Gabon overcomes challenges to investing in construction

While the construction sector in Gabon has seen a slowdown compared to the boom in the years prior to co-hosting the 2012 Africa Cup of Nations (Coupe d’Afrique des Nations, CAN), construction remains central to the state’s economic development plans. As part of an overarching goal to diversify the economy through the Emerging Gabon strategy, funding has focused on infrastructure in recent years. Although budget constraints following the decline in oil prices have limited state investment as well as contributed to a build-up of arrears and payment delays to contractors, several large-scale plans remain in place for affordable housing and infrastructure works. Although the 2012 CAN led to excess capacity in segments like hotels and tourism, the sector is gearing up for stronger growth over the next two years ahead of Gabon’s hosting of the 2017 CAN.

Sector Performance

The global decline in oil prices, which caused a slowdown in economic growth in Gabon to 4.3% in 2014, down from 5.6% in 2013, has put pressure on construction. The economic contribution of major public buildings and works reached CFA298.4bn (€447.6m) in 2014, or 5.7% of GDP, down 10.8% year-on-year, according to the Ministry of Economy. The drop primarily reflects a reduction in public investment in infrastructure. While the 2014 African Economic Outlook for Gabon predicted a growth rate for the sector of 22.5% in 2015 on the back of continued infrastructure spending, this was largely due to higher estimated oil prices. However, the outlook for the sector is still positive, with the 2015 economic outlook putting the segment’s contribution to GDP in 2014 at 6.3%, higher than 5.2% in 2013.

Government Strategy

The construction sector continues to be supported by the state’s National Infrastructure Master Plan (Schéma Directeur National d’Infrastructure, SDNI), launched in 2012, which outlines 114 projects in education, housing and transport to be carried out by 2025. The projects were maintained as priority investments under the government’s 2014 budget. Until recently, the primary responsibility for implementing the SDNI laid with the National Agency for Public Works (Agence Nationale des Grands Travaux, ANGT), a collaboration between the government and US-based engineering firm Bechtel aimed at generating around $25bn in new investment by 2025 from the public and private sectors. The agency has also been working to build the government’s capacity to standardise procurement processes and raise quality standards while ensuring environmental protections are in place.

In July 2015 the Council of Ministers decided to abolish the ANGT and replace it with a new agency, the National Agency for Public Infrastructure Works (Agence Nationale des Grands Travaux d’ Infrastructures, ANGTI), which will also encompass the Road Fund, the body previously responsible for the construction and maintenance of roads. The ANGTI will assist the government in implementing policies for major infrastructure projects. Further details were unavailable at the time of press.

Investment

While publicly funded projects continue to account for much of the ongoing activity in the sector, public investment has declined after steady increases drove growth over the past five years. The biggest change came in 2014, when the Council of Ministers adopted the Amended Finance Act in July which revised capital expenditures downwards by 52.6% from CFA1.32trn (€1.98bn) to CFA627.1bn (€940.65m) as a result of growing fiscal constraints. While the reduction in public investment has had a visible impact on the local construction sector, private capital is on the increase as the state strives to diversify sources of funding. By late 2014, the government had confirmed $2bn in investment contracts of its $25bn goal coming from foreign direct investment (FDI). According to the African Development Bank (AfDB), 40% of FDI in Gabon is targeted at infrastructure development. Financing for projects has traditionally come from or been guaranteed by the state, but as the government grapples with budgetary pressures, a growing emphasis is being placed on private investment.

PPPs

A number of projects are also benefitting from multilateral and FDI support. Alongside the EU, the French Agency for Development (Agence Française de Développement, AFD) granted a CFA78bn (€117m) loan for the 46-km road project between Ndjolé and Médoumane, and announced in March 2015 that it would finance the construction of some 30 health centres in four provinces. The AfDB, the Islamic Development Bank and the World Bank have likewise provided funds for key infrastructure construction projects in Gabon. Although project bonds have rarely been used in Africa, governments have often turned to the capital markets to raise financing, and Gabon is no exception. In 2007 the government issued a regional bond of CFA100bn (€150m) and a $1bn eurobond. An additional $1.5bn eurobond was issued in 2013, and another one worth $500m in June 2015, providing further funds to finance SDNI projects.

Construction Materials

The state’s decline in spending on public infrastructure, which comprised the bulk of construction activity, has unsurprisingly lowered demand in the construction materials segment. Furthermore, the majority of materials – bar cement, wood and a handful of both steel and aluminium products – are imported. Deregulation of the cement industry, and cement imports in particular, in 2006 saw imports of Chinese cement surge in the Gabonese market, with sole local producer Cimgabon’s market share reduced to 35% by 2013.

Formerly a joint venture between the Gabonese government and Germany’s Heidelberg Cement, Moroccan-based Ciments de l’Afrique (CIMAF) bought Heidelberg’s shares in the Cimgabon in May 2014. CIMAF now operates the firm’s facilities, including an integrated cement plant in Ntoum, closed since April 2014, as well as two grinding plants in Franceville and Owendo, which both have annual production capacities of around 150,000 tonnes, though they are currently producing at just 35% of their capacity. CIMAF has invested in a new 500,000-tonne-per-annum (tpa) grinding plant in Owendo, expected to begin production in August 2015. While current demand on the national market in Gabon stands at around 700,000 tpa, Cimgabon’s investment plan indicates growth in capacity to 950,000 tpa.

The increase in supply and the anticipated surplus are expected to reduce the price of cement, which remains among the highest in Central Africa, costing between CFA70,000 (€105) and CFA85,000 (€127) per tonne in Libreville, and more elsewhere in Gabon. The increased capacity will allow Cimgabon to once again meet domestic demand in full with the potential to export. Cimgabon’s facility in Ntoum is currently under study for possible redevelopment into a clinker plant with a production capacity of 1.2m tpa by 2019. Local production of clinker, a key ingredient in cement that is currently being imported, would reduce the cost of producing the material in the country.

Transport Infrastructure

The transport sector has been one of the primary drivers of growth in Gabon’s construction industry in recent years as authorities prioritise infrastructure development in an effort to support diversification of the country’s economy. A number of major transport projects are ongoing or planned for 2015, notably the new road development to provide a land connection between Port-Gentil and Libreville. Other major transport projects contributing to the construction sector include several new roads being built to connect the interior of the country to the capital, upgrades to existing roads to increase the ratio of paved roads in the country, improvements to the railway and developments in the country’s ports and air transport facilities.

The $100m expansion of Port-Gentil International Airport is also ongoing, with the ultimate objective of attaining international standards in order to receive direct flights from abroad. The runway was extended by the local subsidiary of French construction company Colas Gabon to accommodate long-haul aircraft, and upgrades to the terminal are due for completion by January 2016. A new airport outside of Libreville will be another major project for the industry when it gets under way. Expansion of the Port of Owendo is also spurring the construction sector, with ongoing work on a new 500-metre quay and plans to extend the port’s main quay. Future plans include building a deepwater port in Mayumba to supplement the existing deepwater port in Port-Gentil and reduce shipping costs in the south. Anticipated construction projects on the railway segment include a connection between Mbigou and the future port in Mayumba, as well as an additional connection between the existing line and the Belinga iron ore mine in the country’s north-east. Plans are also being developed to rehabilitate existing railway infrastructure, including platforms and bridges (see Transport chapter).

Road Work

Improving and expanding the road network has become a top priority for the government, and road projects are key to growth in the construction sector. Major projects expected to finish in 2015 include a widening of the 28-km road between Ntoum and PK12 at the edge of Libreville, being carried out by Ceddex for CFA178bn (€267m), and the 106-km road between Tchibanga and Mayumba for CFA167bn (€250.5m). The widening of a 46-km section of the N2 between Ndjolé and Médoumane at a cost of CFA78bn (€117m) has already been completed.

Construction of the first stage of the road connection between Port-Gentil and Libreville, among the most prominent projects in the sector, got under way in March 2014. The artery will connect Port-Gentil, the centre of the country’s hydrocarbons industry, to Omboué, and is part of a larger plan to connect to the country’s national road network. China Road and Bridge Corporation is responsible for carrying out the first phase of the construction project, a 93-km section worth CFA341bn (€511.5m). The project, one of the country’s largest capital construction projects, is challenging due to the coastal terrain that requires crossing the Ogooué River and surrounding swamps, calling for the construction of three bridges, two of which will be among the longest bridges in Africa. Construction of the first phase is ongoing and on schedule to reach completion in 2017.

Linking the country’s provincial capitals is another government priority that is influencing the construction sector as additional road projects focus on improving connections in the country’s rural areas. The 142-km section between Mikouyi and Carrefour Le Roy is under way and due to be completed by the end of 2016. Chinese hydropower engineering and construction company Sinohydro is carrying out the CFA116bn (€174m) project, financed by the Road Fund (now merged with ANGT to form ANGTI), which is responsible for road maintenance and development in Gabon. When complete, this section will link Libreville to Franceville in the south-east.

Urban Development

Development of the capital, Libreville, has been another priority for the government in recent years. Addressing the housing deficit – estimated at 200,000 units – continues to be a priority, as does minimising congestion in the city, which relies on a handful of major arteries. While most of Libreville’s population is concentrated in the south, further expansion is challenging and costly due to the swampy terrain. As such, new housing projects are being developed primarily in the north of the city, such as in the suburb of Angondjé. While initial plans targeted the addition of 5000 units of social housing by 2013, delays have slowed progress – though 872 units were commercialised in 2014 with more than 3000 additional ones under construction. The government has set ambitious goals for housing development, and while a number of challenges have resulted in delays, opportunities for construction firms in the housing market are increasing as the state prioritises development in this segment.

Other ongoing construction projects in the city include the redevelopment of the central hospital, due to be completed in 2016, and the construction of new stadiums in preparation for the 2017 CAN. The Gabonese company Entraco is working on Stade Omar Bongo in Libreville, while plans for two more stadia in Port-Gentil and Oyem in the north of the country are being developed and are expected to be complete by June 2016. Meanwhile, a CFA59bn (€88.5m) mixed-use expansion and development project has been planned for the Port-Mole area in Libreville, undertaken by the China Harbour Engineering Company in collaboration with the ANGT, although the financing plan for the project is currently being reviewed.

A number of infrastructure works are also slated for Port-Gentil, such as upgrades to the storm water drainage system. In addition to key state players, the AFD is helping to finance the project while Spanish construction company Acciona is carrying out the work. Acciona is building the seventh water treatment station near Ntoum under a $65.3m contract awarded in June 2013. Martinez Suarez Antonio, managing director of Acciona, told OBG, “As far as the long-term perspective, investors have not changed their mind about Gabon’s construction sector. Cash flow issues are considered more of a short-term crisis, which will not have major impact on the overall development of the construction market.”

Land Access

As is the case in many frontier and emerging markets throughout Africa, obtaining land for development has proven difficult for individuals and small-scale developers in Gabon, with some bureaucratic processes requiring years to complete. However, efforts have been made to streamline bureaucracy in land acquisition and permitting. In 2011 authorities launched the National Agency for Urban Planning, Topographical Works and Land Registry. Since its creation, the agency has been responsible for maintaining the national land registry, transferring land titles and supervising real estate projects. The National Housing Council was created at the same time and is tasked with designing and implementing the country’s housing policies.

As a result, Gabon ranked 76th out of 189 countries for ease of dealing with construction permits on the World Bank’s 2015 Doing Business index, up from 84th in 2014, reflecting the drop in days required for the procedure from 209 to 194. Despite improvements to the construction permit process, registering property remains a significant challenge in Gabon, with the country ranking 181st out of 189 countries on the 2015 Doing Business index, down from 165th in 2014. Gabon’s ranking reflects long administrative delays at the land registry, as well as an increase in the property registration tax rate, introduced in 2015. On average, registering property in Gabon takes 103 days and costs 17.5% of the property value, compared to the regional average of 57.2 days and 9.1%, and the OECD average of 24 days and 4.2%.

Workforce

Another challenge to the construction sector is finding enough qualified employees to carry out projects. According to the state’s Gabonisation policy, at least 95% of the workforce must be Gabonese, which has led to a shortage of workers and comparatively high wages, raising the cost of developing projects. While lack of skilled labour can be a setback, it also presents opportunities for foreign firms to train workers themselves according to their own standards. Hans Fahrni, CEO of Faco Construction, told OBG, “The construction sector has had to face several challenges in terms of human resources, including a high turnover rate. There is a need to implement long-term training programmes as young graduates are not prepared to meet the required level of skill for construction companies.”

Outlook

Key infrastructure projects will continue to provide a steady supply of work for construction companies over the next few years, notably in the transport segment. Continued efforts to reduce the housing deficit will also continue to drive the sector as more affordable housing construction projects are implemented. Though a reduced level of public investment will likely slow the industry temporarily in the short to medium term, foreign partnerships will be key to continued future growth. Preparations for the 2017 CAN will also provide a boost to the industry.

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The Report: Gabon 2015

Construction & Real Estate chapter from The Report: Gabon 2015