Nowhere to turn

Jan-Gunnar Glave, the president of Exbud Skanska, a subsidiary of the Swedish construction giant Skanska, makes no secret of the mistakes that propelled Poland's construction industry and his company into financial crisis. "Polish construction companies, including ourselves, were too slow to adjust to market changes," Glave said. Since buying a majority stake in Poland's Exbud in 2000, Skanska has watched the company's stock slide from around zł. 38 a share in April of that year to less than zł. 10 in March 2002. The company's 2001 loss of zł. 282.3 million ($69 million) dwarfed the negative results of its competitors. Glave said that Exbud failed to restructure, reduce its workforce and stem its appetite as a developer because, like the rest of the industry, its ma-nagement did not plan for an extended period of economic gloom. "Very few companies in Poland were prepared for this," Glave said. "Most of them thought this would be a short-term recession followed by a quick recovery." Falling demand and a squeeze on prices brought heavy losses for the majority of construction companies at the close of 2001, sending their stocks on a downward spiral. This year's sustained market malaise has led investors to rescind finance for construction, further deepening the industry's problems and leaving firms short of funds to pay subcontractors. As a result, new construction projects rarely get off the ground, and many building sites have come to a standstill, brin-ging heavy job losses and the widespread threat of bankruptcy. "At the moment, the construction industry is facing a very deep depression, a very difficult market situation," Glave said. "I would compare it to the crisis in the European cons-truction industry 10 years ago."

Getting its house in order This year, Exbud's parent company Skanska has taken decisive steps to put its Polish interests in order. Skanska delisted Exbud from the Warsaw Stock Exchange (WSE), giving it greater leeway in trimming non-core subsidiaries and focusing the company on civil engineering industrial and general construction. Although Glave admitted that Skanska has already poured zł. 200 million ($49 million) into refinancing Exbud's expensive bank loans, he was tight-lipped about 2002 profit expectations. "I can say that we have seen many improvements already," he said. The belated restructuring of Exbud was a response to this year's ongoing decline in market demand. Poland posted its worst construction-industry confidence level for this time of year, according to a Central Statistical Office (GUS) business confidence survey, which showed that 72% of firms expected no improvement in the market. "There is no sign of recovery; the market is down," said Andrzej Dobrucki, the vice president of construction company Mostostal Export. "Investors are barely holding out, development has stopped, the tempo of hou-sing sales is too slow. There are very few new investments on the market, and companies fight over them like dogs chasing a bone." After closing 2001 with losses of zł. 50.3 million ($12 million), the company plans to return to profitability next year by selling assets valued at zł. 300 million ($73 million) during the next two years, and cutting costs by centralizing management and sales across its subsidiaries. WSE investors have all but abandoned the construction industry in the past two years, with the exchange's Wigbud construction index dipping to less than half its 2000 value last month, as second quarter results showed mounting losses for the industry's biggest players, including Budimex, which lost zł. 27.3 million ($6.7 million), Mostostal Zabrze with a loss of zł. 28.4 million ($6.9 million) and Mostostal Export down zł. 8.2 million ($2 million). The dire condition of the industry is also reflected in the scale of job cuts undertaken by firms in the past two years. Since Skanska bought into Exbud, the company has cleaved its workforce from 14,000 to 7,000, while in the past 18 months Mostostal Export has cut back from about 5,000 to 2,700 employees. Employment at Exbud's and Mostostal Export's subcontractors roughly matches the workforce of the firms and has been reduced by similar proportions, the companies said. Analysts and company directors said that Poland's worsening microeconomic climate in the past two years should have triggered the restructuring of the construction industry. "It all goes back to the Polish economy with high interest rates and high unemployment - factors that make investors reluctant," Glave said. The key effect of the economic downturn, with the government grappling with a growing budget deficit and plummeting investor and consumer confidence, was a cutback in spending on infrastructure investment and a drop in demand for residential housing and office space. As a result, the number of new homes completed in the first seven months of 2002 was down 14.9% compared to the same period last year, according to GUS. New modern office space on the market next year is estimated at just 85,000-95,000 square meters compared to the 216,362 square meters completed last year, according to real estate agency DTZ Polska. "I don't foresee any recovery of demand or investment right now," Dobrucki said.

Reluctant to restructure A small number of construction firms had responded to the malaise by restructuring. Mostostal Warszawa, which built Warsaw's Siekierkowski bridge, ended 2001 with profits of zł. 14.4 million ($3.5 million) after selling off excess assets. But the majority of general contractors simply hoped the downturn would not last. Instead of scaling down their operations, they decided to head off the market decline by increasing their volume of contracts and cutting profit margins, which increased competition and forced down prices. "They thought they could survive the recession by keeping up their volumes, by taking on projects at lower and lower prices," Glave said. "That's not possible in a long recession." Many firms also saw entry into the potentially profitable development business, regardless of their experience level, as a way to bite tough times. As demand for offices and housing continued to decline beyond the expectations of construction companies, funds became tied up in properties that proved difficult to sell, starving firms of cash to pay subcontractors and suppliers. "They didn't have experience as develo-pers; they bought property in poor locations and are now attempting to get out of the business," said Rodryg Łobodda, an analyst at Dom Inwestycyjny BRE Banku. Disaffected subcontractors have refused to take the situation lying down. PIA Piasecki, which closed the first quarter with debts of zł. 358 million ($90 million), was unable to cover its debt to subcontractor Warsaw Construction Company (WPB), which filed for PIA's bankruptcy. Although the filing was quickly dismissed by a regional court in Kielce, PIA saw 70% wiped off its share value in two days. Last Wednesday, however, the same court accepted a filing for arrangement proceedings - the equivalent of an American Chapter 11 bankruptcy code filing, which allows for a company's reorganization under its existing management - for PIA. PIA's bank debts are indicative of the use of short-term bank borrowing by construction firms to pay subcontractors and suppliers to continue projects, a trend analysts say will end this year. After this summer's collapse of the bankrupt Szczecin Shipyard, which put a spotlight on the exposure of banks to economically endangered borrowers, banks have imposed tougher conditions on financing, drawing a shadow of bankruptcy over the construction industry. "Obtaining capital will become an increa-sing problem for construction firms," Łobodda said. "Because of the problems of the Szczecin Shipyard and construction firms Mostostal Zabrze, PIA Piasecki or Espebepe, banks are curtailing construction industry financing." Stricter financing conditions are hampering construction companies from taking on new orders and beginning new development pro-jects. "We haven't halted any projects, but we have those that can't move forward at the right pace or can't even begin, even though we have land and contracts with investors." Dobrucki said. He declined to put a value on the company's halted projects.

Survival of the fittest Banks will not regain their confidence in the industry until construction companies start to show profits, but according to Krzysztof Szamałek, the president of Mostostal Warszawa, this will not happen without bankruptcies and consolidations on the market. "The market has to be restructured in the sense that companies will have to collapse, particularly those that submitted offers at below cost (and) saw new contracts simply as a way of paying off debt," Szamałek said. "The market must be cleansed of firms that are not solid partners, that do not pay their subcontractors and have destroyed countless small contractors and suppliers." With the current attitude of banks and private investors, construction firms and analysts see the biggest potential boosts to the industry in government plans to stimulate the economy by supporting investment in infrastructure and housing and in EU-backed initiatives to upgrade Poland's ailing road and rail networks and environmental facilities. Additionally, sources indicated that NATO, the military alliance of democratic states that Poland joined in 1999, is dissatisfied with the state of Polish military infrastructure and will increasingly push for modernization in the coming years. "The most promising sector is infrastructure development with a link to EU accession and the possibility of obtaining funds for pro-jects," Łobodda said. "Our country has substantial shortfalls in this area." According to Glave, Poland's infrastructure shortfalls will provide work for years to come, regardless of whether the government can afford the necessary expenditure. "Our hopes are not just based on government promises, but on the fact that there is an internal need, too," he said.