Bank interest further slays contractors

Construction companies are on the verge of taking their last breath – Pic by Shehan Gunasekara

The Government has stopped most construction projects without settling contractors’ bills. The total amount due is over Rs. 130 billion. Simultaneously, contractors owe banks around Rs. 200 billion. The finances of the contractor trickle down to the smallest of Sri Lankan labourers. The construction supply chain too is vast and includes many industries and businesses, such as cement and steel manufacturers, brick makers and such, each of which are affected. Further, a portion of SMEs, the backbone of the Sri Lankan economy, are made up of contractors.

When a construction project is conducted, contractors use up to 40% bank money to complete the project. Earlier contractors paid around 18-22%, yet now the ordinary interest has skyrocketed to 25-28% and TOD limits are over 30% which is simply unbearable to contractors, spelling out their incumbent ruin. For example, a company which owes banks Rs. 100 million, within a year this translates to Rs. 130 million paid to banks. People who have funded their work from financial institutes are much worse, being charged 35-40%. No business can make this kind of money to pay the banks in our country.

In such a situation, the Government has halted construction projects without payment, leaving contractors to slowly die off. Construction companies are struggling to pay their staff and workers and projects are stopped half-way all over the country but still they have to keep their security systems and personnel, equipment, balance materials, etc. at hand costing yet another fortune. When income is zero to null, contractors cannot even maintain their salaries which for contractors are usually copious, with some contractors paying about Rs. 100 million overhead a month, and smaller companies paying an overhead of around 2-3 million each month. Companies in such a state cannot in any way make their bank installments.

Therefore what the Government has done has put banks and financial institutions in trouble. Not only banks, this decision destroys some 5,000 construction companies, 4,000 supply chain companies, and around 1 million people. Yet, contractors are still managing the situation by paying out of their pockets and disposing personal assets. Construction companies are on the verge of taking their last breath. This can only go on for another month or two. When this happens, the poorest labourers in the country lose their income, their livelihood and soon may flood the streets due to the fact that they cannot feed their families. Paying Rs. 5,000 to these families is futile and of no practical use because contractors pay them Rs. 50-60,000 a month. They thus cannot survive on Rs. 5,000 Government compensation after losing their job. Therefore, the Central Bank should take into serious consideration imposing very reasonable interest rates for construction sector dues, and also release their balance payments.

The writer has over 30 years of experience in Civil Engineering; he holds a B.E (India) T.Eng. (CEl), MIE (Lon.) MBA (UK) FIIM (HK), FCIOB (Ceylon) Ph.D (U.S.A). He is also President of the Ceylon Institute of Builders and a Past President of National Construction Association of Sri Lanka.