Poland Infrastructure Report Q3 2012

BMI View: We expect a significant slowdown in the Polish construction industry during 2012 and 2013, as the majority of the projects related to the football tournament will have been completed and artificial demand will decline. As such, we have revised down our expectation of 2.9% year-on-year (y-o-y) real growth to a more cautious 1.8% in 2012, which will be followed by a morbid 2.4% in 2013.

A revised set of data released by the Central Statistics of Poland reveals that the Polish construction sector grew significantly higher than earlier estimates. Not only did the sector come out as a regional outperformer, but also stood resilient to the global economic downturn, with average annual real growth of over 9% between 2006 and 2010. This was followed by an even stronger 11.8% y-o-y growth in 2011, which came on the back of an overall increase in civil engineering projects and the last-minute rush in construction activity ahead of the Euro 2012 tournament. In addition to the high base effect, we believe that the completion of a majority of projects, weak investor sentiment and the ongoing gloom in the residential and non-residential sector will make strong growth difficult to attain over the short term.

However, there remains significant growth potential to 2016 (with annual average real growth of 2.8% forecast between 2012 and 2016) on the back of the following developments:

Road building programme: Poland's road building programme, running from 2007 to 2015, is expected to draw US$60bn of investment into the sector. In March 2012, Spanish engineering contractor OHL was awarded a EUR221mn (US$294.6mn) road and tunnel project in the country.

EU Cohesion funds: The EU has allotted substantial funding for Poland's infrastructure sector in an effort to integrate the country into the EU's transport and energy networks. Geographically placed between Eastern and Western Europe, it is hoped Poland will act as a bridge between the two.

Renewable and nuclear power growth: A slew of gas, coal and renewable energy projects are in the pipeline, driving industry growth expectations. The greatest boost to the energy and utilities segment will potentially come from plans to construct two nuclear power plants. In March 2012, French nuclear energy firm Areva and power utility Électricité de France (EDF ) revealed plans to jointly participate in a technology tender for the construction of a nuclear power plant in the country.

Non-Residential Demand: The outlook for non-residential sector is changing for better. In April 2012, French construction company Vinci's subsidiary Warbud was awarded two EUR105.5mn (US$138.13mn) contracts for construction projects in Poland in April 2012. We expect stronger economic growth over the coming years to result in increased demand for housing. Poland remains at the top of our Infrastructure risk/reward ratings table, with an overall score of 66.6, on the back of its balanced infrastructure and construction market. However, we warn that a gradual weakening in sector growth – most notably, infrastructure opportunities - will bring the country back in line with the regional growth average in the short to medium term.