THE SRI LANKAN CONSTRUCTION INDUSTRY: PAST, PRESENT AND FUTURE

The Sri Lankan construction industry is almost old as civilization itself. From domineering stupas to vast irrigation systems, Sinhalese and Sri Lankan Tamils showed their prowess in the art of construction for many centuries. Nevertheless, in the past two decades, the construction industry has gone through a rollercoaster of ups and downs due to a myriad of reasons. At the end of the civil war, a vast inflow of investment caused an unprecedented boom in the construction industry, which contributed significantly to the GDP growth of the country. It became quite apparent that this growth (fuelled mainly by public sector infrastructure investment) was not sustainable. In 2008, a new government that focused on cutting down on public spending, saw a decrease in the number of projects. Several major construction companies (e.g. MAGA, Sanken) had to cut down their staff to survive during this period. At this time, several foreign contractors also came into the local market. This increased competition forced the local companies to innovate and improve their operational capabilities. After the current government came into power, the number of projects started to increase again. However, the COVID-19 pandemic put a stop to this. The construction industry’s contribution to the GDP reduced from 8-10% to 6.2% in 2020. Due to long term structural issues and short-term policy blunders, the Sri Lankan economy is now in dire straits. Consequently, the Sri Lankan construction industry has also been brought down to its knees.

In the past, the main issue that construction companies faced was the shortage of labour and certain construction material (e.g., river sand).?The industry was able to innovate and overcome these challenges over time. Now, due to the current economic situation, the industry is facing a multitude of problems that can only be solved by actions taken at a state level. The key issues currently facing the industry are:

1. Rising material costs
2. Payment delays.
3. Suspended government projects
4. Difficulty in importing goods
5. Increased interest rates

For an industry that is built around small profit margins (approx. 5-8%), such issues can completely decimate the cash flow of construction companies.

The sharp increase in the cost of construction materials due to the ever-increasing dollar rate and inflation rates has made current projects impossible to run. Certain suppliers are also exploiting this situation by increasing their margins. Most SOEs are not following the 20% price escalation that was allowed by the cabinet as well. The table below shows how rapid the increase in construction materials has been in the last two years.

Table: Price Increase of Construction Materials (Source: CCI)

There are delays in payments due to clients scrambling to secure their financial position. It is estimated that the total overdue payments in the road, buildings and waters supply sector are more than Rs 100 billion. All state-sponsored government projects have now been suspended by the gazette as an attempt to reduce its fiscal burden. This holds billions of rupees in payments from government projects. The dollar crisis has made it near impossible to obtain required goods and materials due to the lack of dollars in the local banking sector. Some companies who had to wait 120 days after opening L/Cs had to bear unbearable losses when the dollar was floated in an uncontrolled manner. Any hopes of obtaining new projects have also been squashed due to high-interest rates that are set by the central bank. The Sri Lanka Chamber of Construction Industry (CCI) estimates that more than 100,000 will lose their jobs due to the projects that are halted.

There are several possible options that the government can use to help mitigate these issues. Projects that are nearing completion can be allowed to continue using a case-by-case approach. Foreign-funded projects that are selected on merit can be implemented rather than projects selected due to the whims of politicians and senior officials. More projects can be initiated, that isis related to the service industry that in turn will help build up the GDP of the country in a sustainable manner. It is needless to say that any policy decisions that are made concerning the overall economic situation of the country must involve the construction industry as well.

Samitha Soysa | Chartered Design Engineer | URO Structural Engineers (PVT) Ltd | MBA 2022 Batch

Reference:

https://blog.pim.sjp.ac.lk/2022/05/05/the-sri-lankan-construction-industry-past-present-and-future/