Read Mozambique ­ CEM ­ Industry Section ­ Construction sector ­ draft text version

Mozambique ­ CEM ­ Construction sector ­ draft

We selected the construction sector because it is a key pillar of economic development and often overlooked by economists and governments. The construction sector is not only one of the largest economic sectors and a driver of standards of living, it is also an important pillar of export competitiveness ­e.g. it directly influences the performance of the tradable construction material industry and is an important cost driver for the manufacturing and tourism industries. The construction sector in Mozambique is still very small and suffers from low productivity and high costs. Reforms in the land, housing and public procurement markets would unleash its potential. This report benefited in particular from a parallel study of the Mozambique Housing Finance Sector 1. Many of the issues raised and recommendations made in this report are far reaching, complicated and sensitive - they will warrant further investigation and extensive consultation before being acted upon.

1. Poor current economic performance: low output, high costs and low productivity The construction sector in Mozambique has been hovering between 3 and 3.5% of GDP in recent years which is quite small for a fast growing country ­ e.g. the construction sector had typically accounted for more than 10% of GDP in high growth developing countries. Furthermore, the current level of activity may not be sustainable as most of it is still driven by donor funded programs, which are bound to decrease as a share of GDP as the country continues to develop. Construction costs are high (more than 30% higher than in South Africa) due to high costs of materials (most of them imported), low productivity and high financing costs. We discuss these in more detail below: · Output mostly limited to donor programs, the high end housing market and slums. Most of the construction activity is in public works (e.g. roads, schools and clinics) essentially financed through donor programs. These have been estimated to exceed $400 million in 2007 (with only a fraction sourced locally). Despite huge needs and very high demand, formal housing construction is currently limited to the very high end of the market (e.g. luxurious houses in Maputo). The rest of housing construction consists mostly of informal construction in slums (75% of the urban population live in "bairros" which are very basic concrete block houses) and manufacturing of traditional straw huts in rural areas, which still account for the vast majority of housing in the country. Social housing financed by the government is non-existent. Private commercial and industrial construction is also limited ­ mostly financed through FDI (see the other industry sections for a discussion of the constraints limiting commercial and industrial investments). Construction material output is also limited - most of the construction materials are imported.

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World Bank (2008) An overview of the constraints to the development of the housing finance sector (forthcoming)

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High construction costs. Despite low labor costs for most of the workforce, construction costs in Maputo are more than 30% higher than in South Africa (it gets worse the further north you go). The main drivers of high construction costs have been: o High material costs. Material costs typically account for more than 50% of total construction cost. Material costs in Mozambique have been high because the most valuable materials are imported with high transportation/logistic costs (see the section of the CEM on trade logistics) and import duties. Only the most basic materials are sourced locally ­ e.g. cement and wood ­ even steel has to be imported. Around 90% of the construction material value has to be imported for high end construction. Material costs are further increased by low quality construction (requiring remakes) and sub-optimal use of quantities as well as inadequate construction standards (discussed below). The situation should improve with better trade logistics (especially with South Africa), lower import duties and increasing local production (e.g. new steel plant from Tata on the way). o Low productivity. Given the dual structure of the construction industry, we distinguish between formal and informal construction activities: The formal part of the industry is dominated by a few relatively large vertically integrated and well managed foreign construction companies from Portugal (e.g. Teixeira Duarte, Emocil, Soares da Costa and Jomofi Construcoes), South Africa (e.g. SB Construction and Group Five), Italy (CMC Africa Austral) and China (SOGECOA and CCM). There are very few significant formal Mozambique players ­ one exception is CETA which used to be State Owned. Despite being dominated by these large good practice international players, these players estimate that they only reach 50% of their productivity potential. This is because of legacy issues (work ethics of older workers), the lack of specialization and technical skills (e.g. lack of carpenters and plumbers). This is why Chinese construction companies tend to rely on imported labor and imported prefabricated components. Productivity is further lowered by the lack of economies of scale (there are virtually no large scale housing construction projects) and disruptions in the workflow due to land market regulation, financing, government procurement and red tape issues (discussed below). These issues get worse the further north you go. Informal "concrete block by concrete block" or traditional straw hut construction by individual owners have extremely low level of productivity ­ having been estimated in other countries to achieve less than 20% of the productivity performance of formal construction (see the McKinsey Global Institute studies of the

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construction sector in Brazil and India). The extremely low productivity of informal construction is largely a result of the very low opportunity cost of labor in self-made (low skilled) construction as well as lack of/expensive financing. o High financing costs. Only two banks give loans for construction and they do so to only rich and reputable clients at high interest rates ­ e.g. 1622.5%. This is due to macroeconomic instability (improving but real interest rates are still around 300 basis points) as well as high risks resulting from issues with the land/building registration and contract enforcement systems (discussed below). Mortgages to individuals willing to build their own houses are similarly affected ­ the few mortgages being issued are mostly for existing homes in Maputo and neighboring Matola. Most informal construction is being financed through very expensive consumer loans or informal lenders. Affordable government housing finance is very limited.

2. Reasons for poor economic performance We discuss below the main policy issues standing in the way of higher output and productivity in the construction industry: · Problematic land market regulations. Although there are no fundamental issues with the land laws, there are serious issues with the implementing regulations and processes which hamper performance of the construction industry as well as others (see the CEM chapters on land markets, agribusiness and tourism). Most of the urban/suburban land does not carry secured legal user right titles, which directly limits productive formal housing construction (which requires legally secured property rights) and housing finance (which requires secured legal titles as collateral). New legally secured plots provided by municipalities are very few. The Maputo Municipal Council suspended receipt of land applications five years ago, in order to deal with the backlog of applications. The Matola Municipal Council suspended receipt of new land applications outside areas with an urbanization plan, in order to deal with the more than 10,000 outstanding applications. The following explain the lack of legally secured land: o The first issue is that until 2007 there was no legislation on urban plans and so hardly any plans have been approved since independence. This is a problem because the Urban Land Regulations make land rights in urban areas subject to urbanization and therefore to the existence of an approved plan. o The second issue is that Mozambique has a cumbersome system of land right (DUATs) registrations. DUATs have to be registered at both the Ministry of Justice and municipality. A USAID report showed that the two

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systems are barely compatible, prone to mistakes and requires seven separate fee payments to six different institutions (confirmed by the Doing Business indicator on transferring property). There are also no clear registration procedures for first-time registration. o The third issue is that permanent user rights are only attributed once 80% of the construction has been completed. This makes banks reluctant to lend for new construction except for very low risk projects conducted by rich/proven developers. New construction activities are not encouraged by the fact that owners of these temporary rights can "sit" on them for ten years while only engaging in minimal amounts of construction - allowing owners to wait for prices to go up before selling or constructing (this is aggravated by the fact that taxes paid on land are very low). · Insufficient public infrastructure. The supply of land is further limited by the lack of connections to water, electricity and roads ­ the lack of water connection being the most severe constraint, especially in the South where water is already scarce. The lack of public schools in these new areas may also be a serious constraint. Higher land property taxes could be a major source of financing for these needed infrastructure investments as is the case in other countries. Issues with the procurement of public works. Only a small fraction of public tenders eventually got through due to long delays in the process which force most tenders to be re-issued as external conditions have changed ­ e.g. rapidly increasing dollar denominated construction costs due to weakening of the dollar and massive increase in energy costs. There seems also to be long delays in receiving payments owed by the government. Technical specifications may be gold plated and not adapted to local conditions resulting in extra costs and lack of reliance on local players and materials. For examples, most secondary and technical schools seem to be built according to Western standards using mostly imported materials, while much cheaper and appropriate local design could be built for a fraction of the costs using local materials. There is also a critical shortage of qualified inspectors and quantity surveyors to ensure the quality of construction of public works ­ e.g. use of diluted and/or toxic paints. This is made much worse by the requirement to use government surveyors. Inadequate building codes. In addition to the issue of gold plated technical specifications on some public works, there seems to be also an issue with building codes which are not appropriate for the vast majority of low housing construction - houses built on formally allocated plots must comply with national building regulations which require brick or cement block walls, reinforced concrete beams, thereby excluding all but the wealthiest households. Red tape. Mozambique still suffers from large amount of red tape which slows down construction projects and the creation of domestic formal SMEs. It takes 340 days to get a construction permit ­ Mozambique ranks 147 out of 178 on that

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indicator (called "dealing with licenses") of the 2008 Doing Business report. Taxes are also overly complicated and expensive, encouraging many domestic SMEs to remain informal. · Limited and problematic social housing policies. The Housing Promotion Fund was created in 1995. Its actions have been wide ranging (being a lender as well as builder) but limited due to financing constraints. Only 3480 people have benefited from credits on housing and only 783 new houses have been built using this credit facility (60 houses per year). The selection of beneficiaries has also proven a sensitive matter and not particularly targeted at the poor.

3. Suggested next steps to address the main constraints The government needs to tackle the issues discussed above within the framework of a new Housing Policy to update the long obsolete 1990 document. The new policy should address in particular the issues related to land regulations, social housing and public procurements: · Overhaul the land titling and registration systems (see also the land market chapter of the CEM): o Finalize and publish the regulations necessary to implement the 2007 Territorial Planning Law which defines the principles, objectives and instruments for land use planning. o Simplify, consolidate and computerize the double land right registration system. o Streamline the procedure for issuing construction permits o Invest in human resources to deal with the huge backlog of outstanding applications of land lots. o Make all the provisionary user rights permanent and tradable o Accelerate the regularization and registration of prime informal land o Constitute stocks of secured and developed prime government land banks to be auctioned to large investors (with government guarantees on any future counter claims) ­ a process which should be self-sustainable. The scope of such land banks could/should go beyond housing construction since similar recommendations were made in the context of the agribusiness and tourism industries. o Increase significantly the property tax ­ this will limit owners to sit on unused prime land for long periods of time and be an important source of financing for the implementation of the new land registration system and the development of the necessary local infrastructure on newly developed and secured land. · Redefine the role of the Housing Promotion Fund. One possible role could be to promote the implementation of the new land registration system by financing

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the government land bank mentioned above. Another possible role could be to help develop and diffuse construction materials and techniques adapted to the various housing segments, and which would promote the development of a local material construction industry. It could also use as a way to develop the mortgage market by securing and financing commercial bank mortgages through long term financing. Finally, it could help in the formalization and upgrading of slums. · Reforms of the procurement system on public works. A thorough study should be launched immediately to review the effectiveness and fairness of the current process ­ it should also include a detailed review of the technical specifications being used in current and future tenders. Public procurements should be further leveraged to promote local construction materials and technical/specialized skills among the local workforce (including the provision of technical training and limits on the use of expatriate workers for basic tasks). Review of building codes to adapt them to low cost (currently informal) housing construction and promote local materials. ***

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Sources of information

People interviewed · · · · · · · · · · · · · · · Bruce Chapman, General Manager, Holiday Inn Maputo Inaete Merali, Board Member, Moza Capital Zefanias Chitsungo, National Director, National Directorate for Housing and Urbanization Ken Cockerill, Director of Standard Bank in Mozambique Marie Ribeiro, Director of the National Housing Fund Edgar Ribeiro, Director General, Emocil Tom Durang, MICAO Paul dos Santos, General Manager, SB Construções Adrian Frey, Mozlegal Edgar Baloi, Kwikbuild Mario Rosario, Architect and Owner of (to be completed by Greg) Dr. Correia, BIM Cesar Guitunga, Head of department for territorial planning and urbanization, Matola Municipality Romeu Rodriguez, Director, CETA Rita Furtado, Business Lawyer

Reference Documents · · · · · · World Bank (2008) An overview of the constraints to the development of the housing finance sector (Forthcoming) World Bank: Maputo Jenkins, Paul, Strengthening Access to Land for Housing for the Poor in Maputo, Mozambique, in International Journal of Urban and Regional Research, Volume 25.3, p. 629 ­ 648, 2001 Jenkins, Paul, The role of the state in emerging urban housing markets in Maputo, Mozambique, 2002 Bosten, Emmy, China's Engagement in the Construction Industry of Southern Africa: the case of Mozambique, Paper for the Workshop "Aisan and other Drivers of Global Change", 2006 McKinsey Global Institute studies of the housing construction sector in India and Brazil National accounts data on construction industry

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Mozambique ­ CEM ­ Industry Section ­ Construction sector ­ draft

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