Road Building Sector Woes Prompt Further Downgrade

BMI View: Our pessimistic view for Poland's construction sector in the wake of the country hosting Euro 2012 is playing out. We anticipated a post-tournament slump as momentum behind new projects failed, especially in regards to the construction of roads ; however, the extent of the unravelling of the road building sector has surprise d the industry . The latest development - accusations of price fixing and a subsequent freeze in EU funding - will cut off crucial financing and has prompted a further downgrade to our near-term outlook .

Poland's road building sector is thought to have experienced a sharp slowdown in 2012 , which we believe will deepen into a recession in 2013. A worrying trend of high competition, poorly structured tendering processes, unsustainably low project bids and a frontloaded project pipeline had caused us to highlight the cracks in Poland's road building sector for some time. These are now playing out , with hundreds of companies declaring bankruptcy, contract disputes and reports of unpaid bills. In October 2012, SRB Civil Engineering announced it was suing GDDKiA for PLN1.2bn (EUR286mn) over a contract dispute and unpaid bills for work on the A1 highway. This contract is one of a number that fell apart.

Adding to these woes, the European Commission, the main financier of Poland's road building programme, announced on January 29 2013 that it has frozen EUR890mn in funding for the sector as a result of price fixing accusations .

The EU, through a number of funding mechanisms , including EU Cohesion Funds, the European Regional Development Fund and the European Investment Bank ( EIB ) , has been the lifeblood of Poland's road building sector, providing billions in funding over to implement the country's EUR42bn investment programme.

Pricing In A Slowdown
GDDKiA Road Spending, PLNbn

The frozen funds are from the 'Infrastructure and Environment' operational programme, which is financed by the European Regional Development Fund. The funds are crucial in supporting the PLN17bn (EUR4bn) the GDDKiA is planning to invest in 2013; if it is delayed for any significant period of time, or even suspended long term, planned investment would be seriously hit.

There could even be more severe ramifications. Poland has been able to secure a significant amount of funding for its road building scheme (and other infrastructure) from the EIB. The EIB is the EU's bank, lending funds for projects which further EU policy objectives. Since 2008, the bank has lent an average of EUR5bn per year to Poland. The majority of funding has gone towards supporting Poland's transport infrastructure, with EUR11bn approved over the period; EUR7.5bn of this amount was used for roads. This source of funding is also under threat from transparency concerns, as it is unlikely the EIB will be in a position to lend further funding to Poland, while the EU has suspended aid. Pending the outcome of the investigation into price fixing and contract irregularities, the EIB could also withdraw funding for Poland long term.

Contract Failures Provoke Slump
Poland Roads And Bridges Infrastructure Industry Value And Growth

This would cripple Poland's road sector. Already investment is expected to slow rapidly, as a result of a planned contraction in investment, but this is being exacerbated by the weakness endemic in the country's construction sector, following the bankruptcy of over 200 companies in 2012 and outstanding contract disputes, which have suspended work. We are estimating road construction growth to have decelerated to just 0.7% in 2012, with a contraction of 4.2% expected for 2013. If funding is cut substantially, we expect to see the road building programme come to an abrupt halt, causing further pain for Poland's contractors and prompting us to downgrade our outlook further.

This article is tagged to:
Sector: Infrastructure
Geography: Poland

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