Laying the cornerstones: Government expenditure is supporting increased activity

The influx of capital and burst of growth that followed Ghana’s discovery of oil in 2007 led to a construction boom in 2011-12, evidenced by the cranes dominating the Accra skyline. Although energy tariffs are rising, revenues from oil, cocoa and gold are flowing into state coffers and gas production is scheduled to commence in late 2013, meaning capital for construction projects should remain high in the short term and there is plenty of demand in the low- and high-end segments.

Sourcing construction materials has been problematic, but the cement industry has bounced back from a 2012 shortage with increased capacity as a result of new mills. This does not mean that there have not been challenges. Import costs, project delays, currency depreciation and high land prices will aggravate contractors hoping to meet the sustained demand across the country, but there is strong potential for high returns.

GROWTH: Historically, Ghana’s construction sector represented 4-6% of GDP, but it has seen increased activity in recent years. The industry grew by 20% in 2011 in the wake of the high foreign direct investment (FDI) inflows following the development of the Jubilee oilfield; this slowed to 11.2% in 2012, but it is projected to rise by 12.5% in 2013. The 2012 “Bruce Shaw Handbook”, published by the eponymous UK surveying group, estimates construction will represent over 10% of GDP from 2012 onwards, up from 8.1% in 2010, and that output will grow by 12% annually in 2013 and 2014.

REGULATION & OVERSIGHT: The main bodies that supervise and oversee construction in Ghana are the Ministry of Water Resources, Works and Housing, which oversees housing infrastructure, and the Ministry of Roads and Transport, which is responsible for civil infrastructure. Contractors generally fall under either building or road construction categories, with airports falling under road construction. The Ghana branch of the Chartered Institute of Building (CIOB) estimates that there are 1600 active building contractors in Ghana, and the Ministry of Roads and Transport lists 2095 road contractors in good standing as of October 2012.

Building contractors in Ghana are broken down into four classifications: D4K4, which execute projects worth up to $75,000; D3K4, which can execute projects costing $75,000-250,000; D2K2 companies which handle projects worth $250,000-500,000; and D1K1, which construct projects costing over $500,000. The majority of companies in Ghana fall under D4K4 and D3K4 classification, with larger local players such as De Simone, Micheletti, and Consar in the D1K1 category.

Many of the leading construction firms in Ghana today are owned by expatriates who register their firms with Ghanaian partners in accordance with business registration laws. Road contractors also fall under four categories: Category A, which includes roads, airports and related structures; category B, which includes bridges, culverts and other structures; category C, which comprises labour-based road works, and category S, which is for steel bridges and structures.

MAJOR PLAYERS: De Simone, Micheletti and Consar are three of the largest contractors in Ghana, and are responsible for building a number of high-profile projects in the last decade. De Simone, owned by Italian expatriates and based in Tema with regional offices across West Africa, was responsible for construction of Accra Mall, the Tigo headquarters building, the US embassy in Accra and the Ghacem cement factory.

Ongoing projects at De Simone include the Icon House, Accra Financial Centre and Nester Square.

Micheletti, also owned by Italian expatriates, was responsible for a $53m refurbishment of the Ohene Djan and El Wak Sports Stadiums in 2006, and construction of the 7000-sq-metre NDK Financial Services Office in Osu, Central Accra, in 2011. The company is currently contracted to build the mixed-use office and retail project One Airport Square (see Real Estate overview), and a luxury residential building in Airport City for Wilmar Properties. Micheletti employs 245 people, of which 237 are Ghanaian. Consar has a number of government projects in progress, including the construction of four ground-level reservoirs in Akorley, Dodowa, Adukrom and Atimpoku; a regional library in Wa; a well-testing facility in Takoradi; and a district hospital in Bekwai.

GOVERNMENT CONTRACTS: The government is the largest construction client in Ghana, and new oil revenues have led to a host of projects and infrastructure upgrades. Ghana’s Shared Growth and Development Agenda 2010-13 emphasises the need to develop transport, water, sanitation and power infrastructure, financed through budgetary resources, borrowing and public-private partnerships (PPPs). It is expected to be replaced by a new national development programme in late 2013, which identifies infrastructure spending as one of four key priorities. Prominent projects undertaken as part of this push include the $1.8bn Eastern Corridor Roads Project, a $217m University Teaching Hospital in Accra, and an extensive rehabilitation of the Tema Port and Kotoka International Airport.

In 2012 the World Bank reported that Ghana needs to spend $26bn on infrastructure to support economic growth, including on basic infrastructure upgrades in roads, housing and utilities. However, with some of the key ministries overseeing the public works awarded smaller budgets for 2013 – the Ministry of Roads and Highways and Ministry of Transport, for example, received $460m in state funding, down from $648m in 2012 – the government is also looking to the private sector and foreign governments to move forward on much-needed construction projects.

TOLLS & LOANS: Under the government’s PPP scheme for road works, companies contracted for highway projects operate under a build-operate-transfer (BOT) model, in which the private sector partner builds the road, collects tolls to recoup construction costs, and transfers ownership and operations back to the government when the debt is repaid. The Arterial Toll Roads Company, backed by Dubai’s DSC Infrastructure and the Savarino Development Corporation, is using the BOT model for a $500,000 expansion project on a stretch of highway running between Accra and Kumasi, under a 30-year concession agreement with the government.

Soft loans and development assistance are another avenue the government is using to upgrade infrastructure. Its new foreign affairs building, completed in Accra in 2013, was built by China’s Yanjian Group using a $13.6m interest-free loan from the Chinese government under an agreement on economic and technical cooperation between the two countries. Other governments have provided mixed-credit facilities for large-scale Construction costs, Q1 2012 projects, including a $17.1m loan from the Austrian government for rehabilitation of the Adomi Bridge and $242m from the Brazil to construct a 209-km stretch of road connecting Oti Damanko to Nakpanduri.

AFFORDABLE HOUSING: Perhaps the most significant gap in Ghana’s infrastructure, and one of the areas where construction activity is expected to significantly pick up in the short- to medium-term, is in affordable housing, with a variety of projects both small and large, public and private, planned for the coming years. Ghana has a severe shortage of low- and low-middleincome housing, with a current estimated shortfall of some 1.5m residential units, according to the Ministry of Water Resources, Works and Housing. The government expects this shortfall to grow to 2m by 2020, and though the market will need at least 150,000 new units per year to meet demand, current annual supply falls short of this mark at between 30,000 and 40,000 units.

A number of government initiatives have attempted to address Ghana’s housing deficit over the years. In 2005 the government inaugurated an affordable housing programme to help develop over 100,000 units across the country. In line with the programme, the 2007 budget mandated HFC Bank, the leading home loan provider, to offer an affordable home-ownership scheme for public servants, with 10,000 units to be built under the Ministry of Water Resources, Works and Housing. In 2009 an ambitious $10bn PPP was signed with Korean firm STX, which was intended to provide 200,000 affordable housing units. In August 2010 Parliament approved an initial off-take agreement for 30,000 housing units for security agencies at a cost of $1.5bn, to be carried out by STX Engineering and Construction Ghana, and the company announced in February 2011 that it would train local contractors in the use of prefabricated concrete slabs reinforced with aluminium.

CHALLENGES: However, delays and setbacks have dogged the progress of a number of the projects. In April 2012 the government repossessed 15 plots of land from STX after the project collapsed due to problems between the developer’s Korean and Ghanaian offices. President John Dramani Mahama’s administration replaced STX with South Africa’s Guma Group, announcing plans to build 500 new houses by November 2012, a move that drew fire from local contractors who argued that the job should go to Ghanaian firms.

Meanwhile, a shortage of funds made available for buyers has also played a part in housing demand. In 2012 the ministry’s Public Servant Housing Loan Scheme Board doled out just $1.02m in loans, which allowed for the purchase of 41 flats, completion of 60 houses and construction of an additional 180 homes to begin. These issues have exacerbated the housing situation. Indeed, the shortfall of 300,000-500,000 seen when the government’s affordable housing programme was launched in 2005 has grown to a 1.5m deficit today.

More recently, the government has worked to help channel private interest and capital into the segment, which with tight margins has generally attracted little in terms of private development. For example, the 2011 budget abolished a previously universal five-year tax exemption to developers, limiting it only to those who partner with the Ministry of Water Resources, Works and Housing to provide affordable housing. “Given the housing deficit, the future of Ghana’s lower-income sector should be high-rise buildings, which are more space efficient. Financing at affordable prices remains the main constraint,” Dragica Todorovic-Letica, the managing director of Energo Project, told OBG.

FINANCING: There are no standardised lending conditions for operators in Ghana, and a number of financial institutions are involved in construction finance on a case-by-case basis. Financial institutions providing construction loans include Barclays Bank Ghana, National Investment Bank, Bank of Africa, Stanbic and HFC Bank.

The banking industry’s gross loans and advances grew 28% to $6.69bn by December 2012, compared with growth of 7.7% in 2011. According to the Bank of Ghana, credit allocations to the construction sector amounted to 8.1% of total outstanding credit as of December 2012, up from 8% in 2011. However, the total amount of non-performing loans in the construction sector also rose in 2012, to 18.2% from 15.3% in 2011.

In May 2013 Stanbic Bank’s CEO Alhassan Andani told local press that the increase in infrastructure projects in Ghana would boost the bank’s project-financing business: “The outlook for this year will still be strong, and the interest rate regime will remain high. If you look at the private sector-driven construction industry, it still looks strong, judging from the cranes ruling the skylines of Accra and Kumasi,” he said. This is welcome news for developers. Currency fluctuations wrought havoc in Ghana’s financial sector in 2012, as the cedi depreciated 17.5% against the dollar between January and October. The ensuing imbalance caused the riskfree interest rate to spike from 10.9% in January to 23.1% in September 2012. As of May 2013, Treasury bill rates stood at 23%, with average banks lending rates at 27.1%.

The scarcity of capital and challenging financial environment pose problems to new projects, according to Emmanuel Asamoah, executive director of the Ghana Real Estate Developers Association: “The interest rates are ridiculous, but we are having other problems with lending institutions. One of my developers was looking for funding of $154,000, and the bank demanded collateral of his house, which is worth $200,000, and the land, which is worth $500,000,” he said.

DELAYS: Ellis Atekpe, executive director at local mortgage provider Ghana Home Loans, suggested that some of the problem in finding financing lies with banks’ reluctance to lend when projects could be delayed, stalled or collapse altogether – particularly when developers and contractors operate locally and work in cedis. “The capitalisation of these businesses has not been the best, and their capital has been eroded because of depreciation of the currency,” he said. “Some developers lost credibility in the market when they promised delivery in nine months and subsequently delivered in two years. If you want to breed confidence in the buying public, you need to meet deadlines.”

The CEO of real estate development firm The Ridge Capital (TRC), Eric Gené, said delays are the biggest problem facing construction activity for new projects in Ghana: “Capital is scarce and very expensive, and because most people have debt, the longer it takes you to build, the more expensive it becomes,” he said.

To help improve efficiency and productivity, TRC opened a factory in Ghana producing load-bearing structural panels, which can be used in the place of blocks, and which cut construction time down six-fold. “When you can build a house in three months instead of 18 months – the current average time – you can rent for 15 months upfront and save that money,” said Gené. Innovations in building materials could also help speed the construction process and save developers money. Pozolonna cement, which is manufactured locally using clay and palm kernel shells, could cut concrete costs by 20%; the country’s sole dealer, Pozolonna Ghana, produces 1.2m bags annually at its plant in Kumasi.

PAYMENT WOES: Issues of project delays do not lie with the contractor alone. The industry has been dogged by the inability of clients to pay contractors in a timely fashion, leading to a slew of delays. In April 2013 Martins Nnuro, president of the Association of Building and Civil Engineering Contractors of Ghana, publically demanded payments to contractors from the government and the Ghana Education Trust Fund for $39m that were allegedly a year overdue. In July 2013 President Mahama personally intervened to ensure that three Chinese road contractors were paid, to ensure work on Accra-area highway projects moved forward. Other developments affected by delayed payments include the $17.5m National Data Centre, contracted to Top International Engineering, and the Cape Coast Sports Stadium, built by Poland’s Pol-Mot Holding.

A 2010 report by Samuel Laryea, a professor at South Africa’s University of Witwatersrand, found that local contractors are hit hard by consistent payment delays in a highly competitive operating environment that is becoming dominated by large foreign companies operating in dollars or euros, and with access to a larger financial base and easier lending conditions: “The contracting environment in Ghana is harsh, particularly for local contractors who are often not paid on time and without compensation for late payment,” he wrote. Asamoah agreed. “Payment delays hold up projects and cause costs to rise, which has ramifications for the entire economy as it stunts local level growth,” he said.

MATERIAL COSTS: Costs have been rising in the sector, partly due to the prices of building materials, which have been up across the continent over the past 18 months. Cement prices jumped in 2012 after a factory shutdown at Diamond Cement led to a sector-wide shortage (see analysis), while importing goods can be slow due to congestion and shipping costs.

NEW PRODUCTION: Import costs are squeezing margins, but new domestic developments in the steel industry could ease the burden on contractors. United Steel Company recently constructed a $100m plant in Tema, expected to begin operations in 2014 with a capacity of 350,000 tonnes per year, in addition to high-tensile rebar that can be used in high-rise construction. Rebar from the new plant will be 10% less expensive than imported rebar (see Industry chapter). Spanish consortium Grup Armangue will also build a $10m plant in Ghana to produce prefabricated steel products. Ghana’s current annual steel production is 600,000 tonnes.

The aluminium market also has more room for growth, with production at Volta Aluminium Company (Valco), dropping to 40,000 tonnes of aluminium annually, only 20% of its 200,000-tonne capacity, after foreign investors pulled out in response to constant power shortages. Aluworks, one of Valco’s largest customers, is confident in the growth opportunities. “A young population and a deficit in housing stock mean demand for aluminium products in West Africa will continue to rise,” Kwasi Okoh, the managing director at Aluworks, told OBG.

The cedi’s depreciation in 2012 affected input costs as did interest rates. Since most construction companies import their products and pay in euros or dollars, developers were forced to either absorb the extra cost or pass it on to consumers. This is reflected in the costs of construction. The UN’s “2011 Ghana Housing Profile” found that construction costs stood at $750 per sq metre in 2010, with the Ghana Investment Promotion Centre estimating costs at $250 to $1000 per sq metre in 2011. Construction costs for air-conditioned office space in central locations run between $1230 and $1390 per sq metre, according to the Bruce Shaw Handbook, and between $1030 and $1285 per sq metre for medium-standard apartment construction.

This is high compared to South Africa, where the Turner & Townsend “International Construction Survey 2012” found that a medium-standard townhouse costs $817 per sq metre to build, with office space running between $916 and $1619 per sq metre. The relative size and purchasing power of Ghanaian contractors, geographic realities and high shipping costs could explain the disparity. According to the EC Harris “World Construction Cost Survey 2012”, construction in Ghana is more expensive on average than in South Africa, Morocco and Tunisia, although the survey did not include any ECOWAS members apart from Ghana.

LAND RIGHTS: As with many West African countries, land access and rights can be challenging. While there are no restrictions on foreigners buying property in Ghana, land ownership is a different situation. Many types of land cannot be privately owned, and the country’s four land classifications – government, vested, customary/stool and family/private – each have their own forms of ownership. The land acquisition process, as in neighbouring countries like Côte d’Ivoire and Nigeria, is complex, and negotiations between local chieftaincies and developers can slow construction.

Land prices are also on the rise, particularly in the Accra area. In April 2013 Kofi Antiru, director of research and investment development at the Ghana Investment Promotion Centre, warned that land acquisition problems are becoming more serious, and that the impact could prevent future foreign investment. Echoing that idea, George Twum Barimah Adu, the managing director at La Beach Tower, told OBG, “Most wealthy Ghanaians and expatriates want to live in specific neighbourhoods in Accra, so the land prices in those places have shot up, but we think prices have reached their peak.”

HUMAN CAPITAL: In addition to rising costs and delayed payments, the industry also suffers from quality control and staffing problems, and the issue of shoddy workmanship has gained prominence recently. In the government’s Highway Network Master Plan, 2001-20, poor workmanship was listed as one of four main problems confronting road contractors in Ghana. In June 2013, following an increase in fires across Accra, the Ghana National Fire Service pointed the finger at poor electrical work carried out by unqualified electricians as the primary cause of fires in the city.

Faulty construction can be partially attributed to lack of training for construction workers. The Department of Building Technology at the Kwame Nkrumah University of Science and Technology in Kumasi is the only university offering formal construction training in the country, and the skills gaps are evident. “There are not enough skilled people. The production of housing in Ghana is limited by the system, which is limited by its workforce,” said Gené. The issue was thrown into the spotlight in November 2012 when the Melcom department store in Accra collapsed, killing 14 people; the collapse was blamed on faulty construction.

FRAGMENTATION: Issues of rising costs and poor workmanship could be managed more effectively if the industry had one overarching body to speak on behalf of Ghanaian contractors. The country’s construction industry is highly fragmented, with no official governing or regulatory board. The Melcom tragedy prompted local firms to call for the establishment of a Construction Industry Development Board (CIDB), which will help develop the building and road construction industries by setting firm safety standards and providing training to workers. A universal regulatory board might also help smaller contractors survive. According to the “Evolution of indigenous contractors in Ghana” report published by the University of Reading in 2010, “To become effective, local contractors in Ghana should collate their ideas and adopt a cooperative approach and attitude towards solving their problems.”

The CIOB has spearheaded the CIDB initiative, in addition to calling for the establishment of a bank servicing construction companies, with a number of other agencies joining its cause, including the Ministry of Roads and Highways, the Ministry of Water Resources, Works and Housing, the Ghana Institute of Surveyors, and the Institute of Engineers, Architects, Surveyors and Planners. The loose consortium of stakeholders hosted safety conferences in January and April 2013, and hopes to establish the CIDB within the next 15 months.

OUTLOOK: Despite the escalating cost of doing business, the potentially lucrative rewards available to construction contractors outweigh the difficulties. As Ghana continues to channel newfound oil revenues into its infrastructure, and the private sector takes an increasingly active role in helping to meet housing shortfalls and infrastructure rehabilitation requirements, the sector is set to remain attractive to foreign investment.

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The Report: Ghana 2013

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