Is The Boom Here To Stay? - African Business Magazine
Is The Boom Here To Stay?

Is The Boom Here To Stay?

The construction industry is notorious for its susceptibility to boom-and-bust cycles; when capital is in ready supply and the appetite for new infrastructural projects is strong, the industry flourishes. However, in leaner economic periods, abandoned cranes and half-finished buildings graze the skylines. It is a story that Africa is all too familiar with: vaulting dreams and spending splurges have often been followed by wavering resolve and financial wreckage on the continent. But could the latest construction boom in Africa be different? Will this boom, both in construction and in the manufacture of building materials last?

The construction industry is certainly undergoing a boom period in Africa at present. The sector is experiencing strong growth in several countries across the continent: Nigeria’s construction industry is expanding at a solid rate: according to Business Monitor International, year-on-year growth climbed to 12.3% in 2011 and should be around 9.7% in 2012. It is predicted that the sector will achieve an overall value of $3.3bn this year and $10.1bn by 2021.

In Angola, the construction sector value is projected to increase by no less than 14% in 2012. Even in Zambia, the industry is also predicted to undergo an average growth rate of 9.3% from 2011 to 2015 and from 18 to 19% of GDP. The large-scale projects, which are driving the growth of construction in Africa, are varied, exciting and potentially transformational. Many of these are taking place in the transport sector.

The Nigerian government is spending N326m ($2m) on renovating 22 of the country’s airports. An $850m railway project to link Abuja and Kaduna, in the northern region of the country, is also scheduled to be completed by 2014. A major road in the state of Ogun, a southwestern state in Nigeria, is also in the pipeline – the China Civil Engineering Construction company (CCECC) was recently awarded a multimillion-dollar contract for the project. Further east, a $2bn rail project going through Sudan and Chad is being planned, which could give a much-needed boost to trade in the region.

Tanzania, Uganda, Burundi and Rwanda are also investing in multibillion-dollar regional rail projects, which should facilitate economic integration by boosting regional trade. There is also a lot of major construction activity in the energy sector; Ethiopia is currently constructing what will be the highest dam in Africa, Gibe III. The dam comes with a hefty price tag of $1.7bn and will double the country’s electricity-producing capacity. The Mambilla Dam is also planned for construction in Nigeria. If the project is successful, the dam will be the largest in Africa in terms of capacity and should provide up to 2,600MW of energy.

Power plants are also high on the agenda in the rest of Africa. For example, Sparkle Energy, a Namibian-Nigerian company, is building a 4,000MW power plant in Nigeria worth $10bn. It is scheduled for completion in 2016 and will constitute the biggest gas-fired plant in the country.

Large-scale residential housing projects are also gathering pace across the continent. Angola has attracted much attention recently over its residential housing projects, which should result in the construction of tens of thousands of new homes. Last year, Angola agreed upon a Real Estate Development Project in partnership with China, which will lead to the construction of 100,000 new houses in 14 different Angolan provinces.

Factors driving the boom

There are several major factors which are driving the construction boom in Africa. Population growth, combined with rapid urbanisation, is drastically intensifying demand for basic infrastructural development: the continent’s population has reached more than 1bn and is projected to rise to 2bn by 2050. Moreover, a little under half of the continent’s population now dwell in cities and this figure is anticipated to reach almost 70% in the next decade.

Another factor stimulating construction is that more capital is currently at the disposal of African governments to spend on projects, due to the resources boom which the continent is currently riding the wave of. Record-breaking cocoa prices, rocketing copper prices, and mushrooming oil prices (oil remained at over $100 per barrel for most of 2011) have made African countries wealthier. Better business climates and practices, improved political stability, and fewer wars have also led to record levels of foreign investment.

The increased interest that foreign firms have shown in partnering with African companies and governments to undertake infrastructure projects is also a crucial reason for heightening activity in the sector. The escalation of China’s engagement with Africa in this area in recent years has attracted particular attention.

China’s slice of contract revenue in Africa has jumped from 7.4% in 2009 to 36.6% in 2010, putting it ahead of its major competitors, Italy (15%) and France (10%). Moreover, Africa now makes up nearly 42% of China’s global contract revenue. Its engagement is mainly focused in resource-endowed countries, such as Nigeria, Sudan, Angola and Ethiopia. Commentators assert that a ruthlessly competitive approach to bidding is the key to the success of Chinese companies. China has also famously offered to undertake infrastructural projects in such countries in exchange for resources. This, coupled with the fact that Chinese construction companies have a strong tendency to import their own workers, has sparked controversy, with some observers accusing China of exploitation.

However, others take a more balanced view: “There are two camps; some people who think it’s good for African countries to not be too tied to Western trade partners and others that say African countries are not getting the benefits they should. The truth is probably somewhere in the middle – it’s much better for Africa to have more trading partners,” says Joe Collins, Director of African Supplies Ltd, a leading supplier of building materials on the continent.

As the drive for new projects increases, African governments have also increasingly been looking for new ways to fund projects other than directly through foreign capital. One tactic has been to encourage more private sector involvement. Other countries, such as Cameroon and Ghana, have also looked to infrastructure bonds.

Nonetheless, it is important to note that there are some notable exceptions to the generally positive trends for construction across the continent. One is South Africa. The latest projections and figures indicate that total investment in construction will plummet to R169,000 ($17,000) by 2013, and that, as a percentage of GDP, this figure will drop to 8.2%, from 10.9% in 2009. Moreover, major South African construction firms have been suffering due to increased competition from Chinese firms. Murray and Roberts recorded a $89m loss in the second and third quarters of 2010. Group 5, another major South African firm, also posted a drop in operating profits of 40.5% from R368m ($36.7m) to R219m ($21.8m) for their interim results to December 2011. However, the South African government has announced a record R1 trillion ($150bn) budget for 2012/13 and a large chunk of this, R844bn ($112bn) over three years will go to infrastructure. This will be welcome news to the country’s construction sector although it is still not clear whether the lion’s share of the contracts will go to the public or private sectors.

Will the boom last?

Furthermore, even with the boom gathering momentum, the construction industry still faces some serious challenges. One is that many African construction firms still lack adequately skilled labour for projects. Other stumbling blocks include poor transport facilities and high production costs due to volatile raw material costs and high energy prices. The cyclical nature of the industry also raises questions about the long-term sustainability of the current positive growth trends. Some optimistic commentators assert that, as there are no signs of population growth and urbanisation – the major phenomena behind the increase in projects – slowing in the continent, the boom may be sustainable in the long term: “People talk about there being a bubble for residential construction in some countries. I don’t believe that to be true. A bubble occurs where you have a continuous oversupply of something and an investment in that and the belief that it’s going to keep going in one direction. That hasn’t happened anywhere in any sector of residential construction in Africa,” explains Collins.

“There is a population boom coming through. You can overlay that with the average expected income and the expected growth of the middle classes. All of those people want new housing. The market will continue to grow,” he adds.

However, commentators warn that the current natural resources boom, which seems to be partly financing the construction industry’s expansion, is unsustainable. Projections regarding the life expectancy of vital resources exported by Africa offer compelling warnings: industry experts have consistently warned that Nigeria may run out of oil within the next 25 to 40 years and Zambia could run out of copper in 25 years. Unless their economies diversify significantly, capital for infrastructure projects could dry up within a couple of decades. As many projects take several years and sometimes decades to reach full completion and others require costly long-term maintenance, future troubles could have a significant impact on the long-term success of even present-day projects. Moreover, more immediate problems could also compromise the industry in the short term. For example, according to some commentators, countries suffering from high inflation could struggle with building materials and labour prices when shortages occur. Governments, which have mixed reputations when it comes to repayment for projects, could also find it difficult to push for private sector and foreign funding for particular projects. Moreover, in countries such as Sudan, Côte d’Ivoire and the Democratic Republic of Congo, political instability and the threat of renewed conflict could remain a serious barrier to investment.

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Written by African Business Magazine

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