transform issue7

To revive economic growth, CEE needs to exploit its intellectual rather than its manual might 0

Cover Story

VimpelCom’s global quest

Economic growth in Mongolia

CEE’s game-changing deals

Innovation at Electrogrup

Summer 2011 Issue 7

Knowledge economy

PwC ranked as a business consulting leader worldwide

Worldwide, PwC is seen as much better than its peers at helping clients identify and implement options for growth, according to new IDC MarketScape reports.Download the reports at www.pwc.com/IDC-MarketScape-Report/

Contact: Mark Okes-Voysey, CEE Advisory Managing PartnerTel: +7 495 232 57 13 Email: [email protected]

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From the CEO

A new growth model

As a result of the global financial crisis, the world has fundamentally changed and the way we do business has changed

along with it. This is especially true here in CEE. Before the crisis, CEE economies were growing – often at double-digit rates.

Foreign investors flocked to the region – lured by the attractive emerging markets, low-cost skilled labour and the privatisation of state-held assets.

Almost three years on, most economies are growing again, albeit more slowly than before. But in the new economic reality, growth is no longer a given and we

need to find a new model for sustainable growth. This model will focus on building and sharing knowledge and fostering innovation. It will be about investing in infrastructure and education. The model will also require courage to enter new markets and a shift in thinking about traditional trading partners. While CEE has traditionally depended on inward investment from the West, we are seeing more and more investment from the Middle East, China and other emerging markets. Likewise, CEE-based companies are increasingly looking to expand their activities abroad.

With increased government regulation and involvement in the economy – not to mention media scrutiny – corporate responsibility will be a key element of the new model. Firms will need to demonstrate that they are operating responsibly in their dealings with clients, employees, shareholders, the environment and the communities in which they work.

This issue of Transform focuses on how businesses and governments are using innovative thinking and finding smarter and more sustainable paths to growth. I hope you will enjoy reading about the many exciting opportunities in this region.

CEnTrAL And EAsTErn EuropE

PwC Contributing Editors: Michael BolanChief marketing officer, CEE

Amanda LoweCommunications leader, CEE

donall o’sheaBusiness development, CEE

MikE kubEnaCEo, PwC CEntral and EastErn EuroPE

This new growth model will focus on building and sharing knowledge and fostering innovation

Cover Image: Getty Images

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10 Cover story More thinking, less doing How can CEE shift to an economic growth

model based on high-value R&D?

16 Gulf stream Middle East companies are showing a

growing interest in investing in CEE

19 Lean machine Continuous improvement has delivered

multi-million euro savings at Prakab

20 Profile Moving up, moving out VimpelCom relocates to Amsterdam as

part of its global expansion plans

26 From cell to sell Public and private sector cooperation can

help biotech firms leap from lab to market

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Published by Bladonmore (Europe) Ltd T: +44 (0)20 7631 1155 : [email protected] EdiToriaL dirEcTor: Sean Kearns EdiTor: Eila Madden Sub-editor: Lynne densham arT dirEcTor: ivelina ivanova ProducTion ManagEr: andrew Miller PuBLiShEr: Siân Mansbridge

ContentsComment06 Lessons learned Pavel Mertlík, of Raiffeisen Bank, calls for investment in education and R&D and better government

08 Secrets of successPwC’s Olga Grygier-Siddons on why Poland’s banking sector held firm during the global financial crisis

09 Go-getters wantedSustainable continuous improvement depends on backing from the shop floor, says CCI’s Kevin Whelan

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41 Top priority Slovenské elektrárne takes the lead on

nuclear safety in CEE

44 Interview Cross-sector innovator Teofil Muresan, of Electrogrup, on

exploiting connectivity between energy and telecoms

47 Briefing The rise of Mongolia Better infrastructure and rich mineral

reserves drive economic transformation

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28 Highfive Five deals that will change investors’

attitude towards CEE

32 The back of backhanders The impact of a new UK bribery law

will be felt right across CEE

35 Book review Freeing up creativity The real key to unlocking success in

emerging markets

36 From the business schools Unlocking Russia Rules for navigating corporate Russia and

measuring the impact of CSR

38 Who calls the tune? The debate over who should be responsible

for regulating CEE’s banks rages on

Published by Bladonmore (Europe) Ltd T: +44 (0)20 7631 1155 : [email protected] EdiToriaL dirEcTor: Sean Kearns EdiTor: Eila Madden Sub-editor: Lynne densham arT dirEcTor: ivelina ivanova ProducTion ManagEr: andrew Miller PuBLiShEr: Siân Mansbridge

The economic success of most Central European countries was based on the combination

of price competitiveness, a skilled labour force (in manufacturing industries) and targeted support of inward foreign direct investment. The region lured investors through privatisation and other acquisition opportunities facilitated by low asset prices (due to competitive currency devaluations in the early 1990s), greenfield investment incentive schemes and access to new markets. Low wages safeguarded the profitability of investment projects: as in

most other emerging markets, the wage/profit ratios across Central Europe tend to be lower than in established markets.

This growth model worked very well for more than a decade. After the dot-com bubble burst, and the Central European countries joined the European Union, their economies grew at a very fast pace until the global recession. Trade balances and other aspects of external balance of the region’s economies with the rest of the world radically improved. Post-recession, growth in these countries is picking up again, driven by the German growth engine.

This growth has been based

on manufacturing rather than services, on export rather than domestic household consumption and on successful specialisation in medium value-added industries such as automotive and electronics.

Such development may successfully go on for years. The carmakers will continue to increase their output every year, and so will most other manufacturers. But the number of new manufacturing projects is, and will continue to be, dropping. Already, the capacity of the region to host industrialists seems to be exhausted.

Besides this regional saturation in manufacturing activities, there are two other, even more important factors affecting the future of Central European manufacturing. The gradual but cumulatively substantial increase in wages and production costs across the region will have a negative effect on its real exchange rate and external competitiveness. And, simultaneously, the fast improvement of production

Lessons learnedIn the 2010s, sustained economic growth in Central Europe will depend on investment in education, R&D and better government, says Pavel Mertlík

Central Europe needs to shift national specialisations towards the high value-added segment of economic activity

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capabilities of China and many other emerging economies makes them direct competitors to Central European countries in their dominant fields of specialisation. Take Turkey – a fast-growing, low-cost economy with great potential right on Europe’s doorstep.

Future playerToday, Chinese competition is not serious because of substandard quality. But what about in 10 years? Imagine a European car market full of Chinese imports, with appropriate quality and production costs and prices one-quarter or one-third below the European standards. Carmaking will not disappear from Europe but the boom years will be over in the region.

The solution is simple but not easy. Central Europe needs to shift national specialisations towards the high value-added segment of economic activity. But are the countries, notably their political elites and administrations, prepared for such a shift, both financially and

mentally? (See the cover story on page 10.)

So far the region has been characterised by low spending on education and research and development (R&D), low standards of government and public sector, low quality of public services and comparatively high corruption. Political leaders need to address these challenges and work on social and economic change in the right direction.

The new growth model for Central Europe in the new decade presupposes a serious transformation of public services to make them flexible and efficient, and much higher investment in schools at all levels – not just universities but also primary and secondary schools, which are heavily underfinanced across the region. Household consumption should also play a bigger role in future GDP growth – something so far often orientated towards exports. All these necessary changes are very costly, and they would imply higher taxation than many countries

of the region, though not all, charge today. Economising on existing expenditure may help but will not always suffice.

Whether or not Central Europe can deliver sustainable economic growth remains an open question. What is clear is that decisions to cope with the challenges of the future should be made now, not after the challenges materialise into losses. One inevitable problem is that the costs of the necessary changes would be immediate but their returns distant and uncertain, definitely beyond the tenure of the legislators.

For the next four to five years of economic development in Central Europe, the future seems bright. The second half of the 2010s may still not be so bad but the growth momentum will very likely be gone. The more distant future is in the hands of politicians.

Pavel Mertlík is chief economist at Raiffeisen Bank in the Czech Republic.

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Comment: Economic growth

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Comment: Banking

Secrets of successA mix of conservatism and robust regulation saved Poland’s banking sector from crisis. Now it is shoring itself up further through consolidation, says Olga Grygier-Siddons

The past few years have been dominated by the global economic crisis. Against the

background of many European countries, the economic situation in Poland continues to look good. The country has solid GDP growth (around 4%) and is fortunate in being a recipient of a significant amount of European Union funds.

Although the Polish economy continued to grow during 2008 and 2009, GDP growth slowed significantly as the whole world felt the impact of the global downturn.

Poland’s banking sector, although clearly affected, survived in reasonable shape. Certain factors have contributed to this.

First, traditionally, the Polish banking sector has been quite conservative and has stayed clear of the more sophisticated financial instruments that caused so many problems.

Second, its banking industry went through heavy restructuring during the mid 1990s (following a period of excessive openness). A number of weaker banks were taken over as they struggled to survive due to a low capital base and poor governance structures, because too many of them were established with private individuals as owners. The lessons learned from that period, together with a robust

Solvency II for insurers), is further consolidation among the top banks. AIG (US), AIB (Ireland) and EFG (Greece) have already exited post-crisis – this might be just the beginning. Strong competition for the assets that are coming to the market is likely as key financial groups try to build market position.

Also expect banks to focus attention on enhancing clients’ experience and cross-selling non-capital binding products, especially looking for increased commission earnings and driving customer profitability.

Olga Grygier-Siddons is country managing partner of PwC Poland. See page 38 for more on CEE’s banking sector.

regulatory framework, have provided a sound base for the financial industry.

Third, most of the Polish banks are foreign-owned and their attention pre-crisis was focused on the ample opportunities in the domestic market. This led to a lot of activity in the housing market (and fast-growing consumption), but experts agree that the global crisis “saved” Poland from significant overheating of the residential property market.

Unfortunately, the country had its own “toxic asset” in the shape of Forex options. Some Polish companies used this instrument in a specific way following a sustained period of strengthening of the zloty. During the crisis, the currency weakened and this in turn exposed a number of companies. Some banks were “shamed” by Poland’s

AIB sold BZ WBK to Santander

The key difference between Poland and the rest of CEE was its reluctance to take part in the credit binge

banking regulator for “pushing” products into the market without ensuring clients properly understood the risk involved. The magnitude of this issue, while painful (a few companies collapsed), did not shake the economy and the banking sector too much.

The main trend that PwC sees for the future, in addition to the global trend of increased regulation (for example, stress tests and Basel III for banks,

Comment: Operational excellence

Go-getters wantedSustainable operational excellence needs commitment from the top and go-getters on the shop floor, says Kevin Whelan

Every business wants to do things better, faster, cheaper, giving it a higher margin

to play with. Continuous improvement programmes are an effective way of achieving this objective, but all too often, companies focus too much on the ‘improvement’ and too little on the ‘continuous’ element.

Most companies will identify an opportunity to improve efficiency and launch a project around it, bringing together a project team that delivers a result. But two to three months down the line, the result has fallen away because the project team has been disbanded and it becomes extremely hard work to sustain the result.

Continuous improvement processes are most effective – and sustainable – when they become a business’ way of doing things. To achieve such fundamental change, sponsorship needs to come from the top. Start with a high-level steering committee that is responsible for setting the business’ policy on continuous improvement and will guide and support the process.

Next, for each part of the business targeted for process improvement, form a team that has employee representation from all levels of the organisation. This team, based on the shop floor, will be responsible for putting together and driving the continuous

ball from rolling back down the hill. They need their own development plans to help them respond as their role changes – from traditional leader to mentor and coach.

Effective continuous improvement is a constantly evolving, organic process. The focus might change, the process might move to the next level of the firm, but it always remains part of the DNA of the business. The ultimate goal is sustainable operational excellence.

Kevin Whelan is senior vice president of Competitive Capabilities International (CCI), the developer of continuous improvement methodology TRACC. CCI partners with PwC in CEE to help clients implement TRACC. See page 19 for more on continuous improvement in practice.

improvement plan at ground level while keeping open clear lines of communication to the steering committee.

Crucially, the shop-floor team needs go-getters. A ‘glass-half-empty’ person can communicate the wrong message, potentially damaging the entire process.

The shop-floor team, with management support, is responsible for getting buy-in for continuous improvement through planning and delivering training and education sessions for the rest of the staff. Involve the CEO and senior management team to answer important questions – ‘Why are we doing it?’, ‘What is the burning platform?’ It’s important to show the improvement initiative is well supported by the leaders of the organisation.

The training and education sessions should ensure everyone understands what is happening and their role within that change process. The content of the sessions will change as the needs of the continuous improvement process change. Early sessions might focus on why it’s good to work in teams, or how to problem-solve. Later sessions will become specific to the business. For example, what does it mean if we miss production targets one week?

Team leaders on the ground are crucial to the process. They are the wedge that stops the

Effective continuous improvement is a constantly evolving, organic process. The focus might change, but it always remains part of the DNA of the business

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A t the end of the Communist period, the Czech Republic had one troubled carmaker – Škoda. Two decades later,

the country has a thriving export-oriented automobile industry. Its car manufacturing sector is dominated by three foreign-controlled companies: Škoda/Volkswagen; Toyota/PSA Peugeot Citroën; and Hyundai.

About 85% of the auto sector’s output is exported and it accounts for roughly one-fifth of both the country’s total manufacturing output and total exports – at one million autos a year, the Czech Republic is the world’s largest carmaker per capita. In addition, there is a significant presence of auto supply companies, such as Continental tyres and Bosch engines.

Czech-based carmakers are typical of the companies that benefited from CEE’s post-Communist growth –

generally large-scale manufacturers of medium-quality products requiring an easily trainable, low-cost labour force. But after CEE’s two decades of impressive performance, the global financial crisis exposed flaws in the formula that helped the region move from Communism to a free market system.

Erik Berglöf, chief economist at the European Bank for Reconstruction and Development (EBRD), points out that excessive private borrowing and large current account deficits led to disruptive volatility as credit-driven sectors, such as retail and construction, became overinflated. Now that the crisis has burst these bubbles and the inflow of capital has slowed dramatically, the low-cost export sectors that had been the mainstay of economic growth cannot be expected to continue

“Policymakers in the region needed to pay more attention to fundamental drivers of growth such as education, competition and diversification”Erik Berglöf, chief economist, European Bank for Reconstruction and Development

More thinking, less doingCalls to end low-value mass manufacturing grow louder as CEE adjusts to a post-financial crisis world, but is the region ready to shift to a knowledge-based economy?Words: Tony McAuley

Cover story: Economic growth

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diversification.” The crisis simply brought this into sharper focus.

The Czech car manufacturing sector is a case in point. “You can’t expect anyone to build another plant here; the capacity of the market is reached,” says Pavel Mertlík, chief economist at Raiffeisen Bank in the Czech Republic. Mass car manufacturing is vulnerable to relocation to lower-cost areas in the medium to long run, which could be competitor countries such as Turkey and certainly China globally. Though Škoda has developed research and development (R&D) capabilities since Volkswagen took a stake in 1991, it’s not yet clear whether the country has the potential to become an auto technology hub, and it hasn’t developed any significant homegrown brands – such as Porsche in Germany – that would anchor the industry within the domestic economy.

Mertlík sums it up like this: “The problem with the success of Central European countries in the last decade and a half of fast economic growth is that it was based on a boom of medium-quality, standard producers that face a lot of competition, but it was not backed by [homegrown] R&D, and there are few strong local trademarks.”

This has all led to calls for a “new growth model” for the region, located higher up the value chain and based on innovation and R&D. For that to take shape, however, the region’s governments need to tackle some fundamental challenges first: most notably, more efficient and transparent governance, well-functioning legal systems and business-

friendly policies that don’t kill innovation.

Investing in innovation“What the region needs now is smaller investment in more sophisticated things – a mushrooming in small and medium-sized enterprise investment,” Mertlík argues. That, however, requires progress in areas that still need work in many CEE countries. In the World Economic Forum’s (WEF) Global Competitiveness Report 2010-11, the region’s economies have improved rankings of around 40-50, Mertlík says, “but they have been getting worse and worse markings in areas like government, judiciary, etc. That is what companies need for the future: a well-functioning legal system, predictable taxation, things like that.”

One CEE economy doing well in the latest WEF rankings is Poland. It moved up seven positions to rank 39th – ahead of Spain, Portugal and Italy. The improvement reflected Poland’s relatively strong performance during the crisis due to its fairly prudent economic policies and growing domestic market. Keith Wade, chief economist at Schroders, notes in a report for asset manager Morningstar: “The key difference between Poland and the rest of CEE was its reluctance to take part in the credit binge that had been taking place elsewhere (especially the Baltics), after its accession to the European Union.” Poland has had only one quarter of negative economic growth since 2008 and GDP has risen to nearly 6% above its peak, whereas the other three big economies in CEE – Russia, the Czech Republic and Hungary – all declined

at the same pace. The cost-competitiveness enjoyed by the region as it integrated into Europe and the world economy after Communism has almost run out of road, with rising labour costs the inevitable consequence of the success of economic convergence.

However, even before the financial crisis, it was obvious there was a need for change, says Berglöf: “Policymakers in the region needed to pay more attention to fundamental drivers of growth such as education, competition and

“Human capital and technology policies should be employed to support growth”Vienna Institute for International Economic Studies and the Bruegel think tank

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A new home in Amsterdam

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Bellwether for the new economic model

In the transition to a more innovation-oriented economic model for CEE, the media sector is a good leading indicator. It is an industry that is driven by macroeconomic trends where a well-educated labour force can leverage new technology for growth. It is also one that is wide open to competition.

Agora, owner of Poland’s national newspaper, Gazeta Wyborcza, will be a litmus test for this sector’s response to changing times. The newspaper became the voice for the democracy and workers’ rights movement, Solidarity, at the end of the 1980s and struggled through the Wild West conditions of capitalism in the 1990s. Agora rapidly diversified and expanded to become Poland’s biggest publisher and radio broadcaster.

The company has continued to diversify, moving into freesheets, advertising and websites. And last year it acquired the Helios chain of cinemas (with a domestic market share of 25%). The future now depends largely on Agora’s internet strategy and its ability to expand regionally.

A key factor will be Agora’s ability to compete against foreign websites – according to Gemius, which measures internet traffic in Poland, Gazeta.pl dropped two places to seventh in December 2010 versus the previous year.

Central to Agora’s plans is its Project Euro 2012, to take advantage of the UEFA European Championship finals in Poland and Ukraine. According to Marlena Jezierska, director of Euro 2012 at Agora, the objective is to form new partnerships with the vast array of sponsors and advertisers for its multimedia, multi-platform offering at national, regional and local level through newspapers, billboards, cinema and the internet. The hope is that it will showcase the “vortals” (vertical portals) and “profiled media” (lifestyle and business niches) strategy the company has pursued as it has diversified away from its roots as the intellectual voice of the nation in print. Whether Agora emerges as a regional multimedia powerhouse remains to be seen, but it certainly won’t be based on cheap labour.

6%The percentage increase of Poland’s GDP above its peak

39thPoland’s ranking in the World Economic Forum’s Global Competitiveness Report

significantly and have yet to recover to their peak levels.

The performance of Poland’s central bank, and its financial services sector in general, was a source of improved competitiveness, as was its educational system. But the WEF says that maintaining its improved position will require upgrading a creaky transport infrastructure. The business sector’s ranking of government policies in general was also quite weak and as Klaus Schwab, WEF founder and chief economist, put it: “As Poland transitions to the innovation-driven stage of development, it will have to focus more strongly on developing capacities in innovation and business sophistication. Stronger clusters, more R&D orientation of companies and intensified collaboration between universities and the private sector would help the country to move towards a more future-oriented development path.”

That is strategy advice echoed by Torbjörn Becker of the Stockholm School of Economics and others in a report for think tanks Bruegel

The future now depends largely on Agora’s internet strategy

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Czech Republic, Hungary and Poland in the late 1990s and has spread to other countries in CEE. It has also moved up the value chain to incorporate more advanced IT and R&D functions. Though costs in the region are higher than those in, say, India, CEE has many advantages, including its education infrastructure, proximity to Western markets and attractive investment climates.

The process of accession to the European Union has also given CEE countries a competitive advantage, especially those that can offer the requisite technical skills in IT or science and advanced levels in key European languages – French and German as well as English. It is with all this in mind that a company such as Tata Consultancy Services, which is headquartered in India, based its European BPO hub in Budapest, Hungary, from where it services a number of its largest European clients that previously were serviced from Mumbai. Since 2003, a year before the first eight CEE countries joined the EU, there has been an explosion in IT and software development outsourcing to the region. This continued despite the recession brought on by the financial crisis.

The Central and Eastern European Outsourcing Association (CEEOA), an umbrella group for the region’s national industry bodies, reported in its 2010 annual industry survey that there are now three “clusters” of countries within CEE based on their level of IT outsourcing and software development services. The most advanced group includes Ukraine and Belarus, Poland, Hungary and the Czech Republic. The cluster of countries in the “developing”

and the Vienna Institute for International Economic Studies. The financial crisis has meant, among other things, that the net capital inflows into the region are unlikely to recover for some considerable time. For governments, this will mean following growth polices that, therefore, rely less on foreign direct investment (FDI) and more on strengthening the infrastructure that will support growth, especially in the export sectors. “Given the importance of strengthening the tradable sector in many [CEE] economies, a whole range of human capital, technology, industrial and regional policies should be employed,” Becker’s report advises.

Star clusterOne policy that will continue to see a focus in future is the regional “cluster” approach, advocated by the WEF and which has proved successful in fostering innovation globally. Among the region’s notable successes with this approach is business process outsourcing (BPO), which began in the

“What the region needs now is smaller investment in more sophisticated things”Pavel Mertlík, chief economist, Raiffeisen Bank, Czech Republic

stage includes Bulgaria, Serbia, Estonia, Slovakia and Lithuania. The group with more recently established industries includes Croatia, Moldova, Latvia, Slovenia and Albania.

Ukraine has seen particularly fast growth as the country specifically targeted incentives to attract software outsourcing. According to the CEEOA annual survey, Ukraine had attracted the largest number of companies (nearly 1,000) and had the largest number of IT specialists employed in the outsourcing sector (more than 20,000). Outlining the advantages of one of Ukraine’s main IT outsourcing centres, at Lviv, in the west of the country, Andrey Hankevych, chief technology officer of Lohika Systems, a US company, said one of the main advantages is the large number of specialist higher learning institutions in the area – 15 top-level universities produce about 1,300 IT graduates annually.

Despite such successes, the region’s economies suffer from the inefficiencies – perceived, at least – of their governments.

1,300Number of IT graduates produced annually by Lviv’s universities

15Number of top-level universities in Lviv, Ukraine – a main CEE IT outsourcing centre

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In the WEF’s competitiveness rankings, the region’s weakest scores are often for “first pillar institutions”, primarily government, and “public trust of politicians”.

The hangoverSorting out major structural issues at government level is clearly the priority for getting most countries in the CEE region back on the growth trajectory. It’s a tough task to make these changes while ensuring potential growth sectors aren’t stymied, as is apparent in Hungary.

In its report on Hungary, the EBRD said: “Key reforms to welfare provisions and pensions are necessary to boost the labour supply and increase the

economy’s potential growth rate.” At the same time, however, the budget cuts it must make to get the deficit under control could well weaken the country’s pharma national champions.

As part of its fiscal reforms, the Hungarian government said it plans to cut HUF83bn (24% of the total) from the pharma drug subsidy budget in 2012 and HUF120bn (34%) from 2013, without raising the amount patients must pay. “The cabinet hasn’t disclosed how it plans to achieve this but we believe it can only be bad for the sector,” reckons Gergely Varkonyi, pharmaceuticals analyst at Deutsche Bank. Talks with the Hungarian pharma sector continue through June 2011.

But as Varkonyi says: “The industry contributes HUF40bn at present to the subsidy budget; if the cabinet wants to add HUF120bn to this, the clawback could be as high as 48% (4x increase) – ie, companies paying half of the subsidies which would make most generic drugs lossmaking, posing the risk of mass product withdrawals.”

Richter Gedeon and Egis, Hungary’s two main pharma companies, could be hit hard by the government’s need to cut the pharma budget, thus crimping their R&D spend. Based on its 5% market shares, Egis faces particular risk – up to 19% of its 2013 earnings, Deutsche Bank calculates.

Do this much, no moreThere is broad agreement among economists and policy advisers that change must come, but there are considerable differences in the details on what and how. In particular, some of the leading economists

warn against replacing a policy of integration into the world economy with something that is too interventionist.

The EBRD’s Berglöf says governments should concentrate on developing their domestic capital markets and local currency finance. There should be more reliance on domestic savings to finance growth to avoid the vagaries of international capital markets. This will make domestic companies less vulnerable to exchange rate swings.

In the crisis, exposure to foreign lending led to both macroeconomic tightening and international crisis borrowing, both of which have damaged medium-term growth prospects. As well as reform at the macro level, governments must lead reform in business policy – whether it is to weed out inefficiencies in government bureaucracies or make the tax and regulation codes more transparent and predictable.

Governments should also know their limits and not repeat mistakes, says Mertlík: “Setting strong conditions for economic activity for the private sector is the best solution. Look at Finland, which has been the model of a developing economy over the last 20 years. Give strong incentives to companies to invest; rather than subsidies or trying to pick winners, safeguard the economy and allow companies to find appropriate labour force in the market.” That way the industrial cream floats to the top.

Tony McAuley is a freelance business journalist and a former managing editor at the Economist Intelligence Unit.

“One of the main advantages [of Lviv, in Ukraine] is the large number of specialist higher-learning institutions”Andrey Hankevych, CTO, Lohika Systems

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Gulf streamEmerging markets initially depended on investment from developed economies, but now they are increasingly trading with each other. The Middle East is one region that has shown a growing interest in CEE Words: Dominic Dudley

RAK Minerals & Metals Investments (Ras al Khaimah)Owner: Government of Ras al Khaimah (UAE)Sector: MiningCountry of expansion: ArmeniaActivity: RAK Minerals & Metals Armenia acquired exploration licences in three areas in March 2008. It is focused on mining and processing base metals such as copper and molybdenum as well as precious metals including gold.

Orascom Development (Egypt)Sectors: Construction, real estate, hospitality

Countries of expansion: Montenegro, RomaniaActivity: Orascom has set up a joint venture with the Montenegro government to build a holiday resort. A subsidiary, Orascom Housing Communities, is

developing a budget housing project in Constanta, Romania.

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Mubadala Development Company(Abu Dhabi)Owner: Government of Abu DhabiSectors: Energy, financeCountries of expansion: Kazakhstan, RussiaActivity: In 2009, Mubadala took a minority stake in Kazakhstan’s offshore Nursultan Block oil and gas field, in the Caspian Sea. In November 2010, the company also invested $100m in funds managed by Russia’s Verno Capital.

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Byblos Bank (Lebanon)Sector: BankingCountry of expansion: ArmeniaActivity: In 2007, Byblos Bank bought International Trade Bank, now renamed Byblos Bank Armenia. In 2008, the European Bank for Reconstruction and Development and the OPEC Fund for International Development took stakes, reducing Byblos Bank’s shareholding to 65%.

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Middle East companies have been among the most active cross-border investors

over recent years. Because of the boom in the

price of oil and the desire of Arab governments to diversify their economies, these companies have had both the means and the inclination to take stakes in businesses around the world.

Until now, these investors have tended to focus on expanding into underdeveloped markets in Africa and Asia, or buying up trophy assets in the West, such as real estate in New York and London. But the trend is now starting to spread to CEE too.

In many cases, the investments are in industries where the Middle East has an established track record,

such as real estate, banking or energy, but there are deals in some more unexpected areas too, such as publishing. The burgeoning trade ties can also be seen in the steady growth in the number of direct flights between CEE and the Middle East capitals – Etihad began flying to Minsk in July 2008, Emirates to Prague in July 2010 and Qatar Airways began direct flights to Bucharest and Budapest in January this year.

If the CEE region can tap into this new source of capital even more in the future, it opens up the potential for significantly higher rates of foreign direct investment.

Dominic Dudley is a former deputy editor of Middle East Economic Digest.

Marlene Jezierska, director of Euro 2012 at Agora


Trade flows

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pwc.com/transform

Topaz Energy & Marine (Dubai)Owner: Renaissance Services (Oman)Sector: Shipping

Countries of expansion: Azerbaijan, Kazakhstan, TurkmenistanActivity: Topaz operates more than 50 vessels serving the

offshore oil industry in the Caspian Sea. A company spokesman says: “The business will continue to grow in the CEE region.”

International Investment Bank (IIB)(Bahrain)Sectors: Financial services, real estateCountries of expansion: Azerbaijan, Bosnia-HerzegovinaActivity: In April 2008, IIB acquired a 49% stake in AmrahBank. In August 2009, it acquired a 28% equity stake in the Sarajevo City Centre real estate project in Bosnia, with Al Shiddi Group of Saudi Arabia.

DP World(Dubai)Owner: Dubai WorldSector: TransportCountry of expansion: RomaniaActivity: DP World has been operating the Constanta South Container Terminal since 2004. The Black Sea port has a handling capacity of 1.5 million 20-foot equivalent units a year, but there is room to expand this to over 4.5 million.

Al Jazeera (Qatar)Owner: Qatar Media CorporationSector: BroadcastingCountry of expansion: Bosnia-HerzegovinaActivity: The broadcaster is due to launch a news and current affairs channel, Al Jazeera Balkans, later this year, which will be based in Sarajevo and will broadcast to audiences across the Balkans region.

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Agility (Kuwait)Sector: LogisticsCountries of expansion: Croatia, Czech Republic, Hungary, Kazakhstan, Poland, Romania, Slovakia, UkraineActivity: Agility has been expanding rapidly around CEE, establishing a logistics centre in Budapest in 2008 and a wholly-owned subsidiary in Ukraine in 2009, taking its presence in the region to eight countries.

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Where will opportunities in global entertainment and media be in 2015?

Find your best chance for growth using our online Global Entertainment and Media Outlook 2011-2015. For forecasts of 13 media segments across 48 countries, visit www.pwc.com/outlook

www.pwc.com


Operational excellence

Lean machineContinuous improvement processes have already helped deliver €2m in savings, says Jaromir Schmid, CEO of Czech cable manufacturer PRAKAB PRAŽSKÁ KABELOVNA, s.r.o.

Jaromir Schmid

Current position: CEO and chairman, PRAKAB

Previous positions: l Advanced Plastics, Czech

Republic (managing director)

l Hydro Aluminium Mandl & Berger, Austria (head of project/programme management; head of technology projects and inquiry management)

l SGL Carbon, Austria (product manager)

Education:MSc Metallurgy, Foundry and Corrosion of Metals, Institute of Chemical Technology, Prague

Languages:Czech, German, English, Russian

When I joined PRAKAB in 2008, the company was profitable but I knew that to retain that profitable status we would

need to improve the way we worked.Our working capital management was

not up to scratch, recruiting good people was difficult, and our processes were long and inefficient. Machines often broke down and sometimes had to be stopped because of poor raw material planning and purchase. There was little focus on the rate of production, and we often had too much semi-finished and end product in stock. I came from an automotive background where continuous improvement, particularly LEAN, is a way of life.

We started implementing LEAN thinking in early 2008. In early 2009 PwC helped map the company and its processes, covering areas such as flow of materials and information. Next, we identified which LEAN processes to apply (see box) and trained our employees in LEAN methodologies. Up to 70 staff are involved in LEAN activities – they are from all levels of PRAKAB, a key success factor in the project.

When the global financial crisis hit later that year, our turnover was strongly reduced but our cash flow and working capital management activities allowed us to stay profitable through 2009 and 2010 and we are becoming more profitable by the year.

We have faced many challenges along the way. People have been resistant to change; we have had to win support for a change in the way we pay people, according to performance rather than presence; and we have had to implement LEAN while keeping the daily work of the company going.

We tackled most challenges through regular meetings where we shared

information and explained what we wanted to do, why and how it would impact the company and the people.

Other factors helped us succeed: replacing people who weren’t committed to saving the company; appointing a dedicated LEAN project manager; my personal involvement in many meetings so people felt the project was being supported by top management.

The pilot phase delivered impressive results. We reduced changeover times by 35%, lead times by 34% and WIP (Work in Progress) inventory by 35% on pilot lines. Significantly, we saved €2m through improved efficiencies.

This is only the beginning. We expect to see the biggest financial impact during phase two, which ends in mid-2012. Beyond this, we will continue mainstreaming LEAN into all processes and have created a LEAN Promotional Office to demonstrate that LEAN will become a way of life at PRAKAB.

LEAN methodsl The 5S philosophy helped us to organise

our work environment effectively and standardise work procedures

l SMED enabled us to run our machines in the most time-efficient way possible

l Total Productive Maintenance helped us involve everyone in the organisation to maximise the overall effectiveness of our production equipment

l Statistical Process Control allowed us to control our processes by monitoring changes in them by creating control charts based on random sampling data.


Moving up, moving out

Profile: VimpelCom

On the eve of his departure as CEO of VimpelCom, Alexander Izosimov says the Russian telco’s new HQ in Amsterdam is the right launch pad for global expansion Words: Elliot Wilson

21

When VimpelCom chose to relocate its headquarters to Amsterdam from Moscow, it came as a surprise to the world of

telecoms, to Russia-watchers, and to the wider global business community.

Here, after all, is a Russian corporate superstar in the making. VimpelCom, with its colourful yellow and black ‘Beeline’ brand, boasts powerful local and international backing. Its key investors are Altimo, a private equity firm backed, through Russian conglomerate Alfa Group, by oligarch Mikhail Fridman; Weather Investments II, owned by Egyptian tycoon Naguib Sawiris; and Norwegian carrier Telenor. Publicly listed in New York, the company is transparent, well managed and implicitly trusted by global institutional investors.

Its scale and ambition, however, reach far beyond Russia’s borders. VimpelCom has expanded rapidly in recent years, growing in Vietnam and, in May 2010, completing a merger with Ukrainian telco Kyivstar to create the largest single carrier in the former Soviet bloc. But it is the $6.5bn cash-plus-shares acquisition of Italy’s Wind Telecom from Sawiris that propelled VimpelCom into the big league, overnight creating the biggest global non-energy Russian corporate, and pushing the carrier into new markets including Pakistan, Bangladesh, Zimbabwe, Egypt, Canada and Algeria. The deal has also brought Sawiris into the fold of VimpelCom investors.

Alexander Izosimov, the firm’s fast-talking, quick-thinking CEO, recently announced that he is standing down at the end of June after eight years of steering the

company through geographical expansion and product diversification. Having delivered the cross-border acquisition of Wind, which he felt was his mandate, he believes his work at the company is done. Not only that, a relocation to Amsterdam wasn’t for him although he firmly believes it is right for VimpelCom. In fact, he says, telecoms firms will increasingly need to be international in order to survive.

“Global scale will be more important going forward,” he tells Transform. “Our aim is to become better at decentralising. The aim is not to gain global market share, but to become better at gaining share in key markets, wherever they are in the world.

“Our new strategy is based on the assumption that scale will matter more, but that there are players in our industry with limited synergies of scale. The advantages of scale will become more pronounced the longer we go on.”

VimpelCom’s acquisition of Wind has come at a time when the telecoms industry is in a period of introspection and transition – or, as Izosimov puts it, in a “waiting mode”. For most of the past decade, telcos believed that profit could be generated in any country simply by acquiring an operating licence. That has now changed, with even global players shedding peripheral assets in order to focus on core markets.

Izosimov believes the eyes of the world’s telecoms leaders are on VimpelCom to see whether the acquisition of Wind succeeds. “Clearly our deal with Wind will be a reference point for any future cross-border transactions,” he says. “If we can prove over the next 12 to 24 months that we can successfully absorb Wind and become a much

22

Telenor will be an important factor in the success, or otherwise, of the company’s global expansion strategy. The relationship has been fraying for some time while never completely unravelling. Telenor feels it is often marginalised in the decision-making process and fears its shareholding in the group will be diluted.

VimpelCom in turn feels Telenor is cautious and cagey rather than big and bold. “Telenor is a very complex story that comes from the fact that we are both operators and we both pursue a similar strategy,” says Izosimov. “We both believe in having a presence in developed and emerging markets, hence our expansion into countries like Bangladesh and Pakistan.”

Izosimov admits that the relationship with Telenor has had its “ups and downs” – though the fact that the alliance still endures shows, he insists, that there are

larger company, we will see more industry M&A elsewhere.”

VimpelCom, however, will be “off the mergers and acquisitions scene for the next three or four years as we have recently doubled in size overnight”, Izosimov says. Indeed, after the deal is completed, VimpelCom will have operations in 19 countries, with 181 million subscribers – twice the company’s current total.

The Russian advantageNo Russian corporate outside the energy sector has succeeded in building a business with global scale. Other Russian telecoms firms will be waiting to see how the VimpelCom strategy pans out.

Izosimov has few doubts that VimpelCom will absorb Wind and make the enlarged group a success. Indeed, he believes the firm’s Russian heritage is a distinct advantage when dealing with new customers and managers in the Middle East, Africa and across the Indian subcontinent. “We believe that being Russians, and not being involved in any

history in countries such as Algeria and Egypt – countries where there has been tension in recent months – as well as Pakistan, allows us to start with a clean slate,” Izosimov says. “We have all the ingredients we believe we need to be successful in every market.”

Izosimov says each market has its own strengths. Italy, an “exceptionally interesting” market, offers high margins and profitability, and a market with a solid reputation at adopting new technology. Bangladesh, Algeria and Pakistan provide exposure to fast-growing Asian and African economies. Canada is “another great opportunity” and a “huge future growth driver” – though some investors and analysts are split over the benefits of expanding into a slower-growing North American market.

Tackling TelenorVimpelCom’s relationship with Norwegian shareholder

181mThe number of subscribers VimpelCom has reached as a result of the Wind Telecom deal

1992The year VimpelCom was founded in Russia

Alexander Izosimov

(pictured) is the

outgoing president and

CEO of VimpelCom.

Before joining the

company in 2003, he

held senior positions

with Mars in Moscow

and McKinsey &

Company in Stockholm

and London. He holds

a Master’s degree from

the Moscow Aviation

Institute and

an MBA from INSEAD.

Imag

e: G

etty

Imag

es


“If we can prove over the next 12 to 24 months that we can successfully absorb Wind and become a larger company, we will see more industry M&A elsewhere”Alexander Izosimov, outgoing CEO, VimpelCom

entity be located in a third-party jurisdiction – another reason for relocating.

Izosimov rebuffs any suggestion that legislators and politicians in Moscow might have been unhappy to see a prized corporate abandon Russia in favour of the Netherlands. “From the perception of the Russian government, it’s all about creating the right image of the country,” he says. “Creating a non-resource company in the service sector with global reach and with a Russian flavour does good things for Russia’s image. So the Russian government has been very wise

more of the former than the latter. He also highlights the Norwegian carrier’s “massive and valuable” contribution to VimpelCom’s expansion, and the benefits of its technological expertise.

“But it’s not an easy set-up,” he adds. “Going forward, it will be interesting to see how the relationship develops now VimpelCom is two or three times larger, in fact significantly larger, than Telenor.”

Many analysts believe the appointment of current chairman Jo Lunder – a Norwegian – as the new CEO is an attempt to ease tensions with Telenor. That said, Lunder – an ex-Telenor director – is seen very much as an independent rather than a Telenor ally.

Going global By moving to Amsterdam, VimpelCom has tacitly acknowledged that it cannot build a globally scaled telecoms company from its base in Moscow. A Western European headquarters makes it easier to tap capital from new shareholders while gaining access to a wider pool of executive hires. It also allows VimpelCom to manage its assets from a time zone between Asia, Africa, the Middle East and the Americas.

Amsterdam offers other attractions: a light regulatory touch; excellent transport and telecoms infrastructure; and a low taxation burden. Corporate tax is 20% in Holland, higher than Russia’s but lower than most Western nations. As part of VimpelCom’s deal with Kyivstar, regulators in Ukraine demanded that a combined

A new home in Amsterdam

More than 1,000 VimpelCom executives spent late 2010 and early 2011 making the switch from Moscow to Amsterdam, with most core management now based out of the new Netherlands office (pictured).

Insiders say the move has gone “quite well” but there are kinks to iron out, notably ensuring fluidity and reliability of communication between Amsterdam and Moscow and new operations in the

emerging world. VimpelCom will retain core operational facilities in the Russian capital while senior executives and the board will make decisions affecting the firm’s financial performance in Holland.

in encouraging the company to move overseas.”

However, Izosimov doesn’t harbour ambitions to see VimpelCom as a standard-bearer for Russia Incorporated. “I don’t believe in that talk at all,” he says. “I would leave it to [energy giant] Gazprom to carry the flag.”

Longer term, is Holland the right place for Russia’s premier global carrier? As VimpelCom grows, should it gravitate towards a jurisdiction boasting a major stock market and a pool of major institutional and retail investors – in other words, such as London or New York?

“I believe we have the right strategy,” Izosimov insists, “and we have chosen the right city to implement that strategy. VimpelCom is here to stay.”

Elliot Wilson is an associate editor of Spectator Business and contributor to Asiamoney.

Profile: VimpelCom

PwC and Sochi 2014Better together

www.pwc.ru/en/sochi2014

PwC is a Partner of the XXII Olympic Winter Games and XI Paralympic Winter Games to be held in the city of Sochi in 2014.

The Sochi 2014 Games are modern Russia’s chance to showcase itself to the world. PwC is extremely proud to have been entrusted by the Sochi 2014 Organizing Committee to help plan, prepare and stage the Games – and to help deliver a larger legacy of socioeconomic development that the Games make possible.

What does PwC do for Sochi 2014?PwC works with the Sochi 2014 Organizing Committee on projects in the areas of:• planning, preparation and staging of the Games • taxation• human resources • sustainability• marketing• financial planning and budgeting and more.

We’re helping Sochi 2014 to pioneer a new approach to preparing the Games, implementing a project-oriented organization. Think of it as developing a “Sochi model” that can be applied to other mega-events. We’re working closely with our counterparts at Sochi 2014 to help deliver an innovative, world class Games.

PwC and Sochi 2014Better together

© 2011 PricewaterhouseCoopers Russia B.V. All rights reserved.“PricewaterhouseCoopers” refers to PricewaterhouseCoopers Russia B.V. or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

Robert GrumanRussia Advisory Leader Tel: +7 (495) [email protected]

Evgeny OtnelchenkoAdvisory Consulting Partner Tel: +7 (495) [email protected]

Dmitry Chernyshenko, President and CEO of Sochi 2014:“When holding such large-scale events as the Olympic and Paralympic Games, it is critical to have business partners you can rely on. PwC has been active in Russia for more than 20 years and has made significant contributions to Russia’s economic development. The firm has always been distinguished by the fresh approach and original thinking of its people in meeting new challenges, which is exactly why we have chosen them.”

By combining our global experience and local commitment, we are able to support the Organizing Committee in a range of areas – we’ve had over 103 project requests from Sochi 2014 so far. Among them:

Contacts

Delivering value on National Project #1

Supporting Sochi 2014 in a range of areas

Games planning

Taxation

Financial Planning and Budgeting

Human Resources

Marketing

Risk Management & Sustainability

• Project Oriented Organization design• Tactical, Operational & Integrated

planning• Games Services Model development• Service Level Agreement (SLA)

definitions• Effectiveness management (KPI)

• Customs alternative concept definition• Tax presentation for Marketing

Partners• Consultation on other taxation matters

• Budgeting and financial planning• Management Accounting policy and

procedures development• Optimisation of financial business

processes and procedures

• HR demand study and labour market analysis of Krasnodar region

• Games headcount analysis• Recruitment strategy definition• Standardisation of work with

contracting personnel and policy development

• Retail licensing concept• Ticketing program development• Partner integration effectiveness

project

• Sustainability concept definition• Sustainability report preparation• Risk procedures update• Risk matrix update

26

It was Hungarian scientist Károly Ereky who coined the term “biotechnology” in 1917, describing it as

“all lines of work by which products are produced from raw materials with the aid of living things”. Since then, CEE has become an R&D centre for biotechnology, but as its laboratories begin to cement their reputation in the field, translating this into business success is vital.

Pharma 2020, a recent PwC report, says that by 2016 bioengineered vaccines and biologics – medicinal products created via biological processes – will account for 23% of the global drugs market, a rise from 17% in 2009. Big pharma players are shopping for promising biotech firms as they realise just how significant this discipline will become. Switzerland’s Roche and America’s Pfizer were early movers. In 2009 Roche snapped up Genentech, the US biotech firm, for $46.8bn, and Pfizer bought Wyeth, another US biotech firm, for around $68bn.

But just how well placed is CEE to get a slice of this market? As a host region, CEE has much to offer both players and investors. Tadeusz Pietrucha, head of molecular medicine and biotech at the Medical

University of Łódź in Poland and vice chairman of biotech company Mabion, believes CEE’s advanced education system will stand it in good stead. “There is a high level of education, encouraging us to go faster to catch up with the level of development of current biotech leaders in the US and Western Europe,” he says.

According to figures from UNESCO, 64% of CEE’s tertiary-age population is in education compared to 26% in East Asia and the Pacific – one of CEE’s emerging market rivals. CEE’s governments are also supporting the development of their respective biotech sectors. In Hungary, a 2004 Innovation Act gave companies the right to retain the intellectual property

to discoveries made using public funds. And this year the government is expected to increase a 20% tax allowance to 100% for companies conducting R&D. In Poland, a special economic zone to encourage inward investment from biotechnology companies is helping to enrich the domestic sector. A report from market intelligence group PMR says that after a couple of intensive years of product development, sales in Poland’s “red” biotech sector (biotechnology for pharmaceuticals and medicine) are expected to improve by 30% in 2011 compared to 2010.

That said, governments are “not always supportive of innovation in healthcare as a result of cost-containment policies,” says Monika Stefańczyk, head pharmaceutical market analyst at PMR, a market intelligence firm. “Sometimes the only solution is to finance research by European Union funds.” Funding is scarce, however, from both the public and private sector. The period between developing a drug and bringing it to market is long; this delay often makes biotech firms unappealing ventures to back. The generic drugs market, with its proven products and faster routes to revenue, is much more attractive.

For a biotechnology sector struggling to move from the laboratory to the market, the next five years will be crucialWords: Abigail Brooks

From cell to sell

“Asia’s emerging economies are an opportunity for cooperation rather than a threat”Tadeusz Pietrucha, Medical University of Łódź, Poland

The region should take heart, however, from its success stories. Poland’s red biotech market is one to watch. Bioton, the country’s biggest biotech firm, has successfully registered 20 products from the Gensulin family. Used for the treatment of diabetes, the products have enjoyed commercial success at home and abroad.

There are potential successes too in Poland’s pipeline. Celon Pharma is currently working on cancer treatments using siRNA technology. If successful, these drugs “could have significant Im

age:

Mas

terfi

le


Healthcare

CEE’s biotechnology sector needs to find a faster way from the laboratory to the marketplace. PwC’s Pharma 2020 report suggests the following:l New development technologies

such as virtual process design and validation, similar to computational modelling, would enable biotechnology firms to design and validate manufacturing processes virtually

l New manufacturing technologies such as transgenic engineering – where foreign genes are put into

animals and plants so they start expressing them – can be used to produce large quantities of proteins

l New distribution technologies, such as cloud computing, would provide information platforms for data to be shared securely and economically with suppliers around the world

l New patient interface technologies such as a prototype chip and receiver, which records exactly when a tablet is metabolised, aim to help patients manage their health more effectively

A faster process

impact, yet the company will probably not be able to independently finance the market launch of the innovative drug”, says Stefańczyk.

Regenerative medicine also holds great potential for the Polish biotech sector. Celther and Euroimplant are two firms conducting extensive R&D into the use of stem cells in regenerative therapies. “Firms such as this give reason to hope that earlier research conducted by Polish scientists will yield significant gains for the Polish bioeconomy,” says Stefańczyk.

The missing linkPharma 2020 states that speeding up the drug development process is crucial for the biotech sector. Firms and regions will be measured on their ability to provide demonstrable value for money. With ageing populations and increasing numbers of people falling ill, the current model for manufacturing and distributing medicines is not fit for society’s future needs. Solutions to make this process quicker and simpler lie in development of new technologies and greater collaboration (see box).

For Pietrucha, collaboration is key: “The speed by which Central European biotech companies develop will be illustrated by their ability to cooperate effectively among themselves.”

The next five years will be crucial for the success of CEE’s red biotech sector. Greater efficiency and ongoing collaboration should be the watchwords of the future.

Abigail Brooks is a staff writer for Transform.

5High five

After the turbulence of 2009, inward investment in CEE picked up last year. Here, we examine five deals

struck in 2010 that will have an impact on investors’ attitudes towards the region

Words: Charles Orton-Jones

28

5 1The deal: PepsiCo purchases Wimm-Bill-DannLocation: Moscow, RussiaWhy it’s important: Demonstrates investors are still keen to crack Russia’s non-energy markets

The cynics said Russia was becoming a no-go zone for Western investors. This deal proved them wrong. The $3.8bn purchase of 66% of fruit juice and dairy firm Wimm-Bill-Dann by PepsiCo in December was the biggest FDI deal of the year in CEE. It showed not only that Russia has an appeal beyond the energy sector, but also that the government is willing to authorise takeovers of flagship Russian enterprises. In 2008, Russia passed a law regulating foreign investment in strategic sectors. Deals in 15 sectors would need approval from the government’s takeover commission. The commission has teeth: in June 2010, the planned merger of TeliaSonera and Altimo’s shares in mobile phone networks Turkcell and Megafon was vetoed.

The worry was that Russia might become off-limits to all but the hardiest of investors in the energy sector, so the PepsiCo transaction will come as a huge relief, both to the Russian government and to Western investors who can take heart that PepsiCo is investing for the long term in Russia.

2The deal: Wanhua buys BorsodChemLocation: Kazincbarcika, HungaryWhy it’s important: The first of a potentially long series of Chinese deals

Here come the Chinese! The tie-up between the two mid-sized manufacturers of isocyanates (a sort of PVC used in cars and sofas) might have looked a little dull, but the origin of the buyer sent investment agencies across CEE into a flutter. Wanhua, of Shanghai, spent $1.2bn on Hungarian chemicals firm BorsodChem, and if you believe the hype it’s the start of a long-overdue series of investments by Chinese firms in the region.

So far, CEE picks up just 3% of China’s external investment. Bulgaria is home to two of the highest-profile Chinese investments in CEE – Huawei’s involvement in Bulgaria’s telecoms network and Great Wall Motors’ car plant in Bahovitsa. Now there’s real excitement about Chinese investment. The European Bank for Reconstruction and Development forecasts Chinese investments in CEE will rise to $23bn by 2015, up from $3bn in 2007. If the BorsodChem deal marks the start of this transformation, the whole region has reason to feel positive.

The best thing to be said about foreign direct investment (FDI) levels in CEE in 2010

is that they weren’t as low as the year before. Investment levels fell sharply across the region in 2009 as the global financial crisis took effect: Hungary’s FDI levels dropped 70%, Russia’s 48% and Latvia’s 71%. Overall, PwC calculates the region’s investment levels fell to $77bn, down from $155bn. The decline was particularly tough because the region had enjoyed a prolonged investment boom – with FDI rising fivefold in five years to 2008. In 2010, FDI levels stabilised and, in some nations, began to recover.

A string of headline-grabbing deals in 2010 indicates a shift away from a dependence on privatisations and energy-related investments, both prevalent before the crisis, and towards new sources of investment for the region. The Chinese are finally signing deals, existing centres of excellence in the digital and high-tech fields are continuing to attract new R&D investors, and there’s been a welcome diversification away from hydrocarbons. This is a development widely seen as vital for the long-term prosperity of the region.

CEE’s governments are increasingly doing their bit to attract and hold on to inward investors, using a mix of subsidies, steps towards a more business-friendly environment and even export restrictions designed to encourage investment. The tactic, employed by Russia for its pharmaceutical industry, has triggered a wave of inward investment into the country by many global pharma players.

Whichever way governments have decided to play it, the region’s FDI prospects are looking increasingly brighter.


Foreign direct investment

3The deal: AstraZeneca plans to spend $150m on a drugs plantLocation: Kaluga, RussiaWhy it’s important: Russia’s new drug importation laws are not as onerous as initially believed

In an industry where a single drug can cost $200m to develop, the AstraZeneca deal should be seen not for its size, but for its significance. In January, the Russian government announced tough restrictions on drug manufacturers exporting to Russia, which would be lifted should the makers invest in Russian plants. A month later, AstraZeneca announced it would be developing a plant in Kaluga, south-west of Moscow, to produce heart and cancer drugs.

Pretty much every other big pharma firm is pursuing a similar course: Sanofi-Aventis is buying an insulin plant, GlaxoSmithKline signed a technology transfer deal with Moscow-based Binnopharm to produce vaccines and antigens, and Finnish drugmaker Orion is in acquisition talks with a number of Russian firms. Prime Minister Vladimir Putin, who devised the restrictions, is starting to see the fruits of his strategy.

5The deal: Chinese railway-for-minerals exchangeLocation: Choice of three sites in KyrgyzstanWhy it’s important: First big deal since President Bakiyev’s departure in 2010

Kyrgyzstan looks to have landed one of the biggest investment deals in its history with a $2bn exchange with the Chinese government of mineral deposits for a railway line. The Chinese would fund the construction of a railway line linking Kyrgyzstan, Uzbekistan and China, in return for access to the nation’s rich mineral deposits. A gold ore deposit in southern Jalalabad and aluminium and iron deposits in Naryn province are being examined by Chinese geologists. The deal shows that Kyrgyzstan can land major investment deals despite its financial difficulties, ongoing since the fall of President Kurmanbek Bakiyev. The only hurdle is a lack of endorsement from the main opposition party.

Charles Orton-Jones is a freelance business journalist, specialising in entrepreneurship and small businesses.

4The deal: Apprise Software invests in Czech facilityLocation: Brno, Czech RepublicWhy it’s important: Clustering continues to attract investors

Every country in CEE wants to build a world-class technology hub. So far, the Czech Republic is leader of the pack. Cisco and Microsoft opened technology centres in Prague and Hradec Králové, joining a long list of Western software firms with major facilities in the Republic, including IBM, SUN Microsystems and Telogic. US firm Apprise announced in October 2010 that it is to spend $100m on a software development centre in Brno to develop enterprise resource planning packages.

CzechInvest boss Miroslav Křížek told reporters that Apprise had assessed a number of neighbouring countries and that the concentration of software firms already in the Brno area proved decisive. Government subsidies have played a role in creating this enviable environment. Foxconn, maker of iPhones, received a subsidy in 2009 and Glanzstoff High Tech Fibres of Austria negotiated a 40% subsidy for its $25m production facility.

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Download PwC’s new report – Demystifying innovation: Take down the barriers to new growth – at www.pwc.com/demystifying-innovation

Demystifying innovationSeventy-eight per cent of CEOs worldwide believe innovation will generate “significant” new revenue and cost reduction opportunities over the next three years. How can they create the right processes, structures and culture to transform viable ideas into commercial success?

www.pwc.com

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A new UK law on bribery will bring CEE companies with UK connections under its jurisdiction. Businesses should be awareWords: Jo Russell

The back of backhanders

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The foundations for current UK legislation on bribery came into force in 1889

but many question how well it has stood the test of time. As Jack Straw, when UK Secretary of State for Justice, said: “The UK’s statutory criminal law on bribery is old and anachronistic…It has never been consolidated, and contains inconsistencies of both language and concept.” The Organisation for Economic Co-operation and Development’s working group on bribery agreed, heavily criticising the

UK in its reports of 2003, 2005 and 2007, and recommending enactment of new legislation as soon as possible.

That new legislation – the UK Bribery Act – will come into force on 1 July. But it is not just UK companies that need to take note. The Act applies to foreign companies that carry on

The Old Bailey, England’s Central Criminal Court, topped by a bronze statue of Lady Justice


Mongolia


Bribery laws

business or part of their business in the UK. In a recent speech, Richard Alderman, head of the UK Serious Fraud Office (SFO), said: “A [foreign] company that carries on business or any part of its business in the UK will be within the SFO’s jurisdiction for any bribery that it commits in any other part of the world, even if that bribery has no connection whatsoever with the UK business presence of the [foreign] company.” What’s more, if a firm satisfies the test of carrying on business or part of the business in the UK, and “we find evidence of bribery in another country that has had a detrimental effect on a UK company, then taking action against that…company will be a high priority for us”.

PwC forensic services partner Will Kenyon, who helped develop the Act, says: “The Act is an overdue exercise in tightening up and rationalising the existing patchy framework.” It will be an offence to offer a bribe, receive a bribe, bribe a foreign public official and fail to prevent a bribe. The latter is a corporate level offence, the only defence to which is to demonstrate that adequate procedures were in place to prevent bribery.

This means ensuring staff are trained about what would

“The UK’s statutory criminal law on bribery is old and anachronistic…”Jack Straw, former UK Secretary of State for Justice

34

courts will respond. But growing cross-border cooperation increases the likelihood of the SFO stepping in.

There has been a significant increase in the number of anti-corruption related prosecutions in the past five or so years, says Clegg, thanks mainly to the US’s Foreign Corrupt Practices Act and national legislation in a number of European countries. In 2005, there were fewer than 50 such prosecutions in Europe; by 2009 that had risen to more than 350. In 2010, Bulgaria, Hungary, Germany and the UK imposed prison sentences of up to 10 years on individuals acting in CEE. “Companies dealing in the region are now realising this is real – the probability of an investigation has now increased,” says Clegg.

He adds: “There are benefits to doing business properly. If the UK Bribery Act does one thing, it hopefully gives companies that have a UK presence an extra tool to resist corruption with.”

Jo Russell is a freelance business journalist and profile writer.

constitute a bribe or a facilitation payment that may be disallowed under the Act. Policies detailing a company’s stance on bribery and corruption should be clearly communicated, says John Wilkinson, head of governance at PwC Russia. Firms should undertake risk-based assessment on where the challenges are likely to be, and regularly review internal controls. The use of adequate procedures must extend beyond employees. “A lot of work in CEE from inbound investors is done through distributors and middlemen, but that is one of the hardest areas to control. They are remote from your business and remote geographically,” he says. Steps can be taken contractually, such as building in audit rights, but clear communication and an open approach is recommended. “You will have to work harder with your network than with your own organisation. The more grey area you allow in your policy procedures, the more third parties will push the limit,” Wilkinson advises.

Red flagsThere are other “red flags” companies should be aware of, says Richard Clegg, a partner in the Sofia office of Wolf Theiss, a law firm specialising in Central and South East Europe. “There is a history of corruption investigations in certain sectors – mining, energy and medical devices, for example. Companies operating in these areas have an extra obligation to be careful,” he says. Suppliers that operate in one country but ask for invoices to be paid into a bank account in a different country should also set alarm bells ringing.

Implementing adequate procedures to prevent bribery is technically voluntary. “No one

will be checking whether or not you have them. But if a bribe occurs and you are charged with failure to prevent, then your only defence is adequate procedures. No one in their right mind would suggest ignoring it,” says Kenyon.

Caught in the actCompanies caught in the act could face unlimited fines and permanent European Union-wide debarment from bidding for public sector contracts. Individuals could face prison terms of up to 10 years and unlimited fines. Overseas nationals would not be prosecuted, but the companies on whose behalf those individuals paid bribes would be. Senior officers who “consent or connive” in an act of bribery can be charged on the same facts and be at risk of imprisonment. Time will tell how aggressive prosecutors will be and how

“If we find evidence of bribery in another country that has had a detrimental effect on a UK company, then taking action against that company will be a high priority for us”Richard Alderman (pictured), head of the UK Serious Fraud Office

Toughest by far

1889When foundations for current UK anti-bribery legislation came into force

Freeing up creativityHas China been overhyped? George Magnus’ book presents a concise argument looking at the future of emerging markets Words: David Bond

The West’s system of law is well constructed, unlike in many emerging markets


Book review

Is the eastward shift of power inevitable? Recent thinking suggests that the BRIC economies,

particularly China, are set to level with and even overtake developed nations in the next 50 years. George Magnus’ book, Uprising, presents the challenges emerging markets will face over the coming decades.

China industrialised late because it could not get its social and political institutions right, he says. This lack of drive to reform remains. But it is the speed with which emerging market governments embrace such institutional reform, and the creativity that this reform fosters, that dictate the long-term success of these nations.

At the heart of the argument is the question of whether GDP growth alone can be effectively

Of course this is not true everywhere, and this is a guide to where investors should seek value – Brazil and some Eastern European countries are starting to make the necessary changes. The lesson for investors is to consider how institutional change is progressing.

Whether the eastward shift of power is inevitable depends on how far east one looks. Investors should focus long-term investment on emerging markets, particularly those in Eastern Europe, where genuine commitment is shown to freeing up creativity by building secure legal and social systems.

David Bond, a former fund manager, is a freelance business journalist.

converted into economic power and stock market growth. Magnus argues not, and he has been right so far. While the West may suffer an economic loss in coming years, it is likely to hold on to a competitive edge based on its supply of skilled workers and the maintenance and growth of the institutions through which workers’ productivity is channelled. In other words, the West’s system of law – particularly of ownership, educational institutions and social welfare groups – is well constructed and is evolving. Compare this to the stagnating bureaucratic and political systems in many emerging markets.

Historian Niall Ferguson has argued that America’s decline is likely to be sudden due to systematic shortages of manpower, finance and the will to maintain global domination. He may be right. But Magnus, a senior economic adviser with UBS, makes a convincing case that this is more likely to be because the US is getting it wrong rather than China getting it right. It is not enough for China to manufacture and export; success lies in the reform of its institutions.

Uprising: Will emerging markets shape or shake the world economy?

By George Magnus

Publisher: John Wiley & Sons

Success Formulas for the New Decade

By Andrej Vizjak, PwC consulting leader for South Eastern Europe

Vizjak offers a comprehensive guide for companies in industries dominated by a few large firms that shape their evolution and direction. It identifies four profiles of the past decade – the industry shark, regional hero, local specialist and international champion – and defines their strategies as success formulas for the next decade. Vizjak disputes the idea that the big fish will always eat the smaller fish, arguing that smaller and local players can compete with global players. The book is available in German, Slovenian, English and Croatian and is currently being adapted for the Romanian and Bulgarian markets.

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hile doing business in Russia can be challenging,

the benefits to be reaped make it worthwhile. Dr Carl Fey, of the Stockholm School of Economics, and INSEAD’s Stanislav Shekshnia have come up with eight commandments to help investors negotiate the country’s business landscape.

Their report, The Key Commandments for Doing Business in Russia, intended as a guide for inward investors, is based on interviews with 36 foreign firms operating in Russia, including British American Tobacco, Unilever and McKinsey. These interviews, coupled with the authors’ business expertise, enabled them to compile the rules.

1Practise authoritative, not authoritarian, leadershipThe title of CEO does not guarantee respect or compliance from employees in Russia. In 1999, Robert Sheppard took over BP-owned oil company Sidanco after the firm had been declared bankrupt. Sheppard involved his employees in designing, planning and implementing a turnaround process. He invested in employee development and created a corporate university. By the time Sheppard left in 2002, Sidanco was one of the major oil companies in Russia.

W

Unlocking RussiaA new study offers businesses a set of rules to help navigate corporate Russia Words: Abigail Brooks

2Build a strong one-company organisational culture with visible foreign elementsFey and Shekshnia observe how transparent organisational cultures that value meritocracy, fairness and respect for individuals – values commonly found in mature economies – generate a positive response among Russian employees. At American food giant Mars, any employee can apply for a new job within the company. All candidates are invited to make a presentation, participate in a business game and have an interview. Test results are evaluated by HR and potential future line managers. “Employees’ past work results do not have much weight because the question is not if the employee can do his/her current job well, but who can do the new job best,” the authors say.

3Create an empowered organisation step by stepUS razor manufacturer Gillette has implemented an improvement programme to motivate its employees and generate ideas. Cross-functional teams are given a week off from their normal responsibilities to spend time addressing a specific problem and implementing the solution. “The projects have proved quite successful,” the authors say.


From the business schools

7Recognise that corruption is omnipresent in Russia and must be managedThe key to dealing with corruption, say the authors, is for companies to be clear on their own ethical standards, stick to their principles and come up with coping strategies.

When Telenor, a Norwegian telecoms company, entered the Russian market more than a decade ago, it used a business model it hadn’t employed elsewhere. Rather than applying directly for its own telecoms licence, the company bought non-controlling stakes in local operators and outsourced certain activities, such as dealing with regulatory authorities and bidding, to local agents. This helped Telenor break into the Russian market without having to compromise its ethical standards.

4Respect local rules but play your own gameIn the early 1990s, management consultancy firm McKinsey set up in Russia. While many predicted doom, McKinsey thrived in Russia without compromising on its target audience, pricing or work quality. How? By recruiting and training Russian-speaking consultants and taking time to understand the importance of discretion and office politics when operating in Russia. Fey and Shekshnia affirm that companies which fail to understand Russian specifics pay a high price for their stubbornness.

5Stand firm on major goals and be flexible on detailsRussian telecoms operator VimpelCom wanted to become a leader in the Russian telecoms sector. While the company was flexible on technology – adapting to GSM to keep up with market developments – it didn’t lose sight of its end goal. Four years after it was founded, VimpelCom became the first Russian company to be listed on the New York Stock Exchange.

6Learn to live and manage in crisisCrisis management is essential in Russia and company leaders must be ready to react quickly, say the authors. Trem Smith, CEO of the Russian operation of US oil company Chevron, advises companies to remain calm and analytical, seeking advice from the government, local businesses, analysts and academics.

Impact measurement and performance analysis on CSR (IMPACT)

Central European University Business School (CEU BS), Hungary

There is little known empirical evidence on the impact of corporate social responsibility (CSR) on company performance and the wider economy, partly because no conventional measurement tools exist.

The Centre for Business and Society at Central European University Business School in Hungary is part of a 16-strong consortium of European research institutions working together to tackle this

knowledge gap. The project – IMPACT – aims to develop tools for assessing CSR at a micro (company), meso (regional) and macro (country and EU) level.

Researchers want to measure the impact of CSR programmes to understand whether the EU is justified in supporting them via public policy and taxpayers’ money. To assess this, the project is focusing its research on three areas.

First, it is analysing the effectiveness of national and EU policies supporting CSR, as well as their impact on society. By studying existing EU strategies, tools and policies on CSR, researchers aim to identify “best CSR practice” and use this to

provide recommendations and advice on future policies

Second, interviews and documentary data from 20 companies in five sectors – construction, textiles, carmaking, information and communications technology (ICT) and retail – will be scrutinised for clues about CSR drivers, practices and performance. CEU BS will focus on two case studies in ICT and construction.

Third, a questionnaire will be sent to around 500 industry experts across the five sectors. This will generate data for sector, country and region-specific analysis.

Evidence gathered will form the foundation of the project, with results due in March 2013.

The key commandments for doing business in Russia

By Dr Carl Fey, associate dean of research, Stockholm School of Economics and Stanislav Shekshnia, affiliate professor of entrepreneurship and family enterprise, INSEAD

8Cultivate relationships with government agencies at all levels in businesses and civil societyIn Russia, the government influences the ease of doing business, so it helps to build good relationships with government officials. Computer software company Microsoft enjoys a relationship of mutual respect with the government. Crediting officials for successful projects, addressing them properly in public and sending birthday cards are just some of the small but significant gestures that help.

Measuring the impact of CSR

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Who calls the tune?The issue of where responsibility for regulating CEE’s banking sector lies needs to be resolved before the next downturn hitsWords: James Owen


T he banking sector in CEE survived the financial crisis in much better shape

than seemed likely two years ago. However, its unexpected robustness has meant that the key issue concerning future regulation – who calls the tune in setting the rules for the banks operating in CEE – has not yet been resolved. Failure to deal with this question could leave the sector worryingly exposed if there were to be a serious economic downturn in the next few years.

At the worst point of the financial crisis, there were widespread fears that many banks in CEE could collapse. The region was heavily dependent on external capital and several countries were in the final stages of property booms, which had been pumped up by easy access to loans in foreign currency. Many outside observers feared that the CEE economies would fall into the same downward spiral as the Asian economies – followed by the Czech Republic in 1997 and then Russia in 1998 – had done a decade before, with an outflow of foreign capital causing local exchange rates to depreciate sharply, leading to a wave of bankruptcies and bank failures as loans taken out in foreign currency during the boom became too heavy a burden for borrowers to pay back.

Doomsday avertedThe region managed to avoid this doomsday scenario. Only in Latvia, where the collapse of Parex Bank in late 2008 forced the government to seek external support from the International Monetary Fund and European Union (EU), was there a serious loss of confidence in local banks. Elsewhere, a combination

Banking

of arm-twisting from the authorities, the self-interest of the local banks’ foreign owners and financial support from their governments ensured that all the major foreign banking groups fully supported their CEE subsidiaries. This maintained confidence in the local banking system and limited the outflow of private capital.

However, the success of the CEE economies in avoiding the feared wave of bank collapses has meant that the international effort to update the rules for banking regulation has been focused on dealing with the big international banks rather than banks in CEE. The end result of all this discussion – the Basel III rules – has focused on ensuring that banks have more capital in place to absorb losses in such areas as investment banking and limiting banks’ dependence on short-term market funding. There is an ongoing debate between the representatives of the major international banks, which argue that the new rules will hamper lending and increase its cost, leading to slower economic growth, and academic finance specialists, who judge that the Basel III measures will have only a very limited impact on the cost and availability of credit.

This debate is likely to continue, but it is not particularly relevant to banks in CEE. The banks in the region generally focus on conventional commercial banking and have little exposure to the more exotic financial activities that set off the financial crisis. The new rules do not look likely to be a significant constraint on the behaviour of most banks in CEE. Certainly, the element of Basel III that has attracted the most

attention – the tightening of capital requirements – will not be a problem.

“Most banks in CEE are well capitalised and should have little difficulty in meeting the new capital requirements of Basel III,” says Aleš Barabas, chief risk officer of Unicredit in the Czech Republic. In fact, most of the region’s banks, with the exception of Slovenia, generally have stronger capital positions than in the rest of the EU (see table overleaf).

Other concernsInstead, the main regulatory issues affecting the banks in the region concern two questions that received less attention during the debates over Basel III – the treatment of foreign currency loans and the issue of who sets the rules.

The level of foreign currency loans is only an issue for those CEE countries where domestic interest rates are significantly higher than in the euro area. In countries such as Romania, Hungary and Poland, the attractions of the low interest rates on offer for borrowing in foreign currency are likely to re-emerge as memories of the crisis fade. Despite attempts to develop local currency debt markets to provide a basis for long-term lending (for example, for mortgages), there is likely to be

“Most banks in CEE are well capitalised and should have little difficulty in meeting new capital requirements”AleŠ Barabas, chief risk officer, Unicredit,

Czech Republic

continuing tension between the banks and local regulators. The banks will be keen to offer loans in euros, while the regulators will seek to restrict foreign currency lending, especially to households.

The issue of who sets the rules for CEE banks and who would be liable for covering the costs of any bank collapse is more fundamental. The EU is in principle a single financial market, with institutions in one member state able to offer financial services in any other, with the “home” regulator supervising operations and being responsible for providing deposit guarantees in the “host” countries. This system did not work well during the crisis and there are clear differences of approach between home and host countries in CEE.

In particular, in CEE countries with strong banking systems, there are concerns that the resources of the local operations of foreign-owned banks could be diverted in a future crisis to support their parents. Indeed, if the sovereign debt crises now affecting Portugal, Ireland and Greece had started two years earlier, the CEE subsidiaries of Portuguese, Irish and Greek banks might have come under pressure to divert funds to support their home institutions, weakening local banking systems. Countries such as the Czech Republic, where the banks and regulators have been more conservative than others in CEE (perhaps reflecting the Czech Republic’s own problems in 1996-97), and Poland therefore wish to keep their ability to decide how to regulate the banks operating on their territory.

In contrast, in countries where the local banks are heavily dependent on funding from parent institutions (most of the rest of the region) and required

external support during the crisis, local regulators see the recent crisis as reinforcing the need to involve the parent country regulators (for example, Sweden for the Baltics) more closely in monitoring their banks’ foreign operations.

New regulatorsComplicating things further, there are two new EU-level players in this debate – the European Banking Authority and the European Systemic Risk Board. Both launched in January 2011 and have limited powers. However, there is a belief that they will gradually accumulate more powers at the expense of national regulators.

Shifting regulation to EU level would resolve the tensions – and reduce the compliance burden on the banks. However, it would reduce the ability of national governments and supervisors to regulate bank operations in their territory, while governments fear that they would still have responsibility for financing any bank bailouts that might be needed. Not surprisingly, many governments do not find this combination attractive.

Resolving these issues will be politically difficult but if they are not dealt with soon, the next economic downturn could confront the CEE banking sector with an even more serious variant of the problems that it faced in 2008-09. In particular, as most EU member states are now in a much weaker budgetary position than they were before the crisis, relying on support from local banks’ parents (and their governments) is not likely to work as well as it did two years ago.

James Owen is an economic and financial analyst in CEE.

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Tier 1 capital as share of risk-weighted assets(December 2010 unless otherwise specified) Bulgaria 15.2Czech Republic 14.1Estonia 16.5Hungary 11.6Latvia 11.5Lithuania 11.6Poland 12.6Romania 13.8Slovakia 12.0Slovenia 9.2EU27 9.9

Note: Figures for Poland, Romania, Slovakia and Slovenia refer to September 2010; figure for EU as a whole is for December 2009.

Sources: IMF, ECB, national central banks, national financial regulators

2011Two new regulators, the European Banking Authority and the European Systemic Risk Board, are set up

2008The Parex Bank in Latvia collapses


Nuclear energy

Top priorityCommitment to safety standards at Slovenské elektrárne is as important as ever, says Jozef Zlatňanský, head of nuclear oversight

Operating history

1984Unit 3 of Bohunice starts operation

1985Unit 4 of Bohunice starts operation

1998Unit 1 of Mochovce starts operation

2000Unit 2 of Mochovce starts operation

2008 Modernisation of units 3 and 4 of Bohunice completed

2012Unit 3 of Mochovce due to start operation

2013Unit 4 of Mochovce due to start operation

A t Slovenské elektrárne, we always work hard to ensure maximum safety standards. Recent events at Japan’s Fukushima nuclear power

plant are being thoroughly analysed by the nuclear energy industry. As part of Slovenské elektrárne’s efforts to understand these events and share the lessons, we have taken part in meetings with industry associations to work out the sector’s response. The Convention on Nuclear Safety is planning an extraordinary general meeting in August 2012, by which time sufficient information should have been analysed to help the industry learn the lessons of Fukushima.

Safety firstIn the meantime, Slovenské elektrárne remains committed to its longstanding focus on safety. In the 1990s, an International Atomic Energy Agency (IAEA)-led initiative published guidelines to raise the design and operational standards of VVER reactors. The guidelines aimed to identify safety issues in VVER reactors and compare the safety standards with the highest safety standards applied in Western power plants. The ultimate goal was to match the highest safety standards of the IAEA.

Based on a proposal from Slovenské elektrárne, the Nuclear Regulatory Authority of the Slovak Republic agreed a €500m modernisation and upgrade programme for the two nuclear reactors at our plants in Bohunice V2 to comply with the IAEA rules. Similar safety standards were applied to units 1 and 2 at our Mochovce plant, which were then under construction. In 1999-2000, Mochovce became one of CEE’s first nuclear power plants to resolve safety issues in order to comply with IAEA safety standards.

Our commitment to safety is backed by our parent group ENEL, which we joined in 2006. As well as complying with rigorous national legislation (Slovakia’s 2004 Nuclear Act), ENEL Group’s safety strategy includes independent safety reviews conducted by the IAEA and the World Association of Nuclear Operators every three years.

People powerWe are also focusing on the human factor of nuclear safety through continuous training aimed at reducing human failure. For example, our management development programme has a safety training aspect and promotion depends on engineering capabilities and safety skills.

A successful, safe and reliable nuclear energy industry is dependent on cooperation and assistance between those who operate within it. Slovenské elektrárne aims to play an active role through membership of working groups and associations for nuclear energy at European level. We also regularly provide experts for international safety review missions. National, European and international level safety standards are a must, and we aim to take our own safety standards even further.

We are also focusing on the human factor of nuclear safety through training

Building on our expertisePwC has topped several categories in an independent report on business consulting firms, but it’s not resting on its laurelsWords: Abigail Brooks

A series of reports on business consulting firms, by research and analytics firm IDC, has ranked PwC as strongest on strategy and growth. The reports also said PwC was “the most capable of all

firms” across a number of areas, including “helping clients identify and implement options for growth”.

PwC is constantly looking to build on its expertise. Its CEE network is a case in point. During the past few months, it has recruited a number of new partners to enhance the service it offers to existing and potential clients in the region.

Robert W. Dennis

Having worked at PwC in the US and with more than 20 years’ experience in a wide variety of financial and business issues, Robert has joined the Kazakhstan office as CEE energy, utilities and mining leader. During his time at the Houston office, he was national leader of energy and utilities, working with global clients such as BP.

Kazakhstan

Andrej Vizjak

Andrej has joined PwC as consulting leader for South Eastern Europe (SEE). Previously, he was the CEE CEO of management consultancy A.T. Kearney. He currently sits on the board of domestic appliance maker Gorenje. He has also written several strategy and management books, including his latest, Success Formulas for the New Decade (see page 35).

Romania

Bogdan Belciu

Bogdan, also from A.T. Kearney, has joined PwC as a partner. With more than nine years’ management consultancy experience in Europe and the US, Bogdan’s expertise spans strategy, M&A, operations, supply chain and procurement in a wide range of industries such as telecoms, utilities and financial services.

Czech Republic

Dirk Buchta

Dirk joins the advisory team in the Czech Republic as technology, information, communications and entertainment leader for CEE. Prior to PwC, Dirk worked at A.T. Kearney for 18 years. During that time, he led the strategic IT practice across Europe and founded and led the firm’s Dubai office and Middle East Unit.

42

Hungary

Tomasz Bejm

Based in Warsaw, Tomasz has joined PwC as a technology consulting leader. He brings 17 years’ experience in IT and risk consulting to the PwC team. Tomasz is focusing on the implications of implementing IT strategy, architecture and governance and specialises in financial services, telecoms, energy and utilities.

Poland

Piotr Romanowski

Before joining PwC as a CEE financial services advisory leader, Piotr spent 10 years with McKinsey & Company leading its financial services practice in Poland and working extensively across CEE. Piotr brings broad strategic capabilities in banking and insurance to PwC, as well as deep market expertise in Poland and Russia.

Zsolt Szelecki

Zsolt is a human resources consulting partner with extensive experience gained by building and developing several HR consulting businesses in CEE. His past positions include 10 years as emerging markets leader for Hewitt Associates. Zsolt is an economist by training.

Yury Pukha

Yury has been appointed to PwC Russia as an advisory partner after building up considerable experience at a number of global consultancies, including Accenture, A.T. Kearney and Roland Berger. At PwC, Yury is responsible for communications, high-tech, entertainment and media clients.

Alexey Bereznoy

Alexey has joined PwC as an expert in operational excellence in energy. He will be working closely with PwC’s energy clients including Gazprom, Lukoil and Bashneft.

Natalia Gerashchenko Natalia joined PwC from a leading strategy consulting group, where she was leader for the financial services industry across the CIS. She has advised large Russian and international banks and insurance companies across CEE.

Geoff Nicholson

Geoff has joined PwC Russia as CEE financial services advisory leader. Having held positions at Goldman Sachs and Troika Dialog, he has a background in strategy, change programmes and quantitative risk analysis.

Russia

Douglas DowningDouglas has joined PwC as a CEE information technology leader. It is the latest role in an extensive career in professional services. His expertise focuses on IT strategy, architecture and design implementation.

Simon Kenyon

Simon is a transaction services leader and has come to Russia on a three-year secondment from PwC Germany. He specialises in financial due diligence and will be working with PwC’s advisory practice across a range of industries.

Tim Nicolle

Previously an investment banker at Deutsche Bank, Tim focuses on strategies to consolidate smaller gold mines and oil fields, regional government public-private partnerships and infrastructure financing.


Advertising feature

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Cross-sector innovatorRomania’s Electrogrup has succeeded by exploiting the connectivity between the energy and telecoms sectors. Now, CEO Teofil Muresan is ready to apply this competitive advantage to new sectors and geographiesInterview: Eila Madden

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Interview: Electogrup

When Teofil Muresan started Electrogrup in Cluj-Napoca, in Transylvania, north-west Romania, in 1997, he could

never have guessed just how successful the venture would be. Today, Muresan is CEO and co-owner of one of the top five players in Romania’s energy and telecoms infrastructure industry. Electrogrup is one of a group of companies Muresan controls with his younger brother, Simion.With estimated total assets of €72.59m and turnover of €91.72m, the 303-employee group of companies expects to deliver pre-tax profits of €7.18m in 2010.

Electrogrup’s unique selling point is its innovation, driven by a desire to optimise costs. In 1999, it became one of the first companies to run optical fibre cables along electricity lines. Why build entirely new infrastructure for the telecoms industry when it could exploit existing energy infrastructure? In 2003, Electrogrup took the concept one step further, erecting a mobile telephone

mast on top of an electricity line pole.The company’s cost-effective approach has

won it a number of high-profile customers, from E.on, Enel and the CEZ Group in the energy sector to Vodafone, Orange and Romtelecom in the telecoms industry.

Now, Muresan is ready for the next phase of growth. In addition to offering existing services in countries beyond Romania, he wants to expand into new but related sectors including new media and renewable energy. Last year Electrogrup entered into a joint venture with German partner SSC Montage to form Wind Energy Service East Europe. The new company will offer installation, operation and maintenance services in the wind power sector across a number of Eastern European countries including Bulgaria, Hungary and Ukraine.

Muresan spoke exclusively to Transform about Electrogrup’s success to date and its plans for the future.

Q: You founded Electrogrup, which you run with your brother Simion, in 1997. Where did the idea for the business come from?A: I founded Electrogrup in the same year that the first two telecoms licences in Romania were issued. I considered that to be a good opportunity to approach a new field in parallel with energy infrastructure construction. Simion joined the company two years later in 1999.

Q: How has the company grown since its launch, and what have been the main challenges along the way?A: Encouraged by the dynamic growth of the Romanian economy, Electrogrup quickly developed the necessary skills to grow – advanced technology use, modern engineering and being a reliable local partner for multinational companies.

We faced financial and technical challenges when deciding to offer, as added services, our own fibre optics infrastructure to our customers. The new service consisted of building a national fibre optics network on high-voltage electricity poles. In the end, our technical solutions and business plan were considered strong suits by our customers, the banks and line owners.

After overcoming the early difficulties, Electrogrup’s challenges were to maintain transparency and neutrality while providing quality services to all telecoms operators.

Q: Electrogrup has found a way to exploit the connectivity between sectors. How does this give you a competitive advantage?A: I believe prices should reflect both costs – as a result of fair competition – and a decent profit margin, regardless of the type of provider involved: distributors of natural or financial resources, technology or food suppliers, for example. In the long run, speculators won’t be able to make it. Cost optimisation is vital in Electrogrup’s strategy. The company’s new telecoms infrastructure over existing electrical infrastructure has determined our low costs in investment and maintenance. Interconnectivity, in general, has great potential when it comes to cost optimisation.

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Q: The company has recently expanded into the renewable energy and new media sectors. Why these sectors in particular?A: We chose to further invest in renewable energy and new media carriers because the domains are quite close to our business profile – as a general entrepreneur and maintenance provider. We will invest in our own renewable energy power plants. As for targeting the new media field, its content needs compatible telecoms networks. Direct One, a company of the group, owns and operates the first Content Delivery Network in Romania, offering complete data carry services, as well as video management and delivery services for the media industry.

While we’re expanding, we’re also strengthening the group’s existing lines of business. The company will continue to provide specialised services in maintenance and construction of complex works of infrastructure: telecoms, energy, natural gas and civil construction.

Q: You have also expressed an interest in pursuing geographic expansion. Which markets are you targeting?A: We’re targeting neighbouring markets for wind park maintenance and video content management services. With regard to the business of operating infrastructure, we’re

pursuing a strategy of building partnerships with companies in similar markets to Electrogrup across the European Union.

Q: What challenges do you foresee in rolling out these development plans?A: We predict many short-term challenges: increasing competition; necessary cuts in investment; and a lack of market predictability due to the global financial crisis. In the medium to long term, we will have to meet the challenges of managing the group’s growth process.

We will tackle these challenges by optimising our own costs, investing in areas in which the group already offers services, along with expanding into related fields.

Q: One of the company’s strengths is innovation. How do you plan to remain innovative within your sector?A: We will continue to innovate through using combined technologies that are common to the interconnected industries we are active in. Our “bet” is to use the internet and professional networks to develop both our technical skills and lines of business.

Q: Electrogrup does a lot of corporate social responsibility work within the community. What lies at the heart of

the company’s commitment to CSR?A: Electrogrup has been actively involved with local communities, both through financing local initiatives and developing its own social responsibility projects.

We offer financial and managerial support to various institutions, non-governmental organisations and projects in healthcare, culture and sports. But most of all, we focus on education. For us, it is the most important factor in Romania’s progress. We strongly believe that to achieve this goal, the public and the private sector are equally important. This is precisely why Electrogrup will financially support the building and managing of a private international school in Transylvania.

Q: And finally, what is it like working so closely with your brother?!A: Teofil Muresan: Any successful team is formed of people with compatible visions and personalities. From this point of view, you could say we took close to no risks by co-opting into our team our younger sister, Maria, who is our head of legal.A: Simion Muresan: As the chairman of the board, I set Teo’s targets; as his younger brother, I have to listen to him. As you see, we complete each other…

“We’re targeting neighbouring markets for wind park maintenance and video content management services”

The rise of MongoliaBy exploiting its rich mineral reserves, building international business links and investing in much-needed infrastructure, the country is transforming its economy Words: Bernadette Ballantyne

The landlocked country of Mongolia is at a critical juncture in its development as it finally begins to exploit its rich mineral reserves and boost international trade. Over the

past 12 months, the country has staged what the International Monetary Fund describes as a “dramatic turnaround”, following a gloomy year in 2009. Year-on-year growth was up in every sector but one in 2010, and overall GDP grew by 6.1%.

Briefing: Mongolia

The only sector that did not grow was agriculture, still reeling from a poor rainy season and cold winter in 2009-10, which caused the death of millions of livestock.

Agriculture is the biggest employer among the 1.7 million citizens living in the 21 provinces outside the capital, Ulan Bator. However, the low quality of life is fuelling a rise in urbanisation as people flock to the capital to seek work in service sectors including retail, telecoms and transportation. This is putting pressure on the already-stretched infrastructure. More than 1.1 million people now live in Ulan Bator, which is around 46% of Mongolia’s population. The city was originally designed for 500,000. Local experts say that the biggest priorities are health, education and water infrastructure.

The best opportunity for raising these revenues to improve public services is in the mining sector. Rich in coal,

Country facts

6.1%Mongolia’s GDP growth in 2010. Business Monitor International predicts that growth will average 9.6% between 2010 and 2014

Political backdropRuling party: Mongolian People’s PartyPrime Minister: Sükhbaatar BatboldPresident: Elbegdorj TsakhiaFormer Foreign Minister Batbold was elected as Prime Minister following the resignation of former Prime Minister Sanjaagiin Bayar due to ill health in October 2009. In April 2010, Batbold also became the leader of the ruling Mongolian People’s Party. The Prime Minister is supported by the Great State Hural (GSH), a 76-member organisation of elected individuals that sets policy and law.

Mongolia’s President leads the armed forces and has the power of veto in the GSH. President Elbegdorj Tsakhia is a member of the rival Democratic Party and was elected into power in May 2009. A long-term political figure, Tsakhia was an instrumental figure in the peaceful democratic revolution, which saw the country achieve independence from the Soviet Union in 1990.

Social issuesPopulation: 2.8 millionAverage life expectancy: 67Unemployment: 3.3% The good-natured disposition of the typical Mongolian belies the circumstances that challenge day-to-day life. Temperatures polarise between -40°C in the winter and over 30°C in the summer, with the freezing temperatures spanning more than half the year. During the cold season, permafrost covers more than half of the land, making mining and construction impossible. Although the temperature can soar as high as 38°C in summer months, the average annual temperature in the capital is -2.9°C.

Against this backdrop, farmers are abandoning life in the provinces and moving their ger (wooden-framed circular yurts) into the suburbs of Ulan Bator. This urbanisation is putting pressure on infrastructure and public services in the capital.

2.8mTotal population of Mongolia, more than 1.1 million of whom live in the capital, Ulan Bator

gold, copper, molybdenum, fluorite, iron and uranium, Mongolia’s fledgling minerals and mining sector has the potential to transform the economy. With 1.5 million km² of land across the country, it is not surprising that the area has not been fully explored and the biggest reserves could yet emerge.

Economic developmentAlthough exploration of resources was conducted during the Soviet era – the country’s first official coal mine opened at Sharyn Gol in 1965 and the first copper mine at Erdenet in 1978 – progress since then has been slow. The revolution in 1990, which saw the country move from Soviet control to a democratic republic, paved the way for a free market economy, making the mining sector an attractive proposition.

To date, the biggest deal is the Oyu Tolgoi gold and copper mine in the Southern Gobi region – a joint venture between Ivanhoe Mines, Rio Tinto and the Mongolian government.

Canada’s Ivanhoe Mines has a 66% share of the mine, with the government retaining a 34% stake. Australia’s Rio Tinto, a shareholder in Ivanhoe, is managing the project, following an agreement reached in December 2010. The deal will see Rio Tinto raise its shares in Ivanhoe to 49%, as well as providing a $1.8bn loan to finance construction. Commercial production is scheduled to commence in 2013, but Rio Tinto hopes to bring this forward after long-drawn-out negotiations.

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This is mostly because the government introduced a windfall tax in 2006 that required all mining companies to hand over massive percentages of profits. In 2006, prices for copper skyrocketed from $2,600 per ton to just under $9,000 per ton. With tax at 68%, tax law was a certain way the government could collect cash at the expense of attracting foreign investment to the sector.

Since then, the government has changed tack and laws were amended in August 2009. By October 2009, Oyu Tolgoi was signed, but not without many concessions to local infrastructure development, local employment targets and the government retaining a 34% ownership stake. Revenues from the mine have been estimated at $50bn.

Along with scrapping the windfall tax, the government amended VAT law to encourage firms to process their extracted minerals in Mongolia, rather than simply exporting the raw material. Those companies that do will benefit from zero-rated VAT status, allowing them to claim back any VAT already paid. “This is a key difference and can help firms make big savings,” says Sebastian Merriman, PwC tax leader based in Mongolia.

Coal rushThe next major step for the country will be the initial public offering of state-owned company Erdenes Tavan Tolgoi, whose deposit holds around 6.4 billion tons of coal. Its location, 250km north of China, the most coal-hungry country in the world, will attract many

Investing in people

PwC’s Mongolia office is a good example of how international companies are investing in local expertise. It opened formally in September 2010 after becoming licensed in April. Carolyn Clarke is the managing partner resident in the country.

“One of the commitments we made to the Mongolian government was that we would set up the office and train and develop a cadre of people who in future will make this office their own. We are very much establishing the foundations for a long-term presence here,” she says.

Of the 32 staff based here,

only four are not local, although Clarke says a number of additional international experts are working with the team providing expertise and training. Ensuring that the local specialists are trained to international standards is a priority for the business. “The fundamental challenge for us here is the fact that there has been a limited international professional services presence in the country, so there is not a cadre of staff we can recruit with the expertise we require,” says Clarke, who notes that the level of education and training in the

country is excellent. “We have to balance the commitment and desire we have to develop people here with the need to deliver against internationally recognised auditing and accounting standards. Getting that balance right is fundamental.”

The growing level of international investment in the country is also leading to more firms opting to take their businesses public. “A lot of companies out here are thinking about listing and a lot of foreign companies are looking into Mongolia at investment opportunities,” says Clarke.

investors. A 30% share is expected to be listed in late 2011 or early 2012 in London or Hong Kong. International banks have been vying to manage this process, sending huge teams into the country in a bid to secure a position,

and four banks have now been selected to manage the initial public offering.

Despite these enormous opportunities, there are still challenges for the country to overcome if it is to successfully harness its mineral wealth.


Briefing: Mongolia

Mongolyn Alt Group (MAK) is one of a raft of private companies that originated following the Mongolian government’s decision to award placer gold-mining licences in the early to mid-1990s. In 1992, there were just 12 gold-mining firms in Mongolia but by 1995 there were 60. Since MAK opened in 1993, it has gone on to diversify into coal mining and has its own exploration division.

Its first facility, a gold placer mine at Ikh Galt in north central Mongolia, opened in 1994. Placer mines require the extraction of gold from alluvial deposits, where it gathers after being moved in stream flows from the original source.

After successfully expanding its operations, MAK began exporting gold overseas, signing agreements with US, Swiss, German and Korean companies. By 1999 it was Mongolia’s fourth-largest gold production company and it had also expanded into coal mining. Today the company has two private

Inflation was running at 14% year on year by the end of 2010.

The World Bank’s latest economic briefing on the country warns of an impending “perfect storm” of the rising cost of food and fuel imports, along with a rise in public spending that is keeping prices high. The 2011 budget sets a spending record at over 4 trillion tugriks ($3.2bn), including large handouts to the population, and puts the current account deficit at 9.8% of GDP. Under the Fiscal Stability Law adopted in 2010, this has to be brought down to 2% by 2013.

Enter the private sectorThe government is aware of the issues and is encouraging the private sector to take on some of its investment burden. Mining companies are developing infrastructure such as roads, hospitals and schools, and foreign companies are all encouraged to employ local staff. The government is also planning to establish a

A wealth of golden opportunities

Development Bank in 2011.Looking to the future, it

seems that everywhere a borehole is placed, something of value is discovered. The government has found a way to ensure that both Mongolia and the mining companies benefit from the rich underground deposits. Against this

backdrop, it is not surprising that both Mongolians and the international business community are optimistic about the future.

Bernadette Ballantyne is a freelance business journalist and editor.

mines at Eldev and Naryn Sukhait and a joint venture mine with a Chinese firm called Qinhua-MAK- Naryn-Sukhait.

Beyond the gold and coal markets, MAK is planning a copper and molybdenum mine and processing facility at Tsagaan Suvarga in the south-east of the country and a cement factory at its limestone quarry at Khukh Tsav. The location has been

strategically chosen thanks to its proximity to the Olon Ovoot Station, part of the Trans-Mongolian Railway.

MAK is a good example of a company that has successfully expanded both domestically and internationally with its trade partners. The company’s foresight has allowed it to benefit from the Chinese hunger for coal before many of its competitors.

“A lot of foreign companies are looking into Mongolia at investment opportunities” Carolyn Clarke, PwC, Mongolia

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