ERITREA'S DYSFUNCTIONAL CONSTRUCTION INDUSTRY

C O N F I D E N T I A L ASMARA 000364

SIPDIS

C O R R E C T E D COPY ADDED ADDEES

DEPARTMENT FOR AF/E AND INR
LONDON AND PARIS FOR AFRICA WATCHERS

E.O. 12958: DECL: 07/20/2018
TAGS: ECON EIND EAID ELAB PINR ER
SUBJECT: ERITREA'S DYSFUNCTIONAL CONSTRUCTION INDUSTRY

Classified By: AMBASSADOR RONALD K.MCMULLEN FOR REASON 1.4 (d)


1. (SBU) Summary: The "temporary" measures which
constricted the activities of Eritrea's private construction
and contracting companies in 2006 continue, and have
effectively squeezed the private sector out of business,
according to a member of the European Commission (EC).
Eritrean construction companies currently permitted to
operate are solely owned either by the Eritrean Defense
Forces (EDF) or by the regime's political party, the People's
Front for Democracy and Justice (PFDJ),although several
Chinese and Korean-owned companies have been given licenses
to operate as well. Notwithstanding the
government/party-controlled construction companies, the
construction industry in Eritrea is barely functioning,
suffering from a lack of materials and subject to the
complete dominance by the ruling party's parastatal, the
Hidri Trust. All construction companies operating in
Eritrea, including the Chinese amd Korean-owned firms, are
listed in paragraph 9. End Summary.

PRIVATE CONSTRUCTION LICENSES CANCELLED
--------------


2. SBU) The EC's Program Officer for Infrastructure and
Post-Conflict Rehabilitation recently outlined to Emboffs the
difficulties the EC has faced since 2006 in trying to
implement EC-funded construction projects. In late March
2006, the Government of the State of Eritrea (GSE) withdrew
business licenses from all private contractors and consulting
engineers in Eritrea, allegedly in response to the death of a
worker at a construction site. The GSE officially took this
action at the time as a necessary "temporary" step to weed
out bad business practices in the country. Since then, no
new licenses for construction companies have been issued.
Consequently, the only licensed and currently operating
Eritrean construction companies are owned by either the
ruling People's Front for Democracy and Justice (PFDJ) or the
Eritrean Defence Forces (EDF).

PRIVATE SECTOR CONSTRUCTION ABSORBED
--------------


3. (C) The private construction companies closed in 2006 were
absorbed by the PFDJ-and EDF-owned companies in a
State-directed hostile takeover. (Note: One Eritrean-American
businessman told Emboff that in 2006, professionals working
for private construction companies were instructed by the
PFDJ to attend a mandatory meeting of the party. At the
meeting, the business owners, engineers, and architects were
summarily arrested. Many of these constructon professionals
were detained for months in prison without charge. End
Note.) With no prospects for resuming business activity,
private companies have been selling their assets over the
past two years to the government-affiliated companies at
fire-sale prices, which also includes the hiring of their
skilled workers. The EC officer noted that the few remaining
licensed private companies lack the capacity to perform at
pre-2006 levels when local competition included the private
sector firms.

RESTRICTIONS ON PROCUREMENT
--------------


4. (SBU) In September 2005, the GSE issued Procurement
Proclamation 147/2005 to regulate construction activities.
The proclamation specified for private companies their
allowable profit margins, overhead charges, fees, taxes, and
use of construction materials. Although not specifically
stated in the proclamation, the GSE's application of the new
regulations resulted in private businesses, government
ministries, and agencies having to procure all goods,
including material for civil works, through the Red Sea
Trading Corporation (RSTC). The RSTC, like the remaining
construction companies, is owned by the Hidri Trust. This
leaves Eritrea's entire construction industry vertically
integrated and under the control of the PFDJ.


5. (SBU) The extreme difficulties in importing construction
materials has become another fact of life in Eritrea over the
last two years. The GSE requires contractors to be paid in
internationally worthless Nakfa, although hard currency is
needed to import materials. Projects are often delayed while
contractors wait for a hard currency allocation from the
perennially cash-strapped GSE. Representatives from
international organizations also noted Eritrea's
party-dominated economic model can barely absorb even the
present low level of infrastructure spending, and some
international donor projects are put on hold or even
cancelled as a result.

SOUTH KOREAN CONSTRUCTION COMPANIES IN ERITREA
-------------- -

6. (SBU) Two South Korean owned construction companies (see
paragraph 9) have operated in Eritrea for approximately ten
years. They originally built the Sembel Hospital and Sembel
Apartment Complex near the Asmara Airport, and since have
worked on small-scale residential projects in Massawa.
Post's EC contacts note these companies do not have the
capacity to engage in large-scale projects such as dams or
roads in Eritrea. A separate analysis of Chinese construction
company activity will be provided septel.

NATIONAL SERVICE LABOR USED FOR CONSTRUCTION PROJECTS
-------------- --------------


7. (SBU) In 2002, the Warsay-Yekalo National Development
Campaign was launched under the oversight of the Ministry of
Defense in order to facilitate the enrollment of civilians
into National Service and to engage the armed forces in the
development of the country. EDF- and PFDJ-owned companies
regularly draw from the labor force organized under the
Warsay-Yekalo campaign. As a result, these companies benefit
from laborers receiving a stipend of between 300 and 500
Nafka per month ($20 - $33),versus the GSE's officially
published minimum salary of 1000 Nakfa per month ($67).


8. (C) Comment: The GSE continues to claim its Marxist
economic policies are temporary measures in the face of
national security emergency conditions. These policies are
largely responsible for the current deplorable economic
situation across sectors. After seven years of tightening
economic "emergency measures," these economic policies have
become entrenched, and appear well on their way to becoming
permanent. End Comment.


9. (SBU) CONTRACTING COMPANIES OPERATING IN ERITREA
-------------- --------------

PFDJ/Hidri Trust Fund Owned Companies
--Segen
--Rodab
--Bdho
--As.Be.Co.

Eritrean Defense Force-Owned Companies
--Debwin
--Winna
--Sawa
--Hangar
--Mussa-Ali
--Mereb
--Badme
--DegefZula

Chinese Owned Companies
--China New Era
--China Tianjin
--China Jiangsu
--China Sichuan
--China National
--China State Jiangxi
--China Henan
--China State

South Korean Owned Companies
--Horn
--Keangnam
MCMULLEN