SMARTConstruction - Deloitte United States€¦ · traditional business models, based on domestic construction either for the Public Sector or for real estate developers, and were

First Six Months of 2011 in the Construction Sector

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

Negative development continues with a further slump p. 10

Benchmarking of the crisis’s impact on the construction industry in the Euroconstruct countries p. 15

European Powers of Construction Ranking of the largest European companies p. 4

SMARTStrategic Management | Analyses | Interviews | Trends September 2011

Construction

2

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

InterviewThe Czech Market is a Promising One .......................................8

Outcome ServiceFirst Six Months of 2011 in the Construction Sector ................10

AnalysisImpact 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

Content

3SMARTConstruction • September 2011

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.

The Ministry of Industry and Trade used a “3 i” logo in the heading of the “Strategy for the Czech Republic’s Competitiveness – Back to the Top in 2012-2020” with one of the three i’s representing infrastructure.

It is apparent that not only foreign politicians consider investments significant factors for economic development. I don’t know how it will be implemented overseas but I know exactly how it is (not) implemented here.

As the process of state budgeting for 2012 culminates, we are 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 MatyášPresidentAssociation of Building Entrepreneurs in the Czech Republic

Introductory Comment

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.

4

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 downturn, 2009 and 2010 have been difficult for the construction industry. The economic downturn has been keenly felt across the real estate sector of most European countries and it has also affected con-struction of public infrastructure. However, this sector is very diverse and has demonstrated its ability to innovate over the years. Most of the companies analysed here had anticipated the exhaustion of their traditional business models, based on domestic construction either for the Public Sector or for real estate developers, and were able to expand their business successfully both in terms of geographical location and the activities performed.

While discussing the internationalisation of European construction companies and how their successful attempts for diversification have positively impacted their revenues and margins, we cannot forget that usually diversification and international expansion come at a cost. The-refore, a discussion on indebtedness levels and diversification of both activities and locations is also included in our analysis.

Internationalisation and Diversification Profiling of the Top 20 European Construction CompaniesA quick glance at the top 20 listed European construction companies, taking into account the internationalisation level and the diversification of their activities, will show that the European powers of construction could be classified into four main categories.

“Domestic” Construction Groups This group comprises companies whose primary source of revenue is construction within local markets. International sales account for less than 40% of total sales made.

Vinci and Bouygues are without any doubt the first two companies of our 2010 ranking taking into account total revenues. The international presence of both groups is significant (€12,449 million and €9,719 mil-lion of total revenues, respectively), but they still achieve over 60% of the revenues in France. Similarly, although in the last years both French giants have diversified their activity portfolio, their construction revenue represents 84% and 74% of their total revenue figure, respectively.

On a smaller scale, Peab obtains 86% of its revenue in Sweden and is also focused on the construction business from where it derives 86% of its revenues.

International Construction Groups The second group of companies is comprised of companies whose pri-mary source of sales is construction outside of their country of origin. Hochtief is the most international European construction group, with 87% of its construction revenue being earned in America and Asia/Oceania.

Contrary to Peab, Swedish companies NCC and Skanska achieve over 40% of their revenues outside of their home country. NCC works in Denmark, Finland and the other Baltic countries. Skanska is active in the UK, Eastern Europe and the Americas.

Finally, the limited size of their local markets encourage the Finnish company Yit, the Austrian company Strabag and the Dutch company Bam Groep to conduct their activities in other European countries.

While discussing the internationalisation of European construction companies and how their successful attempts for diversification have positively impacted their revenues and margins, we cannot forget that usually diversification and international expansion come at a cost.

Non

-con

stru

ctio

n re

venu

es /

tot

al r

even

ues

%

International revenues / total revenues %

10%

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

20%

30%

40%

50%

60%

70%

80%

90%

100%

"Domestic" Conglomerates International

Conglomerates

International Construction Groups

"Domestic" Construction Groups

ACS

Acciona

Sacyr

FCC

Balfour Beatty

Bilfinger

Ferrovial

OHL

BamYit

Skanska

NCCStrabag

Hochtief

Bouygues

Vinci

Carillion

Eiffage

Peab

Enka


“Domestic Conglomerates”A third group of companies is comprised of companies that have diver-sified their business portfolio to include non-construction activities but conduct most of their business in domestic markets.

Spanish companies ACS, Acciona and Sacyr have extended their activities to foreign markets. However, in 2010 almost 70% of their activity was still performed in Spain. In addition to their international expansion, ACS, Acciona and Sacyr have diversified their business portfolios. They provide environmental services such as waste disposal or water treatment plants, energy-related services, transportation or infrastructure projects. Consequently construction revenue does not exceed 60% of total revenues. With the consolidation of Hochtief in 2011, ACS radically changed its profile with pro forma international sales of approximately 66%. Hochtief consolidation also drives ACS to the number 1 pro forma position in the Deloitte rankings by sales.

Carillion’s diversification has been oriented to provide support services and Eiffage has achieved a significant presence in the energy and con-cession sectors. Both companies generate over 40% of their revenues through non-construction-related activities, although given the location of such activities, they must be primarily considered domestic.

Enka has reached a significant position in Russia, although the Turkish market still represents over 70% of total revenues. In terms of activity, Enka is the most diversified listed European construction group. Its focus on the energy sector, trade and manufacturing results in the tra-ditional construction business representing less than 25% of its total revenue in 2010.

Nine of the construction companies assessed in the Deloitte study for 2010 obtain at least 50% of their revenues from non-construction activities. Eleven of them generate at least 40% abroad.

International Conglomerates Finally, there is a group of companies that are highly diversified and have significant international sales.

Ferrovial and OHL achieve almost 70% of their revenues outside of Spain, with significant diversification. Ferrovial derives more than 60% 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.

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

6

Strategic Management

FCC and Balfour Beatty obtain approximately 50% of their revenues in foreign markets and non-construction activities. FCC’s diversification has been oriented mainly to environmental services in Austria, Ger-many, the UK and Eastern Europe. Balfour Beatty has a strong presence in Asia and North America and has diversified its construction activity, providing professional and support services.

Bilfinger is present on five continents, drawing approximately 58% of its revenues from foreign markets. The German group has diversified its activities to include industrial and power services that represent almost 50% of group revenues in 2010.

The Diversification of European Construction Companies The construction industry has a cyclical profile that is significantly more 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 number of European construction companies in recent years.

Although at first glance it may seem that the construction compa-nies have diversified into a wide range of disparate activities with no common denominator, a closer examination shows that these activities 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.

• They are activities that may serve as a source of contracts for the other business lines (construction, maintenance, facilities or concessions).

• They seek stable/predictable cash flows that enable a high leverage 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).

The construction industry has historically had relatively-low margins due to the high number of companies operating in the sector and to the strong competition at both a local and international level. The diversification of European construction companies is focused on activities with higher margins and more stable/predictable cash flows.

The construction activity of the major listed Euro-pean construction companies reported margins of between 3% and 5% in most cases in 2010.

A review of the margins obtained by the European powers of construc-tion in 2010 confirms this notion. The first three groups in terms of profitability by sales (OHL, Enka and Ferrovial) are also amongst the top ten groups with the greatest revenue diversification.

Similarly, Acciona, Sacyr, Eiffage, ACS, FCC, Bilfinger, Carillion and Bal-four Beatty present higher average profitability than Yit, NCC, Skanska, Peab, Hochtief, Strabag and Bam because they are more diversified.

Vinci and Bouygues present overall profitability from sales of 10.3% and 5.6%, respectively, but their highest profit margins are to be found in the non-construction activities.

Hochtief

Non

- c

onst

ruct

ion

reve

nues

/ t

otal

rev

enue

s %

EBIT/ total revenues %

10%

2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

20%

30%

40%

50%

60%

70%

80%

90%

100%

ACS

Acciona

FCC

Eiffage

Sacyr

Enka

Balfour Beatty

Bilfinger

Ferrovial

OHL

BAM Strabag

Bouygues

Vinci

Carillion

SkanskaPeab

NCC Yit

Deloitte continuously examines European construction companies, analyses the construction market and finally discusses the situation of the construction sector in the European Powers of Construction publication, available for download from the Deloitte website (Industries / Real Estate).

Miroslav Linhart is a Senior Manager of the Real Estate and Construction Services Group.

[email protected]

Helena Kolarova focuses on increasing the efficiency of construction companies in Deloitte.

[email protected]


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

8

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-declining number of contracts. Our heavy construction division largely depends on public contracts; the share of private investors is minimal. We have completed the contracts that we won in the past years but no major road construction contract has been awarded since 2009.

What is your opinion on the future development of demand?

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 my view the Czech government is not committed enough. In Germany, for example, they make large investments in infrastructure. I am able to make a good comparison as our group also operates in Bavaria and Saxony. While the transportation infrastructure in these countries could already be considered sufficient, the local government invests to help the construction industry in hard times. Roads in the Czech Republic are in miserable condition, and yet our government prefers to save money. Instead of operative management the government should pursue strategic management. I do not suggest constructing roads in vain. I believe that the higher the quality of the infrastructure, the better the conditions for a region’s development, production and trading support.

What segments or customers do you focus on now?

The number of our current contracts declines and thus we need to seek opportunities in other market segments. My experience is that the regions with second- and third-class roads show their commitment to this property, which they received from the state in bad condition. When the state transferred its property to the regions, the road specialists, including myself, disagreed because we were afraid that the regions would have no money for investment and the state would no longer support the transportation infrastructure. Yet we were completely mistaken. Although the regions have no money to spare they take care of their infrastructure. Contracts awarded by

investors on second- and third-class roads are reasonable. We have started focusing on segments where our activities were less intensive in the past, such as water management and more-recently railways, which has been our strength in Austria. However, our competitors have a similar strategy so it is not so easy.

How do you perceive the “price war” and how do you deal with it?

All firms declare that their calculations are reasonable and their prices are never lower than their costs, but in my opinion it is not true. We have designed the first railway construction project recently; the surveyor’s price was 2 billion, our bid was 1.3 billion 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 because it is lower than the actual costs. This is the current situation on the market with such severe competition.

How do you think it is possible to deliver a construction for 8 hundred million if the surveyor estimated the price at 2 billion?

It all depends on how the price is calculated. We use a cost-based approach, ie the price includes the actual cost of materials and our machinery, which we also for other projects, ie our ultimate calculation is lower than the table-based prices. Differences include the way of using materials, work shifts, the use of machinery etc.

Ing. Petr Čížek is a statutory executive of Swietelsky stavební s.r.o. and has been a Chairman of the Road Contractors Association for many years. Swietelsky stavební s.r.o. is part of one of the largest

Austrian construction companies. The company, based in Ceské Budějovice, has operated in the Czech construction market since

1992, focusing on comprehensive construction services principally in transportation and heavy construction and in all areas of

building construction.


The surveyor’s estimate is the maximum. In the past I understood that certain firms would undervalue their price. They perhaps managed it because they won large contracts and thus could afford to have loss-making contracts. Yet, this is no longer sustainable. At present, no one can afford it.

How does the Austrian management of the Swietelsky Group see the Czech market? Does it remain promising for them?

Indeed, it does. For example, our former Austrian CEO ranked individual countries based on the volume of coating mixes per person. In his view the prospects of the Czech Republic were good because in those days it produced 500 kg of mixes per inhabitant. He said that the Czech Republic was a promising market because this indicator would grow to reach the Austrian level one day. The indications suggest a great growth potential in the Czech Republic, greater than in western countries. It is a only matter of time until we will have to start making deferred investments.

Do you see any way of improving the effectiveness and quality of outputs in the road construction industry?

Our Association has tried to enforce planning constructions in a timely manner and to perform road repairs and maintenance in technologically-convenient months, ie in Spring and Summer, since the totalitarian days. However, the actual practice that has been in place in the Czech Republic for fifty years is discussing constructions and repairs in winter, calling tenders in the spring, dealing with appeals in the summer and starting the actual constructions at the end of August. This is hard to change. The best months for constructions are July, August and September. Yet, we produce coating mixes mostly in September, October and November and do most of the work in December, when it is also totally inappropriate in terms of technological regulations.

At present, it would certainly be useful to prepare a study or assessment of the technical regulations and standards in the construction industry to see if they are overly strict and if money could be saved by changing them. This project would have to involve universities, the Road and Motorway Directorate, the contractors and the Ministry of Transport. I believe a more-effective system could be designed at this level.

The question of using the PPP projects is discussed at every conference. Do you consider introducing the PPP projects in the Czech Republic realistic?

At this moment it is clear that the only PPP project that was planned (the D1 road reconstruction) was cancelled owing to the suspended construction of the D8 road as it lacked the required building permissions. To use the funds awarded under the Transport Operational Programme, the D1 road should be built instead of the D8.

In my view PPP projects make sense. They are not the only solution but the concept certainly is an effective solution for transportation infrastructure.

In Spain, for example, the whole construction industry is based mostly on PPP projects. Large firms divide their businesses to two parts: a construction-driven and concession-driven part.

The word “concession” is important. It means that the firm builds a certain stretch of the road and may collect tolls on it when completed. However, Czech politicians often mix-up the concession-based PPP projects with a long-term loan, asking why the state should take a mediated long-term loan if it can get bonds-based funding immediately. In my view the politicians do not understand or do not want to understand the issue. They say it is inconvenient without knowing what it is all about. It is not only about financing but mostly about public services.

What do you consider to be the key question for effectiveness improvement?

The most important question for me and for most of the CEOs in the construction sector is what should be performed in-house and what should be outsourced. The question is, for example, whether the firm should focus on engineering, only co-ordinating the sub-contractors. This approach has been adopted by certain firms and seems successful. Yet, it is a success only when medium- and small-sized companies depend on having any work at all, ie at the times of crisis. Another question is whether the firm is able to produce and deliver constructions itself. It is important when work is abundant. Finding the right balance between jobs to be performed in-house or outsourced is a key decision for medium- and large-sized companies. I often discuss it with my colleagues from other firms and we agree that a solely-engineering firm has no perspective. Our strategy is to have our own production facilities and asphalt plans, or to co-own them at least so that we do not have to rely on what others produce and whether they sell it to us. This is essential for firms planning their future in the long-term.

How do you expect the employment and employee situation to develop?

At this moment it is certainly not about downsizing or upsizing but rather about changing the rewards and employee benefits system. The idea is not cancelling the old system and introducing a new one, but making it fairer. We need to distinguish good and bad performance, aligning it with remuneration.

Current discussions often mention new trends and investments in innovations and new technologies. How do you envision the role of innovation in the future construction sector?

The Road Contractors Association has operated since 1981. It was established because there was nothing else to lean on. Whatever we did was makeshift. Hence, national companies would cop-operate, organising various streamlining initiatives and sharing improvement proposals. The firms used to meet and their work teams would exchange information because we were cut off from 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.

10

Outcome Service

Private sector demand declined mainly as a result of continuing stagnation on the real estate market and the limited scope of residential and commercial development projects, as well as the termination of photovoltaic power plant construction partly compensated by the growth of other energy-related facilities.

Construction production for the public sector declined principally due to cuts in the budgets for governmental investments and the State Fund for Transport Infrastructure, which was partly compensated by the increased production of water management and technical infrastructure constructions co-funded by the EU.

This resulted in the decline of heavy construction and the stagnation of building construction activities.

In the first six months of 2011, construction production in fixed prices declined year-on-year by 1.3%. While building construction grew by 1.9%, heavy construction fell by 8.0% over this period.

Between January and June 2011, companies with 50 or more employees delivered construction production in fixed prices (based

on supplier contracts) totalling CZK 95 158 billion, ie a decline of 5.37% for construction production in fixed prices compared to the first six months of 2010. The largest decline (17%) of construction production in fixed prices from CZK 36 266 billion in the first six months of 2010 to CZK 29 934 billion in 2011 is reported by companies with more than 1000 employees. Companies with a headcount between 100 and 199 employees reported substantial growth (11%).

Basic construction production (work performed by own personnel) totalled CZK 70 637 billion and CZK 73 051 billion in 2011 and 2010 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 2010, the headcount dropped by 4 039 employees, ie a decline of 4.04%. Companies with 50 or more employees, including developers, reported an average wage of CZK 27 504 over the given period in 2011, ie an increase of 1%. Companies with 1000 or more employees reported an average wage at CZK 37 177, ie a decline of 2.19%. The labour productivity for construction production in fixed prices fell year-on-year by 1%, while the same indicator for basic construction production grew by 1%.

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.

Companies with 50 or more employees – Comparisons

Construction work in CZK billion

„C“ „BCP“

January to June 2011


index 2011/2010



index 2011/2010

Companies with 50 or more employees

95.158 100.560 94.63 70.637 73.051 96.70

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

C - Construction production in fixed prices (based on supplier contracts) BCP – Basic construction production (work performed by own personnel)


According to prevailing activities in the statistical classification of economic activities (CZ-NACE) for companies with 50 or more employees in the first half of 2011, the construction production in fixed prices in absolute terms continues to be highest for the construction of residential and non-residential buildings, totalling CZK 44.64 billion, an increase of 7% compared to the same period in 2010, followed by the construction of roads and railways at CZK 30.3 billion, a decrease of 25% compared to the same period in 2010. The highest average wage of CZK 44 723 over this period in 2011 was reported by companies with 50 or more employees focused on developers activities, which is a multiple of 1.63 of the average value for all construction companies, which is CZK 27 504. The second-largest average wage of CZK 32 752 was reported by companies focused on road and railway construction.

In terms of size, companies with headcounts from 100 to 199 employees reported the largest growth of labour productivity (13%) for construction production in fixed prices compared to the period from January to June 2010. The same category of companies also reported the highest growth of labour productivity (10%) for basic construction production. Companies with 1000 or more employees reported a significant decline of labour productivity (18%) for construction production in fixed prices. In absolute terms, companies with 1000 or more employees reported the highest labour productivity for the construction production in fixed prices (CZK 1 622.6 million) as well as the basic construction production (CZK 994.2 million) over the given period of 2011.

The number of issued building permits grew year-on-year by 1.0% from the start of the year to the end of June. The approximate value of these constructions decreased by 1.4% in the 1st half of 2011 compared to the same period in 2010.

The number of flats started increased year-on-year by 0.1% from the start of the year to the end of May 2011. The number of flats started in family houses increased year-on-year by 4.3% and the number of flats started in apartment buildings fell by 11.5%.

The number of flats completed dropped year-on-year by 28.6% from the start of the year to the end of June 2011.

The number of completed flats in family houses and apartment buildings fell by 5.9% and 34.1% respectively.

For the next few months the construction sector lacks the distinct drivers to stimulate construction production demand. No large-scale transport infrastructure constructions funded from public funds are being initiated. Construction companies’ backlogs have declined. Construction production is likely to continue to decline in the coming months.

Information about public construction contracts is critical for the construction sectorAs many as 1 395 public construction work contracts were awarded in the first half of 2011 totalling CZK 50 485 million (including VAT), of which 677 contracts related to building construction (48.5% of the total number of awarded contracts) totalling CZK 17 858 million (35.4% of the total value of awarded contracts), and 718 contracts related to heavy construction (51.5%) totalling CZK 32 627 million (64.6% of the total value of awarded contracts).

If compared year-on-year to the 1st half of 2010, when the awarding of public contracts was already substantially limited, the total value of contracts awarded in the 1st half of 2011 stagnated (a growth of 0.6%); while the value of building construction contracts fell by 3.6%, the value of heavy construction contracts grew by 3.0% principally due to the growth of water management construction contracts co-funded by the Environmental Operational Programme. The value of transport infrastructure constructions contracts fell year-on-year by 11.3%.

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 construction contracts fell by 20.9% and heavy construction contracts by 51.7%, while transportation infrastructure construction contracts declined by 74.7%.

The share of transportation infrastructure construction contracts as a part of total value of contracts awarded dropped to 19.0% in the 1st half of 2011 compared to 48.0% in the 1st half of 2009.

0

20 000

JAN FEB MAR APR MAY JUN

červenec zářísrpen říjen listopad prosinec

40 000

60 000

80 000

100 000

120 000

140 000

160 000

building construction 2010


heavy construction 2009

10 000

14 000

18 000

22 000

26 000

30 000

34 000

38 000

42 000

46 000

50 000

54 000




2 000

6 000

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)

12

Outcome Service

Altogether, 612 companies were awarded public contracts for construction work in the 1st half of 2011.

In total, 1 395 public contracts totalling CZK 50 485 million were awarded in the 1st half of 2011 which was allocated as follows: CZK 35 326 million was allocated to 1 246 contracts awarded to individual providers, and CZK 15 159 million was allocated to 149 contracts awarded to 149 consortiums of providers.

The declining number of consortiums in the total value of awarded contracts results from limitations in awarding contracts for large-scale transport infrastructure projects.

The largest volume of public contracts was awarded to EUROVIA CS, a.s. in the 1st half of 2011 as follows: CZK 3 362 million 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 in ten consortiums.

The second-largest volume was awarded to Metrostav as follows: 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 participation in seven consortiums.

The total of 1 395 public contracts for construction work totalling CZK 50 485 million was awarded by the following contracting authorities in the 1st half of 2011: governmental contracting authorities placed 263 orders totalling CZK 14 124 million, municipal contracting authorities placed 974 orders totalling CZK 25 817 million and other contracting authorities placed 158 orders totalling CZK 10 544 million.

In the 1st half of 2011, the value of awarded contracts fell year-on-year by 17.5% in the governmental sector and 7.4% in the municipal sector and grew by 103.7 with respect to other contracting authorities.

The share of the municipal sector in the total value of awarded contracts 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

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: 1st half of 2011/1st half of 2010

Index:1st half of 2011/1st half of 2009

Index:1st half of 2010/1st half of 2009


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


Indicator 1st half 2011 1st half 2010 1st half 2009


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


The three major contracting authorities from the governmental sector that awarded public contracts in the 1st half of 2011 were as follows: the Ministry of Finance of the Czech Republic and organisations established by the Ministry was the largest contracting authority with its 17 orders totalling CZK 3 129 million; the Road and Motorway Directorate which placed 23 orders of CZK 2 571 million ranked second; and Správa železniční dopravní cesty, the state-owned enterprise, with its 16 orders totalling CZK 1 902 million, ranked third.

The three major contracting authorities from the municipal sector 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 first, followed by the City of Prague, which placed 29 orders totalling CZK 864 million, and the region of Vysočina with its 18 orders totalling CZK 826 million ranked third.

In the 1st half of 2011, the Southern Moravia region placed the largest volume of orders, totalling CZK 6 786 million – 13.4% of the total volume of orders.

Contracts of Construction Companies in Q2 2011At the end of Q2 2011, construction companies with 50 or more employees had a total of 13.3 thousand orders contracted. These orders represented the backlog of construction work that had not 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 and CZK 13.6 billion, respectively.

Compared to Q2 2010, the value of contracted orders declined roughly by 3.8% at the end of Q2 2011. Thus, last year’s trend of companies losing their backlog has continued.


Contracting Authority 1st half 2011 1st half 2010 1st half 2009


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


Region of Construction Location

Q1 2011 Q1 2010 Q1 2009

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 in the Czech Republic

6 2237 8 421 3 50

Cross-border projects 1 2 3 240

TOTAL 1 395 50 485 1 485 50 194 1 779 89 043

14

Zdeněk Kunc, the Engineering Director of ÚRS PRAHA, a.s., specialises in analyses, Czech construction statistics, development concepts and industry strategies.

As parts of the total volume of domestic orders at the end of Q2 2011, public contracts totalled CZK 97.5 billion and private contracts totalled CZK 54.3 billion. The relationship between the private and public contracts is influenced by the fact that statistical surveys principally include larger construction companies, whose share of public contracts is substantially greater.

The share of large construction companies with 500 or more employees in the aggregate volume of orders that companies with 50 or more employees had contracted at the end of Q1 2010 is 82.3%. Information about new orders contracted by construction companies in the given quarter and from the beginning of the year is also revealing.

In Q2 2011, the monitored construction companies contracted 13.6 thousand new domestic construction orders, which is an increase in the number of orders of 21.1% year-on-year. Yet, the total value of these orders fell by 29.1% year-on-year, totalling CZK 41.2 billion, ie 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%).

The decline in new orders was mainly affected by the decline in heavy construction orders. The average value of a newly-contracted construction order was CZK 3.0 billion in Q2 2011.

In Q1 2011, the trend of 2010 of construction companies losing orders was interrupted. The trend of companies losing orders reappeared intensely in Q2. Whether this trend will continue in the subsequent periods of 2011 will depend predominantly on the private sector and its willingness to allocate funds to construction activities. Although this information relates to the orders of construction companies with 50 or more employees, it is applicable to the entire construction industry.

To conclude, re-establishing the dynamics of the construction sector requires the overall economic climate to change from seeking newly-available funds through various reasonable savings and cuts to supporting the dynamics of the economy and improving its effectiveness.

The development of the orders of construction companies at the end of the quarter in CZK billion

The share of public and private orders in the value of total domestic orders at the end of Q2 2011

The share of the number of public and private orders in the total number of domestic orders at the end of Q2 2011

New domestic orders of the construction companies (construction companies with 50 or more employees)

Total orders at the end of the quarter

Private Public

Q2 2011

New domestic orders in the given quarter

Q2 2010

Building construction

Heavy construction

0

50

100

150

200

250

2Q 112Q 102Q 092Q 082Q 07

0

10

20

30

40

50

60

Heavyconstruction

Building construction

New domestic orders in the given quarter

0

10

20

30

40

50

Inženýrskéstavitelství

Pozemní stavitelství

Nové zakázky ve čtvrtletí tuzemsko

36 % 39 %

64 % 61 %

Outcome Service


Analysis

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

A group of four Central European Euroconstruct countries reported a growth in GDP almost three-times higher and a growth in construction production six-times higher than the other three groups of Western European countries in 2000-2008. The Czech gross domestic product parity per capita was 19% lower than the Western European average, however, GDP development was 2.8 times higher and the development of the Czech construction industry was the second highest (after Slovakia) and eleven times higher than the average of Western European countries.

In 2008, the GDP development in Euroconstruct countries started to change when the first five countries went into the red; a year later the same situation occurred in all countries except for Poland, but in 2010 all countries excluding Ireland, Spain and the United Kingdom restored the GDP growth. GDP development in the Czech Republic in the crisis period from 2008 to 2010 was the fifth lowest, ie +2.2% (Western Europe +3.8%). (Euroindicators 161/2009 – 69/2011).

Benchmarking Ranking of Euroconstruct Countries in Terms of Overcoming the Existing Crisis GDP development alone is not sufficient for an assessment of the impacts of an economic boom and therefore the benchmarking method will be used, ie the ranking of nine key euro-indicators’ development as a percentage will be compared first in the period 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 countries in terms of the aggregate development of the indicators in 2008-2010, which is nearly the European average, but it is a substantially worse result than before the crisis in 2005-2008 when the Czech Republic together with Sweden had the best ranking of all countries.

Comparison of the Czech Republic’s results for the first five months of 2011 as a percentage by six euro-indicators (for the remaining three months no data have been available) indicate an improvement in the Czech Republic’s position compared to other Europconstruct countries (second place after Belgium), but with a continued downturn in the construction industry.

Significant Worsening of the Position of the Czech Construction Industry in the European Context since 2010It is well known that the “trigger” of the hopefully-fading economic crisis was the situation related to the financing of investment construction in the USA. That is also the reason why the crisis in the construction industry in Western European countries occurred earlier and was more severe than in other sectors. Development of the construction production of 15 Euroconstruct countries decreased year-on-year in five countries in 2007, in eight countries in 2008, and in 2009, all countries except for Switzerland and Poland were in the red. In 2011, the construction industry’s development has changed in 11 out of 15 Euroconstruct West European countries – the crisis only goes on in Spain, Ireland, Portugal and the United Kingdom. The Eastern European construction industry, except for Poland, entered the crisis in 2009 and the crisis is expected to end in 2012, in the Czech Republic in 2013.

The Czech construction industry was resistant to the crisis until 2009 when it reported the third-lowest decrease compared to 2005, ie only -3.7% (from 9.9% to 6.2%). Better results were only reported by Switzerland and Poland. In summer 2010, the situation in the Czech construction industry dramatically worsened: a decrease of -7.6% in 2010 was the sixth highest with the expected slight change in the development in 2013 or 2014.

Heavy construction, funded predominantly by public sources and partly-subsidised by EU funds, reported the highest growth in construction production in the Czech Republic before 2010. It was followed by the largest decline that is expected to last until 2014. In the first place, infrastructure construction has been significantly limited, which is reflected in the results for 2010 and 2011. The earliest positive change is expected to occur in 2013. Heavy construction has always been partly subsidised by EU funds, but in 2013 EU financial support for the Czech Republic will end and as such the Czech Republic will not only lose large amounts of money form EU funds but will also be obliged to complete postponed construction projects that will only be funded from the state budget.

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.

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

16

Analysis

The interruption of heavy construction still requires investments in preservation and increases unemployment. According to the latest information, the government has proposed not to use subsidies in the transportation infrastructure fund again as it continues to cut the planned expenditure for transportation infrastructure by one third in the proposed state budget for 2012 and to reject requests by regional authorities relating to the transportation network’s increased needs for renovation. Similar catastrophic development s are reported in residential construction. Although the Czech Republic had the lowest level of available housing per household out of all Euroconstruct countries in 2010, it reported the highest decline in the started construction of new apartments in multi-storey buildings.

Non-residential non-production construction, also predominantly financed by public funds, decreased by approximately 10% before mid-2008 and has decreased by more than a quarter since 2009. Substantial fluctuations - growth in odd years and decline in even years - are typical in the public construction of buildings for the education and healthcare sectors in the Czech Republic.

The reason for the decline in the construction production from public sources was the government’s effort to decrease state budget expenses through the investment freeze. Non-residential construction financed predominantly from private sources in 2001-2004 grew by one third but it decreased by one third through 2007 and then rapidly declined by more than a half; the decline is expected to end in 2012. The reason for the negative development is again the lack of investment funds in the private sector and uncertain development.

Residential construction, financed partly by household savings and partly by public municipal funds, was impacted by the crisis as a result of unemployment growth, a decline in real wages and a rapid growth 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 risks but at the same time do not reflect a substantial decrease in the Czech National Bank’s interest rates down to 0.75%. The situation resulted in a gradual growth in the number of unsold and non-rented residential and non-residential premises and a substantial decrease in the prices of apartments, predominantly in new and old multi-storey buildings.

Benchmarking Ranking of the Construction Production Development of Individual Countries Overcoming the Crisis in 2008-13Before 2011 only four countries returned to the same construction production level as before the crisis in 2008 (Poland, Switzerland, Sweden and Germany plus Finland through 2013). The ranking of the countries that continue to lose their positions after 2011 is as follows: CR and Italy (minus three positions), France ?(minus two positions) and Slovakia, Austria and Belgium (minus one position). Denmark and Hungary are faster in overcoming the crisis impacts (+ 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.

The other three groups of Western European countries will not return to their pre-crisis positions through 2013.

Year-on-Year Development of Construction Production by Euroconstruct in 2008-2013 in %:

2009 2010 2011* 2008 -11 Rank 2012* 2013* 2008-

13 Rank

Germany 99 101,9 101,7 102,6 4 101,8 101,7 106,3 4

France 92,6 94,1 102,7 89,5 10 102,3 102,9 94,2 8

Italy 91,3 93,4 99,5 84,8 12 102,1 101,5 87,9 15

Spain 75,4 83,6 85 53,6 18 96,4 101,5 52,4 18

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

Austria 94 96,6 100 90,8 8 101 101,3 92,9 9

Switzerland 103,7 103,3 100,8 108 2 101,7 101,9 111,9 2

Belgium 96,5 99,9 101,8 98,1 5 101,4 99,7 99,2 6

Netherlands 95,1 89,6 101,4 86,4 11 103,2 103 91,8 10

Ireland 65,8 73,4 101,4 49 19 103,2 103 52,1 19

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

Denmark 87,2 91,6 103,1 82,4 14 104,1 105,1 90,1 11

Finland 88,2 106,3 104 97,5 6 100,6 102,5 100,6 5

Norway 65,6 94,8 94,8 58,9 17 105,1 105,1 65,1 17

Sweden 95 103,5 105 103,3 3 104 101,8 109,3 3

4 countries 80,6 98,7 101,3 80,6 IV 103,5 103,6 86,5 IV

West Europe 89,6 96,1 99 85,3 101,2 102,3 88,4

CR 98,4 92,5 98,9 90 9 99,8 100,8 90,5 12

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

Slovakia 87,1 96,4 98,3 82,6 13 104,3 104 89,6 14

East Europe 99,4 99 106,4 104,7 I 103,4 101,9 110,3 I

Euroc. 90,1 96,3 99,5 86,3 101,3 102,3 89,5

Source: Euroconstruct Summary Report 06/2011 *estimate

In 2013 the Czech Republic will be the fifth-worst of 19 Euroconstruct countries in terms of the construction industry’s return to the level before the crisis in 2008. According to recent data on construction development, the Czech construction industry will take the fifth-worst position out of 19 countries in 2008-2013. Worse results are only expected in Spain, Ireland, Portugal and Slovakia.

These results are confirmed by Eurostat databases through 2011. The current global financial and economic crisis confirmed again that the European construction sector was the first industry that signalised the economic crisis in 2008 and will be the last industry to report positive results in 2011. The situation in the Czech construction industry expands the conclusion as it entered the crisis in 2009 and is not expected to overcome it until 2013.

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


Benchmarking Ranking of Other Construction Indicators in 2010 and in an Outlook To emphasise the impacts of the government’s decision to cut planned investment expenses in the construction industry, we provide a benchmarking ranking of the changes in five construction indicators, ie availability of housing per household, share of construction production in GDP, construction intensity Euro-parity per capita, productivity per person and the number of started multi-storey apartments per capita (in 2010 and an outlook in %).

In the total ranking of the sum of the five selected construction indicators according to the benchmarking analysis for 2010 and the crisis development through 2013, the Czech construction industry is in second-last place, ie 18th out of 19. Only Slovakia reported worse results, which proves a substantial worsening of the Czech construction industry’s position in Europe.

This pessimistic assumption of the Czech construction industry’s development is also supported by the benchmark of construction entrepreneurs’ confidence that was fourth-worst in the Czech Republic out of 19 countries in May 2011. Also, the volume of engagements in the Czech Republic was the fifth-lowest in May 2011.

On the contrary, confidence in the development of industrial production is positive except for three countries (Spain, Portugal and Poland) and in the Czech Republic it is higher than average. In June 2011, the indicator of entrepreneurs’ confidence in the construction industry in the Czech Republic decreased further –9 points compared to June 2010. On the other hand, the indicator increased in the Czech trade and service industries. Finally, we can come to a conclusion that, in our opinion, the government’s specific approach to the current economic crisis in the Czech Republic characterised by sacrificing the construction industry is the least-appropriate solution that will have the longest-lasting negative effects on the national economy and that was not applied by any other Euroconstruct country.

Jiří Hezký, Senior Consultant of ÚRS PRAHA, URS Praha a.s. (CR) representative in EUROCONSTRUCT, and a member of the statistical committee of EUROCONSTRUCT.

Available housing per household

Constr/VAT % Const.€ parity/person Started multi-storey apartments per capital

Product.€ parity/person Total ranking

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),

18

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 which construction companies participate as suppliers may be much more attractive than subsidies that can be received directly by construc-tion companies. That may be the reason why the number of construction companies receiving subsidies directly is rather limited.

What are the reasons for this situation and is this situation justifiable?If we examine carefully the individual operational programmes available for the period in the Czech Republic we will find several possible reasons.

The key reasons undoubtedly include the fact that support for the construction industry or construction companies is not directly mentioned in any of the 24 operational programmes as is the case with research and development, IT, manufacturing, the environment etc. Another significant factor relates to the prejudice that in Prague it is nearly impossible to receive support from public funds. This discou-rages developers and construction companies from exerting any effort at the very beginning because Prague, apart from being the capital of the Czech Republic, is also the main city where such companies concen-trate and where they implement the highest number of their projects. At the same time, the condition to own the property supported by subsidies for at least three or five years as part of the construction companies’ assets is not too favourable because ownership title to the property or roads is transferred to another entity shortly after completion, not to mention the fact that large companies have limited opportunities to draw subsidies.

However, if we take a closer look at individual operational programmes we will find out that the options to draw money from public funds are not as limited as it might seem at first glance. In the economic activity classification, the construction industry is classified within the manu-facturing industry and appropriate subsidies should be searched in programmes focusing on this area.

We will have a more-detailed look at the area of grants where construction companies may be the direct recipients of subsidies. Four Operational Programmes will be in our focus: Business and Innovation within the remit of the Ministry of Industry and Trade, The Environment under the auspices of the Ministry of the Environment, Human Resources and Employment administered by the Ministry of Labour and Social Affairs and last but not least, Prague – Competitiveness that is within the remit of Prague Municipal Authority.

Although Operational Programme Business and Innovation includes the Real Estate programme, whose title may indicate that construc-tion companies could apply for larger subsidies through construction engagements, the OP should also be viewed from a subsidy recipient’s perspective.

Predominantly the construction companies that at the same time produce construction materials and need real estate for these purposes may receive grants for the renovation of property. Other supported areas include: opportunities related to the purchase of new hardware and software (SME – editorial note), construction and equipment of training rooms or energy savings (thermal insulation, change of windows, doors etc) in property owned by entities requesting subsidies. Opportunities are provided in the area of subsidies for investment expenses relating to research and development activities, such as providing equipment for laboratories, testing rooms etc, subsidies for the purchase of production technologies used to produce new or innovative construction materials or subsidies for shared service centres for companies with international operations. It should be noted that these opportunities are only offered to projects to be implemented outside of Prague.

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


The Environment offers the largest opportunities predominantly in its fourth priority axis that is focused on the elimination of old environmental burdens. Apart from subsidies for the reclamation of contaminated locations, subsidies may cover the costs of archaeological studies, demo-lition work and final transformation of locations into parks or preparing plots for subsequent construction. Projects may be realised anywhere in the Czech Republic including Prague but the company must comply with the condition of holding the property supported from the subsidy for the required period.

Given the relatively-large number of development projects in Prague located in areas of former railway stations or other locations where environmental burden may play a significant role, this opportunity may be very attractive.

The remaining two programmes focus on the same area of support: development of human resources and education. The differences are in the geographical focus of the programmes; while the Operational Programme Human Resources and Employment focuses on educating employees performing their work outside of Prague, the Operational Programme Prague – Competitiveness focuses on Prague. Support may be provided to educational activities concentrating on general educa-tion (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.

The above-mentioned opportunities summarise the major areas where construction and development companies may be direct recipients of subsidies. Naturally, these areas do not support the construction of 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.

As for the other group of support where construction firms may profit from other projects of applicants who received subsidies, the scope of activity is much larger. Public institutions, schools, hospitals, manu-facturing businesses, etc may receive subsidies for the construction and renovation of property or roads needed to achieve the purpose for which they were established or to run their business, and construction companies can act as project suppliers or sub-contractors. Undoubtedly, these activities include large transport construction projects promoted by large notice boards with the EU flag.

If we go back to the beginning of my article and try and answer the question in the heading the only possible answer is yes. Without significant investments in the construction of new or renovation of old buildings and roads by the public and private sectors and without the European Commission’s subsidies, construction companies would have more difficulties than those caused by the economic crisis.If you find the financing opportunities insufficient you should take into consideration that they will tend to be more and more limited in the long term and therefore, the opportunities we have now may not be repeated.

Antonín Weber is a Senior Consultant in the Tax function of Deloitte focusing on grants and incentives.

[email protected]

Contacts

© 2011 Deloitte Czech Republic, SPS v ČR, ÚRS Praha

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

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

Ing. Michal Petrman, [email protected]

Ing. Miroslav Linhart, [email protected]

Ing. Zdeněk Kunc, ÚRS [email protected]

Ing. František Glazar, ÚRS [email protected]

www.sps.cz

www.deloitte.cz

www.urspraha.cz

Documents

SMARTConstruction - Deloitte United States€¦ · traditional business models, based on domestic construction either for the Public Sector or for real estate developers, and were