Q: What is your opinion of the changes in the construction sector?
A: Very positive. We have joined Europe and Poland has become a normal country. The laws of the market have become effective in Poland, something which has helped some businesses and damaged others. I think that, although we had a crisis at the beginning of this century and many businesses went bankrupt, it was a good time for the building industry. Many of its sectors were developing fast - the housing and infrastructure sectors kicked off. Roads, bridges and environment protection facilities were being built. As a result, builders had more and more work.
The current global crisis has a growing impact on the situation in Poland but the Polish construction sector may be helped to a large extent by European Union funds available under the Infrastructure and Environment Operational Programme. The money is designated for specific projects which have to be carried out. Additionally, there are projects – like stadiums and hotels – planned for the Euro 2012 European Football Championship.
Q: Are there any similarities between this past crisis and the current one?
A: The past crisis was a typical economic downturn, with an almost immediate drop in investment, which obviously had an adverse impact on construction. Many builders were in great trouble but it was an ordinary crisis, one in line with the business cycle. At present, we have to do with a financial crisis. It has spread into the real economy, which has slowed sharply. It is projected that Poland’s GDP growth will be close to zero in 2009 while at the worst moment of the past crisis GDP grew by 1%.
However, thanks to EU funds, the construction sector may be in a better shape than it was several years ago. Of course, not the whole sector – the situation of developers and other businesses opera-
ting on the housing market is very difficult indeed.
Q: Prospective homeowners and home builders are complaining that access to bank loans is very restricted. Have you also suffered as a result of the tighter lending criteria imposed by banks?
A: Of course. We can feel the problems investors have with access to funding and the troubles experienced by construction companies themselves. These days, access to external funding is necessary because own resources account for a mere 20-30% of a project’s cost. Investors, especially private ones, are trying to pass on some of their financial problems to the general contractor, and want to have their payment deadlines extended. But construction companies have to pay their suppliers and workers!
It is also important to make a distinction among large, medium and small builders. The smaller the business, the lower its credibility and the more difficult access to credit. Large companies, especially those working on large projects partially funded by the European Union, have it much easier. I do not think any of them is threatened with bankruptcy. But we have received signals from small builders, especially subcontractors, that they are in trouble because of a drop in orders and liquidity problems. Most of these businesses used to have working capital credit lines in banks and were able to buy materials and pay their workers. Now, with restricted access to credit, some of these businesses may go bankrupt.
Q: But Autostrada Wielkopolska SA, which is a large construction company, also had problems for many months with securing funding for the construction of a motorway stretch from Nowy Tomyśl to Świecko.
A: In this case, the problem concerned public-private partnership and licensing while the project involved is worth billions of zlotys. Fortunately, projects of this kind are supported by the European Bank for Reconstruction and Development and the European Investment Bank. Therefore, Polish commercial banks are more willing to provide funding for them.
The lack of confidence, insufficient liquidity and sluggish lending activity have slowed the economy and have hit the construction sector hard.
Q: Every contract matters at a time of crisis. What do you think about the participation of non-European companies in tenders for infrastructure projects?
A: There are two aspects to this question. The first one has been discussed for many years. Capital, people and services are allowed to move freely in the European Union but the construction sector used to ward off “strangers.” British companies used to build in Britain, French ones in France. Even in Spain, which received huge amounts of money for modernisation after its EU entry, construction projects were carried out by Spanish builders, something which helped them gain the strong position they now have.
In Poland, as a result of privatisation, the controlling stakes in large construction companies are held by foreign owners. But these companies have not ceased to be Polish because their management and workers are Polish, they have headquarters in Poland and pay taxes in Poland. In many cases, it is difficult to identify the owner because most of these companies are listed on the stock exchange and their shares are traded. I think that the issue of ownership has lost in importance in a globalised world.
The rule in the EU is that everyone is allowed to take part in tenders but the company which is awarded the contract has to comply with the regulations which are in force in the country, which practically means compliance with EU law. And in fact no non-EU company – whether from China or India - is prepared to meet this requirement.
Q: What initiatives has the Polish Association of Construction Industry Employers taken to improve regulations for builders?
A: Most of our members are general contractors – the association brings together virtually all of Poland’s largest companies – and we protect their interests. Since the beginning we have addressed the most serious problems which hamper our activity. One example is our successful effort to change the provision that the value of contracts for the implementation of EU-funded projects should be denominated in the euro. This generated a very high risk for construction companies because the exchange rate of the zloty to the euro fluctuated within a band of over 10% while construction margins are not higher than a few percent. In this situation, running a business was like playing roulette. This provision has been changed and, although EU assistance is denominated in euros, the contracts are in zlotys.
We are now striving to ensure an equal footing for investors and contractors. In the EU, terms of contracts, especially public ones, are uniform, with the rights and duties of the investor and contractor clearly specified. The only thing one has to do is to enter the price, completion deadline and warranty conditions into the contract template. In Poland, every contract which allegedly meets FIDIC standards is different. In most cases, the contract does not specify the investor’s duties, only their rights, while the contractor has only duties and no rights. It is a caricature of the FIDIC standards and it has an adverse effect on the implementation of projects. The Association has adjusted FIDIC requirements to Polish law and submitted the study to the minister of infrastructure asking him to check whether everything is in compliance with the law and, if so, order the institutions subordinated to the ministry and local governments to apply the rules.
Q: How did Budimex fare in 2008?
A: Last year, our sales increased by 10%, which was not a very impressive success, but our net profit rose several times to PLN105 million. As a result, we saw a great improvement in profitability – a rise to 3.1%. We are one of the three largest and most profitable companies in the sector.
This year promises to be equally good, if not better – we hope for a rise in net profit. I do not expect any impressive increase in sales because projects are carried out at a slow pace but I think we will be able to improve our profitability to 3.2-3.3%.
What worries us greatly is that the investment process has slowed. It seems money is scarce in the national budget for the required own contributions to EU-funded projects. This is what we feared. The government insisted that money for this purpose will always be found but the budget deficit is mounting.
In 2008 the General Directorate for National Roads and Motorways (GDDKiA) spend PLN16 billion, this year it planned to spend PLN28 billion. We are waiting for information on how much it spent in the first half of the year. If the figure is lower than a year before we are facing a disaster, meaning an increasingly poor absorption of EU funds. In this case, the engine which was supposed to drive our economy and alleviate the crisis will turn out to be a handcar.