Construction industry in 2024: For attention of existing and future governments

Sri Lanka is about to lose one of its largest industries. This is an industry that contributed around 9.6 percent to gross domestic product and involves directly and indirectly nearly 2.6 million stakeholders. This is none other than the Sri Lankan construction industry. 

By now, the industry has shrunk by 60 percent. Over 500,000 employees have been retrenched and over 10,000 professionals have left the county. The government has kindly appointed a task force to counteract this issue. All stakeholders contributed to this cause and produced a 51-point report. From this, the government chosen 11 points of concern and showed their support to fulfil these points. Yet, nothing happened. 
Therefore, immediate attention should be given to put the construction industry back on track by the existing government or any future governments, which shall acquire power. 

Priority areas 

Providing aid to bring back the ruined contractors, who have lost due to the sudden stoppage of their projects and non-settlement of their bills in a reasonable manner should be focused on. Many government officers have ignored the commitments of contractors (noted below) and this harassment is what had devastated the contractors. 

•  Bonds and guarantees issued by banks
•  Cost overruns
•  Settlement of suppliers’ and sub-contractors’ labour salaries and dues
•  Harassment from banks to settle bank dues and encashing their bonds and pressing for settlements
•  Consultants too are ignoring this situation
•  Not approving their EOTs, variations, claims, etc. 

These contract disputes are further torturing the contractors, especially the small and medium enterprise (SME) sector. Imagine the small/medium contractors, who acquire a job and put all their life efforts into that one project. They sometimes keep their own home as collateral for bonds and guarantees, take high-interest loans for bridging finance, gaining credit from material suppliers and even equipment in hope of future projects. All the while, the material prices increase three to four times and these are not remunerated to the contractors. Bearing all this, they still survive. However, when their projects are stopped, it is the final blow to their livelihood. 
To make matters worse, these projects are acquired via highly competitive bids with a 3-4 percent margin or even to the cost, simply for the survival of their company. In such projects, cashflows are damaged, financial stability is damaged and in short, it damages their whole
business cycle. 
Due to a fault of the economy or government, these people have no relief from the banks, creditors and thus marks the end of yet another of Sri Lanka’s few remaining contractors. 

Recommendations

A high-powered committee (consisting of government administrative officers, industry representatives and experts in construction policies and contracts) should be appointed to deal with the contractor issues, enhance contractual obligations, facilitate amicable dispute resolution and evaluate the adequacy of the current terms of contract in the current context of crisis and to make appropriate amendments for adequate compensation mechanisms, in a way that is favourable to the contractor because he is not at fault. 

 Restarting of halted projects – Dangerous half-done structures should be recommenced. Help the contractors of the relevant projects to receive the payment for the cost overruns and complete the projects without incurring losses and complete the outstanding projects. Funds can be drawn from the Rs.55 billion allocated for the construction industry and the Rs.1.26 trillion given for new developments for this. 
 The government to negotiate and encourage the restarting of donor-funded projects. 
 Roads are deteriorating very fast. Therefore, the government should commence road maintenance and overlays. If this is not financially feasible, imposing a minor road tax would be beneficial, rather than waiting for both people and vehicles to be destroyed, due to
dangerous roads. 

Construction cost and VAT increase

Given that the construction cost skyrocketed in the year 2022, currently the Sri Lankan construction cost has reduced to the levels on par with its neighbouring countries, namely, Indonesia, Malaysia, Vietnam, etc. Therefore, even with the Value Added Tax (VAT) increases for material and fuel, we can manage to be at the range of US $ 800/m2, which is still a favourable price to restart private sector projects and attract foreign direct investments. This is good news. 
Fair distribution of work
We ask you to remember that there is no work in the country. Therefore, we strongly and very seriously advise the government and regulating authorities to control the distribution of work in a way that is just and fair for all, so that a few large companies do not grab all the work that the others severely need to survive. This is what the industry requires to survive the year 2024. 

(Rohan Karunaratne is
President of the Ceylon Institute
of Builders (CIOB))