Alexandros Ignatiadis, co- founder & shareholder OCTAGON: Construction companies could gain capitalization and financing through Bucharest Stock Exchange listing

The research team of OCTAGON CONTRACTING & ENGINEERING has made an analysis of the

construction market between 2009- 2014, to study the evolution of the sector during the five years and has emphasized the main issues the market has been facing.  “We have compiled five top 100 construction companies, following this analysis, taking into account turnover, profit and shared capital, reported by these companies within the mention time period.  The novelty element brought by this analysis is the fact that, compared to other rankings, which have been published so far and which include companies selected upon one NACE code or upon the main construction NACE codes, we have taken into account all the existing codes.”, said Alexandros Ignatiadis during the conference “Financing, Guarantee and Insurance - Classic versus Innovation towards 2020”, organized by the magazine “Masini si Utilaje pentru Constructii” .

The share of foreign construction companies on the Romanian market is too high

Top 100 for 2014 includes 35 foreign companies which totaled a turnover of approximately 4 billion euro, accounting for 40% of the total turnover reported by the 100 companies present in the top. These 35 companies have also reached 65% of the total profit and own 17% of the total share capital. This tendency, with small changes, has been present in all the five analyzed years.

“Basically the share of foreign construction companies in the Romanian market is around 30%. 

Considering that the construction business should be mostly local, in any country, this share is too high and raises concerns.

In Romania there are around 35,000 construction companies, and the companies present in the rankings that we have compiled have made 90% of the total construction sector turnover.” said Alexandros Ignatiadis.

The burden of banking guarantees is too high for the companies

For a total turnover of 180 bln euro the companies must provide banking guarantees worth 1.8 billion euro- 10% of the total turnover. The major issue is the fact that the 1.8 billion euro represent the double of the total share capital of these companies. Besides the guarantees for the ongoing projects, the construction companies must also provide post- execution guarantees of at least 5%. “Considering that the profitability of the area does not exceed 6%, the burden of banking guarantees is too high for the construction companies.” added Alexandros Ignatiadis.

A major issue is the weak capitalization of construction companies, generated by the fact that funds are blocked in banking guarantees.  “Romanian companies must find financing and capitalization solutions and this could only be done through listing on Bucharest Stock Exchange. Another solution to unblock the capitals would be to set- up employers’ associations or a guarantee fund, which could provide funds for eligible construction companies. 

We all know that these guarantees are not payment, but insurance instruments, that we give to the beneficiaries. In order to solve this issue the National Bank of Romania could also relax the prudential rules and allow the constructors to guarantee with insurance contracts. We could then use these insurance contracts to obtain guarantees from the bank.” concluded Alexandros Ignatiadis.

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Alexandros Ignatiadis- interview The Money Channel: A licensing system and BVB listing could help Romanian construction companies participate in bids for large infrastructure projects

Romania is supposed to build 656 km of highway and 2,226 km of express roads by 2030, according to the Transport Master Plan, presented by the Minister of Transport Ioan Rus, at the beginning of October. The highway projects included in the Master Plan are Sibiu - Braşov (103 km), Ploieşti - Comarnic (49 km), Craiova - Piteşti (115 km), Comarnic - Braşov (54 km), Braşov - Bacău (158 km) and Gilău - Borş (177 km), the total estimated cost for these projects, reaching  6.28 billion euro. Moreover, the Master Plan includes the construction of express roads totaling approximately 2,200 km, the necessary funds for these projects accounting for around 17.5 billion euro. According to the document, 2,674 km of trans-regional roads, 293 km of EuroTrans roads and 172 km of city belt should be built, the total of necessary funds for the development of the road sector standing at 26.1 billion euro.

Alexandros Ignatiadis, co- founder and shareholder of the company OCTAGON CONTRACTING & ENGINEERING, commented on the Master Plan and offered solutions which could help Romanian construction companies participate in public bids for large infrastructure projects, during the TV show “Metropolis”, broadcast by the “The Money Channel”.

 

The Money Channel: What is your perspective on the Master Plan presented by the Minister of Transport at the beginning of October?

Alexandros Ignatiadis: The Minister of Transport presents a Transport Master Plan on a regular basis. It is our obligations to the European Community to send this report, but the question marks are related to the lack of responsibility towards the objectives within the previous Master Plans.  We never find out which of these have not been reached and who is responsible for the positive or negative results. In the private sector, companies that do not perform, pay through low profits or even losses, for the failed objectives. In the public sector we do not have an evaluation and control system, which could hold those governing the country, accountable. Each new government sends optimistic messages related to the plans for the ongoing terms, but at the end of the term, the results are always disastrous.

The Money Channel: What changes should occur on the construction market to allow Romanian contractors to have access to road infrastructure projects?

Alexandros Ignatiadis:  A major issue, which stops Romanian construction companies to participate in such large bids, is the weak capitalization. The financial burden, represented by bank guarantees and performance guarantees, combined with long delays on payments made by the state, which is the beneficiary of these projects, are the main causes why Romanian companies cannot stand the competition against foreign companies. A method to attract capital would be through Bucharest Stock Exchange, but right now there is no Romanian construction company listed on the Stock Exchange.

The second negative factor is the interference of politics in public bids, which could be eliminated by licensing the construction companies. Through licensing, only the companies with a certain level of capitalization and a certain level of expertise would have access to bids. Right now, the Romanian legislation allows any company, set up six months ago, with a share capital of 200 lei and obviously devoid of the necessary expertise, to be eligible for the construction of large infrastructure projects. The only condition is to partner with other companies willing to provide technical or financial support.

 

The licensing of construction companies would stop the phenomenon of “flat companies”, set up over night, politically backed, which vanish right after the end of the term of those who have supported them. 

Licensing could also solve the issue of contested results, which prolong almost three times the life cycle of a project.

We all know that, within all European projects, the funds are allocated for a certain term and if the implementation of the project exceeds the initial term, the funds can no longer be absorbed. In Romania the execution terms of infrastructure projects are prolonged 3 to 4 times due to the mentioned issues, and at the end of each year we manage to always wonder about the same thing: why do we absorb such a low percentage of the allocated European funds?  

Romania had, at the end of last year, 644 km of highway, 16,466 km of national roads, 35,587 km of county roads and 32,190 km of village roads. According to the Master Plan, there are no express roads in Romania.

You can watch the show here: 

How to avoid Construction Cost Control Nightmares

Nightmares still happen to even the biggest construction projects, where costs and revenue are not properly estimated, Construction Global writes.

Construction is all about estimating costs, then balancing income against expenditure. At least in modern times. The builders of the pyramids had armies of slaves to construct their magnificent monuments, plus the resources of an empire, so costs didn’t matter. Nowadays, construction companies must operate like street magicians who keep plates spinning in the air.

Inevitably though, once the plate marked ‘costs’ starts to wobble, those marked ‘income’ and ‘expenditure’ also go out of control … Such construction cost estimating issues are spreading fast, even to Germany’s oft-praised economy. So why do such nightmares happen?

Don’t get drawn in by ‘the vision’

Sometimes the architect’s vision is so compelling that it receives a green flag, when it deserves the red. Britain’s most spectacular example is Holyrood, the Scottish Parliament. In 1997, its cost was estimated at between £10m and £40m; and the yawning gap really should have set alarm bells ringing.

Instead though, the building went ahead and opened in 2005, three years late, and with a price-tag more than ten-fold the highest ‘estimate’ at £430m. By 2013, annual maintenance costs had soared to £1.7m, mainly through shoddy construction techniques, and in 2014, demolition was suggested as the most cost-effective option.

Client control nightmares

Budgets can also go awry because clients just can’t stop tinkering. Research by Reading University’s Simon Jackson concluded: “Clients are the key drivers of change, and must look at themselves, before blaming the industry for being inefficient.”

A cost control nightmare of Olympic proportions

On occasions too, projects can be judged so important for a nation’s status that a government blithely ignores the estimated

cost. Topping this global League of Shame is the 2004 Olympic Games, intended to herald Greece’s renaissance, but which became a symbol of its subsequent economic collapse. Even years later, as its stadia have become ivy-clad ruins and grand highways lie crumbling, no-one knows the final bill. The Socialist Party which was in power claims 4.8bn Euros, the opposition reckons 10bn, and both estimates ignore the cost of a new airport and high-speed tram network for Athens

So what’s the most obvious solution to cost control nightmares?

Use specialist construction cost estimating software to properly estimate the cost and then keep expenditure and revenue in synch. Then even if clients feel the need to tinker, you’ll have the certainty and precision to understand the potential impact of their variations.

Beware the temptation of being unrealistically optimistic – both from the client’s and your point of view.

Keep the clients in check – if their demands become unrealistic within the budget, tell them early.