Roads remain biggest part of civil engineering construction market, with high investment outlays expected in years ahead

Following a slack 2016, last year witnessed a sharp rebound in investments and construction activity in Poland. Particularly strong growth was observed in civil engineering construction, where output increased by a double-digit percentage, recovering from a double-digit slump the year before. In road building – the biggest segment of civil engineering construction – output jumped by almost 20% in 2017.

Civil engineering accounted for nearly 28% of Poland’s construction and assembly output in 2017, and for more than 49% if we exclude micro companies with fewer than 10 employees, according to a new report from PMR, “Construction sector in Poland H1 2018. Market analysis and development forecasts for 2018-2023”. The single largest segment of civil engineering construction –  and by a huge margin – is road building. In 2017, highways, expressways, streets and roads represented more than 40% of civil engineering output. According to the report, in 2018-2021 the share of road building (including bridges and elevated highways) in civil engineering output will hover around 47%-48%.

Road building is the part of civil engineering construction where the largest sums have been invested in the last years, and despite policy documents and Ministry of Infrastructure officials vowing that railway construction will be the top priority in the current EU budget cycle, a comparison of planned outlays shows that road projects will continue to attract a dominant share of public infrastructure funds going forward.

Thanks to action by the Ministry of Infrastructure, a raft of legal changes were introduced as of mid-2017 designed to make life easier for construction companies, especially sub-contractors. Thus, mechanisms protecting sub-contractors working on construction projects financed by public-sector entities were written into the Public procurement law and the Civil Code and built into contracts  between the General Directorate of National Roads and Motorways (GDDKiA) and general contractors. A list of abusive contract clauses was adopted that are banned from contracts between general contractors and sub-contractors. Payment periods must not exceed 30 days. Also, a provision was adopted preventing contractors from shifting their risks on to sub-contractors. This is of major significance for the road building sector, where sub-contractors were often exposed to liquidity problems because of such practices.        

2017 was a successful year for the road building sector in Poland, even though investment outlays fell short of the PLN 19bn (€4.4bn) envisaged by the National Road Construction Programme (PBDK) 2014-2023. As the GDDKiA announced, actual outlays on road projects amounted to PLN 16.1bn (€3.7bn) last year.

According to GDDKiA data, 356 km of national roads were completed in 2017, and 1,293 km were under construction as of 31 December 2017. By way of comparison, in 2016 just 124 km of new national roads were completed, and 1,312 km were under construction as of the end of that year.    

In 2017 the GDDKiA invited tenders for the construction of 317 km of new roads, and awarded 28 contracts for the construction of 274.3 km of new roads (including 252.7 km of highways and expressways and 21.6 km of GP-grade bypass roads). By the end of 2017, the GDDKiA had concluded 38 co-financing agreements for road projects under the current EU budget, with the combined value of grants awarded exceeding PLN 24bn (€5.6bn).

The key policy document determining the prospects for the road building sector is the National Road Construction Programme  (PBDK) 2014-2023, which was updated in the second half of 2017. According to the updated PBDK, spending on national roads will amount to just under PLN 22.3bn (€5.2bn) in 2018, rather than the originally envisaged PLN 27.6bn (€6.4bn). However, the figure written into the national budget for 2018 is still lower, at PLN 20.4bn (€4.7bn), i.e. nearly PLN 2bn (€464m) less than in the revised PBDK.

The budget for 2018 earmarks PLN 3.75bn (€869m) for renovations, maintenance and redevelopment of national roads, i.e. PLN 475m (€110m) less than in 2017. This is a first year-on-year decline since 2010. With the PBDK estimating road renovation, maintenance and redevelopment needs at PLN 5bn (€1.2bn), a shortfall of approximately PLN 1.3bn (€301m) is expected in 2018. The Ministry of Finance plans to allocate PLN 1.5bn (€348m) for road maintenance, PLN 1bn (€232m) for road redevelopment projects and PLN 200m (€46m) apiece for renovations and preparatory works in 2018.  

The government had initially intended to scale back spending on local roads as well: under the first budget proposal, spending on the construction and renovation of local roads was to be PLN 800m (€185m) in 2018, rather than the anticipated PLN 1.1bn (€255m). However, in March Prime Minister Mateusz Morawiecki announced that he was raising the figure to PLN 1.3bn (€301m).

In early 2018, reports began to emerge about problems with project execution, with general contractors leaving construction sites. There is also the realistic prospect of bidders beginning to withdraw from tender processes – even the winning ones. Even so, we expect that in the years 2018-2023, annual output in Poland’s road building sector will be 25% bigger on average compared to 2011-2017.