By Adrian Krajewski and Christian Lowe
WARSAW (Reuters) - The European Commission is investigating why Poland's government is refusing to pay dozens of foreign contractors for work carried out under a road-building program worth billions of euros and backed by Europe.
Should the investigation find Poland's state institutions have been at fault, it will deal a severe blow to the reputation of a country which routinely is held up in Brussels as a model of the successful use of European Union (EU) development cash.
EU officials are looking into how Poland's state highways agency managed a multi-year program, worth a predicted 5.5 billion euros ($7.27 billion) this year alone, to modernize the creaking road system Poland was left with after decades of Communist rule.
The scheme - one of the biggest publicly-funded infra-structure projects in Europe - has more than doubled the size of Poland's high-speed road network in four years. But it also has left dozens of contractors alleging that the highways agency, GDDKiA, owes them billions of euros in unpaid bills.
The agency says it has complied with the law and where disputes arose it was mainly because contractors' work was not up the required quality.
The risk for Poland is that if the commission backs the contractors' complaints, it could jeopardize Poland's ability to access funds from the EU's next round of development funds, cash on which its economy depends for growth.
"This issue of management of road-construction contracts by GDDKiA has been brought to our attention at the Commission. Our services - in charge of regional policy - have asked the Polish authorities to provide more information," said Shirin Wheeler, commission spokeswoman on regional policy.
"We have also asked the Polish audit authority (within the Finance Ministry) to carry out an audit of the specific contracts which are affected. We expect the results in the first few months of next year," she said.
Poland is the biggest recipient of EU funds. It secured 68 billion euros ($90 billion) in the bloc's 2007-2013 budget, and is seeking a similar amount from the next budget.
GDDKiA's chief executive, Lech Witecki, in an interview with Reuters, said he expected the European investigation would confirm his contention that it was the contractors who were primarily to blame for the problems.
"We are not afraid of its results, as a matter of fact we are happy that it is going on, as it will show the real state of affairs and that we've been acting according to the law," Witecki said.
The current phase of Poland's road-building project is a tale of hope and ambition in one of Europe's most dynamic and fastest-growing countries that degenerated into bitter recriminations.
Poland's PZPB construction industry lobby estimates that contractors are contesting in court non-payments by GDDKiA of 6 billion zlotys ($1.94 billion). The actual value of the cash subject to dispute could be twice that amount, according to people in the sector.
On several sections of highway linking Poland's biggest cities, work has ground to a halt because the contractor walked off the job over disputes with the highways agency, or because the agency terminated the contracts.
The problems have sent ripples throughout Europe's construction sector. Big multinational companies, from Austria's Strabag to Irish firms SIAC, SISK and Roadbridge have said that delays in payments on Polish contracts have affected their financial performance.
Worse for the Polish economy, some of its own big building firms have been pushed into difficulty because of losses made on the road contracts. Many smaller firms have gone bust. The local construction sector generates around 6 percent of gross domestic product, and employs almost 800,000 people.
"From the outside, it looks like the construction industry in the country which is the largest building site in Europe decided to commit suicide," Marek Michalowski, head of the PZPB lobby group, told Reuters.
Poland launched its latest phase of road-building with an ambitious aim: to turn its patchwork of bumpy two-lane cross country roads into a proper highway network that would tie it into Europe after years of isolation behind the Iron Curtain.
It is now possible to drive the 570 km (350 miles) from Warsaw to Berlin along fast, four-lane highways.
However, the project hit trouble almost as soon as the contractors arrived at the construction sites with their machinery. Contractors and GDDKiA have contradictory accounts of what went wrong.
Contractors say the highways agency was responsible for preparing the projects, but did not do its job properly. Irish contractor SRB said it had to stop work on one section of road because a building permit was withdrawn.
Firms said when routine problems arose - for example, the discovery of archaeological sites on the route, or raw materials that were unavailable or unexpectedly costly - GDDKiA was not flexible about finding a solution.
In a rare step for the construction industry in Europe, the agency cashed in a number of bonds, worth millions of euros each, that contractors had lodged as a guarantee they would complete their contracts.
Several companies terminated the jobs, saying they could not work under those conditions. A number of firms that managed to finish the work found they could not get paid even though, they said, they had done everything they were required to do.
The overall picture, contractors say, is of an agency where staff were struggling to keep up with the huge scale of the project and were tied up in red tape.
"The attitude (inside GDDKiA) appears to be: 'I don't want to make a decision, let contractors go to court over it'," said Finn Lyden, chief executive of Irish builder SIAC, one of the firms taking the agency to court.
The highways agency says that where disputes have arisen, it is because contractors' work did not meet its exacting quality standards. It said it was forced itself to terminate several contracts because of failures by contractors.
It also says firms were caught out because they did not properly plan for the possibility that the prices of raw materials would rise.
Nevertheless, GDDKiA chief Witecki acknowledged there was room for improvement in the way the agency managed contracts.
He said some tenders had been rushed through in order to make sure they met a deadline to qualify for EU funding, and that in future that they would be spread out over time to make them more manageable.
He also said future contracts would allow for greater flexibility if contractors' costs go up, though getting the right price for tax-payers "will remain key."
Bilfinger Berger Budownictwo SA, a local unit of Germany's Bilfinger, is another of the firms in legal disputes with GDDKiA over payments. Its chief executive, Piotr Kledzik, said the agency had to change the way it manages contracts.
"It can't go on like this any more. Contractors and the government have to get involved in dialogue," Kledzik said. "Let's hope it happens before the sector is reduced to rubble."
($1 = 3.0927 Polish zlotys) ($1 = 0.7568 euros)
(Additional reporting by Maciej Onoszko; Editing by Michael Roddy)