When will indigenous construction companies dominate Nigeria’s construction industry? What must they do to achieve this change?
Current trends indicate a rise in dominance of foreign construction companies in Nigeria. There is also no sign of an imminent change in the construction industry. The Federal Government has made attempts to encourage local content – through its policies and executive orders. These attempts however, have not successfully improved the competitive positioning of Nigeria’s construction companies.
With this trend in Nigeria’s construction industry, it is unlikely that Government efforts can on their own give indigenous construction firms the much-desired competitive advantage. The executive order 5 for instance, mandates procuring authorities to give preference to indigenous firms over foreign firms in the award of contracts.
Results, however indicate that even the Federal Government still favor foreign construction companies by spending about 10 times more on them than their local counterparts in the award of major capital projects.
The recently released list of all 69 road projects being executed by the Federal Government in the south-east region of Nigeria is a quick reference to the gaps that exist in Nigeria’s construction industry
The results show that a staggering 90 percent of the total value of contracts went to foreign construction firms.
Also observed from this list are the following:
1. Total value of contracts awarded to foreign construction firms was 568 billion Naira (N568,100,252,121.53) while Indigenous construction firms got 66 billion Naira (N66, 045,289,911.81)
2. 74 percent of the total value of contracts went to 5 foreign construction companies out of a total of 46 construction firms.
3. While Julius Berger got the highest contract value at N206 billion Naira; only 5 indigenous construction firms got contracts above N4 billion Naira.
4. Top 3 contractors according to total value of contracts awarded were: Julius Berger Nigeria, Setraco Nigeria Limited and Arab contractors – (all foreign construction companies).
These results illustrate the continued dominance of foreign firms in Nigeria’s construction industry. It demonstrates the Nigerian Government’s dependence on foreign expertise and expatriates to execute its major capital projects.
Construction firms seeking to dominate Nigeria’s construction industry must hence look inwards, adopt sustainable growth strategies and make use of opportunities available to realize this goal.
Some of the most pertinent areas they can focus their strategies to improve their competitive advantage are:
1. Increase equipment acquisition
2. Develop an effective funding strategy
3. Embrace international partnerships and collaboration
4. Embark on Government projects
1. Nigeria’s Construction Companies Should Increase their Equipment Capacity and Acquisition
Equipment ownership has remained a critical source of competitive advantage of foreign construction companies in Nigeria. The fleets of equipment they maintain places them as the preferred choice for capital intensive projects. Consequently, there is an imperative need for indigenous construction firms to boost their profiles and suitability for these landmark projects by improving their equipment ownership.
In Nigeria’s construction industry as well as other parts of the world, people perceive ownership of construction equipment as a primary indicator of construction capacity alongside financial capability. Indigenous construction firms hence need to develop and maintain effective equipment acquisition strategies that improve their capacity to handle capital projects.
While investment in equipment can be a drain on financial resources, the benefits usually outweigh the commitments involved. Especially since equipment acquisition can be a result of outright purchase, lease or rental and not only outright purchase; this gives construction companies liberty to adopt acquisition strategies that address their cash-flow and profitability concerns.
The current growth in the market for renting and leasing construction equipment in Nigeria also presents unique opportunities for adopting flexible and low-cost equipment acquisition strategies.
In addition to increasing construction capacity, construction firms use equipment ownership as collateral for loans; while also using them to improve productivity and their profit potential. Besides these, construction equipment ownership improves the award capacity of construction firms when tendering for projects, thus qualifying them for higher priced projects.
It is worth noting that, inadequate equipment capacity limits the size and value of the project portfolio of construction companies. Hence, addressing the issues of equipment capacity is paramount in developing competitive advantage among Nigeria’s construction firms.
2. Nigeria’s Construction Firms Should Develop an Effective Funding Strategy
The primary challenge of indigenous construction companies in Nigeria has been identified as “funding” Since the construction industry is a capital-intensive industry, it is important that construction companies maintain a sound capital base to remain successful. Consequently, without a focused funding strategy, maintaining competitive advantage in the construction industry will be altogether unattainable.
These Strategies should address the issues of high interest rates, reluctance of Nigerian banks to provide loans and construction finance, effects of payment delays, risks of construction delays and abandonment. In this regard, the need to seek cheaper priced debts from sources other than from Nigerian banks have become imperative. This invariably includes sourcing offshore financing with lower interest rates, longer terms and easier repayment obligations.
Additional funding strategies will focus on finding ways to legitimately lower taxable income. One of such avenues will be prioritizing debt financing over equity financing. By using more debts to finance construction operations, the resulting cost of interests reduces taxable profits; which in turn reduces tax expenses. Furthermore, the tax laws of Nigeria currently provides more relief for companies using debts to fund operations. Paying attention to this avenue will become more crucial as we see stricter enforcement of Nigeria’s tax laws together with a greater attention on the tax affairs of capital-intensive businesses operating in Nigeria.
Results from our recent survey reveal that most CEOs of the leading indigenous construction companies in Nigeria are averse to improving their capital base by taking their companies public. Worse still is the fact that, less than 5 construction companies are listed in the Nigerian Stock Exchange. This may be a signal that Nigeria’s construction industry is either not prepared to use IPO as a critical source of expansion and funding or the industry is generally not attractive to public investors.
3. Nigeria’s Construction Companies Should Embrace International Partnerships and Collaboration
Indigenous construction firms need to build the competencies within their organisations that enable them to meet the demands of high value projects. Most times, professionals with these experience and expertise are not available locally. This necessitates looking beyond the local context to acquire these competencies. More so, recent trends reveal that project sponsors have a greater attraction to construction firms with expatriate quota. This reality is based on the persuasion that such firms would have better quality standards and technical competencies than purely indigenous construction firms. The consequence of this persuasion is the preference for foreign construction companies. Thus, giving them the latitude to dominate the Nigeria’s construction industry.
In practice, a priority requirement for selecting contractors for major capital projects is: “a high degree of technical competence”. Discerning sponsors and project managers as a result, prefer to award their projects to foreign construction firms. This is especially due to a dissatisfaction with the demonstrated competence of indigenous firms.
In addressing these issues, indigenous construction companies in Nigeria should use technical agreement relationships and international partnerships as a driving force of their competitive advantage to stand at par with foreign construction companies. This is besides their use of expatriate quotas to improve their profiles which is currently the trend.
It should also be noted that, the current move by government with the executive order 5 and enforcement of local content policies do not prevent indigenous construction firms from including expatriates in their teams.
4. Nigeria’s Construction Companies Should Reconsider Embarking on Government Projects
According to Deloitte’s 2018 African Construction Trend reports, the major capital-intensive projects in West Africa are predominantly owned by Governments; this accounts for 83% of projects in the region. From this report, Governments fund majority of the capital projects in the region.
This therefore implies that:
1. The construction firms executing these major Government projects have advantage positioning to dominate the industry.
2. By embarking on these capital-intensive projects, these construction firms have leverage and access to the financial resources required to expand their capital base and improve their financial position; thus positioning them as major industry players.
3. Only 17% of projects (by value) coming from the private sector are available to all other contractors not bidding for Government projects.
A valuable growth strategy for local construction firms looking to become industry players should involve embarking on Government projects. This is because the greatest percentage of the funding in Nigeria’s construction industry come from Government projects. On the flip side, they must find ways to deal with the attendant challenges of doing government projects especially corruption. Unfortunately, some foreign construction firms have adopted corruption as a cost of doing business to be recouped from revenues. This practice is unethical. It contributes also to why political heads prefer these foreign firms.
Besides this. other identified challenges are: delayed payments and cash flow problems, high cost of construction finance, financial demands from political heads, non-payment of interest on delayed payments, conflicting demands from multiple stakeholders and a declining demand for quality.
With proper risk management strategies, these challenges can be mitigated.
Will Local Firms Dominate Nigeria’s Construction Industry Anytime Soon?
In view of the wide gaps that currently exist in Nigeria’s construction industry, a takeover is unlikely anytime soon. This conclusion is further reinforced by the Nigerian Government’s continued heavy dependence on foreign companies to execute priority projects.
The rise to dominance by indigenous construction companies hinges therefore on their readiness to address these four critical areas. There are positive results already observed from few Nigerian construction companies already addressing these areas. Results are evident in how these firms have won competitive bids for major capital projects in recent times.
Are we expecting a disruption in Nigeria’s construction industry ?
Yes, disruptions are expected in Nigeria’s construction industry – as disruptions have become the norm. However, these disruptions will not be a result of indigenous construction firms taking over the industry.
In recent times, there has been a steady increase in the number of companies engaging in construction activities. Most of these companies are a result of unqualified and unlicensed individuals gathering construction teams to execute projects. These kinds of companies are gradually gaining grounds. We will see these unlicensed entities competing stiffly with even the top indigenous construction companies for private sector projects. In a short while also, they may find their way into winning major Government projects.
These types of disruption will be a direct result of our laxity to implement and enforce standards that regulate Nigeria’s construction industry.
At ArchVision Workgroup, we tailor our services to all clients with a deep understanding of local intricacies.
By using proven methods, we guarantee repeatable, consistent and long term success on all projects we manage.