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33 (128) 2018
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Real Estate & Construction

Foreign direct investment in Poland: an engineered approach

By Ben Creighton, senior process engineer, Food Sector Head CEE, PM Group
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Poland is a very attractive location for foreign direct investment (FDI) because of its stable economy, well-educated workforce, central location, infrastructure, large market (population of Poland is 38 million) and business-friendly environment.

 

In the EY’s Attractiveness Survey Europe 2016, Poland was again ranked as the most attractive country in Central and Eastern Europe (CEE) in which to invest in the coming years – the region that saw 34% growth in FDI in 2015.

Companies considering an overseas investment have a long ‘to do list’ of things they need to consider. Starting with market research, it's important to know the size, maturity and local trends of the market in the country in which you propose to invest. It's also crucial to know who your main competitors are and what their market share is. Other key considerations are:

  • Skills availability and labour cost

  • Logistics and communications infrastructure

  • Human resources and recruitment

  • Legal and commercial advice

  • Finance, taxation, currency risks and insurance

  • Tax incentives and grants

  • Public relations and marketing

  • Political stability or risk

For production facilities, from an engineering/architecture perspective, you need to begin with three key assessments:

  • Site selection

  • Buildings and equipment design, permitting, procurement and installation

  • Utility applications, considering cost, quality & reliability

Like any investment, there can be a number of pitfalls and in the particular case of site selection, buildings and equipment design, permitting, procurement and installation; these are the key pre-investment considerations you need to take:

Legal entity formation and financial plan. A legal entity is a mandatory requirement for land purchase in Poland and for application for environmental and building permits. Polish regulations allow domestic and foreign enterprises to operate under a wide variety of legal forms. The limited liability company is the most attractive legal vehicle for foreign investors to conduct business in Poland. A financial plan needs to take account of currency risk hedging and financial control processes for the project. Engaging specialist advisors with suitable competence in these areas is highly recommended as a first step prior to site selection.

Site selection and due diligence. When selecting a site, check the ownership status; does the seller holds an appropriate legal title and associated legal burden of proof. Investigate the quality of communications infrastructure, who your neighbours are and what local industries are present in the area. Is there potential for planning permission objections or possible cross contamination / odour from other activities?
Is there a local development plan in place for that region?

Poland's special economic zones offer a range of support measures:

  • income tax exemption (CIT or PIT) from the income created in SEZ

  • plots of land suitable for the investment at competitive prices

  • free support of formal processes concerning the investment

A thorough investigation and assessment of ground conditions and stability is essential to determine whether a site is suitable for building on, especially soil conditions and water table. The availability and lead time for utilities must be investigated and analysed as part of the project schedule and their availability during construction. Your advisor should include the site’s history, archaeological status and unexploded ordnance as these can cause problems during construction.

Site Master Planning (SMP) and Building Concept Design (CD). It is important to complete a SMP and a building CD as this will allow you to plan for complete site utilisation to future-proof your proposed site. As part of this, you will need to consider expansion of buildings and utilities. The CD becomes the baseline for the project budget, scope and schedule so it’s critical that it considers all aspects of the project. A project’s chances for success are determined by the quality of the concept design.

Even at this pre-investment stage of the project, you need to consider constructability and safety, internal and external traffic, people and material flows as you want to maximise efficiency and functionality from the start.

Cost plan, cost estimate and budget. Project cost control is a continuous process, starting with project commencement and continued during the full project duration. The cost plan determines at what stages of the project, the project costs are incurred and reported. It's also important to have a change-management plan in place for the management of the project scope and requests for change.

The building and equipment cost estimate will be produced at the end of the CD. This estimate includes appropriate design and execution contingency and that allowances have been made for inflation and currency fluctuation. It should also include owners costs (legal, HR & staff, utility fees, insurances, etc.). Local authority fees can vary depending on the region. An estimate is not a budget!

Schedule control. As with all projects, effective schedule control is a must for project success. The aim is to have one integrated baseline schedule for the project covering all activities and to update this regularly to track actual progress. It should show all the key milestones. For these key dates it is worth considering using contractual incentives or penalties as a motivation to achieve them. Include some schedule contingency or ‘float’ strategically placed in the schedule. Remember a realistic schedule is the fastest schedule!

Permitting. In Poland, when building a greenfield facility, you are required to have an environmental decision and utility agreements before you apply for your building permit. The environmental permit is a one or two-step process: Environmental Information Card (this is simple and fast for low risk facilities) and is used to determine if a second step involving a full environmental impact study is required (this has a high level of detail, takes five to six months, involves public consultation and is for higher risk facilities).

Utility agreements are required and you have to obtain technical conditions of utilities connection for water, gas, power, effluent, rain disposal, waste disposal etc.
Additionally, a water law permit is required for borehole water extraction and rain water disposal to rivers. The building permit design is detailed (about 60% of the completed design) compared to other western European countries so possible abortive design costs and significant change cost and time could be incurred if significant design changes occur following building permit application.

Execution approach. When looking at the project execution approach complex projects have the best chance of success when a full-service, locally based design and project-management company is engaged to deliver the full project management and design scope of the project. Having a single point of contact with the industry specific expertise, scale and experience will significantly help to mitigate risk and ensure effective project delivery.

For less complex projects a traditional design and build approach may be suitable, however the following factors need to be considered to determine what is important to your specific project.  

  • Time vs quality vs cost

  • Cost level and early cost certainty

  • Schedule speed and early schedule certainty

  • Design change flexibility

  • Quality and suitability of design, materials and finishes

  • General contractor vs specialist package contracting

Some advantages and disadvantages of the two most common contracting approaches are outlined in the table below. Taking time to decide on the right one for your facility, is one of the most important decisions you will need to make.

BIM. With the widespread adoption of Building Information Modelling (BIM) in the construction industry by clients, consultants, vendors and contractors, it is even more feasible to achieve effective and efficient project delivery. For the design of a complex food plant, BIM is an important design tool and allows the plant to be fully designed in 3D before it goes to the installation stage. BIM is being used to model all structures, equipment, piping, HVAC and electrical containment, integrating the process and packaging elements. This has significant design benefits including clash detection and is a powerful co-ordination tool used to complete design reviews as well as facilitating client approvals, for early continuous constructability reviews and for assessing maintenance access during plant operation.

Procurement. Following a structured procurement process has its advantages, such as using a known and vetted contractor short-list, doing robust contractor pre-qualification and a detailed tender analysis ("comparing apples with apples”), technical and commercial “value engineering” and having full contractual support (using for example the FIDIC suite of contracts widely recognised in Poland or bespoke contracts if preferred).

Specialist support is also a benefit, especially if you are importing equipment, as there may be issues with CE certification, import duty or customs clearance. Pre-ordering of long-lead items should be considered, particularly if they are on the projects critical path. Co-ordination is key when renovating and relocating equipment from multiple sites.

Construction and installation management. The safe way is the right way! - Safety must be the number one priority. There are statutory construction control requirements in Poland; statutory supervision (inspektor nadzoru services –  discipline statutory inspectors, site manager and safety manager). During the construction phase it's important to have tried and tested contract, cost, schedule, quality and change management systems. Project success = “scope, cost and quality, delivered on time.”

Commissioning. Commissioning a plant can bring its own challenges. It may involve the start-up of specialist equipment. Depending on the product, there may be regulatory or corporate qualification requirements (IQ/OQ/PQ) and cGMP audits. Many food retailers now have their own stringent standards and carry out audits.

UDT, the Polish inspection and certification body can provide CE certification and the German TUV certification is also widely recognised. Such certification may be required before start-up. In Poland, building occupancy permits and production operational permits are a requirement. If the facility is designed to the latest green building standards for energy efficiency, then application can be made for LEED or BREEAM certifications which require energy modelling and seasonal commissioning. Where such certification is necessary, it is advisable to include this objective in the CD phase to ensure all aspects of certification are included from the outset.

About the author:
Ben Creighton, Food Sector Head CEE, PM Group has over 16 years’ experience leading Europe-wide, multi-disciplinary teams in the design, construction and commissioning of process engineering projects. He has specialist knowledge of thermal process and energy related fields and is currently working on a number of various sectors’ process projects for PM Group across Poland and other CEE countries.

About PM Group in Poland
PM Group in Poland is a part of an international project delivery company, providing architecture and engineering design, project management, construction management and consultancy services across a variety of sectors. In Poland PM Group has been successfully operating from the company’s offices in Wroclaw and in Warsaw for over 20 years. The company is uniquely positioned to support multinational clients looking to enter and/ or expand their operations on the Polish market.

PM Group has successfully completed complex projects in Poland for clients from various sectors, including;

  • Mondelez International

  • AB Foods

  •  VW in Września and in Poznań

  • BAMA Europa,

  • Pasta Food Company

  • Unilever

  • PepsiCo

  • Nestlé Purina

  • Pittsburgh Glass Works

  • 3M

  • AGI

  • XEOS

If you would like to learn more or discuss your next steps, contact:
Monika Slomka, BD Director: Monika.slomka@pmgroup-global.com

 

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