Many job losses in construction sector imminent with worsening economic crisis

At present the total overdue payments to construction contractors in the roads, buildings and water supply sectors alone amount to nearly Rs.100 billion

The Chamber of Industry of Sri Lanka (CCI), which is the apex representative body of all who are engaged in construction sector, predicts that with the present economic crisis and due to several factors causing a debilitating impact, over 100,000 jobs will be lost within next 3 months, unless immediate remedial action is taken. 

In the past, the construction industry used to contribute on average 8 -10 percent to the GDP. However, due to negative impacts in 2019  and 2020, the contribution to GDP was only 7.4 percent and  6.2 percent respectively. 
In addition, this sector has provided employment to 650,000 direct and 325,000 indirect. As such it has to be reckoned as an integral growth sector which should be prioritized for economic revival, especially during times of recession as we are now in.

The main factors affecting can be summarized as below. 
■Delays in payments for work done
■Unprecedented cost escalations
■Fluctuation of the exchange rate
■Shortage of construction materials
■Difficulties in importing raw materials to manufacture construction materials
■Suspension of capital works
■Interest rate increases
■Recovery action by banks

At present the total overdue payments to construction contractors in the roads, buildings and water supply sectors alone amount to nearly Rs.100 billion. When other sectors are considered this will be more than this. To alleviate the burden on the industry the government is kindly requested to make early arrangements to settle these outstanding payments by the RDA, Education Ministry, UDA and NWS&DB as a matter of urgency.

Unprecedented price increase
During the last 15 months there have been unprecedented increases in the prices of all construction materials. The table gives the price changes of 5 basic materials.

With the free float of Rupee, the exchange rate has now increased to Rs.340.00 to 1 US dollar. In December 2020 and December 2021 this was Rs.186.40 and Rs.203.00 respectively.Thus an increase of 82.4 percent.
As nearly 70 percent of the construction materials in building and other engineering constructions and 60 percent of road projects are import based, the impact of this will be to increase the construction costs at least by another 60 percent. 

In addition, the price of diesel which was Rs.121.00 in December  2021 is now Rs.289.00. lt increased by 138.8 percent during last 4 months. This increase will cause to further increase the overall construction costs by another 5 percent.

CCI acknowledge and appreciate the Cabinet Decision for the progressive solution of allowing the price escalation formula of the Construction Industry Development Authority (CIDA) to be applied up to an upper limit of 20 percent of the contract sum for contracts beyond 3 months that have excluded the price escalation clause. 

However, CCI regrets to note that certain State organizations are reluctant to offer this relief to its fullest extent to contractors. CCI therefore kindly request the Finance Ministry to communicate this Cabinet Decision to all SOE’s  via a Public Finance Circular as the industry is in dire need of this relief.  

Due to the unprecedented cost increases shown above the 20 percent cap imposed earlier on price fluctuations will not be relevant any longer. Therefore, CCI strongly request that this ceiling on price escalations should be removed and to allow the actual price escalation based on CIDA formula.

A common complaint is that CIDA price indices do not reflect the actual market prices. Even though the CIDA is in the process of revising the price escalation formula and its responsiveness to the present market conditions, this exercise will take several months and once finalized will apply to work done in the future only. As an interim measure the following reliefs are proposed.

(i) To immediately bridge the gap created by the formula, in not properly allowing for transport costs, to grant a 5 percent increase of the contract price as compensation for the sharp  fuel price hike;

(ii) To provide for the difference of the Dollar fluctuation on the current CIF prices especially for Mechanical, Electrical and Plumbing (MEP) items, and any other items which are not reasonably covered by the CIDA price escalation formula.

In countries where statistics are available it can be seen that quite often construction companies lead the bankruptcy numbers. This is due to the many variables in construction projects with differing site conditions, large number of different materials needed, higher exposure to weather, operating on low profit margins (usually 5 percent), inability to claim price increases fully and nomadic nature of the workforce. 

As a result it is very important that timely payments for work done are received. It is seen that most construction companies become bankrupt not due to no – profitability but as a result of cash flow problems. In the present situation with unprecedented increases of material prices, exchange rate and bank interest rates the need to reimburse cost increases and timely payments need not be over emphasized. 

Act similar to one in S’pore
As such CCI wishes to urge to introduce a “Building & Construction Industry Security of Payment Act” similar to the Act in Singapore. This Act in Singapore has even provided the legal framework for adjudication and to enforce the adjudication decisions. This will also address a lacuna prevailing at present on adjudication process.
The shortage of construction materials due to the import restrictions and difficulties in opening L/C’s because of exchange crisis is having a serious impact on the completion of development projects. 

The importers of materials and also the manufacturers of building materials such as cement or steel etc are faced with the dilemma of correctly assessing the cost when importing raw materials on deferred L/C’s, as at the time of settlement of L/C’s the Rupee cost would have increased more than what was estimated. 

Very often by the time of L/C settlement, the imported materials and the manufactured items would have been already fully sold due to a starved market and any extra cost due to exchange rate fluctuation will be a loss.
The new Secretary to the Finance Ministry has indicated that the Governmentwill be compelled to suspend capital works for at least one year. Perhaps the government has no choice considering the huge budget deficit, with IMF applying brakes onmoney printing and inability to release foreignexchange for constructionsector imports. 
However, CCI wishes to propose that the foreign funded projects should proceed without any interruption. In fact it will be prudent to have a mechanism tofast track these projects to improve the foreignexchange inflow from these.  

On the other hand locally funded projects without a satisfactory EIRR could be suspended or stopped altogether. However, suspension of locally funded projects which are already commenced will have practical and legal issues. Government authorities will have to negotiate and mutually agree onthese on a reasonable basis.
For locally funded projects which are deemed important to continue the CCI wish to propose establishing a credit line of about US$ 100 million to cover the imports. To properly manage the disbursements on this credit line, CCI is willing to assist by setting up a mechanism to monitor the project requirements and make recommendations to the Ministry of Finance.

Another suggestion is to allow property development companies to deposit sales proceeds in foreign currency in separate RFC accounts and utilize such funds to import items required for their property development projects. This measure will allow these projects to proceed smoothly.

It is observed that many projects have and are commenced at the whims and fancies of politicians and senior officials, without any regard to the EIRR. There are many examples of such projects that have led us to the present foreign exchange crisis. 

As such it is proposed that all future development projects shall commence only on the recommendation of a Technical Evaluation Committee appointed with the mandatory representation of CCI, which is established by an Act of Parliament.

Policy rate impact 
The recently announced highest policy rate increases ever by the Central Bank will drastically increase the interest rates on all facilities such as bonds & guarantees, overdrafts, term loans and leasing provided to businesses including construction companies. The Central Bank should ensure that the banks will not increase rates on already approved facilities but only on new facilities.  Also as the policy rate increase could be a short term measures, CCI wish to proposethat the interest rates on long term housing loans should not be increased.

The moratorium allowed by the government and Central Bank on loans taken by the construction sectordue to difficulties arising from a multitude of problems faced by the construction industry consequent to the Covid–19 pandemic and recession, ended on 31st March 2022. Due to large outstanding payments, unparalled cost increases, import restrictions and foreignexchange shocks the construction industry is still encountering the same difficulties. 

As such CCI wish to request that the moratorium on loans taken by construction companies and property developers should be extended on the same basis   up to 31st December 2022.

CCI wish to inform that unless the government take serious note of the situation and take necessary remedial action immediately, large scaleretrenchment in construction sector is unavoidable as majority of constructionsector employees are recruited ona project basis. If this happens, the total job losses may exceed 100,000.
(The writer is the Secretary General / CEO of Chamber of Construction 
Industry of Sri Lanka)