24 August 2014

Ethiopia: Increased Costs Blocking Construction SME Profits

Ashenfi & His Friends Cooperative was established three years ago by 23 members, under the Addis Abeba Small & Micro Enterprises Bureau(AASMEB). It was intended to produce construction materials, mainly blocks. All that are left of that initial large membership now are two brothers, Samuel and Ashenafi Gebregeorgis, in addition to four others.

"The number of members started declining at the beginning of this year," said Samuel. "It began when input prices increased without our buyer, the Addis Abeba Housing Development Project Office, increasing the amount they paid us."

He came from Mekelle with five friends planning to go to Saudi Arabia, but he changed his mind when his brother convinced him that he could make money by joining the SMEs, has says.

The Addis Abeba Small & Micro Enterprises Bureau (AASMEB) gave them a shed, working capital and a machine totally worth 150,000 Br, and the Project Office offered them a job to supply blocks for the construction of 22,000 condominium housing units under construction in the 20/80 and 10/90 schemes at the Yeka Abado project site in Yeka District.

For job creation the Project Office has two categories for Small and Micro Enterprises (SMEs) - those that participate in the construction and finishing works of houses and those that supply construction inputs, including blocks, terrazzo, windows and doors.

During the 2013/14 fiscal year, the Project Office reported that it had job opportunities for 4,310 SMEs, including Ashenfi & His Friends, in its ongoing projects for 120,000 housing units at 18 project sites. Among these, 774 enterprises, including 305 that were established in the 2013/14 fiscal year, are engaged in the supply of blocks. These SMEs are located at 15 of the 18 sites, with 209 block makers found at Koye Fiche and 134 at Bole Arabssa.

The project office provides the cement to the SMEs and buys their products at prices set three years ago. The SMEs buy all other inputs, including sand, pumice and gravel, using their own money.

Since 2012, the Project Office has been receiving three types of blocks from the SMEs, at a fixed rate of 3.24 Br, 4.96Br and 5.86 Br, depending on their size. Similar blocks from private businesses cost seven Birr, nine Birr and 9.50 Br, but these companies use their own cement supplies.

Ashenafi & His Friends have manufactured 500 blocks a day, which is the maximum capacity of their machine, for the last three years, which the Project Office then buys at three-year-old prices.

"The price of the Project Office has remained the same, but the cost of inputs always increases," complains Dawit Mulugeta, another block manufacturer at the same project site.

The price of 16 metre cubed of sand has increased from 4,000 Br three years ago to 8,000 Br now; pumice is also up from 2,800 Br to 3,500 Br for 14 metre cubed.

During Fortune's visit on the afternoon of Tuesday, August 19, 2014, at the Yeka Abado project site, almost half of the total 79 shades were closed and had stopped manufacturing. The SME of which Dawit is part of will do the same after paying the remaining 18,000 Br of a 36,000Br loan they borrowed from the Addis Credit & Saving SC, Dawit says.

The Addis Abeba Housing Development Project Office says there are four reasons for building condominiums: Addressing the housing shortage issue in the city, creating job opportunities for SMEs and transforming the construction sector by building better houses and improving the image of the city, according to Arega Abate head of SME's work process at the project office.

"We considered the challenges of the manufactures, so are helping them by providing loans for the purchase of other inputs, such as sand and pumice," says Arega. "This is in addition to transporting the sand and pumice without any payment."

A quintal of cement makes between 34 and 66 pieces of the various block types. A quintal of cement requires 0.08 cubic metres of pumice and the same amount of sand to manufacture the blocks. The cost of making a block has now increased from 3.5 Br to five Birr through time, according to Dawit. The SME's profit has come down to a tiny amount, he says.

Dawit used to repair TV sets, radios and satellite dishes, with a daily average income of 150 Br, he says. Now his income is down to 65 Br a day, just like the two daily labourers working with them, in addition to 500 Br monthly pay.

"Initially, we were getting 80 Br as a daily wage in addition to the 1,000 Br monthly income," says Dawit.

According to Dawit, the net profit of their Cooperative was 160,000 Br during their first year, in 2012, which enabled them to payback 80,000 Br from the 150,000 Br loan they took from Addis as initial capital.

"But we are currently working to cover only our daily expenses," he grumbles.

Increasing the price of a piece of block is not as easy as it seems, says Arega, as the cumulative impact would be significant on the finished condominiums. However, a committee is now at work to decide whether there needs to be a price adjustment.

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