Construction as an engine
An insight into infrastructure might be gained by looking at construction’s specific role in helping societies to grow and develop. Mainstream economists have studied changes in construction output in relation to output in the overall economy, since the sector is considered to be an engine of growth. One view is that an increase in construction output causes improvement in the economy, and that a sluggish economy can be stimulated by boosts in construction activity. For example, increases in government spending on construction were part of various national stimulus packages in 2008 and 2009 to counter worldwide recession; and in the UK, following its decision to leave the EU, to head off a recession. There is another view that the construction industry is not a driver of economic growth but simply a follower of fluctuations in the macro-economy. (This is supported by research in Cape Verde and Turkey, in 2011 and 2015, respectively, where economic slumps were not reversed by construction activity). Therefore, though increased construction activity ought to engender increased growth, this is not a universal belief.
In the popular view, almost three quarters (73%) of people across the world agree that investing in infrastructure is vital to their country’s future economic growth. This is from a 2018 survey produced by Ipsos in partnership with the Global Infrastructure Investor Association (GIIA); Ipsos MORI is a UK-based independent research entity, and GIIA represents the interests of long-term investors who are looking for investments with reliable returns. (GIIA has a self-interest in such surveys, and its membership includes wealth fund managers, like the type potentially to be engaged on Guyana’s anticipated sovereign wealth fund.) Infrastructure attracts such investors due to its inherent durability (when properly built, and the investment appropriately structured). The survey also found that, globally, about 60% of people agree that local communities’ views on infrastructure plans should be heard properly, even if it means delays.
Data collected on expectations globally may well reflect expectations in Guyana. With anticipation of petroleum revenues, there is interest in deploying increased revenues into construction to support long-term, updated infrastructure to promote diversification, and to boost living standards. As a result, exploration of available statistics on construction linked to the overall economy is worthwhile.
Levels of construction activity
The relationship of construction and other economic activities to the economy in Guyana can be seen from data published by the Bureau of Statistics in Georgetown. The Bureau is a unit within Government and the data output informs decisions at the national, corporate and personal levels. The Bureau publishes online a System of National Accounts, last dated March 2010, but online publication capability apparently means that updated parts of selected data can be published after 2010 as they become available.
Based on the ‘Quarterly GDP at Constant 2006 Market Prices’ on the Bureau’s website, over the years 2006 to 2016 construction contributed about 9% on average of economic activity over the period (as a rounded whole number). Ahead of this, agriculture provided 18%, the largest share, followed by wholesale and retail at 12%, and public administration at 11%. Thus construction ranks fourth.
Danny Myers, in ‘Construction Economics: A New Approach’ (2nd edition), explains that in developing countries, defined here as countries with a low rate of industrialisation, the sector can provide as much as 20% of economic activity because “As industrialisation proceeds … infrastructure and housing are required [to be accelerated significantly] and construction output as a percentage of GDP reaches a peak.” On this basis, a construction share of 9% in Guyana in the recent past is well below ‘the peak’ but observers must stay alert to how this share fluctuates in the near future, and further.
Reflection on data
Reflection on the Bureau of Statistics construction data raises three points. The first is the feature of a single aggregated figure, which is published for construction activity, under ‘Construction.’ However, disaggregation of this figure would greatly assist in identifying sub-sectors of construction for further attention and development. For example, ‘housing’ has special characteristics within ‘construction,’ since it is most directly related to living standards, and is normally identified and shown separately when compiling statistics. Similarly, ‘repair and maintenance’ is identified separately, since this sub-sector maintains existing rather than expands new, productive capacity, which is an important characteristic for special attention. And, ‘private investment’ is separated from ‘public investment’ in all categories of the UN list, since for analysis and planning purposes one should be cognisant of the public/private duality in the contribution of construction activity.
The second point about the Bureau is that, notwithstanding the title of “Market Prices,” it seems to collect and report on construction prices based on added value of labour and materials, etc. rather than the amount chargeable to clients for building work, i.e. comparable bid-prices and bid-prices. If this is indeed so, then the methodology should be modified, as there is danger of misreporting. When a construction contract is agreed between the contractor and government, (or private client) in economic terms, the anticipated output is the contract price. (For readers wishing to follow up: this is inferred at the International System of Accounts, under ‘Machinery, equipment and construction’ at page 112).
Factor cost or bid-price?
However, the Bureau (at System of National Accounts, page 19) states that estimation procedures for public construction starts based on the Public Sector Investment Programme (PSIP) data, to which are added local employment costs and any sub-contractors’ operating surplus. From this, it might be inferred that the Bureau uses the value of the PSIP amounts and adds certain assumed contractor costs (which are factor costs) rather than use contractor product prices (which are shown by comparable bid-prices).
Projected comparable bid prices may be difficult to obtain in construction, and in the inexact science of such statistics, costs may be substituted for prices in some circumstances; strange as this may seem at first sight. However, appropriate technical investigation of the estimation method at the early PSIP stage, with similar investigation of contract terms and pricing by the contract stage as well as technical management in converting data from cost-based estimates to price-based ones during the reporting cycle of the Bureau, is desirable. Indeed it may be preferable to establish estimates at the PSIP stage on comparable bid-prices in the first place. On this basis, it seems that construction sector accounting skills can be beneficially added to the national accounting team of the Bureau.
Imports and construction output
The third point to be raised by the statistics is that of separating imports from domestic production in the construction data. A sharp rise in construction activity would cause a commensurate rise in import of materials (like cement, steel in various forms, glass and asphalt) and services (like foreign contractor and professional services, equipment and mobile plant) not produced locally. This will be dealt with separately in this series. Suffice it to state here that attempts to boost the economy utilising increased construction, which itself creates a surge in imports (and likely loan repayments) presents a paradox. If not regulated, importation costs of construction can worsen the balance of payments situation, and instead stifle the economy. Therefore, where construction increases, a challenge arises for the Bureau of Statistics to develop reporting which matches financial outflows against construction activity that produce them. Hopefully, government and planners can then assess and regulate sector activity in a timely manner.
Construction in demand
Apart from the academic and popular perspectives, construction output is also in demand by governments, in causes ranging from fresh attempts at diversification, to maintaining and expanding economic power and influence. Witness the following:
● Suriname: Like Guyana, it is a sparsely populated country. There have been severe difficulties in diversifying away from exports of gold and oil, before prices fell in 2014. Since then, planned infrastructure is for development of a seaport and airport facilities to promote Suriname as a transit and tourism hub between Europe, Africa and South America. Roads have been improved to link Suriname to the Guyana and French Guiana, and there is a sizeable project to link to Brazil, also, by rail.
● Trinidad and Tobago: Our other CARICOM and closest cultural neighbour, and also an oil producer. The 1960s’ use of ‘petro-dollars’ to build a heavy industrial estate at Point Lisas was a boost to diversification, which is still ongoing. Construction here has a varied history. High, inflation-prone booms with long, recurrent slumps. Works remain dependent on government funds; and sporadic payment has left a sizeable debt to contractors. It is partly for this reason that, in January 2018, a defunct Ministerial Committee for the Construction Industry, chaired by the Prime Minister and comprising public and private officials in the sector, was revived.
● United Kingdom: A developed country with modern, cutting-edge infrastructure; has a 2018 National Planning Policy Framework, with an established Infrastructure Commission. Objectives include building a competitive economy by, among other things, identifying and coordinating the provision of infrastructure. Has a flagship high-speed rail project from London to the north to reduce commuter congestion.
● China: Has a 2013 One Belt One Road outward-bound trade and investment initiative, formed at high political level to work with other countries in arts, literature, finance and infrastructure. Commit-ted to export the country’s vast construction capacity to establish landmark projects linked over land and sea, akin to the historic Silk Road.
Endnote
The ‘Infrastructure Intelligence’ newsletter of May 2017 reports that in January 2017, a freight train from Yiwu, in China, arrived at a rail depot in East London, as part of the One Belt One Road land-based route. The train took two weeks to arrive, because containers had to be transferred across different rail systems several times along the 7,500 mile journey due to a lack of compatibility between rail systems. China’s plan is to provide such connectivity.
The next Part will conclude on construction at the level of the economy.
