Expectations of the Construction Sector Ahead Of 2007 Budget
 1st OCT 2006

President Olusegun Obasanjo is due o present the 2007 Appropriation Bill early October before a joint session of the National Assembly. Expectations among construction industry operatives, who are still groping for hitherto anticipated benefits of last year's heralded banking sector reform, seem mixed.

The banking sector had transited early this year into the new regime which saw the hiking of their minimum share capital from N2 billion to N25 billion, amid hopes that the move would not only strengthen the financial institutions, but also amass a huge pool of loan-able loans available for lending to local contractors and investors.

But industry operatives have been less than upbeat in their assessment of the sector's activities in the post-consolidation period, citing the continued dearth of funding and the apparent inability of banks to settle swiftly into the new dispensation as major reasons.

Other reasons adduced reflect the various perspectives of different players in the industry.

Contractors, for instance, have also spoken of such other factors as the prevailing poor institutional framework, synergy problems resulting from mergers, strident regulatory laws and poor implementation strategies for guaranteeing the effective monitoring of the reforms.

Bankers, on the other hand, are quick to blame the low tendency to finance construction activities on such factors as high interest rates and the high cost of doing business in the country.

The only apparent ray of hope, it would seem, may be found among building sector operators involved in the development of high-value residential property, who have admitted increased private sector activity in the area of housing.

According to Mr. Jimoh Faworaja, past president of the Nigerian Institute of Architects (NIA): "Generally, activity in the construction sector is low. For the past one year, banks have been going through consolidation and they are the major source of construction activities."

Indeed, says Chief Ebenezer Osoba, a former President of the Federation of Construction Industry (FOCI) and chairman, Ebcon Engineering and Construction Limited, "Privatisation is good but the implementation is faulty. Tell me, ordinarily, how many Nigerians have been able to benefit from it? Unless transparency is injected into the system, it would be fruitless."

Besides, says Chairman, Construction Group of the Lagos Chambers of Commerce and Industry, Mrs. Tawa Williams: "The banks are not willing to lend contractors money especially if such loans are to be used to service government's projects. This is because, there is usually delay in payment and as such, a lot of companies have gone under or bankrupt."

National President of the Nigerian Society of Engineers (NSE), Chief Emeka Ezeh, notes however, that though government has been spending "massively" in trying to fix collapsed infrastructure, rejuvenate the power sector and improve the road networks, the low level of local participation in projects may continue to raise questions over the actual performance of the sector.

"As much as government's efforts are being appreciated, more attention should be paid to the development of human infrastructure, which should be capable of meeting the challenge. Human infrastructure is the brain behind any physical infrastructure. When the human infrastructure is developed, over time we would see the results of good physical infrastructure," Ezeh said.

But to Akinsola Olufemi, general secretary of the Nigerian Institute of Builders (NIOB), there are other internal problems among banking institutions that limit their ability to make funding available for construction activities.

"The recapitalisation of banks would not necessarily ensure immediate cash flow into the sector. Though the exercise is making more money available to the banks, that is not to say that the banks are utilising the money for construction works." Olufemi blames merger implications, which are still being resolved among some banks for the slow performance, adding, "until it's concluded, it would be difficult for banks to go into long term projects."

A Fellow of the Nigerian Institution of Estate Surveyors and Valuers, Mr. Femi Olomola, spoke of dashed hopes from operatives who had anticipated major improvement in the post-consolidation era. "There has been stagnation in the construction industry. The cost of cement and all building materials has been consistently high. There is no excitement about the sector," Olomola says. According to him, "We were thinking that with the consolidation, the banks will be ready to finance real estate development. We are yet to see the impact.

"Probably it may be too early as some of the banks are yet to conclude their consolidation formalities. We thought there will be so much cash in their vault, so far it has turned out to be wishful thinking. Let me take it that 2006 as a settlement period for the banks. "We also thought that the recent payment to contractor will stimulate the economy and lead to greater activities in the construction industry. There had been no noticeable change in terms of performance. All the initial dreams had not materialised."

To further boost its reforms, the Federal Government this year increased its yearly budgetary allocation to the building sector by 25 per cent, in view of plans to pay debts owed indigenous contractors.

But Osoba observes that this has had little or no impact on the sector, since inflation has continued to devalue the naira. As at the time those projects were executed, he noted that "the value must have surpassed what they are being paid now and since the exercise is restricted to small scale contractors, the impact would not be highly felt. Rather, the funds should be used in settling bad debts owned to these contractors, as some of these payments are over 10 years. So what will it be worth today, considering the value of the naira?"

Contractors, say LCCI's Williams, are also yet to recover from their debt travails. "The attitude of holding on to the money meant for the contractors over a long period of time, which is being often done by the government is not in any way helpful to the industry. "I will rather want a situation whereby contracts would not be awarded without having the money to execute them. This, if implemented, will definitely reduce the issue of abandoned projects and its attendant casualties. Indeed the bane of construction industry is majorly lack of physical cash to execute any project," Williams said.

However, Olufemi sees the issue of debt payment a little differently, as he commended the debt exercise thus: "At least government is now realising that there is a human aspect to all these things."

He believes, however, that "In the long run, sponsoring capital intensive projects would be made easier since many financial institutions would have access to vast capital to shoulder some big projects. But it will depend on each sector to harness these funds to their advantage. For example, if the construction sector has a viable project, they can be sure that if they approach a bank for loans it will to be accessible but this would all depend on the criteria laid down to access these funds."

Another benefit of the policy he says is that it would encourage firms and government to go into 'mega projects'. These according to him, include skyscrapers, tunnels and bridges.

"The consolidation, I believe, will open up more construction activities because some of these banks that have not merged would either have their properties stagnant or sold, and more branches would be established for the merged banks," Olufemi noted.

Indeed, adds Osoba, the high interest rates charged by the banks is another disincentive to construction activities and even with consolidation going on, he insists a low impact would be made by the banks.

"I don't think the sector would benefit much from the exercise. The banks would only be more favourably disposed to investing in short-term projects, so they are not going to give any concession or reduce their high interest rates."

Consequently, he says, this has made it necessary to beef up plans to ensure that the proposed Associated Construction Industry Bank becomes a reality. "The bank would give loans at special rates. We hope that when it takes off, things would change around for the better. Besides, contractors would have a better guarantee for whatever agreement they enter into with sponsors."

However, there is still considerable concern in industry circles over the issue of high building materials costs. While the country produces some high quality materials, the bulk of those used are imported with high tariffs said Olufemi.

"Government has a role to play in ensuring that there is price stability, quality of materials and adequate supply. The high price of materials is responsible for the glaring disparity between the performance of indigenous contractors and their foreign counterparts. If you look at the big companies, they are able to contain some of these problems, but the local contractors are battling with the escalating prices of materials in the market," Osoba added.

However, some operators remain encouraged by the lift in performance in the housing sector. Says the NIA's Faworaja: "More developers are now into the building of estates. But then, I want to believe the level is still low, because the cheap long-term funds will only come on stream after the banks have developed their products, of which I expect property development will be one of the areas they will focus on.

"In the real estate sector, the vibrancy will depend on the capacity of Nigerian to purchase these houses. There is a lot of restructuring within the Federal Mortgage Bank (FMBN) to ensure more effective housing delivery through access to funds for National Housing Fund contributors. If FMBN and NHF restructure and the consolidated banks promote the right packages, I strongly believe the construction industry will pick up."

Despite the setbacks, other operators in the industry are also still optimistic of future prospects in the industry, which they is on its way out of the woods if the present tempo of reforms are sustained.

"The oil and gas sector, including the power sector, seems to have been picking up in the past years and we are also seeing some changes in the rail system which holds enormous potentials," adds Osoba.

He, however, has advised government to resolve the instability in the Niger Delta if it wants to succeed in lifting the sector, and also to create an enabling environment by providing more access to funds and promoting laws to standardise expertise in the building industry.

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