Gabon awaiting several major infrastructure projects to spur growth

According to the IMF’s 2015 Article IV consultation with Gabon, the early years of the Emerging Gabon Strategic Plan (Plan Stratégique Gabon Emergent, PSGE) proved to be a significant boon for the construction sector. The IMF reported that “high oil revenues funded a scaling up of public investment that helped propel overall growth to nearly 6% on average, led by construction and services”.

Following the construction surge leading up to the 2012 Africa Cup of Nations, the sector’s focus shifted towards improving infrastructure, roads and housing. However, the economic malaise facing Gabon in light of the domestic debt crisis, coupled with the subsequent reduction in oil prices, has translated into a serious slowdown in the construction sector, which shrunk by 3% in 2015. “This year companies that want to invest are adopting a wait-and-see attitude,” Edgar Accary, commercial director of Batiplus, a building materials and interior fixtures provider, told OBG. Batiplus is part of Batimat Group, which operates in West and Central Africa.

Indicators

The construction sector began to slow in 2014 and this trend continued into 2015, when the sector contracted by 3.8%, or CFA296bn (€444m), according to the General Directorate of Economic and Fiscal Policy. The largest drop in employment was in the electricity and water segment, which fell by 8.2%, while civil engineering dropped by 3.1%. These segments rely on government construction projects, and as a result, the drop in oil prices slowed and halted large-scale work. This accounted for the 18.7% drop in employment in 2015, from 7014 workers in the sector to 5699. Total investment in construction also fell, by 72.6% from CFA21.8bn (€32.7m) in 2014 to CFA5.9bn (€8.85m) in 2015.

Government Role

In January 2015 President Ali Bongo Ondimba announced the merger of the two government agencies responsible for public works and infrastructure – the National Major Projects Agency (Agence Nationale des Grands Travaux, ANGT) and the Fond Routier, or Road Fund – into a new entity called the National Agency for Major Infrastructure Projects (Agence Nationale des Grands Travaux d’Infrastructures, ANGTI).

The idea behind the merger was to leverage the financial resources of the Road Fund and prioritise wider infrastructure projects under ANGT’s mandate. The merged entity began operations in July 2015 and has been charged with executing public policy on major infrastructure projects and implementing the National Infrastructure Master Plan (Schéma Directeur National d’Infrastructure, SDNI).

ANGT itself was established by Law No. 16 in July 2010. US engineering corporation Bechtel assisted in setting up ANGT and has continued to support the initiative. The company issued a press release in June 2016 in which it expressed its continued support for ANGTI. The agency is operated by a mixed staff made up of Gabonese workers and Bechtel employees, with 80% of the workers hired locally. Despite Bechtel’s continuing involvement in the agency, it has been independent since 2013. The newly created ANGTI reports directly to the president and focuses on five broad mandates: research, including feasibility studies and environmental assessments; public works including construction and renovation; monitoring; evaluation and maintenance. The SDNI, published in 2012, continues to guide sector priorities through to 2025, featuring 21 key projects out of a total of 114.

International Financing

The Gabonese government has recognised the need to fast-track infrastructure projects to lower transport and logistical costs in order to boost the country’s ability to diversify its economy in view of the fall in commodity prices. Several construction projects from roads to ports are under way, largely owing to international support from multilateral lending institutions. Among the participating lenders are the World Bank, the European Development Bank and the Islamic Development Bank. However, the French Development Agency (Agence Française de Développement AFD), which has a €709m portfolio in Gabon, including projects in their start-up phase, has been the one of the most active financial partners in this regard.

A CFA51bn (€76.5m) flood drainage system in Port-Gentil is being built by Spanish firm Acciona. The project includes a sanitation component, which brings the total cost to €66.2m, of which the AFD is financing €55m. Aside from a 23-km drainage canal network, 1000 latrines and a septic waste treatment station are also planned.

In the last quarter of 2015 the AFD awarded the first tranche of a €100m loan for the drainage and potable water system in Gué-Gué. The 11-km canal and 13-km refuse collection channel are expected to be completed by the end of 2019. Among the AFD’s other sizeable projects in the country are a €70m solid waste management system in Libreville and a €45.5m rehabilitation programme for 96 bridges nationwide, two projects being exclusively financed by the AFD. It is also co-financing the rehabilitation of the Transgabonais mineral railroad and a road to stretch from Ndjolé to Médoumane.

The Brazzaville-based Central African Development Bank (Banque de Développement des Etats de l’ Afrique Centrale, BDEAC) agreed to lend the government of Gabon CFA127.2bn (€190.8m) in January 2016 for two major construction projects. A significant expansion of Port of Owendo will use CFA51.6bn (€77.4m) and is expected to be completed by mid-2016. The remaining CFA75.6bn (€113.4m) is scheduled to be spent on a highway connecting Libreville to inland towns by the end of 2016.

China

As is the case in many African markets, Chinese companies have also been active in the construction sector. The Chinese Road and Bridge Corporation (CRBC) has been involved in road construction, while the China Harbour Engineering Company, a subsidiary of China Communications Construction Company, holds the CFA59bn (€88.5m) Port-Môle contract to convert an unused Libreville port into a marina. The planned marina will include commercial, entertainment and residential areas; however, construction on this site has been stalled for over a year, and there are no signs of it being restarted.

Africa Cup Of Nations

Much has been made of the potential revival of the construction sector in the lead-up to the Africa Cup Of Nations, a football tournament that Gabon will host for the second time in five years. However, construction activity is happening in fits and starts. In June 2015 China State Construction Engineering Corporation (CSCEC) won a bid to build a 20,000-seat stadium in Port-Gentil, and in March 2016 the top structure of the stadium was sealed. As of July 2016 the stadium remained under construction. Another 20,500-seat stadium is being built by Shanghai Construction General, 17 km north of Oyem. Meanwhile, India-based Entraco is renovating the Omar Bongo stadium; however, the renovations are not expected to be completed in time for the Africa Cup of Nations in 2017.

Public Works

More than 1200 km of bitumen road have been built since 2009, reflecting the priority that the government places on the construction sector. The National Road Development Plan represents some 10-15% of GDP and 30-40% of public investment, and employs 15,500 workers, according to the Ministry of Public Works.

Gabon’s second city, Port-Gentil, has to date only been accessible by air and sea. A key new project by the Chinese Export-Import Bank, the CRBC and the Gabonese government is linking the petrochemicals centre to Omboué by way of a 93-km road. The project will feature two 5-km bridges built to navigate the technically challenging jungle landscape of inlets, swamps and rivers. “The topography of the Port-Gentil-Omboué road is one of the primary challenges related to this project, as many sections will be built over swamps,” Yi Yang, general manager at CRBC, told OBG. “We are also sourcing the bulk of our building materials – such as cement and stones – from the local market, making logistics another issue given the lack of available resources nearby.”

While some roadworks have slowed due to payment delays by the government, such as the half-completed 20-km road upgrade from Libreville to Ntoum, others like the AFD-financed 47-km road from Ndjolé to Médoumane are progressing. This €140m project will take seven years to complete because of difficult terrain passing through river areas. AFD is providing €124m in three loan tranches, while the government is financing the balance directly. Disbursement of the third and final tranche of the loan is under way and is expected to be completed by December 2016. The project includes a 1.4-km railway station in Ndjolé.

Construction Materials

With the exception of cement, 90% of building materials are imported from Europe, with some also coming from China. As such, the effect of 10% depreciation of the euro against the US dollar in 2015 was muted, as the CFA franc is pegged to the euro. A small but growing metallurgic industry is showing promise for domestic steel and aluminium production, but cement remains the largest local building material segment. “While consumption is slower, thanks to a reduction in imports, the local industry has not suffered a loss in market share; instead, we have seen a slight increase,” Fakih Ali Oboungou, director-general at the Gabon-based aluminium producer Sotralga, told OBG.

Until the mid-2000s Gabon was self-sufficient in cement production through its sole producer Cimgabon, a joint venture started by Germany-based Heidelberg Cement and the Gabonese government. However, a combination of lack of capacity expansion and investment and deregulation of cement imports in 2006 has seen the market flooded by imports in the last decade, mostly from China.

Morocco-based Ciments de l’Afrique (CIMAF) eventually took over Heidelberg’s stake in 2013. When CIMAF bought Heidelberg’s share, Cimgabon was about CFA23bn (€34.5m) in debt. As CIMAF has boosted the joint venture’s former capital of CFA4bn (€6m) by an additional CFA20.8bn (€31.2m), it was looking for the government to also make a capital injection or recalculate the respective public and private stakes in the joint venture. However, in February 2016 the government notified CIMAF that it would not be injecting new capital, and CIMAF has since been waiting for a recalculation of its joint venture stake. Cimgabon had a 55% market share in 2015, with the rest coming from mainly China.

Production Facilities

Cimgabon operates a 150,000-tonne-per-annum (tpa) plant in Franceville, which currently stands idle. With the opening of CIMAF’s new €35m, 500,000-tpa plant in Owendo in June 2016, Gabon now has the capacity to produce more than the market demands. The new plant also led to the creation of 196 local jobs. In addition to Cimgabon’s older 250,000-tpa plant near Owendo, total grinding capacity is now 750,000 tpa, compared to current national demand of 700,000 tonnes. Salim Kaddouri, country head of CIMAF, expects demand to grow at around 3% annually.

However, Cimgabon is currently producing at 60% of capacity due to the effect of cheaper imports. The company is studying the possibility of exporting its oversupply, but regional trade barriers limit these prospects. The firm is aiming for a market share of upwards of 80%, which it sees as necessary in order to be profitable. Kaddouri said he saw room for an increase in consumption of domestic production on the back of improved product quality and variety from Cimgabon, and a crackdown by Customs on black market imports. “Gabon currently consumes around 400 to 450 kg of cement per head, but with necessary infrastructure improvements, this demand could push beyond 600 kg per head,” Kaddouri told OBG. Cimgabon’s Ntoum facility, which produced aggregate and limestone from a nearby quarry, was closed in June 2015 following a partial closure a year earlier, as it was only producing at 10% of capacity.

All cement inputs are currently imported through traders, who purchase limestone, gypsum and clinker from overseas. While gypsum represents only 4% of Cimgabon’s inputs, limestone and clinker are a more significant concern, and the company would like to see these being produced by CIMAF in the region in order to lower production costs.

Cement is sold for CFA77,000 (€115.50) per tonne in Libreville, with bulk discounts offered to wholesale distributors. The capital commands more than 70% of the cement market in the country. Cement is sold wholesale in Libreville, where distributors transport it to Port-Gentil by sea, Franceville by train and Oyem and Tchibanga by road. Because of the poor existing transport infrastructure, cement can cost up to CFA25,000 (€37.50) more per tonne outside Libreville, especially in rural areas. Franceville, for example, relies on a rail contract with rail operator Société d’Exploitation du Transgabonais (Setrag) to move cement because of poor road linkages, which are impassable during the rainy seasons.

As it holds a monopoly, Setrag has the ability to dictate higher transport fees. Similarly, Port-Gentil is isolated by land and can only be accessed by maritime or air transport. Since cement cannot be transported by plane, the only option is shipping – a method that adds to costs. However, the lack of infrastructure also represents a significant opportunity for the sector. Kaddouri estimates that cement consumption per capita could increase by more than 50% with progress on infrastructure works.

Payment Woes 

Construction companies have been facing payment delays from government projects since 2012. The public debt-to-GDP ratio has more than doubled from 20% in 2012 to 43% in 2015, well above the government’s self-imposed 35% ceiling. The increases in debt were largely brought about by the $1.5bn and $500m eurobond issuances in December 2013 and June 2015, respectively. However, the major drivers of the deterioration of the debt-to-GDP ratio were the CFA franc’s depreciation and the impact of lower oil prices on GDP growth.

As a result of the financial crunch, the government cut its 2015 budget by 11.4%. The 2016 budget was trimmed by only 1%, and stands at CFA2.6trn (€3.9bn), of which CFA562.8bn (€844.2m) is earmarked for infrastructure. The government delayed releasing the 2015 budget until June 2015 as a reaction to the impact of falling oil prices, which was responsible for the 10% contraction of the construction sector in terms of production volume, according to the World Bank. Batiplus’s Accary notes that the slowdown of mega-projects and infrastructure works is expected to take its toll in the coming period.

Faco Construction’s deputy director Jean-Noel Merchadou likewise said that the domestic debt crisis has had a serious effect on business, with Faco’s turnover down 44% in 2015. He notes that current revenues of CFA60m (€90,000) are not meeting the company’s wage bill of CFA100m (€150,000), and around 10% of revenues booked last year remain unpaid. To avoid possible cash flow problems, Faco is focusing primarily on private sector contracts. “We are a small business, so we have the ability to switch client base fairly easily,” Merchadou, told OBG.

While Faco is used to having a diversified portfolio, in 2016 more than 80% of its work will relate to the construction of BGFI bank’s new headquarters (see Real Estate overview). Aside from large construction projects, which typically make up around 88% of Faco’s revenues, the company’s other activities include carpentry, roofing and glass-making.

Meanwhile Spanish construction firm Acciona has put the brakes on all but one of its projects, the CFA51bn (€76.5m) flood drainage system in Port-Gentil. A €43.6m water treatment plant project in Ntoum only reached 30% completion by value when the company halted work over a year ago after government repayments dried up. “The overall macroeconomic problems have caused a lack of cash availability and government repayment problems,” Kaddouri told OBG. “Compounding this was the uncertainty brought about by 2016 being an election year.”

Skills

Given the constraints of a small population of 1.7m, skilled home builders are in short supply. The government has faced some criticism from buying prefabricated houses from Turkey and using Chinese firms to build other social housing, but the skills gap leaves the state little choice. Labour costs are elevated, in part driven by the high cost of living. Aside from labour costs, inadequate skills also need to be addressed through legislation.

Cimgabon, for example, sends its Gabonese staff to Morocco for training courses, due to the lack of locally available curriculum. Despite construction companies bringing in outside trainers and sending staff overseas, they still face challenges filling vacant positions given the legal requirement that caps the foreign workforce at 10% of a company’s staff.

Outlook

While the Africa Cup of Nations will create some construction demand, the main industry drivers are expected to be infrastructure and housing. A network of roads and bridges connecting Libreville to Port-Gentil is slated to open in 2017, which will also drive a reduction in transport costs that should yield both cheaper inputs and construction materials. Accary of Batiplus believes that 2017 and 2018 will see some improvement in the construction sector, but not by much, largely because internal debt pressures will likely remain. The IMF’s medium-term GDP growth outlook has also fallen by one percentage point to 4.5%, which means firms could continue to face payment delays and difficulty accessing financing.

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The Report: Gabon 2016

Construction & Real Estate chapter from The Report: Gabon 2016

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