Thursday, July 28, 2016

Reflections on Sri Lanka's construction industry

Industries grow and have their peak-points. They face problems and aren't immune from slumps. They are all subject to decay, resurrection, and institutional flaws in equal measure. The trick isn't just identifying these, but making sure they don't resurface. In education, healthcare, and pretty much every other sector which the State holds a significant interest in, however, identification must precede solution.

This begs a lot of questions, naturally. Starting with the following: in the construction sector, who's responsible for what?

ICTAD, CIDA, and the Construction Industry Development Act

In the public sphere, the industry is (supposed to be) handled by the Construction Industry Development Authority (CIDA), which was preceded by the Institute of Construction Training and Development (ICTAD). The shift from the one to the other wasn't just to do with the name of the organisation: it was facilitated by a statute (the Construction Industry Development Act of 2014), the aim of which was to create a central body to look after the industry. At least theoretically.

The preamble of the Act invites scrutiny. According to that, CIDA’s main role is to "regulate, register, formalise, and standardise the activities of the construction industry." Logically, that means there was a discernible lack of standardisation before. And it gets more interesting further on: the Act creates an Authority, an Advisory Council, and a Fund. Again, this means these did not exist before. Do they now?

To ask that is to ask what the problems facing the industry are in the first place.

So what are they? I spoke with a veteran in the field some weeks back. He said he knew the answer. His name: Jayasiri Samaratunga.

Introducing Jayasiri Samaratunga

Samaratunga is a veteran. His father was S. D. Stephen, the formidable contractor. His involvement with the private sector speaks for itself: as Managing Director of his father's firm, S. D. Stephen and Co. Ltd. and later another firm, Idikarana (Pvt) Ltd. It's his involvement with the public sector, however, that one should look at.

He was involved with the formation of the National Construction Association of Sri Lanka (NCASL). He was Chairman there and now serves as an Advisor to the Chairman. The Institute of Construction Training and Development (ICTAD) is another organisation he can claim credit for, having served as a Director there until it morphed into CIDA in 2014.

He is also a Council Member of the Sri Lanka National Arbitration Centre, the oldest organisation dedicated to resolving commercial and administrative disputes. He represented Sri Lanka at the 26th International Federation of Asian and Western Pacific Contractors' Associations (IFAWPCA) Convention, held in Tokyo in 1993, and was on the scene again when Sri Lanka got the chance to host it in 1999.

Problems and flaws

I first ask him to identify the most immediate problems facing the industry. He is quick and firm: there's a labour shortage. I ask him to elaborate and he obliges. "There aren't enough workers in this sector anymore," he says, "We can point at two reasons. Firstly, this isn't a lucrative profession. Those who enter it do so to earn a living for and educate their children, who are consequently driven off to other professions. Their parents hence flock by the dozen to the city." He observes that because the profession is physically demanding, "it's impossible to think of a career after you turn 50." Which brings him to the second reason: the sector doesn't offer enough job security.

He contends that people shy away from jobs on account of this stark fact. Not that he blames them: "To date, we haven't implemented EPF and ETF provisions for workers. To make matters worse, construction jobs are unstable, hardly the 9 to 5 job some make it out to be. If you're a builder, in other words, you can't expect to be in one place. Your work may take you to every corner of the country. We also have peak and off-peak seasons. During the monsoon period, for instance, construction jobs are few and far in-between. The solution? We need to not just attract but retain workers in a way which accrues benefits to them."

The best way to forecast flaws and shortfalls in any industry is to take a census. The problem with the construction sector is that there's no census-taking body. I ask Samaratunga about whether the 2014 Act ameliorated this problem. He says that it has not. "We still don’t know how many craftsmen we have," he says, "Numbers are important because they help us foresee the deficits which may face the industry: if we knew how many builders we have, for instance, we could adjust for these oscillations which ail us even today."

Workforce issues

Samaratunga reckons that only about 2% in the industry get some form of perk in addition to their pay, and that these make up the permanent workforce. What of the remaining 98%? Who are responsible for them? Or more to the point, who should be?

Two parties are involved in any construction project: the contractor and the investor. The investor puts the money in, the contractor delivers. If the former funds the latter then, doesn’t it make sense for the contractor to list out the perks and other benefits accruing to the worker in his the amount he bills? Samaratunga thinks so, but adds a caveat: most labourers are treated as "freelancers", which together with the mad rush to cut down on costs means that they are at the mercy of both parties.

One solution would be to stipulate those perks under the project's Bill of Quantities. Samaratunga elaborates: "The Bill of Quantities (BOQ) basically lists down every cost arising out of that particular contract, be it raw material, labour, or overheads. Every item is quantified to make it easier for contractor and investor to see how much they have to spend. I argued in 2014 that the BOQ should include EPF and ETF provisions.

"I thought this to be a practical solution because it doesn't burden the contractor: it's already stipulated as an obligation to be met by the other party. More to the point, I suggested that insurance and pension benefits accruing to the workers be categorised as 'Preliminary Items', which basically include the start-up, sunk, and various other costs related to a job. The contractor needn’t worry because these are accounted for at the outset. It's more or less a legal obligation on the other party."

Perspectives on the Act

Acts of Parliament are more often than not adhered to in spirit than in letter. Has CIDA suffered the same fate? I ask Samaratunga to list out the provisions which weren't implemented. "Forget provisions which weren’t unimplemented, there were problems even in the way the Act was discussed!" is his reply.

There’s no sense creating an Authority without ascertaining how it will be financed. Section 19 created a Construction Industry Development Fund, supposedly to look after the labourer's interests. In part, the Fund would collect a set amount from each and every project (through the Construction Industry Development levy) and more than 50% of the collected amount would be reserved for craftsmen and small-scale contractors. As of today though, it remains unimplemented.

Moreover, the Act created a census-taking entity. This was theoretically accounted for in Section 55, which established or was supposed to establish an Authority to maintain a National Construction Database. Again, unimplemented.

Samaratunga then moves on the problems faced when the Act itself was being discussed. "One of the biggest complaints we hear from those in high positions today is that there’s an influx of foreign consultants who pass off as locals and rob jobs from our people. The fear is justifiable, the paranoia excusable, but those who make these claims forget how much we tried to insert clauses to protect this industry from such threats."

I prompt him to explain. "I don’t want to get into the niceties of the obstacles we had to contend against, but I will say this: those who howl against the threat posed by foreign consultants forget that we were at the forefront of the campaign they champion now, when we struggled to insert provisions which would subject such consultants to various criteria. These howlers were curiously silent and inert back then. Even when our attempts became futile thanks to political pressure. The reason? You tell me."

Alternative perspectives and statistics

Samaratunga's involvement, to be fair, has been mostly with the public sector. What of the private sector? In 2015 the industry growth rate fell down to 6.6% from an average of 7%, while in 2016 it actually contracted by 0.9%. On the other hand (according to the Department of Census and Statistics), the contribution to the GDP by the industry was Rs 89 million in the third quarter of 2015, while in the fourth quarter it was Rs 95 million: a 6.8% increase. Hardly reason for lament, some may argue.

It’s not all rosy, however. Contractors have moved away from the housing sector, in part because of the megaprojects initiated by the previous government. Until 2013, for instance, infrastructure and housing construction grew by about 18% annually, while in 2014 that rate fell down to 15%. It was around then that the Port City project was initiated (among others). Given that they were temporarily halted thanks to the political storm they ran into and given the aforementioned dip in the housing sector, this means that whatever growth the industry is enjoying now can be traced back to those megaprojects its top players are (still) engaged with.

Should there be a paradigm shift then? Not really. Consider the costs borne by these same top players: in 2015, according to Sandeep Holey of UltraTech Cement Lanka, the per capita consumption of cement was 220 kg as opposed to a world average of 440. There clearly is a scope for growth in the industry. But does that mean the issues highlighted by these same top players are nondescript and hollow? Maybe. Samaratunga's assertions about their tirade against foreign consultants merit a second glance hence, not least because of his own attempt at inserting provisions to that end when the CID Bill was being debated.

Meanwhile, there are other issues. Last year, at a seminar themed "Construction Industry and the Way Forward" and organised by the National Chamber of Commerce, Surath Wickramasinghe (Chairman of the Chamber of Construction Industry or CCI) pointed these out. Among them, the red tape encountered in getting projects approved, the absence of indemnity insurance for professionals, and an overall lack of industrial policy were problems he took apart and censured. He urged CIDA to be more proactive with the Ministers involved, and if possible to get another Act passed and enacted to ameliorate these.

Is there a need for another Act, though? Samaratunga says he doesn't think so. "Most of what are paraded as issues which require remedy are, in fact, addressed in the CIDA. But as I mentioned earlier, there were problems we encountered. There was political pressure. Interference. We had to bear up with all that, not least because the government was confused about which minister and parliamentarian was in charge of the industry. As was predicted, then, we got a skewed version of the Act we originally wanted. This is why we don't need a new document: if we can fix what we already have, there's enough and more we can do."

Concluding remarks

No one can seriously contend that the industry is in dire straits. In 2000, for instance, there was zero growth due to a war we aren't facing now. Sri Lanka is a middle income country now, and the middle class is largely consumerist. The housing sector hasn't slumped by a wide margin for this reason, and as for projects initiated by the former government, they are being recommenced. In terms of the private, professional sector then, there's really no cause for serious complaint.

On the other hand, Jayasiri Samaratunga's assertions are worth revisiting. As I pointed out, in any industry where the government holds an interest, identification must precede solution. We already have an Act (scuttled though it is) which pretty much identifies the issue and offers the relevant solution. Yes, it's been passed, not enacted. But that in itself vindicates Samaratunga's point: it it's broke, fix it! New statutes, new ministries, and new restructuring mechanisms: these appear superfluous at best and what's more, unnecessary.

We've had perspectives and reflections being articulated all this while. The problems have been identified, clearly. Time to get on with the solution. That's the next step. The necessary next step.

This is a longer version of the inaugural article of a column in "Ceylon Today" titled "Problems, Perspectives, and Solutions" which I will be writing to. Starting this week, I will be delving into various industries and socioeconomic issues ailing the country and assessing possible remedies for them that we can come up with.

Written for: Ceylon Today, July 26 2016