Overview
Econ/commercial officers met with the general managers of several private construction firms and government enterprises regarding Ethiopia's construction sector. Many of these firms specialize in building roads and bridges but several have won recent contracts for office buildings in Addis Ababa. One local firm is slated to build a new Ethiopian embassy in Djibouti.

Despite the lull in business activity and foreign investment because of the Ethio-Eritrean border dispute, a dozen or so large projects are moving along. In addition, the donor-funded road sector improvement project is creating a lot of opportunities for construction firms and significant demand for building materials. This message examines the problems faced by the firms in the construction industry and the strategies these firms and Ethiopian government agencies are taking to address them. End overview.

Equipment and materials
Although most wood and concrete building materials can be obtained locally and several firms are providing sophisticated steel products, Ethiopia must depend on imports for most other inputs in the construction industry. For example, Ethiopia imports diesel fuel, explosives, steel panels, welding parts, timber and plywood, composite material panels, and bitumen from overseas. The majority of these materials are brought in from Europe and Saudi Arabia.

The four oil companies operating in Ethiopia -- Shell, Mobil, Total, and Agip -- supply the necessary diesel fuel and lubricants. In addition, Shell is the main bitumen dealer in Ethiopia. The construction of a ring road around the capital and the donor-funded Road Sector Improvement Project have increased the need for hot bitumen in Ethiopia. Shell is developing its Djibouti plant and bitumen transport fleet to meet this demand.

Government regulations pose obstacles
According to the general manager of one construction firm, the construction sector faces several bureaucratic obstacles. First, government regulation of contracts has gotten stiffer. Construction firms are now held entirely responsible for any building delays, even when caused by government interference through agencies such as the customs authority. The contracting firm is then responsible for paying fines and damages. Several managers commented that besides the unfairness of the regulation and the lack of any due process in assigning blame, this mechanism could encourage corruption. Firms have a lot to gain for potentially little cost if they can circumvent the financial damages.

Another manager said that non-payment is a common problem, even occasionally with government contracts. Once the building is finished, individuals may delay or refuse payment, claiming there is no funding. Going to court for retribution is an expensive and onerous process. In addition, government regulations require that both contractors and consultants carry out only projects permitted within their license. This issue has restricted construction firms from diversifying their projects and forced them to purchase expensive equipment to keep on hand, as required by their licensing provisions.

The general manager of the Ethiopian Investment Authority said the construction industry is one of the most important for Ethiopia because it affects all sectors of the economy. Investment in nearly every field must eventually have a construction component. Foreign participation and technical expertise in the design and construction of buildings and roads is sorely needed in Ethiopia.

In addition, Ethiopia needs steel structure technology and manufacturing. Currently, the country imports steel from Korea, South Africa and Saudi Arabia. It would be cheaper, however, to import the raw materials and manufacture steel needed for construction locally. The investment authority would like to see more partnerships and joint venture foreign companies but many potential investors are scared away by Ethiopia's land ownership regulations and the high price of leased land.

Scarcity of finance
Finance is another big problem in Ethiopia's construction sector. According to one manager, obtaining letters of credit and the collateral requirement for loans are major hang-ups in the construction industry. First, contractors lack financial management skills. Second, most contractors want to use their machinery as collateral for loan borrowing purposes. However, the banks have problems identifying the true owner of the machinery. Moreover, banks are suspicious that contracting firms are awarded projects that are outside their abilities or beyond their capacities to finish on time. Financing issues impact construction companies as well. They are often unable to expand their business because of government regulations prohibiting private firms from borrowing money from foreign banks.

Big projects off-limits to domestic firms
Although the majority of Ethiopia's construction firms specialize in infrastructure rather than buildings, most of them lack the experience and the capacity to undertake major road projects. It is difficult for local companies to meet the strict pre-qualifying conditions established for projects financed by the World Bank or African Development Bank. For example, World Bank projects require a strong capital base (by one estimate nearly $3 million) and extensive international experience. As a result, nearly all of the road projects go to international contractors and local firms are forced to take only small projects. Several firms are working around this issue by teaming up with international firms to meet the capital standard and win major contracts. This arrangement would also bring greater technical experience and other benefits in technology transfer.

MIDROC in the big leagues
The biggest construction firm on the local scene is MIDROC construction, a sister company in the MIDROC family of companies controlled by Sheik Mohammed Al-Amoudi. MIDROC secures most, if not all, of the construction projects for the companies within the MIDROC (al-amoudi) umbrella. It bids on, and wins, many other large contracts in Ethiopia as well. MIDROC built the Addis Ababa Sheraton hotel and continues to work on other buildings within the Sheraton compound, including an Ethiopian restaurant that will accommodate 500 people.

MIDROC also won the contract to build the residence for the OAU secretary-general (toward which Al-Amoudi donated 20 million birr) and the new OAU conference hall and four-story office building (at a cost of 65 million birr for the labor only -- the materials are being donated). MIDROC is building the company's corporate headquarters near the sports stadium, as well as the Salaam Hospital, the Summit plastic bottling plant, a pharmaceutical plant, the Star laundry soap factory (for 20 million birr), and new facilities for the Ethiopian Leather Industry Corporation (ELICO).

Outside of Addis Ababa, the company is working on the Pepsi-Cola bottling plant in Awassa, a new office building and hospital in Mekele, and the Kombolcha steel products factory. The company is also slated to build hotels for Al-Amoudi in Debre Zeit, Arba Minch, and locations along Ethiopia's historic route.

Customs and clearance
Imports of construction machinery and equipment, together with spare parts up to 15% of their value, are exempted from customs duty, sales tax and excise tax. Frequent changes of management at the customs office, however, has made it difficult for companies to establish a track record and facilitate the entry of their products and materials. Each company has had to reintroduce itself to a revolving door of new general managers and sign separate agreements for the expeditious clearance of imports. Several managers commented that "the customs clearance process can take a long time." For MIDROC, the clearance process on imports is usually facilitated by the energy house in Saudi Arabia. At present, MIDROC only buys some specialty products from within Ethiopia but in the future it plans to increase the amount of local procurement.

Another problem construction companies faces is in the use of technical personnel. As products become more sophisticated, the high technology equipment requires the hiring of technical experts. The government charges the company a 40 percent tax on the salary. Besides paying a wage of $7500 each month, the company must pay another $3000 in taxes on top of that. The companies argue that the government should not tax know-how that goes along with the machinery and equipment.

Skilled labor a rare commodity
Several construction firms have expatriate employees on their staff. MIDROC has 16 foreign workers, though this number has fallen by two-thirds since the construction of the Sheraton. To save on overseas living expenses, the company has built up local capacity, often sending employees on overseas training programs and developing skills-enhancement programs on-site.

One manager noted that the demand for skilled masons and plasterers has risen so much that they can command "any salary they please." Several companies noted that skills are not cultivated within organizations or in commercial training schools and are not being passed down to the present generation.

This dearth of skilled laborers must be addressed for Ethiopia to attract additional investment and improve the quality of the workforce in the construction industry.