Bottom-Up Competiveness Empowers Local Construction Capacity

Except, perhaps, for the brief period of Italian occupation, never in the history of Ethiopia, has there been a government so fond of public investment in construction. The Revolutionary Democrats are so profoundly committed to bridging the infrastructure gap that has been hindering the growth of the nation’s economy, that they continue to put huge resources into the sector. Mega projects of one kind or the other have become essential pillars of their development plans.
With the first Growth & Transformation Plan (GTP I) that ended in June, 2015, the focus had been on sugar factories, fertilizer plants, hydropower projects, irrigation schemes and water supply facilities. Even if success was far off, huge budgetary and off-budget financing has been going into infrastructure. This, of course, is not to mention the outlay into transport facilities, health centers and hospitals, public housing schemes, schools and universities, and research facilities.
As the second GTP (GTP II) comes to the scene, the whole attention has shifted into industrial parks (IPs). Under this scheme, the government intends to build facilities hosting series of interrelated and interlinked industries with the ability to bring about an agglomeration effect into the economy. It is in this plan that the hope of industrial takeoff of the ruling EPRDFites lies. And they seem to trust the experience, charisma and intellectualism of Arkebe Oqubay (PhD), an EPRDF heavyweight whose book on industrial policy has become all the more popular within African policy circles.
By virtue of establishing IPs in various parts of the nation, albeit in line with the dynamic competitive advantage of localities, the ruling EPRDFites wish to bring about, or at least initiative, a wholesome structural shift in the economy of the nation. If this plan of the developmentalists is to succeed, then, the long-awaited transformation can begin in a country that has been witnessing a decline in industry’s share of gross domestic product (GDP) ever since 1960s. Not only would this reorient the economy towards sustainable growth, but it will also help it get away with the plugging effects of unemployment, poverty and inequality.
Nonetheless, the effort to expand IPs around the country has brought to light the inherent limitations of the economy and the very sector the EPRDFites have been trying to embolden. Latest bids for the construction of IPs, which, because of their size and complexity have brought intricate demands from the government, have seen local contractors seriously disappointed. These bids that require sufficient capitalization, access to foreign exchange and tailored experience have placed local contractors at a disadvantage.
In response to their actual industrial position, the contractors have complained to the Prime Minister with the intention of getting preferential treatment in some way. The new demands on the industry are unusual for the ruling Revolutionary Democrats, as they tend to adhere to market principles and opt for what fits their purpose – in this instance, the purpose being to establish IPs as soon as possible. Prevailing market principles, however, mean that local contractors will be pushed to the edge as they are unable to compete.
This is just one case of a local construction capacity standing at the lower end of the competitive framework. When it comes to big hydropower projects like the Great Ethiopian Renaissance Dam, or toll roads, such as the Addis-Adama Toll Road, the local construction industry stands below competitive standards. Hence, projects are often snatched by experienced foreign firms, mostly Chinese.
True to the long-established economic theory of pricing, wherein a firm’s position in the experience curve would have definitive role in its costs (and hence price), production capacity, technology adoption and innovation, Chinese firms are overwhelming the construction scene in the country. Of course, this is not to underestimate the role state support plays in the pricing of these firms. One way or the other, they seem to rightly match up with the competitive matrix.
In contrast, local firms settle for less. It is by no means rational to blame it all on the Revolutionary Democrats’ fondness for the market game. Instead, it all has to do with the way the local construction industry has evolved. There are essential structural snags that cause local construction capacity to be far lower than the standards complex projects require.
For starters, the whole industry is at a nascent stage of development. Most of the construction firms within the country are only as old as the incumbent government and are therefore at the first phase of the experience curve. This means that their capacity, pricing margins, mobilization effectiveness, cost structures, technology and research capabilities are either too sticky or too inelastic.
In looking at the whole construction industry, one sees a pyramidal structure wherein much of the capacity resides at the bottom of the pyramid. Vertical mobility is limited and has been worsened by regulatory requirements, often too demanding to be met by the local firms. These demands are expressed in the form of capitalization, project specifications and asset ownership.
Even within the local industry, growth that could enable firms to move up the grade levels between contractors, requires almost doubling of their asset base, capitalization and project experience. Not even joint ventures can help firms pass the sticking points. Such bold boundaries of mobility stymie the growth of firms to the extent that only few firms stand at the upper rungs of the pyramid.
Worse, the culture of competition within the industry is poor. The industry is overwhelmed with preferential protective measures that are tantamount to ongoing baby-sitting. Instead of trying to live up to the demands of the market, industry players, big or small, often try to twist the arms of the state to be treated differently. Lobbying for preferences has become a norm within the industry. The latest letter from large contractors to the Prime Minister is just an extension of this culture.
Of course, capacity building schemes for contractors, consultants and professionals of the sector are not widely available. Essential skills, such as project planning, costing, scheduling and management, are in short supply. All the more scarce are skills such as risk analysis, integration management and environmental valuation. As such, the competitive bases of local contractors are quite limited. By translation, their cost and price structures are too inelastic to be competitive in large projects such as IPs.
All this means that the structure of the construction industry is not fit for the market. Hence, it needs reorientation.
No state intervention at the upper rungs of the pyramid can solve the problem sustainably. What can solve the problem, on a sustainable basis, is the infusion of market principles in industrial activities all the way up.
Removing the protective and preferential shields under which the industry is sheltering, could be a starting point. When a person becomes accustomed to competition in her childhood, it becomes a principle for living in adulthood. The case is similar in an industry.
In addition, the state could ease the regulatory burdens faced by firms in the industry. This could include both regulations of licensing and vertical mobility. Growth has to be made as easy as possible.
Equally important is building the capacity of industry players. Hence, creating a strong industry-education linkage will be important. Such linkage will not only facilitate practical research, but will also improve industrial adaptation. It is with such capability that firms can avoid inelasticities in cost, technology and capability.
Indeed, investing in infrastructure is vital to Ethiopia’s growth. And the important role a capable local construction industry plays in this is indubitable. Nonetheless, such an industry cannot be realised through protection and preferential treatment.
What instead helps bring such an industry is to streamline market principles throughout the system. An established culture of living up to the market is the only guarantee to have a local construction capacity that can withstand and overcome the dynamic competitive challenges of the time.

Published on Jan 24,2016 [ Vol 16 ,No 821]



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