Tunisian construction sector set to bounce back in 2016

Unlike many economies elsewhere on the continent, Tunisia’s construction market is dominated by local firms, which are also becoming increasingly active abroad, not only in nearby countries like neighbouring Algeria, but also in parts of West Africa. The domestic market is primarily driven by government investment and, following a slowdown in 2015 – a result, in part, of low implementation rates of state-backed projects – there has been a push to improve tendering and contracting procedures, and absorptive capacity in the sector.

Economic Contribution & Performance

Construction and civil engineering GDP stood at TD3.68bn (€1.7bn) in 2014 according to figures from the National Institute of Statistics (Institut Nationale de la Statistique, INS), equivalent to 4.2% of the country’s overall GDP.

In constant prices, sector activity grew by 1.87% on 2013; over the five years to 2014, the sector grew at a real compound annual growth rate of 1.5%. However, in the first three quarters of 2015, according to the latest available data from the INS, sector GDP was down 2.8% on the same period the previous year in real terms, while sector GDP stood at TD2.87bn, €1.3bn in current prices in the first three quarters of 2015. Underscoring the slowdown, local sales of ordinary cement were down by 15% over the same period to 5m tonnes. “Globally, 2015 was a difficult year for the Tunisian construction and engineering industry,” Walid Bel Hadj Amor, deputy CEO of Comete Engineering, told OBG. While adding that demand abroad had nonetheless allowed some companies including his own to have a relatively good year.

The headwinds faced by the sector are in part knock-on effects from challenges in other sectors – such as tourism, which had a very poor 2015 following two separate terrorist incidents in Tunis and the Sousse area. “A major element of private sector construction activity was driven by tourism, which is now doing very badly,” Driss Chokri, president of the National Federation of Construction and Public Works Entrepreneurs (Fédération Nationale des Entrepreneurs de Bâtiment et Travaux Publics, FNEBTP), told OBG. Tight land availability and consequent high costs have also been squeezing real estate developers’ margins (see Real Estate overview), putting further pressure on the sector.

Market Structure

There are over 3500 construction companies active in the country, according to figures provided by the FNEBTP. The sector largely consists of mostly small and medium-sized local firms, with major international construction companies having a small presence in the market.

“Government tenders tend to be based on fairly low budgets, local firms are typically cheap and large projects are rare, so it’s hard for international firms to compete in Tunisia,” Bel Hadj Amor told OBG, adding that this acted as a constraint on market growth and inhibited the spread of new construction technologies and materials in the country.

“In order to help the market develop there is a need for regulatory changes to make it easier for foreign firms to work in Tunisia, such as putting in place regulations more oriented towards high-quality construction launching large infrastructure projects would also interest foreign firms and allow them to be competitive,” Bel Hadj Amor told OBG.

Workforce

The construction and settlements sector employed approximately 465,000 people in 2014, equivalent to around 13.5% of the national workforce. The sector has been facing recruitment difficulties in recent months, which has helped push up wages. “Despite high unemployment, the sector is struggling to find workers, as lots of young people with degrees see themselves as above construction work and aren’t willing to work in the industry,” Chokri told OBG. Comete Engineering’s Bel Hadj Amor said that as a result, the industry would struggle to meet demand should the government succeed in reducing bottlenecks currently holding up infrastructural investment. “At the moment the construction sector workforce is big enough for the number of projects under way, but if all the projects that are needed were launched, the sector would struggle to mobilise enough manpower,” Bel Hadj Amor told OBG.

Export Market

While the domestic market witnessed a slow 2015, the sector is making a name for itself elsewhere. Bel Hadj Amor explained that Tunisian construction companies are increasingly focusing on export opportunities and that many major companies are growing rapidly abroad. “Many were based in Libya but the situation there subsequently became difficult; however Tunisian firms are highly active in areas such as Algeria and Central and West Africa,” Bel Hadj Amor told OBG.

“Markets such as Cote d’Ivoire, Benin, Congo and Togo are all seeing strong growth, and we are trying to encourage firms to work there,” Chokri told OBG. “Most are medium-size firms that can’t compete with major Chinese companies on large projects; however, they can cooperate well with local firms and are cheap compared to European companies, while simultaneously having more of a European management culture than Asian firms.”

Chokri went on to explain that there is also an enthusiastic young workforce in the region, and that companies should provide training, so there is a need for a long investment horizon, but by doing so firms can become very competitive.

Quality

Tunisian companies are by and large able to execute projects to a relatively high standard, with extensive expertise in higher-end and low-rise developments. “They have lots of experience and are building very good quality high-end developments,” Fahmi Chaabane, president of the National Association of Real Estate Developers, told OBG, though he added that local firms typically lacked experience in building towers due to strict urban planning regulations that limit the height of buildings to at most twelve storeys in most areas.

However, Nadhir Ben Ammar, CEO of local developer Edifia, argued that there remains substantial room for improvement in standards. “Construction quality is getting better, but there is still a need to work to improve it further,” Ben Ammar told OBG.

Permits & Ease Of Doing Business

The total number of construction permits issued in 2013, which comprises the latest available data from the Ministry of Public Works, Housing and National Development, stood at 45,846, up from 44,705 in 2012. Available data suggests that acquiring permits is relatively easy and cheap by international standards. Tunisia ranked 57th out of 189 economies in the “dealing with construction permits” category – in the World Bank’s “2016 Doing Business Report” (with first place representing the greatest ease of doing business), down from 56th in 2015.

The construction process requires 17 separate administrative procedures, compared to an average of 14.8 for MENA countries and 12.4 for high-income OECD countries; however, the process is nonetheless significantly faster in Tunisia, taking an average 93 days, compared to 139.7 across the region as a whole and 152.1 for wealthier OECD countries. The costs involved represent 2.5% of the value of a standard warehouse, compared to 3.1% and 1.7% for MENA and high-income OECD countries, respectively.

Nevertheless, while the country scores relatively highly in the “Doing Business” report, Chaabane, told OBG that obtaining construction permissions had become a growing problem for the real estate development sector over the last four years due to the fact that acquiring a permit used to take around 45 days, whereas now it can take six to eight months, and obtaining all the necessary permits for a single lot can take two or three years.

Opportunities

A number of areas present substantial opportunities for the sector to capitalise on, including transport and logistics, and health and education infrastructure. As regards to transport, a number of substantial donor-backed road construction projects are in the pipeline.

For example, in October 2015 the African Development Bank approved $210m worth of funding for the country’s Road Infrastructure Modernisation Project, which will upgrade 719 km of roads throughout the country. This followed the World Bank’s agreement in July 2014 to provide a $230m loan to Tunisia for the construction and expansion of 146 km of roads across three projects. Recently announced projects in the health and education sector include plans announced in August 2015 for the construction of a new university hospital in Sfax, to begin this year and scheduled for completion in 2017.

The construction of social housing also represents a potential opportunity for the industry. While the pace of construction in the segment has been slow in recent years (see Real Estate overview), in October 2015 the government announced plans to build between 6000 and 10,000 new social housing units in 2016, as part of wider plans to build 50,000 units under its 2016-20 five year plan. Other major projects include plans for the construction of a new town in the Monastir governorate, announced by the government in August 2015; the town will be built on 800 ha of land and will eventually house approximately 100,000 people. In the private sector, the planned relaunch of a real estate development mega-project in 2016 could also boost market activity; in December 2015, the UAE-based Bukhatir Group said that it planned to begin work again on the Tunis Sports City project, which has been on hold since 2012. The project involves the construction of several major sporting venues and housing for approximately 100,000 people (see Real Estate overview).

Bottlenecks

However, the Tunisian state is the sector’s major domestic client with some estimates stating that government-backed projects account for around two thirds of industry turnover – and industry figures say that a lack of government spending is one of the main factors putting pressure on the sector – though not for a wont of funds.

“The government has a large investment budget but the implementation rate of budgeted projects has been low in recent years, at around 40% to 50%,” Bel Hadj Amor told OBG. “The authorities are planning to further step up investment in areas such as infrastructure this year, but if the realisation rate remains low, the environment will remain difficult.”

Bel Hadj Amor went on to add that lengthy tendering processes were among the reasons for such delays. “The authorities are working to improve the situation, but at the moment such problems are persisting,” Bel Hadj Amor added. Chokri explained that the departure of experienced civil servants from their roles had also reduced the effectiveness of the state’s administrative capacity, and that government efforts to expropriate land for infrastructure projects had become more difficult. “Since the revolution people have begun to fight expropriation procedures more, which has had a major impact. There is a need to change laws and procedures to address the situation, which will take time,” Chokri told OBG.

Tenders

There is also scope for improving the tendering process and allowing for a range of different bid types. “Tenders are currently awarded to the firm offering the lowest price, which doesn’t always give rise to the best quality work,” Chokri told OBG, arguing that there was a need for a price floor to prevent unfair competition. “If one company is significantly undercutting everyone else in the market, it suggests something is not right and can lead to unpleasant surprises as regards construction quality after the work has been completed.”

As is the case in many emerging markets, part of this could be addressed through an improvement in the quality of the preliminary studies on which government tenders are based, which according to Chokri often specified unrealistically low costs. “The administration needs to spend time on such studies and make sure they are done properly to avoid problems further down the line,” he told OBG, albeit noting that the problem was common, not just in Tunisia, but throughout the construction industry in general.

Outlook

Following a slow 2015, an improvement in the fortunes of the domestic construction market will depend on a range of factors, including the government’s ability to address bottlenecks in project implementation, the extent to which the tourism sector can recover from the major downturn it has entered since 2011, and improvements in the real estate market – which in turn depend on factors such as banking sector liquidity and the pricing and availability of affordable land.

In the meantime, construction companies are set to continue to expand their businesses abroad, and the signing in December 2015 of a peace agreement between neighbouring Libya’s rival governments offers hope that Tunisian construction companies may soon also be able to return to the market there.

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The Report: Tunisia 2016

Construction & Real Estate chapter from The Report: Tunisia 2016

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