New Directive to Govern Construction Joint Ventures with Overseas Firms

Authorities have introduced a new directive that would legalise partnerships between local contractors and global construction firms to work in a joint venture.

Drafted by the Ministry of Urban Development & Construction, the directive seeks to provide a legal framework for joint ventures in the construction industry, contributing nearly a fifth to Ethiopia's GDP. Officials at the Ministry expect the directive would allow local contractors to regain lost ground in the construction industry and boost their financial capability, the key to competitiveness in the market. The directive is expected to enable local contractors to participate in mega-projects, which require large capital, partnering with multinational companies while fostering technology transfer in the industry.

The directive also applies to domestic partnerships.

It is a part of a series of reforms the Ministry is undertaking in the construction industry. It has implemented a new mode of classification for contractors, simultaneously restricting shares general managers can own in a firm while also drafting a set of rules to limit the number of projects that a contractor can handle at a time. The latest reform, which officials claim will boost the capacity of local contractors, comes at a time when the dominance of foreign firms in the construction industry is at its peak.

Ethiopia's construction industry grows by an average of 10pc to 15pc a year.

"There are almost no local contractors who can compete with the foreign ones due to the financial advantage they have," said Tewodros Shimeles, CEO of TABU Construction Plc.

Contractors from China have taken over most mega buildings and massive infrastructural projects, largely because of their competitive edge in capital and turnover over domestic companies.

While partnerships between contractors are not very common, there is currently no law to regulate joint ventures made between local and foreign firms, except for the commercial code, which applies to all sectors. The directive, which is expected to come into force this year, limits the number of contractors who can partake in a joint venture to no more than four – applying to domestic and foreign firms. The joint venture can either be a temporary, project-based partnership or a long-term agreement between contractors.

A contractor entering an agreement will be required to own at least 25pc of the venture while restricting the partnerships to contractors having the same grade level. All 23,000 contractors registered in the country will be eligible to apply for a joint venture.

Officials at the Ministry hope that the directive, which has been in the making since September 2020, will enable contractors to share and gain knowledge and experience, particularly through ventures with foreign firms. Contractors often use agreements made overseas to gain legal status for joint ventures due to the lack of a legal framework, according to Tewederos Tegegne, head of the Construction Industry Reform Office under the Ministry.