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Construction Industry of Pakistan Industrial Marketing Ali Haider Faran Hussain Malik Umer Zulfiqar

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Analysis of the Industry, how it operates, role of government and its marketing and operational activities. A detailed over of all the aspects of the industry which is of great importance in a developing country like pakistan

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Page 1: Construction Industry of Pakistan

Construction Industry of Pakistan

Industrial Marketing

Ali HaiderFaran Hussain

Malik Umer ZulfiqarUsman Younas

12/9/2011

Page 2: Construction Industry of Pakistan

Table of Contents

Construction.........................................................................................................................3

Classification of Industry.....................................................................................................3

Industry Analysis.................................................................................................................4

Contribution to GDP............................................................................................................5

Export of Services................................................................................................................7

Professional Insight of the Industry.....................................................................................7

Trend Analysis.....................................................................................................................8

Key Drivers........................................................................................................................10

Financial Constraints and Foreign companies...................................................................12

Marketing Strategies in Construction Industry of Pakistan:..............................................13

Porter’s Five Forces Model...............................................................................................14

Top 5 construction companies of Pakistan........................................................................15

Industry Outlook................................................................................................................15

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Construction

In the fields of architecture and civil engineering, construction is a process that consists

of the building or assembling of infrastructure. Far from being a single activity, large

scale construction is a feat of human multitasking. Normally, the job is managed by a

project manager, and supervised by a construction manager, design engineer,

construction engineer or project architect.

For the successful execution of a project, effective planning is essential. involved with

the design and execution of the infrastructure in question must consider the

environmental impact of the job, the successful scheduling, budgeting, construction site

safety, availability of building materials, logistics, inconvenience to the public caused by

construction delays and bidding, etc.

In general, there are three types of construction:

Building construction

Heavy / civil construction

Industrial construction

Each type of construction project requires a unique team to plan, design, construct and

maintain the project.

Building construction can be B2C as well as B2B where as Heavy and Industrial

construction is only B2B.

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Classification of Industry

The major construction industry sectors can also be classified as follows:

Buildings & Factories

Institutional & Commercial Buildings

System and mass Housing & Industrial Structures for factories

Transportation Infrastructure

Ports & Harbours and Special Projects

Roads, Airports & Runways

Bridges Ø Hydel & Nuclear Power and Foundation Engineering

Hydropower and Irrigation Projects

Nuclear Power, Space & Defence Projects

Industrial Projects & Utilities

Thermal & Non-conventional Power

Hydrocarbon Construction & Pipelines

Minerals & Metal

Bulk Material Handling

Water Supply and Effluent Treatment

Electrical Instrumentation and Communication

Industrial Electrification & Switchyards

Telecommunication

Instrumentation

Development Projects

Roads

Bridges

Airports

IT Parks

Water Supply Projects

A construction project must fit into the legal framework governing the property. These

include governmental regulations on the use of property, and obligations that are created

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Page 5: Construction Industry of Pakistan

in the process of construction. Building and Other Construction Workers (Regulation of

Employment and Conditions of Service) Act, 1996 regulate the employment and

conditions of service of building and other construction workers and to provide for their

safety, health

Industry Analysis

Construction sector, the world over, is considered to be a basic industry on which the

development of the country depends to a great extent, the growth of a country and its

development status, is generally determined by the quality of its construction companies

and their capability.

It is treated as an important sector, not only in the developing countries but the developed

ones which have separate ministries that look after the housing problems of the people.

Turkey, South Korea and Malaysia are but some of the countries where the support of the

government has helped the sector grow and in return the sector has build a strong

country.

Many governments created separate departments within the housing ministries which

generate soft loans for the people. By doing so, not only is the government generating

business but also providing shelter for the shelterless.

The housing and construction sector in Pakistan plays an important role in developing

aggregate economy and reducing unemployment. It provides substantial employment

opportunities as it contributes through a higher multiplier effect with a host of beneficial

forward and backward linkage in the economy. The sector through linkages affects about

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40 building material industries, support investment and growth climate and helps reduce

poverty by generating income opportunities for poor household. It provides jobs to about

5.5 per cent of the total employed labor force or to 2.43 million persons.

It has been, and still is a practice of some governments in the developed world to provide

loans for other countries on the condition that the project is given to its construction

industry, thereby providing business for their local construction sectors.

But unfortunately, in Pakistan there is no ministry or department that caters to the

construction industry and the Housing Ministry is only there in name as it has failed to

provide shelter for the populace.

During the days when the Steel Mill was being built, most of the Gulf states were being

developed at the same time. This brought the birth of many construction companies in the

country. The sector provided good revenue for the economy in those days in terms of

foreign exchange.

But as soon as the Mid-East boom ended and the Steel Mill project was completed, the

state of affairs in the industry became chaos, forcing some of the smaller players to close

down business in search of greener pastures.

According to analysts, today, the industry is in total chaos, and to construct projects as

roads, bridges, canals, power houses or drains, foreign construction companies were

usually invited which resulted in higher cost and further deterioration in the standards of

the local companies.

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According to sources close to the industry, though the sector was declared as an industry

since 1992, however the source claimed that no SRO is issued in this regard to date and

the sector continued to suffer due to the indifference of the government agencies and one

sided conditions of contract and lack of support from the financial institutions in terms of

guarantees and bonds.

Contribution to GDP

The Pakistani construction sector contributes 2.4 percent of the GDP. Accurate statistics

of the Pakistan’s Construction sector involving public and private sector construction

both in architectural engineering services and physical construction services are not

available. Economic Survey of Pakistan and its statistical bulletin 2003-2004, however,

provide the following summary primarily based on the housing sector:

“The housing and construction industry has enormous forward and backward linkages

and according to a modest estimate, 35-40 industries move in tandem with this sector.

Therefore, the industry has the greatest employment generation potential. It can also

create low-paid jobs of Chowkidars and ordinary construction workers to medium-paid

jobs of Masons, Carpenters, Electricians, Painters, Plumber etc; and highly paid jobs for

architects, engineers, designers, decorators, contractors etc. It is also for this reason that

the government has identified this sector as one of the five major drivers of the growth as

is reflected in the National Housing Policy-2001 and the Prime Minister’s Initiatives

under the “Housing for All” program. According to 1998 census, Pakistan has over 19.3

million housing units while about 24.8 million housing units are required for a population

of 148.7 million people. Hence a shortfall of 5.5 million homes is estimated at the end of

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June 2004. We need 570,000 units against the actual supply of 300,000 increasing annual

shortfall by 270,000 units. A number of measures have been taken by the government for

reviving the housing and construction sector, which has been declared a priority industry.

The government has also announced various incentives in the National Housing Policy

for providing affordable houses for the poor. A rapid growth in housing finance will

significantly contribute to the economy in the form of additional employment and support

a variety of allied industries.”

The other statistics show that share of Pakistan’s construction sector in 1967-70 was

4.2% as against the current share of 2.4% which implies that there is a declining trend in

the Pakistan’s construction sector during the last three decades. In the last decade, many

of the construction giants of Pakistan such as National Power Construction Company

(NPCC), Mechanized Construction of Pakistan (MCP), and National Construction

Limited (NCL) etc, have collapsed and eventually disappeared from the public sector.

The Private sector, too, has been unable to grow effectively because of inadequacies of

the Government policy in that regard. At present the situation is such that Pakistani

Constructors, although they are in large numbers, are unable to undertake any mega-

projects in Pakistan – not because of the lack of potential but due to the absence of

required support and effective measures. The inability is evident from the fact that not a

single Pakistani constructor could participate in the bidding process in the recently

completed Ghazi-Brotha project and same situation is evident in the ongoing 20

dam/hydropower projects, out of which 18 have been awarded to foreign constructors.

(For details see table 1). The stumbling blocks towards the capacity building emerge from

financial constraints, lack of the latest equipments, the absence of required management

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setup, projects beyond the monetary reach of the domestic constructors as well as the

manipulative and stringent dictates of the funding agencies in various forms. These

blocks thus pave the way mostly for foreign constructors.

Export of Services

In the mid-1970s Pakistan was able to export its construction services — both physical

construction services and architectural and engineering services. However, the situation

has been deteriorating since then. The requirements in the guidelines of the international

financing agencies and most developed countries have eroded the chances of local firms'

participation in major development projects related to power-generating facilities and

other infrastructure construction. Local firms are eliminated at the pre-qualification stage

because they are unable to fulfill the criteria laid down by funding agencies and bilateral

donor countries. Since local firms are not given the chance to participate in domestic

construction projects, they are missing opportunities to develop and upgrade their

technical expertise and, as a result, are increasingly unable to participate in construction

projects abroad. The cost of projects executed by foreign services providers can be three

to four times more than that of projects carried out by domestic services providers, thus

creating a debt burden in Pakistan which is increasingly difficult to discharge. Therefore,

the procurement guidelines adopted by the financial institutions and the developed

countries have to be amended to ensure that the funds made available to implement

construction projects truly benefit the receiving country in terms of human resources

development, transfer of technology and poverty alleviation.”

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It is encouraging to note that the current regime in Pakistan is taking appropriate

measures to reactivate the construction sector through the development and expansion of

infrastructure, which is turning out to be instrumental in generating employment and

advancing the production of lateral industries. However, it needs a comprehensive

strategy for a sustainable growth in the sector. Before coming to necessary measures for

such a strategy, let us have a look at Pakistan’s resources in the sector and its

commitment viz a viz WTO.

Professional Insight of the Industry

The sector needs qualified and experienced architect, engineers, technologists, and cheap

workforce to be successful. The state-of-the-art equipment, effective work methodology,

quality standards, track record and credibility are treated as prerequisites in the

construction sector. It is needless to point out that in the absence of construction projects,

a basic infrastructure cannot be developed and without the infrastructure and frequent

contracts, domestic constructors cannot be expected to meet all such prerequisites. The

statistics, as of June 2004, available with the Pakistan Engineering Council (Table 2)

indicate that Pakistan has 84,224 Professional Engineers, 22,784 constructors, 76

operators and 1016 engineering consultants. This suggests that Pakistan has adequate

qualified manpower and sufficient number of registered constructors and consultants to

undertake projects not only in Pakistan but overseas as well. Pakistan’s architectural and

engineering firms and physical constructions firms have successfully undertaken many

prestigious projects in Pakistan either independently or through joint ventures with

foreign firms. No doubt, with the abundance of cheaper workforce, Pakistan should be

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able to easily penetrate overseas market provided sufficient opportunities are afforded by

the developed countries for the Pakistani construction sector.

Over last two decades, Pakistani constructors and engineering consultants have gained

invaluable experience and international exposure by undertaking and completing some

very important projects particularly in Middle East and Africa. Even some of the leading

Pakistani constructors made inroads in some developing countries through personal

initiatives. At least a dozen such Pakistani construction companies are currently working

in the Middle East, Central Asian Republics and Afghanistan.[10] NESPAK (National

Engineering Services Pakistan) has provided engineering services during last 30 years to

thirty two (32) countries. But all these countries are either Middle Eastern or some other

least-developed countries. None of the developed countries allowed even this leading

Pakistani consultancy company to enter in their courtyard.

Public-private partnerships Public-private partnerships have emerged as one of the

significant modes of infrastructural financing. The Government of Pakistan has taken

several initiatives like viability gap funding, Public Private Partnership Appraisal

Committee and Pakistan Infrastructure Finance Company Ltd. to promote PPPs.

Viability Gap Funding is available up to twenty per cent of the total project cost,

normally in the form of a capital grant at the stage of project construction

Ø Increasing Demand for Housing sector is poised to witness unprecedented demands.

As the economy improves, a large segment of the population would arise above the

poverty line and the third need popularly articulated of “Makan” in the famous slogan of

“Roti, Kapda aur Makan” (Food, clothing & shelter) would become stronger The main

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determinants of the demand for housing are demographic. However other factors like

income, price of housing, cost and availability of credit, consumer preferences, investor

preferences, price of substitutes and price of compliments all play a role. The core

demographic variables are population size and population growth: the more people in the

economy, the greater the demand for housing. it is households that demand housing

services: typically one household per house. The size and demographic composition of

households is variable and not entirely exogenous.

Trend Analysis

From an external point of view, housing is being considered more and more as an asset

by international investors as well as by Pakistanis residing abroad. This is attracting a

large amount of international investments and expatriate funds into the housing sector.

From an internal point of view, the economic growth is leading to rapid urbanization and

creation of a new middle class. This along with changing social norms leading to nuclear

families and the decreasing age of individuals purchasing houses are fuelling demand for

housing. Rising income, greater number of income generators per household, especially

working women and the younger generation, and changing mindset are the primary

reasons for reduction in the household size. It is expected that the household size will

continue to decline in the next 10 years. As per industry estimates, average age of a home

buyer has decreased from 42 years to 31 years. The younger generation is creating further

demand for residential units and the trend should continue as the income generation

capability of the Pakistani youth grows. The diagram below is a summarized illustration

of the key factors that are driving housing demand in Pakistan.

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Page 13: Construction Industry of Pakistan

Ø Widening Demand–Supply Gap The demand for the housing, commercial buildings is

very high; but the supply is limited. The urban population is increasing very rapidly. Due

to various key drivers of growth listed above causing the market demand to increase more

and more. It has been analyzed that residential prices have increased by about 15- 20% on

average in the last one year. There has been strong growth in demand supported by rising

disposable incomes, low interest rates, and fiscal incentives on both interest and principal

payments and increasing urbanization. In 1995 EMI (Estimated Monthly Installments) as

a part of salary was 54% as compared to 28 % in 2005. Also, as per industry estimates,

the average age of a house buyer has fallen from 42 to 31yrs.

Pakistan’s booming infrastructure spend Order inflows for construction companies

continue to remain robust which is indication of Pakistan’s booming infrastructure

spend.. The infrastructure sectors are needed to built in Pakistan apart from the some of

metro cities such as roads, airports, power plants. Pakistan Has to build new power plants

to meet its future energy demand which is growing phenomenally. Area where the

demand far outstrips supply is the urban infrastructure amenities. The government is

stressing on large capacity addition in various segments of the sector. Urban

transportation, water supply and housing are some of the key areas. Other than a huge

plan outlay, private participation is also considerable. Special Economic Zone

development is also an area to look out for.. Opportunities in O&M of road projects also

substantial. Ø Industry Moving Towards Consolidation Construction industry is moving

towords a stage where the major players are well defined. Big companies undertake the

major engineering and construction projects like Dams, Tunnels, Power plants, Heavy

construction etc.This creates the huge demand for limited players. The prices of real

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estate in the urban pakistan is very high, which will require companies to have more

capital so as to acquire new lands and develop them. The big players can survive and will

be few in numbers with well defined teritories of operation. The demand in metro cities is

perfectly inelastic,with certain well defined competition will create huge boom for the

operating companies. The small or local players who are in huge nos. are restricted to

local geography only but it will not easy to expand to other teritories. The industry is now

moving towords consolidation. The increase urbanisation will leads the local players also

a great opportunity to serve the huge demands of people. Ø 100 % FDI in construction

industry through automatic route. The Government has allowed 100 per cent foreign

direct investment in the construction industry through the automatic route. Conditions

restricting FDI to a minimum area of 100 acres and 2,000 dwelling units are relaxed to 25

acres and 50,000 square meters for construction development projects.

The decision ensured that FDI was "construction-centric" rather than “landcentric" in the

past. Foreign investors could now come in any area but would have to construct at least

50,000 square meters within a timeframe so that they did not hold land for speculative

purpose. Ø Project Export The Pakistani construction industry has been very active in the

overseas markets, especially in the Gulf during the 1970s and 1980s when

Pakistanicompanies ventured there to meet the demand of construction activities.

generated by the oil boom.

Key Drivers

Growing housing and commercial space requirements The housing needs of urban

population are increasing day by day. Urbanization of Pakistan is important factor in this.

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Many industries are expanding to many cities beyond metros like Lahore, Karachi etc.

Many foreign industries are setting their plants in not so developed parts of Pakistan. The

urbanization of population rise of incomes levels, middle income groups has shown huge

interest in Commercial malls, multiplexes, organized retail which has given a boost to

construction industry. The mall space construction has shown substantial which can be

seen from the graph. Govt. thrust on infrastructure, Government projects, initiatives etc.

Sustenance of growth is fully contingent on the creation of supportive infrastructure.

Hence the Government has been employing innovative options to develop infrastructure.

Airport modernization projects, Construction of roads bridges water supply projects and

many other government initiatives provided boost for construction industry. Rising

Household Income Pakistan’s household income is rising. The new evolution of middle

income groups has supported the boom of construction industry. As a result of rising

income and swelling middle class, Pakistan’s middle class is expected to expand.

Therefore, all these estimates work out to make a strong case for higher home loan GDP

ratio so that Pakistan and its population is able to keep a pace for meeting the demand for

housing units. The emergence of good quality condominiums with additional amenities

has also fuelled the demand for residential properties. However, despite the increasing

demand in these areas, the prices will remain unaffected in the medium term, owing to

the excess supply of stock. Ø Retail sector facilitating real estate growth Apart from the

IT and ITES industry influencing the Pakistan’s real estate sector, Pakistan is also getting

into the knowledge based manufacturing industry on a large scale. Retail, one of

Pakistan's largest industries, has presently emerged as one of the most dynamic and fast

paced industries of our times with several players entering the market. The contemporary

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retail sector in Pakistan which is reflected in sprawling shopping centers and multiplex-

malls is also contributing to large scale investments in the real estate sector with major

national and global players investing in developing the infrastructure and construction of

the retailing business. There shopping arcades are under construction phase and will be

operational by 2012. If industry experts are to be believed, the prospects of both the

sectors are mutually dependent on each other. Another emerging trend is investment in

the hospitality or hotel industry. The exceptional boom in inbound tourism and the IT

sector has also led to an unprecedented shortage of rooms, with hotels all over the

country witnessing their highest-ever occupancy rates. Ø Lucrative Investment

Alternatives The field of Pakistani real estate has proved so lucrative that most of the

Pakistani as well as foreign companies , they have also jumped into this arena as the

results of investment in Pakistani real estate extremely overwhelming which showed fly

by night fast multiplication of capital. Buy property in Pakistan is also suitable for

investors due to emerging new renting system. After buying a house, one gets a well

paying renter. A new, modern concept and a new thinking differs from others are making

unique in Pakistan. Boom on Construction business are pressuring other associated

business to change their strategy and policies in favor this market. Bankers understand

requirement of a new type of investors, who want to invest in this, are providing home

loan to customers on lower interest and under lots of schemes, also providing customers

subsidy home loan, even builders projects in Pakistan also dependent on bankers and

their schemes. Government is launching programs to attract property buyers and

appreciating investors to buy property in Pakistan. Impact of each of these factors when

looked upon in isolation may not be significant, but when viewed in totality they offer

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enormous potential for housing market growth. Rising income levels in combination with

a reduction in average population age has over the years resulted in the fall of average

age of a house buyer. Analyst expects the trend to sustain in due course of time.

GAMMON PAKISTAN Gammon Pakistan Limited, the only PakistaniConstruction

Company to have been accredited with ISO 9001 certification for all fields of Civil

Engineering Works including design, stands out as gateway for Technological and

Engineering excellence in Civil Engineering fields • Establish our presence across diverse

sectors and geographies

Gammon is actively focused on becoming a diversified infrastructure player. It has

currently analyzing a number of new potential projects in the infrastructure sector,

including roads, mass rapid transit systems (“MRTS”), urban infrastructure, ports,

airports, power transmission lines, SEZs and hydroelectric power projects, which will

diversify revenue sources and, subject to market conditions and opportunities. Further, it

believes that infrastructure assets should be geographically dispersed to militate

effectively against geographical risks associated with such assets. Additionally, it also

explores opportunities in projects beyond Pakistan in the future. • Make an early entry

and achieve a dominant position in identified sectors

Early entry into identified growth areas in the various infrastructure sectors within which

it operate provides with a head start in each such sector. It also intends to continue to

pursue the advantages associated with early entry in order to achieve a dominant position

within such sectors. By adopting this strategy, it will able to realize specific advantages

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of higher margins in certain identified sectors and the flexibility to grow and allocate its

resources to sectors that offer more attractive margins.

Financial Constraints and Foreign companies

One of the major reason for such a situation is that, Pakistani constructors are generally

faced with the financial constraints, shortage of appropriate and adequate equipment and

sophisticated construction methodology to undertake mega projects even right here in

Pakistan. Gazi Barotha Hydro-power project can be cited as the glare example of the

pathetic situation of Pakistani Construction sector: not a single contractor was financially

able to participate in bidding since it required furnishing of bonds for 100 billion rupees.

Now the Gazi Barotha project is owned by an Italian company.

As a matter of fact the competing international firms are too big for local firms to

compete with. According to figures given in “Engineering News Record”, dated June 05,

2000, five international construction firms have international revenues of 4 billion US

dollar or above. Three of them are from United States and one each from France and

Sweden. Only one US firm, Bechtel has international revenue of over six billion US

dollars (Table 3). Even in the list of 20 firms from developing countries in terms of

international revenues, not a single Pakistani firm is included. This bizarre situation

cannot be addressed without some extraordinary efforts on the government’s part to uplift

this crucial service sector. Unless the government proactively builds construction sector’s

multifaceted capacity, and creates an environment conducive to greater mobilization of

this sector by providing financial privileges and taking concrete measures to ensure joint

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ventures through establishing consortium for undertaking mega projects, the prospect of

this sector would remain grim.

Marketing Strategies in Construction Industry of Pakistan:

Unfortunately Pakistani construction industry is not very competent enough when it

comes to developing marketing strategies. Companies like Habib Rafiq and Paragon

construction (pvt) Ltd which are mostly involved in B2B have not been using very

dominant marketing strategies to create a difference in the industry. Their qualities of

work and word of mouth have been a major source of their advertising. Word of mouth

and quality of work have been very useful for this industry as majority of the people

consult their business associates and consider the reputation of the company when giving

a contract to a particular company.

When dealing in a business to business market contacts are another useful technique used

for marketing certain association with the government or having a good public image also

sometimes proves to be very successful in getting government tenders. Public relations is

another important tool for attracting the investors, by making presence at such events

where business tycoons and government ministers come companies managers develop

relationship with the potential investors who might give contracts to the company.

Websites have been designed to provide information not to attract only the domestic

customer but also the international customer, in the past decade a lot of investment came

from Middle East, companies like these thus try to target these kinds of customers as they

are fewer customers who can yield high amount of profits for the company.

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Construction industry of Pakistan rarely uses any tv commercial most of the advertising

is done through by means like company’s trucks, bill boards near industrial estates also

boards highlighting company’s name advertised when company is working on a project

or has completed a project.

Sponsorships such as helping out an organization to build hospitals and schools on

discounted rates or lower prices to earn reputation.

Despite all of these measures taken by construction companies to highlight their presence

in the market, it is still believed that our industry lacks a lot in marketing however nature

of business which is business to business does not give a company much opportunities to

advertise but still there is a lot of room for devising effective and innovative marketing

techniques which could make a difference and might get a company a competitive edge

over others, working on things like these will make this industry more competent and

efficient like the European construction companies and other construction companies of

the west.

Pakistani construction industry is lacking in this field because of the fact that this

business has been facing recession worldwide since the last decade, also the instability of

Pakistani government and law and order situation if the country has worsened the

situation as investors are now reluctant to invest in this country, inflation and devaluation

of currency has reduced domestic customers purchasing power which is adversely

affecting this industry other factors like corruption and decisions not being made at merit

have discouraged these companies to genuinely use marketing strategies as tenders or

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contracts might be given according to governments biases and through associations to a

particular political party.

However to stay competent companies must work on these aspects which are;

Face-to-face marketing

Direct Response marketing

Media and traditional advertising

Web based marketing

Porter’s Five Forces Model

Supplier Power

Low. Supplier Power is analyzed though supplier concentration, importance of volume

to supplier, differentiation of inputs, switching costs of firms in the industry, etc.

Suppliers are powerful if there are only a few suppliers, a large number of purchasers,

and significant costs of switching suppliers. Supplier power is strongly buttressed when a

supplier has control over prices. Construction industry where few big guns rule the

industry, suppliers are the people who supply raw materials like cement, bricks and steel,

these suppliers are in large quantities and are well dispersed across the industry supplying

to fewer larger construction companies thus have low bargaining power. On the whole,

suppliers exercise little control in this Industry. Raw materials, hence the amount paid to

subcontractors for a winning bid, are very competitively priced.

Buyer Power

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In context of business to business nature of market, it is believed that in current scenario

where the economic conditions of the country are not very sound construction companies

are finding it very difficult to cover their fixed costs, as there is lack of domestic and

international customers. Construction companies are therefore finding it very difficult to

get contracts whether from government or other businesses. So number of customers are

also very low which makes the customers bargaining power very high, construction

companies are forced to accept orders on very low margins, just to cover their fixed costs

and for survival in the market.

Barriers to Entry (Threat of Potential Entry)

Barriers to this industry are very high as the large companies who have larger chunk of

market share are well established and have developed strong networks with suppliers and

customers, along with that construction is a business where contracts are gained on the

basis of performance and quality of work which the company has done in the past. It is

very difficult for newer company to enter and establish and requires plenty of time to

establish, severe competition from the well established companies will not let new comer

to survive for very long.

Threat of Substitutes

Construction has very low or no substitutes.

Degree of Competitive Rivalry

Construction companies especially in business to business operate as an oligopoly, where

few larger firms rule the industry and compete for the market share with high intensity,

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fighting over each tender and project. But in business to consumer market there are large

numbers of big and small firms operating and degree of competition is high there as well.

Top 5 construction companies of Pakistan

Following is the list of top 5 construction companies of Pakistan.

Emaar Pakistan Group

Habib Rafiq Private Ltd.

Paragon Constructors Private Ltd.

Gammon Pakistan Ltd.

Arif Habib Constructions

Problems

Devaluation is one of the major problems facing the industry. Depreciation of the local

currency and the cost escalation eroded away the capital itself and therefore the industry

could not cope with the funding of projects.

A typical capital of Rs 44 million which was worth $5.5 million about 10 years ago, is

worth only one million dollars today. And a project that once cost Rs 35 million will not

cost less that Rs 200 million in today's rupee value.

According to sources in the industry, except for the housing sector, contractors don't

generally make provision for massive devaluation such as the ones the country has

witnessed for the past 21 months or so.

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Some of the contractors are now complaining of the preference given to foreign

contractors in cases of huge projects, on the pretext of their possessing more and latest

construction machinery "when the actual case is that we could not bring these

machineries into the country in view of the present condition", one of the contractors

said. For example huge projects such as Mangla Dam and Tarbela Dam were constructed

by foreign firms.

According to some analysts in the construction industry, contractors are usually referred

to by the banks as "bad clients". Therefore, they are barred from utilising the facility of

short-term funding which is required to take care of temporary negative cash flow on a

project.

Another important set-back of the industry is the lack of a standardised method of

estimating costs. Different bases of rate analysis are being adopted in different

departments. For example, the Military Engineering Services, the Public Works

Department and Wapda follow different systems of calculating rates and the basis of rate

analysis. Construction companies, too, adopt different methods, which results in large

variations and creating more risks.

Another problem facing the industry is the lack of management skills, according to M.

Aslam Mirza of Project Engineering company, the industry is often run in most

haphazard manner while the peculiar nature of the industry and the problems confronted,

demand the application of the advanced management techniques in fulfillment of the

commitments.

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The share prices of all these companies has also on average fallen to about 50% or less of

their face value while MLC is trading at just 80 paisas for a Rs 10 share. The profitability

situation of these companies shows a mixed trend with Gammon Pakistan being the only

company to have recorded a profit in 1997.

Industry Outlook

The government’s commitments to infrastructure development, especially in the power

and road sectors, are likely to add further impetus to the industry’s growth. One key trend

that has been observed in past few years and growing is that foreign companies have

begun to enter Pakistan either on their own or as joint ventures with Pakistani companies

there are massive investments expected and it will be good for these companies to do

business in Pakistan. Apart from this the foreign manpower is coming and working

Pakistan.. This must be done through more training and certification institutes to augment

the supply of skilled labor; associating with training of construction workers; stipulating

the widespread use of trained labor as a prequalification condition for bidding. The

percentages stipulated could be increased over time. Review of the procurement and

dispute resolution mechanism must be carried out to reduce the cost of construction so

that infrastructure services could be provided at competitive costs. Upgradation of

technology is required to improve productivity and quality as also to ensure the timely

completion of projects. In future there will be consciousness about environment safety

and health standards. This could result in problems of land acquisitions. The demand for

the green construction, green buildings will become large. The construction industry must

be prepared to take the green standards fast. A lot of needs to be done on the part of the

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industry as a whole-that is, by the clients, contractors, government departments, to

improve the scenario.

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