Eight Reasons Why Projects Cost More in Nigeria

Within the last one year, we have seen some public discussions around the cost of certain projects in Nigeria. Whether it is the Ajaokuta – Kaduna – Kano (AKK) gas pipeline, the Lagos metro line, or the recent brouhaha about a road awarded by the Abia State Government to Julius Berger, there are allegations of the contract sums being inflated. Now, we clearly have a corruption problem in both public and private sector procurement, however, here are eight simplified, non-corrupt reasons why a project may cost more than we think.

• Scope (What’s included?)

In most attempts to compare project costs, we see a failure to consider that no two projects are the same. A 12-inch pipeline would not cost the same as a 40-inch pipeline, neither would a 2-lane road cost same as a 6-lane road. Similarly, the specifications matter. A bomb-proof shelter would not cost the same as a similar sized bungalow. Scope considerations also include things like training, material types and sourcing, legal requirements, ongoing operational support, features like drainages on roads, etc. So, before we do a straight-line comparison between two projects, we should ask what is included in each project. At best, we can get a rough, ballpark estimate, but the scope specifics can drastically alter the cost.

• Security (Do we need firepower?)

Unfortunately, this is a significant cost element in many projects. Some organisations have journey management plans that require adequate security cover before personnel can proceed for any activity. Recently, a privately funded project in Imo State was impacted by gunmen attacking and killing contractor personnel at site. Similar events have occurred in several other states. So, imagine a project somewhere in the Niger Delta that requires military gunboats as escorts. At current rates, a company likely needs over a million naira a day just to hire a pair of gunboats. This excludes expenses for security personnel in trucks to accompany personnel on the roads. Similar expenses would be expected if you have a project in other volatile areas like say Niger State where you may need to pay the military to provide mine resistant vehicles and gun trucks. Even in seemingly safe states, security considerations still add to project costs.

• Terrain (Where are we?)

A road constructed in arid Kaduna would likely cost a lot less than a road in water-logged Port Harcourt. A pipeline going through dry ground in Warri would likely cost less than another pipeline going through a swampy area in Warri since the latter would likely need some form of buoyancy control like concrete weight coating to force the pipeline to stay in the ground. The geotechnical characteristics of a place can drastically increase the cost of a project compared to other locations. Even something like rainfall can make a difference in costing. A project in say Kano with a lengthy dry season would likely cost less than a project in Bayelsa where a contractor should factor in how to manage almost year-long rainfall.

• Financing Cost (Can we manage cashflows?)

Projects need to consider things like interest rates for financing activities and the length of payment cycles for invoices. For example, let us say we have a hypothetical project with direct cost elements totally $1 million in the United States and Nigeria. A US Contractor can get loan financing at maybe less than 5% interest rate, while a contractor in Nigeria may be looking at over 20% interest rate. By default, we already have a significant markup in Nigeria. Also, many Nigerian contractors must worry about invoices taking months to be paid. All the delay gets priced in and added to the cost of the project. If it would cost me ₦1 million to do a project in three months, but I know from experience that I would likely get paid in nine months, I would price the cost, plus loan interest for maybe one year, plus a profit margin to get my quote for the project. We can clearly see an important driver of higher project costs in Nigeria.

• Community Settlement (Something for the boys?)

Nigeria is a unique place where you can be awarded a contract to construct a road, but the host community would demand a financial settlement before you are allowed to mobilise to site. We have quietly permitted something called “Freedom to Operate”, which is issued by a host community after some “leaders” have extorted the contractor in the name of the community (without anything getting to regular community members). As if this is not enough, in areas having thugs seen as overlords, a contractor may need to settle such thugs to secure safe passage for personnel, equipment, and materials. We have some of these overlords who would demand to see the contract for a project and require a percentage of the contract sum as their share to be paid, else work cannot proceed.

• Local Content Requirements (Buy naira to grow the naira?)

The Nigerian Content Act was enacted to grow local competence and while it can be argued that significant improvements have been made in local competence, complying with local content rules mean that even where foreign alternatives are cheaper whether due to greater operational efficiency or subsidies enjoyed by foreign firms in their countries, the constraint to use Nigerian firms sometimes means paying a higher amount for projects. Asides the official constraint by law, some community leaders demand that contractors procure certain materials through them or their designated suppliers, even if the contractor may be able to leverage on economies of scale to procure such items cheaper. The cost of this enforced inefficiency finds its way into the cost of projects. 

• Risk Premium (Reward for perceived gambling)

Nigeria has a relatively higher risk premium than several other countries due to factors such as security and political instability. In a clime where a new government can come in and cancel a project, you would find contractors pricing in this risk into the project cost. The same issue exists with payment assurance already discussed above. The Delta State Government recently awarded a contract to Julius Berger to be paid via an Irrevocable Standing Payment Order drawn on the state’s monthly federal allocation. Clearly, the contractor was not certain of payment and so asked for this guarantee. However, few contractors can get this guarantee, so the “guarantee” gets embedded in the contract sum.

• Expatriates (Can Nigerians do it?)

Whereas Nigeria has made immense strides in upskilling its citizens, we still have several areas where there are not enough Nigerians with expert level skill, especially where relatively newer technologies are involved. For example, Nigeria has a lot of welders but many of them qualified on manual welding techniques. So, if you need welders qualified in using automatic welding techniques, the pool of qualified Nigerians is small relative to the number of projects that require them. Hence, we must bring in foreigners paid in several multiples of what a local would earn and this can be a significant cost element in some specialised projects.

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Having presented these eight reasons, hopefully we can better understand some of the issues behind differences in projects’ costs in Nigeria. Government entities have nurtured accusations of padding by failing (or refusing) to properly communicate project information to the public asides from announcing a total cost. However, while we must not necessarily accept any cost that is announced, we should not automatically allege corruption without facts. A better route would be to demand for details of interested projects such that some independent assessment could arrive at a rough estimate of what a project might cost given its specific circumstances. Media organisations also need to do better by consulting experienced professionals to critic project costs rather than having some untrained presenter or columnist discussing issues beyond his or her knowledge. At the end of the day, I hope we all want a nation that works, where major projects meet quality standards at a fair price.

PS. In this article, where any claim has been made that a kind of project would cost less or more than another kind of project, it is with all other variables considered constant (i.e., only one specific reason is being addressed at a time).

Image Credit: mymanagementguide.com