How Croatia’s government policies are impacting the country’s construction sector

Written by Michael Glazer (SEE Regional Advisors) and Tatjana Halapija (Nada Projekt), EECFA’s Croatian members

Croatia will at the turn of the year assume the rotating presidency of the Council of the European Union. So now is an appropriate time to assess how the Croatian government’s policies affect the country’s construction sector.

Source: Depositphotos

The government’s preparations for the presidency don’t inspire confidence that its influence is a positive one: the remodeling of the main building for the presidency won’t be completed until December 22, leaving no room for (further) delays. And there are concerns that the “finished” building won’t in fact provide satisfactory facilities. Not to mention the project’s being at least 50% over budget.

On the other hand, the current government has substantially increased Croatia’s absorption rate for EU funds. At 78% it is now slightly higher than the EU average of 77% and significantly greater than the country’s below-EU-average 2018 rate of 52%. This improved performance has enabled Croatia to invest massive amounts in infrastructure. And while, bureaucratic delays have meant that end users have received only 25% of the amounts they contracted for, much less than the 33% EU average, there is a real likelihood of even more rapid EU funds absorption in Croatia.

First, use-it-or-lose-it rules governing these moneys mean that contracts relying on them must be entered into before year-end 2020. Second, and crucially, presidential and parliamentary elections are coming up next year, by January 20 in the case of the president and by December 23 in the case of the parliament. Parliamentary elections, though, could be triggered far earlier if any of the minority members of the current, fragile coalition withdraws its support.

The political economy of the Croatian election cycle militates for new, large infrastructure projects being commenced to fill the gap left by the completion of the road, airport and seaport projects begun years ago. It has also led to the postponement of a real estate value tax and will as well mean the continuation of subsidies for purchases of residences. These subsidies have had huge, not always straight-forward, consequences for the residential construction sector and will continue to do so.

The current government’s reform efforts have also benefited Croatia’s construction industry. The application procedure for construction-related permits has been streamlined and (with significant hiccups due to totally untrained staff) brought online. Other administrative reforms have had positive effects on the Croatian economy as a whole, indirectly benefiting the construction industry. So have other measures that the government has taken, including debt and deficit reduction.

Despite these positive developments, though, Croatia remains, as one Croatian economist has described it, “trapped in a transitioning economy model.“ Countries that once had far lower GDPs per capita than Croatia have surpassed it, while even those with lower per capita GDPs do better on a purchasing-power-parity analysis. (Croatia’s household purchasing power was 37% below the EU average in 2018.) And the country’s economy appears to be taking on at least some of the characteristics of a tourism-based rentier economy with all the dangers that presents for employment and for the development of other economic sectors and geographical regions.

It is very unlikely that the current government will dare to attempt to address any of these issues in the pre-election period. Although, for example, it has proposed enacting laws to introduce uniform government pay scales and a merit-based reward and promotion system for the public sector, there is essentially no chance that any such measure with real teeth will be proposed, much less enacted, before the next parliamentary elections. Moreover, union pressure will force the government to deliver salary increases to public-safety, education and healthcare employees. These increases, while long overdue, will have implications for Croatia’s budget deficit and so for other spending priorities, e.g., medicines.

The focus of the ongoing presidential campaign and the campaign for parliament (in effect already begun) on “patriotic” issues (including the purchase for billions of euros of fighter aircraft), not economic ones, is discouraging from a construction-industry point of view: any new government will lack a mandate for economic change. Croatia’s continuing problems with corruption, clientelism and conflicts of interest (the current government has lost at least five ministers to such concerns), also bode poorly for the implementation of the root-and-branch changes to the Croatian political system that are needed to move the country from the bottom of the EU league table to a position more favorable to business generally and construction in particular.

Bottom line for construction? The current government’s policies have for the most part greatly benefited the industry. Construction output was up 19.2% in 1H2019 over the same period last year. But the future remains far less clear as Croatia’s social and economic problems (e.g., a worsening lack of skilled construction labor) begin to take their toll. This, and changes to government policy to combat these problems, will surely change the sub-sectors of the construction industry that will see the most growth in Croatia. And perhaps even more important, they will affect the performance of the industry as a whole in ways that are at present hard to predict.

For Croatian construction segment level forecast, please check the EECFA Croatia Construction Forecast Report that can be purchased on http://eecfa.com/

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