Assembling the line: Government policy supports the expansion of value-added processing

Apart from downstream commodity processing, industrial activity in Gabon is still at an early stage. The limited size of the local market and the high costs incurred by industrial activities have been historical obstacles to the industrial development of Gabon. Although the share of the industrial activity – excluding oil and mining – slipped to 7.7% of GDP in 2011, down from 8.2% in 2010, several manufacturing sectors registered a significant growth, a result of the governmental industrialisation strategy.

GOVERNMENT SUPPORT: The Industrial Gabon programme, a component of the Emerging Gabon strategy initiated by President Ali Bongo Ondimba, aims to promote local processing of raw materials into high-value-added exports. The state thus hopes to diversify the economy, and is offering major incentives to investors in order to do so. The government has also engaged in a public-private partnership (PPP) approach to initiate major development projects: the special economic zones (SEZ) of Nkok and Port-Gentil, new rubber and palm oil production projects in Lambaréné, as well as a fertiliser project in Port-Gentil are all managed as joint-ventures between the government and international investors.

PARTNERSHIPS: Past efforts to attract foreign investors were unsuccessful, according to the Public-Private Infrastructure Advisory Facility (PPIAF), a financial and technical assistance facility funded by the Asian Development Bank, the European Bank for Reconstruction and Development, the International Finance Corporation and others. The PPIAF’s report identified several challenges to past PPP projects, including insufficient preparation and feasibility studies, a non-systematic institutional process and a lack of clarity as to how projects fit into the nation’s fiscal and development priorities. However, according to the PPIAF, the Emerging Gabon programme is an “important tool” for increasing PPP activity.

“The Gabonese government’s strategy of investing in public-private partnerships is well-advised, as this is preferable to providing subsidies as in other oil-rich countries. Having the government on board as a stakeholder demonstrates a strong commitment to building successful projects,” Gagan Gupta, the country head of Olam Gabon, the local unit of Singapore’s Olam International, told OBG.

AGRIBUSINESS: Agribusiness contributed 3.8% to GDP in 2011, and production in the sector grew 8.2%. SIAT, a Belgium company specialising in the production of rubber and palm oil products, is one of the main private employers in Gabon, with 4400 workers. Since Africa imports 2m tonnes of palm oil per year, SIAT is considering renewing its existing 7000 ha of plantations and planting another 1000 ha. Planting must be planned well in advance, as it takes three years for the first fruits to be harvested.

Olam is also investing in the production of palm oil, through a 70:30 joint venture with the government. In the first phase of the eight-year project, Olam will create a 7350-ha plantation in the Estuaire Province and a 42,500-ha plantation in the Ngouiné Province. As of August 2012, 1500 ha had been planted. Olam will also build a milling facility with a capacity of 5m tonnes per year, to process local output into crude palm oil (CPO) for export. In the long run, Olam will develop its plantation on a 100,000-ha concession for a total investment of $788m.

Olam is also investing in a rubber production project, through an 80:20 joint venture with the government. The objective is to develop 28,000 ha of hevea tree plantations between 2013 and 2019. In parallel to the development of plantations, Olam will build a processing plant with a capacity of 225 tonnes of dry rubber per day, thus adding value to future exports. The first harvest is planned in seven years. Total investment is estimated at $183m and the project will generate 6000 direct jobs.

As Gupta told OBG, “Two of the main challenges in the rubber industry are the high cost of investing, which runs at around $7000-8000 per ha, and the long wait to make a return on investment. Although there is global demand for rubber, around the world it has historically been governments which have invested in the sector, and plantations were generally privatised at throwaway prices during hard times.”

FOOD PROCESSING: Production in the food processing sector grew by 8.2% in 2011, on the back of preparations for the African Cup of Nations (Coupe d’Afrique des Nations, CAN 2012). The Société des brasseries du Gabon (SOBRAGA), a beverage company, increased beer production by 12% and soft drink output by 7.6%. Revenues were up by 5% to CFA130bn (€195m), and SOBRAGA is forecasting 10% growth in 2012. “Demand is strong, with the Gabonese consuming 60 to 70 litres of beer per year, and there is much capital circulating in the economy,” Fabrice Bonatti, SOBRAGA’s general director, said.

Turnover at local yoghurt producer, SIGALLI, was also up, growing by 18.6% in 2011. “We feared that the economy would slow down after the CAN 2012, but the consumption remains high,” SIGALLI’s managing director, Bertrand Courties, told OBG. “We are targeting a 10% or 11% growth of our turnover by the end of 2012,” he added. Furthermore, SIGALLI is planning to double its yoghurt production capacity with the construction of a new factory by the end of 2012. At full capacity, this factory will quadruple the current production. However, according to Courties, there remains a shortage of skilled labour that presents a challenge for business expansion.

BUILDING MATERIAL MANUFACTURING: Public works related to the CAN 2012 led to a significant increase in imported industrial products: 73% for articles of iron and steel; 83.7% for copper materials; 51.3% for aluminium products. As a result, subsequent public works projects, in particular housing projects, are perceived as an incentive for the development of local manufacturing that can of serving the needs of the construction sector, as only a few firms have the capacity to manufacture building materials. Demand for cement is expected to rise – with the construction of a dam in Pouboura expected by 2013, new infrastructure and buildings on the site of the nation’s SEZ, and the growth in house building by the National Agency of Public Works (Agence Nationale des Grands Travaux, ANGT).

Cement is produced locally by Cimgabon, a subsidiary of German firm HeidelbergCement, and the sector has also had an influx of importers. CAN 2012 projects boosted the cement industry with 1.1% growth in 2011 and attracted several international competitors. The Chinese firm SOGEX BTP and the Cameroonian Fodern Gabon each secured a 61% market share in 2011 by selling imported cement , reducing Cimgabon’s share by 21 points in just a year. In volume, local production now represents 51% of the market for cement in Gabon. Hence, Cimgabon’s objective is to increase production of cement to 900,000 tonnes in 2012, particularly with the Moroccan group Sefrioui expected to enter the cement market. It has announced a €30.5m investment to build a factory with a capacity of 500,000 tonnes per year, set to be operational in 2013.

Cimgabon estimates that 70% of domestic demand, some 600,000 tonnes per year, goes to public works. The price of locally produced cement has been set by the government at CFA5060 (€7.59) per sack. While Cimgabon used to have the market for cement cornered, it has seen its market share decline to 39% in 2012, from 60% in 2010, as new players enter the market to feed growing demand.

In 2009, a goal of 5000 new housing units per year – for a total of 35,000 units by 2017 – was set by President Ali Bongo Ondimba. The first round of contracts for housing projects was issued in late 2011, and the state is expected to invest CFA396bn (€594m) over the next five years. Housing is a key priority of the National Infrastructure Master Plan, and of the total €15.99bn identified for all master plan projects between 2011 and 2016, €2.23 has been allocated to housing developments (see Construction chapter).

“For the social housing project, it is important not to import too much, as this would not help boost local employment,” Ali Fakhi Obounguou, managing director of SOTRALGA, told OBG. “Local companies have the capacity to provide products at competitive prices, with good quality for the price.” SOTRALGA is a major local processor of imported aluminium, with 80 to 85% of the market share. It is planning to upgrade its equipment to adjust to competition from imports.

CHEMICALS MANUFACTURING: The chemicals manufacturing sector overall, and the paint segment in particular, did not benefit from the CAN 2012 effect, instead registering a 4.6% decline in production in 2011, compared to a 6.8% growth in 2010. That being said the production of nitrogen, oxygen and acetylene recorded by a significant boost of 336%, 66% and 86% respectively. The main producers of industrial gases are the French Société Gabonaise d’Oxygène et d’Acétylène, AFGAS and Société Gabonaise de Gaz Industriel.

The high rates in the growth of industrial gases are generated by the needs of a nitrogen-based fertiliser plant currently being developed in the SEZ of Port-Gentil by the Gabon Fertiliser Company (GFC), a joint-venture between Olam (62.9%), Tata Chemicals (25.1%) and the Gabonese government (12%). GCF will use natural gas and nitrogen to produce ammonia, which will then be processed into urea, to be used as a fertiliser (see box).

The current global production of urea is 140m tonnes per year. With an optimum capacity of 1.4m tonnes per year all turned toward exports, the GFC plant will represent 1% of global production. As such, expectations are high that the plant is set to contribute to substantial growth in the industrial sector.

WOOD PROCESSING: The wood processing sector is continuing its quick expansion as a direct result of President Ali Bongo Ondimba’s decision to ban exports of unprocessed timber in 2010. Production increased 17.6% in 2011, compared to 12% in 2011 (see Agriculture chapter). The National Timber Company of Gabon (Société Nationale de Bois Gabonais, SNBG), which used to focus on the export of unprocessed logs, has invested in three new timber processing plants near the Owendo port. The plants allow SNBG to split, cut and laminate wood products. It will potentially create 450 additional jobs.

“Although initially the log export ban provided for a 75% processing rate target as part of the Forestry Code, the sector is now committed to striving for a 100% rate, as this will help boost exports,” Serge Rufin Okana, managing director of SNBG, told OBG.

Meanwhile, the Lebanese company John Bitar Gabon, which already owns two plywood factories, will invest €25m to build four timber processing plants in the SEZ of Nkok, creating 1000 jobs. The Swiss timber firm, Precious Woods, has also been investing in processing capacity. The company currently has two sawmills, a moulding plant and a rotary cut factory for Okoumé veneers, having invested $3.5m in a new hardwood sawmill, which began operating in July 2011. Precious Woods is expected to reach a capacity of 1800-2000 cu metres per month. The company has grown its production base with the introduction of air-dried rotary cut veneer and a range of products made of lesser-known species, such as Faro, Omvong and Niové.

IN THE MINES: The mining industry is on a growth path, largely because of major investments in the production and processing of manganese. However, diversifying production is linked to the continued development of infrastructure. Indeed, Fabrice Nze-Bekale, managing director of Société Equatoriale des Mines (SEM), told OBG, “There are significant logistical challenges in the mining sector related to both extraction and removal, the latter being extremely complex. Gabon is covered in forest so it is necessary to find ways to get resources out, and logistical bottlenecks can hold up the mining sector’s development. An example is the world-famous Belinga site, which has not been developed over the past 50 years, owing to the lack of infrastructure.” Hence, the ongoing development of infrastructure and the upcoming creation of an attractive legal framework will make the difference for sector development.

Gabon’s production of manganese grew by 28% in 2011. COMILOG, the main producer, had record output of 3.4m tonnes of ore in 2011, which places Gabon among the top global producers. With new players extracting manganese ore deposits, production is expected to grow at a high rate in 2013, however, the country faces international competition in a global market dominated by China’s demand. Both the SEZ at Nkok and at the metallurgical complex of Moanda will add value to exports when they commence processing manganese into alloys in 2013.

FREE TRADE ZONES: The establishment of the SEZ is part of the government strategy called Industrial Gabon, the objective of which is “to promote the local development of raw materials, the export of products with high added value, and the diversification of the national economy”. The government expects these internationally competitive free trade zones to attract new industrial investment partners.

The SEZ of Nkok is a 60:40 joint-venture project between the Singaporean company Olam and the state of Gabon. It was inaugurated in September 2011 and the 1126-ha site is located near Libreville. It focuses primarily, but not exclusively, on the timber processing industry: investors have a privileged access to 2m ha of dedicated forest resources.

Investors in the SEZ of Nkok will be exempted from the income tax for the first 10 years of operations. Beyond that period, a preferential 10% tax rate will be applied. Investors are also free of Customs fees and will enjoy a 50% discount on the regular cost of electricity. According to the law establishing the SEZ of Nkok, three-quarters of the products processed on site must be exported. Imports and exports for investors will be Customs and tax free. To facilitate all administrative tasks for investors, a one-stop shop has been set up temporarily in Libreville and will be installed on the site by December 2012.

The SEZ of Nkok has already attracted about 60 companies for the first phase of development, which covers 440 ha: 100% of the land lots in the commercial sector are already sold (a new zone is now under development), as well as 80% in the industrial sector and 20% in the residential one.

The Indian firm, Abhijeet Group, is the biggest investor in the SEZ of Nkok, where it will build a ferroalloy plant, a captive power plant and a sinter plant. Abhijeet Group’s investment is estimated at between $1.3bn and $1.5bn. Infrastructure should be completed by October 2012, which will open the way for the construction of investors’ facilities. The development of the second phase of 500 ha has started but is not expected to end before 2014. An additional 100 ha is kept for future residential needs. In order to facilitate access to the site, Olam is conducting studies for a dedicated loading bay nearby to connect the SEZ with the Owendo Port. Construction of the loading bay should take four to five months. The site will also be connected to the National Highway 1, leading to Libreville and its port. Olam is also planning to construct railway facilities. Overall, the total cost of the SEZ project is about $210m.

As the SEZ of Port-Gentil, incentives to attract investors are similar to those of the SEZ of Nkok. Out of the eight sections of the site, Olam is due to start development of 926 ha for the industrial sector by the end of 2012 when the environmental and social impacts assessment has been finalised and approved. The development of the whole SEZ could take four to five years to be completed.

RETAIL MARKETS: Like in several other African countries, the retail business in Gabon is dominated by the informal sector, which controls nearly 80% of the market. Customs and fiscal fees are such that it makes it impossible for the formal wholesale and retail sectors to compete with informal sales and counterfeits. The government is addressing the issue by increasing fiscal controls and sanctioning the use of public space by informal shops. The main formal wholesale, distributions and retail firm in Gabon is the Compagnie d’Exploitations Commerciales Africaines-Gabonaise de Distribution (CECA-GADIS), specialising in food products, hardware and electrical appliances, among others. Part government-owned, CECA-GADIS has stores in every city and turnover of some CFA200bn (€300m). Other firms have limited territorial coverage, like Géant Casino, which accounts for 10% of the formal market.

A particularity of the retail business is that 80%- 90% of the products are imported. With a limited market size of 1.5m inhabitants, there is little incentive to develop local production of consumer goods. Indeed, high power and labour costs make it less profitable than importing goods. In that regard, Prix Import, a company that owns four supermarkets in Libreville with 300 employees, indicated that with 1500 containers per year, its margins are between 5% and 10%, except for luxury goods (20-30%). However, this high an inflow of import products places the port’s infrastructure under pressure, and forces wholesale and retail firm to order large stocks of products several months in advance.

COSTS: That said, prices of products in the formal retail business are too high for most of the population and only high-income workers and their families are able to afford them. “Prices are expensive due to high associated costs, such as Customs, which are very expensive with 35% import duties; 18% value-added tax, which adds pressure on cash flow and is transferred on to the consumer; relatively high salaries costs (the minimum salary is CFA200,000 (€300); and dependence on air and sea freight imports,” Jacques Rivière, managing director of Géant Casino, told OBG. Variations in Chinese domestic demand also have a pronounced effect the international supply chain of Gabon’s wholesale and retail firms.

“When Chinese demand for frozen food is high, it has a direct impact on our costs: the price we pay for pork can double,” said Nicolas Fiatte, the purchase manager at SAN Gel, a frozen food wholesaler.

DEMAND: Despite the small size of the formal market, demand for imported products is growing quickly. For instance, between 2009 and 2011, wine imports grew 88% in value and 7% in volume. Meanwhile beer imports grew 64% in value and by 63% in volume, poultry imports grew 40% each in value and weight, beauty product imports grew by 208 % in value and by 36% in quantity, while imports of perfumes grew in volume by 8%. This indicates that consumers have sophisticated consumption habits and are looking for quality and refined products.

PERFORMANCE: The preparations for CAN 2012 provided an early stimulus for the retail sector, causing sales to rise quickly during the second half of 2011. Société Gabonaise de Représentation (GAREP), which represents a number of international alcohol brands in Gabon, indicated that it saw an increase of its turnover of CFA5bn (€7.5m) in 2011. Meanwhile, Prix Import registered a 12% growth in 2011, exceeding its own expectations of 8% growth.

LOGISTICS CHALLENGES: In the first months of 2012 port authorities were faced with an unprecedented traffic overflow and a strike of Customs officers, which caused important delays in the unloading of cargo. This situation generated cash-flow difficulties for many firms.

“There are a lot of challenges in importing products, mainly the fact that the port at Owendo is outdated and undersized for what it needs to do. The CAN 2012 slowed things down to the extent that products were arriving one month late. The port is the window to Gabon, and it should be enlarged, ideally able to receive 10 ships at a time,” Denis Torchiana, the managing director of GAREP, told OBG.

As a result of the delays, several firms importing food had to throw away cargo upon delivery, as the consumption dates had expired. In other cases, late delivery of cargo caused sudden overstock, forcing firms to reduce inventory by increasing business hours and/or by selling products at discounted prices.

CONTINUED GROWTH: After the CAN 2012, Gabon’s economy returned to normal, but the retail sector is still benefitting from an unusual high growth rate. “The economic slowdown after CAN 2012 has not affected the retail sector, despite the arrival of new competitors,” Rivière told OBG. “It may be a consequence of the fight against informal business that the government has undertaken.” Géant Casino registered 10% growth in the first six months of 2012, and SAN Gel saw 15% growth for the same period.

OUTLOOK: One of the main challenges in the development of the sector is the shortage of skilled labour. As the Gabonisation policy has made it difficult to recruit expatriates, investing more in local human resources is in the long-term interest of wholesale and retail firms. This will be more and more required as several companies, such as Prix Import, are planning to expand their territorial coverage based on the growing demand. “The wholesaling sector has a bright future in Gabon, but it is important for players to focus on developing their retail distribution strategies as retail networks in Gabon remain underdeveloped. The novelty is that these networks can drive sales and be a growth motor,” Bernard Azzi, the CEO of Prix Import, told OBG. Many companies have a limited presence outside of Libreville, due to limited road infrastruct ure, particularly toward Port-Gentil, which affects the entire sector.

However, ongoing public works, the increase in the processing of timber, the expansion of agribusiness with palm oil and rubber production projects, and the beginning of activities in the SEZ by 2013 should increase the share of the secondary sector in the GDP and ease transport. The free trade zones also have a leveraging effect on industrial suppliers located outside of the SEZs, such as industrial gas producers. This leverage effect should extend to other types of suppliers and intermediaries, thus contributing to the growth of small and medium-sized enterprises.