For Metrostav, the Czech Republic’s leading tunnel construction company, an end to Prague’s metro system might at first glance seem to be the end of the line. Once part of Vodni stavby, now another large independent construc-tion firm, Metrostav is actively seeking new construcconstruc-tion work that has little to do with tunnels – and in some cases, nothing to do with transportation.
Even so, it will still likely garner most of its revenues from transportation-based construction projects. If the country’s transportation networks de-velop in the way Metrostav hopes they will, the firm should be busy indeed.
Metrostav is best known as the general contractor for Prague’s metro system. Between 1989 and 1992, Metro and other underground construction (Prague’s massive Strahov Tunnel) accounted for between 90 and 95% of the firm’s revenues. Beginning in 1993, however, that share fell to 40%, as the firm branched out into other phases of construction: reconstruction of historical monuments; a residential building complex in suburban Prague; a series of gasoline stations; the Zelivka waterworks; and a wastewater treat-ment plant in Cesk´y Brod, among others. In 1994, Metrostav completed the Western end of Prague’s metro line B on schedule. Five new stations were added to the existing 41. The Eastern end of the same line will be completed in 1997. “This line was very difficult to finance,” according to a company official. “During the Communist years, our government allocated Kˇc1.5–2.0 billion for metro construction. In 1991, the government said it will only pay Kˇc1.1 billion.” An international $250 million bond issue by the city of Prague helped Metrostav make up the shortfall: the city allo-cated about Kˇc1 billion to metro construction. Other projects included the reconstruction of a printing works, refurbishment of a large soccer stadium, a solid waste landfill, and a water supply system for a small South Moravian city. At year’s end, revenues from Prague-related construction had increased by 35% versus 1993.
“Branching out” is a Metrostav watchword. Since 1992 a principal goal in Metrostav’s basic business strategy has been to cast its geographical net wider: in 1994 offices were opened in Plzeˇn (West Bohemia), Brno (South Moravia), and Liberec (North Bohemia). Activities outside the capital city are forecast to grow by 30% annually, but that figure will not be reached eas-ily. Metrostav faces stiff competition in South Bohemia and North Moravia, and it is not very active in those regions. This is a disadvantage, since North Moravia offers huge potential in heavy industrial and environmental construction, the very sectors which Metrostav is trying to branch into.
The next priority for the metro system will be the extension of line C (IVC) north from Holeˇsovice. Construction plans to serve Prague’s 150,000-strong North Town community await final approval by city hall. (North
Town is currently linked to the metro system only through buses and “one very bad tram.”) A Metrostav official appears sanguine about completing the line by 2000, even though financing has not been lined up: “Financing is a question for the government, not for us.” Perhaps.
In anticipation of winning any prospective tender from the Ministry of Transportation, Metrostav founded a 10-firm consortium for the reconstruc-tion of the Czech porreconstruc-tion of the Berlin-Prague-Vienna railway corridor in 1993. (The consortium, called Koridor, includes Sudop Praha, Sudop Brno, ZPSV Uherskv Ostroh, Tˇrinesk´ˇ e ˇzelez´arny, ˇZS Brno, ˇZelezni˜anıı stavitelstv´ı Praha, Elektrizace ˇzeleznic Praha, AˇZD Praha, and Posemstav Brno – an illustrious collection.) The cost for reconstructing the line will top Kˇc25 billion, making it one of the largest construction projects in the country.
Metrostav’s prescience was rewarded. In 1994, talks on refurbishing the line began in earnest, and financing from the EBRD and Japan’s ExImbank was secured. On behalf of state-owned Czech Rail, government guarantees were obtained as well. Although no tender has been announced yet, terms should soon be made public.
Metrostav got a boost from the government in late 1994 when parlia-ment passed a new law giving domestic companies an edge in bidding for government-financed projects. The law says,ceteris paribus, a domestic firm can bid up to 10% more for, say, a construction project than a foreign com-pany and still win the tender. (This is, however, sauce for the goose: other domestic construction firms will have the same advantage.)
Like haircuts (the classic example of a non-tradable good), construction services often do not travel well across borders. In the case of construction, however, the reason is due mostly to politics, not the sedentary nature of the company. Metrostav is very price competitive, and has bid aggressively on projects in Germany and Austria. But the firm simply cannot obtain ap-proval from government authorities to participate in their countries. Unable to obtain work permits in Germany, the firm watched the koruna volume of foreign work in 1993 drop by 50%, to only Kˇc42 million. Prospects for 1994 looked better: Metrostav bid on 29 new foreign projects, 18 in Germany alone. But only a small delivery of steel halls were made to Vietnam; the remaining bids were lost.
Rejection, particularly in EU countries, can take the form of refusing to grant a permit for construction work, keeping out construction workers based on artificially low labor quotas, or not allowing the firm to bid at all.
The result is the same: at a time when they have a distinct competitive advantage on price due to low labor costs, Metrostav (and most other Czech and Slovak construction companies) must bide their time, waiting until the Czech Republic joins the EU or their bids become less aggressive.
Metrostav is one of the five largest construction companies in the Czech Republic, and third in terms of turnover. In 1994, the firm had sales of Kˇc4.213 billion. Metrostav forecasts sales of construction work of Kˇc5 billion in 1995; Kˇc1 billion from Metro construction, Kˇc500 million from the Strahov Tunnel, and the remainder from other construction work. Analysts are more circumspect, forecasting sales of Kˇc4.668 billion. But despite an increase in materials costs of 35% and contracted services of 30%, the firm will squeeze more profits out of every koruna of construction work: earnings should grow 37% from 1995 to 1997. Increases in materials costs are forecast to fall to 15% between 1995 and 1997; subcontracting costs should increase 30% in 1995, before falling to 5% per year in 1996 and 1997. Metrostav wants to use subcontractors as sparingly as possible. Once these high increases in variable costs are pared, operating profits should improve.
The construction market in the Czech Republic is growing by 7% per year, about twice as fast as GDP growth. Several market trends are iden-tifiable: increasing competition among large construction firms will squeeze margins; low margin work will be subcontracted out to smaller firms; financ-ing terms are becomfinanc-ing an increasfinanc-ingly important part of project work; and the industry will experience some consolidation through mergers and acqui-sitions. Metrostav is well placed to successfully navigate these changes. The firm’s low level of debt (debt/equity ratio of 25% in 1994) allows it flexibility to increase debt when needed, either to finance new acquisitions (for a push into new regional markets) or to fund other current activities. Metrostav has proved that it can bid aggressively, particularly in non-transportation-related projects.
The firm employs 3,500 people, down from 5,300 in 1989. About 70%
are employed in the field. Metrostav has 10 divisions, all of which operate around a central headquarters based in Prague. Personnel expenses and related costs are growing about 5% per year. Privatization funds own almost 60% of Metrostav shares. Individual and corporate shareholders (domestic and foreign) hold about 32%. Other shareholders include the city of Prague, the National Property Fund, and employee shareholders. The firm was one of the most sought-after shares in the second wave of voucher privatization, and given its performance and future prospects, all brokerages and analysts rate the share a “buy.”
Metrostav Exhibit 1. Balance sheets (in thousand Czech korunas).
1994 1993
Total Assets 1,876,296 1,566,989
Fixed assets 555,335 513,900
Intangible fixed assets 5,581 11,084
Tangible fixed assets 461,769 429,121
Financial investments 87,985 73,695
Intercompany shares and group ownership interests 32,860 18,570
Other financial investments 55,125 55,125
Current assets 1,312,585 1,050,213
Inventory 79,417 112,866
Past due receivables 27,319 19,900
Receivables 705,640 741,078
Financial assets 500,209 176,369
Other assets 8,376 2,876
Total liabilities 1,876,296 1,566,989
Equity 635,973 604,898
Registered capital 475,589 475,589
Own shares (7,171)
Capital funds
Funds created from net profit 53,902 50,559
Profit (loss) from previous years 61,160 11,905
Profit (loss) from current period 52,493 66,845
Liabilities 1,220,826 934,010
Legal reserves 40,625 13,826
Other reserves 20,810 1,100
Overdue payables
Current payables 1,001,406 636,661
Bank loans and other debt 157,985 282,423
Long-term loans 157,985 107,423
Short-term loans 175,000
Other liabilities 19,497 28,081
Metrostav Exhibit 2. Income sheets (in thousand Czech korunas).
1994 1993
Revenues from merchandise 2,183 1,907
Cost of goods sold 2,102 327
Margin 81 1,580
Production 4,102,421 3,227,353
Revenues from products and services 3,972,448 2,532,673
Change in inventory 96,552 643,233
Capitalization 33,421 51,447
Production consumption 3,271,621 2,487,412
Added value 830,881 741,521
Personnel expenses 558,075 530,285
Taxes and fees 13,028 8,770
Other operating revenues 53,193 88,961
Other operating expense 49,200 104,163
Depreciation of fixed assets 89,453 69,961
Reserves, adjustments, and accruals 9,481 25,884
Additions to reserves, adjustments, and accruals 56,216 1,100 Transfer of operating revenues
Transfer of operating expenses
Operating profit (loss) 127,583 142,087
Financial revenues 43,642 100,340
Financial expenses 62,404 120,734
Adjustments to financial revenues Adjustments to financial expenses
Transfer of financial expenses 3,270
Profit (loss) from financial operations (22,032) (20,392)
Income tax on ordinary income 45,604 50,622
Deferred income tax on ordinary income 6,836 5,122
Ordinary income 53,111 65,951
Extraordinary revenues 943 2,692
Extraordinary expenses 2,012 1,067
Income tax on extraordinary income (451) 731
Deferred income tax on extraordinary income
Extraordinary income (618) 894
Net income 52,493 66,845