Postponement of local govt. polls identified as primary reason for construction sector slowdown

Leading cement manufacturer, Tokyo Cement PLC, has identified the long delay in holding local government polls as the primary reason for the major slowdown experienced by the country’s construction sector, in addition to the negative effects from bad weather and rupee depreciation. 

Sri Lanka’s construction industry growth decelerated to 3.1 percent in 2017, from 8.3 percent in 2016. As a result, cement production nosedived to 4.6 percent and imports by 7.1 percent. In 2016, cement production grew 17.8 percent and imports by 29.5 percent.

“Several environmental factors played a role in this, from three consecutive failed harvests and the consequent inflation deflating rural retail expenditure, in addition to rapid currency depreciation that contributed to overall inflation.

However, the primary reason was due to the uncharacteristically long postponement of local government election, inevitably resulting in non-payment of the existing local government contracts and delays in initiation of previously tendered government contracts,” Tokyo Cement Managing Director S.R. Gnanam said in the company’s latest annual report.  

According to Gnanam, the government and its agencies remain the single largest buyer of construction services, with annual budgets extending across the island, for numerous small-scale rehabilitation and building projects, in addition to national level mega development projects. 

“The holdups and uncertainty surrounding local government elections resulted in non-extension and postponement of a myriad infrastructure contracts at local government level. 

Therefore, the capital budgets of local government bodies going into limbo, over a period of approximately 15 months, had a ripple effect across the construction sector, as unpaid contractors extended credit or defaulted on payments from retailers, who in turn attempted to extend credit with material manufacturer.

This, of course reduced industry liquidity, to an overall fall in demand for construction materials due to held stock or constrained cash flow necessary for reordering, culminating in the entire industry slowing down,” he added. 

As a result, Sri Lanka’s construction sector was almost entirely dependent on private sector commercial development projects and household demand, though this sector did not expand at any significant rate. 

“Negative investor perceptions discouraged capital investments within industries and the rising cost of living made urban households postpone capital investments, while the rural households were weakened by losses in agriculture,” he said.  

Tokyo Cement closed FY 17/18 with an after-tax profit of Rs.2.3 billion, down 31.5 percent from a year ago. The depreciation of the rupee against the US dollar had a major bearing on the company’s performance as it imports all of its clinker for cement production. 

However, Gnanam remains positive of the future and expects an industry revival. 

“While the current financial year has been anti-climatic, I am confident of an industry revival in the new financial year and a continued, if intermittent, growth over the medium to long term.”