We’re on a road to nowhere?

Infrastructure projects are currently motoring the Polish economy. They were also supposed to be a lifebelt for construction companies in the new EU countries, such as Bulgaria. However, governments are now cutting budgets and their promises have yet to be fulfilled. How much will the sector pay for this?

Mladen Petrov

In a few days the Bulgarian Construction Chamber (Љамарата на строителите в ЃългариЯ) is to announce the number of companies that have exited the market due to the biggest crisis in the construction sector in modern history. “We are monitoring 5,200 construction companies in the country, which confirm their active presence on the market by registering every year. Because of the difficult situation we have had to extend the registration period. Only 2,100 companies had confirmed their membership by the beginning of August,” relates Ivan Boykov, chairman of the Bulgarian Construction Chamber. In his opinion, when the registration is closed this month, it could turn out that app. 2,000 construction companies have been declared bankrupt. In the opinion of market players, the transformation of the market is taking a heavy toll, so the disappearance of even more contractors should be expected. The number of companies that will be declared insolvent this year is estimated at 1,000-1,200.

To be continued

The latest moves by the government are doing little to improve the state of the industry. According to data released by the Chamber, the turnover of construction companies in 2009 was app. 50 pct less than in the good year of 2008. Execution prices have slumped by up to 30 pct and 100,000 construction workers have lost their jobs. In July the government, which is now looking for savings, announced that a major project to upgrade 
2,100 roads across the country would now be cancelled and has suspended the execution of EUR 630 mln of roadworks until further notice. The project was to have been carried out with the help of the World Bank and the European Investment Bank, which together were to have provided Bulgaria with EUR 500 mln in funding. The rest of the money was supposed to come from the government, which is struggling with a budget deficit.

At the end of May, the government estimated that it would close the year with an increased budget deficit at the level of 3.9 pct of GDP. The International Monetary Fund ‘advised’ the government to reduce the increase in the deficit to app. 2 pct. When these decisions were announced, work on some of the sections of road were already about to begin. “There were not enough funds in the revised budget. Assessing the situation pragmatically, the conclusion has to be reached that the funds for these projects will only be available in March next year, in the new budget,” comments Bozhydar Yotov, director of the governmental Road Infrastructure agency, in the ‘Trud’ daily newspaper. This means that work on only three sections of the Trakia motorway (from Sofia to Burgas) is being continued. The contractors for the frozen projects have received letters requesting them to carry out the work at their own expense for a period of 6 to 12 months. But the companies that were close to putting their roads into operation were unable to start the final stages of work because they had yet to receive any payment.

“This decision of the government will result in another 120-150 companies asking themselves: what should we do next? App. 12,000 construction workers were employed on these projects and could find themselves on the dole. Looking at it objectively, work on motorways such as Trakia is not enough to rescue the whole industry,” remarks Ivan Boykov. “We are reverting to the situation in which local companies are looking for contracts abroad – recently in Albania, Germany and the United Arab Emirates,” adds the chairman of the Bulgarian Construction Chamber in Bulgaria.

Not doing their homework

What is the government’s response to this? “Using the credit line would mean increasing the budget deficit,” was the explanation given by the prime minister of the country, Boyko Borisov. The funds should be found in next year’s budget, because the repayment term of the loan from the World Bank is June next year, while the loan from the European Investment Bank expires in September 2012.

“Modern infrastructure is the basis for providing Bulgaria with development,” emphasised Robert Zoellick, the director of the World Bank, during his August visit to the country. “EU membership has contributed to the economic boom in the country but the crisis has shown that Bulgaria should be even more competitive and invest more, in human capital and road infrastructure among other things. Bulgaria has access to EU funds but so far has not been able to use these possibilities in an effective way,” he added. He also expressed the opinion that the country should carry out further reforms in order to streamline the process for using the available funds.

Up to 2013, Bulgaria will be able to use funds, including those from the EU, amounting to EUR 10 bln. So far app. EUR 1 bln has flowed into the country for the execution of modernisation projects. One of the main problems is the fact that the country does not always fulfil all the requirements to qualify for more funds.

“The government elected in 2009 has revised an agreement signed by its predecessors that resulted in the complete halting of new commissions for construction companies for the long period of eight months,” recounts Ivan Boykov. As a consequence, companies which were not only focused on the boom in residential construction pre-crisis, when the sector was growing by 10-15 pct a year, also found themselves in a difficult position. Forecasts for this year speak of turnover of around EUR 4 bln – 50 pct down on the years of plenty before the credit crunch.

Surviving until the next month

“Now companies are simply trying to manage their losses as best as they can. Those that are now talking about profits are clearly operating on a different market than Bulgaria,” comments Martin Dyakov, managing director of the construction company Eurobuilding Engineering. “I can definitely say that this is the most difficult year for construction companies and I am not one of the optimists. There should be more going on in the area of projects carried out with EU funds, but we should remember that not all companies can participate in tenders,” he adds.

Bulgarian constructors are looking to infrastructure with some hope, but one obstacle on the way to participation in tenders is often the size of the companies, as well as their lack of experience and organisational structure. So firms with foreign shareholders always win. For example, Greek company Aktor won the tender for the third stage of the Trakia motorway, from Nova Zagora to Yambol (36 km). It is part of the Magistrala Trace consortium, which earlier built the first stage of the motorway, is to also build the second (31.8 km), and is now participating in the tender for the fourth, longest stretch (47.7 km), together with firms from Macedonia, Austria, Slovenia, Hungary and Azerbaijan. “Companies have to be exceptionally transparent in order to participate in such tenders and it is sometimes difficult in the case of smaller local players. Since the beginning of the crisis there has been a trend to modernise organisational infrastructure and acquire more of the certificates needed to fulfil the requirements. It also needs to be remembered that few local companies have enough experience to become the general contractor of a big project. This is why the game is mainly about how subcontractors position themselves,” explains Martin Dyakov.

According to the data of the construction companies’ association, Bulgarian companies participated in 68 pct of road tenders, which had a combined value of nearly EUR 700 mln, but not, however, as self-sufficient entities. As part of the ‘Transport’ operational programme, Bulgarian companies are acting only as subcontractors. The number of local companies that are able to carry out large-scale projects independently is estimated at 15, but they prefer to participate in tenders as members of consortiums. Ivan Boykov points out that: “Despite the difficulties it is also worth noting the positive changes. Bulgaria has acquired more experience in using EU funds and at the same time has improved the effectiveness of supervisory bodies in order to limit the bad practices that the country was infamous for in the EU – and this was evident during the latest tenders for the construction of the Trakia motorway.”

The biggest borrower

Resolving this issue, which is of tremendous significance for construction workers, requires greater involvement from the government. In recent years, companies in the sector became major creditors of the government. Initially the government owed these companies app. EUR 500 mln. According to a new scheme regulating payments, companies are slowly starting to recover the sums owed to them, but on new, less favourable conditions. Not all of them have accepted the solution proposed by the government. “For the moment we have changed our approach. No company is agreeing to take on work ‘at face value’. Now you only order what you can pay for,” adds Ivan Boykov. At the end of last year, the state owed construction companies app. EUR 250 mln. In the middle of 2010, the state debt accrued with them amounted to app. EUR 175 mln. “This is a matter of priorities. Paying the construction companies on time cannot mean a delay in paying salaries to teachers and doctors. It is understandable, but the government has not explained its decisions, and from the outside it looks as though it is trying to cheat us,” claims the managing director of Eurobuilding Engineering.

Bulgaria is not the only country which has had to reduce its expenditure. At the same time the government of the Czech Republic has announced the suspension of most infrastructure projects as part of savings programme, including the extension of the motorway and express road network. Despite a request from ‘Eurobuild CEE’, the Czech transport ministry has not provided us with a list of the suspended projects. According to Czech media reports, work on the D47, D8, D11 motorways, as well as on the R6 express road, will most probably be put on hold.

In spite of the recent disappointing news, construction workers have not given up hope that the next year will bring some improvement. As part of the ‘Transport’ operational programme financed by the EU, more tenders are to be announced in September, including, among others, the construction of two sections of the Strumna motorway connecting Sofia with the Greek border, and two sections of the Maritza motorway between the capital city and Turkey. Thanks to this operational programme, which is one of seven schemes Bulgaria is participating in, the country has EUR 2 bln at its disposal. The Maritza and Strumna motorways are to be completed in 2013, while the Trakia motorway will be opened a year earlier. The government is currently planning to spend a total of EUR 1.3 bln on road projects in the period between 2014 and 2020. ν