Business Contractors express doubt over state’s ambitious plans for construction industry
January 4, 2025
Experts and members of the private sector have aired serious doubts over the government’s ambitious targets for the Ethiopian construction sector, which they say is still characterized by state monopoly, foreign contractor dominance, financial constraints, a lack of legal frameworks and price indices, as well as weak contract administration and supply management practices.
During a recent consultation forum organized by the Urban and Infrastructure Ministry, industry players and experts expressed doubts about the feasibility of government ambitions to see Ethiopian construction firms control 75 percent of the domestic market and 25 percent of the wider regional market by the end of the decade.
Samuel Sahlemariam, an engineer, presented the findings of a research study that indicates the construction sector remains heavily reliant on foreign contractors for mega projects despite the sector’s consumption of 60 percent of the federal capital budget and 22 percent annual contribution to GDP.
Experts also pointed to massive budget deficits, heavy reliance on imported raw materials, weak supply chains, issues with contract administration, and the effects of the recent economic reforms as significant challenges holding back the sector.
They contend that although the number of foreign contractors operating in the country is relatively low, their market share has grown to an astonishing 62 percent.
“Almost all of our skyscrapers and huge public projects are handled by foreign contractors. Unless we manage to turn back this wave, we are going to be swamped by even more of them when the country becomes a member of the World Trade Organization,” cautioned Samuel.
He indicated that some foreign contractors are halting projects and demanding to be paid more than what was originally agreed upon.
Samuel cited an unnamed project where a foreign contractor stopped construction and demanded to be paid four times the original fee of 800 million birr. He also pointed to the Adey Abeba Stadium project in Bole as another example.
“The initial cost was a little more than two billion birr. Then the contractor refused even 12 billion birr to complete the project,” said Samuel.
His observations were echoed by another industry expert, who argued that dependency on foreign contractors could even compromise the country’s sovereignty.
“Sadly, most of the mega projects in Ethiopia are executed by foreign contractors. The industry’s poor performance might expose the country to sovereignty issues,” he said.
Data obtained from the Urban and Infrastructure Ministry shows that there are more than 35,000 local construction companies and 151,000 professionals currently engaged in the construction sector. The Ministry deems their performance unsatisfactory.
The other primary concern highlighted during the discussions was the exponential time and cost overruns that have become a regular feature of construction projects in Ethiopia.
Experts presented studies that indicate the average time overrun for road projects is nearly 145 percent, while the figure sits at 110 percent for other construction projects. Cost overruns average 35 and 18 percent for road and other projects, respectively.
The figures dwarf the global industry averages for time overruns (six percent) and cost overruns (nine percent).
Participants attributed delayed payment, heavy reliance on imported materials, improper procurement procedures, poor local contractor experience and lack of proper feasibility studies as key reasons behind the delays and extra costs.
A government official noted that public projects are often initiated with insufficient budgets, creating challenges in cash flow and financing.
Damtew Wole, a member of a contractors’ association, argued that the feasibility of initial cost estimates set by contractors themselves when they bid for projects is questionable.
“The cost estimate we enter into bids is not holistic. It does not include a comprehensive cost analysis for the entire project, beginning to end,” said Damtew.
He called on the government to immediately cease offering preferential treatment to foreign contractors.
“The foreigners that enter the industry through international competitive bids can apply for price escalation whenever there are market fluctuations, even if it’s the first month of their operation. But we can’t do that,” said Damtew.
Habtamu Getachew, a construction design professional, asked how the government expects the private sector to control 75 percent of the country’s construction sector within a decade while it is moving towards a monopoly.
“It might be out of frustration, but recently the government is establishing its own construction and designing organizations. It is constructing projects on its own and outsourcing others to foreign contractors. The private sector’s share is growing thinner by the day,” he said.
Samuel had similar sentiments.
“The pressure that our contractors face due to payment makes me ask the question: ‘Do the government and the sector really know each other?’ Do you really know each other? The sector is almost dead. If payment is not made properly, the duration of the project will increase significantly. Therefore, a bridge financing system is needed to fill this gap,” he said.
He did, however, concede that contractors’ poor contract administration practices lead them into unfavorable deals with consultants, restricting their right to price adjustment.
Samuel cited that a recent plea from contractors to the Ministry of Finance to allow them to adjust prices was met with the question of who was preventing them from doing so.
“It was the consultant that stopped us based on the special conditions and terms included in the contract we signed with them. Adjusting prices is not forbidden, ultimately,” he said.
Participants at the forum urged the government to provide a solution to the security risks they face on project sites in parts of the country that are prone to conflict.
They also requested access to a bridge financing system, enforceable professional standards, a price index platform, and an industry roadmap.
Yetmgeta Asrat, a state minister for Urban and Infrastructure, acknowledged the need for improvements in domestic capacity and reassured those present that the government is determined to move from foreign contractors to local ones.