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- Despite the favorable investment climate, expectations of a strong investment cycle, and positive trends, construction companies in Croatia face the greatest threat from unfair competition from third countries
- This primarily concerns construction companies from China and Turkey, whose home countries encourage them with extremely high subsidies that enable them to operate in our market and compete with artificially low prices
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The construction sector in Croatia is experiencing a kind of renaissance on the wings of an unprecedented influx of EU funds and projects, as well as work on the reconstruction of earthquake-affected areas of Sisak, Petrinja, and Zagreb, writes HUP in its weekly analyses.
The value of construction orders in the first eight months of this year recorded a growth of 6.8 percent and even 10.8 percent in the building segment compared to the first eight months of last year. In the first eight months of this year, the value of construction orders is even 52.0 percent higher compared to the first eight months of 2019. The construction sector also records a strong real growth in productivity per hour worked, which has increased by 28 percent from 2015 to 2023 (compared to a decline of 6.9 percent at the EU level).
The sector’s indebtedness has been significantly reduced, with the ratio of net debt to EBITDA falling to 2.6x in 2023 from 8.1x in 2019, which significantly reduces the perception of the riskiness of financing construction activities, which has been a major obstacle to the sector’s development since the global financial crisis of 2008.
Salaries in the sector are also rising, having jumped by 38.2 percent from 2019 to 2023, placing us among the top five EU member states in terms of income growth. When observing salary growth from the end of 2019 to the end of the first half of this year, Croatia is the best EU member state in terms of total income growth for employees in the sector, with an increase of 55.3 percent or almost 3.5 times higher than the EU average (+16.1 percent). The construction sector is also the second sector in terms of employment growth, with an increase of 24.5 percent, according to HUP.
According to HUP’s macroeconomic and sectoral analyses, the short-term and medium-term prospects for construction are extremely favorable, assuming the absence of significant imported disruptions such as significant fluctuations in financing conditions and (stronger) recession in the euro area. In 2025, we expect a solid growth rate of investments in fixed capital of around eight percent, following three consecutive years of growth of around 10 percent annually, driven by rising orders in building construction and large projects in civil engineering (transport infrastructure).
Good news is also coming regarding the price and conditions of financing, given the expected ‘cut’ in the reference interest rates of the European Central Bank (ECB) to 2.00 percent in 2025 compared to a recent maximum of 4.00 percent. Thanks to the improvement of Croatia’s credit rating to A- by leading rating agencies, the interest spread on the wholesale financing price for the Croatian state has stabilized at around 100 basis points with a downward trend.
Unfair competition from third countries
In the next five years, key state investments for the Croatian construction sector include highways (over three billion euros), state roads (over two billion euros), railway infrastructure (around 6.2 billion euros by 2035), earthquake recovery (2.3 billion euros), as well as private investments in hotels (4.5-5 billion euros) and numerous investments in energy infrastructure. It is also expected that investments in equipment and facilities in the manufacturing industry, investments in green infrastructure and industrial logistics, as well as the growing foreign jobs in civil engineering (co-financed by EU funds) and increasing renovation/maintenance jobs could generate additional opportunities for the sector.
However, despite the favorable investment climate, expectations of a strong investment cycle, and positive trends, construction companies in Croatia face the greatest threat to achieving positive trends from unfair competition from third countries, HUP analyses emphasize. This primarily concerns construction companies from China and Turkey, whose home countries encourage them with extremely high subsidies. These subsidies enable them to operate in our market and compete with artificially low prices.
Domestic companies not only lose jobs in the domestic market due to short-term manipulation of low execution prices but also lose references for projects abroad, which diminishes their potential exports and returns and ‘stifles’ the sector’s development and staffing potential. A challenge for Croatian construction is also the decline in foreign demand due to prolonged recession in the manufacturing industry in the main EU economies.
Furthermore, the continued rise in already unaffordable real estate prices (especially for the young) could ultimately lead to a sharp decline in residential investments, further emigration, and a further decline in the fertility rate, with negative repercussions on already unfavorable demographic trends and the demand for construction services. It is therefore essential to effectively curb unfair competition from subsidized providers from third countries through quality tender preparation and changes to the legislative framework at the national and EU levels to protect the domestic economy and jobs, as well as to ensure responsible management of taxpayers’ money.
Special Law on Public Procurement
A recent ruling by the EU Court in case C-652/22 | Kolin Inşaat Turizam Sanayi ve Ticaret mandates that economic entities from third countries that have not concluded an international agreement with the European Union in the field of public procurement cannot invoke equal treatment in public procurement projects. To protect the domestic market and companies, it is essential to include the application of Special Construction Customs, which were modernized and published in 2021, in the procurement documentation established by public procurers. These are business customs rooted in Croatian construction practice that the business community is very familiar with.
We believe that this process would gradually reduce the scope of application of FIDIC contractual conditions, which are more complicated, less transparent, and designed for business operations that are not suitable for contracts and investments in Croatia. Furthermore, the Public Procurement Act needs to stipulate the payment of wages agreed upon in the Collective Agreement for construction as a mandatory criterion for proving the bidder’s capability, rather than as an optional criterion, as is currently the case. HUP also proposes that a special Law on Public Procurement for low-value works for investments below European thresholds – 5,382,000 euros – be adopted.
The Law on Obligatory Relations should stipulate an appropriate distribution of risk among the parties to the construction contract so that the contractor can demand a price change if the price of the elements on which the price of the works is determined has increased so much that the price of the works should be higher by more than two percent when it is agreed that the price can be changed, or by more than three percent when a fixed price is agreed upon, HUP states.
Finally, HUP believes that companies need to be compensated for the differences in the price of works arising from public procurement projects due to rising input prices caused by disruptions in global construction material markets, rising labor costs, and inflation. Moreover, the Law on Obligatory Relations must stipulate an appropriate distribution of risk among the parties to the construction contract so that the contractor can demand a price change if the price of the elements on which the price of the works is determined has increased so much that the price of the works should be higher by more than two percent when it is agreed that the price can be changed, or by more than three percent when a fixed price is agreed upon.
It is also necessary to amend the Enforcement Act to prevent unjustified collection based on promissory notes, as well as the Regulation on the form and content of promissory notes to align the promissory note forms with the Enforcement Act, concludes the HUP analyses.
