Construction Industry in Africa essay
|← Definition of Words||Competitive Strategy →|
Construction Industry in Africa. Custom Construction Industry in Africa Essay Writing Service || Construction Industry in Africa Essay samples, help
Construction industry is one of the pillars of industrial development. It spurs economic growth and provides job opportunities for many people. Construction products provide physical infrastructure and are considered as capital goods, which form an important base for development. It is widely recognized that construction projects, especially those related to infrastructure development, have a large contribution to economic growth and poverty reduction in developing countries (Zawdie & Langford 2002). The World Bank (1994) estimated that a percentage increase in the infrastructure stock is associated in the same percentage of GDP increase. When oriented to the needs of the poor, construction industry is crucial for providing better housing, health, education, transport and supply of utilities, such as water and electricity.
The scope and level of active construction in a country also reflect a current economic development of the country. In many countries, construction comprises 50% of total investments in capital goods. About 7% of GDP in developed countries is channeled to construction, while this figure for the Sub-Saharan Africa is 5% (World Bank 1994, Zawdie & Langford 2002, p.2).
Construction projects face many challenges, but the problems are more widespread in developing countries given their state of socio-economic development. Challenges of the construction industry in Africa are more pronounced as the continent has often been characterized by economic stagnation, lack of resources, environmental calamities, low institutional capacity and high poverty rates. Most of the African nations have relied on investments or technical support from their formal colonies to develop their construction industries (Rwelamila 2000, p.1).
This paper will put forward and analyze main challenges faced by construction industry in Africa. A special focus will be put on Sub-Saharan Africa (SSA) to outline its obstacles and improvements in the industry. Initially, the paper will present challenges that are common to the African construction industry as a whole. These challenges include poor capacity of public institutions and of local construction companies, overdependence on foreign construction firms, high competition from international market, environmental problems, shortage of construction materials, corruption and cultural differences. Some of these problems will be delineated in the context of SSA. Finally, the paper will outline some successful changes in the SSA construction practices and present concluding remarks.
“Construction” is a general term that extends to wide range of activities. For the sake of clarity, the word “construction” in this paper is related to one of three main different levels of construction output. First is the construction of civil engineering sites, such as roads, dams, railways, ports, water supply, power stations and sewerage. These projects comprise up to 50% of GDP’s total construction share in most countries. These are usually enormous initiatives requiring huge funds. In case of African continent, especially Sub-Saharan Africa, these funds are often provided fully or partially by foreign investors or donors, who usually contract international companies to do the construction works. Second level is commercial housing and property-related construction, which accounts for 30% of the construction GDP. Given the rapid population expansion in Africa, there is a growing demand for these construction products. However, the supply does not keep up with the demand due to the shortage of construction resources and other problems that will be discussed further. The third set of construction activities involves erection of buildings for various uses, including hospitals, schools, offices, factories, hotels, health and sport centers, etc. These activities account for around 20% of the construction GDP (Zawdie & Langford 2002, p.2).
1. General Challenges of the Construction Industry in Africa
There are many challenges that are faced by the African construction industry. This section tries to outline most notable problems that are characteristic to the whole continent. More specific problems will be discussed under the SSA construction industry.
1.1 Weak Capacity and Inefficiency
The development of construction industries in many African countries does not keep up with the progress of international construction business and emerging needs of local economies. In general, construction industries in Africa are characterized by weak capacity. The term capacity here is broad and includes institutional capacity (e.g. capacity of government agencies and regulatory bodies), training and skills of personnel in construction firms, effectiveness and efficiency of decision-making mechanisms, coordination, planning and implementation both within the companies and in the construction market overall.
Most countries of the continent continue to practice orthodox top-down policies with little concern about the needs on the ground. Lack of trained and skilled personnel is another constant woe in the African industry. In addition, lack of long-term plans, weak management strategies, scarce funds and absence of risk analysis result in numerous failed, inadequate or inefficient projects. For example, wide rural roads are built when narrow roads would be sufficient; costly capital-intensive projects are implemented where smaller or labour-intensive projects would be more cost-efficient. The situation is aggravated by absent, inadequate or weak legislative framework in most of the countries. Many projects are not properly monitored and quality control is inadequate. To make things worse, many of the existing infrastructure projects in the region represent risky investments with low return rates and weak impact on economic development (Zawdie & Langford 2002, Rwelamila 2000).
Not all the challenges described above equally exist in the African continent. Relatively wealthier countries of North Africa, as well as the Republic of South African, face the above problems to a lesser extent as their economies are more advanced and they have more robust construction market and better expertise. The following table illustrates the scope of common problems in construction projects across different developing regions.
The table shows that out of fourteen observed projects in Africa (excluding North Africa), at least half of them reflected inadequate manpower, lack of political and public awareness, gaps and duplication of practices, lack of coordination, poor monitoring and inadequate legislative framework. Lack of skilled personnel, poor coordination and weak monitoring were found as the most common problems in the African projects. The prevalence of these problems in Africa is in striking contrast to most other regions included in the table. The data on Middle East and North Africa show that two or less projects out of the five monitored had the stipulated problems. Although the difference in the number of projects observed in North Africa and the rest of Africa may not lead to convincing conclusions, the numbers imply that SSA experience the problems to a larger extent than the North Africa does.
The next figure illustrates the correlation of GDP per capita and infrastructure stocks per capita for different countries. It is clear that the higher is the GDP per capita, the higher is the corresponding number on infrastructure. The causality can be two-way: high GDP can increase infrastructure output, and infrastructure projects can stimulate economic growth and increase GDP. The countries of SSA are positioned at the bottom of the diagram, as given their low GDPs, they also face low infrastructure output.
1.2 Foreign Competition and Dependence on International Companies
Given the underdeveloped state of the construction industry, most of the African governments rely on international firms to implement complex and large-scale construction projects. Moreover, the globalization process has opened many doors for wealthy construction companies to enter the markets in developing countries. Construction market has become international business and depends on many inputs (such as building materials and machinery) from different countries. A large dependence on foreign companies, however, is a two-edged sword. On the one hand, international companies provide a better quality and are less risky. Foreign donors, like the World Bank, often prefer reputable international companies for their credibility. Apart from importing their construction products, multinationals also bring expertise, management skills and technical innovations into the developing countries. Besides, they provide short-term job opportunities for many local workers. In addition, host countries often require international companies to engage local contractors or establish joint ventures with local firms in order to develop capacity of the domestic construction industry.
On the other hand, internalization of the construction industry and overreliance of the African governments on the foreign contractors led to increased competition from foreign companies in the market. Consequently, many local firms lose their ground as they cannot compete with the experienced, equipped and capital-intensive multinational companies. To aggravate the situation, many foreign construction companies are reluctant to establish joint ventures and prefer to operate alone. Sometimes, international companies yield to establishing joint ventures or accepting other government conditions just to make things easier and get access to the new market. Over time, they try to strengthen their presence and expand their influence on the government and the market. Meanwhile, they may not show high commitments to the joint venture arrangements, restricting the transfer of knowledge, technology and experience to local firms to prevent any competition from the domestic market (Zawdie & Langford 2002, p.7). In these cases, government reliance on international construction companies is destructive to the African industry.
1.3 Detrimental Environment and Shortage of Materials
Africa is notorious for its fragile environment and harsh weather conditions, which hinder construction works. Frequent draughts, land erosion, desertification, aridity and salinization, which are combined to other extremes like flooding, lead to land degradation and water shortages. This situation is exacerbated by the lack of wood and other sources that are used as construction materials. Environmental calamities and lack of water and other resources also result in social and political instabilities and conflicts, further hampering economic progress, including construction development.
Africa’s large population and high fertility rates increase pressure on limited resources. High urbanization rates adds additional burden on infrastructure, such as water supply, sewerage and waste management. Construction does not keep up with the population growth and many people live in outdated and primitive housing with very limited basic living arrangements. On top of it, millions are homeless or live in fragile and health-threatening environment. Providing construction products to the increased population with limited resources is one of the major challenges of the African construction industry. The industry must be sustainable to meet the needs of the future generation without sacrificing the nature and the environment.
Corruption is pervasive and debilitating obstacle in the African economies. It is widespread and affects the performance of construction industry as well. A recent case in point can be Kenya, where the World Bank (2010, p.34) reported that government officials deliberately kept thousands of land files in their offices with a hope to get bribes through granting permissions.
Corruption can be tackled only with comprehensive measures that include institutional reforms, economic development, labor reforms and change in mentality via education campaigns.
SSA construction markets and companies differ from those in the West not only by the level of development and capacity, but also by culture. Studies have shown that every organization, institution and market, including those related to construction industry, have their own culture, which determines how they operate. Rwelamila et al (2000) asserts that when international companies or investors ignore cultural traits of procurement and working mechanisms in the SSA industry, construction projects have bad performance. It is pertinent for foreigners to recognize cultural differences and work ethics in SSA and understand how to interact with local contractors and suppliers (Ofori 2002).
Being one of the least developed regions in the world, SSA faces numerous obstacles in its construction market. In addition to the general challenges outlined above, this section will summarize and discuss specific challenges characteristic to the construction industry in SSA. In addition, few success stories in the region will also be touched upon.
2. Problems and Successes of the Construction Industry in Sub-Saharan Africa
The literature review revealed the following common problems of the SSA construction industry.
First, the industry is largely fragmented and scattered with little coordination. Together with other problems, this obstacle prevent the construction sector in the region from evolving into a functional industry (Ebohon & Rwelamila 2001, p.8).
Second, there is weak institutional capacity to regulate the construction industry in SSA. Normally, state institutions need to introduce “rules of the game” in order to allow the industry to function properly. In order to ensure that contractors and construction firms adhere to their obligations, there must be designated public institutions with capacity to regulate and enforce the rules. In case of SSA, however, there is a shortage of solid regulatory framework and policies to control the industry. In addition, there is a lack of qualified personnel and managers to regulate or reform the industry (ibid., p.9).
Third, the SSA construction industry is characterized by the lack of skilled and professional staff, which hinders application of modern management and technological practices to construction projects. This is exacerbated by the fact that majority of construction companies are run by single entrepreneurs without sufficient expertise in the construction techniques. Many of the construction businesses are unregistered and function in informal sector, lacking corporate management practices. Thus, most construction companies in SSA are somewhat transient with very mobile workers, who enter or exit the industry based on its growth and employment opportunities (ibid., p.9). These conditions hamper the retention of skilled workers and professionals. The lack of knowledgeable personnel and high flow of labor in the industry creates the atmosphere of apathy and adherence to old-style colonial construction practices. This is particularly vivid in construction-related procurement practices in SSA, which do not meet the needs of modern construction industry and its dynamics (Rwelamila 2000, p.2). Contractors have increased difficulties to deal with complex tendering mechanisms and documents. Therefore, lack of training and expertise, inadequate procurement practices and shortage of management skills stifle the construction industry in the region, adversely affecting the quality of construction services.
Fourth, SSA has unfavourable environment for modernizing its construction industry. Specifically, it lacks entrepreneurial initiatives and the scope of projects needed to keep the industry at required pace of development. There is an overreliance on government orders and small private sector to initiate commercial projects. Availability of government projects depend on the state budget, which is sensitive to foreign funds. As a result, it perpetuates unpredictability, short-term orientation and high mobility of workers in the construction industry. The informal approach to construction practices and the lack of long-term strategic planning hinder investment opportunities in the industry. This creates a vicious circle. The industry does not attract investments because of the uncertainty, unpredictability and high demand fluctuations. In turn, due to the lack of funds, construction activities stay on small-scale level, unable to purchase expensive materials and attract high-skilled professionals, and incapable of producing long-term strategies (Ebohon & Rwelamila 2001, p.10).
Fifth, the construction companies in SSA often face delays in payments from government and burdensome contract conditions that are beyond their capacity. Often, the late payments push construction companies to the brink of bankruptcy (ibid., p.10).
Sixth, political instability in some of the SSA countries endanger the profitability of construction firms. For example, the new regime may refuse to follow contract issued by the previous government or reject any obligations assumed by its predecessors. In worse cases, the new political situation may lead to violence and chaos, forcing the construction companies to abandon the projects without any financial compensation. Thus, the industry is highly vulnerable to current political processes.
Seventh, the lack of natural resources in combination with environmental problems, such as draught, result in the shortage of construction materials and underdeveloped infrastructure to establish supply chains. There is a high reliance on imports for some construction materials. Moreover, giving the fact that construction industry is very resource-consuming, it poses enormous burden on the SSA environment and further depletes its limited resources. As a result, the materials become more scarce and costlier (ibid., p.11).
Eighth, the fact that many local construction companies operate in informal business, they are not registered and do not pay taxes. This also means that they cannot be subjected to fiscal regulations or incentives.
Ninth, weak supervision and lack of continuous maintenance is yet another woe. Many projects might be doomed to become waste due to the lack of maintenance and follow-up activities. The World Bank (1994) reported that one third of the roads completed in SSA for the past two decades are laid to waste due to the lack of capacity or will to upkeep them. Most of the SSA nations lack institutional capacity, political will and adequate expertise to produce sustainable infrastructure (Zawdie & Langford 2002, p.7).
The above problems resulted in dualistic or two-tier structure of the SSA construction industry. The first tier is the local construction companies that operate on a lower level by taking small-scale and low value-added projects. The second tire is the set of international or foreign companies who take more expensive and bigger projects (Ebohon & Rwelamila 2001, p.12).
The severity of the above problems differs depending on the SSA country. For example, Zawdie & Langford (2002, p.5) report that Kenya is relatively good in regards to availability of construction firms with skilled staff that can be engaged in all stages of construction projects. One of the main problems in the country seems to be lack of building materials and their cost. As a result, builders usually rely on more affordable lower-quality materials that do not produce high-quality construction output. Contractors are also reluctant to engage in projects that require large high-quality material input. In contrast, Tanzanian construction industry usually faces shortage of local construction companies. The main reason for this is that the high-end construction and civil engineering market is monopolized by foreign-run firms. Very few domestic contractors are willing to undertake complex projects. In case of Ghana, there is overreliance on imported building materials, which are sensitive to exchange rate fluctuations. The industry in the country suffers from the lack of local materials and skilled manpower. Lack of training and financial incentives has led to largely unskilled labor in the industry. Nigeria also suffers from lack of skilled workers and inadequate planning in construction projects. In addition, there is poor regulation in the industry, which is characterized by large amount of small companies ripe with inefficiencies. In case of Ethiopia, there are numerous challenges in the industry, including lack of expertise and professionalism, scarcity of equipment and machinery, lack of control over projects and occasionally, detrimental weather conditions (ibid., p.5).
A case in point for failed construction projects can be turnkey contracts awarded to various local companies by the Ethiopian Road Authority in 1993. These were contracts for 15 projects to build rural roads and involved the stages of planning, designing and implementation. The projects were expected to be delivered in 3-5 years. However, in five-year time, only one project was implemented fully and one of them was not started at all. In general, the projects received a rating of 25% for implementation. As a result, some contracts were terminated and few of them were allowed to continue under strict supervision (ibid., p.5).
On a brighter side, there are some success stories in the SSA construction industry. Despite all the obstacles, many local contractors remained resilient and became an important pillar for small- and medium-scale projects across different countries of the region. Many local firms have emerged in a number of SSA countries. For instance, there are more than 700 registered national construction companies in Ethiopia. In some countries, the domestic firms are supported by national governments that introduce additional barriers for foreign companies to enter the construction market or additional rules requiring foreign contractors to engage the local firms (Abate 1997).
To improve the regulatory framework and increase coordination in the industry, some dedicated regional and national agencies and partnerships have emerged in SSA. Examples of these agencies can be the African Construction Industry Council (ACIC) in Malawi, the Construction Industry Development Boards (CIDB) in South Africa and the New Partnership for Africa’s Development (NEPAD) (Rwelamila 2000).
South Africa is also a good example of establishing public-private partnerships to stimulate the construction industry (ibid., p.3). The government of the country has recognized the huge challenges of the construction industry and introduced measures to stimulate small and medium-sized businesses in the market. Special initiatives were introduced to provide local contractors better access to funds and loans (Martin 2010, p.12).
In addition to South Africa, other SSA countries made significant progress in construction reforms. In fact, in its Doing Business 2011 Report, the World Bank (2010) concluded that SSA is one of the leading regions in improvement of the construction business. For instance, the Democratic Republic of Congo (DRC) ranked as the top country in handling construction permits in 2009-2010, reducing the time for granting the permits from 248 days to 128 days in one year. DRC enacted legislative reforms that speeded up the processes and reduced the costs of construction projects (World Bank 2010, p.26). Ghana is another country credited for massive reforms through improving registration process, reducing time for property transfer and introducing financial sources for companies operating in the industry. In addition, three SSA countries - Rwanda, Cape Verde, and Zambia – were placed in the top ten countries in the world that improved their economies and provided more opportunities to start business in general (ibid., p.6).
The paper has shown that the African construction industry is marred with problems and obstacles. The industry suffers from poor capacity, which includes capacity on a top level (legislative, judiciary and executive agencies) and company level (training, skills and material assets). Overdependence on international construction companies and increased competition from outside are other challenges that stagnates the domestic industry. Unfavourable environment, harsh weather conditions and lack of resources and building materials aggravate the situation. Furthermore, pervasive corruption stifles the construction business, and specific cultural traits make it difficult for foreign investors to operate effectively in the market. The challenges are more pronounced in the SSA, which is the least economically developed region in the world. The region has its own peculiar obstacles that prevent the construction industry to be sustainable.
Despite the challenges, some recent trends show significant positive changes in the SSA industry. Small and medium-sized local construction companies have become a driving force in many SSA countries and manage to stay resilient to the unstable social, political and economic environment. In addition, some governments started to recognize the existing problems and reform the system. Dedicated agencies and partnerships have been established on regional and national levels to set regulatory framework and long-term strategies for construction industry. Furthermore, some SSA nations have ranked among the best countries to implement reforms in the industry, reducing inefficiencies and enabling more opportunities to enter and operate in the construction market.
Governments remain a crucial force to improve the industry. Many local contractors depend on government projects and regulations. Thus, there is tremendous opportunity to stimulate the growth of domestic construction industry through the government contracts, grants and incentives. Political will and prudent public policies are pertinent to initiate needed reforms and raise capacity of local firms to implement complex construction projects.