The construction industry has been going through a crisis during the last two years. The industry, which contributes almost 7 percent to gross domestic product (GDP) of the country and was at the forefront in driving the infrastructure development of the country during the years following the end of the war in 2009, has been experiencing one of its worst periods in the recent history. Many construction companies are being closed down and a large number of employees are losing their jobs, giving way to socio-economic problems.
Reasons for downturn
The reason for the present unfortunate state of the industry is multifold. One of the most important factors that affects the construction industry currently is the unusual long unduly delay in payment, experienced by the construction companies, for the work completed by them at government ministries and institutions.
In January this year, our institution along with other industry associations and chambers had the opportunity to meet and explain our plight to Prime Minister Mahinda Rajapaksa and secretaries to the Finance and Housing Ministries. We had highlighted the difficulties faced by the construction industry due to the unduly delays in payment for the work completed by us.
We are thankful to the prime minister for giving us a thorough listening and the immediate steps taken to arrest this situation. Subsequently, a supplementary estimate to the vote-on account was presented to Parliament for seeking the approval to spend an additional sum of Rs.156 billion towards settling the long outstanding payments for the work completed by the construction companies and others during the year 2019.
While we are appreciative of this important step taken by the government to alleviate this long outstanding problem, it is disheartening to note that the government was forced to withdraw the estimate due to the refusal of the opposition parties to support the same.
We are not able to fathom as to why the opposition parties have refused to support the above supplementary budget, which would have enabled the construction contractors to recover from the severe financial crises that they have been facing during the last one year.
Therefore, we appeal to the opposition parties to look at our plight sympathetically and take a bipartisan approach to support the badly affected construction entrepreneurs and companies.
Critical issues on stakeholders
It is well documented that there has been unusually long delays in effecting the payments by the government ministries, departments and institutions during the last one year, owing to many reasons. The delay in payments to contractors for the work completed has had a devastating effect on their finances.
The construction companies have been incurring severe losses due to the interest they are compelled to pay as a result of these payment delays. Many companies have been forced to sell their properties to settle the bank loans while some companies were even forced to file for bankruptcy.
Payments due to the construction workers are delayed by the construction companies as a result of the non-payment by the government. More often, the families of construction workers depend solely on these salaries for their daily existence and the entire family suffer due to the non-payment of salaries to the construction workers. This gives rise to many socio-economic problems.
Besides, this results in skilled workers, either going abroad for employment or moving out of the construction sector altogether to follow a different career such as becoming a three-wheeler driver, etc. This in turn creates a severe shortage of construction workers in the country, which results in higher labour cost and low productivity.
Also, unscheduled delay in payments can have a negative effect on implementing infrastructure development projects planned by the government. If a construction company is not paid for the portion of work they have already completed for a construction project, they will find it difficult to organise funds to continue the next stage of the construction work. As a result, the specific project will not be completed as originally planned by the client.
Various ministries plan construction projects to achieve specific goals. If a construction of a building cannot be completed as per the scheduled target date, the entire implementation plan of the ministry will have to be delayed.
For example, the Health Ministry has planned to build an extension to a ward at a hospital in a dengue-prone area, which needed to be ready in time during the rainy season, where more people were expected to contract dengue and hence, would be in need of hospitalisation.
If the construction of the extension could not be completed by the target date to be ready for use as anticipated, the hospital would not be able to accommodate more dengue patients. This in turn may increase the mortality rate of dengue patients and controlling the spread of disease.
Future of construction industry
It is also our duty as a citizen of this country to look into the future of the construction industry. The stakeholders of this industry are architects, quantity surveyors, consultants, hardware industrialists/retailers and most importantly our students from engineering and other vocational institutes, who join the construction companies to get their internship training.
Presently, most of these students are being sent away from the sites as the company doesn’t have even funds to pay them a mere transport allowance for attending the work. This will rise up to a serious issue in time to come, where the construction companies face when recruiting ‘trained’ employees for specific jobs in the industry.
We also should keep in mind that the students at engineering and other similar faculties should complete their ‘internship’ before applying for suitable employment. Thus, if the above condition of the construction industry prevails, there will be a severe unemployment issue. This will also pave the way for these students to change their career or find employment in another country.
Most of the experts and consultants in the industry leaving the country for better prospects, as the construction companies cannot afford to hire them. This will not only deteriorate the industry but also lose all our experts in the industry.
Effects on entrepreneurs and related companies
The construction industry has many service providers, such as small and medium entrepreneurs, who produce bricks, wooden frames, tiles, along with large companies, which produce cement, roofing, paint, etc. The non-payment to these small and medium industries will affect very badly as they depend on immediate settlement for the products and services rendered.
Most of the time, they in turn, take loans from banks and leasing companies to get the production going. Their survival is highly depends on timely receipt of funds for the products they sell. Their survival has become a hand-to-mouth situation today.
Most of these small timers have to close down their factories due to not receiving the payment on time and also difficulty in getting further bank loans.
We also should not forget the other workers employed by these small and medium entrepreneurs. Even though the government stresses upon developing this sector, how are we going to go ahead with such stagnant condition of the construction industry?
As we all know that the festival season is around the corner. We wish to bring to the attention of all the responsible authorities to rectify and solve these severe issues and release the funds held by the government ministries, institutions and departments to release the outstanding amounts urgently. This will enable all the above small and medium companies and entrepreneurs to enjoy the Sinhala and Tamil New Year and Ramadan festivals.
Remedial measures to go forward
Firstly the government should have a policy to minimise the certification of payment term to 30 days and have a ‘rolling payment scheme’. Also it should discontinue or stop immediately the charges on the ‘liquidated damages’ from the outstanding payments due to the service provider.
It is also noteworthy to state that the government ministries and institutions, which have taken the maximum services from these contractors, should refrain from taxing them further, which will become a severe stress and will lead to closure of their companies, which will leave to a huge unemployment crisis in the country.
The government also should take steps to reduce the unspecified number of months taken by some consultants to attend payment certification, which resulted in a severe delay in the work output.
Fair distribution of work should be practiced, whereby rotation of the public sector work using the mechanisms suggested by industry institutions such as the Ceylon Institute of Builders (CIOB) and chambers and monitor such distribution for success and failures for quality and cost of projects.
The non-competitive status given on a platter to government institutions such as state sector construction and consulting organisations, universities to carry out projects and consultancies should be limited. Instead, competition to all stakeholders should be introduced, so that all will have a fair share or distribution of work.
The government also should introduce a policy where a 30-40 percent stake from foreign-funded projects should be shared with the local construction industry by including it as a clause in the contract conditions to make sure that the local supplier’s local contractors and local consultants are used. A special monitoring board should be established under the ministry as a continuous audit to monitor the fair share to the local industry.
The government also should make major emphasis to the relevant authorities, ministries, institutions and departments not to deduct the liquidated damages from the construction, during this crisis period. The authorities also should understand by deducting the liquidated damages, the contractors will suffer serious downturn during this crisis tenure.
Finally, the government should take immediate action on these delayed payments to the construction companies, which will have a debilitating effect on the overall implementation plan and may even prevent the government from achieving its development targets.
(Dr. Rohan Karunaratne is President of the Ceylon Institute of Builders and Ruwan de Silva is Vice President of the Ceylon Institute of Builders, First Vice Chairman of the National Construction Association, Director and Strategic Committee Member of the Federation of Chamber of Commerce and Industries and Executive Committee Member of the SAARC Chamber of Commerce and Industry)