Poland’s first new rail stretch in 25 years, a two-kilometer link to the Warsaw airport completed this year, could have symbolized a new track for Polish builders as competition and costs rose in road construction.
Instead, Germany’s Bilfinger Berger SE (GBF) won the contract. It was one of many rail orders that Spanish, Chinese and Irish bidders targeted to expand beyond Poland’s 130-billion zloty ($40 billion) road-improvement program. The competition squeezed margins and business fell as the construction boom for the June European soccer championships that Poland co-hosted with Ukraine came to an end.
The rail unit of Budimex SA (BDX), Poland’s largest builder, filed for bankruptcy Aug. 24. According to analyst Andrzej Bernatowicz at broker IDM SA, prospects for its peers aren’t good either as Europe’s crisis continues to drive builders outside their home markets. Poland’s transport-construction program, including 38 billion zloty for rail, is Europe’s biggest, according to the Polish Infrastructure Ministry.
“There’s immense foreign competition, which includes Spanish companies as their home market shrank,” said Warsaw- based Bernatowicz in a phone interview. “The pressure on margins in railway orders is already visible.”
Polimex-Mostostal SA (PXM), Budimex’s largest competitor, asked creditors July 24 for an extra four months to repay debts, while PBG SA (PBG), Poland’s third-largest builder, filed for bankruptcy June 4.
Budimex shares have lost 26 percent on the Warsaw bourse since it said it needed to write down the unit’s value in June. The WIGCON Index (WIGCON), the benchmark indicator for the construction industry, has fallen 45 percent this year as more than 100 builders went bust after losses on road contracts. The measure has declined 89 percent since its April 2007 peak, when Poland and Ukraine were named as co-hosts of the tournament.
Eighteen groups, including Spain’s Obrascon Huarte Lain SA (OHL), Grupo Dragados SA and Fomento de Construcciones y Contratas SA, bid to upgrade a 32-kilometer (20-mile) railway stretch in western Poland in February. A consortium led by Polish builder Torpol SA won the contract last month. The Polish state railway will pay 671.2 million zloty for the work, 250 million zloty less than planned, according to its website.
“I have doubts on whether conclusions have been drawn from what happened in the road construction industry,” Bernatowicz said. “Shifting the entire risk to contractors is a problem” in both road and railway building.
Foreign builders are lured by the fastest forecast growth in the European Union. While the pace of Poland’s gross domestic product declined to 2.4 percent in the second quarter from 3.5 percent in the previous period, the economy, the only one in the EU to avoid a contraction during the global crisis, will expand 2.7 percent this year, according to the median estimate of 31 economists surveyed by Bloomberg.
Budimex, a unit of Spain’s Ferrovial SA (FER), filed for the bankruptcy of its PNI Sp. z o.o. unit, citing unprofitable contracts, less than a year after it spent 225 million zloty to buy it.
Aside from building new stretches of rail, Poland spent 14 billion zloty on rail upgrades in the last five years. Both investment programs were co-funded by the EU and the bidders came from as far away as Turkey and China.
The competition has reduced project costs. In August 2009 GDDKiA, the country’s road-building agency, said it would pay 3.2 billion zloty, or 2.5 billion zloty less than planned, for the key 91-kilometer stretch set to link Warsaw with the EU motorway network after it received 37 bids from builders.
It’s a far cry from 2010, when Poland was preparing to co- host the European Championships, the world’s second-biggest soccer event after the World Cup. The EU funds were used to triple the length of Polish highways and builders were reporting record profits. The combined net income of Budimex, Polimex and PBG rose to a record 563.1 million zloty in 2010.
By contrast, the combined loss for the first half of this year was 2 billion zloty. Only Budimex reported a profit, of 22.1 million zloty. Their net debt stood at 3 billion zloty at the end of June, an increase from a level close to zero in 2009.
While PBG, Polimex and their smaller competitor DSS SA (DSS) failed to pay back their bonds, the yields on Polish government five-year notes fell to a record low of 4.2 percent last week. The cabinet is cutting the budget deficit and investors are speculating the central bank may cut interest rates.
Not all contracts with foreign companies have worked out successfully. In June last year Poland canceled a highway- building contract with China Overseas Engineering Group Co., which had experienced delays and failed to pay subcontractors. The tender it had won was at a price less than half the original budget.
Poland’s DSS SA was hired to finish the work. Then DSS went bankrupt earlier this year as building-material costs and its project-related debt jumped.
Poland, with the most road-accident deaths of any EU country, has built 1,100 kilometers of highways since 2007, spending 85 billion zloty through last year. It plans to invest 23.2 billion zloty in 2012, with spending declining to 12.3 billion zloty next year, according to the Finance Ministry website.
In a country where trains travel at an average speed lower than before World War II, railway construction investments are set to more than double next year from 4.1 billion zloty planned for 2012.
Increasing maximum speed on main links to 160 kilometers per hour is a top priority of the government, which spent 14 billion zloty on upgrading railroads between 2007 and 2011. That’s only 37 percent of the EU funds that have to be spent by 2015, implying a pace of investment that’s 50 percent slower than in other industries where EU funds are used.
“Those data are absolutely worrying,” Minister for Regional Development Elzbieta Bienkowska said at a July 5 seminar on using EU funds in rail investment.
Faster dispersion of funds could help Polish builders, said Krzysztof Pado, an analyst at BDM brokerage.
“The construction industry is very cyclical and usually a boom comes after a wave of bankruptcies, followed by declining prices of building materials, services costs and cuts in overcapacity,” he said in a phone interview. “Those who can withstand the current problems have a chance to rebound in the second half of 2013 or in early 2014, when we know what funds will be available in the next EU budget.”