The construction industry in Poland is growing again

Experts predict that the construction industry will undergo several years of revenue growth. They express concern, however, regarding the accumulation of construction works which will be conducive to increases in the prices of building materials.

The construction industry’s general business tendency climate indicator calculated by the Central Statistical Office of Poland (GUS) has maintained a positive value since April 2017. The last time it had a positive value was July 2011. According to GUS data, after eight months of this year, the revenues of construction companies employing more than 9 persons were 12.5 per cent higher than in the previous year. We should remember, however, that the year 2016 was not a very good year for the construction industry – the revenue of construction companies declined by approx. 6.9 per cent compared with 2015, and the downturn in the industry lasted until the end of August of last year.

Last year’s decline was caused by a reduction in investment expenditures, including expenditures financed from the state budget and from EU funds. The announcement of tenders for the construction of roads or the modernization of railway lines have only started in recent months. At the beginning of 2016 the Ministry of Infrastructure and Construction signaled that there was a shortage of prepared railway projects required for the announcement of tender procedures.

In late September 2017, the President of the Public Procurement Office Małgorzata Stręciwilk told the parliamentary committee of economy and development that, “we had some delay in the implementation of the EU directives, so a large part of the investors, and especially those who were spending EU funds, refrained from launching public procurement procedures.” She added that another reason for the decline in the value of the public procurement market was the fact that the contracting of large investments from the next EU financial perspective had not started in 2016.

According to analysts, in the medium term we can expect growth in the revenue of the construction industry. Looking at the prospects, we should keep in mind that in July 2016 Deputy Prime Minister Mateusz Morawiecki announced that within ten years Poland would spend the equivalent of over USD100bn on investments in infrastructure – the navigability of rivers, roads and motorways, railways, the Central Communications Port and energy investments.

Residential housing on the rise

A solid recovery is maintained in a residential construction. According to GUS, after the first eight months of the year, the number of building permits and applications with a building project was almost 35 per cent higher than in the corresponding period of 2016. From the beginning of this year to the end of August, nearly 109 thousand new flats were built, which is 9.6 per cent more than in the previous year, when an increase of 12.8 per cent was recorded. The number of construction projects started in the first eight months increased by 22.4 per cent to almost 144 thousand flats (in the previous year, the increase was slightly above 6 per cent).

The construction of new housing is supported by low interest rates. Some of the funds flowing out of low-interest bank deposits are invested in new flats built for the rental market. The low interest rates are also conducive to taking out loans for the construction of flats or the recently popular apartment-hotels (in exchange for the co-financing of the construction of a hotel, the buyer obtains the ownership of a room along with a rate of return guaranteed for several years).

More expenditure on the roads

The National Road Construction Program (PBDK) for 2014-2023 (with a view to 2025), which the government updated in July, provides for EUR35bn (the amount of EUR25.3bn was previously established) in investment spending during that period.

Out of the projects included in the program, investments worth nearly EUR1.6bn, covering a total of 205 km of roads, have been completed thus far. Projects worth nearly EUR11.5bn (covering 1,250 km of roads), are now in the implementation phase, and the value of previously announced tenders that are still pending is almost EUR6.6bn. The lion’s share of the value of the already completed and currently implemented investments – EUR7.1bn – are tenders announced still in 2015.

Based on this data, 41 per cent of funds provided in the PBDK have already been utilized, and 38 per cent of the funds are left waiting for the tender procedures to be completed. This means that in statistical terms the situation is better than in the case of railway investments.

Investment optimism on the railways

Despite last year’s collapse in investments associated with the modernization of the railway lines, the Ministry of Infrastructure and Construction and the national railway company PKP SA believe that the investments, worth EUR15.7bn, scheduled under the National Railway Program until 2023, are not at risk.

Not everyone shares this optimism and many point out that a little more than three years before the end of the EU Financial Perspective 2013-2020, which is the main source of financing for the modernization of railways, less than half of the available amount has been allocated. This could mean trouble with the timely settlement of EU funding.

Tenders worth EUR6.4bn were announced in 2015-2016. The contracts signed so far are worth about EUR474m less. Tenders worth EUR3.08bn are still ongoing. Additional tenders worth approx. EUR1.18bn should be announced by the end of the year, and tenders with a value of approx. EUR2.37bn are planned for 2018. If the short-term plans are implemented, then works with a total value of approx. EUR9.5bn should be contracted at the end of next year.

We can expect that the railway construction market should not see any declines until 2023. If the next EU financial perspective includes resources for the co-financing of further investments, the companies specialized in railway construction, such as Torpol and the Budimex group, as well as the Polish branches of foreign construction companies, such as Poor or Astaldi, could have good prospects also beyond that date. The national railway company PKP PLK claims that it will soon prepare a list of projects that could be launched after 2023. Their value is approx. EUR7.1bn.

Energy industry past its peak

For the last few years investments associated with the modernization and recreation of the installed capacities in the energy industry were an important segment of the construction market. The investments of energy companies, which began in the first half of this decade and were worth a total of approx. EUR7.1bn, stabilized the revenues of many companies, including Polimex-Mostostal.

Construction in the energy sector is already past its peak. There are no new large investments on the horizon that would be comparable to the construction of the power blocks in Jaworzno, Opole or Kozienice. The only new contract this year is for the construction of a gas and steam power block in the Combined Heat and Power Plant Żerań worth EUR379.2m. The last coal-powered block is to be built in Ostrołęka (the estimated value of the investment is EUR1.3-1.4bn). It is possible that the construction of a gas block in the Dolna Odra power plant will begin in this decade (investment estimated at EUR237-356m).

We can additionally expect a number of investments aimed at adapting the operating power plants to the European Union’s requirements regarding emissions by 2021. Their total value is estimated at EUR829.6m-EUR1.07bn. The construction of the first nuclear power plant could perhaps become possible in the longer term.

Sea ports and airports

In an assessment of the potential contracts of construction companies, we should not forget about infrastructural investments in airports and sea ports. A separate matter is how realistic they are –especially in the case of airports.

The plan for the construction of a Central Communications Port in Stanisławów, in the Baranów commune, announced in September, is an investment which value can now be estimated at as much as EUR8.3bn. The port is supposed to be opened in ten years, and the commencement of the construction works lasting five or six years is planned to take place within three or four years. The airport is supposed to cost approx. EUR4.7bn and the remaining costs are associated with the construction of a railway junction (EUR1.9-2.1bn) and connecting roads (EUR474m-EUR1.7bn).

Regional airports, such as Wrocław and Kraków, are also planning investments. Their total value could reach EUR545m by 2025. The investments are more than two times lower than in the previous financial perspective, when they reached a total value of EUR1.37bn. The decrease is caused, among others, by the fact that the current EU budget only allocated EUR35.6m for airports, out of which EUR27.3m is to be granted to the Polish Air Navigation Services Agency. In the 2007-2013 perspective, the EU co-financing reached EUR545m.

The LNG terminal in Świnoujście is supposed to be expanded by 2021. Expansions are also planned in the ports in Gdańsk (extension of quays, deepening of the fairway) and Gdynia (total value of the investment is EUR71.1m).

Same risks as before

The construction industry still remembers problems it faced six and seven years ago, which resulted from the accumulation of road investments and infrastructure projects planned for the UEFA Euro 2012. There was a significant increase in costs, including the prices of construction materials. In addition, some investments were delayed. There was a series of bankruptcies of both large and small and medium-sized construction companies, and the subcontractors often waited several months to receive their remuneration for the completed works.

The situation is beginning to look somewhat similar right now. According to analysts, the risk is lower than in the previous financial perspective but still exists.

Companies that signed their contracts in 2015-2016 are now beginning to experience difficulties, because the prices of materials and labor has increased in the meantime. In order to obtain contracts during a period of scarcity in road and railway construction, contract winners offered prices significantly lower – sometimes by tens of per cent – from the budgets established by investors. If the winners didn’t hedge themselves against rising prices, they could now face problems similar to those experienced five or six years ago.

In the last 12 months the greatest price increases – reaching as much as 20 per cent – were recorded for granite aggregates. Meanwhile, the prices of reinforcing bars increased by approx. 19 per cent (their prices are the highest in four years), the prices of ready-mixed concrete increased by 14 per cent, and the prices of cement increased by about 10 per cent. Increases in prices reaching several per cent were recorded for pre-stressed concrete beams and rails used in railway construction projects. According to experts, after the recent increases the prices have now reached the same level as two to three years ago.

The increase in the cost of materials is not the only issue. Specialized works also have become more expensive – by over a dozen percent – while the wage expectations of skilled workers have increased by over ten per cent. Moreover, the market is now signaling emerging labor shortages. As a result, companies are trying to obtain workers from Ukraine and Belarus.

One example of a company that recently fell into trouble is Vistal Gdynia. On September, the company announced that, among others, due to unforeseen costs, delays in contracts and problems with debt collection, it was forced to make write-offs for long-term domestic and foreign contracts. The banks financing the company quickly began to terminate its loan agreements.

There are no indications of declines in the prices of materials. The accumulation of road and railway investment is still ahead of us, and this is driving the demand for materials. The pressure on wages is also unlikely to decrease.

Cezary Bernatek, an analyst at the brokerage company Haitong Bank, expects the peak of spending on road construction to occur in 2018-2020, and in railway construction in 2019-2021. The analyst predicts that local housing construction will peak in 2018, followed by two years of moderate decline. He predicts commercial construction to peak locally in 2017, followed by a slowdown in activity – in 2018 – and a stabilization later on.

The Haitong Bank analyst also points to an additional risk factor associated with the fiscal system. “The construction market is struggling due to the problems of small and medium-sized subcontractors with VAT refunds. They often reject orders, only offering the rental of equipment, or they simply demand a 23 per cent increase in remuneration to reduce the damage caused by the delay in VAT refunds,” he says.

As a result of rising costs, the contractors are submitting bids with prices exceeding investors’ budgets. This has recently led to cancellations of tenders. If a project is co-financed with EU funds, this usually means that a new tender is announced. At the same time, this increases the risk that the peak of works will fall at the same time as in other contracts.

In the case of a tender for the construction of a sports hall in Suwałki, the cheapest bid was nearly 37 per cent higher than the planned budget. “We expected that bids could be higher, but we did not expect them to be that high,” said Kamil Sznel, from the press office of the President of Suwałki, in an interview with the PAP agency.

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