and fostering strong partnerships between domestic and foreign companies. These examples demonstrate that building a robust domestic construction industry is not a pipe dream but a path paved with strategic policy and committed local players.
While foreign expertise has its place, construction experts note that it is for the long-term benefit of Ethiopia as a country to empower its local contractors. Through a combination of well-crafted government policies and proactive initiatives by local companies, Ethiopia can transform its construction sector from a field dominated by foreign players into a thriving industry led by skilled Ethiopians; this, in turn, will not only address the immediate challenges of foreign currency strain and knowledge gaps but also lay a strong foundation for sustainable economic growth driven by local ingenuity and expertise. EBR
EBR 12th Year • July 2024 • No. 130