Contractors Dry Out of Collaterals





Contractors are apprehensive about buying a policy from insurance companies as the requisite for collateral is half the performance bond. After insurers started to require collateral for policies, the Construction Contractors Association of Ethiopia (CCAE), established in October 1991, has been flooded with complaints from contractors.

Tewodros Zewde, head of the Association, says his table is filled with complaints from contractors claiming that insurance companies are demanding them to provide collateral to get performance and advance guarantee bonds.

The insurance companies claimed the rulings came following the alarming announcement by one of the five reinsurers in the country this July. African Reinsurance Corporation (African Re) argues most Ethiopian insurance companies pay large amounts of compensation addressing a huge claim and draining its capital.

The Association has attempted to discuss the issue with regulators at the central bank. However, the meeting was called off last minute.

"We'll exert utmost effort to discuss with insurance companies," Tewodros told Fortune.


According to him, the insurers claim the construction companies are attempting to engage in multiple projects without considering their human and capital resources, leading to failure and disagreement with the clients. As a result, the insurance companies are forced to pay compensation, with reinsurers also sharing the loss.

Kassa Lisanework, CEO of Tsehay Insurance S.C., says collateral is not a new idea, and the insurance companies just started enforcing it. He recalled an incident two years ago when the Ethiopian Roads Administration banned the insurance company from selling policies for contractors in charge of its project due to its default on Akir Construction Plc.

The construction company failed to deliver the project it had contracted with the Ethiopian Roads Administration. The insurance company had settled the advanced payment guarantee bonds last year, with ERA lifting the embargo in November. According to the CEO, the insurance firm had to pay the administration a compensation cost of 4.7 million Br.

The legal framework for collaterals is not rolled out for insurers as it is for banks.


The independent lawyer Elias Endale, with a decade of experience, says there is no legal framework for insurers' requirement of collateral and auction. As contractors shoulder the burden from banks and are required collateral for the loans, insurers must pass through the court process and win to sell the property in times of defaults, said the expert. He said the law should entitle the insurance companies to the same privilege as it did for banks to auction the property of the construction companies.


Not all contractors agree with the method.

Aboneh Gessese is the founder of Tower Plc, a construction company incorporated in 2004. He argues the new regulation is harsh for low-grade contractors. In his twenty years of experience, he did not remember defaulting to any project recommending insurers to show courtesy for long-time clients.

The grade four contractor Addis Mideksa has a different approach.

He is the Chief Executive Officer of AMG Building Construction, handling three projects worth 23 million Br in total. The contractor claimed they do not have enough assets to show as collateral for commercial banks and has taken them to give out loans and advance bonds.

"This is terrible, especially for construction companies with multiple projects," he said.


Aboneh pleads insurance companies check the profile and track record of the construction companies as collateral.

A year ago Ministry of Urban Development & Infrastructure drafted a regulation to control the number of projects one contractor handles at a time. According to Tewodros, fulfilling the obligations became a challenge for most companies due to the spike in the price of construction inputs.

For Addis, the enforcement is like added weight to the already-sinking construction sector, threatened by the on-and-off land-related services.



PUBLISHED ON [ VOL , NO ]


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