Pay contractors on time to avoid cost overruns – Government advised

Jean-Pierre Labuschagne, Director of Corporate Finance, Africa Lead in Infrastructure & Capital Projects at Deloitte & Touche, has called on government to employ competent advisors for infrastructure projects, and pay contractors on time to avoid cost overruns.

Presenting the 2017 Africa Construction Trends report produced by the auditing firm Deloitte & Touche in Accra, on the theme ‘A shift to more but less’, Mr. Labuschagne said: “Spend money upfront on competent advisors to work with government in developing the feasibility study and planning for the infrastructure project.

“A good study will not only outline the technical solutions but also the financial implications of infrastructure projects, the risks and the ideal procurement process. Once government is ready to go to the market for the procurement, they must be organised, efficient and empowered to make decisions quickly.”

According to Labuschagne, as long as the country remains in a high-risk inflation environment, duty-bearers must ensure that projects are priced to a specific start-date – and make sure that the start-date is not missed, as the price may change.

Blaming the cost overruns also on the cumbersome nature of tender processes in the country, he admonished that Ghana must consider a fixed price tender – which is doable if everything is in place to support the construction start-date.

“For example, if the approvals, permits and other regulatory procedures are in place and in particular the funding is ready, when the project meets certain delivery milestones, payment can be verified and disbursed efficiently,” he said.

Meanwhile, as covered in the 2016 issue of the African Construction Trends report, countries are constrained by various external and internal factors affecting economic growth as well as infrastructure and capital projects (I&CP) activity.

Economic expansion for sub-Saharan Africa’s (SSA) growth is expected to lag behind global growth in 2017 but recover somewhat to 3.4% in 2018.

This continues to affect confidence as well as available spend and budgets for infrastructure projects, as reflected by figures such as gross fixed capital formation as a share of GDP.

The research shows that nine out of 10 global megaprojects, with a value of at least US$1bn, are either over-budget or over-time.

While overruns are not limited to megaprojects, the probability of a project experiencing time and cost overruns increases with project size and complexity.

The 2017 Deloitte Africa Construction Trends Report

2017 edition of Deloitte’s Africa Construction Trends report captured some 303 projects, with each valued at US$50m or above. In total these projects, according to the report, are worth US$307bn.

It also came out that the number of projects which qualified for inclusion in the report increased by 5.9%, while the total value of projects on the other hand decreased by 5.2% year-on-year.

On the continent, Southern Africa was reported to have the largest number of projects with 93; while West Africa remains as the region with the largest share of projects in terms of value, worth US$98.3bn.

Therefore, while South Africa is the single country with the most projects at 44, Nigeria rather had the most projects by value – which were worth US$69.1bn.

Also, the greatest number of projects fall into the Transport sector (36%), followed by Real Estate (22.4%), Energy & Power (19.1%) and Shipping & Ports (7.9%).

Mining projects and projects in the Oil & Gas sector remained low at 3.3% and 4.3% respectively, as many large-scale projects remain suspended; and also large-scale investment into social development projects remained low, with only 1.2% of total investment going to the Water sector and Education recording only 0.2%; and also Social Development and Healthcare (0.1% each).

Between 2016 and 2017, there were two less Energy & Power projects in Africa and three less Healthcare projects. The number of projects in the Transport sector increased by 13 projects. The Real Estate and Mining sectors saw an increase in the number of projects, by four and two projects respectively. Encouragingly, the total number of Water projects increased by three projects.

On countries’ investments, China was seen to be the largest investor in projects on the continent as it has overtaken Private Domestic firms as the most prolific and single-country builder of projects, constructing 85 projects

It is followed closely by Italian firms, which are the next most-prominent builders with 17 projects – followed by French firms with 16 projects.

International Consortiums are busy with 12 projects while American, Portuguese and South African firms are building 10 projects each.

Overall, Asian firms construct approximately one in three projects, European firms build one in five projects. and African firms – which include private domestic firms – are responsible for one in four projects.