Building construction sector aftermath of Corvid – 19

Background

The construction sector in Sri Lanka had many beatings in the past namely the political calamity in October 2018, the terror attack in April 2019 but now the epidemic which is going to create unprecedented effect on its very existence.

In general, due to lack of a policy by all successive Governments, the construction sector was not performing towards a healthy development. In the consultancy sector, inappropriate procurement methods, long delays in procuring a consultant, giving more emphasis to State sector organizations or directly awarding projects by the Cabinet to Educational institutions caused the Consultancy segment to  get stagnated. It became a contractor driven building industry rather than a consultancy initiated. This deprived the capacity building in the consultancy services. During last ten years, only  a hand full of Practices with adequate expertise have emerged though the Colombo sky line is full of new buildings.  Free flow of foreign consultants who are coming with the project and due to lack of proper regulations on participating percentage, it is always the foreign consultant took the lead role and the local counterpart is left with the approval process. A country with a very rich architectural heritage it is heartbreaking to see the ugly monsters that have already come up in the prime locations like Galle face and its surroundings. If one goes to the Port city premises and look at the landscape of the city this will be much evident. Building projects commenced without proper market surveys caused imbalance in the supply chain and by early 2020 the market was beginning feel excess supply of certain types of buildings. The changes of the tax policies by the State and the economic down turn are the main reasons of this situation. With the appointment of new Government all major projects were postponed till August causing further frustration among the sector professionals. Therefore even prior to this outbreak, some of the main practices retrenched staff, went on half salary and few days of work for a week due to lack of projects. These led companies to quote very low fees just to keep their nose up and eventually further deteriorating the sector. It had become so alarming that the many juniors found it hard to get place for their training.

Building contractors plight were no better. Long delay in the payments by the State as well as by the private sector, they too were on the brink of collapse. Specially the smaller contractors were very seriously affected. On competitive tenders of many large scale projects, the prices of local contractors, became very much higher than their foreign counter parts which some instances ran in to Billions of Rupees. On deep examination of such situations, it has been revealed that some such companies are financially supported by their respective Governments by giving them financial assistance. They declared that they could work without an advance payments and very fast track programmers with their laborers who are not governed by labor laws of Sri Lanka. Their government supported the construction work here because not only the labor but most of the material comes from that country giving boost to their economy. The local contractors became almost like their slaves by getting the sub contracts at a fraction of the price of a main contract. At a given time 50% of major projects were in the hands of foreign contractors.

Therefore, finding solutions shall be done considering all these factors and not only on the efforts of Corvid 19 epidemic. Our situation is very special because we were in anyway on disastrous situation in the pre Corvid 19 era.

What are the Challenges for the Construction Industry?

1. The global economy is being driven in to a recession and there will be dearth of investment in all sectors including construction. The result will be lack of projects. Since our industry was anyway not doing well in the recent past this will be a big blow.
2. The associated industries mainly Tourism, Apparel, Exports in general are highly affected and there will be very little initiative for new building projects.
3. Travelling between the counties will be at a minimum level due to health risks and also due to poor economic levels. Therefore, the foreign buyers, investors freely visiting the island would not happen as it used to be in the past.
4. Basically, the need and demand for new spaces or built environments will be at an all time low. Clients could either abandon projects that are on pipe line, postpone them or just continue with what they already have. A sign of excessive and disproportionate built spaces in Colombo has been experiencing even prior to this disaster. New apartments, hotel rooms, up-market shopping malls, etc. were reported to be in excess. In this sense Sri Lanka is in a difficult situation to begin with.
5. The inflow of foreign currency as investments will be limited and also remittances by Sri Lankans working abroad will get slashed considerably. The Rupee has already got devalued and the cost of construction will go up considerably.

What would be our strategy?

The danger aforesaid is that there will be less work in this sector and survival of the stake holders until the situations become normal will be the biggest challenge. With less work staff retrenchment will happen and this will result in gradual dearth of experienced consultancy and contraction sector institutions mainly in the private sector. The biggest challenge would be to keep the ongoing projects on track, minimizing the cost revisions and commence the projects that have already been commissioned. So the strategy would be to keep the sector alive by addressing these issues.

CONSULTANCY SECTOR

State Sector Projects - Projects already commissioned

The easiest method for the State to follow is to abandon or postpone the projects to save the capital expenditure. This move will be very negative when considering the sustaining of the Consultancy sector. What is important is to keep sector active by having projects. Certain procedures can be adopted as to reduce the cost either by doing in stages, extending the contact period or changing finishes and equipment. This enables the employers in this sector to be active. Certain projects (other than those that are already under construction) considerations could be given to complete up to the tender stage and reschedule the tender procedure. A forum can be organized where guidelines are given to designers on usage of local products and services to reduce the cost.

New Projects

Under any circumstances Govt. will have certain new projects. Rather than giving most of them only to the State agencies considerable number of projects could be given to private sector as well where all will have a fair share in this difficult period. The general tendency in past has been to straight away hand over project to State sector or to educational institutes like Universities. Certain Ministries as a habit follow this procedure and the excuse is that it is easy to appoint them. But this affects the fair distribution of work and control on cost.

Once the new procurement guide lines that were prepared by consulting all the agencies is approved by the Parliament procuring a consultancy service will be streamlined. The other option is to use Construction Industry Development Authority (CIDA) registration in consultation with the three professional institutes and work out a quick solution.

Further, the health, agriculture, IT and Food manufacturing sectors capacity building programme could be initiated with some grants from funding agencies. Cold storages and other controlled storage facilities for excess agriculture products and for export agriculture would be essential soon in each district with the level of promotion in the sector. Designs for same on a predetermined master plan may start now to avoid unpleasant situations and to avoid depriving farmers on their livelihood in post-harvest periods.

If these or similar strategies are delayed it is inevitable that Consultancy service organization will retrench the excess staff causing huge social problems. Further students will lose their compulsory practical training programs causing severe problem on future professionals and para- professionals.

Private Sector Projects

Unlike the state sector, direct control will be difficult but issues like project financing and delays in approvals could be addressed. Special unit under a suitable ministry can be set up as a one-stop- shop so that the issues can be easily addressed.

The consultancy firms should re visit on cost and work out the new rate of return when facing post Covid-19 situation. Reduction in project cost need to be worked out on fast track before the clients takes a negative attitude for the project. The stimulus packages given by the Govt. should also be studied with the respective banks.

CONSTRUCTION SECTOR (Buildings)

State Sector Projects

With the appointment of the new govt. certain projects were stalled and some were referred to new procurement methods. This had a major setback even prior to Covid 19 issue. The Govt. should immediately award such projects to keep the sector active. Some of these projects have been initiated months or years ago and stopping them at the last lap is really a blow especially at this moment. And for some of these projects contractors/consultants have invested substantially and losing them at this point should be avoided. However to ease pressure on some of the capital expenditure discussions could be held to work on a reduced advance payment, extending the project period or to do them in stages etc.

When offering tenders, it is important to make sure of fair distribution of work, so that the entire sector is active. The unit under the ministry should monitor the work in hand before awarding large project. CIDA should also move in for this purpose because purely going on past experience and staff available will divert projects only to the top notch of the sector. A clear statement on work in hand by the prospective bidders is very important in this regard.

When it comes to small scale projects the National Construction Contractors Association (NCCSL) could work out a programme to work on slandered construction rates and assign projects to their members where all will have work on workable rates. Due to lack of work, contractors may quote lower and impractical rates causing further down fall.

Private Sector Projects

With many active sectors like Tourism, Export oriented Factories, office buildings etc having to face issues of their own, there will definitely be a large scale drop in new projects. However when costing for new projects the use of local materials and non-expensive finishes can be given as alternative proposals.

ACTION PLAN

1. Form a Steering committee consisting of three main professional institutions (Architects, Engineers, and Quantity Surveyors), Chamber of Construction Industry (CCI), Major contractors, National Construction Contractors (NCCSL), Chairman UDA, Chairman CIDA, Chairman BOI and line Ministry Secretaries not exceeding ten members. This will be the advising and monitoring arm for Post Corvid period.
2. CIDA to work out solutions to the contractual issues that will prop up as a result of  Corvid 19 pandemic;
3. Dollar fluctuations – some contracts has no escalation clause and even if they are there, specific clause need to be worked out. A clear guide line will avoid contracting disputes
4. Delays due to lock down, extended preliminaries etc. General guide lines to be worked out to be applicable to all contracts. A clear decision and direction is imperative.
5. Price adjustment mechanisms with new & changes of laws and taxes.
6. Extension to bonds and guarantees.
7. Develop guideline to work at Sites as this pandemic will prevail in the world for a protracted period.
8. A Guide line to be laid down on preferred materials, finishes etc. to be used in projects giving emphasis on local products. This could reduce the construction cost.
9. Work in hand to be made a decisive factor when awarding tenders.
3. Outstanding payments to Consultants and contractors to be assessed and a programme to be worked out to release them on a phased-out basis.
4. The committee to have data on state sector new projects and awarded projects. All projects where tendering and recommendations are over to be awarded. Before awarding to check the work in hand so that projects of reasonable size will not be given to same party. This will help everyone to have work or fair distribution of work. All Govt. agencies to direct to send information to the Committee before hand to arrive at reasonable decision on the award of contracts.
5. The item 4 will be applicable to the Consultancy sector also. Rather than giving all the work to State agencies and university the private sector, who will be greatly affected by this disaster should also be given Govt. Projects. If there is an issue with procurement delay, the Committee and CIDA to sort them out or implement the new procurement guide lines already prepared by the procurement commission.
6. To fast track projects that will proceed despite the current scenario, mainly in the private sector, UDA to have full fledge one-stop-shop for approval purposes. This will give a kick start for projects that are being held-up due to delays in approvals.
7. The small scale projects that are lined up in the country, especially in the provinces to be forwarded to the Committee and NCCSL to work out a programme that everyone will get some work based on rates recommended by CIDA/NCCSL. This will once again give a quick start to projects and all could be occupied.
8. The private sector projects that are on the balance due to the effects of Corvid 19 should be given a hearing by the Committee so that any assistance to proceed could be looked into. If they are allowed just to keep it to them on the balance, the projects will not see the light of the day.
9. Since developed countries are now looking at decentralizing their outsourced industries, Sri Lankan Government could take a firm initiative to get such investments with necessary tax incentives.

These proposals may need considerable effort to materialize but allowing the building construction sector to get the beating of this disaster without any significant intervention by the State, many institutions will perish within a short period from now resulting in a lot of unemployment and social unrest. Therefore these issues have to be taken into account in that National spirit.

Archt. D H Wijewardene, FIA (SL)
Immediate Past President,
Sri Lanka Institute of Architects,