Reforms to Morocco's regulatory framework and the public-private partnership bill to improve project development

With a dynamic local building materials segment bolstered by various upcoming projects, Morocco has the potential to develop a thriving construction sector. According to the Ministry of National Planning, Urban Planning, Housing and Urban Policy, the construction sector accounts for 6.3% of GDP. Sector growth is principally influenced by government investment and the implementation of infrastructure, energy and residential housing projects. Indeed, about 80% of turnover from the sector comes from public projects.

Public spending was strained in 2016 and 2017 as the kingdom underwent a political crisis, stunting construction and infrastructure projects. “There was a slowdown in project development following the government shutdown in 2017,” Marouane Zohry, CEO at Sika Maroc, a local manufacturer of construction chemicals, told OBG. “It resulted in a net increase in payment delays. Currently, it takes around 150 and 180 days to receive payments, which forces companies to cover themselves through bank loans.” However, public expenditure on construction projects is expected to recover, with various developments in the works for 2019.

Between 2011 and 2015 the total production value for the construction industry increased at a compound annual growth rate (CAGR) of 1.3%. Given the increase in the number of upcoming projects, the CAGR for the 2016-20 period is expected to rise to 4.1%.

Structure & Main Projects

There were over 200 active construction projects in Morocco with a combined estimated value of $49.8bn as of early 2018. In the first half of 2018 construction companies created 32,000 jobs, an increase of 2.9% compared to the same period of the previous year. The main market driver is urban construction, which represents 55% of all projects, followed by utilities and transport projects, accounting for over 40% of overall investment.

One of the main construction projects under way is the building of the Dh3bn (€269.8m) Bank of Africa Tower in Rabat, which is set to be the tallest building on the continent at a height of 250 metres. Travaux Generaux de Construction de Casablanca, and Belgian’s BESIX and subsidiary Six Construct are in charge of the design and construction of the building, which started in November 2018 and is set to be completed in 2022.

Another major project seeks to support the kingdom’s rapidly expanding urban population, which is growing at an annual rate of 4%. In 2004 the government launched the New Cities project, which aims to create 15 new cities by 2020. To that end, the government will provide land at competitive prices with substantial tax incentives. Morocco is also building green centres near large cities to create a diverse supply of houses while caring for the environment. One example of such a development is the Bouskoura Golf City located 10 km from Casablanca. Another green project in the pipeline is the $2.5bn sustainable city in Mahdiyya, which will run on solar and hydroelectric power. Set to be completed in 2024, the city will include 400 villas, a hospital centre, a medical university, a research centre and a golf course.

Beyond city projects, other developments in the works are directly related to the tourism industry, such as the $200m St Regis Tamuda Bay hotel set to open in 2020 and the $200m Tan Tan Summer Centre, a resort in El Ouatia, also expected to be completed by 2020. In Marrakech more high-end tourist infrastructure is becoming available. M Avenue, a $100m project that aims to host a number of hotels, residences, offices, restaurants and shops, is slated to open in 2019, and boost the red city’s tourism and cultural offerings. “It will truly be a structuring project for Marrakech, with an approach that combines arts, culture and lifestyle through an innovative customer experience,” Selma Belkhayat, managing director of AMS Africa, told OBG. “These new concepts help attracting brands that are not yet established in Morocco.”

Programme Contract 

On September 24, 2018 a contract aimed at overhauling the construction sector and rejuvenating productivity by 2022 was signed by various authorities, including the minister of economy and finance; and the minister of national education, vocational training, higher education and scientific research. The programme, which contains 10 application contracts, seeks to increase the sector’s GDP from Dh53bn (€4.8bn) to Dh81bn (€7.3bn) and create 220,000 additional employment opportunities. There are two main pillars underpinning the strategy: upgrading the construction sector and increasing its international appeal. Under these pillars 11 strategies were outlined, including improving the regulatory framework, reinforcing professional representation, ensuring the protection of the environment and developing public-private partnerships (PPPs). As various projects within the contract programme come on-line, the sector will consequently experience increased construction activity and overall growth.

Regulation

At the end of December 2018 the minister of national planning, urban planning, housing and urban policy presented a draft legislation to amend and complement Decree No. 2.13.424 promulgated on May 24, 2013, which approves the sector regulations in force. This legislative update is part of a wider initiative to reform the legal framework for urban planning, which has been prioritised by the government. The draft seeks to strengthen the role of professionals by requiring them to carry certificates, review measures in order to simplify projects and shorten delays, and improve coordination between stakeholders. It is expected that the new regulation will facilitate administrative and bureaucratic procedures in the construction sector, leading to better project execution.

Public-Private Partnerships

Reforms to the PPP bill in August 2018 were aimed at clearly defining and improving regulations surrounding the financing mechanism, which is expected to provide a boost to developments carried out under the model, namely infrastructure projects. In accordance with the Finance Law of 2018, around 60 different projects were identified as having the potential to be realised under the PPP model. The PPP model has allowed the private sector more opportunities to contribute to public projects, the investment in which has been on the rise since 2014, reaching Dh195bn (€17.5bn) in 2018. The bill also widened the scope to include new public sector bodies, particularly local authorities, given that they provide a considerable share of public investment. The Finance Law of 2018 set aside Dh17.5bn (€1.6bn) for public investments in PPP projects.

The bill also proposes the creation of a national commission for PPPs, which will report to the head of government. Its main goal will be to put in place a national PPP strategy while defining annual or multi-year action plans. The commission will also have a decisive role in facilitating certain procedures; for example, the body is tasked with authorising the direct award of certain contracts on an exceptional basis and at the request of the public entity in charge of the project.

Building Materials

The building materials segment is valued at Dh45bn (€4bn), with Dh14m (€1.3m) in added value, and created 2198 jobs in 2017. The segment is in the process of restructuring, attempting to better orient its activities toward exports. In 2018 the Construction Materials Federation (Fédération des Industries des Matériaux de Construction, FMC) received a public contribution of Dh4bn (€359.8bn) in accordance with a contract signed with the government in March 2016. The contract covers a period of three years and aims to generate Dh10bn (€899.4m) of additional turnover, as well as incentivise investment and industrial jobs. Some investment is already being put towards waste treatment and recovery platforms, and a number of cement, marble and concrete producers have started to invest in facility upgrades.

To increase the competitiveness of the segment, the FMC is attempting to eliminate the parafiscal taxes on cement, steel, sand and plastic. As a result of high taxes, returns are low for businesses in these segments, which not only penalises the private sector but also incentivises growth of the informal sector.

Cement

More than 90% of the cement sold by local Moroccan producers is grey cement of either CPJ 45 or CPJ 39 standard. The former is used for regular reinforced concrete and concrete for large-scale works while the latter is used for low-demand concrete, as well as different types of mortars. Prices for these cements have been increasing since the beginning of the 2000s. For example, CPJ 45 cement cost Dh860 (€77.35) per tonne in 2000 before rising by 72% to Dh1480 (€131.63) per tonne in 2018. The price hikes are partially due to increasing energy prices and a cement tax, which was put in place in 2002, and raised in 2004 and 2012.

The price increases have, however, allowed producers to retain some margin of profit, especially considering the decrease in demand since 2015. According to the Professional Association of Cement Manufacturers, the cement market contracted by 2.5% from 14.2m tonnes in 2016 to 13.8m tonnes in 2017. “With demand decreasing within the real estate industry, standard cement is going through a stagnation phase, which pushes operators to focus on segments such as construction works material, and other types of cement such as precast concrete and ready-to-use cement,” Marouane Tarafa, president of the Professional Association of Cement Manufacturers, told OBG.

Mostapha Hebbassi, former marketing director at LafargeHolcim, believes that the slowdown is set to continue over the near term. “Cement production is going to decline between 3% and 4% in 2018 compared to 2017,” he told OBG. There was more than 21m tonnes of installed capacity for the production of cement in 2018, while demand stood at 13m tonnes, according to Hebbassi. In other words, there is a utilisation rate of about 60%. In order to address the issue of overproduction, Moroccan cement producers have been looking to export their goods, with Hebbassi estimating that the kingdom exports between 1m and 2m tonnes of cement per year. However, logistics costs are high, meaning that there is not a lot of profit to be made via exports. Moreover, a bag of cement can cost $8 to buy in Morocco while in other countries it could cost half or even less that price. As long as big cement players continue enforcing higher prices, it will be difficult to export cement. For the time being, though, it does not seem that local construction will pick up enough to leverage the available production capacity.

Environmentally Friendly

Historically, sector activity has seen negative consequences for the environment. Waste coming from demolition and building is estimated at 41.9m tonnes per year, and prioritising construction waste management has become an area of concern for the promotion of sustainability. Indeed, Law 99-12 outlines the environmental and sustainable development requirements for the country, which includes regulating and managing construction waste. However, in order to properly address this issue, further investment towards eco-construction practices and waste management is needed.

Plans are under way to build a Dh23bn (€2.1bn) ecocity called Zenata in the greater Casablanca area. The first phase of the project has been financed by the European Investment Bank and the French Agency for Development. The initiative will promote the core principles of sustainable development, including public transport, water management optimisation and green corridors, and the city is scheduled to be completed by 2030. Negative environmental impact on air quality, soil and groundwater will be modest or negligible, and are expected to be contained during the construction phase. It is anticipated that the project will generate significant environmental benefits, for example, through the provision of sewerage infrastructure and the elimination of wastewater discharges from informal settlements. Furthermore, the eco-city will prepare for and be designed to mitigate the effects of climate change. For example, the buildings will be oriented to make use of natural lighting.

“Morocco could become an innovative hub in Africa where companies can develop new solutions and duplicate them across the continent,” Geoffroy Lecureur, general manager of Colas Maroc, a transport construction firm, told OBG. “In that regard the kingdom has the potential to roll out projects such as solar roads since it has already positioned itself as a supporter of green solutions.” Though awareness about energy efficiency and the benefits of ecologically friendly building is increasing, Mohamed Ait Benzaiter, general manager at Menara Holding, argues that more support is needed before the kingdom can expand its influence. “With the right legal framework in place, Morocco could keep developing this segment locally and soon export its know-how across the continent,” he told OBG. For now, Adbessamad Jennane, CEO of Odassia Peintures, an industrial company focused on ecological painting, believes that costs will continue to influence whether or not construction companies adopt more eco-friendly techniques; nevertheless, he is hopeful that the segment will grow over time. “Awareness towards sustainable solutions, such as ecological painting, is increasing,” he told OBG. “As clients at the end of the chain become more eco-conscious, opportunities in this niche will grow.”

In addition to the adoption of innovative solutions in the sector, Morocco is also aware of the importance of internationally recognised best practices, especially when it comes to building local engineering capabilities. “The kingdom through its highly qualified human resources is positioning itself as an engineering hub for Africa,” Hicham Kabbaj, deputy general manager at local engineering firm JESA, told OBG. “Thanks to its development and international investments, Morocco offers the potential to attract talented people from all over the world, as well as the ability to expand and share its success to other African countries.”

Informal

According to a study conducted by the General Confederation of Moroccan Enterprises in 2018, the informal economy in Morocco represents 20% of GDP and is made up of 2.4m people. Although the shadow economy covers various sectors, it represents almost one-third of construction activity. The government has started to roll out measures aimed at reducing the number of informal workers, including a law that mandates companies to register digitally under a common identifier. As of January 1, 2019, invoices must include both the vendor and customer ID. Failure to properly register will result in a fine of Dh100 (€8.99).

In addition to a high rate of tax evasion, security standards are also being overlooked, and the sector experiences many instances of fiscal fraud and false invoices. “The industry could benefit from an upgrade on security measures,” Driss Elrhazi, CEO of construction firm Sogea Maroc, told OBG. “Foreign and domestic companies do not compete on an even level in that regard, which can push decision-makers to select the cheapest offer, even if the company does not comply with basic safety qualifications.”

Outlook

After delays in public infrastructure projects in 2017, 2019 is looking bright for public investment in mega-projects, which is expected to stimulate the construction sector. However, in order to secure stability and long-term growth the sector needs to move away from its dependence on state spending and attract further private investment. PPPs offer an interesting mode of financing; however, support from the financial sector will be necessary going forward. Historically, banks heavily funded a number of projects in the construction sector, though this support diminished substantially as many financial institutions became exposed to defaults on loans. Indeed, payment delays in construction are frequent, which deters banks from getting involved. For this reason the construction sector faces a lack of cash flow.

Going forward, government efforts to garner support from financial institutions will be essential to the development of the sector. Reducing informal construction work will also be a top priority for the authorities. If the sector is successful in securing diversified investment while formalising sector activity, it should be able to fully leverage the advantages of a strong ecosystem and the myriad projects in the pipeline.