Investing in the Construction & Construction Materials Sector
Investing in the Construction & Construction Materials Sector
In the past decade, Afghanistan has experienced unprecedented growth in its construction industry. The construction sector holds the highest amount of private sector investment as compared to other sectors. With the U.S. and NATO’s decision to keep troops, the construction sector will experience further growth. Opportunities for investment lie in construction materials, which are extensively imported from the regional countries. Other than government expenditure on developmental projects, there is huge demand for houses in the capital and the provinces. Following points will briefly describe increasing demand for residential buildings:
- High demand growth for housing due to rising population rate and income level
- Low cost of construction raw materials, and plenty of empty land to build housing,
- Minimum investment risk in housing market due its self-reliance from world economy,
- Cheap skilled and unskilled labor for housing market,
- High capacity of housing market to absorb huge investment and create jobs.
The construction sector contributed 7-10% to GDP in recent years. According to the Ministry of Commerce and Industries (MoCI), 25-40%is valued from the local margin, local labor and traders and 60-75% is valued from construction materials, supervision, and international overheads.
In the past decade, 73% of the construction took place through contractors. The number of Afghan construction companies has increased significantly but due to complicated and strict procurement requirements from international organizations, the Afghan construction companies are usually sub-contractors. Investors with a strong background in the construction sector can benefit from many future construction projects.
In the past decade, Afghanistan saw large and significant construction in the development of townships in the major cities of the country. Rapid urbanization and strong population growth are the main elements that will increase demand of housing markets for many decades to come. The demand for new residential units is estimated to be at 500,000 housing units (HUs) annually. Other major construction projects for investment are discussed in the “Investing in the Infrastructure” section.
Non-Governmental/ International Community Projects
After the international community’s intervention in the country in 2001, the country underwent massive reconstruction activities; and especially the construction sector saw an expansion never witnessed before in history. Most of these projects were awarded and/or monitored by NATO/ISAF. These reconstruction and development activities are continuing and are planned to continue and increase for many years to come, particularly the construction and development projects to facilitate and support smooth operations of Afghanistan National Security Forces (ANSF).
According the to the Afghanistan Builders Association (ABA), the international community is planning to spend USD 1 billion in construction and related projects in the coming years. The Combined Security Transition Command – Afghanistan (CSTC-A) will be managing 94 Strategic Construction Projects and Initiatives worth USD 636 million. The United States Army Corps of Engineers (USACE) and Transatlantic Afghanistan District (TAA)’s current and future construction plans are available for private investment and are briefly stated below:
Based on the information provided by the MoCI’s handbook, due to huge infrastructure projects, rising population and income level, the demand for construction materials in the coming decade will be very high. These materials represent 35%-45% value of the construction market, which according to Altai Consulting (USAID CDP Private Sector Development Program 2007), is estimated USD 2.7-USD 3.5 billion. These building materials include cement, steel, sand and aggregate, bricks, fixtures and fittings, timber and wood, paints and chemicals, electric supplies and construction equipment, some of which are discussed below:
Cement is the most basic element in the modern building materials and its demand Afghanistan is high. Afghanistan once produced cement, but is now a big importer from regional countries. The imported cement is generally of low quality and high transportation costs. According to Central Statistics Organization, the anual cement imports were around 6000 thousand tons while the anual domestic production is ariund 90 thousand tons. This shows the huge gap between the market demand and local supply in-country where the raw materials required from cement production are in huge quantities. Private sector investment will generate high profits through domestic production and fill the supply gap. MoCI have identified following locations for establishing cement production:
Jabal-e Saraj in Parwan Province
This cement production facility has a location advantage as it is very near to Kabul. This facility has not been used for a while now and needs complete machinery replacement to be able to produce again. The road connecting Kabul to the factory site is in a good condition and necessary raw materials for cement production are in huge quantities. An investment estimated by consultants in this production site is USD 23 million to be completely operational.
Aybak in Samangan Province
One of the major resources of limestone suitable for cement production is located in the Aybak District of Samangan Province, some 8 km to the Northeast of the city of Aybak, the provincial capital of Samangan Province. In addition, the coal resources of DaraiSuf are located about 80-85 km to the southwest of Aybak and large resources of gypsum to the east. Following are the estimated resources of this deposit:
Volume (factor 0.5)
Pul-e-Khumri in Baghlan Province
To make Pul-e-Khumri operational economically, Parts 1 and 2 (which are already constructed) needs to be refurbished, as well as completing the construction of unfinished parts. This site is rich in terms of both its quality and quantity. The consultants estimated investment required to operationalize this facility is USD 150 million. Investment through PPP would be a good option for securing finances of such a large scale.
Herat Province Site
This cement production site is situated in the west of the country and is in a large population center. It is a resource-rich site and already has an electric supply line from the Iranian grid. The sabzak coal operation is also situated 140 km north of the plant. The government has announced the right to refurbish and operate the plant with an estimated of USD 100 – 200 million possible through PPP.
- Outcrop 1 :1,400 m
- Outcrop 2 :600 m
- Outcrop 3 :630 m
- Outcrop 1 :835 m
- Outcrop 2 :401 m
- Outcrop 3 :535 m
- Outcrop 1 :1,169,000 m2
- Outcrop 2 :240,600 m2
- Outcrop 3 :337,050 m2
- Outcrop 1 :155 m
- Outcrop 2 :155 m
- Outcrop 3 :155 m
- Outcrop 1 :1,81,195,000 m3
- Outcrop 2 :37,293,000 m3
- Outcrop 3 :52,242,750 m3
- Outcrop 1 :72 g.cm
- Outcrop 2 :72 g.cm
- Outcrop 3 :72 g.cm
Source: Ministry of Mines and Petroleum
Bricks and Concrete Blocks
Bricks constitute 16% of construction materials used in construction projects in Afghanistan. Both baked and unbaked bricks are used in building projects and are supplied by small local productions units in Kabul, Herat, Samangan, Nangarhar, Khost, and some onsite productions. There is a private investment opportunity in the upgrading and expansion of such facilities. Concrete blocks are the other famous building materials in Afghanistan with similar investment potential in its expansion and upgrading.
The types of wood found in Afghanistan are of good quality and huge quantity. Most forest in the country is located in Nuristan and Kunar in the east and Badakhshan, Sar-e-Pol, and Jawzjan in the north. The majority of the wood used as building materials is imported from Pakistan and Central Asian states, with Pakistani wood used for lower end construction projects and Russian high quality wood for other building projects. Afghanistan does not have adequate regulations and licensing systems for logging trees and most Afghan wood is either burnt for heating or smuggled out of the country. There is private investment potential in the cutting and artificial drying of Afghan wood and mass wood furniture production for domestic use and later for export.
Other construction materials that have potential for private investment and has enough local demand include gypsum, doors and windows, tiles, asphalt, electric cables, paints, and joints and fixtures.