Late Payments Derail Machinery Rental Business

Ashenafi Beza has been in the business of renting out construction machinery  for the past five years. Like many others, it was Addis Abeba’s construction boom that attracted him to the machinery rental business. The company rents loaders, back-loaders and excavators to different projects in the construction industry.

“The business isn’t like it used to be anymore,” says Ashenafi Beza, the Company’s CEO. “Nowadays it is difficult to survive as a business.”

The slump that rental businesses are going through started about a year ago, as a knock-on effect of a similar slowdown in the construction industry, according to Ashenafi. Many in the construction sector have been complaining that some of the operations had to close up shop. Others are being forced to sell their machinery. Payment delays from their customers, who are mostly contractors, are causing most of the problem.

“If the contractors feel the burden of a financial shortage, the impact directly affects,” commented Ashenafi.

Thanks to effect of the slowdown on the income in the construction industry, Ashenafi’s company has been struggling to secure a three million Br payment that has been delayed for over a year. The three million Br deal was made with a construction company which is involved in the construction of the Great Ethiopian Renaissance Dam. The contractors themselves are waiting for delayed payments of 200 million Br, according to Ashenafi.

Such delays have become an especially prominent problem in the construction of government low-cost housing projects. Contractors involved in those projects complain that the new system of securing payments through banks is not efficient.

The new method of payment has created a backlog of overdue payments three layers deep, according to one of the 2,500 contractors involved in the housing projects. The contractors, according to the new system have to pass through 10 steps.

“So we as contractors are also facing a problem,” he said.

Ashenafi’s company is now negotiating with buyers to sell one of its machines, in order to try and make up for the payment delay.

The construction industry has seen a lot of growth over the past five years. Currently, the construction industry contributes more than half (56.8pc) to national income from the industrial sector, and nine percent to GDP growth. Again, during the first edition of the Growth and Transpformation Plan (GTP) close to 50pc of the share of industry in GDP is accounted for by the construction sector.

Last year, the construction industry grew by 25pc, signifying the leading role the construction sector plays in terms of growing expansion of roads, railways, dams and residential houses.

Of the total number of investment projects in 2014/15, about 12.3pc were in the construction industry. This was a  14pc decrease from the  previous fiscal year.  In terms of investment capital, the construction industry accounted for  over  133 billion birr.

The construction machinery rental business has been growing in step with the construction industry. Between 2012 and 2016, the country imported 5,685 construction machineries. Most of the machineries are imported from America, China, South Korea, Japan and other countries.

Giga Construction Plc, a grade one contractor, is another one of the companies which are having trouble pursuing payments. The Company used to rent four machines to other contractors.

Giga  stopped renting out machineries a year ago, after it suffered long payment delays. “I prefer my machines to be idle rather than working in such environment,” said Gebrehiwot Girmay, the manager of Giga Construction.

Giga  even sued two contractors for allegedly not paying their rental fees on time and according to their agreement. Alemayehu Ketema Construction is one of the companies, that allegedly delayed payments to Giga.

Giga leased five machines to Alemayehu Ketema Construction.  Although half the payment has already been made, the case is still pending in court.

“The payment was delayed because the client (Ethiopian Roads Authority) didn’t make the full payment to us,” said a manager who works at Alemayehu Construction

Road construction projects notoriously experience payment and completion delays due to various changes, such as the direction of the road and ground conditions. However, the problem has shown improvement to where it was a few years ago, according to Samson Wondimu, communications director of the Authority.

“Upon project completion we pay our contractors without delay. There were some complaints about delays a few years ago,” says Samson  “Once the consulting engineers approve the project’s completion, we make prompt payment.”

Another contractor, Samuel Sahlemariam, was also sued for not paying for the machinery it rented from Giga.

“We were asked to pay for time that the machines were not working, which is unfair,” said Samuel.

The payment disagreements between the contractors and the machine rental companies are not the only problems that are facing the construction industry.  One of the issues is the imbalance between demand for construction machineries and the available supply.

Last year, a study conducted by the then-Ministry of Urban Development, Housing and Construction indicated that  out of 2,705 machineries needed for housing projects in 2015, only 41pc were available. In the case of road projects, about half of the machinery needed for federal projects was available.

“Most machines are idle as the business has suffered from cash shortage due to the payment delay,” said Abubaker Abduelaziz, a machinery renter. “We are searching for ways to get out of the business.”

Unfortunately, it is becoming difficult to find buyers for machines, said the manger of a machinery rental company.

For the past eight months,  his company has been able to rent out any of its machines. He owns excavators and a back loader. In additon, the company has been waiting for a 60,000 Br payment for the past nine months.

Currently, excavators are rented at an hourly rate of 500 Br to 600 Br; the back-loaders cost from 250 Br to 300 Br. The prices have declined by 200 Br to 350 Br, in comparison to two years ago.

The contractor bought the back loader for 48,000 dollars from the UAE two years ago with a duty-free privilege, and the excavator for 1.7 million Br.

He is now struggling to sell the excavator for less than half a million Birr. Contractors also blame the way that rental businesses are run for some of the issues in the industry.

The machineries operating in the sector are old, inefficient and do not function well, according to an expert from the Ethiopian Construction Project Management Institute (ECPMI).

“The fact that the machines are rented on an hourly basis is not right,” says a CEO of a construction company. “Payment  should be based on the machines’ productivity and their purpose.”

“Due to several constraints, including project delays and our own payment delays, contractors will be de-motivated to settle their payment,” said the CEO. “So I am always refraining from renting and use my own machines.”

Whichever direction the issues lie in the construction industry, the rental businesses may not survive the time it takes for the cash to start flowing through the industry again.


Published on Feb 19,2017 [ Vol 17 ,No 877]



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