State of the Construction Industry in Bulgaria Anti-crisis Measures

General overview

Construction takes an important place in EU economy --- 7% of the GDP and 6% of the employed belong to the construction industry. Стопанската конюнктура в строителството през януари – юни 2008 г. The business tendency for the period January – June 2008 remains positive. The forecast of the BCC is for a future growth of the construction sector with 8-10% in the next 5 years. The revenues of construction companies for 2007 are 7098 bln.€, /the data are for current prices/ which is an increase of 15.5 % with comparative prices compared to 2006 / 5527 bln. € /. Construction production for the first three quarters of 2008 of 2008 has increased by 12.9 % compared to the same period in 2007. The Bulgarian economy has comparatively high economic growth of 6.8% annually. According to the economists the third quarter of 2008 will be the last one with high economic growth.

General overview -- construction

Construction: The managers evaluate the construction sector among the branches with significant negative tendencies in its business development. The comparative index “business climate in construction” has decreased by 6.8 points in November and this is the lowest level after December 2005. This reduction is due to the moderate evaluations of business leaders regarding the current business situation in the enterprises and the worse expectations for the next six months (the balancing index of expectations falls under a level that is 9.1 points lower than its long-term average). Similar tendency of neutral and negative expectations is apparent regarding the construction activity and the decrease of employment in the sector. The last business questionnaire record an increase in the number of clients with late payments and lack of security concerning production.

Construction production, mln. BGNPreliminary data from the National Statistical Institute

I – III Quarter

2007 current

2008 current

2007 comparativ

e

2008 comparativ

e

TotalMln. BGN

8 694 10 885 5 658 6 306

Housing constructionMln. BGN

5 663 7 256 3 690 4 209

Engineering ConstructionMln. BGN

2 931 3 629 1 968 2 097

Construction ProductionI-III Q. 2007-2008, mln.€ *Preliminary data NSI (National Statistical

Institute)

Expenses for acquisition of fixed assetsI – III Q 2007-2008, mln.€ * Preliminary data NSI

GDP * preliminary data

-** forecast

Construction permits issued for new buildings Data from the NSI

2007 2008 Growth 2007/2008

Total Q I Q IITotal QI+ QII

Q I Q II Total QI+QII Q I Q II Q III

Overall buildings 18 224 4 049 4 660 8 709 3 505 4 335 7 840 -544 -325 -551

Residential buildings

11 171 2 442 2 735 5 177 2 267 2 694 4 961 - 175 - 41 -366

Residences 64 185 14 101 12 641 26 742 11 437 11 899 23 336 -2 664 -742 -4 860

Administrative buildings

448 104 85 189 78 108 186 -26 23 12

Other buildings 6 605 1 503 1 840 3 343 1 160 1 533 2 693 -343 -307 -197

Foreign investment in construction, mln.€ * Preliminary data Bulgarian Central

Bank

Direct investment in the country –geographic structure

Realities and problems in construction The world financial crisis concerns the construction industry in Bulgaria and

has the following effects:

Rigorous development of the sector in the past 6-7 years, which encompasses not only the construction activity itself /housing, hotels, resorts, roads, etc./ bud also the productions related with construction /woodwork, hardware products, production and supply of construction materials, etc./ as well as the activities directly connected to the sector /transportation services, real estate market, financial services, crediting, etc./

The particularly high growth rates of construction and assembly works in the past few years, which have reached 15% and more, and are significantly higher than the average growth rates for the country. The production growth continues also in the first half of 2008 .

Availability of a significant volume of construction production that is higher than the consumer purchasing demand.

Drawback of some external investors, due to the inability to perform their investment intentions for fast profits from the sale of real estate.

Two large construction sites of Western investors, that have just started in Sofia, were frozen and the investors are trying to sell them (although still in vain). Some other projects that were at the point of negotiations with contractors were also brought to a halt. The investors in apartments and residential areas delay their payments towards the constructors.

The number of issued permits for new buildings in the first half of 2008 has decreased significantly in comparison to the same period in 2007

The direct foreign investments for the period January – September 2008 amount to 27859,2 mln. EUR, compared to 23557,9 mln. EUR for the same period in 2007.

The analysis of the Bulgarian Construction Chamber shows that the decrease in foreign investment will lead to a decrease in the volume of construction and assembly works in the housing sector for 2008-2009 by 2-2,5 bln. BGN.

The interest rates for credits for the purchase of real estates and construction financing have increased /which tendency might continue/.

The requirements for granting credits have changed by increasing the participation of the creditor in the overall value of the real estate. The methods for determining the value of the deposit have changed /decreased/.

The rates of increase in the prices of housings have decreased. For the last financial quarter the increase is only 3-4%. The prices are expected to decrease by 10% in 2009. This will bear a reflection on some construction entrepreneurs.

Higher requirements of the investors and consumers of ready construction products towards the quality of construction.

Despite the decrease in the number of unregistered construction companies after the entry into force of the Law for the Central Professional Register of Construction Companies, there are still some small unregistered firms that lack qualified personnel and technology. They cannot meet the higher quality demands and cause distortion in the construction market.

If the challenge in 2008 was the lack of capacities and human resources, the challenge in 2009 is expected to be in making precise estimations.

The delayed payments for construction and assembly works places contractors in the position of co-investor. The investment activities require a different type of behavior and mindset, which are not typical for construction companies.

Particularly worrying is the forecasted 6-month delay of payments from the EU programs /also PHARE and ISPA Programs/. The issue with granting temporary credits for 6 months is also not settled, which forces Municipalities and construction companies to credit their own activities under these programs.

There is a very dangerous tendency of granting big public procurement projects and EU projects to companies outside the EU, which have subsidies for the export of construction activity abroad. This forces Bulgarian companies to fight against external state protectionism.

The foreign companies outside the EU that use state subsidies mostly work with unregistered labor force. There are a few construction sites in Bulgaria with illegally staying workers. This labor force is placed in working conditions that do not respect the regulations of the European and Bulgarian Laws.

Foreign companies outside the EU, using state protectionism participate in public procurement on dumping prices. Later on they use legal approaches to increase the prices. This situation causes losses both the state and the companies /national income is out flowing/.

The forthcoming negative tendencies could be compensated by: • Increase of the public government investment in the field of infrastructure

projects;• Execution of the operative programs from the EU Funds;• Realization of foreign and internal investment in the field of power

engineering. • Increase in public investment in the Municipalities /the Underground in

Sofia/, the city infrastructure, water and sewage systems, street reconstruction, etc.

• Increase in private investment in the retrofitting of buildings /in view of energy efficiency/, establishment of small and medium enterprises.

The analysis shows that if the work in these directions is well organized, it will create a balance between the dropdown of the negative processes and the abovementioned opportunities. The question with the change of qualification of the labor force remains. The process of redirecting the workers towards the finishing construction works will be difficult.

BCC proposal for anti-crisis measures complementing the ones proposed by the Bulgarian Chamber of Commerce, the Bulgarian Trade and Industry Chamber, the Confederation of Employers and Industrialists in Bulgaria:

The construction industry needs appropriate competitive environment, clear rules for action and accountability, rapid payment system for the works done, simplified procedures for the resolution of conflicts. Clear responsibilities and rules for the entire process of public procurement are needed from the tender announcement to the payment for the completed projects. The Law for the Public Procurement in Bulgaria has to be adapted and amended in the first place.

The state institutions, industry associations and employers organizations should adopt plans for the rapid absorption of EU funds – from the idea, through the project proposals, competitions, implementation and the end product.

The deadlines should be shortened and the rhythmic payments towards construction companies from the state budget should be guaranteed.

The Ministry of Labor and Social Policy, the employers organizations, the Bulgarian Construction Chamber and the Trade Unions should strengthen the measures against the grey economy.

The Ministry of Regional Development and Public Works should give interpretation of the Law for the Bulgarian Construction Chamber in relation to the participation of subcontractors in construction projects. The Directorate for National Construction Control and the BCC should conduct the monitoring on this issue.

The government should adopt measures in public procurement that stop the participation of companies outside the EU, which use direct and indirect subsidies from public resources in any form whatsoever that lead to the distortion of competition.

The inflow of non-regulated labor force in Bulgaria should be stopped. The EU Directives and the Bulgarian employment Code should be abided by.

The best practices of EU Member States against the dumping prices in tendering procedures should be adopted.

The government and the Bulgarian Central Bank should conduct active export policy of construction services to third countries.

The BCC and the companies should work in the direction of maintaining or increasing /not decreasing/ the wages in construction through efficient use of labor resources.

A law on Public Private Partnerships similar to the one in Germany should be prepared for adoption.

BCC should organize the establishment of a voluntary social fund in construction, using the experience of some advanced European countries. This fund shall support the small and medium enterprises in crisis situations.

The salaries of civil servants in the field of EU Operative Programs should be increased and should correspond to the effect of their work.

The Ministry of Regional Development and Public Works should adopt a normative act regarding the regulation and quality of sanitizing of the existing buildings in Bulgaria in view of better energy savings.