This paper assessed the factors that challenged institutional capacity challenges andrnprospect of the Addis Ababa City Roads Authority in the implementation of Roadrnprojects for the last five years (2004/5-2008/9).rnIn this regard the research raises the question on what institutional Capacity and capacityrnbuildings are and how they should be understood, the road project in the city governmentrnof Addis Ababa, whether built by contractors or by AACRA own task forces tornaccomplish as per the established schedule? Does AACRA prepare training policy andrnprofessional development program to its employees? How does AACRA cope up withrnthe increasing demand of the road access in the inner city and expansion area? IsrnAACRA well equipped with materials, rules and systems that can enhance itsrnperformance? Does the organizational set up of AACRA help to accomplish its duties &rnresponsibilities? Does the city government of Addis Ababa allocate enough budgets tornAACRA?rnIt further presents findings from a review of selected road sector projects almll1g atrninstitutional capacity building.rnThe main objective of this research is to identify and recommend the most convenientrnmeans's and strategies to develop institutional capacity of Addis Ababa City RoadsrnAuthority. Accordingly, it has assessed the basic characteristics and reform experiencesrnof the same, discussed different concepts and principles and finally proposed thernappropriate strategies of institutional capacity building.rnTo this end, the primary data collected, using structured questionnaires and interviews,rnfrom three sample project sites and sample customers were analyzed. Results of the datarnanalysis show that, institutional capacity of AA CRA has been affected by complexrnbureaucratic structure and decision-making, inadequate allocation of resources, the salaryrnlevels is often low and not competitive with salary level of the private sector. Apart from