Fear of litigation paralysing construction sector

Public investors are stumped on what to do about cost overruns. Politicians are paralysed by a fear of potential criminalisation In recent times, local Czech politicians have got caught between a rock and a hard place. Should they stop construction on projects worth millions or even billions, thus damaging local economies and even risking visits from the police? Or should construction continue, and face the risk of prison time for breaking public tender laws? Prague’s Blanka Tunnel is a notorious example of such a dilemma. But the difficulties are by no means limited to the Czech capital city. Fears of cost overruns and collisions with the law amidst bouts of anti-corruption hysteria are breaking up functioning coalitions across the country. All the while, no-one has been able to come up with a painless way to conform to the new bureaucratic demands. As a result, instead of building, public investors may end up facing protracted court battles. What has changed? In recent months, elected officials have come to realise that they are responsible – even criminally responsible – for the political decisions they make. And Czech police are now pressing charges for alleged crimes that once would have merely been referred to antimonopoly authorities or administrative courts. And it isn’t just the top job in a given town hall or municipal authority that faces such oversight. In the city of Plzeň, representatives have learnt that the force of the law can make many any official sweat. Should one of many possible interpretations of a Czech law on municipalities become enshrined in practice, all local politicians face the prospect of more red tape. Someone must be held to account The November session of Plzeň’s municipal government was perhaps the most tumultuous in the city’s history. For eight hours, elected officials debated whether to pay the company Hochtief an additional CZK 40m for the construction of a local theatre (Nové Divadlo - formerly priced at CZK 818m). By midnight, exhausted representatives had only decided to approve CZK 18m to cover additional equipment costs. Apparently, the technology on which the bid was based had since become unavailable. An additional CZK 22m of earthwork continues to hang in the balance. All the while, the additional funding dispute has already cost a mayoral deputy responsible for investment, Petr Rund (ODS), his job. It has also thrown the city’s Social and Civic Democrat coalition government into crisis. “Of course I also want the theatre to be completed. But I am not a construction expert and thus am not qualified to determine which pile of dirt should go where. Even those who have the means and technology, can’t make up your minds on that front,” an opposition councillor exclaimed to his colleagues recently. The Social Democrats have rejected a proposal from their Civic Democrat coalition partners to pay the CZK 40m. At a time when the company Metrostav has suspended work on Prague’s Blanka Tunnel over unpaid invoices, a letter from Hochtief circulated among Plzeň representatives threatening the very same recourse with regards to work on the theatre. But what scared representatives far more was that, like their Prague brethren, the affair could lead to questions from the police. “Unfortunately, representatives must make a decision and assume this responsibility, even though I understand that they lack the technical expertise to do so. I am not 100 percent certain that we would win a dispute with the building company. As a result, I cannot risk the potential legal costs of mothballing the construction,” explained the now former deputy Rund. Before his dismissal, Rund had organised seminars to offer a detailed explanation of the problem at hand. But the only regular attendee was Jaroslava Maříková, a councillor from the party Občané.cz (Citizens). She ultimately devoted around 30 hours to the problem of the theatre funding. “I will certainly not support this proposal, even if that results in litigation for the city. The fault lies both with the city and the supplier. They should reach a new agreement deciding upon both accepting a part of the overrun costs,” argued Maříková. Even an emotional appeal, suggesting that without the local government’s approval the theatre will not be open by May to serve as a shop window for the city’s 2015 stint as the European Capital of Culture, failed to move legislators. Overrun epidemic A survey of more than 100 construction firm representatives carried out for Euro by the analysts CEEC Research demonstrated that cost overruns and related squabbles are far more than a marginal problem. More than half of large construction companies operating in the Czech Republic reported unpaid invoices, and more than 90 percent of managers of large construction companies anticipated more work suspensions and litigation in the future. “The private sector has no problems in requesting funding for overruns whenever necessary. But in many cases [companies] lack the funding [to continue otherwise]. Public investors do have the resources, but are often afraid of losing grant funding or of suspicions of corruption and ‘clientelism’. In certain cases, changes made while construction work is ongoing are not approved by legislatures, even though they are entirely rational,” said Jiří Vacek, head of CEEC Research.