Not at any price

History often repeats itself: conquistadors are invading once again, this time convinced of an Eldorado awaiting them in Poland. And construction companies based in Poland are jousting with global competitors taking their first steps into the country. who will be left standing when the dust settles?

 

Ewa Andrzejewska

 

Jan Mikołuszko, the board president of Unibep, a Bielsk Podlaski-based company, at first seemed to be expressing traditional Polish pessimism and the desire to complain when he remarked: “You might think this paradoxical, but the greatest misfortune for our industry would be the rapid re-emergence of a boom situation. Should the market pick up momentum, the prices of building materials and contracts etc. will soar and we shall then see which companies are able to painlessly perform the contracts they have with greatly increased prices.” However, are he and his competitors in the construction industry more hopeful than it may first appear about the current situation?

Billions left frozen in safes

The General Directorate of National Roads and Motorways (GDDKiA) is rubbing its hands: in mid-August it was learned that the estimated PLN 5.7 bln project to construct a 91 km stretch of the A2 motorway from Strzyków to Konotopa would cost PLN 2.7 bln less than expected. A few days earlier, GDDKiA issued a press release revealing that the savings would be even greater. Once the tenders for new road projects this year had taken place, it appeared that more than PLN 4 bln remained in the kitty of the Directorate’s central office. The greatest savings were made in three projects for express highways.

The least expensive contract was to construct a section of the S-6 highway forming the southern ring road around Gdańsk (Gdańsk-Koszwały) signed on August 4th, which Bilfinger Berger is to carry out for PLN 1.2 bln – a project GDDKiA had expected to cost PLN 2.14 bln. Yet another case concerned the upgrading of the section of road from Al. Prymasa Tysiąclecia in Warsaw to Marki outside the city up to become part of the S-8 express highway. This project was to have costed PLN 1.57 bln at the most; however the least expensive offer submitted – by JP Avak – amounted to only PLN 868.9 mln, providing savings of PLN 700 mln. GDDKiA saved a further PLN 609 mln on the contract for the S-2/S-79 route in Warsaw between ul. Puławska and ul. Marynarska. Here the cost estimate was PLN 1.73 bln, but a mere PLN 1.12 bln was the asking price from a consortium made up of Teerag-Asdag Polska, Teerag-Asdag Aktiengesellschaft of Vienna and Intop from Tarnobrzeg (Poland).

Tomasz Rudnicki, the deputy head of GDDKiA, summaries the figures thusly: “Savings achieved in tenders are the outcome of several factors. We made amendments in the Specifications of Essential Contract Conditions, which gives construction companies better access to the market. We decided to change introductory tender conditions so that firms eager to apply need no longer prove that they have experience in carrying out road projects – with subcontracting experience now accepted as sufficient. Financial demands have been liberalized, but only to an extent ensuring they are safe for the investor. The result is that the Polish market for contractors has been enlarged from 20 to 200 companies. Tender prices have been severely affected by the unhealthy financial situation, which is forcing down building materials prices. GDDKiA is the largest investor in Poland, currently with 50 tender procedures under way and with a further 25 to be announced before the year’s end. We are a truly reliable and solvent investor.”

The wide gap between management cost estimates and contractors’ offers has been surprising, stress GDDKiA officials. Cost estimates for the A2 were drafted last year, and since then the prices of building materials have fallen by 20 pct. But how did savings of as much as 30-40 pct – and sometimes even 50 pct – come about? Poland’s largest investor – as GDDKiA likes to style itself – must surely worry that low prices might prove a double-edged sword and that contractors may encounter problems when carrying out projects with such severely trimmed budgets. However, Marcin Hadaj, assistant press spokesperson of GDDKiA, insists that: “We are not at all worried that subcontractors will be unable to carry out their contracts on the A2. All the consortiums which submitted the best offers have great experience and sufficient technical potential to finish the work on time. All contractors submitting offers had to successfully pass through an initial stage of formal proof that they were able to meet procedural conditions and were capable of the proper execution of a contract. GDDKiA studied their economic and financial standing, and also assessed whether they had the necessary know-how and experience and that the people designated to perform key functions in the project were appropriately qualified.”

Piotr Kledzik, the board president of Bilfinger Berger Budownictwo, believes, however, that the initial qualification system is ineffective: “One can draw up a long list of differences in the operations of construction companies with long-lasting Polish roots and those which have insufficient experience. The range of building machines owned is one example, since the sole condition today is to prove they have access to such machinery.Problems must arise when competing with a company which has, for instance, a workforce of 20 in Poland, with the remainder being subcontractors. I employ an army of 1,200 workers for whom we must ensure work and wages. Time will tell which company performs better. Companies, such as ourselves, connected with infrastructure have lots of tenders to work on, but we have to choose how they should be tackled.”

Bilfinger Berger entered three tenders to construct A2 motorway sections, losing out in all of them. One of these was to construct section ‘D’ for PLN 842.5 mln, but Strabag, who came out on top, offered PLN 643.8 mln. The cost estimate for section ‘C’ was PLN 347 mln – again more expensive than the winning offer from a consortium led by China Overseas Engineering Group Co.

Incomprehensibly low offers

Piotr Kledzik points out that the final tender for A2 sections was a completely different kettle of fish. “The ‘design and build’ format which was required means that construction will begin 18 months from now. Risk is an inherent factor in every offer, including the risk that building materials prices and wages may escalate. This time we put a high value on it. I don’t know how the other competitors calculated their prices; but I do know, however, that Strabag – which submitted the most advantageous offer for one of the sections – may, with great probability, complete the task successfully. But I cannot take responsibility for the other winning offers. The prices in each case were very low – I would call them incomprehensibly low.”

The Polish-Chinese consortium composed of the China Overseas Engineering Group Co., Shanghai Construction Group, China Railway Tunnel Group and Decoma submitted the least expensive offers for the two longest A2 sections. The consortium estimated that it could construct the 29.2 km and 20 km stretches for PLN 754.6 mln and PLN 534.5 mln respectively. Andrzej Olszewski of Barylski, Olszewski, Brzozowski legal chambers, which represents the winning consortium, insists that: “Our estimates were prepared on the basis of the estimates of all the consortium’s members and subcontractors. We guarantee that we have all the technical means and human resources to ensure that we can perform the work on time and at the prices we have pledged.”

But isn’t GDDKiA afraid of having to cope with a flood of requests to renegotiate contract conditions? Marcin Hadaj of GDDKiA is of the view that: “Such cases sometimes do occur when tackling motorway construction, such as that of the 51 km Zgorzelec-Krzyżowa section of the A4 motorway, which was opened this August. The contractor Strabag was to have completed the work in November 2008, but came to the conclusion that this deadline would be unattainable, and so instead proposed that a time annex would be signed setting the end of construction by August 10th 2009, to which we agreed. But the contractual prices remained fixed. In the case of the A2, the signing of such an annex is not envisaged.”

Land flowing in gold

Jan Mikołuszko, the board president of Unibep, makes the following point: “The whole of Europe seems convinced that Poland is experiencing something of an Eldorado moment, with firms of diverse origins taking part in tenders: Spanish, Portuguese, Balkan, Greek and Irish. This means there are few winners. Our winning tenders are based on low prices but ensure a profit. In 2008, our profits were around 5 pct. This year, mainly because we have restructuring behind us, a net profit of around 3-4 pct may be regarded as a success.”

Piotr Kledzik of Bilfinger Berger Budownictwo agrees that a clear trend has appeared aimed at public projects – which now account for 87 pct of the company’s entire 2008 portfolio. And although the figure this year will be similar, this is only because the previous year’s contracts are now underway. Jerzy Werle, the general director of Warbud, adds that: “Residential projects have accounted for around 30 pct of our portfolio, although the ratio is shifting towards public schemes. The Czajka sewage plant, which constitutes around 25-30 pct of our 2009 budget, is worth a special mention.”

Dr Jekyll and Mr Hyde

When talking with industry officials one sometimes gets the impression that two parallel construction market universes exist in Poland. On the one hand, there exists a belief in public orders, especially those from the GDDKiA, which completely floods the market with announcements of successive tenders. On the other there are contractors and property agents complaining about poor finance. Warbud’s managing director seems convinced that “a crisis does exist, but there is a very real hope that it is on its way out. The first signs have become evident on the housing market, for instance. We have noticed that developers have started applying for building permits. The situation is getting back to normal, sales are starting to improve and developers are beginning see the future in a brighter light.” The company’s contract portfolio is valued at PLN 1.8 bln, with its 2008 net revenue reaching PLN 1.6 bln. Jerzy Werle adds with some optimism: “I expect the same results next year as this. Indeed, 2010 has a very good feel about it, so should we have to worry about 2011? We should take a 3-year forward look at developments. We are competing for new orders, but not at any price. The market today is not so poor that contracts are being won by those offering cut-throat costs. A low price asked by a contractor is not only his headache but, first and foremost, for the ordering party and, in the final account, for the end user. The contractor is bound to look for cost savings, which means construction workers will have to suffer since this will affect work safety and health issues on the building site.”

Need to cut construction costs

‘Construction Market Price war’ is an attention-grabbing headline, but are building companies on the borderline between safety and risk? Experienced operators, not wishing to be quoted directly, claim that the lowest offers in infrastructure tenders are figments of the imagination. One typically desperate reaction of a tender winner who has won the jackpot is to ask the loser for help. According to Jan Mikołuszko, Unibep’s board president: “I am fully aware of the crisis, but it is making me happy since it is mobilizing the company. We are being forced to learn new things. I used to tell my people ‘we must build more cheaply’. Now I have changed that to “we must build the cheapest of all.” Piotr Kledzik stresses that: “Our 2009 portfolio will be about PLN 700 mln, slightly less than a year ago, although we intend to close 2010 with contracts valued at around PLN 800 mln. My task is to ensure stable profits and not simply ‘empty processing’, in the financial sense of the term.” Jerzy Werle, Warbud’s general director, feels that “8 pct would be excellent in the construction industry, but difficult to achieve. Profit margins usually oscillate around 3-5 pct, but in crisis conditions will surely be somewhat below that.”

Are developers finding anything to be happy about in the furious rivalry on the construction market? Mermaid Properties recently announced a tender for the Warsaw Libra Business Centre office complex. When asked for his initial remarks, Radosław Sieroń, Mermaid Properties’ board president, replied: “The interest in construction tenders seems to be immense, with even the largest companies hunting for new orders. On the other hand, subcontractors still have had their hands full with last year’s contracts. 2010 will contain many surprises. Such is our experience in developing the Cross Point Łódź project in Łódź, where we are also the general contractor. We can today construct 1 sqm of office space for around PLN 5,000 although prices were in the range of around PLN 6-6,500 in 2008.”

2010 will be a survival test year

If you were around then, you will surely remember the fate of construction company PIA Piasecki, its rapid growth and sudden demise in 2003 – and the PLN 300 mln debt it left. Could history repeat itself? Can the current situation be compared with that of 2001-2003? In the view of Jerzy Werle: “The situation is completely different: neither better nor worse – just different. There were not so many expected public projects then, for instance for roads. In addition, in those times there were not so many foreign companies, virtually from the whole world, interested in Poland and looking for a market for their services in this country. These are contractors without technical backup. On the other hand, Polish contractors that have constructed in recent times have huge production facilities. 2010 is going to be a litmus year when companies will have to come to terms with those contracts and their costs – which have been calculated based on the slump in prices.”