18020236

BUSINESS GOVERNANCE AND SOCIETY

INDIVIDUAL ASSIGNMENT

POLAND’S A2 MOTORWAY

- RUPIKA SK

AWSA, a consortium of Polish and Western European firms won an exclusive concession to
build and operate a major segment of the proposed A2 motorway, the first private toll road in
Poland. The total cost of the project was 934 million euros. Wojciech Gebicki, the vice
president finance and chief financial officer in AWSA was hired in 1999 and was responsible
to secure a 242 million commercial bank loan for this project. On January 2000 AWSA chose
Credit Lyonnais and Commerzbank as a joint lead arranger for the bank financing. The
investment bankers had traffic concerns related to this project and if the financing were not
closed by July 29th, 2000 the concession would expire. AWSA was responsible to design,
finance, build and operate one third of the Western side of A2 motorway which was about
254km.

Poland has the sixth largest economy in Europe and 21st rank in the world. It is the largest
among the ex-communist members of the European Union. The main trading partners of
Poland were the European Union countries and Russia. Poland has a negative balance in
foreign trade. The main reason behind this is the lesser net exports as compared to the net
imports. Therefore, constructing of the segment of road in A2 Motorway would help increasing
in the level of exports done by Poland with the neighboring countries. The main trade partners
for the Poland are Germany (above 25%), Russia, United Kingdom etc. The construction of
the road would also help in increasing the Employment rate in Poland. These aspects would be
beneficial to the government along with the VATA that would be applicable to the tolls and
the probable share in the cashflows.

The construction of the road contains three phases for the constructions. Konin which includes
the reconstruction of old national Road 2 and needs to be completed by 2002. The Bypass
Poznan is a toll-free road and was supposed to be completed by 2003. There are various major
project risks associated with the project that AWSA is associated with. The Primary risk was
the project section risk as none of the principle parties including the government had any
significant experience in structuring the project this size. The delay in land acquisition would
cause delay in project as 5000 properties were to be acquired within six weeks of the financial
closure. There are risks about approvals permits are required as AWSA are responsible via the
general contractors. Operational risk, financial risk, design and construction risk are also
associated with this project which includes the toll collection and maintenance of the road,
external financial structure. Finally, political, market and current risks also associated with the
project which includes the change in government, difficulty in estimating the traffic and the
weakening in polish currency zloty.

There are several ways in which these risks concerned with these projects can be mitigated.
Government agreed to support efforts and compensate in case of delay due to government
authorities help reducing the approvals and permit risks. By staging the construction,
maximized early revenue capture to reduce external finance needed, financing plan was based
on the model created by the Deutche Bank. The independent engineer retained by AWSA
would monitor construction and certify completion.
 18020236

The role of Gebicki was to negotiate with the shareholders and present better scenario to the
financial bank in terms of revenue and the traffic forecast. Gebicki should convince the bankers
that their analysis was too pessimistic. He should convince the bankers that the early results of
the A4 Toll Motorway showed 80% of available traffic whereas bankers had considered
Wilbur's assumption for A2 at 50%. He should respond to them saying that European
Investment bank are willing to finance part of the A2 project.

From the financial details given in the case we as a group calculated the cashflow by calculating
the weighted average cost of capital and net present value, IRR and the pack back period.

Cash Flows
Cash Flows in Million Zloty
1600

1400
1200
1000
800
Cash Flows

600

400
200
0
2014

2025
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
-200
-400

From this graph it can be clearly seen that the project is very much feasible to undertake as the
cash flow is increasing over the given time period. Though there are numerous risks associated
with the project, according to the given financial statement the project is feasible to perform.