There is a lot of uncertainty in the minds of contractors in the construction sector over the future of their relationship with government.
The contractors, who are being owed huge debts by governments both at state and federal levels for executed contracts, are in doubt as regards payment of the debts and are, therefore, treading cautiously with government.
Even though many of the contractors contacted by BusinessDay were unwilling to speak for fear of victimisation, the few who spoke on condition of anonymity expressed concern over the huge debts and the impact they have on the industry.
The huge debts are stunting the operations of the construction industry, a catalyst needed to drive the nation’s infrastructural growth, leading to limited capacity and avoidable job losses in the sector, one of the contractors said.
“Currently due to the huge government debts, there is lack of confidence in the economy which is affecting developmental projects in the construction sector,” a Lagos-based contractor working with government told BusinessDay.
BusinessDay analysis shows majority of the construction companies are not listed on the Nigerian Stock Exchange. However, a check on Julius Berger’s financial statement showed amount due from trade and other receivable stood at N101.4 billion in 2018 compared to N48 billion in 2017.
“Trade receivable exposures are typically with the federal and state governments which are major customers of the group and credit risks are generally minimised through forward funding where achievable,” Julius Berger said in its 2018 financials.
Further analysis of other receivables from construction firms showed Dangote Cement recorded a trade and other payables of N230 billion while CCNN recorded N8.8 billion in 2018.
Ramzi Chidiac, CEO of IBT Nigeria Limited, said government should give better opportunities and incentives that will attract private investment in Nigeria and not put stringent conditions to discourage investors.
In an emerging market like Nigeria, the construction sector should play a very crucial role.
Governments at various levels have continued to restate their commitments toward bridging the infrastructural gap bedevilling the nation. Despite the huge amount the government claims to have spent on capital expenditure via construction, however, growth in the sector has not been impressive.
The Federal Government allocated a capital expenditure of N2 trillion in the 2019 budget, representing 22.4 percent of the total budget of N8.92 trillion, while in 2018 N2.37 trillion was allocated representing 31.5 percent of the nation’s total budget to capital expenditure, 22 percent higher than N2.36 trillion allocated in 2017.
Also in 2016, a total of N1.58 trillion was allocated for capital expenditure, while in 2015, it was a paltry N557 billion.
Adeniyi Adewale, a project engineer at a construction and engineering firm Pivot Gis Limited, said there is a lot of corruption in the sector which is not only affecting cash flows of operations but also increasing the cost of construction.
“Sometimes when you enter MOU with banks and government concerning a specific project and due to the peculiarity of Nigeria some unforeseen cost arises which was not provided for, both parties will stop honouring agreement which will lead to high receivables from government in our books,” Adewale told BusinessDay.
Unlike other countries where construction contributes more than 15 percent to GDP, data from National Bureau of Statistics (NBS) showed the construction sector grew by 3.18 percent in Q1 2019. In full year 2018, the construction sector grew by 2.33 percent from 1.0 percent in 2017 and -5.95 percent in 2016 compared to growth of 4.4 percent recorded in 2015.
Folusho Adewale, an engineer and a project manager in one of the construction firms based in Lagos, said the lack of political will of various governments has led to the unimpressive growth in the sector.
“We have seen cases where only a small amount is eventually released for capital expenditure in a year despite huge projections in the budget,” Adewale said.
The lacklustre performance in the construction sector has also impacted negatively on the bottom-line of some construction companies and industrial goods companies listed on the NSE.
“If there will ever be any significant growth in the construction sector, the government must at all levels ensure early passage of budget, simplify bottlenecks in the award of projects, and funds meant for these projects are quickly disbursed to the contractors handling such projects. The only way to jump-start an economy is to spend,” he noted.
Nigeria’s oldest indigenous accounting firm Deloitte said the high operating costs obtainable in the construction industry which result in low profit margins have also created tax challenges for the companies as they have been unable to fully utilise opportunities for relief available under the provisions of the tax laws.
“The constant challenge in this industry is that project owners usually deduct tax at 5 percent from the entire contract sum instead of withholding only on the required percentage of the profits accruing to the counter-party companies,” Deloitte said in a note titled ‘Fiscal Challenges in the Construction Sector’.