The Tribune

• Acting BCA chief suggests capital works ‘revisit’

• Says oil volatility hits all building material costs

• Will ‘further squeeze’ mortgage qualifier pool

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamian Contractors Association’s (BCA) interim president yesterday said high oil and construction material prices may force the Government to “scale back” on its capital works budget for this and the upcoming fiscal year.

Leonard Sands told Tribune Business that road construction, in particular, could be impacted by oil price volatility given that it was a key component in products such as asphalt and other materials. With the cost of road development and repairs increasing, he suggested that that the Davis administration may have to “revisit” the $20.831m allocated to such works for the year to end-June 2022 to determine what this budget can still accomplish.

“I think the Government of The Bahamas will need to revisit the amount of capital works that have been budgeted and see what the increase in the oil price means for the construction of roads,” the BCA chief explained. “It is a direct relationship; the asphalt, the equipment. Ninety-eight percent of road construction will cost them more, and the contractor has to pass those costs on to the Government or whoever is the client.

“Pass the costs on or give you less production. The Government may have to revisit how many roads it intends to move on, and either scale back or increase the budget. The problem with increasing the budget is the debt-reducing situation. The problem is that we’re seeking to pay down debt, reduce the deficit. We’re in a catch-22.

“The only outcome I predict is that the Government will scale back on capital expenditure. It’s the only thing that they can do. If the oil price increases further, and that of construction materials, it is highly likely that the Government will scale back on capital expenditure, which has an impact on GDP, which has an impact on revenues circulating within the economy, which has an impact on taxes, which has an impact on the debt and deficit.”

The Davis administration has already cut back the capital spending it inherited when it took office, reducing this from $370.4m or 3 percent of economic output (GDP) to $316.2m or 2.7 percent. However, it largely left the Ministry of Works’ total capital budget unchanged at $100.614m, with the road repairs and maintenance still the same at $20.831m - a figure that was essentially flat against the prior year.

However, the increase in oil prices - worsened by Russia’s invasion of Ukraine - is certainly ill-timed with works already underway to improve the condition of Village Road and plans in the works to widen Gladstone Road to a four-lane carriageway.

Both projects are likely to now experience cost increases, although global oil prices currently appear to have stabilised having come down from recent peaks. The US West Texas Intermediate benchmark last night had oil priced at $105.1 per barrel, a modest 0.81 percent increase on the day, while Brent Crude was trading at $111.2 per barrel having risen just 0.91 percent.

Mr Sands, meanwhile, said that while supply chain backlogs and delays had changed little, he anticipated that construction material costs could increase by a further 20 percent given that higher oil prices - and associated volatility - feed directly into their production processes.

“Construction prices, I would say and firmly believe, are going to see a further increase,” he warned. “Reason being, as was mentioned just yesterday, the vice-president of the Bahamas Petroleum Dealers Association said fuel prices could reach $8 per gallon.

“Higher prices in the US, where a lot of product comes from, means production costs are going up for a lot of materials. Plywood is $60 per sheet, and we’re using that stock up. If the war persists, and fuel prices stay high, the next batch will go up and not just stay high but may go higher as well.

“There’s nothing we can do about it. It’s a natural relationship, and is not good for us as the consumer. The Bahamas is the consumer; we don’t produce anything, and the consumer is paying more for the same amount of product.” 

Asked how much construction material prices might further increase, Mr Sands said: “I don’t know. I would be guessing, but an intelligent guess would be as high as 20 percent; 20 percent higher than what it is now is a fair estimate.”

Pointing out that such increases for a multi-million dollar project were significant, and could deter investors from proceeding with the full extent of their plans, the BCA interim president added that the residential housing market will be equally affected.

“You’re shrinking the pool of customers that qualify for a mortgage at the bank even further,” he explained of the increased construction costs. “We’ve already seen a shrinking of that number because of the construction costs post-pandemic compared to pre-pandemic. A house that cost $250,000 is now at $300,000, and there’s only a small pool that can afford $300,000 and above.

“Now you have higher oil prices that increase the cost of everything, particularly for construction, so that home worth $300,000 is now worth maybe $320,000 or $340,000. That squeezes the pool of mortgage buyers even further. We have to watch what the next six months will look like in construction, but we will not have a lot more residential, customer-funded projects.

“It’s going to scale back. Our customers are not going to be there. We have a debt-laden society. Where are you going to find that customer? Where are they coming from? Contractors are complaining already. They are asking where the work is.”

Mr Sands said Bahamian contractors were also “scaling back” the warranties given to customers for job estimates, reducing the validity of quotes from the previous 60-90 days to between seven to 21 days to minimise their exposure to construction material volatility.