Construction boom, Infrastructure development and housing projects generously cover the landscape of modern Ethiopia. The rise of the country’s economic standards has gone beyond the expectation as opined by many investors from worldwide.
Aside from its rapid economic growth and the current progress in the country, Ethiopia’s construction sector has turned the country’s financial needs into massive opportunities for foreign businesses – especially those from the European nations.
The country forms the heart of Africa’s economic evolution due to high demands in the construction sub-sectors. The wave of construction for instance in Addis Ababa has spilled into other Ethiopian cities, causing investors to take serious measures in expanding their business in the country.
Experts in the field suggested that Ethiopia’s growing number of construction projects have drawbacks that need careful management. These limitations include among others the costly nature of construction inputs and management gaps. The country has opened its doors to more foreign investors. In turn, opening opportunities for European, Chinese and other companies from all over the globe, to expand their businesses and increasing the country’s employment rate.
The government has paved the way for European and Chinese entrepreneurs to get involved with the innovation of the country’s infrastructural development and industrial growth. Their involvement has of course created competition even if the foreign construction companies are highly advanced that the local firms sometimes are unable to cope up with their financial and technical potential. One of the challenges to local firms is services related to financing construction projects and construction management.
The issue of making construction projects effective calls for financial development and management. Effective and efficient management is urgent to reverse the various problems of the sector. But practitioners and stakes of the sector are sometimes heard saying that the industry is doing below the expected level. Regardless of various drawbacks in the sector, the government is allocating over 60 percent of the total capital investment to the construction industry.
Studies in the sector often indicates that finance limits, performance gaps, contracting, planning, lengthy purchasing activities, consultancy, quality, designing integration, market and consistence gaps are some of the challenges to the booming construction sector.
As construction works are time and cost bound, and it employs huge resources of labor, material, and equipment, they involve heavy investments of millions to billions.
They require a high level of technology so that they need effective management of resources. The execution of major construction capital work is undertaken by projecting them, that is, by organizing them into one or more construction projects for implementation. For these and some other reasons, construction needs strong reliable finance. Hence, it is observed that most of nation’s huge construction projects with the exception of the Great Ethiopian Renaissance Dam are managed and implemented by international companies as they have huge financial capacities. These companies are mostly foreign companies in which they are engaged in big and huge construction projects.
Researches indicate that finance is the core challenge that hinders construction projects not to implemented effectively and efficiently.
Melaku Wondimu a researcher and a private contractor in the area indicated that construction projects in general have two sources of finance, internal and external. Banks, insurance companies, pension funds and individual loans are external sources; from these, banks are the most sources for construction firms. “A project requires the acquisition and utilization of man power, raw material, fixed assets, facilities and capital equipment.”
The researcher further indicated the fact that construction projects need adequate finance at the time of need in order to be profitable. Melaku further stated that banks in developing countries are reluctant to lend to small contractors for a set of obvious reasons. The contractors are often first-time borrowers without any track records at the bank which makes them not able to fulfill the collateral requirements of banks.
Furthermore, he said “Effective construction and growth both need financial institutions capability of assembling resources, domestic saving, and directing them into high return investments. But as the case of Ethiopia shows, the creation of a comprehensive financial system together with an appropriate regulatory framework is not an easy and accessible task.”
Different financial liberalization measures and restructuring of financial institutions have been undertaken over the last two and plus decades. All measures have the aim to promote a competitive environment and efficient banking services to the public.
The other main financial institutions in addition to banks which have great contribution in the economic financing are the macro financing institutions. Macro credit windows are established and retain banks have become wide spread in the developing world as an effective mechanism for capital mobilization for entrepreneurs, especially for those who have little or no access to main stream sources of credit. These institutions have a major role in small scale construction activities.
The Researcher further indicated that most of the construction firms believe that the contribution of banks is crucial for financing projects. Taking the findings of the data he mentions inadequacy of finance and bureaucracy in implementation as major challenges of the construction sector.
Melaku also said that cash-flow management is the major problem for not successfully completing projects. That is why contractors need financial assistance during their mobilization period. Contributions of financial institutions solve the financial problem of construction firms. And private banks are preferred by construction firms for their services and facilities than governmental banks. “Contractors need to fulfill collateral requirement in order to get loan from banks as they provide loan for firms and projects that guarantee work and collateral.”
The researcher recommended for cash flow management, forecasting and allocation of cash properly as factors crucial for healthy accomplishment, development and capacity building of construction firms. So, cash flow forecast should be prepared by professionals who have knowledge of different activities in the construction sector who possess accounting knowledge.
In Ethiopia, sources of finance for contractors are banks. But due to insufficient number of banks, they do not have choice to get easier and modern service, so there should be financial institutions who would serve contractors only to alleviate their financial problems. And contractors’ cash flow shortage occurs during different phases of project life. During the mobilization phase, the financial capacity of a firm is weak due to absence of payment and hence contractors should fulfill their financial capacity before commencement. He said adding for the benefit of both contractors and banks their relationship should depend on healthy working environment through sharing information about their progresses frankly and the rules and relations set by banks concerning contractors should be arranged by discussion from both perspectives.
Moreover, he suggested governmental banks should avoid bureaucracy and their service should be fast to work with contractors to facilitate timely completion of projects.
Mentioning the fact that the major objective of construction industry is to provide infrastructure with effective time, cost and quality, banks according to the researcher should have ample professionals to evaluate the value of properties secured as collateral adequately, because there may be over or under estimate and leads to dispute between contractor and banks. And the construction sector should effectively managed even through financing mega projects timely and efficiently.