construction the fanfare

Construction: The Fanfare is Over

Ethiopia is one of the few African countries to achieve a strong and broad economic growth in the past decade. But keeping up with this momentum has not been easy. The construction industry, one of the main engines to the economy, has come to a standstill. As many have become unemployed as a result of the slowdown, construction firms are experiencing loss and some are shifting to other sectors seeking better returns. EBR’s Kiya Ali reports.

With the downturn of the construction industry observed in the past three years, many contractors are experiencing the sharpest decline in business opportunities, thereby earnings. Layoffs have been increasing with many construction workers and daily wage laborers being pushed out due to the economic slowdown. Over the past one and a half years, construction equipment makers were forced to cut production while machinery renters become idle. Awarding of new road contracts has been stalled as the government curbed capital expenditure to reduce its deficit. The three main segments of the construction sub-sector – house building, commercial and civil engineering – reported sharp falls in activity.

Although it is very small, the rental construction equipment industry’s growth prospects were immensely bright. The earth moving segment, in particular, has been driving the overall construction equipment industry in the country, with the strong demand emanating from the government-backed infrastructure projects. But with the slowdown of the road and building construction market, which are the backbone to the rental business, many were forced to go out of businesses, while their machines remained idle for longer periods of time.

A case in point is the situation observed in the outskirts of the city at the place known as CMC, where there are close to 50 pieces of heavy construction equipment parked, with some of them covered by weeds and had sank in grime as they have been inactive for months. On the other hand, with the recurrence of foreign currency shortage in the country, importers of construction machines are at the verge of extinction with some shifting to other businesses.

The slowdown is also reflected in the progress of pending projects. As the downturn of the construction industry persists coupled with the foreign currency shortage, contractors are not to be able to get raw materials based on their need and process payments promptly, resulting in the delay of construction projects and spike in construction costs.

This is felt by almost every stakeholder in the construction industry, from consultants to main contractors involved in the projects. “Under normal circumstances, it takes a maximum of six months to finalize foundation work. Now it is taking more than a year to do so, which is costly and sometimes results to as much as a 30Pct loss,” says an employee of Anchor, one of the few companies specialized in constructing foundations for buildings in Ethiopia.

Paint factories, which are dependent on the construction industry, are not immune to the problem. “We are struggling to meet the demands of our customers despite the presence of multidimensional problems. We are also working below our production capacity because of shortage of raw materials, pushing us to lose big projects that bring a considerable amount of money,” Isayas Gebre Hiwot, Sales Executive at Bright Paints Factory, explains. “As it is very difficult to get foreign currency, we are now forced to buy raw materials 40Pct higher than the original prices.”

In fact, inflated prices of construction input materials is another factor that contributed to the slowdown of the construction industry, according to insiders. Cement is among the items that exhibited a considerable price upsurge. Although it has declined in the past two months, there was a time when the price reached as high as ETB400 per quintal. Yet, there is a huge gap between the factory and the retail prices of the item. This can be showcased by the experience of Habesha Cement, which sells a quintal of cement for ETB234. “Retailers sell it for ETB380, which is ETB150 higher than the factory price. This means intermediaries are getting a lot of profit, which is even higher than ours and killing the construction industry,” says Yemsrach Teshome, promotion officer of the Factory.

Power interruption is another headache for the construction industry. “During the time when power was being rationed, we incurred a huge loss. Whenever there is power interruption for long hours, the machineries would consume more energy, forcing us to incur up to ETB500,000 in additional costs,” Yemsrach says.

Such problems have been accelerated by the ban put on heavy trucks in Addis Ababa. The ban limits the time where heavy trucks weighing more than 2.5 ton can operate in the city. Aiming to decrease traffic congestion as well as air pollution and accidents, the ban forbids light freight trucks like the Isuzu NPR with a weight of between 2.5ton and3.5 ton from operating in the capital between 6:30am to 10:00am and from 4:00pm to 8:00pm. Heavier trucks that weigh more than 3.5 ton are not also allowed to move around within the city from 6:30am to 8:00pm, according to the ban, which is now in effect for all days except on Sundays. Although now partially lifted, this has an adverse impact on the performance of the industry players, it is not the only factor that speeds up the slowdown of the construction sector, which contributes around eight percent to the country’s GDP.

Construction has been growing by 14.5Pct over the past half-decade, higher than any other sectors and industries. It has also played a great role in exhibiting a double-digit economic growth by the country over the past decade. For instance, in 2017/18, out of 7.7Pct economic growth rate registered by the country, the share of construction was 2.8 percentage points, according to the National Bank of Ethiopia.

The industry sector is also largely dependent on construction, which account for 71.4Pct of the industrial output, thanks to the huge investment made on roads, railways, dams and residential house expansion. Construction expansion appears to reflect the joint impact of both the public sector and the private sector initiatives, the former for driving public infrastructure and the latter in executing projects (as contractors) for both public projects as well as for private developments such as commercial and residential buildings seen throughout major cities. About three-fourth of the government budget goes to finance infrastructural development, which involves the construction of roads, airports, telecom networks and industrial parks. These evidences clearly indicate the overreliance in the construction industry by the state, which have a dominant role in the economy.

Citing the deteriorating role of the state in the economy, experts argue that this is the major reason for the slowdown of the construction industry. The growth rate of the industry dwindled by half to 15.7Pct in the last fiscal year and its contribution to the growth of the GDP was also slashed by half. “The diminishing role of the state, which is the main engine to the economy, is the major reason for its slowdown,” argues Alemayehu Geda (PhD), Professor of Economics at Addis Ababa University.

But beyond that, the ugly truth would be the fact that the industry sector, which the government claimed that has been growing, would suffer, according to Alemayehu. “Despite the false image created by the government that the industry sector has been growing as a result of expansion of industries, the growth actually resulted from the undertakings of construction projects across the country.”

By the same token, Tsedeke Yihune, a major shareholder of Flintstone Homes, points his finger at the state, which he believes contributed a lot to the slowdown of the construction industry. “The government has been pumping millions of Birr in the economy, which is the main reason for the expansion of the industry over the past decade. Now it is not able to keep up with that momentum as it is already indebted and does not have enough budget to satisfy the demand of the construction industry,” he says.

As Tsedeke puts it, much of the government expenditure towards the construction industry came in the form of debt. Currently, Ethiopia’s total debt has reached USD51billion, half of which is external and the lion share of it went to finance mega projects undertaken by the government. “From the inception, the construction industry was almost totally dependent on government expenditure. And, unfortunately, the money went to projects with low rate of return,” Tsedeke says.

According to a data obtained from the Office of the Auditor General, the delay in 290 mega projects pushed the government to spend an additional ETB44.2 billion expenditure, 72Pct of which was allocated to projects ran by the then Ministry of Water, Irrigation and Electricity.

More than 32 projects have been delayed for over five years, while 54 projects were suspended for up to five years. Another 208 projects are also delayed by up to three years, according to the report by the Office of the Auditor General. The report also found out that 16 projects were terminated despite consuming ETB246.5 million.

Frustrated by such outcomes, the government started cutting expenditures and decided not to undertake new constructions. For instance, total investment in road construction and expansion (excluding urban road) declined by more than ETB10 billion to below ETB35 billion in the past financial year from what has been three years ago. Lending to the construction sector players also declined significantly.

But such an action comes at a cost. “It will adversely impact the GDP of the country, worsening the rising unemployment rate and would result in the reduction of tax revenues,” stresses Eyob Tesfaye (PhD), a Policy Analyst and Macroeconomist. Alemayehu agrees. “The role of the mega projects and contribution of the corrupted political elite to the growth of the construction industry was significant. When the two big elephants stop working, its impact won’t be negligible. Keeping that in mind, the government was supposed to come up with something that would replace their role,” says Alemayehu, who recommends the government must look for alternative source of finance to boost the industry, which has been suffering for the past two years.

Berhanu Kassa, deputy manager of Loza and Berhanu Plc, a grade one contractor, believes the growth registered by the construction sector was unreal from the outset. For him, it is the unproductivity of other sectors that make it big. “The construction industry is actually the reflection of the poor growth witnessed in the agriculture and manufacturing sectors. People, are shying away from other sectors that have low-return and tend to invest in the housing and construction sectors, which help them get more earnings that are even better than doing savings,” says Berhanu.

“Additionally, it was politically affiliated individuals and corporations that were active in the construction industry in the past. Unfortunately, their role was not replaced at the time when the government reduced its key role in the industry, thus the government must come up with a new policy targeting their role”

But for Yosef Biru (PhD), former head of Construction Management Institute, what should come first is giving a solution to the problem faced by the private sector in the industry. “A separate institution that follows and supervises the industry must be set up and the shortage of raw materials faced by contractors must be produced locally in the long term in a bid to substitute imports.”

Abebe Dinku (Prof), who is an expert in the construction industry, suggests that the government must come up with a new incentive package to encourage local contractors. Equally important is the political stability of the country, which is adversely impacting the movement of goods.

8th Year • Oct.16 – Nov.15 2019 • No. 79

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