Contracting Dilemma

Why Are Local Contractors Lacking in Large-Scale Projects?

Despite the fact that the number of local contractors in Ethiopia has grown by leaps and bounds over the last 20 years, something seems to be amiss with regard to why they aren’t handling large-scale infrastructure projects. Take, for example, road construction projects. Between the 1997/98 and 2013/14 fiscal years, there were a total of 443 road projects being undertaken by foreign and local contractors. Of the total projects, Ethiopian contractors were responsible for 337, amounting to ETB54.9 billion. However, the foreign construction companies maintained dominance in terms of cost of the projects. They executed 106 road projects, worth ETB76.4 billion. Government officials say that local contractors don’t have the capacity to handle large-scale projects, while local contractors say they aren’t given a fair chance to compete with foreign companies. EBR’s Fasika Tadesse spoke with industry insiders to learn more about why local contractors aren’t handling large-scale projects.

Ever since Ethiopia became a partial free-market economy in 1991, many local contractors and consultants began to enter into the construction sector. The introduction of the minimum capital requirement to encourage the progressive entrance of local contractors into this industry and create competition among them also gave local contractors room to build their capacity in order to upgrade their standing and compete with foreign companies.
More than 20 years later, however, it seems the country hasn’t produced enough contractors that can handle big projects. This is despite the fact that the number of domestic construction companies rose by an unprecedented rate over the last two decades. According to the Ministry of Urban Development and Housing Construction (MoUDHC), the number of local contractors has grown exponentially in the past two decades.
The Ministry registered 8,033 local general, road and building contractors with license grades from one to ten from 2000 until June 16, 2015. This is compared to the handful of local contractors that existed 20 years ago.
Based on the data, the construction sector has grown tremendously – but it still faces difficulties with regard to capacity.
Just like two decades ago, local contractors are still largely absent from big infrastructural projects. “Numerous mega projects, including dam, road and railway construction are currently executed by foreign construction companies,” says Siefu Ambaye, chief executive officer of Tekleberhan Ambaye Construction PLC, a grade one construction company. His company is currently working on Yayu Fertiliser Factory’s mechanical works after being hired by the Metal Engineering Corporation (METEC) for ETB2 billion in 2012.
Tekletsadik Reba, state minister for Transport, supports Seifu’s claim. “Among the total ongoing road projects, local contractors have the larger share in terms of the number of projects, but foreign contractors have the lion’s share in terms of the cost and volume of the projects,” he said.
For instance, between the 1997/98 and 2013/14 fiscal years, there were a total of 443 road projects being undertaken by local and foreign contractors, according to the Ethiopian Road Authority (ERA). Of the total projects, Ethiopian contractors handled 337 of them. These projects cost the government ETB54.9 billion. However, foreign construction companies maintained dominance in terms of cost with 106 road projects, worth ETB76.4 billion.
Beyond the road sector, foreign companies are also gaining momentum by pursuing massive building construction projects in Ethiopia. Just recently, the Commercial Bank of Ethiopia (CBE) awarded the construction of its 4+2+46-storey headquarter building to the China State Construction Engineering Corporation (CSCEC) for ETB5.3 billion. The United Bank S.C did the same- it awarded China Jiangsu International Economic-Technical Cooperation Corp (CJIETCC), a Chinese company, a contract for the construction of its 30-storey headquarters with ETB1.5 billion.
A few years ago, Wegagen Bank S.C also awarded the construction of its 3+2+22 headquarters to a Chinese company called China Jiangxi Corporation for International Economic and Technical Corporation (CJIC). The building, which is currently under construction, is estimated to cost ETB733 million.
Between January 01, 2010 and June 01, 2015 a total of 4,271 companies were licensed for construction investment projects, including building construction, road construction, and water works. Of the total licenses granted, 3,952 of them were obtained by Ethiopian contractors, while 41 Ethiopians obtained licenses with a joint venture with different countries, including Italy, China, Saudi Arabia, and Turkey.
Among foreign investors who obtained licenses, Chinese companies have the major share, obtaining 68 licenses; the remaining foreigners that received licenses include investors from Italy, Turkey, Canada, the United States of America and United Arab Emirates (UAE), according to the Ethiopian Investment Commission (EIC).
Government officials say the failure of local contractors to build their capacity is the reason why big projects go to foreign contractors. “Our main challenge is the [lack of capacity and inefficiency] of local contractors, which is causing lags on the projects,” said Sisay Bekele, now ERA’s deputy director general for Human Resources & Finance, while presenting the hurdles his institution is facing in the nine-month performance report of the Authority on June 9, 2015.
Agreeing on the fact that domestic contractors cannot compete with foreigners, senior managers of local construction companies point their fingers at the government. “We [local contractors] cannot be competitive with foreign companies, as they are financially backed by their respective countries,” argues Alemayehu Ketama, owner of Alemayehu Ketema General Contractor, which was established in 1989 as a grade one construction company. “In addition, we face a problem of getting loans from local banks. Equally, we cannot get a Letter of Credit (LC) on time for the construction input materials we purchase outside of the country.”
Most local contractors stress that if local contractors undertake major projects, the advantage is for the country itself in terms of saving foreign currency and creating job opportunities and building local capacity. Local companies invest their profits in their country, while foreigners take back profits in hard currency.
But government officials argue that maintaining the quality of construction projects should be the main focus. “Do not expect to get projects just because you are Ethiopians,” said Workneh Gebeyehu, minister of Transport, during a meeting with local contractors at Hilton in June 2015. “We have to follow international tender processes that guarantee the best quality.”
Beegziabher Alebel (PhD), managing director of Ultimate Plan PLC, has worked in the construction industry for the last 22 years and believes that had local construction companies focused on establishing stable managerial systems and building modern internal processes, they would have been able to withstand external competition.
“The management of the company should be independent from the owner’s influence,” Beegziabher told EBR. “When that happens, it is easy to create a company that will compete at least at the continental level.”
Workneh agrees: “If the construction sector is to be developed, it should be developed by local contractors. So we want to see our local contractors [become] well organized and ready for the development. The period is a competition era, so local contractors should enhance their capacity and be competent with the foreign contractors.”
Siefu believes that in order to make local companies more competitive, internal changes need to be made. His company recently reorganized its management system. “To be competent we believe that we should have a new organizational structure, which will help us to have a strong management.”
To be competent, Seifu believes that local contractors should focus on reviewing their internal problems rather than focusing on external problems. He advises that local contractors should manage projects professionally and that efficient financial management is also important for the growth of local firms.
Despite their inefficiency, the government is also doing what it can to help domestic contractors, according to Bosena Alemu, Contractors and Consultants Registration Work Process Head at the MoUDHC.
A report entitled “Development of Domestic Construction Industry,” published by the ERA in 2013, reveals that between 1997/98 and 2010/11, the participation of local contractors in projects that were financed by the government grew at an annual average rate of 28.6Pct, while foreign contractors’ participation grew by 20Pct. However, the report mentions that the eligibility criteria of pre-qualification, particularly regarding experience of past performance, equipment and financial status, limits the participation of local contractors in donor-financed projects
In addition, Bosena says the MoUDHC has recently amended the directive for the registration of construction professionals and contractors in September 2014 in order to enhance the capacity of local contractors. “The amended directive has three new items that could benefit the local contractors to be competent with those of the foreign contractors,” argues Bosena.
First, it allows the local contractors to be licensed with grades even if they don’t have enough machinery to earn that grade, by giving them a two-year grace period to attain the requisite machinery. The other adjustment allows for machine replacement. This means if the company has a dozer, it can be considered a replacement for a grader or excavator. The third modification also gives a guarantee by suspending the vehicle and machines of the contractor from foreclosure by banks.
Workneh says the government is making an effort to make local contractors more active and competent: “Beyond the laws and privileges to make local contractors competent, we decided to conduct research that can figure out their problems that hinder them from being competitive with foreign construction companies.” EBR