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High costs impairing construction boom, China’s interest likely to favour

The cost of construction rose 10 percent in the outgoing year due to increase in cement and steel bar prices, and due to the impact of depreciating rupee on imported construction material. Property prices have gone up. The price of a new apartment having three bedrooms has jumped 10 percent on average. In 2016, as many as 100 new apartment projects were launched in Karachi compared to only five projects in Lahore and Islamabad combined. Overall construction activity in the preceding year remained relatively slow, mainly because of delay in approval of new projects.

However, the prospects of property business in 2017 onwards may be good for the construction industry as projects under the China-Pakistan Economic Corridor likely to pick up pace. The government should adopt a comprehensive and transparent policy for developing the sector as it is believed by many experts that the construction sector will boom after annual growth of 15 percent to 20 percent in this sector.

The construction industry in Pakistan has witnessed 11.31 percent year-on-year growth in the current fiscal year on the back of increased government spending, while the country’s GDP surpassed projected estimates, rising by approximately 4.14 percent. GDP from construction has been increased to Rs287,569 million in 2016 from Rs25,4251 million in 2015. GDP from construction in Pakistan averaged Rs231,140.73 million from 2006 until 2016, reaching an all-time high of Rs287,569 million in 2016 and a record low of Rs186,380 million in 2006.

The construction sector is providing jobs to millions of people while dozens of allied industries depend on it, therefore, taxes imposed on steel, cement, and coal should be reconsidered. The government hiked federal excise duty on cement and regulatory duty on coal in the last budget and repeated it in the recent budget too, which is set to damage the construction sector. The decision will increase the construction cost and increase rent for the domestic and commercial property. The government has imposed new taxes to reduce the deficit while it has increased salaries of government servants over and above the inflation rate just to please them.

The construction sector has once again posted a strong growth of 9 percent in the outgoing year, lower than the 14.6 percent increase in 2016, but much higher than the average growth of the past five years. Excluding the exceptional growth of 2016 and 2017, the average growth in the construction sector up to 2015, since fiscal year 2012, was just 4 percent. Construction industry officials believe the recent growth is encouraging for the industry as well as the country because this will create new jobs.

According to government estimates, construction-related activities will gain further momentum on the back of increased public sector development spending coupled with infrastructure and power sector development projects under the China-Pakistan Economic Corridor.

The construction sector contributes 2.4 percent to Gross Domestic Product, according to government assessments. The robust construction activities also led to an increase in demand for steel and allied products, according to the survey.

Cement growth derived from robust domestic demand, which allowed manufacturers to enhance their capacity utilization. The outlook is encouraging on account of firm demand due to flourishing housing schemes and rising development spending along with anticipated CPEC-related projects.

EXEMPTION BY PUNJAB GOVT

The Punjab government has cut GST on construction services from 16 percent to 5 percent as well as merged separately charged CVT, stamp duty and registration fee on properties to facilitate customers. The government has withdrawn exemption given in sales tax on internet services worth Rs1,500 and above packages. However, the exemption on internet packages under Rs1500, primarily being used by students, will continue as such.

The Punjab government has also abolished exemption on GST in furnishing supply contracts to bring in the tax net all companies and firms concerned. The government was earlier giving exemption on furnishing supply contracts up to Rs50 million. However, the companies and firms involved in the furnishing supply contracts were evading taxes by splitting their bills below the ceiling of Rs50 million. The government has also abolished the registration fee for all new business firms.

The exemptions and reduction on sales tax on various services have been introduced in the Punjab Finance Bill 2017 announced by the provincial finance minister Dr Ayesha Ghaus Pasha soon after her budget speech in the Punjab Assembly. The finance bill come into force from July 1, this year. With a mindset that no new taxes be imposed but widen the tax net, the Punjab government has enhanced its provincial revenue target from current fiscal’s Rs280 billion to Rs348.3 billion for the next 2017-18 financial year.

 

Under the direct taxes head, the government aims at collecting Rs230.98 billion as compared to this year’s target of Rs184.4 billion. Under non-tax revenue head, the government aims at collecting Rs117 billion as compared to current fiscal’s Rs95 billion. The government has slashed 11 percent GST on construction services, hoping that underreporting in the construction sector will be minimized and would bring in some Rs3 billion more into tax revenue.

Construction industry provides jobs to millions of people while dozens of allied industries depend on it, therefore, taxes imposed on steel, cement and coal should be reconsidered. The government hiked the federal excise duty on cement and regulatory duty on coal in the last budget and repeated it in the recent budget which is set to damage the construction sector.

MORE INTEREST BY CHINA

Chinese investors, during the recent visit here, have evinced keen interest to build a mega construction and building shopping mall to revamp the construction sector of Pakistan in line with modern construction practices employed in developed world. The purpose of this primary visit was to select the site for this mega project equipped with all ultra-modern construction and building development equipment and technology.

The delegation was of the view that construction style in Pakistan is conventional and energy inefficient. The delegates expressed that their highly energy efficient construction technology and style could save construction and energy cost in Pakistan by up to ten times.

The delegates said they were utilizing solar and geothermal energy in building structures which maintained comfortable temperatures, both in summer and winter seasons.

The Pakistan-China Joint Chamber of Commerce and Industry (PCJCCI) President briefed the delegates about investment opportunities in Pakistan regarding this particular sector. He said construction is a booming sector in Pakistan as many big residential, industrial and commercial construction projects are underway in major cities of the country. He said China-Pakistan Economic Corridor (CPEC) has started a new era of construction of mega projects in Pakistan and it is high time that more Chinese investors should explore Pakistan for investment and joint ventures.

The PCJCCI highly appreciated the idea of establishing model construction shopping mall by the Chinese investors. The housing and construction sector had been identified by the Government of Pakistan as the driver of economic growth that is quite encouraging for foreign investors. Such a mall will bring all modern equipment under one roof. This sector has a gigantic impact on economy as millions of jobs can be generated during the chain reaction process of construction activity in the economy that have good effects in allied industries such as cement, iron, steel, timber and wood, marbles, tiles and stones, electrical and sanitary works, glass, paints and varnishes, electrical lightning, power and gas, horticulture, interior decoration, transport, light-heavy construction machinery, plastics, fibers, furniture, electrical appliances, and many more.

Head of the visiting delegation Shanfeng stated that China is keen to develop infrastructure facilities in Pakistan and the development of infrastructure is all related with the construction industry. He said that in order to nurture this industry, China has planned to inculcate modern trends of construction and housing among the common masses. He said that with the involvement of general public the trends and standards of modern construction will start to flourish in other segments of the society.

PRICES OF CONSTRUCTION ITEMS

Prices of tiles manufactured locally rose 5 percent to 10 percent in 2016; however, there was no change in weighted average prices of imported tiles. The share of imported tiles rose to 65 percent in 2016 from 60 percent a year ago. Window glasses rose by Rs5 to Rs30 percent.

Cement remained the second-best performing sector on the stock market, posting a return of 61 percent in the outgoing year. In 2017 the cement sector was likely to benefit from increased infrastructure spending on power projects, motorways and several private-sector construction and housing projects.

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