charindra chandrasena  00:03
2026 might be remembered as the year that officially turned owning a comfortable home in Colombo and its suburbs into a pipe dream for most Sri Lankans. If you look at the news, the explanation for this is simple: the crisis in the Middle East has sent the cost of building materials through the roof, but that is only part of the story. In fact, the real reason your dream of a Colombo home is slipping away has almost nothing to do with global conflicts. In this video, we are going to look at the fundamental issue that was broken long before the first shot was fired. We will look at how the current conflict is being used as a cover story, and how the dream of home ownership in the suburbs can be made a reality, regardless of what happens beyond Sri Lanka's borders. First, let's look at what happened over the past two and a half months, whether you're building a small house in Panipatia or a larger home in Talavata, you need the same essentials: cement, tiles, aluminium, steel, and roofing. Since the war in Iran broke out, fuel prices and electricity tariffs have surged. This naturally hits energy-intensive industries like cement and steel. On top of that, aluminium prices on the London Metal Exchange jumped nearly 30% and shipping delays around Africa added real costs to imported goods. But here's the catch: evidence suggests that these global events have served merely as a cover story for domestic firms to maximise profits. They appear to be increasing prices much faster and more aggressively than global benchmarks would dictate. The central bank's purchasing managers' index confirms that construction companies significantly increased their quantity of purchases in January and February 2026. They built up massive inventories at pre-crisis global rates because 2026 was expected to see a massive boom in Colombo's construction demand. However, despite holding these stocks, retail prices were jacked up in just a couple of weeks after the conflict began. For example, a bag of cement went from 1007 50 rupees to 1009 25 rupees, a 10% increase. In the aluminium sector, local retail prices for fittings jumped by 20% despite only a 10% global rise. In the stale market, there were price hikes as high as 30,000 rupees per tonne. Even 100% domestically sourced materials such as river sand and crushed stone saw a 20% price hike that far outpaced actual full component of their delivery costs. The industry justified this as replacement cost pricing, which is the practice of pricing current stock based on the cost of the next shipment. Now, in a normal market, a person building a home in the suburbs would simply turn to competitors with fairer prices. But Sri Lanka's construction industry is not a normal market; it is a distorted one. It lacks foreign competition and is dominated by local players. This allows domestic players to create cartels and increase prices at will for cement. Domestic manufacturers command approximately 60 to 70% of the market share. The tyres market has shifted towards domestic dominance due to import restrictions. It is currently an oligopoly where just four main manufacturers meet the majority of local demand. The lack of foreign competition is mainly due to two factors: one, the cess levy and the port and airport development levy; number two, the fact that construction materials are included in the negative lists of Sri Lanka's trade agreements. Cess and Pal are para tariffs. They are taxes applied to imported goods over and above the standard customs duty. They are frequently used as protectionist tools to increase the cost of imports, providing a massive price advantage to domestic manufacturers. The combined effect of these taxes leads to total import taxation levels of nearly 100% for items like cement, and around 50 to 60% for aluminium extrusions. This environment fosters domestic monopolies by making imported alternatives too expensive for local consumers. Then we have negative lists. A negative list is a list of goods excluded from liberalisation under free trade agreements. Essentially, even if Sri Lanka signs a trade deal with a partner like India or Singapore to reduce duties, any item on this list will not receive those benefits, according to research from the Advocata Institute, items like cement, tiles, steel, and electrical cables are frequently restricted. This protectionist measure leads to massive price disparities.

charindra chandrasena  05:34
Tiles and sanitary ware prices remain 70 to 100% higher than in regional piers like Thailand or India, cement prices are roughly 120 percent higher than in China. These factors are the primary reasons why, way before the Middle East conflict, Colombo recorded an apartment price to income ratio of 55.1 in the Nambio Property Investment Index. This was the highest ratio among all 395 cities monitored worldwide. Shortly after this, The Economist ranked Sri Lanka as the second most unaffordable housing market in Asia. These reports back up Advocata Institute's findings from 2022 about the price-to-income ratio for selected cities in Sri Lanka. So, if the situation is so bad, why have successive governments maintained para tariffs and negative lists? It often comes down to three common arguments. First, is that they are protecting local industries, but what they are forgetting is that these are not infant industries. They are mature industries being kept wrapped in cotton wool. If these companies maintain exorbitant prices while earning massive profits, they are certainly not protecting their consumers. In fact, they are exploiting them. The second argument is about export revenue and FDI, but high construction costs actually discourage foreign direct investment because those investors need to build factories here, which become prohibitively expensive. It also discourages entrepreneurs from building factories or hotels, making our exports and tourism less competitive globally. Third argument is that it adds to government revenue. This benefit is a bit overblown. High costs lead to reduced demand, so the government does not gain as much as it appears to. Furthermore, high construction costs lead to higher rentals on commercial spaces and higher building costs for new offices in Colombo, which stifles entrepreneurship. This is why CES and PAL on construction imports must be amended, and construction material must be removed from negative lists. The benefits would be immediate and far-reaching. Consumers would likely see a price drop of 20% to 40% for essential materials as cheaper, high-quality global options enter the market. For the industry, the lower costs would trigger a surge in project volumes, creating a steadier pipeline of work for contractors, masons, and electricians. And for the economy, removing the negative list would boost tourism by lowering the cost of building and renovating hotels, which is currently 40% higher in Sri Lanka than in Thailand, it would also reduce pressure on wages and cool national inflation. To achieve this, the Advocata Institute recommends a simplified three-band tariff system: 0% for raw materials, 10% for intermediate inputs, and 20% for finished products. Sure, local manufacturers may face a period of transition, but the resulting surge in construction activity would foster a more sustainable and competitive market for the entire nation. It is the only way to ensure that owning a home in Colombo and its suburbs is an achievable life goal rather than a pipe dream for most Sri Lankans. To have a deep dive into this, check out Advocata Institute's report, The Impact of Anti-Competitive Practices in the Construction Industry on Affordable Housing in Urban Sri Lanka. It was published in November 2024, but unfortunately, it's still so relevant today.


Transcribed by https://otter.ai