Bosses at one of the largest multinational construction firms, the Swedish Skanska OY, walked into the offices of the Slovak Transport Ministry on May 22 and presented their plans for acquiring the Slovak construction firm Váhostav, promising billions of crowns in investment.
If the government agrees to the acquisition - any firm which wants to be involved in highway construction in Slovakia, as Váhostav is, must first get the government's approval - Skanska will put the money into highway and housing construction.
And although analysts and government officials are wary of playing up the importance of the deal, they say that the company's presence on the construction market would be a shot in the arm for a slumbering industry.
"I don't see this [Skanska's investment plans] as a revival of what is a stagnant sector, but on the other hand Slovak construction firms have problems which they have to solve, otherwise their future is under threat. The solution lies in connections with foreign investors which will acquire companies and get them more contracts," said Gejza Végh, head of the road construction department at the Transport Ministry.
If further talks with the government are successful, and if Skanska is allowed to move onto the Slovak market, it plans to start investing in highway construction at the earliest in 2003. However, housing construction projects in the Slovak capital of Bratislava would begin in autumn this year.
Building on Czech success
The company is planning to invest in Slovakia through a recent acquisition, IPS Skanska, the largest construction firm in the Czech Republic.
According to IPS Skanska Financial Director Miroslav Tvrdý, Skanska wants to invest in Slovakia and build on its Czech acquisition. IPS intends to make a 40 billion Czech crown investment if it wins a bid for construction of a 58 kilometre stretch of highway from southern Moravia to the northern Moravian city of Ostrava. It has also invested in housing construction, planning to build 1,000 flats per year in the Czech Republic.
"We know the Slovak market well. It's similar to the Czech market, and there is space for growth," Tvrdý explained.
By taking a well-known domestic firm, he said, IPS could use its market position and contacts to win more orders. "We have discussed [buying] Váhostav, but it might not be our final decision," he added.
Not always so bleak
Váhostav's economic performance over the last three years exemplifies the general trend of decline in the Slovak construction industry. The company's pre-tax profit dropped from over 77 million crowns in 1997 to only about two million crowns in 2000, the firm recording a 12 million crown loss for the year.
But the picture wasn't always that bleak. Slovak construction companies saw their heyday during the government of Vladimír Mečiar [1994-1998] when a massive programme of highway construction was undertaken. The Mečiar administration planned, but never saw completed, construction of a highway network linking Slovakia into north/south and east/west transport corridors with neighbouring countries.
But after Mečiar's HZDS party failed to form a new government after 1998 national elections, Mikuláš Dzurinda's new government cut highway construction by 20%, denting profits at the largest construction firms - Hydrostav, Doprastav and Váhostav. In 1999 the industry recorded a 25.8% year-on-year decline in real turnover, followed by a 0.4% drop in 2000. Analysts say that only a massive growth in real turnover could bring the industry back to reasonable health.
Foreign investment could be the cure for the sector's troubles. Foreign investment and construction booms often go hand-in-hand, as construction firms find major contracts building plants and road links for investors.
But although Slovakia reported its largest annual foreign direct investment in 2000 - $2 billion - much of that was into existing companies and their facilities, stifling chances for the construction industry to up its revenues.
The only way for the construction sector to awake from its torpor is if 'green-field' foreign investment (when a company sets up entirely new operations) mushrooms across the country and construction firms win lucrative contracts for building plants, say analysts.
Foreign likes foreign
The chances of winning those contracts are also much higher if there is a foreign presence in a domestic construction firm. Adrian Čorba, analyst with Slávia Capital brokerage house, said that when selecting construction firms for building facilities in Slovakia, foreign investors often chose firms from abroad.
Multinational companies such as Skanska were likely to be considered more reliable by foreign investors, and any domestic company that Skanska buys into will have less problems getting rich deals with investors, added Čorba.
"Skanska would bring trustworthiness into the Slovak construction sector and would take over some contracts that would otherwise go to foreign firms," Čorba said.
