Sri Lanka’s construction industry is poised for a gradual recovery, anticipating growth opportunities in tourism, Foreign Direct Investment (FDI), and international projects, according to stakeholders.
However, despite these possibilities, the sector continues to struggle somewhat, with growth at a very slow pace due to the inactivity of the industry.
Speaking to The Sunday Morning Business, Ceylon Institute of Builders (CIOB) President Dr. Rohan Karunaratne shared insights from a recent discussion with the Government and the National People’s Power (NPP) Economic Council, outlining the Government’s plans for the industry.
“While they were unable to provide a clear answer yet due to the economic conditions, there was assurance that with economic growth, it would be possible to restart construction,” he said.
At present, contractors are nearing the final stages of their work, with many expected to complete projects by the end of the year, which may leave them without work in the coming year. However, Dr. Karunaratne highlighted that tourism offered a significant opportunity for growth, as the industry required substantial construction-related support such as new constructions, refurbished spaces, and expanded infrastructure.
He also noted that it would be essential to negotiate with funding agencies regarding their support for infrastructure development next year. He revealed that certain recent Government moves had been helpful, with the new Cabinet approving remaining payments to the construction sector.
“There was a debt of Rs. 250 billion owed to the industry. The former Government paid Rs. 210 billion, while the new Cabinet has approved the settlement of a balance of over Rs. 40 billion, which has been a relief for many contractors,” he said.
Addressing challenges, Dr. Karunaratne highlighted the impact of material costs on the industry, which have been decreasing gradually at present. “We have engaged in discussions with material suppliers who are also working to bring prices to a reasonable level,” he said.
Addressing concerns regarding the high cost of construction, he added that the CIOB had released a document showing that Sri Lankan construction costs were now on par with neighbouring countries, addressing the argument that costs were disproportionately high in the country.
Industry slowly picking up pace
With nearly one million direct employees and over two million indirect employees, the construction sector remains one of the largest in the country.
The Sri Lanka Purchasing Managers’ Index (PMI) for Construction Industry recorded an index value of 52.9 in January, marking the first time that the index exceeded the neutral threshold since January 2022. From the beginning of this year, the industry had experienced growth, with a 14.2% growth in the first quarter of the year and 15.5% in the second quarter.
However, according to the latest data, the PMI for construction indicates a decline in construction activities in September, as reflected by the Total Activity Index, which recorded an index value of 48.6.
Speaking to The Sunday Morning Business, Chamber of Construction Industry of Sri Lanka (CCISL) President and Green Building Council of Sri Lanka (GBCSL) Chairman Jayantha Perera noted that the construction industry was slowly picking up pace.
“Certain abandoned and suspended projects are now recommencing, in addition to the advent of a few emerging projects,” he stated. However, he added that significant progress may be limited until the elections conclude and the Government’s policies regarding the construction industry are clarified.
Perera further noted that some Chinese-led apartment projects were moving forward; although they will mainly be constructed by Chinese firms, there will be certain limited opportunities for local subcontractors. He added that many projects were on hold, awaiting the outcome of the General Elections and the new government’s stance on construction investment, as the industry required substantial funding.
“The labour force in construction is significant, as 20% of the population was involved at one point. Addressing Government-related issues, particularly corruption, could attract FDI for this vital sector. If the Government improves on this front, there could be an inflow of FDI, which is a requirement in the present context,” he said.
Challenges hindering growth
Perera added that while Sri Lanka attracted notable interest from various parties related to investment, delays in approvals hindered the process, leading to hesitancy among those interested. He highlighted tourism as the way forward, considering its capacity to boost construction demand given the need for additional hotel rooms and infrastructure.
“Looking ahead, one of the most prominent aspects is encouraging FDI, which could drive significant activity,” he noted.
Perera emphasised that the Government should look seriously at attracting FDI, especially through Public-Private Partnerships (PPPs). Improving the approval process will be crucial in this regard, and he noted that recent plans to digitise the system under the leadership of Dr. Hans Wijayasuriya could enhance the process if properly implemented.
Several challenges have been identified as impediments to the growth of the industry, including material costs, outstanding payments, and labour shortages, However, due to the relative inactivity in the construction industry, there is no immediate labour force shortage.
Perera highlighted that potential labour shortages would only become a concern should the industry experience rapid growth, as a significant portion of skilled labour had left the country.
Additionally, some contractors have faced delayed payments and even bankruptcy, especially those who have completed work but were not compensated.
“There should be a policy to support these contractors who have been left unpaid. While certain Government payments have been made, issues persist in the private sector, with certain companies going bankrupt and banks unable to intervene effectively,” he said.
He added that the Government prioritisation of FDIs would reduce the financial burden on the State and encourage more construction activity, which would benefit tourism and other sectors.
Tied to the country’s development
Former President of the CCISL and Sanken Construction Ltd. Group CEO Eng. Ranjith Gunatilleke told The Sunday Morning Business that the construction sector was closely tied to the country’s development.
“Currently, no significant development is taking place in the country due to the lack of investors. Investors typically comprise either the public or private sector. However, the public sector has stated that there will be no funds available for capital expenditure for the next two to three years, except for urgent refurbishment of buildings or infrastructure.”
Gunatilleke explained that this meant that public sector investment in construction was likely to remain nearly non-existent over the next few years. He however added that there was a positive sign in relation to the private sector with a confirmed President for the next five years, which could be followed by a stable government, potentially leading to a more sustainable economy.
“This stability is encouraging for private investors. Tourism in particular is growing, which could attract private sector investment, and projects like the Japan International Cooperation Agency (JICA)-funded expansion of the Bandaranaike International Airport (BIA) and other tourism-related developments are very promising,” he said.
However, Gunatilleke noted that these projects offered limited opportunities for the construction industry, with only about 1-2% of the work likely to reach local contractors, emphasising that small and medium contractors faced unique challenges.
“In the past, the main issue for the industry involved material costs. However, in the present context, the most significant setback is sourcing skilled labour, which has become very costly. It’s difficult to find labour at less than Rs. 100,000 per month, even paying Rs. 2,500 per day with EPF and ETF.”
He added that construction costs in Sri Lanka, whether in urban or rural areas, were now higher when compared to other countries in the region.
Gunatilleke therefore added that the construction industry’s prospects over the next two to three years may not seem promising due to the country still recovering from bankruptcy, adding that a breathing space should be accounted for prior to advancing to growth.
“Currently, the country is heavily in debt and banks are burdened with non-performing loans. We need to work hard over the next three years to pay off creditors and stabilise. Also, we will have to wait for the next Government budget to see how much the private sector will contribute to the economy,” he pointed out.
With regard to the impact of elections on the industry, he observed that while elections often disrupted construction, the effect was less severe on this occasion, with fewer workers called away for election-related events.
Gunatilleke however raised concerns regarding Poya holidays, which he described as a barrier to productivity in the industry.
“When Poya days fall on a Thursday, construction workers take Thursday, Friday, Saturday, and Sunday off, causing difficulties in operating construction projects. I hope the Government will reconsider Poya holidays for the construction industry from a productivity perspective and take action to remove them, as they lead to inconsistent productivity,” he asserted.
Industry struggling due to outstanding payments
Meanwhile, speaking to The Sunday Morning Business, Sri Lanka Construction Association Chairman Susantha Liyanaarachchi shared that the construction industry continued to struggle.
“The main reasons for the industry’s struggles are outstanding payments and delays, as the previous Government had not made the due payments. These issues have hindered the industry significantly. They should at least allow private companies to continue working. However, State constructions had not resumed prior to the Presidential Election.”
He added that although prior to the 2024 Presidential Election, former President Ranil Wickremesinghe had allocated funds for 1,500 km of construction work within a regional framework, there was no funding for State construction.
“We have engaged in several discussions with the current President and his Economic Council as we are facing a crisis, with the industry collapsing and job losses occurring,” Liyanaarachchi noted.
He also highlighted long-standing payment delays, particularly under former President Gotabaya Rajapaksa’s 100,000 km road construction project, noting that avoidance of payments, payment delays, and mismanagement by the Secretary and Minister of the Transport and Highways Ministry at the time were key issues.
According to the Cabinet meeting on 5 November, there remains an outstanding balance of Rs. 28.37 billion pertaining to the rehabilitation of the 100,000 km programme, which commenced in 2020. Additionally, Rs. 20 billion has been allocated for the rehabilitation of 1,000 km of essential roads in 2024. The Cabinet approved the settlement of outstanding bills that should be settled under these two programmes.
Liyanaarachchi stated that this green light offered a certain relief, adding that had the payments been made when they had been due, the construction industry would be thriving. He further said that payments were also overdue in other industries, such as health and agriculture.
As a result of these impediments, Small and Medium-sized Enterprises (SMEs) have been severely affected, with registrations at the Construction Industry Development Authority dropping by 50%.
Furthermore, Liyanaarachchi expressed concerns over job losses due to suspended construction, noting that nearly 485,000 labourers had been impacted. He pointed out that if the Government initiated foreign-funded projects, it would at least allow local labourers to receive subcontracts, offering some relief, such as the BIA expansion funded by JICA.
Liyanaarachchi highlighted that $ 5,665 million in foreign-funded projects remained suspended. “With the country heavily indebted, Sri Lanka is in need of a plan to revitalise these industries, which should be done in consultation with stakeholders,” he stressed, adding that small contractors struggling due to these delays were at risk of facing parate actions in the future.
“All industries, including construction, are in a difficult position, and measures should be taken to mitigate these issues,” he said.