Investment for the future is not only a phrase

THE GLOBAL economic crisis is crushing the construction sector in Slovakia, with more bad times still expected to come. But Zsolt Lukáč, the President of the Association of Construction Entrepreneurs of Slovakia (ZSPS) sees some positive features in the current situation. Fewer orders have cleared the market and construction firms cannot take new orders for granted any more, increasing respect for quality work. Lukáč also suggests the industry can use the current crisis to improve the skill levels of current and future construction workers.

The Slovak Spectator spoke with Lukáč about developments in the construction industry last year as well as its future prospects.

The Slovak Spectator (TSS): How did 2009 turn out for the construction sector in Slovakia?

Zsolt Lukáč (ZsL): The impacts of the global and European economic situation also arrived in Slovakia and affected the domestic construction sector. But while the sector was in expectation – or rather fear – of the crisis during the first half of 2009, the impacts were only significantly felt during the second half of the year. The end of 2009 compared with the end of 2008 showed a significant decline. We tried to be rather optimistic when we estimated a year-on-year decline of 10-15 percent, which was already very noticeable and unpleasant, but it turned out that our estimate was too optimistic and the decline actually exceeded 20 percent.

TSS: In what specific ways has the crisis affected the construction sector?

ZsL: In my opinion, the crisis in Slovakia is not the fault of our own construction sector or its companies. Our current condition is a result of the impacts of the crisis which has led to a shortage of orders. The construction sector and its companies in Slovakia are well-staffed and from the point of view of materials, technologies and know-how they are at a modern level. What they need are orders. These include either large infrastructure projects or smaller projects like housing construction and smaller investment developments in towns and villages.

Another aspect related to the crisis and further endangering the construction sector is our relationship with banks. Banks are behaving extraordinarily callously in their dealings with the sector and individual construction companies. Now banks are giving the construction business one of the worst assessment rankings which hampers the sector’s access to financial resources. This is another negative impact of the crisis when the banks become too cautious and are not very willing to bring a little risk into their own businesses. Also connected with this then is the industry’s relations with investors – private, state or public – which have also become more cautious.

The specific impact of the crisis on construction companies depends on the segments in which they are active. Projects in housing construction last from months to one or two years. Civil engineering projects and structural construction projects last longer because preparatory work lasts one or more years and the construction itself then takes several years. From this stems the length of contracts closed for these projects which has also been impacted by the economic downturn.

For these reasons the economic situation has not affected large companies as much because they are focused more on infrastructure projects right now but they have a certain significant time delay. For companies engaged in housing construction, small and mid-sized companies, the threat from the crisis is much more significant right now.

TSS: Do developments in Slovakia follow developments in neighbouring countries in any way?

ZsL: There are some differences but we must say that Slovakia is a relatively small and open market in the construction sector. When compared with neighbouring countries within the Visegrad Group, the Czech Republic, Hungary and Poland, which are the closest countries and most-related with Slovakia, the developments in Poland are most different from Slovakia, especially because of its size. The Slovak market is the smallest within the V4 and the impacts of the economic decline are most visible here. On the other hand, Slovakia is more flexible and from the viewpoint of gradual development, Slovakia has the biggest potential. When the economic situation bounces back from the bottom, the Slovak construction sector is fully prepared to develop to the greatest extent possible.

The Slovak construction sector has always had a significant pro-export basis. Slovak companies traditionally operated in several neighbouring countries, either in the direction of the Czech Republic and Germany or towards Russia. Of course, with regards to the economic situation in these countries Slovak firms have had to back down but there is future potential. And as soon as the situation improves, for example in Germany, the Slovak companies are prepared to take orders there. Slovak companies have a sound reputation abroad as they have learned, when working for example in Germany, German preciseness, strict application of norms, instructions and orders, and have implemented these into Slovak-produced construction. This is also appreciated in more southern countries.

TSS: Has the crisis brought any positives?

ZsL: Yes, every development brings dark as well as brighter moments. One of those brighter moments is clarifying the market space and market relations of individual companies. Another significant benefit for the companies is clarifying the space from the viewpoint of personnel. In this respect I also have to say that the crisis is beneficial because our too extensive construction boom also brought along with it a trend of poorer quality.

Also, before the crisis the Slovak construction sector suffered from a lack of qualified labour. Our group of educated, trained and experienced workers started to work in a labour market not confined only to Slovakia. These workers began to work, either as individuals or as employees of construction companies, in a much wider market beyond the Slovak borders. This dilution resulted in a lack of qualified labour in Slovakia.

The crisis has helped in concentrating a quality labour force back in Slovakia as many construction workers have returned from abroad. Their respect for quality work has increased as well, as both construction workers and their companies have realised that getting an order is not automatic any more. They must compete for orders and demonstrate their abilities and knowledge. From this viewpoint, this is a positive development. But it should not go too far. This is because companies are in a situation when they can bear the burden of continued employment only to a certain point and after crossing it, they must start layoffs. However, based on our survey within the association, our members have so far not been laying off their employees in a significant or massive scope. There is rather an interest in keeping their core labour force, especially from the viewpoint of maintaining existing know-how. The companies are using this time for further education of employees and boosting their current know-how.

This is one of the missions which the association has taken over as its primary task during the economic downturn. We want to support activities in which construction companies can use all possible opportunities to improve the level of education either of their employees directly or to influence the level of education at specialised secondary schools. The association has already created a sector board along with the ministries of education and labour and with individual self-government bodies and others. We hope that via this platform we will be able to affect institutions engaged in education of construction workers so that they educate and train an adequate number of sufficiently-trained and skilful employees for our industry.

TSS: How do you see the current level of education for employees in the construction industry?

ZsL: Unfortunately, when assessing a graduate from a specialised secondary school, the level is not as high as we would expect. Our idea is that a graduate after leaving school and becoming an employee is able to handle all the processes. The fact that this is not possible is partially because students have too little practical experience which is due to insufficient finances at the schools, resulting in a lack of materials and the most-modern technologies. Another problem is that these secondary schools do not cover within their curricula the current technologies which the construction industry is already using. With regard to this, a lot can be achieved via direct cooperation between a specific school and a specific company, but unfortunately this is happening right now only on the basis of personal contacts and initiatives of individual schools and companies. There is no overall system in this and our association wants to contribute to creation of such a system via the aforementioned platform.

The association also puts a lot of hope in the already operating international grant from the EU’s Leonardo da Vinci programme, focused on preparation of curricula, which our association has joined.

TSS: Has the association noticed an increase in bankruptcies or closures of companies?

ZsL: We do not have any exact statistics about this, but we are witnessing the closure of some small and medium-sized companies. The association tries to help as it has a certain set of services which it provides to companies in trouble. Along with consultancy, these include educational services because I believe that educated and experienced people can bring companies new orders and work. The website of our organisation also serves as a platform for exchange of information. For example, we publish information about tenders and public procurement proceedings as well as profiles of our member companies on our website.

TSS: In October 2009 your association sent a letter to Prime Minister Robert Fico with a complaint that state bodies did not pay construction companies in a timely manner. What was the outcome?

ZsL: Our analysis identified overdue payments of over €90 million which state bodies owed to large member companies, an unpaid sum which could have started a spiral of secondary payment insolvency. Still having in mind negative experiences from 12 to 15 years earlier, we explained this problem and its potential consequences to Prime Minister Fico and asked for a solution. It took some time but in the end we received a written answer and more importantly, the state institutions settled their obligations. Through this intervention we did not want only to assist large companies but also those smaller ones as after the larger ones received their money, they were able to pay their sub-contractors and after the primary payment was made the whole chain of payments from bigger to smaller companies was activated.

We perceive that the state is not a 100-percent reliable partner with contractual relationships. In the end the state has to pay, if no other way then when a court so decides in 10 to 15 years, but for us it is important that an obligation is settled at the moment when the contract states. This is important.

Unfortunately, the industry is already showing some effects of secondary insolvency. But the situation is not as serious as it was 15 years ago.

TSS: What kind of development do you expect in the construction sector in Slovakia in the near future?

ZsL: We expect a relative stagnation of the whole construction market this year and the next. Regrettably, we perceive even next year as a critical year. When we speak about this theme we call the course which we expect in 2010 to be a period of mere survival of construction companies. I only hope that the decline this year will not be even more significant than last year and if that is the case that the bottom will be this year. In any event, I do not dare to prophesy future developments because I do not have any crystal ball.

The state can do a lot in this area. There is a gap in significant investments in Slovakia and ZSPS as well as its individual companies are interested in the state – in any available way, either via PPP projects, its own investments or use of the EU’s cohesion or structural funds – carrying out these investments. We see here also the impacts of the crisis; the responsibility of the state in these large projects is irreplaceable.

TSS: You were elected the new president of ZSPS last June. What plans and vision did you bring with you to the post?

ZsL: When I was elected president of ZSPS it was completely clear that the Slovak construction sector would be affected by the global economic downturn. I realised this and perceived it as a challenge and as a fulfilment of working activities which I can deliver to an organisation such as ZSPS. One vision was to start using other available resources for financing ZSPS activities other than just member fees. This has already materialised as we have successfully joined some EU grants. Another goal focused on increasing the level of education in the construction sector as I view the knowledge of current workers and the quality of education at specialised secondary schools to be of key importance for the future of the construction industry in Slovakia.

Long-term examination shows that those economies, either at the level of society, the state or individual companies, which have invested in youth and education have been much more successful and effective that those which focused on immediate benefits or only on the moment of survival in a specific time period. For that reason, investment for the future is not only a phrase – I think that this is necessary for survival in the next year as well as for the next decade.