CENG 6108 Construction Economics Introduction

CENG 6108 Construction Economics
Introduction to Construction and the Economy
Abraham Assefa Tsehayae, PhD
Abraham Assefa Tsehayae (PhD) 1

TO DO
① Introduction to Construction and the Economy

② Course Introduction
Abraham Assefa Tsehayae (PhD) Construction Economics Introduction 2

Introduction to Economics
The term Economics is derived from the Greek Language and means
house-keeping.
Economics is concerned with the allocation of scare resources.
Firms: Income from sales and Investment options
Government: Income from tax and Policy options to select
Economy:
Real Economy: Actual goods and service available, which,
depending on their distribution throughout the population,
determine the standard of living of the nation.
Money Economy: Money is used to enable transactions to take
place, and this money is a liquid asset.
Narrow money: is coin and notes in circulation and banks’ own
bank balances in the National Bank ($14.92 Billion, Dec. 2017)
Broad money: includes narrow money plus bank deposits and
shares ($28.53 Billion, Dec. 2017)
Outline: 1 2 Abraham Assefa Tsehayae (PhD) Construction Economics Introduction 3

Introduction to Economics
Study of Economics can be divided into:
Microeconomics: deals with the individual parts of the economy,

specially the markets and market places.
Mesoeconmics: deals with different sectors or parts of an

economy and how they interact with each other. The economic
problems, theories and issues of the construction industry are
discussed at this level.
Macroeconomics: is the study of the economy as a whole. Is

concerned with issues such as inflation, unemployment,
international trade and government economic policy.

Introduction to Construction Industry
Economic systems range from centrally planned to free market

systems:

Adam Smith (1723-1790) argued in his classic “An Inquiry into the
Nature and Causes of the Wealth of Nations” (1776), that individuals
working for their own self-interest could create a stable and well-
provisioned society (Capitalist Society) through a mechanism he called
the Invisible hand of the market.
Karl Marx (1818-1883) saw capitalism as a source of instability,
struggle, and decline. In his classic “Capital” (1867), he argued for
communist society, where “the people”, i.e. the workers, own the
means of production and thus have no need to exploit labour for profit.
Keynes (1883-1946), in his classic “General Theory of Employment,
Interest, and Money” (1936) favored the use of government’s power to
spend, tax, and borrow to keep the economy stable and growing.
Chalmers Johnson (1931-2010), in his book “MITI and the Japanese
Miracle” conceptualized the developmental state as a state that is
focused on economic development and takes necessary policy
measures to accomplish that objective.

National economies are built on the following main

economic sectors:
Primary Secondary Tertiary Quaternary

Industry Industry Industry Industry
• Agriculture, • Construction, • Transportation, • ICT, Research
mining, oil smelting, health care, and
exploration, automobile food service, Development,
forestry, manufacturing, retail sales, and Non-
farming, textiles, energy advertising, governmental
fishing and utilities, entertainment, organizations.
hunting, and breweries and tourism,
processing bakeries banking and
and packaging law
of raw
materials
Each of these sectors are interdependent on each other.

Ethiopian Economy (The World Factbook_2017): Pop. 105,350,020
GDP = C (Consumer Spending) + G (Government Spending) + I (Investment) + NX (Net Export )
Commercial Bank Prime Lending Rate: 13% (Dec. 2017) and 12% (Dec. 2016)
GDP = $200.2 Billion GDP = $80.87 Billion GDP per capita =

GDP Rank = 65th
(PPP) (Nominal) $2,200 (PPP)
GDP by sector:
Population below
GDP per capita = Agriculture (35.8%),
Inflation (CPI) = 9.9% poverty line ($1.90 per
$767.63 (Nominal) Services (42%),
day)=29.6% (2014)
Industry (22.2%)
Gini Coefficient = Labour Force = 52.82 Unemployment = Exports = $3.076

33 (2011) Million 24.9% Billion
Gross External Debt =

Imports = $16.76 $29.09 Billion (2017) Foreign Reserves =
Credit rating = CCC
Billion $3.147 Billion (2017)
= $24.82 Billion (2016)

2018/19 Ethiopian National Budget
3.6% Growth
from 2017/18
State
Enterprises 55% Capital
own $14.7 Expenditure
Billion Budget
domestic debt
348.16
Billion
Mega project
need $7.5
Birr 45% Recurrent
Budget,
declined by
Billion funding 4.4%
Regional
No budget for subsidy
new projects increased by
15%
Source: https://newbusinessethiopia.com/ethiopia-approves-12-8-billion-national-budget/
Introduction to Construction Industry: Definition
800.0 45.0%
Ethiopian Government Budget Allocation on Construction Industry
40.0%
700.0 38.6% 695.4
36.8%
630.7 35.0%
600.0
31.4% 571.5 30.0%
519.9
500.0
478.9 25.0%
24.0%
400.0 20.0%
15.0%
300.0
9.9% 10.4% 10.2% 10.0%

8.6% 8.5%
200.0 6.8%
6.1%
4.8% 5.0%
4.0%
100.0
0.0% 0.0%
59.0
34.8 43.1
19.1 25.1
0.0 -5.0%
2002 2003 2004 2005 2006 2007 2008
GDP (Billion Birr) GDP by Construction (Billion Birr)

GDP by Construction (%) GDP Growth (%)
GDP by Construction Growth (%) Poly. (GDP by Construction Growth (%))
Source: WB in association with ECPMI

Introduction to Construction Industry: Definition
Construction Industry: is an economic sector which, through planning,

design, construction, maintenance and repair, and operation,
transforms various resources into constructed facilities.
Construction facilities include:
Buildings: Residential, Commercial, Institutional, etc.
Infrastructure: Roads, Railways, Dams, etc.
Industrial: Petro-chemical plans, refineries, etc.
According to UN (1996), International Standards Industrial

Classification (ISIC): Construction is defined generally as an economic
activity directed to the creation, renovation, repair or extension of fixed
assets in the form of buildings, land improvements of an engineering
nature, and other such engineering constructions as roads, bridges,
dams, etc.
In the case of Ethiopia, the definition adopted by the National

Accounts department of MoFED is the same as that of ISIC.
The activities actually covered under the industry are the construction
and maintenance activities of (MoFED, 2005):
1) Residential buildings in urban and rural areas,
2) Non- residential buildings, i.e. factory buildings, ware houses,
office buildings, garages, hotels, schools, hospitals, clinics, etc.,
3) Other construction works, like roads, dams, dikes, athletic fields,
electricity transmission lines, telephone & telegraph lines, etc.
Also includes activities such as quarrying of stone, gravel crushing,

and manufacturing of bricks are accounted in the construction
industry.

Key characteristics:
Unstable construction demand due to the specialized character of

each facility, seasonability, and exposure to economic fluctuation and
demographic influences
Floating labour force

Custom-built nature, resulting in project-
due to unstable
oriented production
construction demand
Immobility (creates
reliance on local High initial expense Complexity
markets)

Key characteristics:
Unique financing procedure: customer has to pay in installments

during construction process. Also, the source of the customer’s short
and long term finance also relies on the loans secured with
constructed facility
No buffer between production and demand

Continuously
as stockpiling construction facilities in
changing technology
inventories is impossible
Many stakeholders:
Similar to service
Client, Consultant, Disintegrated
industry: product
Contractor, Supplier, production process
decided ahead
etc.

Role of construction industry:

Output generation: Satisfy basic physical and social needs through
buildings and infrastructure
Employment creation: Due to the flexibility of the technology used
in construction industry, it can create significant employment
opportunity to skilled and unskilled labour force
Income generation and redistribution: Stimulating economic
growth through backward and foreword linkages through its
requirements for goods and services from other industries
Revenue generation: generation of revenue for government from
corporate income taxes of companies, the rental income, sales
tax, capital gain tax and employees income tax from those
employed in the construction industry

Construction industry in Ethiopian: Average growth rate of
29.9% from 2010 to 2014.
Contribution to national income: Share to GDP increased from
4.0% in 2009, 7.6% in 2013, 8.5% in 2015.
Contribution to employment: In 2005, construction industry
employed 1.4% of the total employed population (31.4 million),
and 2015, it employed 507,000 workers.
Contribution to government revenue: Rental income tax is one of
the major sources of revenue
Multiplier effect: Ripple effect of construction is felt in service,
industrial, and agricultural sectors.
Regulatory Framework:
National Construction Industry Development Policy, 2013
Ethiopian Construction Project Management Institute (ECPMI)
under regulation No. 289/2013
Ministry of Construction, 2015 or MoUD and Construction, 2018
Evolution of the Ethiopian Post 2010
Construction Industry: • Chinese
EPRDEF based
regime contractors
Derg regime • Since 1991 • State owned
• Construction • free market construction
Second companies firms
system
Period: 1968 - under state • Role of • Large
First Period: 1982 control since private number of
Prior to 1968 • Some small 1982 contractors local
• Most civil domestic • State-owned in the contractors
works contractors construction industry and
(including started to companies flourished consultants
roads) emerge: were while that of • Mega
carried out • BERTA, established public projects
by foreign National • Building companies
contractors engineers capacity of diminished
through ICB and the ERA • State
contractors • No company
(NEC), competitive becoming
• Ethiopian bidding more active
building road since 2011
construction
(ETBRC)
2019 African Economic Outlook

Africa’s economic growth continues to strengthen, reaching an
estimated 3.5 percent in 2018, about the same as in 2017 and
up 1.4 percentage points from the 2.1 percent in 2016.
East Africa led with GDP growth estimated at 5.7 percent in
2018, followed by North Africa at 4.9 percent, West Africa at 3.3
percent, Central Africa at 2.2 percent, and Southern Africa at
1.2 percent.
East Africa, the fastest growing region, is projected to achieve
growth of 5.9 percent in 2019 and 6.1 percent in 2020.
Between 2010 and 2018, growth averaged almost 6 percent,
with Djibouti, Ethiopia, Rwanda, and Tanzania recording above-
average rates. But in several countries, notably Burundi and
Comoros, growth remains weak due to political uncertainty.
Source: ADB (2019)

Source: ADB (2019)

Source: ADB (2019)

Source: ADB (2019)
Source: ADB (2019)

African construction trends: Project valued over USD 50

Million and broken ground but not commissioned in 2014
Source: Deloitte (2014)

Construction
us Million
Continental statistics
Deloitte’s
rends
400
projects 375
350
or above 322 326 324
301 303 307
ound by 300 286
257
these 250
223
US$307bn.
200
alifying for inclusion 150

e total value of
ar-on-year. As a 100
the largest number
while West Africa 50
the largest share of
worth US$98.3bn. 0
2013 2014 2015 2016 2017
pread between Number of projects Value (US$bn)
South Africa is
most projects (44 Source: Deloitte analysis, 2017
he most projects
projects shrunk by 5.2% year-on-year. As a 100
region, Southern Africa has the largest number

of projects with 93 projects while West Africa
remains as the region with the largest share of
50
0
projects in terms of value, worth US$98.3bn.
2013 2014 2015 2016 2017
The projects included are spread between Number of projects Value (US$bn)

38 of Africa’s 54 countries. South Africa is
the single country with the most projects (44
projects) while Nigeria has the most projects
Source: Deloitte analysis, 2017
Million and broken ground by 1 June 2017

by value (worth US$69.1bn).
Regional split
East Africa (23.4%) East Africa (10.6%)
Southern Africa (30.7%) Southern Africa (29.2%)

Number of Value of
projects (%) Central Africa (6.6%) projects (%) Central Africa (3.2%)
West Africa (26.1%) West Africa (32%)
North Africa (13.2%) North Africa (25.1%)
Source: Deloitte analysis, 2017. May not total to 100% due to rounding

the number of projects increased by 65.1% However, this is from a low base. projects.
although the value of projects only rose

by 18.8%. This suggests that the region is
pursuing a greater number of lower-value
North Africa, Central Africa and West
Africa all saw a decrease in the number
projects. Central Africa saw the greatest of projects included in this edition of the
African construction trends: Project Types
Projects by sector (number Share of projects by Value of projects Share of projects

Number of projects
of projects) number (%) (US$bn) by value (%)
Energy & Power 58 19.1% 67.4 21.9%
Transport 109 36% 71.6 23.3%
Real Estate 68 22.4% 42.3 13.8%
Water 14 4.6% 3.8 1.2%
Mining 10 3.3% 7.8 2.5%
Oil & Gas 13 4.3% 76.9 25%
Shipping & Ports 24 7.9% 36.3 11.8%
Social Development 2 0.7% 0.4 0.1%
Healthcare 3 1% 0.4 0.1%
Education 2 0.7% 0.6 0.2%
Source: Deloitte analysis, 2017. May not total to 100% due to rounding

African construction funding sources:
Note: DFIs represent Development Finance Institutes

African construction funding sources:
EAST AFRICAN SUMMARY
AFRICAN SUMMARY

(1.7%) own seven,
Water (4.6%)six and five projects (27.1%) in the period
Social Development (0.7%) under review. has remained largely similar to the shares
respectively. represented last year.

Source: Deloitte analysis, 2017
Governments continue to own the largest Entities that own, finance and construct China funds 47 projects and Private
African DFIs (9.2%) Private Domestic (14.5%) South Africa (1.7%)
share of projects with 221 projects (72.9%), projects are defined as the country Domestic firms fund 44, while International
China (1.7%)
or seven out of every 10 projects, followed
by Private Domestic firms that own 12.5%.
US (2.3%)
where the owner,China
funder(15.5%)
or builder is
originally domiciled. In line with ownership,
African countries (1.7%)
Development
France (2%)Finance Institutions (DFIs) African
Brazil (1.3%)
finance 40 projects. African DFIs only fund
Governments
Who funds?(72.9%) UAE (1.3%) Single countries (3.3%)
Firms domiciled in the United States
Who owns?
(2.3%), the United Kingdom (2%) and China
Governments continue
share
Private Domestic (12.5%) of projects,
to fund the
Governments
financing
France (1.3%) 82
largest
(27.1%)
projects
28 large-scale
UK (2%) projects. The share ofEuropean
total
projects that are funded by various entities construction
countries (4.3%)
(1.7%) own seven, six and five projects International

(27.1%) in the period DFIs (13.2%)
under review. hasUS (3%) largely similar to the shares
remained Single countries (6.3%)
respectively. UK (2%) Italy (1%) represented last year. trend:
Source: Deloitte analysis, 2017. African countries include Angola, Nigeria,
Source: andanalysis,
Deloitte South Africa.
2017.Single countries
European include
countries Australia,
include Brazil,
Germany, Canada,
Italy, Germany,
Netherlands, India, Macau,
Portugal, Netherlands,
and Switzerland. Singapore,
Single Switzerland,
countries and Turkey
include Australia, Canada, India, Kuwait, Macau, Namibia, Nigeria, Qatar,
Turkey, and the UAE
10
African DFIs (9.2%) Private Domestic (14.5%) South Africa (1.7%)
China has overtaken Private Domestic behind with 17 projects followed by French construct approximately one in three
China (15.5%) France (2%) Brazil (1.3%)
firms as the most prolific (and single firms with 16 projects. projects, European firms build one in five
Who funds?country) builder of projects, constructing
Governments (27.1%) UK (2%) Europeanprojects and
countries African firms (including Private
(4.3%)
85 projects as opposed to 67 last year International Consortiums are busy with Domestic firms) are responsible for one in
and has gained groundInternational
relative toDFIs
the(13.2%) US (3%)while American, Portuguese
12 projects Single countries (6.3%)
four projects.
other builders. Italian firms are the next and South African firms are building
most prominent builders, albeit some way 10 projects each. Overall, Asian firms
Source: Deloitte analysis, 2017. European countries include Germany, Italy, Netherlands, Portugal, and Switzerland. Single countries include Australia, Canada, India, Kuwait, Macau, Namibia, Nigeria, Qatar,
Turkey, and the UAE
China (28.1%) South Africa (3.3%) Turkey (2.6%)
China has overtaken Private Domestic behind with 17 projects

Francefollowed
(5.3%) by French construct
US (3.3%) approximately one in threeOther African countries (2%)
firms as the most prolific (and single firms with 16 projects. projects, European firms build one in five
country) builder of projects, constructing
Who builds? Italy (5.6%) International
projects and Consortiums (4%)
African firms (including Other
PrivateEuropean countries (5.9%)
85 projects as opposed to 67 last year International Consortiums are busy with Domestic firms) are responsible for one in
and has gained ground relative to the 12 projects while Portugal
American,(3.3%)
Portuguese UK
four(2.3%)
projects. Other Asian countries (6.6%)
other builders. Italian firms are the next and South African firms are building
Private Domestic (22.1%) Brazil (2.3%) Other single countries (3.3%)
most prominent builders, albeit some way 10 projects each. Overall, Asian firms
Source: Deloitte analysis, 2017. Other African countries include Botswana, Egypt, Equatorial Guinea, Tunisia, Uganda, and Zambia. Other European countries include Belgium, Germany, the Netherlands, Spain,
Sweden, and Switzerland. Other Asian countries include India, Japan, Macau, Malaysia, Singapore, and South Korea. Other single countries include Australia, Canada, Lebanon, Saudi Arabia, and the UAE
China (28.1%) South Africa (3.3%) Turkey (2.6%)

France (5.3%) US (3.3%) Other African countries (2%)
Ethiopia’s Economic Performance:
• Real GDP growth slowed in 2017/18, due partly to civil unrest, political
uncertainty, and policy adjustments that involved fiscal consolidation to
stabilize the public debt.
• With a public debt–to-GDP ratio of 61.8% at the end of June 2018,
Ethiopia remains at high risk of debt distress, according to a 2018 debt
sustainability analysis.
• Real GDP growth is projected to recover from 7.7% in 2017/18 to 8.2%
in 2018/19 and 2019/20, supported by industry and service sector
expansion and agricultural sector recovery.

Eritrea’s Economic Performance:
• Real GDP growth was an estimated 4.2% in 2018, down slightly from
5.0% in 2017, driven mainly by increased investment in the mining and
housing construction sectors.
• The service sector’s growth was estimated at 2.3% in 2018, down
slightly from 2.7% in 2017, while industry grew by 1.0% in 2018 and
agriculture by 0.9%.
• The fiscal deficit declined to an estimated 12.6% of GDP in 2018 from
13.8% in 2017. The country is in debt distress. Total external debt was
an estimated 20.1% of GDP in 2018. The bulk of the debt was
domestic, with external debt accounting for only 20% of GDP.

4 ETHIOPIA’S GREAT RUN – THE GROWTH ACCELERATION AND HOW TO PACE IT
Ethiopia’s Recent
FIGURE 1.1: Recent Economic
Economic Growth Performance:
in Perspective
1. Ethiopia, Real GDP growth 2. Real GDP growth in Ethiopia, SSA and LICs
16 1st Take-off 2nd Take-off 14
14
12
12 10.6
10 10
8 8
5.6
6
4 6
2 0.5 4
0
–2 2
–4 0
–6 Drought
War
–8 –2
–10 –4
–12 Famine Drought
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
–14
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Ethiopia SSA5 LIC SSA
3. Real GDP in Birr (left axis) and US$ (right axis) 4. Real GDP per Capita (2005 US$)
700 30 1200
600 25 1000
500
20 800
400
15 600
300
10 400
200
100 5 200
0 0 0
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
Birr US$ Ethiopia Sub-Saharan Africa
Low income (developing only)
Note: SSA5 include Burkina Faso, Mozambique, Rwanda, Tanzania and Uganda.
LIC represents Low5.Income Countries.
GNI per Capita (Atlas Method): Ethiopia & China 6. GNI per Capita (Atlas Method)
Source: World Bank (2016)
7000 1400
Outline: 1 6000
2 Abraham Assefa Tsehayae (PhD) Construction
1200 Economics Introduction 33
5000
Population Pyramid
Source: https://populationpyramid.net/canada/2015/

Population Pyramid
Source: https://populationpyramid.net/china/2015/

Population Pyramid
Source: https://populationpyramid.net/ethiopia/2015/

Ethiopia’s Recent Economic Performance:

Nightlights data showing GDP per capita change, 1994-2012 (left) and 2007-12
(right)

28 ETHIOPIA’S GREAT RUN – THE GROWTH ACCELERATION AND HOW TO PACE IT

Infrastructure GrowthGrowth
FIGURE 3.3: Infrastructure Rates:Rates:
Ethiopia
Ethiopiaininthe GlobalContext
the Global Context (1970–2010)
(1970–2010)
Telephone lines Roads
3 1.0
2
Log change over decade

0.5
ETH ETH
1 BFA
RWA UGA
TZA 0 TZA
0
MOZ MOZ
–1 –0.5
–2 –1.0
0 0.2 0.4 0.6 0.8 1.0 0 0.2 0.4 0.6 0.8 1.0
Rank of country on (0–1) scale Rank of country on (0–1) scale
Mobile phones
15
10
ETH
BFA
UGA
5
TZA MOZ
RWA
0
0 0.2 0.4 0.6 0.8 1.0
Rank of country on (0–1) scale
All countries and decades Ethiopia 2001–2010 SSA5 2001–2010 Source: World Bank (2016)
Source: Author’s calculation based on WDI data.
44
ETHIOPIA’S GREAT RUN – THE GROWTH ACCELERATION AND HOW TO PACE IT
Ethiopia’s
FIGURE Labour
4.2: Ethiopia: Productivity:
Labor Productivity, 1999–20131999 – 2013
1. Labor Productivity Level, 2013 (1,000 birr) 2. Labor Productivity Growth, 1999–2013 (%)
Other services 35.1 Other services 3.8

Public services 33.1 Public services 2.6
Finance 126.7 Finance –2.0
Transport 64.2 Transport 2.6
Commerce 22.2 Commerce 9.1
Construction 29.6 Construction 4.3
Utilities 78.4 Utilities –0.7
Manufacturing 9.2 Manufacturing 4.4
Mining 60.3 Mining –6.6
Agriculture 6.0 Agriculture 3.0
0 20 40 60 80 100 120 140 –10 –5 0 5 10
3. Labor Productivity and Labor Shares, 2013 4. Decomposing GVA Growth per Capita (99–13)
110 140 Source: World Bank (2016)
Outline: 1 2 Abraham Assefa Tsehayae (PhD) Construction

120 Economics Introduction 39
90
)
Introduction toETHIOPIA
Construction
ETHIOPIA’’SSINFRASTRUCTURE
Industry
INFRASTRUCTURE: :AACONTINENTAL
CONTINENTALPERSPECTIVE
PERSPECTIVE
State
Figure
of Ethiopia’s
Figure 3. Spatial view of
of Ethiopia’s
Infrastructure:
Ethiopia’sinfrastructure
infrastructurenetworks
networksagainst
againstpopulation
populationdensity
density
a.a.Transport
Transport b.b.Power
Power
Transport Power
c. ICT d. Irrigation potential Source: AICD (2010)

c. ICT d. Irrigation potential

Ethiopia’s Infrastructure: Where do we stand?

Road Connectivity Air:
1.1
Airports:63
1 No of Airports/Million of
0.9
0.8 Population: 0.74 (World average
0.7
0.6
12.97)
0.5
0.4
0.3
0.2 Rail Penetration:
0.1
0 Total length of Railway Lines
Road (KMs)/Sq KMs Paved roads KMs/Sq Roads penetration 681(KMs)
of surface area KMs of surface area (KMs/Ten Thousand
of population) Rail lines( KM/thousand sq. KM):
0.07 (World average 9.20)
Ethiopia World Average
Energy:
Source: Focus Africa (2016)
Production (Bn KW): 3.268 (World 19,020 Bn KW)
Consumption (Bn KW): 2.941 (World 17,480 Bn KW)
Production (Bn KW/Mn population): 0.038 (World 2.8BnKW/Mn population)
Consumption (Bn KW/Mn population): 0.34 (world 2.57BnKW/Mn population)
Ethiopia’s Housing Need:

Rapid urbanization: In 2012, the urban population was only
17.3%, however, by 2028 it is expected to reach 30%.
Demographic transition: Labor force has doubled in the
past 20 years and is projected to rise to 82 million by 2030,
from 33 million in 2005.
Poor housing quality: Even lower than in neighboring
countries.
An estimated 70–80 percent of the urban population
lives in what might be considered slums, according to a
commonly accepted international definition, because
the units lack durability, adequate space, access to
safe water and sanitation, or security of tenure.

47. A key and urgent priority will be to improve the overall functioning of the
housing market. Rapid urban growth compounds the existing challenge in improving
48. housing
Ethiopian
triple by
conditions,standards
2028, the number of
for formal
particularly outside
urban households
housing
Addis Ababa.
will
With the
also
are
triple
unaffordable
urban
from about
the urban population. 87This affordability challenge needs to be88addressed by taking a3 million
for large
population expected
in
to
2007
segments of
to about 9 million in 2028 , making the need for housing even more pronounced . Growth
sector wideAbaba
in Addis approach
will only to housing.
account In addition
for 5 percent of new urbanto the key affordability
household formation throughchallenge for basic
formal
2037housing due
(Figure 13). to high
Rather, urban standards, a related
areas with the most rapid and
ratesecondary
of householdchallenge ofbeaffordability is the
formation will
Ethiopia’s Housing Need:
in Oromia andfocus
government’s Amhara.onPriority
housingin addressing the twowhich
ownership, key housing
needschallenges of low quality
modification
and overcrowding, exacerbated by urban population increase, will be developing a sector-
poorwide
better. This is necessitated due to the upfront cost barriers of ownership that make it
to benefit the urban
approach.
New urban household formation, by region and by year
unaffordable for many households, particularly those in lower-income groups. These cost
Figure 13: New urban household formation, by region and by year
barriers take the form of upfront lease payments, condominium down payments, or
cooperative income/savings requirements.89 Housing need will be more
49. The government, as the sole supplier of formal urban land, facespounced an enormous in Oromia and
financial burden in extending required basic services to those plots. The current system
Amhara
of providing land below cost recovery for required infrastructure is financially regions. Addis Ababa
unsustainable
will only
and cannot adequately address deficits in the housing sector. In the past several account to 5% of the
years the
government has auctioned some land lots for individual homes, allocated land for
condominiums at benchmark prices, allocated some land for cooperatives house need
almost free of (2037)
charge, and has directly supported the construction of government condominiums (see Figure
14). (For a detailed discussion of urban land management practices, refer to Section 3.2).
Figure 14: Benchmark prices for residential land in Addis Ababa (red) are less than cost
The financial burden of providing basic services to land plots is enormous:
recovery for even the most basic infrastructure (blue)
84
Olga Kaganova with Sisay Zenebe, Land Management as a Factor of Urbanization, Ethiopia Urbanization Review
Background Paper (World Bank, 2014).
85 Minwuyelet Melesse, City Expansion, Squatter Settlements and Policy Implications in Addis Ababa (2005).
86 Graham Tipple and Elias Yitbarek Alemayehu, Stocktaking in the Housing Sector in Sub-Saharan Africa: Ethiopia
Benchmark prices for

(Affordable Housing Institute, 2014).
87 Or more than triple as typically household size decrease with economic development.
88 This could imply the need for 6 million quality housing units from 2007-2028 or about 290,000 units per year to keep up
with urban growth.

residential land in Addis
30 Ababa (red) are less than cost
recovery for even the most
basic infrastructure (blue)
Outline: 1 2Olga Kaganova with SisayAbraham

Source: Assefa
Zenebe, Land Tsehayae
Management (PhD)of Urbanization,
as a Factor Construction Economics
Ethiopia Urbanization Review Introduction 43
Background Paper (World Bank, 2014).
Integrated Housing Development Program (IHDP)
Began in 2005 and was revised in 2014
Units are allocated by a lottery and financed via mortgage loans with CBE
Loans carry an average interest rate of 8.5% and terms range from 15 to 20
years
Households earning 1,200 Birr per month or less (equivalent to the bottom
quintile) are eligible for the 10/90 loan for a studio
Low-to middle-income households earning more than 1,200 Birr per month
are eligible for the 20/80 and 40/60 loans
In Addis Ababa, more than 70 percent of beneficiary households rent their units out

the down payment would be more than ETB 25,000 for households whose total annual
consumption is only ETB 11,628.92 Figure 15 and Figure 16 demonstrate the affordability
gap that persists in the IHDP. For example, the bottom two income deciles are eligible for
the 10/90 program, but the monthly payment is more than 30 percent of household income.93
For the bottom third of households, IHDP condominiums are only affordable if households
select small units, take on high down payments and are able to support high-payment-to-
income ratios. In fact, the 3-bedroom unit is unaffordable for even median households in
Addis Ababa. Aside from high monthly payments, there are other reasons the current
structure of the IHDP may not be a feasible housing solution. Notably, beneficiaries of the
• Sale
10/90 loan prices
may only arepurchase
based studios,
only on direct
even costs
though of construction
lower-income households(labor
are notand
materials),
necessarily smaller. and do not
It is also include
important land
to note (or its
that these opportunity
affordability cost),are based
calculations
on unit sales prices, which do not include the cost of land, infrastructure, and other financing
costsinfrastructure
(see below). connections, and other costs including financing.
Monthly payment of IHDP units and loan programs
Figure 15: Monthly payments of IHDP units and loan programs

In the first phase (2005-10): 244,436 units were completed; 170,000 of which
were in Addis Ababa.
After the first phase, the program was suspended in all cities except Addis
Ababa due to high costs and slow take-up.
Current phase 50,000 units per year in Addis Ababa
In Addis Ababa, new housing demand is estimated 20,000 per year,

leaving 30,000 units per year to replace poor quality existing housing
Due to large implicit subsidies, the costs of the IHDP units are much lower
than those in the private sector.
In 2014, the program’s cost was estimated to be 3,142 Birr/m2 (increase from
1,000 Birr/m2 in 2005), only one-quarter of the cost of private development.

Ethiopia’s Infrastructure: Future Needs

Addressing Ethiopia’s infrastructure deficit will require a
sustained annual expenditure of $5.1 billion over the next
decade.
An option will ETHIOPIA
be to improve: A CONTINENTAL
’S INFRASTRUCTURE efficiency through better
PERSPECTIVE
execution of construction projects.

Potential
Table 11. Potential gains
gains from greater from
efficiency greater efficiency
US$ million per year
ICT Power Transport Water Irrigation Total
Underrecovery of costs -- 42 37 23 -- 102
Overstaffing 9 -- -- -- -- 9
Distribution losses -- 24 -- 9 -- 33
Under collection -- 15 28 1 -- 44
Under maintenance 0 0 263 0 0 263
Total 9 40 290 9 0 451
Source: Briceño-Garmendia and others 2008. Source: Briceno-Garmendia and others (2008)

Africa Construction Trends Report 2017 / Economic Realities for I&CP Spending
Ethiopia’s Economic Future:

Regional weighted real GDP growth outlook (%), 2017f-18f
East Africa Southern Africa Central Africa West Africa North Africa
6.3% 1.7% 1.6% 2.9% 4.4%
Source: Deloitte analysis based on IMF, 2017
Investment in infrastructure and capital Across Africa, GFCF varies strongly – both BMI forecasts expect GFCF spend for
projects (I&CP) is an important aspect for by country and by region. The larger the Nigeria to increase to 21.8% in 2020 from
enabling GDP growth and more diversified GFCF spend (relative to GDP), the more the 17.4% in 2016. Forecasts for South Africa
economic and private sector activity. By country spends on improving and building see an increase in spend by 0.4 percentage
providing access to basic services such infrastructure. A rule of thumb is that points only between 2016 and 2020, while
as water, education and healthcare, economies that are investing approximately for Egypt a 0.1 percentage point increase is
infrastructure ensures that economic 30% of GDP into GFCF are able to create an estimated. Kenya is expected to decrease
growth is sustainable and inclusive. environment conducive to growth.
Source: Deloitte analysis based on
its GFCF spend by 0.8 percentage points.
IMF(2017)
Investment in infrastructure tends to In 2016, SSA’s average GFCF was 20.1% Only Ethiopia (the sixth largest economy
Outline: 1 2 Abraham
increase business confidence Assefa Tsehayae
and lowers (PhD)
while the average Construction Economics
for North Africa was 25%. Introduction
on the continent in 2017) has consistently 48
transaction costs, making it easier for North Africa also had the highest regional spent over the required 30% of GDP on
Gross Fixed Capital Formation (GFCF) as a percentage of
GDP, which includes land improvements and the
construction of infrastructure by both private and public
sector, is indicative of infrastructure spend of countries.
Economies that are investing approximately 30% GDP into
GFCF are able to create an environment conducive to Africa Construction Trends Report 2017 / Economic Realities for I&CP Spending
growth. GFCF of key countries for regions (GFCF as % of GDP), 2010-16
50 50
40 40
30 30
20 20
10 10
0 0
2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016
Ethiopia Kenya
50 50
40 40
30 30
20 20
10 10
Source: World Bank (2017) 0

2010 2011 2012 2013 2014 2015 2016
0
2010 2011 2012 2013 2014 2015 2016
Angola South Africa

s % of GDP
50 50
Outline: 1 2 Abraham Assefa Tsehayae (PhD)

40 Construction Economics 40 Introduction 49
30 30
Why Construction Economics?
Economists, engineering managers, project managers, and

indeed any person involved in decision making must be
able to analyze the financial outcome of his or her decision.
The decision is based on analyzing and evaluating the
activities involved in producing the outcome of the project.
These activities have either a cost or a benefit.
Economic/Financial analysis gives us the tools to perform
this evaluation.
Often the decision to make is to proceed or not to proceed
with a project, and their could be many more courses of
action (alternatives).

Project Life Cycle
Ability to
100% Influence Construction 100%
Cost
Conceptual Planning
& Feasibility Studies
Level of Influence on Cost
Design &
Construction Cost
Engineering
Procurement and Construction
Startup
Operation &
Maintenance
0% 0%
Start Project Time Finish
51
Process of Decision Making
Constraints
Alternatives
Objective Criteria
Viewpoint
Consequences
of alternatives
overtime
Planning Horizon
The Decision
Model

Course Introduction
Course Objectives:
Develop ability to prepare detailed project business plan
Text book:
Economic and Financial Analysis for Engineering and Project
Management, Abol Ardala, Technomic, 2000.
Construction Financial Management, Tang, bookboon, 2014.
Grading:
Distribution
Examination
Course Outline:
Time value of money
Understanding financial statements
Investment appraisal methods
Depreciation, Tax, and Inflation
Outline: 1 2 3 Abraham Assefa Tsehayae (PhD) Construction Economics Introduction 53

Assignment 1
Assignment 1:
Define and explain in detail the multiplier effect of the
construction industry
Identify three countries from from developed, BRIC, and
developing context respectively, and compare and contrast
the level of gross fixed capital formation and multiplier
effect of the construction industry.
Prepare and submit a maximum five-page summary report
which:
Is prepared using ASCE Construction Research Congress
conference paper template.
Due date: April 23, 2019 before 2 P.M.
Submit the hardcopy submission to the Instructor at the beginning of
class and also email the softcopy to: abraham.assefa@aait.edu.et

Assignment 1: Marking Rubric
Rank Excellent Very Good Satisfactory Marginal Unacceptable
Category (A+; A; A-) (80 - 100) (B+; B; B-) (60 - 80) (C+; C; C-) (40 - 60) (D+; D) (20 – 40) (F) (0 - 20)
Title page: As per Title, Name of students, Instructor’s Name, Evidence of 5 Evidence of 4 Evidence of 3 or less Absent
ASCE CRC Course Name, Semester, Date, Neatly
Format finished-no errors
Problem Clearly and concisely states the paper’s Clearly and states the paper’s select States the paper’s select Incomplete and unfocused Absent or no
statement select delivery method delivery method delivery method evidence
Introduction The introduction is engaging, states the The introduction states the main topic The introduction states the There is no clear introduction or Absent or no
main topic and previews the structure of the and previews the structure of the main topic but does not main topic and the structure of evidence
paper paper adequately previews the the paper is missing
structure of the paper
Body Each paragraph has thoughtful supporting Each paragraph has sufficient Each paragraph lacks Each paragraph fails to develop Not applicable
detail sentences that develop the main idea supporting detail sentences that supporting detail sentences the main idea
develop the main idea
Details on The paper clearly demonstrates each of the The paper demonstrates each of the The paper presents each of the The paper presents each of the Not applicable
submission submission requirements and subtle submission requirements and some submission requirements and submission requirements without
requirements: sequencing of the requirements through sequencing of the requirements the requirements through well- any logic and no sequencing of
well-developed paragraphs; transitions are through well-developed paragraphs; developed paragraphs; the requirements through well-
used to enhance organization transitions are used to enhance transitions are not used to developed paragraphs; transitions
organization enhance organization are not used to enhance
organization
Conclusion The conclusion is engaging and clearly The conclusion is clearly explains the The conclusion does not clearly Incomplete and unfocused Not applicable
explains the studied delivery method studied delivery method explain the studied delivery
method
Write up No errors in punctuation, capitalization and Almost no errors in punctuation, Many errors in punctuation, Numerous and distracting errors Not applicable
spelling. No errors in sentence structure capitalization and spelling. Almost no capitalization and spelling. in punctuation, capitalization and
and word usage. errors in sentence structure and word Many errors in sentence spelling. Numerous and
usage structure and word usage distracting errors in sentence
structure and word usage
Citation : As per All cited works, both text and visual, are Some cited works, both text and Few cited works, both text and Absent Not applicable
ASCE Format done in the correct format with no errors visual, are done in the correct format visual, are done in the correct
with no errors format with no errors
Bibliography Done in the correct format with no errors. Done in the correct format with few Done in the correct format with Done in the correct format with Absent or the
Includes more than 5 major references (e.g. errors. Includes 5 major references many errors. Includes 4 major many errors. Includes 3 major only sites are
construction journal articles, books, but no (e.g. construction journal articles, references (e.g. construction references (e.g. construction internet sites
more than two internet sites) books, but no more than two internet journal articles, books, but no journal articles, books, but no
sites) more than two internet sites) more than two internet sites)
Abraham Assefa Tsehayae (PhD) Construction Economics Introduction 55

References:
Baldwin. A. and Bordoli, D. (2014). A Handbook for Construction
Planning and Scheduling. Wiley and Sons limited.
Deloitte (2017). Deloitte on Africa: African construction trends report
2017.
Deloitte (2014). Deloitte on Africa: African construction trends report
2014.
Ethiopian Economic Association (EEA). (2006). Report on the Ethiopian
Economy: The Current State of The Construction Industry, Volume VI
2006/07.
CIV E 601: Project Management, Lecture Notes, Fayek, A. R. University
of Alberta, 2013.
Foster, V. and Morella, E. (2010). Ethiopia’s Infrastructure: A Continental
Perspective. Country Report, Africa Infrastructure Country Diagnostic.
GTP II (2014). Growth and Transformation Plan II. Final Draft.
Ministry of Planning and Economic Cooperation (MEDaC). (1999).
Survey of the Ethiopian Economy: Review of Post Reform
Developments, April 1999.
References:
Moavenzadeh, F. and Rossow, J. A. K. (1975). The construction

industry in developing countries. MIT.
Ministry of Finance and Economic Development (MoFED). (2005).
National Accounts Statistics of Ethiopia: Sources and Methods. Addis
Ababa, Ethiopia.
World Bank. (2015). Ethiopia Urbanization Review: Urban Institutions
for Middle-Income Ethiopia. World Bank Group and Cities Alliance,
2015.
World Bank. (2016). Ethiopia’s Great Run: The Growth Acceleration and
How To Pace It. World Bank Group, February, 2016.
UN (1996). International Standards Industrial Classification (ISIC), Rev.
3, United Nations Statistical Division.
Economic and Financial Analysis for Engineering and Project
Management, Abol Ardala, Technomic, 2000.
ADB (2019). African Economic Outlook. African Development Bank
(ADB), 2019.

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CENG 6108 Construction Economics

Introduction to Construction and the Economy

Abraham Assefa Tsehayae, PhD

Abraham Assefa Tsehayae (PhD) 1

① Introduction to Construction and the Economy

Abraham Assefa Tsehayae (PhD) Construction Economics Introduction 2

Outline: 1 2 Abraham Assefa Tsehayae (PhD) Construction Economics Introduction 3

Study of Economics can be divided into:

Microeconomics: deals with the individual parts of the economy,

Mesoeconmics: deals with different sectors or parts of an

Macroeconomics: is the study of the economy as a whole. Is

Outline: 1 2 Abraham Assefa Tsehayae (PhD) Construction Economics Introduction 4

Economic systems range from centrally planned to free market

Outline: 1 2 Abraham Assefa Tsehayae (PhD) Construction Economics Introduction 5

Outline: 1 2 Abraham Assefa Tsehayae (PhD) Construction Economics Introduction 6

National economies are built on the following main

Primary Secondary Tertiary Quaternary

Each of these sectors are interdependent on each other.

GDP = $200.2 Billion GDP = $80.87 Billion GDP per capita =

Gini Coefficient = Labour Force = 52.82 Unemployment = Exports = $3.076

Gross External Debt =

Outline: 1 2 Abraham Assefa Tsehayae (PhD) Construction Economics Introduction 8

9.9% 10.4% 10.2% 10.0%

GDP (Billion Birr) GDP by Construction (Billion Birr)

Source: WB in association with ECPMI

Outline: 1 2 Abraham Assefa Tsehayae (PhD) Construction Economics Introduction 11

Construction Industry: is an economic sector which, through planning,

Buildings: Residential, Commercial, Institutional, etc.

Infrastructure: Roads, Railways, Dams, etc.

Industrial: Petro-chemical plans, refineries, etc.

According to UN (1996), International Standards Industrial

In the case of Ethiopia, the definition adopted by the National

Also includes activities such as quarrying of stone, gravel crushing,

Outline: 1 2 Abraham Assefa Tsehayae (PhD) Construction Economics Introduction 13

Unstable construction demand due to the specialized character of

Floating labour force

Outline: 1 2 Abraham Assefa Tsehayae (PhD) Construction Economics Introduction 14

Unique financing procedure: customer has to pay in installments

No buffer between production and demand

Outline: 1 2 Abraham Assefa Tsehayae (PhD) Construction Economics Introduction 15

Role of construction industry:

Outline: 1 2 Abraham Assefa Tsehayae (PhD) Construction Economics Introduction 16

2019 African Economic Outlook

Outline: 1 2 Abraham Assefa Tsehayae (PhD) Construction Economics Introduction 19

Source: ADB (2019)

Outline: 1 2 Abraham Assefa Tsehayae (PhD) Construction Economics Introduction 20

Source: ADB (2019)

Outline: 1 2 Abraham Assefa Tsehayae (PhD) Construction Economics Introduction 21

Source: ADB (2019)

Outline: 1 2 Abraham Assefa Tsehayae (PhD) Construction Economics Introduction 23

African construction trends: Project valued over USD 50

Source: Deloitte (2014)

Outline: 1 2 Abraham Assefa Tsehayae (PhD) Construction Economics Introduction 24

alifying for inclusion 150

Introduction to Construction Industry

African construction trends: Project valued over USD 50

Million and broken ground by 1 June 2017

East Africa (23.4%) East Africa (10.6%)

Southern Africa (30.7%) Southern Africa (29.2%)

West Africa (26.1%) West Africa (32%)

North Africa (13.2%) North Africa (25.1%)

Source: Deloitte (2017)