Construction Smartstrategic Management | Analyses | Interviews | Trends September 2011

Construction SMARTStrategic Management | Analyses | Interviews | Trends September 2011

Impact of the Economic Crisis on the Construction Industry in 19 First Six Months of 2011 European Countries in the Construction Sector Benchmarking of the crisis’s impact on Negative development continues with the construction industry in the Euroconstruct a further slump p. 10 countries p. 15 European Powers of Construction Ranking of the largest European companies p. 4 Content

Strategic Management European Powers of Construction Top 50 European Construction Companies...... 4

Interview The Czech Market is a Promising One ...... 8

Outcome Service First Six Months of 2011 in the Construction Sector...... 10

Analysis Impact of the Economic Crisis on the Construction Industry in 19 European Countries...... 15

In the CFO’s Office Should EU Subsidies Support the Construction Industry?...... 18

2 Introductory Comment There Is No Money...

President Barack Obama addressed the legendary investor, Warren Buffett, to consult with him on how to support the economy (HN, 24 August 2011). They have agreed that the solution is increasing infrastructure spending, predominantly for the construction of roads and bridges.

Mr Fischer’s government also intended to support investments when it announced its “Proposed Short-Term Measures to Get Out of the Crisis and Solve the Consequences Thereof”. Six issues out of 38 related directly to the construction industry and included, among other issues, transportation infrastructure, housing policy and the drawing of funds from the EU.

Also, Prime Minister Nečas’s government declared in the “Policy Statement of the Government of the Czech Republic” that investments in transportation infrastructure would be preserved. What a pity that politicians don’t The Ministry of Industry and Trade used a “3 i” logo in the heading of the “Strategy for the Czech Republic’s Competitiveness – Back ask ordinary people on a tram to the Top in 2012-2020” with one of the three i’s representing infrastructure. whether our republic has money.

It is apparent that not only foreign politicians consider investments They would receive a precise significant factors for economic development. I don’t know how answer quickly and would it will be implemented overseas but I know exactly how it is (not) implemented here. save plenty of their, and other

As the process of state budgeting for 2012 culminates, we are people’s, time. hearing a lot of bad news, such as cutting the budget of the State Fund for the Transportation Infrastructure by tens of billions, reducing the funding requirements for the PANEL programme, or restricting subsidy programmes in residential construction. And all this is done in spite of all policy statements, proposals, measures, analyses, concepts or strategies.

It comes to my mind how many qualified professionals have been working on those documents, how much paper is printed and for how many hours discussions are held. Despite that everything has just one conclusion: “There is no money.”

What a pity that politicians don’t ask ordinary people on a tram whether our republic has money. They would receive a precise answer quickly and would save plenty of their, and other people’s, time. And time is money as we all know.

Ing. Václav Matyáš President Association of Building Entrepreneurs in the Czech Republic

SMARTConstruction • September 2011 3 Strategic Management

European Powers of Construction

Top 50 European Construction Companies

Deloitte annually prepares rankings of the largest European construction companies by sales and market capitalisation. This year’s issue of the study also provides an analysis of the largest construction companies’ approach to internationalisation, ie the expansion of their operation beyond their home country’s borders, and diversification, ie the expansion of their activities to include non-construction sectors.

Following the 2008 credit crunch and the continuous economic International Construction Groups downturn, 2009 and 2010 have been difficult for the construction The second group of companies is comprised of companies whose pri- industry. The economic downturn has been keenly felt across the real mary source of sales is construction outside of their country of origin. estate sector of most European countries and it has also affected con- Hochtief is the most international European construction group, with struction of public infrastructure. However, this sector is very diverse 87% of its construction revenue being earned in America and Asia/ and has demonstrated its ability to innovate over the years. Most of Oceania. the companies analysed here had anticipated the exhaustion of their traditional business models, based on domestic construction either for Contrary to Peab, Swedish companies NCC and Skanska achieve over the Public Sector or for real estate developers, and were able to expand 40% of their revenues outside of their home country. NCC works in their business successfully both in terms of geographical location and Denmark, Finland and the other Baltic countries. Skanska is active in the activities performed. the UK, Eastern Europe and the Americas.

100% While discussing the internationalisation of European construction companies and how their successful attempts for diversification have 90% positively impacted their revenues and margins, we cannot forget that 80% usually diversification and international expansion come at a cost. The- Enka refore, a discussion on indebtedness levels and diversification of both 70% evenues % ACS "Domestic" activities and locations is also included in our analysis. 60% Ferrovial Conglomerates International Conglomerates Acciona 50% Eiffage Internationalisation and Diversification Profiling of the Top 20 FCC venues / total r Sacyr Bilﬁnger Carillion 40% European Construction Companies OHL Balfour Beatty A quick glance at the top 20 listed European construction companies, 30% taking into account the internationalisation level and the diversification Bouygues 20% Peab of their activities, will show that the European powers of construction Non-construction re International Construction Vinci Groups "Domestic" 10% could be classified into four main categories. Construction Skanska Bam Hochtief Groups NCC Yit Strabag “Domestic” Construction Groups 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

This group comprises companies whose primary source of revenue is International revenues / total revenues % construction within local markets. International sales account for less than 40% of total sales made. Finally, the limited size of their local markets encourage the Finnish Vinci and Bouygues are without any doubt the first two companies of company Yit, the Austrian company Strabag and the Dutch company our 2010 ranking taking into account total revenues. The international Bam Groep to conduct their activities in other European countries. presence of both groups is significant (€12,449 million and €9,719 million of total revenues, respectively), but they still achieve over 60% of the revenues in France. Similarly, although in the last years both French While discussing the internationalisation of giants have diversified their activity portfolio, their construction revenue European construction companies and how represents 84% and 74% of their total revenue figure, respectively. their successful attempts for diversification have

On a smaller scale, Peab obtains 86% of its revenue in Sweden and is positively impacted their revenues and margins, also focused on the construction business from where it derives 86% we cannot forget that usually diversification and of its revenues. international expansion come at a cost.

4 Following the 2008 credit crunch and the continuous economic downturn, 2009 and 2010 have been difficult for the European construction industry.

“Domestic Conglomerates” Enka has reached a significant position in Russia, although the Turkish A third group of companies is comprised of companies that have diver- market still represents over 70% of total revenues. In terms of activity, sified their business portfolio to include non-construction activities but Enka is the most diversified listed European construction group. Its conduct most of their business in domestic markets. focus on the energy sector, trade and manufacturing results in the traditional construction business representing less than 25% of its total Spanish companies ACS, Acciona and Sacyr have extended their revenue in 2010. activities to foreign markets. However, in 2010 almost 70% of their activity was still performed in Spain. In addition to their international Nine of the construction companies assessed expansion, ACS, Acciona and Sacyr have diversified their business portfolios. They provide environmental services such as waste disposal in the Deloitte study for 2010 obtain at least or water treatment plants, energy-related services, transportation or 50% of their revenues from non-construction infrastructure projects. Consequently construction revenue does not activities. Eleven of them generate at least 40% exceed 60% of total revenues. With the consolidation of Hochtief in 2011, ACS radically changed its profile with pro forma international abroad. sales of approximately 66%. Hochtief consolidation also drives ACS to the number 1 pro forma position in the Deloitte rankings by sales. International Conglomerates Finally, there is a group of companies that are highly diversified and Carillion’s diversification has been oriented to provide support services have significant international sales. and Eiffage has achieved a significant presence in the energy and concession sectors. Both companies generate over 40% of their revenues Ferrovial and OHL achieve almost 70% of their revenues outside of through non-construction-related activities, although given the location Spain, with significant diversification. Ferrovial derives more than 60% of such activities, they must be primarily considered domestic. of its revenue from non-construction activities, mainly environmental services, airports and infrastructure projects, in the UK, Poland and North America. OHL has significant construction activities in the USA, Algeria and the Middle East and is also especially strong in Mexico and Brazil where its concession business is very significant.

SMARTConstruction • September 2011 5 Strategic Management

FCC and Balfour Beatty obtain approximately 50% of their revenues in The construction industry has historically had relatively-low margins foreign markets and non-construction activities. FCC’s diversification due to the high number of companies operating in the sector and has been oriented mainly to environmental services in Austria, Ger- to the strong competition at both a local and international level. many, the UK and Eastern Europe. Balfour Beatty has a strong presence The diversification of European construction companies is focused on in Asia and North America and has diversified its construction activity, activities with higher margins and more stable/predictable cash flows. providing professional and support services. The construction activity of the major listed Euro- Bilfinger is present on five continents, drawing approximately 58% of its revenues from foreign markets. The German group has diversified its pean construction companies reported margins activities to include industrial and power services that represent almost of between 3% and 5% in most cases in 2010. 50% of group revenues in 2010. A review of the margins obtained by the European powers of construc- 100% tion in 2010 confirms this notion. The first three groups in terms of

90% profitability by sales (OHL, Enka and Ferrovial) are also amongst the top ten groups with the greatest revenue diversification. 80% Enka 70% Similarly, Acciona, Sacyr, Eiffage, ACS, FCC, Bilfinger, Carillion and Bal- evenues % ACS Ferrovial four Beatty present higher average profitability than Yit, NCC, Skanska, 60% Acciona Peab, Hochtief, Strabag and Bam because they are more diversified. Bilﬁnger Eiffage 50% evenues / total r Carillion FCC 40% Balfour Sacyr Vinci and Bouygues present overall profitability from sales of 10.3% OHL Beatty and 5.6%, respectively, but their highest profit margins are to be found 30% Bouygues in the non-construction activities. 20%

Non - construction r Vinci Peab Skanska 10% Hochtief BAM Strabag Yit NCC 2% 4% 6% 8% 10% 12% 14%16% 18% 20% Deloitte continuously examines European construction companies, analyses the construction market and EBIT/ total revenues % finally discusses the situation of the construction sector in the European Powers of Construction publication, The Diversification of European Construction Companies available for download from the Deloitte website The construction industry has a cyclical profile that is significantly more (Industries / Real Estate). pronounced than that of the economy as a whole. This is primarily due to an historical dependence on investment in infrastructure and residential and non-residential construction, the construction industry’s main areas of activity. This cyclical nature causes significant financial difficulties for many companies in times of recession, and is the main reason underlying the diversification strategy implemented by a large Miroslav Linhart is a Senior number of European construction companies in recent years. Manager of the Real Estate and Construction Services Although at first glance it may seem that the construction compa- Group. nies have diversified into a wide range of disparate activities with no common denominator, a closer examination shows that these activities [email protected] complement the construction business with a full range of services throughout the entire infrastructure cycle. These activities have, either directly or indirectly, some of the following common characteristics: •• They share clients with the construction activity (Central or Local Government). Diversification includes activities related to long-term contractual management. Helena Kolarova focuses on increasing the efficiency of •• They are activities that may serve as a source of contracts for construction companies in the other business lines (construction, maintenance, facilities or Deloitte. concessions). •• They seek stable/predictable cash flows that enable a high leverage [email protected] of investment to be made. •• The activities are financially complementary to the construction business (high EBITDA margins and stable/predictable cash flows that enable a high leverage of investments as opposed to more modest margins but with a large cash generating ability without leverage as is the case with construction).

6 Top 50 European Construction Companies by Sales

Ranking Country Country Sales (€ m) EBITDA (€m) EBIT (€ m) Market Capitalisation (€ m)* 1 Vinci SA France 33,376 5,052 3,429 23,694 2 Bouygues SA France 31,225 3,701 1,760 12,122 3 Hochtief AG Germany 20,159 1,643 715 4,451 4 ACS, Actividades de Construccion y Servicios, SA Spain 15,380 1,500 1,077 10,773 5 Eiffage SA France 13,553 1,852 1,041 3,806 6 Skanska AB Sweden 12,815 735 572 6,040 7 Strabag SE Austria 12,777 735 299 2,516 8 Balfour Beatty Pic Great Britain 12,288 422 240 2,637 9 Ferrovial SA Spain 12,169 2,514 1,514 6,951 10 Fomento de Construcciones y Contratas SA (FCC) Spain 12,114 1,435 774 2,931 11 Bilfinger Berger SE Germany 8,007 511 343 2,852 12 Koninklijke Bam Groep NV Netherlands 7,611 206 (30) 1,261 13 Acciona SA Spain 6,263 1,211 527 4,667 14 Carillion PLC Great Britain 5,991 265 227 1,819 15 NCCAB Sweden 5,182 236 236 1,965 16 Obrascon Huarte Lain SA (OHL) Spain 4,910 1,005 700 2,763 17 Sacyr Vallehermoso SA Spain 4,820 572 394 3,530 18 Peab AB Sweden 4,004 234 158 1,791 19 Yit Oyj Finland 3,788 256 221 2,500 20 Enka Insaat Ve Sanayi AS Turkey 3,555 584 505 7,122 21 Taylor Wimpey Pic Great Britain 3,034 220 215 1,396 22 Porr Group Austria 2,826 103 49 280 23 Heijmans NV Netherlands 2,680 83 48 402 24 Barratt Developments Pic Great Britain 2,450 71 61 339 25 Morgan Sindall Pic Great Britain 2,386 89 64 523 26 Kier Group Pic Great Britain 2,315 107 102 1,186 27 Interserve Pic Great Britain 2,182 123 87 393 28 Impregilo Spa Italy 2,062 282 224 896 29 Astaldi Spa Italy 2,045 230 174 527 30 Mota Engil Sgps SA Portugal 2,005 237 132 377 31 Veidekke Asa Norway 1,972 98 53 797 32 Lemminkainen Oyj Finland 1,892 65 29 491 33 Persimmon Pic Great Britain 1,829 150 145 1,519 34 Ellaktor SA Greece 1,753 279 167 618 35 Implenia AG Switzerland 1,731 82 53 415 36 Galliford Try Pic Great Britain 1,390 37 33 319 37 Teixeira Duarte Engenharia e Construgoes SA Portugal 1,380 150 84 272 38 Ballast Nedam NV Netherlands 1,359 45 18 163 39 Keller Group Pic Great Britain 1,246 99 50 451 40 Costain Group Pic Great Britain 1,191 37 34 185 41 Bauer Aktiengesellschaft Germany 1,132 166 88 613 42 Mt H0jgaard Denmark 1,114 30 13 178 43 Interior Services Group Pic Great Britain 1,106 16 13 64 44 Polimex Mostostal SA Poland 1,048 63 40 407 45 JM AB Sweden 958 95 95 1,303 46 Trevi Group Italy 953 137 84 554 47 Grupo Soares Da Costa SGPS Sa Portugal 894 88 50 88 48 Bellway Pic Great Britain 876 60 58 923 49 Grupo Empresarial San Jose SA Spain 852 68 25 350 50 J&P-Avax SA Greece 791 80 80 96

* May 2011

SMARTConstruction • September 2011 7 Interview

“The Czech Market is a Promising One” says Petr Čížek, CEO at Swietelsky stavební, s.r.o.

How did your firm perceive the start of the crisis in 2008 and how do you see the current situation in the market? The crisis came to us gradually. While other industries were clearly hit by the crisis, the construction sector continued to operate smoothly. Swietelsky has two divisions in the Czech Republic: a building construction, and a road and heavy construction division. The building construction division, which focuses mainly on private investors, was hit by the crisis in 2008 when its production fell by 50% and is yet to recover in 2011. Nobody knows how private investors will respond to the current turbulence on the stock exchange. The road and heavy construction division was not hit by the crisis until 2009 when the first signs came, before culminating in 2010. The problem is a rapidly- Ing. Petr Čížek is a statutory executive of Swietelsky stavební s.r.o. declining number of contracts. Our heavy construction division largely and has been a Chairman of the Road Contractors Association for depends on public contracts; the share of private investors is minimal. many years. Swietelsky stavební s.r.o. is part of one of the largest We have completed the contracts that we won in the past years but no Austrian construction companies. The company, based in Ceské major road construction contract has been awarded since 2009. Budějovice, has operated in the Czech construction market since 1992, focusing on comprehensive construction services principally What is your opinion on the future development of demand? in transportation and heavy construction and in all areas of building construction. At present, I am rather pessimistic about the prospects. At the end of last year I believed that demand would recover in 2012. Now I know that it will not happen and we will have another bad year in 2012. In investors on second- and third-class roads are reasonable. We have my view the Czech government is not committed enough. In Germany, started focusing on segments where our activities were less intensive for example, they make large investments in infrastructure. I am able in the past, such as water management and more-recently railways, to make a good comparison as our group also operates in Bavaria which has been our strength in Austria. However, our competitors have and Saxony. While the transportation infrastructure in these countries a similar strategy so it is not so easy. could already be considered sufficient, the local government invests to help the construction industry in hard times. Roads in the Czech How do you perceive the “price war” and how do you deal Republic are in miserable condition, and yet our government prefers with it? to save money. Instead of operative management the government All firms declare that their calculations are reasonable and their should pursue strategic management. I do not suggest constructing prices are never lower than their costs, but in my opinion it is roads in vain. I believe that the higher the quality of the infrastructure, not true. We have designed the first railway construction project the better the conditions for a region’s development, production and recently; the surveyor’s price was 2 billion, our bid was 1.3 billion trading support. and the winning bid was eight hundred million. I do not consider such a price to be safe enough for the firm to cover all costs and risks What segments or customers do you focus on now? because it is lower than the actual costs. This is the current situation on The number of our current contracts declines and thus we need to the market with such severe competition. seek opportunities in other market segments. My experience is that the regions with second- and third-class roads show their commitment How do you think it is possible to deliver a construction for 8 to this property, which they received from the state in bad condition. hundred million if the surveyor estimated the price at 2 billion? When the state transferred its property to the regions, the road It all depends on how the price is calculated. We use a cost-based specialists, including myself, disagreed because we were afraid that approach, ie the price includes the actual cost of materials and our the regions would have no money for investment and the state machinery, which we also for other projects, ie our ultimate calculation would no longer support the transportation infrastructure. Yet we is lower than the table-based prices. Differences include the way of were completely mistaken. Although the regions have no money to using materials, work shifts, the use of machinery etc. spare they take care of their infrastructure. Contracts awarded by

8 The surveyor’s estimate is the maximum. In the past I understood that In Spain, for example, the whole construction industry certain firms would undervalue their price. They perhaps managed is based mostly on PPP projects. Large firms divide their it because they won large contracts and thus could afford to have loss- businesses to two parts: a construction-driven and concession- making contracts. Yet, this is no longer sustainable. At present, no one driven part. can afford it. The word “concession” is important. It means that the firm builds a certain stretch of the road and may collect tolls on it when How does the Austrian management of the Swietelsky Group completed. However, Czech politicians often mix-up the concession- see the Czech market? Does it remain promising for them? based PPP projects with a long-term loan, asking why the state should Indeed, it does. For example, our former Austrian CEO ranked take a mediated long-term loan if it can get bonds-based funding individual countries based on the volume of coating mixes per person. immediately. In my view the politicians do not understand or do not In his view the prospects of the Czech Republic were good because want to understand the issue. They say it is inconvenient without in those days it produced 500 kg of mixes per inhabitant. He said that knowing what it is all about. It is not only about financing but mostly the Czech Republic was a promising market because this indicator about public services. would grow to reach the Austrian level one day. The indications suggest a great growth potential in the Czech Republic, greater than in What do you consider to be the key question for effectiveness western countries. It is a only matter of time until we will have to start improvement? making deferred investments. The most important question for me and for most of the CEOs in the construction sector is what should be performed in-house and Do you see any way of improving the effectiveness and quality what should be outsourced. The question is, for example, whether of outputs in the road construction industry? the firm should focus on engineering, only co-ordinating the sub- Our Association has tried to enforce planning constructions in contractors. This approach has been adopted by certain firms and a timely manner and to perform road repairs and maintenance in seems successful. Yet, it is a success only when medium- and small- technologically-convenient months, ie in Spring and Summer, since sized companies depend on having any work at all, ie at the times of the totalitarian days. However, the actual practice that has been in crisis. Another question is whether the firm is able to produce and place in the Czech Republic for fifty years is discussing constructions deliver constructions itself. It is important when work is abundant. and repairs in winter, calling tenders in the spring, dealing with appeals Finding the right balance between jobs to be performed in-house or in the summer and starting the actual constructions at the end of outsourced is a key decision for medium- and large-sized companies. August. This is hard to change. The best months for constructions I often discuss it with my colleagues from other firms and we agree are July, August and September. Yet, we produce coating mixes that a solely-engineering firm has no perspective. Our strategy is to mostly in September, October and November and do most of have our own production facilities and asphalt plans, or to co-own the work in December, when it is also totally inappropriate in terms of them at least so that we do not have to rely on what others produce technological regulations. and whether they sell it to us. This is essential for firms planning their future in the long-term. At present, it would certainly be useful to prepare a study or assessment of the technical regulations and standards in How do you expect the employment and employee situation the construction industry to see if they are overly strict and if money to develop? could be saved by changing them. This project would have to involve At this moment it is certainly not about downsizing or upsizing but universities, the Road and Motorway Directorate, the contractors and rather about changing the rewards and employee benefits system. the Ministry of Transport. I believe a more-effective system could be The idea is not cancelling the old system and introducing a new designed at this level. one, but making it fairer. We need to distinguish good and bad performance, aligning it with remuneration. The question of using the PPP projects is discussed at every conference. Do you consider introducing the PPP projects in Current discussions often mention new trends and the Czech Republic realistic? investments in innovations and new technologies. How do you At this moment it is clear that the only PPP project that was planned envision the role of innovation in the future construction (the D1 road reconstruction) was cancelled owing to the suspended sector? construction of the D8 road as it lacked the required building The Road Contractors Association has operated since 1981. It was permissions. To use the funds awarded under the Transport Operational established because there was nothing else to lean on. Whatever Programme, the D1 road should be built instead of the D8. we did was makeshift. Hence, national companies would cop- operate, organising various streamlining initiatives and sharing In my view PPP projects make sense. They are not the only solution improvement proposals. The firms used to meet and their work but the concept certainly is an effective solution for transportation teams would exchange information because we were cut off from infrastructure. the rest of the world and its development. This is no longer true for the construction sector. Every firm protects its knowhow. Nobody wants to share information. Indeed, innovations are a competitive edge driving the construction sector.

SMARTConstruction • September 2011 9 Outcome Service

First six months of 2011 in the Construction Sector

Construction production slowed down between January and June 2011 entering the “red” in April 2011 for the first time this year. This trend continued in May and June. The fall in construction production was due to declining demand in the private and public sectors.

Private sector demand declined mainly as a result of continuing on supplier contracts) totalling CZK 95 158 billion, ie a decline of stagnation on the real estate market and the limited scope 5.37% for construction production in fixed prices compared to the first of residential and commercial development projects, as well six months of 2010. The largest decline (17%) of construction production as the termination of photovoltaic power plant construction partly in fixed prices from CZK 36 266 billion in the first six months of 2010 compensated by the growth of other energy-related facilities. to CZK 29 934 billion in 2011 is reported by companies with more than 1000 employees. Companies with a headcount between 100 and 199 Construction production for the public sector declined principally employees reported substantial growth (11%). due to cuts in the budgets for governmental investments and the State Fund for Transport Infrastructure, which was partly compensated Basic construction production (work performed by own personnel) by the increased production of water management and technical totalled CZK 70 637 billion and CZK 73 051 billion in 2011 and 2010 infrastructure constructions co-funded by the EU. respectively over the given period, ie a decline of CZK2 414 billion (3.3%) in absolute terms. Compared to the period from January to June This resulted in the decline of heavy construction and the stagnation of 2010, the headcount dropped by 4 039 employees, ie a decline of building construction activities. 4.04%. Companies with 50 or more employees, including developers, reported an average wage of CZK 27 504 over the given period in In the first six months of 2011, construction production in fixed 2011, ie an increase of 1%. Companies with 1000 or more employees prices declined year-on-year by 1.3%. While building construction grew reported an average wage at CZK 37 177, ie a decline of 2.19%. by 1.9%, heavy construction fell by 8.0% over this period. The labour productivity for construction production in fixed prices fell year-on-year by 1%, while the same indicator for basic construction Between January and June 2011, companies with 50 or more production grew by 1%. employees delivered construction production in fixed prices (based

Construction production index: year-on-year indexes in months

January February March April May June Construction Production Index 110.0 105.8 94.0 95.1 93.7 Of which: Building Construction 108.6 118.0 103.9 97.7 97.5 97.3 Heavy Construction 96.4 92.1 111.0 86.3 90.5 87.6

Construction production index: year-on-year indexes from the start of year

January February March April May June Construction Production Index 106.9 107.0 102.5 100.3 98.7 Of which: Building Construction 108.7 109.9 109.4 105.5 103.3 101.9 Heavy Construction 107.0 99.1 100.8 95.3 93.7 92.0

Companies with 50 or more employees – Comparisons

Construction work in CZK billion

„C“ „BCP“

January to June January to June index January to June January to June index C - Construction production in 2011 2010 2011/2010 2011 2010 2011/2010 fixed prices (based on supplier contracts) Companies with 50 or more employees BCP – Basic construction 95.158 100.560 94.63 70.637 73.051 96.70 production (work performed by own personnel)

10 160 000

140 000

120 000

100 000

80 000

60 000

40 000

20 000

0 červenec srpen září říjen listopad prosinec

Basic construction production (work performed by own personnel) – Building construction and heavy construction (From the start of the year - construction companies with 50 or more employees in CZK million)

54 000

50 000 building construction 2011 46 000 heavy construction 2011 42 000 building construction 2010 38 000 heavy construction 2010 34 000 building construction 2009 30 000 heavy construction 2009 26 000

22 000

18 000

14 000

10 000

6 000

2 000 JAN FEB MAR APR MAY JUN

According to prevailing activities in the statistical classification The number of completed flats in family houses and apartment of economic activities (CZ-NACE) for companies with 50 or more buildings fell by 5.9% and 34.1% respectively. employees in the first half of 2011, the construction production in fixed prices in absolute terms continues to be highest for For the next few months the construction sector lacks the distinct the construction of residential and non-residential buildings, totalling drivers to stimulate construction production demand. No large-scale CZK 44.64 billion, an increase of 7% compared to the same period transport infrastructure constructions funded from public funds are in 2010, followed by the construction of roads and railways at CZK being initiated. Construction companies’ backlogs have declined. 30.3 billion, a decrease of 25% compared to the same period in 2010. Construction production is likely to continue to decline in the coming The highest average wage of CZK 44 723 over this period in 2011 months. was reported by companies with 50 or more employees focused on developers activities, which is a multiple of 1.63 of the average value Information about public construction contracts is critical for for all construction companies, which is CZK 27 504. The second- the construction sector largest average wage of CZK 32 752 was reported by companies As many as 1 395 public construction work contracts were awarded in focused on road and railway construction. the first half of 2011 totalling CZK 50 485 million (including VAT), of which 677 contracts related to building construction (48.5% of In terms of size, companies with headcounts from 100 to 199 employees the total number of awarded contracts) totalling CZK 17 858 million reported the largest growth of labour productivity (13%) for construction (35.4% of the total value of awarded contracts), and 718 contracts production in fixed prices compared to the period from January to June related to heavy construction (51.5%) totalling CZK 32 627 million 2010. The same category of companies also reported the highest growth (64.6% of the total value of awarded contracts). of labour productivity (10%) for basic construction production. Companies with 1000 or more employees reported a significant decline of labour If compared year-on-year to the 1st half of 2010, when the awarding productivity (18%) for construction production in fixed prices. In absolute of public contracts was already substantially limited, the total value terms, companies with 1000 or more employees reported the highest of contracts awarded in the 1st half of 2011 stagnated (a growth labour productivity for the construction production in fixed prices (CZK of 0.6%); while the value of building construction contracts fell 1 622.6 million) as well as the basic construction production (CZK 994.2 by 3.6%, the value of heavy construction contracts grew by 3.0% million) over the given period of 2011. principally due to the growth of water management construction contracts co-funded by the Environmental Operational Programme. The number of issued building permits grew year-on-year by 1.0% The value of transport infrastructure constructions contracts fell from the start of the year to the end of June. The approximate value year-on-year by 11.3%. of these constructions decreased by 1.4% in the 1st half of 2011 compared to the same period in 2010. Compared to the 1st half of 2009, the total value of awarded contracts fell by 43.6 % in the 1st half of 2011 as follows: building The number of flats started increased year-on-year by 0.1% construction contracts fell by 20.9% and heavy construction from the start of the year to the end of May 2011. The number of contracts by 51.7%, while transportation infrastructure flats started in family houses increased year-on-year by 4.3% and construction contracts declined by 74.7%. the number of flats started in apartment buildings fell by 11.5%. The share of transportation infrastructure construction contracts The number of flats completed dropped year-on-year by 28.6% as a part of total value of contracts awarded dropped to 19.0% in from the start of the year to the end of June 2011. the 1st half of 2011 compared to 48.0% in the 1st half of 2009.

SMARTConstruction • September 2011 11 Outcome Service

Year-on-year comparisons

Construction Focus 1st half 2011 1st half 2010 1st half 2009 Number CZK mil. Number CZK mil. Number CZK mil. BUILDING CONSTRUCITON 677 17 858 669 18 517 872 23 416 Of which: Civil Infrastructure 602 16 769 595 17 042 808 21 740 Housing Construction 75 1 089 74 1 475 64 1 676 HEAVY CONSTRUCTION 718 32 627 816 31 677 907 65 626 Of which: Transport Infrastructure 230 9 598 253 10 824 345 42 716 Technical Infrastructure 488 23 029 563 20 853 562 22 910 TOTAL 1 395 50 485 1 485 50 194 1 779 89 042

Year-on-year indexes

Construction Focus Index: Index: Index: 1st half of 2011/ 1st half of 2011/ 1st half of 2010/ 1st half of 2010 1st half of 2009 1st half of 2009 Number CZK mil. Number CZK mil. Number CZK mil. BUILDING CONSTRUCITON 101,2 96,4 77,6 76,3 76,7 79,1 Of which: Civil Infrastructure 101,2 98,4 74,5 77,1 73,6 78,4 Housing Construction 101,4 73,8 117,2 65,0 115,6 88,0 HEAVY CONSTRUCTION 88,0 103,0 79,2 49,7 90,0 48,3 Of which: Transport Infrastructure 90,9 88,7 66,7 22,5 73,3 25,3 Technical Infrastructure 86,7 110,4 86,8 100,5 100,2 91,0 TOTAL 93,9 100,6 78,4 56,7 83,5 56,4

Altogether, 612 companies were awarded public contracts for The second-largest volume was awarded to Metrostav as follows: construction work in the 1st half of 2011. CZK 2 494 million was obtained by Metrostav alone, and a certain share of the amount of CZK 1 659 million was obtained by its In total, 1 395 public contracts totalling CZK 50 485 million were participation in seven consortiums. awarded in the 1st half of 2011 which was allocated as follows: CZK 35 326 million was allocated to 1 246 contracts awarded to The total of 1 395 public contracts for construction work totalling CZK individual providers, and CZK 15 159 million was allocated to 149 50 485 million was awarded by the following contracting authorities in contracts awarded to 149 consortiums of providers. the 1st half of 2011: governmental contracting authorities placed 263 orders totalling CZK 14 124 million, municipal contracting authorities The declining number of consortiums in the total value of awarded placed 974 orders totalling CZK 25 817 million and other contracting contracts results from limitations in awarding contracts for large-scale authorities placed 158 orders totalling CZK 10 544 million. transport infrastructure projects. In the 1st half of 2011, the value of awarded contracts fell year-on-year The largest volume of public contracts was awarded to EUROVIA by 17.5% in the governmental sector and 7.4% in the municipal CS, a.s. in the 1st half of 2011 as follows: CZK 3 362 million sector and grew by 103.7 with respect to other contracting authorities. was obtained by EUROVIA CS, a.s. alone and a certain share of the amount of CZK 1 082 million was obtained due to its participation The share of the municipal sector in the total value of awarded contracts in ten consortiums. in the 1st half of 2011 reached 51.1%, substantially exceeding the share of the governmental sector, which had prevailed in previous years.

Year-on-year comparisons

Indicator 1st half 2011 1st half 2010 1st half 2009 Number CZK mil. Number CZK mil. Number CZK mil. Contracts awarded to individual provides 1 246 35 326 1 353 32 464 1 691 48 086 Contracts awarded to the consortium of providers 149 15 159 132 17 730 88 40 957 TOTAL 1 395 50 485 1 485 50 194 1 779 89 043

12 Year-on-year comparisons

Contracting Authority 1st half 2011 1st half 2010 1st half 2009 Number CZK mil. Number CZK mil. Number CZK mil. Government 263 14 124 251 17 127 387 44 237 Municipalities 974 25 817 1 111 27 891 1 185 41 284 Other sectors 158 10 544 123 5 176 207 3 521 TOTAL 1 395 50 485 1 485 50 194 1 779 89 043

The three major contracting authorities from the governmental sector In the 1st half of 2011, the Southern Moravia region placed that awarded public contracts in the 1st half of 2011 were as follows: the largest volume of orders, totalling CZK 6 786 million – 13.4% of the Ministry of Finance of the Czech Republic and organisations the total volume of orders. established by the Ministry was the largest contracting authority with its 17 orders totalling CZK 3 129 million; the Road and Motorway Contracts of Construction Companies in Q2 2011 Directorate which placed 23 orders of CZK 2 571 million ranked At the end of Q2 2011, construction companies with 50 or more second; and Správa železniční dopravní cesty, the state-owned employees had a total of 13.3 thousand orders contracted. These enterprise, with its 16 orders totalling CZK 1 902 million, ranked orders represented the backlog of construction work that had not third. yet been carried out totalling CZK 165.3 billion, of which projects in the Czech Republic and cross-border projects totalled CZK 151.8 billion The three major contracting authorities from the municipal sector and CZK 13.6 billion, respectively. that awarded public contracts in the 1st half of 2011 were as follows: the region of Ústí with its 13 orders totalling CZK 983 million ranked Compared to Q2 2010, the value of contracted orders declined roughly first, followed by the City of Prague, which placed 29 orders totalling by 3.8% at the end of Q2 2011. Thus, last year’s trend of companies CZK 864 million, and the region of Vysočina with its 18 orders losing their backlog has continued. totalling CZK 826 million ranked third.

Year-on-year comparisons

Region of Construction Q1 2011 Q1 2010 Q1 2009 Location Number Mil. CZK Number Mil. CZK Number Mil. CZK The City of Prague 129 3 610 169 4 132 147 8 007 Central Bohemia Region 133 5 421 119 3 145 194 10 151 Southern Bohemia region 109 3 239 142 3 159 139 4 577 Plzeň region 80 2 684 93 2 650 112 4 138 Karlovy Vary region 48 1 541 54 4 295 76 5 654 Region of Ústí 104 4 194 117 4 623 117 12 051 Liberec region 59 2 932 46 1 060 78 4 203 Hradec Králové region 85 1 983 56 1 774 71 3 433 Pardubice region 77 4 635 78 1 907 106 3 517 Vysočina region 104 2 519 104 3 161 129 2 615 South Moravia region 158 6 786 190 10 474 160 4 858 Olomouc region 83 3 189 55 1 257 165 7 497 Zlín region 77 1 992 77 2 233 116 2 788 Moravian-Silesian Region 142 3 521 177 5 904 163 15 265 Constructions in multiple regions 6 2237 8 421 3 50 in the Czech Republic Cross-border projects 1 2 3 240 TOTAL 1 395 50 485 1 485 50 194 1 779 89 043

SMARTConstruction • September 2011 13 Outcome Service

The development of the orders of construction companies at the end The share of public and private The share of the number of public of the quarter in CZK billion orders in the value of total and private orders in the total domestic orders at the end of number of domestic orders at 250 Q2 2011 the end of Q2 2011

200

36 % 39 % 150

100

64 % 61 % 50

0 Private Public 2Q 07 2Q 08 2Q 09 2Q 10 2Q 11

Total orders at the end of the quarter Building construction New domestic orders in the given quarter Heavy construction

As parts of the total volume of domestic orders at the end of Q2 2011, The decline in new orders was mainly affected by the decline in public contracts totalled CZK 97.5 billion and private contracts totalled heavy construction orders. The average value of a newly-contracted CZK 54.3 billion. The relationship between the private and public construction order was CZK 3.0 billion in Q2 2011. contracts is influenced by the fact that statistical surveys principally include larger construction companies, whose share of public contracts In Q1 2011, the trend of 2010 of construction companies losing orders is substantially greater. was interrupted. The trend of companies losing orders reappeared intensely in Q2. Whether this trend will continue in the subsequent The share of large construction companies with 500 or more periods of 2011 will depend predominantly on the private sector and employees in the aggregate volume of orders that companies with 50 its willingness to allocate funds to construction activities. Although this or more employees had contracted at the end of Q1 2010 is 82.3%. information relates to the orders of construction companies with 50 or Information about new orders contracted by construction companies in more employees, it is applicable to the entire construction industry. the given quarter and from the beginning of the year is also revealing. To conclude, re-establishing the dynamics of the construction sector In Q2 2011, the monitored construction companies contracted 13.6 requires the overall economic climate to change from seeking thousand new domestic construction orders, which is an increase in newly-available funds through various reasonable savings and cuts the number of orders of 21.1% year-on-year. Yet, the total value of to supporting the dynamics of the economy and improving its these orders fell by 29.1% year-on-year, totalling CZK 41.2 billion, ie effectiveness. CZK 17.5 billion (a decline of 15.5%) in the building construction and CZK 23.7 billion in the heavy industry (a decline of 36.9%).

New domestic orders of the construction companies (construction companies with 50 or more employees) Zdeněk Kunc, the Engineering 60 Director of ÚRS PRAHA, a.s., specialises in analyses, 50 Czech construction statistics, development concepts and 40 industry strategies.

0 New domestic orders Building Heavy in the given quarter construction construction

Q2 2011 Q2 2010 50

40 14

0 Nové zakázky ve Pozemní Inženýrské čtvrtletí tuzemsko stavitelství stavitelství Analysis

Impact of the Economic Crisis on the Con- struction Industry in 19 European Countries

European construction results published in June 2011 at the 71st Euroconstruct conference confirmed our fears that the current economic crisis has had a dramatic effect on the Czech construction industry.

A group of four Central European Euroconstruct countries reported Significant Worsening of the Position of the Czech Construction a growth in GDP almost three-times higher and a growth in construction Industry in the European Context since 2010 production six-times higher than the other three groups of Western It is well known that the “trigger” of the hopefully-fading economic crisis European countries in 2000-2008. The Czech gross domestic product was the situation related to the financing of investment construction parity per capita was 19% lower than the Western European average, in the USA. That is also the reason why the crisis in the construction however, GDP development was 2.8 times higher and the development industry in Western European countries occurred earlier and was of the Czech construction industry was the second highest (after Slovakia) more severe than in other sectors. Development of the construction and eleven times higher than the average of Western European countries. production of 15 Euroconstruct countries decreased year-on-year in five countries in 2007, in eight countries in 2008, and in 2009, all In 2008, the GDP development in Euroconstruct countries started to countries except for Switzerland and Poland were in the red. In 2011, change when the first five countries went into the red; a year later the construction industry’s development has changed in 11 out of 15 the same situation occurred in all countries except for Poland, but in Euroconstruct West European countries – the crisis only goes on in 2010 all countries excluding Ireland, Spain and the United Kingdom Spain, Ireland, Portugal and the United Kingdom. The Eastern European restored the GDP growth. GDP development in the Czech Republic construction industry, except for Poland, entered the crisis in 2009 and in the crisis period from 2008 to 2010 was the fifth lowest, ie +2.2% the crisis is expected to end in 2012, in the Czech Republic in 2013. (Western Europe +3.8%). (Euroindicators 161/2009 – 69/2011). The Czech construction industry was resistant to the crisis until 2009 Benchmarking Ranking of Euroconstruct Countries in Terms of when it reported the third-lowest decrease compared to 2005, ie Overcoming the Existing Crisis only -3.7% (from 9.9% to 6.2%). Better results were only reported by GDP development alone is not sufficient for an assessment of Switzerland and Poland. In summer 2010, the situation in the Czech the impacts of an economic boom and therefore the benchmarking construction industry dramatically worsened: a decrease of -7.6% method will be used, ie the ranking of nine key euro-indicators’ in 2010 was the sixth highest with the expected slight change in development as a percentage will be compared first in the period the development in 2013 or 2014. between 2008 and 2010 and then in the first half of 2011, based on Eurostat data. The Czech Republic placed tenth out of 19 Euroconstruct Heavy construction, funded predominantly by public sources and partly- countries in terms of the aggregate development of the indicators in subsidised by EU funds, reported the highest growth in construction 2008-2010, which is nearly the European average, but it is a substantially production in the Czech Republic before 2010. It was followed by worse result than before the crisis in 2005-2008 when the Czech the largest decline that is expected to last until 2014. In the first place, Republic together with Sweden had the best ranking of all countries. infrastructure construction has been significantly limited, which is reflected in the results for 2010 and 2011. The earliest positive change Comparison of the Czech Republic’s results for the first five months is expected to occur in 2013. Heavy construction has always been partly of 2011 as a percentage by six euro-indicators (for the remaining subsidised by EU funds, but in 2013 EU financial support for the Czech three months no data have been available) indicate an improvement Republic will end and as such the Czech Republic will not only lose large in the Czech Republic’s position compared to other Europconstruct amounts of money form EU funds but will also be obliged to complete countries (second place after Belgium), but with a continued downturn postponed construction projects that will only be funded from the state in the construction industry. budget.

2008-10 Unempl. Inface GDP Invest. Constr. industry Ø wage St. budget Debt Total CR +2,8 1,2 +2,2 +4,0 -13,0 -12,0 -6,8 8,5% -2% 93 Ranking 13. 8. 15. 12. 13. 12. 17. 7. 3. 10. EA 16 +2,5 -1,6 +3,8 +6,9 1,3 -6,4 -2,2 +15,2 -4,3 ø 87,2 Euroind. 114/11 EUcodes 69/11 8/11 89/11 84/11 90/11 60/11 60/11

2010-11 Unempl. Inface GDP Constr. Industry Ø wage Total CR -0,7 +0,7 0 -2,9 +3,7 0,5 38 Ranking 2 4 8 13 6 5 2 EA 16 -0,1 +1,1 +0,1 -1,3 0,2 0,7 Ø 63 Euroind. 99/2011 103/2011 69/2011 107/2011 117/2011 90/2011

SMARTConstruction • September 2011 15 Analysis

The interruption of heavy construction still requires investments in The other three groups of Western European countries will not return to preservation and increases unemployment. According to the latest their pre-crisis positions through 2013. information, the government has proposed not to use subsidies in the transportation infrastructure fund again as it continues to cut Year-on-Year Development of Construction Production by the planned expenditure for transportation infrastructure by one third in Euroconstruct in 2008-2013 in %: the proposed state budget for 2012 and to reject requests by regional 2008 2008- 2009 2010 2011* Rank 2012* 2013* Rank authorities relating to the transportation network’s increased needs for -11 13 renovation. Similar catastrophic development s are reported in residential Germany 99 101,9 101,7 102,6 4 101,8 101,7 106,3 4 construction. Although the Czech Republic had the lowest level of France 92,6 94,1 102,7 89,5 10 102,3 102,9 94,2 8 available housing per household out of all Euroconstruct countries in Italy 91,3 93,4 99,5 84,8 12 102,1 101,5 87,9 15 2010, it reported the highest decline in the started construction of new Spain 75,4 83,6 85 53,6 18 96,4 101,5 52,4 18 apartments in multi-storey buildings. UK 89,6 106 97,8 92,9 7 99,3 104,7 96,6 7 5 countries 90,1 96,3 98,5 85,4 III 100,9 102,4 88,3 III Non-residential non-production construction, also predominantly Austria 94 96,6 100 90,8 8 101 101,3 92,9 9 financed by public funds, decreased by approximately 10% before mid- Switzerland 103,7 103,3 100,8 108 2 101,7 101,9 111,9 2 2008 and has decreased by more than a quarter since 2009. Substantial Belgium 96,5 99,9 101,8 98,1 5 101,4 99,7 99,2 6 fluctuations - growth in odd years and decline in even years - are typical Netherlands 95,1 89,6 101,4 86,4 11 103,2 103 91,8 10 in the public construction of buildings for the education and healthcare Ireland 65,8 73,4 101,4 49 19 103,2 103 52,1 19 sectors in the Czech Republic. Portugal 90,1 93,8 93,7 79,2 16 92 95,3 69,4 16 6 countries 93 94 100,3 87,7 II 101,1 101,2 89,8 II The reason for the decline in the construction production from public Denmark 87,2 91,6 103,1 82,4 14 104,1 105,1 90,1 11 sources was the government’s effort to decrease state budget expenses Finland 88,2 106,3 104 97,5 6 100,6 102,5 100,6 5 through the investment freeze. Non-residential construction financed Norway 65,6 94,8 94,8 58,9 17 105,1 105,1 65,1 17 predominantly from private sources in 2001-2004 grew by one third Sweden 95 103,5 105 103,3 3 104 101,8 109,3 3 but it decreased by one third through 2007 and then rapidly declined 4 countries 80,6 98,7 101,3 80,6 IV 103,5 103,6 86,5 IV by more than a half; the decline is expected to end in 2012. The reason West Europe 89,6 96,1 99 85,3 101,2 102,3 88,4 for the negative development is again the lack of investment funds in CR 98,4 92,5 98,9 90 9 99,8 100,8 90,5 12 the private sector and uncertain development. Hungary 90,6 91 97 80 15 103,8 108 89,7 13 Poland 104,5 104,8 112,9 123,6 1 104,7 101 130,8 1 Residential construction, financed partly by household savings and Slovakia 87,1 96,4 98,3 82,6 13 104,3 104 89,6 14 partly by public municipal funds, was impacted by the crisis as a result East Europe 99,4 99 106,4 104,7 I 103,4 101,9 110,3 I of unemployment growth, a decline in real wages and a rapid growth Euroc. 90,1 96,3 99,5 86,3 101,3 102,3 89,5 in apartment prices, which caused a substantial decrease in demand. A negative role is also played by banks that do not approve loans with higher Source: Euroconstruct Summary Report 06/2011 risks but at the same time do not reflect a substantial decrease in the Czech *estimate National Bank’s interest rates down to 0.75%. The situation resulted in In 2013 the Czech Republic will be the fifth-worst of 19 a gradual growth in the number of unsold and non-rented residential Euroconstruct countries in terms of the construction industry’s and non-residential premises and a substantial decrease in the prices of return to the level before the crisis in 2008. apartments, predominantly in new and old multi-storey buildings. According to recent data on construction development, the Czech construction industry will take the fifth-worst position out of 19 Benchmarking Ranking of the Construction Production countries in 2008-2013. Worse results are only expected in Spain, Development of Individual Countries Overcoming the Crisis in Ireland, Portugal and Slovakia. 2008-13 Before 2011 only four countries returned to the same construction These results are confirmed by Eurostat databases through 2011. production level as before the crisis in 2008 (Poland, Switzerland, The current global financial and economic crisis confirmed again Sweden and Germany plus Finland through 2013). The ranking that the European construction sector was the first industry that of the countries that continue to lose their positions after 2011 is signalised the economic crisis in 2008 and will be the last industry to as follows: CR and Italy (minus three positions), France ?(minus two report positive results in 2011. The situation in the Czech construction positions) and Slovakia, Austria and Belgium (minus one position). industry expands the conclusion as it entered the crisis in 2009 and is Denmark and Hungary are faster in overcoming the crisis impacts (+ not expected to overcome it until 2013. 2 positions) and a slight improvement was reported by Finland and the Netherlands (by one position). In terms of groups of countries, the best results are reported by Central European countries that have overcome the decline thanks to Poland in 2011.

Construction Development in 2008-2013 in %

1. POL 2. NOR 3. ITA 4. SWE 5. SWI 6. GER 7. FIN 8. HUN 9. UK 10. BEL 29 15,5 10,1 9,9 6,7 5,4 2,1 -2,7 -3,3 -3,3 11. AUS 12. FRA 13. NETH 14. DEN 15. CR 16. SR 17. POR 18. SPA 19. IRL West. E. -4,5 -5,1 -12,1 -12,8 -13,4 -15,0 -31,7 -41,2 -41,6 -10,4

16 Benchmarking Ranking of Other Construction Indicators in On the contrary, confidence in the development of industrial production 2010 and in an Outlook is positive except for three countries (Spain, Portugal and Poland) and in To emphasise the impacts of the government’s decision to cut the Czech Republic it is higher than average. In June 2011, the indicator planned investment expenses in the construction industry, we provide of entrepreneurs’ confidence in the construction industry in the Czech a benchmarking ranking of the changes in five construction indicators, ie Republic decreased further –9 points compared to June 2010. On availability of housing per household, share of construction production in the other hand, the indicator increased in the Czech trade and service GDP, construction intensity Euro-parity per capita, productivity per person industries. and the number of started multi-storey apartments per capita (in 2010 and an outlook in %). Finally, we can come to a conclusion that, in our opinion, the government’s specific approach to the current economic crisis in In the total ranking of the sum of the five selected construction the Czech Republic characterised by sacrificing the construction industry indicators according to the benchmarking analysis for 2010 and is the least-appropriate solution that will have the longest-lasting the crisis development through 2013, the Czech construction industry negative effects on the national economy and that was not applied by is in second-last place, ie 18th out of 19. Only Slovakia reported worse any other Euroconstruct country. results, which proves a substantial worsening of the Czech construction industry’s position in Europe.

This pessimistic assumption of the Czech construction industry’s Jiří Hezký, Senior Consultant of ÚRS PRAHA, URS development is also supported by the benchmark of construction Praha a.s. (CR) representative in EUROCONSTRUCT, entrepreneurs’ confidence that was fourth-worst in the Czech Republic and a member of the statistical committee of out of 19 countries in May 2011. Also, the volume of engagements in EUROCONSTRUCT. the Czech Republic was the fifth-lowest in May 2011.

Available Constr/VAT % Const.€ parity/person Started multi-storey Product.€ parity/person Total housing per apartments per capital ranking household 2010 2010 2008-10 2010 2008-13* 2010 2008-10 2010 2008-10 (%) (%) (%) (%) CR 929 18 -8,6 65495 -17,7 0,93 -0,83 33093 -59 128 Ranking 19 1 17 14 17 15 13 14 18 18 West Europe 1130 10,1 2,8 77133 4,7 1,61 -0,81 75994 -21 82

*outlook

Ranking of Construction Development Confidence in % by European Construction Businessmen in June 2011:

SWE FIN BEL AUS GER FRA NETH DEN POL 10. BEL 14,3 4,1 -2,5 -4,4 -7,7 -9,9 -15,0 -18,3 -23,3 -3,3 EA16 EU27 ITA HUN RR UK SR SPA POR West. E. -23,6 -26,2 -37,9 -39,4 -41,4 -44,1 -44,2 -55,8 -59,2 -10,4

(Indicator of confidence and economic sentiment June 2011, Eurostat),

SMARTConstruction • September 2011 17 In the CFO’s Office

Should Subsidies from EU Funds Support Construction Industry?

Although we are in the second half of the programming period in which the European Commission granted member firms with subsidies from the EU structural funds for 2007-2013, the results of drawing the subsidies in the Czech Republic indicate that construction firms, developers and other entities from similar sectors still fail to pay sufficient attention to funds from the EU even though successful bidders received approximately CZK 700 billion in this period.

It can be argued that construction projects funded from subsidies in We will have a more-detailed look at the area of grants where which construction companies participate as suppliers may be much construction companies may be the direct recipients of subsidies. Four more attractive than subsidies that can be received directly by construc- Operational Programmes will be in our focus: Business and Innovation tion companies. That may be the reason why the number of construction within the remit of the Ministry of Industry and Trade, companies receiving subsidies directly is rather limited. The Environment under the auspices of the Ministry of the Environment, What are the reasons for this situation and is this situation Human Resources and Employment administered by the Ministry justifiable? of Labour and Social Affairs and last but not least, Prague – If we examine carefully the individual operational programmes available Competitiveness that is within the remit of Prague Municipal Authority. for the period in the Czech Republic we will find several possible reasons. Although Operational Programme Business and Innovation includes The key reasons undoubtedly include the fact that support for the Real Estate programme, whose title may indicate that construc- the construction industry or construction companies is not directly tion companies could apply for larger subsidies through construction mentioned in any of the 24 operational programmes as is the case with engagements, the OP should also be viewed from a subsidy recipient’s research and development, IT, manufacturing, the environment etc. perspective. Another significant factor relates to the prejudice that in Prague it is nearly impossible to receive support from public funds. This discou- Predominantly the construction companies that at the same time rages developers and construction companies from exerting any effort produce construction materials and need real estate for these purposes at the very beginning because Prague, apart from being the capital of may receive grants for the renovation of property. Other supported areas the Czech Republic, is also the main city where such companies concen- include: opportunities related to the purchase of new hardware and trate and where they implement the highest number of their projects. At software (SME – editorial note), construction and equipment of training the same time, the condition to own the property supported by subsidies rooms or energy savings (thermal insulation, change of windows, doors for at least three or five years as part of the construction companies’ etc) in property owned by entities requesting subsidies. Opportunities assets is not too favourable because ownership title to the property or are provided in the area of subsidies for investment expenses relating to roads is transferred to another entity shortly after completion, not to research and development activities, such as providing equipment for mention the fact that large companies have limited opportunities to laboratories, testing rooms etc, subsidies for the purchase of production draw subsidies. technologies used to produce new or innovative construction materials or subsidies for shared service centres for companies with international However, if we take a closer look at individual operational programmes operations. It should be noted that these opportunities are only offered we will find out that the options to draw money from public funds are to projects to be implemented outside of Prague. not as limited as it might seem at first glance. In the economic activity classification, the construction industry is classified within the manufacturing industry and appropriate subsidies should be searched in programmes focusing on this area.

SME – Small and mid-sized enterprise with the headcount up to 250 employees with the turnover up to EUR 50 million and assets up to EUR 43 million, related parties are included in the assessment

18 The Environment offers the largest opportunities predominantly in its As for the other group of support where construction firms may profit fourth priority axis that is focused on the elimination of old environmental from other projects of applicants who received subsidies, the scope of burdens. Apart from subsidies for the reclamation of contaminated activity is much larger. Public institutions, schools, hospitals, manu- locations, subsidies may cover the costs of archaeological studies, demo- facturing businesses, etc may receive subsidies for the construction lition work and final transformation of locations into parks or preparing and renovation of property or roads needed to achieve the purpose for plots for subsequent construction. Projects may be realised anywhere in which they were established or to run their business, and construction the Czech Republic including Prague but the company must comply with companies can act as project suppliers or sub-contractors. Undoubtedly, the condition of holding the property supported from the subsidy for these activities include large transport construction projects promoted the required period. by large notice boards with the EU flag.

Given the relatively-large number of development projects in Prague located in areas of former railway stations or other locations where If we go back to the beginning of my article and try and answer environmental burden may play a significant role, this opportunity may the question in the heading the only possible answer is yes. Without be very attractive. significant investments in the construction of new or renovation of old buildings and roads by the public and private sectors and without The remaining two programmes focus on the same area of support: the European Commission’s subsidies, construction companies would development of human resources and education. The differences are have more difficulties than those caused by the economic crisis. in the geographical focus of the programmes; while the Operational If you find the financing opportunities insufficient you should take Programme Human Resources and Employment focuses on educating into consideration that they will tend to be more and more limited in employees performing their work outside of Prague, the Operational the long term and therefore, the opportunities we have now may not Programme Prague – Competitiveness focuses on Prague. Support may be repeated. be provided to educational activities concentrating on general education (language courses, soft skills, etc) or specific education, ie training courses necessary to perform a specific type of job. The opportunity to receive up to 100% of the training costs may be very attractive. Antonín Weber is a Senior Consultant in the Tax function The above-mentioned opportunities summarise the major areas where of Deloitte focusing on grants construction and development companies may be direct recipients of and incentives. subsidies. Naturally, these areas do not support the construction of [email protected] apartment blocks or family houses, office buildings, business centres, etc that would be most desired by developers or construction firms, but it must be emphasised those areas have never been and will not be supported. For this reason, realistic opportunities offered at present should be considered attentively because the possible subsidies from public funds may decrease in future as the macroeconomic situation in the Czech Republic approaches the European Union average.

SMARTConstruction • September 2011 19 Contacts

Ing. Václav Matyáš, SPS v ČR [email protected]

Ing. Miloslav Mašek, SPS v ČR [email protected]

Ing. Michal Petrman, Deloitte [email protected]

Ing. Miroslav Linhart, Deloitte [email protected]

Ing. Zdeněk Kunc, ÚRS Praha [email protected]

Ing. František Glazar, ÚRS Praha [email protected]