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Czech Republic: Struggling Construction Industry Lacks Capital

Prague, 19 November 1997 (RFE/RL) - The Czech Republic has experienced a building boom in the eight years since the Velvet Revolution and the nearly five years since the Velvet Divorce. But housing construction has lagged far behind and only just started gathering momentum this year.

The state is no longer in the business of financing public housing. Most Czech builders lack the capital to build new homes to be sold near the time of completion. Instead they have sought with varying degrees of success to find well-off individuals willing to invest in a new home before construction even begins.

The president of the Association of Construction Entrepreneurs, Milan Veverka told RFE/RL by telephone today that last year there were no more than 10,000 new housing starts in the Czech Republic. This year, he says there have been between 25,000 and 30,000 new housing starts. Veverka says that while this is a big move forward it is still only about half the number needed to replace old housing.

Last July's massive flooding in eastern Bohemia and Moravia came as a welcome boon to road and railway construction companies. But the impact on building firms in the housing sector will only begin to be felt next year since reconstruction funds have been slow in arriving and the early onset of cold weather has halted most construction work until the Spring. Veverka says some 15,000 to 20,000 flood-damaged apartments and homes are to be reconstructed at a cost of between $50 and $60 million.

Recent government austerity measures are making matters considerably more difficult for many building companies, where according to Veverka, more than 40 percent of Czech construction firms are currently losing money. He says worst hit are small companies and if there is a further wave of rises in interest rates, many will be wiped out. He says a further 10 percent are just breaking even with the rest profitable.

In addition, political infighting among the Czech Republic's three ruling coalition parties has produced what Veverka describes as "a nervous, tense atmosphere in which everyone is cautious about whether to invest, be it in one's own household, or an industrial enterprise." As a result, construction work during the last three months has dropped by about nine percent compared with the same period last year. Veverka says most companies are too slow to lay off workers and rent out their unused heavy equipment to deal with the sudden downturn.

The president of the Association of Construction Entrepreneurs says the Czech Republic still needs to invest heavily in construction in all sectors. But he notes domestic investors lack the large quantities of capital to be found in the west.

"The state budget which simulated private capital has gotten into difficulty and has had to restrict investment," he says.

In a bid to overcome this situation Veverka says his association is working with the German federation of construction entrepreneurs and the Czech and German ministries for transportation to find a way for the private sector in Germany to help fill the void in investment funding created by the sharp reduction in Czech state investment.

"We are looking for German, French, and Spanish capital to make up for the missing public funding," he said.

Veverka describes the current situation as "an enormous opportunity" for construction companies in EU-member countries because they have capital, while their Czech counterparts don't.

Industry-wide, Veverka says, outstanding debts in the construction sector currently amount to the equivalent of more than $500 million, which is equal to ten percent of total annual construction work and is growing by some $60 million a year. He terms this an "interest-free loan to investors" and insists the big firms are hardest hit by the refusal of investors to pay their bills.

A few building companies are suffering losses due to the apparently insolvent "H-System" building society, which bought vast tracts of land around Prague on which to build 7000 modest row houses and apartments. But H-System attracted barely 1,000 small private investors -- mainly individuals and families who invested their life savings -- with the promise of having a home of their own within two years or their money back.

Veverka says H-System's managers appear to have failed in terms of technology, engineering and finance rather than through speculation. The firm is reported to have put liens on all its building sites but has not yet declared bankruptcy while it searches for a "strong investor" to give it a fresh injection of capital. Veverka says the case of H-System "should serve as a warning that no citizen should take-up naive offers."