State saves builders’ bacon

As commercial and residential  investment has now come to a grinding halt, everyone who can is switching to road, bridge and sewage plant projects. Central and local government look set to guarantee work for contractors over the next few years

Emil Górecki

None of the leading companies carrying out engineering work can complain about a lack of orders at the moment, a hardly surprising fact considering Poland has substantial funding for such projects guaranteed by the EU 2007-2013 budget. Much will be used for the re-construction of transport infrastructure, with the total sum earmarked for this being EUR 19.4 bln, as well as environmental projects (including sewage treatment plants, sewage removal – EUR 4.8 bln) and the energy industry (EUR 1.7 bln), with approximately the same amounts being contributed from the state budget. In addition to this, many of these projects will have to be carried out in time for the Euro 2012 football championships. Polish State Railways (PKP) is also planning a significant number of projects. The General Directorate of National Roads and Motorways (GDDKiA), one of the largest road investors in our part of Europe, is creating something of a stir by announcing a raft of tenders for the construction and modernization of roads and bridges. There were around 30 tenders in progress for road construction and 80 for modernization as 2008 came to a close. The board of GDDKiA last year decided to reduce the formal requirements for companies to enter the tenders, resulting in the potential number of such contractors having risen from around 30 to almost 300. According to Artur Mrugasiewicz of GDDKiA’s press office: “We have discarded some requirements in order to encourage a larger number of firms to carry out our contracts. But they cannot be casual firms without the necessary experience.”

Roads instead of homes

New real estate contracts have come to a halt, with developers now taking their time in starting new projects due to poor demand and difficulties in obtaining finance. This is why construction companies are now vacating building sites – as has happened in Gdynia, where a lack of investment finance has forced Mostostal Warszawa to stop work on enlarging the Wzgórze shopping centre being developed by Apsys. But this is not causing the company any great angst, as Mostostal Warszawa’s contract portfolio is certainly not one of the leanest. The company is now about to extend Reinhold Polska Project 4’s Silesia Atrium office complex in Katowice, in a contract worth PLN 43 mln, and to build a bridge over the Odra river in Wrocław, in a joint contract with Acciona Infrastruktura worth PLN 577 mln. They are also contracted to construct a motorway roundabout in Wrocław as part of a consortium in a contract worth a total of PLN 2 bln, of which 30 mln will go to Mostostal. Infrastructure projects now amount to more than 70 pct of the company’s contracts. The value of the entire portfolio comes to around PLN 3 bln – 1.3 bln more than a year ago. Jarosław Popiołek, Mostostal Warszawa’s president, feels that: “Poland is clearly entering a stage where there is going to be many infrastructural projects. I have particularly noticed over the last few weeks an unprecedented crop of new tenders and announcements of future tenders.”

One of the more interesting projects being carried out by Pol-Aqua is the first stage of work on the National Stadium in Warsaw. But this is only the tip of the company’s operations. Its portfolio also contains orders from the University of Opole, Lotos Group, PKN Orlen, ZDM Warsaw, Wojskowe TBS ‘Kwatera’ and a number of water supply and sewage removal companies. According to Małgorzata Akimowicz-Paruszewska of the company’s press office: “We cannot complain about any lack of work. Our order portfolio is PLN 1.3 bln today, greater than a year ago. Indeed, we are not afraid of any future difficulties afflicting the industry.”

But why is all this happening now?

Apart from its operations as ageneral contractor in the petroleum, chemical and energy industries, Polimex-Mostostal is also involved in projects funded by the EU. This year sales are expected to grow by around 20 pct compared with the 2008 performance. The company’s order portfolio currently amounts to PLN 7 bln, with more than 70 pct planned to start this year, out of which infrastructure projects account for more than 20 pct. Konrad Jaskóła, Polimex-Mostostal’s company president, puts it this way: “The prospects for the market are good because material prices have fallen, exports are becoming more profitable, inflation and interest rates are dropping, while domestic demand is rising due to the falling land prices. We are also finding additional backing in a new directive enforcing 20 pct advance payments for infrastructure contractors, while it is also becoming easier to recruit skilled workers.”

More players

It is not only the companies already active on the market that have been scenting opportunities from all the infrastructure contracts. Since Poland is one of only a few countries with decent prospects for infrastructure contractors, those companies which have yet to enter the Polish market will surely enter the scene to compete for the many millions of Polish złoty worth of contracts up for grabs. Jerzy Werle, the general director of Warbud, comments that: “These are companies which have been active, for instance, in commerical or residential construction projects, belonging to strong international corporations. They will have no problems in becoming qualified for infrastructure construction purposes, since these groups often already own such companies.” Jarosław Popiołek concurs: “There are many well-run companies on the market whose managers are capable of changing their specialities. But what they require most of all, apart from money, is time. That is why I would not be scared by their competition in tenders to be staged in the next few months.” Warbud general director Jerzy Werle is, however, just a little wary: “The new constructors that could appear might even make offers at dumping prices, especially Asian firms, which usually differ from us in the way they calculate their offers.”

Mustering forces

The heads of large construction firms tend to claim, against the general view, that the Polish building market is fragmented. The best of evidence of this can be seen from the ranking list of European construction companies drawn up by Deloitte, in which the first Polish company, Polimex-Mostostal, is way down in 75th place, with Budimex second in 82nd position. Konrad Jaskóła, the head of Polimex-Mostostal, believes that: “The strong competition is not caused by new firms appearing on the market, but rather by the permanent hunger to carry out orders. This is confirmed by the large number of companies or consortiums which submit offers at tenders. An essential barrier they encounter are the often unreasonable tender requirements. And that is why I do not expect a huge wave of new players to flood this market in the near future.”

Profit margins are what encourage constructors to undergo such complex processes as reconstructing their companies to meet the requirements of a somewhat different group of customers. Although these margins are still not so wide, they are nevertheless greater than for general construction. They amount to around 3 pct gross for Mostostal Warszawa in a diversified order portfolio. Jarosław Popiołek expresses the view that: “The margins existing in engineering construction remain at the same level, but they are falling in commercial and residential construction, which is why contracting firms are seriously considering moving into the infrastructure sector.” Mostostal Warszawa’s president expects the 2008 revenue level to grow 20 pct in 2009, but stresses that today’s order portfolio was created when the current crisis was still not being felt so acutely. Jerzy Werle of Warbud also agrees about the size of the margins: “Profits between 3 and 5 pct will be difficult to achieve in the future. More companies will be participating in tenders, so offers will be more competitive, although there should enough contracts for everyone.” His company will also have an increasing number of infrastructure projects in its portfolio, although this will change in mid-2009 when work on several residential projects has been completed.

Insurmountable barrier

Marcin Kasprzak, the head of Arup’s road construction department, simply does not believe the future will be so bright for construction companies currently involved mainly in commercial and residential projects. “I see little opportunity for such companies to change their production profiles. Infrastructure construction requires highly specialized and expensive equipment and expertise. The most probable outcome will be that the bigger, stronger and more diversified firms will move some of their operations from companies or sections dealing in traditional construction to those constructing roads and bridges.” He also believes that there are many companies around the world with such structures to easily allow a change of tack in response to the situation on the market, but that new, inexperienced contracting firms could get their fingers burnt if they embark upon this strategy. Marcin Kasprzak also has this to say on the matter: “Public orders, the principles of which are valid for all the more important infrastructure orders, are an additional issue. The rule is that the investor demands that those entering tenders should have references and proven experience in delivering similar projects over several years. Companies that cannot demonstrate any participation in such projects may accept the role of subcontractor. But they will not be given references for such work which they could use to win such contracts later on.”

Mariusz Szmyd, director of the Tebodin SAP-Projekt design studio in Poznań takes a calmer view: “Public orders for such facilities as schools, hospitals and sewage treatment plants offer an opportunity for developers and contractors active in the commerical and residential sectors, and there are going to be a lot of them. Such firms possess the technical qualifications and can often meet formal conditions, but is almost impossible to