SJSC State Real Estate (SRE) is currently evaluating the implementation of projects under the supervision of the capital company, as the Russian invasion of Ukraine and the pandemic period have affected the construction industry and will affect both the implementation deadlines of individual projects and the required funding. Construction companies continue to gather information to submit detailed cost increase documentation, but the documents already submitted and the estimated cost growth estimates are in the millions of euros. The risks of construction projects are related to the increase in the prices of construction materials caused by the war and the pandemic, the amount of financing required and the availability of labour force. The solutions in each of the 23 currently implemented SRE projects under construction differ, but in general, two scenarios emerge in the implementation of construction projects - increasing the amount of available funding without extending the project implementation period, and increasing the amount of funding by extending the planned project implementation period.
Data from the Central Statistical Bureau show that construction costs in Latvia alone increased by 21.6% in April this year compared to the corresponding period of 2021. We cannot demand that the occurrence of the above-mentioned global risks be fully transferred to the contractor, so we are responsibly reviewing the amount of funding allocated to projects with all parties involved. The increase in costs in state-commissioned construction projects is carefully assessed. It is important to create an equal division of responsibilities and risks between the customer and the contractor, because such additional costs, which the construction merchant could reasonably foresee and make the necessary preparations for their elimination, are not planned to be covered. We have developed criteria for evaluating the costs incurred due to the rapid changes in the geopolitical situation, which we are already using to review costs in existing projects.
It is clear that the works will not stop; some projects may have adjustments in the amount of funding or the implementation schedule. We work with each construction merchant separately so that a decision on the future implementation scenarios of the projects can be made within the next two months, while ensuring the continuity of work until the final decision is made. In the largest national projects, such as the reconstruction of the New Riga Theatre and Riga Castle, additional funding has already been found with the support of the government, and we continue to work on a detailed assessment of the situation of all projects. Some projects have the opportunity to raise funds by redistributing project funding from unallocated project budgets. Such a solution has been found for the implementation of the Riga Castle convent reconstruction project in the initially planned amount. The additional funding required for the Riga Castle project has been attracted from the redistribution of funding for several other projects, creating a total of 2.74 million euros in additional funding. Similarly, additional funding in the amount of 2.69 million euros has been attracted to the New Riga Theatre for the full implementation of the project with the support of the government.
It is already clear that the budget and deadline set for the reconstruction and renovation of the Great Guild Concert Hall will also be affected, as construction will start in the new market situation and raw materials will have to be purchased under the new market conditions, which will also significantly impact their delivery possibilities and terms. SRE, together with the Ministry of Culture and other parties involved in the project, has already discussed the possible additional funding, the division of the project into several available funding periods, while ensuring that the user, the Latvian National Symphony Orchestra, performs the necessary work.
The impact of rising prices is also being felt in projects for the creation and modernisation of national security infrastructure. At the beginning of the year, a new tender for the construction of the Eastern Border, a high-priority national security project, was due to be announced by the SRE. SIA Citrus Solutions won both the first and second price survey. The new price survey had to be announced because the construction company informed the capital company about the inability to maintain the previously submitted tender responsibly and in time. It was decided to launch a new price survey, the results of which were in line with the current market situation. The price survey of the next stages is also coming to an end, the results of which will be announced in the coming weeks.
According to the draft regulations of the Cabinet of Ministers “Regulations on Mandatory Provisions and their Content to be Included in Public Construction Works Agreements”, the capital company will include indexation opportunities in future construction implementation agreements at the initial stage, which will allow it to solve the impact of rising costs on project implementation more quickly. According to the draft regulations submitted to the Cabinet of Ministers of the Ministry of Economics, the customer will be able to choose the indexation model that corresponds to the description of the specific construction plan, assessing the risks related to the implementation of the plan. SRE has now identified a possible indexation model, which is planned to be included in the new agreements, which provide for the recording of periodic cost increases in accordance with the performance of works and price indexation using the indices of the Central Statistical Bureau. Agreements that already include indexation at the time of their conclusion are planned to be concluded in the near future. In turn, in the existing agreements, in order to ensure the continuity of works until common cost evaluation criteria are developed, SRE revises payment schedules for critical works in order to facilitate settlements with subcontractors, as there are some projects where construction contractors already have difficulties settling with their subcontractors.