Business environment - Market development prospects

Business environment - Market development prospects

Market development prospects

2015 was the second year in a row which saw a boost in the level of construction and assembly production. The upward trend will probably be maintained also in 2016 and subsequent years. Settlement of new contracts financed partly from the European Union budget within the framework of the new financial perspective for the years 2014–2020, as well as drawing conclusions from the spending of funds allocated to the previous EU financial perspective for the years 2007–2013 will be of crucial importance. Efficient use of European funds is the factor that will determine the dynamics and directions of development of the construction sector in Poland in the coming years. The total amount of funds allocated to member states in the 2014–2020 financial perspective for the cohesion policy will reach approx. EUR 350 billion. The main beneficiary of EU funds will be Poland who may expect total support in the amount of EUR 82.5 billion, in comparison to 68 billion allocated to Poland in the past 2007–2013 financial perspective. The Infrastructure and Environment Programme, with allocation at the level of EUR 27.4 billion, will remain the largest operational programme. Its priority is a low-carbon economy, environmental protection, development of national technical infrastructure and energy security. In accordance with the Programme approved by the European Commission in December 2014, it can be expected that the largest amount of funds will be allocated to transport-related projects — roads, railway, urban transport, air transport and sea transport (planned allocation of approx. EUR 19.8 billion). The above sectors will be followed by: environmental sector (EUR 3.5 billion) and energy sector (EUR 2.8 billion). The main recipients of the support will be public sector entities, including local government units and entrepreneurs, in particular large companies.

In accordance with the assumptions of the act on state budget, the GDP growth in 2016, in real terms, should amount to 3.8%, and the average annual inflation rate should amount to 1.7%. The unemployment rate at the end of 2016 is projected to be 9.7%. Prospects for the development of the construction market for 2016 are stable with some growth perspective. Much higher growth dynamics, resulting from the accumulation of construction works under contracts co-financed from the new EU perspective, should be expected in 2017–2019.

New priorities and challenges are currently being defined in the road construction segment. “National Roads Construction Programme for the years 2014–2020, with the perspective until 2025” (Program Budowy Dróg Krajowych — PBDK), adopted in September 2015, stipulates that the amount spent for tasks specified in Appendix 1 to PBDK will be PLN 107.1 billion. In comparison with the draft PBDK published in December 2014, the amount of the projected investment spending increased by approx. PLN 14 billion. The new financing plan for national road investments includes also a wider scope of investment tasks. As compared with the December 2014 document, the idea of splitting individual investment tasks into two lists (main and reserve) was abandoned in favour of creating a single list of priority projects.

As a result, the final investment list includes tasks translating into a total length of 4,783 kilometres, as compared with 3,005 kilometres in the 2014 draft programme (including 2,228 kilometres on the main list and 777 kilometres on the reserve list). According to data provided by the management of the Ministry of Infrastructure and Construction in January 2016, PLN 198 billion is needed to fully implement the material scope of PBDK. In 2013–2015 the General Directorate for National Roads and Motorways (GDDKiA) issued calls for tenders within the framework of PBDK for tasks translating into approx. 1,985 kilometres, approx. 70% of which shall be implemented on the “design & build” basis. The gross value of the bids opened by GDDKiA in the years 2014–2015 under PBDK amounted to PLN 39.3 billion. The estimated use of the current budget of the programme exceeded 36% (as at the end of 2015). In material terms, the opened bids referred to the implementation of 93 tasks of a total length of approx. 1,310 kilometres. As at the end of January 2016, GDDKiA conducts tender procedures under PBDK for sections of a total length of 675 kilometres.

The implementation of most contracts on the “design & build” basis is yet another standard risk factor related to the road infrastructure engineering market, including also uncertainty of prices for raw materials, construction materials and subcontractor services. Furthermore, there is also a large risk of accumulation of works in 2017–2019, which may lead to difficulties in the mobilisation of sufficient capital, personnel and material resources.
Investments in the railway infrastructure sector did not reach the dynamics assumed in the Long-term Railway Investment Programme until 2015, which included tasks of the value of PLN 46.5 billion. In 2011–2015, PKP Polskie Linie Kolejowe SA (PKP PLK) spent as little as approx. 50% of the funds assumed in the programme. The efficiency of spending of the EU funds allocated to PKP PLK within the EU perspective 2007–2013 was lower than expected. Out of PLN 16 billion allocated to railway investments, PKP PLK used only PLN 13.4 billion in line with their intended purpose.

Despite numerous issues, prospects for the railway construction sector are relatively good. In September 2015, the government adopted “National Railway Programme Until 2023” (Krajowy Program Kolejowy – KPK). According to the Programme’s financing plan, in 2015–2023, within the scope of 197 investments on the Programme’s main list, PKP PLK shall implement projects of the value of PLN 67.5 billion. Additionally, the reserve list includes 70 projects with the value of PLN 27.4 billion, whose implementation is subject to potential savings generated during the implementation of KPK. In 2015, PKP PLK announced tenders of the historically highest value, i.e. of approx. PLN 16 billion. At present (as at the end of January 2016), two-step tender procedures for 20 contracts with the estimated value of PLN 12–15 billion are underway. Despite a relative advancement, the efficiency of awarding significant contracts under the new financial perspective is unsatisfactory. PKP PLK announces that tenders announced in 2016 will be of lower value (approx. PLN 5 billion). Risk factors for the railway infrastructure engineering market are the same as for the road market, the difference being that the accumulation of works is expected later, i.e. in 2018–2020.

In view of numerous organisational problems related to announcing tenders and coordinating investments, the management of the railway infrastructure decided to implement a plan for streamlining the implementation process of the announced programmes. PKP PLK announced, among others, that most tenders will be based on a two-stage formula with pre-qualification, that there will be advance payments, payment for materials used for construction, partial payments for contractors, monitoring the advancement of the investment and its coordination with timetables and a tenfold increase in the number of quality checks for the investment implementation. This shall facilitate better use of the EU funds and avoidance of mistakes made when spending funds from the EU financial perspective for 2007–2013.

The energy-related construction segment will probably maintain good growth rate due to large projects for the construction of several power units which entered the implementation phase almost at the same time. The Energy Regulatory Office [Urząd Regulacji Energetyki, URE] estimates that in 2015–2028 approx. 18 GW of new production capacities are to be commissioned, with the simultaneous withdrawal of production units with the capacity of approx. 6 GW. Although the largest contracts have already been awarded, several major investments in the broadly understood conventional energy sector are still at the planning or tender stage. In line with the development plan for 2016–2023 published by the Polish Transmission System Operator (Polskie Sieci Elektroenergetyczne, PSE), currently implemented major investments in new power units shall allow the energy demand to be met only until 2021. PSE recommends that new investments of the combined capacity of 2.0–2.5 GW be launched. Moreover, the importance of the renewable energy market will increase, in particular with respect to wind energy. The essential role in this aspect will be played by the stabilisation of the regulatory environment, in the form of a new act on renewable energy sources which is to enter into force as a whole as of July 2016. Meanwhile, over recent years, on the market of thermal treatment of municipal waste 6 contracts were awarded for the construction of incineration plants which either were commissioned at the end of 2015 or are expected to be commissioned in 2016. Over the next years, the construction of some additional facilities is planned, among others in Gdańsk, Warsaw and Olsztyn.

It seems that prospects are stable for the transmission and distribution market of electricity and gas. In 2015, the act on the preparation and implementation of strategic investments within the scope of transmission networks entered into force. The act shall facilitate the implementation of 23 strategic investments in electric power infrastructure by way of removing significant impediments related to the way of acquisition of titles to the real property on which a given investment is located and to the procedures and ways of issuance of required administrative decisions. 2016 may bring a further increase in the number of investments in property development companies. The major market players announce a similar or a slightly higher pre-sales for flats in 2016, as compared with 2015. However, the maintenance of a comparable number of transactions may be difficult. The biggest players present in large Polish cities and providing an offer adopted to the expectations of the market have probably the greatest chances for further growth. The following factors will have a potentially positive impact on the shape of the market in 2016: interest in the MdM programme and continued low percentage rates. On the other hand, the increase of the minimum own contribution for mortgage loans (from 10% to 15%) and a new bank tax may limit the availability of loans to some number of customers and thus, curb the market growth.

The opportunity of further development of the construction market may be also based on the public and private partnership (PPP) formula. PPP is still applied in Poland to a very limited degree, usually with respect to small projects. We can celebrate some small successes which build up the catalogue of best practices and verified solutions acceptable by public entities, private partners and the banking sector, however, unfortunately, there are still too few of them.

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