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Case Analysis Project Risk, Communication and HR Management Poland's A2 Motorway Muhammad B Khan

1) Overview of the situation AWSA had won an exclusive concession to build and operate a major segment of the proposed A2 Motorway, the first private toll road in Poland. Gebicki had been hired by AWSA in October 1999, to secure a 242 million commercial bank loan as part of the projects 934 million total cost. The financial plan had undergone numerous changes since AWSA won the concession in 1997. Four months earlier, in February 2000, AWSA had chosen Credit Lyonnais and Commerzbank as joint lead arrangers for the bank financing. Although the banks had submitted a firm underwriting proposal, their commitment was subject to due diligence including a review of the underlying traffic forecasts and financial projections. In this meeting, the bankers had expressed concerns with the traffic forecasts, and indicated the deal might require an additional 60 million to 90 million of equity to cover certain pitfalls. Gebicki thought that any change at this point would entail difficult negotiations with the shareholders and could derail the entire concession. If the financing were not closed by July 29, less than six weeks away, the concession would expire. Prior to his recent meeting with the bankers, Gebicki had been convinced that the project structure was good and that the team undertaking the deal had effectively assessed, mitigated and allocated all of the major risks. But now, he knew they would have to revisit many of the key assumptions, particularly those related to the revenue and traffic forecasts.

2) Briefly state the four options facing Gebicki Option 1: Convince the bankers that their analysis was too pessimistic. As evidence, he Motorway. Option 2: Issuing additional bonds. Option 3: Use European Investment Bank (EIB) funds that expressed renewed interest in financing part of the A2 Motorway. Option 4: Pull altogether a new financing plan before the deadline. could point to the early results from the A4 Toll

3)

Recommend

an

option

and

explain

your

decision

(1-2

paragraphs) The best and the easiest option according to me would be to convince the banker that analysis was too pessimistic. Gebicki also thought that the recent Wilbur Smith analysis was probably too conservative as well. The reason why the Wilbur Smith study is too conservative is because they cut the revenue projections contained in the previous studies by as much as 50% just like the consultants before them. In fact, Wilbur Smith assumed a lower value of driver time, lower perceived vehicle operating costs, and higher speeds on alternative routes. The result was a 16% decline in revenue in 2002 and a 50% decline in 2022.

4) What are the major risks in this project? Have they been properly identified, assessed, and mitigated under the current structure? Political Risk: Poland is a former Soviet Union country where the state owns most of the businesses. Meanwhile, a critical risk that faced the project was that there were no previous privately financed projects in the country. There were no precedent regulations, and neither the

government nor the private participants had any previous experience. Due to the hyperinflation and governments deficit, analysing currency risk was also important. Market Risk: There were no prior projects in the country thus the traffic on the toll road was difficult to estimate. The reaction of the people may make toll collection impossible because Poland has been a welfare state for years and citizens are used to price control and subsidies, hence, paying for using a road may be an issue that public would not accept. Market risk was mitigated by engagement with the repeatable

international institute and hiring qualified contractors. Construction Risk: The construction risk was transferred by adopting a fixed price design and construction contract. Besides the operation cost was fixed contractually, AWSA remained responsible for heavy

maintenance

5) Who bears the major risks? What factors determine who should bear the major risks? (1-2 paragraphs) According to the case, Gebicki is the one who bears the major risk because of the following factors: Responsible to negotiate with the shareholders. Responsible to present better scenario to the financial bank in terms of revenue and the traffic forecast. Expiry of the concession

6) How should Wojciech Gebicki respond to the bankers concerns in June 2000? (1-2 paragraphs) Firstly, he should convince the bankers that their analysis was too pessimistic. Secondly, he should convince the bankers that the early results of the A4 Toll Motorway showed 80% of available traffic whereas bankers had considered Wilburs assumption for A2 at 50%. Lastly, he should respond to them saying that European Investment bank are willing to finance part of the A2 project.