New companies enter the market, despite high energy and labour costs

The year 2014 was marked by strong growth in the construction sector, which has become well established as one of Jordan’s key economic drivers. New companies are also entering the market, with an eye towards gaining a share of a major pipeline of projects now beginning to get under way – developments spanning the transport sector, residential real estate, energy grids and liquefied natural gas (LNG) terminals. In all of this, the government is a major client as it seeks to implement national growth strategies, often in partnership with the private sector.

At the same time, the sector continues to face challenges, including high energy costs, labour concerns and the fallout from turbulence elsewhere in the region. Nonetheless, with a longstanding reputation for stability within its own borders, coupled with long experience of doing business in a volatile region, Jordan’s construction firms have continued to thrive.

Industry Statistics

According to the most recent data from the Department of Statistics, some 48,799 people were employed in the construction sector in 2012. More recent statistics from Bank Audi indicate that these workers were employed at some 224 registered companies in 2014, up 3.2% on the 217 registered in 2013.

The seven newly registered companies had $16m in capital between them in that year, one illustration of the small size of Jordanian construction outfits relative to those in the broader Gulf region.

Statistics from the Central Bank of Jordan (CBJ) show that in 2014, the sector’s contribution to GDP at current prices was JD1.14bn ($1.6bn), up from JD1.06bn ($1.49bn) in 2013 – and part of a pattern of consistent growth over the last five years. With the country’s GDP totalling JD25.4bn ($35.74bn) in 2014, this gave the sector a share of around 4.5% of GDP that year, up from 4.4% the year before.

Jordan’s economic health has been improving in recent times, despite a significant loss of trade with Syria and trade disruptions with Iraq. The number of Syrian refugees in Jordan – which have reached 21% of the population according to a June 2015 statement by Nasser Judeh, deputy prime minister and minister of foreign affairs and expatriate affairs – have put demands on the economy. The government, helped by international agencies, has well-managed this, although it is still a major issue. The country’s infrastructure is strained and donor fatigue is a concern.

Despite this crisis, the government’s fiscal position has even been improving, thanks to better tax collection and revenue performance, while strong financial support from the GCC and Western countries has endowed Jordan with a high level of international reserves. Since construction and GDP in Jordan are closely linked, such growth bodes well for the sector.

Credit Where Due

The country’s banking sector is also robust – in 2014 total assets grew by 4.8% and deposits by 9.7%. Despite this improvement in liquidity, however, loan growth has been sluggish, coming in at just 1.8% in 2014, mainly in the form of new credit extensions in the local currency. This is of significance for construction, as in Jordan the sector receives more credit facilities than any other economic activity. CBJ and Bank Audi numbers show that 23.6% of all credit facilities extended in 2014 went to the construction sector, more than to general trade (19.1%) or to industry (13.1%).

Credit extended to the construction sector in 2014 totalled $658m, up from $569m in 2013 – an increase that contrasted with the trend of decline in credit extended in most other sectors. Although this amount was down from a recent peak of $825m in 2010, it was still up 15.5% year-on-year (y-o-y). The loans to deposits ratio for the construction sector stood at 14.3% as of June 2014, down from 14.8% in 2013, according to IMF statistics.

While the uncertain economic and security climate made banks more cautious about extending loans to industry, transport and general trade, construction’s continued centrality to the economy – and its place in state development plans – has kept its stock high with the banks. Despite this growth, the number of construction permits granted fell in 2014 for the second year in a row, decreasing by 3% in 2013 and 7.4% in 2014, with the residential segment showing the biggest decline at 8.6% y-o-y. Residential permits still accounted for 90.4% of the total, however, down slightly from 91.6% the previous year. The main locus for new construction permits was the capital, Amman, which accounted for 39.3% of them in 2014; other major areas were the governorates of Irbid (23.2%) and Zarqa (12.8%).

Material World

Contractors in Jordan are able to source many building materials locally, such as sand, gravel, crushed stone, natural sands and ornamental stone. In cement, Lafarge Jordan is the largest domestic company, with a capacity of 1.8m cu metres a year and sites across the country. Other significant plants are owned by Al Rajhi Cement Holding, the Qatrana Cement Company, Northern Cement and the Arab Company for White Cement Industry – Khaldeya White Cement.

From all of these, however, there has been significant oversupply in recent years as markets in neighbouring Syria and Iraq have closed while the domestic market has slowed. “Many firms that supply raw building materials to the Iraqi market have reduced their operations in the country and are increasingly looking to Jordan to make up the difference,” Nadim Kattan, CEO of Falcon Timber, told OBG.

Team Players

A key government body for the construction sector is the Ministry of Public Works and Housing (MoPWH). Because the sector impacts many other areas of the economy, however, several other state agencies play a part, such as the Ministry of Transport (MoT), the Ministry of Energy and Mineral Resources MoEMR), and the Ministry of Planning and International Cooperation (MoPIC).

King Abdullah II ibn Al Hussein takes a lead role in coordinating and initiating major public works at the strategic level, having instructed the government to carry out Jordan Vision 2025, the country’s 10-year development plan. In early 2015, MoPIC was working with individual governorates to update their 2013-16 medium-term development plans, and harmonising these with the first part of Jordan Vision 2025.

Close participation from other stakeholders, such as businesses and trade associations, has also been central to such planning.

These blueprints will all likely have construction components. This is the case with the 2015 Jordanian Response Plan (JRP) to deal with the Syrian crisis, which says basic infrastructure is under severe strain as the country seeks to accommodate its 647,700 Syrian refugees, most of them poor.

The JRP notes that the annual shortfall in housing construction, which averaged 2400 units before the crisis, has been compounded by the need to build 120,000 more for Syrian refugees. The crisis has boosted the need for maintenance of existing infrastructure, as roads, power and water systems take heavier use, often in less developed areas. All this means the construction sector has a key role to play in dealing with the crisis.

The country’s sound economic performance in the face of negative external factors in recent years has enabled the government to increase its capital spending. The 2015 budget shows an increase of 5.3% y-o-y to reach JD1.1bn ($1.55bn), or around 14.5% of total planned government spending.

Rolling Out

This is a vital source of funding for Jordan’s construction sector, and a range of major projects involving significant state participation are currently under way. Yet the country is keen to engage the private sector in these projects, seeking to form public-private partnerships (PPPs) with many international and local construction firms.

The transport sector is one major focus area. Aqaba, for example, has been singled out as a key location and starting point for marine and rail projects. The Aqaba Special Economic Zone has undergone substantial work in recent years, carried out by the Aqaba Development Corporation. This multi-faceted development scheme involves a major expansion of the existing main port, industrial port and container terminals, as well as the construction of a new port to the city’s south.

The new port’s first JD200m ($281.42) phase – a three-package project – was tendered in April 2015, including contracts for marine works, a grain terminal, buildings, yards and sheds. A total of 18 new berths will be added by the end of the third phase, along with four roads, an electricity station, flood prevention channels and a water tank. A $74.9m LNG terminal was finished in June 2015.

Linking Up

Aqaba will also be the starting point for a major new rail connection with Amman. At present, the Aqaba Railway Corporation has 293 km of track linking the port to phosphate mines in the interior, while the Jordan Hejaz Railway has 217 km of track in use and runs a few scheduled services out of Amman. For some time, the government – as well as many logistics firms – has wanted to upgrade these railways and establish a north-south rail transport corridor from Aqaba through Amman and on to the Syrian border. Projected to cost $3.5bn, the national rail project was initially given a 2013-20 timeframe, with the first stages funded by Jordan and Saudi Arabia. However, regional tensions and domestic political concerns have resulted in delays.

Two other railway projects are also reportedly at an advanced stage of planning. One is a rail link between Aqaba and Chidiya, an area of southern Jordan with phosphate resources, and the other is a rail line between Amman and Zarqa. The latter project, however, has a history of false starts, and the transport minister’s announcement in March 2015 that a rapid-transit bus system would open on the same route, raised questions over the rail line’s future.

Jordan is party to several regional rail agreements that commit it to joining a region-wide network in the coming years. Links to Egypt and Iraq have also been planned, but were effectively put on hold due to the security situation. A rail connection to Saudi Arabia is likewise planned, with the Saudi side – part of the GCC network expansion – working its way from Riyadh to Al Haditha, near the Jordanian border.

Hitting The Road

Road development is proceeding apace. In April 2015 the MoPWH announced that it had completed 19 major road works worth a total of JD334m ($469.97m), as well as JD80m ($112.57m) of agricultural roads. The ministry is also rehabilitating the road at the Azraq-Omari border crossing and the Airport Road, with the latter scheduled for completion by the end of 2015.

In The Pipeline

The MoPWH has also prioritised investments in health and education, announcing in April 2015 it had completed 152 buildings worth JD176m ($247.65m) in these sectors, with more school and hospital projects on the way.

Another major venture in the pipeline is the $1.1bn Porto Dead Sea project, which began construction in March 2015, with an expected completion date of 2021. This project, being built on 800,000 sq metres of coast along the Dead Sea, will have four hotels, three malls, a cinema complex, an international spa, medical and health facilities, and 20 global-brand restaurants and cafés.

Egyptian developer Amer Group, which has experience with similar projects in Morocco and Egypt, has begun building the first phase.

Jordan’s energy sector is likewise attracting new construction. The National Electric Power Company (NEPCO) is currently rolling out a new high-voltage transmission network, due to be operational around 2018, while a 65- to 75-MW solar power station is at the tendering stage. A range of other power and energy projects are coming up in both renewables and shale (see Energy chapter).

Outlook

Energy is one notable challenge in Jordan, which has no fossil fuels of its own and is thus obliged to import some 97% of the energy it consumes. As the government has moved to cut subsidies, energy costs have stayed relatively high, affecting the costs of building materials, logistics and overhead. At the same time, financing costs can be high for some contractors, with high interest rates and caution among lenders putting a brake on many construction activities. The regional insecurity has also had a major effect on project roll-out, particularly in tourism and in transport links with neighbouring countries.

Yet for all that, the sector continues to expand, and many of its outfits are prospering. Jordanian companies have diversified abroad, capitalising on the construction boom in the GCC in particular. The year ahead looks likely to be one of steady growth, with a few major new projects afoot and much depending on external factors. Higher state capital spending will push forward several important initiatives in transport and infrastructure, benefitting the sector.

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The Report: Jordan 2015

Construction & Real Estate chapter from The Report: Jordan 2015

The Report: Jordan 2015

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