Croatia’s new government: Turning point or business as usual?

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

Near Senj, Croatia – Photo by Tatjana Halapija

It’s at last becoming possible to assess the consequences for Croatia’s construction sector of the country’s July 2020 elections. Jockeying for governmental positions, COVID-19- and tourism-season-related priorities and other pressing matters prevented the new Croatian Democratic Union (HDZ) led government from moving on its larger agenda until recently. Now, though, the political picture, and the impact of the elections on Croatia’s construction sector, is getting clearer.

The July elections were particularly important to the Croatian construction sector for a number of reasons. They occurred mid-COVID-19-pandemic, when a change in government or even just a change in government policy would have had large consequences for Croatia’s fight against the disease and so for public- and private-sector finances and accordingly for the resources that would be available in the next few years for construction projects. This was especially true as the elections were called in the midst of Croatia’s tourism season, a critically sensitive time, as the survival of the country’s hospitality sector, which is responsible for much of Croatia’s building construction, was at stake, and relatively soon after the Zagreb earthquake, which caused on the order of EUR 12bln in damage to the city’s buildings and infrastructure that must be repaired.

Making the elections still more consequential, they seemed likely to decide the fates of several political parties and movements, some with significant influence on Croatia’s construction sector, as well as those of a few individually powerful politicians important to that sector. Finally, they also seemed likely to affect Croatia’s relationship with the new EU Commission and EU Parliament, relations determinative of the amount and nature of EU COVID-19- and earthquake-related aid that Croatia could secure.

So, how have things turned out? Regarding winners and loser, the center-right HDZ was by far the biggest winner (increasing by five the number of seats held by its coalition in the one hundred fifty-one seat parliament) and the center-left Social Democratic Party (SDP) the biggest loser (with its coalition’s seat count falling by ten). Far-right defectors from the HDZ did well as a new party (securing sixteen seats), but paradoxically lost power, since the HDZ’s strong performance made them irrelevant to the formation of an HDZ-led government.

The consequences of the HDZ victory are mostly positive for the construction sector. Importantly, there will be substantial continuity in the government’s construction policy. While by no means certain, it’s possible that a victory by the SDP and its coalition could have led to months of fractious conflict within the coalition, and indeed within the SDP itself, and put in power a party that after many years out of government might no longer have been familiar with how to rule.

As to the policies that the new government will adopt, further simplification of bureaucratic procedures relating to construction is likely, as is a continued emphasis on large infrastructure projects and COVID-19- and earthquake-damage amelioration measures. Crucially as to the latter, Andrej Plenković, Croatia’s prime minister both before and now again after the elections, has great pull with the European Commission, since he played a major role in brokering the selection of Ursula von der Leyen as the Commission’s president. (In fact, von der Leyen, while EC president, made a controversial video supporting Plenković’s candidacy, for which she later apologized.) For the same reason, he has similar influence with the European People’s Party, of which the HDZ is a member. These relationships have very likely already been reflected in the large sums that the EU proposes to allocate to Croatia for earthquake and COVID-19 relief. They probably also mean that the EU will be more flexible in how Croatia spends the money that it receives for these purposes. All good news for construction in Croatia and in particular for civil engineering projects.

Construction forecast for Croatia is available in the EECFA Forecast Report Croatia that can be purchased on eecfa.com

Also important to the construction sector is the dramatic decline of the Croatian People’s Party (HNS) as a national political force and the eclipse of its leaders. The HNS kept only one parliamentary seat and no ministries. The party’s formerly extensive influence on energy matters is now very much past tense, and its members are being gradually removed from positions of power in Croatian state-owned enterprises, a process likely to be accelerated by the arrest of the CEO of JANAF, Croatia’s gas pipeline company, who was formerly a HNS member is said to still be close to that party. The result is likely to be a better alignment of Croatia’s energy policy with its policies in other spheres. In particular, it will likely lead to a construction program for electrical-power facilities more in keeping with Croatia’s energy needs than with its government’s political makeup.

Other developments have been less positive. The HDZ has not followed through on some of its electioneering promises. One important one is that the number of Croatian sub-sovereign administrative divisions would be reduced from the present 428 municipalities (the smallest of which has 137 inhabitants), 128 cities and twenty counties to a more sensible number. The cost of maintaining so many governmental organizations is quite high, with, for example, a mayor, municipal secretary, administrator/bookkeeper, etc. required for each municipality and city not to mention the offices, office cleaners, doorkeepers, official automobiles and the like. that lead to even more expense. It appears, though, that the internal political cost of rationalizing Croatia’s local governments, which would be a painful task for a government of any political stripe, is too high for the current one, and so significant reductions in numbers and payrolls are unlikely. The rub here is not just that Croatia’s surfeit of local governments is expensive and leads to corruption. It’s also that reduction in their number and related reforms are high on the priority list of the EU. So a failure to follow through on the promised reforms could lead to friction in the release of EU funds, including construction-related money.

The new government has also scored some own goals with its post-earthquake and anti-COVID-19 policies. As to its response to the devastation that the earthquake wrought in and near Zagreb, promised relief has been slow in coming, and the legislation governing it was not well drafted. While matters are now being clarified, funding delays have caused real suffering for those whose residences and offices the earthquake rendered unsafe.

Zagreb upper town, Croatia, after the March 22 earthquake – Source: Cropix

As to the COVID-19 pandemic, the prior HDZ government’s success in the spring in tamping down COVID-19 infections eroded dramatically in the summer and fall. Daily infections are now at record levels, likely a result of lax enforcement of preventive measures in the summer (to accommodate tourists and electioneering) and continued lack of enforcement into the fall (reflecting public resistance to inconvenience and a loss in confidence in the government figures leading Croatia’s COVID-19 response). The upshot may be a weaker tourism season in 2021 as travelers no longer see Croatia as safe. This would in turn hurt the hotel construction sector directly and, because tourism is such a large part of the Croatian economy, many others indirectly. A failure to get COVID-19 back under control could also have other, nearer-term economic consequences through mounting health-care costs (including those relating to the disease’s long-term consequences) and worker absences due to self-isolation and disease symptoms. The latter absences could be quite prolonged given COVID-19’s effects.

Split, Croatia – Photo by Tatjana Halapija

Budgetary problems, including those alluded to above, are another problem facing the new government, and only a few of them are of its own making. Income and value-added tax receipts are down dramatically. Combined with the pandemic support payments needed to prevent massive unemployment and company failures, these shortfalls have blown a large hole in Croatia’s budget that the government has covered by borrowing. Earthquake relief and further COVID-19 measures will exacerbate the budgetary problem, and borrowing more is not a viable solution. While Croatia has been promised substantial EU aid, indeed more on a per capita basis than most EU members, it’s still not clear when that aid will arrive or how fast the government can disburse it once received. Progress at the EU level in this matter has so far been slow, and the consequences could be severe for all Croatian construction sectors, including civil engineering, if it does not speed up soon.

All in all, the outcome of Croatia’s July elections is likely the best that the country’s construction sector could have hoped for. Policy continuity, experience in governing and good relations with the EU are essential to Croatia at the present time. By triggering reform and renewal in the SDP, the elections may even have laid the groundwork for a more competitive, and hence more responsive, political environment in Croatia, which would also likely be a positive not just for the country, but for the sector.

Croatia C-19 situation in construction (status on 23 April 2020)

Written by Michael Glazer (SEE Regional Advisors) and Tatjana Halapija (Nada Projekt) – EECFA Croatia

UPDATE ON 30 APRIL 2020: During the first phase of Croatia’s response to COVID-19, the country’s construction industry was not as tightly locked down as some others (e.g., the hospitality sector). While construction firms were not as free to operate as, say, grocery stores and food processing plants, projects of national significance, some projects considered important by municipalities and other sub-national governments and some private-sector projects continued to move forward. Construction companies were also called on to assist with the cleanup effort following the March 22 Zagreb earthquake. This provided some liquidity to the sector, or at least to those lucky firms involved in the projects on which work continued. Now that the Croatian government is lifting the strictest limitations on business, including those on construction work, construction activity is likely to increase considerably.

This, though, may be a double-edged sword. Social distancing is difficult to enforce on construction projects even with the best will in the world, and anecdotal evidence suggests that in many cases there is not even an effort to do so. For example, groups of workers have been seen traveling to and from construction sites seated close to one another in vehicles with enclosed cabins, and of course there are the frequent “supervisory meetings” where several workers gather to monitor the one working. If one or more construction workers causes an outbreak at some point, the sector as a whole could suffer real consequences.

Physical restrictions

On March 20, the Croatian government imposed stringent restrictions on movement and business activity in order to combat COVID-19.

  • They included prohibitions on travel outside one’s place of residence or across international borders unless for trips defined as necessary (e.g., to transport goods to stores that remained open or internationally), closure of educational institutions and nurseries, cultural and sports facilities, prohibition on the operation of all but essential businesses and limitations on the size of gatherings (initially no more than 5 people, ultimately no more than 2)
  • Work-from-home requirements were imposed
  • Public transport was suspended

Mid-April, the Croatian government permitted travel within counties, while on April 20 restrictions were extended to May 5 but their strictness was reduced.

On March 22, a 5.5 (Richter)/5.3 (MW)/VII (MMI) earthquake struck Zagreb.

  • It damaged 26,197 buildings of which 1,900 were rendered unusable. A number of hospitals, museums, churches, schools, government offices, historic buildings and other culturally important structures (including graves) were badly damaged
  • No specific regulatory measures were immediately promulgated other than that many sidewalks were closed due to the risk of debris falling from roofs and facades

Construction works

No strict ban was imposed specifically on construction, but the industry was restricted by the broad limitation, from which it was not excepted, to working from home.

  • That said, it appears that work continued on a number of construction projects, including those of the City of Zagreb and politically connected private firms and the Pelješac Bridge, either in violation of this limitation or pursuant to special exemptions
  • Also, after the Zagreb earthquake a number of firms with the appropriate equipment were permitted to clear debris and blow things up

We are planning to issue the new EECFA Croatia Construction Forecast Report on 29 June 2020. Sample report and order

Anticovid measures in construction

  • We are not aware of any construction-sector-focused anti-COVID-19 measures
  • Construction firms are benefiting, though, from general measures that the Croatian government took to limit the economic consequences of COVID-19
  • These measures include relief from taxes and governmental contributions (primarily payment deferrals for three months but some forgiveness), payroll support payments (minimum net wage of EUR533 for three months), loan payment moratoria (three to six months), debt enforcement moratoria (during the period of extraordinary measures), liquidity loans, sector-oriented loans (for the tourism and other export sectors) and credit lines for MSMEs in the tourism and hospitality sectors (although the minimum loan amount is EUR100k, which makes them ill-suited for micro and even small businesses)

Factors limiting the construction sector’s performance

  • There is no lack of construction materials, particularly in view of the fact that most building has ceased
  • Most tourism-related construction for the coming season has been completed, since that season is at hand
  • But other construction projects are not moving forward except for those considered essential. (“Essential” can have a variety of definitions, depending on the government responsible for defining the term. Some politically connected private projects are proceeding.)
  • Croatia’s heavy dependence on tourism, and the likelihood that tourism will not recover for years, means that construction, and the Croatian economy in general, will be very negatively affected for a significant period of time

Any other

Croatia’s handling of the COVID-19 crisis has been unexpectedly, indeed startlingly, good. It flattened the curve rapidly and has already achieved an R0 of less than 1. Much is due to the chance replacement of an ethically tainted Minister of Health by a highly competent appointee shortly before the crisis broke. But much is also due to the professionalism of Croatia’s public health services and medical personnel.

It remains to be seen if Croatia can continue its stellar performance. There are signs that segments of the populace are beginning to ignore social distancing measures. But the government seems alert to the possibility of R0 rising and willing to act rapidly to bring it down again.

It is clear, though, that Croatia’s quick and effective response to COVID-19 will lessen the severity of the economic effects of the crisis.

Croatia will be hit by a reduction in remittances from its citizens abroad. There may also be political consequences, since many Croatian ex pats are returning, and their political views may have been affected by their time abroad.

It is possible, but by no means certain, that the weaknesses in Croatia’s healthcare infrastructure, and possibly increased EU funding for healthcare infrastructure generally, will lead to significantly greater hospital and healthcare facility construction. That said, healthcare tourism, and so private healthcare construction is likely to be badly damaged long-term by COVID-19.

Construction in Zagreb, though, looks likely to increase dramatically in volume for years to come as reconstruction work of a minimum value of EUR6G will be needed.

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.

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

Global warming: near-future effects on the Croatian coastal infrastructure

Due to its coastal geography, Croatia is exposed to the effects of climate change such as rises in sea level and serious wave and storm threats. In the near future, the country will need to take action which will involve increased civil engineering construction on the coast.

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

Rovinj coastal city – Source: http://www.studio-pastello.com

Croatia’s building boom is continuing, but some of the engines currently driving it will likely run out of steam in a few years: Coastal hospitality-related construction will decline in importance as current renovation and greenfield projects complete and opportunities for new projects become more limited. Educational, health and other construction spending fueled by EU post-accession funds will decline as those funds dry up.

All of this is several years off, and inland hospitality construction and renewed office and residential building will take up some of the slack, so there’s no need to panic. But, it’s still worth asking: what will be the next big thing in the Croatian construction market?

One likely candidate is Continue reading Global warming: near-future effects on the Croatian coastal infrastructure

Agrokor aggravation: Do the Agrokor Group’s tribulations threaten the Croatian construction sector?

Earlier this year, Croatia’s construction industry at last seemed on track for recovery after many dismal years of negative growth. 2015 saw a number of construction sectors moving into positive figures for the first time since 2009, but the recovery really took hold last year with all construction sectors likely to show positive growth once complete data for the year are available. Now, though, the Agrokor crisis has thrown this rosy picture into doubt.

Written by Michael Glazer, SEE Regional Advisors and Tatjana Halapija, Nada Projekt – EECFA Croatia

agrokor_1
Illustration of Agrokor HQ (Croatia) photo by Zeljko Hladika, source: http://www.24sata.hr

First, some background. The Agrokor Group is by far ex-Yugoslavia’s largest business conglomerate, with EUR6.4 billion in sales in 2015. Indeed, it is one of Central Europe’s largest companies (11th, according to Deloitte’s Central Europe’s Top 500 2016) and its second largest retailer (behind Poland’s Jeronimo Martins Polska, also according to Deloitte). Among other things, Agrokor owns the biggest retail grocery chains in Croatia, Slovenia, Serbia and Bosnia-Herzegovina (BiH), several large Croatian agricultural producers, important Croatian resort projects, significant travel agencies and major distribution companies for the wholesale and HoReCa sectors in Croatia and BiH.

Agrokor is now in serious trouble. It is having difficulty finding liquidity, a government administrator has been appointed for it by the Croatian government, the Slovenian and Serbian governments are considering similar measures and it is making only limited payments to its suppliers, on its taxes and to its lenders.

In theory, the consequences of an Agrokor Group collapse could be grave for all of the economies in which the Group operates, particularly Croatia, Continue reading Agrokor aggravation: Do the Agrokor Group’s tribulations threaten the Croatian construction sector?