From 2010 to 2015 the construction sector regularly accounted for around 5% of Trinidad and Tobago’s GDP, fluctuating from 5.4% in 2010 to 4.7% in 2012. In the Ministry of Finance’s “Review of the Economy 2015” the sector was forecast to have a strong 2015, growing 3.4% and accounting for 5.3% of GDP. In the fourth quarter of 2015 the sector was estimated to employ around 95,300, 14.8% of the country’s workforce. Unemployment in the sector stood at 6.9%.
T&T’s construction sector is often described as being formed of three major components: building construction, civil infrastructure and energy and industrial construction. While energy construction projects started to slow down at the end of 2014, following the drop in oil and gas prices, government-led building and infrastructure activity continued to perform well during 2015, an election year, albeit declining after September’s polls. Central bank data on cement sales confirms that, following 7.3% growth in the third quarter of 2015, in the last three months of the year construction activity declined 8.3% year-on-year (y-o-y). The incoming People’s National Movement (PNM) government, faced with tighter cashflow due to the declining oil price, chose to review its public construction programme in the first six months of its mandate.
However, there may be light at the end of the tunnel for T&T’s contractors. Major infrastructure and housing projects look set to go ahead and some builders have used the lull as a time to retool in preparation for a new construction boom.
Electoral Cycles
The government’s capital expenditure remains the main driver of construction activity. As a consequence, the sector’s performance volatility in the second half of 2015 is nothing new in a country where a strong democratic tradition often translates into regular government and policy changes. In the last 15 years, the people of T&T have been called to the polls four times, opting for a change of ruling party in 2002, 2010 and 2015. Data from the Central Bank of T&T (CBTT) shows that on all of these occasions, the real GDP quarterly performance of the construction sector increased in the lead up to elections and generally contracted afterwards. In September 2002 quarterly growth stood at 11.9% compared to the -6.3% of December of the same year, before picking up in the next two consecutive periods (0.9% and 10.6%).
In June 2010 real GDP was 8.9% lower than in the same period in the previous year, and it was not until September 2011 that it picked up again, with a 10.6% jump from the previous quarter. By contrast, when the PNM stayed in power after the 2007 election, only a gradual slowdown of construction activity was felt. It seems reasonable to assume that, all things being equal in terms of government resources, construction activity might pick up again by early 2017.
Materials
A good proxy for the sector’s performance is the sale of cement in the domestic market. In 2015 local cement sales were 656,000 tonnes, down 1.4% from 2014 but well up on 2012 and 2013, at 511,000 tonnes and 618,200 tonnes, respectively. Consistent with the sector’s growth dynamics, domestic sales of cement dropped sharply by 16% in the fourth quarter of 2015, quarter-on-quarter, according to CBTT data. Monthly figures for local sales of cement in early 2016 suggest a moderate recovery, at 49,912 tonnes in March compared to the 40,801 tonnes in December 2015. According to the Central Statistical Office, building materials’ prices slowed in the second half of 2015 after increasing by more than 5% y-o-y in the first half of 2015. In the latter half of the year they rose by just over 3%.
Roads
In 2015 TT$897m ($138.1m) was spent on expansion and improvement of road infrastructure in T&T. Of this, TT$285m ($43.9m) went towards maintenance work, with 354 road rehabilitation projects begun during the year – of which 192 were completed – and 19 landslip stabilisation projects were in progress. During FY 2014/15, TT$119m ($18.3m) was spent on the Bridges Reconstruction Programme, which completed eight bridges and continued work on a further 18. Over TT$121.6m ($18.7m) was spent on preparing designs and tender documentation for future road projects.
One of the key announcements in the April 2016 mid-year budget review by Colm Imbert, the minister of finance, was that the government had taken the InterAmerican Development Bank’s (IDB’s) advice to shelve the proposed mass transit project due to the anticipated expense. To compensate, additional focus will be placed on upgrading T&T’s road infrastructure in order to reduce congestion. Imbert identified a number of projects for “immediate implementation” many of which fall under the purview of the National Infrastructure Development Company (NIDCO), the government agency responsible for the project management of strategic infrastructure projects.
First, an expansion is planned for the Churchill-Roosevelt Highway, Trinidad’s major east-west artery running from Barataria, on the eastern outskirts of Port of Spain, to the town of Wallerfield, 24 km to the east. The project involves extending the highway to Manzanilla on the east coast, constructing a ring road around the town of Sangre Grande and the widening of a 12-km stretch. “Projects such as the Wallerfield to Manzanilla Highway and the Princes Town Highway have been ready for construction since 2010,” Imbert said. “It is our intention to construct interchanges at all major intersections along the Churchill-Roosevelt Highway all the way to Piarco … as well as [making] improvements to … areas in and around Chaguanas, Diego Martin and Tobago.”
Pressing Ahead
Other major road projects that received Imbert’s backing included a freeway from Valencia in the centre of Trinidad to Toco in the north-east tip of the island, where a new port and ferry service will offer an alternative to flying to Tobago, and the San Fernando to Princes Town highway. The latter will feature a four-lane carriageway to be built on a design-build-finance model. Imbert also renewed the government’s commitment to the Curepe Interchange and the completion of the Point Fortin highway. Both projects had to overcome political and financial difficulties in 2015. The Curepe Interchange requires the construction of a TT$400m ($61.6m) overpass and initially NIDCO was unsatisfied with the bids it received for the tender. Yet in June 2015 it was announced the project would go ahead when NIDCO jointly awarded it to Lutchmeesingh’s Transport Contractors and Vinci Construction.
The TT$7.5bn ($1.2bn) Point Fortin highway extension project has faced more serious challenges due to the financial difficulties of its chief contractor, OAS Construtora. In March 2015 the company filed for bankruptcy in its native Brazil and in August, then opposition leader Keith Rowley said that the government planned to break up the project into smaller contracts to be tendered to local contractors. In May an activist group called on the government to undertake a full audit of the project, claiming that it was running significantly over budget.
Speaking in March 2016, Steve Garibsingh, acting president of NIDCO, told OBG, “Although works are currently at a standstill as OAS reorganises, the government is committed to completing the project, which is expected to provide major benefits for the country. The highway will open up economic space in the south-western peninsula of Trinidad and provide connectivity for several major towns. It will also bring much needed economic activity to the La Brea industrial park.” Indeed, the road has already had an impact in the region, with considerable reduction in the travel time in the areas already completed, and in the employment of labour and services from the local communities, according to Garibsingh.
Civil Infrastructure
Financial constraints have forced the government to rein in its spending on civil infrastructure projects. During his budget speech Imbert noted that the government had been unable to finalise loan agreements made by the previous administration for projects including “billion-dollar loans for hospitals, infrastructure, housing, military vessels, security equipment and so on.” In recent years government spending on public buildings, schools and hospitals has become a major source of business for local contractors.
The public agency responsible for the development of major civil infrastructure projects is the Urban Development Corporation of T&T (UDeCOTT). In the two years leading up to 2015 UDeCOTT completed significant projects in the field of health care. The first was the retrofitting of an existing office building to develop the San Fernando Teaching Hospital, which was completed at cost of just over TT$830m ($127.8m), and the second was the construction and outfitting of the Couva Children’s Hospital, which was undertaken at a cost of just over TT$1bn ($154m). In the area of national security the agency also completed eight new police stations throughout Trinidad, with an additional three stations under construction, which are scheduled to be completed sometime in 2016. The Mayaro Fire Station was also completed by the end of 2015.
In terms of 2016 projects, early in the year UDeCOTT completed work on the Ministry of Education Tower, which includes a 16-storey curved glass tower as well as a five-storey secondary building, with a total construction and outfitting cost of TT$180m ($27.7m). Work on the completion of the Brian Lara Cricket Academy is scheduled to commence in the second half of 2016 and is estimated to cost some TT$90m ($13.9m).
In addition, major refurbishment work continued in 2016 on some of Port of Spain’s most iconic buildings. By February 2016 restoration work was already 85% complete on Stollmeyer’s Castle on the fringes of Savannah Park. Once complete, the castle will serve as a house museum. The President’s House, the Red House – formerly the parliament building – and Whitehall – a former plantation house that has been occupied by the National Archives – are all set for major restoration projects, with Rowley setting up a committee to oversee the projects in February 2016.
Unpaid Invoices
During years of strong economic growth, agencies such as NIDCO and UDeCOTT could provide local and international construction firms with a constant stream of infrastructure projects. However, the fall in government revenues resulting from the low oil price has led to the delay or mothballing of many projects. Funding has been labelled as the biggest challenge facing government construction although, with lots of projects at the planning stage, if the economy does pick up, the sector is expected to make a quick recovery.
In addition to a slowdown in project flow, many contractors have not been paid for the work they have already completed. In March 2016, Mikey Joseph, president of the Contractors Association of T&T, told local media that companies were owed TT$1.5bn-1.7bn ($231m-262m) by the government. “A lot of opportunities will present themselves if we retool and change the way we do things. It can be good and interesting times ahead,” said Joseph.
In his April 2016 mid-year budget review, Imbert acknowledged that the government would have to make budgetary allocations to provide for repayment of contractors in the second half of 2016. However, the measure did not come fast enough for some. In May 2016 the Trinidad & Tobago Guardian reported that Namalco Construction Services, a local contractor, was suing the Estate Management and Business Development Company, a government agency, over TT$1.2bn ($184.8m) in unpaid bills. The case could be a forbearer of similar cases if the government does not find a way to appease contractors. Not all government agencies are equal, however. While the Housing Development Corporation (HDC) and the Education Facilities Company had debts of TT$400m ($61.6m) and TT$600m ($92.4m), respectively, in March 2016, UDeCOTT’s debts are minor, according to Joseph. The latter agency has a policy of financing its projects fully before beginning construction. “Many government development agencies are fully dependent on the Ministry of Finance for funding, which can make it hard for them to control their own spending plans,” Thomas Chanona, CEO of local contractor Kee-Chanona, told OBG. “UDeCOTT typically waits for funding before it begins projects. We have significant debt outstanding with other agencies but we can only survive because we have a client, UDeCOTT, that consistently pays on time.” In the early stages of 2016 Kee-Chanona finished fitting the Ministry of Education Tower.
Contract Considerations
One of the major concerns facing contractors is that 25-30% of the government debt to contractors has not been certified, according to Joseph. Government projects typically use contract templates sanctioned by the International Federation of Consulting Engineers (FIDIC). Until recently the most common contract was the standard Conditions of Contract for Works of Civil Engineering. The contract outlines construction firms’ obligations when following a pre-determined set of plans and given a set budget.
However, during construction, unforeseen expenses and last-minute design changes can sometimes require the allocation of extra cash resources. Under such circumstances, the extra expenditure needs to receive board approval and therefore be certified. Due to the tight squeeze on government finances, some professionals in the industry believe that firms could face challenges receiving certification and repayment of these debts.
One way of minimising such disputes is for government to use FIDIC’s Yellow Book, which provides standardised terms for design-build contracts. The contractor receives a brief from the end client and then works with its preferred architects and consultants to provide the client with a fixed, lump sum price for the project. Increasingly the government is moving towards such contracts, according to Chanona. “Often projects overrun their budget and it turns into a blame game between contractors and the design firm,” he said. “The Yellow Book is good for the contractor as it gives us more control over the design stage and it is good for the client as it establishes a single point of responsibility for the project.”
However, the nature of the FIDIC contracts, which require contractors to complete their responsibilities to strict deadlines, can lead to excessive paperwork. “Government agencies take the time limits very seriously and missing deadlines can have major consequences,” said Chanona. “The big construction firms are geared up to handle the legal and administrative challenges, but for some smaller firms the emphasis on administration can be a distraction.” However, big firms’ investments in project management personnel will be frustrated if activity does not pick up. “There is no point in companies building up their competencies if there is no work,” said Chanona.
Private Partnerships
One option open to the government as it seeks to boost momentum in the construction sector is to open contracts to greater private sector participation through public-private partnerships (PPP). Increasing the involvement of the private sector in housing construction has been a government priority in recent years. Traditionally the public sector has supplied roughly half of new housing units in T&T and there is a waiting list of 160,000 for government housing from HDC.
Under the previous People’s Partnership government progress was made with the first PPP housing project, an 80-unit structure in San Fernando that began construction in June 2015. However, many contractors believe that the thin margins in state housing construction may make it unattractive to private investors. “The PPP model is the obvious way forward for the construction industry,” Chanona told OBG. “Politicians want a quick fix, the banks want to invest capital and the contractors have no work. Yet there is uncertainty over what PPPs in the housing sector involves. It’s untested in T&T and contractors will need assurances about long-term payment.”
However, in other sub-segments of the construction industry, the PPP model may be quicker to take root. In February 2011 the government signed an agreement with the IDB to promote the use of PPP for infrastructure projects. Together with accounting firm EY, the government and IDB drew up plans to build 10 early learning centres and 10 primary schools using a PPP model. Requests for proposals are set to be made in the second half of 2016, with construction earmarked to begin a year later.
Incentives
As well as opening the door to PPP projects, the government intends to provide fiscal incentives to firms working across a number of segments. In the budget review, Imbert said that the government would extend existing tax concessions for the construction of multi-storey car parks and commercial buildings to 2025. “We recognise that private investors need time to plan. These concessions currently involve tax holidays on income from property rentals and property sales. However, it can take up to seven years to complete a major building project, from conceptualisation to completion of construction and commissioning of the facilities, hence the extension of concessions to 2025,” he said. Imbert also stated the government’s intention to introduce tax concessions for the construction of multi-family residential buildings, and said that his team was considering government grants to “motivate the private sector to get involved in urban renewal and rural development in designated areas.”
With the government looking to stimulate the domestic construction industry, there are reasons to believe that the drop in activity in 2015 and early 2016 will be temporary. As the government works to pay off its debts to contractors and outline its spending plans, contractors are looking to take advantage of the slowdown to retool and boost efficiency. “Our machinery sales have not dropped. Despite the slowdown in construction, in the post-election period some contractors are reinvesting the returns on cashed contracts into new tools,” David O’Brien, executive chairman of Massy Group’s automotive and industrial equipment business unit, told OBG.
Outlook
Generous government construction contracts appear to be a thing of the past as the steep decline in revenues forces the government to reconsider its spending priorities.
However, Imbert’s budget speech shows that the construction sector remains an important stimulus to the national economy at a time when the energy industry is going through a slowdown.
Road projects, social infrastructure development and housing construction are set to continue to drive growth in construction, but with a greater emphasis on partnerships between the private and public sectors. Those contractors that can adapt to the new normal and retool their companies can expect to reap the benefits over the coming years.
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