With the economic crisis, many job losses in the construction sector are imminent

The Sri Lanka Chamber of Industry (CCI), which is the supreme representative body of all those engaged in the construction industry, anticipates that with the current economic crisis and due to several factors having a debilitating impact , more than 100,000 jobs will be lost. within 3 months, unless immediate corrective action is taken. In the past, the construction industry contributed an average of 8-10% to GDP. However, due to the negative impacts in 2019 and 2020, the contribution to GDP was only 7.4% and 6.2% respectively. In addition, this sector provided jobs for 650,000 direct and 325,000 indirect. As such, it should be seen as a growth sector in its own right that should be prioritized for economic recovery, especially as the country is now in recession.

The main affecting factors can be summarized as follows:

(I) Delays in Payment for Work Performed

(II) Unprecedented Cost Rise

(III) Exchange rate fluctuation

(IV) Shortage of building materials

(V) Difficulties in importing raw materials to manufacture building materials

(VI) Suspension of investment works

(VII) Increase in interest rates

(VII) Recovery action by banks

At present, the total outstanding payments to construction contractors in the roads, buildings and water supply sectors alone stands at almost Rs 100 billion. When other sectors are taken into account, it will be more than that. In order to ease the burden on the industry, the government is requested to make expeditious arrangements to settle these outstanding payments by the RDA, Ministry of Education, UDA and NWSDB as a matter of urgency.

Over the past 15 months, there has been an unprecedented increase in the prices of all building materials. The table below gives the price trends of 5 basic materials.

With the free float of the rupee, the exchange rate has now risen to Rs.340.00 against 1 US$. In December 2020 and December 2021, it was Rs 186.40 and Rs 203.00 respectively. That is an increase of 82.4%. Since nearly 70% of construction materials in buildings and other engineering constructions and 60% of road projects are imported, the impact of this will be to increase construction costs by at least 60%. Moreover, the diesel price which was Rs.121.00/It in December 2021 is now Rs. 289.00/lt, increased by 138.8% in the last 4 months. This increase will further increase the overall construction costs by another 5%.

CCI acknowledged and appreciated Cabinet’s decision for the progressive solution of allowing the application of the Construction Industry Development Authority (CIDA) price escalation formula up to an upper limit of 20% of the contract amount for contracts longer than 3 months that have excluded the price review clause. However, the ICC notes with regret that some state agencies are reluctant to offer this relief to the full extent to entrepreneurs. The CCI has therefore requested the Ministry of Finance to communicate this Cabinet decision to all public companies through a public finance circular, as the sector is in urgent need of this relief. Due to the unprecedented cost increases noted above, the previously imposed 20% cap on price fluctuations will no longer be relevant. Therefore, CCI strongly requests that this cap on price increases be removed and that it allow for actual price increases under CIDA’s formula.

A common complaint is that CIDA’s price indices do not reflect the true market price. Although CIDA is in the process of reviewing the price escalation formula and its responsiveness to current market conditions, this exercise will take several months and once finalized will only apply to future work. As an interim measure, the following relief is proposed.

(i) To immediately fill the void created by the formula, by not properly taking into account transport costs, to grant a 5% increase in the contract price in compensation for the sharp increase in the price of fuel;

(ii) To cover the difference in fluctuation of the dollar on the current CIF prices, in particular for mechanical, electrical and plumbing (MEP) items, and any other items which are not reasonably covered by the indexation formula of CIDA award.

In the countries where statistics are available, it can be seen that very often construction companies are at the top of the bankruptcies. This is due to the many variables of construction projects with different site conditions, the large number of different materials required, higher exposure to weather, operation with low profit margins (typically 5%), the inability to fully claim price increases and nomadic nature. of the work force. Therefore, it is very important that timely payments for work performed are received. It is observed that most construction companies go bankrupt not because of a lack of profitability, but because of cash flow problems. In the current situation with unprecedented increases in material prices, exchange rates and bank interest rates, the need to repay cost increases and timely payments should not be overstated. As such, CCI wants to introduce a “Building and Construction Industry Payment Security Act” similar to the law in Singapore. This law in Singapore even provided the legal framework for arbitration and the enforcement of arbitration awards. It will also fill a gap that currently prevails in the adjudication process.

The shortage of construction materials due to import restrictions and difficulties in opening letters of credit due to the foreign exchange crisis has a serious impact on the realization of development projects. Importers of materials and also manufacturers of construction materials such as cement or steel etc. face the dilemma of correctly assessing the cost when importing raw materials on deferred L/Cs because at the time of L/C settlement, the cost in rupees would have increased more than expected. Very often, by the time the letters of credit are settled, the imported materials and manufactured items would already have been sold out due to a hungry market and any additional cost due to exchange rate fluctuation will have to be borne at a loss.

The new Secretary of the Ministry of Finance has indicated that the government will be forced to suspend capital works for at least 1 year. Perhaps the government has no choice given the huge budget deficit, IMF curbs on money printing and the inability to free up foreign exchange for construction sector imports; CCI wishes to propose that the projects financed abroad proceed without interruption. In fact, it will be prudent to have a mechanism to accelerate these projects to improve the inflow of foreign currency from them. On the other hand, locally funded projects without a satisfactory ERR could be suspended or stopped altogether. However, suspending locally funded projects that have already started will have practical and legal issues. Government authorities will have to negotiate and mutually agree on this matter on a reasonable basis.

For locally financed projects whose continuation is considered important, the CCI wishes to propose the establishment of a line of credit of approximately 100 million US dollars to cover imports. To properly manage disbursements on this line of credit, the CCI is ready to help by setting up a mechanism to monitor project needs and make recommendations to the Ministry of Finance. Another suggestion is to allow real estate development companies to deposit foreign currency sales proceeds into separate RFC accounts and use these funds to import items needed for their real estate development projects. This measure will allow these projects to proceed smoothly.

It is observed that many projects are launched at the whims and fancies of politicians and senior officials, with no regard for the TAR. There are many examples of such projects that have led us to the current currency crisis. As such, it is proposed that all future development projects shall only commence on the recommendation of an appointed Technical Review Committee with mandatory representation from CCI, which is established by an Act of Parliament.

The highest policy rate increases ever recently announced by the Central Bank will significantly increase interest rates on all facilities such as bonds and guarantees, overdrafts, term loans and corporate leases, including construction companies. The Central Bank should ensure that banks do not raise rates on already approved facilities, but only on new facilities. Moreover, as the increase in the policy rate could be a short-term measure, CCI wishes to propose that interest rates on long-term housing loans should not be increased.

The moratorium authorized by the government and the Central Bank on borrowing by the construction sector due to difficulties resulting from a multitude of problems faced by the construction industry as a result of the COVID pandemic and recession -19, ended on March 31, 2022. Due to large outstanding payments, unprecedented cost increases, import restrictions and currency shocks, the construction industry is still facing the same difficulties. As such, the CCI wishes to request that the moratorium on loans contracted by construction companies and real estate developers be extended on the same basis until December 31, 2022.

The CCI would like to inform that unless the government takes serious note of the situation and immediately takes the necessary corrective measures, a large-scale reduction in the construction sector is inevitable because the majority of employees in the construction sector construction are recruited on a project basis. If this happens, total job losses in the sector could exceed 100,000.

The author is the General Secretary/CEO of the Chamber of Construction Industry.

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