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8/8/2019 Transform Issue 6
1/56
One new messageIs social media really the
saviour of business?
Outside inThe rise and rise of public-to-
private equity deals
Health checkTaking the temperature
of pharma in CEE
Intelligent lifeHow Russias innovation
city will inspire the region
Insight for CEEs business leaders
Bridging
the gapSpecial report: Building
CEEs future fabric
Transform Issue 6/Autumn 2010
8/8/2019 Transform Issue 6
2/56
Adviser of the Year
to Private Equity
in Central & Eastern
Europe
www.pwc.com/cee/private-equity
unquote has named PricewaterhouseCoopers
Adviser of the Year to the Private Equity
industry in Central & Eastern Europe.
The unquote CEE Private Equity Awards
recognise excellence in the CEE private equity
market. In a highly challenging environment over
the past year, we were among a few select firms
that still managed to achieve above-par
success.
PricewaterhouseCoopers helps more private
equity houses to realise the unique investment
opportunities in Central & Eastern Europe than
any other adviser in the region.
For more information please contact:
CEE Private Equity Leader
Mike Wilder
Tel: +48 22 523 4413
Czech Republic
Miroslav Bratrych
Tel: +420 251 15 2084
PolandJoanna Simonowicz
Tel: +48 22 523 4213
Russia
Jonathan Thornton
Tel: +7 495 232 5711
2010 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited,
each of which is a separate and independent legal entity.
http://www.pwc.com/cee/private-equitymailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]://www.pwc.com/cee/private-equityhttp://www.pwc.com/cee/private-equityhttp://www.pwc.com/cee/private-equity8/8/2019 Transform Issue 6
3/56
3
f r o m t h e c e o
As trusted advisers to leading
businesses across the globe, we at PwC
oten experience frst hand the game-
changing events o the corporate world.
The global economic downturn has
led to a brave new world that we andour clients operate in now. In CEE the
fnancial crisis has had an added potency, oering, as it does,
a new perspective on the regions honeymoon with capitalism
ater so long under socialism.
The fnancial crisis doesnt mean the end o capitalism but it
does mean a resh start. This amounts to a new economic
environment, intensifed by the greater immediacy o climate
change, new technology, tougher competition, increasedregulation, demographic issues and government involvement
in the economy.
These actors make it
imperative to transorm
our businesses and
reinvent ourselves.
Inventiveness and
innovation will be key to
any businesss success
in the post-crisis uture.
We ourselves in PwC
CEE are undergoing a process o change, setting a bold vision
o our uture frm and articulating the changes necessary to
realise that vision.
The core principle o this vision is to enable our clients, tohelp them prepare or and proft rom the new era. This issue
oTransform magazine eatures a number o ascinating
organisations, businesses and leaders, all grappling with
todays complex issues and turning them into opportunities.
I hope these stories provide some ood or thought and help
you build a resilient business or the uture.
PiwauscpsCentral and eastern europe
Ceo:
Mk K
Managing partner advisory:Mk ok-v
Managing partner assuranCe:rck MManaging partner tax & legal
serviCes:s spwC Contributing editor:d os
Cover iMage: photolibrary
Brave new world
Mike Kubena
wc.cm/fm
Inventiveness andinnovation will be key to
any businesss successin the post-crisis future
8/8/2019 Transform Issue 6
4/56
06 UAwards spotlight the response of Czech
entrepreneurs to the nancial crisis; call
for Hungarys SSCs to develop beyond the
capital; PwC Russia launches technology and
innovation centre; new man at the top at PwC
Czech Republic; PwC forms JV with operations
management consultancy rm; PwC wins Adviser
of the Year award for private equity in CEE
10 CmmDmghc dmm
Aging and declining populations are presenting
major socioeconomic and business challenges
for the CEE region
4
Contents
Capital projeCts anDinrastrUCtUre
12 iducActivity in CEEs capital projects and
infrastructure sector is on the rise. PwC
partner Tibor Almssy sets the scene
13 Mgg humgbNew energy infrastructure is a high priority in
CEE. To achieve success, cooperation between
the public and private sectors is key
16 th uc Nuclear power is making a comeback in CEE.
But CEE governments and energy companies
rst need to navigate a number of hurdles
19 th d hdPwCs Mark Okes-Voysey calls for the
creation of a new government body to oversee
Russias infrastructure shopping list
20 Cee h mv?Private public partnerships could be theanswer to CEEs transport infrastructure
needs, provided best practices are adopted
13 20
25 Cmmrdd cEncouraging local production could
provide the required boost to get Russias
car market motoring again
26 Mc-busm, d cy md
Micro-businesses are contributing to thegrowth of several CEE economies however,
government support for them is vital
30 Cmy fgg hd
Polish copper mining company KGHM sets
out plans for major global growth
34 ivMd andm
Why a new knowledge city could put Russia
on the innovation map
38 Cm chglghg h wy
Regulation and taxation can help CEE make
its economy greener, but how?
26
Published by Bladonmore (Europe) Ltd T:+44 (0)20 7631 1155 E:[email protected]
mailto:[email protected]:[email protected]:[email protected]8/8/2019 Transform Issue 6
5/565
42 phmcuc Hhy c
The international pharma industry has
already shown a commitment to CEE.
What can governments do to deepen
that relationship?
46 pv quypubc vWhy the number of public-to-private
transactions is on the rise in CEE
50 sc wkgty wd
It is time that companies recognised the
business potential of social networking sites
54 D cA focus on economic facts and gures from
across the CEE region
The potential of social networkswas recognised only half a year ago.
Now big companies use Facebook applications
pw.m/tsm
42
50
30
46
34
EdiTor:El Me Managing EdiTor:Se Kes Sub-EdiTor:Lye desm arT EdiTor:ivel ivv ProducTion ManagEr:aew Mlle PubLiShEr:S Mse
8/8/2019 Transform Issue 6
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upfront >>>upfront >>>
Crisis, as the proverb
goes, is opportunity
a maxim that the
Czech winners o the
In Defance o Crisis Awards woud
agree with. The 10 winners (see boxbeow) o the inaugura awards or
sma or medium-sized privatey owned
businesses were recognised at a June
ceremony at PwCs ofces in Prague,
or their creativity and innovation in
response to the fnancia crisis.
Working with the Czech Chamber
o Commerce, PwC Czech Repubic
was the main expert partner or theawards, devising the methodoogy used
to assess appicants onine award
submissions. PwC partners visited the
shortisted companies to interview the
company owners. Petr Zmtk, director
in assurance at PwC Czech Repubic,
coordinated this process, whie PwC
Czech Repubic managing partner Jir
Moser oversaw PwCs invovement in
the project and presented the awards.
Trave company Exim Tours, the
overa winner, was recognised orits decision to ocus on high-end
customers which heped stabiise
demand, or its investment in the
deveopment o its empoyees to secure
high-eve customer care, and or
impementing an onine booking system
that heped cut costs. Exim aso won the
education and trave award category.
More than 30 companies wereshortisted or the 10 category awards,
with a pane o our judges making
the decision in consutation with an
expert company advising in each
category. At the awards ceremony, a
the companies invoved were invited
to vote or the most inspiring project,
with the winner co-owner o Rodinn
pivovar Bernard, a beer companythat aunched a new, non-acohoic
pum beer to the market during the
fnancia crisis picking up his award
at the end o the evening. "We see
the award as a recognition that a the
activities we undertook were successu
and correct," said Stanisav Bernard.
"Consequenty, we have introduced
another new product to the market anon-acohoic beer caed Bernard's
Cear Head Sour Cherry."
The utimate aim is to use the
top ideas as best-practice modes
or other sma and medium-sized
companies in the Czech Repubic,
where SMEs account or a arge
proportion o the economy. The SME
sector is credited with having hepedthe country weather the fnancia crisis
better than many other EU economies.
For more on SMEs, see p.26.
Czech awards recognise SME innovators
And the winners Are
Main winner Exim Tours
Most inspirational projectRodinn pivovar Bernard
Construction and engineeringIsolit-Bravo
Education and travel Exim Tours
Food and beveragesRodinn pivovar Bernard
HealthcareLinet
IT WBI Systems
Manufacturing/industrial products5M
Mechanical engineering, electroZikmund electronics
Professional services Moris design
Transportation and telecommunicationDial Telecom
TradeTPT Coating
JuryPetr Kuel, president, Czech Chamber o Commerce
Petr Zmtlk, director, assurance, PwC audit, Czech Republic
Jindrich Soukup, vice rector, University o Economics, Prague, Czech Republic
Pavel Finger, fnancial director, CCB Czech Credit Bureau
Best in class: Exim Tours executivedirector Romana Slkov accepts
the main winners award
8/8/2019 Transform Issue 6
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Hungary shoud deveop the
inrastructure and iving
standards o a second city
beyond its capita, Budapest,
i its shared service centre (SSC)
sector is to continue thriving, saysGyua Bunna, a director in
PwC Hungarys advisory practice.
Hungarys SSCs shouldbranch out from Budapest
7pwc.com/transorm
MASTERfIlE
time to reboot
hungArys ssC
seCtor At A glAnCe PwC has launched a Center or Technology and
Innovation (CTI) in Russia, in response to Russian
President Dmitry Medvedevs call or more
high-technology businesses in the country.
The CTI opened in October last year and aimsto provide leading-edge research on technology
trends and encourage the exchange o talents
between Russia and the US the centre is
modelled on PwCs existing CTI in San Jose,
Caliornia and the two centres will work
closely together.
By talking to Russian stakeholders, companies
and the government, we identifed a number o
areas where we could concentrate our expertise.These included government policy on stimulation
and innovation, building innovation clusters and
regions and investigating how technology can help
small businesses, explains Ekaterina Shapochka,
a PwC director in Russia.
The centre has already published a Russian
edition o the Global Technology Forecast. Having
initially translated the quarterly PwC publication
into Russian, the CTI in Russia then went astep urther. We involved Russian experts and
interviewed Russian companies to gain their
perspective on global technology trends, says
Shapochka. Its a very interesting platorm, where
we are bringing political and technological cultures
closer together.
So can Russia lead the way in developing
innovative technologies, in line with Medvedevs
call to action? The combination o good fnancialinvestment, a clear strategy and the necessary
resources means the country has every chance o
success, she says.
The CEE state is aready a ocation
o choice or mutinationa companies
that want to set up SSCs speciaising
in transaction-based work in support
unctions such as human resources
and fnance.A recent market inteigence survey
conducted by PwC the frst o its
kind in the Hungarian sectors 10-year
history reveaed that the countrys
80 centres coectivey empoy 30,000
peope, and the various taxes that the
industry pays account or 1.2% o the
centra state budget.
The survey ound that 80% othe SSCs that were assessed are
currenty in the expansion phase
o their ie cyce, with their we-
estabished operations enabing them
to shit ocus towards high-end, vaue-
added activities such as customer
service and treasury support. That
expansion coud potentiay create
more than 2,000 extra jobs within thenext two years.
Cost arbitrage and a highy
educated taent poo are two o
the main reasons attracting investors
to Hungary, but Bunna beieves
current costs are not as cheap as
they used to be.
Today, rom a simpe cost arbitrage
viewpoint, Hungary is not the bestocation, he says. However, we are
seeing more and more SSCs come to
Hungary because they ee its a sae
pace to be.
Hungary shoud not rest on its
aures, however. To maintain its cost
arbitrage advantage, Bunna beieves
that in the next two years the country
shoud buid up the image andinrastructure o one secondary city
so that it can sti oer investors the
winning combination o ower costs
and strong inrastructure.
Contribution tocentral state budget
1.2%Predicted job creationmore than
2,000new jobs in the nexttwo years
Number of SSCs
more than 80
Employees withuniversity orcollege degreemore than 80%
Total number ofemployees
30,000
8/8/2019 Transform Issue 6
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8
upfront >>>
Domestic companies in the
Czech Repubic can expect
a charm oensive rom
PwC ater the frm there
appointed its frst ever Czech nationa
as country managing partner. JirMoser, a ieong PwC empoyee, took
over the roe rom Stephen Booth in
the spring. We spoke to him about his
pans or the Czech practice.
What is the signifcance o a
Czech national heading PwC
Czech Republic?
The Czech economy is quite open.O the top 200 companies here,
70%-80% o them are mutinationas.
In the past, the management o these
companies was oreign but as the
business community matures, we
are seeing more and more Czech
managers. Im the frst Czech
nationa to ead PwC in the Czech
Repubic. The biggest advantageis that I understand the cuture and
speak the oca anguage.
How will you build on your
predecessors success?
We are currenty very strong in a
three ines o service assurance,
advisory, and tax and ega services.
What we need to do is fnd newopportunities in the market and grow
the business hopeuy by buiding
reationships in the oca market. So
we wi carry on with the good stu
that has been done in the past and
just take it one step urther.
What are your short-term goals or
the Czech practice?As we as impementing PwCs goba
and regiona strategies, we need to
deveop a specifc action pan or the
Czech market. We wi aso ocus on
New leader or PwC Czech Republic
deveoping specifc industry soutions
or our cients. We have identifed nine
industries that we want to ocus on,
incuding the pubic sector and energy.
And longer term?
We did a CEO survey among 70
companies operating in the Czech
market. Combined with responses
rom PwCs goba CEO survey, the
eedback indicated that the economy
shoud stabiise and be growing in
somewhere between six and 12
months time. We have to position andprepare ourseves or times o growth.
In fve years time, we want to be at
east 50% bigger than we are now.
Do you oresee any challenges in
trying to achieve these goals?
The biggest chaenge is the
deveopment o our peope. We
need to create a cuture o success,deveop our key taent and reay think
about how to train the whoe frm.
Should clients and colleagues
expect to see a change in the way
the Czech frm is run now?
What I reay want to do is raise our
profe in the oca community, both
personay and as a practice. And thenin ine with the goba strategy, we
want to change our cuture to be more
cient-orientated, more coaborative
and more orientated towards success.
In fve years timewe want to be at least
50% bigger than weare now
mosers rise through the
PwC rAnks
2010 Appointed countrymanaging partner or PwC
Czech Republic
2006 Becomes advisoryleader or PwC Czech Republic
2002 Appointed leader o thePerormance Improvement business
unit across CEE
2001 Makes partner andbecomes leader o the Perormance
Improvement Group in Prague
1995 Moves to the UK or ayear and a hal-long secondment in
PwCs London ofce
1994 Joins PwC (thenCoopers & Lybrand) in Prague
ater gaining a PhD in scientifc
computations
8/8/2019 Transform Issue 6
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P
wC has launched a new
venture to help manuacturing
clients across CEE cut costs
and improve operationaleciency on the actory foor. New
services oered by PwC Operational
Excellence a subsidiary set up
in partnership with manuacturing
consultancy Competitive Capabilities
International (CCI) will help clients
save as much as 2%-3% o annual
revenue every year.
The new venture will oermanuacturing clients access to
TRACC an integrative improvement
management solution developed by
CCI to drive continuous improvement
in manuacturing processes. It is
particularly eective when applied
to processes where downtime
or a shutdown would cause
major diculties.TRACC is primarily a repository o
best practices built up over
20 years rom 1,000 companies,
says Andrew Friars, managing
partner, advisory, in PwC
Poland. It is already used by
several leading companies,
including SABMiller,
Coca-Cola and DuPont,across 55 countries.
PwC Operational Excellence
is expected to revolutionise
the way PwC can help
manuacturing clients to
improve perormance.
Traditionally in the
manuacturing sector we have
had a limited set o oeringsto take to our clients, says
Friars. Typically, we have
done work around tax, nance
and the supply chain, but the
majority o their cost base isnt in the
back oce, its on the actory foor.
As we are developing our consulting
business, we are building capabilitiesaround perormance improvement
processes such as LEAN and Six
Sigma. We want to take our clients to
world-class excellence where they will
have integrated these improvement
initiatives across their entire value
chain. The TRACC solution ocuses
on continuous improvement by driving
change, reducing cost and increasingcapacity in the biggest cost base o
the business.
Friars says market response has
been positive and a pipeline o
opportunities is developing.
Future plans include adapting
TRACC or back oce processes
(including HR and admin, supply
chain and sustainability) and non-manuacturing industries.
PwC has beennamed Adviser o
the Year at the third
annua unquote
CEE Private
Equity Awards.
The award was made oowing
a vote by readers ounquote and,
according to Kimbery Romaine,
editor-in-chie o the privateequity news site, PwC came out
heads above its competitors in
the po.
We aowed the CEE readership
o unquote to decide on the winner
and PwC came out heads above,
she said.
Mike Wider, the eader o PwCs
transactions group in CEE, coectedthe award on beha o the frm at
a ceremony in london on 20 May,
oowing the unquote CEE Private
Equity Congress.
PwC has been in the region
onger than most, so pretty much
anybody who does private equity in
CEE wi have worked with PwC,
added Romaine, expaining whyPwC had ared so we. Knowing
and working with the major payers,
theyve obviousy worked on the
argest and most signifcant deas in
the region.
Athough the event has been
running or severa years, it was
the frst time that an Adviser o the
Year category had been incuded.However, Romaine said the success
o the category means that it wi be
incuded again in next years event.
Words by Dominic Dudley
pwc.com/transorm9
Clients on TRACC to improveperormance on actory foor
Adviser ofthe Year win
at private
equity awards
ISTOCK
8/8/2019 Transform Issue 6
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10
Demographic dilemma
CEE s ac e bes ppua ece e
w. As vemes abu ambs secmc w, w su e esp s
emapc me bmb?
D
emographic trends matter, and
they matter a lot in CEE. While
the world as a whole is in the
middle o rapid populationgrowth, the opposite is true or the
majority o CEE economies. For these
countries, this will represent a ormidable
challenge in the coming years.
CEE countries stand out when it
comes to population decline. The most
recent United Nations (UN) population
projections (World Population
Prospects: The 2008 Revision) liststhe 10 countries in the world where
population is due to rise most rapidly
over the next 40 years and where the
declines are expected to be greatest.
Including Russia, all 10 countries in the
latter category are in the CEE region
(see table opposite).
Nor does it end there. As George
Magnus, UBSs senior economic adviser,put it in his book The Age of Aging: O
the top 25 population shrinkers by 2050,
18 are ound behind what used to be
called the Iron Curtain The populations
o the countries in Eastern Europe that
have joined the European Union and
those o the Baltic republics and the
Balkans will typically experience alls o
between 10% and 30%.Why are CEE countries apparently
locked into long-term population
decline? The two driving actors in
what the UN describes as the
demographic transition o Eastern
Europe are sharply declining ertility
rates and greater longevity. The two are
related: the ormer reduces the naturalincrease in the population directly, while
the latter means that an increasing
proportion o the population is beyond
child-bearing age.
Aging trEndAccording to the UN: This aging trend
is the consequence o demographic
transition, which is when populationsprogress rom premodern regimes,
where both mortality and ertility are
high, to postmodern regimes, where
both mortality and ertility are low.
The cause o the
transition lies
in the control
o epidemics
and contagiousdiseases, which eventually contribute
to lower mortality, and in the processes
o modernisation, which leads to lower
levels o ertility.
In the hal century rom 1950, ertility
rates in CEE countries, which were
not high to begin with, more than
halved, in the majority alling well below
replacement rates. In many cases,ertility rates are merely hal o that level.
At the same time, longevity increased
by an average
o a decade or
David Smith has been economics editor ofThe Sunday Times since 1989, where he writes a weekly column.
masterfile
Combating population deCline
W e Ue nas ecas a 18% p
russas ppua b 2050, 116 m,Pese dm Meveev mus ave wecme
e ews auce ea s ea a e
ppua as w. te russa ea ms
eveae a 1.5% se e umbe bs e
fs quae 2010 e fs suc se ecaes.
damac ppua eces ave bee ece
eac ea e ps-Sve eas russa,
caus cce successve vemes.
i 2006, e pese Vam Pu aske erussa paame evep a pa cease
e cus b ae, abe e ppua
ece e ms acue pbem cempa
russa. i espse, a ew aw was uce,
pa $10,000 a c e ba. te
pc a e mmeae eec ceas bs
2006 2007 b 130,000. ts sma se as
cue, w 2.8% me babes b russa
2008, cmpae e pevus ea.i ebu Pa, e veme as
uce measues ame a ecua Pes
eu. i 2008, abse a ue wc mea
ma wkes wee abe pa axes b
Ba a a me. We Pme Mse da
tusk was eece 2007, s pc pam
cue a pee ecuae ma wkes
eu. te veme as avese s p-eu
pces e Bs pess, a b pesuaesme e ues usas wkes w
mve e UK we pee s bes
Ease Eupea wkes 2004, eu me.
8/8/2019 Transform Issue 6
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comment
11pwc.com/transform
comment
men and 12 years or women.
The other big actor is migration.The big story in the ex-Communist
world is people, wrote Edward Lucas
oThe Economist. Too ew are being
born And tens o millions have
changed country. Estimates by the
World Bank suggest that between
5% and a third o the working-age
populations o CEE economies are
making a living elsewhere. The impacto this is not all one way. The World
Bank has been developing a databank
to monitor ows o remittances. These
ows o the proceeds o higher wages
back to countries o origin are an
important economic bolster. Whether
they make up or the loss o the most
productive part o the population
is another matter.Population decline
or CEE economies
means a rising
dependency ratio
and slower long-run
The second policy thrust is to try
to reverse migration ows, replacing
signifcant net emigration with net
immigration. Again, to an extent this
should be a natural eect o rising
prosperity. Particularly or thoseeconomies that have entered the EU,
the lure o higher wages and living
standards or CEE workers has been
powerul. Some o these migration
ows partly reversed themselves
when the fnancial crisis struck
previously vibrant labour markets.
The third broad approach
is to squeeze longer workinglives out o the existing population,
by encouraging people to stay
in the workorce longer.
Fortunately, there has been
plenty o scope or doing this. In the
Communist era people expected
to retire in their fties in most CEE
economies. In the two decades
since the collapse o Communism,
signifcant pension reorms have takenplace, which include the development
o private or organisation-based
pensions. In parallel, retirement ages
have been raised, typically to 62 but
in some cases higher. Romania, or
example, is moving to a common
retirement age o 65 or both men and
women in 2015.
Aging and declining populationsrepresent a ormidable challenge or
CEE countries. In most economies,
policy is responding to this challenge.
It will not, however, be easy. n
prediCted population deCline aCross Cee
Country 2009 population
(million)
Expected 2050
population (million)
% decrease
2009-2050
Georgia 4.3 3.3 23
Moldova 3.6 2.7 25
Lithuania 3.3 2.6 21
Ukraine 45.7 35 23
Bulgaria 7.5 5.4 28
Belarus 9.6 7.3 31
Latvia 2.2 1.85 16
Romania 21.3 17.3 19
Russia 141 116 18
Hungary 10 8.9 19
Poland 38.1 32 16
Slovakia 5.4 4.9 9
Slovenia 2.02 1.95 3
Czech Republic 10.4 10.3 1
Source: United Nations
Countries with the biggest proportionate population decline in the world
economic growth, a keycomponent o which is rising
population. Pressures or higher age-
related public expenditure increase
inexorably. Aging populations tend
to have high levels o saving and low
levels o discretionary spending.
thrEE-WAy SolUtion
What can CEE economies do abouttheir declining populations? There are
only three broad policy responses
to the situation. One is to attempt
to increase ertility rates, essentially
by encouraging women to have
more children. It is possible, but not
guaranteed, that rising prosperity will
have this impact, essentially because
amilies will be able to aord to havemore children. Running against this
is the act that, in most Western
economies, rising prosperity is
associated with smaller amilies.
11
8/8/2019 Transform Issue 6
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12
A
mong the challenges acingCEE economies, perhapsnone is greater than thedevelopment o their aging
inrastructure and the capital projectsrequired or an efcient economy. Itis probably the largest single criticalsuccess actor needed to close thegap between standards o living inEast and West.
During the last 20 years, the transitionto market economics and democratic
principles has been key to CEEssocial development. The next stageo economic development cannot beattained without signifcant investmentin inrastructure, be it roads, powerplants, airports or pipelines. Unlessthis unding is orthcoming, an entiregeneration could miss out on thebenefts o economic growth and the
social and developmental rewards oefcient economies.
The paradox is that the challengeis not so much economic as it is
political. The time rame required orsuch investments is greater than manygovernment cycles, and the temptationto think short term and satisyimmediate social concerns given tightmonetary constraints is alwaysa barrier to progress.
However, there are increasing signsacross the region that many i notmost countries have realised that,regardless o political nuances, long-term investments in inrastructure
cannot be delayed any longer.Ambitious programmes have beenannounced by governments in Russia,Poland and Romania, to name justa ew. But there are lessons to belearned rom public private partnershipstructures and other tools that theWestern economies have utilised andcareul implementation is required.
This special report explores theseareas in detail, shedding light on therisks and rewards o investing in capitalprojects and inrastructure.
Special reportC a p i ta l p r o j e C t s a n d i n f r a s t r u C t u r e
12
Tibor Almssy, Partner, Capital Projects and Inrastructure CEE, PwC
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Managing theunmanagea
ble
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13
p e C i a l r e p o r tC a p i ta l p r o j e C t s a n di n f r a s t r u C t u r e
nw g c w cc cc v Cee. t v v, k c gw g
w c c cv g
Words: daWn CoWieistock
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14
the cost o
keeping the
lights on in
CEE over the
next 25 years is
estimated at $3.3trn, according
to Lights Out?, a World Bank
report. Without this investment
in inrastructure, the region acesenergy shortages that will constrain
economic development.
Almost all o the unding or new
inrastructure is expected to be
provided by private investors. A
main task or CEE governments
is to create the right regulatory
environment to ensure energy
companies and investors eel theycan earn appropriate returns.
Higher country risk and more
volatile capital markets have
prevented energy companies rom
identiying as many proftable
investment projects as pre-crisis,
according to Peter Mohnen, chie
fnancial ofcer o E.ON Hungria.
That said, E.ON has invested intwo long-term projects in Hungary
during the crisis: a combined-cycle
power plant and the extension o its
gas storage capacity.
The World Bank report advocates
progressive taxation, where public
authorities make a positive economic
rate o return on projects, while also
ensuring the proftability o projectsater tax or private investors.
aGreeinG a ContraCtGovernments also have a crucial
governance role to play in ensuring
projects are managed eectively,
and delivered on time and budget.
Creating clear lines o accountability
at the contract stage is essential.A power plant is an incredibly
complex product and thereore
the customer-supplier relationship
is not simple. It is not like buying
200,000 nuts and bolts, says
John Wilkinson, PwCs head oorensics and disputes in Russia.
His team specialises in analysing
the causes o delays and oers
advice on how to design bespoke
governance systems. The
customer oten cedes responsibility
to the supplier to deliver the project
and what is missing on the supplier
side is ongoing communicationand project management with the
customers involvement.
There comes a point when the
customer does not understand
why the terms o the project
have changed or the costs have
increased. From a suppliers
perspective, the greatest risk is
to overpromise but underdeliver.I a suppliers contract sets out
requirements that are too specifc,
the slightest problem could result in
the contract being terminated. PwC
is working or a contractor
in this position. Our
client didnt pay enough
attention to his contract
requirements, and didnt
keep his client inormed
about delays, which led to
the termination o the contract.
Beore they go into litigation,we are carrying out critical path
analysis so that he can explain his
position, says Anthony Morgan,
orensic services partner at PwC
in London.
GoVernanCe roleCreating a sound governance
ramework is the best way to ensurethat problems do not escalate out
o control. At E.ON Hungria, every
project has standard milestones and
its status is monitored monthly at
company level and more requently
at a regional level. For cost overruns,
the project manager has to request
additional budget and go through an
approval process, says Mohnen.When developing a monitoring
ramework, it is important to bear
in mind that no two capital projects
are alike. The logistics involved in
building a power station in a remote
location in Siberia are dierent rom
building a similar plant 50 miles
rom Budapest, says Wilkinson.
For example, there will be costsassociated with transporting the
workorce, challenges getting work
permits and a dierent pay structure.
It is important to complete a
scoping exercise to identiy the
actors that could introduce delays.
This includes everything rom harsh
weather to the insolvency o a
supplier. There could be hundredso actors so it is important to
appoint a risk manager who
understands what the main risks
will be and then engages with the
There is a lot ofroom for improvement
in the economics ofrunning projects
tibor almssy, pwC, hunGary
masterfile
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customer and supplier to defne an
efcient means o managing these,
says Wilkinson.
However, the risk review does not
have to be incredibly complicated. It
could be as simple as a 30-minute,
monthly review o the engineering
cost sheets with the customer and
supplier to ensure they are in linewith expectations on both sides.
buildinG up eXpertiseFor public sector organisations
that have several energy projects
in the pipeline, this could be a
good opportunity to build up their
governance skills. People are oten
the biggest risk on a project, saysDoug Downing, partner and leader
o IT services or CEE at PwC. It
is important to assess whether you
have the right skills in place and
whether your business partners have
put enough expertise and knowledge
into the project. I they have not, how
will you deal with that?
Another important actor is toensure that you have the right IT in
place and avoid complexity having
too many dierent systems and a
lack o integration can be a classic
cause o problems. Partners on
a project have to work towards
the same objectives, on the same
schedule. Employing a turnkey
contractor, responsible or overseeingthe whole project, can help prevent it
ragmenting into 50 dierent pieces.
Cost overruns on big capital
projects can be eye-wateringly
large so every stakeholder has to
be aware, and slightly araid, o the
consequences i things go wrong.
You have to make risk a point o
pain or everybody involved. Anengineer looks at the risk dierently
rom the IT guy and the fnance guy,
but they all have to understand that
it is important, says Downing.
The fnancial crisis has ocused
minds on how to produce
large capital projects that are
economically viable. Today energy
companies have to back up
their investments with corporate
guarantees because banks are
not willing to provide o-balance-
sheet fnance or projects. Energycompanies are building up portolios
o projects that make more fnancial
or economic sense, rather than
looking at each power plant as a
one-o, says Tibor Almssy, a
partner at PwC in Hungary.
This is starting to have a knock-
on eect on the governance o
projects. Typically, when new powerplants have been built in the past,
the whole process rom design to
delivery has been project managed
to achieve an optimal result rom
an engineering and technical
perspective, says Almssy.
By contrast, the next generation
o energy inrastructure needs to
be built using a better system orassessing and allocating risk over
the lie cycle o each project. There
is a lot o technical expertise in the
industry, but there is also lot o room
or improvement in the economics
o running projects. This requires
modelling to be done to get the right
balance between the commercial
risk, fnancial risk and the technicalspecifcation o the project, he adds.
Common goals and eective
cooperation between the public
and private sectors will be critical
i the region is to meet its energy
inrastructure needs over the next
25 years. I the right lessons are
learned, it should be possible to
shrink the unmanageable to moremanageable proportions. n
Dawn Cowie is a reelance business
and fnance editor and writer.
p e C i a l r e p o r tC a p i ta l p r o j e C t s a n di n f r a s t r u C t u r e
ntl shbkv, PwC pt, y txu hul b hgh k mg lt
ru
Uncertainty about the macroeconomic outlook and the
increasing volatility o capital markets means that risk
management is a much higher priority or inrastructure
investors than beore the nancial downturn. Tax issues
related to inrastructure projects should be as high on theradar as any other risks. For example, is an investment
structure, particularly a holding structure, tax ecient?
Such questions are especially important when choosing
a jurisdiction or joint ventures and consortiums, as well as
the nancing o projects. Loan nancing can oten lead to
negative tax implications, which can be avoided through
careul consideration o all the possible options.
Delays in the recovery o VAT related to construction
costs can also lead to signicant cash-fow issues.Structuring construction contracts in a way that
minimises these delays can improve the cash-fow
position o a project.
Regulations in some Russian regions provide or tax
incentives or investors, particularly investors in energy
projects. Normally, the incentives include exemption rom
property tax and a reduction o the prots tax rate or a
certain time period. At investment stage, it is important
to review the regional regulations to take advantage otax incentives.
The Russian government has recently been promoting
public private partnerships (PPP) as an ecient tool
or the development o inrastructure projects. Careul
analysis o PPP agreements is needed to ensure that
payments and other conditions o the agreement
are clear and benecial rom a tax standpoint.
Experience shows that the young and developing PPP
regulations can create uncertainty about how regionaltax authorities will interpret the tax treatment o PPP
agreements, particularly where there are contradictions
with ederal laws.
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cEEs nuclEar PiPElinE
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the mobilisation o vast resources
over a lengthy period o time. Again,
as nuclear programmes are a highly
complex undertaking, watertight
project, process and systems
management is part o the solution.
Challenge 3: skills
Scarcity o people with the requiredexpertise is another hurdle. There
are not currently enough nuclear
scientists around, and there are
not yet enough people going to
university to study nuclear science,
explains Almssy. On top o this, the
latest nuclear technologies are very
dierent rom 20th-century ones, and
there have been relatively ew newprojects in the past two decades
which means that much o the
nuclear skills base is not equipped to
handle the requirements o running
modern nuclear power plants.
Part o the solution to plugging
this skills gap is embarking on
joint ventures with overseas
energy organisations that havebuilt up more recent experience o
nuclear power projects. General
Electric, Mitsubishi and EDF
are participating in discussions
regarding potential projects in
Poland, or example.
Challenge 4: loCaTion
and publiC supporT
It is quite difcult to fnd a location
oering three important things
required or a nuclear project: a
sufcient water supply, proximity
to the existing national grid
inrastructure and distance rom
centres o intense public opposition
to nuclear power plants.
The choice o site or RomaniasCernavoda plant illustrates other
considerations that need to be
made. The location was chosen
due to the geological structure o
the soil, the low seismic activity
o the region that is generally
sae rom the earthquakes that
aect the south and east, and the
availability o the water supply rom
the Danube.
How much o a problem is
public opposition to nuclear powerin the CEE region? In Poland,
public attitudes are relaxing as
people see nuclear as an eective
channel or bolstering energy
independence and reducing
reliance on ossil uels, says Luba.
However, i you ask: Do you want
a nuclear power station to be built
15km rom your home? it will
remain a huge issue.
The solution, he says, is or
governments and energy companies
to engage in an open discussion
with citizens. With carbon emissions
and energy security continuing
to rise up the agenda, and with
many power stations entering thelast stretch o their lie cycles, it is
a discussion that should happen
sooner rather than later.
Scott Payton is a regular contributor
to numerous publications including
Spectator Business, The Spectator
and Financial Management.
p e C i a l r e p o r T
C a p i Ta l p r o j e C T s a n d
i n F r a s T r u C T u r e
souc:WodNuc
aocon,bbc.co.uk,
TheBalticCourse,WodNucNw,ru
russia
Plans to increase
nuclear power
generation rom16% to 25%-30% o
total energy mix by
2030 by building 26
new reactors.
CzeCh republiC
Six existing nuclear
reactors generate about
one-third o the countrys
electricity. Czech utility EZ
issued a tender last year
to build two new nuclear
reactors on the existing
Temeln site. The winning
bidder is expected to be
announced in 2012.
romania
Two nuclear reactors
already operational,
generating almost 20%
o the countrys electricity.
Government has well
advanced plans to build
two more through public
private partnerships.
Four existing nuclear
reactors generate more
than one-third o the
countrys electricity.
The Hungarian
parliament
has expressedoverwhelming support
or building two
new reactors.
esTonia
In February 2009, the
government approved
plans to build a nuclear
power plant by 2023.
poland
State-owned Polska Grupa
Energetyczna plans to develop two
nuclear power plants that together
will generate around 6,000MW as a
frst stage o nuclear development.
liThuania
Plans to build a new nuclear
reactor to replace the Ignalina
nuclear power plant, which was
closed in December 2009.
hungary
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Adviser of the Year
to Private Equity
in Central & Eastern
Europe
www.pwc.com/cee/private-equity
unquote has named PricewaterhouseCoopers
Adviser of the Year to the Private Equity
industry in Central & Eastern Europe.
The unquote CEE Private Equity Awards
recognise excellence in the CEE private equity
market. In a highly challenging environment over
the past year, we were among a few select firms
that still managed to achieve above-par
success.
PricewaterhouseCoopers helps more private
equity houses to realise the unique investment
opportunities in Central & Eastern Europe than
any other adviser in the region.
For more information please contact:
CEE Private Equity Leader
Mike WilderTel: +48 22 523 4413
Czech Republic
Miroslav Bratrych
Tel: +420 251 15 2084
Poland
Joanna Simonowicz
Tel: +48 22 523 4213
Russia
Jonathan Thornton
Tel: +7 495 232 5711
2010 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited,
each of which is a separate and independent legal entity.
http://www.pwc.com/cee/private-equitymailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]://www.pwc.com/cee/private-equityhttp://www.pwc.com/cee/private-equityhttp://www.pwc.com/cee/private-equity8/8/2019 Transform Issue 6
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pwc.com/transform
The ride aheadIt is time to establish a credible
new body to help deliver
Russias infrastructure needs
The growing demand or
inrastructure worldwide
continues to put pressure on
public budgets, especially
in countries with fscal defcits. Higher
energy prices as well as demographic,
social and environmental concerns also
add to the strain on public fnances.
The drivers or investment may vary
rom country to country but demand
continues to rise. The UK and US need
signifcant investment to upgrade or
replace aging inrastructure, while other
economies are aggressively ocused on
building new inrastructure to acilitate
economic growth.
Russia aces the same challenge as
most large economies at the moment
how to upgrade its inrastructure in order
to provide high-quality public services
and remain competitive in an increasingly
global economy. It is difcult to source
accurate data but inormed sources have
quantifed inrastructure plans in Russia.
The numbers are staggering. Current
plans call or 17,000km o new roads,
3,000km o new railroads and more than
100 airport runways. They also call or
expanding annual port capacity by 400m
tons o cargo.
This is one o the worlds largest
inrastructure shopping lists and
only covers some o the headline
requirements. In 2007 the then President
Vladimir Putin announced that $1trn
would be spent on inrastructure by
2020, with a third coming rom the
ederal budget and the rest rom
Mark Okes-Voysey is managing partner o PwCs advisory practice in CEE.
corbis
non-budgetary unds and companies.
In September 2009, President Dmitry
Medvedev reiterated the Russian
Federations commitment to using private
fnance, stating that the government
cannot allocate budget unds to all the
projects that it needs to support, that is
why we [the government] need public
private partnerships (PPP).
How can Russia successully meet
its PPP demands over the coming
decades? The government may
consider constructing a credible
administrative ramework empowering
one government body with the legislative
authority to originate and implement
PPP projects. This body which could
be called Inrastructure Russia
should be able to resolve issues as they
arise on projects. It should provide a
new strategic ocus across the range o
inrastructure sectors, assessing how
inrastructure investment is planned,
prioritised, fnanced and delivered.
Responsibilities o Inrastructure Russia
should include:
l Developing a strategy or the countrys
inrastructure over the next fve to
50 years
l Identiying and attracting new
sources o private sector investment
in inrastructure
l Prioritising the governments
investment in inrastructure
l Supporting the delivery o major
inrastructure projects and
programmes, helping to build stronger
inrastructure delivery capability
across government.
Inrastructure Russias frst role should be
to publish an inrastructure plan with a
ocus on PPPs. This publication should:
propose suitable sectors or PPP; give
plans or PPP within individual states;
suggest legislation and regulations to
promote and monitor PPP projects;
and initiate the drating o model or
standardised PPP project agreements.
It would be solely responsible or these
areas and should provide a coherent
message or the advancement o PPPs
in Russia. The Russian PPP market is
evolving. In todays globally competitive
market, it is important or Russia to
develop the rameworks undamental to
the success o its market, so that it can
compete or investment. n
This is an edited version o an article
that frst appeared in Law and
Management XXI Century magazine,
published by the Moscow State Institute
o International Relations.
p e c i a l r e p o r t
c a p i ta l p r o j e c t s a n d
i n f r a s t r u c t u r e
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CEE
on the move?
F
ollowing decades o underinvestment,
CEEs transport inrastructure is in need o
upgrading to enable the region to continue
to develop economically. Not only are there
domestic imperatives or getting networks
up to scratch, but commitments have also
been made on a pan-European level: the
Trans-European Networks (TEN-T) initiative, which seeks to
ensure that integrated road, rail, water and air travel networks
are in place across the European Union (EU) and beyond, was
enshrined in the Treaty o Lisbon in 2007.
There is little available data on how much will need to be
spent to bring the regions roads, railways, ports and airports
up to Western European standards, although PwC estimates
put the gure at around 500bn over the next 20 years.
So where will the money come rom? Following the
nancial crisis, many o the regions public nances are
in poor shape. Hungary, Latvia and Ukraine have needed
support rom the EU and International Monetary Fund to
restore nancial and economic stability. Other countries are in
better shape, but still have to manage public resources more
careully than in the past.
The answer may well be private capital through public
private partnerships (PPPs). PPPs have already been used in
a number o transport inrastructure projects in the region to
varying degrees o success, yet the nancial crisis appears
to have sharpened governments ocus on involving the
private sector. Estonia, or example, is soon to launch a tendermasterfile
CEE badly needs improved transport networks to foster further economic
development. Public private partnerships are one way of funding this, but
success depends on careful planning and structuring
Words: Vicky Meek
or a 170m road project. And Latvia is extending its PPP
programme; it has already launched a tender or its rst PPP
road pilot project, the 140m E77 Riga-Senite stretch, and the
opening o bids is expected on 30 September 2010.
setting a good example
One project that has already got o the ground and that other
countries can learn rom is Slovakias R1 Expressway project.
This 52km dual carriageway, which connects the towns o Nitra
and Tekovsk Nemce, is the countrys rst major motorway
PPP project to reach nancial close. The act that the project
reached this stage is remarkable because o its size at more
than 1bn, it is large by any standards and, because the
government did not have to give nancial guarantees, an
achievement in todays market.
According to Karel Kolr, director in the inrastructure team
in PwCs Czech Republic oce, several actors were in place
that contributed to the success o the process. These included
the involvement o international advisers rom the start and the
use o standard legal documentation where possible. Another
actor was the decision to use availability payments (where
the government pays according to the availability o specied
services, encouraging repairs to be made during o-peak
hours) rather than tolls or shadow tolls (where the government
pays according to trac volume). The whole approach to the
project was very sensible right rom the beginning which meant
that when the nancial crisis hit we were in good shape to deal
with it, he says. The government also took a pragmatic stance
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Newer countriesto PPP will have to adoptthe standards o moredeveloped markets i theyare to have any success in
getting projects fnancedand completed
nick allen, pc
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22
over the dicult nancing environment.
Instead o cancelling the procurement
when market debt terms altered ater
the appointment o the consortium,
it agreed to most o the increased
terms in return or improvements in
renancing contracts.
Flight to quality
Yet attracting international nance
in the rst place will not be easy in
the current climate. Over the short
term, there has been a fight to quality
among investors. At the height o the
PPP boom, two to three years ago,
there was a lot o money chasing
deals, and governments could aord
to be demanding and innovative,
says Nick Allen, a PwC partner
specialising in inrastructure nance.
Now private capital is a more
scarce resource, it is tending to go
to less risky markets and less risky
projects. This means the countries
newer to PPP, like many in CEE,
will have to adopt the standards o
more developed markets i they are
to have any success in getting these
transport projects nanced and
completed, he says.
It will be a steep learning curve or
many countries. While some, such
as Poland and Hungary, have a track
record in PPPs, others have no such
experience to draw on. As a result,
many countries are not prepared or
the complexities involved in ensuring
projects are bankable, negotiating
with the private sector and with
understanding which risks can and
cannot successully be transerred.
One o the main actors or
governments is risk allocation. For
some, PPPs are attractive because
they help shit liabilities o the
balance sheet. Yet past experience
shows that projects can ail to get
o the ground i governments seek
to transer too much risk. Payment
mechanisms have been a particular
problem, says Marzena Rytel,
director o the transport, inrastructure
and public sector team in PwCs
Warsaw oce. This is especially so
when governments try to transer
demand risk and trac levels turn
out to be too low to provide adequate
revenue or the private operators.
There is a temptation to shit as much
risk as possible to the private sector
that makes negotiations dicult, and
in the market at the moment, deals
will ail because o it.
the political dimension
The other key issue is politics. With
elections every our years or so and
the act that many CEE countries
have coalition governments, the
commitment to see projects through
to close is oten absent. Political
instability or a lack o support or
projects will make banks run away,
says Werner Weihs-Raabl, head o
inrastructure nance and public
sector at Erste Group, the Austrian
bank. Even i you make it to the
next round, there is a risk that an
incoming government will cancel the
process, leaving you with millions o
euros in sunk costs.
Elections in the Czech Republic,
or example, have cast doubt
on whether planned projects will
go ahead. There is still a bit o
uncertainty about how things will
evolve, says Kolr. The parties
currently in talks to orm the new
government mentioned transport
inrastructure as one o the
priorities including transport PPP,
which is a good start. What is not
Under constrUction: A amp f aa PPP pj cee
Country Project Procurer Project details Size (m) Likely t imetable
Czech RepublicHighway PPPprogramme
Ministry o Transport DBFO (Design, Build, Finance andOperate) schemes to be considered
Minimum500 each
Project procurementpotentially romend 2010 to 2013
H ungar y F EREX rai lway lin k MV Zrt; Ministryo Transport andEconomics
Railway link between Ferihegyairport and Budapest city centre
200 Under investigation
PolandHigh-speed trainline
Polish Railways
Construction o new high speedrailway, connecting western Polandwith the countrys capital. Private
sector involvement under analysis
4,000Project in preparationphase likely to beoperational in 2020
RomaniaSibiu-Pitestihighway (116km)
CNADNR(National Companyor Motorways andNational Roads inRomania)
Public debates on the environmentalimpact o the motorway inDecember 2009. The trafc studyhas been fnalised
3,500, accordingto the easibilitystudy
Not yet clear
masterfile
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23pwc.com/transormpwc.com/transorm
internAtionAl best PrActice
ppp
, .
t :
liv ,
v
,
z
le v v . ppp
vv
v v f
v
v
lm
. a
v v
lu "" v
v v
le
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v f
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v v
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.
p e c i a l r e p o r tc a p i t a l p r o j e c t s a n d
i n F r a s t r u c t u r e
very helpul, though, is that
they would preer PPP with
demand risk to be borne by
the concessionaire. Recent
elections in Slovakia may pose
similar question marks over
some proposed PPP projects.
One other problem CEE
has aced in recent times has
been getting nance or larger
projects. Some governments
are now splitting them into
smaller, more bankable and
more manageable phases
and these seem to be
getting a better reception
in international markets.
Governments need to think
about smaller projects, says
Weihs-Raabl. This will help
restore trust with developers
and banks and once that has
happened, the region can
start thinking once more about
bigger projects.
Provided governments are
willing to learn lessons rom
the past, the prospects or
transport PPPs in the region
seem bright. With so much
investment required in the
inrastructure, capital will need
to be sourced rom the private
sector. And while the nancial
crisis may have parked some
projects that have ailed to
raise unding in recent times,
over the longer term, those
that are prepared to ollow
best practice standards
and stay the course will nd
interest aplenty.
Vicky Meek is an award-
winning business and
fnance journalist.
Political instabilityor a lack o support
or projects will makebanks run away
werner weihs-raabl, erste group
8/8/2019 Transform Issue 6
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Adviser of the Year
to Private Equity
in Central & Eastern
Europe
www.pwc.com/cee/private-equity
unquote has named PricewaterhouseCoopers
Adviser of the Year to the Private Equity
industry in Central & Eastern Europe.
The unquote CEE Private Equity Awards
recognise excellence in the CEE private equity
market. In a highly challenging environment over
the past year, we were among a few select firms
that still managed to achieve above-par
success.
PricewaterhouseCoopers helps more private
equity houses to realise the unique investment
opportunities in Central & Eastern Europe than
any other adviser in the region.
For more information please contact:
CEE Private Equity Leader
Mike WilderTel: +48 22 523 4413
Czech Republic
Miroslav Bratrych
Tel: +420 251 15 2084
Poland
Joanna SimonowiczTel: +48 22 523 4213
Russia
Jonathan Thornton
Tel: +7 495 232 5711
2010 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited,
each of which is a separate and independent legal entity.
c o m m E n t
http://www.pwc.com/cee/private-equitymailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]://www.pwc.com/cee/private-equityhttp://www.pwc.com/cee/private-equityhttp://www.pwc.com/cee/private-equity8/8/2019 Transform Issue 6
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pwc.com/transform
Roadside assistanceEuragig lal prdui
will help ge Russias auive
idusry bak he rad
revery
The global downturn was slow
to hit the Russian car market.
Few anticipated that, when it
did, Russias slump would turn
out to be around twice as severe as any
market in the world and that unit sales in
2009 would all by about 50% rom 2008
levels. First hal fgures rom 2010 show a
market continuing to struggle to recover,
with overall unit sales little better than the
previous year, at the height o the crisis.
Producers o oreign brands in Russia
are outperorming the market with an
impressive 32% growth in unit terms
and a dramatic 62% increase in dollar
terms compared to the frst hal o 2009.
However, much o this perormance
is down to import substitution the
additional $1.6bn spent on locally
produced oreign brands has been oset
by a $1.2bn all in spending on imports.
Despite the dramatic all in demand
rom 2008 to 2009, the 15 or so
major OEMs (original equipment
manuacturers) that have invested in
car production in Russia are sticking
to their plans. Peugeot/Mitsubishi
have gone ahead with the launch o
production at their actory in Kaluga,
joining Volkswagen. At an estimated
cost o450m, this is currently the
second highest value o investment
behind Volkwagen. Both are set to be
eclipsed by the planned 2.4bn Sollers/
Fiat investment in Tatarstan.
Providing in excess o three million unit
annual sales, the Russian market could
Stanley Root is automotive industry leader and a partner at PwC in Russia.
corbis
just about accommodate its unusual
profle o so many oreign players, each o
which is hoping to outdo its competitors
in a race to carve out a long-term,
sustainable share o the market.
However, with demand alling, many
OEMs are struggling in the short term to
cope with lower than planned levels o
production. Those that have hedged their
bets with a balanced strategy o local
production and continued import are
having to rebalance heavily in avour o
the ormer as the demand or expensive,
hard currency imports shrinks.
Current market conditions may
discriminate against imports, but two
major actors inhibit the growth o local
production the relatively low quality o
auto components manuactured
in Russia and the very low levels
o unit demand rom any one
Russian automotive actory or any
one component.
The Russian governments 10-year
strategy or the automotive industry
highlights the need to attract signifcant
amounts o oreign investment into local
car parts production, but given the
problems this part o the industry aces,
investors are unlikely to commit without
signifcant government support.
There is a more undamental challenge
setting up and running a medium-sized
business is not a process undertaken
lightly in Russia. And yet worldwide,
the car parts industry has its roots in
an extensive, complex and energetic
network o SMEs.
During the past two years, there has
been a growing realisation at all levels o
the need to tackle these issues i Russias
strategic engineering capability is to be
preserved. Regional administrations such
as Kaluga and Tatarstan are making
strenuous eorts to attract oreign
investment by streamlining
the processes o doing
business within their
territories.
At stake is the
countrys ambition to
modernise its economy
and secure long-term
employment and wealth
or its citizens. It is now
understood that the
high-tech engineering
skills that are essential to
the automotive sector are
equally central to the overall
modernisation o the economy.
The skills that
are essential tothe automotivesector are equallycentral to the overalleconomy
25
8/8/2019 Transform Issue 6
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2626
Small,and perfectlyformed
masterfile
Se pats f Easte Epe
esaped the eess e
pssle eas s the gwth
ad stegth f the egs
-sesses
Words: Christian doherty
m i c r o - b u S i n E S S E S
8/8/2019 Transform Issue 6
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27pwc.com/transorm
The owner o themicro-business shouldspend their time runningthe business and notflling in orms
Stee klop, pwc, czech republic
While the developed
economies o
Western Europe
and the US have
spent the past
ew years looking nervously at growth
statistics, trade gures and share
prices, some countries have escaped
the worst o the global nancial crisis.
Indeed, many countries in CEE
have continued to post healthy
growth gures. For example, Kosovo
last year recorded 4% GDP growth,
which this year is orecast to be
5%-6%, compared to growth o
less than 1% in the UK (see box on
p.29). This can in part be explained
by structural advantages, principally
less consumer indebtedness and
less exposure to the international
nancial system, while the regions
reliance on its small and micro-
business sector is another key actor.
One-th o Macedonias economy is
in the grey market, according to the
CIA Factbook, illustrating how much
micro-businesses on the ringe o
the economy contribute in terms o
employment and wealth creation.
There is a positive correlation
between the number o SMEs [small
and medium-sized enterprises] in
a country including start-ups
and economic growth, says Peter
Jungen, president o the SME Union,
an organisation that lobbies or small
business at a European level.
While the positive role o SMEs is
well documented, what exactly is a
micro-business? In a 2009 report,
European SMEs under Pressure,
the European Union describes them
as employing between ve and 10
people, and says they are most
prominent in construction, hotels and
restaurants, business services and
parts o retail and wholesale trade,
and are heavily orientated towards the
market or domestic consumption.
Wide Spread
In CEE, micro-businesses are mainly
ound in consumer businesses,
services industries, technology and
the entertainment and media sectors.
Karel Havlcek, vice president o the
Association o Small- and Medium-
Sized Enterprises and Crats in the
Czech Republic, says the Czech
SME sector, traditionally strong in
the automotive and mechanical
engineering sector, has recently
recorded a surge in innovative sectors
such as biomedicine and nanotech.
Whatever the sector, micro-
businesses are embedded in the
abric o Eastern Europes economies.
Thousands o micro-businesses grew
up during the 1990s, in the years
ollowing the all o Communism.
But as their numbers have grown, so
have the obstacles they ace, such as
lack o government support at both
national and EU level. However, as
Stee Klop, private company services
leader CEE at PwC in Prague, points
out: In the CEE region, it seems that
micro-businesses fourish despite
27
8/8/2019 Transform Issue 6
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28
government policy, not
because o it.
Jungen agrees. I they
thrive, itll be purely down to them
and will have nothing to do with
the advice theyve received rom
Brussels. In terms o governance
and putting in new ideas and
promoting micro-businesses by
providing incentives or role models
to mentor, theres not very much
coming rom Brussels.
reducing red tape
In Jungens view, the main problems
are both administrative and nancial.
Research backs this up. According
to the World Banks Doing Business
2010 survey, Eastern Europe has
the worst ranking o any region
in terms o procedures to ollow
and the time it takes to complete
a simple administrative task. For
example, acquiring a construction
permit takes on average 264 days
in Eastern Europe, compared to 157
days in the OECD member states.
masterfile
Crisis is opportunity
M-ssss SMes ss cee
w m y s. c my
Wbi Sysms s s .
S y , SMe s it ss ss
c S ms s Ms ibM s.W s sx ms s-, Wbi m m
35 it ss w ss s.
W [] ss s y w
xs, sys Wbi w r pss. ts ss,
w w sm it xs m m sm w
w m m w.
Wbis it ss, s s m, my ss,
m w. pss s
my w y y.
nw, Wbi s s s ms y c
cm cmm. t my w it y
cms i d css aws (s .6).
Many believe that this lack o
attention and assistance must
be tackled, on both a national
and European level. But what
can governments and European
agencies do to oster micro-
businesses? First, pay attention
to them and second, lower the
administrative burden they ace,
says Klop. In my experience o
working with micro-businesses,
although they are small, they still
have a lot o mandatory orms
to ll in, and in that respect theres
usually no dierence between
micro-businesses and SMEs, and
the mid-market.
Jungen has spent the past
10 years advocating the rights
o smaller businesses. Whats
needed in these countries is
the introduction o one-stop
government agencies or SMEs and
start-ups. So that means that the
ounder o a new rm only has to
deal with one government oce,
maybe on a regional level. And that
oce will deal with all issues to do
with SMEs permits, licences, tax
and so on, he says.
In Bucharest, the authorities are
planning to establish such an oce.
However, across the region, the
range o measures enacted to help
In termso governanceand putting innew ideas andpromotingmicro-businesses,theres not verymuch comingrom Brussels
peter jungen, SMe union
m i c r o - b u S i n E S S E S
8/8/2019 Transform Issue 6
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29pwc.com/transorm
one to WatCh
kss s my s s m
ws ss. i, r W ass
rs b, ys s s ,
y The Banker kss m
ws s s. isy s m,
m. S y y
s, s s s
ss ss sm m-ssss.i s ss ys
s pc g, s m
21 ss s ms
s a, l am
es e, w s w
s SMes s s. kss m-
ssss s y ms s
ss f y w ks
s 2008. a ss
m sm sss s, w
sm sss s w s.
micro-businesses fourish is narrow.
Access to nance has been limited
as European banks retrench ater
the credit crisis. Until that changes,
small and medium-sized rms will
struggle to access loans to expand
their companies.
In response, some governments
have lowered taxes to help
companies struggling with cash
fow. One o the most popular
measures has been the introduction
o fat tax rates. Within days o
taking power in April, the new
Hungarian government proposed
a series o sweeping tax reorms,
the central plank o which was the
introduction o a fat income tax o
16% and a corporate tax o 10%
or SMEs. Similar fat tax regimes
in Slovakia and Romania have
resulted in higher budget revenues
because the lower rate reduced
tax evasion.
Currently six out o the eight
ormer Communist countries that
joined the EU have a fat tax so
that is very positive, says Jungen.
In his view, there are some clear
regional dierences in the levels
the small businesses in them, are
very conservative. That means that
they had more nancial reserves
than the bigger companies. They
were better prepared to cope with
the downturn when it hit. Normally
small amily businesses are looking
beyond the next quarter earnings,
and are more ocused on the
long term and thereore build up
reserves or the bad times.
However the CEE economies
develop over the next two years,
it is clear that micro-businesses
will be crucial to any success in
the region. Having played such
an important role in sustaining
the regions economies during the
recent downturn, the owners o
micro-businesses will be hoping
their governments support them in
the years to come.
Christian Doherty is a fnancial
journalist, specialising in
corporate governance, risk and
accountancy issues.
o understanding o the issue. The
countries o the western Balkans,
or example, get mixed reviews.
Serbia is still dominated by state-
owned businesses, but Macedonia
is racing ahead and they have
a great understanding o the
importance o SMEs and micro-
businesses. But Serbia and Croatia
are still nding it hard to make that
leap and change their economy.
The Czech governments
support o the SME sector is also
relatively strong. A recent survey
o the European Association o
Crat, Small and Medium-Sized
Enterprises (UEAPME), the largest
European employers association,
evaluated governments compliance
with the EU Small Business Act,
and the Czech Republic came top.
Im not saying it is the best
marketplace here, and as an
association o SMEs we have to
continuously put pressure on the
state, but in comparison to the
rest o the world, the conditions
here are not at all bad. Joining the
EU helped our companies a lot,
namely to those orientated towards
exports, says Havlcek.
Poland has long been one o
the leading CEE countries or
micro-business, along with
Romania. But in some countries
such as Ukraine, Hungary and
Belarus, the ocus remains on
attracting large multinationals to
the country more than developing
indigenous small rms.
conServative outlook
Whatever the country, there is
little doubt that micro-businesses
have enjoyed an easier time than
their large corporate counterparts.
But size alone cannot explain that
statistic, as Klop says: I think those
countries that were less aected by
the nancial crisis, and by extension
8/8/2019 Transform Issue 6
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30
Fggahead By he ed o he decde, Posh coppemg fm KGHM ps o be mjogob compy. Geogphc d podcdvesfco e js p o how CEOHebe Wh eds o ge hee
Words: dominic dudley
c o m p a n y p r o F i l e
8/8/2019 Transform Issue 6
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31
year we have PLN1.6bn worth o
investments planned and, ater
the frst hal o the year, there are
no risks as ar as achieving those
plans is concerned, says Wirth.
The strategy, which Wirth is
leading, is the latest in a series o
evolutions o KGHM. Its history
dates back more than 50 years to
December 1959, when the Minister
o Heavy Industry ormed the state-
owned Lubin Mine Company to
exploit copper deposits, which had
been discovered in the region two
years earlier.
In 1961, the companys
name was changed to Copper
Mining and Smelting Industrial
Complex, or Kombinat Grniczo-
Hutniczy Miedzi (KGHM) in
Polish. In September 1991, it was
transormed into a joint stock
company, KGHM Polska Mied,
and in July 1997 it listed its shares
on the Warsaw Stock Exchange.
The government remains the
largest single shareholder in the
company, with a 32% holding.
pwc.com/transorm
K
GHM is a company
in transition. From
its base in Lubin,
in the southwest o
Poland, the business
is aiming to become a globally
signifcant copper producer while
also moving into new industries
in its home market. The company,
whose accounts will be audited by
PwC rom 2010 onwards, is already
one o Europes largest copper
producers and is planning to
increase its copper production by
40% to 700,000 tonnes a year. But
it also wants to earn as much as
30% o its revenues rom outside
its core sector by 2018.
The most signifcant target or
diversifcation is power generation
and supply. Last year, KGHM
bought stakes in wind arm
operator Biowind and thermal
energy frm WPEC in Legnica,
and in June this year it bought a
stake in Tauron Polska Energia.
KGHM has set itsel the target o
controlling 3% o the Polish energy
market by 2020.
Diversifcation is just one
element o a broad
growth strategy, which
KGHM set out in
2009 and which also
includes improving
its productivity,
developing new
minerals resources
and enhancing its in-
house skills.
The most important
event o the past ew
years was setting the companys
strategy ocused on innovation,
says KGHMs president, Herbert
Wirth. I KGHM does not change,
we will witness a constant increase
o costs.
In all, the company plans to
invest PLN19.8bn ($6.2bn) in this
strategic overhaul. It invested
PLN1.2bn last year and will
spend even more in 2010. This
MininG COrE
These days the KGHM group contains
more than 30 subsidiaries ranging
rom health services frm MCZ to
tourism company Intererie and the
Zagbie Lubin ootball club. Between
them, they employ some 28,000
people. Notwithstanding the unusually
diverse nature o its subsidiaries, the
core o the company remains very
frmly in the mining and refning o
The outlook for demandis positive and the supply sidelooks even better
HErBErt WirtH, KGHM
copper and precious metals, rom
what is the largest single deposit
o copper in Europe.
The company operates three
mines Lubin, Rudna and
Polkowice-Sieroszowice. The
copper ore extracted rom them
is transported to processing
plants where it is enriched to
produce copper concentrate.
That is sent to the companys
smelters where it is reined into
anode copper which is reined
into copper cathodes. From these
cathodes, wire rod and round
billets are produced.
The copper production process
leads to a number o other
products. Most importantly, the
anode slime rom the refnery is
used as a raw material or the
extraction o precious metals,
including silver and gold. Other
by-products include lead, nickel
Mine
8/8/2019 Transform Issue 6
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This years publication marks our seventh
annual survey o the top 40 mining companies by
market capitalisation, provides a comprehensive
analysis o the fnancial perormance and position
o the global mining industry and also discusses
current trends in the global mining industry.
pwc.com/mining
For more information please contact:
CEE Mining LeaderJohn Campbell
Tel: +7 495 967 62 79
Global Mining Leader
Tim Goldsmith
Melbourne
Tel: +61 3 8603 2016
MineBack to the BoomReview o global trends in the mining industry 2010
2010 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers reers to the network o member frms o PricewaterhouseCoopers International Limited,each o which is a separate and independant legal entity.
c o m p a n y p r o F i l e
mailto:[email protected]:[email protected]:[email protected]:[email protected]8/8/2019 Transform Issue 6
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33pwc.com/transorm
sulphate, copper sulphate and
sulphuric acid.
The environmental impact o these
processes is potentially huge, but
KGHM has invested heavily to try
to minimise the danger. It has three
industrial waste-water treatment plants
and has built desulphurisation and
dedusting plants.
In the past, copper smelting in
particular had a signifcant impact
on the environment, says Wirth. As
a result o long-lasting ecological
investments, the emissions into the
atmosph