Sri Lanka’s construction industry is worth approximately $ 8 billion, and comprises of over 2,500 registered local construction firms which are categorised by the Construction Industry Development Authority (CIDA) taking into account companies’ financial assets, technical capabilities, and field- specific experience. Immediately after the conflict ended, the industry witnessed exponential growth as the economy entered a new phase of development and transformation. Recording a growth that was twice as fast as the nation’s Gross Domestic Product (GDP), the construction sector was seen as one of the most dynamic components of the economy, propelled by large-scale infrastructure development. However, in the past two years, the industry witnessed a systematic contraction. In 2017, the construction sector slowed down to record a growth of 3.1% compared to 8.3% in 2016. This deceleration in construction activities was reflected in cement production and imports, which grew at slower rates of 4.6% and 7.1%, respectively, in 2017, compared to the respective growth rates of 17.8% and 29.5% witnessed in 2016. It collectively recorded a 6.3% growth in 2017, compared to 25.3% growth in 2016. Further, the building material imports volume index, which increased by 22.6% in 2016, recorded an increase of only 6.8% in 2017, indicating a contraction in construction activities. Continued trend This trend is ongoing as evident in the published National Accounts of Sri Lanka for the first quarter of 2018. In comparison with the first quarter of 2017, ‘Construction’ activity dropped by 4.9% in the first quarter of 2018. The share of construction activity to the GDP is reported as 7.4% in this quarter. The total cement supply also decreased by 3.55% during this time. In value terms, the GDP from construction in Sri Lanka decreased to Rs. 161,305 million in the second quarter of 2018 from Rs. 164,173 million in the first quarter of 2018. GDP from Construction in Sri Lanka averaged Rs. 137,746 million from 2010 until 2018. Why the decline? For an industry that was on the upward trend, and which contributed approximately 15% to GDP, the spiralling downward trend is worrying. Stakeholders attribute the decline to a number of constraints and drawbacks that the industry is facing due to policy inconsistency. As with most industries in Sri Lanka, the construction industry is plagued by lack of sustainable policy, as national policy often changes every so often, in tandem with changes in government. Unlike in economies such as Singapore, Malaysia, and even emerging nations such as Myanmar, Vietnam, and Cambodia, where strategic national policies are put in place and executed for the long term, Sri Lanka’s most pressing issue remains policy inconsistency. With regards to the construction industry, this was starkly evident when mainstay infrastructure projects came to a standstill on the back of a governmental change in 2015. Such trepidation and inconsistency does not augur well for investment, thereby acting as a deterrent for further investment into property development or large-scale infrastructure development. A majority of the players in the Sri Lankan construction industry are professionals with vast experience in diverse areas of construction. They also demonstrated their capabilities in innovation by moving with global trends towards sustainable construction, smart and green building construction, and geo-technologies. The Chinese Despite the expertise demonstrated by the industry, local players have become second fiddle to international operators. There is a growing concern amongst stakeholders on the enlarged role that Chinese construction companies deployed to cater to the construction needs of the local industry play. It is estimated that approximately 35-40% of industry activity, both in value and volume, are under the purview of Chinese contractors. The worrying aspect of this is that Chinese operators exclusively utilise Chinese labour and Chinese building materials, thus, facilitating a huge exodus of dollars out of the country. Local operators cry foul over the fact that the Chinese construction companies are able to outbid them due to financial assistance from the Chinese Government, reducing the local operators to work as sub-contractors. The complexity of the challenge is enlarged in that Chinese operators are expanding their horizons, scouting for projects that are medium range, thereby edging out local players by securing business even outside of the construction of mega complexes. Cash crunch Cash flow and working capital needs remain a critical area of concern for stakeholders, who claim that rising interest rates, coupled with trapped cash flows in delayed and projects that are on hold for the Government, have placed them in a cash crunch. With the exponential rise in the cost of capital, managing working capital requirements in a scenario of trapped cash – where operators are waiting for payments in excess of credit periods – places severe stress on the construction industry, which has cascaded down through the multiplier effect, placing suppliers, employees, and the general public in vulnerable situations with regards to disposable income. A new tax reform effective from 1 April saw the industry taxed 28% as opposed to the concessionary tax rate of 12%. The impact of the taxation reform will place additional stress on the industry as players grapple with the issue of containing rising costs and delivering ongoing projects within budgets. The general opinion amongst operators is that the doubling of the taxation will lead to further erosion of margins as raw materials and complementary services also rise in price. Skills Another on-going difficulty is the industry’s lack of skilled labour, a reason that has thrust the Chinese construction companies to the fore. Tapering interest amongst Sri Lankans for jobs in the construction industry, driven in large by the enlarging under-employed working population, coupled with the lack of appeal for the role of a construction worker has resulted in a shrinking labour force for the industry. It is interesting to note that government policies encourage self-employment (non-productive activity) as opposed to productive usage of labour to enhance economic activity. With 1.3 million three-wheelers operating in Sri Lanka, it is estimated that almost two million people are engaged in operating a three-wheeler as a means to an income. The transfer of skills and transposing large numbers entering the workforce to productive economic activity needs to be the focus of the State, with emphasis placed on offering technical skills development to school leavers. Additionally, the industry also needs to adopt a strategy to enhance the image of the construction workers, recognising them for their contribution to the economy. The US dollar fluctuations, and the alarming depreciation of the Rupee in the past few months continues to add pressure on the industry as costs of raw materials increase disproportionately, placing the industry on a volatile footing. However, despite the gloom and doom outlook, the construction industry is a heavyweight that can weather the storm if given conducive policy backing and assurance of strategic national policies to govern and shape the industry. Moving forward, the industry needs a robust strategic national policy framework with the assurance of implementation and relevance despite the volatility in the political structure of the country.