Also from GAN

Building materials and components industry in dire need of investment
Thu, 20 Aug 2009 06:56
Alitheia Capital

As predicted, in spite of the current financial challenges, there is a notable increase in activity in Nigeria’s construction sub-sector. This is primarily driven by government agencies through new public private partnership initiatives particularly in the development of infrastructure (bridges, expressways, major upgrades to airports and rail networks), and also renewed efforts to tackle the huge housing gap by collaborations with local and international developers. To this end, the federal government and various states have committed N400 billion to infrastructure projects in 2009.

Nigeria continues to rely heavily on imported building materials and components. It is reported that at least 70% of the fabric and finish of a building is not locally produced. International market forces, import tariffs and varying exchange rates are some of the factors which affect the pricing of imported products.

Importation dependency – an unsustainable “quick fix”

With a heavy reliance on imported materials, the depreciation of the naira has an immediate impact on both the supply and pricing of building materials and components. The price of steel, building ceramics (sanitary wares and tiles), and electrical components rise year on year by an average of 10%-15%. 2009 figures already show an increase similar to the annual average.

In addition to this is the often arbitrary change in import policies, particularly with regards to taxes and charges. This is further compounded by the cumbersome clearing process, causing delays and congestion in the ports. The end user bears the brunt of the inconsistency in policy and poor process implementation by paying a significant premium on all imported materials – three to four times the off-the-shelf price in other economies.

Local manufacturing – confronting the challenges

Local manufacturers run their businesses under rather challenging conditions. Chief of these is the lack of services infrastructure - power, water supply and transportation. This makes local manufacturing costly. A case in point will be the epileptic power supply. It is reported that this problem alone has kept capacity utilisation in the manufacturing sector to below 60%i, and has resulted in whole plants shutting down, as well as businesses relocating to neighbouring West African countries.

The building materials industry faces peculiar challenges – a general lack of standardisation of components means manufacturers are not able to establish "factory lines" for their products, the total reliance on imported sub-components, accessories, additives etc., and the lack of research and development initiatives which should be the primary source of manufacturing opportunities.

The problems confronting the building materials manufacturing sub-sector do not end here. Technical skills and technology knowhow add to the challenges. A recent study carried out on Nigeria's steel sub-sector reveals that the "high level of skills, technical and organisational capability, and systematic sophistication available in most Asian nations, is almost absent and has to be imported by African countries".ii

Kickstarting an industrial revolution in the building materials and manufacturing industry

Fundamental to any industrial revolution is the availability of basic infrastructure. Current measures on the part of the government in this regard must be intensified.

A government’s resolve to support the real sector of the economy is demonstrable in the policies it creates. Unfortunately, a number of existing policies do not encourage manufacturing at any scale. Tax breaks, special financing sources, and governmental agency backed guarantees are some of the ways to incentivise investors in this sector.

“Although Nigeria has attracted over $7 billion in foreign direct investment from the U.S. alone (2004 – 2009), virtually all of this is in the petroleum industry”.iii Investment in other sectors is sorely needed to diversify and grow the economy. Attracting investment in the building materials manufacturing sector will require a review and relaxation of several policies, and regulations. While foreign investors continue to show interest in the development of the sector, local financing institutions will be required to play a major role alongside government in realising this. The much talked about construction bank, fashioned after China’s Construction Bank, the world’s second largest lender (by market value) is yet to be established, several years after the initiative was recommended as the solution to funding the sector.

Small and Medium Enterprises (SMEs) that are active in the application of new technologies should be given pioneer status and accorded appropriate fiscal reliefs. State governments should include serviced industrial estates in their land allocation policy for new town developments.

A focus on establishing new, and enhancing existing specialist R&D institutions (e.g. the Raw Materials Research Institute, Federal Institute of Industrial Research Oshodi, etc.), alongside technology incubation centres supported by appropriate local and international affiliations will provide the needed impetus for the sub-sector. Application of research results on new build technology or building materials development from various institutions, both academic and public, should also be embraced by both public and private sector.

The development of fully serviced industrial parks for the purpose of providing an efficient enabling environment for small and medium enterprises (SMEs) with similar status as Free Trade Zones should be encouraged by government.

On transportation, the much touted rehabilitation and expansion programme for the railways must be accelerated. Policy consistency and processes streamlining at the sea ports are necessary to address the existing bottlenecks.

A good integration of the above recommendations into the industrialisation development strategy will help the building material sub-sector improve exploitation of the local production/manufacturing of cement, steel, ceramics (tiles and sanitary ware), paints and sealants, wiring and cable, aluminium components, glazing, alternative internal partitions, and external cladding panels.

i - CBN Annual Report & Statement of Accounts December 2007
ii - International Development Research Centre (IDRC Canada) - Report on Nigeria Steel Industry
iii - USAID/Nigeria Country Strategic Plan 2004-2009

  • This article first appeared in Alitheia Capital Real Estate Insight
  • Alitheia Capital is an investment manager and advisor. Our mission is to broaden the ownership of businesses and real estate; to this end, the company is committed to doing well, while doing good. Alitheia enables socially sustainable investing and provides the opportunity for investors across the economic pyramid to invest in key sectors of the economy via structured investment vehicles. From its base in Lagos, Nigeria, the company is focused on channelling private equity investments into businesses and real estate assets.