Despite the energy crisis and the war in Ukraine, construction in Latvia has not stopped. The priority of SJSC “State Real Estate” (SRE) is to ensure the continuity of work in the projects commissioned by the state and to continue working together with users and construction companies in such difficult conditions as these.
At present, extensive internal resources have been allocated to enable SRE to promptly address current issues and, in cooperation with users and construction companies, to ensure the continuity of construction works in public procurement, which is also one of our most important priorities. SRE manages and develops various types of projects of national importance, including important state security facilities. At present, it is vitally important to implement them as soon as possible. The new circumstances are expected to lead to adjustments in the planned timing and budget for the implementation of the projects.
We saw a significant rise in prices even before the war in Ukraine. In certain categories, the rise in construction material prices reached up to 80 percent and more over the past year, especially affecting timber (more than 130%), metal (80%), concrete and labour costs. For other raw materials, price increases ranged from 5% to 20%. The current situation is new and not comparable to the rise in construction material prices and labour shortages in 2021, which already last year led to a justified extension of some projects. According to the data of the Central Statistical Bureau (CSB), during the last year construction costs rose by 13%. This year, their increase could be 20% or more.
The situation is changing very dynamically, and we will be able to assess its real impact in about six months. It is currently causing unprecedented and unpredictable price increases. If the war in Ukraine ends, clear price estimates will be visible in early summer, when the situation in Europe and the construction market as a whole will stabilize. I expect that the fastest changes will be in March, April and May. At present, the industry is still adapting to the new rapidly changing circumstances.
SRE is already observing the impact of the international political situation and rising energy prices on the construction industry and the markets of certain raw materials in general. Uncertainty of costs will affect all facilities in the near future, both those where construction and design agreements have already been concluded and those where procurement has been announced. Currently, SRE is evaluating the possibilities of the implementation of each project individually and critically, and together with the users and construction companies (if they are already involved in the implementation of the project) seeks the best possible solutions to ensure the implementation of projects and continuity of work.
The bids submitted by construction companies in public procurements will show the current situation in the industry. One of such projects is the construction project of the Eastern border, in which a repeated price survey has been announced and the results of which will be known in the coming weeks. This project, which is critical for national security, is one example of how it is possible to resolve a situation where a construction company is forced to withdraw its tender before signing the agreement for reasons beyond its control, while ensuring the further implementation of the project. At the end of 2021, we announced a tender in which SIA “Citrus Solutions” won amongst the competition of six construction companies. They submitted their offer 20 days before the start of the war, but as the political situation changed, so did the various risks associated with construction, the entire metalworking market. Construction companies had to redirect themselves, change their suppliers, but manufacturers had to quickly solve the problems of supply of raw materials that arose when the countries of the world, including the European Union and Latvia, imposed sanctions on Russia and Belarus.
At the same time, it is clear that it is not possible to announce new tenders for all projects, so we welcome the latest changes made by the Procurement Monitoring Bureau, which allow for compensation of unforeseen price increases of up to 50% if additional funding is available. The current situation needs to be addressed at the industry level, not at the level of customers and contractors, but this process is not as dynamic as the current changes, therefore we have submitted proposals to the Ministry of Economics and offered various solutions for price indexation in public construction orders, for example, to amend agreements, recoding the current fulfilment and costs, and further index prices using CSB indices; to extend the terms of the agreements or to perform a one-time indexation at the specific moment, determining a new agreement amount for the remaining works in accordance with the CSB indices. The possibility of suspending the operation of agreements by providing the construction company with a technological break for a certain period of time is being considered, while a plan of further action is being developed and agreed upon at the level of the Cabinet of Ministers. There is also the potential to freeze projects until the situation stabilizes and it is possible to forecast price increases and the availability of materials, which would also give entrepreneurs time to redirect their operations. There is also a possibility to terminate the agreement with the construction company if all negotiations and proposed solutions are unsuccessful, freezing the implementation of the project, but in the long run such a solution would be the most ineffective.
I am certain that together we will be able to find the best possible solution to continue working even in such difficult circumstances as these. The priority is to ensure the continuity of work on state-commissioned projects, allowing construction companies to redirect to other markets and suppliers, as events have significantly changed the market for raw materials and the amount of materials available. All involved parties must work together to find solutions to current challenges and seek a balance between deadlines, quality and finances.