Steven Miller, a US architect and senior VP at Shapoorji Pallonji, a 150-year-old Mideast and Indian construction company straddling Dubai and Mumbai, outlines the company’s African push, the opportunities in construction and how one thing quickly leads to the next on the continent. Related article SSA Investments signs MoU with Ugandan trade minister for cotton revival
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1. Could you start by discussing Shapoorji Pallonji’s presence in Sub-Saharan Africa?
Shapoorji Pallonji works through two operating offices, one in Lagos, Nigeria, and the other in Accra, Ghana. Nigeria’s such a big market that the Lagos office specifically takes care of our Nigerian business, whereas the office in Ghana is the headquarters for the remainder of our ECOWAS business including projects in Togo, Sierra Leone, Equatorial Guinea, Burkina Faso, Gambia, Gabon and others. We chose Ghana in part because of its port facilities and excellent tax relationship, as well as its geographical position.
2. As a company based in Dubai and Mumbai, when did you first enter the Africa market?
We entered the market for buildings approximately four years ago – working with a sister company of ours called Afcons Infrastructure in East African countries such as Mozambique, Kenya and Mauritius. We ended up completing some buildings with them, as their primary focus is heavy lifting construction such as dams, airports, roads, and bridges. On the back of this we engaged in a number of government based projects including an exhibition facility in Mauritius, the National Assembly building in Gambia and a government house in Ghana.
Today, we share a marketing office in Nairobi, and another marketing office for building and construction in Addis Ababa. They both function differently from how things operate in the GCC and the Levant and even differently from how our offices used to operate in Libya. We’re now very active in Algeria and have plans to expand into Morocco shortly.
3. What construction sectors will have the highest demand in the coming years in SSA?
There are several markets that are very strong: the first of which is hotels, whether it’s a three, four or five-star – every brand I can think of will tell you that they expect, within the next five years, to build five of every one of their sub-brands across Sub-Saharan Africa.
A lot of the time within the Sub-Saharan market, it’s a lot easier to do design-build work than more traditional EPC type contracts, and it works – because it’s very hard for owners to understand the total spectrum of works necessary as well as experience in the field.
We also found a lot of the developers are very land rich, but cash poor – the land equity never realistically being worth more than 12% of the total value of the project – so between the banks and the operators, someone has to help them.
The banks that support African development never provide more than 65%, meaning many projects are short by up to 23%, and at this stage, we’re not of a nature to be investors.
That being said, we have invested in India. There are also competitors of ours who’ve raised major funds in the UK and in France and who are there and running around with money in their pockets. However, it can leave a very small margin for the developer, because these types of companies are going to ask for as much profit as they think they can get for the design and construction – plus they’ll want very large amounts of interest and equity positions, as their money really only acts as mezzanine financing, especially in hotels.
Realistically, most of the people using these hotels are either transient locals moving between cities the majority of whom are aware that a Holiday Inn or Radisson Blu aren’t five-star hotels, or business people who will likely be staying for short periods of time.
At the African Hotel Investment Conference last week, representatives from Marriott and Hilton posed a question to the audience: “Why do people fear three-star hotels when, as an owner, you make more money on a three-star hotel per key than you do with a five-star.”
They said, “All you 500 people attending, you’re business people coming from all over the world. How many of you use the bathtub?” No one puts up their hand. “How many people are here for an extra day either side?” Only a couple put their hands up. “How many of you only really care about having the following items in their room; Wi-Fi, a comfortable bed, good lighting and a comfortable desk chair?” Almost everyone raised their hands. “So why do we need 35m2 with a bathtub, spas, swimming pools, ballrooms, and all that added cost?”
This clearly illustrates where the market should be.
(RIGHT: Design for the Transcrop Hilton Lagos)
Another market that is in high demand is the medical sector – there’s a desperate need for hospitals, but currently neither government or private funds are providing the necessary equity to create the facilities. However, we believe that in time the sheer demand will dictate this development.
The third area is housing, because everywhere in the world needs affordable housing. Unfortunately, affordable housing in Sub-Saharan countries isn’t a market place for companies like ours. It’s a marketplace for international contractors who put everyone into fast build, simple, high-rise communities, like how they’re trying to do it in Lagos and other areas – implementing two or three level row type housing with local labour, minimal amenities and finishes that we can’t, most of the time, compete on with the local contractors in terms of price. There’s no demand at the moment for the type of quality we bring to the market within this sector. Even the affordable housing we have been developing in Saudi Arabia and shortly in UAE will be of a much higher standard.
We are, however, tendering for one brilliant concept – a Hyatt serviced apartment project on top of an office building – in Lagos. We’re also tendering for a Fairmont Hotel with an office tower and adjacent apartment tower over a retail area with a gigantic amount of parking. They’re both good concepts, but also high end and could hardly be called affordable.
4. How could you use your experience to support Africa’s affordable housing demand? caption
The standard concrete villa makes no sense in Africa, and precast makes no sense either. They work here in the GCC where you can construct efficiently and cost effectively build 400 villas in one go. These markets don’t have that kind of thing, and there’s no infrastructure for it.
We will construct infrastructure in areas of Dubai or Saudi – in fact we’ll often do the infrastructure first before doing the housing project itself – but you don’t have this system in Africa.
In a hotel we can organise all the utilities, but you can’t afford to do that even in a village of 500 houses in Africa. Who owns it? Who pays for it? How does it get distributed? If you do a vertical building it is a shared expense, fine, but we’ve not seen people willing to develop mid-rise, six to 20-storey communities that can then afford to have central chiller, power etc.
We’re only design build contractors so we can advice, but we can’t fund it. If Governments don’t, will not or cannot fund it, how are we expected to?
5. One of the major issues mentioned at the recent Africa Global Business Forum was logistics. What is your take on this and how does Shapoorji coordinate its logistics?
There are three issues. Firstly corruption: You have to be very smart and have a very strong partner. Almost everything comes in through the port, and getting your goods cleared can be very difficult. We’re also working on some specific projects, which are under urgent development, such as a cancer clinic in Lagos. We’re lucky in that we’re working with some very strong clients who are able to assist in ensuring the timely delivery of our cargo. We’ve also built relationships with local logistical companies who have their own transportation facilities and two of which are our clients now – all of these elements help us to overcome the logistical issues typical to this region.
We find bigger problems with modular construction solutions. As a port issue, we have to be careful what we import, because, as an example, modular rooms or pods imported with laid carpet could be considered contraband, or if furniture is imported, it cannot be assembled.
Countries like Uganda and Rwanda become extremely difficult to manage in terms of logistics, with cargoes having to travel up to 1800km to their destination, often by river. How do you deal with this? How do you bring your technical people in and out to do their jobs? When people say, “Africa’s cost of labour is very cheap,” people often forget that the labour is often not technically trained. There are few technical schools in Sub-Saharan Africa, and so importing technical skilled staff has been a necessity for a number of our projects. If you do use local labour, you must implement training.
Even in a country that isn’t landlocked, a given project will run at a cost of up to 18% higher in Sub-Saharan Africa than it would by comparison in Dubai. Hotel companies deal with this by adjusting their classification, i.e. a four-star hotel in Dubai becomes a five-star in Africa and so on.
6. Are you focused on any particular geographies within Africa?
Since we’re already in West Africa, we certainly want to continue working across this region. Even if the roads aren’t fully developed, there is plenty of access through the ports, and we’ve been lucky in starting in a place like Sierra Leone, where we’re in the process of completing a Hilton hotel (we have had to stop temporarily), and since which the Sheraton developers approached us with their owner hotel from the UK and started negotiations.
And because we’re in Ghana, all of a sudden it’s easy for Rezidor to approach us and discuss further projects, simply because we’re there, and the same applies to Nigeria in Lagos, Abuja and Port Harcourt – we are designing, building or discussing over half a dozen hotel projects.
Ethiopia, Kenya and Tanzania are also great markets for the hotel business and I believe it will come soon. While generally poorer, they have better infrastructure than Western Africa, with proper roads, infrastructure and shopping facilities. They additionally have a higher standard of education amongst their workforce, from labourers to engineers.
Providing we can understand and implement effective logistics, countries like Uganda and Rwanda will become very interesting as well. South Africa we’re not really interested in. They might not be the biggest economy, but they don’t need the rest of Africa in terms of ongoing development, and we could never compete against longstanding contractors and their relationships with international project managers and suppliers.
7. Do you see financing being an issue in the continents ongoing development?
Certainly, the hotel companies, in the next 5 to 10 years will have to start putting some cash into the business. They have to bridge that mezzanine financing to some extent. If they don’t, I personally don’t think they can reach the goals that are expected. I believe some of them, like Marriott and possibly Hilton have been looking to the UK market place for funding.
While development is slowly moving forward for the primary cities and port cities, we have to consider the bigger picture. What about the secondary and tertiary cities and the roads in between them all? It’s still not a total urban economy. There are 22 million people in Lagos, but in reality that is a fraction of the national population, which is estimated at 180 million.
8. What do you believe sets Shapoorji Pallonji apart from your direct competitors?
We’re there – we don’t need to test the market. At the recent hotel conference I mentioned in Addis Ababa last week, there was only one other contractor present. There were plenty of interior design and architecture companies, but only us and one other contractor. Many contractors discuss the opportunities available in Sub-Saharan Africa, but we have made an actual commitment and we look forward to increasing our business on the continent over the next decade.
Related article SSA Investments signs MoU with Ugandan trade minister for cotton revival
Turkish-based SSA Investments has signed and memorandum with Uganda in a bid to revive the country’s cotton business.