Sri Lanka stands on the verge of losing a major industry – its construction sector, which notably contributes approximately 9.6% to the GDP and involves nearly 2.6 million stakeholders. The industry has already seen a significant contraction by 60%, resulting in over 500,000 job losses and the emigration of more than 10,000 professionals. In response, the government has established a task force, producing a 51-point report, from which 11 critical points were selected for action. Despite these measures, progress has stalled, necessitating urgent intervention to rejuvenate the industry.
The plight of contractors, particularly in the SME sector, is alarming. They face immense hardships from halted projects, non-payment, and financial pressures, often risking personal assets. The competitive nature of acquiring projects, with minimal profit margins, exacerbates their vulnerability, leading to a detrimental cycle affecting their entire business operation. As the industry contends with these challenges, the proposal is for a high-powered committee to address contractor grievances, improve contract terms, and establish fair compensation mechanisms.
Additionally, strategies include restarting halted projects, resuming donor-funded initiatives, maintaining and upgrading deteriorating infrastructure, managing construction costs and VAT effectively, and ensuring equitable work distribution among companies. These steps are essential to prevent further decline and promote recovery in the construction sector, vital for Sri Lanka’s economic stability and growth in 2024.
Assistance for Distressed
Contractors
Initiating support to rehabilitate contractors affected by abrupt cessation of their projects and unsettled payments. The aim is to address issues often overlooked by government officials, leading to severe hardships for contractors. Key areas of focus include:
* Ensuring the enforcement and honour of bonds and guarantees issued by banks.
* Addressing cost overruns and ensuring the timely settlement of due payments to suppliers, subcontractors, and labourers.
* Mitigating the aggressive recovery tactics from banks, including the encashment of bonds and pressing for immediate settlements.
* Encouraging consultants to acknowledge and address the dire circumstances contractors face, including the approval of Extensions of Time (EOTs), variations, and claims.
* Specifically, addressing the ongoing contract disputes that disproportionately impact contractors in the SME sector.
Revival of SME contractors
Reflect on the challenging circumstances of small and medium-sized contractors who invest all their resources in a single project. They often risk personal assets, take on high-interest loans, and rely on credit, all amidst fluctuating material costs. A sudden halt in projects can be catastrophic, upending their entire livelihood.
Engaged in fierce competition, these contractors work with minimal profit margins or even at cost, just to keep their business afloat. This fragile financial situation precipitates a domino effect, eroding their cash flow, undermining financial stability, and disrupting the entire business operation. In times of economic downturn or due to government oversights, they find themselves without support from banks or creditors, leading to a dire conclusion for many of Sri Lanka’s industrious contractors. There is an urgent need for targeted action to protect and rejuvenate this vital sector.
To address these challenges, it is recommended:
l The establishment of a high-powered committee comprising government officials, industry representatives, and experts in construction policies and contracts. This committee’s mandate would be to address the myriad issues faced by contractors, improve contract enforcement, facilitate fair dispute resolution, and review and adjust contract terms to provide fair compensation, particularly favouring contractors unjustly affected by the crisis.
l Initiating the restart of suspended projects, particularly those that are unsafe and incomplete. Ensuring that contractors receive compensation for cost overruns and can finish these projects without further financial loss is essential. Utilization of the 55 billion allocated for the construction industry and the 1.26 trillion set aside for new developments could fund these efforts.
*Encouraging the government to negotiate and support the resumption of donor-funded projects.
*Addressing the rapid deterioration of roads by commencing immediate maintenance and overlays. If direct funding is unfeasible, imposing a minor road tax could provide necessary funds and prevent the further degradation of roads and the potential harm to people and vehicles.
Construction cost &
VAT increase:
Given that construction costs skyrocketed in the year 2022, Currently Sri Lankan construction costs have reduced to levels in par with its neighbouring countries namely, Indonesia, Malaysia, Vietnam etc. Therefore, even with VAT increases for material and fuel, we can manage to be in the range of $800/m2, which is still a favourable price to restart private sector projects & attract FDIs. This is good news.
Fair Distribution of work:
We ask you to remember that there is no work in the country. Therefore we strongly & very seriously advise that government & regulating authorities control the distribution of work in a way that is just and fair for all so that a few large companies do not grab all the work that others severely need to survive. This is what the industry requires to survive the year 2024.
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