ECONOMY

Construction firms brace for impact of bad planning in EU-funded projects

Greek construction companies have no doubt seen as a heaven-sent gift the Economy and Finance Ministry announcement that it will expedite a bill on Public Private Partnerships (PPP) in large projects. The long-awaited enactment of such legislation will also allow for the development of small- and medium-scale privately funded infrastructure projects, including hospitals, governmental facilities, schools and waste management projects. The initiative is to materialize at a time when construction companies fear they will be faced with a crisis, leading to a shakeout in the sector and perhaps even to a sudden and serious recession. Managers of large construction groups which owe a large part of their growth to the development of infrastructure related to the Olympics, as well as to ample funding made available through the European Union-subsidized Third Community Support Framework (CSFIII) investment program, believe that the slump is inescapable. The causes are the omissions, delays and various expediencies which have created a serious vacuum in the flow of projects, despite the fact that both the money (CSF funds) and the need for projects is there. «The inability to implement the existing plan for CSFIII projects, which seriously delayed seven concession agreements auctioned in 2000, will play a crucial role in this unpleasant development,» Construction Economy Institute (IOK) director Grigoris Yiannaros told a recent Technical Chamber of Greece (TEE) conference. Of the seven projects, only two, the underwater road tunnels at the Malliakos Gulf in central Greece and Thessaloniki, have made any progress beyond the survey stage. Industry officials insist that come September, the balance of supply and demand for construction work will show a huge deficit due to a slump on the demand side. They add that beyond publicly funded infrastructure projects, supplementary sources of construction activity, including PPP, and their expansion into other markets, such as energy or real-estate development, do not appear sufficient to overturn the current negative business climate. Yet the recent takeover bid by the Hellenic Technodomiki-Aktor group for Rokas, a company which controls 50 percent of the Greek wind power energy market, proves that liquidity-rich Greek construction companies will seek to expand in alternative markets in order to limit the effects of the projected deceleration of construction activity. Most importantly, the sector must face up to the fact that it will be extremely difficult for European Union funding to maintain the growth rates of the last decade. EU funds made available to Greece between the years 2000 and 2006 are expected to fluctuate between 3.6 and 3.8 percent of the total value of the Greek gross domestic product. This percentage is projected to be cut by half or even by two-thirds in the 2007-2013 period, a fact due to the increase in the per capita income of the country, which limits its access to certain funds and programs, and to the likely creation of a new system for the allocation of funds to take account of the new EU member states. Concerning the new PPP legislation, which indeed provides new opportunities for the sector, an important question is: How many companies will be able to undertake the funding of such projects? According to the ministry, private investors may have to meet up to 100 percent of costs of smaller-scale projects. Indeed, Greek construction groups which would be able to fund such projects, even with the assistance of bank financing, are very few. «No matter how much stronger a number of Greek construction firms became through mergers, the deficit in total capacity in relation to the required work within the given time frame remains significant for most,» former TEE Vice President K. Savvidis told the IOK conference. High borrowing «The sector’s general financial structure has shown a serious deterioration in the last two years, which is largely due to the particularly strong rise in short- and long-term liabilities in the form of borrowing,» he added, noting that «in the vast majority of firms, operating expenses are high and create serious losses, while delays in receiving payments lead to a rise in short-term borrowing for working capital.» It now seems certain that before entering a new era, the sector will have to be restructured. Analysts note that the future of the sector will depend upon companies becoming stronger and that smaller or weaker companies are already becoming buyout targets. Problematic mergers They add, nevertheless, that firms must avoid the trap of becoming overbloated entities, as past experience shows; the mergers publicized by the previous government as leading to the creation of an internationally competitive sector had exactly the opposite effect; they created entities that are barely viable today, as the mergers were «forced,» leading to huge losses and difficult administrative and organizational problems. Construction companies are indeed at a crossroads and many consider that the toll which the coming slump will take will not be insignificant. Few firms have managed to acquire a foothold in neighboring markets and even fewer wield the financial clout to diversify into other sectors such as energy and realty. Everyone again expects the government to open the funding tap of European Union subsidies through jointly financed concession agreements. The experience from the seven concession agreements auctioned in 2000, most of which are still at an early stage of studies, does not bode well for the construction sector in the post-Olympic era.