Polish builders take on the world

The Polish construction sector has had to cope with the pandemic, work stoppages on building sites and supply chain disruption. Now it is also having to cope with all the consequences of the war in Ukraine, inflation, the soaring cost of construction materials, upwards wage pressure and fewer projects. “2022 can be viewed as one of the toughest years for the Polish construction industry since the 1990s. The outbreak of war in a country directly neighbouring Poland marked the beginning of a period of unprecedented chaos in the building sector. With the proximity of the conflict, along with the size of the market and the stage of the economic cycle, it would be fair to say that in 2022 the construction sector in Poland was struck by a combination of unfavourable events far harder than in any other country of the CEE region,” admits Damian Kaźmierczak, the main economist at the Polish Association of Construction Employers (PZPB).

Bartłomiej Sosna, a construction market analyst at Spectis, sees the pain the Polish construction market is going through as a common affliction across the CEE region. “All countries in the region expect a similar slowdown in the construction market in 2023, which is due to rising interest rates and an imminent reduction in public spending caused in large part by the effect of being in between two EU seven-year budgets,” he points out.

Waiting for the EU

European funds are not being handed out in the same way for everyone, since unlike most EU countries covered by the National Recovery Plan, Poland has not yet been able to receive any of them. Thus, a difficult situation for the rest of Europe has been compounded in Poland. “We are seeing prices continuing to rise here in Poland and a marked slowdown in local government and residential investment. The withholding of funds from the EU’s National Recovery Plan has destabilised the investment market when it comes to the construction of both buildings and railways,” explains Cezary Łysenko, a board member of Budimex and its director of infrastructure construction. Construction company ZUE is faced with the same problem. “The situation with tenders in Poland at the moment is not what is motivating us, but it’s certainly making us work faster. Poland right now has no money from the National Recovery Plan to spend. But for a company to grow, it has to keep conquering new markets. By working for a wider variety of clients, we have to a certain extent freed ourselves from the ups and downs that are currently a feature of the Polish market,” claims Wiesław Nowak, the CEO and managing director of ZUE.

Looking for contracts

Polish companies see contracts abroad as one way of expanding and achieving geographical diversification, so it’s quite common for them after having built up a strong position at home to cast an eye on other markets. One obvious place to expand to from our region is Germany, due to its large, prosperous economy. “In Germany, we act through our subsidiary Budimex Bau to construct buildings, railways and industrial facilities. Our German company has been working on bridge contracts worth close to EUR 18 mln. Additionally, in 2022 we set up a second German company, RailBX, which in the future is going to carry out work on constructing and modernising rail networks,” emphasises Cezary Łysenko of Budimex.

Budimex has also been active in the Czech Republic since 2021 (Budimex Construction Prague) as well as in Slovakia (Budimex Slovakia). “In December 2022, we began work on building the D1/D4 motorway junction in Slovakia in a contract worth EUR 110.85 mln net – and this is currently our largest foreign contract,” points out Cezary Łysenko.

ZUE also announced this year that it had won a contract in Romania. In a Polish-Romanian consortium, it is to modernise certain stretches of railway in the country. “We’ve been interested in markets abroad for many years. In 2014, we worked on our first big contract in Slovakia to rebuild the road and tram line infrastructure in Košice, and between 2016 and 2020 one of our offices in partnership with a Bulgarian firm worked on the designs for the modernisation of a number of railway lines,” reveals Wiesław Nowak. “Our latest contract in Romania is the result of our long-term plans and our previous efforts to take our services beyond Poland’s borders. This is our first contract on such a large scale – a task that we are going to undertake with our consortium,” he adds.

Large foreign contracts won by Polish companies may be growing in number, but they are still not that common. “It’s still rare for Polish companies to act as general contractors abroad. They are generally employed as subcontractors for various types of specialised work, including concreting, mounting installations and finishing work,” explains Bartłomiej Sosna.

Dreaming of Ukraine

The CEO of ZUE, Wiesław Nowak, insists that his company is also looking into the possibilities of working in other foreign countries, and not just Romania. “We are interested in EU countries because the legal framework is clear and well-understood and the differences are not too big,” he says, and goes on to reveal that “outside Romania we are also looking at Bulgaria and the Baltics as well as Germany. But we are being cautious with our expansion and we don’t intend to take the decision to enter a given market until the time is right.”

Such an approach appears sensible and so far has been successful, but taking on work outside Poland requires preparation. “When assessing the potential of a particular country, we look at its planned investments but also at how the various commissions have been carried out up to this point and how EU funds have been used. Of course, we are also interested in countries where these processes have run smoothly,” explains Wiesław Nowak, who then points to another factor: “We also consider the political situation of the country, because this can affect whether projects are completed or abandoned,” he says. According to him, it takes around a year to prepare each bid. Before ZUE enters any other tenders, it plans to complete the railway modernisation project in Romania, calculate its final margin, and assess the profitability of its venture.

Budimex, on the other hand, is planning further expansion into Germany and Slovakia, while chasing down more orders in the Czech Republic, Lithuania and Latvia. “We are already taking part in several tenders, although we are concentrating on winning infrastructure contracts. Moreover, we have been invited to take part in such processes in Scandinavia, and we expect that at some time there will be contracts for the reconstruction of Ukraine,” believes Cezary Łysenko. Mostostal Warszawa is also casting its gaze on Ukraine. The company is not currently active outside of Poland, but companies from its wider group have already worked on such projects. “We are following and studying the possibility of expanding outside Poland and we are also familiarising ourselves with the Ukrainian market, as it is going to require reconstruction after the war,” reveals Jorge Calabuig Ferre, the vice-president of Mostostal Warszawa. ZUE is another that is thinking along the same lines. “If Ukraine wins the war, we would definitely like to take part in rebuilding the country. And probably just like every other construction company in Poland, we are maintaining all kinds of contact with Ukraine. Unfortunately, everything seems to indicate that the war will continue for some time,” admits Wiesław Nowak.

Laws and interpretations

The EU supports Polish companies operating in associated countries, but starting operations in a foreign land still involves many challenges, at the forefront of which is the local law. “Many Polish companies that are boldly trying to expand abroad to free themselves from the turbulence of their home construction market hit a series of legal barriers outside Poland that make it impossible to win new contracts quickly in these markets that they don’t know so well,” points out Damian Kaźmierczak of PZPB. Before entering a new market, it’s necessary to get to know the local conditions, as well as to acquire the formal licences and build up a team. “Our activities in three foreign countries have been made possible due to Budimex’s growth in Poland and our desire to diversify. We decided that after operating for 50 years, our company was mature and developed enough for us to expand without hesitation into neighbouring markets. Our preparations for taking this step took a long time. We looked for and trained suitable employees, and we had to learn new abilities,” relates Cezary Łysenko. Jorge Calabuig Ferre of Mostostal Warszawa also highlights the legal issues. “The most serious barrier is the law, which abroad can sometimes be diametrically opposite to what it is in Poland. Every legal restriction and difference from Polish law can reduce a company’s competitiveness in terms of any given project,” he explains.

Cezary Łysenko of Budimex also emphasises that starting up in other countries can be made a lot easier by using your own equipment as well as the qualifications and experience of your own personnel. “The next most serious barrier to succeeding in a foreign market is the need to sufficiently build up your position and recognition to win the trust of local and national organisations,” he says.

Expanding in a consortium

According to Jorge Calabuig Ferre, the second most serious hurdle in the way of operating in a new market is persuading adequately qualified Polish employees to relocate. Damian Kaźmierczak also raises this difficulty. “The relatively high pay in Poland and the changes in lifestyle have gradually reduced the desire of Polish personnel to go abroad, when just a few years ago this was the dream of many specialists, enticed by the prospect of significant financial gains. Nowadays, Polish companies have to take on staff from the local market, who know their trade very well but also cost a lot more. As a result, only a few companies can afford to establish foreign branches,” he explains.

The costs of doing so, naturally, depend on the country, so Polish companies also have to take this factor into consideration. Businesses that take a long-term approach to their foreign activities open up their own branches and companies while gradually recruiting local workers. “We don’t want to end our operations in Romania with just one contract, so we have set up a branch there. We spent a long time preparing this and have obtained the required certificates and formal permits for the work we want to undertake. We employ both Poles and Romanians, who know the market and its conditions, and are also aware of the different applications of EU law,” reveals Wiesław Nowak.

Foreign expansion, at least in the initial stage, is decidedly easier with a local partner. “We are taking on the contract in Romania in a consortium. We realised that it is worthwhile going into a new market with a local firm that knows about the different issues and has knowledge based on its own experience and activities. For many questions that we would struggle to find the answers to, they can answer without thinking, since such issues are dealt with every day for them,” claims Wiesław Nowak.

Mega projects and geopolitics

As Damian Kaźmierczak points out, the rising prices of materials, fuel and labour have reduced the profitability of construction contracts across all sectors, and so many investors have put their latest projects on hold. “Public investment, which accounts for around 50–55 pct of national construction output and has for many years been the main driver of the industry in Poland, now finds itself in a state of suspension as it awaits new funding from the EU, without which most power and rail projects will not be launched,” he says. Even taking into account that other countries in the region can already start work on their National Recovery Plan funded projects, this doesn’t automatically mean that the investment environment is favourable. Analyses of the markets in the Czech Republic and Slovakia show that there are even fewer tenders there than in Poland. “We are also seeing significant price pressure from our competitors, which means winning contracts abroad is not easy,” adds Cezary Łysenko.

Despite its present difficulties, Poland remains a large and attractive market when compared to others in the region. “Since joining the EU in 2004, Poland has been the biggest building site in Europe and the large infrastructure contracts have attracted many international firms, resulting in a growth surge for Polish construction firms,” insists Damian Kaźmierczak.

This is why so many constructors, rather than risk a foreign debut, still prefer to look for other opportunities in Poland and so are leaving their particular sectors to engage, for example, in power generation and railway projects. “Recently, we have been taking an interest in contracts to build new infrastructure, including high-speed rail,” reveals Jorge Calabuig Ferre of Mostostal Warszawa. Bartłomiej Sosna also emphasises the role that the large public investment projects in the pipeline are set to play: “What could set Poland apart from other countries in the region over the next few years are the planned mega construction projects, including the construction of a nuclear power plant, wind farms and the Solidarity Transport Hub,” he points out.

However, such an approach assumes that Poland will be granted significant EU funds, such as those from the National Recovery Plan, which still remains uncertain. What is actually needed is for the economy to stabilise – and that’s going to be difficult for a country that borders onto an ongoing military conflict. “And the risk also exists that the increased military expenditure in Poland since the outbreak of the war could result in lower public spending on construction investment,” adds Bartłomiej Sosna of Spectis.