Transform 4 by O T

PricewaterhouseCoopers Central and Eastern Europe

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TRANSFORM

ESTONIA

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Contacts

© 2009 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. Issue 4/Summer 2009

This publication has been prepared as general information on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, neither PricewaterhouseCoopers nor Bladonmore accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

Women’s work

Senior female executives in CEE on their rise to the top

Risky business

How Fortum is dealing with post-acquisition integration in Russia

On the rebound

Nursing sick companies back to health with corporate turnarounds

Transform New frontiers Pulling ahead with innovation

Going to town

Enterprising cities put themselves on the map

Issue Issue 4/Summer 3/Spring 2009

The solutions to the challenges facing your business are out there. You just need to know where to look.*

Sometimes it’s hard to know where to start. In Central and Eastern Europe, PricewaterhouseCoopers has 7,600 experienced professionals who provide industry focused assurance, advisory and tax services to the region’s leading companies. We focus on your key business issues, providing you with innovative strategic solutions, positioning your business at the top of the league.

*connectedthinking © 2009 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.

Editorial letter R PricewaterhouseCoopers CEO Central and Eastern Europe: Mike Kubena Managing Partner Advisory in CEE: Mark Okes-Voysey Managing Partner Assurance in CEE: Nick Brasington Managing Partner Tax & Legal Services in CEE: Steven Snaith PwC Contributing Editor: Donall Oâ&#x20AC;&#x2122;Shea Published by Bladonmore Media Ltd Editor-in-chief: Richard Rivlin Editor: Eila Rana

cover image: getty images

Managing editor: Sean Kearns Sub-editor: Lynne Densham Art director: Owen Thomas Designer: Ivelina Ivanova Production manager: Andrew Miller Publisher: SiĂ˘n Mansbridge Managing director: Jonty Summers T: +44 (0)20 7631 1155 E: firstname.surname@bladonmore.com

ecently, I have spent time with clients throughout the region and a question that seems to often emerge in conversation is about the key characteristics of the leaders and managers who can win out in these chaotic times. The answer I give has three parts: the best leaders of organisations combine resilient operating skills, access to deep levels of financial understanding and an ability to make decisions. These leaders have a sense of urgency to manage for the short term within the context of a longer term strategic plan that stands up to scrutiny, whatever state the economy is in. Internally I have created a shorthand for it: it is a blend of finding opportunity, minding numbers and grinding performance. I am convinced the next year will be one for the finders, minders and grinders to take centre stage. Good businesses do not automatically go bad when times become tough and great leaders do not cower when the economic temperature is turned down. They face up to the challenges of the moment and get smarter. What does that mean? Fresh time must be spent on product definition, providing customers with what they want today as opposed to repeating what you offered yesterday. Extra time and investment should go into sales and marketing to repair and energise pipelines and leaders need to summon extra levels of effort from colleagues and teams to get the attention of existing customers and new ones. Operational and financial data provide leaders and managers with the basic information they need to take the key decisions, but there is no substitution for sound and timely judgment. History highlights how these moments can become times of great opportunities for those able to take the right calculated risks and to manage effectively throughout the downturn. PwC is your business partner for the good and the less good times. This is the fourth issue of Transform and we are keen to know what you think about the magazine. Please spare a few minutes to fill in our online reader response survey at www.pwc.com/transform. Your feedback will be immensely valuable in helping us to continue to improve Transform so that it remains relevant and interesting to you.

Mike Kubena

PricewaterhouseCoopers

Contents 6 Upfront Redefining the chief information officerâ&#x20AC;&#x2122;s role; prospects for East to West mergers and acquisitions; PwC Russia partner Cherie Ford on the impact of The Last Word on Power by Tracy Goss; conversations with Levon Hampartzoumian, CEO of UniCredit Bulbank, and Joanna Simonowicz, a PwC director in Poland; and corporate tax reductions across CEE

technology & it 10 Future dreams Strong education systems and entrepreneurial drive combine to provide a firm foundation for the CEE region to become a centre of innovation

capturing deal value 26 In from the cold Fortumâ&#x20AC;&#x2122;s expansion into Russia has given the Finnish energy company a toehold in a burgeoning market but first it must deal with transparency and compliance issues

developing talent 30 Female intuition Leading businesswomen in the CEE region are finding few barriers to success, and they believe that any lack of representation at senior levels requires individual rather than institutionalised solutions

16 Small is beautiful Nanotechnology may involve dealing with matter at a micro level, but its impact on the economy of Russia could be huge, enabling the country to fulfil its ambition of becoming a global leader in the field

22 Net gains E-government services are increasingly seen as a way of meeting the need to improve public services in CEE, but takeup is often poor. Consulting citizens first could be the solution

30 4

growth in cee business recovery SPecial Report

36 A fresh start

43 Swimming against the tide?

Thanks to innovative leaders, Baia Mare in Romania and Ekaterinburg in Russia are showing other ambitious cities how to create new reputations in order to attract investors

Distressed companies in CEE are discovering that one of the consequences of the global credit crisis is an increased threat of fraudulent behaviour by employees

54 DATA CENTRE

44 Back to life

A focus on economic facts and figures from across the CEE region

The worsening economic crisis is increasing the need for corporate turnarounds in CEE. But a shortage of business recovery experts can cause difficulties

50 Flow motion Although effective cash management is a high priority for most companies in a downturn, businesses in CEE have to face additional challenges in tackling this issue

53 Divest to avoid distress The difficult decision to divest could be eased for companies in CEE by the benefits brought about by focusing on core business areas

Cesar Bacani was the personal finance editor and senior business editor at Asiaweek. The author of The China Investor: Getting Rich with the Next Superpower, he is also a former contributing editor for CFO Asia and CFO China, two specialist magazines published by The Economist Group until March this year, and an experienced speaker on investing in China and China-related equities. A graduate of the University of the Philippines, he is an award-winning poet and a former university lecturer. Don Durfee is the former editor of CFO Asia and CFO China. He joined in January 2007 as managing editor after several years with CFO magazine in New York. He was a senior editor with the Economist Intelligence Unit. Before that, he served as the managing editor of the Alliance Analyst. Charles Orton-Jones is a freelance business journalist, specialising in entrepreneurship and small businesses. He is the former editor of EuroBusiness magazine and deputy editor of Real Business magazine. He has written for the Guardian, Financial Management, Real FD, The Marketer and the CBIâ&#x20AC;&#x2122;s magazine, Business Voice. Scott Payton is a regular contributor to numerous publications including Spectator Business, The Spectator, Financial Management, Accountancy and Accounting & Business. He is also the editor of Linklaters Quarterly and former editor of Business Voice and Real IR. Ben Schiller is a freelance journalist. Previously, he was a correspondent in San Francisco and Prague, and the editor of EBF, a European management review. He writes frequently for the Financial Times, Business Voice, and other publications.

44 PricewaterhouseCoopers

Elliot Wilson is an associate editor of Spectator Business and Hong Kongâ&#x20AC;&#x2122;s Asiamoney magazines. He also writes for The Spectator and Euromoney.

upfront>

From the network CIO of the future CIOs are in an ideal position to “help define and execute forward-looking business strategies”

The role of the chief information officer (CIO) is changing fundamentally. As the one senior executive who knows how the business works from one end to the other, the CIO has the potential to take on a more strategic role, says I for Innovation, a recent PwC report. CIOs are in an ideal position to “help define and execute forward-looking business strategies” by using IT to drive the business. There are some signs of this starting to happen in CEE, says Grigory Katsman, senior manager at PwC in Russia. He cites the example of a Russian energy company, which has an ambitious young CIO who, with PwC’s help, is both building new IT functions and leading business strategies.

While the CIO’s role is expanding and becoming more complex, one aspect is likely to simplify: technology. Several trends, including commoditisation, consolidation and outsourcing, are converging to enable companies to pass on the management of technology infrastructure to consultants or contractors. However, it is early days. Katsman says: “In CEE there is a lot of talk about these trends, especially commoditisation, but not so much action.” Many CIOs feel their role is to juggle an ever-increasing number of balls and this is a matter of growing concern to CEE businesses. “In more than 50% of our projects, our clients raise this problem and ask us to help,” says Katsman. I for Innovation can be downloaded at www.pwc.com.

masterfile

Push and pull

Between The Covers Transformation Trend watch East to West M&A The small but previously fast-growing trend for emerging markets companies to acquire targets from western economies has slowed down as the global downturn continues. “Activity in CEE has gone much quieter over the last three to four months,” says Chris Hemmings, global head of corporate finance at PwC and the author of two reports on the East to West M&A trend: Going West… and Eastern Approaches… This is a development that is being played out in Kazakhstan where, pre-credit crunch, investment in acquisitions from more developed economies had grown 10-fold since 2004 to $18bn. Since the downturn, natural resourcerich Kazakhstan’s ability to invest has been impacted by the fall in oil prices and demand, and the fall in commodity prices. “This does not mean long-term prospects are not good,” says Alper Akdeniz, managing partner for Central Asia and the Caucasus at PwC. “In fact, for a country such as Kazakhstan, with the kind of resources that it has I would expect investment in its immediate region, as well as in Europe, to pick up again.” Hemmings agrees, adding that emerging economies will come out of the downturn faster than the likes of the UK. The question is, when? He predicts that CEE will start pulling out of the downturn in Q2 of 2010, one year later than other emerging economies such as the BRIC countries and Latin America but that is simply because CEE was hit by the slowdown before them. What should CEE acquirers do in the interim? Historically, corporate defaults tend to occur around 12 months after a downturn. “CEE companies need to be clear about their five-year business plan so that they can move quickly when those defaults come onto the market,” Hemmings advises. PricewaterhouseCoopers

Tracy Goss’s The Last Word on Power [Broadway Business, 1985] helped Cherie Ford, a partner in PwC Russia’s M&A practice (pictured), realise the difference between change and real transformation. Here, she explains how. What made you read The Last Word on Power? I’ve been focused over the past several years on trying to find balance and peace in my life. I have three kids, a big job and I live in a tough place – Moscow. I read Eckhart Tolle’s The Power of Now and it had a profound impact on me. He speaks about being present in the now, not in the past or the future. I started to read business books that focused on this same philosophy. What are Goss’s key messages? Change is a function of altering what you are doing – improving something that is already possible in your reality. Transformation is a function of altering the way you are being – creating something that is currently not possible in your reality. To be a leader who can transform an organisation, you need to start with yourself.

in numbers

$18bn The figure to which the value of overseas acquisitions by Kazakh companies has grown since 2004

What is the best lesson this book has taught you? Things are as they are. Learning to let go of past experience as a bias to current challenge has been very empowering. It changes the dynamic of discussions and gives you the ability to stand in someone else’s shoes. Hearing their perspective with an open mind, being present with the situation at hand is the only way to make a truly great transformation. Have you changed anything about the way you work since reading this book? I listen more, though no doubt I am still a work in progress. I approach a situation with a clean sheet of paper rather than a preconceived notion of what I think it should be. I leave the past in the past and don’t make judgments. When making decisions, I don’t try to predict the future but focus on what is needed now.

upfront> where are they now? Levon Hampartzoumian, Chairman and CEO, UniCredit Bulbank As chairman and CEO of Bulgaria’s UniCredit Bulbank, Levon Hampartzoumian is well placed to steer the bank through the wave of company bankruptcies and surge in credit defaults that he recently predicted. He says the early part of his career, as director of business development and management consulting at PwC Bulgaria, gave him a strong foundation in the many qualities needed to be an effective banker. “Being part of the PwC team gave me the opportunity to work in a thoroughly international environment and have access to know-how,” he says. His journey from PwC to UniCredit Bulbank has been a fascinating one, taking in a spell as Bulgaria’s Deputy Minister of Economy and some time as head of Sofia’s Privatization Agency. “It was an agency torn by public scandals, lack of communication and suspicions of

corruption and my challenge was to change all this,” he says. Today, Hampartzoumian’s challenge is to support loyal clients and keep employees motivated as he guides his bank through the global economic turmoil. Does he find his PwC heritage useful? “PwC is a company that develops lots of leaders – our alumni are now in top positions in government or the economic field,” he says.

“Being part of the PwC team gave me the opportunity to work in a thoroughly international environment”

From the network

Tax update PwC’s worldwide tax summaries have recently been updated online. January 2009 marked the start of many corporate tax reductions across CEE. For more details, visit www.taxsummaries.pwc.com

Estonia

Complete abolishment of withholding tax on dividends.

Kazakhstan

12%

Kazakhstan’s standard VAT rate as of January 2009, down from 13% in 2008.

russia

20% Russia’s corporate profits tax rate, reduced from 24%, from January 2009.

Hungary

100% The amount of income arising from activities of a foreign PE (permanent establishment) of a Hungarian company that is exempt from local business tax, if such a PE is subject to similar local entrepreneurial tax in the foreign country, from February 2009.

PricewaterhouseCoopers

90 seconds with... Joanna Simonowicz Joanna Simonowicz, a partner in the Transaction Services group in Poland, started out as an auditor at PwC in 1997. After two years, she switched to transactions and due diligence, becoming one of the first people in Poland to work in this area, which helps companies make acquisitions, divestments and strategic alliances. Since 2005, she has worked with private equity clients to build their presence in Poland and the CEE region. She predicts a more complex transactions market ahead. What aspects of the job do you especially enjoy? I really enjoy working with the client from the very beginning when they explain their plans for the transaction – it’s like starting a new adventure. Initially, the client can be quite distant because they don’t know you but by the end they are calling you every day to get your advice, and bringing you into negotiations. How do the needs of private equity and corporate clients differ? Private equity clients are more proactive and relationship-driven than corporate clients. Work is constant whether there is a transaction or not – with relationship building, for example. They are financial investors so they know less about the market; they need help with commercial and

“By the end, the client is calling you every day to get your advice” Joanna Simonowicz partner, pwc operational due diligence as well as financial due diligence. Also, they are always looking for deal ideas so this is another area where you can add value. What are the forthcoming challenges for those dealing in transactions? Lots of changes are occurring at the moment, which will make the market increasingly complex. There are more and more distressed companies – but it’s not enough now to buy and hope, especially for private equity clients. They must ensure they integrate and restructure to add value. Some major private equity players will not survive – this is a real change in the landscape. Another challenge is to identify new market trends. People are looking at public-to-private and distressed M&A, both areas in which we have expertise.

technology & IT

photolibrary

he global growth of Graphisoft illustrates how far a bright idea can take a CEE company. Founded in Budapest in 1982, the firm is now one of the world’s largest architecture, engineering and construction software providers, and eastern Europe’s most successful software company. Graphisoft’s global expansion began in 1988 with the launch of an office in Germany – Europe’s largest computer-aided design market. A year later the company opened for business in San Francisco. A Tokyo office followed in 1994, with UK and Spanish operations launching in 1997. Graphisoft’s international success offers a key lesson for other CEE technology companies to learn from, says Akos Pfemeter, director of global marketing at the company: think globally rather than locally. “Hungary was a closed country when Graphisoft was founded. Most Hungarian companies looked only as far as Germany for market opportunities. We thought that we should look further, to the global economy,” he says. “This has enabled us to learn much more, as well as to seize more opportunities.” But how do innovation-focused companies in CEE measure up to their counterparts elsewhere? And what challenges must businesses, investors and governments overcome before CEE can unlock its full innovation potential? Businesses undoubtedly benefit from the region’s greatest

innovation assets – its academic institutions and cultural emphasis on the value of education. “There is a strong culture of science in CEE countries,” says Dr Per Högselius, author of the 2005 book The Dynamics of Innovation in Eastern Europe: Lessons from Estonia and researcher at Stockholm’s Royal Institute of Technology. “If you travel around the region, you will find science and technology being frequently discussed in the media. It’s part of society. And a very high percentage of the population – 90% in most CEE countries – has a secondary level education. This is something that most other countries with comparable GDP levels can only dream about, and is very important for innovation and technology.” This culture of science consistently produces people

“If you travel around CEE, you will find science and technology being frequently discussed in the media. It’s part of society” dr per högselius, researcher, royal institute of technology, stockholm

with world-class software programming and engineering skills. Additionally, today’s CEE university graduates have grown up in an environment of rapid societal and economic development, says Högselius, referring to the changes that have

The development of an entrepreneurial spirit combined with a well-educated population could see CEE countries becoming innovation powerhouses words: Scott Payton

future dreams PricewaterhouseCoopers

getty images

taken place in the region since the late 1980s. This means young people here are hungry to do new things, he adds. The real challenge for CEE is to turn this hunger into real commercial activity. The October 2008 Economist Intelligence Unit (EIU) report, A Time for New Ideas: Innovation in Central Eastern Europe and Turkey, highlights the point. “We found that, with the exception of Slovenia, the investment going into innovation – what we call the innovation inputs – was not delivering the expected number of patents, or innovation outputs, so something in the process is not working effectively,” says author Paul Lewis, managing editor of the EIU’s Executive Briefing. This disconnect between what gets invented in the lab and what gets sold in the marketplace is leading to one of the biggest

“Hubs of technological development similar to Silicon Valley are starting to spring up in CEE, such as in Dubna” martijn peeters, director, pwc threats to innovation activity in the CEE region – the so-called brain drain. “Many talented people are migrating to more developed countries, particularly the US. The region has the innovation potential, but we must work hard to keep it,” says Graphisoft’s Pfemeter. There are signs that the link between innovation and commercial activity is improving. In 2008, a number of CEE countries saw a growth in the number of US patents registered, including Poland, the Czech Republic and Hungary (see table, opposite). How can the region build on this? By creating “innovation

Blast off: Kazakhstan’s first satellite launches from Russia’s Baikonur cosmodrome in Kazakhstan in 2006

ecosystems”, says Christopher Wasden, the leader of PwC’s innovation practice in New York. “You need to develop the incentives that get the academic centres to collaborate with both the entrepreneurial community and the business support community – covering business development, marketing and so on. These communities can then mutually support one another and work together.”

Government boost Innovation ecosystems such as this have formed the bedrock of activity in places such as Boston and Silicon Valley for decades, Wasden adds. While they tend to thrive without government support once they reach a critical mass, they rely on such help to get going. Martijn Peeters, director of transaction services strategy at PwC Russia, says similar hubs of technological development are starting to spring up in CEE. He cites Dubna in Russia, where the new International Innovation Centre of Nanotechnology is being established by the Kurchatov Institute, the Joint Institute of Nuclear Research and the International Association of Academies of Science. The new hub in Dubna is part of a Russian government strategy to turn the country into a world leader in nanotechnology (see article on p.16). Government assistance is particularly crucial for stimulating innovation in CEE countries because they do not have the levels of access to private capital enjoyed by innovators in the US, Wasden says. Russia is not the only country in the region taking such steps. “In Poland, there is the Polish Academy of Science, which

technology & IT

Innovation trends The number of US patents registered by companies in particular countries is used by academics, including Dr Per Högselius at Stockholm’s Royal Institute of Technology, as a barometer of innovation activity. Here is a snapshot of how CEE countries compare according to this metric: 1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

All years

Russia

118

112

194

185

239

203

173

154

176

193

181

2,456

Hungary

1,696

2,401

Poland

329

646

Bulgaria

347

420

Czech Republic

413

Serbia-Montenegro Yu

267

313

Turkey

238

Estonia

Kazakhstan

Latvia

Armenia

Uzbekistan

Azerbaijan

Serbia

Moldova

Kyrgyzstan

Bosnia/Herzegovina

Macedonia

provides grant funding and support for young inventors,” Wasden says. This initiative is designed to reverse the brain drain. “You don’t have to be Polish to benefit; you just have to be linked to a Polish innovation activity. The aim is to bring talent into the country to create domestic employment and commercial opportunities.” Help is available at EU level too. “In the last couple of years, since Hungary has been part of the EU, lots of new funds have become available. It changes the whole picture,” says Graphisoft’s Pfemeter. The EU has earmarked E25bn for supporting research and innovation in new member states between 2007 and 2013. On top of this, the EU is devoting PricewaterhouseCoopers

E750m to funding research and development (R&D) cooperation between CEE firms and their counterparts across the rest of Europe. “This important planning of investment is essential to build and strengthen the research and innovation capacity of central and eastern Europe,” says a European Commission spokeswoman. “The big challenge is now to implement this ambitious planning within the context of the global economic crisis, as governments are

“Many people are migrating to more developed countries.The region has the potential but we must work hard to keep it” akos pfemeter, director, graphisoft

Source: US Patents and Trademark Office

Pre 1995

more reluctant to engage high amounts of R&D.” While government funding is welcome, Wasden sounds a word of warning: “You often have reviewers of government grants who have no commercial sense. All they focus on is the scientific elements. So you get people who receive grant money because they are brilliant scientists, but there is no commercial avenue or channel.” It is important, he adds, that those who are responsible for handing out government grants have a commercial head on their shoulders. What more can governments do to stimulate and commercialise innovative technologies? Pfemeter reckons investing in internet connectivity would help: “The world is

Best in class What types of technology and IT innovation are specific countries particularly proficient at? Hungary performs strongly in innovation. Hungarians have won 10 Nobel prizes – per capita, that is high. Moreover, the country boasts the highest number of US-registered patents in CEE, apart from Russia. There are signs that the next generation of Hungarian technologists will continue to push back the boundaries. For example, a Hungarian student recently won an international award for creating a 3D interface that enables computer users to control on-screen images using head movements. Poland, meanwhile, boasts particularly impressive healthcare innovation and is also strong on smallscale aviation. In Russia, IT is one of the few areas outside the oil and gas sector in which domestic companies are building strong brand recognition and growing market share abroad. “Antivirus software provider Kaspersky Lab is a good example,” says Alexey Dang, a manager in PwC Russia’s transaction services strategy team.

“This company now sells more products outside Russia than inside the country.” Document conversion, data capture and linguistic software outfit ABBYY is another Russian IT firm enjoying global success. Its products are sold in 130 countries and used by more than 30 million people. “Russian software exports are now worth more than $1bn annually,” says Slavo Radoševic, professor of industry and innovation studies at University College London’s School of Slavonic and East European Studies. “This is focused on the high-value-added end of the software sector. This is a very healthy signal.” Software and IT services development is also relatively strong in Romania and the Czech Republic. Because these countries are smaller than Russia, the importance of looking overseas for customers is even more important. Elsewhere, Estonia has shone in telecoms and IT innovation, though this has seen high levels of exports. “Local firms are not strong enough to scale up sufficiently. So activities are focused on electronic assembly, for example,” says Radoševic.

science photolibrary

Future thinking: Russia has ambitions to become a nanotech hub

shrinking because of the internet. It brings the rest of the world into the CEE region, which means that there is no longer a strong reason for people to physically leave the vicinity. So improving online information access will improve the competitive advantage of the region.” There is also a need to foster a culture of entrepreneurialism across the region. Indeed, recent polls suggest that the majority of young Russians either want to work for the government or a state-owned enterprise, says Thomas Nastas, president and founder of Innovative Ventures, a Michigan and Moscow-based firm that designs and builds venture capital funds.

Better environment According to the EIU report mentioned earlier, most innovation activity across CEE is spearheaded by foreign rather than local firms. “Such dependence leaves the region’s economies vulnerable, and to overcome this governments, universities and local businesses will have to work together to improve the environment for innovation,” it concludes. Yet Pfemeter is adamant that homegrown CEE companies are increasingly holding their own in innovation. “Foreign money and companies come in, but companies such as Graphisoft are increasingly reaching out.” What more can technology companies in the region do to attract investment? Slavo Radoševic, professor of industry and innovation studies at University College London’s School of Slavonic and East European Studies, has the following advice: make the most of the skilled local workforce;

technology & IT

CEE innovation hotspots Poland: In 2005, the Polish government established the Council for Science, a new body designed to finance science and technology-related R&D. Poland has a strong track record in small-scale aviation innovation, with around 55 aeroplane, glider and helicopter firms employing about 16,000 people.

Dubna, Russia: Site of the new International Innovation Centre of Nanotechnology, announced earlier this year by the Kurchatov Institute, the Joint Institute of Nuclear Research and the International Association of Academies of Science. The Russian government has launched a strategy to position the country as a world leader in nanotech (see article on p.16).

Budapest: The Hungarian capital is home to cutting-edge technology companies such as Graphisoft, a leading architectural software firms and Nav N Go, a top satellite navigation firm. Hungarians have registered more US patents than residents of any other CEE country apart from Russia (see table on p.13). Moscow: Headquarters for a growing number of world-leading software firms including linguistics specialist ABBYY and anti-virus developer Kaspersky Lab. In 2008, Russian IT-related exports reached the $1bn mark for the first time: a promising sign for the future, says Slavo Radoševic, professor of industry and innovation studies at University College London’s School of Slavonic and East European Studies.

Slovenia: Ranked by the Economist Intelligence Unit as the leading CEE country by innovation performance because of its strong links between academic research activity and commercial enterprise.

build a robust list of western clients and partners; and focus on specialised products and services rather than competing head-on with incumbent technology giants in the developed world. Making greater use of patents would also help to bolster CEE technology firms’ investment case, he adds. If companies in the region focus on these goals, technology investors are sure to become more active in the region, says Nastas. “Consumers and businesses in CEE countries PricewaterhouseCoopers

“Consumers and businesses in CEE countries are technically savvy and open to innovation so their uptake of technology is strong” thomas nastas, president, innovative ventures are technically savvy and open to innovation, so their uptake of technology is strong. As CEE economies continue to mature, we will see a broadening of technology opportunities.” The EIU’s Lewis expects the recent increase in government

support for innovation across CEE to bear fruit in the near future, and predicts a rise in patent levels. However, that won’t happen unless start-ups and investors play their part too. How important is technology and IT innovation to CEE countries’ broader socioeconomic future? Lewis says: “There has been a consensus in the past that transition economies should focus on copying the West. This is not the case. Innovation is vital for the GDP growth of transition economies as well.” n

Small is beautiful Russia is a relative newcomer to the nanotechnology sector but given enough investment and regulatory freedom, it is well placed to realise its ambition of becoming a global leader words: Elliot Wilson

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anotechnology (or nanotech) is the smallest next big thing. Although theoretically this branch of science has been around for 50 years – it was officially born on 29 December 1959, when US quantum physicist Richard Feynman made a groundbreaking speech at the California Institute of Technology (Caltech) – it only truly sprang to life after the turn of the millennium. Nanotech is science at a microscopic level, on which the universe itself can be broken down into quantum packets, allowing scientists to deconstruct and analyse the make-up of everything from single molecules to entire planets. A nanometre is measured as a billionth of one metre – or the distance that a man’s beard hair grows in the time it takes to lift a razor to his face. Each month billions of dollars are pumped into nanotech research at private institutes and leading corporates such as French defence group Thales, German transport-to-aerospace giant Daimler and US-based electronics company Seagate. Each is seeking ways to make smaller things that extend our lives and make our working careers more effective and more efficient. In recent years

Chinese, Indian and Singaporean institutes and corporates have also gained prominence. And in 2007 Russia joined the fray, in the form of the Russian Corporation of Nanotechnologies (Rusnano). With an initial budget of $5bn, Moscow-based Rusnano aims to act as a “venture investor in nanotechnology-related projects” – essentially, injecting capital into start-up companies in exchange for an equity interest. The company is 100% state-owned. One major stakeholder, the Moscow-based Kurchatov Institute, has been Russia’s leading atomic research centre since the USSR kicked off its nuclear programme in 1943. Rusnano’s aims are lofty. Its chairman, Anatoly Chubais (see box on p.19), has reportedly said Russia’s nanotech industry will account for RUB900bn ($29bn) in annual sales by 2015. While a bold claim, the global market for the application of nanotech in manufactured goods alone is tipped to grow at a compound rate of 33% over the next six years, reaching $3.1trn by 2015, according to technology advisory firm Lux Research. The overall market is expected to hit $200bn in global sales by around 2015, from about $30bn in 2008, according to Global

photolibrary

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Industry Analysts. Rusnano has already started dipping into its pot of cash, to date investing RUB32.4bn in 14 projects. It always acts as a minority co-investor, taking a less than 50% equity stake, and provides loans at favourable rates. Latest investments include a RUB3.7bn equity contribution towards a new company specialising in the production of solar modules using thin-film technology. The company, due to be based in Novocheboksarsk, is a collaboration between Rusnano and Russia’s Renova Group. Another Russia-based joint venture, this time between Rusnano and Danaflex, involves the production of high-barrier polymer film and flexible packaging materials for the packaging of food and other household materials. High-barrier flexible film allows food to be heated in microwaves without the need to remove the packaging first. Rusnano has put RUB1.2m into the project.

Further afield will Rusnano is also investing overseas. In April 2009, it announced that it would put RUB10.9bn into the European X-Ray Free Electron Laser Project at Hamburg’s XFEL research

facility. Set to open in October 2012, XFEL’s facility will include a chamber capable of emitting 30,000 X-ray flashes each second. It will help scientists map the ultrafine molecular make-up of many diseases, and chart the composition of the nanoworld. The medical world is one that hopes to benefit from this research, which could lead to cures for many ailments. Rusnano hopes the XFEL project will be one of many overseas investments. Chubais recently met with leading investment banks in a bid to attract investors from outside Russia. The one condition placed on applications for investment from overseas projects is that part of the nanotech production be based in Russia. Rusnano’s German investment has a historic resonance. The 3.4

kilometre-long laser research facility being built at XFEL is based on breakthroughs made in the 1980s at the Novosibirsk Institute of Nuclear Physics in central Siberia. Indeed, many advances in the nascent nanotech field in the 1970s and 1980s were made in Soviet research labs, where scientists manipulated matter on an atomic scale.

Track record

“The aim is not just to create a nano-industry but to perceive it as a locomotive for creating an innovation economy in the country as a whole” anatoly chubais, director general, rusnano

In the 1980s, scientists working in the industrial city of Gorkiy developed a form of technology known as ‘quantum dots’: tiny motes of semiconducting material that work on a microscopic scale and are now used on electronic display screens. In 1980, the USSR was 15 years ahead of the rest of the world in nanotech research; now, the US, China and some European countries have overtaken it. But if Moscow can to lure back its foremost scientific minds, there is reason to believe Russia can redeem its position on the burgeoning nanotech scene. For that to happen, Rusnano and others need more investment and lighter state regulation. That means easing capital controls, cutting taxes and relaxing customs laws.

A short history of nanotech 1867

1959

1965

1980s and 90s

1999

The potential of nanotechnology is first mooted by Scottish physicist James Clerk Maxwell, who imagined a tiny ‘being’ that is able to control individual molecules.

The first proper mention of nanotechnology (still minus the actual name) is made in a 29 December speech at California’s Caltech by American physicist Richard Feynman.

Gordon Moore, co-founder of Intel, posited that the number of transistors in a given space could double every year, which he later updated to approximately every two years, a theory that became known as Moore’s Law. This law creates the entire underpinning of nanotechnology, which in its basic form is predicated on the ability to get very small things to do what you want them to.

Key decades for nanotechnology in which the building blocks for today’s breakthroughs are laid down. Major developments include the invention of the scanning tunneling microscope and the discovery of fullerenes and carbon nanotubes.

The Russian Academy of Sciences (RAS) begins publishing the respected industry magazine, Journal of Nano and Microsystem Technique. The publication quickly gains a wide audience both at home and in key institutions and colleges in the US and Europe.

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peter menzel, christian darkin/science photo library, getty images

Tiny helpers: MIT’s robotic lab hopes to use robot ‘gnats’ to perform internal checks and repair inaccessible machinery

The intellectual property rights of Russian nanotech start-up firms also need to be protected. Chubais has said nanotech is a vital cog in the wider Russian economy. It is a standalone revenue and tax generator while driving a variety of other economic sectors, including utilities, medical products, clothing and military applications. “The aim is not just to create a nano-industry, but to perceive it as a locomotive for creating an innovation economy in the country as a whole,” Chubais said in an interview with the Financial Times. “We have a market economy, but our market is fairly primitive. It produces oil, gas and foodstuffs but very few modern high-tech goods. At the moment, we mostly do not have products that

can compete in the global market.” Russia has long been seen as a natural resources supermarket that powers an economy dependent on heavy industry. For Rusnano and other nanotech bodies to succeed, that must change. “If we were able to create the basis for a market economy then the next aim is to take it to the next level,” Chubais told the FT. “Now we have to go [back] to college. Russian business should learn not just how to make good steel or extract oil but also produce innovative goods. This is a very complicated task.”

Tapping potential Hungary, widely seen as a CEE leader in the nanotech space, might offer one model solution. It has more than 50 research groups and institutes, each focused on developing new, nano-scaled technology that can be applied across all manner of industries. Such investments will be repaid because nanotech really is the next big thing. True, the sector is controversial, with many critics worrying about the potential damage to the environment and human health caused by meddling with nature at such a quantum level. In

Anatoly Chubais: the right man At the head of Rusnano sits Anatoly Borisovich Chubais, a businessman, political figure and reformer. It is hard to imagine anyone better suited to running Rusnano than the 54-year-old Chubais. His background as an engineer and financial thinker introduced him to a group of pioneering economists in the early 1980s. Determined to bring free market-based reform to the Soviet Union, Chubais was the key figure involved in the privatisation of Russian state interests from 1991, on the watch of former president Boris Yeltsin. He remained an influential figure during Vladimir Putin’s presidency, and his high profile in the Russian corporate and political world under four Soviet and Russian presidents has earned him respect in many quarters. During his 10 years as head of UES, Russia’s stateowned electricity company, he delivered unprecedented reform of the nation’s utilities industry. The former vertically integrated system of power assets today operates as two segments: competitive power generation and monopoly-based distribution. The industry has also successfully attracted big and small foreign investors. All this makes Chubais a logical choice to head stateowned Rusnano, which needs to throw off the shackles of government regulation and cut investment deals in Russia and across the world.

2007

2008

2009

Moscow launches a new institute for development, the Russian Corporation of Nanotechnologies (Rusnano). Based in Moscow, and with an initial budget of $5bn, Rusnano’s stated aim is to act as a “venture investor in nanotechnology-related projects”. IBM announces it is close to creating magnetic anisotropy in individual atoms and molecules. This would mean the creation of a fundamental new way to store and stream digital information on a quantum scale. In future, it will probably be possible to store millions of videos or files on a device roughly the size of an iPod.

Andre Geim and Kostya Novoselov, researchers at the University of Manchester, produce a groundbreaking new material, graphane, derived from graphene, which opens up new possibilities in the development of electronic devices. As well as being both an insulator and a semiconductor, graphane might also find use as a hydrogenstorage medium and could be used to create transistors.

Rusnano announces it will invest RUB31.6bn in projects in 2009, with 90% invested in industry, infrastructure and educational projects, and the rest to be invested in the XFEL project. Rusnano says it will invest 250m in the European X-Ray FreeElectron Laser Project at Hamburg’s XFEL research facility. Separately, Rusnano announces it will invest $36m in a packaging materials joint venture with a Tatarstan-based firm, Danaflex. In exchange, Rusnano will receive a 49% share, which will manufacture high-barrier plastic film used in grocery, pharmaceutical and cosmetics packaging.

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Growth can be achieved in any climate.* No matter what the markets are doing, or how buoyant the economy may or may not be, it’s never all doom and gloom. There are always ways for businesses to grow. All you need is the right advice from the right people at the right time.

Advisory Managing Partner – CEE Mark Okes-Voysey +7 495 232 5713 Consulting Leader – CEE Bob Gruman +7 495 232 5725 Transactions Leader – CEE Mike Wilder +48 22 523 44 13

eye of science, volker steger, science photo library/alamy

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recent years, for example, European countries banned the addition of silver nanoparticles to clothing, after finding that the metal leaks into waste water during washing, where it destroys bacteria essential to human health and water treatment. Still, the potential is vast. Nanowiring in semiconductors massively increases the power of every electronic component. For the same reason, doctors expect nanotech to provide the next great leap forward in the medical and pharmaceutical space. Nanotech will allow doctors to identify cancerous tumours, for example, before using nano-scale therapy to destroy them, as well as miniaturised tools driven by nanopowered batteries. The potential at this infinitesimal scale is virtually limitless. Nanotech will eventually allow scientists to visually deconstruct entire planets, allowing us to view them from the insides – and to see if any extrasolar planets are capable of sustaining life. Researchers at Brown University in the US believe they are close to being able to repair damaged joint cartilage by inserting microscopic carbon nanotubes, which in turn cause stronger cartilage cells to be generated. On the military front, University of Sydney researchers have created a system of interlocking carbon nanotubes that create an almost indestructible protective jacket. Few of the most advanced products in the nanotech space have emerged from CEE but with enough time and money – and a lighter regulatory touch – there is no reason why Russia or the likes of Hungary, the Czech Republic, Poland and Slovenia, cannot become global leaders in nanotechnology. n PricewaterhouseCoopers

Nanotech in practice Clothing: Nanoparticles embedded with silver particles added to clothes prevent textiles from getting sweaty. The silver particles prevent the build-up of bacteria that leads to body odour. On the negative side, the silver often washes out, harming waste water and ‘good’ bacteria that we need in our bodies and in nature. Prognosis: work in progress.

Weatherproofs: Nanoparticles added to weatherproof clothing prevent any water or wind getting in. The tight tubing of the particles can also shrink clothing to a precise fit and, when allied with bacteria-proof particles, means that clothing can be worn for months without needing to be washed. The downside is the expense. Prognosis: promising but, like all new technology, needs to fall in price before being widely accepted.

Green technology: Virtually unlimited potential. Ultracapacitors in batteries will eventually lead to much more durable batteries powering any manner of electric vehicle. These ultracapacitors are able to withhold, release and absorb energy at a far more prodigious pace and in greater quantities than existing batteries. Prognosis: huge potential; few obvious drawbacks.

Military applications: In future, nanobots can be used to dismantle landmines, while smaller working parts mean smaller working bombs, allowing payloads to be carried on smaller aircraft. Carbon nanotubes in protective clothing, meanwhile, will cause bullets to bounce off. Prognosis: another profitable set of applications, although smaller bombs will also be more easily hidden by terrorists.

Medical procedures: Nanobots and nanoinstruments can be used to operate on a microscopic scale on everything from kidney stones to ear infections. Nanotubes can be inserted into joints to rebuild cartilage and spur regrowth. Prognosis: nanotech will allow us in time to ‘visualise’ the entire body, broken down into healthy and damaged molecules. Could bring in trillions of dollars in revenue.

Meteorology: Astronomers will be able to use complex visual tools to give us an idea of where other habitable planets lie. Geologists and physicists will use the same process to understand the make-up and structure of our own planet. Prognosis: less practical than other applications, but could help us understand ourselves and the universe.

Net gains CEE governments are stepping up efforts to offer e-services, but some are finding that demand remains weak. Consulting citizens first will guarantee better take-up

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imultaneous political, economic and social reform has, without doubt, been the biggest good news story across CEE over the past two decades. Less celebrated is the ability of many government services to keep up with this reform, but this situation cannot be sustained for much longer. As the region’s market economies mature, government departments will start to feel pressure from several sides: citizens will demand better public goods and services; the burgeoning private sector will seek an appropriate investment climate, regulatory regime and a level playing field; and the democratically elected parliaments will want the delivery of effective policies and programmes.

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Finding a solution Many officials and observers tout ‘electronic government’ as a way of meeting these emerging demands. For e-government enthusiasts, the internet and related technologies offer a fast track to updating and improving moribund public services and, in the process, altering the relationship between governments and their various stakeholders. Exactly how do they expect the relationship to change? Neel Ratan, an executive director with PwC India and an e-government veteran, sums it up: “In the past, most government services were designed with the government at the centre. Now the question is, how easy is it for the citizen to get the service done?” That is a question that lies at the heart of the work on e-government that Ratan and his team have

carried out for the Indian administration. It is a project that could prove to be a model for many CEE governments. The award-winning e-Sampark project in Chandigarh, northern India, employs a one-stopshop approach to providing government services for local residents. The e-Sampark centres, available at 11 locations within the city of Chandigarh and 13 more in outlying areas, allow residents to access multiple services at a single point – for example, to pay taxes and electricity bills, get birth and death certificates, and apply for passports. Staff input information on computers for citizens who need help, overcoming problems of computer illiteracy. The city, which is well known for its modern approach to urban planning, says the main point of e-Sampark is to avoid the need for visits to multiple locations, and to improve access for citizens who would normally visit the city centre to carry out basic tasks such as paying taxes. In addition to public services, e-Sampark also allows visitors to pay private sector bills, and to access other services online. The e-Sampark initiative has been a resounding success. Since launching in September 2004, the project has been singled out for praise by Indian Prime Minister Dr Manmohan Singh, and has also received a Golden Peacock Award from the Indian Institute of Directors. e-Sampark’s knack of allowing local citizens’ needs to drive the way e-government services are developed is something CEE could do with emulating if it is to

“In the past, most government services were designed with the government at the centre. Now the question is how easy is it for the citizen to get the service done?” neel ratan, executive director, pwc

Country

Readiness score

World rank

Key website

Estonia

0.7600

www.riik.ee

Czech Rep

0.6696

http://portal.gov.cz

Slovenia

0.6681

http://e-uprava.gov.si/e-uprava

Lithuania

0.6617

www.evaldzia.lt

Hungary

0.6485

www.magyarorszag.hu

Poland

0.6117

www.poland.gov.pl/

Latvia

0.5944

www.mk.gov.lv

Slovakia

0.5889

www.portal.gov.sk

Bulgaria

0.5719

www.government.bg

Romania

0.5383

www.gov.ro

Source: United Nations 2008 e-Government Survey

be equally successful in this area. At the moment, provision across the region is patchy. Some nations are bounding ahead. Estonia and Slovenia have been investing in e-services for some time, seeing technology as a source of national pride and a badge of modernity. After a slower start, the likes of the Czech Republic, Hungary and Latvia are progressing strongly too, driven by outside influences, as well as internal political pressures.

EU influence EU accession has played a major role in persuading countries to pursue e-government initiatives, says Ljupco Todorovski, a professor specialising in e-government at Slovenia’s University of Ljubljana. “Many governments adopted e-government during EU accession, as part of reforms to make them seem more modern in the eyes of Brussels.” The availability of EU structural funds for electronic development provides an ongoing incentive as well, according to Jiri Halouzka, advisory partner in the Czech

Republic and CEE public sector leader at PwC. “There is a special operational programme where you can finance many e-government programmes using EU funds. That’s why in the Czech Republic it has moved forward substantially,” he says. There are other, less direct drivers. The influence of organisations such as the EU and the United Nations (UN) – both of which have e-government benchmarking exercises – has created a virtuous circle where governments continually add more services as they seek to maintain their standing among their peers. Across CEE, e-government services include registering cars, births and marriages; issuing licences, building permits and passports; collecting taxes, VAT and customs fees; and providing information about medical tests and state procurement. Recently, countries such as Estonia have begun to use technology to deliver services and to involve citizens more directly in the running of government. The development of

in numbers Regional average of e-government readiness

0.6490 EUROPE

0.4936

The Americas

0.4470 asia

0.4338 oceania

0.2739 africa

Source: UN, 2008

e-government is particular to each country, depending on the nature of government structures, the expectations of citizens and the internal motivations of administrations in charge. Estonia’s development has been helped by a proximity to e-government pioneers Finland and Sweden, and the expectations of its people, who were exposed to IT even during Soviet times. That Estonia has fewer than 1.4 million people means reforms are less complex than elsewhere. Arvo Ott, executive director of the e-Governance Academy in Tallinn, says political dynamism has also been important to Estonia’s quick progress. “There was motivation among our top leaders to push forward the key projects. We launched electronic ID cards in 2002, and it gives us good grounds for interoperability. The same tools can be used on government sites and on private sector sites, for internet banking and so on.”

High scoring While Estonia ranks 13th overall in the UN’s 2008 e-Government Survey, its fellow Baltic countries, Lithuania and Latvia, are in 28th and 36th places respectively (see table, above). Hungary, Poland and Slovakia score respectably in the UN survey but outside the EU, CEE countries have moved slower on e-government. Russia for example, produced an “E-Russia” plan in 2002, but the scheme stalled. President Dmitry Medvedev recently announced an initiative to revitalise the project. In February, he admitted that most internal government documents still circulated in paper form, and that little had improved for citizens.

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e-government readiness: How CEE shapes up

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Miroslav Lyantsevich, a Moscow-based independent analyst, says much of this malaise in Russia is down to a problem of definition. The task is perceived mostly as a technical one, and little attention has been paid to how this new software will change the way citizens and government interact with each other. These changes would require significant legislative amendments. “The citizen, for example, is still not legally able to use an electronic signature when accessing government-issued documents online,” says Lyantsevich. “There is no body within or outside the State Duma [Russia’s parliament] responsible for making the appropriate legislative proposals.” Not only that, there is an absence of consistent political will throughout Russia’s three-tier governance structure to make e-government a reality. Haiyan Qian, director of the Division for Public Administration and Development Management at the UN Department of Economic and Social Affairs, who is also responsible for the UN e-Government Survey, says political will is the top factor in determining how quickly

countries adopt e-government. The UN’s e-Government report says governments move through five stages of evolution in their electronic development. The first is a web page with basic information. The second is an enhanced site with links and downloadable documents. The third has some interactivity, with access to forms for tax payments. The fourth allows citizens to pay taxes. The final stage has an integrated ‘back office’ government infrastructure, with electronic connections between departments, to third-party stakeholders and citizens through a range of services. Qian says the majority of governments are stuck at stages two or three, believing that e-government is merely a matter of putting services into an electronic form. This is often because governments fail to put their citizens’ needs at the heart of their e-government strategies. Qian says: “A lot of countries have made the mistake of imagining what citizens want and delivering that without asking them first. At one point, one of the eastern European countries, for example, found that only 1% of its citizens

E-government best practice Focus on the customer: Effective services are based on in-depth analysis of customer data. Explore alternative delivery: Real world service centres, kiosks, and mobile delivery, rather than a PCbased service, ensure access to the greatest number. Get high-level buy-in: Evidence shows that those that have moved furthest in e-government are those that gained political commitment at an early stage. Learn from others: Leaders in e-government tend to take ideas from elsewhere, skipping needless trials and errors of their own. Improve continuously: E-government is a process, not a destination. Leading countries are never satisfied and are always thinking about ways to improve their services. Reform, don’t repurpose: The best administrations are moving beyond simply putting offline services on the internet. Instead, they are thinking about e-government as an end-to-end process to be more efficient and customer-focused.

“The citizen, for example, is still not legally able to use an electronic signature when accessing government-issued documents online” miroslav lyantsevich, analyst, russia

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was using their government service online.” But as Ratan’s team demonstrated with its work on the e-Sampark project in northern India, it is possible to overcome this obstacle and when that happens, citizens are motivated to actually use e-government services. In April 2009, e-Sampark collected about 830m INR (E12.3m) per month in revenue, up from 300m INR the year before. Chandigarh now plans to add more e-Sampark centres soon to expand access further. Such a ‘customer-centric’ approach will require a change in mindset among many government departments, especially among those in the former Communist Bloc. “The focus on the customer is something new in this part of the world,” says PwC’s Halouzka. “For many years, if you needed something from a public institution, you were treated with caution. Now that is changing.” n

In from the

cold

Finnish energy company Fortum has expanded into Russia and is stressing the importance of transparency and compliance

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little over a year ago, Fortum, Finland’s largest energy utility, took a giant leap forward in its bid to expand beyond the company’s Baltic Rim home turf when it acquired a majority stake in TGC-10 (Territorial Generating Company number 10), which was up for sale as part of the privatisation of Russia’s electricity sector. The deal was a major coup for Fortum: buying one of the 14 Russian TGCs gave Fortum a foothold in a huge and fastexpanding market. TGC-10 had the added draw of being located in the heavily industrial area of the southern Urals Federal District and part of western Siberia. However, the deal also brings an unfamiliar degree of risk for Fortum, and not just a financial risk – though that is large enough, with the E2.5bn price tag for the acquisition of 93.4% of the company. The deal also represents a huge cultural leap for the Finnish utility, bringing it 2,200 kilometres south of its Helsinki home base and into a vastly different business culture. In February, when PwC was brought in by Fortum to conduct a full gap analysis of TGC-10’s internal audit, risk management and control systems, the point person picked was Michelle Moore, partner in PwC’s Moscow Performance Improvement practice (part of Governance, Risk and Compliance, or GRC). In recent years, Moore and her colleagues have worked with some of the largest energy companies, including TNK-BP and Tatneft, the first Russian energy company to list on the New York Stock Exchange. For its part, Fortum has operated outside its home country for years, including in

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the former Soviet bloc through its interests in Poland. But the risks of operating a newly privatised utility in southern Russia represented a quantum leap. “A company that has never been public – especially one that is in an outlying Russian region – is just not used to being as transparent about its own risks and controls, and their impact on the business, as a listed western company,” Moore says. While TGC-10 employees may have had some experience of compliance regimes, they simply had never considered a global context and the potential exposure that a publicly quoted western company’s brand has.

On the ground For the risk assessment project, Fortum’s man on the ground is Lars-Hakan Ellenius, vicepresident of risk at TGC-10. The initial objective, he says, was to try to implement as much as possible the basic elements of Fortum’s existing risk management system in TGC-10. However, the company is fully aware of the difficulties involved, as illustrated by the following passage from the risk management section of Fortum’s 2008 annual report: “Inadequacies in the legal systems and law enforcement mechanisms in Russia… exposes Fortum to risk

“We recommend defining the business process owner and articulating new KPIs” michelle moore, Partner, PwC 27

Risk and reward. Find the right balance.

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of loss as a result of criminal or abusive practices by competitors, suppliers, or contracting parties. Fortum’s ability to operate in Russia may also be adversely affected by difficulties in protecting and enforcing its rights in disputes with its contractual partners or other parties, and also by future changes to local laws and regulations.”

Extensive investment programme in russia Fortum plans to increase generating capacity across TGC-10’s six locations from 3,020 MW to 5,290 MW

Tobolsk• Tyumen• Nyagan•

• Kurgan

Argayash •

• Chelyabinsk

•Helsinki

Slush funds This is more than boilerplate risk copy. There have been plenty of examples in recent years of western companies that have done huge damage – both financially and to their reputations – because they have assumed a relativist approach to governance and operating practices in emerging markets. Perhaps the most high-profile example recently involving Russia was Siemens, the German industrial conglomerate that has had to pay massive fines and has seen some of its most senior executives face trials for running slush funds to secure business. In December 2008, Siemens finally resolved all the charges under the US Foreign Corrupt Practices Act, by agreeing to pay $1.6bn in fines and disgorgements of profit. As Moore says, the risks are very well known among senior Russian executives.

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•Moscow

Source: Fortum Annual Report 2008

All change: TGC-10, which produces electricity for the oil and gas sector, faced major changes to bring it into line with Fortum’s business culture

But translating their concerns down to the shop floor proved a painstaking effort, which required her to spend time working with Ellenius and key managers in Chelyabinsk on the details of the gap analysis and how to turn Fortum’s system into a workable equivalent for south Russia. As with the parent company’s risk framework, the audit committee is responsible for risk oversight at the local level. The main principle of the Fortum system is that risks are managed at source and to maintain a strict segregation of duties, risk control functions at the business and service unit levels are responsible for reporting risks to Corporate Risk Management at group level. The system advocated by PwC, Moore explains, is twofold; a kind of carrot-and-stick approach. “We recommend defining the business process owner… and articulating new KPIs [key performance indicators] for a particular job,” she says. The carrot part is that the KPI is linked to salary and bonus, while the stick part is that job

performance is assessed partly in terms of how the business process owner has assessed the risks and designed controls to mitigate it.

New culture The real test is in eliminating bad practices that may have become embedded, such as paying kickbacks to suppliers. “The only way to overcome these challenges is to show how it is going to be good for their jobs and their pocketbooks, and to show how they can do better without these practices,” Moore says. For TGC-10, Ellenius says the company has initially focused on just a handful of priority areas. Have there been any surprises? Ellenius treads carefully but says that the process revealed some “important angles in the purchasing process” that helped it to tighten up its control systems. Caution about internal controls is something Moore encounters time and again from Russian executives: nobody wants to end up as the Russian Enron. That is the main point of the exercise. n

Marina Jigalova-Ozkan, head of Walt Disney in Russia, has faced many challenges during her climb up the career ladder â&#x20AC;&#x201C; but none has been because she is a woman, she says 30

developing talent

Female intuition Leading businesswomen in CEE say that, provided they put their strengths to work, there is no reason why they should be at a disadvantage compared to men Words: Eila Rana

Portrait: Frank herfort

arina Jigalova-Ozkan knows about success. A graduate of the Moscow State Institute for International Relations, she took up her first board position when she was just 25. Today, she runs the Russian operation of US-based global entertainment company Walt Disney. Along the way she has served as first deputy general director of Prof Media Moscow (part of Russia’s biggest media company), worked at the European Bank for Reconstruction and Development and earned an MBA from Harvard. The road to success has not been short of challenges. Most have been about not being afraid to take responsibility early on in a role; not being afraid to have a view; and not being afraid to make mistakes – but none have been because she is a woman in a mostly male world. On that front, says Jigalova-Ozkan, “I’ve never experienced any difficulties.” That is a common story among many women working on the front line of business across CEE. It is a far cry from the almost daily

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accounts in western Europe and beyond of the glass ceiling that women in the corporate world face. In the UK, for example, Harriet Harman, the government minister for equality, has proposed new legislation that will require firms employing at least 250 staff to publish hourly pay rates for men and women by 2013 in a bid to expose employers who pay female employees less than their male colleagues. Furthermore, a recent PwC survey of City professionals concluded that the pipeline of female leadership for UK business could be reversed or irreparably damaged by the current economic downturn, after almost three-quarters of the mainly female respondents said they saw redundancy as an opportunity to exit corporate life. Companies like PwC have long worked towards mitigating this risk via initiatives such as its Gender Advisory Council, an international group of 14 senior male and female leaders from across PwC who actively seek to improve the representation of PwC women in

“It’s part of mythology that women are unable to cope with further career progression. That’s one of the biggest reasons for female turnover at senior levels” Natalia Yakovleva, partner, Pwc

Fortunate one: Henryka Bochniarz, president of the Polish Confederation of Private Employers â&#x20AC;&#x201C; Lewiatan

developing talent

the workplace. This initiative was recently recognised by Opportunity Now – a UK-based employers’ group that promotes gender equality at work – which presented PwC with its Global Award at the Opportunity Now Awards 2009. Glass ceiling stories coming out of CEE are few and far between. Why the difference? It is partly to do with a new era of economic opportunity that many women, and men, are living through across the region. Tanya Rukavina, country managing partner with PwC Croatia, says the face of business in Croatia is changing. “Younger people are taking over leadership roles in business,” she explains. “They are looking for innovation, they are looking for their place in the European Union and they are looking to move forward. They can’t afford to be stuck in the old ways.” Rukavina is typical of that new generation of leaders. A Croatianborn national, she moved to

“You have to start from zero every time, building your own reputation and credibility, which is tough” Olga Grygier, country managing Partner, PwC poland Canada when she was young. After joining PwC Canada in 1988, she transferred to Budapest five years later and worked her way back to Croatia, making partnership in 1999. Today, she is the only female partner among the Big Four in Croatia. There is also a strong desire in CEE not to institutionalise any inequality in male/female representation in the higher

echelons of business. Most women will say that the decision whether or not to pursue career progression is very much a personal one. One of Rukavina’s most valued clients is Lada Tedeschi Fiorio, a shareholder and vice president of the supervisory board at Atlantic Grupa, a Croatian-based sports food production company. Tedeschi Fiorio joined Atlantic Grupa – a part

Portrait: filip miller

When luck runs out Henryka Bochniarz counts herself as one of the fortunate ones. The former Fulbright Scholar has enjoyed a long and varied career during which she founded one of the first consulting companies in Poland, NICOM Consulting, and served as the country’s government minister for industry. “I had no major trouble with my career,” she says. “I think it was because of my knowledge, character and perseverance. Compared to other women, I had a lot of luck and a chance to work with many smart men.” In her current role as president of PKPP Lewiatan – the Polish Confederation of Private Employers – she seeks to help women who have not been so lucky in the workplace.

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Bochniarz reckons Poland’s working women suffer “multi-dimensional” discrimination: not only do they have less access to senior executive positions, they also earn less money than their male colleagues (20% less, on average) and tend to be employed in less prestigious economic sectors. They also struggle with juggling work and family commitments, which can lead to discrimination at both recruitment and promotion stage. Female discrimination hurts companies too, she adds. According to recent research, the best-performing Fortune 500 companies employ more women at medium and high managerial positions compared to more poorly performing firms. A similar trend can

be observed in European companies and the more women they employ, the higher their return on capital is. For this reason, it is crucial for the government and companies in Poland to implement measures to help women progress in the workplace, Bochniarz argues. Employers should allow for more flexible working arrangements and grant women access to jobs with promotional potential, while the government should provide suitable child care systems. It should also stop introducing laws that are more of a hindrance than a help. A case in point? The recent introduction of protection against redundancy after maternity leave is pushing women out of the jobs market because employers are more reluctant to take them on.

family-owned business run by her brother Emil Tedeschi – in 1997. Her success is not down to family connections or her gender, she explains. “It was very much based on my professional skills and my willingness and dedication to the job and to the company itself. Some women choose not to go into top positions – they are tough roles,” she says. “It doesn’t mean because they are not at the top they are discriminated against.”

Exploding myths In the same way that businesswomen in CEE are reluctant to institutionalise a lack of female representation at senior levels, they generally believe solutions to this issue are also very personal. In fact, many say it is time to explode a few myths about why women do not succeed as well as men in the workplace. Natalia Yakovleva – a partner with PwC Russia’s Technology, Communications and Entertainment team, who works closely with Walt Disney’s Jigalova-Ozkan – has a young daughter. Being a working mother did not preclude her from becoming a partner at PwC, Yakovleva points out. “It’s part of the mythology that women are unable to cope with further progression in the firm,” she says. “That’s one of the biggest reasons for female turnover at senior levels, I think.” Not only has Yakovleva managed to balance a busy work and home life, at times she has exceeded the performance of her colleagues. On returning from maternity leave, she found herself in a performance appraisal for the seven-and-a-half months that she had worked that year. “My boss was shocked,” she remembers. “He said I had achieved the same as partners who had

worked for 12 months.” How does Yakovleva do it? She says it is down to three things: getting buy-in to personal flexible working needs from bosses and colleagues; defending those boundaries; and ensuring you deliver on performance objectives. “I have been quite strong-willed in defending my boundaries and my male colleagues really respect my approach,” Yakovleva says. “I do believe it’s really important when women are planning their family lives that they should have the

buy-in of colleagues to make sure that any arrangements they make – including flexible work options – are understood and accepted.” What about the other myths? Women cannot communicate; women cannot think strategically; women do not make good leaders. Much of that, says Yakovleva, is just not true. Women’s inclusive and consensual communication style is often more effective at achieving buy-in compared to male colleagues’ directness. It is also a myth, says Yakovleva, that women are not capable of thinking long-term and are not good at strategy. “I believed this myself so I requested training to understand clients’ strategic agendas when I was a first/second year partner,” she says. “I found that women are actually thinking about longer-term, sustainable approaches rather than short-term immediate options. Women need to build their own selfconfidence in this area.”

Empathy advantage

“Younger people are taking over leadership roles. They are looking to move forward. They can’t afford to be stuck in the old ways” tanya rukavina, country managing partner, PwC croatia

As for management styles, Tedeschi Fiorio reckons women have more empathy than men. “They are better at multi-tasking, multi-thinking, they are more open-minded and take more things into consideration,” she adds. “That helps gain trust and loyalty. The worst thing a woman can do in business is pretend to be like a man.” There are some things, however, that will always be tough to tackle. Olga Grygier, recently made PwC’s country managing partner in Poland, says the time when careers become most demanding tends to coincide with the time when women start their families – in their early to mid30s. “That’s a structural problem,” she says. That said, it is not unusual to see women at senior levels of

Portraits: Dag orsic

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business in Poland, she adds. The bigger problem in this part of CEE is building credibility. “In the UK, if you’re a partner at PwC, a certain level of knowledge, experience and capability is taken for granted,” says Grygier. “Here, you have to start from zero every time, building your own reputation and credibility, which is tough.” That is a legacy from the early days following the collapse of the Berlin Wall, when western European advisers attempted to apply their experience to CEE problems, with limited success. That has left many in CEE sceptical of what external advisers can bring to the table. “You need to prove to the client that you know what you’re talking about, you have the right experience and you can apply that knowledge to the particular problem. It takes time, and very often it takes social interaction. That’s where women find it tougher because you don’t go out for a beer maybe as often as your males colleagues do.” Whether women like Grygier have the time to entertain clients late into the evenings or not, the fact is that companies need a fair representation of women at all levels. Not only are women leaders more likely to get the best out of female employees, they can also better exploit the potential of relationships with female stakeholders outside the organisation, says Yakovleva. Not only that, “the more diverse your organisation is, the more sustainable it’s going to be.” Diversity along any lines, including gender, tends to buy an organisation a longer and more secure future. The good news? Women in CEE are not looking for any special favours. As Rukavina says: “I would never want to be chosen for a position because I’m female.” n PricewaterhouseCoopers

in numbers

10-15%

Tough at the top: Lada Tedeschi Fiorio, shareholder and vice president of the supervisory board at Atlantic Grupa

Average percentage of female partners in PwC globally

20% Percentage of female partners in PwC across CEE

25% Percentage of female partners in PwC Russia

60% Percentage of PwC Russia’s entry-level intake that is made up of women

Best-laid plans: Baia Mare’s mayor has plotted the commercial, social and environmental future of the city

A fresh start Outside its famous capitals, cities across CEE are building new reputations to attract investors. Baia Mare and Ekaterinburg are two of many leading the way Words: Charles Orton-Jones

very city loves to style itself as memorable for someone or something. What is Liverpool without the Beatles, Sydney without the Opera House or Kyoto without geishas? Ekaterinburg and Baia Mare, two hugely ambitious cities in CEE, are seeking to put themselves on the map in similar ways. While Baia Mare – a prosperous city on Romania’s northern frontier – wants to become a beacon of urban regeneration, the challenge for

Russia’s Ekaterinburg is to unlock the huge potential offered by its wealth of natural resources. Fortunately, both cities have leaders who are determined to create new reputations for their respective homes. Their approach and the role played by partners such as PwC are being seen as templates for other aspiring cities. Baia Mare’s mayor Cristian Anghel has held the post since 1993, when the city was still adjusting to life after Nicolae Ceausescu. Anghel is the architect

of Baia Mare’s long-term plan to become that beacon of urban regeneration and show the rest of Romania what is possible. He is a methodical planner, a dedicated believer in masterplans, having written a document in 2002 that plotted the commercial, social and environmental future of the city. The 2002 document was based on a United Nations initiative called Agenda 21, which was designed to reconcile emerging nations’ desire for explosive economic growth with environmental concerns. Anghel adopted the resolutions of Agenda 21 and used them as a basis for analysing everything that was right and wrong with Baia Mare. His report delved into every aspect of local life, recording the growth of industrial waste, the chemical composition of waste gases, and even calibrating roadside noise. His strengths, weaknesses, opportunities and threats analyses were brutally honest. Threats included the potential collapse

growth in cee

fact file: BAIA MARE • • • • •

Location: Maramures County, Romania Population: 137,921 Mayor: Cristian Anghel Founded: First mention, 1347 Economy: Mining, manufacturing, agriculture, construction, tourism

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of the social security system, unemployment in the mining and metallurgic industries and ancient public transport. Anghel warned that if Baia Mare didn’t follow the plan, the brightest young talent would depart for Cluj, which offered world-class education only 150km away. Baia Mare has many natural advantages, despite having a population of only 137,921. Its proximity to the Hungarian border means it is a thoroughfare for freight. It has strong construction and agriculture sectors, and its historic character lends the city tourist potential. Anghel set Baia Mare to work, devising radical measures, including 12 to upgrade the city’s infrastructure, seven to tackle environmental problems, 14 to rehabilitate deprived areas and 21 to improve civic life. Not a sewer, telephone pole, road or stream was excluded. The mayor exhorted his fellow citizens to join him in achieving these goals: “It is time to look around us

and say that we care about our neighbourhood, communities and about the natural beauty that surrounds our city. It’s time to admit that Baia Mare is our city, our citadel. Why don’t we turn it into an oasis of prosperity, cleanliness and safety? It is within our power!”

The results Now the legacy of Anghel’s plan is plain to see. Wages in the city

“We used instruments for communication and public consultation such as polls, themed contests and public debates” cristian anghel, mayor, baia mare 37

Must see: Baia Mare’s history makes it attractive to potential visitors

are 20% higher than the national average. Tourism is growing and three new shopping centres are under development. The ring road has been upgraded as part of a national E32bn infrastructure programme and a new motorway will provide a fast connection to Vaja in Hungary. Far from resting on his laurels, last year Anghel launched an update of his original plan. He says the secret to implementing such a far-reaching schedule for regeneration is consultation. “All our projects are based on public consultation campaigns. These focus on messages that would lead to informing, as effectively as possible, partners and final beneficiaries, to ensure the highest level of transparency.” Anghel adds that all

communications channels are open. “We used instruments for communication and public consultation such as polls, themed contests and public debates. At the same time, we used the print and electronic media.” All the plans are available for download. Dinu Bumbacea, a partner at PwC Romania, says the mayor deserves wide recognition. “His long-term plan was a novelty for Romania. We were used to mayors with short plans, four years at most. He created an urban plan for the next 20 years. The public consultation was significant too. He insisted everyone be asked for their opinion. It’s the same with his new plan, called the CiViC plan, which stands for creativity, initiative, integration and communication. He asked residents’ associations, local councils, the business community – everyone.” Naturally, such regeneration takes money, which is where PwC comes in. Bumbacea explains: “We plan to help Baia Mare apply for EU money. There are grants if you know how to apply. Romanians need to improve their ability to apply for grants – I think

“To maximise the effectiveness of the plans’ implementation, Ekaterinburg’s authorities are working closely with consultants” M.i. maksimov, First Deputy Prime Minister, Minister of Economic Affairs and Labour, Sverdlovsk Region Government

we still aren’t good enough. PwC can draft the applications thus maximising the chances that the city will get its fair share.” The city may now need to consider more radical plans if it is to continue to fund its strategy, Bumbacea says. “Public-private partnerships could work. Certainly, public and EU money is limited. Partnerships could fund public projects and be win-win. We are having discussions about this subject with the government, and something may happen.” Undoubtedly, Baia Mare is ready for the next step. Bumbacea says you only have to walk down the street to see the improvement. “I remember in my youth everything seemed quite dark. There was a cement plant on the way to the mountains, and it made everything grey. They had no filters. The change now is like night and day. Everything is green. We are adopting EU standards and the city is quite environmentally friendly.”

Russia’s star performer On the other side of the Urals, Ekaterinburg had a head start on Baia Mare. A romantic city boasting Palladian architecture, with a hinterland of heavy industry, it has always had the potential to rival St Petersburg as Russia’s second city. The Antei 3 skyskraper is the tallest in Russia outside Moscow, and the presence of consulates from most of the world’s major economies signal the city’s commercial eminence. The challenge for Ekaterinburg has always been to live up to its potential. Few other cities enjoy such natural resources; half the region’s wealth comes from metals (see pie chart, p.41). For two centuries, it has supplied Russia

growth in cee

with steel and copper. The government of the Sverdlovsk region, home to Ekaterinburg, has put in place a socio-economic development plan that runs to 2020, which seeks to maintain and build on the region’s role as the economic dynamo of Russia. Ekaterinburg itself is focused on implementing a 2005-2015 strategic plan – extended to 2020 last year – that covers all aspects of urban and economic development. A separate urban development plan will see Ekaterinburg more than double in size to 114,000 hectares by 2025. Thirty industrial sites will be relocated outside the city to make way for private flats and 870km of new roads will be built. “In order to maximise the effectiveness of the plans’ implementation, the region’s authorities are working closely with consultants from leading international and Russian companies and financial institutions,” says M.I. Maksimov,

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first deputy prime minister, minister of economic affairs and labour, Sverdlovsk region government. PwC has recognised Ekaterinburg’s potential and in February opened its sixth Russian office there. The firm has built up a strong client base in the region. It already audits huge companies such as Gazprom Transgaz and VIZ-Stal, and is expanding into tax and consulting.

Starting point PwC’s first mission is to promote Ekaterinburg on the world stage. In February, Peter Gerendasi, managing partner of PwC Russia, and Victor Koksharov, prime minister of the Sverdlovsk region, signed a co-operation agreement in which PwC agreed to provide consulting services to the local authorities, to help develop an industrial strategy and to transmit the message of Ekaterinburg and Sverdlovsk to the wider world. “This collaboration is aimed at increasing the region’s investment appeal and optimising

fact file: ekaterinburg

Attracting investors To promote Ekaterinburg and the Sverdlovsk region, PwC has written a comprehensive guide to the area for investors entitled Guide to Investment Volume 6 Sverdlovsk Region. The report can be ordered from publications. uk@uk.pwc.com

• • • • •

Location: Sverdlovsk region, Russia Population: 1,401,729 Mayor: Arkady Chernetsky Founded: 1723 Economy: Metallurgy, engineering and defence, utilities and mining

Broad appeal: Ekaterinburg’s challenge is to live up to its potential – it is an attractive city with plentiful natural resources, an industrial hinterland

2019 2019 Which Which direction direction will will your your family family business business take? take?

2009 2009 Will you own it? Will you own it? Will your family own it? Will your family own it? Would you have sold it? Would you have sold it? Will the special culture Will the special culture you created still exist? you created still exist?

At PwC our Private Company Services team is At PwC ourtoPrivate Company Services team –is large dedicated working with family businesses dedicated to working with family businesses large and small – to envision the future and achieve– the and small – to envision the future and achieve the goals of yourself and your family. With over 150 goals of of experience yourself andwe your family. With over 150 years pride ourselves on building yearsterm of experience we pride ourselvesyou on building long relationships. So supporting as you long termyour relationships. So supporting you as position family business over the next 10 you position your family business over the next 10 years is a challenge we would like to take up. years is a challenge we would like to take up. Please call or email Steef Klop, Please call or email Steef Klop, Private Company Services Leader – CEE Private Company Services Leader – CEE + 420 251 151 806 + 420 251 151 806 steef.klop@cz.pwc.com steef.klop@cz.pwc.com

Private Company Services Private Company Services © 2009 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. © 2009 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.

growth in cee

Sales by industry in Russia’s sverdlovsk Region (% of total), 2008

Generation and distribution of energy, gas and water

Metallurgy

49.6%

11.3 %

Mineral resource mining

5.3%

Other

Engineering (incl.defence)

19.2%

14.6%

Source: Guide to investment: Volume 6 Sverdlovsk Region, PwC

business processes by preparing recommendations and materials by company professionals and organising various business events across the region,” says Maksimov. Victor Ovsyannikov, managing director of infrastructure financing at PwC Russia, says investors rarely need much convincing. “We recently did a roadshow in London to promote the city and region. The region is undoubtedly attractive, even during a downturn. It is very well known because of the importance of its industry. So we didn’t have to explain Ekaterinburg much – investors already knew about the city and region.” Ovsyannikov says banks in France and Germany are particularly keen to fund investment in Ekaterinburg. “They have the liquidity and they can see the potential. The appetite for projects in Germany, in particular, is exceptional.”

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Clear results The consequences of the increased publicity and investment are visible. A E1bn development project employs 1,000 PricewaterhouseCoopers

Cities of the future To share insights and experiences of ambitious cities around the world, PwC has published an in-depth report containing interviews with 44 mayors called Cities of the Future. The report has information on creating strategies, which include emphasis on environmental capital, technical capital, financial capital, and culture and leisure capital. It builds on PwC’s creation in 2004 of the City and Local Government Network. The report can be ordered from publications.uk@ uk.pwc.com or downloaded at the publications section of pwc.com.

construction workers, scheduled to rise to 3,000 by the end of the year. Hyatt has just opened a $107m, 20-storey hotel. RMJM, the Scottish architecture firm that designed Moscow’s City Palace Tower, is designing a 100m curved glass block labelled the world’s first ‘vertical park’. The centrepiece is the 300m Ural Tower, scheduled to open in 2012. Ovsyannikov admits that the global economic crisis will delay the opening of these buildings. “Construction work has slowed. The economy is very dependent on the metals trade, and, as you know, the prices of metals are down by as much as 70%.” This isn’t dampening his optimism, however. “The region undoubtedly has huge potential in industrial manufacturing. We have the infrastructure, partly as a result of production being moved to Sverdlovsk during World War Two. In defence, aircraft manufacturing and oil and gas equipment there are huge opportunities for investors.” Maxim Matsiborko, partner and head of PwC’s Ekaterinburg office, says: “We are here for the long term and that in itself sends a signal to foreign investors that the business climate is right.” Both Ekaterinburg and Baia Mare have learned that if you create the right environment, investors always beat a path to your door. When you are creating a new reputation for a city nothing – not even a global economic downturn – must be allowed to stand in your way. n

“We are here for the long term and that in itself sends a signal to foreign investors that the business climate is right” maxim matsiborko, partner, pwc 41

specialreport Business recovery

As good times turn to bad, Transform explores how businesses across the region are facing up to a tough new reality. In this special report, we examine the critical and growing role of business recovery teams (p.44), the art of effective cash management (p.50), how businesses can better fight fraud (p.43), and prepare for the eventual economic recovery (p.53).

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Swimming against the tide? John Wilkinson In the downturn, many distressed businesses in CEE are fighting fraud risks

n the wake of the credit crunch, those charged with the governance of some of our largest private sector companies have had to focus on short-term measures to address the risk of corporate failure. As the economic tide goes out, new threats are emerging from under the water: evidence of fraud and wrongdoing in the past, and a greater motivation to commit it now. The Madoff affair and similar scandals might seem too out of this world for most companies to seriously worry about. But in CEE we are seeing instances of fraudulent borrowing or fraudulent investment management

“Corporates are discovering that they are, or were, more vulnerable to the threat of fraud than they thought”

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coming to light. Corporates are discovering that they are, or were, more vulnerable to the threat of fraud than they thought, often in their treasury and banking operations. There is a greater temptation for staff to meet targets by trading beyond their authority, and for owners to massage the numbers they provide to banks or provide inadequate valuations of pledged assets. We are currently investigating a case where a borrower has simply moved their encumbered assets offshore and claimed trading losses. In another case, a bank discovered when trying to attach on collateral that the security for a loan was not in fact owned by the borrower. In both cases the options for recovering the loss are limited: after establishing the facts and the fraud trail we try to help the bank and its lawyers to secure value out of the assets or against the borrower’s other assets. But the lesson here is that prevention (i.e. adequate anti-fraud measures) is better than cure.

Ask the difficult questions Boards of directors and management need to look more carefully at their risk management and control measures. These are the questions you need to ask yourself: l Do you have a workplace culture that truly promotes and encourages ethical behaviour? l How confident are you that management and employees are aware of the fraud control processes in place?

l Your

best fraud detectors are your employees. Are they really able to report suspicions of fraud or corruption without fear of retribution? Do you seek their feedback? l Is your organisation insured against the risk of loss arising from fraud?

Set the tone at the top Economic crimes are committed not by organisations but by individuals making the wrong decisions. Boards of directors, audit committees and management have a fundamental role to play in fraud prevention and detection. In an increasingly challenging economic environment, the tone coming from the top of an organisation is critical. Companies that actively encourage transparency and all stakeholders to make the right ethical decisions will be far better placed to prevent and detect fraud and wrongdoing than those that ignore the issue. Difficult conversations and measures requiring corporate courage may be needed at some or all levels of your organisation. Following up when something “doesn’t feel right” is key. n John Wilkinson, partner, is the leader of PwC’s forensics group in CEE. For a more detailed look at these questions and the strategies adopted by fraud-savvy organisations, download our Fraud in a Downturn publication at www.pwc.ru/change/eng.

Back to life As CEE’s economic crisis deepens, demand for business recovery experts is increasing. What services can struggling companies expect to receive? Words: Cesar Bacani and Don Durfee

pioneer in business recovery services in eastern Europe, Petr Smutny worked to rescue LG.Philips Displays Czech Republic a few years ago. The colour TV picture tube manufacturer had been plagued by legal and environmental problems. The final blow was struck by television’s rapid shift to flat panel displays. “There were 20 businesses [around the world] in the group and all went bankrupt,” recalls Smutny, who is partner in advisory services at PwC in the Czech Republic. He put together a team in 2006 to keep the Czech unit afloat. PwC convinced suppliers to agree to continue deliveries and negotiated short-term support from the banks. “Then we went to court to go through the legal

process of restructuring, which was approved 100% by the creditors,” recounts Smutny. The business was sold for some E10m to a property developer. “Basically, we increased recovery about 10 times for secured creditors and we managed to pay 30% of the claims of unsecured creditors,” says Smutny.

Trouble ahead A success story? At that time, yes. However, earlier this year, that LCD plant was closed, a victim of the global economic crisis. It was not the only casualty. In Russia, Jonathan Thornton, a partner in transaction services at PwC, has seen a surge in defaults on debt repayments since Christmas. “It’s really starting to pick up now and the expectation is that we’ll

see some further troubles going forward,” he says. In Romania, Emilian Radu, a partner in advisory services at PwC, estimates “something like 25% of small and medium-sized companies might disappear, mostly because of lack of access to financial resources.” Demand for business recovery services is booming as a result. But CEE is not proving an easy environment for turnaround specialists. There is a dearth of professional managers and technical experts, making it hard to staff recovery efforts. Also, some company owners refuse to accept that their businesses may have to close, wrongly believing that governments will not allow wholesale failures. Above all, the sheer weight of their clients’ problems can prove

overwhelming. From the heady days after the Soviet Union’s dissolution in 1991 through the transition to a market economy, CEE entrepreneurs often gorged on easy credit and over-invested in core and non-core business areas. Many borrowed in euros, US dollars, sterling, Swiss francs and other foreign currencies. Now, of course, these currencies have surged against their home currencies even as demand for CEE’s export products has cratered. Fixing many of these companies will take an extraordinary effort – at least in some countries. It is worth noting that the crisis has not had a uniform impact across CEE.

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Why turnaround? Restructuring is actually part of the normal business cycle. It can help a company manage its growing pains, resuscitate an enterprise limping under heavy debt and invigorate a tired and aging organisation. Consultancy firms such as PwC have long offered restructuring as part of their business recovery services. In 1988 they helped form the Turnaround Management Association (TMA), which now has 9,000 members in 45 chapters, including one in the Czech

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Republic that Smutny heads. A textbook turnaround process typically follows five phases, starting with analysis and ending with rebirth (see box, p.47) but not all turnaround efforts unfold so neatly. In Russia, turnaround specialists start with an extra stage: education. “I think there’s a belief by many Russian companies that they’d be bailed out by the government,” says Thornton. Moscow has spent around a third of its foreign currency reserves to support the rouble, but it is now trying to preserve its holdings. That means stepping away from bailouts of any individual company. But, says Thornton, “because the problems in Russia were triggered by a global crisis, many view it as

something outside their control.” The next few quarters should be an eye-opener. “Pre-crisis, people were expecting growth of around 6% to 7% this year.” says Thornton. “The latest figure from the government is a 2.2% contraction.” It could even get worse. “In Q1, the economy already contracted by 7%,” he adds. “In January and February, manufacturing production was down about 14% each month. So a 2.2% [contraction] for the full year – that’s pretty optimistic.”

“Liquidity is the real issue here. It’s difficult to get financing or to refinance. Some of the government banks are helping to support companies, but the interest rates are around 20% or more” Anna Beattie, director, PwC

Avoiding bankruptcy

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Difficult times PwC Russia is working with several ailing companies. One of them is a major industrial manufacturer. Anna Beattie, director of business recovery services, says: “They’re a good example of what we’re seeing in terms of financial difficulties. Their industry has been hit very hard and very quickly. Late last year they reduced their workforce by about 25%-30%, and their

actually have sufficient demand for their products,” says Thornton. “But they’re suffering from working capital shortages and cannot run at full capacity.” The problem is that they have rouble earnings and primarily US dollar debt – a lethal mismatch. On 3 April, the rouble was at 33.65 to the dollar, down 42% from a year ago. “Liquidity is the real issue here,” adds Beattie. “It’s difficult to get financing or to refinance. Some of the government banks are helping to support companies, but the interest rates are around 20% or more.” The recovery work is still in the early stages, in part because PwC has first to clean up the clients’ financial reporting. “One of the problems with Russian companies is they are less good at producing accurate and reliable financial information, particularly forecast information,” says Thornton. “So there’s a lot of work understanding the current and forecast position of the company.” What PwC is trying to help them avoid is bankruptcy. “It’s much better if we can find a solution where the company continues as a going concern,” he says.

production has been around 50% of what it was the same time last year. And the confirmed orders for their product have really just dried up. They have debts with at least 15 foreign and local banks and have bonds outstanding.” The other clients are in slightly better shape. “Two companies

A similar dynamic is at work in Romania. “There were many bankruptcies in the postCommunist period after the 1990s, when the economy restructured,” says Radu, who was the first executive president of the Romanian National Insolvency Practitioners Association in 1999. “But now this crisis is not at the level of the company, sector or country. It’s a global crisis. And the consequence is that there is a lack of liquidity in case you want, for example, to sell a

Art of the turnaround The turnaround specialist typically embarks on a five-phase process. The first is a thorough analysis. A key area for analysis is the three requirements for viability: having one or more viable core businesses, adequate bridge financing and sufficient organisational resources. Specialists also make a detailed assessment of strengths and weaknesses in the company’s competitive position, engineering and R&D, finances, marketing, operations, organisational structure and personnel. It is a good idea to engage attorneys at this early stage of the process, says Neil Torpey, partner with Paul, Hastings, Janofsky and Walker. In particular, it is important for lawyers to carefully review the loan documents – what are the triggers for default, what remedies are available, and what governing laws are involved? One major consideration is whether there are other financing sources in the capital structure that would

distressed business. So the name of the game is not bankruptcy. The name of the game is rescheduling, restructuring and reorganisation, because right now there’s no powerful demand to absorb distressed assets.” In Romania, says Radu, companies are not claiming that the government will bail them out. Indeed, the state has little room to manoeuvre. The economy is so bad that the International Monetary Fund (IMF), European Union and World Bank are providing Romania with E20bn in emergency aid. Fortunately, the financial system remains comparatively healthy. Radu had met with the IMF delegation in his capacity as honorary president PricewaterhouseCoopers

cross-default if one convenant is violated. “You have to ask, if you bust a covenant, does the whole house of cards come down?” says Torpey. Once the major problems are identified, the turnaround specialists develop a strategic plan with specific goals and detailed functional actions and sell it to the board, management team and employees. When particularly dire problems are found, the plan may be simple but drastic: mass lay-offs and elimination of entire departments, an emergency surgery aimed at stopping the bleeding and enabling the company to survive in the short term. At the third stage, the CEO, CFO and weak board members may be replaced. Even if incumbent managers are willing to implement changes, they often lack the credibility or objectivity to do so because they are viewed as having caused or contributed to the problems. The specialists then focus on the

of the Insolvency Practitioners Association. “It was a good surprise for them to find that the Romanian banking system is quite strong,” he reports. “The only risk they could see was mother banks in Austria or France or another country requesting local units to stop financing lines or withdrawing part of their reserves to the home country.”

Standing back In about half of the cases PwC Romania works on, the owner also runs the company. “This is a real problem because they are unable to turn over management to professional managers when the company becomes too complex,” Radu says. “They should just

restructuring itself. An important aim is establishing a positive operating cash flow quickly and raising enough money to fund the turnaround strategies. In many ways, this stage can be the most difficult of all. Eliminating losses is one thing, but achieving an acceptable return on the firm’s investment capital is quite another. If the core business has been irreparably damaged, bankruptcy may be the only realistic option. In stage five, the specialists ensure the emphasis on profitability and return on equity is embedded in the company’s DNA. “This final step cannot be successful without a psychological shift as well,” says the Turnaround Management Association. “Rebuilding momentum and morale is almost as important as rebuilding return on investment. It means a rebirth of the corporate culture and transforming negative attitudes to positive, confident ones as the company maps out its future.”

in numbers

42% The drop in value of the rouble during the course of a year from 3 April 2008 through to 3 April 2009

limit themselves to being the owner, hire good professional management and just agree on strategy, mission and so on.” This is one of the points in PwC’s action plan for a current business recovery client. Radu and his team are now setting up a new corporate governance structure, including forming a board consisting of professional directors and a new CFO. “We are contemplating that, for an initial period, somebody from PwC will be transferred to the corporation, although he or she will be under the direct control of top management and the owner,” says Radu. “We will be able to spare that person for a few months while we are

loan savers The global economic slowdown has arrived in eastern Europe, and it is not only the region’s corporates that are feeling the pressure – many banks are now struggling with swelling portfolios of bad loans. This is prompting many to look to restructuring experts for help with their ailing loan portfolios. One of the recent non-performing loan (NPL) transactions was completed by Poland’s largest privately owned bank, Bank Polska Kasa Opieki (Bank Pekao). The bank finalised a major project to clear its balance sheet of NPLs. Many of those loans dated from an earlier slowdown in Poland: the 2001-03 downturn that left many borrowers unable to repay their debts. Managers of the bank decided to bring in PwC experts to support them in the loan disposal process. “Rather than work out these loans internally, the bank wanted to find a more efficient solution,” says Janusz Sekowski, director of advisory services for PwC in Poland. The answer was to sell the loans to third parties. The transaction was the largest of its kind in Poland’s history: the loans carried a face value of about E450m.

Step by step

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PwC guided the bank through a multiple-staged process. First was a portfolio review. The team classified the loans by various criteria, including borrower type, size and type of collateral. Such groupings matter because investors specialise in different sorts of distressed loans, and may pay a premium for a subportfolio that closely matches their investment profile. The team then estimated the portfolio’s value, selecting a sample of more than 150 loans. This required intensive work by a team of up to

10 professionals who examined the loan terms, estimated the worth of the underlying collateral, and ran a discounted cash flow analysis. The team then decided that the best structure was to securitise the loans in two different tranches. With this plan in hand, PwC approached potential investors. After signing non-disclosure agreements, the investors were provided with detailed information about the portfolio. PwC did this via a secure, web-based platform that enabled the investors not only to review all of the necessary documents, but also facilitated the question-and-answer process. “These were international investors,” says Sekowski. “Although they had local due diligence teams, they also pulled other people from other locations onto the project.” The investors submitted their bids and Bank Pekao selected one for each tranche. The timing was good. By selling the NPLs, the bank was able to improve its liquidity and boost its capital adequacy ratio – before Poland felt the full effect of the global slowdown. “The bank was fortunate,” says Sekowski. “They managed to complete this transaction before the major economic crisis broke out.”

recruiting somebody, and then we’ll just support the new CFO, and monitor and jointly assist the company in implementing the restructuring plan,” he continues. In the Czech Republic, Smutny is also looking for CFOs and other managers – but it is difficult to find them. “This morning I just had two calls reiterating the need for such people,” he says. “Unfortunately, there are not many bona fide experts in crisis management, and even fewer who do not have any side interests and meet the criteria of being entirely honest and straightforward in their position so that all stakeholders can fully trust them.” The need is for both clients and the PwC business recovery services unit. “I’m constantly looking for good people, but when you find somebody, he or she gets tied up for six to 12 months in the client company and then you need to continue to search for a new one,” says Smutny.

Rising demand This lack of talent is only likely to become a bigger problem as he expects demand for business recovery services to continue rising. “I do not see any sign of an upturn in the Czech economy yet,” Smutny says. “The businesses that are considered healthy, I’m afraid you’ll see that they are not really healthy. They do not have good cost structures and are not managed well.” Foreign exchange is also a headache, although it is more a hedging issue rather than a mismatch between borrowings and earnings. Exporters had hedged at 25 koruna to the euro, but it has now shot up to 28 – at a time when revenues have been halved by the global crisis. “All these businesses have massive

Tough times GDP across most CEE countries is expected to dip before showing signs of recovery in 2011. As economic conditions weaken, experts predict more corporate difficulties – and turnarounds. Country

Bulgaria

2008%

2009% estimated

2010% forecasT

2011% forecasT

6.0

-1.9

1.1

3.7

Croatia

2.2

0.4

1.8

3.6

Czech Rep

3.5

-2.0

1.6

3.8

Estonia

-3.5

-8.0

-1.5

2.8

Hungary

0.5

-4.5

0.4

2.7

Latvia

-4.6

-12.0

-2.0

1.5

Lithuania

3.2

-8.0

-2.5

2.9

Poland

4.8

0.7

2.0

3.2

Romania

7.7

-1.8

3.1

4.9

Russia

5.6

-2.0

3.0

4.5

Ukraine

2.1

-10.0

1.0

3.5

Source: Economist Intelligence Unit

hedging losses that are killing them,” he says. Is it too early to tell whether the recovery efforts will succeed? “The sooner we can get in to help, the better, because as time goes by, things get worse and worse and the company’s options get fewer and fewer,” says Thornton, in reference to the reluctance of Russian companies to call in the recovery consultants. But the situation is changing, not least because the banks are insisting on a credible restructuring plan before they ease loan terms or extend new financing. The highprofile restructuring of companies such as Rusal, the aluminium giant, also underscores the reality that bailouts are not forthcoming. Still, education efforts need to continue. “One thing that hasn’t been happening much is gaining consensus between different creditors,” notes Thornton. “Some lenders are suing the company for recovery of specific assets, rather than looking for a broader solution. This is partly based on a lack of trust and communication PricewaterhouseCoopers

and limited experience in applying sophisticated solutions in getting the company going again. “There also seems to be an attitude among certain banks that results in an unwillingness in principle to consider writing off or restructuring any debt. So if you put a feasible commercial solution in front of the creditors, it may be voted down by certain banks because they don’t understand that this is what is

“Initially, some clients are quite hostile because they had to hire us under pressure from the banks. But it’s a step-by-step process of getting to know one another” Emilian Radu, partner, PwC

needed or they can’t get approval at the right level,” says Thornton. In the Czech Republic, Smutny is counting on the newly formed TMA chapter to help deepen the talent pool. “Because restructuring is an area where a lot of corruption can exist and weird transactions may happen, we decided to build on very strong ethical and professional standards,” he explains.

Clean-up required There will be legal hurdles in many places. While countries like Romania, for example, have modern insolvency laws, matters are murkier elsewhere. Russia, for example, has a largely untested insolvency regime for corporations, according to Logan Wright, a partner with law firm Clifford Chance in Moscow. There is no debtor-in-possession provision, the auction process for collateral may not be transparent, and there is a general concern that foreign creditors do not always get a fair hearing in Russian courts. “Creditors typically say the last thing they want here is an insolvency process,” says Wright. In the end, the onus is on the company to follow through with the action plan, assuming the creditors sign off on it. A lot depends, in turn, on its relationship with the turnaround consultants. “Initially, some clients are quite hostile because they had to hire us under pressure from the banks,” Radu concedes. “But it’s a step-by-step process of getting to know one another. There is no other way but to adjust to a more professional way in approaching the business plan.” Many such friendships need to be forged in CEE if vulnerable enterprises are to survive the economic crisis – and emerge leaner, stronger and more profitable. n

Flow motion If they haven’t already, executives are pushing cash management to the top of the corporate agenda

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hen it comes to cash management, individual companies in CEE face several unique challenges on top of those that stem from the global economic slowdown. The tendency to borrow for short durations and rely on regular rolling renewals has many companies feeling the pinch, notes Alan Vaksman, a partner in financial services advisory for PwC in Moscow. Firms need to map out their ‘lines of defence’ should refinancing become unworkable. Additional advice about effective cash management needs to be tailored to a company’s circumstances, adds Lukasz Bystrzynski, a partner at PwC in Warsaw. A crucial factor is whether a company or its key banking partners are foreignowned. A foreign-owned firm may have less leeway to manage its cash flows, and a bank less scope to lend, when issues facing a troubled parent in the West trickle down, Bystrzynski says. Whatever the circumstances, most executives place cash management at the top of their agendas. More than 70% of managers in Russia surveyed by PwC at the end of last year said they planned to finance future investments with their own resources. “In a downturn, liquidity

is often more important than profitability,” says Bystrzynski. There is no need to remind Yevgeny Pogorelov of that. The chief financial officer of Samson, a Russian office supplies distributor and retailer, says he is “doing a lot of things differently” now. When the rouble’s devaluation led to interest rate hikes by the country’s central bank, he had to act fast to preserve cash, as the burden of debt repayment grew heavier and foreign suppliers demanded cash on delivery. After opening its newest branch in June, Pogorelov will probably halt all new investment and focus on paying down debt. But he says the most crucial thing will be to refine his monthly cash flow forecasts. Even with three-quarters of a credit line available, he does not want to take chances with working capital.

“The companies that take liquidity the most seriously are including cash management in their business continuity plans” Alan vaksman, partner, PwC

“A realistic cash flow forecast will also go a long way when it comes to negotiating with banks to extend or keep credit lines,” says Vaksman. Until recently, many banks were willing to lend based solely on collateral. Now, they need to see that a company can construct detailed cash projections, a practice that is not always followed in CEE. The companies that take liquidity the most seriously, Vaksman notes, are including cash management in their business continuity plans.

Added complications But even the most sophisticated corporate planners in the region are finding that foreign exchange fluctuations complicate matters. At the end of 2008, Russian companies rated by Moody’s had $144bn in foreign currencydenominated debt, with $39bn coming due this year. Amid the turmoil of the first two months of 2009, the equivalent in roubles soared by more than 20%, Moody’s estimated. With around $8bn in debt – less than 20% of which is denominated in roubles – mobile operator VimpelCom cancelled its dividend in February, and a month later announced a 30bn rouble bond and an 8bn rouble loan to refinance its existing foreign currency debts.

Around the same time, when a devaluation of the Kazakh tenge cut its value against the dollar by almost a quarter, Kazakhstan’s largest bank, BTA, saw nonperforming loans soar as borrowers found it difficult to repay foreign currency-denominated debt. A large government intervention was required to prop up the institution, which ceased principal payments on its debt in April. As recently as December, the bank described its own foreign debt obligations as “entirely manageable”, a potent reminder of how swift and severe the downturn has been. An even more dramatic currency collapse in Hungary – the forint lost more than 40% of its value versus the dollar between July and March – is also punishing companies of all types. Even in Poland, where the economy is performing relatively well compared with most of its neighbours, firms are coming under plenty of pressure. For example, the ballooning value of foreigncurrency debt at oil group PKN Orlen brought about a covenant breach as the company’s netdebt-to-EBITDA ratio more than doubled during 2008. In addition to the interest rate hikes that often accompany debt renegotiations, companies may also face tax issues (see box).

Beyond engineering Given that financial engineering alone is unlikely to address companies’ cash management challenges, Bystrzynski suggests some improvements. On the operational side, the key is tighter cash planning. Improving management information systems and processes can help to compile the detailed information about cash positions and forecasts that will allow managers to run various scenarios and PricewaterhouseCoopers

stress tests. Firms can then look for natural hedges, and keep a close eye on working capital. On governance, Bystrzynski advises companies to enact stricter controls on decisionmaking authority. This will drive greater management accountability. As hard as it may be, given the anger directed at financial institutions for their role in the downturn, companies will see long-term cash management benefits from forming partner-topartner relationships with banks, Bystrzynski says. Both sides have had a tendency of abusing their positions, he adds. In the future, transparency, honesty and trust should guide relationships. No company, of course, would suggest anything less. “It may sound simple, but past experience shows that this is not always the case,” he says. n

Taxing times As companies scramble to renegotiate debts, they cannot ignore potential tax implications, notes Ekaterina Lazorina (pictured), a partner at PwC in Moscow. In Russia, for example, the limits on interest deductibility were recently increased – from 15% to 22% for foreign-currency loans, and from 1.1 to 1.5 times the central bank refinancing rate for rouble-denominated debt. However, this may still not be enough, Lazorina says, as the punitive rates that beleaguered banks now demand during renegotiations may rise even higher than the new limits. A deductibility dilemma also faces the foreignowned subsidiaries in CEE that may be close to breaking thin-capitalisation limits – and thus the ability to deduct interest from taxes – because of the rising burden of foreign-currency intercompany loans. Potential solutions may include changing the currency of a loan or rerouting loans from a parent via a sister company, but neither of these options is easy, nor is the tax authorities’ potential reaction clear.

In times of trouble, experience is your biggest asset.*

When things start to look a little uncertain, it helps to have someone on your side who’s been there before. Someone committed to your interests, with the most extensive range of expertise in turnaround, restructuring and insolvency, at your service. And above all, someone who can provide innovative solutions to the issues you’re facing. To find out more visit www.pwc.com/brs

*connectedthinking © 2009 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.

comment

Divest to avoid distress Lev Holubec

he current economic downturn has significantly altered the near-term growth prospects of the majority of businesses across most sectors. For some, even long-term prospects are now about survival rather than growth. Many CEE companies have yet to feel the full impact of the crisis. Many are relatively young – surfacing only after the fall of the Berlin Wall – and are yet to experience navigating such harsh and sudden changes in the economic cycle. There might not be a more appropriate time for CEE companies to refocus on their core businesses as a means to realise value in the form of cash flow, from selling underperforming or non-core assets. The decision to divest a business is seldom easy,

“The decision to divest now depends on whether the sale of any of the parts preserves or increases the value of the remaining operations”

PricewaterhouseCoopers

While the decision to divest is never easy, companies should take the opportunity to refocus on their primary objectives and save their core assets

particularly for the region’s proud entrepreneurs who built their businesses from scratch or privatising and turning around state enterprises. Furthermore, sellers now outnumber acquirers. Multiples earned on the sale of business have significantly decreased and, at times, are near or even below zero times EBITDA. Thus the mathematics of whether to divest might no longer be based on determining whether the sum of the parts carries greater or lesser value than the whole. Instead, a more appropriate equation might be: “Will the sale of any of the parts preserve or increase the value of the remaining operations?”

What to divest? So which operations should remain with the business, and which should be separated? Determining what to divest need not be entirely traumatic – there are also benefits. Identifying core and non-core assets will help a company see what is bleeding and what is generating cash. It will help to crystallise how the ‘group’ benefits each individual business. This can also reassure banks

about the focus of a company’s ongoing business strategy, making it easier for them to assess the risk of restructuring loans. When preparing to divest noncore or underperforming assets, a business must present a ‘fit for purpose’ financial and operational model. To best encourage competition for that asset, the model must be accompanied by a plan that convinces potential buyers the asset will be viable. A seller who can do that will find a broader set of buyers who are interested in a quick decision and willing to pay more. Many CEE companies are realising that a rough road lies ahead. That road will challenge the stability of even the best businesses and will certainly bend, and maybe break, the overleveraged. Some firms will revisit core objectives and separate and divest certain assets. Others will continue their attempts at cost reduction – and many will ultimately meet their fate in the processes associated with distress. n Lev Holubec, a PwC partner based in Ukraine, leads M&A Integration Consulting in CEE.

data centre>

PwC

Recent economic performance and forecasts (percentages)

Russia GDP growth Inflation Consumer spending growth Investment growth Exports growth Unemployment Poland GDP growth Inflation Consumer spending growth Investment growth Exports growth Unemployment Czech Republic GDP growth Inflation Consumer spending growth Investment growth Exports growth Unemployment Hungary GDP growth Inflation Consumer spending growth Investment growth Exports growth Unemployment Kazakhstan GDP growth Inflation Consumer spending growth Investment growth Exports growth Unemployment Romania GDP growth Inflation Consumer spending growth Investment growth Exports growth Unemployment Ukraine GDP growth Inflation Consumer spending growth Investment growth Exports growth Unemployment

2006

2007

2008(e)

2009(f)

2010(f)

Sources

7.3 9.7 11.2 17.7 7.3 6.7

8.1 9.0 12.8 20.8 6.4 5.6

5.5 14.1 9.7 1.6 -0.8

-2.5 10.2

1.1 7.0

1, 2, 3, 4

2006

2007

2008(e)

2009(f)

2010(f)

Sources

6.2 1.3 5.0 14.9 14.6 13.9

6.6 2.5 5.0 17.6 9.1 9.6

4.8 4.2 5.3 7.9 5.8 7.1

-0.2 2.5

1.1 2.8

1, 4, 5

2006

2007

2008(e)

2009(f)

2010(f)

Sources

6.8 2.5 5.4 6.5 15.8 7.2

6.0 2.8 5.3 6.7 14.9 5.3

4.4 6.3 3.2 4.5 11.1 4.4

-2.5 2.7

0.5 2.4

1, 4, 5

2006

2007

2008(e)

2009(f)

2010(f)

Sources

4.1 4.0 1.7 -6.2 18.6 7.5

1.1 7.9 0.6 1.5 15.9 7.4

0.5 6.0 -0.7 -2.6 4.6 7.8

-5.0 2.1

0.6 3.5

1, 4, 5

2006

2007

2008(e)

2009(f)

2010(f)

Sources

10.7 8.6 13.8 26.5 6.9 7.8

8.5 10.8 10.0 10.0 9.3 7.3

2.3 16.8

0.1 9.2

2.1 9.5

1, 3, 4, 6, 7

2006

2007

2008(e)

2009(f)

2010(f)

Sources

7.9 6.6 12.7 23.5 10.4 7.3

6.2 4.8 11.6 29.0 8.7 6.4

7.1 7.9 9.1 19.3 19.4 5.8

-3.8 4.1

-0.3 3.8

1, 4, 5

2006

2007

2008(e)

2009(f)

2010(f)

Sources

7.3 9.1 13.6 18.7 -4.9 6.8

7.3 12.8 5.5 12.2 6.3 6.4

2.0 24.9 11.6 3.4

-9.8 17.9

-1.8 11.0

1, 3, 4, 6, 7

Sources: 1. International Monetary Fund 2. Federal State Statistic Service 3. PricewaterhouseCoopers estimate (e). 4. PricewaterhouseCoopers forecasts (f) 5. Eurostat 6. The World Bank Group 7. International Labour Organisation

Spotlight: Exchange rates 08 08 AprMay 08Apr 0808 DecJan 08Dec 09 08 JanFeb 09Jan 08 08 MarApr 08Mar 0808 MayJun 08 May 08 08 OctNov 08Oct 0808 SepOct 08Sep 08 08 FebMar 08Feb 0808 NovDec 08Nov 0808 AugSep 08Aug 09 09 FebMar 09Feb 09 09 Apr 09Apr 09 08 08 JunJul 08Jun 09 09 MarApr 09Mar Jan 08 JanFeb 08Jan 08 08 JulAug 08 Jul 80 80 Apr 08 Dec 08 Jan 09 Mar 08 May 08 Oct 08 Sep 08 Feb 08 Nov 08 Aug 08 Feb 09 Jun 08 Mar 09 Jan 08 Jul 08 100

100

120

140

160

180

Apr 09

100

120

140

160

180

Hungary Hungary Ukraine Russia Russia Russia Hungary Ukraine Ukraine

Hungary Russia Ukraine Depreciating currencies in CEE are placing pressure on borrowers in the region, where many loans are denominated in foreign currencies. A potential debtor crisis could pose a risk for western European banks, as they account for large financial industry market shares in CEE. PwC Macro Consulting economics.pwc.com Yael Selfin I +44 (0)20 7804 7630 I yael.selfin@uk.pwc.com

PwC CEE Strategy www.pwc.com/strategy Daniel Cappelletti I +420 251 151 333 I daniel.cappelletti@cz.pwc.com

Source: SunGard PowerData

100

value index (inverse Jan 2008 = 100)

PricewaterhouseCoopers named Lead Russia Financial Advisor for 2009

Acquisitions Monthly Magazine, the premier source for international news, features and analysis relating to the M&A and buyouts industry, has named PricewaterhouseCoopers Lead Russia Financial Advisor for the year 2009. Winning the award in the first year of participation confirms PricewaterhouseCoopers as the leading provider of financial advisory services in Russia.