Despite regulatory challenges, public investment in infrastructure development continues to attract foreign bidders

Benefitting from the government’s push for transport infrastructure and public housing, and guided by a new capital-intensive five-year plan, the construction sector has been seeing constant activity. This is not only positively impacting local building and contracting firms but also attracting a host of contractors from abroad which are looking to tap into the country’s public tenders – a clear contrast with the more muted levels of activity in Europe. During the 2010-14 five-year period, authorities channelled €210.2bn to modernise transport infrastructure, expand energy production and improve urban housing. Currently under preparation is the new 2015-19 five-year plan, which the government announced would be worth €192.6bn.

However, while the demand for construction materials and expertise – coming almost exclusively from the public sector – is high, contracts have faced operational constraints. Stringent bureaucracy in terms of permits, approvals, payment and tenders has slowed the project pipeline, from preparation through to final delivery. Despite these difficulties, Algeria’s comparative stability in the region continues to garner international interest for a host of development projects that will cover areas such as road and rail construction, energy production and water infrastructure.

“Algeria is a stable country in a region that is currently full of instability. The country has liquidity, and there are many projects on the pipeline,” Farid Gamal, general manager at Orascom Construction, told OBG.

Improving Roads

A large share of the most recent round of construction activity has been concentrated on infrastructure work, which is the result of the large volume of transport, electricity and water-related projects in the government’s successive five-year plans.

Expansion of Algeria’s road network has been one of the main objectives, for example. With the 1216-km, €9.6bn East-West Highway project – which links Annaba, on the border with Tunisia, to Tlemcen, on the Moroccan border – close to completion, with only a small 87-km section remaining, 2014 is seeing the beginning of another large-scale road project.

Priorities

The Hauts Plateaux Highway will run for 1020 km in parallel to the East-West Highway, but further south. Construction of the new motorway, budgeted at €6.62bn, will involve greenfield planning and construction work – as opposed to the upgrading of several existing segments for the East-West project. However, perhaps more significant for potential investors, authorities are putting more emphasis on involving primarily Algerian contractors in the project, although they will be allowed to subcontract foreign companies for the more technically challenging sections of the highway. Initial priority will be given to the 640-km stretch between Saïda and Batna, where work is expected to commence before the end of 2014.

A considerable amount of upcoming road work will also come from a number of auxiliary roads, which will serve to connect the East-West and Hauts Plateaux Highways with each other, as well as with Algeria’s ports on the Mediterranean. A total of 23 of these routes are planned under the National Road and Highway Plan 2005-25. Among those currently under construction is the 100-km Béjaïa auxiliary highway, which was awarded in 2013 to an Algerian-Chinese consortium made up of China Railway Construction Corporation and Société Algérienne des Ponts & Travaux d’Arts. Additionally, in early 2014 the 48-km Tizi Ouzou auxiliary road was awarded to an Algerian-Turkish consortium, and this is expected to cost AD50bn (€465m).

Also being built is a 40-km auxiliary road to link the Skikda port to the East-West Highway. The project was awarded in April 2014 to a consortium made up of Portuguese construction company Teixeira Duarte, Algerian contractor ETRHB Haddad and Spanish firm SICE. Similar road links, such as the 62-km auxiliary highway between Batna and the East-West Highway, and the Mostaganem auxiliary road, will be tendered soon.

“We are prioritising the construction of the first 11 auxiliary highways that link the East-West Highway to the airports and ports located on the coast, as this will facilitate the flow of merchandise and stimulate trade,” Ali Khelifaoui, managing director of the Algérienne de Gestion des Autoroutes, the state-owned body in charge of highway management, told OBG.

Rail Links

In the transport sector an increasing number of railway projects are also expected. Between 2014 and 2017, there are plans to build an extra 6000 km of railways across the country, for which the government has already allocated €22.1bn.

Much public investment is also going towards the construction and expansion of tramway systems in Algerian cities. For example, the new tramway in the city of Sétif, which was awarded in 2013 to a consortium made up of Turkish company Yapı Merkezi and French company Alstom, started construction in May 2014. Completion of the 22.4-km line will involve an estimated investment of AD38bn (€353.4m).

Additionally, in July 2014 Algeria awarded the €313m expansion of Constantine’s tram line. Currently running for 8.3 km, it will be extended for an additional 13 km with 14 new stations. The project was awarded to a consortium made up of Spanish Isolux Corsán, French manufacturer Alstom and Algerian state-company Cosider. Construction of a tramway in Annaba was also awarded to a consortium composed of South Korean company Daewoo and French company GS Studies.

Ports & Airports

In the air transport sector, the construction of Algiers airport’s new €650m terminal was awarded in 2014 to China State Construction Engineering Corporation (CSCE). The project is set to be completed by 2018, when the current infrastructure is expected to reach full capacity (see Transport chapter). CSCE had previously built the airport’s international terminal, which was finalised in 2006.

Upcoming port upgrades include a two-year investment programme at the Port of Algiers, Algeria’s main container port, which will include infrastructure upgrades such as rebuilding of the shipside berths to accommodate container cranes and repairing three berths to improve efficiency, safety and security. Oran, home of Algerian’s second largest port, is also investing in a dedicated terminal for container traffic. The first phase of the development, costing €103m, will see the construction of a 500-metre-long quay and a storage area. Work is scheduled to begin in 2014 and take three years. East of the capital, capacity at Béjaïa port is also being expanded with the port’s hydrocarbons terminal relocated to a site further outside the city.

Housing Programmes

Urban improvement is also happening through housing infrastructure. The government allocated €36.8bn to the public housing sector under the previous five-year programme, from 2010 to 2014. Algeria’s housing gap is estimated to be at 1.2m homes, and the government has established several building programmes to increase the number of units. Rapid population expansion and a high rate of urbanisation have contributed to overcrowding in Algeria’s cities, leading to the spread of unregulated housing. The population has nearly doubled since 1980 to the current 39m people, while the percentage living in urban environments has increased from 43.5% to 73.7%.

Despite these housing programmes, which have seen the government build homes either through its own public companies in the construction sector or through the contracting of domestic and foreign construction companies, annual building capacity is still low, with around 80,000 new homes being built in Algeria every year. As in many markets, a significant challenge has been how to make public housing contracts sufficiently enticing for private firms. “The prices allocated to the government’s housing programmes are quite low, and therefore not particularly interesting for a lot of companies,” Mohamed Anneb, commercial director at Brazilian construction firm Andrade Gutierrez, told OBG.

Attempting to solve this, the government has signed deals with foreign countries in order to have experienced contractors build large numbers of homes. For example, in late 2012, Algeria signed two agreements, one with Portugal and another with Spain, which allocated 50,000 homes per country to their respective construction companies. This followed on another 2012 programme to build 15,000 government rental units in the wilaya (province) of Oran, which were allocated to Chinese and Indian contractors. In September 2013 Egyptian construction group Arab Contractors won a €132.3m project to build 4500 homes across Algeria, expected to be delivered in 2015. During the first half of 2013 alone, a total of 13 joint ventures were established between Algeria and foreign construction companies willing to work on public housing programmes.

Urban Development

Housing construction should also be galvanised by government plans to build five new cities over the next 15 years. However, these projects have been advancing slowly, with construction deadlines unclear. In the hydrocarbons production area of Hassi Messaoud, in the Ouargla wilaya, a new city with up to 18,000 homes and capacity for 80,000 people is set to be built 75 km from the original town of Hassi Messaoud. The €4.7bn project has suffered several delays, and tensions have arisen over the housing and infrastructure demanded by the population of the existing town of Hassi Messaoud. Works on the new city were expected to begin before the end of 2014.

Progress is also going slowly at the new town of Draâ Errich outside Annaba. Although construction of the new 1344-ha urban centre began in 2012, the project is still in its initial phase, with work being driven mainly by the structuring of the different plots of land. The project is expected to eventually accommodate 50,000 housing units for 200,000 people, and had secured initial government financing for the first phase of construction totalling €210m.

Around 200 km from the capital Algiers, the new city of Boughezoul with a planned population of 300,000 is currently planned, while in the Constantine wilaya a smaller €780m city of Bourouag is planned to house 3000 new homes over 40 ha.

Energy Projects

Despite being a major hydrocarbons exporter, the country has had difficulty keeping up with rising demand for electricity. Currently under execution is a government plan to build six combined-cycle power plants until 2017. The total value for these new units is expected to surpass €2.94bn. In February 2014 Samsung Construction won a €995.6m contract to build two of those power plants, a 1450-MW unit in Mostaganem and the other 1163 MW in Nama.

A second consortium, composed of South Korean firms Daewoo International and Hyundai Engineering, secured a €1.03bn contract to build two power plants in Biskra and Jijel. In December 2013 Spanish contractor Duro Felguera won a €407m contract to build another combined-cycle power plant in Djelfa. The contract to build a sixth power plant was awarded to another South Korean firm, GS/Daelim, to set up combinedcycle power plant in Khenchela. The combined capacity of these six new power plants will reach 8400 MW.

In preparation for these new units, Sonalgaz, Algeria’s state-owned gas company, awarded in September 2013 a €1.5bn contract to US conglomerate General Electric to build 36 turbines to be fitted into the new power plants. The contract entails the establishment of turbine production units in Algeria and has led the company to enter into a joint venture with Sonalgaz. The tender was targeted at companies willing to build factories in Algeria as opposed to just supplying the turbines, part of larger-scale government attempts to increase industrial production in the country.

In June 2014 Indian energy contractors Dodsal Engineering won a tender by state-owned oil company Sonatrach to build a €500m gas compression unit in Hassi Messaoud, one of the country’s most important hydrocarbons production areas. Many investments in the hydrocarbons sector are also making their way into other parts of the country. “Adrar is expected to be the next boom in terms of oil and gas production, and there are around €5.15bn in projects planned for the area,” Georges Assi, managing director of Maghreb Consolidated Contractors Company, told OBG.

Five different refineries have also been announced by the government over the past years, with the goal of doubling the country’s refining capacity from 30m tonnes in 2013 to 60m according to local media reports.

In 2010 French contractor Technip won a €667.5m contract to build a refinery near Algiers and Sonatrach announced the beginning of construction work on the AD230bn (€2.1bn) Tiaret refinery in late 2013. With completion expected in 2017, the new unit will be able to produce 2.7 tonnes of diesel and 1.4 tonnes of gasoline per year. Another unit to begin construction at the end of 2013 was the Biskra refinery, which is budgeted at AD240bn (€2.2bn), and will produce five tonnes of oil-based fuel products a year. Two additional refineries, near the southern towns of Ghardaïa and Hassi Messaoud, have also been announced, but no exact details in terms of investment amounts or deadlines have so far been given by the government. Increased capacity is also expected to come from the renovation of existing refineries in Skikda and Arzew.

Water Works

Alongside the need to invest in energy infrastructure to accommodate rising demand, the authorities are also building a series of dams and other water-related infrastructure across the country. The state announced it would invest €12.9bn for the 2015-19 plan, aiming to build several dams, irrigation systems and desalinisation plants to secure the water supply. For the coming five years, the Algerian government has pledged to build 30 new dams in order to improve availability in several regions of the country.

Building Materials

The 2014 Global Cement Directory puts Algerian cement manufacturing capacity at 21m tonnes per annum (tpa), which would place the country within the top-20 cement producers worldwide based on 2011 figures from the US Geological Survey.

However, demand outstrips local output by up to 5m tpa, requiring the country to import the shortfall. In 2013 the value of cement imports stood at around €290m, up 26% on 2012 figures. Plans are in motion to increase domestic cement production, and the government has even stated that capacity increases will eventually transform Algeria into a cement exporter (see analysis).

Current demand is driven by the large quantity of infrastructure construction works. But on a retail level, the market is also strongly influenced by smaller household and individual construction projects, which represents around 30% of all construction in the country according to Riadh Ledjehed, business development manager at Sika, a distributor of construction materials.

Raising production levels will nonetheless prove to be quite challenging. “For that the country will need to build new production units and upgrade and renovate existing ones. But to do this you need to stop production at some of the facilities, and this is hard to do at the current level of market demand,” Ledjehed said.

Plans for new cement production units are already taking shape across Algeria, including a new cement factory for the private Algerian group Cevital. In June 2014 the government authorised Cevital to build the unit in the wilaya of Constantine. The new unit will have the capacity to produce 8m tpa.

Domestic steel production is also experiencing similar levels of growth. In mid-2013 the new €389.6m steel and iron manufacturing unit built by Turkish group Tosyalı Holding started operations. Another steel production unit, part of a partnership between Qatari firms Qatar Steel and Qatar Mining and Algeria’s Groupe Sider, was announced in 2013. The €2.2bn unit was set to start construction in Bellara in late 2013 and have a total capacity of 4m tpa. However, the start of the project has been delayed, as the shareholder agreement has not yet been finalised. The Algerian government, however, has stated that the new unit will be built with or without participation from the Qatari firms.

As a result of the increased domestic production, the value of steel and iron imports fell 14.2% year-on-year in January 2014, from €110m to €94m. More effective curbs on black market activity would also help. “The informal market represents 40% of the construction materials market; if authorities deal with it, it would greatly increase efficiency,” Ledjehed said.

Increased Competition

With a slowdown in the eurozone pushing Spanish, French, Portuguese and Italian companies to search for work abroad, Algeria is an increasingly competitive market for contractors, despite the large number of ongoing projects – something that is noticeable in the tendering, design and execution of infrastructure projects.

The growing involvement of foreign companies in the construction sector has been encouraged by the authorities, which are looking at international partners to not only play a part in the execution of the most challenging projects, but also to encourage the transfer of technical know-how to local construction firms. “It can be a challenge for smaller Algerian contractors, who may lack the necessary financial, managerial or technical capacity, to address the complexities of large-scale projects,” Kuider Miraoui, managing director of road construction firm Société Nationale de Grands Travaux Routiers (Sonatro), told OBG. Additionally, Mohamed Remini, managing director of Entreprise de Viabilisation de Sidi Moussa, told OBG, “While most of Algeria’s economy is built upon the public sector, there is a large deficit in senior executives and middle managers. Low salaries and career prospects often result in individuals moving to the private sector.”

Other measures are directed at increasing building capacity within government companies. Following a decision to divide the state-owned SGP-Indjab, which is in charge of home building, into five different companies to focus on different regions of the country, the government announced that five new factories to produce prefabricated homes are also set to be built.

The AD17bn (€158.1m) plan will establish the first four factories in the cities of Algiers, Annaba, Biskra and Oran before mid-2015, with a fifth factory to be set up later in the south-western city of Béchar. Each of these new factories is expected to be able to build between 2000 and 5000 prefabricated homes per year.

Challenges

Despite a hefty portfolio of large-scale construction projects, foreign firms must navigate a number of regulatory requirements that seek to expand local content and capacity. Algerian law requires foreign companies to work in the country under a minority shareholder agreement, in which they cannot hold more than 49% of a business venture; however, this has not prevented a number of major firms from entering the domestic market. A 2011 law that gave an advantage to domestic companies – allowing them preferential treatment even when their offering price for a project is up to 25% more expensive – has to a certain extent changed the competitive environment for foreign companies bidding on projects.

According to market actors, small regulatory issues in dealing with approvals and documentation processing are the biggest hurdles for foreign construction companies. “Bureaucracy and payment delays remain the biggest problems affecting the sector,” Anneb told OBG.

To a certain extent, bureaucracy issues have become more troublesome following a spite of recently publicised corruption cases, which have led to slower decision-making in certain areas of public administration.

Obtaining a building permit, for example, can be a challenge. According to the World Bank, obtaining the relevant approvals from local, wilaya and national agencies can take roughly 150 days, and requires the submission of five sets of relevant documents.

Once obtained, the permit is valid for three years but requires subsequent re-approval if the project has not finished by this time. By comparison, Morocco allows electronic submission, and the approval of a construction permit takes on average 15 days.

As is the case in many emerging markets, dispute resolution mechanisms can be problematic, and some contractors have faced difficulty in ironing out contractual disputes. According to local media, in September 2014 a Japanese consortium involved in the construction of the East-West Highway sought discussions through the International Court of Arbitration to resolve payment issues with the government. However, a lack of clarity over how to resolve such disputes has made enforcing any arbitration judgement difficult. Meanwhile, according to sector participants, standards could be better enforced. “There needs to better enforcement of building standards and norms because many building codes are not respected in Algeria,” Samy Bouakaz, manager of Knauf Plâtres Fleurus, a manufacturer of gypsum-based building materials, said.

Regional Integration

Algeria has pushed for the establishment of an integrated economic block that would boost regional collaboration in a variety of areas. However, according to Abdelkader Fahem, managing director of Contrôle Technique des Travaux Publics, the national body responsible for the technical control of public works, “Improving the quality of academic training and strengthening local partnerships leads to increasing domestic content in infrastructure and public works projects. Such an initiative can help ensure greater multiplier effects for local projects, especially in regions like the south of Algeria.”

Outlook

With a large number of projects under execution and more in the pipeline, the construction sector is expected to remain attractive for both domestic and foreign firms, as evidenced by the high level of interest from around the world in the government’s tenders for everything from roads to power plants. That is not to say that the sector is without its challenges such as bottlenecks in terms of building material production and challenging red tape, but ample liquidity and favourable payment terms have helped the country maintain its appeal. Securing production for sufficient amounts of construction materials, especially cement and steel, will be essential for Algeria to reduce its import bill and allow balanced construction costs.