As Sri Lankans, we are conditioned to have four priorities in life – get a degree, build a house, buy a car, and be a good citizen.
While this is the mantra of every teacher and every parent, the system in which we live and work is filled with barriers. Let’s take the first goal for example. Before you get a degree, the first step is getting into school. Entering grade one is a painful and tedious process, and even if you succeed, only about 7% [1] of school leavers will have the opportunity to enter a state university. What happens to the remaining 93%? The rest are dependent on external degrees, vocational training, and private educational institutes for their tertiary education.
Every dream we are conditioned to hustle for does not come easy. What is truly terrible is that the system also prevents you from realising your dream through hard work. Let’s analyse the case of owning a house.
Is the dream of owning your own home a realistic one?
I recall a recent conversation with my retired parents. “After pouring all of our EPF/ETF, gratuity, and housing loans and spending every cent kept we had saved for medical treatments, we still could not finish the ceiling and light fittings of this house.”
My parents’ house was hardly anything fancy. It was a simple, single storey, 1,500 sq. ft. structure with basic amenities. This is the most common form of Sri Lankan houses, even after pouring years of money and energy into building them.
Statistics by the Ministry of Housing and Construction [2] shows that more than 250,000 families live in temporary housing and more than 400,000 families live in houses with roofs with galvanised sheets. Another 386,000 families live in partly constructed houses – either the floor is not cemented or the walls are not plastered. Isn’t it a very poor performance for a country categorised as upper middle-income by the World Bank?
Why is this so challenging?
The challenges of building a house are numerous and varied; from settling land disputes to finding a good contractor, the list continues on. A major factor often not included in this list of woes is the taxes on building and construction material that results in exorbitant raw material prices. The prices of these items are high, but we rarely question why.
Here is a breakdown of border taxes of a few raw materials [3]:
- Wall tiles and floor tiles – 107%
- Construction steel – 90%
- Sanitaryware (commodes, squatting pans, etc.) – 62%
If you have ever attempted to build a 100 sq. ft. basic toilet, you may have realised how expensive material and labour can be. My focus is on basic sanitary facilities and not a five-star bathroom with a bathtub and expensive fittings. How can a population afford to build a basic bathroom when their steel is taxed at 90% and their wall tiles and floor tiles are taxed at 107%?
The consequences of the tax create a chain reaction where individuals spend nearly two times greater than the actual price for steel in their basic construction. The reason most of the houses are incomplete and most of the people are becoming housebuilders for a lifetime is that they spend money for basics like steel, wall tiles, and many other basic units that are double the actual cost and then inevitably run short on cash for completion.
Why do these high taxes persist?
The purpose of high tariffs is to discourage the importation of construction materials that are already available for a very reasonable price with higher quality in the global market. The excuse subsequent governments provide is that this is done to protect the local manufactures. But what is the rationale behind this kind of protectionism? Tariff protection is often provided for local manufactures to give them breathing space in which to grow and innovate up to the point that they catch up with global competition. However, this industry has been protected for a few decades and the lobbying gets stronger every year for more protectionism.
Is it fair to keep half of our population in temporary and incomplete houses as a result of tariff rates as high as 107% on basic material required for construction?
Additionally, the purpose of this tax is to discourage some other who produces efficiently and effectively in favour of more inefficient local production. In economic terms, this is called a rent and the businesses who gain from this are the rent seekers – something Sri Lanka has many of. Most of the self-proclaimed successful businessmen are not the ones who have done better than the competition, but have minted money from taxpayers by hiding behind government protectionism.
High taxes at what price?
The market contraction, as a result of the unfair tariff policy, goes beyond what can be seen at surface level. High taxes have an unseen dire impact on other supporting industries connected to construction. For instance, once you spend all your money for steel, tiles, and electric materials, you will be forced to cut your expenses on furniture, curtains, and other items which are also supplied by local businesses. Most Sri Lankans build a house on a housing loan. In addition to paying off a loan with interest, we also have to pay the rent of 107% on construction material – how justifiable is this?
This was simply a common man’s perspective. Even when considering industrial and commercial buildings, the situation is no different. For an instant, if you are investing on a property in the leisure industry as a result of incurring a greater expense on construction material, one would have to consider the higher interest rates on loans and recovery of the capital. That higher recovery rate will create higher room rates, making the property almost uncompetitive in the market.
The dreams of buying a car and getting a degree is no different from building a house. Unfortunately, what the former Indian President said about dreams is perfectly applicable to Sri Lankan’s dreams of building a house.
“Dream is not that which you see while sleeping – it is something that does not let you sleep.” And yes, for the majority of Sri Lankans, it’s a dream that doesn’t let us sleep, keeping us up with worry till the last day and hour of our lives.
Dhananath Fernando is the Chief Operating Officer of the Advocata Institute and can be contacted at dhananath@advocata.org. Advocata is an independent policy think tank based in Colombo, Sri Lanka. They conduct research, provide commentary, and hold events to promote sound policy ideas compatible with a free society in Sri Lanka.
In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.
The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute, its Board of Directors, its Research Fellows, or its Advisors. [1] University Grants Commission. 2018. Handbook of Statistics-2018. https://www.ugc.ac.lk/downloads/statistics/stat_2018/Chapter1.pdf [2] Ministry of Housing and Construction, Housing Needs Assessment and Data Survey, 2016. [3] Calculation by Advocata Staff, using 2019 Tariff Guides