Wednesday, July 23, 2008

More Public Sector Projects Put On Hold To Ease Squeeze

Source : The Business Times, July 23, 2008

Move will free up resources for integrated resorts, other key projects

The government will postpone construction of another $1.7 billion worth of public sector projects - on top of some $3 billion worth that have already been put off - as it looks to manage rising construction costs.

With this move, the government is deferring a total of $4.7 billion worth of public sector construction projects to 2010 and beyond.

'The additional deferment will allow the existing construction capacity and resources to be channelled towards the timely delivery of some big projects such as the integrated resorts, Marina Business Financial Centre and the downtown MRT line,' said regulatory body Building and Construction Authority (BCA) in a statement yesterday.

Most of these projects are expected to be completed around end-2009. The construction resources freed up at that time would then be available for the deferred public sector projects, therefore achieving a better spread of construction resources and activities beyond 2009, BCA said.

Projects postponed in this round include the main building of the proposed Jurong General Hospital and upgrading works at schools.

Developers and analysts BT spoke to were hopeful that the government's response could help to slow down the increase in construction costs.

Construction costs shot up some 20 to 30 per cent in 2007. And in the first quarter of this year, building costs rose by another 3-5 per cent, Minister for National Development Mah Bow Tan said in a statement.

The building boom also means that contractors were in short supply, with some private developers here reporting difficulties in hiring contractors and sub-contractors.

The new postponements could therefore be helpful in keeping the sector on a more sustainable growth path, said Citigroup economist Kit Wei Zheng.

'Anecdotal evidence suggests that some contractors may have even refused to take up contracts, because of concerns that rising costs would wipe out initially projected profits or even result in losses,' he said.

However, there were some concerns that the reduction in government spending was coming at a time when the sector, and the overall economy, is seeing a slowdown.

'To some extent, given the downside risks to growth, one would have thought that perhaps the government may have contemplated boosting construction demand to shore up growth,' said Mr Kit.

But he added that with the sector suffering from capacity constraints, it is not clear that GDP growth would have received a significant boost even if the government had increased construction demand.

Chua Hak Bin, chief Asian strategist at Deutsche Bank Private Wealth Management, similarly pointed out that the outlook for the construction sector is 'not as rosy as it was a year ago'.

Growth in the construction sector is tapering off. Growth slowed to 16.9 per cent in Q1 2008 and then to 15.2 per cent in Q2 2008. By contrast, in Q4 2007, the sector grew by 24.3 per cent.

Dr Chua, however, said that the new deferments could help reduce current supply bottlenecks.

Before yesterday's move, the government had announced two rounds of construction postponements for public sector projects, in November 2007 and February 2008. Projects put off included the Ministry of Health's National Addiction Management Centre and part of the Changi Prison Complex.

For the whole of this year, construction demand is likely to come in within current estimates of $23-$27 billion, BCA said.

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