Positive aspects of Budget 2022 in relation to construction industry

The future of global construction industry looks promising and according to some estimates, it is expected to reach $ 10.5 trillion by 2023. This presents numerous opportunities for Sri Lankan construction organisations to venture abroad. Construction services is a potential export income earner for the country – Pic by Shehan Gunasekara

CIOB President Dr. Rohan Karunaratne

CIOB Vice President Ruwan De Silva

The construction industry accounts for 6% of global GDP and is considered to be a powerful stimulant for economic growth. In Sri Lanka, the construction industry contributes 7.1% to the GDP of the country.

The future of global construction industry looks promising and according to some estimates, it is expected to reach $ 10.5 trillion by 2023. This presents numerous opportunities for Sri Lankan construction organisations to venture abroad. Construction services is a potential export income earner for the country. However, despite the rosy pictures as mentioned above, the Sri Lankan construction industry itself has been facing severe difficulties and financial losses; and is not able to capitalise on the growth opportunities

CIOB, as an institute dedicated to the growth and sustenance of the construction industry in Sri Lanka, has been highlighting the problems faced by the industry and submitting recommendations to the Government authorities to develop the construction industry. In this regard, we presented a set of pre-Budget proposals to the Minister of Finance Basil Rajapaksa prior to the Budget. 

Overall, the Budget proposal has been a futuristic one and we are confident that the inclusion of the above clauses in the Budget proposal will have a positive impact on the construction industry. While respecting the inclusion of them in the Budget proposals, we would highlight some of the concerns that we have.

Industry concerns

Even though the proposal to suspend construction of new office buildings for the next two years will affect the construction industry, we acknowledge the fact such measures are essential at this critical time when our country’s economy is facing challenges in the face of COVID-19 pandemic. At the same time, we appreciate the Government’s decision to continue investing in the development of national road network, completion of expressways, construction of bridges and flyovers, development of urban and rural housing, establishment of 1,000 national schools and rehabilitation of small tanks. At the same time, we request the Government to promote funded-projects (eg. by JICA, World Bank, ADB, etc.) to fill that gap.

Secondly, we would like to highlight one of the pressing issues that the construction industry has been facing with regard to the payment of price escalation claims. We have been highlighting this issue to the Government authorities in the past. 

There have been unusual increases in prices of the construction materials in the world market from 2015 onwards. As a result of this and the steep depreciation of the rupee value against the dollar, the cost of construction has gone up substantially against the cost estimated at the time of awarding the tender. Contractors face severe financial difficulties due to reluctance by the tender awarding institutions to pay price variances claimed by the contractors based on actual market conditions. 

Therefore, we request the Government’s intervention to introduce a mechanism to use the actual current market prices of construction material while calculating the price variation for reimbursing contractors. 

We are heartened to note that some of the suggestions that we proposed through the ‘Pre-Budget-Submission’ have been included in the Budget proposals:

1. Budget proposal:

5.4.7 The efficiency of the public sector has an impact on the efficiency of the private sector as well. We have firmly recognised the importance of transforming the public sector into an efficient service and one that is easily approachable by the public. Hence, I propose to prepare a Client Charter for every Government institution.

5.4.8 I propose to introduce an appraisal system for the public service based on the satisfaction of clients and Key Performing Indicators (KPI) and thereby motivate them and enhance the efficiency and productivity of the public service to an optimal level.

5.4.10 I propose to establish an Integrated Results Based Management System to follow up the achievements of anticipated progress as per the plans prepared by integrating the national development priorities as well as priorities in areas related to those priorities

5.4.4 Assets of many of these enterprises are underutilized. I expect that my fellow Ministers, their secretaries and heads of departments would provide leadership to utilize these assets to the maximum.

Our pre-Budget suggestions:

Modernise the regulatory framework

• Government regulations that negatively impact businesses and impede growth should be changed with the objective of reducing red tape;
• Putting burden reduction principles at the forefront of the day-to-day work of the Government by amending, introducing and eliminating regulations;
• Strategise and implement measures to mitigate the deficiencies, delays and lapses in the current regulatory system;
• Monitor and provide ministry-by-ministry breakdown of progress on regulatory reduction on a regular basis;
• Conduct regular surveys among public to find out the performance of Government employees vis-à-vis expectation of the public while receiving Government services;
• Department of Census and Statistics should be directed to publish internationally comparative data on the administrative burden created by excessive Government regulation in Sri Lanka;
• Formulate a mechanism to identify Government institutions which are over staffed and introduce measures to reduce the recruitment of Government officers to those institutions;
• Introduce a ‘Voluntary Retirement Scheme’ to encourage public sector staff to retire from the Government services and engage in other productive activities.

2. Budget proposal:

5.4.48 To fast track the public investment programme, maintaining efficiency, effectiveness and transparency, the procurement processes will be modernised including through the introduction of a more decentralised process and also the e-procurement process. 

The new processes will be benchmarked to those processes already followed by multilateral agencies such as the World Bank and the Asian Development Bank. At the same time, to remove legal impediments to promote investments standing Investment Committee will be set up.

Our pre-Budget suggestions:

Streamline public procurement with harmonised procurement guidelines and bidding documents

We recommend the following measures to be taken to streamline the public procurement process:

• Enactment of a Public Procurement Law;
• Enactment of a construction contract adjudication law for a speedy and cost effective dispute resolution procedure;
• Revision of Government Works procurement guidelines with positive features;
• Incorporating such procurement guidelines in SBDs (Standard Bidding Documents);
• Introduction of fair and reasonable terms in general conditions of contract.

3. Budget proposal:

Although public services operate incurring an enormous expense expecting an efficient and effective public service; owing to the rigid laws and regulations, and lengthy and outdated administrative methods and procedures, the public has to exert a lot of effort, time, and expense to connect with Government agencies for their needs. Therefore, to increase the productivity and efficiency of the public service, making it client-centric, and to digitise the public service, and in addition to the allocation of Rs. 3,500 million a further Rs. 500 million will be provided.

5.4.42.6 There is a need for public and private entities to improve their, businesses, products and services in line with new technology. Therefore, digitalisation is no longer an option. It is proposed to use technologies such as blockchain to strengthen internal systems by improving the efficiency, operational efficacy, expenditure management.

Our pre-Budget suggestions:

Fuel future growth by digitising the delivery of Government services to businesses and public

We propose that an inter-ministerial steering committee be set up with the following objectives:

• Conducting extensive studies and audits within individual ministries to identify regulations, processes and pain points:
• that impede efficient delivery of services to the public and businesses;
• that can be eliminated by digitisation;
• that are duplicated in other ministries contributing to wastage of time and hence need to be streamlined
• Employ state-of-the-art technology to make it easier for businesses to comply with regulations;
• Engage with ICTA to develop and implement a digitised solution in the relevant ministries/institutions assist them to adopt the solution in the most convenient and the fastest manner;
• Conduct capacity building training programs among Government officials to equip them with the required skills to function effectively in the new digitally-empowered environment;
• Benchmark our progress against other countries that have achieved significant regulatory streamlining and digitisation.

4. Budget proposal:

5.4.26 Sri Lanka should immediately move towards an economy which is more tilted towards the production economy, synergising on the opportunities in the service economy. We should create a trend where the educated young generation of our country strive to become entrepreneurs and employment providers by changing their mentality of pursuing job opportunities. Accordingly, it is proposed to not to charge the business registration fees in the year 2022 in order to provide an impetus for new start-ups.

Therefore, the Government has directed its attention to establish small and medium scale industries at divisional and district levels. A number of direct and indirect employment opportunities at divisional level will get created under this programme. I propose to allocate Rs. 5,000 million for this purpose.

Our pre-Budget suggestions:

Foster entrepreneurship in the construction industry

Entrepreneurial organisations which are typically Micro, Small and Medium Enterprises (MSME) are known to contribute disproportionately to innovations, job creation and improve economic conditions of a country.

We propose that the Government should include the following measures to promote entrepreneurship in the country:

• Introduce innovative schemes and financial instruments to enable access to finance by the start-ups;
• Develop special schemes to support entrepreneurs by helping them to integrate with the digital economy and gain a stronger foothold in global value chains;
• While negotiating with other countries for trade agreements, gaining market access for smaller start-ups should be discussed;
• Foster an inclusive innovation ecosystem for entrepreneurs.

5. Budget proposal:

6.8.1 Relief for micro, small and medium scale businessmen

We have recognised the importance of providing relief to the micro and small businessmen, especially those who sell kadala, wade, porridge, hoppers, king coconuts, young coconuts, who have become unable to do business being affected by the pandemic. Similarly, medium scale industrialists too deserve relief. Therefore, it is proposed to allocate an additional Rs. 5,000 million in addition to the already provided allocation to provide relief to micro, small and medium scale businessmen representing all sectors that were directly affected by the actions resorted to by the Government to control the COVID-19 pandemic.

Our pre-Budget suggestions:

Support small business recovery and enhance access to capital

While COVID affected the entire country, it had a disproportionate impact on certain sectors and demographics, including small businesses. As we enter a period of economic recovery, access to the right forms of capital will be key to the rebound of Micro, Small and Medium Enterprises (MSME) across the country. In the Budget 2021, we encourage the Government to:

• Consult businesses and financial institutions on further measures to enhance small business financing, including tax policies to incentivise increased investment in small businesses and opportunities to modernise existing programs;
• Issue clear directives to the Provincial Councils and Local Government authorities to follow the Government recommended standard procedure for awarding construction tenders to only contractors registered with CIDA;
• Provide training to MSMEs on management, business planning, financial management, book keeping, IT based accounting packages and other important subjects.

6. Budget proposal:

6.10.5 Vocational and technical training

Skilled youth is essential for the development of the country. Skilled work force is an asset to the country. The foreign earnings brought in by skilled labour is very high. Even in the private sector there is a huge demand for multi-skilled young labour.

Therefore, it is expected to allocate Rs. 2,000 million in addition to the already made allocation to provide facilities for technical and technological education and city universities and to improve the existing facilities for vocational and technical skills after school education.

Our pre-Budget suggestions:

Address skilled labour shortage in the construction industry

We recommend that the Government should:

• Make budgetary allocations to invest in vocational education infrastructure to increase the annual student intake for building related vocational courses;
• Encourage work-integrated learning by providing incentives for employers to take on more trainees during studies;
• Introduce regulations where a provisional sum is allocated in budgeting for tenders to encourage construction companies that are awarded the tender to employ and train the students of technical colleges and training institutes attached to Vocational Training Authority and National Industry Apprentice Training Authority.

7. Budget proposal:

5.4.50 Focusing on ongoing green projects and programmes for achieving sustainable development goals, I propose to initiate discussions with interested foreign stakeholders to obtain green bond financing facilities and to respond to climate change through those projects. I propose to encourage state as well as private sector banks to develop this type of financing facilities.

6.9.1. Conservation of environment garbage disposal to the environment has become a national issue. We have paid our attention to urban forests and beautification including conservation of water, soil, noise management, solid waste management. Under ‘Surakimu Ganga’ conservation programme, priority has been given to conservation of 103 rivers and river valleys in the island in eco-friendly manner, conservation of eco-sensitive area of Muthurajawela and as a Ramsar wetland. Accordingly, additional Rs. 2,000 million is allocated in addition to the already made allocation for environment conservation.

Our pre-Budget suggestions:

Prioritise the achievement of Sustainable Development Goals

We recommend that the Government should:

• Initiate a policy to include the achievement of Sustainable Development Goals (SDGs) in the planning stages of any infrastructure project to ascertain that the project will enhance the country’s march towards achieving the SDGs by 2030;
• Ensure that priority is given to minimise waste and standardise design requirements of the Government sector buildings at the design stages;
• Incorporate on-site power generation from renewable sources such as solar, wind etc. as a component in the new building projects;
• Promote prefabricated and modular technologies to minimise construction waste;
• Invest in identifying and developing methods in mitigating construction waste and implementing processes to recycle construction waste;
• Develop long-term plan to achieve Carbon neutral (Zero Co2 emissions) for all new buildings.

8. Budget proposal:

8.17 State banks and financial institutions such as State Investment and Mortgage Bank, Housing Development and Finance Corporation, Sri Lanka National Savings Bank and Regional Development Bank have not transformed to development financing. Need of a development bank which is a collaboration of the aforesaid state banks that work for the small and medium scale enterprises.

Our pre-Budget suggestions:

Financing construction industry via development banking

Construction is a capital intensive industry and availability of long-term capital at concessionary interest rates are essential for the development of the industry. Therefore, we recommend that a development bank be established for the development of the construction and other capital intensive industries.