transform spring 2010

8/14/2019 Transform Spring 2010

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DiggingdeeperEntering a new erao consolidation

TrailblazersneededWhy are entrepreneurshard to fnd in CEE?

GreendreamMoving towards alow-carbon world

SwitchingtacticsWhy CEE creditors should

ollow Londons lead

TransformIssue 3/Spring 2009Issue 5/Spring 2010

Insight for CEEs business leaders

AiminghighHow CEEs leadersare navigating thenew climate


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Result Seeing inthe darkOur challenge is to chart a safe course tosuccess through good times and bad, withoutknowing which future will come to pass.

Rethink Strategic planning

Reshape

Risk assessment

2010 PricewaterhouseCoopers. All rights reserved. Pricewaterh ouseCoopers and PwC r efer to the network of member rms of PricewaterhouseCoopers In te rnational Limited (PwCIL). Each member rm is a separate legal entity and does not act as agent ofPwCIL or any other member rm. PwCIL does not p rovide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member rms nor can it cont rol the exercise of their professional

judgment or bind them in any way. No member rm is responsible or liable for the acts or omissions of any other member rm nor can it cont rol the exer cise of another member rm s pr ofessional judgment or bind another member rm or PwCIL in any way .

pwc.com/ceosurvey


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3

f r o m t h e c e o

A new year o ten prompts a new outlook but Im certainthat, like me, business owners, managers and executivesthroughout the region will not orget 2009 in a hurry.Most o last year resembled a rollercoaster ride as wehelped clients re-engineer their businesses and navigatethe turmoil. Working closely with some and watching

many more begin to emerge still standing, lookingstronger and able to cope with the market, were the highlights o my year.

Consequently, I believe that Winning in Action will be a major theme o 2010. Its a theme I spoke about when I recently hosted a con erencein Budapest or PwC partners. While no leader will do anything toundermine the long-term viability o their operations, organisations needthe actions they take today to generate results as swi tly as possible.

Decisions have not been easy. You all know o organisations that havehad to undergo restructurings headcounts have been cut, balancesheets restructured and executives replaced by a new generation thatcan live with constant change. These new leaders are orging theirreputations during these tough times.

They will be judged not just on how they cut costs but also on how theygrow, whether that be through consolidation or by spotting and exploitinga niche in the market, as many entrepreneurs across our region aredoing every day. Private investors are re-emerging too leaders who candemonstrate the potential o their companies will be the ones towin backing.

So despite the markets travails, there remains no shortage o great opportunities or entrepreneurs and leaders to trans orm theirorganisations and industries.

It is the job o PwC to be a partner to them, adding real and sustainablevalue, however di fcult the situation. That is the essence o Winningin Action.

P i wa us c p sCentral and eastern europe

Ceo:M k KManaging partner advisory: M k ok -vManaging partner assuranCe: r ck MManaging partner tax & legalserviCes: s s

pwC Contributing editor: d os

Publis d by Blad n (eu p ) L deditor: e r

Managing editor: s K

sub-editor: l d m

art direCtor: ow t mdesigner: i i

produCtion Manager: a w M

publisher: s M

direCtor o Conte nt: s h w -J

CoMMerCial direCtor: d l

Managing direCtor: r c r

t: +44 (0)20 7631 1155

e: f m . m @ m .c m

cover image: photolibrary

Winning in action

Mike Kubena


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06 UUkraine faces tough challenges ahead; HRleaders step up efforts to keep employeesengaged as companies emerge from therecession, and PwC practises what it preaches;PwC Russia re ects on huge changes in its rst20 years; companies are increasing efforts to linkbusiness strategy and operational performance

4

Contents

10 C mmM y g d, m badMistakes may have been made as the CEEregion opened up for business over the past20 years, but there is still plenty to celebrate

36 M&AFa g ac

A successful consolidation starts with theright due diligence

40 C ma c a gt g a wa dClimate change is being pushed up theagenda in CEE due to energy security issues

45 C mmt u u a dCEE is fast becoming a prime location forshared service centres, saysRomek Lubaczewski

46 D d d bs Economies may be recovering from the

nancial crisis, but the number of non-performing loans in CEE is still on the rise

leADership FoCUs

12 W d ad , w dc a gCEE business leaders re ect on what shouldbe on the business agenda following Davos

16 Back ackRomanian Secretary of State for the Ministryof Public Finance Bogdan Dragoi explainshow his reforms are helping to pull thecountrys economy out of recession

20 s k g a ba a cHow are CEEs companies managing the juggling act of addressing both the currentshort-term challenges and long-term growth?Four leading businessmen discuss the issues

25 t w ma y As companies start to emerge from thedownturn, they are learning that uncertaintyis the new norm

26 s ad g Entrepreneurship has not been a word that isclosely associated with the CEE region. But anumber of trailblazers in Estonia are makingsure that is no longer the case

32 h g fyPrivate equity group Penta is already one ofSlovakias largest employers; now it issetting its sights further a eld

10


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5

40

26

46

36

32

20

48

48 Av d g ba k u cy C ub u

Is the multi-creditor work out approachthe way forward for the bankingcommunity in CEE?

53 Ca udys a g

As OKD grew larger, the miningcompany recognised that it neededhelp with ironing out inef ciencies inits HR and nance functions. PwCanswered the call

54 Da a c A focus on economic facts and guresfrom across the CEE region


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6

upfront>

Do you think your companys reputation was

negatively a ected by the HR measures takenin the past six months?

0

10

20

30

40

50

60

70

80

0

20

40

60

80

Increase 31%Decrease 27%Stay the same 42%

Stay the same 37%Increase 54%Decrease 9%

Promotion plans or 20091. Same as in 20082. Much less than in 2008 (more than 10% less)3. Slightly less than in 2008 (up to 10% less)4. More than in 2008

Is variable pay correlated with company per ormance?

How do organisations motivatetheir employees, especiallyduring a nancial crisis? Its aquestion that prompted PwC

to conduct its rst CEE and CIS-wide

HR Pulse Survey to nd out how HRteams had responded to the downturnover the past year and to gauge themorale o employees.

Responses rom nearly 600companies across 20 countries revealedthat around a quarter o companiesare reducing headcount while nearlyhal are reining in their promotion

plans compared to 2008. There werestriking di erences along industry

Taking the pulselines. Comparing di erent sectorson reductions in headcount, a higherpercentage o companies in productionand publishing had to make reductionscompared with, say, pharmaceuticals,

says Stephen Quick, HR consultingleader at PwC Russia. There were somedi erences along geographical lines too.Employers in Central Europe seem tohave made more drastic reductions thanin Russia and CIS, or example.

How have such cost-saving measuresa ected employees? Quick says 41% o employers did have concerns that these

measures had a negative e ect on theway they were perceived by employees.

As a result, he believes, more companiesare exploring ways o improvingemployee engagement.

Pay is the biggest bill or mostorganisations, says Quick. To getthe best return on their investment,employers need to know what they cando to retain employees. Initiatives suchas employee surveys mean they can be

better in ormed about whats workingwell and whats not. Bonuses are stillimportant, but there is less money inthe pot so thats partly what is drivingemployers to take a resh look at othermethods o motivating employees, suchas training and development.

For more details about PwCs CEE &

CIS HR Pulse Survey , contact StephenQuick at [email protected].

InternalExternal(customers/clients/ potential employees)

T o a g r e

a t e x t e n

t

S l i g h

t l y

N o t a

t a l l

I d o n

t k n o

w

Yes Yes

1. 2. 3. 4.

No No N/A N/A

ManagementSta

Headcount variation

CEE & CIS HR Pulse Survey key fndings (all countries)

Base pay measures

%

%

40 % 23 % 24 % 13 %


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everything counts

Little gestures can help to boost employee

morale too. Practising what it preaches, PwChas introduced various small-scale initiativesin some o its bases across the region. In theroo top co ee bar o its Prague o ce, orexample, every Friday beer is served or ree

rom 5pm onwards. In Moscow, the rm isintroducing a number o eatures in its newo ces in the White Square O ce Centre. Onthe 10th foor dubbed the people foor sta

will have access to a Wellness Centre, boastinga doctors surgery, massage rooms and a quietarea. The pice de rsistance is the PwC ClubRoom 800 square metres o dining area withtables, so t seating, plasma screens, a roo terrace, two bars and a central kitchen wheresta can unwind over subsidised ood anddrink. The idea is to provide a com ortable

acility to keep people engaged and make

them more e cient in their roles, says RichardGregson, the PwC partner in charge o theo ce move.

Arecent assessment o theeconomic threats acingCEE countries suggeststhat Ukraine has the highest

mountain to climb as the region seeksto pull itsel out o recession.

The PwC report Hard Landing:Central and Eastern Europe Facingthe Global Crisis identi es threemajor threats to the success uleconomic recovery o CEE countries:potential di culties in nding external

nancing; the threat o a seriousinternal nancial crisis; and a highdependence on the economic

wellbeing o overseas countries. The report says these threats are at

their most severe in Ukraine, while theyare only moderate in Poland, the CzechRepublic, Russia, Slovakia and Slovenia(see chart, below).

Inconsistent economic re orms, anoverheated economy, a low credit ratingand political instability have converged

to make Ukraine more vulnerable to the

major threats than its CEE neighbours.However, Pro essor Witold Orlowski,chie macroeconomic adviser with PwCPoland, and author o the report, saysthere is some regionwide cause oroptimism: The economies o the region

share many similarities, and most o all, they are acing similar challenges,and are strongly interdependent.O ten, todays risks are tomorrowsopportunities. I we take properadvantage o these opportunities, theregion will soon return to a path o strong economic growth.

To do so, Pro essor Orlowski says

the regions governments need toorge ahead with a number o di cult

re orms that will boost CEEs globalcompetitiveness and its attractivenessas an investment destination.

For more details about Hard Landing:Central and Eastern Europe Facing theGlobal Crisis , contact Professor Witold

Orlowski at [email protected].

Hard landing, but still intact

7

P l Czech Republ c Russ

Sl v k Sl ve

Bul r

Hu ry Cr Es

R m Bel rus

L hu Serb

L v

Ukr e

ModERatEtHREatS

StRongtHREatS

ModERatE intERnaL and ExtERnaL tHREatS

StRong intERnaL and ExtERnaL tHREatS I S T O C K


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upfront>

Company leaders acrossCEE are stepping upe orts to link businessstrategy and operational

per ormance in a bid to improve theway they manage their businesses,according to a new PwC survey.

Linking business strategy andoperational per ormance is a practice

commonly known as corporateper ormance management or CPM.CPM programmes typically ocus on

nancial and operational planning,execution, reporting and evaluation.

Nearly 400 companies respondedto PwCs European CPM Survey: HowDo You Manage Your Business? 143 rom CEE and 241 rom Western

Europe. The survey ound thatcompanies elt they were spendingtoo much time on non-value-creatingactivities such as data collection,calculation and reconciliation ratherthan making decisions based on thatdata to bene t the business. Non-value-creating activities take up 59%o time available respondents said

they wanted to reduce that to 33%.Respondents also revealed that

business intelligence (BI) technology which provides snapshots o how thebusiness is per orming was helpingto improve the quality o data delivery.

The survey ound that moreundamental barriers to success ul

CPM exist in many companies,

including complex organisationalhierarchies, missing responsibilitiesand unde ned escalation rules.

CPM is not about implementingKPIs or a BI solution. In act, that

Beyond the basicsmight just give you a headache,says Marc Gossi, a PwC partnerspecialising in CPM. But it is aboutrigorous ocus on the strategic valuedrivers delivering your objectives and

ull alignment o structure, people andtechnology with strategy.

In addition, CPM gives managersbetter visibility across the business.

It also delivers improved pro tability,although there are various estimateso how much. According to a studyby technology research rm IDC,companies can generate a 112%return on investment over ve years,while recovering average costs o $4.5m within 1.6 years.

Strategic elements o CPM

programmes have been PwCs area o expertise or some time but ollowingthe rms acquisition o ParagonConsulting Group a global CPMconsultancy it is now also able to

implement CPM so tware solutions.Paragons bases in Singapore, Dubai,Istanbul and London allow it to serveclients in Asia, the Middle East, theMediterranean and Europe.

When it comes to the prevalenceo CPM, CEE is catching up with therest o the world very quickly, saysDavid Jones, director o Paragon.

These companies have the bene t o not having a lot o legacy processesand systems that act as a drag onthe pace o change. Jones believesthe expansion through cross-borderacquisitions o many CEE-basedcompanies will be the trigger or agrowth in demand or CPM solutionsas those rms deal with integrating

disparate systems and processes. The challenge, he says, will be helpingcompanies to understand what CPMcan do or them and how quickly itcan produce signi cant returns.

Companies were spending time on non-value-creatingactivities like data collectionrather than making decisionsbased on that data8

I S T O C K


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As PwC celebrates its 20thanniversary in Russia, it is

worth remembering howar the company and thecountry have come in that time.In September 1989, both PriceWaterhouse and Coopers & Lybrandboasted representative o ces inMoscow manned by a hand ul o hardy expatriates.

Wind orward two decades, and

the merged PwC employs morethan 2,000 people spread acrosssix Russian branches, including newo ces in Kazan, Ekaterinburgand Vladikavkaz.

Peter Gerendasi has seen the rmchange be ore his eyes. The nativeHungarian emigrated to Australia as ayoung boy, returning to Budapest in

1995 with PwC, heading up the rmsCEE and CIS tax and legal servicesdivision rom 2002. In January 2007,he moved to Moscow to head upthe wider Russian market, takingthe reins rom Mike Kubena, whobecame partner in charge o CEE.

Gerendasi is keen to point to therms Russian growth potential and

the increasing Russi cation o thecompanys domestic operations.We take pride in the act that as wecelebrate our 20th anniversary, themajority o our partners arenow Russian nationals, and thatwe have Russians sitting on ourleadership team.

The uture in a carbon-rich

country o 140 million people actingas a bridge between centres o power in the East and the West isvirtually limitless.

* Happy birthday!

9

C ! *New home: PwC Russia marksits 20th anniversary with a moveto new o fces in MoscowsWhite Square O fce Centre


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Rep r f CEE ec m c eve pr b b y bee ex er e

Mostly good,some bad

The consensus view is that emerging markets are

pulling the global economy out o the depths o a near-global depression. But having been theblue-eyed boys o the global nancial markets

rom 2003 to mid-2007, emerging Europe isnow depicted as a major global loser and a weak link inglobal emerging markets. Why waste time and money inCEE when you can make a packet in China, India and Asia?

The good and the bad times are probably bothexaggerated. CEE has taken massive strides in the past 20

years. The region and the quality o li e o tens o millionshave been trans ormed or the better but, clearly, mistakeswere made and much remains undone.

FiRst, thE good nEwsFor starters, 10 countries have been integrated into theEuropean Union (EU); some have joined the euro and otherswill join in 2013-14. The global nancial crash and thevulnerability o local currencies convinced many in the region

that it is time to get into monetary union; many scepticschanged their minds. The perversities o the Maastrichtentry criteria at a time o virtual defation will mean delays;nevertheless, Hungary, Poland and the Czech Republicshould be in by 2014.

Second, East and West Germany were peace ullyreunited, even i many Ossis still bear grudges. WestGermany poured huge amounts o money into rebuildingand subsidising the East, which may be one actor holding

back other sectors o the German economy, includingpersonal consumption: so there has been a cost. Third, peoples lives have improved remarkably, but

one should not be taken in by the glitz o the capital citieswhere the nouveau riche are congregated: Warsaw is

not Poland and Budapest is not Hungary. Westerncompanies can miss this point, as most o their consumers and their local sta are located in the capital or thesecond city.

And nally, the EU has been a driver or political stabilityand slow-but-steady institutional improvement, and orensuring greater transparency in tax and legislative matters.Nothing is per ect (just as in Greece or Italy), but the trend isinexorably in the right direction.

But what was CEEs aChillEs hEEl? The weak spot or the region (including Russia andUkraine) was that corporate and personal retail debtlevels shot up too high and too quickly. When the marketturned, CEE was le t exposed. Rating agency Moodysissued a report in February 2009 that caused localcurrencies to accelerate downwards. In very simpli edterms, the report implied that with $1.5trn o debt and

about $400bn to pay in 2009, the whole region wason the verge o bankruptcy, which would pull down allthe Austrian and some German banks, and ensure thecollapse o those economies as well as the whole o CEE.

The region was on the brink.However, it became clear that the International Monetary

Fund, World Bank, EU and European Central Bank wouldnot abandon the region, and that the Austrian banks wouldnot simply pull out, leaving CEE to its ate. It quickly became

apparent that uncontrolled de aults would not be allowed(not even in Ukraine); currencies stabilised and the worstwas over.

Did CEE open up its banking and nancial markets tooquickly? The answer until June 2008 was no; the answertoday is probably yes. But everyone else, except China,

ell into the same trap. China has survived the global crisisbest because it kept control o its banks and currency;the country implemented a scal expansion and put credit

behind it.With 80% o local banks owned by Western ones,CEE was most vulnerable to the global banking collapse.In addition, many bank customers in the region tookout low-interest-bearing mortgages in Swiss rancs andeuros in 2005-08; this looked very clever back then, butmillions o people have seen their mortgage paymentsspike as local currencies ell 5-20%. The good news is thatlocal currencies overall have stabilised and rallied; their

medium-term outlook is or steady appreciation, thanks toconvergence and EU membership.Questions have been raised about whether Romania and

Bulgaria were allowed into the EU prematurely. One canrightly question the move. However, EU entry has ensured

daniel thorniley

I S T O C K


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12/5612

World leaders,World challenges

The main risk is that this post-crisisdevelopment loses momentumsergei guriev, new economic school, moscow

the global superpower in most cases, is now muchmore multilateralist and much more interested incooperation. However, the danger is that PresidentBarack Obamas domestic agenda will distract him romthese global priorities.

The greatest priority is to sort out the nancial servicessector. Regulation should be improved and then we haveto gure out how not to kill the incentives or nancial

innovation. Too much government control over the nancialsystem will damage restructuring and growth.

As or business leaders, they need to work with theirrespective governments and show a certain degree o sel -restraint and conservatism in the way they manage theirrisks. Many o the companies that ailed badly during thedownturn were too ocused on the short-term outlook andtook too much risk. The private sector should think abouthow it can produce longer-term per ormance incentives

or employees. This latest downturn has been very pain ul or this part o

the world. While the ormer Soviet Union got hit by the all inoil prices, CEE was hit by the seizing up o capital outfows.In both cases, it was a great shock. Yet this does not implythat the whole ree market model is bad. Some areas needwork improving the regulation o banks, expanding socialsa ety nets and rein orcing the IMFs role as the creditoro last resort but the crisis doesnt mean we have to go

back to the Soviet system or quit the European Union. Mostpeople dont even talk about that but some do. Crises dohappen but you have to be prepared or them. Its importantnot to panic.

The New Economic School was established in Moscow17 years ago and is a centre o economic research and education in post-communist countries.

s i gu i vRectorNew Economic School, Moscow

In their response to the global nancial crisis, politicalleaders have, in a sense, outper ormed expectations. Whilecoordination between di erent governments strategieshas been lacking, everyone expected the outcome tobe much worse. That said, the situation is still not good.

Governments still need to ocus on post-crisis development,namely how to resolve global nancial imbalances and howto improve regulation o the nancial sector.

The main risk is that this post-crisis development losesmomentum. The good news is that the US, which remains

All eyes recently turned to Davos, as businessand political leaders gathered or the WorldEconomic Forums annual meeting. The

orums ocus in 2010 was on six areas: makingeconomies stronger, mitigating global risks, ensuringsustainability, enhancing security, creating a values

ramework and building e ective institutions.Has this allayed the concerns o CEOs whose

con dence about business prospects plummeted in 2009?PwC released its 13th Annual Global CEO Survey at Davos,and the ndings refected a more positive outlook or 2010.This year, 31% o CEOs described themselves as verycon dent o achieving revenue growth over the next 12months, up 10% on 2009. The prevailing atmosphere isone o cautious optimism but lessons have been learnedthe hard way. Companies are addressing risk assessmentand management, with more CEOs intending to change

their risk management process than any other element otheir strategy, organisation or business model.

As we refect on these ndings and the discussions atDavos, Transform asks our leading gures to commenton how well business and political leaders have handledthe economic crisis, and what they should ocus on next.

G E T T Y I M A G E S

i


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economic recovery

The long slog: politicalleaders may have helpedsteer economies in the rightdirection following the globaleconomic crisis, but many

challenges lie ahead

13


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M ti n v kCFOCEZ Group

The downturn has a ected business and governmentsin di erent ways but both have su ered a decline inrevenues. Governments are acing rising levels o statebudget de cits just as they need more cash to supporttheir banking sectors and industrial companies. At thesame time, many business leaders are watching their

revenues slide very quickly.Business leaders have responded in a airly expected wayand have started to take any measures they can to improvee ciency. These are the companies that will survive thecrisis and be more e cient when they emerge the other end.

One o the key lessons companies should take away isthe risk o using too much debt to und ast expansion onthe assumption that demand or their product or servicewill always go up. When this doesnt happen, there is really

nowhere to go. Firms should use this knowledge whenthey plan or uture growth.CEZ has been impacted by the recession too. The

biggest issue or us is the decline in electricity pricesaccompanied by the decline in consumption. Due to diligentrisk management, we have hedged ourselves againstfuctuations in electricity and currency prices three yearsahead so we have not been impacted so dramatically. Theonly impact came rom the part o electricity volume that

was not purchased by our industrial customers and wewere orced to resell it at a lower price. Compared to overallearnings, the e ect was not material.

Governments have supported the nancial sector byinvesting billions o dollars and euros. While original thinkingmay have been that a sizeable company or bank that is notable to survive should ail and go bankrupt, that is just notpolitically easible these days. Governments could not lethal o the banking sector disappear. They should deal with

the level o debt that mounted and prepare plans to privatiseall those institutions that are now state-owned.Business leaders should be ocusing on the recovery.

Many companies were signi cantly hit so business leaderso those companies that survive in a reasonable shape willhave many opportunities to rede ne their product or servicemarkets and possibly acquire complementary companiesat discounted prices. For companies that were severelyimpacted, they should now be looking at building up their

order books again.One pit all to bear in mind, however, is overestimatingthe speed o the recovery. Optimism is very important, butcompanies should also think about more neutral scenariosin terms o growth in the near uture. Companies should

establish e ective risk management practices i they donthave them yet. That way, companies can survive when thenext recessionary wave comes.

CEZ Group is a Czech Republic-based electricity generator.It is among the 10 largest energy companies in Europe.

Mi s uCEO and managing partner

Visor Holding

To restart the global economy, we need to get theconsumer back spending as soon as possible so we needto address the unemployment problem across the West,

and CEE or that matter. Although government responses to the downturn have

been di erent rom region to region, across the board theyhave done a pretty good job. The initial responses may nothave taken into account the magnitude o the crisis and, in G

E T T Y I M A G E S

At Davos(from left):Azerbaijanspresident,Ilham Aliyev,chairman of PwCInternational, DennisNally, and Sloveniaspresident, Danilo Tuerk


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retrospect, the ull policy responses were a little slow. Thatsaid, all the measures that have been taken in an attempt

to get the economy going again nancial support to getliquidity back into the system and the deleveraging o banks,or example are starting to work. The US has just gone through an earnings season and

all those who reported came out with good earnings predominantly by cutting costs, which means they aremaking money but the top-line growth isnt there.

Thats why we need to get people back into work andback in the shops. Governments need to think about

whether they are spending the resources they have in theright places. Some administrations have pumped moneyinto their stock markets I dont think thats the right wayto support a system. When you go out and help an industrydirectly as the US and many European governments havebeen doing with their automotive sectors you have abetter chance o saving jobs.

Businesses can only go so ar on their own. Access tocredit is extremely limited, especially in CEE, due to the

deleveraging o the banking sector and its new- ound riskaversion. I believe we could see more banking problems inRussia and Eastern Europe. Only around 42-50% o bankshave deleveraged. I asset prices stay up and theres liquidityin the market, then there wont be a big problem but i wesee a second liquidity crunch, a lot o people could get hurt.

There is no single thing a business can do to avoid this,but it o ten boils down to having good banking relationships.Government help will go some way to easing the pressure

on banks but its not necessarily the responsibility o governments to go out and take care o all banks problems. They dont have enough unds to solve all the problems sothey have to be selective. Governments are doing their bestalthough, in retrospect, we could have had better oversight.

This nancial crisis was driven by greed but I dont thinkit was just the greed o bankers driven by the prospect o large bonuses. Everyone appeared to like the economicgrowth that was being driven by easy credit and high

leverage and, while the going was good, nobody wanted toget o the bandwagon.

Visor Holding is a Kazakhstan-based private equity frm, specialising in emerging markets.

st p KiGroup chief economistHSBC

The big challenge today is trying to think about how theworld will look in two to three years time, bearing in mindthat policies in the West are becoming increasingly austere.

The legacy o this global nancial crisis is incredibly highgovernment borrowing and incredibly low interest rates.

The world economy looks better but one shouldnt

underestimate the amount o li e support its currently on what has happened over the course o the past two to threeyears in terms o policy stimulus is phenomenal. That stimuluswill have to be withdrawn at some point and, when it is, Ithink we will nd that the initial bounce in economic activityisnt really prolonged and we will end up with a much fattergrowth pro le in the West over the next ew years.

How will other parts o the world, particularly some o theemerging markets, cope with that fatter, austere, rather dull

environment? I think they will continue to do quite well. I thinkthat will happen because emerging markets will increasinglytrade with each other and borrow and lend to each other. Sowe will see new links established between emerging worldcountries that we havent seen in such great size be ore.

Also, because US interest rates have been very low,investors will be borrowing in dollars and looking to investelsewhere in the world that will also be a very positivestory or emerging markets.

Sustaining this growth will be a challenge though.

Policymakers must ensure they dont go down theprotectionist route. The biggest risks to globalisation andeconomic development tend to be political rather thaneconomic. Bad decisions taken by policymakers who refectlocal ears rather than the global reality have to be avoided.

With this period o austerity in the West, unemployment willbe relatively high, which means it will be relatively easy to tryto nd scapegoats elsewhere in the world. Its not so di cultto argue that i , say, China is growing at around 8-10% a

year, it becomes an obvious scapegoat or pressure groupsin the US or the UK to blame. So protectionism has to beavoided. Business leaders need to get this message acrossas clearly as possible because they have a vested interest inmaking sure that protectionism does not come through.

The world economy looks better but one shouldnt underestimate theamount of life support its currently onstephen king, hsbc

When you go out and helpan industry directly, you

have a better chance of saving jobsmichAel sAuer, visor holding

economic recovery


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Romania cannotcome out o thecrisis by itsel


17/5617

Bogdan Dragoi, Secretary of State at Romanias Ministryof Public Finance, explains how reforms are helping theeconomy return to its high-growth journey

IntervIew: eIla rana

Bo

gdan Dragoi has had no shortage o cha engesto tack e since returning to Romanias Ministry o Pub ic Finance as Secretary o State a year ago. (Hehad previous y he d the position between 2006 and

2007 be ore eaving to do a stint as Genera Director o theEconomic Department, Municipa ity o Bucharest.) Financinga 2009 budget de cit o 7.3% in a nancia crisis is tough butits even tougher when a degree o po itica uncertainty, thoughto be expected ahead o e ections, is thrown into the mix.

Romanians returned to the po s just be ore Christmas a terPresident Traian Basescu and his riva Mircea Geoana tiedwith just over 30% o the vote each in November e ections.

The po itica imbo has made oreign investors nervous, orcingDragoi to turn to the domestic market or he p. Credit ratingsagencies are a so concerned that po itica uncertainty and ashrinking economy cou d make Romania a high-risk bet. Ontop o a that, Dragoi has been orced to bat o c aims thatRomania has ai ed to proper y absorb mi ions o euros worth

o pre-accession unds received rom the European Union (EU).Dragoi is undeterred, however. In addition to tack inggovernment bureaucracy, he is overseeing re orms designedto rein back pub ic spending and tack e the budget de cit. Inthe hope that his re orms wi have gone some way to restoringinvestor con dence, he is a so starting to test market appetite

or onger-term government bonds. He to d Transform how heis he ping to get the Romanian economy back on its eet.

The EBRD expects Roma as eco omy to ha e shru k byabout 8% 2009 a ter stro g growth o 7.1% 2008. Whats dr g th s decl e a d how s t mpact g the cou try?

This is due to a contraction o investment and consumerspending, o set to a certain extent by an improvement in

net exports. Our economy is a sma , open one, which issensitive to the wider deve opments in the EU and the wor deconomy. We expect a gradua recovery, with an estimated0.5% gain in rea GDP in 2010.

What sort o measures are you putt g place toe sure th s growth co t ues beyo d 2010?

The government rst needs to put its own house in order.We need to spend pub ic unds more e cient y and

restructure the administrative apparatus. Moreover, wehave to continue to improve per ormance on tax co ectionand reduce tax evasion. And we shou d promote cautiouspo icies accompanied by structura re orms in the pensionsand wages areas.

The Romanian sca system has competitive advantages the main two being the fat income tax and the pro ttax, both at 16%. However, requent changes in aw andinsu cient regu ation are key actors that have to be

addressed. Moreover, key re orms have to be imp ementedin the state-owned enterprises to reduce their osses anda ow a cut in the subsidies and trans ers rom the statebudget. Overa , a move rom current spending to capitaspending is needed.

Roma a rece tly took rece pt o 300m, the frsttra che o a 1b loa rom the World Ba k. Cayou talk us through the pol c es these u ds w ll be

used or? According to pub ic debt egis ation, the money can be usedor budget de cit nancing but subject to the u ment o

certain conditions in key re orm areas (unitary pay aw, scaresponsibi ity aw, pension egis ation). P H

O T O G R A P H E R :

S I l v I U M A T E I

Z I A R U l F I N A N C I A R

back on track

i n T E R v i E W


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Maximisingvalue.Whats itworth to you?

You cant control the future, but you can prepare for it. A proactive approach to realise value from portfolios hasnever been more important.

We can help you develop and implement value creation

strategies for your portfolio companies. So whatever thefuture brings, youre ready to seize the opportunity.

For more information please contact:

CEE Private Equity Leader

Mike WilderTel: +48 22 523 [email protected]

Czech RepublicMiroslav BratrychTel: +420 251 15 [email protected]

Poland

Joanna SimonowiczTel: +48 22 523 4213

[email protected]

RussiaJonathan ThorntonTel: +7 495 232 5711

[email protected]

2010 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.


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i n T E R v i E W

The government needs to put its ownhouse in order. We need to spendpublic unds more e fciently and

restructure the administrative apparatus

The government assumed responsibi ity in Septemberor three o these aws. The unitary pay aw, which has

a ready been approved by Par iament, wi be gradua yimp emented to reduce the pub ic sector wage bi rom9.4% to 7% o GDP by 2015. And progress has been madetowards a na dra t o sca responsibi ity and pension

egis ation. Under the sca responsibi ity aw, egis ation isexpected to be passed to standardise the costs o ocagovernment and remove extreme oca disparities in areassuch as sta numbers.

We are a so enacting egis ation to create a uni edsystem o pub ic sector pensions and we are ooking ata number o improvements in socia po icy. Measures wibe taken to stream ine the socia ass istance programmeand, in Ju y 2009, the minimum guaranteed income wasincreased by 15%. legis ation to improve hea th servicesand introduce a co-payment concept in hea th bene ts isbeing na ised, whi e a pub ic hea th awareness campaignwi be aunched nationwide. We are a so seeking toimprove the qua ity o , and access to, education.

In the nancia services sector, corporate debtrestructuring guide ines wi soon be pub ished, aimed atsupporting the business environment in the context o thecurrent economic crisis to avoid recourse to courtinso vency intervention.

A rece t Europea Comm ss o (EC) report re ealedthat Roma a had a led to absorb 169m rom 3b -worth o EU pre-access o u ds. Why d d th soccur a d how s the go er me t e sur g u ds areused e ect ely uture?First o a , the EC report mentions that it is possib e orRomania not to absorb 169m rom the pre-accession

unds. It is not c ear how the 169m gure was ca cu atedas, at the time the report was pub ished in Ju y 2009,projects using 2005 and 2006 unds were sti in progress.

The amount o 2008 pre-accession unds not awardedstood at ess than 100m and, or previous years, more

than 90% o unds were used. The act that certain projectswere comp eted under budget actua y spe s savings o pre-accession unds and shou d not be marked asnot absorbed.

The ower take-up o unds in 2008 was main y promptedby changes in the ECs approach, which ed to de ays in

aunching tenders and in conc uding contracts within theconstraints o procurement ru es.

On the other hand, the Commission mentioned de ays inimp ementation. Pre-accession projects not na ised duringthe imp ementation period sti can and wi be na ised bythe bene ciaries and, there ore, the amounts a ocated rompre-accession unds are sti to be considered e igib e.

So the amount o pre-accession unds that has not beenawarded versus the entire a ocation indicates a rather goodabsorption rate. As or the e cient use o community undsin the uture, the phasing out o pre-accession assistanceis care u y monitored by the Romanian authorities and thesustainabi ity o the unded projects is ensured.

The EU u ds were te ded or a ra ge ode elopme t projects clud g u employme tprojects, labour tra g, reg o al de elopme t,corporate moder sat o , rastructure, healthcarea d educat o . What are the go er me ts pr or t esamo g these projects a d how do you te d to u dthem ow?

A these deve opment sectors are priorities or Romaniaand are c ear y spe ed out in the Nationa StrategicRe erence Framework and in the Operationa Programmesapproved by the EC in 2007. As such, there is no need tochoose between them. Funding those types o projects inthe uture wi o ow the same ru es as at present.

There are ple ty o pred ct o s about the outlook or theRoma a eco omy but what s your perso al ew?Romania cannot come out o the crisis by itse but wi doso with the g oba economy, with a simi ar gap as at thetime o entering the crisis two quarters. In my opinion,the government is responsib e or improving perceptionsregarding the countrys risk and restoring the con dence o the internationa community in the Romanian economy.

The Romanian government is expecting economicgrowth to have a avourab e impact on pub ic revenues and,taking into account measures to cut expenditure, wi c ose2010 on a de cit o be ow 6% o GDP, down rom the 7.3%set or 2009, and move orward with a downward trend inthe o owing years to prepare or adoption o the euro.

More e cient pub ic spending particu ar y in the area o pensions and pay wi be key to this overa process. n


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striking abalanceTransform asks some of CEEs leading businessmen how they are

tackling the short-term demands of the downturn alongside theneed to plan for long-term growth

IntervIews: ChrIstIan Doherty

20


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c e o r o u n d ta b l e

in rastructure, which is a long-termbusiness. Second, its supported byEuropean Union money owing intoPoland. So the downturns worste ects are limited to some parts o our industrial business, especially theproducts business. But ortunately thatonly accounts or around 15-20% o our total revenues.Pl: Short or long term, the customeris most important they must bein the centre o everything we do,so that means trying to answerpeoples needs.

Our short-term priority has beento launch projects and services toaddress that need. For example, welaunched a bill insurance schemedesigned or those who lose their jobor all into long-term unemployment.Fundamentally, we have to adapt all o the cost structures and processes o the company so that any impact isnt

elt by the customer.

the impact o the economicslowdown is still being eltacross CEE, challengingeven the best companies

in the region. Short-term issues o liquidity, access to fnance and costreduction have come to the ore. Buthave short-term measures trumpedlong-term strategy? Are frms indanger o losing sight o their longer-term goals to either cash in on eetingopportunities or satis y the marketsdemand or immediate payback?

We sat down with the chie executives o three o CEEs biggestcorporate players to fnd out how theyare juggling short-term demands withlong-term growth.

Q: Wh o of ho - m d m dh h dow u p d o you

u d how h h ff do - m ow h ?

nH: A ew months ago I think theanswer would have been ar di erent.Back then we were ocused on internalmanagement and addressing the need

or strong fnancial management. But Ithink the situation is now changing toone o how to position the business orgrowth again.

It has been di fcult: we run a largedistribution business, and we were

eeling the change in the markets.Russia has seen a boom in the autosector in the past ew years. Butin the current situation, there hasbeen pressure on working capital.

That has required the reinventiono management to deal with theslowdown. So there has been achange in management thinking.

As per ormance is looking betterand the economic situation improving,some o the more important issues aremore about returning to the long-termplans we had in the frst place.Pb: Thank ully, we werent hit toohard by the slowdown because 80%o our business in Poland is based on

Peter Baudrexl is i gSi m s mp y . H j ii 1971 h s h s ip si i s i h p i g,

s y ms hsi ss. H h s w k ss

h g , si 2004, h s h hi x iv

Si m s i P .Nick Hawkins is ceo hrolF G p c mp i s ir ssi . rolF is h i g

m iv i i h y H wki s is i h g

h g i g v pm

h g ps p i s, whi hi v v s m gi g m

w si ss i i i iv s s w sm i i i g s i i ships wi h

mm i i p s.P i j i i g rolF, h w s p Pwc r ssi .Pavol Lancaric mp his Phdi mi s h u iv si y b is v w ki g i v i ss i s wi hi h S v kig v m . a sp s d i

G , h w s pp ig m g o g S v kii 1999.

Q: som omm o h vu d h h ho - m m

of h m h fo d m yomp o u h ow y f om o - m p fo m

d ow h. H v you fou d h o h you xp ?

Pl: It hasnt undamentally changedthe business, but we are investingmore care ully than in the past. Thatis because the return on severalinvestments is likely to be slower thanit used to be. O course that shouldntimpact on long-term strategy,but there are items o our capitalexpenditure that we may postpone.

And we will do that i necessary, unlessit is something that would impact onthe quality o service that we provideto our customers.nH: Were a private company, and assuch we beneft rom not having thosemarket pressures. Thank ully, we havea shareholder who has always taken

the partICIpants: whos who

We have a much longer perspective, which makes it easier to adjust and adapt

peter baudrexl, siemens poland

I S T O C K


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a long-term view o the developmento the business. We look at the annualpicture o course, but in the context o a rolling three- or fve-year plan.

In the past year, we deviated romthat to deal with the obvious marketissues. And now were looking in detailat how we can get back to that plan.Pb: Siemens in Poland is a privatecompany, entirely owned by Siemens

AG. That means we have no need tocommunicate directly to shareholdersor analysts, and we dont have themedia rounds or quarterly results.

But we do still have to report ourprogress: our main audience is thedecision-makers in the in rastructurebusinesses that we work with. Sothats where we communicate. Itis our job to keep them close tocommunicate the latest in technology.

Q: Do you f h omp yu hou d jud d oo - m p fo m h h

qu y um ? if o, youy o ou h ph o ophy

w h you ow o o ?Pl: I think its a dual process. I wewere su ering heavy short-term losses

or too long, wed be in the position o not being able to answer the long-termchallenges rom the market. So weneed to work hard on that.

On the other hand, when is theuture? It is now, surely. So we have

to concentrate e orts on the issuescoming up soon. So or example,we aced a substantial decreaseo revenues last year. Happily thatwont necessarily lead to a drop inproftability, at least in terms o EBITDAon our total revenues. But it meanswe need to manage our internalprocesses better. I believe that i wewere to concentrate solely on short-term measures, we would get out o the crisis weaker than otherwise.nH: Out o necessity weve had to be

airly short term in the past year, orsure. The circumstances demanded

that things like headcount reduction,cost rationalisation, the extension o fnancing all became part o the day-to-day strategy. So thats a bit di erent

rom quarterly results presentations,but the ocus has had to become a lotmore short term during the past year.Pb: For us, there are two types o business the long-term in rastructureprojects in energy, rail and so on, andthe shorter cycle ocused on products.

The latter only accounts or 15% o our businesses, and weve been ableto adjust our capacity in terms o thesales orce, the administration unctionand so on to the new level o demand.

The same is true i the in rastructurebusiness begins to decline. A ter all,Im sure that ollowing 2012 [and theconclusion o the European ootballchampionships in Poland and Ukraine],there will be change in demand. In thatcase, well have to make the sameadjustments as anyone else would. Theonly advantage we have is that we havea much longer perspective and timehorizon. That makes it easier to adjustand adapt because we will know

well in advance that changes arecoming. Frankly, i the projects

dont get commissioned todaythen we can plan or that intwo years time.

Q: How you ouo - m p fo m , wh

o of h h pod you o h

y d v y po v u ?Pb: Theres no desire to change ourstrategy. Thats or the simple reasonthat we are a technology company butwe are not in a short-term business.

Think about how long it takes todevelop a new generation o trainsor power stations: these are verylong-term investments.

And o course our customers expecta long-term, well-planned approach we cant just sell them a train andwalk away. We have to think aboutwarranty, support, spare parts in 10or 20 years. So our business is, by itsnature, orientated to the long term andit will continue to be.Pl: We dont concentrate ouractivities purely on the short term.Were continually trying to adapt ourprocesses and scrutinise what we do.We do believe that the crisis will easesoon, and while the uptick wont beimmediate it will come, so we need tobe ready or the post-crisis period.

And we certainly hope to emergestronger. Internally, we have beenable to fnd reserves in various places,whether in terms o headcount or

We look at the annualpicture, but in

the context o a three- or fve-

year plannick hawkins, rolf

I S T O C K

d t b l


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c e o r o u n d ta b l e

better productivity o labour or capitalexpenditure. And we also believethat the liquidity crisis might even behelp ul. Some things cost less thanthey otherwise might. Some suppliersare prepared to reduce their unitpricing in order to keep jobs or orders,

or example. So i theres a chance tospend wisely, we can accelerate. Andwhen that changes, we use the brake.nH: There has been a cultural change

or management. Be ore, we wereheavily reliant on the sales unctionto drive the business orward. Butthen in a declining market, fnancialmanagers tend to gain the upperhand. Tellingly, that process has madethe organisation a lot more robust,and now its a question o how westart relaxing some o those fnancialmanagement restrictions and allowthe sales unction to once again ex itsmuscles and get the business goingagain without releasing too many o the constraints weve put in place tosurvive the downturn. n

Christian Doherty is a fnancial journalist, specialising incorporate governance, risk and

accountancy issues.

Our short-termpriority has been

to launch services that addresscustomers needspavol lancaric,

orange slovakia

I y k ws h w s g is i h gh h gi g

im s, di P i i s. thm h i m ceo

r mp h r m i is vi s mp y h q i

ams m i s s m im s - w ss m j

e p i mp y wi h v $7 . t y P i i

is h i m h diP i i H i gs (dPH), Swiss-

s h i g mp y h h yw s. dPH h s v $1 i ss s

s s p iv q i y, s p i i v s m s.th sh - m s

m y mp i s s s p isP i i . I , h s ys i s i vi s i s is

mp i s h w s h m y h m p his sh -p i sh - m y . Q y

i gs p s si y ivh mp y p v isi sh k s

g- m s ss, h s ys.P i i k s his w

g- m pp h h s whim s h w s

pp i y, q i i g m ss s iv p i s.

H w v , h s ys im i s p xi s pp h s

h i v s s m i s w. this is m i h s

im s. My vi w is h f xi i i y,i v i g m g mwi w ys w w wis mp i s h isp y h s

h is i s m g s g y mh mi si i .th s p i ip s h P i i

h s i s v m yy s. F m , s g- m,h s- i v s , si ss is h vi g visi i g v

s h visi . th h g

is iv h p i p j his y h v

h s p p i v v . this iswh I i v s sh hv . S I i v i i i g

- hip m g m ms.this is wh I i r mp

i is p i ip I h v pp i my h si ss s. e h

im , P i i h s i ivis m iv his m g m ms

h g m.t y, P i i is si g

s i s si ssv pm : s , iv

gy, ki g m i mm i i s. H i v s

h iv si p i pp hwi w him i g- m

pp i i s h wi iv p si ivg w h dPH h w .

FlexIbIlIty, InnovatIon anD gooD management

Having a

diversifed port olioallows us to ocus on a varietyo long-termopportunitiesdinu patriciu, dph


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c o m m e n t


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25

c o m m e n t

The new

normalityThe regions businesses have usedthe downturn to get healthy nowthey are in a better position tograsp the growth opportunities2010 will present

At least the lounges in the regions airports are onceagain lling up with owners and executives. Someo the regular aces who charged around the regionin better times have been replaced by a di erent set

o people, emerging rom this nancial crisis, seeking a newgeneration o opportunities.

The questions on everyones lips are: have their operationsrestructured enough to take advantage o the green shootsand will the trickle o deals increase exponentially in 2010?

Piloting businesses when there is so little visibility makesor a particularly challenging journey. Owners and executives

are working harder than ever to navigate the globaldownturn. In our own region, it is inspiring to see the numbero leaders who demonstrate deep wells o resilience anddetermination to ensure their rms emerge in as t a state aspossible to take advantage o any opportunities that 2010may present.

The best ones have completed their restructuringprogrammes and have strong, sustainable businessplat orms. They are now investing additional time and energyin opportunities internationally, not just in the West, but also

urther east and south into India, China and parts o A rica.Everyone accepts the potential or China to dominate

the business agenda during the second decade o the21st century so executives rom CEE are spending everlarger quantities o time there to examine the angles or theiroperations. For some it is about reviewing their supply chain,

or others it is a sourcing story and or many others it comesdown to exploring potential new markets.

In the new normality,businesses have learned to live with uncertainty

As a consequence o the nancial meltdown, leaders andexecutives have reviewed and are reviewing operations withan open mind and re-examining new ways o working. Armedwith underlying data and resh perspectives rom restructuringexperts, leaders are able to start conversations with I knowrather than I think, ahead o taking the di cult cost-cuttingdecisions that have been so important to ensure survival.

Other themes need addressing. What impact will afuctuating oil price have in 2010? And when should leadersput mergers and acquisitions back on the agenda? Vendorso good businesses have become much more realistic abouttheir pricing expectations and those who are not runningsound operations are looking or sa e harbours in thesetempestuous times.

Mark Okes-VOysey

2010 should be a better year than the past 12 months. A new normality has emerged in which businesses havelearned to live with uncertainty. Finance unctions have hadto become stronger and more rigorous and this enablesbusinesses to make better decisions about how they seizeupon the opportunities or di erent types o growth in timesto come.

The key watchwords o today are conservative, caution anddiligence as leaders consider their moves care ully. There will beno shortage o opportunities in 2010, and there may even bea mini mergers and acquisitions boom in our region as activitylevels grow, led by those willing to seize the moment. n

Mark Okes-Voysey is managing partner of PwCs advisory practice in CEE. P H

O T O L I B R A R Y


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spreadingthe spirit

CEE is not a region renowned forentrepreneurship. But talented networks of

individuals and one trailblazing Baltic state are bringing it into the mainstream

reeling o t e na es o

o egrown entrepreneurs isa toug ask in a country sucas t e Czec Republic. Petra

Kursova, secretary general o t e Czec Venture Capital Association, strugglesto co e up wit even a and ul. PetrKellner, t e legendary investor valuedby Forbes at $6bn, easily springs to

ind, but beyond t at, s e ust aboutrecalls a co pany t at akes ospitalbeds, a so tware r called Unicorn andUni ex, a travel conglo erate. Czecentrepreneurs arent celebrities, s eexplains. Apart ro Kellner, t ey areunknown by t e public.

I you want to know t e Czec wordsor venture capital and angel investors

I cant tell you as we dont ave t e .We use t e words in Englis . T ere isno direct translation. It is so new orCzec people, Kursova says. So new,in act, t at young Czec s rarely wantto be entrepreneurs. A ter 1989, t e

rst wave o develop ent was drivenby large oreign r s w ic ca e ereto take advantage o a skilled work orceprepared to work or low wages, saysPrague-based Stee Klop o PwC.Fir s like Bosc ca e to t e Czec

Republic and e ployed 6,000 people. Itwas good or t e country. But it eantt at young people pre erred a careerpat wit t ese e ployers to beco ingan entrepreneur. It is still true t at inPrague t e goal o brig t young peopleis to work or a ultinational. I you wantto nd entrepreneurs you ave to look tot e regions, to Ostrava and Brno.

Klop says t at even i Czec s wantto start a business, t ey will nd it ard.T e availability o nance is on t elowest level t ere could be, seriouslyterrible, e says. I you ask Czecbusiness owners about t eir biggestconcern, t e rst t ing t ey say is t att ere is no access to oney. Banks arereluctant to lend even ore so duringt e current crisis. T ere is very littleventure capital and scarcely any unding

or early-stage r s. T e only way tonance a business is to look to your

inner circle o a ily and riends. And yet t ere are entrepreneurs in t e

Czec Republic. In act, across CEE,against t e odds, quietly, entrepreneursare fouris ing. T ey rarely get t eirstories publis ed. Like an underground

ove ent, t ey eet in ca es and onsocial networking sites to discuss ideas.

words: Charles orton-Jones

The Czechmarket aloneis too small

for us. We aremore ambitious

than thatMichal Blaha, ontheroad

e n t r e p r e n e u r s


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p

M c l Blo t r , Cz c r b c

Cz ch Micha B aha co dhow wh h comma d c amo go g com a io ag o b ak i o

b i . H o d d hi com a , ai co a c , i 1995 whi i a

iv i . Hi x v wa a a chgi a d o a ca d A a , which i i

h co d bigg i h Cz ch r b ic.B aha o d i o Wa b g pi c o $15mi 2008. H ha a o o d d a n fix-DVD a vic a d a mobi ma k i gag c . C , h O th road, a ocia

wo ki g do com ba d i p ag .B aha o admi ha i i o a o b

a i h Cz ch r b ic: thgov m do ca abo . th o

hi k abo m i a io a a h hav momo . I i a o a com a . to bho , hi g a g i g wo a d wo .

Cz ch i ack h ia m o i g h iow b i , h a . th ack co ag .Mo a a aid o wha h migh o . Ma bi i a i di i h i c o , a

a - co a o ow, o ca a acom a i o a im a h w k d.

D i a h di c i , B aha a hi a g owi g ia c . p ag i

ma o w a k ow ach o h , h x ai .I hi k h a 200 i hi c o h , o which ha 50 a

cc . th i a ocia i o . eva ho d b Fi t da [a wo ki g

o m o ch o og ]. thd o b o c a mo h. now h o

m i g a d co c h im a w k.B aha, o o , i maki g h g id .

O th road i o i mo h o d a da ad ha 15,000 . t av oi i a i , vid o a d dia i . th i hab oca i d i o e g i h, G ma a dCz ch, a d B aha a Ja a , F ch a ds a i h v io a j a o d h co .W wo d ik ha a mi io i wo

a , h a . H ha a ma k i g di c oba d i s a o add h i a io ama k . th Cz ch ma k a o i oo ma

o . W a mo ambi io ha ha .

27 P O R T R A I T :

V O j T E C h V I K


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Jo k m h l u t g C , e

Fo h mo co vi ci g imo o e o iah g o b i , m Joakim H i . Hi h gio o mo a cia ,havi g o d d t igo Ca i a , h biggm cha ba k i h Ba ic . A Fi b bi h,H i o d h wo d wi h hi di oma a ha a chi d, a d d Camb idg u iv i a d

h h ad d o o Wa s . I 1992 h o d dt igo Ca i a . toda , t igo boa o c i

igh ci i i ea e o a d o i A ma ,Kazakh a . I ha a d ma ag m divi iowi h $1b i a , a a a a m, ovid

h i o co o a a c vic a d hamajo ag ic a ho di g . H i ow 56%.

H i hi m i om e o ia a d i aco vi ci g ok ma o h co . e o ia ia g a cc o , h a . ev wi h h ai GDp o 16% hi a , i ha ma ag d o g owa a o g- m av ag o 5%. tha ma kab .

A d a e o ia ha o ig i ca x a d b ,i ca i c ivi a d i v o

h o gh h ax m. I wi b h a oh cov . ev o i di ac d b h bad

h ad i o a i g GDp, a d h hav mi dwha a a a ic o e o ia i .

th i a i a io a c iv , h a ,which di i g i h h a io a o ook. thi a c i b, h add . e o ia ha

v hi g i d o b a co omic cc .shi i g i a a ta i i a majo ha bo . th

ai wa a h am ga g a r ia, o goodca b hi d ea wi ho oadi g om o

ai o a o h . th ax gim i a ic aa ac iv . po i ica d ci io a i g o ax havb v b i i d , h a .

H i o ca h a -g ow h c owi b ma ac i g. sw di h a d Fi i hma ac wa o o o c oca . tho o c d o Chi a, a d hi ov ch d h ig oba chai . e o ia i i h c

o i io o o o o c d ma ac i gvic o h m . W wi ig i ca

i d ia i a io ov h x v o 10 a .t igo i o i io i g i o hi . I ac , w

ho d x c e o ia cc o i i ac o , h b i v . e o ia a

o imi . th a c ai h ca achi v g ahi g . th o ia i o g a .

Estonia can incentivise investors through the tax system. It will be the superstar of the recovery

joakiM helenius, trigon capital

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mic al Bla a is one suc trailblazer. Aserial entrepreneur, e runs OnT eRoad,a social networking dotco based inPrague. he is well known on t e Czecentrepreneurial scene and is regardedas a entor to eager young Czec s.W en t ey need advice, t ey ask e.I eeting anot er entrepreneur onmonday, e says. he asked e or ac at so we are going or a beer. T ats

ow we do t ings in Prague. (See casestudy on p.27.)

nO MOneyBla a and is ellow entrepreneurs areproving t at, alt oug li e ay be tougin t e Czec Republic, it is possible tot rive. But w y is it so ard? T e reasonis lack o cas . European Venture Capital

Association statistics s ow t e scale o t e proble . Early-stage capital investedacross CEE in 2008 was 53 . Bycontrast, t e UK alone invested oret an seven ti es t is a ount in early-stage r s. Seed unding essential oridenti ying co ercial opportunities isscarcely detectable (see table, rig t).Only Poland reported invest ent at t eseed level 3 -wort .

Lack o oney is crippling t ee ergence o entrepreneurs. In Latvia,t e i pact is clear. For exa ple, att e countrys ig ly respected Instituteo Organic Synt esis, Pro essor IvarsKalvins is t e aut or o a long list o valuable patents. But e is unable todevelop t e i sel . Instead, t ey aresold to ultinationals t at co ercialiset e . At Connect Latvia, t eorganisation tasked wit elping Latvianentrepreneurs develop t eir ideas,t ere is rustration about t is situation.Connect Latvia anager El arsBaltins says: Talented researc erslike Pro essor Kalvins are orced tooutsource t eir knowledge, giving awayt e work o t eir brains to internationalco panies. We dont ave unding inLatvia to elp potential entrepreneurslike Pro essor Kalvins to develop t eir

researc . It is not a good situation.Worse, t e lack o support or

potential entrepreneurs suc asPro essor Kalvins eans t at Latvia is

ailing to create role odels or youngpeople. Baltins says: We ave no

a ous entrepreneurs. Even t e wordis a proble . Under socialis , t e onlyword we ad was business an, w icwas not a desirable word. It was likebeing called a speculator. Today anypeople ave t e sa e negative attitude.

Baltins is working to c ange t issituation by introducing establis edentrepreneurs to t ose ust starting out.he can call on a ew top-class na essuc as Nor unds Bergs, t e oundero icrowave radio anu acturer SAF

Te nika, a an Baltins lig t eartedlycalls t e Donald Tru p o Latvia. Il arsOs anis, ounder o hanzas Elektronika,is anot er and Peteris Rucevskis,

ounder o optical researc er Algorego,is a t ird. T ese en o er inspirationand advice to young entrepreneurs. No

atter ow bad t e econo y and owtig t t e nance, t ey prove it is possibleto build ast-growt co panies in Latvia.

B a l t i c

s t a t e

s

B u l g a

r i a

C r o a

t i a

C z e c R

e p u b l i c

h u n g

a r y

P o l a n

d

R o m a

n i a

S e r b i

a

S l o v a k i a

S l o v e

n i a

U k r a i

n e

O t e

r s *

Venture Capital inVested in Cee in 2008

Seed

Start-up

Later-stage

(t ousands o euros) S o u r c e :

E V C A C e n

t r a

l a n

d E a s t e r n

E u r o p e

S t a t i s t i c s

2 0 0 8

10,000 20,000 30,000 40,000 50,000 60,0000

tHe estOnIAn MIrACleOt er CEE nations ave si ilar stories.So e, suc as Lit uania and Ro ania,are be ind t e average. Poland o ersa ore avourable environ ent orentrepreneurs. But only one countrycan genuinely be considered anexception Estonia.

T e list o Estonian entrepreneursis long and distinguis ed. T ere is

Too as Annus, ounder o constructionco pany merko. Annus oundedmerko in 1990 and is now one o t eric est en in Estonia. T ere is realestate developer margus Reinsalu;

otelier Toonart Raask; t e arc itect o hansabanks extraordinary rise, IndrekNeivelt; co puter builder and investor

Allan martinson; and casino operator Ar in Karu, w o starred in Estoniasversion o The Apprentice . Below t esuper-ric level, t ere is a ric veino less well-known na es, ocusedstrongly in t e so tware and obileteleco s sector.

W y is t ere a peculiar abundanceo Estonian entrepreneurs? Proxi ity toits cultural sister, Finland, is one reason.

* B o s n

i a a n

d h e r z e g o v i n a ,

m o n

t e n e g r o a n

d m a c e

d o n

i a


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30

L M cG , e

Wh wo d a G ma wi hB i i h ch o og o d hi b i ? laMach cho ta , e o ia co d ci . Icam h 10 a ago o wo k o a un wi d

ow oj c , h a . I wa a ac d b hi a io a o ook o e o ia, which i imi a

o sca di avia, a d h ack o co io . tho hav ch a i i ch o og . yod io i g h i mobi ho o

mak a m a d h h i o ax . Wh I go o G ma , h hhi k i i ova iv m o d o m b ca Iiv i e o ia. I ch a xci i g co .Mach i h coo b hi d Go ia h, a wi d

bi ma ac ha c aim o b ab ood c a- igh a d g a box bi .

th ch o og i h b ai chi d o p o oed s oo o h u iv i o D ham i

h uK. th a i o a ch, d ig a db i d h bi i e o ia. O o g- m

a i o ow a od c io i h , aMach. A h mom w a b i di g ad mo a io machi . I i b i g a mb d

igh ow, a d w ca a o . A h ma ac i g wi b o o c d. Wi d

bi a h o o hi g o ca b i d iChi a. th a oo big a d co oo m ch o

hi . B i g i e o ia m a w a c o oo a g ma k .

Mach v o d a c i e o ia: I wa ov h wo d ooki g o i v o . I w

o no h Am ica a d ac o e o . I hd, w o d i v o a hom . th e o ia

D v o m F d, a a io a v ca i ad, bo gh 21% o Go ia h o 250,000m.

th co-i v o wa pow D iv , which ook aq a ak o h am m.Mach g f dg i g o

co id oca i g o e o ia o ak adva ago ow ax, ow ov h ad a d h ab da co ow-co , high-q a i abo . sa a i ha v a ac iv , h a . th i a o g

adi io o ch ica xc c , o o ca hig a o . A d e o ia a wa o a ac

who add va i i d iik ma ac i g. I o com h , o wi

di cov a o o o doo .

Finlands infuence on odes o t inking,and its role as Estonias biggest tradepartner, ave elped t e latter to leapa ead. T ere is also a political reason:low tax and an entrepreneur- riendlygovern ent ave been i portant. T et ird and crucial reason is Skype.

Estonian progra ers wrote t eso tware be ind Skype. As t e rgrew, progra ers do inated t e top

anage ent positions. W en Skypewas sold to eBay or $2bn, s areoptions resulted in a wind all or EstonianSkypers, w ic is now working asrocket uel or t e econo y.

Toivo Annus, Priit Kasesalu, A tiheinla and jaan Tallinn our Estoniansw o were wit Skype ro t e start are using t e oney ro t e saleto invest in Estonian start-ups. T eirve icle, A bient Sound Invest ents, isproviding seed capital and early-stagecapital w ere very little existed be ore.

margus Uuda is A bients ead o private equity. he as 100 to investand is nding no s ortage o start-ups to back. We ave suc a stronginterest in tec nology in Estonia. We areproviding t e oney and knowledge toco ercialise t is expertise. A bient isprepared to back any business, as longas it as good tec nology at its core.In its port olio o 30 r s, it as UnitedCats and Dogs, a social networkingsite or pet owners; Oskando, w icbuilds GPS devices or logistics r s;modesat, an industrial-grade ode

anu acturer; and a string o biotecr s. Its a diverse list, s owcasing t e

best Estonia as to o er.Skype is doing to Estonia w at

Nokia did or Finland, explainsUuda . In Finland, you nd t at onein t ree entrepreneurs as a Nokiabackground, and t e oney used toback start-ups was created by Nokia.here we ave Skype. And Skype didso et ing else or us. It s owed ust e scale o our a bition. Skype was aglobal business. It s owed Estonians

t at we need to t ink globally. Uudarecognises t at Estonian inventorsdont always ave t e experience to

ead up a ast-growt co pany. Weave t e attitude t at tec nical people

are best at ocusing on tec nicalissues, so we bring in external

anagers. Estonia is a tiny arket, ust 1.5 illion people, so we need tot ink internationally. T is is w y weo ten recruit oreign CEOs. having an

A erican CEO eans t e start-up willave an international outlook. To date, A bient as invested 15 .

We arent running out o oney,says Uuda . he e p asises t at eis open to proposals ro anyw ere.No one and no country are excluded.Entrepreneurs ro cas -starvedneig bours take note.

At PwC Estonia, Teet Tender sayse supports t e view t at Estonia can

produce a plet ora o great businesses.But, e warns, t ey will need strongpro essional support. Estonianentrepreneurs are too s y to ask or

elp, e observes. T ere is ust noculture o consultants t ere. T ey wantto nd solutions on t eir own. O tent ey turn to pro essionals or advicew en it is already too late. I would liketo see Estonia i prove its structure o ad inistrators and business elp.

he says t at, wit t e rig t support,Estonias entrepreneurs can be t eengine o prosperity. W en you dont

ave natural resources like oil and gas,you need entrepreneurs all t e ore.S all businesses are w at drive t eecono y. In Estonia I see young peoplew o want to study business. T eyunderstand entrepreneurs ip.

Even better, Estonia can provide aodel or ot er CEE nations on ow to

encourage entrepreneurs ip.

Charles Orton-Jones is afreelance business journalist,

specialising in entrepreneurship and small businesses. P O

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I went all over the world looking for investors. In theend, we found

them at home lars Mach, goliath

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p r i v at e e q u i t y


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Rewind ve years and ewwould have guessed thatSlovakia would be the rstnew European Union (EU)

member state to adopt the euro. Inact, ew would have guessed that this

small, young country would even have joined the EU.

Yet Slovakia, which only gainedindependence in 1993 ollowing thedissolution o Czechoslovakia, tendsto be ull o surprises. Three yearsago, it achieved the highest sustainedgrowth rate in the EU an impressive10.4%. The story o Slovakias growthis one o perseverance and, at times,o overcoming adversity.

It was out o this country andagainst this backdrop that PentaInvestments developed and itssuccesses can be compared to thoseachieved by its home nation.

Founded as a securities trader in1994, Penta has grown to becomeone o CEEs most proli c private

Eu pe s ee f act e est s. C ul a tea fSl ak a e t e a swe ?words: kimberly romaine

the aggressive and competitiveinvestment pro essionals.

Much o Pentas success is down toits hands-on approach to investmentmanagement. Penta has largelyinvested in non-cyclical industries, soits port olio is in very good shape,says Miroslav Bratrych, partner at PwCin Prague. They are very active inimproving pro tability in the businessesthey back. They improve both theirown in rastructure and that o theport olio companies.

In 2006, Penta made a tidy pro ton its investment in Severomoravskevodovody a kanalizace Ostrava(SmVaK), Moravias largest watercompany. SmVaKs value increasedshortly a ter Penta took the helm. Weare strongly engaged on a day-to-daybasis with our acquisitions, particularlyin the rst 100 days, Hascak says. Asa result o its active ownership, Pentasold SmVaK just two years a ter itsinvestment to a Spanish trade buyer

high flyeRs

33

equity investors. It is run by a teamo ve partners Marek Dospiva,Jaroslav Hascak, Martin Kusik, Joze Oravkin and Joze Spirko.

The rm has clocked up 44investments over its 16-year history,and manages E 2.3bn o assets.Nearly hal 20 o the private equitydeals have been realised, generatingan average internal rate o return o 50% well above the 20% averagemost und managers achieve inWestern Europe.

ThE righT EnvironmEnTWe are very entrepreneurial andwould like to remain that way, saysHascak. The way we invest createsa highly competitive environmentinside the businesses we back. Wealso aim to encourage knowledgesharing within our organisation, orexample through new in ormationsystems or strong back-o ce teams.

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the partners not limited and managed by the ruleso undraising, he explains.

That said, Penta has so ar verycleverly timed most o its investments,achieving hold periods on a par withbuyout houses that rely on third-party

unding. But Hascak admits: Havingonly our own evergreen und doesmean we are more limited in capitalresources, which remains a constantchallenge or our organisation.

bEyond CEE The strategy may be unusual, butit clearly works. Having conqueredSlovakia Penta is one o thecountrys largest employers, withport olio companies comprising25,000 jobs the rm set its sights

urther a eld. It rst expanded at themillennium, when it branched out intoneighbouring Czech Republic. Todayit has o ces in Moscow and Warsawas well. It is now looking to the West:Penta aims to be a top mid-marketinvestor in Europe by 2013, upping itstarget deal size to E 100m- E 250m.

The rm also aims to double its equityto E 3bn by 2012.

While any expansion involveschallenges, Penta is better placedthan most to overcome them.Normally, access to capital is adi culty, but Penta is very liquid,meaning it is better placed to takeadvantage o opportunities as theyarise in todays market o depressedvaluations, says Bratrych.

The investment strategy will alsoprove bene cial, particularly whenentering markets that have beenburned by short-termism. Penta actsas a cross between a strategic and

nancial buyer. It is very hands-on,similar to a strategic player; however,it has also proved it is very capableo exiting businesses pro tably, like

nancial buyers, says Bratrych.Free rom the constraints o third

parties holding the purse strings, and

orE 190m netting a tidy pro t o E 175m (see box on p.35).

Attaining majority stakes in thebusinesses Penta backs is crucial toenabling this active ownership andresultant high returns.

A ter securing control, we havea very clear corporate governancestructure, drawing boundariesbetween the actions o Penta, theproject team and the companysmanagement, says Hascak.

Last year, the rm gained majoritycontrol over Slovak health insurancecompany Apollo, in which it alreadyhad a signi cant minority stake. At thebeginning o the year, Apollo mergedwith complementary player Doverazdravotna poistovna (Dovera), anotherPenta port olio company, creating agiant with 1.5 million customers.

Timing iSnT EvEryThing The pro t Penta turned on the SmVaKdeal in just two years may haveincreased its internal rate o return, butit is unusual or the investor to o foadan asset that quickly.

That is because a major actordi erentiating Penta rom other privateequity investors is its unding structure:Pentas ve partners each invest in thebusiness, instead o third-party moneybeing committed by institutionalinvestors rom around the world, asmost private equity rms are unded.

This evergreen nature o its capitalbase means it is ree rom the shackleso an institutional investor base, whichtends to exert pressure to deploy andreturn capital quickly instead o waiting

or optimal timing.Though this issue o unding has

o ten been brought up, we believethat having this structure gives usa lot o reedom in our operationsand decision-making, says Hascak.We are not orced to exit rom ourinvestment i the conditions are not

avourable as the investment horizon is

Mar k Do p va

Mart n Ku k

Joz sp rko

Jaro av ha cak

Joz Oravk n

Dospiva manages and develops aport olio o private equity investmentsin utilities, aerospace and retail, as wellas real estate projects. He is currentlyoverseeing the business development o

Aero Vodochody, and the expansion o Zabka, originally a Polish retail chain, toother CEE markets.

Kusik is responsible or severalinvestments in telecommunications,entertainment and retail. He is currentlyoverseeing the expansion and businessdevelopment o the largest CEE sportbetting chain, Fortuna Group, the start-up telco operator in the Czech Republic,

MobilKom/U: on and Stream in Poland.

Spirko is responsible or investmentsin manu acturing, the metal industryand ood processing. He is currentlymanaging the consolidation andrestructuring o Pentas meat processingholding, Carnibona, including the

Debrecen and Mecom Groups. He wasinvolved in the restructuring o ZSNP.

Hascak is managing partner in Pentasprivate equity division, and is currentlyoverseeing the rms healthcare andenergy investments, such as Dovera, thebiggest private health insurer in Slovakia,and the energy holding group, PPCEnergy Group. He has been involved withmost o Pentas signi cant investments.

Oravkin is managing partner in Pentasreal estate division, and he is alsoactive in private equity investments.He specialises in private banking, themetal industry and transport. He iscurrently overseeing the development o

Privatbanka and the exit rom aluminiumoundries, Slovalco and ZSNP.

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turning water into wine

p n s ck co d n own ngb s n ss s s m ss . th mm d d o on s n s m n

n Smv K, Mo s l g s wcom n , n 2006. a c d b hs bl c sh fows l d ng l c n

o d , p n l nch d b d o bh b s n ss om aWG, Smv Ks

m jo own s nc 1999. aWGg d h s l nd h sh s

w c d om m no ownOnd o, l m l g ng p n 98.5%own sh . th l o h b s n ss

nc s d sho l p n ook hh lm, s h b ck n od c d d b

o h c l s c , w h C b nkl d ng b nk s nd c o o d E 70m lo n.

a k ng own sho Smv K, p n wo k d w hC b nk o l d o m l n nc ng,cons s ng o 10- bonds wo hE 80m. th mo h l d lSmv K o c sh cons n s bd ng m n o h nc lon h lo ns. add on ll , h

m x c dE 8m b s ll ngo non-co ss s. O ll, p nh l d h com n o nc s sm g ns b 10% nn ll n h s

wo s o p n s s w dsh .D ng h s m , n n on l

n s n n s c ss s w ssk ock ng, w h mos ns onsl nch ng d d c d nds nd

ol c b o n s o G H ndsbl cl d c ng: B 2008, ll

h w com n s n B n w llb own d b . in

s ons , h c o n s css s b lloon d g n ws on on l d hold ng h m. as

s l o h cl m ng o p n sn s m n , nd s c own sh ,

p n sold Smv K j s wo s s n s m n o E 175m o .

as seasoned hands-on investors,Penta is well placed to export itsexpertise beyond CEE. We are inthe process o trans orming rom alocal player to international, Hascaksays. Our mid-term goal is to expandour activities outside the Central andEastern European region and thusto be one o the most signi cantinvestment groups in the mid-sized

Penta acts as a crossbetween a strategic and

fnancial buyermiroslav bratrych, pwc, czech republic

market in Europe. Years ago, theremay have been doubts that a ve-strong team rom a nascent countrycould achieve such status, but i itcontinues along its impressive growthtrajectory, and that o its home country,it may just be conceivable.

Kimberly Romaine is editor-in-chief of unquote . P H

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I t y c li ti i CEE i et t c ti e ce.T elive e l v l e, e l-m ke will ve t m et t e t iti l t cti l e ili e cewords: Lev HoLubec

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G E T T Y I M A G E S

Falling intoplace

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Opportunity knocks whenan industry consolidates.No question aboutit. Unite a number o

smaller, independent entities rom aragmented industry and the result

promises big returns through economyo scale, greater geographic reach anda much more ormidable competitor.Scale and reach o er the consolidatedentity the opportunity to provide highervalue through broader service andproduct o erings.

A number o consolidations havecreated tremendous size, e fciency

and market value over the pastcentury. A ected industries range romtelecoms, banking and paper throughto o fce supplies and uneral services.

Sadly or some, however,consolidations do not always realisethe ull potential their promoters andmanagers predict. In some instances,a poorly ormulated execution plan

is the culprit, in others the plansexecution alls short. In still others,shoddy transitions leave customers,suppliers and employees wonderingwhat will happen to them. They leave,

earing the worst. Today, more and more companies

in ragmented, converging industriesare under competitive pressure,

requiring them to quickly trans orminto more e fcient and broader-serviceenterprises, o ten across countryborders, just to remain solvent.

The frst global economic crisiso the 21st century exacerbates theneed to trans orm or solvency. Thecombination o di fcult economicconditions, required speed o

transition and radical change hasmade consolidation more complexthan ever. To meet the challenge,companies need to attract strong

Markets in Russia, Ukraine andother emerging CIS countries canexpect to see robust trends o consolidation over the next threeto our years. The main drivero consolidation is the heavily

ragmented state o markets in theprovinces, which are serviced bya large base o companies thato ten lack scale. Consolidation willoccur not just within the provinceso these countries but also cross-border, both within CIS and CEE.

This applies to banks, privatehealthcare, retail and telecoms.With increased regulation andcapital requirements, the bankingsector will consolidate by itsel ,particularly in Russia, where asmany as hal o existing banks will

ace closure or takeover as theymay not be able to strengthen theirbalance sheets su fciently.

cee consoLidatesmanagement and implement strategicand operational changes to adequatelyreinvent themselves. This requirescapital that, when available, is o tenbeyond the reach o individualcompanies. The only viable solution is

to build a value proposition with otherplayers in the industry and to fnd

unding together, based on the valueto be delivered through theirconsolidation hypothesis.

Thus, with the promise o quicklygeneratin

transform spring 2010

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