investment opportunities in the ethiopian construction sub ... · the ethiopian landscape is...

Investment opportunities in the Ethiopian

Construction sub-sector

Mr. Auke BoereMr. Maryn KleingeldMr. Dawit KidaneNABC

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ContentsMajor trends in the development of the construction sub-sector 5Investment opportunities 15Points to consider 21Sources of further information 25

Written by: Auke Boere¹, Maryn Kleingeld¹, Dawit Kidane¹With technical support of: Kassahun Minali²

Edited for series consistency: Monika Sopov³

Layout and illustrations Erika Endrődiné Benkő ▪ [email protected] on design of 360Ground ▪ www.360ground.com

¹ Netherlands-African Business Council (NABC) ² Remco ruimte bouw BV.³ Centre for Development Innovation (CDI), Wageningen UR

Commissioned by the Embassy of the Kingdom of the Netherlands in Addis Ababa.

Please quote as: Boere, A. et al., 2015, Business Opportunities Report Construction #8 in the series written for the "Ethiopian Netherlands business event 5–6 November 2015, Rijswijk, The Netherlands”

Please contact the following organizations for more information and support: ▪ Netherlands Africa Business Council (NABC) Ethiopia office; [email protected], T: +251 93 554 0266 ▪ Embassy of the Kingdom of the Netherlands in Addis Ababa; [email protected], T: +251 (0)11 371 1100 ▪ Enterprise Agency part of the Netherlands Ministry of Economic Affairs; [email protected], T: +31 88 602 1047 ▪ AGRIBiz.et part of AACCSA; [email protected], T: +251 (0)91 266 0725

Contributors:

Commissioner:

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Foreword from

Lidi Remmelzwaal Ambasador of the kingdom of the Netherlands in Ethiopia

Not many people realize how much Ethiopia has changed over the last two decades. Ethiopia combines strong economic growth with impressive results in poverty reduction and other social indicators, food security and infrastructure; a structural transformation of the economy is underway, with an increasing role for manufacturing and industrialization. For the coming years, the perspec-tive for future private sector investment is promising in many areas, especially in sectors where more value can be added and where large numbers of jobs can be created.

Of course these developments have also had its effect on the changing relation between the Netherlands and Ethiopia. Although development cooperation is still very much needed for years to come, the relation has broadened into a dynamic partnership, in which Aid and Trade and economic cooperation are becoming more and more prominent.

Many Dutch companies have discovered the potential in Ethiopia; at present we have are over 100 companies with a permanent basis in Ethiopia and the number is increasing. Although the majority of these companies is active in horticulture/agriculture, there is also Dutch presence in other sectors like transport, construction, tourism, food & beverages etc.

Opportunities in Ethiopia are almost endless and one of the promising areas is the Industry sector of Construc-tion. The Netherlands Embassy in Addis Ababa there-fore felt the need to commission a Business Opportunity Report, to provide further insight into the opportunities in construction sub-sector and specific information for companies that are interested to invest in this sector in Ethiopia.

This Business Opportunity Report will also be used as an important input for the first Ethio-Netherlands Business Event that will take place on 5 and 6 Novem-ber 2015 in the Netherlands. This important event will focus on a selected number of promising sectors in Ethiopia, such as seeds, oilseeds, poultry, dairy, spices, textiles and logistics.

The idea for this Ethio-Netherlands Business Event surged in a dynamic discussion that I had with my colleague, the Ethiopian Ambassador to the Netherlands (based in Brussels). We felt that the growing economic coopera-tion, the ambition of Ethiopia and the numerous oppor-tunities for Dutch companies deserve a much broader and prominent approach, such as this Ethio-Netherlands Business Event, in addition to sectoral economic and trade missions.

In good partnership between Ethiopia and the Nether-lands this initiative was further developed and together with many other partners and stakeholders this idea has been turned into reality. This Business Opportunity Report is an important building block for the Ethio-Netherlands Business Event.

I hope that this Business Opportunity Report on Con-struction will prove to be instrumental for raising the interest of Dutch companies to invest in Ethiopia and will provide them with useful and realistic information. The Ethio-Netherlands Business Event will certainly offer an interesting podium for this and I am very much looking forward to this important event. It will certainly be yet another step in the further strengthening and broadening of the partnership between the Netherlands and Ethiopia.

Message from

H.E. Teshome Toga Ambassador of the Federal Democratic Republic of Ethiopia to the BENELUX, Baltic Countries and Permanent Representative to European Union

On behalf of the Ethiopian Embassy, I would like to warmly welcome you to the business event organized by both the Ethiopian Embassy in Brussels and the Embassy of the Kingdom of Netherlands in Addis Ababa. The Ethio-Nether-lands Business Event, being first of its kind, is aiming at enforcing the ever-growing friendly relations between the two countries. It is my strong believe that both the Ethiopian and Dutch private sectors shall benefit from this impor-tant business forum as it creates a unique opportunity for new networks and acquaints the Dutch private sector with valuable insights about business opportunities in Ethiopia.

Presently, Ethiopia and the Netherlands enjoy good diplomatic relations and a strong development and eco-nomic partnership. Ever since the Netherlands opened its diplomatic Missions in Addis Ababa in 1950, the relation grew from strength to strength. Most recently, the second round of political consultation took place in The Hague from 5 to 6 March 2015, where we emphasized the need to further stimulate the economic relations by maintaining and diversifying the foreign direct investment (FDI) and trade between the two countries. Our statistics clearly indicate that Dutch investors are leading among Europeans in FDI flows in Ethiopia. Tapping into the Dutch investment opportunity and potentials in Ethiopia, the Dutch government has included Ethiopia in almost all financial instruments available for the private sector encouraging investment in developing countries.

Trade between the two countries is showing an encour-aging development in recent years. Today, there are over 100 Dutch companies active in Ethiopia, and this number is increasing. However, I strongly feel that the current level of investment is not commensurate with the potentials of the two countries. My government is highly

committed to promote the private sector by offering a comprehensive set of incentives to enhance the FDI in the country. Investors shall be accorded with several in-centives depending on the sectors; such as custom duty payment exemptions on capital goods and construction materials, income tax exemptions from two to seven years and carry forward losses. Similarly, several export incentives have been put in place to encourage investors aspiring for export. Ethiopia is highly devoted to protect investment through its Investment Code that protects private property, repatriation of capital and profit. More importantly, my government guarantees constitutional protection from expropriation. Ethiopia is also a signatory to the International Investment agreements such as the Multilateral Investment Guarantee Agency (MIGA), Bilat-eral Investment Promotion & Protection Treaties (BIPPT), and the International Convention for the Settlement of Investment Dispute (ICSID). Equally, Ethiopian products have duty-free, access to the U.S. and EU markets.

Ethiopia is now going through a constant multifaceted economic growth and transformation. Ethiopia’s improved economic infrastructure, abundant and affordable labor along with its excellent climate and fertile soil remains the country’s comparative advantage attracting investors. Market wise, the >90 million population and strategic geographical location offer a wide market access. Ethiopia with its huge investment potential has a lot to offer for the Dutch private sector. My government is ready to address any investment request from the Dutch private sector and to create economic interdependence between the two countries and peoples. It is therefore, my sincere believe and expectation that the outcome of this business event will highly equip participants with the required information and techniques necessary to elevate the economic rela-tions of the two countries to a higher level.

Using this opportunity I would like to extend my appreci-ation to all the stakeholders who took part in organ-izing this important event both in Ethiopia and in the Netherlands along with our Embassy in Brussels. My special thanks also goes to my counterpart and friend Lidi Remmelzwaal, the Ambassador of the Kingdom of the Netherlands to Ethiopia and Djibouti for her tire-less effort and the excellent working relations we have developed over the last two years.

With my best wishes for the success of the Ethio-Netherlands Business Event.

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Major trends in the development of the construction sub-sector

“Construction remains the most attractive investment opportunity in Ethiopia.” Jan Mikkelsen, head of the IMF’s mission in Ethiopia

Ethiopia’s rapid economic growth has fueled a recent wave of construction in Addis Ababa and elsewhere in the country. The Ethiopian landscape is dot-ted with construction sites. There are major government projects scattered throughout the country and industrial parks are being developed in many regions and major cities. The government has embarked on one of Africa's biggest state-housing projects, building about 32,000 units per year since 2006 and creating a national savings scheme that offers subsidized mort-gages to the poorest. For the last five years especially, Addis Ababa, powered by public and private forces, has witnessed a major change in its cityscape. In relative terms, the demand for housing in Addis Ababa is much higher than in other cities.

At the same time, infrastructure developments such as health bureaus, universities and schools are expanding throughout Ethiopia. Public works projects, worth billions of dollars, include new roads, railways and massive power-generation schemes across the country. The national railway is designed to link large parts of the country as well as the industrial parks, major dam projects, ports, sources of minerals such as potash in Afar, agri-culture and mining zones (for gold and other minerals). The first light-rail system in Sub-Saharan Africa was opened last September in Addis Ababa. This report tries to provide the most important information about the status of the Ethiopian construction sector and its projects, but with a particular focus on infrastructure projects and the industry parks, which seem most interesting for Dutch and European construction companies. All stakeholders that were interviewed for this report stressed the opportunities that can be found in the Ethiopian construction sector for European companies and expressed a strong desire and willingness to work together.

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6 Major trends in the development of the construction sub-sector Major trends in the development of the construction sub-sector 7

For an overview of the planned railway projects within the National Railway Network, see map below.

In 2012, the Ethiopian Railway Corporation (ERC) started the construction of the Addis Ababa electrified light-rail project to improve the accessibility of the capital. The ERC secured funds (USD 475 million) from the Export-Import Bank of China, after which the project was contracted to the China Railway Group. On 20 September 2015, the 17-km railway line from Kality in the south of the city to Menelik Square in the north started running, while an east-west line remains under construction and is expected to open in late 2015. The total length of both lines will be 31km (19 miles) and trains are expected to reach speeds of 70 km/h (43 mph). The line is operated by the Shenzhen Metro Group.

1.1 Main trends and developments in the industrial sector Construction in Ethiopia is on a constant rise and con-struction sites can be seen everywhere in Addis Ababa, in other urban areas and throughout the country be-cause of large-scale infrastructure projects like new roads, railways and the Grand Renaissance Dam.

1.1.1 Importance of the industrial sector to the economyAlthough Ethiopia’s economy is largely based on agri-culture, the share of services and industry sectors is increasing rapidly. The annual growth of the industry sector is mainly a result of the performance in the construction sub-sector, which will grow by 11.6% annually, fueled by a surge in investments in infrastruc-ture and industrial parks (http://www.et.undp.org/).

Research institutes forecast that the growth in the Ethiopian construction sector will remain one of the highest in the world, even though the growth rate has decreased due to government’s inability to keep in-vesting at the same rate in construction-related projects in comparison with a few years before (http://construc-tionreviewonline.com/).

The Industry Zones shall support Ethiopia’s export-ori-ented policies aiming to increase the number and value of agricultural exports. For instance, the Kombolcha Indus-try Zone will be used to host prioritized export-oriented sectors, such as textiles, garments, leather and agro-based industries. The construction sector therefore has a number of direct and indirect spill-over effects on other sectors, such as commodities, logistics and agriculture.

First, the construction sector needs large volumes of many different building materials of which only a minor-ity is produced domestically and the majority needs to be imported, for example from Dubai.

Second, building materials need to be transported to the construction sites, which in turn supports the domestic logistics sector in the short term. In the long term, the logistics sector will benefit from increases in agricul-tural production in particular, and economic activity in general. Lastly, manufacturing of agricultural produce in the Industry Zones adds value to the product and to the economy as the value of exports also increases—an indirect result of the construction sector.

1.2 Infrastructure projects1.2.1 National Railway NetworkThe railway network in Ethiopia, is a series of intercon-nected railway lines that span the length and width of the country. There is a 10-year master plan to build 5000 km of railway lines across Ethiopia, including 75 km within Addis Ababa (Yehualaeshet Jemere, Chief Officer Con-struction and Project Execution Department ERC, per-sonal). A major component of the network will be the Addis Ababa-Djibouti railway, a 656-km line linking Ad-dis Ababa with the port of Djibouti, providing landlocked Ethiopia with a multimodal transport system to the sea for its exports and imports (see also text in box). Ethiopia is seeking to have 5000 km of new lines working across the country by 2020.

The National Railway Network of Ethiopia is designed to connect major regions and development corridors. Construction of the different railway lines has been prioritized on a needs basis, taking into account the following criteria:

1. Connection to the port2. Mineral-rich areas and industrial parks3. Areas where transport is very costly and clogged

with high traffic, such as the Addis Ababa-Dji-bouti route

4. To reach every region of Ethiopia thereby creating a sense of political balance within the country

5. Regional connectivity with neighbouring countries.

ADDIS ABABA-DJIBOUTI RAILWAY

The Addis Ababa-Djibouti Railway is a standard gauge railway that links Addis Ababa with the port of Djibouti. The railroad is approximately 90% compelte as of Sep-tember 2015 and is excpected to start operation in early 2016. The 700-km (450-mile) line is being built by China Railway Group Limited (CREC) and China Civil Engineering Construction Corporation (CCECC).

The line is double-track for the first 115 km, from Addis Ababa to Adama, and single-track thereafter. Maintenance shops will be established along the line in Dire Dawa, Ethiopia’s main city in the east. There are 187 bridges along the route, but only one tunnel at Gol du Harr, northeast of Dire Dawa.

The estimated costs are expected to be USD 3.2 billion, which is being covered by a long-term loan from the Chinese government and an internal budget of the Ethio-pian government.

Ethiopian National Railway Network Construction Phase

“There are a lot of opportunities in Ethiopia in the construction sector, but some sub-sectors are more interesting than others. In real-estate, opportunities for foreign companies are little, but in infrastructure, electricity, energy and everything for which specialized knowledge is required, European companies can play an important role.”

Annelies De Beule, DENYS


1.2.2 Road projects There has been a major expansion of federal roads across the country. The Ethiopian Roads Authority (ERA) has plans to expand the current road network to 200,000 km of road within the next five years. Ethiopia currently has about 100,000 km of roads, including low-class and unpaved roads.

Entry and exit roads for Addis Ababa are undergoing an overhaul expansion, with plans for new roads to connect airports. The ERA is trying to open up areas such as import/export corridors and prioritizes roads for major potential investment areas, including industrial parks. Important road projects currently under construction are, for example, the new road from Dire Dawa towards the Djibouti (Dewele) border, which will run parallel to the Addis Ababa-Djibouti National Railway line, and the expressway between Modjo and Hawassa.

1.2.3 International Airport Project In October 2015, it was announced that the Ethiopian government in the person of the Minister of Transport, Mr. Workneh Gebeyehu, would commence a new mega-project, namely the construction of a new international airport in Addis Ababa. The new airport is expected to serve up to 120 million passengers every year and is proposed to be built in several phases over a span of four to five years. On completion, it will feature four run-ways and an undisclosed number of passenger terminals (http://preciseethiopia.com/).

1.2.4 Grand Renaissance DamIn March 2011, the Ethiopian government announced the start of the construction of the Grand Renaissance Dam. The Dam is currently under construction on the Blue Nile River and will generate 6000 MW of energy when completed, probably in the second half of 2017. The total

construction costs are estimated at USD 4.8 billion and are being financed by Chinese banks (USD 1.8 billion for the turbines and electrical equipment for the hydro-plants) and by the Ethiopian government itself through issuing bonds (USD 3 billion).

1.3 Industry parks and agro-processing zonesMany economic activities in Ethiopia are related to agriculture and Ethiopian policies focus primarily on increasing agricultural production and exports. However, the agricultural products produced in Ethiopia often lack any form of processing before being consumed or exported outside the country. This has been a major reason for the Ethiopian government’s decision to es-tablish 11 Special Economic Zones (SEZs)—renamed Industry Parks.

Maps below show the location of industrial centers and the planned Special Economic Zones or industry parks around Ethiopia and Addis Ababa respectively.

For the establishment of industrial parks, construction can follow three paths:

1. Designed by the government, on behalf of the government

2. Public-Private Partnership with the Indusry Parks Development Corporation (IPDC)

3. Private developer only.

As with options 2 and 3, private investors are also encouraged to develop their own industrial parks. The Eastern Industrial Zone, George Shoes cluster and Huajian Group shoes cluster are examples of this.

Recently, the development of industry parks, established or designed in various stages and in different regions around Ethiopia, has been focused on creating sector bases, for instance, Hawassa for garments and Adama for agro-processing.

Industrial parks operated or owned by IPDC (Brochure Industrial Parks Development Corporation, 2015)

Name of park

Site & Location

from Addis Ababa

Km from Addis Ababa

Km to Djibouti

Port

Delim-ited land

(ha)

Phas

e I Eligible industries

(only major ones)

Com

plet

ion

peri

od o

f Ph

ase

I

Status

Addis Industry Village

Addis Ababa - 863 8.7 8.7 Apparel 2012 Operational

Bole Lemi I Addis Ababa - 863 156 156 Apparel 2014 Operational

Bole Lemi II Addis Ababa - 863 186 186 Textile & apparel 2017 Detail design phase

Kilinto Addis Ababa - 863 337 337 Food processing, pharmaceuticals, furniture, household appliances, electronic & electrical

2017 Detail design phase

Hawassa South 275 998 300 100 Textile & apparel 2016 Under construction

Dire Dawa East 473 380 1500 150 Textile & apparel, vehicles assembly, food processing

2016 Under construction

Kombolcha North-East 380 480 700 50 Textile & apparel, food processing 2016 Open for bids soon

Mekelle North 760 750 1000 50 Textile & apparel, food processing 2016 Open for bids soon

Adama South-East 74 678 2000 100 Textile & apparel, vehicles assembly, food processing

2016 Feasibility study phase

Bahir Dar North-West 578 985 1000 50 Textile & apparel, food Processing

2016/2017

Feasibility study phase

Jimma South-West 346 1098 500 50 Textile & apparel, food processing 2016/2017

Feasibility study phase

Starting from 2016, IPDC will develop additional parks in Mekelle, Dire Dawa, Kombolcha, and probably also Adama. at the same time, feasibility studies will be done for Bahir Dar in the North-West and Jimma in the West. With a final size ranging from 500 to 2000 hectares, each park will be developed in phases of 75–200 hectares, and will have its own specificities (see also table below) (http://www.ipdc.gov.et/).

The Industry Parks Development Corporation (IPDC) is connecting the parks with the key infrastructure in the country, and as much as possible with the railway net-work. The IPDC and the Ethiopian Railway Corporation are working in tandem to establish many of these zones.

Land allocation for these industrial parks is therefore partly influenced by the proposed stations of the na-tional railway. Zones in Dire Dawa and Hawassa are good examples of this. In Dire Dawa, the zone is at very close proximity to the railway station.

The IPDC is also responsible for connecting the industry parks to sources of infrastructure, including telecoms, power, water, and the building of power sub-stations.

The Construction Contractors Association of Ethiopia (CCAE) aims to get more local Ethiopian companies involved in the establishment of the Industry Zones.

“Especially in road construction the capital require-ment is bigger. Construction of buildings is less ur-gent; so many local building contractors are already here. If we think of mutual benefit, then initially we are thinking of road and railway construction.”

Solomon Gizaw, General Manager, Construction Contrac-tors Association of Ethiopia (CCAE)


Mr. Solomon Gizaw provides 3 major reasons why the government has so far preferred Chinese contractors over local contractors:

1. The capacity of local contractors is limited.2. Chinese contractors quote lower prices compared

to other international contractors. 3. Intransparent procurement procedures, which

are most often not favorable for local contractors (here Mr. Solomon refers to a publicized study on collusive practices).

Even so, Ethiopian contractors show an increasing interest in being involved in the establishment of the Industry Zones, if possible through joint ventures with European construction companies. Mr. Girma Gelaw of BamaCon states:

“The Industry Zones are a major focus for BamaCon in the coming years. BamaCon has done manufacturing plants in the past and with that experience we are planning to become active in the Industry Zones. In such a case a partnership with a European company would make for a good combination of local experience and foreign experience and a good price–quality ratio.”

And there are local companies involved in the estab-lishment of these zones. RAMA Construction has taken part in the development of Bole Lemi 1 Industry Zone.

European companies are strongly encouraged to partici-pate in the establishment of industry zones in Ethiopia. As Shiferaw Solomon of the IPDC states:

“European companies adhere to certain quality standards that are important for the establishment of Industrial Parks, for example, on technological, environmental and project management aspects. For the IPDC and the Ethiopian government, it is impor-tant to incorporate these standards in the Industrial Parks.”

1.4 Specialized construction contractors Next to core building sectors in infrastructure and real estate, the latter with less opportunities for foreign construction companies, complementary works by specialized contractors need to be carried out as well. Electro-mechanical engineering is one of these projects. Here also, there are opportunities for European compa-nies with specialized knowledge.

Other areas of specialized projects are, for example, sanitary installation, woodwork and metal works, insula-tion (water, heat, sound), sheet-metal work, commercial refrigeration, the installation of illumination and sig-nalling systems for roads, railways, airports, harbors and basically every construction activity that requires high technological sophistication. To map the full range of opportunities for European companies in specialized construction sectors like those mentioned above, ad-ditional research and business profiles will have to be done to picture this in a satisfactory way.

Location of industrial centers and planned Special Economic Zones in Ethiopia

Indusrial centers and planned Special Economic Zones in Addis Ababa

“The government has always promised to capacitate also local contractors, but in practice most assignments for the Industry Zones are currently going to Chinese contractors. Therefore we are lobbying with the govern-ment to involve more local construction companies.”

Solomon Gizaw, General Manager, CCAE

“Currently there are no big electro-mechanical com-panies in Ethiopia. For larger projects, they do not have the capacity. However, there are a lot of spe-cialized projects throughout the country: dam, wind projects, geothermal, solar, sugar factories, cement factories, etc. If they get big electromechanical part-ners from Europe, they are happy to partner, because they can gain detailed information about the market segment they want to enter, gain local knowledge and networks etc., and we can learn from them as well. We do not see the European company as a com-petitor, rather as a potential partner.”

Teferi Awlachew, Director, Splenor Technology PLC

12 Major trends in the development of the construction sub-sector

1.5 Industrial projects—Private initiativesIn the last decade, multiple foreign companies have shifted elements of their supply chain to Ethiopia, such as the production of fast-moving consumer goods. This shift requires the establishment of new factories, brew-eries and manufacturing sites. Beer brewers Bavaria and Heineken, for example, have constructed new breweries in Ethiopia thanks to the vast supply of commodities and the growing local beer market. Unilever, at the same time, is building a manufacturing plant in Ethiopia.

In order to construct plants and factories, a general contractor employed by the investor on the advice of an engineer or architect is required. The most active contractors in Ethiopia are from China, Turkey, Italy and Ethiopia itself. The latter is often the most economic option, but capacity issues in terms of quality project management have to be addressed.

Since the prime contractor is responsible for providing all of the material, labor and equipment necessary for the construction of the project, they can hire specialized subcontractors to perform portions of the construction work. Often therefore, the main contractors, in consul-tation with their clients, often turn to subcontractors with whom they have built a long and solid relationship in their home country or those that have unique exper-tise in a specific area. As a result, international and local construction companies can participate in new private projects in Ethiopia, either as main contractors or subcontractors.

CASE STUDY ON A PRIVATE INITIATIVE— HEINEKEN KILINTO BREWERY

The new Heineken Kilinto brewery on the fringe of Addis Ababa aims to meet Heineken's long-term ambition to create sustainable businesses and generate investment impact beyond its gates, by increasing the income of smallholder barley farmers and improving access to markets. The new brewery supplies the local market and now employs around 280 people. A limited timescale and a tight budget meant developing a fast-track schedule to help Heineken meet the additional capacity requirements for their Ethiopian beer brands Harar, Bedele and Walia.

Heineken employed Royal Haskoning-DHV for the overall project management. Royal Haskoning-DHV took care of the extended design, tender and construction documents that reduced building costs and accelerated construction time. Where possible, the design was based on the use of local materials with tendering undertaken with local pre-selected class-one civil contractors. A 'one building' pre-engineered solution was introduced, covering most of the key brewery processes. The tender of the civil works was divided into four packages (earth works, PEB, early foundation works and main civil works) which made it possible to start construction work on site while still final-izing the engineering.

In turn, Remco Afrique was employed as one of the sub-contractors for the early foundation works. Remco Afrique has built the breweries of Heineken with a number of foreign operators and a local contractor, Rama Construc-tion Ltd.

Finally, the establishment of the Kilinto factory created spill-over effects on other sectors in Ethiopia, such as the logistics and transport sector. Although Ethiopian Shipping Lines is the sole transport operator in Ethiopia, its Dutch agent Steder Groep B.V. has been responsible for the transport of the odd-sized beer tanks to the brewery.

Aad de Jong (RHDHV), Kassahun Minali (Remco Afrique), Ingrid van Ginkel (Steder Group)

Currently, there are various inefficiencies in the implementation of construction projects in Ethiopia, both with local and non-European contractors.

Inefficiencies are raising the price of construction, for example: ▶ most construction inputs have to be imported ▶ high rates of foreign exchange ▶ weak management of projects.

Projects are in need of stricter management practices to deal with rising construction costs. Proper project management can help save time and achieve deadlines (Teferi Awlachew, Director, Splenor Technology PLC, personal). Using local labor and foreign experience can create opportunities for com-petitive prices and better service quality.

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Investment opportunities

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16 Investment opportunities Investment opportunities 17

European involvement in Ethiopian construction European construction companies are scarce in Ethiopia. There are a few exceptions such as the Italian company Salini which is involved in the Grand Renaissance Dam, Belgian DENYS which is building part of Addis Ababa’s sewage system, and Remco Ruimtebouw B.V. which is deploying various steel construction projects,

Chinese involvement in Ethiopian constructionAs in many African countries, Chinese companies and finance play a key role in the infrastructure development of Ethiopia.

One thing that makes the Chinese important partners in the Ethiopian construction sector is their tendency to move fast. Through barter deals or payment guaran-tees from African governments, they are more inclined to take risks, have little fear in taking up projects and often see win-win situations. Furthermore, the Chinese government wants to create job opportunities for its people. Moreover, because of China’s vast amounts of foreign reserves, the Chinese government sees investing in Africa’s construction sectors as an opportunity for potentially profitable investments.

International consortiaInternational consortia would also create unique selling points for European construction companies and their investors. The Ethiopian government can sign a contract with one company and that company can hire different sub-contractors.

‘’There is plenty of financing available; Europeans just need to tap into it. This does not only go for railways, but also for roads, dams, wind farms, etc.’’

Yehualaeshet Jemere, Ethiopian Railway Corporation

RAMA Construction already has experience in part-nering with Dutch companies. In the construction of Heineken’s brewery in Kilinto they worked together with Remco Ruimtebouw B.V., which provided the steel construction.

2.1 Opportunities in various construction subsectors Certain parts of the Ethiopian construction sector are protected by Ethiopian law, meaning that national regulations restrict foreign parties from becoming involved in small-scale projects. Large-scale projects, infrastructure projects and specialized projects, on the contrary, are open to foreign contractors and companies for the capacity, knowledge and technology assets they can bring. Furthermore, the capacity of the Ethiopian private sector to undertake big and complex construc-tion projects is limited. Complex construction projects are therefore usually granted to foreign-based con-struction contractors.

There are many possibilities of becoming active in the Ethiopian construction sector and to seize business opportunities. This depends on the initiator and the scope of the project, which can be acquired through the following methods:

▶ competitive bidding for public projects ▶ negotiated contract for public projects ▶ private assignments ▶ as a subcontractor.

The greatest opportunities can be seized by bidding for public projects exceeding a budget of more than 50 million Ethiopian Birr, in conformity with the Ethiopian public procurement procedure. For all public projects below this threshold, Ethiopian law does not require the national authorities to implement the competitive bidding procedure and they can appoint preferred com-panies to execute the project (by negotiated contract). Private-sector initiatives are not subject to obligatory bidding procedures and are likely to choose the least bidder or partners to execute the activity.

The initiator of public and private projects defines the scope of the project and lays down all requirements and criteria for the project assignment. The winning con-tractor of the bid has to carry out all described tasks and responsibilities and can employ subcontractors to perform specific tasks as part of the overall project.

The section below outlines business opportunities for foreign companies in various construction-related areas, especially those outside the core sectors of infrastructure and industry zones.

2.2 Exports of machines to EthiopiaIn 2014, given the lack of domestically produced equip-ment, approximately 20% of the total value of Ethiopian imports consisted of machinery, ranging from large construction vehicles to cranes and mill equipment. The value of these imports grew to USD 2.3 billion in 2014 and has been increasing for the past five years. The majority originates from countries in the Middle East, India and China.

Dutch companies have exported some machinery, trucks and cranes to local contractors and projects in Ethiopia. The Dutch company BIG Machinery has limited experience exporting its products to Ethiopia, because banks and other lending institutions often refuse to finance such projects. Moreover, BIG Machinery only sells its products to small, local traders and does not have contact with the project contractors themselves. Connecting suppliers of high-quality machines with contractors of larger-scale projects would facilitate new trade opportunities.

There are no import restrictions for construction ma-chinery. Since these imports contribute to Ethiopia’s long-term goals, such as developing the industrial and manufacturing sector, no taxes are levied and import of machinery is duty-free. However, foreign com-panies that aim to export machines or materials to Ethiopia, need to hire a local customs clearing agent for the clearance and further transportation. The import trade (except for a few items) in Ethiopia is exclusively reserved for domestic investors.

2.3 Exports of materials to EthiopiaIn Ethiopia the major missing material inputs for construction are building materials. Since domestic production of such materials is limited, the majority needs to be imported from all over the world. Conse-quently, Ethiopia will very likely continue to import most of these goods for the years to come. In 2014, for example, Ethiopia imported metals, coal and asphalt worth more than USD 1.7 billion.

A foreign company can have a business partner with an import license. This partner has to be registered with the Ministry of Trade, which regulates imports, and manages trading licenses. Obtaining a trading license has become relatively easy in recent years.

Remco Afrique, for instance, provides steelwork for warehousing and construction structures and is involved in privately initiated projects in Ethiopia. All their imports are exempted from taxes and come from the Netherlands, Germany and Romania. Similar to the export of machin-ery, materials can be imported duty-free as long as they contribute to long-term economic development.“It is up to the client which standard they want, but if

they want a high standard, the Chinese can most often bring it. The issue with the Chinese is really that they will always bring their own money, also because the Ethiopian government might not have it, but it means there is no bid. The Chinese will sit together with the responsible Ethiopian government office and negotiate about the deal, and try to negotiate to bring in Chinese companies.”

Teferi Awlachew, Splenor Technology PLC

“When it comes to bidding for projects, Europeans often do not act fast enough and want zero-risk. They are less willing to take up a whole project (turnkey contracts), and are sometimes only interested in one aspect of a project.”

Yehualaeshet Jemere, Ethiopian Railway Corporation

18 Investment opportunities

2.4 Consultancy and project managementThere are significant opportunities for consultancy service-providers for construction design, quality checks and project management for example. Local contractors often lack the capacity and experience to manage large-scale projects such as the establishment of Industry Zones or significant infrastructure projects. Both public and private initiators outsource the project management to third (foreign) parties to supervize the construction progress. Both domestic and foreign parties, possessing significant experience and capacity, are able to bid for project management.

For foreign contractors, and in partuclar consultancy service-providers, it is recommended to form a consor-tium with local consultants to facilitate the tender bid procedure.

Concrete opportunities exist in the following areas: ▶ Project management of large-scale projects ▶ Design of large-scale buildings or infrastructure

projects ▶ Quality management ▶ Supervision of projects; European engineering firms

can supervize as consulting companies for Ethiopian construction projects.

For consultancy firms, specific opportunities exist in traffic management within cities. The traffic in a city like Addis Ababa can be chaotic, but this often has to do with how the traffic is managed rather than the amount of vehicles.

2.5 Civil engineering The main opportunities in civil engineering can be found in specialized projects that require specific knowledge or technology, since regular building construction can be done by Ethiopian contractors only (as they are protected to do so by Ethiopian law).

Concrete opportunities :

1. Throughout Ethiopia various works, such as geo-thermal, solar, sugar, and cement factories, etc., are being built. There are no big local electro-mechanical companies with the knowledge or financial capacity to execute these projects. There is a clear demand for electro-mechanical companies from Europe that can fill this gap.

2. Many specialized products are currently imported, so there are opportunities for companies inter-ested in starting manufacturing factories e.g. for sockets, light fittings and fixtures, conduits, etc. For cables, there are four companies already operating in Ethiopia.

3.1 Registration of foreign construction companiesThe Ministry of Urban Development and Construction registers and issues certificates of professional competence to engineers and architects and determines the grades of contractors and consultants. Accordingly, the following regulations are the most pertinent for a foreign investor entering the construction sector in Ethiopia: ▶ All foreign construction companies and their professionals who may under-

take any activity related to construction works in the country are to be registered at the Ministry.

▶ All foreign contractors who want to take part in the National Competitive Biddings (NCB) shall be registered as a Contractor of only grade 1 for all categories, and they should not participate below grade 1 (see table on page 23).

▶ Foreign professionals or specialists with experience from foreign countries should submit documents authenticated by appropriate bodies.

▶ Foreign professionals who want to be registered should supply evidence of both work and residence permits.

3.2 Tender policies3.2.1 Government tendersEthiopian law stipulates that any government project that is expected to exceed a budget of 50 million Ethiopian Birr has to be tendered out inter-nationally. The government uses contractors for the implementation of the projects, but is in charge of the management of the contracts and the assets.

The usual public procurement procedure in Ethiopia is known as the Least Bidder Procedure. Individual contractors or joint ventures are requested to send a technical and financial proposal to the responsible authority. This organisation first evaluates the technical proposals, after which approximately 70% is generally rejected immediately, and then evaluates the financial proposal. The contractor or joint venture that fulfils all technical requirements sufficiently and bids the lowest price, is selected as prime contractor.

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Points to consider

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22 Points to consider Points to consider 23

3.2.2 Tendering and selection of contractors for Industry ZonesThe industry parks are projects costing hundreds of millions of dollars and require a contractor or joint ventures that can do all the buildings and related infrastructure (roads, building sheds from steel struc-tures, waste treatment plants, telecommunication, sub-stations, office facilities, hotels, apartments) inside the park. There are two types of bidding procedure for the construction of these industry zones.

1. Evaluated least bidder: In this case, bidders will submit their financial and technical pro-posals in two separate sealed envelopes and their technical proposal will be evaluated first. Those who score lower than 70% in their tech-nical proposal will be automatically rejected and their financial proposal will not be opened. For those who have scored higher than 70%, their financial proposal will be opened and the bidder who has offered the lowest price with the same specifications will win the bid. This is the case when a client hires a consultant to design the whole industry park.

2. Weighted average: When the tender concerns a design-and-build (turn-key) project, the bid-ding procedure is different. For those who have scored higher than 70% in their technical pro-posal, their financial proposal will be opened and the weighted average is taken to determine the winning bidder. Most of the time, the technical proposal is 70% of the final value and the finan-cial proposal is 30%. Typical examples of this occurred in the bidding for Hawassa Industry Zone (USD 240 million project) and Dire Dawa Industry Zone (USD 250 million).This kind of bidding procedure is especially suitable for European contractors.

(Sources: Mr. Kassahun Minali, Country Manager, Remco Ruimtebouw B.V. and Mr. Shiferaw Solomon, Deputy CEO, IPDC, personal)

3.3 Grading systemEthiopia has established a grading and classification system for its construction companies that should fa-cilitate tender processes. Below are the most important features of this grading system:

In Ethiopia registered foreign companies can basically only be grade 1 companies, since otherwise they will not be allowed to participate in National Competitive Biddings.

3.4 Private projectsFor non-governmental, private projects, the selection of contractors is often different. Projects for private companies are often granted after selected bids. Im-portant factors in winning these selected bids are the price and delivery time. Sometimes, when time is very limited, private companies will even skip the selected bids procedure and directly choose a contractor and negotiate the price with them.

3.5 Challenges with regulationsRegulations in Ethiopia’s construction sector some-times complicate the work, both for local contractors as well as for foreign contractors, and are not always implemented or carried out correctly. Below are some quotes from various interviews which provide examples:

Grading system for BCs, RCs and GCs Source: Ministry of Urban Development and Construction – Directives for the Registration of Construction Professionals and Contractors, June 2013

Catego-ries G

RADE

Construction Costs (in Ethiopian Birr) GC = General Contractors: Contractors who are qualified to undertake a variety of construction work such as buildings, roads, railways, bridges, airports, dams, water-works, etc.

BC = Building Contractors: Contractors who are qualified to undertake building construction and supplementary works on buildings.

RC = Road Contractors: Contractors who are qualified to undertake construction of roads and other related civil engineering works.

SC = Specialized Contractors: Contractors who are qualified to undertake con-struction activities in specialized fields as classified under the following sub-categories: 1. Electro-Mechanical (SC-EM) 2. Painting and Decorations (SC-PD) 3. Sanitary Installation (SC-SI) 4. Wood and Metal Works (SC-WM)

Building Contractor (BC)

Road Contractor (RC)

General Contractor (GC)

GC, BC, RC 1 Above 210,000,000 Above 300,000,000 Above 350,000,000

GC, BC, RC 2 Up to 210,000,000 Up to 300,000,000 Up to 350,000,000









Grading system for SCs

Catego-ries RA

NK Construction Costs

(in Ethiopian Birr)

SC 1 Up to 100,000,000

SC 2 Up to 45,000,000

SC 3 Up to 18,000,000

SC 4 Up to 9,000,000

Source: Ministry of Urban Development and Construction – Directives for the Registration of Construction Professionals and Contractors, June 2013

Lack of decision-making“It would help if Ethiopian officials would be more open and assertive; to dare to make decisions. An additional problem is that certain laws can be interpreted in many ways. The system can be rigid.”

Stijn Vandersyppe, Project Finance Manager at DENYS

Liquidity constraints on the part of local contractors“Liquidity constraints are one of the biggest issues among Ethiopian contractors, next to lack of skilled human resources. Project management software is very rare. If you have many projects at hand and if payment is not executed on time, companies get into huge problems, since their capital is tied. This inhibits the company’s growth and, depending on the sever-ity, can even lead to bankruptcy.”

Solomon Gizaw, General Manager, CCAE

Lack of international banks in Ethiopia “The international banks are not allowed in Ethiopia, so for any foreign company coming to Ethiopia it is hard to manage their money here. If international banks would be in Ethiopia they could more easily manage their finances.”

Girma Gelaw, General Manager, BamaCon

Lack of full alignment between the loan conditions of the World Bank and Ethiopian implementation of regulations“World Bank projects are always tax-exempted. Still, some officials at Ethiopian customs are expecting tax payments on the imported equipment for the World Bank project that we are involved in. Often there is also a dis-crepancy between orders from higher and lower officials.”

Annelies De Beule

Issues related to “Material on Site” payments“In contradiction to the International Federation of Consulting Engineers’ (FIDIC) Conditions of Contracts, regulations of Ethiopia’s government lift payments for supplied materials on site. This has great financial impact for contractors. For example, the purchase costs for generators, lifts, big-size pumps etc. are much higher than the installation costs, whereas the contractor will be paid only after the installation. In such cases, the con-tractor is not interested to order materials in advance and this leads to late orders of the materials, which de-lays the completion date of the project and furthermore leads to inflation of prices. If the contractor were paid as soon as the material is delivered on site, he would be able to use the money for other deliverables for the project.”

Mr. Zelalem, RAMA Construction

Sources of further information

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26 Sources of further information Sources of further information 27

4.1 (Semi)-public sector partnersEthiopian Railway CorporationThe Ethiopian Railway Corporation (ERC) was established in November 2007. Its mission is to build railways and to provide railway transport services in Ethiopia, more specifically cargo rail freights and passenger railways. It is not directly involved in the construction of the railway, which is done by contractors, but serves as a facilitator and contracting party for (foreign) construc-tion companies to come and build railways within the country. The ERC reports to the Ministry of Transport. Currently ERC is establishing a new Ethiopian Railway Institute (ERI) to train Ethiopian engineers to increase their local capacity for railway construction. Website: http://www.erc.gov.et/

Ethiopian Road Transport Authority (ERA)Established in 1951, the Ethiopian Road Transport Authority (ERA) is the oldest road authority in Africa. The ERA has the mandate to set standards and regula-tions of the national roads, and to create and maintain national roads. The ERA is also responsible for direct implementation of the federal road network. It reports to the Ministry of Transport. There are three general managers at the ERA: one for each of the three depart-ments i.e. engineering, planning and finance.Website: http://www.rta.gov.et/

Ethiopian Industrial Parks Development Corporation (IPDC)The IPDC was established in 2015, although before that, a similar organization called the Ethiopian Industry Development Zones Corporation was in place.

Based on the IPDC regulation enacted by the Council of Ministers, it is fully mandated to develop industrial parks in Ethiopia. It is a public enterprise, owned and supervised by the government. The infrastructure con-necting industrial parks with Ethiopia’s core infrastruc-ture is also part of the IPDC mandate. Furthermore, IPDC aims to provide a one-stop-shop service for those investing in designated industrial parks in collaboration with the Ethiopian Investment Commission (EIC), the Ethiopian Revenues and Customs Authority (ERCA) and others.Website: http://www.ipdc.gov.et/

Construction Contractors Association of Ethiopia (CCAE)The CCAE was established in 1992. It is the biggest association of construction companies in Ethiopia and now has now over 1500 company members. The CCAE has members in building construction, road construction, general construction and civil works or specialized construction.

4.2 Private sector partnersThere are hundreds of construction companies registered in Ethiopia, categorized in grades from 1 to 10. In this section we will mention a few of the most important grade-1 contractors in the country.

BamaConBamaCon is a construction company established in 2006. They have a large portfolio of projects, especially around Addis Ababa, including 43 finished high-rise buildings. They focus mainly on the construction of buildings. Most of their projects are hotels, apartments and the like, but they are also currently working on two bridge projects in Debre Zeit and Dire Dawa.

BamaCon has about 1500 workers, although the majority is temporary; their permanent staff is about 500 or 600. About 90% of their projects is for private companies and only 10–20% for the government and other organisations. BamaCon also has a sister company called Anchor Foundation PLC, which focuses on working pipes and micro pipes used for high-rise buildings and foundations.

Rama ConstructionRama Construction was established in 1995 and has about 400 employees. During the early years, the com-pany was only involved in the construction of buildings, but recently it has been expanding its activities into other areas, such as road construction, and under-taking civil sub-contracts in other major projects around the country. Some of these major public and private projects include civil works for Wengi, Metahara and Fincha Sugar Factories, a wind farm in Mekelle, and an Irish-American geothermal plant in Shashemene. Rama Construction operates with environmental safety standards in all its activities including water recycling and water treatment, curbing soil erosion and reusing oils from trucks.

Huda Real Estate Pvt. Ltd. Co. (HUDA)HUDA, a member of the MIDROC Ethiopia Technology Group, the largest conglomerate in Ethiopia owned by Sheik Al Amoudi, is engaged in Land/Real Estate develop-ment activities, buying and/or construction of buildings for offices, commercial use or residential purposes etc. Its business is construction and construction manage-ment. Examples of HUDA projects include:

▶ The (MIDROC Corporate Office) in Meskel Square (a pioneer 22-storey building)

▶ City Center Development (CCD) (a 39-storey, high-rise twin towers)

▶ MIDROC Gold Mine Carbon in Pulp (CIP) and Fuel Depot Projects.

Tekleberhan Ambaye Construction PLC (TACON) TACON is a Grade-1 registered Building Contractor undertaking various types of construction projects in different parts of Ethiopia. Some of their major finished projects include Jimma Agricultural College, Jimma University, the African Union upgrading works, Mekelle University and Commercial Bank of Ethiopia Megenagna Branch Office Building Project. Some of the projects currently under construction include: Ambo University College, Tigray Stadium Complex and Debre Markos University.

Interviews

Mr. Aad de Jong – Project Manager Royal Haskoning-DHV Ms. Annelies de Beule – Country Manager DENYS Mr. Bekele Negussie – Deputy Planning Manager Ethiopian Roads AuthorityMr. Anteneh Getnet – Independent engineering consultantMr. Girma Gelaw – General Manager BamaCon Ms. Ingrid van Ginkel – Business Development Steder Group Mr. Kassahun Minali – Country Manager Ethiopia, Remco Ruimtebouw B.V.Mr. Ron de Bruijn – Sales Manager Africa BIG MachineryMr. Shiferaw Solomon – Deputy CEO Industrial Parks Development Corporation (IPDC) Mr. Solomon Gizaw – General Manager Construcion Contractors Association of Ethiopia (CCAE) Mr. Stijn Vandersyppe – Financial Manager Ethiopia DENYSMr. Teferi Awlachew – CEO Splenor Technology Mr. Yehualaeshet Jemere – Chief Construction and Project Execution Department ERCMr. Zelalem Tilahun – General Manager RAMA Construction

References

• Ministry of Urban Development and Construction, June 2013 , Directives for the Registration of Construction Professionals and Contractors

• Precise Ethiopia, 01 October 2015, Ethiopian Airports Enterprise to Embark on Mega International Airport Project• Team of Experts, December 2013, Prevention of Collusive Practices through: Transparency; Performance Measurement and

Competition • UNDP, 2014, Ethiopia Quarterly Economic Brief – http://www.et.undp.org/content/dam/ethiopia/docs/Economic%20Brief-%20

Third%20Quarter-2014.pdf• Jenny Vaughan, 2014, Boosting Ethiopia's economic growth with building boom, Africa Review – http://www.africareview.com/

Special-Reports/Making-sense-of-Ethiopias-building-boom/-/979182/2239086/-/eqyigpz/-/index.html

Websites

• Industrial Parks Development Corporation – http://www.ipdc.gov.et/ • Ethiopian Roads Authority – http://www.rta.gov.et/ • Ethiopian Railway Corporation – http://www.erc.gov.et/• 2Merkato – www.2merkato.com/2482-import-and-export-procedures-in-ethiopia • Atlas Media – https://atlas.media.mit.edu/en/profile/country/eth/• Construction Review Online – http://constructionreviewonline.com/2015/05/growth-of-ethiopia-construction-sector-to-surpass-

that-of-regional-peers-bmi-says/

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