Dilemma at the core of transformation

The age-long development dilemma that is rebalancing immediate needs of society/economies with long-term ideals of building local capacity looks to be creeping up on the Ethiopian economy. One case in point, at least partially, is the recent debate regarding the development of Industrial Parks in Ethiopia and whether local firms with still infant capacity should play a major role in development process or not. The authorities look adamant that the level of urgency would not allow for learn-by-doing experiment while local contractors argue that government should not lose sight of the long term targets, write Asrat Seyoum and Birhanu Fikade.

Since the National Planning Commission took over the national economic planning task from the former Ministry of Finance and Economic Development (MoFED), the new commissioner, Yinager Dessie (PHD), went public last week to formally announce the commencement of the second generation of the Growth and Transformation Plan (GTP-II). Yinager’s announcement was symbolic in a sense that the commission would be formally taking ownership of the GTP-II plan and would be responsible to monitor its implementation in the coming years.

This is not a responsibility that could be taken lightly since the next five years would be the period that the plan (GTP-II) is expected to bring about changes that would be worthy of its name—Transformation. Economic transformation, in one way or the other, would depend on engineering and fabrication capacity; a capacity that Ethiopia is yet to develop. These sentiments were reflected by Abay Tsehaye, director-general of the Ethiopian Policy Study and Research Center, on a consultative meeting on the draft GTP-II document that was held with the private sector a few months ago. He stressed on the occasion that the second GTP is the make or break moment for manufacturing development.

Although Abay stressed that mere fabrication or manufacturing capacity would not be sustainable without nurturing long-term engineering aptitude, the sole focus of government in the coming five years seems to be developing fabrication capacity thereby transforming the basic structure of the economy. Well, there is an added perk or so to speak in the form of altering the county’s foreign trade makeup in favor of Ethiopia. And in improving the hard currency shortage that is becoming almost synonymous with the Ethiopian economy.

Arkebe Oqubay (PhD), special advisor to the Prime Minister, is another politician who is actively involved in solving this puzzle of economic transformation. As far as Arkebe is concerned, the concern is a bit more than a long-term economic progress and transformation; it also means addressing short-term and more pressing development matters like hard currency shortage and massive employment creation. Another paramount issue is paying the country’s one billion dollars debt that it accessed via Eurobond it floated in 2014, which is allocated to the development of industrial parks. As matter of fact, massive development of industrial parks looks to be the chosen model to bring about fast manufacturing growth in Ethiopia.

Arkebe chairs the board of Industrial Park Development Corporation (IPDC), a body set up to spearhead the development of parks across major cities in Ethiopia. So far, the corporation has plans to erect not less than seven industrial parks and it has allocated USD one billion (USD 750 million from the bond proceeding and USD 250 million from a credit line extended by the World Bank Group) for this project.

According to documents, the first industrial park, industrial estate as it was called back then, was the Trafford Park, in Manchester England, which was developed in 24 June 1896. Already proclaimed vanguard of the industrial revolution, the city of Manchester at the end of the 19th was a bustling industrial metropolis. Well, that was with the exception of secluded parks and woodlands like that of Trafford Park, owned by the De Trafford family.

Later on, even owners of the park had to give in to the industrial push when the Manchester Ship Canal was constructed along the northern limit of the park. As matter of fact, Old Trafford sporting arena, owned by the famous football club Manchester United FC, is currently located next door to the park.

Meanwhile, one hundred and twenty years later, the Ethiopian authorities have managed to test their hands on the development of industrial parks with the commencement of the Bole-Lemi industrial Park, which is currently occupied by companies who are exporting manufactured goods to the international market. Bole-Lemi is the first of the especially designed state-sponsored industrial parks in Ethiopia; however, the first industrial park in Ethiopia has to be the Eastern Industrial Zone located in the town of Dukem, in the Oromia Special Zone Administration.

Nevertheless, the government looks to be stepping up its speed with regards to the development of industrial parks in recent years. Since the start of 2015, the government has managed to float the bid for the construction of the Hawassa, Dire Dawa and Adama Industrial Parks attracting wide interests from construction companies, local and international. 

In an exclusive interview with The Reporter, Arkebe underscored the need to heavily rely on the industrial park model on grounds of “the urgency of developing the manufacturing sector” whose contribution to the national GDP still languishes at a lousy five percent. According to Arkebe, the urgency goes both ways since Ethiopia also needs urgent solution to its hard currency shortage and job creation priorities.

Playing industrial (development) catch-up requires learning from those who had already done it, Arkebe argued with vigor. “If you are going to learn, learn from the best,” is his motto and one thing the best FDI companies don’t have is patience, he explains. If these companies come, they need to start work immediately; it requires cutting considerable installation cost and furnishing them with already organized and well-oiled production facility.

Apart from the urgency, the corporation also observed that parks would be advantageous in the provision of facilities and services for manufacturers at minimum average fixed cost since they will be condensed in one area. Coordination among producers is also another big advantage, Arkebe says; not to mention the advantages in terms of the environment since their waste management could easily be integrated.

In a bizarre turn of events, the merit of industrial parks is not widely debated in Ethiopia; but the point about “who should develop them” is becoming a bone of contention these days. Given the country’s experience in industrial parks, the debate and controversy surrounding the merit of the parks would not have been surprising, according to commentators; but the debated is growing from a different direction that is the respective role of local contractors against the international ones.

Generally speaking, a handful of local contractors who have taken part and are still taking part in the bid process of three industrial parks: Hawassa, Dire Dawa and Adama, and other potential bidders are feeling that the bid criteria is designed to keep local firms at bay.

Local contractors started to become skeptical of the government’s increasing cautiousness when dealing with industrial parks when the IPDC issued a letter of “Request for Conformation on the Additional Requirements” on June 09, 2015. For one, the so-called additional requirements came in the middle of the bid process for Hawassa Park and asked bidders if they comply with condition that include the ability to start the project without expecting a cash advance from the government, the ability to find alternative source of foreign currency apart from a formal Letter of Credit (LC) and also having adequate liquidity to execute the project without expecting interim payment from the corporation.

These conditions were considered to be huge hindrance for local contractors, said an anonymous industry player. Arkebe believes that these conditions have to be met if the projects were to be finished in the timetable that is set for them, which in the case of Hawassa was six months. This is somehow understandable for the industry player, given the urgency that the government is facing and the problem with processing LC and other financing. Nevertheless, he says that his view started to change once the bid criteria for the Dire Dawa and Adama began to tighten, almost appearing to be a carefully designed deterrent for the local contractors.

Generally, the two bid criteria appear to be the source of much of the discomfort for the local contractors. The first is the “Annual Turnover” criteria which states that the contractor need to post a minimum average annual turnover of six billion birr within the last five years. However, in the case of Joint Ventures (JVs), each entity in the JV is expected to post at least 55 percent of (around 3.3 billion birr).

On the other hand, “Specific Experience” criteria entails that the bidder has successful execution of at least two projects valued at 2.5 billon birr and comparable in size and complexity with the proposed work that is in the field of industrial construction. While this criterion carries 25 points in technical evaluation methodology, the former “annual turnover” criterion has 15 points.             

According to the industry player, bidding as a single entity, the requirement to show six billion birr turnover in five years or an average of 1.2 billion a year is way beyond contractors in Ethiopia.  For all practical purposes, those local firms invited for the bidding are all exploiting the JV angle and are expected to post only 55 percent as an entity in the JV.

This where it get tricky, the industry players told The Reporter that in the Dire Dawa bid, with regards to the “annual turnover” criterion, if one of the companies in the JV could not meet at least 55 percent of turnover requirement and the other one does, the JV would fetch a cumulative 7.5 points (half of the 15 points). What this means is that for a local company, which most likely do not meet the 55 percent requirement, would be able to get at least half of the available points (7.5) by forming a JV with a company that meets the 55 percent requirement. Assuming all goes well, he argues, it means that when the local company goes into the bid, it will know that it automatically dropping 7.5 points.

Nevertheless, the five-page clarification (addendum No.2), which was attached to the Adama bid after IPDC decided to cancel the Dire Dawa bid after two firms progressed to the financial evaluation stages, changed the rules of scoring points. According to the industry player, this made things tougher for local firms. “By now, if one of the firms in JV were unable to meet the 55 percent turnover criteria the cumulative point that will be received by the JV contractor will not be half (7.5 points) but zero points,” he expounds.

This meant, he continued to argue, that local firms who would not meet the turnover criteria would go in the race knowing that they will lose 15 points all together. To make matters worse, he says, the specific experience criteria of fulfilling at least two projects would entail further points dropped for local contractors whether they are bidding alone or in JV. Yet again, the minimum that a contractor has to score to progress to the financial evaluation stages is 70 percent and he simply says “you do the math”.

Apart from that, the industry player also argues that other requirements which are not yet in the bid document of any of the industrial park bids are also a bit worrying. “For instance, I have learnt that a local bidder is expected to forge JV with foreign firms which are already in the country so that there will not be a mobilization time lag,” he says. But, he rejects the premise that mobilization time will be three to four months as proposed.

Nevertheless, Arkebe is adamant that the foreign companies in the JV should be close to Ethiopia and could be ready and available to start work immediately should they be awarded the project. He says that the corporation will not have the repeat of the Bole-Lemi project which took more than five years to complete.  

As far as Abera Bekele (Eng), President of Construction Contractors Association of Ethiopia is concerned, such trend is very worrying. Although he did not get details of the controversy in the bid process, he says that member contractors have drawn the association’s attention to the problem. “We have requested a formal sit-down with the corporation and other relevant authorities; we have received no response yet,” he told The Reporter.

What concerns Abera is what is going to happen to the maintenance and expansion works on these industrial parks in the future if the local firms were not nurtured to acquire the capacity today. “I understand, contractors might not be at the required level at present, but government should at least think about opining up subcontracting position so that they will learn from the foreign firms,” he argues.

But, for Arkebe it will not be possible to reconcile the urgency and long term infant industry support target at once; not at least in the industrial park development and certainly not at this stages.

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