Algerian construction and real estate continue to grow with emphasis on improving housing supply and infrastructure

 

Despite the impact of lower oil prices on government budgets, Algeria’s construction sector is growing and developing thanks to ring-fenced investments in public and industrial infrastructure as well as housing.

In an attempt to diversify the economy and the state’s sources of revenues, the government launched a €233.7bn five-year Public Investment Programme in 2014 spanning 2015-19, to continue building upon the previous 2010-14 programme worth €255.1bn. However, a slowdown in government revenues on the back of low oil prices has led to Prime Minister Abdelmalek Sellal ordering all ministries and public authorities to prioritise the most structurally important projects, ensuring that public funds are going to those projects with the greatest external impact, such as public works and transport. That said, as Boualem Chetibi, general manager of technical resources and realisation at the Ministry of Public Works and Transport (Ministère des Travaux Publics et des Transports, MTPT), told OBG, “The low oil prices have affected the government’s five-year plan, though for the construction industry it’s mostly about prioritising some projects and looking into additional means of funding to put into place.”

Similarly, Gamal Farid, general manager of engineering and construction company Orascom Algeria, said, “The downturn means a series of projects that aren’t critical to the economy have been put on hold for there to be increased focus on revenue-generating projects as well as projects critical to the government’s policies.”

Sector Growth

Prior to the decline in oil prices, the construction sector’s output value rose at a compound annual growth rate of 7% per year between 2011 and 2015, according to UK-based research company Timetric. In 2015 the construction sector, including public works and water works, posted 5.3% growth, compared to 6.8% the previous year, figures from the National Office of Statistics (Office National des Statistiques, ONS) show. Timetric expects growth to decrease to a little under 5% per year between 2016 and 2020 due to the persistent decline in oil prices and government budget cuts. In 2014 the sector accounted for 10.2% of GDP, only a slight drop compared to 10.8% in 2009.

Public spending accounts for the bulk of activity in the sector, and while lower overall revenues are having an impact on the funding, most projects in infrastructure and housing have been labelled a priority — supporting as they do key government policy objectives — and are still being funded. According to the government’s 2016 budget, the MTPT – in charge of affairs related to public infrastructure – was allocated AD19.1bn (€28.7m), while the Ministry of Housing, Urban Planning and the City (Ministère de l’Habitat, de l’Urbanisme et de la Ville, MHUV) – handling the government’s affordable housing and urbanism projects – was given a similar budget of AD21.3bn (€32m). The 2016 budget represents a decrease of AD800m (€1.2m) for the MTPT and AD1.3bn (€2m) for the MHUV compared to the previous year, an indicator that the government-wide budget cuts have had a small impact on these two key ministries for the construction industry.

Housing

The residential sector was estimated to be the largest market in the construction industry in 2015, according to Trimetric, accounting for close to 41% of the sector’s total value, primarily supported by the continuation of affordable housing projects run by the state. The government has pledged spending of €58bn on 1.65m new homes by 2019, on top of the previous programmes, which still had 650,000 units under construction as of 2014.

According to the current and previous five-year plan, more than 2m housing units are therefore due to completed by 2019. The goal is an ambitious one for the government’s priority sectors, particularly in light of the slowdown in overall revenues and the increases in 2016 of the cost of construction materials.

In January 2016, for instance, construction of a 624-unit social housing project was halted, and the site vacated due to rising costs of construction materials as a result of restrictions on imports. According to local media, negotiations were held with a Chinese contractor to arrange a takeover of the site.

Contractors

In the past few years the government has signed deals with a number of foreign construction companies to address the lack of affordable housing. Egyptian construction company Arab Contractors announced in August 2015 that it is building three new towns consisting of 4500 housing units.

South Korean contractors are, meanwhile, designing new towns at Boughezoul near Aïn Oussera, Bouinan near Blida and Sidi Abdellah in the suburbs of Algiers in the heights of Zeralda. Development of Naama, which is located further to the south, was awarded to the French-owned EGIS International.

Government data from 2015 shows that out of the 1800 contractors developing public housing, 1500 are domestic firms, which often work on smaller projects of 100, 200 or 500 units. The rest of the developers that are carrying out the remaining public housing projects – approximately 300 companies – are from overseas, with many coming from Turkey, Portugal, Italy and France, among other countries.

Road Network

One of the main areas of activity in the construction sector over the past decade has been road and highway construction, thanks in large part to the $11bn East-West Highway, which is nearing completion, and the €6.6bn Hauts Plateaux Highway, which will be fully completed in 2016. And the focus on road works is not likely to end anytime soon. The five-year plan enacted in 2014 earmarked around AD4.3trn (€35.6bn) for developing close to 1000 km of motorways and approximately 7000 km of smaller, secondary roads between 2015 and 2019. “Highway infrastructure is key, as it interconnects regions, enabling the creation of opportunities and a certain level of socioeconomic development,” said Chetibi.

The remaining 84-km stretch of the 1016-km EastWest Highway is due to be finished by the end of December 2016, according to the National Highways Agency. Building works commenced in 2006, and the highway will cover a total distance of 1216 km and connect 20 wilayas (provinces).

The country is also working on improving the road network connecting the coast to the south of the country, part of the Trans-Saharan Highway – a 9400-km route connecting Algiers to Lagos, and traversing six countries: Algeria, Mali, Niger, Nigeria, Chad and Tunisia – the primary axis of which in Algeria is the RN-1, a 2335-km road connecting Algiers and Guezzam at the border with Niger. Works are under way to double the width of the RN-1, with the project expected to be completed by the end of 2016.

Additionally, the RN-3, a 2120-km road connecting the coast to Tassili in the desert, and the RN-6 are both undergoing modernisation works to improve transit between the coast and the south.

Railway Expansion

The government has also earmarked close to €32bn under the current five-year plan to build 5000 km of new railroads and modernise existing lines in an effort to ease the load on the saturated road network and enable further economic development beyond Algiers, the capital city, and the densely populated northern coastal region.

To enable the construction of 12,500 km of electrified double-track lines by 2025, the National Company for the Construction of Rail Infrastructure (Entreprise Nationale de Réalisation d’Infrastructures Ferroviaires, Infrafer) signed an agreement with the China Railway Construction Corporation in February 2016 for the creation of a joint venture. In addition, the agreement also provides for the construction of a new plant for the manufacturing of the parts and the signalling and telecommunications system needed for the network – another field in which Infrafer is keen to work on for the new stretch of railway being built.

New Lines

Algeria’s rail network is operated by the National Company for Rail Transport (Société Nationale des Transports Ferroviaires, SNTF), which manages around 4000 km of rail and is planning to add close to 6000 km of new lines over the next few years.

In the wilaya of Algiers, SNTF opened a new 23-km electrified double-track line running from Birtouta to Zeralda in November 2016. In the eastern Hauts Plateaux, meanwhile, a 151-km railway between Boughezoul and M’Sila in the works since 2011, was in the final completion stages as of February 2016, according to state construction group Cosider, one of the two contractors for the project. Once launched, this new line should reduce the journey time between the two towns to less than two hours with trains travelling at a speed of around 160 km per hour.

A 140-km railway line connecting Boughezoul to Djelfa through Hassi Bahbah and Aïn Oussara is also currently under way, as is the construction of Boughezoul’s central train station. Located at the future crossroads of many regional railway lines, Boughezoul’s train station will have 28 platforms.

Moving Minerals

In the phosphate-mining region of Tébessa, meanwhile, a 413-km line is being built, with expected delivery in 2018-19. The track will connect the mining city of Djebel El Onk in the wilaya of Tébessa to the industrial harbour city of Annaba, Algeria’s fourth-largest city, located along the country’s eastern coastline. Construction of the project commenced in 2015, and the line is expected to reduce road congestion that results from large convoys transporting mining products in the area. The line will be fitted with state-of-the-art signalling and security systems.

Another ongoing major railway project – now roughly two-thirds finished – is the construction of a 132-km high-speed track that will run alongside the East-West Highway and connect Oued Tlelalt near Oran to Tlemcen. Started in 2013 by Italian contractors Condotti and Rezzali and monitored by Algeria’s National Agency for Railway Project Studies and Investments (Agence Nationale d’Etudes et de Suivi de la Réalisation des Investissements Ferroviaires, ANESRIF), the €1.7bn project is expected to be completed in 2017. The line has experienced delays due to land expropriation issues, although the target date remains in place. Once completed, trains will be able to travel at a speed of 220 km per hour along a route that includes tunnels and close to 50 viaducts – including one near Tlemcem which, according to ANESRIF, is one of the largest rail viaducts on the African continent.

Other projects include the August 2016 re-opening of the line between Annaba in the east and Tunis in Tunisia; the construction of a route linking Birtouta and Zeralda, to be finished by the end of 2016; and the modernisation of the Thénia-Tizi Ouzou line, expected to be completed by the end of 2016.

Recent Contracts

A major contract was signed in April 2016 between French multinational rail company Alstom, Algeria’s public transport operator, Entreprise Métro d’Alger (EMA), Spanish infrastructure company Ferrovial and SNTF to further develop the country’s railway network. According to the agreement, SNTF becomes a 10% stakeholder in Cital, a joint venture between Alstom, Ferrovial and EMA. The contract also provides for the extension of Cital’s activities from solely focusing on building and maintaining tramways to also include building trains, and the enlargement of the company’s facilities in Annaba from 46,000 sq metres to 190,000 sq metres.

Cital will produce one train per month, and is expected to hire some 270 additional workers on top of its existing workforce of 240 employees. SNTF has already placed an order for 98 trains as part of its plan to extend Algeria’s national railway network to a combined 12,500 km by 2025.

Urban Rail

Expansion is also on the cards for the metro and tram systems, which are being extended to cover 54 km with 50 stations and 26.8 km with 44 stations, respectively, by 2025. In 2016 Colas Rail was awarded two contracts totalling €168m to expand the capital city’s metro network in a public-private partnership (PPP) with Algerian public works company KOUGC.

Port Infrastructure

A joint-venture agreement concerning one of Algeria’s largest planned infrastructure projects – the new port of El Hamdania in Cherchell, wilaya of Tipaza – was signed in January 2016 between Algeria’s Groupe Services Portuaires and two Chinese firms, China State Construction Engineering Corporation and China Harbour Engineering Company.

According to Boudjema Talai, the minister of transport and public works, the joint venture, established in line with the 51:49 rule of shared foreign and Algerian ownership, has been tasked with the preliminary feasibility studies, as well as the construction and operation of the new harbour. The $3.3bn project will be financed by a long-term Chinese bank loan. Construction is due to take around seven years, but the operator is expected to begin a progressive opening of the port after four years. Ultimately, the port will have 23 quays and an annual processing capacity of 6.5m containers and 25.7m tonnes of general cargo – nearly double the 14.8m tonnes that the port of Algiers processed in 2014. The port itself will cover an area of around 1000 ha, with an additional 2000 ha freed up for the construction of a neighbouring industrial zone connected to the facility. The project is currently in its study phase. “El Hamdania port represents a vision of Algeria as an African transit hub,” Chetibi told OBG. “Neighbouring West African countries – and especially land-locked countries of the Sahel – will be able to transit their merchandise through this port within a shorter time and with fewer costs,” he added.

Cement

Algeria has made attempts to reduce its overall import bill on the back of declining foreign exchange reserves and imports of construction materials are on the decline. The current domestic demand for cement is approximately 25m tonnes annually. With an estimated annual production of around 18m tonnes, the country has sizeable local capacity, which will increase substantially over the next few years, and is targeted to nearly double by the end of the decade.

Plans have been put in place to enable the country to become self-sufficient in cement. Strategies include investing heavily on the expansion and development of local factories (see analysis). The leading producer is state-owned Groupe Industriel des Ciments d’Algérie (GICA), which estimates its existing production capacity to be approximately 11.5m tonnes per year.

According to Abdessalem Bouchouareb, the minister of industry and mining, up to 4m tonnes of cement will be added to annual national production by the end of 2016, thanks to the construction and entry into production of two additional cement plants by GICA in cooperation with Chinese equipment manufacturers. Bouchouareb expects the country to be self-sufficient in cement production by 2017 and begin to export the surplus. As part of this, GICA is planning the construction of three new cement plants by the end of 2016. The company has received significant public investment to upgrade and expand its two existing plants as well, in a bid to increase current total annual output to approximately 20m tonnes by 2018.

Private producers are also expanding output. In 2016 Egyptian construction firm Orascom signed a contract to build a 6000-tonnes-per-day cement facility for a private sector client in Al Beida. Other privately owned projects under way include the construction of a 6.7m-tonnes-per-year plant in Biskra, a 2.2m-tonnes- per-year facility in Laghouat and one with similar capacity in Adrar, the country’s second-largest province.

Steel

Algeria is also working towards increasing domestic steel production. External purchases have already decreased, with iron and steel import bill falling by 19.9% to $793.7m in the first eight months of 2016, compared to $990.5m a year earlier. Import quantity also dropped by nearly 10% to 1.82m tonnes.

As a result of underinvestment and labour disputes, domestic steel production has been on the decline in the past decade, falling from 1.3m tonnes in 2007 to around 300,000 tonnes in 2014. The country’s output at present mainly consists of two major steel plants including a facility with 2m-tonnes-per-year capacity in El Hadjar, co-owned by the state steel company Sider (51%) and Luxembourg-based ArcelorMittal (49%). The goal is to gradually increase local steel production to some 12m-13m tonnes per year by 2020, Bouchouareb told local media in August 2016.

New facilities are currently under construction. With an annual production capacity of 2.3m tonnes, Bellara Steel complex, a new steel factory in Jijel, to be built by Spanish firm Danieli Procome Ibérica and commissioned by Algerian-Qatari company Algerian Qatari Solb, is due for completion by the end of 2016. The construction of another steel plant is currently under way in the town of Relizane, close to the western coast. The $300m project is to be carried out by a joint venture between Algerian construction group Bellazoug and Emirati company Bidewi. The first stage, due to start in mid-2017, will see the plant producing steel shapes and concrete bars at a rate of 600,000 tonnes per year. The second stage, comprising installation of a foundry and an electric furnace, is due to be launched in 2019. Ultimately, the plant will have a capacity of around 1m tonnes of steel products per year.

Encouraging Private Investment

While the majority of construction projects are currently driven by the public sector, the authorities are increasingly promoting local and foreign private investment in the construction industry. Under the current investment law, foreign private investment falls under the 51:49 rule, whereby a foreign company wishing to invest and work in the country must register as a joint venture with an Algerian partner. This provision is, however, set to be relaxed in the near future thanks to the July 2016 vote on a new Investment Code. The law, approved by the Council of the Nation – the parliament’s upper house – but yet to be signed and promulgated, stipulates that the 51:49 rule can be removed under the annual Finance Law. The new law also includes tax breaks and measures to ease bureaucratic procedures.

“The public sector has some comparative advantages in heavy investments and infrastructure projects that require a lot of technical knowledge,” said Chetibi. “That said, in the near future, public officials will surely encourage the creation of joint ventures and local private manufacturing plants,” he added.

Orascom’s Farid, meanwhile, noted that private capital was behind a number of real estate and property projects, which could help further drive construction activity. “The devaluation of the Algerian dinar has especially favoured private real estate investors who wanted somewhere stable to invest their money.”

Local Content

According to the MTPT, there are more than 4000 construction companies operating in Algeria, of which around 60 are state-owned. While the country has partnered with foreign firms through 51:49 joint ventures, the sector climate currently favours Algerian companies. According to Chetibi, local engineering and construction companies get an automatic 25% bonus when competing for tenders.

Quality Control

As the government intensifies its efforts to develop local manufacturing of construction materials through import restrictions and investment in manufacturing plants, it is also seeking to improve the quality of local production – which has been an issue historically. Responsibility for this falls to the National Organisation for the Technical Control of Public Works (Organisme National de Contrôle Technique des Travaux Publics, CTTP), which is tasked with ensuring that both construction materials and the infrastructure it builds meet requisite standard. The CTTP is in charge of research and studies, quality control and certifications of road, airport and maritime infrastructure, as well as public works such as bridges.

Measures have been taken by the MHUV to enhance the quality of construction, with the ultimate goal to improve the sustainability of the nation’s housing units and to meet international construction standards.

Outlook

In the ongoing low oil price environment, the government’s capital spending is being shifted to priority projects, which is helping to partly address the country’s ever-growing need for economic diversification to sustain growth and create jobs. Major infrastructure and housing projects are still progressing, and although Algeria’s construction industry is experiencing a shortage of private sector investment, the government is exploring the potential of new PPPs to help reverse that trend.

Significant strides have been made to enhance the country’s infrastructure in a bid to attract domestic and foreign investment, and the construction sector is expected to continue to offer opportunities in segments including housing, infrastructure and industry. In addition, the government has announced it will invest $16bn over the next 20 years in alternative energy projects such as solar, geothermal and wind power plants (see Energy chapter).

Despite lower government oil revenues, authorities will press ahead with infrastructure and housing projects. Although some challenges such as land expropriation and urban planning with regards to public works remain to be tackled, the country’s new Investment Code is set to relax foreign investment regulations – a clear signal of the government’s intention to further open the Algerian market for private investment.

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The Report: Algeria 2016

Construction & Real Estate chapter from The Report: Algeria 2016

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