Private Companies

Private Companies Bring Efficiency to Construction

The construction sector is a crucial driver of economic activity – and has been the key to Ethiopia’s double-digit economic growth for the last decade. Despite its promise, the sector is plagued by inefficiency, with projects sometimes generating cost overruns of 60Pct or more, according to the World Bank. This trend, however, may change soon, as many private real estate management companies have proven that local, large-scale construction projects can be completed in a time- and cost-efficient manner. But what, if anything, will other public and private companies learn from this? EBR’s Ashenafi Endale spoke with industry insiders to learn more about what’s being done to make the country’s construction sector more efficient.

The construction industry plays a significant role in Ethiopia’s development because it’s a major driver of investments in the public and private sectors. Encompassing a broad array of projects, the sector is comprised of large-scale projects like dams, roads, and railways, as well as commercial and residential buildings – critical infrastructure that are key to building economic capacity in a country.
However, the construction sector’s remarkable growth in the past two decades is overshadowed by persistent project delays and late deliveries, which lead to poor investment returns, cost overruns and inflationary spirals.
Construction efficiency is defined as the ability to finalise construction projects on time without compromising quality and by avoiding wasted manpower, money and materials.
The necessity for efficiency is particularly important for construction, as it’s a lucrative sector and delays often result in significant financial losses. According to the World Economic Forum (WEF), the global construction sector generates over USD11 trillion annually and is expected to grow to USD17.5 trillion by 2030.
In developing countries, the WEF says the construction sector is crucial, as it delivers key infrastructure that is indispensible for overall economic growth: “[I]nfrastructure underpins almost every aspect of economic growth and human development. It is a vital component of the most pressing global challenges that we face, including eliminating poverty, achieving food security, rebuilding the global economy and dealing with the effects of climate change. Put simply, unless we rapidly improve the efficiency of infrastructure investments, our efforts to meet the great global challenges of our era are less likely to succeed.”
However, the World Bank says the construction sector in Ethiopia is prone to inefficiency, including “instances of poor-quality construction, inflated unit output costs, and delays in implementation.” Their data confirms this reality, demonstrating that public construction projects in Ethiopia have average cost and time overruns of 60Pct and 130Pct, respectively.
Despite this trend, private companies with comparative financial advantages and capacity are emerging in the industry, completing projects in a timely, efficient manner. One such company is Noah Real Estate, which was established in 2013 and succeeded in delivering six housing projects in different locations throughout the capital within two years.
Two projects currently under construction – in CMC and Ayat, both in the Bole District and which have 730 housing units combined – are 75Pct finalised, according to Abiy Hailemariam, Marketing Consultant at Noah Real Estate. The company also plans to build 2,000 houses within the next two years. Noah builds apartments and sells them when the construction reaches at least 60Pct, with prices ranging from ETB1.2 million to ETB4 million per unit. It is a sister company of Abyssinia Water, Abyssinia Coffee, Tulip Paper, Boston Hospital and Splash soft drinks factory.
Noah’s other project, a 16-storey apartment, which costs ETB350 million and rests on 2,500 square metres of land in the Bole District around Atlas Hotel in Addis Ababa, began in April 2015 and is currently in the completion phase. “The company has been finalising two floors per month, on average, and some of the clients who bought the houses are already adjusting their rooms,” says Abiy. “The building will have 226 housing units, four basements and a 10,000 square metre parking area, which will make it [one of] the largest parking areas in the capital to date.”
Previously, real estate was seen as a segment of the construction industry, which is still developing in Ethiopia. Although the real estate sector in Addis Ababa seemed promising in recent years due to favourable demographics and increased demand from the Ethiopian Diaspora, it failed to live up to expectations.
In fact, because of problems like inefficient construction techniques, inadequate finance and the limited availability of raw materials such as cement, steel and other imported construction items, delays in transferring houses by real estate developers were common.
Abiy says efficiency is one of the keys to Noah’s successes in the construction sector. “So far, we have never faced a project delay. Our success is due to proper planning, which is based on how to use the available resource efficiently,” he says. “We do not start many projects at once. We also utilise different alternative strategies during the execution of the plans and very close control. We do not allow paperwork to take time after the project is initiated.”
Another company, Tsehay Real Estate, which is co-owned by the Chinese CGC Overseas Construction (Ethiopia) and Red Fox International Investment Business, is also finalising its first project, which is known as Poli Lotus International Centre. The project, which began in September 2014 at a cost of ETB3 billion, has 13 apartment buildings, each with 12 storeys and international standard facilities, and is housed on 30,000 square metres of land in CMC.
Although the units weren’t supposed to be completed until 2017, apartments are already available at prices ranging from ETB2.7 million to ETB5.5 million per unit. Tsehay, which is relatively new to the construction sector, did not collect money in advance from the over 1,000 home-buyers.
In addition to housing projects, Ethiopian Airlines’ four-star hotel that is under construction on 40,000 square metres of land in front of Bole International Airport is another construction sector success story. Though the construction of the hotel began in January 2016, it has undergone rapid progress, with a deadline of 720 days. The contract was awarded to the China National Aero-Technology International Engineering Corporation at an estimated cost of ETB300 million.
In the infrastructure sector, which is comprised largely of government investments, the Hawassa Industrial Park, whose opening was celebrated three months ago, is among the few public projects to be finalised ahead of its deadline. The Park, which rests on 1.3 million square metres of land and cost USD250 million, was built by the China Civil Engineering Construction Corporation, which has decades of experience in developing, constructing and administering industrial parks.
It is not only foreign contractors that are succeeding in Ethiopia by undertaking and delivering construction project according to schedule. A few local contractors, like Tekleberhan Ambaye Construction (TACON) also have their own successes.
TACON is among the local contractors trying to build a reputation in the construction sector. It is currently involved in the construction of the Ethiopian Grand Renaissance Dam, the Yayu Fertiliser Factory and two national mega projects, among others. Established 20 years ago, its current project revenue is ETB6.5 billion, with over 6,500 employees, and nine sister companies under the umbrella of Tekleberhan Ambaye Fenta Corporate.
The company is undertaking numerous endeavours, including a housing project for federal judges in Addis Ababa, which is under construction in Megenagna, the emergency centre expansion project at Tikur Anbessa Hospital and a building for Africa Insurance around Wollo Sefer in the Bole District.
Company representatives say pursuing these projects in an efficient manner is of paramount importance. “Continuous overlap of projects and bankruptcy are results of delays. Therefore, we always invest in management skills and construction capacity in order to evolve,” says Tesfu Alemayehu, Public Relations Officer at Tekleberhan Ambaye Construction. “Recently, we introduced enterprise resource planning with ETB20 million, imported materials worth half a billion birr and we currently have 208 heavy machineries.”
Tesfu says the company believes that developing capacity is the first task to build competence and become an example for local contractors: “We aim to become one of the top ten contractors in Africa in the near future. We are bringing drastic change [to the sector], especially after introducing enterprise resource planning, the company’s new structure and recruiting more experienced professionals.”
He says that there are a number of key elements that contribute to construction efficiency: Establishing a sense of ownership among the employees, creating a conducive environment for them, introducing the company’s targets, implementing modern leadership and techniques, focusing on quality results, superior human resource and bringing scientific solutions are the basic elements of the company’s restructuring.
Studies conducted on the subject reveal that there are proven methods to ensure efficiency in the construction industry. According to a report entitled “Improving Construction Efficiency and Productivity” published by the Modular Building Institute, since the construction site is a dynamic place that involves contractors, subcontractors, and labourers, all of whom require equipment, materials, and supplies to complete their tasks, improving project site efficiency through more effective management of people, processes, materials and equipment will help reduce wastage.
This is because when construction projects are poorly managed, money, resources and time will be wasted, causing workers to wait around for construction materials and timetables to conflict. Tesfu says this is why TACON initially installed enterprise resource planning software. “It really helps you to plan and execute your work appropriately,” he stresses.
Enterprise resource planning is software for business process management, which enables companies to integrate and manage many office-related functions, including technology, services and human resources. This means the software provides integrated information about core business processes in real-time, providing crucial, outcomes-oriented information in a timely manner.
“The software will also enable the company to measure its performance against the plan,” Tesfu argues. “This is because measuring performance is one of the keys to success in the construction industry.”
Performance measurement was one of the key issues raised in a report entitled “Rethinking Construction” published by Sir John Egan, a British industrialist. According to him, key measurements include construction cost and time, defects, client satisfaction with the product and service, profitability and productivity, predictability of design cost and time, the predictability of construction cost and time, and safety. These factors, he says, are central to process-orientated thinking.
Indeed, researches conducted on the issue suggest that effective performance measurement techniques will help construction companies make corrective actions throughout a project’s life cycle. In the construction industry, a project life cycle includes phases like initiation, planning, implementation, and closure. Taken together, these represent the trajectory a project takes from the beginning to its end.
Tesfu says using technologies such as enterprise resource planning software help companies trace the activities in each project’s life cycle: “[This] can help companies understand how processes lead to success or failure, improvements or inefficiencies, and how to use that knowledge to improve products, processes, and outcomes.”
Other ways to ensure efficiency, according to the report published by the Modular Building Institute, is increasing the productivity of a project’s resources, especially labour. Productivity, which measures the rate at which work is performed, is a ratio of production output to what is required to produce it.
In construction, the output is usually expressed in weight, length, or volume, and the input resource is usually in cost of labour or man-hours. To increase productivity in the construction industry, the study suggests that it is important to analyse factors that affect overall labour productivity.
There are many factors that affect the productivity of labour in construction. These, according to the report, include extended workdays, the morale and attitude of workers and fatigue. As construction is a labour-intensive industry, to improve project performance, inconsistency in labour productivity should be managed well. There also should be a friendly working environment to increase productivity.
In this regard, Abiy suggests creating a sense of belongingness among employees helps increase their performance: “When employees are empowered, they can do their work and even exceed expectations. These are simple methods almost every construction company can use and benefit from, although [only] few are following this path.”
Indeed, most construction companies that operate in an efficient manner in Ethiopia are foreign entities that handle larger projects with their own funds, or are local companies that have strong financial backing. Most local contractors have not yet developed the capital and capacity to handle complex projects.
Yet, Samson Wondimu, Public Relations Head at the Ethiopian Roads Authority (ERA), argues it’s difficult to compare the local contractors’ capacity with foreign companies because developed countries have immense construction experience. “Until recently, Ethiopian contractors were limited to gravel roads, but now they are working on big asphalt projects,” he explains. “There are a few who deliver [their projects] on time, but still there are a lot to be done to bring efficiency. Still we do big projects with foreign contractors.”
According to Samson, in addition to the challenges with overall capacity, there are problems specific to contractors, which contribute to inefficiency in the construction industry. “They do not strive to upgrade their companies’ structure and performance; they are totally controlled by family members, which is a traditional way of managing companies,” he argues. “Since their inefficiency results in delays and cost increments, government support is necessary to build their capacity.”
As a result, some of the country’s biggest contracting entities, like the Ministry of Urban Development and Housing (MoUDH), the ERA and other government institutions have decided not to award projects to contractors that have previously delayed projects beginning this year. “Contractors cannot place bids for projects from now on if they have delayed or have delivered poor quality projects in the past,” said Shemeles Eshetu, Plan, Implementation and Follow-up Officer at MoUDH.
The Ministry is currently implementing nine programmes to fulfil increased housing demands in the country. The programmes include constructing and selling condominium houses under three schemes, supporting real estate companies, associations and individuals to build houses.
However, the Ministry has fallen short of its goals. After ten years, they have been able to deliver only 205,482 condominium houses out of the 400,000 it has planned, partly because of the inefficiency of the contractors and partly because of the poor controlling mechanism of the Ministry.
“We will introduce new codes that will ensure professionalism in the industry and strategies that will help build contractors’ capacity within a month,” says Kahlid Abdulrahman, State Minister of the newly established Ministry of Construction (MoC).
Experts also agree regarding the need to build contractors’ capacity to improve efficiency in the construction industry. “The construction industry’s current and expected contribution in the future is at stake if contractors [don’t] manage to achieve efficiency,” says Yosef Biru (PhD), Director General of the Ethiopian Construction Project Management Institute. The Institute was established three years ago to ensure the effective implementation of construction projects in the country.
According to the Ministry of Finance and Economic Cooperation, the construction industry has been growing by more than 30Pct annually since 2010/11 fiscal year. Its contribution to the national economy also reached 9.4Pct in 2013/14 from 4Pct in 2010/11.
The construction industry consists of different subsectors, including road, building, residential development, and civil engineering. The industry also consists of different types and sizes of firms that operate within each subsector. Stakeholders believe government support is necessary to uplift these companies and improve their efficiency.
However, Yosef doesn’t deny that even with support most companies will not be successful. “This is because most of the local construction companies are family-owned companies; they have no strategies as far as I have seen, they are short-lived, and they have no long-term plan,” he argues. “In addition to the traditional ways of managing companies, there are many things that should be improved to bring efficiency.”
He says in order to bring this trend to Ethiopia the government should establish a legal framework for companies’ structure, encouraging specialisation and excellence in every field. “Currently, everything is general in Ethiopia,” he argues.
To that end, a new draft proclamation, which will have three major regulations, has been under formation for the last five years and was recently brought to the MoC. Many believe it will likely be implemented. Among other regulations, the proclamation changes the legal framework of construction companies’ structure. It also includes regulations to help a company exceed in drilling, foundation building or another specified field, according to Kahlid.
The proclamation establishes professional standards, ensuring competency through regulation by the Construction Industry Council and the MoC. “I am sure it will bring a major change in the industry, when it gets ratified,” says Yosef, who has worked intensively on the draft proclamation.
However, he says that there are people in the industry and at the government offices who argue that the proclamation will harm the country because it will adversely affect their benefits: “In Ethiopia, the demand and supply in the construction industry are not equal. The demand has gone far ahead of the supply because of the rapid growth the country. If the capacity matched the demand, we could have saved huge resources from wastage because of delays.” EBR

4th Year • October 16 2016 – November 15 2016 • No. 44

Ashenafi Endale

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