Chapter 6 :Valuation and compensation

 What is valuation?
 What type of valuation is used in
Ethiopia?
 What are the compensable interests?
 How is compensation calculated?
 Valuation
2
 Valuation is the process of determining the current worth of an
asset, mostly real property.
 There are mainly three valuation approaches: the comparative sales,
the income capitalization and the cost replacement approach.
 The cost replacement approach is the one applied in Ethiopia (see
Art. 7(2) of proc. 455/2005).
 In this approach, the value of a property is derived by adding the
estimated value of the land to the current cost of constructing a
replacement for the improvement and then subtracting the amount
of depreciation.
 (Site value + replacement cost of new property) – (depreciation
allowance)
 This approach is based on the assumption that cost equals value
By Mohammed 12/18/2023
 Compensation
3
 Compensation is defined as “full indemnity or remuneration for the
loss or damage sustained by the owner of the property taken or injured
for the public use.”
 The compensation requirement under the law demands that the
expropriator reimburses the expropriated for the property interest taken
and places the latter in as good a pecuniary position as if the property
had not been taken.
 It is “the property and not the cost of it that is safeguarded by the
state.”
 In other words, it is the value of the property, not its cost, which
determines the amount of compensation to be paid.
 Fair compensation can be reached through payment of market value.
 The compensation principle in Ethiopia is enshrined under Art. 40(8)
of the Constitution as Commensurate (equal to the amount of damage)
BY MOHAMMED 12/18/2023
 Compensable Interests in Ethiopia
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 As per the reading of Arts. 40 (1) (2) (3)(7) &(8) of

the FDRE Constitution private property is the subject
of compensation.
 Private property is everything a person creates by his
labor, enterprise, capital and skill on the land.
 But it does not include the land/ground itself
 Therefore, in Ethiopia private property means all
those properties rested on the land and improvements
made to the land.
 In other words, land is not compensable
BY Mohammed 12/18/2023
 Compensable interests…
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 A property situated on the land private

 Permanent improvements to the land property
 Loss of land
 Relocation of property
 Lost income, in case of temporary loss of land

By Mohammed 12/18/2023
 Private property
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 Art. 7 of Proc. 455/2005 provides that private property shall be

compensated
 While property situated on the land refers to building, structure or plants
of any kind that have value, improvement to the land refers to any work
made on the land that increases the value, productivity, or fertility of the
land.
 As per Art. 3 & 4 of Reg. 135/2007, compensation for building and fence
shall be calculated by taking the current cost to build a square meter
(current cost of construction materials and labor).
 The practice is that central price index is prepared by (Bureaus) or Cities
and valuators use that.
 The problem is that the price index may not be updated frequently, at least
every 6 months.
 The other controversial issue is the reduction of the depreciation
allowance. By Mohammed 12/18/2023
 Private property….
7

 Other private property such crops and trees are

compensated on the market value of the properties Read
Arts. 5-8 of Reg. 135/2007
 Also Read Art. 13 of Reg. 135/2007 for detailed valuation
formula.

Compensation
for crops = the total area of the land (in squat meters)
x value of the crop per kilo gram
x the amount of crop to be obtained per square meter
+ cost of permanent improvement on land
By Mohammed 12/18/2023
 Loss of Land Art. 8 of Proc 455/2005
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 As a matter of principle, loss of land is not compensable.

 What the government pays is giving replacement land or
paying displacement compensation.
 In urban areas, replacement land is always provided (or
the chance of buying Condominium house) and one
year’s displacement compensation in the form of rent
(replacement cost+1 year’s rent + cost of relocation) (Art.
8.4)
 In Rural areas, if land is available it will be given as
replacement. If there is none, then displacement
compensation will be provided.
By Mohammed 12/18/2023
 Urban
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 In urban areas displaced people are offered with three

alternatives
 Replacement Cost +Rent + Replacement land
 Replacement Cost +Rent + chance of buying
Condominium house
 In the second case, the replacement cost will be used
for purchasing condominium house
 With those who get replacement land the problems
are the incomparability of land value and the non
compensated distance.
By Mohammed 12/18/2023
 Urban
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 In city centers people used to walk less to work and

public facilities. Some women operated business
from their homes.
S. Zone Initial Lease Up front Auction lease Exprop
N price market price price riation
value
1 Central 894-1686 8000-10,000 20,000-25,000
2 Transition 555-1035 5000-7500 14,000-20,000
3 Expansion 191-355 3000-5000 5000-14,000 18 birr

By Mohammed 12/18/2023
 Calculation of rent in Addis Ababa
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Grade Compensation Rent/m2 Land size Annual rent Total

Range in birr in birr in m2 Payment

Grade 1 Below 80,000 20 200 20x200X12 48,000

Grade 2 80,001-275,000 40 300 40x300x12 144,000

Grade 3 275,001-500,000 60 375 60x375x12 270,000

Grade 4 Above 500,001 80 400 80x400x12 384,000

By Mohammed 12/18/2023
 Displacement compensation
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 Displacement compensation is calculated by taking

the average income of the past 5 years and
multiplying it by10.
 Assume Ato Alemu posses 1hct & gained an

income:
Year Crop Productivity Price/qn Total Ave. 10
/hectar price year’s
2000 Tef 30 qn 700 21,000
2001 Wheat 45 qn 800 36,000
2002 Maize 50qn 800 40,000
2003 Barely 65qn 1100 71,500 45,400 454,000
2004 Tef 45qn 1300 58,500

By Mohammed 12/18/2023
 Problems
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 The 5 years average calculation does not reflect the

actual harm.
 First it does not consider the likely inflation that is
happening or will happen
 Secondly it does not consider the likely future
increase of productivity (yield is increasing
because of use of modern farming technology)
 In case of land replacement it does not consider
differences in fertility, location and so on
By Mohammed 12/18/2023
 Compensation for peri-urban
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 Peri-urban is the periphery of the urban centers.

Those are land expropriated by urban centers for
urban expansion (housing, industry etc)
 The farmers who lost their land will get the
following compensation package;
 Compensation for private property (Art. 7)
 Displacement compensation (Art.8)
 Urban land for housing construction
 One year’s Rent

By Mohammed 12/18/2023
 Valuation process (Art. 9&10)
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 As a matter of rule valuation has to be done by

certified private or public institutions or consultants
 In the absence of such professionals, it can be carried
out by a committee of people selected by the woreda
or urban administration.
 In urban areas it includes people such as engineers,
accountants, and agriculturalists
 In rural areas representatives of the woreda
agriculture, land administration, investment offices
and local elders.
By Mohammed 12/18/2023