Infrastructure developments support Algeria's growing population and exports

In an effort to meet the infrastructure needs of a growing population and facilitate increasing exports of industrial and agricultural products and minerals, the government sees a robust and stable construction industry as a key component of their vision for the future. Even as the overall economy in the country has slowed, the sector has remained a consistent engine of growth. The building materials segment, which grew by 16.3% in the first quarter of 2018, is particularly promising as Algeria builds on recent investments in manufacturing plants and shifts its focus to scaling up exports.

Construction contributed 11.7% of total GDP and employed around 17.2% of the Algerian workforce in 2017, and is poised to grow further due to the expanding population and large-scale government operations to facilitate the development of the non-hydrocarbon sector in the wake of the market’s collapse in 2014. While officials are prioritising projects that will yield revenue to the state, such as those in oil and gas and power, public housing programmes and public works will continue being the recipients of consistent, large-scale investments through 2021, as stipulated in the five-year plan.

Size & Performance

The sector maintained its position as a significant driver of overall economic growth for the country in 2017, expanding by 4.4% – nearly three times that of overall GDP, which grew by 1.6% during the same period. According to the National Statistics Office, construction, including oil and gas projects, stabilised over the two years leading up to 2017 at an annual growth rate of around 4.8%, after a period of strong performance backed by sizeable public investments that resulted in an average compound growth rate of approximately 7.5% per year between 2012 and 2014.

This slowdown, linked to the collapse of the hydrocarbons market, has consolidated the sector significantly in the past years. Industry analysts have told OBG that the general downturn has increased competition, sifting out the stronger firms from those that were only able to capitalise on the economic boom. This may make 2018 a turning point in which new companies need to decide what strategies to implement, while established players consider where to focus on and how much to diversify. “Competition is tight in the sector,” Marcel El Khoury, CEO of speciality construction chemicals firm Sika El Djazaïr, told OBG. “Therefore, companies are starting to look towards new and niche segments.” Construction is expected to expand through 2021, though at a relatively slower pace, aided by a significant annual investment budget of around €15bn, with 70% of this devoted to infrastructure development projects. Stakeholders estimate that the government will invest $50bn-$60bn in large-scale construction projects over the next five to seven years, helping to maintain consistent growth.

Driving Demand

There is significant potential for expansion in construction due to population growth, which increased at a rate of around 1.7% in 2017, necessitating the construction of not only housing, but also schools, hospitals, transportation networks and other public infrastructure. As the government has aimed to deliver 1.63m units between 2015 and 2019, housing developments account for the majority of construction projects in the country. In addition to ongoing demographic changes, demand is driven by the government’s efforts to diversify the economy, moving away from a reliance on hydrocarbon exports and relieving the national trade deficit. As industry and agricultural outputs rise, upgrades to transportation infrastructure will become increasingly important. Large public works projects aimed at maintaining and expanding national road and rail networks, as well as developing port facilities, ensure that construction will maintain its central status.

Sector Structure

According to the IMF, construction and public works made up 18% of the value-added private sector in 2016, while in September 2018, Nacira Haddad, vice-president of the Algerian Business Leaders’ Forum, stated that the sector was 90% private. Despite this, the procurement structure of the industry is state dominated, with large housing and public works projects contracted by the government, while private initiatives are generally relegated to tourism and small-scale industry developments. Although the sector has historically relied on the expertise of foreign companies, officials have begun pivoting towards increasing the allotment of domestic contracts, which has had an impact on international firms operating in the country.

“The situation for foreign enterprises has been difficult since the oil crisis, and while the price of oil has increased in the past year, the government is prioritising its own reserves rather than initiating new investments in infrastructure,” Ricardo Acabado, director general of Teixeira Duarte, a Portugal-headquartered infrastructure development company, told OBG. “The reality is that there are no more international tenders. What foreign players are doing now is managing and completing previously held contracts and projects, with most new contracts and tenders being oriented towards Algerian firms,” he said.

Re-evaluation Costs

Large public investment projects initiated by the state are relatively costly compared to other countries in the MENA region, which has motivated the government to spend considerable resources on the re-evaluation of ongoing programmes in each year’s public works budget. The cost of building roads, in particular, was 34% higher than the average regional cost between 2011 and 2017, a figure matched only by the UAE and over double that of Morocco and Tunisia. In addition to the difficult terrain and high cost of land, the large price differential is likely also due to a lack of efficiency in project management. In the way of addressing this situation, the state has allocated considerable resources to the reassessment of public projects in recent years. Reassessment costs reached an all-time high of AD760bn (€5.5bn) in 2015, which was nearly 40% of the public works budget. In more recent years, the figure has been closer to 25% of the budget, including the 2018 Finance Law, which allocated AD178bn (€1.3bn) to re-evaluation.

However, these measures have yielded results: according to the IMF, the efficiency of public investments has improved over the course of the 2010s to the extent that delays and cost overruns have been mitigated, despite remaining relatively high. While delays have been reduced by over 50% in the current decade compared to that of the 2000s, cost overruns for public projects have also been lowered and currently range between 10% for construction projects and 22% for territorial development, which is comparable to international standards.

Major Players

Registering nearly AD425bn (€3.1bn) in contracts in 2017, the publicly operated Cosider Groupe is the largest construction firm in Algeria and the sixth largest in Africa in terms of revenue. The company, which is 100% owned by the Algerian National Investment Fund, employs over 28,500 workers and achieved a turnover of AD171bn (€1.2bn) in 2017, 45% of which was realised as added value. Public works and transport constituted AD175bn (€1.3bn), or 41% of its planned projects, while housing development accounted for AD95bn (€689m), or 22%. Among its ongoing and planned developments, state construction group Cosider has been contracted for the construction of 314 km of railway, 36 km of metro and tram lines – totalling 48 stations – and 350 km of hydrocarbon pipelines. The firm has also entered into a number of significant partnerships, including an agreement with LafargeHolcim for the manufacture of plaster and another with Banque Extérieure d’Algérie targeting real estate development. The largest private Algerian firm involved in building and public works is ETRHB Haddad, which handled over $2bn in construction between 1997 and 2018. In addition to the acquisition of large contracts for roads and railways, 2018 saw the company diversify into the building materials segment, announcing sizeable investments in two cement plants being developed in Djelfa and Rélizane, and a steel production facility in Berrahal.

Public Procurement & Housing

In terms of public procurement, the state has prioritised the construction of housing units and the continuation of existing infrastructure projects. Ahead of the 2019 elections, the government announced its intention to provide 200,000 public housing units in 2019, though it is has been anticipated that the state will shift towards expanding the role of private developers in its policy after Algerians go to the polls.

While the state originally committed to building 3.24m housing units in the five-year plan running to 2019, the collapse of the hydrocarbons market led the authorities to cut this number by nearly half. According to the Ministry of Housing, Urban Planning and the City (Ministre de l’Habitat, de l’ Urbanisme et de la Ville, MHUV), 300,000 housing units are built per year, a rate of construction that necessitates the involvement of many firms and the mobilisation of significant amounts of materials.

Speaking in mid-2017, Abdelwahid Temmar, minister of housing and urban planning, said 70% of housing contracts were being carried out by foreign firms, mostly from China and Turkey, and announced intentions to institute preference for Algerian construction companies in future developments. In line with this, the MHUV stated that 85% of materials used in the building of state-funded residential units were locally produced in 2017. Apart from the vast resources mobilised for housing, the other main component of state planning in the sector is that of public works.

Public Works

After three years with a negligible budget, the 2018 Finance Law increased the public works’ equipment budget to AD380.8bn (€2.8bn), up from AD62.7bn (€455.2m) in 2017, a change of 507%. Several key infrastructure projects that promise economic returns have received funding, with the Ministry of Transport and Public Works (Ministère des Travaux Publics et des Transports, MTPT) stating that while the sector had made it through its most turbulent phase, for now projects would advance based on governmental priorities and efficiency.

The 2018 public works budget also allocates AD65bn (€471.9m) to the maintenance of 500 km of national roads, the East-West Highway, and further upkeep of the country’s ports, airports, bridges and rail lines. The budget also provides AD28bn (€203.3m) for the connection of remote areas by means of road expansion and rehabilitation. The largest public sector project is that of the new El Hamdania port and its corresponding transport and logistics infrastructure, which was approved in February 2017 after the announcement of a $900m loan from the African Development Bank. The government has mobilised AD150bn (€1.1bn) for the first phase of the project, which is being built by China Harbour Engineering Company and China State Construction Engineering Corporation, which jointly control a 49% stake in the project, with the remaining 51% being held by the Algerian Port Authority, and is expected to begin operations in 2024. The new commercial port, being developed at a total estimated cost of $3.3bn, will be one of the largest on the continent with an annual handling capacity of 6.5m twenty-foot equivalent units. In March 2018 the government announced that three new industrial zones and a rail line would also be built in conjunction with the project.

However, despite this progress, stakeholders are witnessing a shift away from new investments as the state works to restore its reserves, and transportation, dam and desalination infrastructure begins to meet the country’s basic needs. In late 2017 the MTPT stated that the sector was in the process of establishing a regulatory framework to open investment in maritime and air transport to the private sector.

Roads

While the maintenance of existing transportation infrastructure is a key focus for authorities, two projects central to the country’s economic development – the Algerian portion of the Trans-Saharan Highway and the East-West Highway – have also been moving forward. In April 2018 it was reported that the 1800-km Algerian section of the Trans-Saharan Highway had reached nearly 90% completion. The project, which will pass through six African countries and connect Algiers to Lagos, will enhance regional connectivity and increase commercial exchange. In addition, the East-West Highway connecting Dréan to the Algerian-Tunisian border is expected to reach completion in the first half of 2019 as construction continues on the remaining 84 km. With a view to improving off-budget financing for infrastructure projects, the highway will require a set toll per km of travel in order to finance maintenance work. As of September 2018, 72% of the highway’s stations and toll points had been completed.

Rail

The country’s rail network reached 4200 km in 2018, having grown substantially from a total of 1800 km of lines in 2000. While it was reported in April 2017 that the state-owned National Rail Transport Company had set a goal of expanding the network to 12,500 km by 2025, more recent statements from the government have scaled the target down to around 6300 km by 2030. The increased rail capacity is part of the government’s wider drive to diversify exports, while at the same time balancing trade. In the wilaya (province) of Tamanrasset in the south, AD2.4bn (€17.4m) was allocated in July 2018 for a project to lay 200 km of tracks between Tirek and Bordj Badji Mokhtar for the rapid transportation of gold from the considerable reserves in Tirek. In addition, in June 2018 the MTPT announced new targets of transporting more than 60m passengers and 17m tonnes of products per year by 2021.

Dams & Desalination

As the government seeks to expand the country’s non-hydrocarbons exports, boosting agricultural production is a key priority that necessitates significant water resources and hydraulics development. In June 2018 the government reported that 7bn cu metres, representing 66% of the 10.6m cu metres of water the country consumed per year, was used for agricultural purposes, while drinking water accounted for 3.2bn cu metres and 400m cu metres was used by industries. In order to meet demand, Algeria has been placing large investments in its dam infrastructure. As of September 2018, 26 out of the 80 large-scale dams operating in the country had been built since 2000, with the construction of five additional dams, set to open by 2020, in progress.

In June 2018 the authorities announced that two calls for tenders relating to seawater desalination plants in El Tarf and Zéralda would be launched in July 2019. These two projects, which will each treat 300,000 cu metres of water per day, have been slated since 2010 under a presidential programme for the construction of 13 desalination plants. These developments will contribute to reaching the MTPT’s goal of increasing the percentage of water supplied by seawater desalination plants from the 17% reported in May 2018 to 20% by 2020.

Building Materials

During the first quarter of 2018, the building materials industry grew by 16.3%, continuing the positive trend seen over the previous two quarters when the segment increased by 8% and 10.2%, respectively, averaging an expansion of 5.5% for all of 2017. This is due in part to government-imposed import restrictions, including a move to not issue import licences for grey cement in 2017, as well as significant increases in local production. The authorities are also looking to limit the import of steel products in the medium term.

The most consistent demand for building materials comes from the development of state-funded housing programmes and the prioritisation of locally manufactured products. According to the MHUV, the rate of integration of domestic building materials into public housing projects surpassed 85% in 2017. Between mid-2018 and 2019, it is estimated that the state housing programme alone will need 30m tonnes of cement, 30m tonnes of bricks, 3m tonnes of iron and 110m sq metres of tiles. Continuing demographic changes mean that in the future there will continue to be a need for housing programmes, ensuring demand in this segment will remain high in the coming years.

Cement

The country’s cement industry has expanded rapidly in recent years to the extent that not only has self-sufficiency been achieved – exceeding the annual domestic demand of 24m tonnes to reach 25m tonnes in May 2018 – but in December 2017 the first cement export operations began. The industry has grown so quickly that in 2017 then-Prime Minister Abdelmalek Sellal warned of overproduction given that many Algerian plants have had to operate at less than 50% capacity. By 2020 the country’s production capacity is expected to have reached around 40.6m tonnes per year with publicly owned Groupe Industriel des Ciments d’Algerie supplying 20m tonnes, LafargeHolcim Algérie – a unit of French construction materials firm LafargeHolcim – accounting for approximately 11.1m tonnes and the remaining 9.5m tonnes coming from smaller private operators. A key focus is infrastructure. “On the domestic market, the renovation of the road network based on new technology cements is the highest potential outlet in the short to medium term,” Serge Dubois, Public Affairs Director, LafargeHolcim Algerie, told OBG.

In terms of notable new developments in the segment, ETRHB Haddad has contracted Danish engineering firm FLS midth in partnership with Beijing Triumph International Engineering Company to construct a new cement plant capable of producing 3m tonnes per year in Rélizane. The deal for the project, expected to be operational by 2020, is worth over €100m. Additionally, in March 2018 the local Ministry of Environment in Bellara announced that the construction of an environmentally friendly cement plant was commencing in the new industrial zone in the region. The factory, financed by an Algerian-Emerati-Indian partnership, will emit comparatively low levels of CO while producing about 2m tonnes of cement per year using waste recycled from the nearby power station and steel complex.

Steel

The country has made significant progress in steel production in recent years, increasing output by 108% between 2010 and 2017 to exceed 2.5m tonnes per year. According to local media, production covered 30-35% of domestic needs as of December 2017. Algeria’s steel imports grew by nearly five times to 1.8m tonnes in 2017, compared to just over 372,000 tonnes in 2016. This came on the back of a significant expansion in long steel rolling plants, which was facilitated by considerable foreign investment and spurred by import restrictions. Officials have announced plans to boost the production of steel products to 12m tonnes annually by 2020. While Algeria currently imports most of its steel, in the medium term the industry is expected to become a net exporter of steel products.

A significant change to the segment came in April 2018, when the state sold a 49% stake in the non-operational El Hadjar iron and steel complex in Annaba to Emirati steel and construction firm Emarat Dzayer. The deal involves a AD160bn (€1.16bn) investment to develop the complex, which is expected to begin operations in April 2020. The government plans to increase the plant’s operating capacity from its current 300,000 tonnes per year to 1.2m.

Staffing

The country’s construction industry suffers from a general shortage in manpower, although the extent of this varies by region, as finding a qualified workforce tends to be a more achievable goal in the north of the country. Foreign contractors are required to contact the government body in charge of employment in the wilaya that the project is in and contract labour from that given region, which prevents companies from employing the same teams for similar projects in different regions. Only when certain competences cannot be found locally are firms allowed to source their workforce from outside of the province. Industry stakeholders have told OBG that a lack of expertise has necessitated bringing in foreigners to implement training programmes and build teams, investing in workforces that can hopefully be used again in the future.

The ratio of foreign to local labour has changed in recent years, with the state increasingly choosing to authorise projects that have 70-75% domestic workers. In order to help address the sectoral shortage in skilled labour, the Ministry of Training and Professional Education committed 12.41% of its vocational programmes to the construction sector in 2018, the equivalent of training approximately 49,600 individuals. Between 2015 and 2017 over 100,000 Algerians were trained by government-run, specialised programs related to construction. The ministry also began offering three new diplomas related to buildings restoration in 2018.

Illegal Sites

The government has been identifying and demolishing sites built without authorisations or deeds of ownership, focusing especially on farmland and the wilayas along the Mediterranean coast. In the first quarter of 2018 the state registered around 3490 construction-related offences across the country, mostly due to buildings being developed with insufficient permits. While the Ministry of Interior, Local Authorities and Territorial Planning announced in May 2018 that the deadline to address permit-related offences would be postponed until August 2019, it was emphasised that illegal buildings on farmland and along the coast would not have the opportunity to receive authorisation. Demolitions along the coast will free up land for the development of tourism infrastructure and agricultural projects. More than 1700 illegal sites were demolished in Algiers in 2017 and over 570 during the first half of 2018.

The wilaya of Oran is incorporating ICT into its fight against illegal sites by working with the satellite development centre of Bir El Djir to monitor the proliferation of developments. Addressing this issue is of particular importance to the region as Oran prepares to host the Mediterranean Games in 2021.

Outlook

Given Algeria’s vast geography, growing population, and the government’s strategic pivot towards non-hydrocarbons exports and the subsequent need for supporting transportation and utilities networks, the potential for the construction sector is significant. As the sector regains a strong dynamic, the restoration of a sizeable public works budget and the country’s thriving building materials segment suggest a particularly positive outlook.

While the level of demand will remain high in the medium term, the role played by foreign companies will have to shift if they are to reap the benefits of the market given the shift in policy in favour of domestic firms and products. As such, partnerships with local entities, which are gaining a more privileged position, may become a greater priority over the long term.