The big question in the minds of many is for how long the local construction industry, which employs 650,000 workers directly and another 325,000 indirectly, could survive without a total collapse due to the multiple shocks it had to face during the last 2 years.
For economic revival after overcoming a recession, the catalytic inputs of the construction industry will be imperative. However, with the scant attention of the authorities to the issues facing the construction industry, the Chamber of Construction Industry of Sri Lanka (CCI) cannot be certain of the future that lies ahead. CCI, as the apex representative body of all who are engaged in the construction industry, request urgent resolution of following issues.
The total amount of payments outstanding to contractors and consultants on work performed on contracts in roads, school buildings and water supply projects alone exceed Rs. 100 billion. When outstanding payments on contracts in other sectors are also considered this will be a huge amount. Some of these payments are overdue for over 12 months.
Authorities must understand the inherent nature of the construction industry, which has a relatively low capital base and a high turnover, operating with a low profit margin averaging 5%. Consequently, it is very vulnerable to unsteady cash flows. As such the Government should take immediate steps to settle all outstanding payments that are overdue for more than 3 months in Government Projects, along with the interest payments allowed under the contract terms.
Reimbursement of price escalations
During the last 4 months, the prices of most construction materials have more than doubled. Last November a Cabinet Decision was taken to allow price fluctuation on all contracts over a 3 months completion period that had excluded price fluctuation as per the CIDA formula, subject to an upper limit of 20% of contract sum.
In the context of steep price increases it is urged to remove the 20% cap and also allow this even on contracts less than 3 months. Also as the CIDA formula does not adequately cover MEP items and some imported civil items as well, it is suggested to reimburse the difference in foreign currency fluctuation on the current CIF values of these. Another burning issue is the increased diesel cost. To bridge the gap created by the CIDA formula on transport costs, it is proposed to grant a 5% increase on contract sum as compensation for fuel cost increase.
Building & Construction Industry Security of Payment Act
As stated above it is very important that timely payments for work done are received by the contractors. In the present situation with unprecedented price increases of materials, exchange rate and bank interest increases, the need for timely payments is critically felt as never before. As such it is strongly suggested to introduce a “Building & Construction Industry Security of Payment Act” much similar to the Act in Singapore.
Suspension of projects
The Secretary to the Treasury by the National Budget Circular No. 03/2022 has informed the suspension of projects funded locally. As per this all new projects and projects on which construction work has not commenced will be stopped. In addition projects commenced but with poor progress could also be suspended with understanding between the parties. However, this circular will not affect the foreign funded projects.
CCI believes that this suspension, though mentioned as temporary, would last at least until the end of this year. This will be a severe blow to many consultants and construction companies, who are not much engaged with foreign funded projects. Within the next 3 months most certainly large scale job losses will be evident in the construction sector due to lack of work. Consequent to devaluation of rupee, import restrictions, material shortages, high prices and unbearable interest rates, there will be no new investments from the private sector, local or foreign, as well.
For locally funded projects which are deemed important to continue it is proposed to establish a credit line of about US$ 100 million to cover the import of materials and equipment required. 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.
In this situation CCI wishes to propose the acceleration of foreign funded projects, which will improve the inflow of foreign funds. Towards this end it is suggested that all payment claims of contractors for work done shall be certified and paid within 3 weeks. To ensure steady progress of work foreign exchange received on these projects shall be utilized to fund the project import requirements.
Recommence aborted projects with concessionary funds
CCI also proposes that the Government should negotiate immediately to recommence the aborted LRT project and upgrading of KV railway line with JAICA and ADB funds. On both these projects, feasibility studies, EIA, detailed designs and even contract documents were done and later abandoned due to ill gotten advice, similar to the fertilizer ban.
The JAICA loan package of US$ 1.85 billion on LRT was on very concessionary terms with an interest rate of 0.1%, payback period of 40 years and a grace period of 12 years on capital + interest payments. We have not received such concessionary funds on any other project to date. Even the upgrading of the KV line with a loan package of US$ 1.2 billion from ADB was on concessionary terms. As both these projects had EIRR of 20% and 16% respectively, the reasons for cancellation cannot be economic non viability but surely other considerations. Had these projects proceeded without a disruption our local companies could have got a fair share of the work involving nearly US$ 3 billion.
The Government has announced a Golden Visa scheme to foreigners who invest US$ 75,000 or US$100,000 to purchase an apartment. But now most apartment projects are at a standstill due to the same reasons stated above, viz devaluation of rupee, important restrictions, material shortages, high prices and unbearable interest rates. To mitigate these impacts to some extent, it is proposed that the property developers should be allowed to utilize foreign exchange earned by them to import the materials and M&E equipment required for these projects. As announced by the Central Bank Governor, the interest rate increase is a short term strategy, in which event to sustain the property development and home building, it is proposed that a concession should be given on housing loans.
It is observed that one of the main reasons for the present foreign exchange crisis is the projects undertaken without any economic viability with foreign loans, based on unsolicited proposals. There are ample examples of such projects. To avoid occurrence of these in future following are proposed.
i. Establishment of an independent National Planning Commission (NPC) similar to NPC in India with the appointment of qualified persons approved by Constitutional Council. One member of the NPC shall be a nominee of CCI. ii. All projects more than Rs.500 million to have the approval of NPC, who should approve only on the basis of national priority and satisfactory EIRR iii. Procurement for projects to be strictly on the basis of minimum 5 competitive bids. On very exceptional circumstances number of bids may be reduced to 3. no unsolicited bids to be allowed. iv. TEC’s for project procurements in excess of Rs. 500 million to have a representative of CCI to ensure transparency. v. Replace the present outdated Government Procurement Guideline 2006 with what was developed by the now defunct NPC in 2018, after extensive industry consultations.
Stable government and good governance to attract investments
To kick start the economy with more investments and thus create more employment it will be essential to ensure political stability with good governance, rule of law, transparency and a conducive environment even after a degree of economic stability is reached by debt & economic restructuring with IMF intervention and rating upgrade. This economic programme may include very painful measures to increase taxes, scale down welfare measures, restructuring loss making SOE’s to achieve fiscal consolidation. No single party Government will be willing to carry out the needed economic programme to resurrect the country from the present situation. As proposed by the BASL and Joint Chambers the need of the hour is the formation of a National Government composed of all parties in Parliament for a limited period to carry out a reforms programme. A good example is the war Cabinet in the UK during the Second World War. This National Government should be headed by a prime minister acceptable to all parties in parliament and protestors, If no such person can be found in the present Parliament, a suitable person from civil society should be brought in through the national list.
To ensure public confidence it will be essential to withdraw 20A and introduce 21A with all good features of 19A and also converting the Executive Presidency to a nominal head of state elected by Parliament as in India. The argument that the Executive President is required due to the formation of provincial councils has no justification, with India being the best example. In the Constitutional Council the majority of members should be representatives from outside the Parliament, as per the original proposal. In addition it is proposed that the Colombo Port City Economic Commission and the National Planning Commission shall be brought under the CC.
Independence of Public Service
It is seen that ensuring independence of Public Service which is essential will not be achieved only with the appointment of PSC by CC as per 19A. We witnessed this during 2015 -2019. At present the Ministry Secretaries who are expected to manage and control the Ministries & Institutions have to function under the whims and fancies of the Ministers. To ensure independence the following measures are proposed.
i. Cabinet Ministry Secretaries who are the Chief Accounting Officers of the Ministries and institutions under the Ministries as per the Public Finance Act, should be appointed with the approval of CC similar to Superior Court Judges. ii. Cabinet Ministry Secretaries should have a fixed term of 5 years similar to the practice in India which has 7 years. iii. Even though Ministry Secretaries are expected to function as the CEO and CAO to supervise Ministries & Institutions under, their hands are tied by Sec 52(2) of the Constitution which states that a Ministry Secretary shall be “subject to the direction and control of the Minister”. This should be changed to read as “subject to the policy direction of the Minister”.