Report

on

CONSTRUCTION INDUSTRY
Prepared For

Mrs. Raheela Fatima

College of Business Management

Prepared By

Saad Ashfaq

26th December, 2008

 CONTENTS

EXECUTIVE SUMMARY

INTRODUCTION
Definition

Background

IMPORTANCE

PROBLEMS

Solutions/ REMDEDIAL MEASURES

APPENDIX

BIBLIOGRAPHY

GLOSSARY
EXECUTIVE SUMMARY

This report is prepared on the request of Mrs. Raheela Fatima Teacher of Business
Communication at college of Business Management. The data for this report is taken
from various websites, national journals and reports.

This report extensively analyzes the importance and role of the construction industry. Its
history and background. Also it focuses on the issues and problems faced by the industry
and thereafter policy measures and suggestion to resolve these problems.
DEFINITION
“an industry that builds housing”

“In the fields of architecture and civil engineering, construction is a process that
consists of the building or assembling of infrastructure.”

Construction sector and construction activities are considered to be one of the major sources of
economic growth, development and economic activities. Construction and engineering services
industry play an important role in the economic uplift and development of the country. It can
be regarded as a mechanism of generating the employment and offering job opportunities to
millions of unskilled, semi-skilled and skilled work force. It also plays key role in generating
income in both formal and informal sector. It supplements the foreign exchange earnings
derived from trade in construction material and engineering services.

The construction industry plays an essential role in the socio economic development of a
country. The activities of the industry have great significance to the achievement of national
socio-economic development goals of providing infrastructure, sanctuary and employment. It
includes hospitals, schools, townships, offices, houses and other buildings; urban infrastructure
(including water supply, sewerage, drainage); highways, roads, ports, railways, airports; power
systems; irrigation and agriculture systems; telecommunications etc. It deals with all economic
activities directed to the creation, renovation, repair or extension of fixed assets in the form of
buildings, land improvements of an engineering nature. Besides, the construction industry
generates substantial employment and provides a growth impetus to other sectors through
backward and forward linkages. It is, essential therefore, that, this vital activity is nurtured for
the healthy growth of the economy.

BRIEF HISTORY

Construction sector, the world over, is considered to be a basic industry on which the
development of the country depends to a great extent, the growth of a country and its
development status, is generally determined by the quality of its construction companies and their
capability.
It is treated as an important sector, not only in the developing countries but the developed ones
which have separate ministries that look after the housing problems of the people. Turkey,
South Korea and Malaysia are but some of the countries where the support of the government
has helped the sector grow and in return the sector has build a strong country.

Many governments created separate departments within the housing ministries which generate
soft loans for the people. By doing so, not only is the government generating business but also
providing shelter for the shelterless.

It has been, and still is a practice of some governments in the developed world to provide loans
for other countries on the condition that the project is given to its construction industry, thereby
providing business for their local construction sectors.

Unfortunately construction sector is one of the most neglected sectors in Pakistan. Although the
construction sector has only a 2.7 percent share in GDP, its share of the employed labor force
was disproportionately large at 6.1 percent in FY07.

The construction sector is estimated to have grown by 17.2 percent in 2006-07 as against 5.7
percent of last year. The higher demand for construction workers is also reflected in a
continued double-digit rise in their wages since FY05. Their wages increased by 11.1
percent in FY07.
But unfortunately, in Pakistan there is no ministry or department that caters to the construction
industry and the Housing Ministry is only there in name as it has failed to provide shelter for the
populace.

During the days when the Steel Mill was being built, most of the Gulf states were being
developed at the same time. This brought the birth of many construction companies in the
country. The sector provided good revenue for the economy in those days in terms of foreign
exchange.

But as soon as the Mid-East boom ended and the Steel Mill project was completed, the state of
affairs in the industry became chaos, forcing some of the smaller players to close down
business in search of greener pastures.

According to analysts, today, the industry is in total chaos, and to construct projects as roads,
bridges, canals, power houses or drains, foreign construction companies were usually invited
which resulted in higher cost and further deterioration in the standards of the local companies.

According to sources close to the industry, though the sector was declared as an
industry since 1992, however the source claimed that no SRO is issued in this regard to
date and the sector continued to suffer due to the indifference of the government
agencies and one sided conditions of contract and lack of support from the financial
institutions in terms of guarantees and bonds.

The housing and construction sector in Pakistan plays an important role in developing
aggregate economy and reducing unemployment. It provides substantial employment
opportunities as it contributes through a higher multiplier effect with a host of beneficial
forward and backward linkage in the economy. The sector through linkages affects about
40 building material industries, support investment and growth climate and helps reduce
poverty by generating income opportunities for poor household. It provides jobs to about
5.5 per cent of the total employed labor force or to 2.43 million persons, (2.41 million male
and 0.2 million female) during 2003- 04 (Economic Survey 2004-05)

Unfortunately the construction sector is one of the most neglected sectors in Pakistan.
It is at low ebb, which can be judged from the fact that per capita consumption of
cement in Pakistan is one of the lowest among the developing countries i.e. 72 kgs.
(Hassan, 2002).

construction sector provides direct employment to unskilled labour

who are trained in various disciplines. He was further informed that
 29 local technology based industries are directly related to the
construction business.

APCA delegation also briefed the Prime Minister about the potential
in the construction sector with regards to improving national
economy, infrastructure development and employment generation in
addition to meeting the housing needs of the people.
The Prime Minister was further informed that the construction sector
of the country is almost entirely working within the country and if it
gets organized the sector has the potential of exporting its labour as
well as consultancy services which can help the country earn foreign
exchange worth billions of dollars.

Pakistan has about 20 million housing units while the actual requirement is 25
million for its 150 million population. Total annual demand has been estimated
around 570000 houses against the construction of 300000 thus giving a net shortfall
of 270000 housing units which is accumulating ever year. Major factors
responsible for the housing shortage are the high rising cost of construction inputs
/materials and lack of R&D effort for their local development.

Total annual quantum of construction works in Pakistan is around Rs. 360 billion of
which construction inputs worth Rs. 40.00 billion, are imported. The import bill can be
minimized through development of good quality construction materials, application of
indigenous materials and efficient techniques locally. This would help increase income of
laborers working in the construction industry as well as alleviate poverty in the country

PROBLEMS

Dispute settlement is one of the principal causes of the downfall of the construction industry in
the country due to the unending arbitration, and in some cases the companies close down before
the final decision is arrived at. For this purpose, better facilities should be made available for
expeditious settlements.
Devaluation is one of the major problems facing the industry. Depreciation of the local currency
and the cost escalation eroded away the capital itself and therefore the industry could not cope
with the funding of projects.

Fiscal policies impose further burden, on the weak sector in the form of registration fees,
professional tax, withholding tax and other taxes.

Some of the contractors are now complaining of the preference given to foreign
contractors in cases of huge projects, on the pretext of their possessing more and latest
construction machinery "when the actual case is that we could not bring these machineries into
the country in view of the present condition", one of the contractors said. For example huge
projects such as Mangla Dam and Tarbela Dam were constructed by foreign firms.

While talking to Engineering Review some time ago, Engineer Ikramul Haq Siddiq,
chairman of Muslim Constructors, mentioned problems such as tax laws, labour laws,
registration laws, bonding, estimating and tendering, funding, dispute settlement and lack
of benefits as partly responsible for forcing the industry to its knees.

The income tax calculations are based on the assumption that all constructors always make profit
of upto 20% or more, without considering whether such project is executed on no profit basis.
And this is contrary to the government-contractor agreement in the 70s, which allowed a certain
amount to be treated as ex-gratia payments, in case a project is a non- profit venture, in which
case these ex-gratia payments are being treated as taxable by the Income Tax Department.

Nonavailibility of Short term Financing

According to some analysts in the construction industry, contractors are usually referred to by the
banks as "bad clients". Therefore, they are barred from utilising the facility of short-term funding
which is required to take care of temporary negative cash flow on a project.

Lack of Standardised Method of Estimating Costs

Another important set-back of the industry is the lack of a standardised method of estimating
costs. Different bases of rate analysis are being adopted in different departments. For example,
the Military Engineering Services, the Public Works Department and Wapda follow different
systems of calculating rates and the basis of rate analysis. Construction companies, too, adopt
different methods, which results in large variations and creating more risks.

Despite repeated advise of the Pakistan Engineering Council to the development agencies and
government bodies to rationalise the conditions of contract which were said to be 'client oriented'
the government, it is said did not pay any attention to these requests advices.

And according to sources in the industry, this indifference results in lack of progress on the
industry which has even forced some of the construction houses to close down and "those that
are surviving cannot compete with the foreign companies", another source said.
The poor performance of the industry have kept it low in the eyes of the government and
business houses. There are only four construction companies listed on the Karachi stock
market and right now three of them are trading on the defaulters counter. The four
companies are Haydari Construction Company, Gammon Pakistan, MLC and Pak German
Prefabs. Of these only Gammon Pakistan is still trading on the ready board while the
others for one transgression or another are trading on the defaulters counter.

The companies have a very poor record of dividend payouts also. None of these four
companies have paid any dividend for the past few years which alone is enough to get
them all on the defaulter counter. If nothing at all this suggests the attitude of these
companies towards their shareholders so one can imagine what their attitudes towards
their customers would be like. The three listed on the defaulters counter have not paid any
dividend for the past few years.

Land Grabbing Mafia

Political Issues / Interferences

Every government in the past has tried to destroy this industry. The owners are forced to
pay for election campaigns. They are blackmailed by withholding issuance of NOCs for
utility services like electricity, gas and telephone. They are entangled in false litigation
and harassed through the Revenue Department. This results in loss to builders of housing
projects and those in ancillary businesses. Members of housing schemes suffer multiple
losses

Economic & Political Instability

Lack of Technological Infrastructure

Lack of Managerial Skills

Another problem facing the industry is the lack of management skills, according to M. Aslam
Mirza of Project Engineering company, the industry is often run in most haphazard manner while
the peculiar nature of the industry and the problems confronted, demand the application of the
advanced management techniques in fulfillment of the commitments.

Every government in the past has tried to destroy this industry. The owners are forced to
pay for election campaigns. They are blackmailed by withholding issuance of NOCs for
utility services like electricity, gas and telephone. They are entangled in false litigation
and harassed through the Revenue Department. This results in loss to builders of housing
projects and those in ancillary businesses. Members of housing schemes suffer multiple
losses.

Solutions
The Income Tax Department should allow the industry to offset annual profits against the losses
incurred prior to imposing income tax on them

Modalities should be provided to have data on prices and quantifying the rate of escalation on
periodical basis for tendering and settling of price escalation claims.

As far as the management of the industry is concerned, there is every need to involve
professionals to handle the construction commitments, the experienced professionals would in
this case bring the results with efficient control on cost, time and quality of a project.
GDP Share

Sector 2003-04 2004-05 2005-06 2006-07 2007-08

Construction -10.7 18.6 10.2 17.9 15.2

Construction Industry Growth Rate

25
20
15
10
5
0
-5
-10
-15
2003-04 2004-05 2005-06 2006-07 2007-08
Year

GDP Share

Sector 2003-04 2004-05 2005-06 2006-07 2007-08

Construction 2.0 2.1 2.2 2.5 2.7

Construction Industry Share in

GDP(Real)

3
2.5
2
1.5
1
0.5
0
2003-04 2004-05 2005-06 2006-07 2007-08
APPENDIX

SRO of the industry

List of Builders and Developers

Rufi Builders
www.rufibuilders.com

Paragon Construction (Pvt.)Ltd.

www. paragon.com.pk

EMAAR Pakistan
www.emaar.com/pakistan

Sofitech Consultants

Engineering Consortium

Engineering Consultants

Anum Real Estate

Lakhani Builders

Association and Bodies related to Industry

National Housing Authority

www.nhagov.pk

ABAD –Association of Builders and Developers

www.abad.com.pk

APCA- All Pakistan Contractors Association

www.apca.org.pk

KCCI- Karachi Chamber of Commerce and Industry –Sub Committee Housing,

Construction, Industry and Infrastructure.
www.karachichamber.com

FPCCI- The Federation of Pakistan Chamber of Commerce and Industry

www.fpcci.com.pk
BIBLIOGRAPHY

1. By M. K.AREOLA, construction industry A key sector suffering from funding constraints and
rregularities
Oct 27- Nov 02, 1997

2.Economic Survey of Pakistan

3.Hassan.S.A. (2002) Construction Industry. (Pakistan) published by Economic Review 2002

4.Raza Ali Khan, Role of Construction Sector in Economic Growth: Empirical Evidence from Pakistan
Economy 2008

Websites:

wordnet.princeton.edu/perl/webwn

en.wikipedia.org/wiki/Construction_Industry

www.titleplus.ca/RSREG/glossary.asp

en.wikipedia.org
GLOSSARY

GDP: GROSS DOMESTIC PRODUCT: national income earned in a given period

in a country using domestic resource by residents nationals or foreigns.

Devaluation: Decrease in the Value of money i.e Pakistani Rupee in relation to

other foreign currency specially dollar

• an official lowering of a nation's currency; a decrease in the value

of a country's currency relative to that of foreign countries

Inflation : Rise In Price level of goods and services.

Inflation is a rise in the general level of prices of goods and services over time

Builder : The company responsible for construction of the houses in any

particular subdivision. The builder buys the lots from the developer and then
builds the dwelling.

someone who contracts for and supervises construction (as of a building

Developer : The company responsible for taking raw land, subdividing it into lots,
bringing in the services (such as sewers and roads) etc., and then selling the lots
to the builder.

someone who develops real estate (especially someone who prepares a site for
residential or commercial use)