Algeria focuses on transport infrastructure and housing

 

As a key industry for Algeria’s economic development and diversification, the construction sector’s growth forecast remains positive despite the slowdown of the wider economy. There are major projects in transport and housing in the pipeline, though a flatter rate of expansion is expected due to investment cutbacks, and the buoyant curve of the sector’s inflow throughout 2012-16 has begun to dip.

With the aim of building on previous advancements, the government launched a €233.7bn five-year investment plan (2015-19), which should ensure sustained expansion in construction as far as 2021.

However, with oil prices remaining relatively low for the last three years, Algeria faces subdued revenues and a shift towards austerity. This has led the government to put several projects on hold and resort to using the country’s sovereign wealth fund to meet expenditure commitments.

Contribution & Funding 

The construction industry’s contribution to GDP was nearly 6% at the end of 2016, upheld by earlier large-scale investments. In October 2017 the government stressed that housing and infrastructure development are key priorities, and the 2018 budget will see an 8% rise from 2017 in funding allocated to social transfers, including social housing. In the Finance Law of 2018, AD384.9bn (€3.2bn) was allocated to housing.

For the first quarter of 2017 the growth rate of the buildings, public works and water segments fell to 3.7%, from 4.4% in the same period of 2016. Moreover, low oil prices have affected the hydrocarbons sector, which is vital for domestic construction. The growth rate of infrastructural development of the energy sector dropped year-on-year in the first quarter of 2017, from 4.7% to 4.4%. Works in the pipeline across these sectors are being rearranged, and reprioritisation has halted many projects.

Ricardo Acabado, general director of Portuguese building firm Teixeira Duarte’s Algerian office, told OBG that elements of the five-year plan have been delayed. “Projects such as the Sports Stadium and the 50,000-unit housing scheme in Constantine have been brought to a halt. Others with less feasibility, which were in the pipeline because of the economic boom, have been set aside for redefinition.”

The downturn in the oil market has resulted in a lack of liquidity and delays. Over 70% of ongoing construction projects have payment delays of six months to a year. Nonetheless, public entities are providing leverage for companies to venture into public calls for tenders. National petroleum company Sonatrach – along with Sonelgaz, the state-owned utility in charge of electricity and natural gas distribution – has a $50bn investment plan for 2016-21. The hydrocarbons exploitation activities of these two companies entail a constant need for the construction of energy plants, housing to accommodate workers, transport, infrastructure and more.

To meet the demands of a dense, rising population that mainly resides on the northern coastline, the government has identified the development of transport infrastructure as vital for economic growth. There are several projects on the horizon for 2021, including the enhancement of ports and rail networks, while the National Roads Agency is providing financing for the expansion of roads.

Investment 

The budgetary scale-down has resulted in long delays for companies in recovering their investments, affecting their balance sheets. In May 2017 information on the effects of the drop in investment was released by the General Association of Algerian Entrepreneurs (Association Générale des Entrepreneurs Algérien, AGEA). The association encompasses more than 1600 companies in the construction sector and, according to its assessment, around 60% of these were experiencing difficulties.

AGEA estimated that the overdue amount reaches AD750bn (€6.2bn). Often companies cannot afford the costs of non-payment, resulting in the temporary ceasing of activity. When a project is paused the banking system does not allow the extension of credit immediately, and resuming works can take up to three months. Working with or for public entities can be unappealing for companies, and the market is seen as lacking in competition and possibilities for new stakeholders. The government filtering process has screened out many firms and discouraged some entrepreneurs aiming to access the market.

Few players have been able to avoid the impact of constraints and cutbacks. The economic situation is having a draining effect on the construction industry, and the smaller firms that manage to pull through are increasingly rallying under bigger ones with the capacity to sign contracts with state entities. “Today’s solid companies in Algeria are the ones that have survived the impact of the crisis through adaptation and diversification,” Rachid Bouabdallah, managing director of DOKA, a producer and supplier of wall and slab formwork, told OBG.

Housing 

Population growth and rapid urbanisation have seen the government draw on public investment to meet rising housing demand. The ever-growing inflow from the countryside to urban areas is a challenge that the government addresses through subsidised housing provision.

Supplying affordable properties at a rate that matches the current pace of growth of Algeria’s cities requires the synergy of various national industries, as new housing needs to be followed up by social and logistics infrastructure to cover health, schooling and transport. Hence, despite budgetary limitations, housing programmes remain a priority for the government, both politically and economically, especially in the growing metropolitan areas of Algiers, Oran, Sétif and Annaba. To this end, the previous five-year investment plan for 2010-14 provided over €55bn that proved beneficial both to major companies and to local small and medium-sized enterprises involved in residential projects.

In the 2015-19 investment plan, the public funding projection for housing development alone amounts to €58bn, and the Ministry of Housing, Urban Planning and the City (Ministre de l’Habitat, de l’ Urbanisme et de la Ville, MHUV) expects to deliver 2m more turnkey units by 2019. It is forecast that by 2020 residential construction will account for 41% of the industry’s total value, thanks largely to budgetary support from the government.

However, the slow progress of construction – combined with migration to urban areas – has resulted in the appearance of shanty towns, which severely degrade welfare due to overcrowding and a lack of basic amenities. The state is addressing this issue as part of its social policy, and the MHUV is carrying out a strategy that involves relocating the inhabitants of informal housing. The government is aiming to develop underprivileged areas by providing affordable, high-quality houses. This approach takes into consideration the revalorisation of sites where the new neighbourhoods are established, allocating funds to the construction of schools, medical facilities, commercial and leisure areas, as well as the expansion of transport connections. The strategy also includes the rehabilitation of old buildings. More than 20 districts in Algiers are currently being renovated with an eye to preserving the unique colonial-era historic buildings.

The government is aware of the need to be cost-effective while at the same time meeting sustainability goals. It is therefore seeking to establish a housing regulation institution that will also serve as a mechanism to combat corruption and, in the long term, transform the subsidisation system, which is currently seen as fostering dependence on the state.

Water Management 

The expansion of Algeria’s construction industry and housing development goes hand-in-hand with ensuring the availability of water. Its provision and management is crucial for a country with a vast desert and challenging geography. To address basic consumption demand, the future of agricultural irrigation, water potabilisation and desalination are among the key issues outlined in plans to upgrade infrastructure.

The state has also been pursuing the expansion of the country’s water management facilities. The current network has been in place since 2005 and comprises 75 dams across Algeria. Nine new dams are under construction, all of which are expected to be operational by 2019. According to the Ministry of Water Resources, five of them – with a joint capacity of 500m cu metres – will be in service in 2018. In early 2017 the government announced its aim to achieve a storage capacity of 12bn cu metres by 2030 with the aid of 139 dams.

Public-private partnerships (PPPs) are key to ensuring investment in water management and treatment facilities. For example, the €443m Magtaa Desalination Plant near Oran is the result of a PPP. Algerian banks provided 70% of the financing for the project, with the remaining 30% coming from the Singapore-based Hyflux group. Launched in 2015, the plant is the largest of its kind in Africa.

In addition, the 2015-19 investment plan allocates €15bn for works on water treatment and management facilities, including the rehabilitation of some existing dams. Earth movements and natural degradation have caused a reduction in storage capacity, and a proposed project to drain and repair the dams is currently under assessment.

Ports

Algeria also plans to upgrade its ports in the hope of making the country a competitive Mediterranean shipping hub. Planned developments include adapting existing infrastructure to accommodate larger vessels in the Port of Algiers, and construction of the Port of El Hamdania in Cherchell.

With 1200 km of coastline, 11 commercial ports and 95% of its merchandise transport activity being conducted by sea, the performance of Algeria’s port facilities is of the utmost importance. The current strong government focus on increasing capacity for both passenger and freight transport will entail the development of facilities and supporting infrastructure – such as roads, railways and logistics platforms – and will be accompanied by huge public expenditure, as well as private and foreign investment.

Planned government spending on port projects for 2015-19 totals AD550bn (€4.6bn). The new deepwater Port of El Hamdania is the biggest infrastructure project in Algeria. Under construction and experiencing delays, its completion is expected in 2024. Algerian Port Services Public Group holds 51% of the venture, and a consortium of China State Construction Engineering Corporation (CSCEC) and China Harbour Engineering Company has 49%.

The AD784m (€6.5m) project to modernise the Port of Djen Djen launched in 2015 and is progressing, while plans for the ports of Ghazaouet (west of Oran) and Ténès (between Oran and Algiers) aiming to improve various operational features are experiencing delays. Meanwhile, the capacity of the Port of Algiers’ piers is being expanded.

Roads 

Motorway expansion is also on the agenda. A key project will be the construction of the Trans-Saharan Highway in 2019. Algeria is set to deliver its segment of the highway, Route Nationale 1, a 2400-km road running from Algiers to Niger, 90% of which is complete. By July 2017 less than 600 km was unfinished, and 200 km remained to be built of a 500-km branch road to Mali.

The African Development Bank estimates the cost of the project to be around $3bn. It is likely to create construction opportunities in Algeria on all fronts. For example, demand for housing, hospitals and schools is expected to rise as regions develop their respective sections along the route.

The National Public Works Company (Société Nationale de Travaux Publics, SNTP), a state-owned company responsible for public works and transport infrastructure construction, has been entrusted to carry out the national programme to connect the remote regions in the south with the high plains. The company’s primary goal in the short term is to provide a road network to these areas to improve the distribution infrastructure for energy, water and food, as well as improving the development of agriculture. The SNTP’s pipeline for the next few years includes a 130-km route from Oud Ali Dema to Djanet, in Illizi Province in the south-east of the country, paving a 70-km road in Illizi and the completion of the East-West Highway.

Air 

Work is under way on a new 650,000-sq-metre terminal at Houari Boumediene Airport, comprising a 200,000-sq-metre building, adjoined parking lot and an energy centre. CSCEC is undertaking the construction, valued at AD90.3bn (€749m).

Rail 

The €32bn, 5000-km expansion of the rail network is a priority under the current five-year investment plan. There is a pressing need to reduce road traffic congestion, and improve capacity for moving both passengers and freight across the country beyond urban areas by rail.

There is a particular focus on the north-east, for two main reasons. The first is the opening of the line linking Annaba with Tunisia, which is a major landmark for Algeria’s regional connections. The second is the drive to boost mining activity in the region, particularly phosphate extraction around Tébessa. Reinforcement of the lines linking Tébessa, Ouenza and the rest of the area’s mines to the Port of Annaba is already under way.

In addition, annual output of 3.5m-7m tonnes of steel products in Jijel has driven efforts to ensure a reliable rail route to the port of Skikda. The construction of a high-speed line running parallel to the East-West Highway is also planned.

Self-Sufficiency 

The price of construction materials has been rising rapidly in recent years due to increasing domestic demand, particularly in the cement and steel markets.

Inflation has also been halting projects, and there is a shortage of building materials on over 80% of construction sites, according to AGEA.

The import ban enforced in early 2017 also affected the sector. Among other products, imports of cement, steel and the metal wire used in form-works and tiles are restricted.

In July 2017 this was extended to industrial equipment, such as electrical transformers, plumbing products, and marble and granite. The restrictions are a result of the current five-year investment plan’s objective to promote and capitalise on Algeria’s natural resources. Although development of the country’s capacity to produce iron, steel, cement and phosphates has been slow so far, these Algerian-sourced materials have been used in the construction of several facilities. Currently, there are 21 provinces being explored for these resources.

Cement 

To meet growing demand for construction materials, the Algerian cement market is undergoing a transformation, with self-sufficiency the goal. Though demand does not currently surpass the available supply, Groupe Industriel des Ciments d’Algérie is implementing a programme to ensure the availability of cement by increasing production from 12m to 20m tonnes per year. By 2019-20 the group expects to have reached its goal thanks to the expansion of cement plants in Chlef, Ain El Kebira and Zahana, in addition to the construction of two new plants in Oum El Bouaghi and Béchar.

In January 2017 Abdeslam Bouchouareb, then-minister of industry and mining, announced the inauguration of a second production line at Ain El Kebira, in Sétif Province. Bouchouareb said it would help in the pursuit of annual cement production of 5.5m tonnes from the site, setting the stage to begin exporting the surplus in 2018.

The tender for one of the new plants was awarded to Germany’s Thyssenkrupp, which announced plans for construction in Oum El Bouaghi Province in January 2017. The plant is due to be operational in 2019 and will have a production capacity of 6000 tonnes of cement per day. Located in the north-east, it will benefit from proximity to the ports of Annaba and Skikda. Both the expansion of existing plants and the construction of new ones will follow an energy-efficiency approach. Some of the measures comprise recycling schemes for the plant’s waste, water treatment and the rehabilitation of quarries. In July 2016 the CILAS cement plant – a €270m joint venture between Lafarge Algeria and Souakri Group with a capacity of 2.7m tonnes per year – commenced activity in the city of Biskra.

“Ensuring cement production locally will be a positive development for everybody in the sector,” Paul Magera, CEO of specialty chemicals company Sika El Djazaïr, told OBG. “Importing cement does not make sense logistically, and means that the quality can fluctuate, because we are never sure of the origin.”

The construction sector is relying on several major projects to expand its capacity. In correlation with transport infrastructure development, the $2bn Bellara steel complex, in Jijel Province, is expected to be operational by 2018.

The new plant will have an initial annual production capacity of up to 2m tonnes of steel, with plans to double this to 4m tonnes from 2019. The Bellara project is being executed by Algerian Qatari Steel, a subsidiary of the Sider Group. The facility will require a power plant with a capacity of 1400 MW and an investment of AD89bn (€738.2m).

Increasing local production of phosphate and reducing imports is a priority in the area around Tébessa, while the new mine in Bled El Hadba there has also provided an employment boost.

Investment 

The economic strategy includes further promotion of private investment as well as boosting foreign partnerships. Under its current legal framework, Algeria’s appeal has waned due to restrictive requirements and complex administrative processes. Investments must be executed under the 51:49 rule – a regulation that limits foreign companies to a minority stake in local joint ventures. Foreign investors must therefore partner with an Algerian-owned shareholder, and are bound to retaining most of their capital in local currency.

For public works, a PPP in road construction requires a 30% investment in Algerian dinars. This rises to 45% for rail works and 50% for housing projects. Taking into consideration the devaluation of the dinar, present conditions for investment are uncompetitive as they do not offer attractive returns. However, there are signs of improvement. A new investment code was approved in 2016 aimed at fostering PPPs, simplifying administrative processes and easing liaison between stakeholders by removing the 51:49 rule under some circumstances. The ministries of health, public works and tourism have given clear instructions to their branches to encourage PPPs to ensure more investment flow.

Thus, while around 70% of construction projects are owned by the state, there is a growing movement of smaller investors and entrepreneurs seeking bank credit for projects. Foreign investors with an eye to long-term strategies and an understanding of the dynamics of the market may find opportunities.

The process of diversification is also set to benefit local companies, but dependence on Chinese investment is a reality across Africa, and Algeria is no exception. Of the major ongoing building works being carried out by Chinese companies, the construction of the Great Mosque in Algiers by CSCEC is particularly representative of foreign capital development projects. The layout was designed by German architectural firm KSP Jürgen Engel Architekten and is expected to be finished by 2020. External players are slowly entering the Algerian construction market, with Egyptian and Turkish firms also benefitting from the momentum in housing.

Adding Value 

Major construction projects have resulted in an increased number of housing developments in surrounding areas. For instance, the Technopark being developed in Sidi Abdellah is already attracting real estate development to that area in Algiers province. The 100-ha park will host companies specialising in technology. In July 2017 then-prime minister Abdelmadjid Tebboune announced the delivery of 16,000 units later in the year, with a total of 26,000 to come by 2019.

Construction of the Great Mosque and the new Houari Boumediene Airport terminal provide opportunities for developers, especially in the luxury segment. There are several projects in the pipeline in the Algiers district of Bab Ezzouar, including towers with housing and office space.

Outlook 

A catalyst for socio-economic progress for the country despite the recent austerity measures, Algeria’s construction sector is likely to continue to expand, albeit at a slow rate, with increased focus on priority projects. Public expenditure should sustain construction levels as the current five-year investment plan unfolds further. Public budget cuts are likely to encourage private, domestic and foreign PPP ventures, building on previous efforts to address insufficient infrastructure and rising demand for housing. In the near future, the Banque Extérieure d’Algérie is set to step up its activity in an effort to leverage Algerian companies by establishing offices in other countries, enabling it to support firms in their efforts to expand into foreign markets.

In addition, to comply with international standards, modernisation is necessary in the sector. Meeting these will depend on the use of upgraded equipment, skilled personnel and up-to-date organisational schemes. In turn, this is driving the government to restructure its strategy, broadening the possibilities for investors in the construction sector.

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The Report: Algeria 2017

Construction & Real Estate chapter from The Report: Algeria 2017

The Report: Algeria 2017

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