Credit Crunch pushes construction industry to the brink

An already visible impact is delayed government projects and incomplete buildings

With Bhutan now in its fourth month of a severe credit crunch since April 2012, when banks stopped giving loans many construction companies faces serious financial difficulty. As a result some construction companies say they may even have to close shop while most say that the ongoing and future works including government’s projects will get delayed.

This is a cause for concern as the government still has huge ongoing developmental construction works like highway networks, bridges, schools, medical units, farm roads, electricity supply, Gewog centers etc.

Almost all the contractors who talked to The Bhutanese said that construction works both for government and private sector have been delayed.

Tshering Tashi of T T Construction in Trashigang said that since loans have been restricted for everyone there is no solution despite acute financial constraints.

He said “funds are not released on time even for government projects at times, and we need to resort to work-order loans but again loans are banned”.

Pema Tenzin of Pelden Construction in Samdrup Jongkhar said his company hasn’t defaulted on loans as yet but is on the verge of defaulting in the near future. This is while works have been delayed. “One of my projects also got terminated due to many financial and environmental constraints”.

Lhendup Dorji of East-West Construction, who is also the Vice President of the Construction Association of Bhutan (CAB), said in addition to a credit crunch there isn’t enough business or work these days because of the INR shortfall. “I think it will not improve at all for quite some time,” he added.

He said most of the bigger companies have the overdraft (OD) facility which enables them to fund their projects without much difficulty for now. However, companies without the OD facilities need to apply for fresh loans whenever they get a project or when a work is awarded to them and fresh loans are currently not available.

Some of the smaller construction companies fear that they might have to close down business if nothing is done to tackle the INR shortfall.

Proprietor of Zeko Construction is one of the many proprietors who retreated similar points. She said “nothing is available for now. We don’t get loans, we can’t bring in equipments and there is difficulty getting Indian workers too”. She said there is a huge problem when it comes to repayment of loans because of the current issue.

Contractors are also skeptical that the situation will improve anytime soon.

Lhendup said, “Despite the government’s assurance that the situation will improve, I personally don’t think it will, because we need to have some means of earning INR to improve the credit crunch situation”. He said the economy is banking on the hydropower projects which will take some 20 years before Bhutan can earn any INR.

He said it was possible that smaller construction companies may have to close shop if the shortfall persists.

Big contractors who ordinarily would not be worried about loans and their overdraft are also worried. Many of them say if the credit crunch continues for a longer period then in addition to hampering their work it will also lead to delays in government projects.

Aum Phub Zam of Yarkay Construction said, “At the moment we have enough resources for our work, but sooner or later we will face the same problem as loans are not forthcoming”.

She explained that though government agencies gave a 10% mobilization advance and another 75% advance on the materials bought at site there was a 2% TDS deduction, 7% security deduction and additional mobilization advance deduction reducing the rolling money for contractors.

“It would still be okay if bills were cleared within one month as per government rules but in many cases contractors have to wait for up to even 4 months to get their money and in the meantime banks will not give any loans for other jobs,” she added.

She said that if the credit crunch continued even big companies would have problems in taking on multiple construction jobs hampering the construction sector.

A few contractors blamed their own fellow contractors who they feel are “taking in more than they can chew”.  Wangda of Choki Construction said “some contractors in order to win bids for a government project tend to bid much lower than the reasonable limit and later face financial problems while executing the works”.

Construction business, he said has dropped but the worse hit would be private home builders.

A civil servant in the process of building his house in the capital said works are at a standstill since three months ago as there is no way to finance his building. “Moreover, we have a labor problem,” he added.

In the meantime, the civil servant admitted that he has already defaulted on the loans he had taken before earlier as the incomplete building is not even ready to yield rental income for him.

This scenario is being repeated across several hundred incomplete buildings in Thimphu and urban areas across the country. Contractors say it is likely that small house owners with incomplete buildings will default first, to trigger a real-estate crisis.

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