Hit the Road

When all the finances earmarked this year for constructing and upgrading Poland's road infrastructure is taken into account, this section of the market is worth around 8 billion zlotys. World Bank loans alone are to be used to repair 705 kilometres of roads at a cost of 455 million zlotys. The General Management of National Roads and Motorways (GDDKiA) intends to upgrade a total of 1,500 kilometres of roads for 1.5 billion zlotys, a sum which will come from The World Bank and also the European Investment Bank, European Union funds and the national budget. It is, however, the tender for the next phase of the A2 motorway which is exciting all the construction company officials that we talked to.

Highway to heaven

At the end of April the GDDKiA's tender committee opened the envelopes that had been submitted by consortiums competing to construct five sections of motorway from Konin to Stryków, a total of 103.5 kilometres. 31 offers had been presented. Were the lowest cost contractor for each section selected, the total cost of constructing the motorway would be 324.72 million euros (around 1.6 billion zlotys). The tender was to have been resolved within a month, with the verdict to be approved by a Ministry of Infrastructure steering committee. Construction is to get off the ground in early July. Grzegorz Owczarski - director of the Department of Transport Infrastructure Construction in Mostostal Warszawa remarked, "No matter which consortium wins the tender, the whole industry will benefit. A state of order will finally exist in the market."

Room for the great and the small

Grzegorz Owczarski is a man who knows everything there is to know about road construction. He worked for 30 years for Warszawskie Przedsiębiorstwo Robót Drogowych and, for the last 2 years, has been expanding the road construction department of Mostostal Warszawa. His company is competing for four of the five sections of the motorway, so he is far from indifferent as to who wins. But what does he mean when he says that the motorway contracts will impose order on the market? He elaborates, "Three large road construction firms are required to make each section. The whole motorway is 100 kilometres long, or 200 kilometres of actual roadway. It will employ some 15 large firms in this industry, i.e. practically all major domestic companies will be concentrating their resources on this project. Small and medium enterprises will benefit as a result, since they will have the opportunity to win subcontractor orders elsewhere in Poland and will not have to compete with the giants in these smaller tenders. It is much better that a medium-size company participates for a medium contract, than when a giant enters the field. The difference in fixed costs means that whereas a smaller company can make a profit, a larger one would barely cover its expenses.

It's good and it's going to get even better

Dariusz Słotwiński, Strabag's president, looks with similar optimism to the future. His company is present in tenders for all motorway sections to be started this summer. Strabag's strength lies in its performance last year when it constructed 38 kilometres of motorway in 6 months (from conclusion of preparatory work), working around the clock. This earned the company 462 million zlotys, which is one half of its earnings from road construction (924 million zlotys). Słotwiński admits: "I am counting on consecutive contracts this year related to motorway construction, otherwise I might fear that income from one source alone could endanger the company's stability". He and his homologue at Mostostal Warszawa agree that the awarding of motorway construction contracts will not be over either this year nor next. Grzegorz Owczarski is convinced that such contracts must be implemented if Poland wants to take advantage of EU funds available. Dariusz Słotwiński believes that road infrastructure outlays will grow each year and that a slice of around 1 billion zlotys could go to his firm.

A safe sector

At first sight it would seem that road, especially motorway, construction is a licence to print money - you just can't lose. The procurer, i.e. local or central government, rarely goes bankrupt and also cannot make excuses for late payment. However construction company managers are far from being starry eyed. Dariusz Słotwiński remarks sadly, "Companies in our sector have capacity for more work than the market requires, which means that many firms participate in a tender, competing and forcing the price down to borderline profitability," while Grzegorz Owczarski of Mostostal adds: "We rub our hands together with joy whenever we succeed in registering a 3 percent net profit margin when meeting large orders". Even so, Strabag last year constructed a section of the A2 motorway with a 3 percent net profit margin, thereby earning around 14 million zlotys. In one of the largest Polish contracts, Necso which belongs to the same group as Mostostal Warszawa, upgraded national highway 7 and built a bridge over the Vistula at Kiezmark, at a cost of around 30 million euros, thereby earning around 1 million euros, i.e. around 4.5 million zlotys.

Promised land

Managers of Polish road constructors are not alone in believing the Polish market will grow. Herbert Bodner, board president of Bilfinger Berger told an assembly of his company's shareholders in May, "We are taking over Warszawskie Przedsiębiorstwo Robót Drogowych (WPRD) because we are counting on participating in infrastructure investments that will be made when Poland becomes a fully-fledged European Union member." In short, the reason why Bilfinger is taking over WPRD is to participate in the motorway construction programme. Management at WPRD themselves used the same argument to justify the sale to the German investor. Zdzisław Bożym, production and marketing director, told us, "To participate in the A2 construction tender process, companies were required to prove earnings of at least 200 million euros. That requirement was reduced to 80 million euros, i.e. around 400 million zlotys, for the Emilia to Stryków section. We could only show annual earnings of around 200 million zlotys, which led the board to allow in an investor with credentials that would overcome the shortfall in turnover, as well as being able to invest in growth of the company." Eurovia Polska and Colas also attempted to purchase WPRD, but lost out to Bilfinger. The level of minimum earnings required was high, which made it difficult not only for WPRD to meet the threshold but Mostostal Warszawa too last year only registered income of around 240 million zlotys. This was why the name of Necso Entrecanales Cubiertas - also owned by Acciona, Mostostal's principal shareholder - appears in the motorway tenders.

Is the competition just biding its time?

Bilfinger Berger has operated in Poland for many years but is expanding its activities due to new infrastructure projects. Both Dariusz Słowiński of Strabag and Grzegorz Owczarski of Mostostal Warszawa do not think other foreign construction companies will follow in Bilfinger's footsteps. Dariusz Słowiński calculates that, "Only PRInż remains a takeover target. All other firms already having strong partners. It should be added that it is going to be much more difficult than several years ago for a construction company to enter Poland. Being just a source of finance and know-how, and subcontracting work out to small Polish firms is not the best solution since many use old equipment, for example, while more modern and larger companies usually want to go it alone as general contractors. Companies with developed structures do the best in the Polish market." Not fearing a flood of foreign competition does not mean that no attempts will be made to enter the Polish market. Grzegorz Owczarski admits that an employee told him last week that the competition had offered him a job. He added though, with a grin, that this "aggressive take-over" attempt proved unsuccessful.