Present status of construction contractors and industry in Sri Lanka and need for urgent reforms | Daily FT

The book is being handed over to State Minister of Money and Capital Market and State Enterprise Reforms Ajith Nivard Cabraal by the author Ruwan De Silva 

 


This article is an excerpt of my book ‘Present status of construction contractors and the construction industry in Sri Lanka and the need for urgent reforms for improvement’, which was published in Jan. 2021.

– Ruwan De Silva – 


Construction impacts everyone across the globe. The construction industry accounts for 6% of global GDP and is considered to be a powerful stimulant for economic growth. Various studies conducted worldwide have predicted a steady growth trajectory for the construction industry in the current decade. This presents numerous opportunities for Sri Lankan construction organisations to venture abroad. 

Sri Lanka too will continue to witness a continuous increase in construction-related activities. Large scale infrastructure projects are already in the pipeline and the country’s mega Port City development project is open for construction activities. The land reclamation and filling work of Port City has already been completed and the next phase will see the infrastructure facilities being developed within the Port City followed by construction of buildings. It is needless to say that we can be certain that there will be a massive increase in construction activities in Sri Lanka in the next few years. 

In Sri Lanka, the construction industry contributes 7.1% to the GDP of the country and is considered to be one of the major drivers of economic development in Sri Lanka. Despite the rosy pictures as mentioned above, the Sri Lankan construction industry itself has been facing severe difficulties and financial losses; and is not able to capitalise on the growth opportunities. Why is that?

My intimate involvement with the construction industry for the last three decades has given me the opportunity to understand and analyse the numerous problems faced by the construction industry. In my book, I endeavoured to discuss these problems faced by the Sri Lankan construction companies, suggest recommendations for correcting the current problems faced by the industry and the measures that could be taken to make the construction industry on par with the international standards. I hope that this book will create awareness among the Government policymakers, Government officers, construction sector professionals and business leaders of the current problems affecting the industry and the measures that need to be adopted to develop the industry. 

The reasons for the current state of affairs in the construction industry can be attributed to many factors. I have identified 42 factors that are vitally important to the construction industry. 33 of these factors are related to the current problems that the industry faces and hence need to be either rectified or improved through policy intervention and industry involvement. The other nine factors are linked to the emerging global issues and need to be embraced by the country and the construction industry. 

The book analyses these factors in detail and provides recommendations for rectifying the shortcomings and developing the industry to become internationally competitive. The identified 42 factors can be broadly categorised into six categories as follows:

  • Government regulatory landscape;
  • Business and labour landscape; 
  • Economic landscape;
  • Education and technical skills;
  • Competitive landscape;
  • Absorption of latest developments by the local construction industry

Government regulatory landscape

Following are some of the problems faced by the construction contractors in their interaction with Government authorities:

  • Inconsistencies in system and procedures adopted by the Government ministries 
  • Discrepancies between works procurement guidelines, and CIDA ‘Standard bidding documents’
  • Conditions of contract that is not suitable to the Sri Lankan conditions
  • Bureaucratic delays
  • Unrealistic total cost estimates
  • Price fixing committees
  • Pricing preambles
  • Retention money and performance bond in the conditions of contract
  • Delay in payments
  • Unfair liquidated damages
  • Ease of doing business
  • Political stability and uncertainties 

 Business and labour landscape

  • Labour shortage and productivity
  • Shortage of skilled labour
  • Labour laws
  • Holidays
  • High employee turnover among construction professionals
  • Micro, small and medium scale contractors
  • Survival and development of large-scale contractors
  • Industry productivity
  • Safety and health in construction
  • Image and Industry
  • Entrepreneurship in construction industry

Economic landscape

  • Cost of finance
  • Inflation, exchange rate and cost of raw materials
  • Tax structure
  • Construction guarantee fund
  • Financing the construction industry via development banking
  • Economic slowdown
  • Economic freedom

Education and technical skills 

  • Education and training
  • Capacity building
  • Language proficiency in construction

Competitive landscape

  • Threat from international contractors
  • Unfair competition from state agencies 
  • Industry competitiveness

Absorption of latest developments by the local construction industry

  • Technical infrastructure and knowhow
  • Research and development
  • Innovation in construction industry
  • Design – build
  • Sustainable Development Goals
  • Global warming and construction

In addition to the above issues, the COVID-19 pandemic that has been ravaging the world during the past one year has brought about long-lasting changes to the way we live and work. Existing business models are giving way to entirely new business models and remote working has become a necessity. This will continue at a rapid pace and we need to adjust to this new reality. The outbreak of the pandemic and the subsequent lockdowns have resulted in massive losses and cash flow problems to majority of the business sectors including the construction sector worldwide. This had a devastating effect on the Sri Lankan construction industry which was already undergoing a crisis. 

The much-desired new normalcy and various health guidelines have now led to change in the manner in which general and specific construction operations are carried out. These serious changes to the long-established working practices have largely contributed to overall and individual changes of the unit rates, preliminaries and other overhead components like head office overheads. The changes for the standard resource norms have caused productivity-related issues (for which the contractors are not responsible), work practice constraints and continuous disruptions due to volatile and dynamic operational environment caused exclusively by COVID-19 related issues. 

In this regard, we note at this stage that general work rates noted in the standard Building Schedule of Rates (BSR) will no longer render applicable warranting immediate attention from the authorities for change. Additionally, we see certain constraints and hurdles in recovering such costs under contractual claims under force majeure (exceptional events), changes in legislation or other appropriate claim headings.

While COVID-19 has affected all the economies of the world, the extent of damage to our economy is likely to be much more serious. We are an island nation with a population of 21 million and our economy was in a precarious situation even before the pandemic hit. Therefore, while we are still battling the COVID-19 pandemic, we should prepare ourselves to face the challenges and opportunities emerging in the post-pandemic period. There needs to be a policy and strategic planning initiative to address the issues and problems faced by the construction industry, as given in the book. 

The way forward

Given the right environment, the local construction companies have the potential to compete successfully with international contractors and win projects not only in Sri Lanka but also internationally. The Government should view the construction services as a potential export income earner for the country. Through addressing the above issues and finding proper long-term solutions for these ailments, we can build a world-class construction industry that will enable our construction companies to become internationally competitive and bring the much-needed foreign income to our country. 

At this point, it is worth remembering the revival of the construction industry under the leadership of the former President R. Premadasa during 1989-1990. President Premadasa initiated many schemes, with World Bank assistance, to revive and reform the construction industry and provided grants for construction companies to upgrade their skills and technical capabilities. Many cabinet directives were issued to create an enabling environment for contractors. The cabinet paper No. 116 of Dec. 1988 is a good example. This paved the way for locally grown, professionally run, large and medium scale local construction firms in the country. 

During this period, authorities such as ICTAD (presently CIDA) and CHPB were formed to assist the construction industry. The National Construction Association of Sri Lanka, which was formed in 1990 with the assistance and guidance from World Bank, provided the construction companies with a forum to collectively address the challenges faced by the industry, voice their grievances and have a constant dialogue with the Government. It is important that we need a similar focus by the Government at this crucial period when the construction industry is facing enormous difficulties and challenges. 

During the Presidency of Mahinda Rajapaksa (2005-2014), the Government made huge contributions in uplifting the construction contractors. Many massive infrastructure projects were launched and the contractors had the opportunity to participate in these large projects. Some construction companies even acquired the necessary financial and other resources to compete internationally. The contractors had to undergo many hardships during the period from 2015-2019. A large amount of money owed to the contractors was either not paid or paid after a lapse of many months. 

The decision-making was painfully slow due to frequent shuffles of ministries. The fact that the Government could not present a proper Budget and had to rely on supplementary budgets instead. The increases in tax rates had debilitating effect on the businesses. This was further exacerbated by the dastardly Easter Day bombings which shook the economy of the country to the core. The hotel and tourism sector came to a complete standstill. This had a cascading effect on other sectors including the construction sector. There were suspension of construction and refurbishing of hotels by hotel owners which affected the construction contractors badly. 

There were many outstanding payments due to contractors who had been working on tourism and hotel related projects due to suspension of loans and financial facilities given to hotel owners. However, with the changing of Government in 2019, the Prime Minister intervened and presented a cabinet paper to settle the long overdue amounts totalling Rs. 400 billion to the contractors. As explained above, the construction companies had faced a severe crisis during the last six years. 

In fact, the construction industry was the hardest hit during this period, even more so than other industries such as tourism, exports, etc. The contribution of the construction industry to the country’s economy has declined enormously during the last six years and hence considerable amounts of resources need to be channelled to affect a swift ‘v-shape’ revival of the industry and to get it back to its growth stage. Therefore, I earnestly request both President Gotabaya Rajapaksa and Prime Minister Mahinda Rajapaksa to make radical changes necessary to make the industry great again. 

At present, there are many Government institutions and authorities that are involved in construction-related matters either directly or indirectly. CIDA, NBRO, UDA, RDA, Water Board, Education, Health, Irrigation, Land Reclamation Board, HDFC and National Procurement Commission are some of the entities with stakes in construction sector. All these organisations have their own development agenda, procurement procedures and regulations which are more often contradictory to each other’s. This creates confusion among the industry firms and result in decision making delays. 

Establishing a dedicated unit under the Ministry of Finance to act as a single window for providing solutions to all the problems faced by the construction industry, will go a long way in alleviating the numerous problems faced by the contractors and the industry currently. This unit should be given the necessary legislative authority to issue directives and circulars as and when necessary to ministries, departments, authorities, provincial councils and local government institutions to strictly implement clear and consistent policies and should have the power to enforce these directives. The unit should have the authority to hold the public sector officers accountable for implementing its directives. 

Since this unit should have the authority to issue directives to a multitude of Government institutions that deal with the construction industry, it is suggested that this unit be setup under the Finance Ministry. The Finance Ministry already issues to and enforces directives across all the Government ministries; and hence the circulars sent by them will be more authoritative across all the ministries. Setting up this unit under the ministry of construction or any other ministry will not serve the purpose for which the unit is setup as the directives issued by them will not be taken seriously by the institutions that come under different ministries, provincial councils and local authorities. 

In addition, this unit could regularly monitor the regulations and payments to be made to the contractors by line ministries, departments, provincial councils, etc. and ensure that the ministries don’t deviate from the established standard contract document, procurement procedures and directives issued by this unit. There is also a necessity to issue public finance circulars and directives regularly to address anomalies in tax structure, depreciation of Rupee against Dollar, etc., and to protect the contractors from future payment delays and mitigate disputes. 

This unit also should have the authority to issue temporary circulars for specific periods as and when unforeseen risks strike the industry; and should have the mandate to formulate and reform policies, rules and regulations as and when necessary, with immediate effect. This unit also should look into settle the outstanding payments owed to the contractors in an effective manner. This will greatly ease the financial burden that the contractors are saddled with at present and ensure speedy delivery of development projects. 

This unit should incorporate private sector participation by inviting representatives of the construction industry, construction professionals and academia to serve in the advisory panel. This would enable the Government to have a holistic view of the construction industry. Private sector participation will facilitate the unit to not only find out the problems faced by the industry but also to understand the measures that could be taken to make the Sri Lankan construction industry to be on par with the world’s best. 

The construction contractors contribute in no small measure to the GDP of the country. The Government should view the construction contractors as partners in nation building. There is an urgent need for the Government to seriously address these issues that are crucial for the long-term survival of the Sri Lankan construction contractors.

The construction industry is the backbone of a healthy industry.