What good projects look like in Africa: successful set-up delivers the most reward
Africa is a huge continent offering huge opportunities. With a population three times that of the USA, it boasts around 20 percent of the world’s oil reserves, 23 percent of its gas reserves and 30 percent of its mineral reserves. Foreign investors are already active, attracted to growing markets such as Ethiopia, Kenya, Nigeria, Mozambique, Tanzania and Uganda. Infrastructure, oil and gas, power, commercial and retail projects are all benefiting.
Yet Africa has a reputation as a challenging market in which to invest. Projects have overrun on schedule, costs have spiralled and decision-making has been slow, leaving some investors cautious about future programmes.
This does not have to be the case. Investors and their project teams looking to take an opportunity to market in Africa must address and plan for country-specific challenges that will impact the execution of the project later on. This holds true in Africa perhaps more than any other place in the world.
Having worked in 34 of Africa’s 54 countries over the past 34 years, we can contest to the fact that no two countries – or even provinces – are the same. However the problems encountered and their causes are common to many countries, albeit they will need a slightly different solution.
In this article we share some of the challenges we encounter on projects – and offer advice on how to mitigate against them in order to get your product to market in the shortest possible time:
1. Difficult to deliver
Aside from the usual and obvious infrastructure challenges encountered across most of the region, there are other factors to consider when deciding whether a project in Africa has real potential or not.
Assess whether the local labour force will be able to work with the foreign technologies and engineering concepts required to build the asset. Look at how the political regime over the period of your project might impact project progress. Consider that the remoteness of the project location and how this will drive up the cost of connecting to power, water, road or rail networks.
Projects that require negotiation across more than one country are particularly challenging. Project teams need to consider how they will mitigate these challenges in each country. They also have transnational challenges to face, such as aligning the timing on approvals across countries and understanding specific country goals and drivers.
An understanding of the country, continent and how all the interlocking issues will impact on your project’s delivery is vital at the feasibility stage. Without this, informed decision-making is not possible.
Armed with the right information, choices will be different. Investors should look for projects that are scalable and provide the swiftest route to market, perhaps paving the way for more challenging developments in the future.
2. Shared decision-making power
Investors will often commit to projects in a country, with support from that country’s political party, only to realise once on the ground that there are several sets of stakeholders with decision-making power to consider. In the case of a linear programme, such as an oil or gas pipeline, or a rail line, where there are multiple projects in the chain, these stakeholders can be many and varied.
We see a tendency to neglect stakeholder engagement, particularly in relation to those communities that will be affected by a project. There are several layers of people to communicate with, over and above a country’s president including provincial and local governments as well as local communities.
Our advice to would-be investors would be to make time in the very earliest stages to communicate with those communities, through someone who understands the local language and culture. Communities need to know what the project involves, how they will be involved and something about the legacy that will be left behind.
In our experience, people are not anti development per se, but like communities in any developed country, they need to be informed. If left in the dark, they can - and do - create huge problems leading to significant delays and even derailing projects altogether.
3. Unfamiliar contract forms
One common mistake is to impose unfamiliar forms of contract on African markets. Western firms may favour the NEC suite of contracts, but in Africa FIDIC is by far the most familiar.
We have seen companies run into trouble, having insisted on using NEC in line with their corporate governance. NEC was designed to be a collaborative contract form, but that requires both client and contractor to be at the same level of maturity. Without that, it can lead to challenges.
The result can be a costly court battle, played out in a foreign court. Many months, years and dollars later, the project is still not complete. We would always advise that you adapt your contracting strategy to work within one that locals have knowledge of and has been used successfully before in country.
The other pitfall contractually comes when the investor tries to impose a contract that on paper transfers all the risk to the contractor. In a new market, or with experience of troublesome projects, this is an understandable approach, however it is not always achievable in Africa. A fair contracting strategy should be backed up with knowledgeable consultants who have operated in the region previously.
In theory, it is possible to transfer risk, but in practice, if something goes badly wrong, the risk will return to the investor – at the very least as a major delay in product reaching the market. We have seen many instances where contractors have taken on too much of the risk unknowingly, and have stopped working mid project and walked away to prevent their business from going under.
If you want to avoid this challenge during project execution, you need to create an equitable contractual relationship with your supply chain, where the risks are shared appropriately and allocated to those most able to mitigate them.
Africa has a reputation as a challenging market in which to invest. Projects have overrun on schedule, costs have spiralled and decision-making has been slow, leaving some investors cautious about future programmes. This doesn’t have to be the case.”
4. Being unrealistic about logistics
Africa’s limited infrastructure means that the time taken for materials to get through ports and then onto site are in no way comparable to other markets around the world. For instance site regulations at local ports can be different to that of main ports in the same country, and in many countries the road and bridge infrastructure is unable to take the load of heavy equipment and machinery, so you will need to consider alternatives and their financial implication.
There are also limited material supplies in Africa and the costs to import goods and materials is high. These are things that investors often fail to appreciate at the planning stages, leading to project delay and cost overrun.
In Africa, the average time to clear customs at a port is between 42 and 60 days. This compares to an average of two days in some ports in East Asia. And then you can wait more than two days at some border posts.
For landlocked countries, served by insufficient road or rail networks, the transport time required for materials clocks up even higher. You need to be realistic, taking into consideration the limitations of country-specific supply chains and the demands on them.
All these aspects can be accommodated by employing logistics experts on the ground and by programming a project early on to reflect the realistic times required to get materials to site.
Investors will often commit to projects in a country, with support from that country’s political party, only to realise once on the ground that there are several sets of stakeholders with decision-making power to consider.”
5. Selecting the wrong expert
Will a local, global or Chinese contractor be the most suitable contractor for your project? That depends very much on which country you are in, the complexity of the project and whether a strong contracting presence in the sector already exists. There are many well-established contractors in Africa, many of whom have come from a global base. Using their cost effective, local skills will help you stay competitive.
An overseas contractor comes with global best practice and methodologies, but without a local presence. They are likely to add cost to the contract price because of the risks related to working in an unfamiliar market. You could say that their ’school fees’ are being paid at the owner’s expense.
We would always advise to invite one or two local contractors onto the tender list. They understand the culture and have access to local supply chains and materials. As a minimum, quotes from local firms will allow you to benchmark material and labour costs and provide insight into local contracting strategies.
If a local firm has the capacity and the capabilities, it always makes sense to work with them. They will also be able to communicate directly with local communities and supply chains and to navigate the individual permits and licences required.
To avoid the high costs of low estimates or overpricing projects, always include local commercial experts in the project team to perform part of the due diligence and estimate reviews.
Some investors have encountered problems in the past when working with Chinese contractors, most commonly in the areas of health and safety of the workforce, leaving a lasting legacy for the local communities and the increased operating and maintenance costs of assets built. While most Chinese contractors are now more aware of the standards and practices required and are very competitive in certain sectors, they may still need support in terms of developing the right contracting strategy and achieving compliance and this needs to be addressed early on in the negotiation.
6. Managing projects remotely
Where an owner has employed a turnkey form of contract, such as EPC, the temptation is to sit back and manage it remotely. Project teams are often lean, in order to limit overhead costs.
Experience has demonstrated that this is a false economy. With an EPC – rather than a standard – contract, the risk is that problems are revealed much later in the day, when the ability to find solutions and limit damage will be far less. Particularly where owners have not adequately addressed the project controls and assurance aspects of the contract.
We have seen situations where reports from the EPC contractor have reassured a client that all was going to plan, when it fact the project had been slowly unravelling for months.
To avoid this, without exception, we advise would-be investors and project teams to make provision to employ project controls people locally who can carry out monthly checks to oversee and assure the project. As a general rule of thumb for Africa, the further you are from home, the stronger the team you need on the project.
As well as flagging up problems as they arise, a strong controls team will also be able to come up with strategies to help limit the damage arising from those problems. For instance, rescheduling and re-sequencing when delays in deliveries occur.
7. Not knowing what you don’t know about compliance
It is not difficult to comply in Africa with local regulations, such as building licenses or permits, localisation requirements and taxes, but we have seen many projects fall foul in this area simply because the investor was not aware of the regulations when contracts were let. The impact of getting compliance wrong in Africa can be as minor as a fine or as serious as arrest.
On one large project, officials discovered that for three weeks, two of a subcontractor’s employees had visitor’s visas. As a result the whole site was shut down while checks were carried out on every single person on site. This could have easily been avoided had the information about working regulations been written into the subcontract.
It is also important to understand that local governments have different capabilities when it comes to processing permits. If your project is complex, or unfamiliar, it will pay to surround yourself with relevant, local companies that have in-country specialists to deal with these issues.
Focus upfront for success
In order to make the most of the opportunities that Africa offers – and there are many opportunities and success stories - it is important to ensure that you have the right commercial, project management and soft skills in your project team, alongside the technical ones.
Equally important is to allow these experts to start considering the issues above at the earliest possible stage of the project, as soon as the technical design work begins rather than waiting until you mobilise on site.
More effort is required upfront during project set-up, but this does not mean a huge uplift in overall project costs... and the benefits that those costs will accrue down the line mean that this is the only way to successfully approach projects in Africa.
More effort is required upfront during project set-up, but this does not mean a huge uplift in overall project costs... and the benefits that those costs will accrue down the line mean that this is the only way to successfully approach projects in Africa.”
Turner & Townsend in Africa
Turner & Townsend has spent the past 34 years striking the balance between a replication of our global business model and an adherence to local considerations in Africa.
Our business’s market advantage and differentiators are derived from understanding clients’ requirements, building strong relationships with them and delivering projects with quality and consistency across the continent. We are able to offer a portfolio of services that are the right fit for projects in Africa because:
- Our support is relevant because we have extensive experience with African challenges and the ability to deliver consistency for global clients
- Our solutions are realistic and take into consideration the limitations of and demands on country specific supply chains
- Our reporting is robust and we make sure that sufficient levels of reporting and relevant project details are produced to enable appropriate management of projects within country and remotely
- Our resources are scalable and we can easily adapt the requirements for our experts to suit a project’s changing environment
- We offer a competitive service that uses our local people from offices in eight African countries, who leverage global best practice methodologies and processes to deliver a quality service to global standards.