Nigerian government to align national development and infrastructure

The Nigerian construction industry has remained resilient through the country’s recent macroeconomic volatility, benefitting from mid- and long-term economic development policies emphasising infrastructure investment, and a sizeable deficit that has created new opportunities in the transport, energy and real estate sectors. Although currency volatility and a recession in 2016 impacted private sector investment, public spending on new infrastructure has surged in recent years, and is expected to rise again for the remainder of 2018 and into 2019. Public funds do not suffice to close the country’s widening infrastructure deficit, something that has led the government to increasingly target private sector investment to launch new projects. In addition to successful bond issuances that should relieve budgetary constraints and boost transport spending, the authorities have moved to increase the deployment of public-private partnerships (PPPs) to deliver big-ticket projects, a strategy that has had considerable success, and should keep the industry on the path towards positive growth going into 2019.

Macro-View

The Federal Ministry of Power, Works and Housing (FMPWH) is an important player in the construction industry, accounting for the bulk of public infrastructure spending in recent years. Its responsibilities include overseeing the planning, design, construction and regeneration of federal highways, roads and bridges, as well as public housing and electricity projects. The FMPWH oversees 15 professional departments, four service departments, five units and five parastatals, including the Office of the Surveyor General of the Federation, the Federal Roads Maintenance Agency, the Council for the Regulation of Engineering in Nigeria, the Federal School of Surveying, and the Surveyors Council of Nigeria. Other important players include the National Planning Commission (NPC), which sets Nigeria’s long-term macroeconomic and infrastructure development targets, as well as the Federal Ministry of Agriculture and Rural Development, which is involved in regional infrastructure projects linking agricultural production to local and regional markets. The Infrastructure Concession Regulatory Commission (ICRC) oversees the development of PPPs in Nigeria.

In the third quarter of 2017 the construction sector employed a relatively small proportion of the total workforce, with 1.74m employees out of the 85m-strong labour force working in the sector, according to the National Bureau of Statistics (NBS).

Policy

FMPWH activities are broadly guided by the National Integrated Infrastructure Master Plan (NIIMP), which aims to improve integrated infrastructure investments across the country, strengthening links between infrastructure and national economic development, prioritising projects and programmes over the short and medium term, and strengthening legal, policy and institutional frameworks to expedite the implementation of major projects. The plan estimated that Nigeria would need to invest $2.9trn over the course of 30 years. The NIIMP’s sector-specific targets include channelling 50% of transport investment into the roads subsector and the expansion of regional roads networks, including multi-modal linkages. Goals for the utilities sector include boosting generation capacity and extending transmission infrastructure, as well as the construction of a network to support natural gas development. The plan also aims to address the country’s housing deficit, estimated at 17m units, by providing new affordable units, as well as building schools, hospitals, sports facilities and social infrastructure.

Mid-Term Planning

The government recently released its Economic Recovery and Growth Plan (ERGP), a medium-term roadmap for 2017-20, emphasising reform and investment to kick-start economic recovery and support diversification, in order to reduce the country’s dependency on oil. The ERGP calls for N3trn ($9.7bn) of infrastructure investment through to 2044, stressing that the federal government cannot provide these resources without leveraging private sector investment. The ERGP advocates $30bn of new borrowing to help finance the short-term gap, while cost-sharing frameworks supported by private investment are heavily emphasised. The plan aims to establish a robust capital project development framework in transport infrastructure in order to encourage and increase the deployment of PPPs in delivering critical transport projects. The plan also aims to provide a sustainable, alternative funding mix for critical projects, which could include infrastructure bonds, diaspora bonds and value capture financing.

Infrastructure Deficit

As highlighted by the NPC, which oversaw the NIIMP’s creation, Nigeria’s core infrastructure stock was estimated to be between 20% and 25% of GDP, or less than $100bn in 2012, against developed economies’ average of 70%. The ERGP, meanwhile, reports that existing infrastructure stock was valued at 35% of GDP as of 2017. Public and private sector spending on infrastructure has historically been low, with the NPC reporting that Nigeria spent just $10bn annually on infrastructure as of 2015, of which 50% is private sector investment. According to the council, the ICT sector accounts for 28% of total infrastructure spending, followed by transport at 23% and energy at 19%. The NIIMP projects that Nigeria’s infrastructure deficit will amount to $3.1trn over the plan’s duration, and targets boosting annual expenditure to 5.4% of GDP between 2014 and 2019, to hit an average of N5.67trn ($18.3bn). More recent estimates highlight the sector’s significant long-term growth potential. In July 2017 Global Infrastructure Hub, a research unit of the World Bank, forecast that the country’s infrastructure deficit would hit $878bn by 2040, based on annual population and GDP growth estimates of 2.4% and 4.1%, respectively, over the same period.

According to the researcher, Nigeria needs to invest $267bn, or 1.33% of annual GDP, on electricity infrastructure over this period, and $82bn, or 0.41% of annual GDP, on water projects. “The waterways of Lagos are heavily underutilised for a coastal and island city, which provides opportunities for developers and the local government,” Femi Akioye, managing director of local company Channeldrill, told OBG.

In early 2018 Obadiah Mailafia, former deputy governor of the Central Bank of Nigeria (CBN), told media that N20trn ($64.6bn) of investment will be needed over the next 20 years to upgrade railways, highways, ports and ICT infrastructure to reach the NIIMP target of boosting infrastructure stock to 70% of GDP by 2043.

Spending

The federal government has focused recent spending efforts on agriculture and infrastructure in an effort to stimulate economic growth and diversification away from oil. FMPWH funding to this end has increased substantially since 2016. However, public spending continues to fall short of NIIMP and ERGP targets, creating new opportunities for private investors. The BusinessDay Research and Intelligence Unit (BDRIU), a Nigerian economic research firm, reports that the 2016 federal government budget allocated N422.9trn ($1.4bn) to the FMPWH, comprising N260.82bn ($843.2m) for works, N91.26bn ($295m) for power and N71.56bn ($231.4m) for housing. According to the BDRIU, the ministry contracted 103 construction companies to execute 192 projects in 2016, employing 17,749 people directly and 52,000 indirectly. “Filling Nigeria’s housing deficit should provide jobs in the construction industry for the next 20 years,” Ibukun Sonola, CEO of Formwork, told OBG. An additional N90bn ($291m) of provisional funding was given to the ministry in 2017 to pay 62 contractors working on 149 ongoing projects. Budgetary allocations to the FMPWH have shifted recently to emphasise capital expenditure.

Recurrent expenditure fell from N34.87bn ($112.7m) in 2017 to N31.71bn ($102.5m) in 2018, although capital expenditure surged from N529.34bn ($1.7bn) to N682.96bn ($2.2bn) during the same period.

Recent Growth

The construction sector has benefitted from these funding efforts, and the NBS reports that in nominal terms, Nigeria’s construction sector grew by 8.96% year-on-year in the first quarter of 2018, against 21.25% in the fourth quarter of 2017, and 19.25% in the first quarter of 2017. The sector’s nominal GDP contribution adjusted slightly to 4.13% over the same period, similar to 4.14% in the first quarter of 2017, but an improvement on 3.58% in the fourth quarter of 2017. In real terms, the sector contracted by 1.54% year-on-year in the first quarter of 2018, 1.68% less than in the first quarter of 2017, and 5.67% lower than the fourth quarter of 2017. The construction sector’s contribution to total real GDP was 4.04% in the first quarter of 2018, compared with 4.18% in the first quarter of 2017, and 3.49% in the fourth quarter of 2017. However, public spending still falls well below NIIMP’s targeted N38trn ($122.9bn) of necessary annual infrastructure investment.

Challenges

Although the sector has remained resilient, recent years have been challenging. The economy was deeply impacted by the global oil price collapse of 2014-16, and fell into recession in 2016, with GDP growth contracting by 1.62%, before recovering to 1.5% growth in the second quarter of 2018. “Despite the recession and the fluctuation in oil prices, real estate is the best investment anybody can make in Nigeria. There is still significant demand for housing that will have to be met in future years,” Nasiru Suleiman, managing director of Wiser Estates, told OBG. With foreign exchange reserves dwindling, the CBN moved to unpeg the naira in June 2016, after which it rapidly depreciated by 30% against the US dollar. It dropped from 160 naira to one US dollar in 2014 to a low of 365 naira to one US dollar in mid-2017. It has remained close to 360 naira to one US dollar since August 2017.

This is particularly problematic for contractors reliant on imports, with currency depreciation exacerbating rising material costs. “The way to be a successful construction company in modern Nigeria is to find ways to value engineer without compromising quality,” Saadiya Aminu, managing director of Urban Shelter, told OBG. In September 2017 local media reported that Nigeria had imported up to N19.5trn ($63bn) worth of primary raw materials, including building materials, since 2010. Based on data obtained from the Raw Materials Research and Development Council, imports hit N13.6trn ($44bn) between 2010 and 2015 and N5.89trn ($19bn) in 2016 alone, amounting to an average annual cost of N2.79trn ($9bn). The NBS reported that raw material imports rose by 1.93% quarter-on-quarter in the first quarter of 2018 to N284.81bn ($920.8m). This represents a 9.89% increase on early 2017 levels, with raw materials Nigeria’s largest single import category.

Regulatory Issues

In addition to recent macroeconomic volatility, construction has been constrained by land acquisition and regulatory challenges. Nigeria ranked 147th out of 190 economies in the category for dealing with construction permits in the World Bank’s “Doing Business 2018” report. Under the report’s theoretical parameters, a company looking to build a N26.97m ($87,200) warehouse in Lagos would need to complete 15 bureaucratic procedures taking 110 days, with the cost of a permit amounting to 23.7% of the warehouse cost. Nigeria ranked 179th in the category for registering property, with the World Bank saying private companies must complete 11 procedures that take 69 days to register a property.

The country ranks 7.4 out of a possible 30 in the World Bank’s quality of the land administration index, which measures reliability of infrastructure, transparency of information, geographic coverage and land dispute resolution indices. As government budgets become more constrained, late payments are also an issue, with the Nigerian Infrastructure Bank reporting that contractors working for federal and state governments were owed N1.7trn ($5.5bn) as of March 2018, with some debts estimated to be up to 10 years old.

Local Content

Recognising the challenges facing private construction players, the federal government announced in August 2017 that it planned to extend national local content regulations to the construction sector. Backed by the Federal Executive Council, the regulations could see the Nigerian Oil and Gas Industry Content Development Act extended to cover construction activities. The act was brought into effect in 2010 and promotes local participation in the oil and gas industry, stating that “exclusive consideration” for contracts and services should be granted to indigenous Nigerian service companies that demonstrate local equipment ownership, the capacity to execute projects and the hire of local employees. All regulatory authorities, operators, contractors, subcontractors and any entities involved in any project, activity or transaction fall under the act’s purview. According to media reports, local content regulations in construction would be implemented by the Federal Ministry of Science and Technology, with the move welcomed by many industry stakeholders as an important step in encouraging domestic industry. “In the oil and gas sector we’ve been able to retain $5bn of contracts annually out of $20bn awarded each year. We’re hopeful this legislation will work in construction,” Victor Nkwocha, general manager of FILMOR ealty, a Lagos-based property management company, told OBG.

Growth

In April 2018 Brent crude prices rose to their highest levels since 2014, triggered in part by production cuts from the Organisation of Petroleum Exporting Countries. With a maximum daily production capacity of 2.5m barrels, Nigeria is Africa’s largest oil producer. Just three of the 169 companies listed on the Nigerian Stock Exchange are construction firms, accounting for 0.3% of total market capitalisation. In addition, in mid-2018 the African Development Bank announced it would help the country bridge its gaps in infrastructure, which it estimated would cost some $3trn over the next 26 years. Nigeria is also set to benefit from rising investment from Chinese-backed projects.

PPP Strategy

Stakeholders called for new PPPs to help boost infrastructure delivery. Akin Mabogunje, former president of the Technical Committee on Housing and Urban Development, echoed these views in January 2018, reporting that PPPs would ease budgetary pressures and boost the development of secondary infrastructure, including roads. There are several pieces of legislation that govern PPPs in Nigeria, including the ICRC Act of 2015, which established the ICRC as the primary state authority responsible for PPP development and the implementation of the National Policy on PPPs, promulgated in 2009. The Ministry of Finance’s PPP division operates as a technical service department to support the development of PPPs. Alongside the ICRC and various ministry, department and agency PPP units, it works with private investors to launch new infrastructure projects under a cost-sharing framework.

Some 42 PPPs valued at $10.5bn have been approved in Nigeria since 1990. Recent big-ticket projects include the $2.9bn phase four expansion of Onne Port and the $1.5bn Lekki Deep Sea Port, due to be completed in 2020, and the $880m first phase of the Azura Thermal Power Station, finalised in 2015. There were 38 active PPP projects valued at $10.3bn as of November 2016, according to the World Bank’s PPP Knowledge Lab.

Projects

The development of PPPs has remained steady in recent years, and several major public infrastructure projects including the Mambilla Power Station, a nationwide civil servant housing scheme, and the N126bn ($407.4m) Bonny Bodo road project will be developed with support from private players. The Bonny Bodo project was announced in September 2017, after the government partnered with Nigeria Liquefied Natural Gas (NLNG) and Julius Berger, one of Nigeria’s largest construction companies, to recommence work on the project that had been stalled for 40 years. On making the announcement, Babatunde Fashola, minister of power, works and housing, told media the government would provide N60.6bn ($196m) of financing for the project, with NLNG slated to provide the remaining N60bn ($194m). Tony Attah, managing director of NLNG, said that the development, which entails the construction of a road linking Bodo to Bonny Island, including a 1-km bridge across Opobo Creek and a 550-metre bridge, is expected to open the Niger Delta and facilitate development. The city is expected to attract $3bn of investment over the next 25 years.

In November 2017 the government announced the signing of a $5.79bn contract with the China Gezhouba Group, Sinohydro, and the CGCOC Group for the construction of the 3050-MW Mambilla Power Station in Taraba State, with local media dubbing the project the “Three Gorges of Africa”, a reference to a similar landmark hydroelectric power project constructed in China. The federal government also announced plans to build 5000 units of civil servant housing in each of Nigeria’s 36 states in 2016, with the scheme slated to be developed under a PPP framework.

Chinese Investment

China has become an important source of infrastructure funding, particularly for large, capital-intensive projects that require long-term financing. For example, it was recently announced that Chinese firms would invest $300m in a mass housing scheme in Nigeria for low- and middle- income workers, and ongoing projects to upgrade and rehabilitate Nigeria’s 3500-km railway network are valued at $46bn. In May 2018 the Federal Ministry of Transportation announced it had awarded the China Civil Engineering Construction Corporation (CCECC) a $6.68bn contract for the Lagos-Kano Standard Gauge Railway, which will connect the two cities with an estimated 1000 km of new railway track. Under construction since 2006, the project has been heavily backed by Chinese investment, with Reuters reporting that the China Exim Bank is providing a $1.23bn loan for it. CCECC was also awarded a $1.69bn contract for a segment connecting Kano to Kaduna in 2016. China’s minister of foreign affairs, Wang Yi, travelled to Abuja in January 2017 to announce $40bn of Chinese investment in Nigeria, telling media that China had already invested $45bn in the country to finance $22bn-worth of completed projects, with an additional $23bn of projects ongoing. New deals between the two countries will benefit from a N720bn ($2.3bn) three-year currency swap, signed in May 2018.

Fund Raising 

A further boost to construction growth is the federal government’s recent efforts to increase debt issuance for new projects, including a sukuk (Islamic bonds) issuance in September 2017.

Proceeds from the N100bn ($323.3m), seven-year bond have been channelled into road rehabilitation, with the FMPWH reporting in December 2017 that it had received two payments of N22bn ($71.1m) and N41bn ($132.6), to be used for 25 priority road projects. According to former minister of finance Kemi Adeosun, the offer was oversubscribed by N105.87 ($342.5m), indicating strong potential for bond-financed infrastructure projects in the country. In February 2018 the government also announced plans to undertake a direct sovereign issuance in the form of a $2.5bn eurobond, which will be used to refinance domestic currency debt.

These measures have been well received by construction companies. “We are in need of creative solutions to the financing issues in the sector, such as the sukuk infrastructure bond, which helped a number of projects in Kano and Abuja that had been put on hold get back on track,” Nasiru Dantata, executive director of Dantata and Sawoe Construction Company, told OBG.

Outlook 

Nigeria’s ongoing economic recovery will help to maintain stability in the construction sector, despite the notable challenges. With the macroeconomic climate and banking sector expected to benefit from a global oil price recovery, private construction investment could increase into 2019. In addition, the recent rise in the number of visitors in the tourism sector is likely to spur new projects. “Hotels in Nigeria have multiplied very fast, especially now that local and international online travel agencies are expanding in the market,” Jonas Schwarz Lausten, co-owner Nordic Villa and Nordic Hotels, told OBG.

At the same time, the CBN is expected to continue exchange regime reforms, meaning the naira may depreciate further, delaying a potential resurgence in private sector spending. Nevertheless, the industry is expected to grow steadily moving into 2019, supported public spending, new financing models and PPPs.