Thanks to big corporations and financial companies, Addis is becoming a city with many buildings compared to East African cities. With its challenges, many local contractors have built magnificent buildings in the past two decades in the capital and the rest of the country. Most structures built by local contractors need more quality and basic infrastructures and have similar designs. Frustrated, many builders are now turning their backs on local contractors while strengthening their ties with foreign ones, particularly those from China. Chinese contractors run the country’s significant buildings, roads and dam projects. This article is an updated version of earlier content published on EBR, 8th Year • Dec.16 – Jan.15 2020 • No. 81.
In the past, domestic contractors were immensely involved in the construction sector. From roads, buildings to real estate development projects, local contractors had the upper hand. But this trend is 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 opens its door to Chinese contractors. Chinese contractors run most capital and technology-intensive construction projects, from airports, highways, and railways to building construction projects above 20 storeys and even [recreational parks].
Of course, construction works that demand large labour numbers, like foundation works and 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-kilometre-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 cosy and comfortable the country is becoming with Chinese contractors. The government also recently awarded a new, complex 3.4-kilometre-long road project stretching from Pushkin Square to Gotera Interchange to the same Chinese contractor.
But this has started to change in recent years. Just 18 years ago, when close to ten giant domestic contractors like TACON, Sunshine, Sur, Afrotsion and a 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 a 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.
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.
According to the Chinese Chamber of Commerce, revenue from finalized engineering contracts by Chinese contractors in Ethiopia stood at USD 2.3 billion in 2012 alone, with newly signed contracts topping USD 5.2 billion during the same period. The figure was an aggregate of USD686 million between 1998 and 2007. This figure reached an estimated more than USD10 billion three years ago.
“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 the CCCC Ethiopia office. It opened in 2018 to closely handle its increasing projects in East Africa. 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 undertaking about a dozen large projects in Ethiopia.
CCCC is one of three leading global contractors, ranking 91st among the top 500 enterprises. The Company set foot in Ethiopia in 1998 when it built Addis Ababa’s first ring road project. Many projects, including the construction of Bole Road, followed this. 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 most significant 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 Ethiopia, where it has constructed the Ethiopian Glass Factory and the Nile River bridge project. Currently, it is making 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 the 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 to foreign contractors,” says Niguse Tekle (PhD), Project Manager of the Airport Expansion Project at Ethiopian Airport Enterprise.
Currently, over 1,300 projects are being constructed by Chinese contractors in Ethiopia, up from 415 in 2011, according to Liu Yu, who was then Minister Councilor at the Chinese Embassy in Ethiopia.
China’s modern times’ engagement in Ethiopia mainly 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 country’s development.”
Approximately half of the 70 Chinese contractors in Ethiopia are state-owned, according to Wen Yingzheng, then Head of the 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 and developing several 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 to transport infrastructure, including the railway, which is critical for landlocked Ethiopia.
Globally, China is also outmaneuvering international competitors in 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 2013, the Year China unveiled the Belt and Road Initiative; Chinese contractors have exponentially increased in the non-oil economies of East Africa. On the other hand, it shows a decline 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 in 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 with oil and minerals supply help 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 African influence.
Ethiopia is the leading country in sub-Saharan Africa, with the highest number of Chinese contracted projects worth nearly 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, 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 survived because of the people involved with ‘back-scratching’ with officials who own and run them. In contrast, 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 meddling 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. However, what they have now is truly an asset of theirs and the country because they possess it. But they do not have full confidence in the new administration, so they refrain from undertaking new construction activities. Some 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. According to him, they have generous subsidies from the Chinese government, and their bankers at home supply loans directly, giving them up to four years to repay. “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 delaying projects and poor quality. Some also blame local contractors for not upgrading themselves within the time and opportunities availed over the years. According to insiders, this has much to do with Ethiopia’s political dynamism and economic diplomacy with China. “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, then 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 policy and corruption problem that allows 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 a 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 the 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 involve a political decision since the Ethiopian government guarantees the loans. For now, Chinese contractors and the backing of 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 per cent of GDP. However, the Ethiopian government is also worried about debt ratings.
The Ministry of Finance announced that it stopped commercial loans in 2018 after its external debt alarmingly climbed to USD30 billion, half of which goes to China. Considering China’s reputation of supplying excessive loans to African nations that cannot return then claiming significant 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 results from 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 that China’s vast investment in developing nations like Ethiopia is part of its foreign policy strategy, not a debt trap. According to studies, economic dominance is China’s ultimate target in the far future, as opposed to political dominance perpetuated by its Western rivals.
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 could cost China USD575 billion, of which 18Pct goes to sub-Saharan Africa. Other estimations put the figure at over USD1 trillion.
Although the official discourse is that the BRI is open to contractors from all over the globe, the reality is the contrary. According to research, Chinese contractors dominate the initiative at the expense of domestic ones. Chinese contractors have already amassed construction contracts worth USD340 billion, owing to the industry, which touches close to 70 economic corridors. Critics conclude that the initiative is instead looking to reduce excess capacity at home in China, just like it pushed out its small and medium-level industries to create space for technology-intensive sectors at home. But this comes at a cost, adversely impacting local contractors, and it is no different in Ethiopia.
One of the significant problems for Ethiopian contractors is the need for more 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 could be more vital, 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 favours, but it will be great if the government removes the shackles that are hindering us from working.”
However, for Abebe Dinku (PhD.), a Professor of civil engineering and then Head of the 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 demands 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 need to improve road and building projects in which they have at least 20 years of experience. The major problem is that local contractors can only commence a project if the client provides initial working capital upfront in international bids, which is impossible for local companies. This weakness is the biggest door-opener, particularly for Chinese contractors, which can access finance from their banks at home. This 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 engage small and medium enterprises in the value chain. “We have also advised creating 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 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 that stayed for fifteen years, according to Abebe the following are key reasons. The deterioration of peace and security in the country; Demand for construction has increased exponentially, while the supply side constraints, particularly upon domestic contractors, have significantly improved; and the reluctance of Ethiopian firms to invest in research and development (R&D) is the main reason for the inability of local contractors to bid with foreign contractors equally, stresses Abebe. “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 compete with foreigners on an equal footing. “We can catch up only if we can access foreign currency and freely import inputs, machinery, and experts as well as access loans from foreign banks.”
11th Year • June 2023 • No. 118 EBR