Polish finance minister spurns calls for state aid

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By:
Lucy Fitzgeorge-Parker
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Construction industry in dire state; Unions no bar to sector shrinkage

Poland’s construction industry slid further into crisis last month as finance minister Jacek Rostowski rejected calls for direct financial support for the heavily indebted sector.

Economy minister Waldemar Pawlak and treasury colleague Mikolaj Budzanowski had previously raised the hopes of investors and industry chiefs by announcing proposals for state aid for leading local firms such as PBG and Polimex-Mostostal, whose already tight margins have been squeezed to extinction by the rising cost of raw materials.

The suggestion was quickly rejected by Rostowski, however, who insisted that Poland would remain true to its free-market principles. "A market economy is the best environment for companies and that’s how we’ve built our national wealth over the past 20 years," he said in mid-July.

Analysts note, though, that the possibility of state aid should not be ruled out, given the central role still being played by some of the firms facing funding difficulties in key public sector infrastructure projects. PBG, for example, which filed for bankruptcy in June, is the country’s third-largest builder.

Competition law

Opinion is divided, however, on the form such aid might take. Direct financial assistance in the form of cash or the purchase of newly issued bonds from the struggling firms was seen as unlikely, given the near certainty of either action falling foul of European Union competition laws. However, Budzanowski’s suggestion that state industrial development agency ARP might help arrange the sale of selected assets has met with approval in some quarters.

Marek Czachor, equity analyst at Erste Group in Warsaw
Marek Czachor, equity analyst at Erste Group in Warsaw
"It’s important to remember that the entities that are in trouble are holding companies and that these could go bankrupt without affecting their subsidiaries, which could be bought by competitors or – if they are involved in key projects – by the state treasury," says Marek Czachor, equity analyst at Erste Group in Warsaw.

That appears to be the option favoured by Polimex, which in mid-July – shortly after announcing the start of debt restructuring talks following a selective default in May – offered relatively successful subsidiaries Energomontaz and Sefako to ARP with a price tag of at least Z200 million ($58 million).

But as Adrian Kyrcz, sector analyst at BZ WBK, points out, this approach would not be risk-free for the Polish state. "Setting a price for the acquisition of construction subsidiaries by the state would be difficult," he says. "In theory it should probably reflect market levels, but those would be hard to determine given that the companies are known to be facing a liquidity crunch.

"Furthermore, the acquisition of subsidiaries would take time, and in many cases time is of the essence if companies are to remain solvent and projects are to be completed."

For Kyrcz, the simplest solution – and therefore the most likely – would be for the Polish treasury to offer loans to troubled companies at market rates and thus ease the liquidity squeeze, which has been felt across the industry after more than 500 companies filed for bankruptcy in the six months to end-June.

"The wave of bankruptcies we’ve seen so far this year has made banks cautious about providing financing to the construction sector; simply rolling over existing debt has become a challenge, even for companies that are not highly leveraged," he says.

Bank and bondholder confidence in the sector is unlikely to return, however, while growth prospects remain at best subdued and at worst nonexistent. The wave of EU funding that poured into Polish road-building in the years following 2007 might have contributed to the industry’s current woes, by encouraging builders to submit ever more aggressive bids for tenders, but the winding up of the programme is likely to cause more permanent pain.

Lean times

Indeed, analysts agree that the next two years are likely to be extremely lean ones for construction firms as the end of spending associated with the Euro 2012 football tournament coincides with the tapering off of the current round of EU structural funds, which runs out in 2013. Further big-ticket public-sector investment is thus unlikely before the start of the next funding round in 2014 – and with the eurozone in disarray, Poland’s chances of receiving its reported target of €80 billion seem slender.

According to Peter Attard Montalto, emerging markets analyst at Nomura, the dismal outlook is a powerful argument for the Polish government to stay its hand on aid to the sector. "The stark truth is that as public-sector investment falls off over the next five years the construction sector is going to have to shrink, and there’s no point in trying to support companies that will have to be winding down anyway," he says.

"In addition, supporting firms that underbid for contracts creates a big moral hazard, because then there’s no reason for them not to do it again in future."

Czachor at Erste adds that the need for shrinkage and cost-cutting is already gaining widespread acceptance across the sector, even among unionized workers. "I don’t think the trade unions will be too much of a problem," he says. "They will probably try to postpone and mitigate layoffs, but they are also aware that the situation is tough and that an agreement needs to be reached."

Pressure for state support for constructors is likely to linger, however, given the sector’s importance for the wider economy – in 2011, construction output was equal to 7.3% of GDP, making the industry one of Poland’s leading employers.