FT SPECIAL REPORT Investing in Central & Eastern Europe

Friday November 9 2012 www.ft.com/reports | twitter.com/ftreports

Inside » Region draws Beijing targets European shift China out to woo new EU members strength from Page 2 Auto factories in top gear prudence New models and low labour costs boost production Outlook is brighter for the area but there is still Page 3 a difficult year ahead, writes Neil Buckley Football fortunes Euro 2012 provided he outlook for central and to do whatever it takes to keep the a spur to overhaul eastern Europe (CEE) still eurozone together. hinges on developments and Investors have drawn reassurance infrastructure in decisions beyond its borders from the European Central Bank’s Poland and Ukraine – in the eurozone periphery, September declaration that it was Tand the big capitals of western ready to engage in unlimited buying Page 3 Europe. But hopes are growing that of sovereign bonds, and progress the period of greatest risk may have towards a eurozone banking union. passed. “It is pretty clear that the EU has cally.” Mr Quijano-Evans suggests a investors have been taking a Membership matters: Shale gas Six months ago a Greek exit from recognised it can’t afford simply to growing belief that the euro can sur- more differentiated view and giving investors drew the euro, dealing a huge blow to CEE give up,” says Simon Quijano-Evans, vive could set off a virtuous circle. credit to CEE countries for putting reassurance from advance slows countries, and endangering the single head of Emea research at ING. “The Improving news could make consum- their fiscal houses in order much ear- ECB’s declaration it Recent restrictions currency’s survival, looked distinctly most supportive thing for CEE coun- ers more willing to spend – encourag- lier than eurozone periphery coun- would buy unlimited possible. tries is to have a clear message that ing companies to invest some of tries – in some cases through sovereign bonds AFP hinder development But that danger has receded as the there is still something for them to their record cash holdings. That sce- super-tough austerity programmes. Page 4 EU has shown signs of being prepared converge on, politically and economi- nario remains some way off. But Continued on Page 4 Sturdy banks sector is well cushioned

Financial services Indicators are good although the picture is differentiated between countries, says Jan Cienski

As western Europe descends into its second slump in four years, many central European banks – Part of Austria’s Volksbank is now in Russian hands Getty largely owned by eurozone- based parents – look well braced for any external 2 per cent,” says Zbigniew seek to intervene in $2.8bn shock. This is particularly Jagiello, chief executive of of local government debts. true of banks in the north- state-controlled PKO Bank Romania has been ern part of the region. Polski, Poland’s largest plagued by three years of Over the past couple of bank. austerity, with falls in real years central and eastern “That means payments for wages, leaving problem European banking sectors financial services will fall, loans rising and credit have shown strong profits, and banks with a small growth sluggish. gradually declining levels of share of the market will Beyond the EU, Ukrain- problem loans and steadily have trouble demonstrating ian banks are showing rising deposits. adequate returns on capital.” signs of stability after a As a result, loan-to-deposit Although Polish banks bruising crisis in 2009 when ratios across the region did dabble in foreign cur- non-performing loans leapt have decreased, reducing rency mortgages, as did to more than 50 per cent. the need for external sup- their counterparts in Hun- Banks had to be bailed out port, which historically has gary, Romania and the Bal- by parents, and billions in been important in countries tic countries, new forex loans have been written off. where foreign ownership mortgages have now almost Many foreign banks ranges from two-thirds of completely disappeared. pulled out of Ukraine, leav- the banking system to more Existing ones are largely ing the field clear for big than 90 per cent. being repaid because Polish Russian rivals, which have That has largely saved banks were more stringent also been playing a larger local economies from credit in their lending procedures role in Belarus, targeted by crunches, as there are signs than banks elsewhere in the EU and US sanctions that parent banks are grad- region. Forex loans have because of its authoritarian ually decreasing funding. never been a problem in government. Fitch, the rating agency, Slovakia and the Czech Russia’s Sberbank has says foreign-owned banks Republic. moved into central Europe, decreased their funding by buying the international about 20 per cent between operations of Austria’s the end of 2008 and mid-2011 Volksbank. The Russians to €62bn. Loan-to-deposit are also thought to be eye- Sturdier central and east- ratios across the ing a midsized acquisition ern European banks are in Poland, although Sber- likely to be tested as parent region have fallen, bank’s arrival would create banks face growing troubles political shockwaves. in their home countries, reducing the need Consolidation has contin- and economies across cen- for external support ued in Poland, where tral Europe slow, as with Spain’s Santander has Poland and Slovakia, or fall added to its Bank Zachodni into recession, as is happen- The situation looks more WBK (bought in 2011 from ing in the Czech Republic. troubling in Hungary, Allied Irish Banks) by tak- Most countries now see Romania and Bulgaria, ing over KBC’s Kredyt loan growth decelerating, however. “Poland and the Bank to create Poland’s and profits are expected to Czech Republic have third-largest banking group. decline this year and next. increased their resilience to Further sales are thought “Generally, 2013 looks a an external shock, while to be unlikely as western little more pessimistic than the vulnerabilities in Hun- European banks grapple 2012 just about everywhere gary and south-eastern with a crisis at home and in the region,” says Artur Europe have increased,” lack the cash to buy. Szeski, financial institu- says Gunter Deuber, chief What risk there is for the tions director at Fitch in central and eastern Europe region is external, possibly Warsaw. analyst at Austria’s Raif- in the form of shocks to While the overall indica- feisen Bank International. parent banks and subse- tors for central and eastern “While Russia is close to quent liquidity withdrawals European banks are fairly overheating in the retail – something regulators in good, the picture is growing segment and Ukraine is the region are keeping a more differentiated between stagnant, there is nothing close eye on. countries. Poland, the Czech like a regional trend.” Governments, particular- Republic and Slovakia have Hungary’s nationalist ly in countries with surplus by far the most solid banks government has already liquidity such as the Czech – the Czechs and Slovaks given western banks a Republic, are also worried even have fewer loans than nasty shock, when it about the impact of a possi- deposits – that have no pushed through a forex ble eurozone banking trouble meeting demanding repayment scheme last year union. They fear such a capital requirements. that saw banks shoulder union could allow banks to “The prospect for the more of the costs of such drain capital from stronger next six quarters or so is mortgages. Now, there are countries to prop up opera- economic growth of about fears the government may tions in weaker ones. 2 ★ FINANCIAL TIMES FRIDAY NOVEMBER 9 2012 Investing in Central & Eastern Europe Region puts its faith in foreign partnerships

Outsourcing Top companies prepare to share the spoils of new-found economic success, says Kester Eddy

When BP moved to set up a business service centre in central Europe in 2009, the UK-based energy company surveyed half a dozen coun- tries, before plumping for Skills set: Budapest has seen a surge in investment Dreamstime Hungary. “When we create a serv- ice centre, we’re not prima- But the torrent of new and especially Poland rily about cost savings, but arrivals has stalled since attracting large numbers of about creating value,” elections in 2010 heralded foreign-owned service cen- Philip Whelan, BP’s head of the arrival of prime minis- tres in the past decade. European business service ter Viktor Orban. His right- Anna Wojt, consulting Talking business: Wen Jiabao, the outgoing Chinese premier, and Bronislaw Komorowski, Poland’s president, at the Belweder Palace in Warsaw Reuters centres, told a business wing Fidesz government manager with PwC, the pro- seminar in Budapest last quickly set about imple- fessional services firm, esti- month. menting unorthodox eco- mates the sector will boast “For us, it’s all about the nomic policies which, 100,000 jobs in Poland by capability of the people, the though ostensibly designed the end of next year, helped skill sets on the market, the to rein in the budget deficit, in particular by growth in Beijing targets European shift security of the industry, the were disruptive and widely provincial cities. economy and infrastruc- seen as favouring domestic “The SSC-BPO sector is ture, it’s about government businesses. continuously growing in support.” “Unfortunately, there is a Poland, with both resident He admits that the com- negative perception of Hun- companies expanding and petition was stiff. “Lots of gary,” says Mark Bownas, new entrants coming in. China Wooing EU’s new member states may prove wise investment, writes Neil Buckley other countries are very partner with KPMG in For example, this year new good at this – Krakow, Budapest responsible for arrivals include Shell and where BP has also estab- outsourcing advisory across Heineken in Krakow, Dolby hinese investment in cen- western Europe and its direct access saw with Berlin, a flagship project for lished a service centre, is a the region. and Bank of New York Mel- tral and eastern Europe has to the EU single market. the Euro 2012 football championship. great location – but when “Whereas, previously, lon in Wroclaw, and Bayer long lagged behind the François Godement, strategy direc- But Covec caused anger after pull- we filled out all those Budapest would always be and Metsa Group in Tricity advances it has made into tor at the Asia Centre in Paris, and a ing out of the contract with parts of parameters, we just felt on the short-list [of compa- [the Gdansk Bay agglomera- other emerging markets. senior fellow at the European Council the road still incomplete, unable to that Hungary was the best nies seeking to locate tion],” says Ms Wojt. CBut, in the past year, Beijing seems to on Foreign Relations, suggests there complete it within its bidding cost. fit,” he says. new service centres], Romania, Bulgaria and, have started to wake up to the oppor- may be a political element, too. China That may complicate Chinese efforts Three years on and Mr now it’s more difficult most recently Serbia have tunities. aims to counter suspicions or opposi- to bid for other public contracts. Whelan has recently rented to get it included. And it’s entered the fray, each In recent months, China has agreed tion to its investments in western So, too, may a draft law from Karel more office space, expecting claiming similar workforce an unusual “loans-for-crops” deal with Europe with a strategy of going into de Gucht, EU trade commissioner, to raise the headcount from skills as their central Euro- Ukraine under which Kiev will the “periphery” first, before moving demanding reciprocity from China the current 850 to above pean rivals, but with even receive $3bn in credit lines in towards Europe’s “core”. “This is how and other countries if Europe opens 1,000 in Budapest within the ‘If I had a dime for more competitive operating exchange for supplies of maize. you soften up your tougher interlocu- its public procurement markets to next 12 months. every time people costs. This year, production started at the tors,” he says. “By showing that you them. BP is just one of some 70 Cristian Stoica, advisory first Chinese car factory in the EU – will be present in any case in coun- Mr Godement suggests China’s woo- corporations – including tell me Hungarians director with KPMG in Great Wall Motor Company’s plant at tries around them.” ing of the EU’s new member states Diageo, Vodafone and BT of Bucharest, says: “Romania Bahovitsa, near Lovech, in northern Central and east European coun- may be an attempt to undermine EU the UK, India’s TCS (Tata are pessimistic! ranked ninth in the Jones Bulgaria. That is widely seen as a test tries themselves, meanwhile, seem to unity on this reciprocity issue. Covec Consultancy Services) and, It’s just so untrue’ Lang LaSalle Top 10 project that could pave the way for be overcoming suspicions they once aside, he suggests many CEE coun- most recently, Avis, the US- Shoring locations during broader Chinese automotive invest- harboured towards Beijing. That may tries will be happy to see China based car rental firm – the last four years, with 40 ment in the region. The same month, be linked to the fact that China, with bidding for infrastructure projects on which have expanded their not just the political new projects, including China completed its biggest invest- its $3.2trn foreign currency reserves, attractive terms. shared service centre (SSC) perception, people also tend R&D centres, and more ment to date in Poland, with LiuGong is an important potential source of “It is very clear that Poland, for operations in Hungary after to think it’s expensive.” than 11,000 new jobs cre- Machinery taking over Huta Stalowa capital now that investment and example, has no interest in reciprocity a positive initial experience. The irony is that the oft- ated. We expect double digit Wola, a maker of road machinery, for financing from western Europe is because they are not going to gain This surge in investment, criticised tax changes initi- growth in this sector in about $100m. harder to attain. from it in China,” he says. facilitated by a pool of edu- ated by the Orban govern- coming years.” In April, Wen Jiabao, the Chinese Ukraine is hoping that its agricul- But, while they may not be ready to cated, cost-competitive and ment have in many cases In the face of such compe- premier, was the star turn at an ture deal with China will not only bid for big public procurement often multi-lingual labour, favoured the better earners tition, can Hungary success- investment forum in Warsaw, organ- boost investment, but open up access projects in China, a significant incen- plus a rapid expansion of in the SSC segment, while fully attract new entrants? ised at Beijing’s request, with 300 Chi- to a vast market. tive for CEE countries in building modern office space, has Hungary’s economic diffi- Certainly one consultant nese businessmen in tow. Meeting no Mykola Azarov, Ukraine’s prime better relations with Beijing is to created an estimated 35,000 culties have led to a devalu- confided that “a significant fewer than 14 prime ministers from minister, told the FT that the crops- open opportunities for their exports. -40,000 jobs in Hungary ation of the forint vis-a-vis US company” is close to the region, Mr Wen announced a for-loans deal with Beijing was likely Chinese imports to central and east- since the first operations most world currencies. announcing a new develop- $10bn special credit line for joint to be followed by others. “We have ern Europe outstrip exports the other were launched by Alcoa, “Salary costs have come ment for next year. Mean- investment projects in east European established very good relations with way by about 10 to one. the US aluminium com- down in Budapest in the while, BP’s Mr Whelan infrastructure and technology and a China,” he says. “There were visits, Mr Wen set a target at the Warsaw pany, soon after the turn of last two years, especially if maintains his resolute sup- $500m investment co-operation fund. and there will be more visits at the summit of nearly doubling trade the millennium. we denominate in euros or port for the Magyar corner. All the activity suggests China is most senior level. And . . . we reached between 16 CEE countries and China Some companies – such dollars. Fact is the situation “If only I had a dime for taking a more strategic approach to a some agreements – about the partici- from $53bn last year to $100bn by as IBM and GenPack – here is better than a lot of every time people tell me region where its investment to date pation of China in the modernisation 2015, adding that Beijing was ready to maintain pure business people imagine,” says Mr that Hungarians are so pes- had been largely piecemeal. In doing of our coal industry, and also energy. import more to reduce the trade process outsourcing (BPO) Bownas. simistic! It’s just so so, it is following the example of Besides, there is a whole range of ‘The big incentive in imbalance. centres, which work with But, while companies untrue,” he says. South Korean businesses, such as projects in the infrastructure sphere.” improving Chinese “The big incentive in improving ties other companies, while seeking outsourcing loca- “We came here because Samsung and LG in Poland, and Kia Yet China may face obstacles in with China is the prospect of invest- shared service centres tions may be bypassing we were confident that the in Slovakia. expansion efforts in CEE countries. ties is the prospect ment. But there’s also a realisation in (SSCs) are typically dedi- Hungary, they are certainly attitude of people would They were attracted by CEE’s low- One of its construction companies, countries like Poland that their com- cated, or ‘captive’, to spe- not ignoring the region, also be right, and so far, we tax environment, well-trained work- Covec, won a contract to build 50km of investment’ panies are not direct actors yet on the cific companies, such as the with the Czech Republic, have no complaints on force and wages well below those in of the main highway connecting War- Chinese market.” Mr Godement says. BP unit in Budapest. Slovakia, the Baltic states that.”

Contributors » Early foray into eastern Europe reaps rewards

Neil Buckley For advertising details, Profile people, is no screwdriver third in the country’s manufacturing facilities.” LED lamps in Hungary, a At the Veresegyhaz Eastern Europe Editor contact: Jim Swarbrick, operation. exporter rankings, with He is particularly proud move helped by EU grants, plant, Mr Lencses bids on +44 207 873 3708 GE True, the alternator sets, goods valued at Ft 1,000bn of the Engineering Design says Mr Beccalli. farewell to the departing Jan Cienski email: [email protected] or gas engines and aero- (€3.5bn). Centre, in Warsaw, set up When asked about the Friday daytime shift using Warsaw and Prague your usual FT representative Business makes its derivative gas turbine Nani Beccalli, president 11 years ago in current difficulties, he the informal “te” form of Correspondent power units are imported, and chief executive of GE co-operation with the hints that the government address – highly unusual All FT Reports are available own way in Hungary but the work done here Europe, admits nobody Polish state. He says: of prime minister Viktor in socially-conservative Roman Olearchyk on FT.com at ft.com/reports with or without help, comprises 25 per cent of predicted this when the “This has grown from 20 Orban has little Hungary. Kiev Correspondent Follow us on Twitter at the sales value. red star still appeared on to 1,300 people working on appreciation of GE’s Asked for details twitter.com/ft.reports writes Kester Eddy “We’re doing real top of Hungary’s coat of leading technologies for contribution to the regarding professional Kester Eddy world- class manufacturing, arms. global markets. Hungarian economy and problems at the works, his FT Contributor All editorial content in this it is not just putting “[GE] Lighting was “For example, the centre that the wave of tax and response is also untypically supplement is produced by Through a protective glass together three pieces and looking for a European contributed to GEnx, our legal changes initiated over Magyar. Aban Contractor the FT. window, Gergo Lencses shipping it. foothold and the coming latest aircraft engine, and the past two years has “Look, within a year of Commissioning Editor points to the glow of a “And in one of the worst system change in Hungary they are also engaged in provided a less than idyllic the first ground-breaking Steven Bird Our advertisers have no moving flame, sweeping economic crises of our provided an opportunity [such diverse activities as] business environment. here, we were shipping out Designer influence over, or prior sight across the inside surface of lives, we are growing by [for that to come about],” the development of sub sea “We continue to our first units,” he says. Andy Mears of the articles or online what – though it is not 25 per cent this year. he says. drilling technologies,” he emphasise to the Having just returned Picture Editor material. fully visible from outside – “We are improving With the collapse of adds. government that we have from Vietnam, where he is part of a combustion productivity. We can ship All told, GE investment long-term commitments built a factory, he insists chamber for heavy-duty units to Venezuela and be into the region “exceeded and obligations to our that there is no turbines. competitive,” Mr Lencses $1bn between 2007-2011”, employees, customers and comparison. “This is a plasma- says. ‘In one of our worst according to press shareholders and, like all “Can the government spraying unit. The robot- When GE first ventured economic crises, information. The company major investors, we do support our activities controlled spray applies a into then communist declines to give total not like surprises,” he more? Pah! Yeah – always. patented thermal barrier Hungary, taking a majority we are growing figures since 1989. replies. “But should I complain coating to the component. stake in Tungsram, a Inevitably, there have that I can’t find vertical “When in use, the venerable, but ailing, by 25 per cent been hiccups along the lathe operators? I mean, combustion chamber can light-bulb manufacturer in this year’ line. this is our job. That’s why reach temperatures in 1989, it created headlines The pioneering I get my salary.” excess of 1,200C, but the worldwide. investment, Tungsram, plasma spray in this After all, this was GE, piled up losses in the GE has spent millions of machine is over 15,000C,” an icon of US-driven global communism, GE looked tumultuous early 1990s and dollars on high-tech says Mr Lencses, plant capitalism and a major beyond Hungary’s borders suffered again more machinery in the region manager of GE Power and defence contractor to boot, and soon expanded into recently following the EU’s Water Hungary. investing in a member of the Czech Republic, decision to ban traditional The unit is one of the what was then perceived Romania and Poland. filament light bulbs, which many pieces of high-tech as the global threat – the Today, across the region, led to lay-offs. machinery at this plant – a Warsaw Pact. GE employs about 26,000 In response, GE Lighting $130m investment by GE, But armed with its people, boasting sales in has invested to develop the US-based conglomerate, Tungsram experience and 2011 of $4.5bn. That year, it and produce modern that since 2001 has been driven by the kind of sourced goods and services manufacturing heavy-duty performances now achieved worth $1.5bn from its 6,200- gas turbine components, at Veresegyhaz, GE has strong local supplier base. along with gas-turbine and expanded dramatically in Mr Beccalli says: “Our gas-engine driven the past two decades, to growth in central and generating sets, for sale employ more than 12,500 eastern Europe has been a across the world. people in Hungary in mix of greenfield As the 35-year old operations spanning investments and Hungarian manager is energy, water, engineering, acquisitions … [and keen to point out, the aviation, healthcare and includes] investments Veresegyhaz plant, near banking. in banking, aviation, Budapest, employing 1,500 In 2010, GE Hungary was energy and healthcare FINANCIAL TIMES FRIDAY NOVEMBER 9 2012 ★ 3 Investing in Central & Eastern Europe Car plants accelerate past western counterparts

Automotives New models and low labour costs are keeping production in the region’s factories buoyant, writes Jan Cienski

t a time when many western Still in Slovakia, 200km to the north- Tim Urquhart, an automotive ana- ACEA, the European Automobile “Customers are choosing brands In full swing: European car factories are east in Zilina, South Korean carmaker lyst at IHS, a consultancy, says the Manufacturers’ Association. By com- that are a little cheaper, but higher Kia’s plant in Zilina, putting workers on unpaid Kia added a third shift at its factory region’s success is due to its low parison, Volkswagen saw a 1.2 per quality,” says Wojciech Drzewiecki, Slovakia, has leave and watching produc- this year. Output increased in the first labour costs and to new factories pro- cent drop in European sales while whose Warsaw-based firm Samar added a third shift tion spiral downwards, car six months of the year by 10 per cent ducing attractive new models that are Daimler’s fell 3.2 per cent. analyses the Polish car market. this year Reuters Aplants across central and eastern to 149,000 vehicles. The target is to managing to find buyers despite the Opel, Poland’s third-largest car- An additional problem for the Polish Europe are attracting huge invest- build 285,000 cars in 2012, compared slump in the European car market. maker, produces its Astra model at its market is that, as with other central ment and have increased their output. with 252,000 last year. There are signs, however, that the factory in Gliwice, Silesia. It expects European countries, almost all vehi- The region is reaping the benefits of Over the border in the Czech Repub- troubles in western Europe are hitting production this year to fall below cles produced are exported, he says. new factories and low labour costs to lic, Kia’s sister company Hyundai weaker central European manufactur- 140,000 units from 174,000 in 2011. While that may not make much of a gain market share. posted a sharp increase in production ers, especially those producing older Output from Volkswagen’s Poznan difference in Slovakia – with 5m peo- At a sprawling factory outside Bra- of 32 per cent to 230,000 units in the models whose natural demand cycle factory in western Poland, which ple, the country is seen more as a tislava, the Slovak capital, German first eight months of this year. has already peaked. makes its Caddy light commercial production site by carmakers, which carmaker Volkswagen has invested Skoda, the Czech marque owned by The best example of that is in vehicles, saw a relatively small 4.5 per have little interest in its domestic mar- €308m and is planning to put in a Volkswagen, has seen its production Poland. In the first nine months of cent drop in production in the first ket – the same is not true of Poland. further €1.5bn over the next five level remain stable compared with this year, car production fell 22 per nine months of 2012. With 38m people, Poland is the sixth years. The plant makes high-end last year – at about 500,000 cars in the cent to 498,000, largely because of dif- Fiat is planning several production most populous country in the EU, but sports utility vehicles under the Por- first eight months of the year – as it Mercedes’ ficulties faced by Fiat, the Italian holidays this year and unions are wor- in the first nine months of this year sche, Audi and Volkswagen marques makes big inroads into emerging mar- production group, and General Motors’ unit Opel. ried about lay-offs, while Opel is mov- only 207,000 new vehicles were regis- as well as compact cars such as the kets such as Russia and China. Fiat, the largest car manufacturer ing from three shifts to two. tered in the country. In contrast, Volkswagen up!. In Hungary, Mercedes-Benz’s new costs in in Poland, has shifted production of Also feeling the pain is France’s Austria, which has 8.5m people, put Production last year came to 210,000 €800m factory in Kecskemet began its latest Panda model to its factory PSA Peugeot Citroën, which is plan- 267,000 new vehicles on its roads. vehicles, but this year the factory production earlier this year, princi- Hungary outside Naples, leaving its productive ning a 19-day shutdown of its The reason is that Poland is flooded will hit its capacity of 400,000, pally of the new version of the B-Class are about a Polish plant to make older models. factory in Trnava, Slovakia. with used cars from western Europe – says Vladimir Machalik, a company compact model. Fiat is also facing deeper problems The Toyota-PSA joint venture in the double the number of new cars that spokesman. “For us, Hungary is the optimal third lower than its German rivals, noting a Czech Republic, which makes the Cit- have been registered this year. “We are doing really well,” he says. location,” says a Mercedes-Benz than in 17 per cent drop in European sales in roën C1, Peugeot 107 and Toyota Aygo “If we sold more new cars in “In the first half of this year we pro- spokesman, noting that overall pro- the first nine months of this year. cars, has seen production fall Poland, maybe Opel and Fiat would duced 122 per cent more cars than in duction costs are about a third lower Germany New car sales in Italy, its primary 22 per cent in the first eight months of not be having so many problems,” the same period in 2011.” than in Germany. market, fell 20.5 per cent, according to this year and is cutting its workforce. says Mr Drzewiecki. Football fever boosts building boom in Poland and Ukraine

more European travellers. Infrastructure Unlike Poland, which had EU structural funds, Euro 2012 provided Ukraine’s government had a spur to overhauling to bankroll much of its own infrastructure upgrades, transport links, say albeit with help from the Roman Olearchyk European Bank for Recon- struction and Development, and Jan Cienski which invested €2.2bn. Anton Usov, the EBRD’s Ukraine spokesman, says: Deadlines can have a galva- “The infrastructure sector nising effect on procrastina- will definitely remain one tors, as happened with of our top priorities in com- Poland and Ukraine under ing years. We should be the pressure of this sum- ready to invest around 30 to mer’s European football 50 per cent of our annual championships. business volume [€1bn] in Two decades ago, both infrastructure projects.” countries emerged from Ukraine plans to continue communism with dilapi- bringing in private invest- dated transport systems: ment, starting with a tender potholed roads, few high- for concession rights to ways, rattling railways and Boryspil, Kiev’s airport. archaic airports. Efforts to The aim, says Mr Koles- modernise were initially nikov, is to turn the air- stymied by penury in their ports into a major east-west early years of capitalism. hub, boosting tax receipts Poland’s entry into the Football fortunes: the Donbass Arena in Donetsk Getty Images for government coffers. EU in 2004 resulted in large Ukraine also wants to injections of EU structural modernise its railway fleet funds, but bureaucratic billionaire oligarchs also south from Gdansk to the with trains built by domes- muddle meant that it took a spent part of their fortunes Czech border. tic producers, and to bring long time to take advantage building some of Europe’s In the end, the total came in private passenger rail- of improved circumstances, best football stadiums. to less than half that, and way operators. Management while Ukraine, outside the Built a couple of years there are still gaps – espe- rights for some 14 govern- EU, and buffeted by politi- ago at a price tag of some cially on the north-south ment river and sea ports cal and economic crises, $500m by Ukraine’s richest highway, where disputes could also be put out to ten- struggled to find the cash. oligarch, Rinat Akhmetov, with construction compa- der, adds Mr Kolesnikov. What got both countries Donetsk’s football stadium nies have left sections Jacek Rostowski, Poland’s moving was the Euro 2012 lights up like a flying unfinished. In all, the coun- finance minister, thinks championships and the pos- saucer. As a result, resi- try spent about $31bn on that the upgrades will sible international humilia- dents of Rostov, a Russian roads, about three-quarters result in higher economic tion if visitors from across city 200km to the south- of which came from the EU. growth. the continent were faced east, have been regularly Railway modernisation “There are other aspects with a transport débâcle. attending football and was much less successful – of our situation which Under pressure, the infra- hockey games in Donetsk. trips from Warsaw to Wro- would actually argue for a structure of both nations “Donetsk is progress- claw still take about five- pickup in growth. Five had the biggest facelift of ing...it’s certainly better and-a-half-hours to cover years ago we hardly had all countries in eastern than Rostov,” says Vladimir under 400km. But big motorways. We now have Europe and beyond. Rakhimov, 35, who visits strides were made in air key motorways covering “We built five brand new regularly for sporting travel, with $2bn spent on much of the country and airports in 18 months,” says events and parties. upgrading or building new will be completing the net- Boris Kolesnikov, Ukraine’s The roads connecting airports for the country’s work to 2020,” he says. deputy prime minister in Kiev with Poland and other largest cities. With the rush of prepar- charge of infrastructure. EU countries are “now The improvements in ing for the tournament now Through a $5bn govern- pretty much done”, says Mr Ukraine and Poland are lur- over, new construction has ment spending spree on Kolesnikov. “The focus is ing in investments. In slowed, but Poland wants to infrastructure ahead of the now on building new roads Poland, logistics companies continue building, seeing tournament, thousands of connecting to eastern cities are building new ware- infrastructure projects as a kilometres of Ukrainian and Russia.” houses serving the whole of way of stimulating demand roads were repaved. In 2009, Poland’s govern- central Europe. in a difficult macroeco- A handful of modern pas- ment promised about Visitors to Ukraine’s larg- nomic environment. senger trains purchased 3,000km of new highways est cities arrive at gleaming The government intends from South Korea’s and expressways, which airports and are greeted to spend about $5bn next Hyundai rolled on to the would leave the country with smiles, rather than year, and is hoping for a railways, cutting travel with a modern highway sour border guards. spending boost in the next times within the country by running from Warsaw to Blessed with picturesque EU budget. Slawomir more than one-third. the German border, another medieval architecture, cob- Nowak, transport minister, And private investors in the south of the country blestone streets and a café says: “Poland will still be pumped about $1bn into from Germany to Ukraine culture, Lviv in western Europe’s largest building building hotels. Ukraine’s and a third running north- Ukraine is also luring in site for many years.” 4 ★ FINANCIAL TIMES FRIDAY NOVEMBER 9 2012 Investing in Central & Eastern Europe Direct investors steal in as stock markets begin to falter Another year to The slowdown is partly a an example of the advan- cash return to France’s Iso- last year came to €1.2bn for under management, includ- Private equity result of the exchange tage of having a local pres- tip-Joncoux Group. the region, a decrease of 4.6 ing a 33 per cent stake in cracking down on listings ence. The two founders Before being bought by per cent on 2010, according AmRest, a Polish restaurant go before Businesses’ overseas by small companies and were looking for an investor Riverside, a fund with $3bn to a study by the European operator now aggressively growth ambitions are partly down to the gloomier who would help them under management, MK Private Equity and Venture expanding internationally. macroeconomic environ- expand in foreign markets, Zary had focused on eastern Capital Association. The two other big mar- driving deals, writes ment. It is, however, provid- but they were reluctant to Europe, but then widened Consumer goods and kets on the periphery of recovery Jan Cienski ing an opportunity for approach investment banks. its horizons to Germany retail accounted for 24 per central Europe – Turkey private equity funds. The growth story still and Scandinavia, which cent of investment in 2011, and Russia – are also pull- “The WSE is less of a drives many of the region’s increased its attractions for followed by communica- ing in investors. Continued from Page 1 For many years, the biggest guaranteed cash-generating transactions, as investors its eventual French owner. tions and life sciences. “While each has its rival of private equity funds machine than it has been in look to a region with Tomasz Glowacki, princi- Most of the activity was attractions, with Poland Yawning current account hunting for deals in central the past few years,” says greater growth potential pal, origination, for central focused on Poland, which there is a strong case that deficits that left some coun- Europe was the Warsaw Thierry Baudon, managing than western Europe and and eastern Europe and accounted for €681m in one can buy developed mar- tries vulnerable to the 2008 Stock Exchange, whose partner of Mid Europa Part- where companies, espe- Turkey at Riverside, says investments, followed by ket risk with above average financial crisis have been high prices and large ners, a fund focused on cen- cially in Poland, are a the atmosphere following Hungary at €195m and the growth prospects,” Mr Piet- narrowed. number of initial public tral and eastern Europe with Warsaw Stock Exchange decent size for their domes- the first wave of the crisis Czech Republic at €139m. rasik says. Peter Brezinschek, head offerings were a tempting €3.2bn under management. tic markets but need finan- in central Europe has Divestments were domi- While underlying eco- of research at Raiffeisen alternative for entrepre- As a result, funds are cial and management assist- become more conservative. nated by the same three nomic growth in central and Bank International, notes neurs looking to sell out or seeking entrepreneurs who “You need to be on the ance to expand abroad. Before 2009 it was possi- countries, accounting for eastern Europe is set to be that, even as the euro slid for an injection of cash. started their businesses street and source your deals “That is the number one ble to finance deals with 92 per cent of the €1.4bn in faster than the rest of the to new lows in the summer, But, over the past year, soon after the fall of com- directly,” says Marcin reason why these guys only 20 per cent equity, but transactions last year. EU for many years, there most CEE currencies per- the number of new listings munism and are now look- Hejka, managing director approach us,” says Mr Bau- now banks are demanding “Poland has one of the are signs private equity has formed well. And, while on the WSE has fallen ing to sell. Because the for eastern Europe, the Mid- don. “They see us as a natu- at least 50 per cent, best reputations of any already levelled out. yield premiums for Spanish steeply – its main market region has a lower level of dle East and Africa at Intel ral partner to help them although, unlike in parts of European market in the Private equity accounts and Italian bonds over Ger- had 16 IPOs as of the end of intermediation – the advis- Capital, the private equity grow beyond their borders.” western Europe, they are private equity industry for 0.2 per cent of gross man Bunds hit records, October, compared with 38 ers who originate most arm of the information An example of how such still willing to talk about because it is a growth play,” domestic product in Poland credit default swap spreads for all of last year, while its deals in western Europe technology company. an investment can work is financing transactions. says Cezary Pietrasik, prin- and Hungary, just a little for Poland, the Czech small companies New Con- and the US – legwork has to Mr Baudon cites Mid the exit in May this year by The more careful cipal in consumer, indus- below the level in Germany Republic and Slovakia nect market has had 76 new be put into finding transac- Europa’s recent decision to Riverside Partners from MK approach has meant the trial and services for emerg- and above that in Austria. moved close to those of core listings so far this year, tions through local banks, buy 50 per cent of Walmark, Zary, a Polish chimney region is only slowly recov- ing Europe at Warburg Pin- “We’re essentially an eurozone countries. compared with 176 in the professional organisations a Czech vitamins and min- maker acquired in 2006 and ering from the slump in cus, the global private emerged market,” says Mr Given CEE countries’ reli- whole of 2011. and personal contacts. eral supplements maker, as sold for 2.9 times cash-on- 2009. Investment activity equity firm with $35bn Pietrasik. ance on the eurozone as both main source of capital and biggest export market, they have inevitably been hit by its slowdown. The economies of the Czech Republic, Hungary, Slovenia and some Balkan states will all contract in Shale gas will 2012. Even Poland, the EU’s best performer since 2008, is now slowing as domestic demand finally weakens. The European Bank for Reconstruction and Devel- have its day in opment warned in its latest forecasts last month: “Emerging Europe is likely to live through another challenging year before any real recovery can start.” Europe – but But the EBRD forecasts growth in central Europe and the Baltic states to nudge up from 1.4 per cent this year to 1.7 per cent next. In south-eastern Eur- not just yet ope – the former Yugosla- via, plus Romania, Bulgaria and Albania – it saw growth up from 0.4 per cent this year to 1.6 in 2013. The Balkan region is still Resources Unconventional gas may not the most vulnerable to fall- out from Greece’s problems answer all Europe’s energy supply problems but because of close trade, in- its development will help, reports Neil Buckley vestment and banking ties.

nconventional gas seems become a bigger issue in Europe than Deleveraging has set to transform central and in the US because of greater popula- not proved as big a eastern Europe’s energy tion density and more powerful envi- market – though it may not ronmental lobbies. problem as feared be the “magic bullet” once A moratorium imposed by France in – but led to muted seenU as reducing the region’s reliance 2011 has been followed by others in on imports from Russia. Germany’s North Rhine-Westphalia credit growth Reduced estimates of reserves in (where the country’s most promising some countries, difficult geologies, reserves are situated), and Bulgaria. No go areas: growing numbers of people have protested against fracking, leading to greater restrictions Getty Images and environmentally-motivated mora- The Czech environment ministry has Sir Suma Chakrabarti, toria on the hydraulic fracturing tech- also proposed a temporary fracking the EBRD’s president, has nology used to produce shale gas have ban until 2014, to allow time to appointing flow rates from test wells. exploration with PGNiG, the natural Chevron and Royal Dutch Shell been rallying support from slowed the outlook for its develop- develop new legislation to regulate Geologists say rock formations in gas company. Foreign companies, were also winners of two major ten- financial institutions for a ment in Europe as a whole, and in the technology. Europe are proving more impermea- including Chevron and ConocoPhil- ders earlier this year in Ukraine, esti- fund to help south-east CEE countries. The industry says it hopes a better ble to existing technology than simi- lips, also say they remain committed mated to have 1,200bn cubic metres of Europe, investing in infra- But, even if production in CEE understanding of fracking will ulti- lar formations in North America. to exploring in Poland. recoverable shale gas reserves. structure to boost jobs. countries takes longer to develop than mately lead to moratoria being lifted. The EU’s Joint Research Centre Mr Budzanowski has said the initial Chevron won rights to explore in The bank also spear- foreseen a few years ago, its own “Development and production of concluded in a report in September target is to double Poland’s existing the Olessky field in western Ukraine, headed efforts early this energy market may continue to see natural gas from shale formations has that fracking “will not make Europe gas production of 4.3bcm a year with with Shell getting the rights to the year to combat one of the important knock-on effects from that a proven record of being done in a self-sufficient in natural gas”, as was the help of shale gas by 2015. Poland Yuzivska field in the east, in what – if biggest potential threats to explosive growth across the Atlantic. safe and environmentally responsible once hoped. consumes about 14bcm a year. commercially viable resources of gas the broader region, delever- The development of shale gas has manner,” says Sally Jones, a spokes- The best-case scenario for develop- Kash Burchett, senior European are found – could become the biggest aging by the west European transformed North America from a woman for Chevron, one of the lead- ment of the fuel, it said, would see energy analyst at IHS Global Insight, foreign investments in the country. banks that dominate CEE, net gas importer to a prospective ing shale gas players in Europe. shale gas replacing declining produc- the consultancy, notes that Poland Mr Burchett says natural gas’s day as they bolstered balance exporter – and freed up supplies of At the same time, however, reserve tion of conventional gas, but with last month also presented a long- in CEE will still come, but significant sheets at home to meet liquefied natural gas from elsewhere estimates have been cut back in Europe still needing to import about anticipated bill setting out rules and production may not happen until the tough capital adequacy to come to Europe instead. Poland, one of the most promising 60 per cent of its needs. taxation for hydrocarbons, next decade. requirements. One factor restraining shale gas countries where fracking is not Yet Poland is pressing ahead with This said total taxes on oil and gas Ms Jones of Chevron says the US It brought together banks growth in central and eastern Europe restricted. The Polish Geological Insti- shale development – as is Ukraine. In production should be a maximum of group believes shale gas could bring and policy makers in is the spread of restrictions on “frack- tute in March estimated likely recov- both countries, the desire to reduce 40 per cent of pre-tax profit, less than “enormous economic benefits”. Vienna 2.0, a revival of the ing” – injecting water, sand and chem- erable reserves of shale gas at 346bn- dependence on expensive imports of some industry executives had feared. “In the US, natural gas from shale so-called Vienna Initiative icals at high pressure into shale to 768bn cubic metres, about one-tenth of Russian gas has helped outweigh “The fact [Poland has] set out some has been a game changer,” she says. in 2009 that prevented west open fractures that release gas – a previous 5.3trn cubic metres esti- environmental concerns. kind of framework for operation, not “This is now an opportunity for [Euro- European banks from with- across the continent. That reflects mate by a US agency in April 2011. Mikolaj Budzanowski, Poland’s just on fiscal terms, but operational pean countries] to determine if they drawing from the region concerns that it can cause environ- Polish optimism was dented further treasury minister, has encouraged issues, is generally positive, because it have the shale gas resources that during the global financial mental damage, such as pollution of in June by ExxonMobil’s withdrawal state power utilities, as well as gives some visibility on what will be could help them gain energy security crisis. groundwater. Such concerns have from shale gas exploration after dis- KGHM, a copper miner, to co-fund required,” says Mr Burchett. and economic development.” Deleveraging has not proved as big a problem as feared – though it has led to muted credit growth. “The most disruptive sce- narios seem to have been avoided. But there is still a Dedicated business leaders help new ventures prosper steady outflow in bank funds,” from CEE countries, Sir Suma told a Warsaw conference last month. mentoring programme”. Mr former lecturer at Insead Yet, with just a simple programme, working ups have won funding, effective communication But Andreas Treichl, Entrepreneurship Moehring tells the FT: business school. He has page on Google, more than through the European including Remagine Tech- skills. ” chief executive of Austria’s “We’ve had great compa- “fought for more than a 50 people responded. Entrepreneurship Founda- nologies, whose Smart- In truth, Mr Zaboji is not Erste Group Bank, one of A pilot programme nies, amazing organisation, year” to bring Seedcamp to Always keen to maintain tion established for the pur- Socket energy-saving alone. As Sandor Erdei, the biggest lenders, said to help start-ups a really good showing of Budapest high standards, he selected pose, Mr Zaboji has run five devices persuaded Primus, chief executive of DBH, CEE deleveraging was “not international mentors and “This is something I am 28 for the first VAC. VACs, with 150 partici- a Budapest-based fund, to which runs a local venture as dramatic as people say”. has succeeded good energy between the very proud of. It is like On the surface, Mr pants. last month inject $1.6m for capital fund (and provided Mr Treichl said that, bar- beyond expectations, teams. We’ll probably end being knighted by the Zaboji’s method is simple. The investment is now future development. the office venue for Seed- ring Hungary, where gov- up investing in some.” Queen,” he says. His contact list already beginning to bear fruit. Another, Antavo, a web- camp Budapest) notes, a ernment policies seen as says Kester Eddy Seedcamp has come to Mr Zaboji has dedicated includes the various charac- Four of the alumni start- based system that empow- variety of individuals, com- hostile by international Budapest because, as he his considerable energies to ters needed to ensure the ers SMEs to create their panies and institutions are banks had led them to puts it “the east European mentoring start-ups in balanced development of a Mentor: Peter own, low-cost online promo- busy nurturing the future reduce exposure, “delever- Across the crowded room a belt is one of the best driv- Budapest and the region start up – from venture cap- Zaboji’s course tional campaigns, won its in Budapest. aging . . . in CEE is substan- Romanian software engi- ers [of start-ups] we have.” since 2009. italists to patent lawyers, as is deemed first funding after attend- “Just two weeks ago, the tially less than the delever- neer is agitatedly pointing And the buzzing crowd – “Once I stopped teaching well as successful entrepre- ‘outstanding’ ing Seedcamp Tel Aviv CEU business school, US aging in many other Euro- out a venture capitalist to including start-ups from and had the time to look neurs. this spring. embassy, American Cham- pean markets”. his business partner; near- Moscow to the UK, but pre- around the region, it He then employs his con- “Without Peter’s ber of Commerce and the Encouragingly for inves- by, struggling to be heard dominantly formed of cen- quickly dawned on me that siderable diplomatic skills course the team Entrepreneurship Founda- tors, business-friendly re- above the babble, two tral European, and espe- it was very much like the to persuade, charm and wouldn’t be as it is,” tion of Hungary held an forms seem to be continu- Czechs sip wine with a Brit- cially Hungarian entrepre- late 90s and the dotcom rev- cajole them – invariably Attila Kecsmar, entrepreneurship seminar. ing in CEE countries. ish entrepreneur and com- neurs – attests to this. olution in Germany and pro bono – to speak about co-founder and chief exec- The original allotment of Poland was the biggest pare notes on marketing For many in the room, France, ie youngsters with their experiences and to utive of Antavo, tells the tickets was spoken for in riser in the World Bank’s start-ups; to the side, every- attending Seedcamp – the great, working ideas, but coach and mentor the FT. “The fourth co- less than 24 hours,” he says. latest Ease of Doing Busi- one seems to want to meet fund lends its name to the no business knowledge,” start-up teams attending founder, Andras Nonetheless, Mr Zaboji’s ness index. Eastern Europe a young German. event that can span three he says. the accelerator course Bencsik came prodigious efforts stand out and Central Asia together The modern office setting days – is a dream come However, when in 2009 and its associated social across Antavo among the crowd. overtook East Asia as the could be Los Angeles, New true. The young, typically Mr Zaboji announced his events. through the Adam Somlai-Fischer, world’s second most busi- York or London. In reality very un-savvy, entrepre- first entrepreneurship The accelerator [VAC] network. co-founder of Prezi, the fast- ness-friendly region in the it is Budapest in late neurs get valuable training, workshop series – called course participants, “In general growing presentation soft- rankings, after the devel- October and the much- insights and business con- the Venture Accelerator who attend classes the accelerator ware company headquar- oped OECD countries. sought German is Philipp tacts, plus the chance to Course (VAC) – “people once a week over a course set our tered in Budapest, and reg- That leaves CEE coun- Moehring, the principal of access their first capital looked at me in disbelief. A 10-week period, international ular VAC speaker, says: tries well placed to garner a Seedcamp, which immod- injection. course on entrepreneurship must also prepare – mindset, and “His course is indeed decent slice of the invest- estly bills itself as It is also a dream realised in English was deemed a and be assessed on – a also gave outstanding – I mean glo- ment cake – even if that “Europe’s leading micro- for Peter Zaboji, a Hungari- very odd proposition,” he business plan. a hand in bally. And I have seen quite cake is rather smaller today seed investment fund and an-born businessman and recalls. Since the pilot a c q u i r i n g a few.” than in pre-crisis days.