Cloud on the Horizon

Machinery Shortages Hinder Ethiopia’s Burgeoning Construction

Despite the promising growth prospects of Ethiopia’s construction sector, a lack of construction machinery is proving to be detrimental to contractors-public and private – who rely on them to complete their projects. In fact, a study conducted by the federal government found that of the total 2,705 machineries needed for housing projects alone in the 2014/15 fiscal year, only 41Pct were available. It is a dynamic similar to other construction projects – and is an issue stakeholder are eager to fix. EBR’s Ashenafi Endale spoke with contractors, importers and government representatives to learn about the on-going shortage of construction machinery and what, if anything, can be done to address the shortfall.

In 2012, when Tsedeke Yihune, founder and general manager of Flintstone Engineering and vice president for the Ethiopian Construction Contractors Association, signed a contract to construct a 20 km road within ten months, he was confident that he would live up to his promises. Such assuredness seemed reasonable; his company successfully finalised and delivered 40 villas, 60 town houses and 450 condominium units on time.
Nearly four years later, however, the upgrading of the road that stretches from Kibremengst to Shakiso in southern Ethiopia is just slightly over 50Pct complete because of the unavailability of construction machinery.
“The construction machinery we wanted, especially the grader, loader and bulldozer, were not available in the market. When we [finally found] them they were unaffordable,” Tsedeke told EBR. “Even after we [obtained] machinery, they operate at almost 10Pct of their capacity due to maintenance problems.”
The imbalance between supply and demand for construction machinery may drag the booming construction sector. The Ethiopia construction sector exhibited a 23.7Pct growth in 2014/15 fiscal year, according to data obtained from the Ministry of Finance and Economic Cooperation (MoFEC). Additionally, BMI Research International recently revealed that the construction sector in the country is expected to enjoy one of the highest growth rates in the world over the next ten years.
The construction sector comprises companies engaged in site preparation, building construction, civil engineering, building installation, building completion and the rental of construction or demolition equipment with operators. The industry includes all activities of construction irrespective of whether they are carried out by private or public construction firms.
Construction makes significant contributions to the economic development of any country, especially rapidly developing nations like Ethiopia. The industry contributed 7.6Pct to the national economy last fiscal year and employs 60,000 new labourers each year. The contributions of the sector are expected to grow, fuelled by a swell in infrastructure investments for large-scale public projects.
However, the lack of construction machinery puts the pursuit of large, time-sensitive government projects in jeopardy. “As there are so many projects going on throughout the country, construction is always delayed because there is not enough machinery available for all contractors,” says Samson Wondimu, public relations director of the Ethiopian Roads Authority (ERA).
The problem is not only restricted to road projects – all projects implemented by the government, including condominium houses, offices for ministries, and sugar factories, are impacted by the problem.
“Projects are always delayed and contractors’ excuses are the unavailability of machinery in the market, its high rental price and not getting equipment on time,” says Yohannes Abayneh, public relations core process owner at the Addis Ababa Saving Houses Development Enterprise. The Enterprise is currently overseeing the construction of a few thousand condominium units under its 40/60 scheme. There is also a plan to construct 38,000 houses under the scheme at the end of the second phase of the Growth and Transformation Plan (GTPII). About 15,000 of these units were supposed to be constructed during the first phase of the GTP; however, only 1,292 housing units were started and are now 89Pct complete. The shortage of machinery has been one of the daunting challenges in finalising these units on time.
The Enterprise also plans to build 15,000 units each year within the next five years. “As buildings are going higher and projects diversifying, the construction is no longer as labour-intensive as before,” says Yohannes.
The problem is not different under the 20/80 scheme either, in which the government is planning to build 250,000 housing units during the GTPII, according to Nesru Temam, public relations officer at the City Housing Development Project. “Most of our projects are delayed primarily because of lack of inputs and machinery, although our projects do not require heavy machinery,” says Nesru. They planned to finalise 50,000 houses within 18 months; however, only 40,000 of them began construction last year.
Fetene Getachew, project and contract administration team leader at the Federal Government Offices Construction Project Office also has a similar experience. “Government projects are delayed up to 50Pct to 100Pct of their scheduled time,” he says. “This leads to an increase in the estimated project costs of up to 20Pct.”
In addition to overseeing the construction of 30 buildings, most of which are delayed for an extended period, Fetene’s office plans to construct buildings for 25 federal institutions during the GTPII, which will end in 2020.
The same construction hindrances face the Ethiopian Sugar Corporation (ESC). Of the 14 sugar factories supervised by the Corporation and that planned to start operation at the end of the first phase of the GTP, eight are still in the initial stages, while the rest are near completion and a few have begun trial production.
It is amid such uncertainties that the government plans to start big projects in housing, road, railway, sugar and fertiliser as well as power generation. On top of these, the government also plans to build 11 new public universities within the next five years.
Despite such ambitious plans, research conducted by the former Ministry of Urban Development, Housing and Construction last year shed light on the lack of construction machinery for mega government projects. The study found that of the total 2,705 machineries needed for housing projects in the 2014/15 fiscal year, only 41Pct of that amount were available.
Similarly, of the 2,760 machineries that are needed for university expansion projects, only 49Pct are available, while only 48Pct of the construction machinery needed for federal road projects are available in the country.
In Ethiopia, contractors, rental companies and the government own construction machinery. However, contractors and rental companies are the major players within the industry, owning 49Pct and 45Pct, respectively, of the available 11,445 construction machineries in the country in the 2013/14 fiscal year.
Data from the Ethiopian Revenues and Customs Authority reveals that the number of imported construction machines is increasing year after year, especially within the past five years. In the past four years alone, the country imported a combined total of 5,685 machineries.
Although, the number is increasing, industry insiders say it is not enough to satisfy the demands of the market. “Most of the construction machinery importers are companies and individuals whose capital comes from other businesses,” says a general manager of a grade one contractor, who spoke to EBR on the condition of anonymity. “So the level of their import is determined by the operation of their other business.”
Tsedeke agrees with the contractor’s critiques, adding that importers of construction machinery do not have the expertise to identify the right type of construction equipment needed in the country. “They import [by guessing]. The huge investment in the construction sector is not directed in an innovative way. The problem is that the ones who have the expertise do not have the foreign currency to import,” he argues.
Birhan Kassa, general manager of Birhan Kassa Building Construction Company, echoes Tsedeke’s sentiments, stating that the lack of machinery in the country creates additional burdens on contractors. “Investing the limited finance on machinery ties up your capital and you cannot operate,” he says. “This is why I say the sector is growing but [will eventually face a] dead end.”
According to the Ministry of Urban Development and Housing, the number of local contractors has grown exponentially in the past two decades. Since 2000, the Ministry has registered 8,033 local general, road and building contractors with license grades from one to ten. The growth in the number of contractors is drastic compared to the handful of local contractors that existed 20 years ago.
In Ethiopia, although contractors have duty-free privileges to import construction machinery, almost all of them prefer renting. Machinery rental companies buy the equipment from importers.
Importing enough machinery to fill the demand gap has become increasingly difficult because of the shortage of foreign currency, according to Iyasu Gebeyehu, import and sales manager at Tamrin International Trading PLC. The company imports construction machinery such as cargo trucks, dump trucks and pickups.
Iyasu’s company used to import machineries just to keep in its warehouse as stock. However, because of the uncertainties in securing foreign exchange permits, the company changed its strategy. “Now we deal with buyers only after securing the foreign exchange permit,” he told EBR. “There is very high demand that we are not fulfilling.”
More than 90Pct of the machinery purchasers are rental companies and contractors who buy them when they get money, according to Iyasu. “Contractors have the demand but not the capacity to buy the machines; they have problems in their cash flow.”
The company has a duty-free privilege to stock the machinery at the Ethiopian Revenues and Customs Authority’s warehouses for 120 days, within which time the importer has to sell them. “Nobody buys machineries imported with duties.”
In addition to this, the shortage of spare parts is also threatening the sector. Although the government has allowed machinery owners to import spare parts duty-free for the first five years after the import of the machinery, those close to the issue say many have not taken advantage of it.
To lessen the problem, Yohannes suggests that local assemblers should focus on construction machinery instead of passenger vehicles. “The country even imports simple machineries, while local assemblers focus on [producing] luxury automobiles,” he says.
As a way out, Solomon Belay, operational manager of Belay Ab Motors, argues that the government must provide duty-free privileges to import construction machinery parts and assemble them locally. “But, by importing bodies with duties and assembling them, we cannot compete with duty-free imported machines,” he says.
The major local machinery assembler in the country is the Metal and Engineering Corporation. Since the Corporation started to assemble construction machinery in the 2011/12 fiscal year, it has managed to market 1,132 machineries.
Stakeholders agree that the fate of the second phase of the GTP and its ambitious infrastructural goals rely on the speed and extent to which the government attempts to solve the problems that hinder the growth of the construction industry. Otherwise, they stress that the government will not be able to sustain the growth of the industry and its contribution to the national economy in the future. EBR