Algeria's construction sector remains buoyant as the economy diversified away from hydrocarbons

Algeria’s construction sector remains buoyant despite the impact of the significant drop in global oil prices, with the government continuing its support for the main social programmes and infrastructure projects to diversify the oil-dependent economy. A new five-year investment plan for the period 2015-19 worth €233.7bn was approved by the government in late 2014 to build upon the achievements of the first plan of this sort for the 2005-09 period, which was worth €178.4bn, and the 2010-14 plan worth €255.1bn.

However, the effects of continuing low oil prices, which is leading the government to tap into its sovereign wealth fund – the Fund for the Regulation of Receipts – may slow public spending commitments over the long-term. As a result, in June 2015 prime minister Abdelmalek Sellal ordered ministries and regional authorities to freeze all projects that had still to be launched. A review of the investment programme is ongoing with non-priority infrastructure projects in the education, health and transport sectors expected to be postponed for the immediate future. However, based on media reports, spending commitments are likely to be maintained for key housing, energy and water projects.

Government Focus

Successive cabinets under president Abdelaziz Bouteflika have emphasised the need for economic diversification to reduce Algeria’s dependence on its hydrocarbon sector. The impact of the current low oil price environment since mid-2014 only serves to further underline the need for Algeria to intensify investment in developing its infrastructure to diversify its economy and in turn drive economic growth. As a result, new transportation projects, new public housing, new schools and new hospitals are helping drive the construction industry. The sector still accounts for a large percentage of GDP, at 10.2% of GDP in 2014, down only slightly compared to 10.8% in 2009. The sector grew by a total 6.8% in terms of non-oil GDP growth in 2014, up from 6.7% in 2013.

The government’s five-year plans have focused heavily on developing Algeria’s transport, energy and water infrastructure to meet the growing demands of the densely populated northern coastal region as well as to extend development to other areas of the country. The construction of major road and rail lines and the development of new industrial zones and new towns along these transport axes are designed to spread development away from the north, which represents just 4% of the total national territory but is home to 64% of the country’s population of 39.5m. In sharp contrast, the south accounts for 87% of the territory but just 9% of its population.

Ports

Construction of one of Algeria’s single biggest planned infrastructure projects is set to start in 2016, according to a statement in October 2015 by Sellal. The new port to be built between Cherchell in Tipaza province and Ténès in Chlef province will cost an estimated AD200bn (€1.8bn) but will not be state financed, with studies under way by the Ministry of Transport on alternative forms of financing. The project, which will cover an area of more than 1000 ha, is to be developed in three stages over 10 years by local public and private companies in partnership with foreign firms. The need for a new port is underlined by the forecast tripling of port tonnage from the 10.5m tonnes per annum (tpa) now handled by the ports of Algiers and Ténès to 35m tpa by 2050.

Meanwhile, in early 2016 Algiers will open its new ferry terminal. The government has budgeted approximately AD550bn (€5.1bn) in spending for port projects between 2015 and 2019.

Roads

Algeria earmarked close to AD4.3trn (€39.6bn) on developing road infrastructure in its 2015-19 plan, including more than 1000 km of motorways and about 7000 km of secondary roads.

The single most significant investment project envisaged in the current five-year plan is the Hauts Plateaux Highway, which will run 1020 km in parallel to the nearly-completed East-West Highway to the north, from Tlemcen to Tébessa on the Tunisian border. Construction of the highway, which will cost an estimated €6.6bn, is to be divided up into ten stretches and to be carried out exclusively by local contractors, according to the Ministry for Public Works. Each section is expected to take around 36 months. Studies are underway on the Tiaret-Batna, Batna-Khenchela and Khenchela-Tébessa sections. The state construction group Cosider has been awarded the Batna-Khenchela section but is awaiting the green light from the authorities. “Roads built during the 1990s were constructed under difficult conditions and access to construction materials was often challenging,” Lakhdar Rekhroukh, CEO of Cosider Group, told OBG. “Roads built during that era are of poor quality but measures are being taken now to improve them,” he added.

Setbacks 

Work is continuing on the 1216-km, six-lane €11bn East-West Highway, which links Annaba on the border with Tunisia to Tlemcen on the Moroccan border. The central and western sections were built by a consortium of China Railway Construction Corporation (CRCC) and CITIC Group while the eastern section was constructed by a Japanese consortium of Kajima Corporation, Nishimatsu Construction Company, Itochu Corporation, Hazama Corporation and Taisei Corporation. Allegations of corruption marred the completion of the project, and the government began a number of cases against the parties involved, leading to ten-year sentences for representatives from the National Highways Agency (Agence Nationale des Autoroutes, ANA) and their intermediaries, and fines for Cojaal and CITIC-CRCC. Mohamed Khelladi, former manager for ANA, had testified that “the motorway cost $11bn, to which one should add $5bn worth of corruption”.

Although the motorway has technically been completed, different sections of the route are in need of additional maintenance or work before being opened and are in the process of being re-laid. Additional associated infrastructure is being built in the meantime. For example, a consortium led by Portugal’s Teixeira Duarte, with the local ETRHB Haddad and Spain’s SICE, is building a series of service stations, toll gates and rest areas to serve a 330 km stretch of the western section. The €253.6m contract, which was awarded in April 2014, is due to be completed in 2016.

Similarly, in July 2015 Teixeira Duarte in partnership with local contractors – Seo EST Batna and Nardjess Construction – won a €218m contract to build a 31 km, dual three-lane motorway linking the port of Skikda to the East-West Highway. It followed the award in April 2015 of a €204m contract to the same group for the first 22 km of an eventual 54 km two-way three-lane motorway to Ténès. Both orders are expected to be completed in 2017. In addition, numerous roads are being built or expanded to improve connections with the south. One such project is the transformation of a 53 km trunk road linking Chiffa with Berouaguia into a dual carriageway. The project, budgeted at AD85bn (€782m) and scheduled to be completed in April 2016, is aimed at facilitating the transport of goods from the port of Cherchell to the south of the country as well as to a number of neighbouring north African countries.

Rail 

In a bid to ease a saturated road network and promote economic development beyond the northern coastal region, Algeria is also investing heavily in the extension and expansion of its rail system through the construction of new lines and the modernisation of existing lines. A total of €32bn has been budgeted under the current five-year plan to build 5000 km of new lines, including the doubling of the northern rail line, as well as electrification and resignalling of existing routes.

Algeria aims to have 12,500 km of electrified double-track lines with state-of-the-art signalling by 2025. At present the National Company for Rail Transport (Société Nationale des Transports Ferroviaires, SNTF) operates 3800 km of railway lines and a total of 6000 km of new lines are under construction. Major ongoing projects include a line linking Birtouta and Zeralda, a line linking Oued Tlélat to the Moroccan border, and the modernisation of the line between Thénia and Tizi Ouzou. Construction is also under way for the first 700 km of an eventual 1160 km line to serve the Hauts Plateaux, which will run from Tébessa in the east to Sidi Bel Abbes in the west of the country. Other rail lines totalling close to 3400 km are planned in the south to better serve the main towns.

Algeria’s National Agency for Railway Project Studies and Investments (Agence Nationale d’Etudes et de Suivi de la Réalisation des Investissements Ferroviaires, ANESRIF) signed a memorandum of understanding in June 2015 with ITALFERR, the engineering subsidiary of the Italian State Railways, to create an engineering joint venture, which will support the modernisation and expansion of the country’s existing railway network. Numerous contracts have been awarded to foreign contractors such as Portugal’s Teixeira Duarte, which is to complete modernisation of the Thénia to Tizi Ouzou line and develop its electrification up to Oued Aissi in 2016.

Metro System 

A major expansion of Algiers’ transport system is planned by 2025, comprising a metro network stretching 54 km with 50 stations and a tramway system totalling 26.8 km with 44 stations. The metro system, which opened in November 2011, began with a 4 km long service from Haï el Badr to El Harrach Centre, with four stations, and extensions opened for service in July 2015. It was built by a consortium led by Colas Rail under an €85m contract awarded in 2012. A further intermediate station at El Harrach Gare is to open in the future. An extension of the line north from Tafourah Grande Poste towards Place des Martyrs is being built by Teixeira Duarte while Algeria’s state construction group Cosider is building a branch line from Haï El Badr to serve the southern district of Aïn Naadja, and then on to Baraki in south-east Algiers. Both these extensions are planned to be operational by the end of 2017.

Cosider is also building an extension east from El Harrach Centre to the Houari Boumediene Airport, which is scheduled to open in 2020. However, plans for further expansion to Chevalley and Dely Ibrahim have been put on hold until further notice as a result of the government’s current budgetary issues, the CEO of the Entreprise du Métro d’Alger (EMA), Aoumar Hadbi, announced in October 2015.

Tram 

Alstom, in a consortium with Spain’s Isolux Corsán and Algeria’s Cosider, won a contract in July 2015 to extend the tramway in Constantine by 10 km to link the existing station of Zouaghi with the new city of Ali Mendjeli and with the Mohamed Boudiaf Airport. The extended line, which will span 18 km once completed in 2015, will be equipped with the first Citadis trams manufactured by Cital, Alstom’s local joint venture, with Ferrovial and Algeria’s public transport operator EMA, at its factory in Annaba.

Alstom, which has already supplied integrated tramway systems for Algiers, Oran and Constantine, is also supplying infrastructure for the tramways of Ouargla and Sétif. The company is also in consortium with Corsán-Corviam Construcción and Isolux Ingeniería, contracted to build the first tramway line in Mostaganem. The €250m project, which involves the construction of a 14-km rail system with 24 stations, is slated to be completed in late 2017.

Utilities Projects

Construction work is also under way for the utilities sector. Development of the country’s water supply system remains a priority, specifically in terms of improving access to drinking water and sewerage systems for the urban population and dispersed settlements, as well as for providing water for irrigation for agriculture. The five-year plan to 2019 budgeted close to €165.6m for the construction of 26 dams, 2440 km of water transfer pipelines, 1250 km of waste-water network, more than 60 wastewater treatment stations and the rehabilitation of 1680 km of the water distribution network.

This follows on the back of a major programme that was launched in 2010 to nearly double the volume of treated wastewater from 660-750m cu metres per year to 1.2bn cu metres in 2014 through the construction of 239 new treatment plants. As of October 2015 a total of 166 stations are in operation with the revised aim of having 272 in service by the end of the current five-year plan, according to the Ministry of Water Resources and the Environment.

The projects have attracted a number of foreign contractors. Spain’s Isolux Corsan is building a waste-water treatment plant to serve the city of Mahouane in the region of Sétif under a €23m contract awarded in March 2015. The new plant, to be completed in 2017, will serve the city of 900,000 inhabitants. Meanwhile, a consortium led by Portugal’s Teixeira Duarte is developing a wastewater treatment station for the new city of Ali Mendjeli near Constantine. The station will be commissioned in early 2016.

Significant investment is also planned for the power and gas supply sectors. According to a programme published in June 2015 by the state-owned gas and power utility Sonelgaz, the total value of planned investments by 2025 is AD5.76trn (€53bn), of which AD4.83trn (€44.4bn) will be financed by the utility. As well as extending the transmission and distribution networks, these funds will pay for an additional 27.8 GWh of generation capacity, which is deemed necessary to meet expected increases in demand. The programme envisages investment of €15.2bn in power generation, €13.4bn in power transmission, €13.4bn in electricity and gas distribution networks and €7.14bn in the gas transmission network.

Approximately half the planned investments are scheduled for the period until 2017, though the realisation and timing of these investments will depend on the utility’s ability to secure additional funds. In September 2015, the company’s CEO Noureddine Boutarfa announced that Sonelgaz was preparing to launch a new bond issue on the Bourse d’Alger in 2016 and would seek to raise revenues through a gradual increase in power tariffs.

Housing 

The government’s spending initiatives extend into property development. The importance of providing affordable housing to a growing population saw the government commit to €58bn in funding to build 1.6m new homes by 2019 in a bid to address the current housing shortage. Taking into account the 650,000 units that were still being built in 2014 under the previous five-year plan, this would require construction of over 2.2m housing units by the end of 2019.

The biggest challenge for the government is delivering the volumes of new housing required in such a short time span. While there have been 2.4m new housing units built under government contract since 1999, the total shortfall is still estimated at 1.2m homes. The government has turned to foreign contractors, most notably from China and Turkey, to assist public sector companies in meeting the targets but is still struggling to meet demand. The low price offered for public housing contracts means that there is little interest from private property developers.

In an attempt to accelerate the supply of low-cost housing, Algeria is now industrialising production methods for housing. In October 2015, the secretary-general of the Ministry of Housing called for the large-scale construction of pre-fabricated housing units, with factories to be built in new economic zones or using mobile production plants capable of assembling units at the housing sites. The first four such plants are to be built by state holding company SGP Indjab in Algiers, Annaba, Oran and Biskra, with a state credit of AD17bn (€156.4m), with a fifth planned to be built in Bechar. The production capacity of each plant is expected to vary between 2000 and 5000 pre-fabricated houses per year. In May 2015 the Ministry of Housing approved pre-qualification bids by nine foreign companies to set up joint ventures with local partners to build pre-fabricated housing plants.

New Towns 

Much of the government’s new housing stock is being built in and around the main cities, in new towns designed to ease pressure on existing urban centres. Four new towns are planned but their development has slowed since the budgets allocated for these projects and their supervision was transferred from the Ministry of Environment and Regional Development to the Ministry of Housing. Korean contractors were commissioned to design new towns at Boughezoul near Ain Oussera, Bouinan near Blida and Sidi Abdellah in the suburbs of Algiers in the heights of Zeralda and carried out initial works but work has since halted. Development of Naama, further to the south, was contracted out to the French-owned EGIS International. Egypt-based Arab Contractors reported in August 2015 that it is building three new towns, expected to provide 4500 housing units, while in May a contract was signed with an unnamed Turkish company for the construction of 5000 units under the government’s rent-to-buy programme.

The sites are contributing to the government’s social housing build programme, but may not have critical accompanying infrastructure like transport connections, schools and leisure facilities, according to Mohamed Larbi Merhoum, owner of Algiers-based MLM Architects. According to Merhoum, this runs the risk of leading to social ghettos.

Building Materials

Algeria’s efforts to reduce its import bill for construction materials appear to be bearing fruit. Imports of construction material declined by almost 30% year-on-year (y-o-y) to €1.33bn from January to July of 2015, compared to €1.9bn in the same period in 2014, according to the Algerian Customs’ National Centre for Data Processing and Statistics. Purchases of iron and steel fell by 34% y-o-y to €701.8m, though the drop in spending on metal imports is mainly attributed to a fall in prices as a result of oversupply following a decline in Chinese demand. In the ceramic products sector, imports declined 46% to €25.2m while wood imports declined 29% to €329.5m.

Since the end of 2014, the government requires that property developers with projects that are part or wholly financed by the state to use locally produced building materials rather than imported products. This appears to be having a positive impact on the country’s import bill, even allowing for a fall in international metal prices. Prior to this measure, imports had been rising. In 2014 imports of construction material rose by 6.4% on 2013 to €3.26bn.

The modernisation of building construction and growing demand among consumers for higher quality housing is reflected in the emergence of new players on the scene. One such example is Tlemcen-based Construction Energetique, which specialises in energy efficiency solutions for new and existing buildings. According to the company’s director, Mohammed El-Amin Benhabib, more specialised building materials are currently imported and with respect to locally produced materials, such as doubled glazed windows, joineries and internal woodwork, the quality level is typically not sufficient to meet energy efficiency targets. As such, there is still a lot of room for growth and evolution. “We work with local contractors where we can and train local workers and subcontractors to carry out the installation,” Benhabib told OBG. “But we still import a lot of materials, that is why we keep insisting to our partners that there is a real opportunity to invest in the Algerian market.”

Cement 

In the cement segment, Algeria aims to meet domestic demand from its own production by the end of 2016, with the ongoing construction of a number of new plants as well as the further expansion of existing production well under way (see analysis). Current demand stands at an estimated 26m tpa, but with domestic production of 21m tpa, Algeria currently needs to import around 5m tpa. Customs data showed that the country’s bill for cement imports reached €458.1m in 2014, which is up from a total of €356.9m in 2013.

Steel

Increased domestic steel and iron production would also significantly reduce the import bill. Iron and steel accounted for 57% of the total construction materials import bill in 2014 at a combined cost of €1.6bn. The sector received good news in June 2015 when Turkish steelmaker Tosyali Holding announced it had inked a €453m deal with China’s Sinosteel to expand capacity at its ore-tosteel plant near Algiers from 1.6m tpa to 2.3m tpa.

Also in 2015, ArcelorMittal announced continued technical support for the expansion of the El Hadjar iron and steel complex in Annaba province. The project, which will cost an estimated €642m, will be financed with a €535m credit from the Banque Extérieure d’Algérie, and will increase overall production capacity from 1m tpa to 2.2m tpa.

Meanwhile, construction started in March 2015 on a new steel production plant in El Milia, south-east of the city of Jijel. The Bellara steel plant, which is being built by Italy’s Danieli on behalf of a joint venture between Algerian state group Sider (51%) and Qatari Qatar Steel (49%), at a cost of €1.8bn, will eventually produce 4.2m tpa of rolled steel and special steel for the national rail industry. It will produce 2m tpa from 2017 and reach full capacity by end-2019.

Challenges

While there has been more private sector investment, most notably in high-end residential and commercial real estate and in certain industrial sectors, much more is needed to sustain Algeria’s infrastructure programme and drive economic diversification and growth. “Algeria needs private investors to contribute to the country’s development. With the state’s reserves being reduced, it is important that efforts are made by the government to encourage greater private investment,” stressed Gamal Farid, general manager of construction group, Orsacom Algeria.

The IMF also noted the need to improve the efficiency of capital spending. This will require consistent implementation of competitive practices in public procurement as well as measures to strengthen planning, implementation, monitoring, and maintenance of public investment projects and the setting up a legal framework for public-private partnerships.

Outlook

In the current low oil-price environment, economic diversification is all the more crucial to ensure sustainable growth, create jobs for the country’s youthful population and ensure social stability. As a result, Algeria is continuing to support the development of its national infrastructure. This will continue to offer significant opportunities for both domestic and foreign investors as well as contractors. Yet with a widening current account deficit as a result of falling revenues from its oil and gas exports, pressure is growing on the government to find new ways to finance its plans.