Sri Lanka’s construction industry has been battered for the last two years, even before the economic crisis took place in April 2022, due to a lack of new projects and the higher cost of construction. However, the recent import relaxation on some 30 construction-related materials could give some hope to the sector, which has been one of the main drivers of economic growth in the past years.
According to ConsTrack360, a manufacturing market intelligence platform based in India, Sri Lanka’s construction industry is expected to grow by 9.2% to reach Rs. 1,535 billion in 2023.
Despite near-term challenges in certain construction sectors, it predicts that the medium to long-term growth story in Sri Lanka remains intact as the construction industry in Sri Lanka is expected to grow steadily from Q2 2023 to Q1 2024.
The growth momentum is expected to continue over the forecast period, recording a CAGR of 7.6% during 2023-2027 while the construction output in the country is expected to reach Rs. 2,058.3 billion by 2027.
However, according to the Department of Census and Statistics (DCS), construction activities contracted by 38.3% in the first quarter of 2023. The manufacture of basic metal and fabricated metal products, manufacture of machinery and equipment, and manufacture of chemical products contracted by 43.7%, 35%, and 22% respectively.
‘Import relaxation won’t fully revive construction’
Speaking to The Sunday Morning, Chamber of Construction Industry of Sri Lanka (CCISL) President Architect Jayantha Perera said that easing import restrictions on construction materials would definitely benefit the construction industry in the form of cost, which would lead reluctant investors to rethink investing in the industry.
However, he added that a reduction in the cost of construction may not be enough to revive the industry entirely, although it may definitely revive some projects.
Perera said that interest cost had become a major issue for builders and unless the interest rates came down, new projects would not be feasible.
He noted that by September, contractors would be able to benefit from the reduction in construction cost and the interest rates coming down, while it would also pave the way for smaller projects.
“To really revive the industry you need Foreign Direct Investments (FDIs). We have also suggested that the Government should support us to find outside contracts, where the country and the contractor will benefit in the form of foreign exchange coming in,” he added.
However, he said once the foreign debt was restructured by September, the construction sector may see a turnaround with foreign-funded projects resuming.
According to Perera, resuming suspended projects might not be easy as it looks, as some clients have had to pay huge amounts contractually to contractors for looking after and maintaining the site during the suspended period, in order to resume the construction again.
‘Over 600,000 have lost jobs in the sector’
Speaking to the media last week, National Construction Employees Association (NCEA) Deputy Secretary Sanjaya Thilakaratne said that over 600,000 direct employees and over one million indirect employees of the construction industry had lost their jobs so far due to the suspension of projects and lack of new projects.
According to the DCS, there were a total of 641,636 direct employees in the construction industry by the first quarter of 2020.
Multinationals won’t reduce prices
Also addressing the media at the same press conference, NCEA Secretary Supun Abeysekara said that they had requested multinational companies in Sri Lanka which were providing construction materials to reduce the prices of their products when the rupee had appreciated in the last few months.
However, he said that the multinational companies had informed that the joint trade unions of those companies were not allowing them to reduce prices.
Therefore, the NCEA announced that it would help the local SME manufacturers to uplift their product quality standards according to the International Organisation for Standardisation (ISO) and Sri Lanka Standards (SLS) requirements and promote those products, instead of products by multinational companies, at much lower prices.
For example, he said a 20 litre can of weather shield paint by multinational companies which was sold at Rs. 80,000 could be sold at around Rs. 30,000 by locally-manufactured brands with equal standard certifications.
According to the Construction Industry Development Authority (CIDA) monthly report for May, price indices of locally-manufactured cement, reinforcement steel, and aggregate base course have reduced by 10-15%, while bricks and quarry pipes have reduced by 5-10%.
A return to pre-crisis situation a way off
Former President of the Institute of Quantity Surveyors Sri Lanka Lalith Ratnayake said that the costs of construction, including labour, had increased a little over 100% in Sri Lanka since January 2022, while prices of plumbing and painting materials had gone up by 200-500%.
He said the daily labour charges in the construction sector had increased to Rs. 3,200 from Rs. 2,500 in the same period.
“I’m uncertain whether it will settle into the situation we had in 2021,” he said regarding the benefits of the import relaxation on construction material, although he acknowledged that the relaxation and the US Dollar exchange rate depreciation would definitely reduce the construction cost to a certain extent.
Ratnayake said that most manufacturers in the construction sector would not reduce prices until their existing stocks were over. He said, for example, a cement manufacturer who had already brought down clinker to produce cement would not reduce the prices until their stock was used.
“Nobody is going to reduce prices, whatever the market situation, until their previous stock is over,” he said, adding that by the time manufacturers would actually reduce the prices, the US Dollar might appreciate and manufacturers would then have to maintain the same prices without reducing them.
“The benefit of import relaxation will not be felt by the industry until the manufacturers clear out the stocks,” he added.
Furthermore, he said that the cascading effect of the Social Security Contribution Levy (SSCL) of 2.5% charged through the supply chain had increased the cost of construction, since the cascading effect of the SSCL was higher as the supply chain of a project went deeper.
He said that in a project, the SSCL would start from the cement manufacturer and go through the subcontractors all the way to the main contractors, adding to the cost.
Ratnayake noted that about 35-36% of the overall construction cost in Sri Lanka comprised non-material and non-labour related costs. He added that according to his experience, 5% on average was the wastage of construction projects in Sri Lanka, 8% was the cascading effect of the SSCL, 8% was corruption, and 15% was VAT for unregistered SMEs, which formed a majority in the industry, adding to about 36% of the total construction cost.
Moreover, he said that about 95% of the players in the construction industry were SMEs with less than Rs. 500 million turnover, of which about 50% were already bankrupt.
Ratnayake opined that the construction industry may return to ‘business as usual’ by 2026.
‘Nothing big can be expected with import relaxation’
Meanwhile, CIDA Chairman R.H. Ruvinis told The Sunday Morning that nothing ‘big’ could be expected for the construction industry with the relaxation of the import restrictions as the revival of the industry would depend on how much capital was being pumped in.
He added that it was difficult to expect anything ‘big’ from the construction industry during this year as the foreign-funded projects of the Government were unable to resume until the debt restructuring was completed
“We expect foreign donors to return after the debt restructuring, which is set to be completed by September, but it will take a considerable amount of time to restart the projects after calling for tenders and such,” Ruvinis said, adding that “something positive” for the construction industry could be expected in 2024.
Ruvinis, a member of the Construction Industry Revitalisation Committee headed by Senior Advisor to the President on National Security and Chief of Presidential Staff Sagala Ratnayaka, said that although import bans had been lifted, it was hard to say whether there would be any actual reduction in the cost of materials until the US Dollar rate stabilised.
He noted that about Rs. 140 billion in dues was yet to be paid by the Government to contractors for completed projects.
On the issue of SSCL, he said that there was a clause in construction contracts known as Change of Registration, where contractors could claim funds from clients for additional expenses as a result of laws imposed after the awarding of a contract.
Therefore, he added that the cascading effect of the SSCL could not be considered as a huge loss to contractors.