Rising costs a challenge for Nigeria's construction sector

When Nigeria’s economy was flourishing a decade ago, the country earned a reputation as one of the most expensive places in the world for construction undertakings. Strong demand for expertise, labour and supplies for major hydrocarbons projects pushed up prices and ensured hefty profits for construction firms. Yet while it may have slowed activity, even the country’s recent recession has not stopped the continuous rise of building costs.

Scope

Contractors across the industry agree that prices climbed steadily in the 12 months to July 2017. “I estimate that construction costs have increased between 30% and 40% over the last year,” Igbuan Okaisabor, CEO of Construction Kaiser, a local construction and civil engineering firm, told OBG. “The sector has been impacted by the weaker exchange rate and general inflation, as well as increased wage costs due to inflation.” 

In August 2014 the exchange rate stood at N160:$1. Three years later Nigeria’s currency has more than halved in value, with one US dollar fetching 360 naira in August 2017. At the same time, inflation rose from 8% in January 2014 to 18.7% in January 2017 before falling to 16% mid-year.

The impact these two factors have had on project budgets is significant. Nigeria imports many of its construction materials – including an annual spend of $3.3bn on steel – despite having the world’s second-largest reserves of the essential road building material bitumen, at 600,000 tonnes. As a result, foreign exchange risk spiked over the course of 2015 and 2016 when the country experienced a recession.

Prices have been rising even for those materials in which the country is self-sufficient. “In 2016 we saw the price of steel rebar go up 80% and later fall in 2017, yet it is still up 40% on 2015 prices,” Okaisabor told OBG. “Concrete has also risen 40% in the last 12 months. Although the cement is produced locally, there is high foreign content in terms of some aggregate ingredients, equipment purchases and transportation costs, the last of which are linked to the rising price of diesel.”

By August 2017 the price of a 50-kg bag of Portland cement ranged from N2500 ($8.84) to N2650 ($9.37), depending on the supplier. A tonne of high-tensile 12mm rebar was selling for N155,000 ($548) if sourced locally and N204,000 ($721) if imported. However, the reliance on imported goods is more accentuated in non-core materials. According to Suleiman Adamu, the minister of water resources, more than 60% of components needed to build water supply systems are imported, making the essential undertaking too expensive for many state and local governments.

Response

The factors contributing to increasing construction costs are many, and range from the limited output of local producers and a small mining and quarrying sector, to a weakened currency and capital controls. However, there have also been concerns over the appropriateness and transparency of procurement and billing practices in the segment to satisfy personal financial interests.

At a summit hosted in Abuja in April 2017 with the theme “Fighting corruption through proper project costing in Nigeria”, Babatunde Raji Fashola, the minister of power, works and housing, told attendees that deliberate inflation of project costs was one of the root causes of construction price increases, and that was why he supported the institution of a national construction costs database. “The ministry will continue to collaborate with the Quantity Surveyors Registration Board of Nigeria, the Nigerian Institute of Quantity Surveyors and other stakeholders in the construction industry with a view to establishing a reliable cost database that will ensure realistic costing of buildings, roads, bridges and other civil engineering projects across the nation’s geopolitical zones,” Fashola said at the conference.