Construction : Building Africa’s Future (Africa Report n°33 – August-Sept 2011)

As the global economy restarts its upward trend and African governments continue to create ambitious development plans, there will be more room for companies both foreign and domestic in Africa’s construction market

Go to any major city, from. Port Harcourt to Cape Town, and you will see that Africa is a continent Under construction. Railway lines in Nigeria, social housing projets in South Africa and dams in Ethiopia are the infrastructure of tomorrow’s economic growth. While global financing markets have slowed considerably due to the effects of the economic downturn in Europe and North America, Chinese package deals have already given Chinese contractors a strong footing in building African economies from the ground up.

What goes up comes down, and goes back up again. The construction business is a cyclical one with contractors pitched between landing new contracts and finishing up old ones. There are scores of variables that determine en a project will get started, from. the time project financing is approved to the signing off of the last permits.

Even for some of the big companies based out of South Africa, the forecast does not seem so sunny. Group Five, South Africa’s fourth-largest construction company, is active across Africa, the Middle East and Eastern Europe. In the past few wear Group Five was heavily involved in th construction of many of the 2010 World Cup projects in South Africa. The past two wear have brought a slowdown, but the company is optimistic about the medium-term prospects for the industry. On 5 July, Group Five reported that it expected its full-year headline earnings per share to drop by about 50% for the year ending 30 June. However, on 17 June, the Passenger Rail Agency of South Africa announced that the company would be the lead contracter on the Cape Town rail link project that will connect the central business district to the air port and begin in 2013.

Murray & Roberts, annoter leading South African firm, says that competition from China as well as other companies in the country has led to a lack of projects in the pipeline. The group reported a loss of $89m in June-December 2010 after enjoying profits of $86m in 2009.

Mining, Roads and Energy. In South Africa, spending on air ports and stadiums has dropped, but the mining sector, roads and energy sectors promise new revenue streams. In June, the South African National Roads Agency was pitching new projects to financiers: the N1 /N2 Winelands toll road (at a cost of R10bn [$1.4bn] and 150km in length), the Wild Coast toll road from East London to Durban (R9bn and 560km long), the R72/N2 toll road from East London to Port Elizabeth (R5.3bn and 260km long) and the Cape Town R300 ring road (R4.1bn).

Executives from the Basil Read construction group told the local press that its mining division would have to turn down work should developments in the sector continue at the same pace: its subsidiary TWP Projects is working on five major platinum mining developments in the Western Bushveld. Contractors eagerly avait green light for the government’s plans to turn the old Durban International Airport into a seaport at a cost of R100bn.

Urbanisation is a major driver of construction growth. Angola’s post-war recovery plans include building entire new cities and the revitalisation of old ones. In June, the Luanda municipal government announced that it was preparing hundreds of thousands of plots of land in the capital for new projects. In Addis Ababa, Habesha Construction Materials and Development plans to begin work next month on four new apartment complexes covering 5,600 square mètres. In Kenya, Russia’s Renaissance Partners are backing the construction of a new city outside Nairobi, Tatu City, that will house more than 60,000 people. The $4.5bn project is one of the most ambitious real estate development projects in sub-Saharan Africa, but its start-up bas been mired in legal battles.

The infrastructure build-out across the continent is attracting construction companies from across the world, eating into margins ail around. In 2010, the Nigérian National Petroleum Corporation signed a $23bn agreement with the China State Construction Engineering Corporation to build three oil raffineries and a fuel complex. In Gabon, Indian company Tata Chemicals is working with Singapore’s Olam to build a S1.5bn fertiliser plant at Port Gentil while Ramky Infrastructure won a contract to tarmac 1,000km of roads in August 2010.

The Italian Salini Group has begun work on Africa’s largest hydroélectrique project, the 1,870MW Gilgel Gibe III dam in Ethiopia, worth $4.9bn. French company Bouygues, BESIX of Belgium, Saipem in Italy as well as the Moroccan company Somagec are undertaking developments on one of Africa’s largest ports, Tanger-Med in Morocco, for $1.4bn. As the market in Dubai looks less rosy, India’s Unity Infraprojects says that it is nowlooking tords South Africa and Libya.

But South Africa – host to some of the continent’s largest firms – is not afraid of the new competition, according to Mike Sprott, managing director of the international division of Wilson Bayly Holmes-Ovcon. « South African companies stack up well against the Chinese because we have the technical ability and financial strength to do the job … but there are not that many other local competent companies. »

Sam Priddy, director of PW Ghana, part of the Irish PW Group, says one of the advantages of bing a foreign company is that you are able to secure funds from outside the country more easily. But Priddy is careful to add that governments are protective of local companies. In Ghana, for exampie, the government is pushing a new bill through parliament to ensure that a certain percent age of infrastructure jobs are réserve for Ghanaian companies. Algeria approved legislation in 2010 to give preference to local operators in infrastructure deals.

In North Africa, political instabilité has dampened expectations in the short term. Many countries had engaged in major infrastructure roll-out programmes during the downturn in order to bolster local economic growth against ill winds from abroad. The entire force of the Egyptian government appears to be focused on elections to be held before the end of theyear, so Orascom Constructiong Industries and Arab Contractors are complaining that contracts for 2012 and beyond are off the radar. Arab Contractors has warned that its first half profits for 2011 have dropped by 25%.

Dealing with the risks. Diversification helps. In July, Orascom Construction Industries announced a $450m deal for road construction and drainage system in Saudi Arabia. Competition in South Africa is leading its builders to expand elsewhere. South African contractor Basil Read has expanded outside its home country through a network of partnerships with local companies to participate in road projects in Namibia and Botswana.

Working with governments often carries risks. Governments can struggle to find the money and construction firmes end up losing out. The Angolan government’s inability to manage the boom and bust of oil cycles has damaged construction prospects in the country: in mid-2010 it announced that it owed nearly $10bn in back payments. The debt backlog froze large activities but the government has since paid down the debt to $2.5bn. The revitalisation of rail lines in Nigeria has stalled because the government in Abuja has not budgeted its share of the project being carried out by the China Civil Engineering Construction Corporation.

That particular project is not fully Chinese-financed. Most Chinese deals are designed to eliminate that risk by cutting the African government out of the payment loop. In Chad, the Chinese government is lending the Société Nationale des Hydrocarbures its 20% share to finance the construction of a 20,000bpd refinery being but by the China National Petroleum Corporation.

African governments are pushing for new financing methods to drive their construction plans. The South African government has called on the private sector to help close the housing gap by providing inexpensive housing for students and familles that are too well-off to qualify for public housing and who are otherwise priced out of the housing market. One of the first to respond to the call was Old Mutual Investment Group South Africa, which announced on 6 July that it had raised $1.3bn for its Housing Impact Fund for South Africa that plans to build 120,000 housing units.

Infrastructure bonds are a common solution to government spending shortfalls. Ghana issued a Cedi 300m ($19.5m) five-year bond in July to finance four major road projects in Accra and Kumasi. While there has been a lot of talk about public-private partnerships, they have not picked up as quickly as government planners had hoped. The Cabeolica Wind Farm off Cape Verde is an example of a current success. Construction started in July on the $85m 28MW project that is partially financed by the Cape Verdean government, the Electra parastatal, Contractors InfraCo Africa, the Finnish Fund for Foreign Investment, the Africa Finance Corporation and the African Development Bank. The project’s bottom line is attractive enough for state subsidies not to be neededto make it viable.

Skills shortage. In South Africa there is talk about government getting involved. At a late June conference, Zwelinzima Vavi, secretary-general of the Congress of South African Trade Unions, said the union would like to discuss the creation of a state-owned infrastructure company with its partners in the tripartite governing alliance.

While financial capacity is one problem, technical capacity is another. South African utility company Eskom said in late June that the construction of two new coal-fired power stations would be delayed because the company canot find the 1,500 scilled welders it needs. Relations between employees and bosses are already tense as the workers have complained about the number of forain workers on the projects.

The health of the construction sector has knock-on effects for the rest of the economy. Construction materials companies have struggle to keep up. Cement manufacturera from Nigeria to Kenya have announced aggressive expansion plans this year. Kenya’s Devki Group, which owns National Cément, plans to become East Africa’s biggest supplier by increasing production from 400,000tn per year to 2.5m tn per year at a cost. Of Ksh13bn($140m).

As growth of about 5% per year continues into 2015, construction companies will continue to brighten the path for more solid economic returns. Each new mining deal and export processing zone brings with it anywhere from. tens of millions to billions of dollars in new contracts that top construction firms can bid for.

Billie McTernan

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