Infrastructure Market Opening Up, China Still Dominant

BMI View: BMI's Infrastructure Key Projects Database shows that Chinese firms have gained a significant market share within Nigeria's construction industry. While the risks to international firms are high, the scale and potential of the Nigerian market is attracting more European, American and South Korean firms to the sector, especially within energy and utilities infrastructure. We expect that the residential and non-residential sector, traditionally dominated by domestic firms, will be the next target for international players.

Nigeria's inadequate infrastructure is often highlighted as one of the key impediments to the country realising its potential economic growth. Hence, the Federal Government (FG) has prioritised investment into addressing the country's infrastructure shortfalls, especially in the power and transport sectors. In tandem with public expenditure, the government is also encouraging and implementing public-private partnership (PPP) schemes as a way of financing infrastructure projects across the industry, from hospitals to roads, housing, and power plants. Such dynamics are increasingly attractive to international firms, looking to gain a market share in Africa's largest construction market.

While we note that the market remains fragmented in many cases, with smaller local firms taking the majority of projects, the push for more complex and large scale infrastructure projects has necessitated the opening of the market to international expertise. Cultural and historical ties with European states are evident in West Africa's infrastructure industry competitive landscape, with French, Italian and other European majors active in the markets. Also, Chinese firms have been extremely successful in developing strategic relationships with the FG and are undertaking some of the country's flagship projects.

Transport Dominated By Chinese And Nigerian Firms
Transport Projects By Nationality Of Main Contractor, % Of Total Number of Projects - As of 06/08/2014

BMI View: BMI's Infrastructure Key Projects Database shows that Chinese firms have gained a significant market share within Nigeria's construction industry. While the risks to international firms are high, the scale and potential of the Nigerian market is attracting more European, American and South Korean firms to the sector, especially within energy and utilities infrastructure. We expect that the residential and non-residential sector, traditionally dominated by domestic firms, will be the next target for international players.

Nigeria's inadequate infrastructure is often highlighted as one of the key impediments to the country realising its potential economic growth. Hence, the Federal Government (FG) has prioritised investment into addressing the country's infrastructure shortfalls, especially in the power and transport sectors. In tandem with public expenditure, the government is also encouraging and implementing public-private partnership (PPP) schemes as a way of financing infrastructure projects across the industry, from hospitals to roads, housing, and power plants. Such dynamics are increasingly attractive to international firms, looking to gain a market share in Africa's largest construction market.

While we note that the market remains fragmented in many cases, with smaller local firms taking the majority of projects, the push for more complex and large scale infrastructure projects has necessitated the opening of the market to international expertise. Cultural and historical ties with European states are evident in West Africa's infrastructure industry competitive landscape, with French, Italian and other European majors active in the markets. Also, Chinese firms have been extremely successful in developing strategic relationships with the FG and are undertaking some of the country's flagship projects.

China's Transport Drive

Looking at BMI's Infrastructure Key Projects Database, it is clear that Chinese firms have established themselves as the dominant foreign players in the transport infrastructure sector - although Nigerian firms maintain a solid market share. As a means of gaining access to Nigeria's substantial oil reserves China has used cheap credit to offer extremely attractive infrastructure deals for Nigeria. Nigeria has been one of the key export markets for Chinese infrastructure companies such as China Communications Construction, China Railways Construction, China Harbor Engineering Company (CHEC). In particular, China Civil Engineering Construction Corporation (CCECC) has a significant presence in the market.

Transport Dominated By Chinese And Nigerian Firms
Transport Projects By Nationality Of Main Contractor, % Of Total Number of Projects - As of 06/08/2014

Nigeria's largest construction company, Julius Berger Nigeria, is heavily involved in road and airport construction, with other smaller Nigerian firms such as  Setraco Nigeria Limited and Hitech Construction Company Limited performing well on the back of road building. European firms have been increasingly squeezed in the transport sector by the Chinese, but firms such as Salini Impregilo, Royal Boskalis Westminster, Bouygues, Effiage and Vinci have all won contracts in recent years.  

Competition Rife In Lucrative Energy And Utilities

There is a much more diverse competitive landscape within the energy and utilities sector, according to our Infrastructure Key Projects Database. While Chinese firms such as Synohydro hold around a quarter of the market, there is a notable presence of American firms like Global Edison and South Korean majors like Daewoo Engineering & Construction Company. In the same manner, technically proficient European firms such as Alstom  SA, Saipem and Siemens.  We expect that with Nigeria's power privatisation well underway, that more international utilities, especially European, will be drawn into the sector to take advantage of the potential in the Nigerian electricity market.

Power Dynamics Attracting International Majors
Energy And Utilities Projects By Nationality Of Main Contractor, % Of Total Number of Projects - As of 06/08/2014

Construction Creating African Giants

On top of the demand from increased infrastructure spending, the residential and non-residential sector is set to become the key driver of the construction industry. According to UN data, Lagos will be the 12th largest urban area globally, in terms of population, by 2025. At present, Nigerian firms dominate in terms of market share, although we expect that as we have seen in Kenya, Chinese firms will increasingly move into the Nigerian real estate market. We have already seen a number of European and American investors position themselves to invest in commercial and residential property in Nigeria's economic hubs.

The major Nigerian beneficiaries of these dynamics are the cement players. Looking at the chart below, the Nigerian cement majors have been some of the best performing stocks on the Nigerian exchange over the past year. Dangote  Cement is a company we have been watching for over a year as a rising major and is already Nigeria's largest producer. Lafarge's Nigeria operation Larfarge  Wapco, is soon to be merged with the South African arm of the company as a direct response to the success of Dangote, highlighting the growing competition within the Nigerian cement market.

Cement Building On Construction Growth
Nigeria Cement Majors and Nigeria All Share Index - Prices Normalised as of 01/01/2013

The risks of the Nigerian market should not be understated for international firms. Corruption is endemic, especially at local government level. Transparency International ranks Nigeria 144 out of 177 countries for corruption in the public sector. This is particularly troublesome for European contractors who are increasingly subject to stringent anti-bribery laws in their domestic markets which are enforceable extra-territorially.

Security has also been an issue for some time, but risks have risen markedly over 2014 with the growing presence of militant group Boko Harem in the north of the country. Various other armed groups pose significant threat to international workers and there have been numerous instances of kidnappings and attacks directed specifically at infrastructure and oil and gas companies' employees.

Finally, as much as a risk in Nigeria as elsewhere in Sub-Saharan Africa, delays in project delivery on account of bureaucratic inefficiencies and poor existing infrastructure affect most projects. From the project approval phase to the allocation of financing and payment of due funds, the Nigerian bureaucracy is burdensome and can have a major impact on supply-chain planning. In this context, firms often partner with local construction players in an attempt to mitigate some of the potential pitfalls of the Nigerian tendering process. Similarly, delays and cost increases on account of lack of power supply or building materials is often cited as a major factor eating into the profitability of projects. Nigeria's poor existing infrastructure leads to projects having to down tools on account of poor power supply, or the supply chain failing to deliver materials on time.

Ease Of Doing Business - Dealing with Construction Permits
Indicator Nigeria Sub-Saharan Africa OECD
Procedures (number) 18 15 13
Time (days) 116 171.1 147.1
Cost (% of income per capita) 3,504.80 736.8 84.1
Source: IFC, World Bank

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This article is tagged to:
Related sectors of this article: Infrastructure, Transport Infrastructure, Utilities - Infrastructure, Construction, Residential Construction, Companies - Infrastructure, Public Private Partnership, Commercial Construction, Industrial Construction, Railways, Roads and Bridges, Ports, Airports, Housing
Geography: Nigeria
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