Building up: The sector expands as a result of new government-led projects

Despite softening demand in a handful of segments due to exogenous factors, activity in Nigeria’s construction industry is expected to continue to grow for the foreseeable future. Major demand drivers include rapid population growth, high levels of government investment in infrastructure and steadily increasing urbanisation, among others. In the first quarter of 2013 the building and construction sector accounted for 3.27% of GDP at 1990 base prices, up slightly from 3.01% in the same period the previous year, according to data released by the National Bureau of Statistics (NBS). These figures are well below international standards – indeed, construction has accounted for 5-7% of GDP in most OECD countries in recent years, and the figure is much higher in many East Asian economies and developing nations. In light of the upside risk, and taking into account current demand, most construction players in Nigeria are looking forward to continuing expansion.

THE CHALLENGES: Notwithstanding, the cost of land, labour and materials is high compared to most other countries in the region. “The cost of construction in Nigeria is generally 1.5-1.6 times the cost of construction in Ghana,” said Michael Chu’di Ejekam, a director at Actis, a private equity firm with real estate holdings throughout Africa. “And building in Nigeria is 2.5 times more expensive than in East Africa.” Paying for construction projects is also expensive, with commercial financing costs in the 17-20% range on an annual basis for large firms. Finally, while the government is considered to be a key growth driver, the large number of public developments currently under way has resulted in a large backlog of uncompleted projects. Despite these issues, Nigeria is poised to become one of the most competitive construction markets in Africa in the coming years. With annual GDP growth in excess of 7%, the country is increasingly viewed as a key investment destination for international developers. Perhaps more importantly, the construction sector is expected to play a major role in the government’s ongoing, large-scale power, transport and housing development programmes.

OVERSIGHT & PLANNING: Various government entities regulate and manage the industry. In addition to the Ministry of Works, which houses the Office of the Surveyor General of the Federation, the Council of Regulation of Engineering in Nigeria, and the Federal Ministry of Lands, Housing and Urban Development (FMLH), there are a variety of federal-level professional bodies are influential in the sector, including independent Nigerian Institutes of Architects, of Engineers, of Surveyors, of Town Planners and of Building, as well as the Federation of Construction Industry, the latter of which is one of the sector’s oldest and-largest professional organisations. State-level bodies also exert their influence in the construction sector, including the state government land bureaux, particularly in a handful of the most populous states, and the state ministries of physical planning and urban development, for example. Akwa-Ibom State, for instance, has invested heavily in infrastructure. The state’s budget amounted N407.8bn ($2.57bn) in 2012, with capital expenditure comprising 83.7% of this total. Ongoing and planned projects are expected to put Akwa-Ibom among the top-three states for construction activity in next few years.

SETTING STANDARDS: As of early 2013 Nigeria did not have a federal-level building code. While a variety of state and federal agencies have enforced standards of various sorts over the years, in general the sector has developed without nationwide uniform benchmarks. In 2006 the Federal Executive Council on Housing and Urban Development, which is part of Nigeria’s Cabinet, launched a series of meetings among sector stakeholders with the goal of developing a federal building code. The resultant piece of legislation, known as the National Building Code (NBC), was handed off to the National Assembly for final approval back in August 2006. Since then it has undergone two readings in the legislature, but as of September 2013 had yet to be signed into law. In April 2013 the federal government announced that it also planned to overhaul the land registration legislation in the future.

TRANSFORMATION: In the meantime a number of the government’s top-level development programmes are set to benefit the sector. President Goodluck Jonathan’s Transformation Agenda, which was launched in 2011 and runs through 2015, includes more than 1600 priority programmes, 28% of which involve infrastructure development initiatives. In particular, the programme focuses on upgrading and expanding the country’s transport systems, including ports, airports, waterways, and the national rail and road networks, which will entail a significant jump in contractor activity. Other federal-level plans aim to ramp up power provision and expand affordable housing programmes.

According to the World Bank’s 2013 “Doing Business” report, Nigeria ranked 131st out of 185 economies around the world in terms of ease of doing business, but 88th in terms of dealing with construction permits. Indeed, according to the report, in 2013 it was both substantially faster and cheaper to build a warehouse in Nigeria than in sub-Saharan Africa more generally – 85 days and 417.7% of per capita income compared to 196 days and 751.6% in the region. For comparison, in OECD countries the report estimated it would take 143 days and 78.7% of per capita income – the latter figure is lower than in Nigeria primarily as a result of higher average per capita income in OECD member states.

ACCESS TO FINANCE: According to a statement released by the federal government in mid-2012, domestic construction costs are among the highest in the world. Most local financial institutions do not offer project finance facilities, so contractors and developers for large infrastructure projects regularly seek financing outside Nigeria, particularly from China, the US and the EU. In addition to high interest rates, many of these external loans are denominated in dollars or euros, which has led to steadily rising levels of exchange-rate uncertainty for local players in recent years.

In addition to the cost of financing, contractors that operate in the north-east and a few other areas generally must factor in security risks, which can be costly. Additionally, as previously mentioned, the sheer number of government projects currently under way or in the planning stages has resulted in many developments going underfunded or unfunded and, subsequently, cancelled or put on hold indefinitely. With this situation in mind, many contractors bid for more projects than they can officially handle, in an effort to ensure that they are able to bring in adequate revenue even if some of their projects are eventually sidelined. “We have always worked primarily for the government,” Nasiru Dantata, the executive director of Dantata & Sawoe, a local construction firm, told OBG. “In recent years in particular we make a point to sign on for more projects than existing capacity, because we experience budgetary limitations on existing projects that hinder their timely delivery. It is a challenging environment.”

The cumulative effect of these idiosyncrasies resulted in construction costs rising substantially in recent years. The government has worked to counter this trend in a variety of ways. Under the Public Procurement Act, introduced in 2007, for example, the government is required to make a 10-15% payment on all public contracts in advance, with the final rate defined by whether or not the contractor is a domestic firm. Additionally, the federal government has worked to expand Nigeria’s public-private partnership programme in recent years, specifically with the goal of funding upcoming large-scale infrastructure projects.

MAJOR PLAYERS: While there is a large amount of small-scale construction activity in the sector, the largest projects tend to be handled by a mix of local and foreign contractors. Julius Berger, a local firm, employs a workforce of around 18,000 in the country, making it one of the largest private sector employers in Nigeria. The firm is responsible for constructing a substantial percentage of the country’s existing transport infrastructure, including both the Eko Bridge and the Third Mainland Bridge in Lagos; numerous road, rail and port projects throughout the country; and many large-scale developments in Abuja, including parts of Abuja International Airport and the National Assembly building.

Other major local construction firms include: Costain West Africa, which has been involved in large-scale road, rail, port and airport projects, not to mention commercial developments, such as the Nigerian Stock Exchange Building in Port Harcourt; C&C Construction, ITB Construction, Hitech Construction and Fleetwood Construction, all of which are part of the Chagoury Group and are involved in a variety of ongoing projects; Dantata & Sawoe, which has built roads and other infrastructure for the government; the Lekki Concession Company, a special purpose vehicle that was set up to build the Lekki Toll Road concession project; Stateco; G Cappa; PW Nigeria; and Cakasa, among others.

Foreign contractors are also playing an ever-larger role. “International competition has increased over the past decade,” said Dantata. “We have seen more foreign companies bidding for major government projects, especially Chinese firms.” Indeed, a handful of Chinese contractors have played a key role in the industry in recent years. The China Civil Engineering Construction Corporation (CCECC), for example, employs a local workforce of more than 10,000, and has been involved in a number of large-scale public infrastructure developments, including the ongoing Abuja light rail project.

In early 2013 two South Korean civil engineering and construction firms announced that they had signed a joint memorandum of understanding with CMD, a local civil engineering company, to work in Nigeria. The Korean companies – COSMO Engineering and Construction and the IKC Construction Company – have announced plans to bid on both public and private sector projects. Because the country has yet to introduce a federal building code, many foreign companies have taken the lead in terms of implementing best practice, both in terms of construction standards and post-construction building maintenance, the latter of which has been largely non-existent in the country thus far. “Because most building owners prefer to start by setting up in-house management teams to perform facilities management functions, irrespective of whether they possess the requisite skills and capability, the development of the local facility management has been limited. As a result, the facilities management market in is still in its infancy, with the lion’s share of demand coming from international companies,” Femi Akintunde, managing director of Alpha Mead Facilities, told OBG.

“Multinational companies are really driving improvements in building construction and maintenance,” said Mko Balogun, the managing director of WSP Group Nigeria, a UK-based facilities management firm. “Overseas standards generally translate to a market like Nigeria. Local companies, on the other hand, generally do not understand the value of facilities management.”

INFRASTRUCTURE: Expanding and upgrading Nigeria’s infrastructure has been one of the government’s top priorities in recent years. Under the Transformation Agenda, the government plans to spend N1.6trn ($10bn) on transport projects through 2015, which is equal to around 22% of the agenda’s total budget of N7.2trn ($45bn). Around N695.5bn ($4.4bn) of this transport budget will go towards new roads and bridges, according to a summary of the Transformation Agenda released by the National Planning Commission in 2011, while N498.5bn ($3.1bn) is expected to be spent on rail projects and N250bn ($1.6bn) on road maintenance projects. The remainder of the plan’s budget will be put towards port and aviation development.

According to Mike Oziegbe Onolememen, the minister of works, from mid-2011 to mid-2013 the federal government completed 32 road projects covering around 2000 km in total, at a total cost of N126bn ($794m). Major projects to upgrade Nigeria’s 200, 000-km road network – only one-third of which is paved – that are currently under way include the dualisation of the East-West highway, which cuts across the Niger Delta region; the first and second sections of the Lokoja-Benin Expressway, which was launched in February 2013 and is a continuation of the Abuja-Lokoja route; the Enugu-Port Harcourt highway; the Benin-Ore highway; and the Abuja-Kaduna highway, among others. According to the Ministry of Works, road projects under way as of mid-2013 were estimated to be worth around N1.3trn ($8.2bn) in total. In addition to the federal government, these projects are being funded by state and local governments, international organisations such as the World Bank and the African Development Bank, and, in some cases, private entities.

The redevelopment and expansion of Nigeria’s national rail network is also expected to supply a substantial amount of business to the construction sector over the next decade. According to the federal government, total investment in rail for the period 2013-15 was set to reach around N1.61trn ($10bn), well above the N499bn ($3.14bn) announced in the original Transformation Agenda planning document. The difference was expected to be made up by additional financing from a variety of sources, including federal, state and local governments, as well as the private sector. As of early 2013 around 15 rail projects were under way or in the planning process. Major rail developments under construction include a new Lagos-Ibadan line, a Lagos-Calabar route, the Abuja mass transit project and the Lagos light rail project (see Transport chapter).

In addition to transport, the government also plans to invest a substantial amount of money in rehabilitating and upgrading the nation’s federal power infrastructure. In early May 2013 President Jonathan announced that the federal government expected to see around $10bn in power investments over the following decade, both in the supply and transmission segments, which when combined with the privatisation of the state-owned power firm Power Holding Company of Nigeria, will help pave the way for a rise in the construction of new power plants and transmission lines (see Utilities chapter).

HOUSING: As of the end of 2012 an extra 15m-20m residential units were needed to meet Nigeria’s housing requirements, according to estimates from the Federal Ministry of Lands, Housing and Urban Development (FMLH), the UN and other organisations. This figure has increased steadily over the past few decades, as a result of the country’s rapidly expanding population and lack of long-term investment in housing. The government has established a variety of housing schemes over the years, although implementation has been uneven. The federal government’s first National Housing Policy (NHP), which was launched in February 1991, aimed to ensure that all citizens had access to decent, affordable accommodations by 2000. The plan, by the government’s own admission, was largely ineffectual.

In September 2011 the FMLH announced that it planned to update both the NHP and the National Urban Development Policy (NUDP), taking into account the priorities laid out in both the Transformation Agenda and Vision 20:2020, the country’s long-term economic development initiative run under the auspices of the National Planning Commission. As of early 2013 the updated NHP and NUDP were under discussion in the National Assembly, which is expected to formalise the legislation before the end of the year. Under draft versions of the plans, the government aims to supply an estimated 700,000 to 1m new units on an annual basis through 2020, which is expected to cost around N60trn ($378bn) in total. In addition to building new units, and crucially for the construction and real estate sectors, the plans include provisions for overhauling mortgage facilities in Nigeria and improving and streamlining land registration laws, two areas which have historically constrained growth.

PRIVATE PLANS: In addition to the government’s housing expansion plans, a handful of upcoming private sector projects include accommodation components. In February 2013, for example, South Energyx Nigeria, a private developer, broke ground on the Eko Atlantic project, a 10m-sq-metre neighbourhood to be built on reclaimed land off the south-western corner of Lagos’s upscale Victoria Island. According to South Energyx Nigeria – a subsidiary of the local Chagoury Group – and the Lagos State government, the project is estimated to cost $6bn and will be home to around 250,000 residents and handle a flow of 150,000-250,000 daily commuters. In February 2013, 5m sq metres of land had been reclaimed, though construction of the first access road to the land began in 2008. Construction firms involved in Eko Atlantic include Dutch firms Dredging International and Royal Haskoning.

OUTLOOK: With numerous government- and private sector-led projects currently under way, Nigeria’s construction sector is poised for considerable expansion in the coming years. At the same time, the industry faces a number of challenges. Construction costs remain high, due to a lack of local bank financing, the potential for delayed payments, rising labour costs, exchange-rate uncertainty and volatile land and materials prices (see analysis). Additionally, the country’s construction backlog has continued to grow in recent years, and it remains unclear whether or not a number of projects will be completed and, if so, how the government intends to pay for them. Security issues have also become increasingly prevalent in recent years. “The number one concern right now is security,” Dantata told OBG in early May 2013. “Managing security risks – especially in the north – is challenging and expensive.”

Despite these hurdles, most local players remain optimistic about the future. The sheer number of projects currently on the table is expected to supply the construction industry with new work for years to come. Indeed, the supply demand differential in the power generation and housing segments alone is expected to result in trillions of naira worth of federal- and state-led investments through 2020. With this in mind, the local construction sector will likely eventually experience rising competition as new firms set up shop in Lagos and Abuja. “While many new firms have entered the market recently, we have not yet felt increased competition because the number of available projects has simply exploded in recent years,” said Dantata.