The Tanzania construction sector continues to be one of the most exciting sectors in the Tanzanian economy.
The sector is currently experiencing a period of growth primarily driven by the recent developments in the roadwork, housing and mining industries.
The growth rate of the sector increased to 11.9% in 2005/06 from 10.8% in 2004/05 and the contribution of construction activity to the overall GDP rose to 5.7% in 2005/06 compared to a contribution of 5.4% in 2004/05.
Management of the sector falls under the Ministry of Infrastructure Development and is seen by the government as an important link to both economic and social development.
In 2005/06, the total government expenditure for construction affairs and services was TZS 53,425 mill compared to the expenditures in 2004/05 which were estimated to be TZS 58,693 mill and the expenditures in 2003/04 which were estimated to be TZS 29,740 mill.
The government is looking to continue making gains in the construction sector and is hoping to repeat and improve upon the gains made last year.
The combined sectors of works infrastructure, transport and communications are paramount to the process of development and poverty reduction within Tanzania.
The effectiveness of these sectors directly contributes to the creation of economic opportunities such as the ease of market access; increased competition; encouragement to trade, tourism and foreign investment; contribution to government revenue and increased employment opportunities.
These three sectors were previously split under independent entities, but were merged by the current government into the Ministry of Infrastructure Development in order to better coordinate the key elements of infrastructure.
According to Hon. Basil Pesambili Mramba, the formerly appointed Minister of Infrastructure Development and currently appointed Minister of Industries, Trade and Marketing, the sectors were combined in order to encourage economic growth.
“We would like to increase the growth rate so as to be able to address poverty issues,” says Mramba, “thereby attaining the Millennium Development Goals through the infrastructure sector.”
The ministry is hoping to fund the projects through partnerships with the private sector and they are inviting experienced investors to participate in the sector.
“There are legal handicaps which we have to work on,” says Mramba, “but at least we want to invite private sectors from Tanzania and abroad who have experience with the construction of housing estates for low cost people and medium and very few high cost people.”{xtypo_quote_right}we want to invite private sectors from Tanzania and abroad who have experience with the construction of housing estates for low cost people and medium and very few high cost people.{/xtypo_quote_right}
The two requirements from the private sector will be capital and expertise, but the government will provide the land and the labor as well as anything else that can be channeled through government sources.
The Tanzania Ministry of Infrastructure Development has recently been seeking investors from the USA, the Middle East and from South Africa.
According to Hon. Mramba, there has also been an influx of Chinese companies that have expressed interest in investing in the information and communication technology (ICT) sector as well as inquiries from South Korean companies that are interested in constructing bridges here.
Currently, there are several South African investors seeking to launch joint ventures with the government on infrastructure development.
At the same time, Hon. Mramba stresses the fact that, “in the infrastructure sector we welcome donors” who still finance 40% of Tanzania’s national budget.
Indeed, the donor communities tend to invest in the Tanzania infrastructure sector primarily through the roads.
Tanzania Roads Sub-Sector
The Tanzanian roads sub-sector is likely the most important developing sector in the Tanzanian economy.
Today, while the network of roads within Tanzania remains underdeveloped with many of the roads being in poor condition, the sector has improved dramatically since the establishment of the Tanzania Roads Agency (TANROADS) in 2000 under the Ministry of Infrastructure Development.
According to Mr. Fred Addo Abedi, the former Chief Executive of the Tanzania National Roads Agency, the development of the roads system is crucial for the communication system within the country.
“Let me put it in this way,” says Mr. Addo Abedi, “the roads are very powerful in developing countries. You do not hear about this that much in the developed world because there they have been built already. But roads can make a lot of difference to any community that has a good access […] so roads are the most cost effective way of providing access to communities.”
TANROADS is responsible for the day to day management of the trunk and regional roads network.
Its primary functions include the maintenance and development of the primary road network to support the economic and social development of Tanzania.
Mr. Addo Abedi stated that TANROADS is currently faced with approximately 30,000 km of roads, only 5,000 of which are paved.
“I define this as an immature network and this is a problem,” he says, “that is why it is even necessary to ensure that investments are made prudently so that we build, then upgrade the roads to between standard or become paved.” {xtypo_quote_right} Investments are made prudently so that we build, then upgrade the roads to between standard or become paved.{/xtypo_quote_right}
In 2001, just after the establishment of TANROADS, the Agency estimated that approximately 50% of the entire main network was in poor condition.
Today, the percentage of the network remaining in poor condition has been reduced to an estimated 16%.
In order to update the remaining 16%, TANROADS will rely on its two different forms of financing.
The first form of funding comes directly from the government, however, according to Mr. Fred Addo Abedi, TANROADS receives only 50% of the cost needed in order to correct the network.
The second form of funding comes from the Roads Fund which draws its revenue from a levy on fuel.
“We get around 50 million US dollars a year from the Roads Fund for maintaining the national route network,” says Mr. Fred Addo Abedi.
TANROADS has formulated a 10-year development program through the Ministry of Infrastructure and the Government of Tanzania.
The implementation of the plan began in 2002 and it has been integrated into the Transport Sector Investment Program (TSIP).
The cost of TSIP is expected to be around $5.5 billion for the first 5 years and will primarily be financed by the international donor’s community.
The largest portion of the funding is expected to be diverted to the roads.
According to Mr. Addo Abedi, there are two basic options for utilizing the funding.
“For example,” says Mr. Addo Abedi, “if [the] government may have to repair a section of road, it can be let out to the private sector to maintain this for about 25 years and then give it back to the government, where, through charging of tolls, they could maintain them and also have profit on the investment that they make. Another option is to develop new roads where the government would put part of the equity.”
According to Mr. Addo Abedi, the government is currently in the process of finding the roads that will be the most profitable for the private sector to invest in and is also in the process of establishing a framework to protect the future investors in the sector.
Tanzania Cement Production and Consumption
Since the privatization of the construction sector in the late 1990s, the cement consumption in Tanzania has risen dramatically.
In 2006, the cement production rose by more than 9% in just the first quarter.
The three largest cement producers in the country have been the Tanzanian Portland Cement Company (TWIGA), Tanga Cement Company (SIMBA) and Mbeya Cement Company.
In 2005, the total combined output of these three companies reached an all time high of 1.6 million tones, and TWIGA and SIMBA, both listed at the Dar es Salaam Stock Exchange, have experienced constant increases in their share value.
The Tanzanian Portland Cement Company (TWIGA) is the leading cement producer in Tanzania and currently produces over 40% of the domestic cement demand.
The Gross profit for TWIGA in 2006 was TZS 43,011,222, up from TZS 33,190,490 the previous year.
Because of the increased demand for cement in Tanzania, a majority stock holder in TWIGA, Heidelberg Cement, plans to invest more than USD 100 million in order expand and modernize TWIGA’s production facilities by 2009.
Tanzania Construction Sector Outlook
The construction industry in Tanzania is still a young and developing sector.
The government is seeking to increase the incentives for foreign investors and it seems likely that they will continue to support any joint ventures between foreign and local contracting firms.
The government is hoping to advance the gains they made in the construction sector last year and is optimistic that the sector will continue to grow and develop.
The current projects in the road and cement sub-sectors have increased the demand in the industry and there are many opportunities for interested investors.
In order to better accommodate these growing demands, the government of Tanzania organized the sector under a specialized institution known as the National Construction Council (NCC), a subsidiary of the Ministry of Infrastructure.
The NCC was established in 1979 through an act of Parliament and became fully operational in 1981 with the purpose of promoting the growth and development of the local construction agency.
Currently, the NCC is managed by a Council composed of 7 members: three of the members come from the private sector and four of the members come from the public sector.
Today, according to Mr. Kesogukewele Msita, Executive Secretary of the National Construction Council, “the private sector is now considered to be the engine of growth in Tanzania.” {xtypo_quote_right}The private sector is now considered to be the engine of growth in Tanzania{/xtypo_quote_right}
Mr. Msita recognized the main challenge facing the sector as the need to achieve higher levels of productivity and improved quality.
This, he says, will enable clients to receive value from their money and will drive Tanzania towards international competitiveness.
In addition to this, Mr. Msita says, that they would like to be able to corner the local market, which is currently dominated by foreigners.
“These challenges shall be met and overcome,” he says, “by implementing the Construction Industry Policy as it provides a holistic approach in dealing with any impediments.”
The NCC has been involved in the planning, coordination and formulation of the policies and strategic involvement in the construction industry since it began.
One of the institutions implemented as a result of the NCC was the Tanzania Contractors Registration Board, established by an act of Parliament in 1997.
Its mission is to regulate and develop a competitive Contracting Industry with capable contractors who deliver quality work and observe safety in the pursuit of economic growth.
According to Mr. B. C. Muhegi, Registrar of the Tanzania Contractors Registration Board, prior to 1997 the atmosphere within the industry was chaotic because there were no guidelines for the contractors or the consumers to follow.
However, since 1997, there have been many positive developments in the construction sector.
“Things have actually improved a lot [and] today we have over 4,470 contractors registered in Tanzania, both local and foreign” says Mr. Muhegi.
In spite of the large number of registered local contractors, however, the majority of large projects remain dominated by foreign contractors.
Some of the largest contracting companies in Tanzania belong to Chinese investors.
According to Mr. Muhegi, this aggressive competition has both positive and negative aspects.
“The good thing about it is that you get a good product at a cheap price,” he says, “the bad thing is that it can undercut the local companies. Then, there is the problem that the local sector will not grow.”
To date, a large percentage of the available materials in Tanzania originate from foreign locations such as China.
However, there are also several South Korean companies who are currently looking to invest in the construction sector.
Mr. Muhegi estimates that of the 97% local contractors, about 94% are small contractors and, therefore, are not capable of handling the major projects.
In an attempt to address the imbalance between the foreign and local contractors, the Tanzanian government passed the Public Procurement Act in 2004.
Part of this Act offers special preference to foreign construction firms who embark on joint ventures with local construction firms.
In addition to this, the government has established a fund to assist the small local contractors, the Contractors Assistance Fund (CAF).
According to Mr. Muhegi, an increase in foreign firms will be beneficial to the construction industry in Tanzania.
“Their coming should be a win-win situation,” he says, “whereby they will be able to also assist the industry with growth, to impart knowledge and to work hand in hand with the locals.”
Tanzania Construction Sector Investment Opportunities
Because of the numerous improvements that have been made within the construction sector, there are many opportunities for interested investors.{xtypo_quote_right}the main opportunities for foreign companies and investors are in physical infrastructure developments that include roads and bridges, airports, electrical power generation and distribution, railways, ports, educational and health facilities, tourism facilities (hotels and recreational facilities), water and waste water management, real estate, construction equipment, and production of building and supply materials and components{/xtypo_quote_right}
According to the Executive Secretary of the National Construction Council, Mr. Kesogukewele Msita, ”the main opportunities for foreign companies and investors are in physical infrastructure developments that include roads and bridges, airports, electrical power generation and distribution, railways, ports, educational and health facilities, tourism facilities (hotels and recreational facilities), water and waste water management, real estate, construction equipment, and production of building and supply materials and components.”
Mr. Msita says that the benefits of partnering with local companies will be both valuable and helpful to any interested foreign investors because, ”partnering with local companies provides the benefits of knowledge of the market, realistic viability assessment of investments, lowering of overhead costs, and contribution to social obligations of empowerment.”
According to Mr. Msita, not only is the investment climate in Tanzania continuously improving, but there is also easy access to high-level trained manpower.