Key fact

About 57 per cent of Algiers’ projects market consists of schemes that have been cancelled or put on hold

Source: MEED

Algeria has long been seen as a projects market with excellent potential. Thanks to its large oil and gas reserves, educated and growing population and close proximity to Europe, the country is well-positioned to be a major projects hub in North Africa.

However, over the past two years, a combination of political paralysis and corruption have resulted in stagnation in the projects sector, with the value of contracts awarded falling by two-thirds, compared with the 2006-09 average. If the market is to live up to its potential, it will first have to overcome these issues.

Hydrocarbon economy

There is little doubt about Algeria’s potential. It is the largest country in the Middle East and North Africa (Mena) region, and the 10th largest in the world. It is one of the few nations in the region to have maintained positive growth over the past five years, with gross domestic product (GDP) rising 2.5 per cent a year on average. Annual economic growth is forecast to be at least 3.5 per cent over the coming five years.

“In 2010 and 2011, there was a collapse in award levels, with a total of just $8.6bn-worth of new contracts signed”

The main contributor to Algeria’s economy is its oil and gas sector, which accounts for 98 per cent of export earnings, almost two-thirds of government revenue and more than one-third of GDP. Algeria’s reserves are the 10th largest in the world, the biggest in Africa and the fourth largest in the Mena region. The country is also the third-largest oil producer in Africa and the sixth largest in the Mena region.

Until 2010, consistent economic growth underpinned the local projects market. The sector was given further impetus by the government’s announcement in 2010 of an ambitious $280bn five-year infrastructure investment plan. Hopes were high that this could be achieved, especially considering that Algiers had succeeded in paying off its foreign debt and, due to rising oil and gas prices, had amassed an estimated $200bn in foreign exchange reserves with which to finance its spending programme.

Rapid population growth has also fuelled the projects sector. The country’s population is forecast to reach 38 million by 2016, up from 35 million in 2009. In response to this, the government planned to create 3 million new jobs between 2010 and 2014 and diversify the economy away from hydrocarbons.

An estimated $68bn-worth of main contract awards were signed between 2006 and 2009; more than $15bn a year on average, making it one of the largest markets in the region. The bulk of new contracts were generated by the gas and transport sectors. Each accounted for about $23bn in main contract awards between 2005 and 2012.

The gas sector benefited from Algeria’s drive to increase production in order to meet rising domestic demand and the launch of a raft of major gas export projects. The transport sector was boosted by several major awards as part of the government’s infrastructure development programme, including the East-West motorway and the Algiers metro.

The result of the flurry of project awards in the latter half of the last decade is that Algeria now has $51bn-worth of new infrastructure under construction. More than half of this, or $27.7bn, is in the gas sector alone, underpinned by two new liquefied gas terminals and a series of gas development projects in the southwest of the country.

However, the level of activity is set to drop radically. In 2010 and 2011, there was a complete collapse in awards, with a total of just $8.6bn-worth of new contracts signed. This sharp slowdown was due in large part to internal political divisions, which have paralysed the country as a whole.

The problems began in early 2010, when investigations were launched into alleged corrupt practices in the award of contracts by the country’s main client, state oil and gas company Sonatrach. The investigations ultimately ended in the dismissal of Sonatrach’s chief executive officer and several senior executives, as well as Energy & Mines Minister Chekib Khelil. The ensuing upheaval has brought oil and gas project activity to a near complete halt.

Project slowdown

The issues facing the hydrocarbons industry have spilt over into other sectors, as the government has taken a more cautious approach to awarding contracts in light of the corruption allegations. Compounding the slowdown is the significant number of projects that have been halted. Of Algeria’s $206bn projects market, 57 per cent are schemes that have either been cancelled or put on hold.

The majority of stalled projects are in the construction sector, where $71bn-worth remain suspended. Most of these were drawn up before the global economic crisis, which resulted in the withdrawal of several Gulf firms, notably the UAE’s Emaar Properties, from a series of planned real estate projects valued at billions of dollars. Changes to government regulations concerning foreign currency earnings and repatriation of dividends, as well as the limitation of foreign companies to a minority stake in local joint ventures, also contributed to the fading of interest in the sector and the country.

Contractors and suppliers will be hoping that the past two years will prove a temporary dip in the long run. The figures are encouraging. More than $60bn-worth of projects are already in the pipeline for 2013-17, including projects already under construction. The gas sector accounts for a large chunk of projected spending, with more than $25bn of new gas infrastructure due between 2013 and 2015. Construction schemes will also play a major role, with an existing project pipeline of almost $15bn due to be awarded between 2015 and 2017.

Renewable energy

In light of a new Sonatrach management team and amendments to the country’s hydrocarbons law now under discussion, the government hopes to stimulate interest in upstream hydrocarbons. The newly appointed energy & mines minister, Youcef Yousfi, has outlined ambitious plans for investment in power and renewable energy infrastructure, as well as in the oil and gas sector, with a renewed focus on exploration.

Algeria plans to add 1,200MW in new power generation capacity each year to 2020 at a cost of up to $30bn, to meet the 10 per cent projected annual growth in demand. It also aims to increase the share of renewables in the energy mix to 40 per cent by 2020, and then plans to invest $80bn in the development of renewables capacity and efficiency promotion by 2030.

The transport and construction sectors will be driven by continued government investment as part of its robust infrastructure development programme and will include roads, railways, urban transport and housing. Opportunities for international investment in transport projects exist as a result of Algeria’s comprehensive $30bn rail development programme. The government plans to build tramways in 17 cities across the country. It is also aiming to build 5,000 kilometres of road in 2012 alone.

The real estate market is likely to continue to suffer from the poor global economic climate, but any revival in the home markets of potential investors could result in the eventual unfreezing of some projects. The development prospects in the short term are weak, but in the longer term, Algeria offers significant potential in light of its ambitious tourism development programme, which calls for the construction of up to 40 new resorts by 2025, and a $4bn allocation for the development of 700 tourism projects across the country.

Industrial investment

Industrial project growth can also be expected in light of a government programme aimed at creating 39 new industrial zones across 9,000 hectares to promote the development of Algeria’s downstream manufacturing sector.

Continued high oil prices and a government commitment to infrastructure development are likely to help Algeria’s projects market maintain momentum for the foreseeable future, with the hydrocarbons sector remaining the lynchpin of the economy in the coming years.

Despite a reputation for bureaucracy and the nationalist sentiment behind some of the government’s recent regulatory changes, Algiers’ projected hydrocarbons earnings in the coming years coupled with an ambitious development programme across numerous sectors are likely to make for a multiplication of project opportunities in the coming years.

Omar Annous is a consultant for MEED Insight, MEED’s premium research division.

MEED Insight’s Algeria Projects Market Report 2012 is now available for purchase.

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