Improving access to finance and reducing building material costs remain priorities

Infrastructure development in Ghana has seen a healthy progression over the past decade, mainly as a result of the Jubilee oil field discovery in 2007. Following Tullow Oil’s initial operations in 2010 demand for construction surged in 2011-12 as the government commenced various large-scale infrastructure projects. There was a particular focus on transport, housing and utilities, while private developers began to redefine Accra’s skyline.

The recently established Ghana Infrastructure Fund intends to facilitate private investment, with a new public-private partnership (PPP) infrastructure law expected to be passed in late 2014. Against this more promising regulatory backdrop, as well as high demand and an abundance of projects, growth potential is encouraging for the near term.

Obstacles

However, the sector is not without its various challenges. Following the oil discoveries, local financing was readily available. As revenue began to slow and, more recently, the value of the cedi slid, a number of local banks became reluctant to fund large-scale infrastructure projects, as turnover requires a long-term investment.

“A large project may not see returns for the banks for at least two years,” Samuel Mensah Dadzie, commercial manager at GKL, a locally based construction company, told OBG. “And in the current fiscal climate local banks do not want to have these projects on their books,” he continued.

The ongoing currency depreciation dilemma, which has seen the cedi depreciate by 27% against the US dollar from January to July 2014, has also harmed the construction sector. Ghana’s market is highly dollarised and prices have become volatile (see Economy chapter). Developers consequently fix prices for shorter amounts of time and need to review arrangements constantly. Owing to the fluctuating local currency and its increasing volatility, knowing when to deposit cedi or dollars has become a major challenge, Ellis Atekpe, executive director of Ghana Home Loans, told OBG. Regardless, construction growth is expected to average almost 10% between 2013 and 2017, driven by major infrastructure developments and public spending, according to London-based consultancy group Business Monitor International.

Regulatory Structure

The two primary supervisory bodies overseeing construction activities in Ghana are the Ministry of Water Resources, Works and Housing – responsible for housing infrastructure – and the Ministry of Roads and Transport, which oversees civil infrastructure developments. The former is working with the Ghana branch of the Chartered Institute of Building to develop a new permanent regulatory body for construction oversight. According to the minister of water resources, works and housing, Alhaji Collins Dauda, the new entity would be responsible for regulating the entire industry and ensuring professional certifications, adequate training and up-to-date health and safety laws.

“There is a need in the construction industry for a collaborative body that brings together all stakeholders in a construction project. This body can liaise with both the project sponsor and the ministry to mobilise the project,” Eunice Ijeoma Aku Ogbugo, CEO at construction group Eugo Terrano, told OBG.

PPP Law

The legislature is expected to pass a new PPP infrastructure law by the end of 2014, aimed at supporting the roll-out of the PPP policy put in place in 2013, which should make it easier for private investors to enter into such partnerships. The local media reports that Ghana is experiencing a significant infrastructure finance gap, averaging $1.5bn per year. According to Paul Victor Obeng, the late chairman of the National Development Planning Commission, limitations placed on government expenditures make innovative financing mechanisms for large infrastructure projects an important priority, particularly with the involvement of private stakeholders.

The World Bank is supporting Ghana’s PPP drive through a $30m loan to finance feasibility studies, potential projects and managerial training. Michael Cobblah, director for C-Nergy, a local investment banking group, told the press that the significant allocation of funds provided by the World Bank and other bilateral partners for capacity development must be utilised in order for PPPs to be properly structured, such that they become bankable and succeed in attracting other investors to Ghana.

“The Ghanaian civil construction industry is increasingly moving towards PPP projects,” Ogbugo told OBG. “Some investors are deterred by the long-term returns of infrastructure projects, and so the government is working to create shadow funding for these types of projects,” she added.

Major Projects

The rising demand for infrastructure development, including transport, utilities and housing, compared to overall economic growth has created a significant funding gap, with estimates that the government would have to spend between $1.2bn and $1.5bn per year over a decade to provide adequate nation-wide infrastructure. The vast majority of funding is acquired through the private sector and foreign governments, particularly China.

Following the approval of a $3bn loan from the China Development Bank (CDB) in 2010, negotiations are ongoing for the approval of a second loan of $6bn from the Export-Import Bank of China (Ex-Im Bank) that would target social infrastructure projects. According to a Bloomberg report, the loan would be injected in three tranches of $2bn for education, health, electricity and water projects. While progress continues on the construction of the Bui Dam and the Sunon Asogli power plants, undertaken by Chinese companies, negotiation delays are affecting implementation of the social infrastructure projects.

Roads

Transport projects saw significant gains in 2013 (see Transport chapter). Roughly 103 km of road and highway work – including reconstruction, construction and upgrades – took place and 13 bridges were completed, according to the Ministry of Finance. Under the 2014 budget the government prioritised investment on the following road networks: Tetteh Quarshie-Madina; Asankragwa-Enchi; Kwafokrom-Apedwa; Buipe-Tamale and Fufulso-Sawla, as well as the Dodi-Pepesu Nkwanta; Tarkwa-Bogoso-Ayamfuri; Agona Junction-Elubo; Anyaa-Pokuase; Burma Camp Roads; Giffard Road; and the Sunyani road in Kumasi. Furthermore, a feasibility study is under way for the roll-out of a PPP to build, operate and transfer the Accra-Cape Coast-Takoradi Road.

Road contractors for such projects are hired based on the type of work required: roads, airports and similar works (Category A); bridges and culverts ( Category B); labour-based road works (Category C) and steel bridges (Category S).

The Buipe-Tamale road project, financed by China’s Jiangxi International Corporation for Economic and Technical Cooperation, is the only direct road corridor between Accra and the country’s three northern regions, enabling greater domestic movement as well as ease of trade with Burkina Faso.

Furthermore, Accra’s traffic system is set for an upgrade, and part of the $3bn CDB loan – $135m – will be allocated to the Accra Intelligent Traffic Management System, which was launched in March 2013. The project expects to integrate 182 smart traffic lights across the city’s major intersections.

Rail

Upgrading and extending the rail network is a growing priority due to road congestion and challenging routes for goods such as produce and minerals (see Transport chapter). In 2012 the Ghana Railway Development Authority called for funds to develop a massive railroad rehabilitation and expansion programme. It plans to use $1.95bn from Ex-Im Bank for the Central Line; $900m from the Industrial and Commercial Bank of China for the Eastern Rail Line; and $500m from the CDB for the Western Line, which stretches from Takoradi to Kumasi.

Electricity

According to the Ministry of Energy and Petroleum, Ghana has an installed capacity for electricity of about 1960 MW. While demand sits at 1400 MW, 10% growth in annual demand illustrates the medium-term need to increase installed capacity (see Energy chapter). Power plants such as the Akosombo Hydro Power Station, the Kpong Hydro Power Station and the Takoradi Thermal Power Plant, all owned by the Volta River Authority, are unable to achieve full generation capacity due to uncertain water inflows and limited fuel supplies.

New plants, however, aim to bolster capacity and increase national access to electricity (power is currently available to 72% of the population). China’s Sinohydro is finalising construction of the Bui Dam, set to be Ghana’s second-largest hydroelectric generating plant after Akosombo. Located on the Black Volta on the border of the Northern and BrongAhafo regions, the dam is already operational – producing 133 MW – with plans to add 400 MW in total to the grid by the time the project is complete at the end of 2014. The $622m project is financed by ExIm Bank and operated by Bui Power Authority.

The Sunon Asogli Power Plant, owned by Shenzhen Energy Group and China-Africa Development Fund, the latter holding a 40% stake, already produces 200 MW (with 160 MW more planned). The company is planning for significant expansion in its Ghana operations, with production goals of up to 1560 MW. A new $1.5bn, 700-MW coal plant is in the pipeline and expected to take 36 months before operations begin. Another plant from Shenzhen, which is expected to produce 500 MW, is planned at Domlemi in the Western Region’s Jomoro District.

Water

The level of urban infrastructure development has not kept pace with the population growth rate of Ghana’s city-dwellers. Potable water supply remains a chief concern in this regard and the government has prioritised water supply accessibility in the recent budget allocations. Overall access to safe water increased from 63% of the population in 2012 to 68% in 2013, and the Ghana Water Company completed a number of major infrastructure projects across the state over the year, adding 17.5m gallons of water per day (gwpd) to overall production.

Under finance allocations detailed in the 2014 budget, planned projects include the rehabilitation and expansion of 20 water supply systems across Ghana’s seven regions; a treatment plant for Nsawam Water Project; 10 dams and weirs throughout the Northern, Ashanti, Western, Eastern, Brong Ahafo and Greater Accra Regions, and a 13.2m-gwpd desalinated plant under a PPP project at Teshie-Nungua.

In addition, Ghana is serving as a case study for US-China geopolitical cooperation, as the two powers are working together to fund water projects. The Sunyani water project received $15m in funding from the US’s Import-Export Bank while China’s ExIm Bank provided $93m in export credit for a Chinese contractor, the MCC8 Group, to expand and rehabilitate a water facility in Brong-Ahafo.

Hope City

Despite these obstacles, Ghana did begin construction earlier in 2014 on the $10bn information technology hub, known as Hope City – an acronym for home, office, people and environment – located in Prampram, just outside of Accra. The facility aims to house more than 25,000 people and generate 50,000 jobs upon completion. According to Roland Agambre, CEO of local tech firm Rig Communications, it will include a computer hardware assembly plant, information and communications technology training and educational centres, a hospital, banking services, and recreational facilities. Agambre is aiming to fund the project from the private sector and has already solicited support from several partners, including Microsoft.

Delays And Financing

A 2013 article, entitled “Ghana: Stakeholders’ Perspective of Causes of Delays in Construction of Public Buildings” and published by the International Institute for Science, Technology and Education, highlighted the fact that clients are typically responsible for the delays that have long plagued the sector. The underlying challenges include bureaucratic inefficiencies, inadequate contract management, material imports, equipment access and a lack of liquidity.

The core issue, however, is access to financing and insufficient cash flow. The restraint displayed by banks for support of the full range of projects is of particular concern to smaller contractors, which account for the majority of the market. As a result, there are numerous examples of small-scale contractors providing the foundation of projects and waiting months between each level of development. These challenges are compounded by high interest rates, typically about 30% if borrowing locally. This is less of a problem for larger players who have access to international credit.

Health & Safety

In May of 2014 the Ghana Contractors Association Council (GCAC), with assistance from the Ghana Business Sector Advocacy Challenge Fund, which receives funding from the Danish, British and US international development ministries, initiated a campaign to reform Ghana’s antiquated occupational health and safety law. The Factories, Offices and Shop Act, established in 1970 and currently the guiding piece of legislation for workplace safety, does not provide adequate safeguards for work in the construction sector. Rockson Dogbegah, chairman of the GCAC, told the media that the absence of an updated, clear law is particularly costly for the industry. In addition to pushing for a new policy, he also urged the government to ratify the International Labour Organisation’s Convention on Occupation Health and Safety to incentivise international best practices in the sector in Ghana.

Land

Access to land in Ghana is managed through a longstanding tenure system, or stool/skin systems, whereby local chiefs govern the use of land. Approximately 80% of all land is operated under this system and negotiations with such chiefs are therefore a necessity, consequently creating delays in land acquisition. Moreover, some developers may have to pay two or three times for the same piece of land due to disputes and title issues.

Many stakeholders are therefore calling for the government to purchase land and establish a land bank for developers to tap into. As population growth and urbanisation trends have caused land prices in central Accra to soar, developers are increasingly interested in seeking new projects towards the outskirts of the city, offering chiefs high prices for land that was historically used for agricultural purposes.

Raw Materials

The commodities markets relating to the construction sector are tightly linked to the price of fuel and foreign-exchange rates. Due to the currency challenges facing Ghana in 2014 (see Economy chapter), the devaluation of the cedi meant that prices for raw materials were bumped up since the majority of them are imported.

Other factors affecting importation add to the costs, such as demurrage and port congestion, as well as high prices for building materials across the continent. For cement, the key ingredient for construction, the price per bag increased quickly. In mid-2013 one bag was valued on average at GHS16 ($6.10). By June 2014 that price had reached GHS24 ($9.15). Prices, however, vary depending on the brand of cement, with the main suppliers being Ghana Cement, Diamond Cement and Dangote. Despite price hikes and port concerns, high rates of consumption and surging demand continue to characterise the market (see analysis).

Growth in the steel industry is also helping domestic supply and easing costs for local contractors. Most recently the United Steel Company (USC) invested in a $100m processing plant in the port city of Tema, commencing operations in 2014. The facility has the capacity to produce 350,000 tonnes annually of tensile rebar. Since most steel is imported, USC expects that its rebar will be 10% cheaper. Spanish consortium Grup Armangué also invested in a $10m plant to produce prefabricated steel products.

While the new steel plants are expected to help reduce local material costs, the ability for new entrants to achieve a strong return on investment depends on their access to the ECOWAS market, mainly Nigeria. And tapping into the Nigerian market remains precarious, as it has yet to sign the ECOWAS Trade Liberalisation Scheme (ETLS).

This may not happen anytime soon, according to Pieter Swanepoel, West Africa financial manager for BSi Steel Ghana. “I do not foresee Nigeria agreeing to the ETLS as the country has a clear history of protectionism,” he told OBG. “Just look at the example of Dangote. The intention is to create wealth inside their boundaries, building up competitive industries and only then opening up the economy by un-banning product importation in certain categories.”

Outlook

Although Ghana’s construction segment faces challenges such as the high cost of building materials, contract enforceability and access to financing, sustained infrastructure development, urbanisation and middle-class growth demonstrate that the contract pipeline will remain filled for the foreseeable future. For first-class contractors with international credit and strong technical expertise, Ghana’s market offers significant growth potential.

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The Report: Ghana 2014

Construction & Real Estate chapter from The Report: Ghana 2014

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