Access Engineering Co-Founder and Managing Director Christopher Joshua says the future of the construction industry would continue to remain positive, as the short to medium term impact on the construction industry due to the COVID-19 pandemic is relatively much less. The depreciation of the Sri Lanka Rupee according to Joshua has had an impact on housing construction. Christopher is also the Managing Director of Sathosa Motors. Following are excerpts of the interview:
Access Engineering Co-Founder/MD Christopher Joshua
Q: In any country, the performance of the construction industry is often considered as a barometer of economic development. At present, our construction industry is plagued by low construction volume, skilled worker shortage, high construction costs, and unequal competition from foreign contractors. As a dominant player in the industry what are your views?
The construction industry grew by 6.8% and 4% respectively at current and constant prices in 2019. This was higher than the GDP growth recorded for the same period which was 4.5% and 2.3% respectively. Hence it is reasonable to say that the construction industry is still at a growth phase despite macro challenges faced by the business environment.
The challenges faced as a result of restrictions imposed due to COVID-19 will have a substantial impact on construction volume during the first half of this year, and the positive measures adopted to control the pandemic has already enabled the industry to get back close to capacity.
In order to deal with the shortage of skilled labour in the industry, we have tied up with technical colleges and also developed our own curriculums to train and develop young people in crafts of masonry, carpentry, bar bending, etc. We are now supporting a very positive endeavour pursued by the Vocational Training Authority to attract and train youth to be engaged in the construction vocation.
Construction costs are dependent mostly on raw material and labour cost and the relatively high construction prices are a result of relatively high raw material costs. Unequal competition from foreign contractors are applicable to bilateral funding projects where the contractors from the funding country are given preference to undertake the work.
The Government has taken positive measures to support the local construction industry, where only local contractors are eligible to participate in local Government funded projects. The Central Expressway stage 2 and the proposed Ruwanpura Expressway stage 1 and the many projects carried out under local bank funding, are among such initiatives.
Q: A clear indication on low construction volume is the drop in cement. The construction industry contribute about 9% to the GDP, employing about 600,000. In recent years, the total annual construction turnover is about Rs. 800 billion. What is your prognosis for the future of the industry?
As a major contributor to the GDP along with the generation of employment, the future of the construction industry would continue to remain positive, as the short to medium term impact on the construction industry due to the Covid-19 pandemic is relatively much less.
The Government too has taken positive measures to support the construction industry with many mega scale infrastructure development projects currently in progress along with the projects identified to be pursued in the future. This is a very positive sign for the industry.
Q: The high construction cost today acts as a disincentive to attracting FDIs needed to spur economic growth. Why is the industry taking so long to innovate?
There are other significant barriers and constraints in attracting FDIs needed to spur economic growth. Whilst the construction cost would be relative to the work to be carried out, our local construction cost remains to be higher than our regional countries.
The significant growth in the construction industry in Sri Lanka only took place following the end of the conflict, and the technological advancements and processes in value addition and cost reduction measures has mainly taken place during the last 10 years.
Access Engineering has been in the forefront in introducing technological advancements to the industry and this has been practiced in every sector we operate. The industry would need to facilitate innovation, carry out value engineering and increase its value addition.
Q: A comparison of the construction costs of housing in SL, it is evident that our unit cost of construction is the highest in the region, second only to Singapore and Hong Kong. What is driving these costs?
A: The relatively high cost of construction for housing in Sri Lanka is mainly due to the high cost of raw materials and labour, which amounts to around 60-75% of the total cost of housing construction. Cost of material and payments for licenses, permits and transportation of material such as soil, sand, bricks, aggregate, etc. and insufficient productivity from labour is a major contributor to this cost increase.
The majority of the construction activities yet take place in the Western Province and most of the materials and labour needs to be sourced and transported from other Provinces. The depreciation of the Sri Lanka Rupee also has an impact on the cost of imported material used for housing construction.
Q: The demand for river sand is a huge issue for the industry. Is it viable to promote the manufacture of rock sand?
While there are many restrictions concerning the use of river sand (mining, transportation, etc.), a viable option is the use of Manufactured Sand (M – Sand) which is primarily made out of rock. Access Engineering is among the early adopters of using this alternative to river sand. Whilst M – Sand has its advantages primarily due to reliability in supply, whilst there are no significant cost benefits.
Q: Many people in the industry object to engaging foreign consultants and foreign contractors. Is it an issue awarding projects to foreign contractors when it is foreign funded?
Foreign consultants and contractors are eligible to participate in some of the major infrastructure development projects pursued with bilateral and multilateral finance. The concern for the local industry is its sustainability and the foreign contractors needs to be encouraged to tie up with local contractors in carrying out such work. The Government has already taken initiatives in this regard.
As a leading contractor in the country Access Engineering continues to provide valued added services to foreign contractors, and is the local contractor with the highest number of jointly executed projects with foreign contractors.
Q: Post COVID-19 how is the industry managing bank finance, supplier credit and State sector debtors?
Every business is faced different challenges and adopt their own methods in managing bank finance. A positive move post COVID is the facilitation of bill discounting of Government sector certified bills at 4% interest where the respective businesses could obtain working capital against their certified bills.
While there are delays in the settlement of bills arising out of treasury funded projects, this mechanism provides some temporary relief to the cash flows. Supplier credit depends on the credit worthiness of the business concerned and presently, there is ample liquidity in the market at very attractive interest rates.
Q: Given the challenges and opportunities for the industry, what would Access Engineering look like in 2025?
Our core business is supported by a very healthy order book, including work overseas. Our backward integration initiatives continue to complement our business, where some of them, have progressed to be industry leaders in their respective segments.
Our forward integration initiatives have placed us among the leading property developers in the country, where Access Towers 1 and 2, provide around 325,000 square feet of A grade office space in Colombo 2. Capital Heights Rajagiriya which consists of 240 apartments and associated facilities due to be completed in early 2021, and Marina Square Colombo, which is the largest apartment complex in the City of Colombo, due to be completed in early 2023, are very much on track.
Marina Square, would also add a further 150,000 square foot of commercial space. We are currently on course in building the country’s largest single roof warehouse facility, which is due to be completed by early 2021. Since listing in the CSE in March 2012, we have increased our net assets per share from Rs. 10.67 to Rs. 21.83, whilst paying consistent dividends to our shareholders throughout, totalling to Rs. 6.612 billion. Our total assets have increased from Rs. 14.2 billion to over Rs. 50 billion, during this period. Returns on most of investments made by us during this period will be forthcoming during the next few years.
(The writer is a PhD candidate and a lecturer at the University of Buckingham, UK)