Boosting local construction capacity a policy priority for Tanzania

 

Tanzania’s construction industry is undergoing significant expansion, and is a direct beneficiary of the government’s current economic strategy, which focuses on major infrastructure, housing and energy investments. Although recent months have seen the growth rate level off, the election of President John Magufuli in 2015 did help to improve the outlook for the construction sector, following on the back of a promise to complete the long-proposed transfer of most government functions from Dar es Salaam to Dodoma. This relocation will require major works to build up the city’s housing, social infrastructure, utilities and transport infrastructure.

Since then, the pace of growth has been fast, with the overall sector valuation jumping from $1.6bn in 2010 to $6bn by 2015. The construction sector’s contribution to GDP has grown from 7.4% in 2006 to 13.6% in 2015 on mainland Tanzania, and from 7.7% to 9.5% on the Zanzibar archipelago.

“With GDP growing at between 6.8% and 7.1%, the construction sector has grown 11-15% in recent years. Due to a lack of housing and underdeveloped infrastructure, growth of 15% or higher is possible,” Vatsal Shah, CEO of Nabaki Afrika, a Tanzania-based firm supplying construction materials, told OBG.

Ample Demand

Most of that increase on the mainland has come since 2013, the first year in which construction accounted for more than 10% of the economy. The timeline coincides roughly with the discovery of vast deposits of natural gas in the country’s territorial waters. A pipeline covering a length of 548 km was completed in 2015, for example, and other major infrastructure projects are anticipated, including a planned pipeline from Uganda, along with downstream facilities, such as a proposed investment in a two-train gas liquefaction facility.

There is certainly plenty of need beyond the headline-grabbing energy projects. Tanzania has a severe housing shortage, which is a legacy of past struggles by the state’s handful of public builders and developers. An estimated 68% of dwellings in the country have modern roofs, for example, according to the National Bureau of Statistics (NBS). The figure falls to 46% for modern walls. According to the Energy and Water Utilities Regulatory Authority, 46% of Tanzanians have access to power in their homes, although not all have chosen to connect to the grid.

The central business district of Dar es Salaam, the country’s commercial capital, has similarly seen a building boom in the past decade, and builders have reshaped its skyline with a number of modern highrises. These and other projects have been made easier by the cost of construction.

According to the professional services company Turner & Townsend annual construction costs survey, Dar es Salaam is one of the world’s least-expensive cities in which to build property, citing an average cost of $803.50 per sq metre, although nearby Nairobi has the lowest costs at $683.50.

Prudent Approach

However, the recent double-digit growth has been easing on the back of a handful of domestic factors, which are leading to more pragmatic spending decisions by investors. The construction sector expanded by 8.8% in the second quarter of 2017, according to the “GDP Second Quarter 2017” report published by the NBS. “By the end of 2017 the construction sector will be stable and the outlook positive,” Dhruv Jog, managing director of Advent Construction, told OBG.

This is in part a function of the pace of developing offshore gas projects, which tend to have a long-term time horizon and require marshalling significant capital. In addition, it also reflects fiscal consolidation by the state – partially due to an anti-corruption drive by the president – which has led to tighter controls on spending management, including centralising the cash balances of all public bodies into a single account (see Banking chapter). The account, which is held by the central bank, has lowered the volume of capital that commercial banks can lend for private projects.

The anti-corruption drive has included tax audits of major businesses, ranging from industrial manufacturers to mining companies and ferry services, which has similarly led to the postponement of capital investment decisions by private investors. The most prominent of these cases involved Acacia Mining, a subsidiary of Canada-based Barrick Gold. The government accused the gold-producing company of under-reporting revenue, and issued it a $190bn tax bill, equivalent to four times the country’s GDP. In September 2017 the company announced it was reducing activities at Bulyanhulu Gold Mine, a result of a nationwide export ban on unprocessed mineral ores. The situation, if left unresolved, could seriously affect Tanzania, as Acacia Mining is one of the country’s largest private investors, investing some $4bn in Tanzania over the past 20 years.

Ultimately, however, the reasons behind the slowdown in activity are beneficial. A lower incidence of corruption – and more transparent spending and lending practices – is expected to improve the business environment, and minimise the challenges of building and construction in Tanzania. “The new president has brought in discipline and standards, and has successfully reduced the amount of fake products in the market,” Mark McCluskey, general manager of construction materials vendor Nabaki Afrika, told OBG. “There is a drive to do things properly and to use the right building equipment.”

State Developers

The government has long taken a direct role in the construction industry, not only in terms of funding infrastructure and public works projects, but also in terms of residential and office development. The government formally owns all the land in the country, and there are several state agencies tasked with developing it.

Public developers include the self-funding, forprofit National Housing Corporation (NHC). Of the approximate 17,000 houses built by the NHC since its inception in 1962, around half were completed in the current decade, according to Arden Kitomari, the NHC’s business planning manager.

Watumishi Housing Company (WHC) is another government agency, which formed in 2013 to develop homes and to manage them through a real estate investment trust (REIT) called WHC-REIT. The company has built 800 housing units in total, typically by contracting with smaller builders to erect predesigned units aimed at low-income buyers.

The Tanzania Buildings Agency (TBA) is a public body that has been charged with helping to build up Dodoma. In August 2016 the agency began to construct housing for public servants in Dodoma, following President Magufuli’s directive to move government operations to the new capital city by 2020.

The TBA went through restructuring in 2017, as the government mandated that it begin to operate as a for-profit entity. The Infrastructure Development Committee also ruled that the government pay back the TBA nearly TSh30bn ($13.6m) so that it can begin work on additional projects in the Dodoma area.

Road projects are overseen by the Tanzania National Roads Agency, which in recent months has faced increased scrutiny over contracting prices, with at least one road-building contract renegotiated in July 2017, for example. “The cost of construction is much higher than it should be for roads,” Samuel Nyantahe, chairman of the Confederation of Tanzania Industries, told OBG. “It’s about $800,000 per km.”

Contractors 

As is common in many sub-Saharan markets, large-scale infrastructure construction contracts in Tanzania are often awarded to foreign companies, such as Dutch-based BAM International and Japan’s Sumitomo Mitsui, due in part to the high level of technical expertise and capacity required. The need for foreign financing for large capital contracts can also affect contractor selection.

For example, BAM International was contracted to build the $250m Terminal 3 at Julius Nyerere International Airport (JNIA), which is benefitting from export credits, financing and guarantees from the government of the Netherlands, while Sumitomo Mitsui is working on a near-$1bn flyover project funded in part by the Japan International Cooperation Agency.

However, a more prudent approach to spending by the current presidential administration may mean a slowdown in projects of a similar scale, with the government looking to lower costs and limit exposure to project risk. The JNIA expansion contract, which was signed under the previous administration, included a number of incentives, such as guarantees. “This government is against giving out sovereign guarantees, and most investors appear to have accepted this stance,” Nyantahe told OBG.

Local Content

Tanzania’s own local construction industry is also aiming to develop a greater capacity to participate in major projects. The country has 314 class-one contractors, according to the list of licensees published by the Contractors Registration Board.

At the top of the market are a handful of local Tanzanian companies capable of building high-rise structures or complex technical facilities such as factories, including: Estim Construction, which focuses on large residential, retail and commercial developments; Advent Construction, which specialises in large-scale civil works and industrial facilities; and Caspian, which focuses on the mining sector.

However, there is a range of issues confronting local companies. “Challenges facing local builders include procurement, time management and a lack of appropriate expertise in mechanical engineering,” Mussa Kimaka, managing director of KIMPHIL Konsult, a local consulting firm, told OBG. The country also has a large number of domestically owned smaller contractors, subcontractor and supplier firms, such as Amar Builders, BQ Contractors and Ametan Custom Building Solutions, which could see an increase in demand from foreign investors as the government looks to expand local content requirements in extractive sectors. “For those big projects we’d like to see competent local contractors also getting some work on the periphery,” Dan Holodnik, a managing partner of Ametan Custom Building Solutions, told OBG.

One factor that may help local contractors win government business is transparency in procurement. “It’s not impossible for local companies to win a tender,” McCluskey told OBG. “Those that succeed are the ones that have improved their organisation and efficiency. Companies have to produce a proper invoice and show they are buying materials locally.”

Capacity Building

There are also a number of capacity-building initiatives under way to help further improve the technical expertise of domestic contractors and subcontractors. In the energy sector, where technical expertise is often very specific to that particular industry, the Association of Tanzania Oil & Gas Service Providers (ATOGS) is helping engineering and construction firms to participate in upcoming projects such as the Uganda-Tanzania Crude Oil Pipeline (UTCOP). ATOGS announced it will help local producers gain access to capital from banks, and will seek to remove red tape and bureaucratic roadblocks. It has also pledged to train and empower Tanzanians so that they can gain a stronger foothold in the sector.

The private sector is also rolling out smaller-scale training programmes, such as Nabaki’s Mtalaam initiative, which provides technical training and support services to small-scale contractors. “Small-scale Tanzanian builders have a good reputation in the region,” McCluskey told OBG. “The standard of workmanship is fairly good, and Tanzanian roofers are sometimes asked to work in neighbouring countries.”

Materials

As is the case for many regional markets, domestic production of building materials is limited, with roughly 70% to 80% of construction materials imported. However, this has begun to change on the back of increased demand and a push for industrialisation. China’s Goodwill Ceramic, for example, is spending $100m to build a new roofing tiles factory.

However, the cement sector is seeing the biggest growth, as demand and capacity are both on the rise. Consumption of cement has accelerated at a pace of 10% or greater in all but two years between 2006 and 2015, according to the NBS: in 2012 the growth rate was 0.2%, and in 2015 it was 7.9%. The year 2015 was also the first since 2006 in which the number of imports fell – the total dropped from 1.4m tonnes to 1.26m. Domestic production rose from 1.5m tonnes in 2006 to 4.4m tonnes in 2015.

The market leader is Tanzania Portland Cement Company, a subsidiary of Germany’s Heidelberg Cement Group, with a share of 37.9% of overall sales. The second-largest producer is Nigeria’s Dangote Cement, at 20%, although production levels have fluctuated because the company is a new producer and is still seeking a long-term solution for feedstock. ARM Cement of Kenya has operations in Tanzania with a share of 11.3%. The only other producer with a market share above 10% in 2017 was Tanga Cement, which trades domestically under the Simba brand name. Overall capacity is currently 10.3m tonnes per year.

Reflecting the rise in local capacity, imports fell in 2016 for the first time since 2006, sliding from 1.4m tonnes to 1.3m, and could possibly end once the 3m-tonnes-per-year facility by Dangote is fully operational. The company is currently in discussions to source energy feedstock for the new facility, which currently relies on diesel fuel.

Pricing has become increasingly tight as competition has increased, and the overall average has fallen from approximately $120 per tonne in 2013 to $65 in 2016, making Tanzania’s cement the cheapest in East Africa. That could pose a challenge for smaller producers, which lack the economies of scale and larger capital base of the bigger producers.

However, the future still looks to be relatively hopeful, in light of the continued demand expected from the public works and real estate sectors. Exotix Capital estimated demand growth of 28% in 2017, and stated in a report from earlier in 2017 that “Tanzania provides immense latent demand growth in the long term, dependent on its ability to secure funding for large infrastructure projects”.

ARM is building a facility in Tanga, while Tanga Cement is expanding in Arusha, and smaller producers are following suit, including Lake Cement, which is investing in a new plant in Bagamoyo.

Infrastructure Contracts

Much of the demand for cement – and for engineering and construction services in general – comes from a handful of large publicly financed projects. While some of these relate to property development, most of the projects are concentrated on the transport sector.

The JNIA’s Terminal 3, for example, will boost capacity from 3.5m passengers per year to 5m, and includes a taxiway and additional parking around the airport. There have been concerns from the government over costs, while delays in payment to BAM International have also slowed execution, but the project is still expected to reach completion by 2018. In addition, work is under way on a contract worth €37m – also awarded to BAM – to rehabilitate and expand Kilimanjaro International Airport.

Elsewhere, there are continued works at the heavily congested intersection of Nelson Mandela Expressway and Nyerere Road, where Sumitomo is working on the $965.9m flyover. Investment in ports is also picking up, with the $345m Dar es Salaam Maritime Gateway Project under way, which will widen and deepen berths and boost capacity at the Port of Dar es Salaam.

In 2017 Tanzania cancelled a proposed $7.6m financing deal from the Export-Import Bank of China to finance a standard-gauge railway, to be constructed by Chinese firms, putting the project out for bidding. Later in 2017, the first phase of the rail project was awarded to a consortium spearheaded by Turkish construction firm Yapı Merkezi and Portugal’s Mota-Engil. Tanzania reported that other companies had expressed interest, but that this consortium was the only one to submit a bid.

Energy Projects

In the power sector the current government has expressed a desire to contract with builders for the engineering, construction, procurement and finance of generation plants that are to be owned by Tanzania Electric Supply Company.

The country also has an independent power producer programme, but the government’s current fiveyear development plan emphasises public-private partnerships that ensure ownership of assets remains with the government (see Energy & Mining chapter).

Brazil’s Odebrecht signed a 2012 memorandum of understanding, which was renewed in 2016, for a dam and power plant located at Stiegler’s Gorge. This project has been on the table for years, but was complicated by the proposed location in a game reserve, which created environmental concerns.

However, Odebrecht’s recent legal troubles appear to have slowed momentum, and could affect financing of the dam. Nevertheless, multilateral funding from the World Bank, the African Development Bank or national export companies could see the successful implementation of the project.

Another final investment decision expected in 2017 is that of the UTCOP, which would carry crude from Uganda to a port in Tanga, in northern Tanzania. Approval of this project, estimated at a value of $3.55bn, would trigger a flurry of action for contractors, and some 10,000 jobs in Tanzania and Uganda.

Outlook

The needs have been clearly identified in Tanzania, and the local construction sector is keen to boost capacity so it can compete with the global players on large infrastructure packages. The government is betting that short-term struggles caused by rooting out corruption will pay dividends over the long term by providing a more predictable operating environment in which domestic builders can thrive.

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The Report: Tanzania 2018

Construction & Real Estate chapter from The Report: Tanzania 2018

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