Construction industry on the verge of collapse

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Given the tremendous difficulties the construction industry is presently facing, it is not surprising to see small construction companies go bankrupt in quick succession following the recent price hikes and a shortage of industrial input.

There is also a chance that other large construction projects may follow, potentially creating a domino effect for subcontractors, who will be left out of pocket and in debt.

Due to rising raw material costs and a fuel and energy shortage, Sri Lanka’s construction industry is facing thousands of job losses and a sharp drop in construction projects.

Construction has historically been one of the primary areas that have contributed to the country’s overall economic growth. Nearly 1 million people are employed in the sector, including 600,000 direct positions.

However, with the rupee depreciating by over 70 per cent since 7 March, cement prices have climbed to approximately Rs 3,000, up from Rs 850 before the Covid-19 outbreak, according to industry stakeholders. The industry has been hit hard by the price hike as well as a serious lack of cement.

The decline of this sector, which is one of the country’s largest foreign exchange earners, is projected to persist in the coming months.

However, with the increase in the price of basic materials such as cement, Colombo suburbs and outlying areas faced severe material shortages.

According to Lankapriya Nishantha, owner of a small hardware shop in Hambantota, the price of a bag of cement is now roughly Rs 2,800. However, following the price hike last week, some companies are now selling it at Rs 2,800, while others are selling it at Rs 2,600. The black market price is around Rs 3,200.

However, in comparison to other locations, costs did not vary, but the most serious issue was a scarcity of materials. Meanwhile, some establishments in Colombo’s central and northern districts displayed price lists for bricks and pipes.

A small brick costs between Rs 45-49, a concrete brick (big) costs between Rs 90-95, small bricks cost between Rs 23-29, and clay bricks cost between Rs 39-42.

Furthermore, a GI pipe now costs Rs 6,000, whereas it used to cost roughly Rs 3,000. Sand costs between Rs 25,000 and Rs 26,000 per cube. A large foundation stone cube used to cost Rs 8,000, but itnow costs between Rs 9,000-10,000.

The cost of a 3/4 metal cube is
Rs 17,000. According to industry experts, due to a shortage of dynamite, these costs would certainly rise.

A 10mm wire, on the other hand, cost Rs 480 in December, but now costs roughly Rs 2,050. Previously, a 16mm wire cost Rs 720, but now costs between Rs 4,200 and 4,400.

President of the National Construction Association of Sri Lanka, Susantha Liyanarachchi, spoke about the price hike and the construction industry collapsing, claiming that the rising cost of materials, Covid-19 shutdowns, supply problems, and labour shortage had created a perfect storm that was now battering the construction industry.

“Throughout 2021, we’ve witnessed rises in the cost of materials of 15 to 20 per cent,” he said.

Meanwhile, in terms of wages, a constructor’s wage as of last week was between Rs 3,500 and 4,500, while a helper’s wage was between Rs 2,500 and 3,500.

When speaking with some small-scale builders, they said when there are time overruns, labour price increases, contractor price increases, and material cost increases, and margins swiftly erode.

They said it is impossible to make up for the price rise when they have some of these larger projects that may take years to complete.

When it comes to fixed-cost arrangements, he believes the industry needs to rethink its approach to pricing work and determining how to deal with these types of really rapid and challenging shifts.

Darinton Paul, Chairman of the National Cement Association of Sri Lanka, said 80 per cent of construction projects in the country have been shut down, and that the industry is being impacted not just by the cement problem, but also by fuel and energy shortages.

He claimed that the present 180-day credit period for settling import costs was insufficient for importers to pay their bills, and that the Government was not offering enough assistance.

Importers are turning away from traditional vendors like China and India in favour of Bangladesh for its cheaper, though low-quality cement, according to Nissanka N. Wijeratne, Secretary General/CEO Chamber of Construction Industry.

“And the industry is already feeling the job losses. Over 100,000 jobs will be lost in the next three months as a result of various causes, having a devastating effect, unless prompt remedial action is implemented. The fuel crisis, according to industry officials, will have an impact on machinery operators’ work, since adequate fuel to power backhoes and excavators is in short supply,” he said.

Due to the industry’s slump, some permanent employees are compelled to become casual workers.

Moving on to labour-related issues, Nishantha, a small-scale worker at a home construction site, expressed his desire to change jobs. His pals, he added, travelled out of Sri Lanka to countries such as Qatar and South Korea. He is a father of five and claims to have worked in the sector for over 20 years. According to Nishantha, he can no longer rely on the industry, because it is not stable or dependable enough in the present environment.

Low-wage and low-skilled labourers are employed in the construction industry. When these people have been disproportionately impacted by the building downturn, they have lost not only their jobs, but also their homes.

Unfortunately, people who are impacted in this way are unlikely to find comparable job in their own country. Official unemployment figures in the countries where they have worked frequently fail to reflect their plight.

Sri Lankans never imagined an influx of unskilled labour in any of the country’s industries. However, there is a valid concern that construction workers, like those in the afflicted agricultural sector, may migrate away from the construction industry, causing the sector to collapse.

Yamil, who oversaw six sites across the country, lamented that due to material price increases, only one construction site is operational, leaving approximately 30 workers unemployed. He said the site, which is presently operational near Dehiwala, is run by a small number of employees.

He claimed that, despite rising material costs, labour costs remained constant at Rs2,500 to 2,000. However, he underlined that they would have to drastically reduce the number of employees.

He said as a result of all these challenges, more than half of firms report having projects cancelled, postponed, or scaled back due to increasing costs.

Ramesh Silvanayagam from Kadawatha, who also works in residential construction in Colombo and Gampaha, has ceased operations because the labourers have refused to work in the industry.

He said there are many qualified, skilled craft workers who are unable or unwilling to work because the industry is not stable.

He said the employees are concerned about losing their jobs.

Triggered by acute shortage of foreign currency, ill-timed tax cuts, losses to tourism, fall in foreign workers’ remittances, shortages of food and fuel, and high foreign debt, Sri Lanka is presently battling the worst economic crisis since its independence. Considering this turmoil, Global Data, a leading data and analytics company, forecasts the Sri Lankan construction industry to contract by 4.6 per cent in real terms in 2022 against the previous projection of 9.2 per cent growth.

Pooja Dayanand, Analyst at Global Data, comments: “The depleting foreign currency reserves, mounting debt, and the continuing weakness in Sri Lanka’s tourism sector are expected to limit the public spending on infrastructural projects this year. Besides the economic catastrophe, the country is also witnessing a troubled political environment.  This is expected to further weigh on investor confidence, thereby further affecting the Sri Lankan construction industry’s output this year.”

The Sri Lankan construction industry, which is one of the biggest GDP contributors and employment generators in the country, is also facing significant headwinds due to the shortage of cement. The severe foreign exchange crisis has prompted the Government to impose strict import control measures. This has led to the shortage of raw materials required to produce raw materials domestically.

Dayanand concludes: “The Sri Lankan Government’s decision to default on all its outstanding foreign debt could prevent a further deterioration of the country’s financial position. Although it had sought debt relief from India and China, both countries offered more credit lines to buy commodities. However, the Government’s plan to seek financial assistance from the IMF and the World Bank, could provide economic aid to bounce back.”

Construction firms are concerned about finding enough work today, owing largely to rising prices, even as they struggle to find enough workers.

The bad news is that many of the issues confronting contractors are being driven by the currency crisis and ineffective policy responses to it, which is unavoidable for the time being. Because economists predict that the forex crisis, economic crisis, and political crisis will last for a long time, demand for construction will almost certainly not rebound, and the labour pool will likely to shrink.

Residential construction requires more labour than engineering construction, so a billion rupees of residential construction generates more jobs than a billion rupees of engineering construction.

Residential builders continue to have plenty of work on their books, but not nearly enough to sustain all of the jobs created in recent years.

Pix by Laksiri Rukman

By Thameenah Razeek