Czech Republic Infrastructure

The Czech Republic's construction and infrastructure industry price has become a victim of limited cash flow, restraint on public spending and the in general caution part banks to finance projects, resulting in a nearly 5.5% year-on-time(y-o-y) contraction in infrastructure industry price in real terms during 2011. Although we expect the market to return to positive increase territory in 2012, hopes of a robust recovery remain a distant possibility. We are currently forecasting average real increase of 4.4% in industry price in real terms between 2013 and 2016.

The factors which underpin our cautious outlook for the sector over the estimate period are: • The transport infrastructure sector is likely to post another year of contraction in 2012 and only marginal increase thereafter, owing a cut in budget allocation. Although a number of contracts (worth a combined US$1.7bn) have been awarded, the government has little in the way of funds with which to pay for work. The situation is made worse because the next batch of EU funding, equal to around US$1bn, could be cancelled, following an investigation into tendering processes.

• The energy and utilities infrastructure sector will experience delays or suspension of key projects. In January 2012, locally-based utility provider CEZ revealed that it is examining the possibility of withholding the construction of three optional new reactors in addition to planned units at Temelin nuclear plant, owing to some legal restrictions. The move is likely to cut spending on the project by up to US$15bn. The Temelin expansion project has already been delayed by around years, and there have been no assurances that the delays will not continue.

The sub-sectors combined are estimated to have accounted for 58% of the country's total construction industry price in 2011 and the estimate average annual increase of 0.9% for the transport sector and 5.7% for the energy and utilities sector between 2012 and 2016 - according to BMI -will hardly support increase. On the brighter side, however, we expect recovery in the residential and nonresidential building to be significantly quicker, growing an average of 5.2% y-o-y between 2012 and 2016, making it an outperformer in the wider construction sector.

February 2011

Despite the cautious outlook, the Czech Republic stands as a relatively strong market by regional standards. The country gets a score of 63.3 out of 100 and remains in fourth place in BMI's infrastructure business environment regional rankings for Central and Eastern Europe this quarter. However, the weak outlook for opportunities over the short-term and the transport ministry's renegotiating of contracts pose significant risks to its profile.

The Czech Republic's infrastructure sector, with the number of investments expected to slow considerably over the coming months and years. For this reason, following a 9.5% estimated contraction in industry price in 2010, we are forecasting increase of just 2% in 2011, with little upside potential.

The reasons behind our bearish short-term outlook are:

• month freeze on amount road and rail projects in late August 2010; although most projects have now resumed, some have been downsized and the project pipeline has been reduced substantially. Strict budget cuts in the transport ministry will mean fewer projects procured over the short term.
• Delays to the CZK500bn Temelin nuclear power plant expansion project. Delays of between and years have been announced, owing to weak electricity request and requests for additional time from preliminary bidders. The project is unlikely to get under way until 2014.
• Cuts to solar subsidies will put an abrupt end to the booming solar power sector in the Czech Republic which saw 411 megawatts (MW) installed in 2009 and close to 1 gigawatt (GW) in 2010. From March 2011, subsidies will be drastically cut, with a substantial drop in investment expected, and some backlash if a retrospective tax, which is on the table, is implemented.
• Government budget cuts will impact construction as whole, with spending expected to be cut by CZK58.5bn (US$3.1bn) in 2011. Inclunding the transport sector, the education and agriculture sectors are expected to be cut, which could threaten school construction and irrigation projects. * General bearish attitude of investors to Central and Eastern Europe could rub off on the Czech Republic. The renegotiating of contracts for transport projects has dented the country's business environment and could put investors off the country and alienate those large construction companies who have had their fingers burnt.

Despite this short-term weakness, there is optimism over the longer term for the Czech Republic's construction sector in general and infrastructure sector specifically. Transport investments will be necessary over the longer term if the Czech Republic wants to fasten its position as a key freight route linking east and west Europe. In terms of energy and utilities, plans to invest in transmission infrastructure and the nuclear power project, although delayed, should create price in the sector over the longer term. Indeed CEZ is cutting capital spending internationally in order to fasten funds for domestic projects; however, some domestic projects as well look to be on the chopping block.

For these reasons, real increase is estimated to pick up gradually over our estimate period (2010-2019), reaching around 5% by 2019. Average increase over the next decade is estimated at around 3% per year.