Contrary claims have emerged over construction activities in the country as constructors and builders paint a gloomy picture while the State Bank of Pakistan (SPB) paints a rosy scenario given 85 per cent growth in construction and housing finance in 2021.
The decline in local cement despatches to 4.057 million tonnes in December 2021 from 4.124m tonnes in November 2021 as well as sliding imports of iron and steel scrap used in the manufacturing of steel bars in July-December 2021-22, signal the dwindling pace of construction activities.
Former chairman of Constructors Association of Pakistan (CAP), Engr Syed Ashfaq Hussain said construction activities relating to government projects like highways, canals, roads, mega projects, bridges etc have been facing a slowdown for the last two to three months. He said constructors have also not been participating in the tenders being issued by the Punjab government.
CAP in November 2021 had alerted the government that the construction sector is heading towards a collapse following a meteoric rise in the prices of various construction materials, non-viability of current construction contracts. Housing has become beyond the reach of the common man.
“The government claims to have supported the contractors but it is a 100 per cent wrong impression,” he said, adding that CAP has been meeting with concerned ministries but the “situation is the same as nothing concrete has arrived from the government.”
He said the government usually mixes the CAP with the Association of Builders and Developers Association (ABAD) which is basically focusing on housing projects. Builders invest in the projects, make handsome profits and get away but the story of CAP members is different from the work of ABAD as contractors operate either on a fixed profit or minimum 10pc profit margin.
The Nasla Tower episode in Karachi and rising costs have slowed down activities all over the country despite State Bank’s claims of a rosy picture
He said the government has still not realised the ballooning project costs given soaring cement prices to Rs750 per 50 kg bag from Rs480 in March 2020, followed by steel bar rate closing to Rs200,000 per tonne versus Rs104,000 per tonne in March 2020. The prices of construction materials have risen due to rupee devaluation against the dollar, higher fuel and energy charges, sea freight costs and interest rates.
He predicted a dismal picture given the standstill situation in many government projects while many contractors would no longer be able to continue working on the ongoing projects due to escalating costs.
Mr Hussain said CAP had demanded the government to allow one-time escalation for ongoing contracts as allowed in 2004 by the government.
Chairman ABAD Mohsin Sheikhani said only 50pc construction activities have been going on at 250-300 approved high-rise projects in Karachi since the Nasla Tower case has surfaced, thus shattering the confidence of investors as well as consumers.
“No objection certificate (NOC) has lost its value after the Nasla Tower case. Apartment buyers are in a quandary over the developments in the aftermath of its demolition,” he said adding that illegal construction without the approval of map has been thriving at 120-200 yards plot on which no action is being taken.
He said massive jumps in steel bars and cement bag prices have also ruined the cost of production of the projects. Steel bars and cement hold 23pc and 18-20pc share in the construction of a high-rise project respectively.
Mr Sheikhani said Punjab has also witnessed a drop in construction activities mainly because of soaring costs but in Karachi, Nasla Tower incident caused the lull. However, around 70-80pc of construction materials are being utilised in various cities of Punjab after the massive slowdown in construction work in Karachi as several Karachi builders have been investing in Punjab.
Karachi has also not witnessed any mega housing projects in addition to already thin construction in various societies, he said adding the consumption of steel bars and cement is currently being consumed in residential works in the city as old houses are being transformed into multi-storey houses followed by renovation process of old houses.
He said another reason for lacklustre construction work in Karachi was the non-approval of 275 high-rise and housing projects by the Sindh Building Control Authority (SBCA) for the last 1.5 years.
CEO, FF Steel, Zarak K. Khattak stated that as per official data, the import quantity of iron and steel scrap has plunged from 2.7m tonnes in the first half of 2020-21 to 2.1m tonnes during the first half of 2021-22, while the average per tonne price has increased from $353 to $585, thus resulting in rising steel bar manufacturing cost and subsequently sale price.
The increased price of steel bars essentially means that the working capital requirements of steel companies have doubled. Companies with access to cash flow are the only companies
that can survive which puts the larger players at a distinct advantage. The escalation in steel price has an equally damaging effect on the consumption side, said Mr Khattak.
Firstly, developers have pre-booked sale deals of apartments, plazas, shops etc on non-escalating costs of steel bars. However, now that they have to buy the steel bars at a double price which is affecting their profitability.
Secondly, he said, contractors have won tenders based on last year’s steel pricing and now they have to execute tenders at the escalated steel bar prices. While an escalation clause does exist in most long-term contracts, it is only applicable after the commencement of the initial 12 months. Lastly, due to price, retailers have halved their in-shop stock of steel bars.
Due to all these reasons, there has been a tremendous decrease in demand for steel bars over the past two months, he claimed. However, the decrease in consumption is only temporary as everyone who has done forward-selling will sooner or later book a loss and move on, Mr Khattak added.
Company Secretary, Attock Cement Pakistan Limited, Irfan Amanullah included other factors such as higher markup rates that may affect the interest in procuring housing loans. Political uncertainty, economic vulnerability due to the International Monetary Fund programme and possible curtailment of the Public Sector Development Program may also pose a serious challenge on the construction activities.
President Karachi Iron and Steel Merchants Association, Shamoon Baqarali said the steel markets have been witnessing a 15-20pc drop in the sale of steel bars in the last two months while surprisingly, January 2022 is going quite bad as compared to January 2020.
The State Bank said that housing and construction finance has recorded an unprecedented growth of 85pc to Rs355 billion during 2021. Within the housing and construction portfolio, the disbursements under the government’s markup subsidy scheme, also known as Mera Pakistan Mera Ghar (MPMG), had risen by Rs38bn.
Financing to housing and construction and particularly under MPMG has witnessed impressive growth on the back of many enabling regulatory environments introduced after extensive consultation with stakeholders. Further, SBP also advised the banks to increase their housing and construction finance portfolios to at least 5pc of their domestic private sector advances till December 2021, introducing a set of incentives and penalties to ensure compliance.
Published in Dawn, The Business and Finance Weekly, January 24th, 2022