Locally made construction materials support development in Nigeria

After growth of 1-2% per year between 2017 and 2019, in 2020 the Nigerian construction sector contracted for the first time since 2016, when the economy last entered a recession. The government launched the Economic Recovery and Growth Plan (ERGP) 2017-20 at that time to reinvigorate the economy by prioritising infrastructure investment, among other objectives, which was expected to drive construction activity over the period. However, the sector’s expansion was constrained by relatively low public investment and high operating costs that resulted in the low growth rate of the following years. Nigeria’s annual average public investment in infrastructure stood at around 3.6% of GDP between 2007 and 2017, compared to the continent’s annual average of 4.3% during the same period.

More recently, the global economic downturn caused by the Covid-19 pandemic weighed heavily on building activity, as lower oil prices and production impacted government revenue and foreign exchange reserves. Nonetheless, the leadership’s renewed prioritisation of infrastructure projects – particularly in energy, housing and transport – is expected to drive recovery in the construction sector in 2021 as the country works to bounce back from the crisis.

Oversight & Policies

The Federal Ministry of Works and Housing (FMWH) oversees the planning, design, construction and rehabilitation of highways, roads and bridges, as well as public housing and electricity projects. It comprises 21 departments and six units. Other key sector players at the federal level include the National Planning Commission, which determines long-term macroeconomic and infrastructure development targets, and the Federal Ministry of Agriculture and Rural Development, which promotes the construction of critical infrastructure in rural areas, among other mandates.

Construction activity is broadly guided by the National Integrated Infrastructure Master Plan (NIIMP) 2014-43, a strategy that aims to boost infrastructure stock from around 30% of GDP to the World Bank’s benchmark of 70% by 2043. It also seeks to increase annual infrastructure spending from 3-5% of GDP to an average of 9% over the 30-year period. According to a November 2020 report from credit ratings agency Moody’s, the country needs to invest $3trn through 2050 to close the infrastructure gap.

The ERGP 2017-20 was a medium-term strategy built on the NIIMP. It aimed to kick-start the economy by raising infrastructure investment; improving efficiency in the public and private sector; diversifying production in a sustainable manner; ensuring food and energy security; and promoting national cohesion. The ERGP emphasised the importance of close partnership between the government and the private sector to achieving its targets, especially in the development of power, road, rail, port and broadband infrastructure. Of the ERGP’s 19 goals, 13 were achieved and five were almost fully met by the end of 2020. In March 2021 the government issued the Medium Term National Development Plan 2021-25, which includes expanding transport and other necessary infrastructure.

Performance

According to the National Bureau of Statistics (NBS), the construction sector accounted for approximately 3.7% of real GDP between 2017 and 2019, before dipping slightly to 3.5% in 2020. Moreover, it expanded by 1% in 2017, 2.3% in 2018 and 1.2% in 2019, before contracting by 7.7% in 2020 on the back of weak investment from both the public and private sectors. Notably, building activity stalled due to containment measures associated with the Covid-19 pandemic: in the second quarter of 2020 the sector contracted by 31.8%, before recovering to growth of 2.8% and 1.2% in the third and fourth quarters, respectively. Overall, the construction sector contributed N2.4trn ($6.4bn) to GDP at constant prices in 2020, down from N2.7trn ($7.2bn) in 2019.

In early 2021 analytics and consultancy firm GlobalData forecast a recovery for the sector that year, to be driven by estimated year-on-year growth of 40-50% in the second quarter. Such a rebound is expected be facilitated by the 2021 budget, which President Muhammadu Buhari presented to the national assembly in October 2020. Some N3.9trn ($10.4bn) was earmarked for capital expenditure, an increase of 43% on the amount proposed in the 2020 budget and equal to roughly 29% of total expenditure for the year. In his budget speech, President Buhari noted that construction projects covered by the appropriations bill will include over 780 km of roads and bridges; transmission lines and power substations; irrigation systems and dams; and 377 rural roads connected to key agricultural corridors.

Transport

As of December 2020 over 700 road projects were under construction, according to the FMWH. Key projects include the Abuja-Kaduna-Kano expressway and the second Niger bridge. The reconstruction of the Abuja-Kaduna-Kano expressway is being carried out by local developer Julius Berger Nigeria and is expected to be completed in 2023. Meanwhile, the 1.6-km second Niger bridge is estimated to cost N414bn ($1.1bn) and is expected to be completed in the second quarter of 2022. As of March 2021 the government had invested N116.7bn ($311.6m) in the development. The bridge is part of a new motorway ring project that aims to alleviate traffic on the old bridge and boost connectivity in the region. Another major project, the 43-km Objana-Kabba road – the longest concrete road in Nigeria – was completed in January 2021.

To help finance rail, road and power projects, the government approved the creation of a public-private infrastructure fund called the Infrastructure Corporation of Nigeria (InfraCorp) in February 2021. The fund has N1trn ($2.7bn) in seed capital from the Central Bank of Nigeria, the Nigeria Sovereign Investment Authority and the Africa Finance Corporation, and is expected to grow to N15trn ($40.1bn) in capital and assets in five years. As part of its infrastructure push, the government launched a number of bigticket rail projects that same month, and in March 2021 announced a procurement process for private sector developers to participate in the construction and rehabilitation of public roads (see analysis).

Energy

The government is looking to tap private financing for energy initiatives as well. A number of projects are currently under construction as Nigeria works to boost capacity to meet the high demand of its large population, with further investment anticipated to come with the passage of the Petroleum Industry Bill (see Energy chapter). Many are being executed under a public-private partnership (PPP) framework, such as the first phase of the Ajaojuta-Kaduna-Kano gas pipeline. It is the largest of its kind in Nigeria and slated for completion in 2023.

In late January 2021 the government announced that it was discussing partnering with the UK Nigeria Infrastructure Advisory Facility to carry out key energy initiatives. Specifically, the Nigerian government is seeking technical support from the facility on policy and tariff reforms, electricity distribution company audits, grid efficiency and sustainable off-grid solutions. The partnership would also help Nigeria move from the Transitional Electricity Market to the Medium-term Electricity Market, which would mean higher competition among generation companies and limited competition among retailers. This is part of the 2005 act to reform the power sector from a state monopoly to a competitive wholesale market.

Housing

The government is also enlisting help from the private sector to bridge its housing gap of 17m units (see Real Estate overview). While an estimated minimum of 700,000 houses per year are needed to meet demand, the country currently builds 2000 on an annual basis. In 2019 the FMWH – then known as the Federal Ministry of Power, Works and Housing – earmarked $55m for building 2383 housing units as part of the National Housing Programme. In 2020 the government proposed an additional N60bn ($160.2m) to finance the building of homes, while it earmarked N17bn ($45.5m) for housing projects in the 2021 budget. In December 2020 the authorities announced that it will build 300,000 housing units for low-income earners as part of the National Social Housing Programme. While the state’s Family Homes Funds is poised to be the lead developer, the programme welcomes private participation.

Materials

In terms of building materials, local production has risen rapidly since the early 1990s on the back of high investment in cement, iron and steel amid a boom in construction activity. However, the level of domestic manufacturing remains insufficient due to high power, labour, security and input costs. Materials account for 35-80% of total construction costs and 97% of intermediate goods consumed by the sector, which means that the development of affordable housing, for example, is dependent on cost-effective building materials. As a result, many contractors have found it more profitable to import building materials from abroad.

While cement prices in Nigeria remain high, new facilities are expected to boost local capacity and drive down costs. In December 2020 Nigerian producer BUA Cement announced that it commissioned the building of new cement plants in Edo, Sokoto and Adamawa states. Each plant will have a capacity of 3m tonnes per year, which combined marks the largest contract awarded in the Nigerian cement industry for new plants. Construction of the $1.1bn undertaking will be carried out by China’s Sinoma CBMI Construction. Upon the completion of all plants in 2022, BUA will have a total capacity of 20m tonnes; cement production in the country will then be 60m tonnes per annum. In 2020 cement manufacturing contributed N617.6bn ($1.65bn) to real GDP, up from N594.6bn ($1.59bn) the previous year.

Nigeria’s capacity to manufacture steel is also limited, despite the abundance of raw materials for steel production. However, the $1.5bn steel plant in Kaduna State owned by African Natural Resources and Mines is expected to produce 1m tonnes of the alloy annually. In October 2020 Zainab Ahmed, the minister of finance, budget and national planning, visited the facility and noted that it was nearing completion. In 2020 basic metal, iron and steel manufacturing contributed N160bn ($427.2m) to real GDP, down from N166.2bn ($443.8m) in 2019.

Outlook

Construction activity is expected to pick up in 2021 and beyond, driven by the establishment of InfraCorp and work on major transport, power and housing initiatives. The NBS forecasts that the industry will expand by a compound annual growth rate of 16.6% to reach a record high of N13.2trn ($35.2bn) by 2024. The private sector is expected to play a major role in driving this growth, with the government initiating various PPP projects.

In order to further boost the construction sector’s contribution to economic development, reducing dependence on imported building materials will be key. While border closures and transit restrictions stalled building activity in 2020, it also prompted developers to source materials locally – a trend that is expected to continue. Although prices remain high, the completion of a number of manufacturing projects is expected to boost domestic capacity and further promote the use of local inputs. This will in turn lower costs, removing a barrier to the construction of critical infrastructure such as affordable housing.