New legislation and an investment drive will provide a boost to Ghana construction

Growing year-on-year as a contributor to the economy, Ghana’s construction sector is increasingly dynamic and led by private sector participants. While parts of the real estate market have slowed in recent years, demand for low-cost housing remains as strong as ever. Government investment is a major driver of the sector’s momentum, with a substantial pipeline of projects in transport infrastructure in particular expected to be rolled out in the coming years, often using public-private partnership (PPP) models.

Performance

Construction activity contributed GHS13.7bn ($3.8bn) to GDP in 2014 at current prices, according to the Ghana Statistical Service. This was 12.7% of total GDP and up 26.9% from GHS10.8bn ($2.9bn) in 2013. The sector has grown strongly over the past decade, from GHS1.01bn ($280.3m) in 2006, and has become of increasing importance to the broader economy, more than doubling as a contributor to GDP from 5.7% in 2006.

Across West Africa as a whole, construction demand has been driven by infrastructure investment. In 2014 construction investment totalled $74.8bn, up from $49.9bn in 2013. Of this, 29% came from transport investments, 21% from energy and power, 14% from mining, 12% from water, and 9% from oil and gas. The middle- and high-income segments of the housing market have not proved as robust as some other parts of the sector, being affected both by Ghana’s economic slowdown and economic difficulties in North America and Europe, according to Ibrahim Bah, managing director of real estate developer Regimanuel Gray. In the early months of 2015 the market continued to experience tough times, with demand low and some projects put on hold.

Slowing Down

A cooling in the construction sector seems natural after years of rapid growth. As professional services firm Deloitte noted in its “African Construction Trends Report 2014”, the number of foreign direct investment (FDI)-led projects, which tend to require significant construction activity, are a reasonable sign of investor confidence and construction sector strength. The number of FDI projects fell by an annual average of 34.1% from 2007 to 2013.

Meanwhile, sector operators continue to bemoan bottlenecks that restrain growth and push costs up. “Sourcing materials is a major challenge,” Karim Ibrahim, managing director of Dream Realty, which is developing the mixed-use project The Octagon in Accra, told OBG. “Quality building materials are not available in Ghana so we have to go outside to find them. There are also major challenges with the issuing of construction permits. This is a very tedious process and it is also at times fraught with corruption.”

Ebenezer Denzel-Amanor, the CEO of construction company Around the Clock, also told OBG that finding quality labour in Ghana is not easy. According to Denzel-Amanor, better training and education services for youth would help address this.

On the supply side, developers have had concerns about finding financing in an environment of high interest rates and investor wariness about emerging markets in general and Ghana specifically, due to the cedi’s volatility, policy uncertainty and the economic slowdown. Bah said that taxation and regulation push up costs in what is already a difficult environment.

“There is a lot of construction activity under way in Ghana, both for private developments and infrastructure projects, which is good news for contractors”, Denzel-Amanor told OBG. “However, payment issues can be a challenge.”

Demand Drivers

Nonetheless, there are strong grounds for optimism in the medium to long term, among them population and economic growth, and increasing interest from investors in higher-yielding African assets. Other factors include greater economic diversification through expanding manufacturing, and government efforts to address shortcomings in transport and utilities infrastructure.

A number of factors are driving demand for housing and real estate more broadly. First and foremost population growth is running at a rate of approximately 2% a year in Ghana, where 38% of people are under the age of 15, according to the Population Reference Bureau, a US-based non-governmental organisation. As this segment of the population reaches adulthood, they will need their own homes.

Urbanisation is another major factor. A March 2015 report by PwC, “Real Estate: Building the Future of Africa”, examined the effect of global real estate trends on the continent. One of these is “huge expansion in cities”, which PwC expects to accelerate. Ghana’s urban population is just 51.9% of the total, but the urbanisation rate is 3.5%, according to the report. The rapid rate of change is putting pressure on housing stock, working spaces and infrastructure.

Growth Areas

Using UN data, PwC estimates that Accra’s population will have grown by just under 40% between 2010 and 2015, while it says that medium-sized cities and those with a population under 1m will grow the fastest across Africa. In Ghana this would include Tamale, the economic centre of the north; Sekondi-Takoradi, which is the centre of the oil industry; and Sunyani, the capital of the BrongAhafo Region. PwC also identified industrialisation as a driver of construction demand across Africa. This applies to Ghana, where there is a renewed emphasis on developing industrial capacity to add value. PwC noted that Chinese investment and intra-regional trade would stimulate industrialisation. Ghana has been a major recipient of Chinese investment.

The country is working to position itself as a regional trading centre, providing an outlet to the sea for its landlocked northern neighbours (see Transport chapter). Industrialisation would reduce Ghana’s susceptibility to fluctuating commodity prices ( particularly oil, gold and cocoa), which is a risk factor to growth, even as agriculture expands.

Economic growth is also an obvious upside for the sector. In its April 2015 World Economic Outlook, the IMF forecast that Ghana’s economy would grow by 3.5% in 2015, which is slow by recent standards, but it should pick up to 6.4% in 2016, 9.2% in 2017 and 6.9% in 2018. PwC expects another 1.6m households to join the middle class by 2025, which would constitute growth second only to Nigeria in the continent.

That this can be achieved while Ghana is not particularly populous by African standards is a testament to its economic growth and social mobility.

Infrastructure

Ghana’s economic growth has both put increasing strain on its transport and utilities infrastructure, and created more resources to invest in improving it. The energy, manufacturing and transport sectors are driving demand for infrastructure expansion and improvement, as are population growth and urbanisation. Transport and utilities lag behind economic growth. The government is determined to address these shortcomings, often in partnership with private sector operating companies that are playing an increasingly important role in investing in, managing and owning public infrastructure assets.

PwC forecasts that annual infrastructure spending in sub-Saharan Africa will top $180bn by 2025, growing by more than 10% a year. It noted that a need to top up government resources is creating more opportunities for PPPs, adding that collaborating with the government on urban development will become more important, and also increasingly easy due to political stability. “We believe that significant private sector participation alongside government is required to enable Africa to close the infrastructure gap,” said Deloitte in its report, which noted 10% of construction projects across Africa had been structured as PPPs in 2014, up from just 4% the year before.

PPP Programme

Ghana is likely to turn to PPPs over the coming years. A commitment to developing PPPs where appropriate was enshrined in the National Policy on PPPs, which was published by the Ministry of Finance and Economic Planning (MOFEP) in June 2011. This estimated that Ghana had an infrastructure gap requiring $1.5bn in investment per year in the following decade. As the 2011 policy noted, PPPs allow the government to leverage private sector expertise, technology, capital and human resources, as well as free up government resources for other uses. The profit-driven private sector can be more rigorous in cost assessment. The document added that the model allows for pooling of risk within the private sector; however, private contractors naturally prefer contracts that can offer guarantees.

The policy document also outlined the essential parameters of how PPPs should work in Ghana, including scope and the responsibilities of the partners and the bodies involved, including new government agencies. It was followed by a draft of the Ghana PPP Bill, the second revision of which was published in May 2013. The bill sets out in more detail the regulations that will be applied to PPPs from start to finish, though with flexibility for processes to be shaped to the project in question. Areas covered include project identification, feasibility studies, requests for proposal, bid evaluation criteria and dispute resolution.

Pipeline

The government had pledged to ratify the full bill by the end of 2014, but as of November 2015 it had yet to be passed. However, the administration seems committed to the model. In August 2014 the MOFEP published an extensive list of PPP projects in the pipeline, including project scope and progress updates. Major developments listed include the dualisation of the 185-km Accra-Takoradi Highway, which is currently single-lane for all but around 10 km. The private sector is expected to take responsibility for the design, financing and construction of the expansion, including interchanges and bridges, maintenance and operation, and extension of road safety structures. It will also run tollbooths. The highway is expected to operate on a build-operate-transfer (BOT) model, which usually sees the asset return to the government after the private contractor has recouped its cost plus an agreed margin. The government can then offer the road operation for a set period through a new tender. In 2014 the government appointed a transaction advisor for the BOT tender.

Another major project listed for PPP development is the expansion of the 20-km Accra-Tema Motorway, linking the capital to the country’s largest port. The road has high levels of traffic, with 30,000-40,000 vehicles a day, up to 50% of them heavy vehicles heading to the port. Developing the port and reducing bottlenecks in and around it is central to securing Ghana’s position as a regional transport centre. The government wants the dual carriageway expanded to at least four lanes each way, along with broader improvements to the road under a BOT agreement.

Ports & More

In the ports segment there is a successful PPP with Meridian Port Services (MPS) to operate a container terminal at Tema, which was followed in November 2014 by a memorandum of understanding between MPS shareholders APM Terminals and Bolloré Africa Logistics to expand the port in a deal worth around $1bn. The government is seeking a partner to develop and operate parts of Takoradi Port, which has lagged behind Tema’s development. It has gained in importance in recent years as the centre of Ghana’s oil industry. The project is likely to follow a plan in place for the port, and could include facilities such as container and oil services terminals.

Boankra Inland Port will be developed via a PPP on a 162-ha site outside of Kumasi, the capital of the Ashanti Region. The port would operate as an intermodal hub and is designed to take pressure off the seaports. The government is seeking a private partner to develop primary infrastructure around Boankra, as well as warehousing, and administrative and industrial buildings. In addition, the government is looking to use a PPP for the related project of redeveloping the 330-km Eastern Railway Corridor, which runs to the railway junction town of Nsawam and on to Kumasi, and would link to Boankra. In January 2015 Joyce Mogtari, the junior transport minister, announced that the contract to rebuild the railway would be awarded by the end of 2015.

The government is seeking a partner to build and operate the Asutsuare Bulk Water Project, which would supply the Accra-Tema area. The facility would include a treatment plant, high-pressure pumps, terminal reservoirs and two 72-km transmission pipelines. The first phase would supply 180,000 cu metres per day (cmd) of water, while a second phase would add 360,000 cmd. The government had originally aimed for these phases to be complete by 2016 and 2018, respectively, but that time frame may now shift.

“With the government’s work to improve transport and energy infrastructure, there has been a significant increase in demand for quality contracting services,” A Y Abebrese, chairman and managing director of construction firm Taysec, told OBG. “There are only a few contractors in the country who can meet international standards, but there is a need to improve regulatory enforcement to ensure all construction activity is safe and legal.”

Public Services

Construction companies should also benefit from the government’s efforts for regional development and to improve public services across the country. A case in point is President John Dramani Mahama’s announcement in April 2015 that the government would construct five new district hospitals as part of a drive to boost health care access for all citizens. The president added that the government was working to secure funding to start the hospital projects, located in five towns in the Northern Region. President Mahama added that the government was looking to establish Buipe, a small town in the Central Gonja District, as an industrial centre for the north of the country, which included establishing an inland port.

Other PPP projects include the construction of “model markets” in cities across the country, including Accra, Tamale and Nkoranza, that will replace older marketplaces that lack access to roads, proper plumbing, sanitation and waste disposal, and are generally unsafe. These will be built, operated and owned by the private sector until costs are recovered.

Cement

Rising demand from the construction sector has seen investments in domestic cement production, despite the controversial availability of low-cost imports. Ghana’s per capita cement consumption is around 186 kg per year – relatively high for the continent – according to a 2015 annual report from Dangote, a major African cement producer based in Nigeria. Ghana has limited limestone reserves and imports up to 6m tonnes of cement a year, according to Dangote, which operates a cement terminal at Tema importing from Nigeria, with a bagging capacity of 1.5m tonnes per annum (tpa). Local production capacity is 7m tonnes, but up to 15m tpa will be needed to meet rising demand.

The depreciation of the cedi in 2014 created more challenges for importers like Dangote, which saw sales fall by more than half to 309 tonnes, and led to shortages in the country. Prices rose to GHS32 ($8.88) in Accra and GHS35 ($9.71) outside the capital. Partly in response to the shortage, in July 2014 Dangote announced plans to build a new clinker grinding plant at Takoradi with a 1.5m-tpa capacity, using Nigerian clinker. In April 2015 Savanna Diamond Cement Company, which is part of West African Cement Group, opened a new $90m integrated cement plant at Buipe in the Northern Region, with an annual capacity of 440,000 tonnes.

Market operator Ghana Cement Works (Ghacem) is 93.1% owned by global cement giant Heidelberg Cement via a Scandinavian subsidiary, with the Ghanaian government retaining a 5% stake. Ghacem remains a dominant player, although its market share has decreased to 50% since it lost its effective monopoly in 2000. As of June 2015, Ghacem was offering a factory gate price of GHS29.37 ($8.15) for its super rapid cement, with depot prices varying across the country from GHS31.59 ($8.77) in Kumasi to GHS34.47 ($9.56) in Wa. Despite shortages in 2014, in June 2015 the Ghana Cement Manufacturers Association called for the government to impose anti-dumping duties on cement imports. While Ghanaian construction firms may welcome cheap imports, over the longer term security of supply might arguably be better supported by ensuring the domestic industry has the margins to invest in capacity, while imports will be an important part of the mix.

Outlook

The construction industry has continued to grow, despite more sluggish demand from parts of the property sector. A wave of government projects should help support continued growth, combined with a revival of private sector demand as the economy picks up and the fundamentals of population growth and urbanisation assert themselves. Obvious downsides include a sustained drop in oil prices, as well as for other commodities that have helped drive Ghana’s economy in recent years. This may be somewhat offset by industrial growth and diversification.