Polish Construction Companies 2017 Major Players, Key Growth Drivers and Development Prospects

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1 Polish Construction Companies 2017 Major Players, Key Growth Drivers and Development Prospects

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4 Contents Introduction 5 Section 1. Analysis of the largest construction companies Ranking of the largest Polish construction companies by revenue earned in Ranking of the largest Polish construction companies by operating income achieved in Ranking of the largest Polish construction companies by net profit achieved in Debt analysis of the largest construction companies in Relation of capital expenditure to sales ratio of the largest construction companies in Geographical and generic structure of revenue earned by the largest construction companies in Market cap of the largest construction companies listed on the Warsaw Stock Exchange 26 Section 2. Prospects for development of construction companies in Poland Introduction Macroeconomic factors: economic growth, public debt EU funds Bankruptcies in the construction sector Employment and remuneration in the construction sector Development prospects for construction market segments in Poland Summary 67 Section 3. Profiles of largest construction companies in Poland 69 Bibliography 115 Contact 117

5 Introduction Ladies and Gentlemen, We have the pleasure to present to you the fifth edition of our annual report: "Polish Construction Companies Key Players, Key Growth Factors and Perspectives for Industry Growth", in which we present the analysis of the condition of the fifteen largest Polish construction companies in terms of revenues and describe the prospects of market development broken down into its key sectors. As projected, after a period of growth over the years , 2016 saw a decrease in construction and assembly contracts, which was reflected in our ranking. The total revenue of the fifteen largest construction companies exceeded PLN 28.6 billion, but was 3% lower than a year before, although still higher than in 2014 (PLN 27.9 billion). The slowdown seen on the construction market resulted mostly from a deferral in new tender procedures regarding large infrastructural projects, co-funded under EU perspective. At the end of 2016, there was a revival and improvement in the construction industry. Growth rate and further development of the construction market will depend will depend mostly on effective use of EU funds under perspective to finance large projects, especially regarding roads and railways. Despite a material increase in the number of new projects announced at the end of 2016 and in 2017, sector representatives remain concerned that deferred public procurement procedures regarding large projects may result in accumulation of work, construction material price increases and problems with access to qualified staff will not see intensified construction works as most projects follow the design and construct approach. In the upcoming years, construction companies will on the one hand focus on taking most advantage of the increased volume of projects and look for opportunities ensuring long-term growth in value after 2020 on the other. At present, expansion on foreign markets can be observed, accompanied with business diversification and investing in new competencies, such as modernization of buildings or maintenance of infrastructure. As in previous editions, the first part of the report includes a financial analysis of fifteen entities that have achieved the strongest market standing in It examines their revenues, sales profits, net profits, debt, geographical and revenue structure. The second part of the report presents growth projections for the industry, both in short and medium term, including expenditure planned in each market segment and statistics regarding bankruptcies and employment trends in the construction sector. At the end of this section, a summary of the industry s current condition and the key growth drivers are presented from the perspective of the largest Polish construction companies and key public investors, such as PKP Polskie Linie Kolejowe S.A. In the final part of the report, we briefly examine the characteristics of the business activity of the fifteen most important market players in We include the most crucial information concerning the scope of their activities, ownership structures and detailed financial data derived from their annual financial statements. The report has been based on publicly available financial data or information provided to us directly by the entities presented herein. We hope that you will find the report Polish Construction Companies 2017 Major Players, Key Growth Drivers and Development Prospects informative and that it will give you a better understanding of the current situation on the Polish construction market, including the opportunities and challenges that lie ahead of sector investors and construction companies. 5

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7 Section 1. Analysis of largest construction companies 7

8 1.1. Ranking of the largest Polish construction companies by revenue earned in 2016 In 2016, revenue of the fifteen largest construction companies reached PLN 28.6 billion, which denotes an almost 3% decrease in comparison to the prior year. Budimex Group, with revenue of PLN 5.6 billion (a 8.5% increase in comparison to 2015) has become the leader, followed by Skanska S.A. with revenue of PLN 3.8 billion. At this point it should be emphasized that in previous years, our ranking included aggregate financial data of all Skanska Group companies operating in Poland, while this year, the Group has provided us only with information regarding revenue generated by Skanska S.A. As in prior years, the last place has been taken by Strabag, an Austrian origin company, with a revenue decrease of 11% vs. prior year, equal to PLN 3.4 billion. In 2016, the Budimex Group, the ranking leader, saw the highest revenue growth in terms of value (by PLN 438 million). The PBG Group also experienced a substantial revenue increase (PLN 188 million, i.e. 10.5%). The third best result was achieved by the Mostostal Warszawa Group, with revenue increase of PLN 128 million (10% compared to the prior year) following two years of drop, which has moved it two places up in the ranking. Revenue increase seen by other entities included in the ranking did not exceed PLN 120 million. Table 1.1: The largest construction companies in Poland by revenue in 2016 (PLN 000) No. Company name Revenue 2016 Revenue 2015 Change in nominal terms Change in percentage terms 1 Budimex Group % 2 Skanska S.A % 3 Strabag Group % 4 Polimex-Mostostal Group % 5 PBG Group % 6 Erbud Group % 7 Mostostal Warszawa Group % 8 Trakcja Group % 9 Unibep Group % 10 PORR Group % 11 Elektrobudowa Group % 12 Warbud S.A % 13 Mostostal Zabrze Group % 14 Mota - Engil Central Europe S.A % 15 Mirbud Group % Total % Average % New in the ranking Increase Decrease No change Note: This analysis does not take account of the revenue generated by foreign branches of construction companies operating in Poland or that of special purpose vehicles established to carry out specific projects as part of consortia, as their revenue is included in the revenue of the consortium members. Source: Financial statements of the reviewed companies for

9 Strabag Group and Skanska S.A. have seen the most substantial revenue decrease, by PLN 637 million and PLN 424 million, respectively. Elektrobudowa Group has experienced a slightly smaller drop (by PLN 271 million), but the most substantial percentage one among those ranked (by 22%). Mota Engil Central Europe and Warbud also saw revenue drops in excess of 15% (by 17% and 16%, respectively). The current year ranking includes two new entities, which joined the group of the fifteen largest construction businesses in 2016 following a substantial increase in the scale of their operations in Poland: Mostostal Zabrze Group and Mirbud Group (with revenue for 2016 of PLN 792 million and PLN 774 million, respectively). In 2014 and 2015 we observed a favourable turn on the construction market. Revenue of the sector companies increased as a result of large infrastructural projects being carried out under the first EU perspective. The revenue stagnation observed in 2016 resulted mostly from delays in new public procurement procedures regarding infrastructure to be performed under the new EU financial perspective. Based on the ranking, it is clear that certain entities had problems with filling their contract portfolio. Additionally, it is important to note that new projects are often implemented under the design and construct approach, therefore even if a public procurement procedure is opened and finalized, construction work (i.e. actual revenue generation) will commence nine to 18 months of the contract date. Chart 1.1: Change in average revenue of the ranked companies between 2011 and 2016 (PLN 000) 10% 5% 7% 5% 0% -5% -3% -10% -15% -20% -25% -20% -23% Based on previous editions of reports presenting the largest construction companies in Poland (Deloitte reports: Polish Construction Companies ) 9

10 1.2. Ranking of the largest Polish construction companies by operating income achieved in 2016 Operating income generated by the largest construction companies calculated as the difference between operating revenue and costs of sales (except for other income and operating expenses) indicates that for most entities, the revenue increase/decrease observed in 2016 was accompanied by an increase/decrease in profit on core operations. The average operating margin of the largest companies increased by mere PLN 6 million, the growth being clearly lower than that seen in 2015 (by PLN 25.5 million). The Budimex Group reported the highest operating margin and earned operating income of PLN 751 million. The Strabag Group was the second, with the operating margin of PLN 238 million, which denoted a decrease vs. the prior year. The Trakcja Group was the third best, having seen a margin drop vs. the prior year, and the sales income of PLN 148 million. Operating income generated by other entities included in the ranking did not exceed PLN 130 million. The Budimex Group saw the highest increase in operating income by PLN 259 million (a margin growth o by 3.9 p.p.). zanotowała Grupa Budimex. The Polimex - Mostostal Group was the second - with operating income drop of PLN 120 million (a margin drop by 4.8 p.p.). The Strabag Group companies, which prepare their profit and loss account by nature of expense, include costs of sales and general and administrative expenses in the operating income (unlike the other ranked entities). Table 1.2: The largest construction companies in Poland by operating income in 2016 (PLN 000) No. Company name Operating income in 2016 Operating income in 2015 Change in nominal terms Change in percentage terms Operating margin change (p.p.) 1 Budimex Group % Strabag Group % Trakcja Group % Erbud Group % PBG Group % Mostostal Warszawa Group % Warbud S.A % Elektrobudowa Group % Unibep Group % Mirbud Group % Mostostal Zabrze Group % Mota - Engil Central Europe S.A % Polimex-Mostostal Group % Skanska S.A. no data no data PORR Group no data no data Average Average operating margin (%) 8.31% 7.99% Increase Decrease No change Source: Financial statements of the reviewed companies for

11 Among the thirteen companies listed in our ranking, six entities have managed to improve their operating income in The Budimex Group has seen the largest increase (in excess of PLN 258 million), while Polimex - Mostostal has experienced the largest decrease (in excess of PLN 120 million). All entities which have provided their financial data generated operating profit both in 2015 and %. The Elektrobudowa Group also generated an operating margin in excess of ten percent. This contrasts with the operating margin of 1.2% achieved by the Polimex - Mostostal Group, which is at the bottom of the list. The average operating margin was positive and reached 8.31% in The Budimex Group saw the highest operating income growth with the operating margin of 13.5%. Warbud was second with the operating margin of 11.3%, and the Trakcja Group came third with the operating margin of Chart 1.2: Operating margins of the largest construction companies (%) 16% 14% 12% 10% 8% 6% 4% 13.5% 12.5% 11.3% 10.7% 9.6% 9.6% 10.1% 9.2% 8.8% 8.4% 8.6% 8.6% 7.2% 7.0% 7.5% 7.6% 6.7% 6.7% 6.5% 6.1% 5.4% 5.2% 4.6% 4.3% 6.0% 8.3% 8.0% 2% 0% 1.2% no data Budimex Group Warbud S.A. Trakcja Group Elektrobudowa Group Mirbud Group Mostostal Warszawa Group Erbud Group 3 Strabag Group 2 Unibep Group PBG Group Mostostal Zabrze Group Mota - Engil Central Europe S.A. Polimex-Mostostal Group Skanska S.A. PORR Group Average Source: Financial statements of the reviewed companies for

12 1.3. Ranking of the largest Polish construction companies by net profit gained in 2016 Net profit indicates financial standing of the largest construction companies. The average net profit of the thirteen largest companies was positive and amounted to PLN 119 million, having grown nearly three times in relation to A net margin improvement by nearly PLN 1 billion seen by PBG Group, which in 2016 generated profit of PLN 789 million, was the main factor contributing to the growth. The material increase in the net profit results mostly from the composition agreement concluded with creditors, that came into force in June The second place went to the Budimex Group, which generated a net profit of PLN 411 million. The Strabag Group was third with a net profit of PLN 231 million. The Polimex - Mostostal Group closed the ranking with the net loss of PLN 61 million and the lowest operating income among the ranked companies. Net loss was incurred by two more participants: the Mostostal Zabrze Group (of PLN 23 million) and by Mota Engil Central Europe (of PLN 12 million). As many as ten ranked companies reported a net profit, whereas three incurred a loss. Interestingly, the 2015 ranking saw just one entity with a net loss, i.e. PBG Group, the 2016 ranking leader. Table 1.3: Net profit/loss of the largest construction companies in nominal terms (PLN 000) No. Company name Net profit/ loss for 2016 Net profit/ loss for 2015 Change in nominal terms Change in percentage terms Net margin change (pp) 1 PBG Group % Budimex Group % Strabag Group % Trakcja Group % Elektrobudowa Group % Warbud S.A % Unibep Group % Mirbud Group % Mostostal Warszawa Group % Erbud Group % Mota - Engil Central Europe S.A % Mostostal Zabrze Group % Polimex-Mostostal Group % Skanska S.A. no data no data PORR Group no data no data Average Average net profit margin (%) 6.53% 2.23% Increase Decrease No change Source: Financial statements of the reviewed companies for

13 In percentage terms, the average net profit in 2016 was more than 4 p.p. higher than in the preceding year and reached 6.53%. The data are distorted by the extraordinary performance of the PBG Group. If we exclude PBG Group from the analysis, the average net margin in 2016 would be close to that of 2015 for the ranked entities and would amount to 3.5%. The PBG Group s net profit margin neared 40%. The Budimex Group came second, and Strabag third, with net profit margin of 7.37% and 6.74%, respectively. The results were more than 2 p.p. higher than those of The margin improvement seen by other entities did not exceed the above threshold. Chart 1.3: Net profit margins of the largest construction companies (%) PBG Group Budimex Group Strabag Group 2 Elektrobudowa Group Trakcja Group Warbud S.A. Mirbud Group Unibep Group Mostostal Warszawa Group Erbud Group 3 Mota - Engil Central Europe S.A. Polimex-Mostostal Group Mostostal Zabrze Group Skanska S.A. PORR Group Average 40% 39.7% 35% 30% 25% 20% 15% 10% 5% 0% 7.37% 6.74% 5.67% 4.08% 4.61% 4.63% 3.78% 4.02% 3.89% 2.78% 3.23% 2.56% 1.92% 1.87% 2.55% 2.71% 1.86% 1.04% 0.06% 0.48% 0.33% no data 6.53% 2.23% -5% -1.55% -2.28% -2.85% -10% -15% % -20% Source: Financial statements of the reviewed companies for

14 In 2016 both gross and net profit margin generated by construction market entities was close to that of the prior year (assuming the PBG Group with its net profit margin for 2016 substantially improved is excluded from the ranking). The growth rate, though, was not as high as in prior years. Since 2012, when the result on unprofitable infrastructural contracts carried out under the prior financial perspective adopted by the European Parliament for was recognized, a regular profitability improvement has been observed in projects carried out by and performance of the largest market players. Nevertheless, in 2015, and in particular, in 2016, the growth trend has slowed down, obviously as a result of a reduced supply of new contracts on the one hand; on the other, the largest market players have reached a certain profit margin threshold, which requires substantial work and capital in order to be exceeded through efficiency improvement. Chart 1.3.1: Change in average net and gross profit margins of the ranked companies between 2011 and 2016 (PLN 000) 10% 5% 0% -5% -10% -15% -20% Gross profit margin Net profit margin Based on previous editions of reports presenting the largest construction companies in Poland (Deloitte reports: Polish Construction Companies ) 14

15 1.4. Debt analysis of the largest construction companies in 2016 An analysis of the debt ratios of the largest construction companies reveals that the ratios were lower than in the prior year. The average debt weighted by revenue reached 75% in In the analysed period, most entities reduced the share of foreign capital in their funding, with the most substantial debt reduction performed by the PBG Group as a result of debt restructuring (converting debt to shares). In the case of seven entities, foreign capital constituted at least 75% of their assets value. Despite a substantial drop seen throughout 2016, the highest debt ratio expressed in percent, was disclosed by the PBG Group, the same as in prior years. Its total debt level at the end of 2016 reached 88% and was 49 p.p. lower than in The Mostostal Zabrze Group was the one with the highest debt increase: from 51% at the end of 2015 to 58% at the end of Changes in the debt ratio of other entities did not exceed 5 p.p. Chart 1.4: Debt ratios in years 2015 and 2016 PBG Group Budimex Group Warbud S.A. Polimex-Mostostal Group Mostostal Warszawa Group Unibep Group 6 Mota - Engil Central Europe S.A. Erbud Group Strabag Group Mirbud Group Elektrobudowa Group Mostostal Zabrze Group Trakcja Group Skanska S.A. no data PORR Group no data Average Source: Financial statements of the reviewed companies for

16 As in the prior year, the debt ratio of the Trakcja Group was the lowest among the ranked companies and reached the level of 44%. At the end of 2016, in the largest construction companies, the average debt ratio weighed with revenue dropped by 4 p.p. vs. the prior year Relation of capital expenditure to sales ratio of the largest construction companies in 2016 Companies operating in the construction sector usually demonstrate a low capital expenditure to sales ratio due to high sales volumes and relatively low capital expenditure necessary to provide construction services. In 2016 the total capital expenditure of the largest market players exceeded PLN 320 million and were 5% higher than in Table 1.5: Capital expenditure of the fifteen largest construction companies in nominal terms (PLN 000) No. Company name Capital expenditure in 2016 Capital expenditure in 2015 Change in nominal terms Change in percentage terms 1 Strabag Group % 2 Budimex Group % 3 Trakcja Group % 4 Mota - Engil Central Europe S.A % 5 Mirbud Group % 6 Mostostal Zabrze Group % 7 Elektrobudowa Group % 8 Mostostal Warszawa Group % 9 Warbud S.A % 10 PBG Group % 11 Unibep Group % 12 Polimex-Mostostal Group % 13 Erbud Group % 14 Skanska S.A. no data no data PORR Group no data no data - - Total % Average % Increase Decrease No change Source: Financial statements of the reviewed companies for

17 In 2016, in terms of the nominal amount of capital expenditure, Strabag Group companies lead the ranking with total capex of PLN 76 million, being PLN 10 million higher than in The Budimex Group with total expenditure of PLN 70 million (a 4% increase year-on-year) and the Trakcja Group with expenditure of PLN 57 million (a 29% increase year-on-year) came second and third, respectively. In 2016, the capital expenditure to sales ratio was 1.36%, which means a drop by 0.07 p.p. year-on-year. Entities with the highest ratio included Mota Engil Central Europe and Strabag Group companies, while in the Erbud Group and in the Polimex-Mostostal Group the ratio was the lowest. Chart 1.5: Capital expenditure to sales ratio (figures for 2016 and 2015) Trakcja Group 3.33% 4.14% Mota - Engil Central Europe S.A. 1.81% 3.80% Mirbud Group 0.75% 2.30% Strabag Group % 2.22% Mostostal Zabrze Group 1.24% 1.80% Elektrobudowa Group 1.11% 1.41% Budimex Group 1.27% 1.32% Warbud S.A. Mostostal Warszawa Group 0.78% 0.95% 1.56% 1.47% Unibep Group 0.23% 0.56% PBG Group 0.44% 1.62% Erbud Group 3 Polimex-Mostostal Group 0.21% 0.17% 0.10% 0.78% Skanska S.A. no data PORR Group no data Average 1.36% 1.29% 0% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% Source: Financial statements of the reviewed companies for

18 1.6. Geographical and generic structure of revenue earned by the largest construction companies Sales by geography Large construction groups operating in Poland are also present on foreign markets. However, their sales value generated abroad is still relatively low and Poland remains the key market on which they provide construction services. In nominal terms, the average revenue generated abroad by the largest construction companies was PLN 187 million, denoting a growth o by PLN 29 million compared to the average foreign revenue generated in 2015, i.e. by 19% year-on-year. As in 2015, the Trakcja Group, which controls a large AB Kauno construction group operating in Lithuania, in other Baltic states and in Scandinavia, generated the highest revenue abroad. It totalled PLN 511 million and was 5% higher than in The Polimex-Mostostal Group was second, as in 2015, with the revenue of PLN 489 million denoting a 10% growth year-on-year, and the Erbud Group came third with the revenue of PLN 376 million, which means that its foreign revenue increased more than twice compared to the prior year. The exports of Polish construction companies focus on the neighbouring markets, mainly on Eastern Europe, Scandinavia and Germany. Table 1.6.1: Revenue earned by the largest construction companies abroad, in nominal terms (PLN 000) No. Company name Revenue from sales on foreign markets in 2016 Revenue from sales on foreign markets in 2015 Change in nominal terms Change in percentage terms 1 Trakcja Group % 2 Polimex-Mostostal Group % 3 Erbud Group % 4 Mostostal Zabrze Group % 5 Budimex Group % 6 Elektrobudowa Group % 7 Unibep Group % 8 PBG Group % 9 Mostostal Warszawa Group % 10 Strabag Group % 11 Warbud S.A % 12 Mota - Engil Central Europe S.A % 13 Mirbud Group % 14 Skanska S.A. no data no data PORR Group no data no data - - Total % Average % Increase Decrease No change Source: Financial statements of the reviewed companies for

19 The average share of revenue generated abroad in the total operating revenue of the largest construction companies was 10.3%, meaning a year-on-year growth by nearly 1.6 p.p. In two entities, foreign sales exceeded 30% of the total sales revenue: 37% in the Trakcja Group and 32.5% in the Mostostal Zabrze Group. An analysis of sales by geography reveals that a growing number of companies from the construction sector are looking for opportunities to fulfil contracts and find clients on foreign markets. In the longer term, searching for new markets and, consequently, diversification of business risk, will be of crucial importance after the EU funds received in the perspective have been used up. Many companies have already performed contracts on foreign markets (mostly in Scandinavia and in the countries adjacent to Poland). Market players, in particular companies funded with domestic capital, have been increasingly interested in eastern markets (Belarus and Ukraine), which offer broad opportunities (accompanied with risks) and in the Balkans. A growth in foreign sales expected in the years to come should correspond to the reduction of time left to complete the EU-funded projects. Chart 1.6.1: Percentage share of foreign sales in total sales for the fifteen largest construction companies in % 35% 30% 37.0% 36.6% 34.4% 32.5% 25% 20% 15% 10% 5% 0% 21.0% 19.2% 18.3% 17.4% 19.2% 14.9% 9.2% 9.1% 9.0% 7.2% 4.0% 3.6% 2.2% 1.0% 1.1% 0.3% 0.2% no data 0% 0% 0% 10.3% 8.7% Trakcja Group Mostostal Zabrze Group Erbud Group 3 Elektrobudowa Group Polimex-Mostostal Group Unibep Group PBG Group Budimex Group Mostostal Warszawa Group Warbud S.A. Strabag Group 2 Mota - Engil Central Europe S.A. Mirbud Group Skanska S.A. PORR Group Average Source: Financial statements of the reviewed companies for

20 Chart 1.6.2: Sales of the fifteen largest construction companies in by geographical area MARKETS Domestic Western European Eastern European Scandinavian Asian Other TOTAL 2016 (PLN 000) Budimex Group Strabag Group Polimex-Mostostal Group PBG Group Trakcja Group Erbud Group Locations abroad where the revenue is generated are unknown. Foreign revenue amount Locations abroad where the revenue is generated are unknown. Foreign revenue amount Locations abroad where the revenue is generated are unknown. Foreign revenue amount Locations abroad where the revenue is generated are unknown. Foreign revenue amount Locations abroad where the revenue is generated are unknown. Foreign revenue amount Mostostal Warszawa Group Unibep Group Elektrobudowa Group Warbud S.A Mostostal Zabrze Group Locations abroad where the revenue is generated are unknown. Foreign revenue amount Mota - Engil Central Europe S.A Mirbud Group Skanska S.A. No data PORR Group No data TOTAL Source: Financial statements of the reviewed companies for

21 Chart 1.6.3: Sales of the fifteen largest construction companies in by geographical area MARKETS Domestic Western European Eastern European Scandinavian Asian Other TOTAL 2015 (PLN 000) Budimex Group Strabag Group Polimex-Mostostal Group PBG Group Erbud Group Trakcja Group Locations abroad where the revenue is generated are unknown. Foreign revenue amount Locations abroad where the revenue is generated are unknown. Foreign revenue amount Locations abroad where the revenue is generated are unknown. Foreign revenue amount Locations abroad where the revenue is generated are unknown. Foreign revenue amount Locations abroad where the revenue is generated are unknown. Foreign revenue amount Mostostal Warszawa Group Unibep Group Elektrobudowa Group Warbud S.A Mota - Engil Central Europe S.A Mirbud Group Mostostal Zabrze Group Locations abroad where the revenue is generated are unknown. Foreign revenue amount Skanska S.A. No data PORR Group No data TOTAL Source: Financial statements of the reviewed companies for

22 1.6.2 Sales by a type of operations Sales by type reflect diversification of the operations carried out by the largest construction companies in the general construction, energy, road and railway sectors. A material part of their revenue is also derived from the housing construction and construction engineering sectors. Chart 1.6.4: Sales of the fifteen largest construction companies in by a type of operations MARKETS General construction Housing construction Road and railway construction Engineering construction Power construction Other activities TOTAL 2016 (PLN 000) Budimex Group Polimex-Mostostal Group PBG Group Erbud Group Mostostal Warszawa Group Trakcja Group Unibep Group Elektrobudowa Group Warbud S.A Mostostal Zabrze Group Mota - Engil Central Europe S.A Mirbud Group Skanska S.A. No data Strabag Group No data PORR Group No data TOTAL Source: Financial statements of the reviewed companies for

23 Chart 1.6.5: Sales of the fifteen largest construction companies in by a type of operations MARKETS General construction Housing construction Road and railway construction Engineering construction Power construction Other activities TOTAL 2015 (PLN 000) Budimex Group Polimex-Mostostal Group PBG Group Erbud Group Trakcja Group Mostostal Warszawa Group Unibep Group Elektrobudowa Group Warbud S.A Mota - Engil Central Europe S.A Mirbud Group Mostostal Zabrze Group PORR Group No data Skanska S.A. No data Strabag Group No data TOTAL Source: Financial statements of the reviewed companies for

24 Table : Other activities of the largest construction companies in 2016 No. Company name Other operations 2016 Other activities 2015 Change in nominal terms Change in percentage terms 1 Budimex Group % 2 Polimex-Mostostal Group % 3 Mostostal Zabrze Group % 4 Elektrobudowa Group % 5 PBG Group % 6 Unibep Group % 7 Mirbud Group % 8 Trakcja Group % 9 Mota - Engil Central Europe S.A % 10 Warbud S.A % 11 Erbud Group % 12 Mostostal Warszawa Group % 13 Skanska S.A. no data no data Strabag Group no data no data PORR Group no data no data - - Total Increase Decrease No change Source: Financial statements of the reviewed companies for

25 The largest non-construction income was recorded by the Polimex - Mostostal Group and the Budimex Group, which reached PLN 492 million and PLN 475 million, respectively. Revenue of the Polimex - Mostostal Group generated on other activities included mostly production and assembly of steel structures used in construction. The second best Budimex Group generated non-construction revenue mostly on property development. As compared to 2015, the average percentage share of other operating revenue went down from 9.9% to 8.2%. In 2016, in most cases, the share of construction and assembly services in total sales ranged from 80% to 100%. The Mostostal Zabrze Group, with the share of non-construction revenue exceeding 20%, is the exception. The Group manufactures steel structures and provides repair and maintenance, as well as other manufacturing related services. In the case of eleven analyzed entities that generated revenue from other activities in 2016, only one increased the percentage of non-construction income in total revenue compared to Chart 1.6.6: Share of revenue from other (non-construction) operations in total operating revenue (for ) Mostostal Zabrze Group 26.9% 28.5% Polimex-Mostostal Group Elektrobudowa Group Mirbud Group 17.8% 19.4% 16.7% 15.7% 14.0% 14.2% Budimex Group Unibep Group Trakcja Group PBG Group 5.9% 6.6% 5.7% 8.8% 9.0% 7.9% 9.2% 13.7% Mota - Engil Central Europe S.A. Warbud S.A. Erbud Group Mostostal Warszawa Group Skanska S.A. 3.4% 1.7% 1.4% 0.5% 0.0% 0.1% 0.2% no data 6.5% PORR Group no data Strabag Group Average no data 8.2% 9.9% 0.0% 25.0% 50.0% Source: Financial statements of the reviewed companies for

26 An analysis of the aforesaid data shows clearly that still a relatively low share of revenue is earned on operations other than those directly related to the implementation of construction projects. This trend should reverse once projects receiving EU support in the second financial perspective have been finalized. It should be emphasised, though, that large construction groups have already begun to diversify their business and invest in areas which are not directly related to construction or property development operations, such as property management, supply and installation of specialist industrial equipment or construction advisory and consulting services Market cap of the largest construction companies listed on the Warsaw Stock Exchange Following a significant increase in WIG Budownictwo is a subindex of Warsaw Stock Exchange Index (WIG) which submits only construction companies listed on WIG. index in 2015, the subsequent year saw a slowdown related to an overall decrease in construction and assembly related production, resulting mostly from delays in public procurement procedures regarding large infrastructural projects. In 2016, WIG BUD dropped by 1.5%. At the same time, WIG increased by more than 10%. Ten out of the fifteen largest construction companies were listed on the Warsaw Stock Exchange. At the end of 2016, the combined market cap of the ten construction companies listed on the Warsaw Stock Exchange was PLN 9.7 billion and was PLN 1.7 billion higher than their combined market cap at the end of In percentage terms, the combined market cap rose by 21%. The substantial increase resulted from an increase in the PBG Group market cap, which in turn had resulted from a composition agreement signed with creditors and completion of the bankruptcy procedure. With PBG excluded from the analysis, the total market cap of the listed companies included in the ranking would decreased by 2%. Budimex, whose market cap was PLN 5,054 million (up by 2% as compared to 2015), whose share in the total cap of all companies presented in the table exceeds 50%, has been an unquestionable leader since The PBG Group has come second, and Trakcja PRKiL third, with market capitalisation of PLN 1,927 million and PLN 728 million, respectively. Chart 1.7.1: Construction and assembly production ratio in 2016 YOY - cumulative year over year changes Chart 1.7.2: Construction and assembly production ratio in 2017 YOY - cumulative year over year changes 0% -2% -4% -6% -8% -10% -12% -14% -16% -18% -4% I II III IV V VI VII VIII IX X XI XII I II III IV V VI VII VIII % 12% 10% 8% 6% 4% 2% 0% -2% Source: Deloitte analysis based on data available on the website of the Central Statistical Office (January 2017 report). 26

27 In the first quarter of 2017, WIG Budownictwo grew by over 20%, most likely as a result of a good standing of the entire economy, which is confirmed both by a growth in WIG and by the fact that in the first half of 2017 the value of construction and assembly production sold (expressed in current prices) increased as did the number of new large infrastructural tenders announced. On the other hand, the lower than expected results of construction companies in 2017 made investors more cautious, which has resulted in a decrease in WIG Budownictwo in the second half of the year. Most probably, 2017 will not see intensified construction works since most projects follow the design and build approach, which means that both the commencement of construction and revenue recognition will be deferred. In future, this may result in accumulation of work, construction material price increases and problems with access to qualified staff. Table 1.8: Market cap of the largest construction companies listed on the Warsaw Stock Exchange as at 31 December 2016 (PLN 000) No. Company name Market cap 31/12/2016 Market cap 31/12/2015 Change in nominal terms Change in percentage terms 1 Budimex S.A % 2 PBG S.A % 3 Trakcja PRKiI S.A % 4 Elektrobudowa S.A % 5 Unibep S.A % 6 Erbud S.A % 7 Polimex-Mostostal S.A % 8 Mostostal Warszawa S.A % 9 Mostostal Zabrze S.A % 10 Mirbud S.A % Total % Increase Decrease No change Chart 1.8: Market cap share of the largest construction companies listed on the Warsaw Stock Exchange as at 31 December % 5% 2% 4% 3% 4% 20% 2% 1% 52% Budimex S.A. PBG S.A. Trakcja PRKiI S.A. Elektrobudowa S.A. Unibep S.A. Erbud S.A. Polimex-Mostostal S.A. Mostostal Warszawa S.A. Torpol S.A. Mostostal Zabrze S.A. Mirbud S.A. Source: Deloitte analysis based on data published on the website of the Warsaw Stock Exchange. 27

28 Based on financial data available as at 30 June 2017, the total cap of the presented companies increased by over 30% compared to the end of December The substantial growth in the market cap of the listed construction companies has resulted mostly from a growth in the value of shares in Budimex (by nearly 20%), PBG S.A. (by over 31%) and Polimex Mostostal S.A. (by over 376%). The increase in capitalisation of the three entities accounts for over PLN 2.8 billion of the total change of PLN 3.1 billion observed in the period from 31 December 2016 to 30 June When analysing each company s capitalisation over the last six months, Polimex Mostostal saw its highest growth expressed in percent, contributed to by the largest domestic power companies that have become its shareholders. The increase in the value of shares in PBG S.A. has resulted from implemented restructuring measures. It is worth noting that in the second half of the year the growth of WIG BUD index turned into a decrease, unlike the continuing increase of WIG. The turn of the trend results indirectly from a change in quoted prices of the largest entities and market valuation of risks related to contracts they have been working on. Chart 1.9: Changes in Warsaw Stock Exchange Index and WSE Construction Index in period 01/ / WIG WIG BUDOW Source: Deloitte analysis based on data published on the website of the Warsaw Stock Exchange. 28

29 Table 1.10: Market cap of the largest construction companies listed on the Warsaw Stock Exchange as at 30 June 2017 (PLN 000) No. Company name Market cap 30/06/2017 Market cap 30/06/2016 Change in nominal terms Change in percentage terms 1 Budimex S.A % 2 PBG S.A % 3 Polimex-Mostostal S.A % 4 Trakcja PRKiI S.A % 5 Elektrobudowa S.A % 6 Unibep S.A % 7 Erbud S.A % 8 Mostostal Warszawa S.A % 9 Mostostal Zabrze S.A % 10 Mirbud S.A % Total % Increase Decrease No change Chart 1.10: Market cap share of the largest construction companies listed on the Warsaw Stock Exchange as at 30 June % 12% 1% 1% 2% 2% 3% 3% 4% 19% 46% Budimex S.A. PBG S.A. Polimex-Mostostal S.A. Trakcja PRKiI S.A. Elektrobudowa S.A. Unibep S.A. Erbud S.A. Torpol S.A. Mostostal Warszawa S.A. Mostostal Zabrze S.A. Mirbud S.A. Source: Deloitte analysis based on data published on the website of the Warsaw Stock Exchange. 29

30 In the first half of 2017, the companies listed on the Warsaw Stock Exchange reported an inconsiderable increase (by less than 2%) in their sales revenue year-on-year. The Budimex Group with revenue of PLN 2.7 billion (a rise by 12%) was again the major player. The companies managed to partly rebuild their order portfolio; still, not all tenders have been announced yet. A low supply of contracts available in recent years made offered prices drop much below the investor budget assumptions. Table 1.11: Revenue of companies listed on the Warsaw Stock Exchange as at 30 June 2017 and 30 June 2016 No. Company name Revenue 06/2017 (PLN 000) Revenue 06/2017 (PLN 000) Change in nominal terms Change in percentage terms 1 Budimex Group % 2 Polimex-Mostostal Group % 3 PBG Group % 4 Erbud Group % 5 Unibep Group % 6 Mostostal Warszawa Group % 7 Trakcja PRKiI Group % 8 Mostostal Zabrze Group % 9 Elektrobudowa Group % 10 Mirbud Group % Total % Source: Deloitte analysis based on data published on the website of the Warsaw Stock Exchange. 30

31 Therefore, strong margin pressure shall affect investment budgets. Additionally, risks related to significant accumulation of works in may translate into a growth in construction material prices and reduced availability of qualified staff (which can be observed at present in all economy sectors). This will affect future performance of the companies and, despite apparently positive indications, may adversely impact their financial standing and quoted stock prices. Chart 1.11: Revenue of construction companies listed on the Warsaw Stock Exchange in the first half of 2017 and 2016 (PLN 000) Budimex Group Polimex-Mostostal Group PBG Group Erbud Group Unibep Group Mostostal Warszawa Group Trakcja PRKiI Group Mostostal Zabrze Group Elektrobudowa Group Mirbud Group Revenue June 2017 (PLN million) Revenue June 2016 (PLN million) Source: Financial statements as at 30 June In the prior year, our ranking included aggregate data of all Skanska Group companies operating in Poland, while this year, the Group has provided us only with information regarding revenue generated by Skanska S.A. 2 Due to absence of consolidated financial statements, for simplification purposes, the financial data of the Strabag Group include the total of revenue generated by Strabag Sp. z o.o. and Strabag Infrastruktura Południe Sp. z o.o. Financial data for 2015 have been reconciled to financial statements for 2016 after opening balance adjustments. 3 Financial data for 2015 have been reconciled to financial statements for 2016 after opening balance adjustments. 4 Due to absence of consolidated financial statements, for simplification purposes, the financial data of the PORR Group include the total of the revenue generated by PORR Polska Construction S.A. and PORR Polska Infrastructure S.A. Financial data for 2015 have been reconciled to financial statements for 2016 after opening balance adjustments. 5 For the ratio calculation purposes, the balance sheet total has been reconciled to the financial statements for 2016 after adjustment of the balance sheet total as at 31 December For the ratio calculation purposes, the balance sheet total has been reconciled to the financial statements for the six months of 2017 after adjustment of the balance sheet total as at 31 December

32 32

33 Section 2. Prospects for development of construction companies in Poland 33

34 2.1. Introduction In 2016, the construction market value decreased by 6.9% to PLN billion in relation to PLN billion in Nevertheless, the market standing was different in different market segments. Thus, evaluation of the observed trends requires an individual approach to each segment. The building construction segment saw record-high apartment sales levels; at the same time, the railway and road construction segment rebounded only in the second half of 2016 due to deferred public procurement procedures co-financed with EU funds. In 2016, a record-high number of apartments was offered and sold. About 62,000 apartments were sold in the six largest agglomerations (Warsaw, Kraków, Wrocław, Tricity, Poznań and Łódź) compared to approx. 52,000 in The demand was contributed to by continuing low interest rates, high availability of mortgage loans, growth in salaries and wages, as well as by decreasing unemployment. Apartment purchases for investment purposes contributed to the demand increase, in particular in districts of large cities with well-developed transportation systems. The percentage of apartments purchased for cash in large cities (mostly for investment purposes) has approximated 40%. seems to be well-founded taking into account the following factors: prices per square meter being relatively stablewith a slight tendency to grow; land banks built by property developers to secure future investments; about 75% of apartments to be completed in 2017 being sold already; apartment sizes being better adjusted to financial capability of clients; own contribution required by mortgage loan providers was another year of record high supply of office space in Poland. At present, office space available in Poland approximates 9 million sq. m, out of which nearly 5 million sq. m located in Warsaw. In 2016, 800,000 sq. m of office space were commissioned, half of which in Warsaw. According to statistics, though, compared to Western Europe, the Polish office space market is not saturated yet (e.g. office space available in Munich equals 22 million sq. m). In the coming years, demand for new office space should be supported by such factors as being the largest economy in the region, infrastructure development owing to access to EU funds, well educated labour, and universities in large cities supplying labour market with educated staff. The standing of the retail and service space market was good. In 2016, it increased by o 470,000 sq. m. A supply growth projected for 2017 is 400,000 sq. m, out of which 360,000 sq. m being already in progress. A tax on retail sales or Sunday trade ban/ limitation, if introduced, may adversely impact the market growth. On the other hand, growth in salaries and reduced unemployment may counteract the negative trend. According to REAS projections, in 2017 the number of apartments sold in key agglomerations shall approximate 72,000, denoting a 16% increase year-on-year. An 18% increase in WIG Deweloperzy during the first nine months of 2017 has confirmed the good standing of this sector. The projected growth of the residential construction market 1 REAS,

35 In the first half of 2016, the road and railway construction segment saw further delays in public procurement procedures regarding large infrastructural projects. The sub-segment of civil engineering facilities (mainly the construction of roads and railways) decreased significantly by approx. 11% y-o-y, while the construction of pipelines, telecom lines and electric power lines dropped by approx. 24% y-o-y. In the road and railway construction sector, the period from the second half of 2016 to mid-2017 was marked by a high number of tenders co-financed from EU funds by GDDKiA (Directorate General for National Roads and Motorways, DGRNM) and PKP PLK. From January to July 2017, production of construction materials and assembly parts increased by approx. 11% y-o-y. During the period of intense contracting, construction market companies rebuilt their projects portfolios relatively fast, thus ensuring free capacity utilisation. Competing for contracts and free capacity utilisation in the discussed period may translate into reduced margins, as already observed in the first half of 2017 in the performance of the Torpol Group, Trakcja Group and ZUE Group (the main railway market players). Polish construction market by segment in (PLN billion) minus 6.9% Specialized construction Civil engineering Building construction * Current prices, excluding VAT Source: Central Statistical Office Structure of the construction market in Poland % 90% 80% 31.9% 37.9% 35.5% 40.6% 38.2% 40.8% 42.6% 70% 60% 50% 40% 23.4% 26.8% 27.5% 26.0% 28.3% 26.1% 24.2% 30% 20% 10% 44.6% 35.2% 37.0% 33.5% 33.5% 33.1% 33.2% 0% Specialized construction Civil engineering Building construction Source: Central Statistical Office, Deloitte study 35

36 The construction market standing improvement seen in 2017 is reflected in growing prices of shares in construction companies quoted on Warsaw Stock Exchange. The broad WIG Budownictwo index, including 47 companies, grew by 13% from January 2016 to August Pursuant to our analysis, WIG- Budownictwo index has followed WIG from the beginning of 2016 to September 2017, albeit the growth has been slower. Additionally, international gas transmission and distribution pipelines are planned to connect Poland to Denmark and Lithuania, as well as the North-South one going through Poland. The total value of gas transmission and distribution investments planned until 2025 approximates PLN 26 billion. The road transport market growth shall be triggered by the continuing motorway construction, including the completion of A2 motorway sections between Warsaw and Terespol, expressways and ring roads, among others those in Kraków and Warsaw, as well as the plan of building pan- European roads, such as Via Carpatia. WIG Budownictwo and WIG benchmarked to 1 January % 30% =100% 20% Further growth in the construction segment will be supported with investments in power generation, including the completion of the pending construction of power units, such as Opole, Kozienice, Żerań, Stalowa Wola, and commencing the construction of new ones, such as Ostrołęka C (approx. 100 MW). Further, the value of power transmission and distribution investments planned until 2025 is estimated at PLN 52 billion. 10% 0% -10% -20% -30% -40% WIG WIG BUDOW Source: Stooq 36

37 Long-term plans include the Central Airport with initial estimated costs of PLN billion and a nuclear power plant. The above investments have not been confirmed as at the report date. According to press reports, the future planned capacity of the nuclear power plant shall range from 3,000 MW to 6,000 MW. The estimated cost of the power unit with 1,000 MW capacity is PLN 16 billion (including both technological and construction aspects). Bearing in mind the good standing of the construction market in with the perspective until 2022, the industry seems to face the following challenges: Limited access to labour and increased pressure on salaries/ wages. The number of construction sector employees is much lower than in , when the EURO 2012 related peak, and the average employment in the sector approximated in compared to approx in the period from 2016 to Q At the same time, BAEL2 unemployment rate dropped in the first quarter of 2017 by 0.4 p.p. y-o-y and reached the level of 5.2%. 2 In the first quarter 2017, the average annual pay in the construction sector increased 2017 faster than the national average, i.e. by 5.5% vs. 4.3%. Hiring foreign construction workers, mostly Ukrainians, is a common practice. The opening of Western countries for Ukrainians may adversely affect availability of low-qualified workers, among others in the building construction segment, where the share of technologically advanced work is lower. Since the expenditure planned in the road and railway segment for is higher than before EURO 2012 and the other segments are in a good standing, the limited access to qualified labour may increase the pressure on pays, or even cause delays in construction works due to deficit of employees. Re-opening tender procedures as a result of exceeding investor budgets. The peaking number of tenders in the road and railway construction segment may result in cancelling some of them when submitted bids include exceeded investor budgets (the trend has been already observed). Construction companies, having replenished their order portfolios, have been including Construction sector 1 Roads (1) Estimated expenditure (PLN billion) approx Comment National Road Building Programme Local government roads Years (with perspective until 2025) 2 Railways (2) approx Power generation (3) Power transmission and distribution (4) approx. 41 approx. 52 the substantial increase in the volume of construction works expected in the coming years in their contract prices, which may result in an increase in the costs of subcontracting and materials. Market players believe that investor budgets should better reflect market expectations to avoid possible delays in completion of future public procurement procedures as a result of exceeding the limits. Includes technological aspects Includes technological aspects Gas transmission and distribution (5) ok Includes technological aspects (1) National Road Building Programme for (with projections by 2025) (2) National Railway Programme by 2023 (3) Strategies of Energa, Enea, PGE, Tauron (4) PSE, key distribution companies (5) Gaz System, PGNiG, PSG, Lotos Group 2 Employment according to Economic Activity Survey (BAEL) 37

38 Limiting bid evaluation criteria to price. In mid-2016 the 60/40 tender criterion was introduced, according to which the maximum price weight for a bid is 60%, while quality criteria account for the other 40%. The most frequent practice adopted by public bodies is to consider the guarantee terms and delivery date as the key quality criteria. Consequently, the lowest price remains the key condition, since all tender participants usually adopt the maximum permitted guarantee period and the shortest possible contract delivery deadline. Making the price the only bid assessment criterion may result in difficulties in contract delivery, in particular in light of growing prices of materials and labour. Black scenarios may include a replay of that preceding EURO 2012, i.e. bankruptcies of selected construction market players. Limited supply of construction materials, in particular in the railway construction segment. Construction market players are concerned about a potential bottleneck in the form of limited supply of special construction materials, such as ties. The time-consuming construction material attestation procedure and capacity increase processes may result in a shortage of certain construction materials, and delays in completion of planned infrastructural investments. Limited supply of construction materials may result in delays in construction contract completion and price increases, which in turn will translate in reduced contractor margins. Adverse traffic changes. Intensified construction works necessitating railway traffic changes may result in negative publicity, in particular if causing adverse effects in cargo transport (among others of aggregates), which may increase their transport costs. Costs of railway transport of selected materials, including aggregates, may increase as a result of difficulties caused by ongoing modernisation works. Organising construction sites in accordance with design and build formula. The Designing Period may take from a few months to over a year and is usually long due to questions regarding the tender documentation, asked by potential contractors. On the one hand, design and build approach allow contractors efficiencies owing to their participation in the designing procedure; on the other hand, though, they often involve an extended tender procedure. Developing and accepting a template agreement that reflects both client s and contractor s interests and guidelines regarding tender description and procedures is an important factor that may facilitate the completion of road and railway investments. In February 2017, the Ministry of Infrastructure and Construction adopted New Road Construction Standards that provide a general framework for road construction projects. The ongoing work includes a draft agreement with contractors to comprise: risk sharing; independence of third-party engineers; protection of sub-contractors; reduced number of disputes and faster settlement procedures; rationalised system of liquidated damages; obligation to conclude employment contracts. An Expert Council has been established to facilitate the completion of railway investments, with the objective to optimise the investment process. The Council wants to introduce a unified template agreement for all railway investments. Although certain ideas have been implemented, certain issues, such as the payment model for the engineer, unified interpretation of current legal regulations, certification of tender participants or bid selection criteria applicable to railway accessibility, remain unsolved. Positive projections for the period until 2020 regarding selected macroeconomic indicators, such as economic growth and national debt, support the good standing of the construction segment, which in medium term may translate into improved access to funding from the State budget, also for infrastructural investments. In a long term, after 2020, with reduced EU funds, development of infrastructure maintenance services and use of alternative funding sources such as PPP, provide the opportunities to be looked for to sustain the road and railway investments in Poland. The Ministry of Infrastructure and Construction plans to update the transport strategy, extending its perspective, indicating strategic projects and aiming at stabilisation of the road construction market with the annual investment value approximating PLN 15 billion to PLN 17 billion over a long term, following the completion of projects included in the current EU perspective. 38

39 2.2. Macroeconomic factors: economic growth, public debt Economic growth In 2016, economic growth in Poland reached 2.7% in relation to 3.6% in The slowdown resulted from reduced investments, which could not be offset with solid private consumption and a slight trade surplus. Other factors underlying the slowdown included geopolitical uncertainty, in particular related to Brexit and presidential elections in the U.S. and in France. Data for Q1 and Q indicate a rebound in Polish economy. GDP increased by 4.2% in Q1 and 4.5% in Q2 2017, respectively. The increase was triggered mostly by record high private consumption, whose contribution to the economic growth has been the highest since Q Additionally, in the same period the inventory level decreased as a result of the demand growth. Investments continue to have little effect on GDP increase. The positive, albeit quite insignificant, impact of investments on GDP growth 3 in Q reached mere +0.8%. Further, in both quarters, adverse net effect of export (imports exceeding exports) on the economic growth rate was seen (-0.1% in Q1 and -1.5% in Q2 2017). DGP growth decomposition, ,0 5,0 4,0 3,0 2,0 1,0 0,0-1,0-2,0-3,0-4,0 I II III IV 2012 I II III IV 2013 I II III IV 2014 I II III IV 2015 I II III IV 2016 I II 2017 Private consumption Public spends Investments Inventories Net export Total GDP growth Source: Central Statistical Office, Deloitte study 3 Balanced for each season, i.e. with fixed prices and the number of working days equalised to the reference quarter. 39

40 Pursuant to the monetary policy assumptions for 2027 published by the National Bank of Poland, in subsequent quarters, high private consumption should be supported by a growing inflation, triggered by increasing salaries and food prices, a growth in the Eurozone, which is Poland s key partner and an increase in investment level caused by a good financial standing and increased use of EU funds. The first half of 2017 saw an improvement in the state budget. In June 2017, the Ministry of Finance announced the total budget surplus of PLN 5.9 billion, while according to budget projections for 2017, in June the deficit was near PLN 19 billion. The substantial difference, approximating PLN 25 billion in nominal terms, resulted from high tax proceeds (a year-on-year growth by PLN 23.4 billion). year-on-year. If the positive trends continue throughout 2017, the improved budget standing may translate into reduced national debt and, consequently, promote co-funding of infrastructural projects. This will depend, though, on durability of the increase in tax proceeds, which is of importance, among others due to an increase in fixed budget expenses related to 500+ programme. The optimistic outlook is supported bypositive adjustments to Polish economic growth projections for 2017, introduced in 2016 by international bodies: European Commission from +3.2% to +3.5% in 2017 (2 May 2017); OECD from +3.2% to +3.6% in 2017 (6 June 2017); Moody s from +3.2% to +4.3% in 2017 (4 September 2017). EIU 4 anticipates a growth rate of approx. 3.2% to 3.5% in the years Government debt At the end of 2016, government debt to GDP ratio increased to 51.4% compared to 49.0% at the end of 2015 o (a 2.4% increase y-o-y). Pursuant to the government debt management strategy for , published by the Minister of Finance on 16 September 2016, in 2017 further increase in government debt is assumed up to 52.3%. Since the national debt is related to local self-government debt, the increase in the former may translate into limited cofunding of infrastructural projects by local authorities. Projected GDP growth in Poland, % 5.0% 5% 4% 3.7% 3.6% 3.5% 3.3% 3.2% 3.1% 2.8% 3.3% 3% 2.7% 2% 1.6% 1.3% 1% 0% P 2018P 2019P 2020P 2021P Source: EIU "Country Forecast Poland - August 2017" Government debt as a GDP percentage 55% 53.9% 54% 53.4% 53% 52.6% 52.3% 52% 51.4% 51.7% 51.1% 51% 50% 49.5% 49% 48% 47% 46% 47.8% 49.0% 45% P 2018P 2019P 2020P Source: Ministry of Finance Public Finance Sector Debt Management Strategy for , September August

41 2.3. EU funds Funds available under perspective are a key growth factor for the Polish construction sector, in particular for infrastructure, since they are intended to support railway and road investments. The total allocation of funds for Poland under the EU cohesion policy for is EUR 82.5 billion. Programmes with the highest contribution to infrastructural projects under the central pool of funds include Infrastructure and Environment Operational Programme (EUR 27.4 billion) and Eastern Poland Operational Programme (EUR 2 billion) 5. Projects involving new construction technology development are eligible for funding as well. The sector has been indicated in National Smart Specializations, a document indicating preferred forms of using EU funds for R&D and innovation. Construction is referred to in similar documents issued on the regional level; therefore, co-financing is available also under Regional Operational Programmes. In 2016, implementation of Operational Programmes under perspective substantially accelerated. Last year, tenders were announced for the amount of PLN 182 billion, i.e. approx. 59% of funds assigned to the EU cohesion policy. Already signed agreements account for one-fourth of the funds assigned to Poland, and the payments already settled approximate PLN 15.8 billion. According to information published by the Ministry of Development, at the end of 2016 Poland was the leader among the Vysehrad Group states and the seventh best in the Community in terms of funds obtained from the European Commission. 6 According to information provided by the Ministry of Development as at 17 September 2017, applications for cofunding submitted under perspective totalled PLN billion, while the EU contribution requested therein totalled PLN billion. The value of cofunding agreements signed so far totals PLN billion (41% of the pool assigned to Poland). Poland is the leader in the use of EU funds. So far, the European Commission has paid approx. EUR 15.4 billion to its member states, out of which EUR 5 billion to Poland (as at 15 September 2017). Allocation of European funds under perspective (PLN billion) Source: Ministry of Infrastructure and Development Rural Areas Development Programme Regional Operational Programmes National Operational Programmes Brexit announced by the United Kingdom, the largest net EU budget payer, may limit access to the EU funds (including support of investment projects) in future, and toughen the eligibility criteria. As at September 2017, negotiations were pending between the UK Government and the European Union regarding Brexit principles and date (at present not determined yet, but according to press reports, it may take place even in March 2019) Modern Transport Infrastructure and Transregional Railway Infrastructure

42 2.4. Bankruptcies in the construction sector In 2016 the number of bankruptcies decreased to 135 in relation to 160 in 2015 (down by 16% y-o-y). Last year s bankruptcies included mostly road and water supply infrastructure constructors. In the first half of 2017, the number of bankruptcies in the construction sector increased by 19% year-on-year; with deferral of infrastructural investments on the national and local level among possible reasons. Faced with pressure to sign lower-priced contracts, to reduce costs and extend payment deadlines, many construction companies experience liquidity problems, further augmented with the reverse VAT mechanism. The amended VAT Act, obliging buyers of construction materials to pay the tax, came into force on 1 January The extended reverse VAT scope includes construction of residential and non-residential buildings, demolition, site preparation, earthworks, gas installations, and other works, such as painting, works in glass and cement. Growing demand for apartments and good projections regarding the labour market in Poland support the good standing of the residential construction companies (details further in this report). Over the coming years, the expected growth in prices of construction materials and in salaries/wages will pose the key threat to the infrastructural construction segment, as it may result in reductions in planned margins on ongoing projects, deteriorated economic standing, and even in bankruptcies of smaller entities with less diversified contract portfolios. Number of bankruptcies among construction contractors between 2011 and Q % 24.9% 24.1% 20.4% 21.6% 17.8% 41.9% 36.0% Q Q Bankruptcies in the construction sector to total bankruptcies Source: Coface

43 2.5. Employment and remuneration in the construction sector Data published by both Central Statistical Office and National Bank of Poland indicate the improvement in the employees position on the Polish labour market. Pursuant to the Rynek Pracy 7 report, the BAEL 8 unemployment rate dropped by 0.4 p.p. in relation to the prior quarter and has reached 5.2%. Further, improved position of Polish employees is confirmed by the restriction index (the number of employment offers divided by the number of the unemployed), which has recently increased from approx in Q to in Q According to the Central Statistical Office, in Q the average employment in Poland reached 8.7 million and was 1.4% higher than in Q In the construction sector, the average employment was 382,600 and remained flat year-on-year. Average employment and gross salary in the construction sector from 2008 to Q Q Average gross salary (PLN) Average employment in the year ( 000) An increase in employment accompanied with a decrease in unemployment (as per Economic Activity Survey, henceforth: BAEL) may result in a growth in salaries/ wages to maintain headcount and win new hires. In Q1 2017, the average monthly remuneration net of annual bonuses approximated PLN 4,200 and was 4.3% higher than a year before. The average monthly gross remuneration in the construction sector was PLN 4,300, which denoted a 5.5% growth year-on-year. Source: Central Statistical Office The average gross remuneration in Q in selected construction industry segments (PLN/month) Building construction Civil engineering Specialized construction Average remuneration in each segment Average remuneration in the industry Source: Central Statistical Office 7 NBP, Q Employment according to Economic Activity Survey (BAEL) 43

44 According to an annual survey conducted by the Central Statistical Office among construction companies, a shortage of qualified staff is a growing problem in the industry. In July 2017, approx. 40% of companies indicated this issue (a 14 p.p. increase year-on-year) as a business barrier; a higher percentage was seen only in As in the prior year, employment costs were considered the heaviest financial burden. They were identified as a barrier to business by 60% of employers. Employment outlook The latest report entitled Manpower Employment Outlook Barometer issued in June 2017 presents the employment outlook for the economy for Q The data contained in the report show that employers in Poland are moderately optimistic about the future. Net employment projection 9 is positive for eight out of ten surveyed sectors. In Q3 2017, 14% of the surveyed companies planned to increase headcount; 74% declare no plans of personnel changes, while 5% wants to reduce employment. Optimism prevails also among employers in the construction sector. The net employment projection for the surveyed period is +18%, which translates into a 2 p.p. growth by quarter and a stable annual level. Hays 2017 Salary Guide indicates that the year shall see accumulation of tenders in the infrastructural construction segment, which will make employers look for both managerial staff and workers, faced with a limited supply of candidates and growing financial expectations of the current and potential employees (the recent production Key business challenges faced by construction companies 70% 60% 50% 40% 30% 20% 10% 0% VIII 2015 VIII 2016 VIII % 61% 60% Employment costs Source: Central Statistical Office 33% 31% Insufficient demand 22% decrease has not provided grounds for salary rises). 31% 29% 27% Costs of materials 26% 21% 40% Shortage of qualified staff Infrastructural projects following the design and build approach provide considerable opportunities to optimise contracts and implement general contractor s efficiencies, which, should certain risks not materialise, may translate into savings, both for clients and contractors. Market players see the attempts to introduce favourable changes to the Public Procurement Law and to introduce assessment criteria alternative to prices. Nevertheless, non-pricing criteria limited to the guarantee period and delivery deadline indirectly support the lowest price as the key criterion, since all tender participants usually indicate the maximum permitted guarantee periods and the shortest possible delivery periods. Scoring too high technical parameters is also charged with risk. Examples from Western Europe prove that non-price criteria may include environmental impact (contractors declaring the lowest carbon emissions in the course of contract implementation are preferred), reduced power consumption, optimised logistics, etc. Wojciech Trojanowski Member of the Management Board of Strabag 9 The "net employment outlook" in the "Manpower Employment Outlook Barometer" is a percentage difference between the number of employers anticipating an increase in the total number of employees and the number of employers expecting a fall in the total number of employees in their branch in the nearest quarter. 44

45 2.6. Development prospects for construction market segments in Poland Road construction National Road Building Programme (NRBP) is a key document regulating development of the road sector (with projections by 2025) of 8 September 2015, revised in particular in terms of financial assumptions in July The purpose of the document is to provide a streamlined long-term plan for development of highways, motorways and ring roads, as well as to develop national transport corridors based on the network of national and pan-european roads, such as Via Carpatia. Investments comprising NRBP are funded from the State Budget and National Road Fund (NRF), including EU funds. Key sources of cash proceeds for the fund is the fuel fee and viatoll. NRF is managed by Bank Gospodarstwa Krajowego. The initial budget for tasks planned under NRBP was PLN 168 billion, and following an update, it approximates PLN 196 billion 11. The list of investments to be funded under the increased limit is to be presented by the Minister of Infrastructure and Development by year-end. It has not been decided yet whether any additional funds will be allocated to finance all projects planned or whether the projects will be reprioritized and rescheduled. The limit of the current Programme expenses is higher than in NRBP for , which amounted to PLN 82.8 billion. The current NRBP for (with projections by 2025) assumes the construction of approx km of motorways, including: km of highways 3,832.6 km of expressways 56 ring roads (including 12 S-class ones 12 ) According to draft data provided by the Ministry of Infrastructure and Construction, a substantial amount shall be allocated to the Eastern Poland (Via Carpatia, S17 - the road from Lublin to Ukraine, the road from Siedlce to Biała Podlaska and additional ring roads in cities). In 2016 approximately 130 km of new national ways were commissioned and the value of completed works approximated PLN 15.7 billion compared to PLN 11.5 billion in 2015 (a 36% increase y-o-y). Key sections of highways and national roads commissioned from December 2012 to June 2016 Section Length (km) Construction period Gross value (PLN million) 1 A1 Stryków Tuszyn 37, A4 Rzeszów Jarosław 42, S7 Miłomłyn Ostróda north 9, S8 Zambrów Mężenin 15, S19 Lublin, western ring road 9, DK15 Brodnica, ring road 1, DK74 Bełchatów, ring road Source: DGNRM Report for July In Poland, S class includes expressways. 45

46 In 2016, 23 contracts were concluded, including 18 concerning A and S class roads totalling km and five contracts for GP class roads (ring roads) totalling 30.5 km. In 2016, tenders were pending for km of national roads, including km of A and S class roads and nine ring roads totalling 76.5 km. In 2017, public procurement procedures were continued. According to the Ministry of Development, as at 11 August 2017, under Infrastructure and Development Operational Programme , DGNRM had secured the amount of PLN 42 billion, out of which PLN 22 billion were already assigned. Local government road network Although these roads account for 95% of all roads, outlays for their development and maintenance are relatively low compared to funds spent on national roads. Local government roads are financed from: Municipal and District Roads Development Programme (approx. PLN 3.8 billion in ); general subsidy from the Ministry of Infrastructure and Construction (approx. PLN 340 billion); Funding national roads in with outlook until Domestic funds EU funds Source: National Road Building Programme, updated 12 July 2017 National Road Building Programme for (with projections by 2025) EU programmes (approx. PLN 5.9 million); local government s own funds. Investments completed or pending under former NRBP Investments carried out under the NRBP financial limit Other investments Source: NATIONAL ROAD BUILDING PROGRAMME FOR (with projections by 2025) 46

47 Municipal and District Roads Development Programme At present, the Municipal and District Roads Development Programme is the key plan regarding the local government roads network, developed on the national level. Its purpose is to improve security on local roads and transport accessibility through a consistent and sustainable road network on the local level. The Programme, with projections for , managed and supervised by the Ministry of Infrastructure and Construction, assumes co-funding of extension and improvement of municipal and district road infrastructure with the total value of PLN 3.8 billion. Every year, district and municipal roads of ca. 2,200 kilometres may be built, rebuilt or repaired under the programme. This corresponds to mere 1% of all roads. Each municipality may obtain up to PLN 3 million each year. General subsidy Further, local governments may obtain support from the Ministry of Infrastructure and Construction ringfenced for local government roads under the general subsidy recognized in the state budget (approx. PLN 340 million per year). EU programmes Local government road modernisation projects receive little EU funding. Under the current EU perspective, as at 31 August 2017, projects classified as local or regional roads (166 projects) received the total funding of PLN 5.9 billion. Draft bills In July 2017, a draft bill regarding Local Government Road Fund and amendment of certain other acts was submitted to the Parliament. It assumes establishing a new road toll, 50% proceeds from which would go to the Local Government Road Fund (LGRF). The purpose of LGRF would be to co-finance the construction and improvement of municipal and district roads, as well as bridges included in the regional routes. According to the draft bill, projected road toll proceeds would amount to PLN 4-5 billion per annum, while LGRF would fund 50% of investment value (up to 80% in locations with small local tax proceeds). The bill has been withdrawn, but based on its assumptions, it may be expected that investments funded under LGRF each year would range from PLN 4 billion to PLN 5 billion. Following the withdrawal, other solutions have been searched for to collect funds necessary for investments in local roads. Polish public road categories (as at 31 December 2016) Road category Length 2015 (km) Share (%) Length 2016 (km) Share (%) Road administration authority* Ownership National roads % % Regional roads % % District roads % % Municipal roads % % Directorate General for National Roads and Motorways Central administration authority in the region Central administration authority in the district Municipality head (Mayor) State Treasury Local administration authority in the region Local administration authority in the district Local administration authority in the municipality Total % % - - *in district cities/towns, the mayor is the administration authority for all public roads, except motorways and expressways Sources: Central Statistical Office, Deloitte study Source: Central Statistical Office, Deloitte study 47

48 Surface condition National roads For many years, technical condition of roads has remained a key issue in terms of infrastructure quality. Recently, the condition has considerably deteriorated. As at the end of 2016, the condition of approx. 17% of roads was considered poor (vs. 14% in 2015), and of 31% unsatisfactory (vs. 25% in 2015). The national road quality deterioration 13 in 2016 was caused by the following factors: adverse weather conditions exceptionally low temperatures in winter and high in summer; increased truck traffic accelerating surface degradation; a lower mileage of new A and S class roads commissioned in 2016 (approx. 130 km in 2016 in relation to 148 km in 2015). Alternative funding solutions include Public-Private Partnership. At present, a single road investment has been performed based on the PPP formula, namely Reconstruction and maintenance of regional roads in Dolnośląskie Province, carried out using the PPP approach. For Skanska, innovation is a crucial component of contract performance. Innovative solutions, such as Building Information Modelling (BIM), allow effective management of the construction process, which among others translates into higher contract margins. In a medium and long-term perspective, translating innovative solutions into non-pricing criteria, e.g. through improving efficiency of work, is of key importance, as it will motivate construction companies to innovate. Government sector institutions must develop a strategy and the related maintenance service model, whose importance will increase in light of the present and future share of public infrastructure investments. Piotr Janiszewski, CEO, Skanska S.A. Local government roads According to the Supreme Chamber of Control, 36% of district and municipal roads are in poor condition, with mere 29% being in good and satisfactory condition 15. Local road infrastructure receives little support from EU funds under perspective 16. Further, local government debt has increased, limiting their ability to fund investments, including infrastructural ones. 13 Report on technical condition of national roads at the end of 2016, DGNRM [March 2017] 14 The Dangerous Road Section Management Programme (the "DRSMP") was launched earlier this year with a view to improving the condition of the existing national roads. The tasks defined in the programme are mainly aimed to improve the safety of unprotected traffic participants. In 2016, the total of 292 tasks were to be fulfilled, for which the amount of PLN 300 million had been allocated. The National Road Fund and the government budget allocated to the annual programmes implemented by the Directorate General for National Roads and Motorways are the sources of funding for the aforesaid programme. Ultimately, PLN 600 million will be allocated to the programme annually. 15 As of March 2014, considering the effects of the implementation of the National Programme for Local Road Rebuilding between 2008 and Regional road investments may be funded under the Regional Operational Programmes. 48

49 National road condition by region (as at the end of 2016) Province Good condition (%) Unsatisfactory condition (%) Por condition (%) Zachodniopomorskie Wielkopolskie Pomorskie Kujawsko-pomorskie Łódzkie Mazowieckie Warmińsko-mazurskie Podlaskie Lubuskie Dolnośląskie Podkarpackie Opolskie Lubelskie Śląskie Świętokrzyskie Małopolskie TOTAL Source: Directorate General for National Roads and Motorways 14 Eastern markets, such as Belarus and Ukraine, allow Polish construction companies to diversify their operations in terms of geographies. Operating and performing construction contracts on the eastern markets involves a series of legal, business and purely operational risks. Nevertheless, for our domestic businesses, these markets provide a promising alternative to operation on Western or Scandinavian markets, which, being dominated by local companies and highly regulated (often these regulations are difficult to satisfy for foreign entities), also generate substantial challenges, albeit of a different nature. At present, the number of tenders cancelled by public sector investors has been growing since the offered prices exceed the original value of the investor budget, which is especially true for road construction contracts, since market players, aware of a substantial increase in the volume of construction works in the coming years, highly price risks related to the performance of small projects: costs of subcontractors, materials, labour etc., as costs of these items shall most probably increase along with the number of contracts offered. Therefore, the current investor budgets require adjustment to market expectations, to include the projected increase in implementation costs, which will allow avoiding project completion delays. Leszek Gołąbiecki, CEO, UNIBEP S. A. 49

50 Railway construction The first half of 2016 saw a decrease in the number of tenders announced by PKP PLK. As a result, railway construction companies were performing few contracts as at 30 June 2016 (Torpol - PLN 0.44 billion; Trakcja - PLN 1.34 billion; ZUE - PLN 0.64 billion). Only in H and H tender activities accelerated in PKP PLK, which translated into strong pricing competition among key players aiming at winning as many contracts as possible (at the end of June 2017, the value of order portfolios was as follows: Torpol - PLN 3.1 billion; Trakcja - PLN 1.9 billion and ZUE - PLN 1.5 billion), often with reduced margins, in order to at least absorb substantial fixed cost items. The offering peak at the level of PLN 9 to 12 billion per annum, expected in shall bring a series of challenges for the railway construction companies, which may be observed in the form of: In order to accelerate the investment process under tenders announced since 2016, PKP PLK allows advance payments for materials, partial investment completion and changes in the contract engineer role. The scope of railway construction projects includes modernization and development of railway and tram infrastructure. At present, 19,100 km of railways are used in Poland, out of which approx. 96% (18,400 km) are managed by PKP PLK. Capital expenses of PKP PLK (PLN billion) Average expenses under perspective: PLN 3.5 billion Average expenses under perspective: PLN 9.3 billion difficulties with access to the sufficient number of qualified staff (the process of business orientation and certification of university graduates takes a few years); increasing prices of materials; limited access to materials, including rails and ties, in particular in light of extended certification procedures; works being carried out along frequently used routes in a manner minimizing passenger and cargo transport delays Contracts performed under the design and build approach may pose a challenge, with the design stage lasting from 3 to 12 months, which may result in delays in the completion of projects performed under the National Railway Plan. Performance Estimates Projections Source: Reports of PKP PLK, National Railway Programme Performance report 2016, Deloitte study 50

51 Framework documents Future railway investments are determined by the National Railway Programme until 2023, the latest update of 12 July 2017 (henceforth: NRP), a follow-up of the Multi-Annual Railway Sector Investment Programme until 2015 (MARSIP). The latest important update of NRP was approved in November 2016 and resulted among others from the necessity to divide the project stages between the former and the current EU perspective, develop cost plans for projects, calculate financial gaps and include capabilities of PKP PLK regarding performance of each task and of the entire programme. Under the current expense schedule, expenses incurred in the period will approximate PLN 12 billion per annum, while under the prior one the peak was planned for 2019 and 2020, in the amount of PLN 14.3 billion and PLN 18.4 billion, respectively. The new schedule should mitigate the adverse effect of the investment peak, but according to market players, the potential material accessibility and price risk will remain significant, as well as the risk of qualified labour shortage, in particular, on the subcontractor side. Implementation of the WPIK plan According to the Supreme Chamber of Control (henceforth: SCC) regarding the performance of MARSIP of 6 December 2016, the programme funds utilised under the programme in totalled PLN 22.7 billion out of the planned amount of PLN 31.6 billion (72% of the plan completed). Since the plan was not fully achieved, the European Commission Investments included in the National Railway Programme (as at September 2017) (red - commenced; blue - planned) decided to continue the funding of key non-completed projects under perspective. SCC indicated that the failure to achieve full implementation of the plans resulted among others from the plans being not adjusted to capabilities, and that according to the initial plan, in the scope of investment-related works would increase four times compared to the level before Source: PKP PLK For a construction company, securing a large volume of contracts whose performance will allow absorbing of all fixed costs related to its operations, is of key importance. Irregular supply of large contracts on the railway market in 2014 and 2015 has resulted in a substantial increase in price pressure in the course of ongoing procurement procedures. Consequently, market players that will carry out railway investments have based their future contract portfolio on low margins, which may adversely impact their financial standing and therefore effective performance should any unexpected risks materialize. In large railway tenders, declared route closing deadlines which, if not met, result in high amounts of liquidated damages, are among the key non-pricing criteria. These criteria are appropriate since they prefer companies specialized in railway construction, with necessary machinery and contractual experience, which gives them competitive advantage in this respect. Jarosław Tomaszewski, CEO, Trakcja PRKiI S.A. 51

52 Investments beyond NRP PKP PLK has been working on investment plans that go beyond NRP. According to its estimates, in capital expenditure will remain on the level of PLN 10 billion per annum, including EU funds under the subsequent financial perspective On 22 September 2017, Chancellery of the Prime Minister presented draft assumptions regarding the construction of the Central Transportation Hub in Stanisławów. The railway part of the investment is estimated at PLN 8-9 billion. It will be situated 2.5 h away by rail from the largest Polish cities, and 15 minutes from the Warsaw downtown. The investment is to be completed in Summary of 2016 In 2016 investments in the railway network managed by PKP PLK reached PLN 4.1 billion. According to data presented by the Railway Transportation Office, improvements included 509 km of rail routes, 549 junctions and 213 crossings; in addition, 47 grade-separated crossings were built. Gradual modernisation of the infrastructure reduces the scope of temporary and permanent speed limits established due to poor technical condition of routes. In 2014, such limits were put on 1,366 km of rail routes; in 2015, on 1,110 km, and in 2016, on 832 km. In 2016, PKP PLK carried out public procurement procedures totalling PLN 28.7 billion out of the pool of projects with the total value estimated at PLN 66.4 billion. Procurement procedures opened in 2016 only totalled PLN 11.1 billion and contracts concluded amounted to PLN 2.6 billion. By 22 September 2017 contracts totalling PLN 14 billion have been concluded, with the total of PLN 20 billion planned for the entire year. According to an analysis prepared by the Ministry of Development as at 31 August 2017, PKP PLK has used EU funds to carry out 27 projects totalling PLN 12.9 billion (PLN 8.3 billion obtained from EU funds). The prior edition of this report included information that under the new EU perspective, up to PLN 13 billion can be spent on tram network (infrastructure and fleet), half of which would finance the infrastructure alone. According to newest data regarding investments in trams, investments in the rail infrastructure should peak in the years Funding capital expenditure under National Railway Plan, (PLN billion) Domestic programmes included in Regional Operational Programmes Eastern Poland Operational Programme IEOP CEF A review of the existing projects, which were launched in the form of public tenders, took place in Contracts shall be signed, investments commenced and procurement procedures continued in 2017 and The period will see implementation of the investment tasks and preparing the Company for a new EU perspective after We aim at building a project portfolio of PLN billion to be able to launch them step by step when the new EU budget is ready in Please note that by the end of 2018, approximately 90% of investment tasks included in the current EU perspective (i.e. in the National Railway Plan until 2020) shall be contracted. We maintain the projected infrastructural investment level, as presented in NRP. Construction companies estimate their total contracting potential at approx. PLN 10 billion per year; from 2018 on, the capacity will be fully utilised. We believe that in a longer perspective, infrastructure maintenance works shall grow in importance (the target amount is PLN 2 to 3 billion per annum) Ireneusz Merchel, CEO, PKP Polskie Linie Kolejowe S.A. 52

53 Power construction 17 The power construction is divided into three segments: Power generation; Power transmission and distribution; Gas transmission and distribution. The total capital expenditure planned for with regard to generation capacities of key power companies in Poland (Enea, Energa, PGE and Tauron), is estimated at PLN 41 billion. The amount includes both investments in technologies and in construction works. The expenditure estimates are based on the ongoing construction of new generation units, modernisation plans regarding the existing power units to meet relevant environmental requirements, investments in renewable energy sources and other. Capital expenditure planned with regard to power transmission and distribution in the period are estimated at approx. PLN 52 billion. The amount includes both expenditure for grid improvement and extension and investments in grid operation and control systems. The planned capital expenditure on gas transmission and distribution by 2025 is estimated at PLN 27 billion and includes mostly new infrastructure construction. Power generation At present, several power generation related investments are carried out, including construction of new generation units with capacity over 100 MW: Changing market and legal conditions (among others, introduction of Best Available Techniques (BAT) Conclusion or plans to establish the capacity market), have made power generators amend their investment plans 18. BAT implementation necessitates technology replacement in the first place, as opposite to construction investments. Capacity market may support investments in the form of a 1,000 MW system power plant construction in Ostrołęka. Current power generation investment projects Project amount Capacity Fuel Gross (PLN billion) Investor Planned completion date 1 Kozienice Power Plant 1075 MW hard coal 6,3 Enea 19 December Opole Power Plant 2 x 900 MW hard coal 11,6 PGE Unit no December 2018 Unit no July 2019 * 3 Stalowa Wola Power Plant 450 MWe; 240 MWt gas 1,9 Tauron and PGNiG 31 December Turów Power Plant 450 MW hard coal 5 PGE May Jaworzno Power Plant Płock Heat and Power Plant Żerań Heat and Power Plant 910 MW hard coal 5,4 Tauron November MWe gas 1,7 Orlen December MW gas 1,6 PGNiG Termika December 2020 * Projected completion deadline (general contractor) 17 The national power industry investment plans discussed in the previous edition of the Report have not changed. 18 [1] Łagisza Power Plant (413 MW; natural gas ) the project has been suspended by the Tauron Group, which was communicated in September 2016 when the Tauron Group's Strategy for was being announced. [2] Czeczott Power Plant (ca MW). [3] North Power Plant (2 x 800 MW; hard coal; a construction permit has not been obtained yet); 53

54 The total capital expenditure for included in strategies prepared by leading power concerns in Poland approximates PLN 41 billion. The amount includes both construction of new power generation units, engineering and upgrade of the existing technologies. Capital expenditure planned by power concerns Company Total estimated expenditure (PLN billion) Investments in the generation segment (PLN billion) Key generation investments Investments in the distribution segment (PLN billion) Investments in the mining segment (PLN billion) Source ENERGA Ostrołęka C Power Plant with Enea Power plant at Bogdanka mine 13.0 b/d Strategy for ( ) ENEA Ostrołęka C Power Plant with Energa Power unit upgrade in Połaniec Power Plant Power unit upgrade in Kozienice Power Plant Strategy by 2030 ( ) PGE Opole and Turów Power Plant (approx. PLN 15 billion) Power unit upgrade (PLN 7.5 billion) 7.0 no data PGE Management Board s Report for 2016 / plan for ( ) TAURON a new power unit Jaworzno III new heat and power unit Stalowa Wola * Strategy ( ) TOTAL * including investments in Janina, Sobieski and Nowe Brzeszcze mines 54

55 According to analyses of Polskie Sieci Elektroenergetyczne S.A., the total demand for new generation capacity until 2035 ranges from 23 GW to 30 GW, depending on the scenario of the existing capacity decommissioning 19. Wind farms 20 were to account for the major part of the new investments. However, in the context of the legal changes introduced, the investment plans have been revised and the funds relocated to conventional energy sources. Required capacity increase for BAT modernisation scenario, YTD, MW Planned investments: 1. Ostrołęka Power Plant (approx. 1,000 MW); hard coal; tender procedure regarding a financial advisor; Dolna Odra Power Plant in Nowe Czarnowo (approx. 500 MW; hard coal); 3. Łęczna Power Plant at Bogdanka mine (approx MW; hard coal) Capacity built Below is presented a selection of key investments planned in the power sector (by project completion stage). Nuclear power plant Additional capacity Source: Polskie Sieci Elektroenergetyczne Map of selected key capacity investments in progress and planned Żarnowiec Gąski Nowe Czarnowo Ostrołęka Płock Żerań Kozienice Turów Łęczna Stalowa Wola Jaworzno Sources of energy: - hard coal - brown coal - natural gas - nuclear power plant locations under Source: Deloitte based on information published by CIRE ( 19 Projected peak capacity demand coverage (as at 20 May 2016) 20 Investment plans regarding renewable energy sources have been modified. According to the Energy Regulatory Office, the installed capacity in the renewable energy sector is 8.4 GW (as at 31 March 2017), while the share of renewable energy sources in the energy mix approximates 13.5%. 55

56 Nuclear power The power industry plays an important role in the draft "Responsible Growth Strategy" approved by the Council of Ministers on 14 February Measures aimed at energy security improvement include implementation of nuclear power systems based on the industrial and scientific potential of Poland. Follow-up of Polish Nuclear Power Programme is planned, which assumes the preparation of two nuclear power plants with the aggregate capacity of ca MW net. The initial cost estimates regarding a 1,000 MW power unit approximate PLN 16 billion. The final decision was to be made immediately after the Minister of Energy has delivered relevant analyses and technology providers have submitted their offers, which would allow determining the necessary capital expenditure and confirming feasibility of nuclear power investments in Poland. The discussion regarding the issue is pending. Power transmission and distribution Transmission In addition to capacity investments, a number of projects aimed to develop the transmission and distribution networks are planned. Modernisation of the National Power System is being coordinated by Polskie Sieci Elektroenergetyczne (PSE). According to communication of 11 May 2017, PSE is planning to spend PLN 7.6 billion for investments in the nearest five years, including PLN 5.9 billion to be spent for construction and extension of power stations and lines and PLN 1.2 billion for modernisation. The delivery of the tasks and investments planned for should result in construction of approximately 2,700 km of 400 kv lines, approximately 80 km of 220 kv lines and six new power stations, as well as modernising of approximately 200 km of 400 kv lines and 1500 km of 220 kv lines. In 2016, PSE invested PLN 1.2 billion in construction, extension and modernisation of power stations and lines. The value of investment plans for 2017 is similar to those of the prior year (approx. PLN 1.3 billion), with construction and extension of power stations and lines having the biggest share (approx. PLN 1 billion), followed by modernisation of such stations and lines (approx. PLN 0.17 billion). Distribution In the entire 2016, key distribution segment players spent approximately PLN 7 billion on investments. Their capital expenditure plans for subsequent years until 2025 approximate PLN 44 billion 21. Investments completed by power operators in 2016 (PLN million) Operator Amount spent to connect new consumers Amount spent to connect new sources Amount spent to replace assets Other capital expenditure, including IT systems Total Enea Operator Energa Operator PGE Dystrybucja Innogy STOEN Operator Tauron Dystrybucja PSE Total Source: Polskie Towarzystwo Przesyłu i Rozdziału Energii Elektrycznej, Power construction przesyłowa i dystrybucyjna, maj The amount includes other investments in the transmission segment. Individual items are presented in the table regarding total investments of power companies. 56

57 Gas transmission and distribution Key gas market players include GAZ-System (transmission) and PSG (distribution). At present, Gaz-System has played the key role in activities aimed at a capacity increase in the Polish natural gas transmission network, diversification of gas exports and national energy security improvement. The strategy assumes the construction of over 2,000 km of modern transmission pipelines by 2025 and providing access to global gas markets through construction of new cross-border connections and efficient use of the LNG Terminal in Świnoujście. Further, in 2016 Gaz-System and Instytut Nafty i Gazu signed contracts in excess of PLN 1 billion for co-funding of the North-South Corridor under the Infrastructure and Environment Operational Programme. Projected investments include gas pipelines with the total length of approx. 380 km. Key investments planned by Gaz-System include connecting Poland with external suppliers, i.e. with Denmark, through Baltic Pipe (EUR 1.7 billion by 2022) and with Lithuania (PLN 1.9 billion by 2022). The North-South Corridor for gas transmission connecting the LNG terminal in Świnoujście and the Baltic Pipe through southern Poland, Czech Republic, Slovakia and Hungary to the proposed Adria LNG terminal in Croatia is the key investment (PLN 4.5 billion by 2022). Key investments realized or planned in the field of distribution and transmission systems by 2025 Project name Segment Company name Estimated project value North-South Corridor Gas transmission Gaz-System PLN 4.5 billion Baltic Pipe (Poland-Denmark) Gas transmission Gaz-System EUR 1.7 billion (including EUR 0.9 billion spent by Gaz-System) GIPL gas pipeline (Poland- Lithuania) Gas transmission Gaz-System PLN 1.9 billion EFRA Project Refining Lotos Group PLN 2.2 billion LNG FSRU Terminal Storage Gaz-System PLN 3.0 billion (IEOP approx. PLN 1.1 billion) Natural gas storage facility (Kosakowo) LNG terminal development in Świnoujście Storage PGNiG PLN 0.9 billion Storage Gaz-System PLN 0.9 billion Kościerzyna - Olsztyn Pipeline Gas distribution Polska Spółka Gazownictwa PLN 0.9 billion Kosakowo Gdańsk Pipeline Gas distribution Polska Spółka Gazownictwa PLN 0.5 billion Construction of gas pipelines across Poland Total Gas distribution PGNiG PLN 8.4 billion PLN billion Source: "Bezpieczeństwo warte miliardy, the Rzeczpospolita daily, 27 May

58 PSG has planned approx. PLN 11.3 billion to remodel the Polish gas system in For 2017 the amount of PLN 1.4 billion has been planned for tasks directly related to the gas network. When updating the List of power infrastructure strategic projects under Infrastructure and Environment Operational Programme PSG submitted to the Ministry of Energy 52 investment projects for the total co-funding amount of PLN 1.3 billion. The total investment cost is estimated at PLN 4.5 billion. Contracts for construction of the Lwówek-Odolanów section (project value: PLN 847 million, EU funding: PLN 473 million) and the Hermanowice- Strachocina section (project value: PLN 296 million, EU funding: PLN 110 million) to be commissioned in Q and in 2019, respectively, have been concluded. Development of Gaz-System infrastructure: investments planned for Environmental protection Infrastructure and Environment Operational Programme (IEOP) is a national programme supporting low-emission economy, environmental protection, counteracting climate change and adapting to it, transport and energy security. Under the perspective, IEOP capital expenditure for water, sewage and waste management amounts to EUR 1.6 billion and EUR 0.9 billion, respectively. Source: Gaz-System, Perspektywa strategiczna rozwoju Gaz-System na lata Planned capital expenditure structure according to NPMST Water and sewage management Investments planned in the field of water and sewage management have been defined in the "Master Plan for the implementation of Council Directive 91/271/EEC" (the "Master Plan") and the "National Programme for Municipal Sewage Treatment" (the "NPMST"). Currently, the fourth version of the NPMST of 21 April 2016 is in force. As of the beginning of September 2016, update of NPMST has been commenced, to be completed in the autumn of The costs of investments to be carried out in , included in the 5th NPMST update, total PLN 27.0 billion. Sewage treatment plants including sludge processing and management Sewage network modernisation Source: NPMST update draft, July % 15% 52% Sewage network construction 58

59 The 5th update includes the construction of 112 new sewage treatment plants and other investments in 1,044 existing plants. Further, NPMST assumes the construction of 14,185.9 km of sewage network and improvement of 3,406.6 km of the existing network. Once all investments are completed, the number of sewage network users shall increase by 1.5 million to 37.6 million people (97.2% of population). Waste management National Waste Management Plan 2022 (NWMP) described in the prior issue of the report is the key document describing planned investments in waste management. On the regional level, the NWMP implementation plan shall be determined by Provincial Waste Management Plans (PWMP), approved by respective Marshall Offices by 30 June Total capital expenditure as planned under PWMP for the 16 provinces is PLN 18.6 billion. In the perspective, funds of EUR 0.88 billion have been allocated to municipal waste management under the Infrastructure and Environment Operational Programme. The projected investments are among others based on the assumptions that by 2020, recycling should include 50% of municipal waste (60% by 2025) while up to 30% should be thermally processed. NWMP puts special focus on the use of waste for power generation and provides for construction of waste incineration plants. At present, six such plants operate in Poland, with ten more being under construction or preparation. The Ministry of Environment is likely to discontinue some planned investments in light of new closed-circuit economy assumptions and the necessity to comply with European standards. Capital expenditure by province planned under Provincial Waste Management Plans for as per convention adopted (PLN million) Dolnośląskie 3,700.3 Kujawsko-Pomorskie Lubelskie Lubuskie Łódzkie 1,117.9 Małopolskie Mazowieckie 3,103.0 Opolskie Podkarpackie 1,093.1 Podlaskie Pomorskie 1,598.8 Śląskie 2,760.3 Świętokrzyskie 75.3 Warmińsko-mazurskie Wielkopolskie 1,302.1 Zachodniopomorskie Total 18,571.4 Source: Deloitte study 59

60 Construction in the retail and service space sector Despite the good standing observed in 2016, projections for the retail and service space market in a longer time horizon are uncertain due to changes in legal and tax regulations in Poland, as well as political and economic uncertainty in Europe. The form of introducing the new tax on retail sales remains unknown. The former progressive system levied on approx. 100 main commercial networks in Poland has been suspended in September 2016 by the European Commission. Waiting for the final ruling in the dispute, the Parliament has postponed its implementation until 1 January No final decision has been made with regard to shopping on Sundays, either. The final form of the limitation and its implementation timeline remain unknown. Additionally, growing uncertainty in Europe (among others due to Brexit in particular in the context of foreign exchange rates, may slow down foreign investment, which would result in a decrease in the volume of investments in the commercial property sector, including retail space. Thirteen commercial facilities have been extended and modernised (74 sq. m for lease, i.e. 16% of the annual supply). The largest investments included extending the existing malls with separate shop buildings, such as Agata furniture shop at PH Targówek in Warsaw or Leroy Merlin offering construction materials at Galeria Sudecka in Jelenia Góra. In mature markets (i.e. in large cities), the average share of unused space reached 3.3% at the end of Warsaw was the best in this respect (1.9%), while Poznań, Tricity and Wrocław had the highest rates (6.2%, 4.5% and 4.1%, respectively). The projected rate of unused space shall be stable and reach up to 5% for the most developed markets. In 2017 an increase in supply by 400,000 sq. m is projected, with 360,000 sq. m being already under construction. In September 2017, North Gallery was opened in Warsaw (64,000 sq. m). Other investments, such as Wroclavia (64,000 sq. m), Forum Gdańsk (62,000 sq. m) and Serenda (41,300 sq.m) in Kraków are quite advanced. Development of smaller, local malls is also projected. The share of retail space in towns below 100,000 inhabitants shall increase to 18% of the total supply of this kind of space. Interest in sales outlet facilities, among others in Bydgoszcz, Toruń, Kraków, Rzeszów or Gliwice, has been growing. Structure of retail space opened in 2016 by format and investment type In 2016, the market of retail space in Poland increased by o by 470,000 sq. m. A higher supply was observed in the second half of the year, when almost two-thirds of new retail space were made available for use. Shopping centres accounted for ca. 338,000 sq.m. and commercial warehouses represented 28,000 sq.m. At the end of Q1 2017, more than 13.4 million sq.m. of modern retail space were available in Poland. Shopping malls (402 facilities) accounted for over 71% of the supply, totalling 9.5 million sq. m. Other facility types included parks and large-size commercial warehouses (3.7 million sq. m, i.e. 27%) and outlet facilities (0.24 million sq. m, i.e. 2%). 1% 5% 2% 10% Extended shopping parks Extended shopping malls Commercial warehouses 15% 67% New shopping malls Extended shopping malls New shopping parks In 2016, 22 new retail and service facilities were opened, including 15 shopping malls, Posnania in Poznań (99,000 sq. m) and Galeria Metropolia in Gdańsk (34,000 sq. m) being the largest. Source: Cushman&Wakefield analyses 60

61 Housing construction The outlook for housing construction companies remains positive. The number of apartments per 1,000 citizens ratio in Poland is lower than in other European countries. This means a potential for further growth and an opportunity for entities active on the Polish housing construction market. The year 2016 saw a record-high number of apartments for sale and record high sales. According to REAS, about 62,000 apartments were sold in the six largest agglomerations (Warsaw, Kraków, Wrocław, Tricity, Poznań and Łódź) compared to 51,800 in 2015, in the total amount of PLN 24.5 billion. The highest increases in sales were seen in Wrocław (28% y-o-y), Warsaw (26% y-o-y) and Tricity (26% y-o-y). In the same period, developers put for sale over 65,000 new apartments (in 2015: ). The first half of 2017 was exceptionally successful, too. During the period 36,400 apartments were sold and 33,400 offered for sale, which denotes a growth by 23.8% and 6.4%, respectively, vs. H On the supply side, acceleration in the housing construction is visible in statistics as well, including the number of completed apartments, or the number of construction permits issued with regard to housing buildings countrywide. Number of apartments per 1,000 people in Israel Poland Slovenia Ireland UK Austria The Netherlands Hungary Czech Republic Belgium EU 28 Germany France Spain Portugal Source: Euromonitor International, Deloitte study Number of apartments sold in six largest Polish cities ( 000) I Q II Q III Q IV Q I Q II Q III Q IV Q I Q II Q III Q IV Q I Q II Q III Q IV Q I Q II Q Source: REAS The housing market in Poland is affected by two demand types: investment demand, which has recently grown considerably, is originated by investors, who buy apartments for rent, at present providing the best opportunity to realize a better return rate with a relatively low risk. The other type is core demand, driven by individuals who buy apartments for own use. A variety of public co-funding programmes offered to apartment buyers support the demand growth; nevertheless, despite a growth in sales, developer margins remain under pressure due to high prices of land, especially in attractive locations. Additionally, economic growth contributes to increasing cost of construction companies, which translate into higher construction costs for developers and as a result, since revenue growth opportunities are limited (the price of a square meter of housing space cannot grow too high), it may adversely affect margins. Tomasz Łapiński, CEO, Ronson Development Sp. z o.o. 61

62 In 2016, they were 147,600 and 82,900, respectively. This will result in a 10.2% growth in the number of new apartments vs and a 10.5% growth in the number of construction permits issued. Developers around the country commissioned 78,500 apartments (48.2% of the total number of apartments), denoting a growth by 25.7% vs The high growth in supply was maintained in the period from January to August ,900 apartments were commissioned (+9.6% y-o-y); construction permits were issued or construction designs submitted for 169,200 apartments (+24.8% y-o-y). On 1 January 2017 the amended construction code came into effect, extending the scope of construction works for which no permit is required. Regulations regarding substantial deviations from the construction design have been eased, too. The new regulations should not conflict with the currently developed spatial and construction code, which is to regulate the entire investment process. The effective date of the code is still unknown. Factors affecting the demand on the housing construction market After the exceptional 2016 and providing PLN 340 million subsidies under the Mieszkanie dla Młodych programme in January 2017, the subsequent months seem to promise stability. The end of deflation and potential interest rate increases by the Monetary Policy Council shall increase costs of loans. The required own contribution of 20% of the total amount, return of social and rental housing, as well as the postulated provision of legal framework for REIT allowing investments in rental properties, may reduce demand on the housing construction market in a longer run. So far, the positive trends on the housing construction market have been supported by: low interest rates and growing household income; high investment demand for apartments, especially in large cities, in district with well developed public transport systems; Mieszkanie dla Młodych (MdM) governmental programme. Completed apartments and issued construction permits ( 000) Number of completed apartments Housing construction permits issued Source: Central Statistical Office, Banking Supervision Authority

63 Low interest rates and low price of money Pursuant to a report by National Bank of Poland, Sytuacja na rynku kredytowym III kw (Loan market in Q3 2017) published in July 2017, in Q2 banks have slightly tightened housing loan criteria, increased margins for higher risk loans, and reduced non-interest loan costs. According to AMRON SARFiN for Q2 2017, demand for loans has increased: from January to June, clients signed 100,100 housing loan agreements, totalling to PLN 22.7 billion (which denotes a 13.2% growth y-o-y). Total debt resulting from housing loans amounted to PLN 391 billion at the end of June The number of active loan agreements increased to 2.1 million (i.e. by 1.9% YTD). The termination of the MdM programme results from the National Housing Programme (NHP) adopted by the Government in Q4 2016, which determines key directions of the housing policy, which will allow an increased access to apartments for individuals whose income disallows purchase or rent on market terms. Mieszkanie Plus is the key part of the programme, which includes construction of rental apartments on land owned by local governments or by the State Treasury in cooperation with municipalities or developers; support of municipal, sheltered and social housing, and regular housing savings programmes. Under the programme, the amount of PLN 150 million Housing loans in Poland in and in Q and PLN 12.8 million shall be spent in 2017 and 2018, respectively, plus PLN 6.7 billion in It will provide co-funding of almost 200,000 apartments (7,000 in 2017, 13,000 in 2018 and 179,000 in ). According to Government Information Centre, these measures shall increase the number of apartments per 1,000 citizens from the current 363 to 435 (the EU average), which means the need to build approx. 2 million new flats. Demand for investments According to information provided to us, demand for rental apartments is high in large Polish cities. They are built in districts with well developed public transportation system, e.g. close to underground stations in Warsaw. A typical rental apartment includes one, two or three rooms occupying 40 to 60 sq. m. The demand is triggered with a belief that investing in apartments is more feasible than bank deposits given the current low interest rates Governmental programmes The increase in the number of housing loans is contributed to by demand for subsidies under the MdM programme. In 2017, the programme budget exceeded PLN 300 million, with more than half allocated already in 2016, and the rest used up in January In 2017, the amount of PLN 230 million shall be availed from the 2018 budget, when the programme is to be completed II kw Number of active agreements ( 000) Total debt (PLN billion) Source: Polish Banking Association

64 Until June 2017 BGK Nieruchomości signed 8 investment agreements for construction of approx. 4,500 to 5,000 apartments. By year-end, 40 agreements should be signed for 20,000 apartments. First apartments under Mieszkanie Plus have been built since December In Biała Podlaska, three blocks of flats with 186 apartments will be built, while in Jarocin, 258 tenement apartments. By year-end, construction of 10,000 apartments shall be commenced; over 40 cities have qualified to the programme and 9 letters of intent have been signed. The Mieszkanie Plus programme makes developers worry about reduced feasibility of their investments for sale, especially those located beyond the key Polish agglomerations. Some clients, instead of buying an apartment, will prefer renting it with a later purchase option. Further, cheap government investments of poor visual quality may adversely affect the value of adjacent properties. Although actual programme eligibility criteria are still unknown, the Government has declared that concerns raised by developers are groundless. Mieszkanie Plus shall be addressed mainly to non-affluent families with little kids that have not planned purchasing any apartments on the primary market. Additionally, the programme is intended mostly for towns and counties which developers or private investors do not find attractive. Towns and cities qualified to Mieszkanie Plus and places where construction works have commenced (as at June 2017) Gorzów Wielkopolski Świnoujście Szczecin Zielona Góra Września - Places where construction has commenced Source: Mib.gov.pl, Deloitte analysis Gdynia Poznań Jarocin Konin Starogard Gdański Pelplin Grudziądz Toruń Łódź Suwałki Augustów Grajewo Łomża Warszawa Pruszków Głogów Radom Wieluń Wrocław Tomaszów Wałbrzych Mazowiecki Opole Katowice Nysa Chorzów Chrzanów Nowa Gliwice Kraków Dęba Zabrze Tychy Sources of energy: Rybnik Trzebinia Tarnów Dębica - Towns/cities qualified to the programme Skawina Biała Podlaska Stalowa Wola Rzeszów Białystok 64

65 Office construction The standing of the Polish commercial property sector depends mostly on foreign capital investments. Low interest rates offered by the finance market promote investing in real property with a higher return rate, which is confirmed by current statistics was another year of record high supply of office space in Poland. The total supply of modern office space in nine largest Polish cities (Warsaw, Kraków, Wrocław, Tricity, Katowice, Poznań, Łódź, Szczecin, Lublin) exceeded 9 million sq. m a the end of In 2016 alone, 800,000 sq. m of modern office space were completed, out of which approx. 400,000 in Warsaw and the rest on regional markets. Despite a slight drop in demand, 2016 has remained the second best in the history of the domestic market, with demand clearly exceeding 1 million sq. m. At the end of H1 2017, the total supply of office space in Poland was 9.3 million sq. m. During the period of six months, 300,000 sq. m. of office space were completed. The first half of the year saw an increase in the transaction volume on the office space market (+15% y-o-y). The share of vacant space has not changed and amounted to 11.9%. Interestingly, according to JLL projections, more than half of 800,000 sq. m of the planned space shall be built in regional cities, not in Warsaw as before. The planned incorporation of Commercial Space Rental Companies is an interesting solution that may positively affect its standing over a long term. These companies are an equivalent of Real Estate Investment Trust (REIT), i.e. listed investment funds that invest directly or indirectly in commercial property. Opening Western countries for Ukrainians, resulting in their outflow from the Polish construction sector, shall affect access to labour in building construction, where most of works performed are little advanced in terms of technology and automation. On the other hand, segments where Polimex-Mostostal Group operates, i.e. power, chemistry, oil and gas, should not be significantly affected by this trend. Antoni Józwowicz, CEO, Polimex Mostostal S.A. Further, it saw a record high investment value, with transactions exceeding PLN 4.5 billion. Please note that transactions on the office space market accounted for nearly 40% of the total transaction value. Last year we saw further decrease in capitalisation rates, which illustrates attractiveness of Poland as a location of capital investments. 65

66 Warehouse construction Economic growth driven by internal consumption, infrastructural investments and stable rent levels are the key factors contributing to the growing demand for warehouse space in Poland. Assuming that the friendly trend is maintained, the good standing of the warehousing space market in Poland should continue. Warehouse space under construction in Q ( 000 sq.m) In the first quarter of 2017 the rapid growth of the warehouse space market continued. At the end of March 2017, Poland had the total of over 11.6 million sq.m of modern warehouse space. Following activation of developers in H2 2016, in Q the total of 533,000 sq. m of warehouse space were completed, denoting a 20% increase y-o-y. Demand has also hit a record high; in Q it reached PLN 925,000 sq. m, the highest value in the history of the Polish warehouse space market City of Warsaw Warsaw suburbs Source: Cushman&Wakefield Central Poland Upper Silesia Poznań Wrocław Tricity Kraków Szczecin Rzeszów Other regions The vacant space rate dropped slightly countrywide to 6.3% (down by 0.4 p.p. compared to Q4 2016) Average rent rates have remained flat, ranging from EUR 4 to EUR 5.25 per sq. m. monthly for the city of Warsaw and from EUR 2.5 to EUR 3.6 per sq. m monthly in central regions. Shortage of qualified labour shall become the key challenge of Polish economy in general and of the construction market in particular in the nearest future. It may significantly contribute to an increase in contract performance costs. The problem will indirectly impact large construction companies acting as general contractors, since medium and small firms acting as subcontractors will directly face the challenge, as a result of which their costs will grow to protect margins. The market of large infrastructural contracts is subject to cyclical changes. In the current financial perspective, we saw both the contracting and contract performance stage. This is of key importance from the viewpoint of a construction company, since tenders closed in shall translate into actual revenue and cash flows only after a year or two, as a result of extended administrative procedures related to the tender formula and the design stage, which takes from six to 18 months. Marcin Węgłowski, Management Board Member, Budimex S.A. 66

67 2.7. Summary Volume of selected planned investments, broken down by construction market segment Years Planned investment volume Source Comment Expressways approx PLN 149 billion National Road Building Expressways and highways Excluding expenditure on modernization of regional and municipal roads. Road and railway Maintenance Municipal and district roads of the technical standard of the existing road network approx PLN 47 billion approx PLN 11 billion (1) Municipal and district road infrastructure programme for (2) General subsidy (3) EU funds Government budget expenditure on programme implementation and EU funds Railway approx PLN 66 billion Railway Programme by 2023 Update of 12 July 2017 Railway construction Suburban trams and railways approx PLN 1.5 billion Long-Term Financial Plans of six largest Polish cities Amounts planned under city budgets do not cover all expenses of investment in tram transportation in these cities (a portion shall be funded by municipal tram companies). Power generation approx PLN 41 billion Strategies of main power sector concerns The amount includes technology and construction. Excl. capital expenditure on nuclear power plant construction. Power enginering Power transmission and distribution approx PLN 52 billion PSE and distribution companies Gas transmission and distribution approx PLN billion Gaz System and PSG Sewage systems approx PLN 16.7 billion 5th update of NPMST Environmental protection Waste management approx PLN 18.6 billion WPGO Sewage treatment approx PLN 11.1 billion 5th update of NPMST Construction of buildings and facilities (commercial and service facilities, residential, office and warehouse buildings) No forecasts as to amounts in the longer term. The finance market offers low interest rates, thus promoting investments in real property as more profitable than bank deposits. Demand in housing construction is driven mostly by a low number of apartments per 1,000 citizens in Poland, low financial costs and governmental support. Source: WPGO

68 68

69 Section 3. Profiles of largest construction companies in Poland 69

70 Budimex Group Budimex S.A. was established through the conversion of Centrala Handlu Zagranicznego Budownictwa Budimex, founded in 1968 in order to export construction services, mainly to developing markets in Asia and Africa, and to the Socialist block countries. In the late 1980s and the early 1990s, Budimex became a leading contractor on the Polish market. In 1992, the enterprise was privatised and two years later converted into a joint-stock company. Since 1995, its shares have been traded on the Warsaw Stock Exchange. As at 31 December 2016, its key shareholders included Valivala Holdings B.V. (The Netherlands) with 59.1% of shares (a member of the Spanish Ferrovial S.A. Group) and Aviva OFE Aviva BZ WBK with 6.7% of shares. The Budimex Group provides broadly defined construction and assembly services acting as a general contractor, both in Poland and abroad, it is a property developer and manager and engages in sales, manufacturing, transport and other activities, which account for an insignificant part of its operations. In 2016, the revenue of the Budimex Group went up by 8.5% year-on-year. Poland and Germany are the key markets where the Group operates. Over 91% of its total sales revenue were generated from construction activities. As compared to 2015, sales in this segment increased by 9% and exceeded PLN 5.1 billion. The Group s EBIT was PLN million, up by over 70% year-on-year. The net profit increased by over 70% as well. The net debt increased o by 22.1% y-o-y at the end of Expenditure for nonfinancial non-current assets incurred in 2016 was similar to that of the year before and amounted to PLN 71 million. In 2016, the Budimex Group companies entered into construction contracts totalling PLN 5.7 billion. As at 31 December 2016, the Group s contract portfolio totalled PLN 8.9 billion, which represented a rise by 6% year-on-year. Its market capitalisation increased by 2% and exceeded PLN 5 billion at the end of Along with performing construction operations, Budimex has been acting as an advisory, management centre and finance centre in the Group. 70

71 Key data (PLN 000) Change in percentage terms '16 vs '15 Assets Non-current assets % Current assets % Current assets held for sale % Total assets % Equity and liabilities Equity % Provisions for liabilities % Long-term liabilities % Short-term liabilities and accruals % Total equity and liabilities % Profit and loss account Revenue % Domestic sales % Foreign sales % Construction operations % Other operations % EBITDA % EBIT % Net profit/loss % Other data Net debt % Debt/Balance sheet total 85.6% 87.2% 86.5% -1.8% Capital expenditure/revenue 1.3% 1.3% 0.5% -2.1% Market capitalisation ,0% 71

72 Sales by operation type 2016 Sales by geographical region type % 3% 4% 91% 96% Construction operations Real property management and development Domestic sales Foreign sales Other activities EBITDA, EBIT, net profit/loss in (PLN million) EBITDA EBIT Net profit/loss

73 Skanska S.A. Skanska has been operating on the Polish construction market since early 1970 s and has operated in all construction segments, building office, housing, commercial and industrial facilities. It specializes in road, bridge, railway and hydrotechnical construction as well. In Poland, it has built Złote Tarasy in Warsaw, the arrival terminal in International Katowice Pyrzowice Airport, the northern section of A1 motorway and Świnna Poręba reservoir. Skanska is among the founders of the Construction Safety Agreement, an initiative of the largest general contractors operating in Poland, whose mission is to improve construction site security. General construction Skanska acts as a general contractor in the building construction segment; its contracts include science and technology parks, sports facilities, healthcare investments, shopping malls and entertainment centres, public utilities, cultural and leisure centres, offices, hotels and residential buildings. Engineering construction Projects carried out by Skanska S.A. include transport infrastructure, railways, hydrotechnical facilities and environmental protection initiatives. Unlike in previous editions of the report, presenting the consolidated data of the entire capital group, for this edition of our report, we have received only selected financial data of Skanska S.A. Revenue of Skanska S.A. in 2016 amounted to PLN 3.8 billion (compared to PLN 4.4 billion in 2015 regarding the Skanska Group in Poland; we did not provide data for Skanska SA itself for 2015). In 2016, the Company employed over 7,400 people. 73

74 Key data (PLN 000) Change in percentage terms '16 vs '15 Assets Non-current assets no data % Current assets no data % Total assets no data % Equity and liabilities Equity no data % Total equity and liabilities no data % Profit and loss account Revenue % EBITDA % 74

75 Strabag Strabag is a European construction concern with over a hundred years of professional tradition. It has been operating in Poland since Its key companies in Poland are STRABAG Sp. z o.o. and Strabag Infrastruktura Południe Sp. z o.o. Their key operations include general construction, infrastructure, bridge and railway construction. STRABAG operates in other sectors as well, among others in hydrotechnical and power construction, acting also as a property developer and facility manager. The financial statements of the STRABAG Group are not consolidated at the local level. STRABAG SP. Z O.O. The operations of STRABAG Sp. z o.o. focus mainly on infrastructure investments as well as on general construction and construction engineering. Its other projects include environmental protection, railway construction, modernization and construction of wharves, industrial and power engineering construction, also in relation to renewable energy. In 2016, the Company s revenue decreased by 22.7% y-o-y and amounted to PLN 2.5 billion. It generated a positive EBIT of PLN 216 million and net profit of PLN 203 million. Its net debt decreased by nearly 40% y-o-y and amounted to PLN 209 million at the end of The STRABAG Group companies do not use any external sources of funding and participate in a cash pool system instead. 75

76 Key data (PLN 000) * 2014* Change in percentage terms '16 vs '15 Assets Non-current assets % Current assets % Total assets % Equity and liabilities Equity % Provisions for liabilities % Long-term liabilities % Short-term liabilities and accruals % Total equity and liabilities % Profit and loss account Revenue % Domestic sales % Foreign sales % Construction operations no data -24.1% Other operations no data 6.1% EBITDA % EBIT % Net profit/loss % Other data Net debt % Debt/Balance sheet total 66% 71.3% 71.3% -8% Capital expenditure/revenue 2.1% 1.7% 0.8% 25.7% *The financial data for 2014 and 2015 were reconciled with the financial statements for 2015 and 2016, respectively, after adjustments had been made to the opening balance. 76

77 Sales by operation type 2016 Sales by geographical region type % 93% 100% Construction operations Other activities Domestic sales Foreign sales EBITDA, EBIT, net profit/loss in (PLN million) EBITDA EBIT Net profit/loss

78 Strabag Infrastruktura Południe Sp. z o.o. The Company has been active on the Polish market for 20 years and its business focuses mainly on design and construction works in the sector of roads and bridges as well as airfield pavements. Until the end of 2014, it had operated as Heilit+ Woerner Sp Sp. zo.o. It adopted the name of STRABAG under the image unification campaign. It has specialized mainly in concrete pavements. The major part of its revenue is generated in Poland. The operations of Strabag Infrastruktura Południe are not particularly diversified. In 2016, the Company generated revenue of PLN million, which denotes a 55% increase y-o-y. Its EBIT and net profit amounted to PLN 28.2 million and PLN 27.4 million, respectively, and both decreased year-on-year. The company's operations are financed mainly with cash pool loans from related parties. 78

79 Key data (PLN 000) * Change in percentage terms '16 vs '15 Assets Non-current assets % Current assets % Total assets % Equity and liabilities Equity % Provisions for liabilities % Long-term liabilities Short-term liabilities and accruals % Total equity and liabilities % Profit and loss account Revenue % Domestic sales % Foreign sales % Construction operations % Other operations % EBITDA % EBIT % Net profit/loss % Other data Net debt % Debt/Balance sheet total 75.6% 80.0% 73.3% -5.5% Capital expenditure/revenue 2.5% 1.9% 0.5% 31.6% *Financial data for 2014 have been reconciled to financial statements for 2015 after opening balance adjustments. 79

80 Sales by operation type 2016 Sales by geographical region type % 1% 97% 100% Construction services Sales of asphalt mixes and grit Domestic sales Foreign sales Other EBITDA, EBIT, net profit/loss in (PLN million) EBITDA EBIT Net profit/loss * 80

81 Polimex-Mostostal Group The Polimex-Mostostal Group has been ranked among the largest Polish construction and engineering groups for a few years. Polimex-Mostostal S.A. listed on the Warsaw Stock Exchange since 1997 is its parent. Its present legal form has resulted from a merger of Polimex-Cekop S.A. and Mostostal Siedlce S.A. effected in The history of the entire Group originates from Its operations focus on four segments: power construction: project delivery including construction, design, overhaul and modernisation of power facilities (among others, power units in Kozienice and Opole power plants); oil-chemistry-natural gas: services for the refinery and petrochemical industry and for the power engineering segment; In 2016 sales revenue generated by the Group was 4.7% higher than a year before and amounted to nearly PLN 2.7 billion. Most of the amount (PLN 1.9 billion) came from power construction; the general construction segment generated PLN 288 million. 82% of the revenue originated from the domestic market. The Company closed the year 2016 with a loss of PLN 61 million unlike in 2015, when it had managed to generate a profit of nearly PLN 69 million after a few years of losses. In 2016, EBIT was negative and amounted to PLN -28 million. The Group s debt ratio did not change compared to the prior year. industrial construction: comprehensive services for the segment; manufacturing: steel structures and elements, including catwalk grids. presented its new strategy for the years The vision involves regaining the leading position on the construction markets. Along with the parent, the Group includes Polimex Power construction, Naftoremont- Naftobudowa, Mostostal Siedlce, Polimex Budownictwo, Polimex Infrastruktura, Polimex Operator, Polimex Opole, Stalfa, Polimex-Mostostal Ukraine. 81

82 Key data (PLN 000) Change in percentage terms '16 vs '15 Assets Non-current assets % Current assets % Assets held for sale % Total assets % Equity and liabilities Equity % Provisions for liabilities % Long-term liabilities % Short-term liabilities and short-term accruals % Liabilities directly related to assets held for sale % Total equity and liabilities % Profit and loss account Revenue % Domestic sales % Foreign sales % Construction operations % Other operations % EBITDA % EBIT % Net profit/loss % Other data Net debt % Debt/Balance sheet total 80,7% 80.2% 84.0% 0.7% Capital expenditure/revenue 0,2% 0.1% 1.3% 74.7% Market capitalisation % 82

83 Sales by operation type 2016 Sales by geographical region type % 16% 18% 11% 71% 82% Manufacture General construction Domestic sales Foreign sales Power construction Other operations EBITDA, EBIT, net profit/loss in (PLN million) EBITDA EBIT Net profit/loss

84 PBG Group The PBG Group has been operating since It originated as a family business named Piecobiogaz s.c. Jerzy Wiśniewski, Małgorzata Wiśniewska (a partnership). Initially, the entity focused primarily on construction, modernisation and maintenance of pressure reduction and metering stations, as well as construction of steel and polyethylene pipelines for transmission and distribution of natural gas. In 1997, Technologie Gazowe "Piecobiogaz" Sp. z o.o. was established and it took over the key part of the partnership s business involving construction of gas facilities. Continuous growth and implementation of innovative projects resulted in a change of the company's legal form into a joint-stock company named PBG S.A. Its IPO on the Warsaw Stock Exchange took place in mid-2004 and enabled the company to secure funding and establish the PBG Capital Group. Since June 2012, PBG S.A. has been in bankruptcy by arrangement. The vote on the arrangement with creditors was held in August 2015, and approved by the Bankruptcy Court in October When the decision became binding, in June 2016 negotiations with key creditors were completed. At the end of June 2016, Jerzy Wisniewski holding 23.61% of interest in the share capital and 23.61% of the voting rights was the key shareholder of PBG S.A. At the end of 2016, the value of the PBG Group s contract portfolio was ca. PLN 4.9 billion, out of which contracts totalling ca. PLN 2 billion were to be fulfilled in 2016 and the remaining part in the following years. The Group focuses on the domestic market, which remains its key investment location, both in the power sector and in investment planning regarding natural gas and crude oil, as well as hydrotechnical investments in anti-flood systems. At the end of 2016, the PBG Group saw a 10.5% increase in sales revenue year-on-year. Its performance improved substantially following implementation of the arrangement provisions. The Group's revenue went up from PLN 1.8 billion in 2015 to nearly PLN 2.0 billion in EBIT and net profit were positive and amounted to PLN million and PLN million, respectively. The Companies and PBG regained full business capacity in September Pursuant to the assumed timeline, the Management Board of the Company has followed its obligations imposed by the arrangement, including issue of shares and bonds and their public offering, as well as changes in corporate governance and other measures related to restructuring of its assets and operations. Funds obtained from divestment shall become the key source to repay instalments negotiated under the arrangement and to redeem bonds. 84

85 Key data (PLN 000) Change in percentage terms '16 vs '15 Assets Non-current assets % Current assets % Assets held for sale ,867.7% Total assets % Equity and liabilities Equity % Provisions for liabilities % Long-term liabilities % Short-term liabilities and accruals % Total equity and liabilities % Profit and loss account Revenue % Domestic sales % Foreign sales % Construction operations % Other operations % EBITDA % EBIT % Net profit/loss % Other data Net debt % Debt/Balance sheet total 88.4% 136.8% 130.7% -35.4% Capital expenditure/revenue 0.4% 1.6% 1.1% -72.4% Market capitalisation % 85

86 Sales by operation type 2016 Sales by geographical region type % 3% 9% 94% 91% Natural gas, crude oil and fuel Power construction Domestic sales Foreign sales Other EBITDA, EBIT, net profit/loss in (PLN million) EBITDA EBIT Net profit/loss

87 Erbud Group Erbud originates from 1990, when it commenced operations under the name of Przedsiębiorstwo Budowlane i Usług Technicznych Erbud in Toruń. A year later, its first foreign branch was opened in the Federal Republic of Germany. In 2003 it changed its name to Erbud Sp. z o.o. and moved its head office to Warsaw. At the same time, a subsidiary, Erbud International Sp. z o.o., was incorporated and a strategic investor, Wolff & Muller GmbH & Co. KG, provided a capital injection. Erbud s foreign business grew rapidly and in 2005 it entered Belgian, French, Swedish, Irish and English markets. In 2006 Erbud Sp. z o.o. changed its legal form to a joint-stock company and a year later had its IPO on the Warsaw Stock Exchange. In 2007, it acquired Budlex S.A, Rembet Plus Sp. z o.o. and PRD S.A. In more acquisitions followed and allowed establishing the construction and service segment for power and industry clients. In 2016 the Company concluded its largest contract for the construction of Galeria Młociny shopping and service mall in Warsaw. Erbud acts as the general contractor and subcontractor both in Poland and in other European countries. It specializes in: building construction (shopping malls, hospitals, office buildings, public utilities and residential buildings); power construction (power, heat and power and incineration plants); renewable energy (wind farms, photocell farms); road and engineering construction (earthworks, construction of roads, parking plots, storage yards, vehicle manoeuvring areas, etc.). In 2016 the Company generated revenue of PLN 1,790 million, which denoted a y-o-y growth by 1.5%. 79% of the revenue originated from the domestic market. The Group implements mainly building construction (64%), road and engineering (19%) and power construction (14%) projects. In the surveyed period, its EBITDA and EBIT increased by 10.7% and 12.7%, respectively, year-on-year. Its net profit generated on sale of a significant asset: Budlex S.A., a property developer, amounted to PLN 1 million, while net profit on continuing operations was PLN 35.3 million denoting a 51.7% increase year-on-year. 87

88 Key data (PLN 000) * Change in percentage terms '16 vs '15 Assets Non-current assets % Current assets % Total assets % Equity and liabilities Equity % Provisions for liabilities % Long-term liabilities % Short-term liabilities and accruals % Total equity and liabilities % Profit and loss account Revenue % Domestic sales % Foreign sales % Construction operations % Other operations EBITDA % EBIT % Profit/loss on continuing operations % Profit/loss on discontinued operations % Net profit/loss % Other data Net debt % Debt/Balance sheet total 72.5% 72.6% 72.7% -0.2% Capital expenditure/revenue 0.2% 0.8% 1.0% % Market capitalisation % *Financial data for 2014 have been reconciled to financial statements for 2015 after opening balance adjustments. 88

89 Sales by operation type 2016 Sales by geographical region type % 21% 19% 3% 64% 79% Building construction Property development Domestic sales Foreign sales Road and engineering construction Power construction EBITDA, EBIT, net profit/loss in (PLN million) EBITDA EBIT Profit/loss on continuing Profit/loss on Net profit/loss operations discontinued operations

90 Mostostal Warszawa Group Mostostal Warszawa was incorporated in 1945 and was among the few ones participating in post-war reconstruction of Warsaw. It launched its business operations abroad in In 1991, it was transformed into a joint-stock company and privatised. Its IPO on the Warsaw Stock Exchange took place in At present, Mostostal Warszawa SA is the key shareholder of a few businesses included in the Mostostal Warszawa Capital Group. In 1999, the company was merged with the Spanish Acciona Group. At the end of 2016, Acciona Construcción S.A. with 50.09% of shares was the majority shareholder of Mostostal Warszawa. Otwarty Fundusz Emerytalny PZU "Złota Jesień, an open-ended pension fund, and AVIVA PTE AVIVA BZ WBK S.A. also held considerable interest of 18.33% and 5.83%, respectively. The operations of Mostostal Warszawa can be divided into two main segments, namely industrial engineering and general construction. Its current key projects in the general construction segment include Park Wodny Tychy, new university buildings for AGH University of Science and Technology in Kraków and for Poznań University of Technology, an office building for LPP in Gdańsk, Mennica Residence II housing building, residential settlements in Warsaw and Kraków. The power segment investments include construction of power units in Opole Power Plant, and in the eco segment, extension of the sewage treatment plants in Otwock and Krosno; infrastructural projects include the construction of ring roads in Strzyżów, Stalowa Wola and Nisko, and a bridge named Roskilde Fjord Link in Denmark. The consolidated revenue generated by Mostostal Warszawa in 2016 amounted to PLN 1.4 billion and was almost in whole derived from construction operations. The majority of contracts focused on general construction and industrial engineering works. The revenue earned in 2016 was 10% higher than in the preceding year and approx. 2% of sales revenue was generated abroad. In 2016, the Group reported a net profit of PLN 14.5 million. EBIT generated in 2016 was PLN 47.4 million denoting a 3% decrease year-on-year. In 2016, the average headcount in the Mostostal Warszawa Group neared 1,500, which means a nearly 2% growth as compared to The net debt ratio in 2016 was 79% and it was lower than in the preceding year, when it reached the level of 83%. 90

91 Key data (PLN 000) * Change in percentage terms '16 vs '15 Assets Non-current assets % Current assets % Assets held for sale n/a Total assets % Equity and liabilities Equity % Provisions for liabilities % Long-term liabilities % Short-term liabilities and short-term accruals % Liabilities directly related to assets held for sale Total equity and liabilities % Profit and loss account Revenue % Domestic sales % Foreign sales % Construction operations % Other operations % EBITDA % EBIT % Net profit/loss % Other data Net debt % Debt/Balance sheet total 79.2% 82.6% 85.9% -4.1% Capital expenditure/revenue 0.8% 1.5% 0.5% -48.2% Market capitalisation % 91

92 Sales by operation type 2016 Sales by geographical region type % 2% 78% 98% Engineering and industry General construction Domestic sales Foreign sales Other operations EBITDA, EBIT, net profit/loss in (PLN million) EBITDA EBIT Net profit/loss

93 Trakcja Group The Trakcja Group is among leaders of the Polish and Lithuanian rail, tram and road infrastructure construction market. It employs over 2,000 people. Trakcja PRKiI S.A. with the registered office in Warsaw is its parent. The Group was established in stages, beginning from restructuring of a stateowned enterprise in 1995, all the way through privatisation in 2005 (Spanish Comsa S.A. purchasing a minority share). In 2008, the parent had its IPO on the Warsaw Stock Exchange. In 2009 and 2011, Trakcja acquired PRK 7 S.A. and Tiltra Group, respectively, which allowed extending the Group s operations in Poland by property development and obtaining one of the largest Lithuanian construction businesses, specialized in infrastructure (roads, bridges, tunnels, airports and seaports) and railway modernisation. The core business of the Group involves comprehensive works regarding road and railway infrastructure, performed with the use of modern machinery. The Group specializes in engineering and construction services involving design, construction and modernisation of railways and tram lines, as well as their power supply networks, power transmission lines, construction of bridges, viaducts, flyovers, channels, tunnels, underground passages, retaining walls, roads and auxiliary road and railway infrastructure. It can also perform general construction works including site preparation, construction and improvement of structures, as well as installations and finishing. Building construction, both infrastructural and for general purposes (residential and office buildings) is a crucial element of its offer. Other services include construction of power engineering and remote control systems. The Group has modernised several thousand kilometres of railways and provided power supply to over 10,000 km of railways. It has built and modernised over 450 power supply substations and 350 distribution boards. In the road construction segment, the Group specializes in the construction and remodelling of roads, motorways, bridges, viaducts, airports, seaports and public utility infrastructural installations. Since its incorporation, i.e. 1949, AB Kauno Tiltai, a Group company being among the largest infrastructural business in the Baltic states, has built over 100 bridges and viaducts and has been in charge of construction and reconstruction of many roads in Lithuania. As at 31 December 2016, the Parent s key shareholders included COMSA S.A. with 30.8% of shares, OFE Nationale Nederlanden with 9.9% of shares and OFE PZU with 8.5% of shares. In 2016, the Group generated sales revenue of nearly PLN 1.4 billion, which denoted a 4% increase year-on-year. Its sales in the domestic segment increased in 2016 to PLN 870 million. Its foreign sales grew to PLN 511 million and accounted for 37% of total sales, mostly thanks to contracts performed for the Lithuanian Road Administration. PKP PLK S.A. is the Group s key client on the Polish market. Railway works have the biggest share in the Group s sales structure (53%), and are followed by road construction works (37%). As at 31 December 2016, its order portfolio amounted to PLN 1,201 million. In 2016 the Group concluded construction contracts totalling PLN 911 million. Its largest contracts performed in 2016 included three ones involving railway modernisation amounting to PLN 625 million (Podłęże Bochnia section), PLN 535 million (Wrocław - the Dolnośląskie Province border section) and PLN 417 million (Dębica Sędziszów Małopolski section). The Group s EBIT for 2016 was PLN 73.8 million (2015: PLN 76.7 million). Its net profit for 2016 was PLN 56.3 million in relation to PLN 51.8 million in 2015, denoting a 9% growth. As at 31 December 2016, the Group s funding structure was the same as at 31 December 2015, the foreign capital to total assets ratio being 45%. 93

94 Key data (PLN 000) * 2014 Change in percentage terms '16 vs '15 Assets Non-current assets % Current assets % Total assets % Equity and liabilities Equity % Long-term liabilities % Short-term liabilities % Total equity and liabilities % Profit and loss account Revenue % Domestic sales % Foreign sales % Construction operations % Other operations % EBITDA % EBIT % Net profit/loss % Other data Interest-bearing loans and credit facilities % Equity to assets 55% 55% 46% 0% Capital expenditure/revenue 4.1% 3.3% 1.6% 24.1% Market capitalisation (the Parent) % * Data for 2015 were restated 94

95 Sales by operation type 2016 Sales by geographical region type % 2%3% 3% 37% 37% 53% 63% Railway construction Road construction Domestic sales Foreign sales Bridge construction Tram line construction Power construction Manufacturing Other operations EBITDA, EBIT, net profit/loss in (PLN million) EBITDA EBIT Net profit/loss

96 Unibep Group In 1950 s, the company had operated in Bielsk Podlaski under the name Powiatowe Przedsiębiorstwo Budowlane and prior to 1998 had been owned by the state. Then it was transformed into a limited liability company, and in 2006, into a joint-stock company, which was accompanied with a change of its image and logo. Its IPO on the Warsaw Stock Exchange took place in In the same year, Unidevelopment, a subsidiary in charge of property development, was incorporated (in 2013 transformed into a joint-stock company). In 2009, Unibep S.A. acquired Makbud Sp. z o.o. and thus entered the road construction segment. A year later, it acquired Przedsiębiorstwo Robót Drogowych i Mostowych, and in 2015, Budrex-Kobi Sp. z o.o., a bridge construction company with the registered office in Białystok. In 2010 the Company opened its Belarussian branch, which successfully built a four-star Victoria Hotel in Minsk. At present, two major contract have been delivered in Belarus: a shopping mall in Grodno and a tennis centre in Minsk. Besides, it carried out some contractual works in Russia and in Germany. Group s activities in 2016: constructed Galeria Północna at Warsaw Białołęka; constructed Aura Sky residential building in Warsaw; constructed a 16 km section of S8 expressway from Warsaw to Białystok (in a consortium with PORR Polska Infrastructure); prepared for the construction of a shopping mall in Grodno, Belarus; built a powdered milk factory Mlekovita 3 in Wysokie Mazowieckie. The Group s core business includes general construction. Building construction accounts for 67% of its total revenue. Road and bridge construction is the second largest revenue source with the share of 13%. Domestic market generates 85% of revenue. At the end of 2016, the Unibep Group generated revenue of PLN 1,249 million, i.e. similar to the prior year (a slight increase of o 0.5%). Both EBIT and net profit, though, increased substantially year-on-year (by approx. 42% and 37%, respectively). Modular construction performed by Unihouse made the Company one of the largest European suppliers of the technology. At present, Norway has been the key market for Unihouse, but Polish buildings can be found also in Sweden. In 2016 Unihouse commenced cooperation with CRAMO, for which it has built modules based on a commissioned design. 96

97 Key data (PLN 000) * Change in percentage terms '16 vs '15 Assets Non-current assets % Current assets % Assets held for sale Total assets % Equity and liabilities Equity % Provisions for liabilities % Long-term liabilities % Short-term liabilities and accruals % Total equity and liabilities % Profit and loss account Revenue % Domestic sales % Foreign sales % Construction operations % Other operations % EBITDA % EBIT % Net profit/loss % Other data Net debt % Debt/Balance sheet total 77.4% 71.7% 69.5% 8.0% Capital expenditure/revenue 0.6% 0.2% 0.3% 179.0% Market capitalisation % *Data disclosed in the financial statements for H

98 Sales by operation type 2016 Sales by geographical region type % 15% 8% 13% 67% 85% Building construction Road construction Domestic sales Foreign sales Property development Light structures EBITDA, EBIT, net profit/loss in (PLN million) EBITDA EBIT Net profit/loss

99 PORR Group Established in 1869, PORR is one of the largest Austrian construction companies and a key player on the European market. With numerous offices across Central, Eastern and South-Eastern Europe, PORR has embarked on expansion in the Middle East, mainly in Qatar. In Poland, PORR has been carrying out construction operations since 1987 and has been represented by two key companies, PORR Polska Construction S.A. and PORR Polska Infrastructure S.A. The former specializes in building and railway construction, while the latter focuses on transport infrastructure, power and hydrotechnical engineering. The financial statements of the PORR Group are not consolidated at the local level. PORR Polska Construction S.A. PORR Polska Construction S.A. specializes in the construction of buildings and facilities as well as in railway engineering. PORR Polska Infrastructure S.A PORR Polska Infrastructure S.A. specializes in transport infrastructure, power and civil engineering, and in hydrotechnical construction. In 2016, the Group s Management Board decided to combine the Polish companies into one entity to achieve synergies, fully utilise their potential and know-how. The formal merger was to take place in Q2 2017, while the Shared Service Center commenced its operations in October Following the merger, the new company named PORR S.A. shall become a supplier of comprehensive services in all segments of the current construction market. Key data (PLN 000) Change in percentage terms '16 vs '15 Revenue PORR Polska Construction % Revenue PORR Polska Infrastructure % 99

100 Elektrobudowa Group The Parent, ELEKTROBUDOWA SA, was incorporated in 1953 under the name Przedsiębiorstwo Montażu Elektrycznego Elektrobudowa. In 1992, this state-owned enterprise was converted into a joint-stock company. Three years later it had an IPO, and since 1996 it has been quoted on the Warsaw Stock Exchange. At the end of 2016, its key shareholders included open-ended pension funds: AVIVA OFE AVIVA BZ WBK S.A. (10.75%), Nationale- Nederlanden Otwarty Fundusz Emerytalny (9.89%), PKO BP Bankowy Otwarty Fundusz Emerytalny (9.79%), AXA Otwarty Fundusz Emerytalny (9.41%), OFE PZU Złota Jesień (9.31%), Allianz Polska Otwarty Fundusz Emerytalny (6.31%), MetLife Otwarty Fundusz Emerytalny (5.72%), Generali Otwarty Fundusz Emerytalny (5.09%). At present, the ELEKTROBUDOWA S.A. Group provides comprehensive construction and assembly services for the needs of the power engineering, petrochemical, mining and public utility buildings construction segments. The business activity of the Group can be divided into the following segments: power engineering: acting as the general contractor (PC) and turnkey (EPC) provider; comprehensive assembly of low, medium and high voltage power installations; instrumentation and automation; manufacturing of power engineering, transmission and takeoff equipment; industrial segment: acting as the general contractor (PC) and turnkey (EPC) provider; comprehensive assembly of low, medium and high voltage power installations; instrumentation and automation; manufacturing of power engineering and power distribution equipment; power transmission and distribution segment: acting as a general contractor in the course of construction, remodelling and modernisation of power stations, underground and overground cable lines of all voltages; automation segment: comprehensive services (design, delivery, research and commissioning) regarding automated systems; power engineering, technology, control and supervision systems for power plants, heat and power plants, transmission and distribution stations and for industry; manufacturing of automated systems for the power engineering segment. In 2016, ELEKTROBUDOWA Group employed over 2,000 people. Its domestic revenue reached PLN 785 million, while that generated abroad amounted to PLN million. This denotes a general sales decrease by 22% year-on-year. In 2016, EBITDA was PLN 75.2 million and decreased by 3% as compared to The Group's EBIT for 2016 totalled PLN 61.8 million as compared to PLN 63.1 million in the preceding year. The net profit for 2015 amounted to PLN 55.1 million and increased by 10% year-on-year. In 2016, foreign capital accounted for 54% of the Group s funding as compared to nearly 57% in The contract portfolio of ELEKTROBUDOWA SA totalled PLN 1 billion at the end of

101 Key data (PLN 000) Change in percentage terms '16 vs '15 Assets Non-current assets % Current assets % Current assets held for sale Total assets % Equity and liabilities Equity % Provisions for liabilities % Long-term liabilities % Short-term liabilities and accruals % Total equity and liabilities % Profit and loss account Revenue % Domestic sales % Foreign sales % Construction operations % Other operations % EBITDA % EBIT % Net profit/loss % Other data Net debt % Debt/Balance sheet total 53.5% 56.9% 62.9% -6.0% Capital expenditure/revenue 1.4% 1.1% 1.0% 28.1% Market capitalisation % 101

102 Sales by operation type 2016 Sales by geographical region type % 14% 19% 83% 81% Construction and assembly Electrotechnical products Domestic sales Foreign sales Other services EBITDA, EBIT, net profit/loss in (PLN million) EBITDA EBIT Net profit/loss

103 Warbud Warbud has been present on the Polish market since Initially, the company had operated as a private business. In 1992 it was transformed into a jointstock company co-owned by a French construction giant, at present the VINCI Group. VINCI Construction International Network remains the majority shareholder of the company with 99.76% of interest in the share capital as at 31 December For a few years, the VINCI Group has been the leader in the ranking of the largest European construction companies, measured by revenue. As it is part of the VINCI Group, Warbud may draw on the international experience of its experts in addition to enjoying stability and a strong financial position. Warbud provides services in all segments of the construction market, including building construction (shopping malls, office buildings, residential buildings and estates), civil engineering structures (roads, bridges), healthcare facilities (hospitals, health centres, spas), cultural facilities (theatres, philharmonics, museums), military, power engineering and environmental projects (sewage treatment plants, incineration plants). It carries out specialist construction; one of the Group companies (Warbud Beton Sp. z o.o.) is a concrete manufacturer. In 2016, Warbud employed 1,082 people and generated revenue of PLN 930 million from its core operations, which means a drop in sales by 16% as compared to the preceding year. Construction and assembly services accounted for 98% of the said revenue. The Company's EBIT in 2016 was PLN 38.6 million as compared to PLN 40.8 million in 2015, down by 5%. In 2016, EBITDA was PLN 49.4 million and decreased by 2% as compared to The net profit for 2016 totalled PLN 35.1 million and dropped by 2% year-on-year. In 2016 foreign capital accounted for 81.6% of the company s funding, much like in the prior year. The funding structure has virtually not changed over the past few years. 103

104 Key data (PLN 000) Change in percentage terms '16 vs '15 Assets Non-current assets % Current assets % Total assets % Equity and liabilities Equity % Provisions for liabilities % Long-term liabilities % Short-term liabilities and accruals % Total equity and liabilities % Profit and loss account Revenue % Domestic sales % Foreign sales Construction operations % Other operations % EBITDA % EBIT % Net profit/loss % Other data Net debt % Debt/Balance sheet total 81.6% 82.0% 80.2% -0.5% Capital expenditure/revenue 1.0% 1.6% 1.3% -38.7% 104

105 Sales by operation type 2016 Sales by geographical region type % 1% 98% 99% Revenue from construction and assembly Revenue from other services Domestic sales Foreign sales Revenue from sales of goods and materials EBITDA, EBIT, net profit/loss in (PLN million) EBITDA EBIT Net profit/loss

106 Mostostal Zabrze Group The Mostostal Zabrze Group originates from 1945, when it was incorporated under the name of Przedsiębiorstwo Budowy Mostów i Konstrukcji Stalowych Mostostal in Kraków. In 1951, independent enterprises called Mostostal were separated, located in Zabrze, Poznań, Piotrków Trybunalski and Warsaw. The same year, Samodzielne Przedsiębiorstwo Mostostal in Zabrze was established under the name Zjednoczenie Montażu Urządzeń Przemysłowych in Zabrze. In 1958, its name was changed again to Śląskie Przedsiębiorstwo Konstrukcji Stalowych i Urządzeń Przemysłowych Mostostal in Zabrze. On 1 November 1992 the enterprise was privatised and Mostostal Zabrze - Holding S.A. joint-stock company was incorporated. Two years later, it had its IPO on the Warsaw Stock Exchange. In 2013, its name changed to Mostostal Zabrze S.A. The company operates in four segments: construction and assembly, machinery construction, general construction and engineering, design and engineering services. Projects performed in 2016: construction works under the pyrometallurgy modernisation programme at Huta Miedzi Głogów and delivery of a waste heat boiler for Huta Miedzi Głogów I system with the fluidised-bed furnace at KGHM Polska Miedź S.A. construction of a metal components production hall with office, social and auxiliary facilities in Ropczyce for Aero Gearbox International Poland Sp. z o.o.; works contracted by Polimex Projekt Opole Sp. z o.o. under Construction of Power Units no. 5 and 6 in Elektrownia Opole S.A. ; shell and road construction along with external infrastructure in GEMINI PARK TYCHY shopping mall saw a 4% y-o-y revenue growth in the Mostostal Zabrze Group. o Construction operations accounted for 73% of the Group s revenue in 2016; 63% came from production and assembly, and 68% of the total revenue was generated in Poland. EBIT for 2016 was negative and amounted to PLN million. The Group incurred a net loss of PLN million, which denotes a decrease in performance; in 2015, it had generated a profit of PLN 2.5 million. 106

107 Key data (PLN 000) * Change in percentage terms '16 vs '15 Assets Non-current assets % Current assets % Assets held for sale % Total assets % Equity and liabilities Equity % Provisions for liabilities % Long-term liabilities % Short-term liabilities and short-term accruals % Liabilities directly related to assets held for sale no data Total equity and liabilities % Profit and loss account Revenue % Domestic sales % Foreign sales % Construction operations % Other operations % EBITDA % EBIT % Net profit/loss % Other data Net debt % Debt/Balance sheet total 57,6% 51,0% 50,8% 13.0% Capital expenditure/revenue 1,8% 1,2% 2,2% 50.4% Market capitalisation % 107

108 Sales by geographical region type % 68% Domestic sales Foreign sales EBITDA, EBIT, net profit/loss in (PLN million) EBITDA EBIT Net profit/loss

109 Mota-Engil Central Europe S.A. Mota - Engil Central Europe S.A. is among the largest construction companies operating in Poland. It was established through the merger of two Polish enterprises, namely Krakowskie Przedsiębiorstwo Robót Drogowych S.A. (KPRD) and Przedsiębiorstwo Budowy Mostów w Lubartowie Sp. z o.o. (PBM), which had been present on the local market since Today, Mota-Engil Central Europe is a strong construction company drawing on more than 60 years' Polish tradition in road and bridge construction and specializing at the same time in the construction of buildings and facilities, railways and in power engineering. Additionally, it has a mine in Górka Sobocka, where high quality aggregate is extracted for sale. Mota-Engil Central Europe has built hundreds of kilometres of motorways which are of crucial importance to Poland, including A4, A2 and the S11, S17, S5 and S3 expressways, a ring road in Nysa and Odra- Widawa channel, residential and public utility buildings or electric power stations. Acting as the general contractor on the major construction projects in Poland, Mota-Engil Central Europe cooperates with hundreds of local businesses. In 2016, revenue generated by Mota-Engil Central Europe S.A. amounted to PLN 787 million, i.e. PLN 163 million less than in Revenue from construction services accounted for almost 97% of its total revenue in The remaining portion was generated from sales of materials and products (aggregate and mineral asphalt mixtures). The road and railway construction segment was the source of over 75% of the total revenue. In 2016, EBITDA exceeded PLN 20 million as compared to more PLN 35 million a year before. EBIT amounted to PLN 9 million vs. more than PLN 7 million in In 2016, the company reported a loss of PLN 12 million as compared to a profit of PLN 4.5 million in the preceding year. At the end of 2016, the order portfolio amounted to PLN 1.4 billion and the total contract value approximated PLN 2.5 billion. Gross investments in non-current assets neared PLN 30 million. In 2016, the headcount approximated 1,250 people and was about 3% lower than in the prior year. The company has substantial equipment resources, a network of bituminous material production facilities as well as its own boarding and scaffolding division. In 2016, production of mineral asphalt mixtures exceeded 4,000,000 tons, denoting a year-on-year growth by ca. 17%. 109