Ghana's construction sector to rebound in 2018 as oil prices improve

Following a period of rapid economic growth, Ghana’s slowdown over the past couple of years has had a noticeable impact on the construction sector in particular. However, its prospects appear to be modestly brightening, with sizeable capital allocations in the government’s budget and growth of 3.7% targeted for the construction industry in 2017.

According to most recent data from the Ghana Statistical Service, the contribution to GDP from construction in market prices increased to GHS21.5bn ($5.1bn) in 2016 from GHS17.3bn ($4.1bn) in 2015, constituting a 24% current market growth rate and making up 13.7% of the overall GDP. In constant prices, growth reached 2.9%, which builds on a 2.1% rate of expansion in 2015 after no rise in 2014. So, while immediate revival is unlikely, there is a cautious optimism that new government initiatives and increased oil revenues in 2017 will bring further opportunities for infrastructure and real estate construction projects.

Organisation & Regulation

Oversight of the construction industry is divided among a number of entities, with many large-scale infrastructure efforts under the remit of the Ministry of Transport and Ministry of Roads and Highways (MoRH), while housing initiatives fall under the Ministry of Works and Housing.

Prior to a January 2017 decision to create a separate Ministry for Sanitation and Water Resources, the Ministry of Water Resources, Works and Housing had constituted a single department.

The country’s regulatory frameworks – from building standards, to procurement and contracts – are well crafted, although enforcement and public-private dialogue is sometimes lacking. “The laws and regulations are clear, including value-added tax, and other financial regulations, particularly once they revoked the 2014 law that regulated foreign exchange,”Clovis Abi Nader, area general manager for construction firm MAN Enterprise, told OBG. However, implementation of these regulations is not always reliable. As noted in a 2016 paper by the Department of Building Technology at the Kwame Nkrumah University of Science and Technology, “There is very little collaboration among stakeholders in the public and private sectors and professional bodies are usually weak in enforcing regulations.” This has led some to highlight the absence of a single platform to suggest and implement sector-wide improvements. In 2016 the vice-president of the Chartered Institute of Building for Africa called for an independent building oversight authority in Ghana to regulate and consolidate the construction industry, ensuring high standards, as well as payment reforms for contractors so businesses can stay competitive in spite of currency fluctuations.

In response, in May 2017 the government pledged its commitment to support the establishment of the Construction Industry Development Authority, which would serve as the regulatory body to oversee the strategic development of the sector and formulate regulations. In addition, the Association of Ghana Industries (AGI) has recommended a local-content policy be implemented for the industry to enhance the capacity of Ghanaian construction firms (see analysis).

Operating Environment & Trends

Despite the trailing effects of the slowdown in 2014, Ghana’s construction sector maintains a high regional ranking, as described in the World Bank’s “Doing Business 2018” report. Though the country fell 14 places in the dealing with construction permits category, its rank of 131st places it comfortably above regional neighbours Côte d’Ivoire and Togo, which came in at 182nd and 154th, respectively. Furthermore, the report praised the country for improving transparency in the sector by publishing transparent regulations related to construction online free of charge. “One of the main challenges facing the construction sector relates to the speed of permits and bureaucracy. Once this is sorted out, even if just partially, we can expect even more foreign participation in the sector,” Kadir Yadigar, board chairman of construction firm Kass Group, told OBG.

Similarly, the industry has benefitted from some aggressive policies by the new administration to support investment in the sector down the line. In June 2017 local press reported the opening of Construction Bank (Ghana), a specialised lender set up to offer financial services, including project and mortgage financing, to the construction sector. The Ghana Investment and Infrastructure Fund, established in 2014 to help secure investment for infrastructure projects, has also continued to develop. In April 2017 President Nana Akufo-Addo formed a board of directors who approved an Investment Policy Statement to provide a framework for its investment decisions. The statement includes an acknowledgement of the key role private financing will play in closing the infrastructure gap.

Key Drivers

The government has been bullish about increasing capital spending on infrastructure projects, with a range of factory, roadways, airports and railways initiatives in the pipeline. However, Abi Nader told OBG that he anticipates short-term interest will be in projects that provide a faster return – such as recycling projects or agricultural initiatives – rather than 25-30-year investments in power stations and roadways.

Property is also seen as a larger potential driver over the coming year. “There is a lot of private investment in the expensive and just-below-expensive sectors of accommodation, as well as an increasing demand for places like shopping malls, hotels and mixed developments,” Harm Ploeger, president for Africa at Saudi Arabia-based Red Sea Housing Services, told OBG.

Abi Nader has seen this rise in demand for top-end accommodation as well, noting, “The market demand for high-luxury, secure compounds is increasing day by day, though projects are still progressing from 2015-16 with few to be initiated before the end of 2017.” To complement this higher-end housing push, the government has announced several initiatives to increase the supply of low- and middle-income housing as well.

Infrastructure Update

As is the case throughout sub-Saharan Africa, infrastructure – whether electricity, water, road or rail – is where construction project volume and value sits. In 2017 government-led drivers of construction projects were port expansions and their accompanying infrastructure efforts, with a total infrastructure budget of GHS2.6bn ($622.4m) presented. The $1.5bn expansion of Tema Port, a joint initiative of the Ghana Ports and Harbours Authority (GPHA), Dutch APM Terminals and France’s Bolloré Africa Logistics, continues apace and is expected to be complete by 2019. AECOM, the US engineering firm providing construction oversight, noted that the project will triple Tema Port’s current traffic of about 1m twenty-foot equivalent units (TEUS) as it allows the port to accommodate larger vessels (see Transport chapter).

Similarly, Takoradi Port is also undergoing major renovations to increase the port’s capacity and make operations more efficient, particularly for the nearby hydrocarbons and mineral industries. GPHA released a public tender for operation of a new, integrated container terminal in January 2017, which has already attracted international interest, and in June 2017 local press reported on the visit of delegations from China’s Sinopec, as well Ghana Manganese Company (GMC) and Ningxia Tianyuan Manganese Industry Company to explore potential opportunities.

Road & Rail

Road and rail networks are the recipients of large chunks of public funding, though new major works are more likely to happen in the medium term, with an immediate focus on routine maintenance. In the 2017 budget the MoRH was allocated GHS871m ($208.5m), compared with GHS902m ($215.9m) in 2016. However, the ministry is looking to build on 2016 efforts; in 2017 a total of 45,050 km of routine maintenance was due to be completed compared to a total of 36,290 km undertaken in 2016, while construction works on trunk roads, urban roads and bridges were expected to total 220 km in 2017 as opposed to the 208 km in 2016. Of note, in March 2017 Brazilian firm Queiroz Galvao began construction works on the 116-km Bolgatanga-Bawku-Pulmakom Road, which is estimated to cost GHS660m ($158m), and will connect six constituencies to relieve traffic on the busy Bolga-Bawku Road. Japan also signed a $56.6m agreement in April 2017 to fund the Tema Motorway roundabout project and rehabilitate the damaged Yamoransa-Assin Fosu Road.

The Ministry of Railways Development (MoRD) was given a budget of GHS518m ($124m) to improve the mostly defunct western, eastern and central lines, and to source additional financing for repairs and construction. One key project is the effort to construct the 340-km western line to facilitate the transport of bauxite, cocoa and other bulk commodities for export. In June 2017 international press reported that China intends to provide funding to facilitate the mining and transport via rail of Ghana’s 960m tonnes of bauxite reserves, the main source of aluminium (see Mining chapter).

This rail development comes as part of a larger $15bn infrastructure grant provided by the Chinese government to be used for the construction of bridges, four interchanges (including the first significant interchange in northern Ghana), industrial parks, hospitals, security service housing units and the rehabilitation of various school buildings. In July 2017 Joe Ghartey, minister of railway development, noted to local press that the government was also likely to choose a local contractor for the construction of the Kumasi-Paga railway line from the mining centre to the Burkina Faso border.

One District, One Factory

Another expected driver of construction is the One District, One Factory policy. In June 2017 President Akufo-Addo reasserted his commitment to building a medium- to large-scale factory in each of Ghana’s 216 districts during his first term and noted that the initial 51 districts had been identified; work on the first 10 factories was scheduled to commence in June 2017. “In terms of infrastructure development, the government’s priority should focus on two key areas: completing existing projects and building rural connectivity to support the One District, One Factory initiative,” Kwaku Abebrese, group managing director at Taysec Construction, told OBG.

The government budgeted some GHS456.3m ($109.2m) in funding in 2017 for capital and operating costs, hoping to complement this funding with increased international investment. R Yofi Grant, CEO of the GIPC, reported to local press that the programme has already generated significant international interest, saying, “The One District, One Factory content has sparked very interesting discussions and interests from investors both here and abroad.” The sector is already attracting great interest. A funding facility worth $2bn from the China National Building Materials and Equipment Import and Export Corporation as laid out in a memorandum of understanding signed in June 2017 in cooperation with local banks.

Energy Needs

Lack of access to reliable power has also prompted a push to boost generating capacity, as well as transmission and distribution infrastructure. In the 2017 budget the Ministry of Energy allocated GHS890m ($213.1m) for energy programmes to increase capacity by 1227 MW, making up 33% of the total budget for the sector and including projects such as the construction of power substations and transmission lines, as well as completing the design of the 50-MW Solar Hybrid Project (see Energy chapter).

To complement government efforts, a number of large-scale independent power producer projects were scheduled to come on-line in 2017, including the 350-MW Kpone Independent Power Plant, the 400-MW Bridge Power Plant and the 203-MW Amandi Power Plant, alongside the launch of several renewable projects. Of note, international trade shows on energy, renewables and construction – Powerelec Ghana and Construct Ghana – which took place August 2017 brought together stakeholders addressing challenges in the power and construction sector.

Building Materials

Construction remains expensive in Ghana compared to other sub-Saharan economies. The “Housing Finance in Africa Yearbook 2016” from the Centre for Affordable Housing Finance in Africa (CAHF), notes that construction costs in Accra for a standard house were among the highest, outstripping comparable costs in Nairobi, Pretoria and Abuja. A 2016 report from AECOM also pointed to high costs compared to those in Nigeria, with the average construction cost for a light-duty factory in Accra at $1000 per sq metre, while these were $650 per sq metre in Nairobi and $339 per sq metre in Johannesburg. The availability of low-cost materials is at the heart of this issue. Ploeger told OBG there is an advantage to being located in the free zone because many companies still need to import the majority of raw materials as the local supply chain remains expensive and often unreliable. “In theory everything is available, with the exception maybe of chemical compounds like PVC, but on average prices are significantly higher compared to importing the commodity and paying the associated duties,” Ploeger said.

Cement

In 2016 CAHF estimated the cost of a 50-kg bag of cement at between $8.44 and $8.95. “After 2005, we saw an annual growth in volume in Ghana’s cement market of roughly 7%, which is very strong. That attracted a lot of interest from potential investors and also existing players in the market,” Morten Gade, managing director of Ghacem, told OBG. “However, the market has been flat for the last four years, which has resulted in a production overcapacity.” Gade estimated that producers have a combined annual production capacity of 8.8m tonnes – without including import terminals for bulk cement and cement projects yet to come on-stream in the next couple of years – but the market is only for 5.3m tonnes. However, he expressed cautious optimism about the future: “In 2017 we have seen some growth in the market, though how sustainable it is remains to be seen.”

The energy-intensive steel industry recorded some challenges, including the shutdown of one steel factory due to high power tariffs. However, plans for the development of the industry were highlighted during the Economic Counsellors Dialogue hosted in May 2017 in Accra, with a proposal for an integrated aluminium project and the exploitation of a northern iron ore deposit for the development of a steel industry seen as promising investment opportunities. Local press also covered a proposal to use concrete for road construction instead of asphalt, based on the success of the Tema motorway as an example of a concrete road that has served Ghana for decades and noting its enhanced sustainability, despite being more expensive.

Outlook

While it is unlikely that the construction sector will reach peak levels of activity seen in 2013 in the immediate future, a gradual recovery has begun, particularly with the development of secondary markets like Kumasi and Tema, Chinese and Japanese-supported road and rail infrastructure efforts, and government initiatives like the One District, One Factory programme.

In particular, building on the momentum of the projects launched during the presidential campaigns in 2016, there is likely to be ongoing progress for government efforts. “There will likely be several opportunities for foreign investors to work with the government in the form of public-private partnerships or build-operate-transfer projects financed by the World Bank or other financial institutions,” Abi Nader told OBG.

Meanwhile, private, hospitality, commercial and residential developments are still progressing from where they were in 2015-16, compensating for the small number of projects initiated in 2017. Importantly, there is increased confidence in the long-run viability of the Ghanaian construction market. “The messages I have heard out of this government are positive as they take measures that would bring down the tax burden on private individuals and businesses,” Ploeger told OBG.