Radar | Aug 20,2022
Habtamu Tegegne, director general of the Ethiopian Roads Administration, has good news for many contraction companies his agency contracted for federal road projects.
Consumed by worries over cost escalations on construction materials eating up their margins, construction firms' plea for contract review has been approved. Habtamu has received a nod from federal authorities to disburse billions of Birr in price adjustments for hundreds of road contracts paid from the federal budget. The amount represents a little over 80pc in an additional budget Chaltu Sani, minister of Urban Development & Infrastructure, requested last month.
The Ministry is taking over the supervision role of road projects from the Administration. Over a dozen projects have thus far been transferred. The administration will focus on road fund management, overseeing roads' maintenance and safety.
“Price escalation adjustments will apply to road contracts signed after 2018,” Habtamu told Fortune.
He disclosed the value of the price adjustments could go as high as 100 billion Br.
Habtamu had served as the head of the Addis Abeba City Roads Authority for two years before taking over from Araya Girmay in 2018. Araya headed the Administration, for long the Ethiopian Roads Authority, since 2015. Established as an Imperial Highway Authority 71 years ago, it is a federal agency managing tens of billions of Birr in federal spending to award and supervise the construction of roads across the country.
Rising costs for construction inputs have been a major concern for contractors. Coupled with the pandemic and the scarcity of foreign currency, the skyrocketing input prices have pummeled the industry, contributing nearly a fifth of the country's gross domestic product (GDP). The construction industry had been growing at an average of 11pc annually before taking a series of hits in the past couple of years. The flip-flop began with the doubling of cement prices to 500 Br a quintal in 2019. The industry has been struggling to recover since, though prices continue to surge.
A quintal of cement retails for over 700 Br, a significant factor that has pushed the authorities to consider price adjustments for several of the 800 public projects the federal government finances.
Earlier this month, the federal budget bill tabled to legislators apportioned 60 billion Br in capital expenditure to Habtamu's agency. It accounts for nearly a quarter of the federal government's proposed capital budget. The Administration will not award any new contracts next year.
Last year, the Construction Works Regulatory Authority, a federal agency supervising and evaluating progress on public projects, began conducting a study to determine a mechanism for adjusting contract value for projects. Last month, the federal government approved the injection of billions of Birr to contractors undertaking public projects under 41 public universities to shield them from cost escalations in construction materials and inputs.
There are a little more than 6,000 registered contractors in the country.
Outcries from contractors handling federal road projects led the experts of the Administration to conduct a study to determine the extent of the problem. They found that close to 71 billion Br is needed to cover the cost of adjustments. The federal government funds 190 road projects.
Price variations in the bill of materials have led to long delays and suspensions of federal road projects, often causing disputes and litigation.
The Roads Administration has lifted a rule introduced four years ago, limiting price adjustments to 20pc of cost in the initial contract. Projects scheduled for completion in less than a year and a half are ineligible for adjustments.
Incorporated 17 years ago, Yirgalem Construction Plc is a grade-one contractor undertaking 20 projects valued at six billion Birr. With 150 million Br registered capital, the company was awarded the Jigjiga Bypass asphalt concrete road construction in the Somali Regional State last year. The seven-kilometre road was projected to cost 672 million Br. It is expected to wrap up construction in 18 months.
However, the project has seen a gridlock in recent months due to cost escalations, according to Tamrat Wondimu, general manager and principal shareholder of the company.
“Fuel prices for construction machinery went through the roof in the past year,” said the General Manager.
Tamrat expects to receive a price adjustment to keep up construction.
Samson Chernet General Contractor has also been awaiting the latest decision from the federal government. Incorporated with an initial capital of 15 million Br in 2010, the construction company was awarded a 30Km asphalt road project in Dengelo Wereda of West Welega Zone two years ago. It had committed to finishing the road within an 18-month window but has yet to complete the job.
“We're expecting a 70pc price adjustment,” said Samson Chernet, the general manager.
Determining price adjustments for road projects is a less complex process than doing so for other construction works, such as buildings, experts say. Fewer inputs are required to build roads, according to Yonas Chaka, a construction management expert. The primary materials are fuel, bitumen, cement, reinforcement bars, and construction equipment.
Over 16,400 heavy construction equipment are available, 60pc higher than the equipment registered five years ago.
However, the expert urges federal officials to think long-term when implementing the price adjustments.
“If the adjustments aren't made periodically, they will no longer reflect true value,” he said.
PUBLISHED ON Jun 18,2022 [ VOL 23 , NO 1155]
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