Poland has to speed up in order not to lose millions

(Irish Typepad, CC BY-NC-ND)

Poland is late with the construction of three regional broadband networks. The country is in danger of losing PLN600m subsidies from EU. More than 100 such projects are being implemented. A project in Romania is also at risk, while Lithuania fared very well.

In Poland, four months before the final deadline for the settlement of the investment, the timely completion of the works is still uncertain. The construction of Regional Broadband Networks (RBNs) is one of the biggest internet infrastructure projects in Europe. The project provides for the construction of 26,300 kilometers of fiber optic backbone and distribution networks and more than 3,000 backbone and distribution nodes in 11 Polish voivodeships. In total these projects are worth more than PLN 3 billion, the lion’s share of which – 63% – are subsidies from the EU. In order not to lose the EU funding, the projects must be settled by the end of 2015.

The RBNs are built in order to indirectly increase the availability of internet in poorly urbanized areas. In accordance with the project assumptions, any company will be able to build access networks and provide services to its clients with the use of the backbone-distribution network created within the framework of the RBNs.

As seen by the auditing authority

In a report published by the end of July 2015, concerning the construction of internet networks aided by EU funds, the Polish Supreme Audit Office assessed the state of progress of the works in seven voivodeships: five voivodeships covered by the “Broadband Network in Eastern Poland” program, as well as the Masovian Voivodeship and the Greater Poland Voivodeship. The Supreme Audit Office praised the local governments for the applied procedures and warned that it saw a threat for the timely settlement of some of the projects.

“Taking into account slow material progress of the investments observed in some voivodeships we think that there is a risk they will not be completed and settled before the end of 2015. The extreme example is the Subcarpathian Voivodeship, where, as of the end of 2014, not a single one of the constructed sections of the network has been received yet”, concluded the Supreme Audit Office in the report.

According to the Supreme Audit Office, the delays in the implementation of the investments were caused by prolonged activities preceding the launch of the investment, as a result of which their actual implementation began too late, and also by the sluggish process of removing legal and organizational obstacles.

At the end of August 2015, construction work was completed in five RBNs. In three more was close to completion. Three projects – in the Masovian, Lesser Poland and Subcarpathian voivodeships were still considered to be at risk due to the level of progress of the works. Maybe it will be possible to complete and settle them at the last minute, so that hundreds of millions of PLN in EU subsidies are not forfeited. Out of the five projects in which the construction works have been completed, there are two networks implemented in the model of public–private partnership – in the Lubusz Voivodeship and Pomeranian Voivodeship. Both projects were implemented by the Orange group.

Delays at the beginning

The history of construction of the RBN dates back to the second half of the previous decade. At the end of 2007, the European Commission granted EUR2.5bn for the development of five voivodeships of Eastern Poland, out of which about EUR1.1bn was intended for the internet infrastructure. Preparations for the construction began at that time. Numerous studies, expert opinions and feasibility studies were prepared, which were supposed to create the final shape, cost, and model of construction of the network needed to obtain EU funding. This is when the first delays occurred.

In 2007 it was tentatively assumed that the feasibility study for the project for Eastern Poland would be ready by September 2008. However, in the agreement with the contractor preparing the feasibility study, signed in January 2008, the deadline was 30 April 2009. This deadline was also missed. After final amendments, the study was ultimately ready in March 2010. This had an effect on the entire schedule of the works.

The schedule presented in July 2007 by the Ministry of Regional Development stated that that the project would be completed in 2012. At the beginning of 2012 the completion deadline was already set for 2014.

The first efforts to obtain the European Commission’s approval (notification) for the use of public aid – in the form of EU co-financing – began in March 2010. At that time, the largest project – the Broadband Network in Eastern Poland consisting of five regional networks – launched the so-called pre-notification process. The project received the notification on 10 November 2011 which is the best example that it was not prepared at this stage. Three other large projects also required supplements and amendments at the stage of obtaining EU approval for public assistance. Even though the efforts to obtain notification were launched between June and August 2011, the European Commission’s approvals for the subsidies were granted only between May and December of the following year.

The time of tender procedures

Some projects experienced further delays at the stage of selection of the contractor. Already at that point, there were voices claiming that there was an increased risk that some projects would not be completed on time.

“We are waiting for the tender procedures” – in spring 2012 this was the common response of the representatives of the potential contractors of the regional networks built under the “Broadband Network in Eastern Poland” project. They also admitted that they were a bit disappointed that tenders had not been announced in the first quarter of 2012. They emphasized that before construction could commence, the network had to be designed and permits obtained, and that following the completion of the project it had to be accepted and settled. They expressed hope that no one would challenge the tender decision, because that would mean additional months of waiting for the commencement of the construction works. However, challenging procurement decisions, especially in large tenders, is a standard procedure. This was also the case in the “Internet for Mazovia” project at the stage of selection of the contractor, who would also be the operator of the network. The agreement was only signed in October 2013, even though the winner of the tender process, which began in November 2012, was selected in July 2013. One of the losing bidders – the Otwarte Mazowieckie Sieci Szerokopasmowe company, part of Hawe group – challenged the result, claiming that the winner (a consortium led by the Korean KT Corporation) offered an understated price. Also the tender for the operator of the Lublin Voivodeship’s RBN was challenged.

In turn, the authorities of the Lower Silesian Voivodeship found a reason not to sign the agreement with the network operator that won the tender in December 2014. The operator decided to defend its rights before the Voivodeship Administrative Court, which sided with it. The agreement was ultimately signed at the end of August.

In 2014 there were also problems with the selection of the operator of the Greater Poland Broadband Network. The consortium of MNI Centrum Usług and Hyperion, which won the tender, failed to submit the required documents on time. Then the Management Board of the Greater Poland Broadband Network entrusted the task to the second bidder in line. However, according to some local operators this consortium had family ties with the members of the governing body of the Greater Poland Broadband Network. In addition, MNI Centrum Usług and Hyperion challenged the decision of the Greater Poland Broadband Network to the Voivodeship Administrative Court. The court dismissed the appeal. The consortium of HFC Operator and Telekomunikacja Wielkopolska ultimately became the operator of the Greater Poland Broadband Network – one year after the announcement of the tender.

In Greater Poland a battle was fought over the selection of the active equipment supplier. The tender, concluded in February 2015, was challenged by the bidders who lost. The final decision was made by the District Court.

“The disputes over the outcome of the tender procedure delayed the project so much that we had to obtain the consent of the Greater Poland Voivodeship government to postpone the deadline for the material completion of the project from the original date of 30 June to 30 September, and the deadline for the financial completion from 31 October to 30 November,” said Anna Streżyńska, the CEO of the Greater Poland Broadband Network. The launch of the wholesale data transfer services available in the Greater Poland Broadband Network has been delayed by three months.

Race against time

Anna Streżyńska became the head of the Greater Poland Broadband Network in April 2014, after the company’s previous CEO was dismissed due to publications in the “Nie” and “Gazeta Wyborcza” newspapers on the alleged irregularities in the tenders organized by the company. Since the end of March 2015 she has also been responsible for the construction of a regional network in the Masovian Voivodeship. She claims that the construction of the network in itself is a relatively quick process, but it takes a lot of time to obtain the necessary permits.

“It takes 14 months to obtain permits for a section which is built in two months,” says Anna Streżyńska.

As of the end of August, the construction of the regional network in Mazovia was running late. The contractor estimated that in the construction of the network the project was 9% be-hind schedule for the end of August (258 km of network). In the case of the construction of the backbone network nodes, the target for 31 August 2015 was 86% completed.

Despite the delay, Streżyńska remains optimistic and claims that it should not pose a risk for the completion of the project in accordance with the schedule.

“We met the previous milestone (a goal set in the construction schedule), that is, the completion of the network design, before 30 June. When I came to this project, the two previous milestones, from March and December, were missed. Unfortunately, these early delays are still affecting us, despite the fact that we’ve already caught up a lot,” Anna Streżyńska told us in early September. She added that corrective measures intended to provide support for contractors and supervision inspectors would be introduced as early as the first half of September.

In August Hyperion, which is responsible for the construction of the network in Lesser Poland, obtained yet another consent of the Voivodeship government to extend the construction deadline – this time until November. The company is already planning future revenues from the operation of the network. On the other hand, Hawe, whose subsidiary company is building the network in the Subcarpathian Voivodeship, is still maintaining the October deadline for the completion of the works.

The total value of the EU co-funding in these three projects is PLN 609 million, out of which PLN 341 million was allocated for the Masovian Voivodeship.

Spectre of a repetition of the highways debacle

It is possible that the companies building the regional broadband networks – much like the companies building the highways for the Euro 2012 tournament – will not make a profit on the projects, and may even incur a loss. There are already the first signs of that.

Nanotel, which was a subcontractor in the RBN in the Lublin Voivodeship, has acknowledged that it incurred losses on the contract. The costs turned out to be higher than estimated at the time of signing the agreement. Their increase was caused by the extended duration of the works, as well as problems with recruitment of skilled workers. The company hopes to make up for the losses on the contracts for the construction of the network in the Subcarpathian Voivodeship and in the Lesser Poland Voivodeship.

Problems in the labor market (including the shortage of engineers and skilled workers, associated with the fact that works on numerous projects all piled up in 2015) were already anticipated two years ago. At the time a representative of one of the contractors building the net-works explained that it was necessary to maintain good relations with the subcontractors so that when they are needed they will choose to work for their consortium and not another.

One of the companies in real trouble is the Hawe group. A subsidiary of the group – Otwarte Regionalne Sieci Szerokopasmowe – is responsible for the construction of the RBN in the Subcarpathian Voivodeship and the Warmian-Masurian Voivodeship, and another company – Hawe Budownictwo – is one of the contractors of these networks. Hawe ceased servicing its debt (resulting, among others, from investments in its own Polish nationwide backbone net-work) and announced in early September 2015 that it intended to file for bankruptcy. The company claims that it will be able to service its debt if it is able to restructure it, if it can raise capital, and when the contracts for the construction of the RBN are fully settled.

Romania has a problem, while Lithuania is a shining example

There are more than 100 projects for the construction of broadband networks carried out in the European Union in which the use of public funds is planned – either from the state budgets or from EU subsidies. One of the biggest projects (with state aid worth EUR600m) involves the construction of telecommunications ducts in Germany in areas where commercial operators were not planning investments over the next three years. The project, funded from the German budget, is supposed to be completed by the end of December 2015. In this project, the EU notification, necessary for the commencement of works, was obtained in five months (the European Commission issued it in mid-July 2010), which means, that at this stage the German project was much better prepared than any of the Polish projects.

According to the Romanian press, the Ro-Net project for the construction of a backbone and access network covering nearly 800 locations in seven regions of Romania, co-financed by the EU, is at risk. The project involves the creation of nearly 4,900 kilometers of fiber optic network. Approx. 130,000 households, 8,500 companies and 2,800 public institutions will gain access to the Internet.

The project, prepared for years by the government, received the EU notification very late – on 12 December 2013. At the time it was assumed that the investments would begin in 2014 and the settlement of the project worth EUR84m (EUR68.5m in EU subsidies, with the remainder financed by the state budget) would be completed by the end of 2015. However, the design works began only in January 2015 and the construction works commenced in June. In August the CEO of the contractor and the future operator of the network (Telekom Romania) announced that the project was at risk and that it would not be completed within the deadline agreed upon with Brussels, which meant that the EU subsidy would be forfeited. He laid the blame for the delay on the bureaucracy, incompetence and inertia prevalent both in the ministries and in the local governments. He stressed that the company had to obtain 10 different permits in each of the nearly 800 locations covered by the project. In response to these words, Romania’s Minister for the Information Society, Sorin Mihai Grindeanu, blamed the operator. He concluded that the contractor’s problems with obtaining permits resulted from the incomplete documentation that he submitted to the local authorities and that he also failed to pay all the fees for the permits.

The situation was entirely different in Lithuania. That country’s project of construction of backbone and distribution networks “RAIN” (total project value of EUR60.5m, co-funding from the EU funds of EUR51.4m) proved to be a success. The indirect result of the project is that our neighbor is among the world’s top countries with the highest number of fiber optic access links per 100 inhabitants.

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