KPMG FORUM. Quarterly contains articles written by KPMG experts in Poland who explore the challenges and problems arising in their daily work. kpmg.

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1 ISSN 2299/6206 KPMG FORUM Quarterly contains articles written by KPMG experts in Poland who explore the challenges and problems arising in their daily work. kpmg.pl nr

2 2 KPMG Forum Editorial office: KPMG Sp. z o.o. ul. Chłodna Warszawa T: F: Editor in Chief: Magdalena Maruszczak Supervising editor: Anna Gajewska-Płomińska Design studio: KPMG Sp. z o.o. kpmg.pl

3 KPMG Forum 3 TABLE OF CONTENTS Arbitrability of corporate disputes in Poland and Russia Michał Miedziński, Ruslan Kusov... 6 Organisation of the procurement process of the Advanced Metering Infrastructure System Maciej Chłodziński...10 Change of the Renewable Energy Sources sector structure in the light of the proposed new supporting scheme Piotr Wołoszczenko...13 CEE Property Lending Barometer 2013 Steven Baxted...17 Invest wisely Tomasz Wiśniewski, Michał Urszulak... 21

4 4 KPMG Forum KPMG offices in Poland Warszawa ul. Chłodna Warszawa T: F: E: Kraków al. Armii Krajowej Kraków T: F: E: Poznań ul. Roosevelta Poznań T: F: E: kpmg.pl Wrocław ul. Bema Wrocław T: F: E: wroclaw@kpmg.pl Gdańsk al. Zwycięstwa 13a Gdańsk T: F: E: gdansk@kpmg.pl Katowice ul. Francuska Katowice T: F: E: katowice@kpmg.pl Łódź al. Piłsudskiego , Łódź T: F: E: lodz@kpmg.pl 2014 KPMG Sp. z o.o., a Polish limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

5 KPMG Forum 5 Experts contributing to the issue 1/2014 Michał Miedziński Ruslan Kusov Maciej Chłodziński Piotr Wołoszczenko Steven Baxted Tomasz Wiśniewski Michał Urszulak kpmg.pl youtube.com/kpmgpoland twitter.com/kpmgpoland facebook.com/kpmgpoland

6 6 KPMG Forum Legal Arbitrability of corporate disputes in Poland and Russia Arbitration is an acknowledged and widely-used method of settling business disputes. To some extent arbitration provides a more flexible and efficient dispute resolution framework than the recourse to state courts; it also ensures privacy, which in certain cases may be essential for the parties. Furthermore, arbitration enables parties to choose the place of dispute settlement, language of the procedure and composition of the adjudicating panel (especially in an ad hoc arbitration). However, as it is often the case, domestic legislation may limit the possibility of arbitrating certain types of claims. As a rule, such constraints are officially designed to provide stability in areas of law, in which private dispute resolution is not considered sufficiently reliable. This line of argument is often applied to corporate relationships, i.e. particularly conflicts between shareholders and the company or its management. Both Russia and Poland are nowadays among top destinations for foreign direct investments. To carry out business effectively on a cross border basis, foreign investors must e.g. pay attention to the local rules of resolving corporate disputes. Are such disputes arbitrable in Russia and Poland? The analysis of the respective regulations and related court practice is given below. Poland Polish arbitration law underwent significant reform in The new frameworks set forth in the Code of Civil Procedure (CCP) were based on the (1985) UNCITRAL Model Law on International Commercial Arbitration. The amended CCP provided e.g. for the possibility of arbitrating disputes in corporate matters. Article 1163 CCP clarified that the arbitration clause concerning disputes arising out of company relationship, included in the articles of association of the company, is binding on the company and the shareholders. The above provision gave rise to a view that Article 1163 implicitly defines all corporate claims as arbitrable. This opinion was not universally accepted however. In 2009 the Polish Supreme Court explained that corporate disputes could be arbitrated on condition that they met general arbitrability criteria set forth in Article 1157 CCP (Resolution of 7 May 2009 r.; III CZP 13/09). According to the Supreme Court, Article 1163 has

7 Legal KPMG Forum 7 only technical meaning, i.e. sanctions the arbitration clause in the articles of association, i.e. not necessarily in the arbitration agreement. Inconveniently, the interpretation of Article 1157 CCP proved to be debatable too. This provision says that, unless otherwise determined by law, parties can refer to arbitration any disputes concerning property rights and/or non-property rights, in which parties can amicably reach settlement in court, except for alimony matters. A question was raised whether the possibility of an amicable settlement in court (i.e. entering into an agreement on resolving a dispute subject to the conditions agreed by the parties) only refers to non-property rights or to any rights in general. Apparently, one could make a case for either interpretation. The above uncertainty is not an academic one if one looks e.g. at resolutions of the shareholders meeting, which are the major cause of corporate disagreements. Arguably, since any such conflicts concern the company as a whole, i.e. shareholders investments, they could be viewed as at least indirectly property-related. On the other hand this generalization seems overly-simplified. It is not possible to understand and properly define the nature of a dispute without looking into the object of a resolution. This would mean that matters concerning resolutions, which are not per se property-related, must not be arbitrated. Other important considerations are associated with amicable settlement as a construct of law and as mentioned above an underlying condition for arbitrability of disputes. Some commentators argue that the majority of disputes concerning shareholder resolutions could not be settled amicably and, for this reason, must not be considered arbitrable. First, they claim, an amicable settlement re. resolutions would affect the majority rule principle, because it could deprive the majority shareholders of the right to decide policy of the company and weaken their position vis-à-vis the minority shareholders (a settlement reached with minority shareholders challenging a resolution would, in fact, cancel the vote of majority shareholders that caused the resolution to be adopted). Second, the management board has basically no authority to interfere with the extent to which valid shareholders resolutions are to be carried out. It is rather, supposed to put them into effect. Third, any amicable settlement as to the validity of deliberations could be unlawful because no one can validate an act in law that is null and void by definition. Apart from doubts regarding the arbitrability criteria laid down in Article 1157, there are controversies concerning the relation between CCP and other laws. The main question is whether arbitration might be an option in disputes coming under jurisdiction of registry courts. Such conflicts generally fall into one of the following categories: a) those concerning registry entries, e.g. regarding the company incorporation or share capital increase and b) conflicts referred to registry courts based on the provisions of company law, e.g. re. authorization from the registry court to sell shares of a company, to hold the meeting of shareholders etc. While the provisions of the company law governing the Both Russia and Poland are nowadays among top destinations for foreign direct investments. To carry out business effectively on a cross border basis, foreign investors must e.g. pay attention to the local rules of resolving corporate disputes.

8 8 KPMG Forum Legal competence of registry courts suggest that matters referred to these courts cannot be arbitrated, Article 1157 CCP implies a contrary view. In general, Polish legislation is poised for facilitating arbitration of corporate disputes. However, the relevant provisions of CCP are limited in scope and lack specificity. At the same time, little is known about the arbitral awards issued in corporate matters, because most parties seek the privacy and confidentiality of the arbitral process. While, therefore, shareholders may submit their disputes to arbitration under the relevant provisions of the articles of association, they must take careful account of the above circumstances to avoid uncertainties in the operation of the arbitration clause Russia According to the Commercial Procedure Code of the Russian Federation ( RF CPC ) 1, a dispute can be referred to arbitration unless otherwise is stated by federal law. However, Article 33 of the CPC Russian establishes special jurisdiction of Russian state commercial ( arbitrazh ) courts which includes, inter alia, corporate disputes. Moreover, pursuant to Article 38 of the RF CPC, all corporate disputes fall within the exclusive jurisdiction of the commercial court at the location of a company. The list of corporate disputes to be subject of special jurisdiction set out in Article of the RF CPC is not exhaustive and includes, inter alia, disputes connected with the establishment, reorganisation or liquidation of a legal entity; disputes connected with the ownership of shares; disputes related to the appointment (election), termination or suspension of management bodies; disputes involving claims by founders, participants or members of a legal entity seeking reimbursement of damages. The direct literal interpretation of the respective provisions of the RF CPC gives no answer whether they exclude per se the possibility of corporate disputes to be triable in an arbitration tribunal. The problem of arbitrability of corporate disputes was reviewed by 2 highest court instances in and so far these court rulings form the basis for enforcement of the respective provisions of law in Russia. Both rulings relate to Mr. Maximov vs. NLMK case 2 regarding payment of RUB 9,5 billion under an SPA for the sale of JSC Maxi-Group shares transferred to NLMK. The case was initially tried in the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (the RF ICAC ) as it was agreed by the parties in SPA. In its decision the RF ICAC partially awarded Mr. Maximov s claim. However, NLMK filed an application to the state commercial ( arbitrazh ) court trying to set aside the award of arbitral tribunal. The commercial courts of several instances stated that the dispute considered by the RF ICAC was not arbitrable due to the fact that it was connected with questions of the title to such shares, corporate governance and the conduct of the additional issue of shares. Finally, the Supreme Commercial Court of the Russian Federation (the RF SCC ) in his ruling dated 30 January 2012 No.15384/11 upheld the position of lower instances and denied to refer the case to the Presidum of RF SCC. Among other grounds, the RF SCC stated that corporate disputes stipulated by Article 33 and Article of the RF CPC are not arbitrable. Mr. Maximov also filed a claim to the Constitutional Court of the Russian Federation arguing the compliance of Article 33 of the RF CPC with the Constitution of the Russian Federation, particularly his guaranteed right for protection of his rights and liberties by all legal methods. The Constitutional Court of the Russian Federation denied the claim and indicated in its Ruling dated 21 December 2011 No.1804-O-O that Article 33 and Article of the RF CPC do not limit the right for court protection but specify the certain forms of such protection. As a result, according to the existing court practice corporate disputes are not arbitrable in Russia. However, provided that the problem was not considered by the Presidium of the RF CPC (only its rulings are binding upon commercial courts) and that the Constitutional Court of the Russian Federation in its ruling did not directly indicate that corporate disputes are not arbitrable, it is possible that this question may be raised again in future cases and resolved differently. 1 Para 6 Article 4 of the RF CPC 2 Novolopezk steel mill

9 Legal KPMG Forum 9 Michał Miedziński Of Counsel in Law Office D.Dobkowski sp.k., associated with KPMG in Poland 2000: Warsaw University, Faculty of Law and Aministration, master s degree in law 2000: Warsaw School of Economics, International Business and Political Relations, master s degree in economics 2005: Legal Advisor (Attorney at Law), Member of the Regional Bar of Legal Advisors in Warsaw Michał Miedziński joined D. Dobkowski Law Office in His earlier experience included work in audit, advisory and law firms. Michal provides legal advice in company and securities matters, with an emphasis on M&A, joint venture and financing transactions. He was engaged in many advisory projects carried out for financial institutions and provided guidance on regulatory issues. Michał has extensive experience in litigation and arbitration. He represented clients in court and arbitration proceedings on a variety of business matters. He also counselled companies and individuals in penal, administrative and insolvency proceedings. Ruslan Kusov Senior Legal Consultant, Legal Services KPMG in Russia PhD in Law from the Russian State Tax Academy (law faculty) Ruslan joined KPMG in 2008 and started his career as tax consultant in International Corporate Taxation group. Starting from 2009 Ruslan is a member of KPMG Legal team. Ruslan specialises in the areas of corporate law, civil law, bankruptcy law, legal due diligence Ruslan s professional experience includes: transaction support, agreements drafting; general corporate and M&A issues; legal due diligences, drafting LDD reports (corporate, contractual, compliance issues); legal opinions preparation, including opinions in the field of contract and corporate law. Ruslan s recent projects include: due diligence of stock exchange and its group companies; due diligence of the major Russian non-state pension fund; drafting of the shareholders agreement for the joint venture under English law; due diligences of a leading Russian tour operator and tourist agency; a number of due diligences for the leading Russian oil company; memoranda on certain bankruptcy issues; memoranda on corporate matters.

10 10 KPMG Forum Advisory Organisation of the procurement process of the Advanced Metering Infrastructure System Implementation of the Advanced Metering Infrastructure (AMI) may in a significant manner change the so-far practiced method of functioning of energy distribution companies. Currently, in connection to the executed activity, such companies possess limited competences which enable for the implementation of the system, which requires the combination of skills not only from the scope of the power supply industry but also IT and telecommunications. As a consequence operators should broaden their competences within areas which so far had not constituted the main scope of their business activities, or should initiate cooperation with other entities (which stem from their equity group or with outside companies). The important challenges that have to be faced by the companies willing to implement the AMI system include the selection of the tendering approach for the purchase as well as respective planning and organisation of the AMI implementation process. The Advanced Metering Infrastructure System consists of the two main layers: The measurement layer, which is constituted by the electricity consumption meters and in the case of PLC transmission, concentration devices which allow for the collection of measurement data from meters as well as for their transmission to the remaining sections of the AMI system; Central AMI application i.e. IT system responsible for gathering and storing measurement data. The central application communicates in both directions with the measurement layer which allows for the collection of data from electricity meters as well as allows for the execution of management and maintenance activities. Moreover, the system is equipped with the function allowing for the making measurement data available in other systems (for instance in the billing system). In practice two general approaches for the purchase procedure for the AMI system are possible. The first one assumes organisation of a single tender procedure for the delivery of the whole AMI system, which is constituted by both the meter infrastructure as well as for the purchase of the central application. The second approach introduces two separate and independent tender procedures which results in greater complexity in its execution. Despite the fact that the first one is simpler both models present drawbacks as well as advantages. Organisation of a joint tender and therefore the choice of the single supplier responsible for the delivery of both the central application as well as the meter layer (i.e. the so called turnkey solution) could introduce the following benefits: Less complicated contract management considering one relation with the contractor;

11 Advisory KPMG Forum 11 Responsibility for the operation of the whole system, including integration of both layers of the AIM remains with the same contractor. The aforementioned method has been exploited amongst others in Scandinavian countries. The goal of dividing the tender procedure to two or more sections, constituted by the purchase of central application separated from the purchase of metering infrastructure, is to ensure maximum competition amongst the meter suppliers during further phases of AMI roll-out. What should be observed is the fact that the division of the purchase process may impose difficulty in unambiguous determination of responsibility for the integration of the whole system. In fact it might be necessary that the distribution company assume this portion of responsibility. Moreover, adoption of aforementioned approach may result in a more difficult contract management considering necessity to maintain parallel contractual relationships with a number of contractors. This could result in a more difficult co-ordination of works and the timelines of their execution is dependent upon the engagement of more than a single contractor. So far, the aforementioned type of approach was applied by large European operators of electricity distribution networks. It is difficult to execute considering the need to integrate elements supplied by various contractors, nevertheless adoption of such approach allows to obtain competences indispensable for the execution of further works in connection to the development of the system. Execution of the project with the application of the described model may also be connected to greater costs for the ordering entity within the initial phase of the project, nevertheless adoption of such a solution may introduce measurable benefits during further phases of the system development. The choice of optimal approach to the AMI procurement procedure requires detailed analysis as well as determination of goals, which the organisation implementing the Advanced Metering Infrastructure aims to achieve. Therefore the approach adopted with regards to pilot programmes could be different from the approach adopted with regards to large scale implementations. The second key challenge faced at the initial stage of implementation of the AMI system is constituted by the adequate planning and organisation of the process of implementation. Thisrefers to the need of identification of the most important tasks which are to be achieved as well as to their schedule and to the associated budget requirements. The plan of the implementation of tasks should translate to the adequately chosen structure of the project design team, which takes into the consideration competences within the scope of the measurement layer, telecommunications as well as the IT system. Generally, the process of implementation of the AMI system encompasses the four main tasks: Implementation of an IT system (including the central application, also including the integration of the aforementioned application with the measurement layer as well as with other systems); Installation and deployment of the metering layer; Change management within an organisation; Communication (including PR activities). Implementation of the IT system should be started from the elaboration of initial documentation, which shall determine all assumptions and requirements connected to further The choice of optimal approach to the AMI procurement procedure requires detailed analysis as well as determination of goals, which the organisation implementing the Advanced Metering Infrastructure aims to achieve. Therefore the approach adopted with regards to pilot programmes could be different from the approach adopted with regards to large scale implementations.

12 12 KPMG Forum Advisory implementation. Apart from the elaboration of documentation at this phase the ordering entity shall be also engaged in the execution of all indispensable works, associated for instance, with data cleansing or integration of the existing systems to be applied in the process of cooperation with the AMI system. Further important activity is constituted by the installation and start up of the layer of measurement devices. What should be underlined is the necessity of co-ordination of deadlines of installation of meters with the schedule of the installation as well as start-up of the central application. The next step is the the implementation of organisational changes resulting from introduction of AMI system, which shall change the operational processes of the distribution company as well as of the other entities for instance the users of electricity consumption data. This will require redesign of the business processes. These processes should be then introduced within an organisation so that as of the moment of the start of the AMI system they could successfully and effectively be performed. Thus in the process of implementation of AMI system one should focus on communication both inside as well as outside of the implementing organisation. The first type of communication is important because the implementation of intelligent meters changes the business activity of the company. Project success to a great extent will be determined by the attitude of employees with regards to the changes being implemented. Employees must be aware of the goal of the implementation of the AMI system along with the communication of the changes that should be expected within the operation of the company. Moreover, if employees are well informed about the essence of the operation of the AMI system, they Maciej Chłodziński Senior Manager in Entrepreneurship Advisory Department KPMG in Poland Maciej has over 14 years of professional experience in advisory for companies from the sector of communication and media, energy and transport. He specialises in implementation projects as well as regulatory aspects and strategies of operation on regulated markets. He managed a number of large projects for Polish as well as for foreign based clients. Thus in the process of implementation of AMI system one should focus on communication both inside as well as outside of the implementing organisation. may become ambassadors of the new solution outside the organisation. Internal communication executed within the company should also be combined with workshops and training sessions, which would allow all employees to understand how the AMI system works and in what direction should they broaden their qualifications so that to be able to meet the new challenges connected to, for instance with maintenance and development of the central application. The intention of workshops and training sessions is to minimise the inevitable distractions to work, which could take place in the process of implementation of such far reaching changes within the business operation of the company. To summarise what should be underlined is the fact that the implementation of the AMI system within companies operating within the power supply industry is a highly complicated process. Amongst others this translates to the necessity of execution of a thorough analysis of advantages and disadvantages of various options of conveyance of the public tender procedure depending on the situation, which is currently characteristic for the operator as well as depending on goals which the operator is willing to achieve. Considering the character, the implementation of the system of intelligent measurement constitutes a long process with its scope encompassing both the implementation of an IT system as well as the start-up of a intelligent metering layer. Considering the above it is required to ensure that the plan of the execution of works has been thoroughly prepared along with ensuring adequate structuring of an interdisciplinary project team, which shall consists of both technical experts within the scope of particular tasks as well as managers characterised by the high efficiency in the execution of project design tasks.

13 Corporate Finance KPMG Forum 13 Change of the Renewable Energy Sources sector structure in the light of the proposed new supporting scheme Renewable Energy Sources sector in Poland The Polish sector of Renewable Energy Sources ( RES ) is one of the most dynamically developing sectors of the economy in the last few years. Partially its a result of the Kyoto Protocol ratified by Poland, implemented by the European Committee decree on energy and climate policy, which imposed upon all member countries the so-called obligation of 3 x 20% i.e. lowering until 2020 emission of greenhouse gasses by 20%, reaching 20% of electricity production from renewable sources as well as achieving a 20% increase in the effectiveness of generated energy 1. The aforementioned obliged the national authorities to implement applicable procedures, which on one hand would encourage entities to invest in the RES industry (thus in a positive manner influencing economical growth) and on the other would introduce tools allowing to monitor stage of the new installations development in the sector with respect of accepted in the decree obligations. In order to fulfil adopted by Poland obligations the supporting scheme for RES producers has been introduced, based on the so-called green certificates system (transferable property rights received by the green energy producers for each MWh generated, which as the consequence constitutes an additional source of revenues). The introduced RES scheme, supported with the series of procedural facilitators within the scope of development and construction of the green sources (amongst others the priority in connecting to the grid, reimbursement of 50% of the connection costs until 2011, etc.) has resulted in the fact that not only local utilities, but also strategic and financial investors from other EU countries as well as from all around the world located funds into green energy projects in Poland. Current supporting scheme RES supporting scheme based on green certificates in its current form is based amongst others upon the novelised Energy Law Act dated 10 th April 1997, with small amendments introduced with the Act dated 8 th January 2010 on the change of the Energy Law, as well as upon the Decree issued by the Minister of Economy dated 14 th August Apart from the green certificates based support, the system introduced minimum price of electricity per MWh generated in green sources (announced every year by the President of the Energy Regulatory Office), as well as imposed upon all energy entities obligation to produce determined amount of electricity from RES, which afterwards was confirmed on annual basis by the number of redeemed green certificates.

14 14 KPMG Forum Corporate Finance The introduced RES scheme, supported with the series of procedural facilitators within the scope of development and construction of the green sources (amongst others the priority in connecting to the grid, reimbursement of 50% of the connection costs until 2011, etc.) has resulted in the fact that not only local utilities, but also strategic and financial investors from other EU countries as well as from all around the world located funds into green energy projects in Poland. At the same time considering the fact that the RES sector was within the initial phase of development and the introduced green certificates quota obligations assumed intensive growth of the green energy production, the system allows for the green certificates replacement through settlement of the substitution fee. The amount of the substitution fee (announced every year by the President of the Energy Regulatory Office) in its form constituted the maximum value of the green certificate. The introduced scheme resulted in the intensification of RES projects development, nevertheless the scale and the direction of the sector growth were divergent from the assumed within the projections of the Ministry of Economy growth scenarios and as a consequence threatened the execution of the Kyoto 2020 goal. The main reason of the aforementioned situation was utilization of aged and to vast majority already amortised large hydropower assets, as well as investments in co-combustion multifuel fired units, which with low level of required capital expenditures, allowed in a limited time to fulfil RES share obligations in the energy mix. The first attempts at the modification of the RES supporting scheme As a consequence actions aimed at the modification of the supporting scheme were undertaken, which resulted in preparation of the draft of new RES Act dated 26 th July 2012, which has been subject to further modifications within drafts dated 4 th and 9 th October Amongst the main modifications presented within the novelties there were: limitation of the support of RES to the period of 15 years from the date the project started to generate electricity (both with respect to the minimum guaranteed energy price as well as green certificates based support, but not longer than till 2035) and introduction of the so-called corrective coefficients (announced every 3 years for the period of further five years by the Minister of Economy), which indexed number of granted green certificates subject to applied RES technologies. The aforementioned procedure was aimed at the introduction of a simple tool that will multiply support for the most perspective and desired by the Ministry of Economy technologies (such as for instance off-shore wind farms and photovoltaic installations, which in accordance with the provisions of the draft dated 9th October would respectively receive 1,80 and 2,75 of green certificate for every MWh produced), and in parallel will reduce support for less important in technologies in terms of the final energy mix structure (e.g. biomass within co-combustion multi-fuel fired installations support at the level of 0,30 certificate in 2014). The proposed solutions have met with utmost recognition within the industry, nevertheless considering the character of modified RES supporting scheme structure it has generated doubts at the government level due to the costs side of the proposed support. This fact was partly driven by the neighbouring countries experience (i.e. the Czech Republic and Germany), which through the introduction of the preferential scheme especially with respect to photovoltaic installations, led to the establishment of the sector bubble and forced the government to quickly revise the structure of the supporting scheme. Additionally the situation has been complicated by the turmoil on Polish green certificates market at the beginning of 2013, where the 65% decrease in terms of value on y/y basis has implied the necessity to introduce modifications within the presented project of the new RES Act,

15 Corporate Finance KPMG Forum 15 with the aim to stabilise the current market situation and to avoid for the occurrence of similar turbulences upon the market in the future. The new proposal of RES supporting scheme, i.e. a 180 degree turn On the 12 th November 2013 the Ministry of Economy published a new draft of the RES Act, the main assumptions of which have been presented within the presentation dated 17 th September Despite the number of remarks and comments voiced by representatives of the industry (who had only foreseen a slight modification with regards the year 2012 proposal), the draft introduced a different supporting scheme based upon the auction type system. The key introduced parameter, which determined obtaining of the support has been set at the lowest price offered during the auction for the determined amount of MWh, which the installation operator obliges himself to deliver to the system for the period of not longer than 15 years, in certain intervals (from the date of the project will start to generate electricity) and at the predetermined price. Auctions are to be conveyed separately subject to applied RES technologies as well as the size of the installation (i.e. up to 1MW and above 1MW), based upon the prior completed projects pre-qualification procedure, which guarantee their start-up within the period of 4 years from the action winning date. Additionally for the needs of auctions, the President of the Energy Regulatory Office is to determine the reference price for given technology, which constitutes the maximum price, at which electricity generated by the auction winning installation will be purchased. In parallel the co-combustion multi-fuel fired installations (with the exclusion of the dedicated co-combustion installations) as well as biomass and hydropower units of the nominal capacity surpassing respectively 50MW and 1 MW will not be considered nor allowed to participate within auctions, With regards to the installations that are already in operation (or will become operational before the new RES Act will come into force), the assets owners are to be given the possibility to move from the green certificates based scheme to the auction system (in the period of the first 2 years). If the given installation remains within the green certificates supporting scheme, what shall be introduced will be the limitation of support to the period of 15 years (starting from the day electricity has been generated for the first time within the given installation). Additionally hydropower installations with capacity exceeding 1MW will be excluded from the support, whereas co-combustion multi-fuel fired units will be granted with limited support both in terms of volume (average for period) and value of electricity generated (0,5 of green certificate per each MWh produced). In order to avoid for any turmoil upon the green certificates market (alike those from the beginning of 2013), what is to be introduced is the power trading obligation (55% of certificates of origin in 2018 will have to be sold at the Polish Power Exchange, in case the assets operator does not possess long-term power purchase and green certificates purchase agreements), as well as the lack of possibility for the substitution fee settlement in case the price of green certificates at the Polish Power Exchange shall be lower than value of 75% of the aforementioned fee. The effect of the proposed by the Ministry of Economy solutions (which in contrary to the 2012 draft of the RES act, are fully supported by the government) is to be optimisation of support for the RES sector as well as selection of the most economically effective projects, and as a consequence stabilisation of the sector investment conditions which will guarantee fulfilment of the Kyoto 2020 goal. Who could benefit and who could lose potential consequences of the new RES act draft on RES sector structure? It seems that the introduced determinant of economical effectiveness will promote RES technologies with greater maturity upon the Polish market, thus at the same time shoving aside projects which are based on new type solutions but upon the earlier stage of advancement. As a consequence (having excluded hydropower installations as well as cocombustion multi-fuel fired units from the support) we could witness certain type of wind monopoly of the Polish RES market, which despite the execution and conveyance of separate auctions for particular RES technologies will still be the cheapest and the safest solution from the point of view of the Kyoto 2020 goal. On the other hand rapid growth of the wind energy installations (characterised by the significant daily and yearly productivity fluctuations), could impose a negative impact upon the safety of the country s electricity system thus implying necessity to maintain the reserve power in the system base load, which is based on stable (mainly coal-fired) sources. As the result of the modification of the current supporting scheme, striving towards promoting of the most effective technologies, will therefore the factual cost of implementation of adopted solutions will not be higher from the current level of support? The main factor for the further sector development will be determined by the Ministry of Economy in preferred RES mix structure, which on the other hand will require implementation of

16 16 KPMG Forum Corporate Finance acceptable, from the point of view of potential investors, level of reference prices set for the auctions. This will allow for technological and capital diversification within the sector, which will translate into increasing of chances of the Kyoto 2020 goal fulfilment and at the same time will relieve domestic entities from the requirement of fulfilling of obligations imposed upon Poland. The second important aspect of the further sector development will be determination of the final shape of the new RES Act as well as its introduction in such manner so that the currently persisting regulatory uncertainty period finally comes to an end. Thanks to the above what shall become potentially possible will be planning of investment actions within the 2020 horizon and beyond (and potential implementation/ modification of mechanisms supporting investments in the sector) as well as selection of the most effective projects among those participated in the auctions, which will allow for the new RES Act main goal execution, i.e. limitation of the cost side of the RES sector supporting scheme. Recently observed decrease in number of transactions in the RES sector has been driven mainly by the uncertainty with regards the future shape of the green energy sources supporting scheme. There had been transactions stemming from the adopted strategy of concentration upon key, from the point of view of the given entity, markets which resulted in disinvestments within selected regions (Vattenfall, Dong, Iberdrola). The other examples, with regards to entities only entering the market, shows that potential equity investments were frozen (till final version of the new RES act will be agreed) or relocated to other markets in the region. Summary The proposal of the new RES supporting scheme as well as the strategy with regards to the determination of reference prices adopted by the Ministry Piotr Wołoszczenko Associate in Mergers & Acquisitions - Energy and Natural Resources Team, Corporate Finance Group KPMG in Poland Joined KPMG Advisory in 2012 Has more than 6 years of experience in execution of projects associated with mergers and acquisitions of companies. For 6 years now specializes in the renewable energy sector, possesses abundance of experience within the scope of transaction advisory within the sector, including financial modelling, assets valuations as well as sensitivity analysis. Participated in number of successfully completed transactions within energy, fuel and construction sectors, acting on both sell- and buy-side throughout every stage of the transactions (starting from preparation of the project documentation, through the assets valuation, organisation of due diligence till negotiations of share purchase agreements). The proposed solutions have met with utmost recognition within the industry, nevertheless considering the character of modified RES supporting scheme structure it has generated doubts at the government level due to the costs side of the proposed support. of Economy shall be of key importance to the final technological and capital structure of the green energy sector. The sector advantage shall be obtained by the RES technologies which are mature upon the Polish market, with the lowest operational expenses level, which considering the project financing costs as well as the guaranteed 15 years supporting period, will be able to attain the acceptable, from the point of view of the equity provider, return on investments and will be able to continue assets operation following the auction guaranteed price period. This could lead to the limitation of the type of technologies applied as the consequence of which the given RES technology, considering the issue of the Kyoto 2020 goal fulfilment obligation could drive the other more cost consuming technologies out of the market. 1 The Kyoto 2020 goal connected with the share of RES in the final energy mix has been decreased for Poland to the level of 15% 2 The Decree on the detailed scope of obligations of attainment and presentation of certificates of origin which are to be terminated, settlement of the replacement fee, purchase of electricity and heat generated within renewable energy sources as well as the obligation for the conformation of data connected to the quantity of electricity generated within RES

17 Audit KPMG Forum 17 CEE Property Lending Barometer 2013 Despite the continuing effects of the global crisis, the CEE region is still a promising region in relation to real estate investments in Europe. In our survey of banks KPMG examined the banks opinions on financing of real estate investments in the CEE region. The surveyed countries were ranked based on the results considering how positive banks are towards financing real estate investments. While the survey continues to indicate a cautious approach to lending, Poland continues to be one of the favoured locations compared to other countries in the region and Poland continues to account for the majority of real estate investment. Overall prospects for banks real estate portfolios Compared to last year the level of interest of banks remained stable in Openness of banks to refinance loans coming due in the next 2 years Open Not open CZE HUN POL SVK ROM BAL SRB BUL CEE Property Lending Barometer 2013 CEE Property Lending Barometer 2012 Source: KPMG in CEE Property Lending Barometer 2013 relation to new lending and renewals of existing loans. On average approximately 15% of real estate loans are due in the next year and one-third are due in the next two years. Compared to 2012, the proportion of short-term loans decreased and the willingness to refinance loans due in the next 2 years slightly increased in most countries. Taking into account the country averages, we can conclude banks are reasonably open to refinancing. Opportunities for financing new real estate projects The majority of banks still consider the financing of income-generating projects as being more appealing than development projects. However, after a general setback in 2012, the overall openness to finance new developments increased this year.

18 18 KPMG Forum Audit Banks were asked about their preferred asset class in each country. Based on the regional average data, office is the most preferred asset class followed by industrial and retail. Lending in these segments is generally considered less risky assuming certain minimum pre-letting levels are reached. Similar to previous KPMG Lending Barometer surveys, the hotel segment clearly remains the least preferred. In order to successfully obtain financing for a project, banks stated a strong business model and high quality asset were the most important considerations. The level of equity and reputation of the developer/operator tied for second place. Banks were asked to spell out their technical criteria for financing. When questioned about loan-to-cost ratios, responses varied by country. In case of the more mature CEE markets, the loan-to-cost ratios for the office, residential, retail and industrial/logistics sectors were between 0.58 and In countries with a higher risk profile (i.e. Serbia), the ratio was slightly lower, ranging from 0.55 and Similar to last year, banks are still demanding high pre-let and presale ratios. The expected ratios vary greatly among countries and sectors. The Baltics exhibit the highest ratios on average, followed by Poland and Hungary. The pre-let ratios for the office and retail sectors are similar, ranging from 40 to 65%. In general, most industrial and logistic projects are built to suit specific tenant requirements, where the number of speculative developments is very low. Managing impaired Loans The combined impact of the global economic crisis and the Eurozone sovereign debt crisis has been detrimental to the financing of the real estate sector outside core markets, especially in the CEE region. The survey Openness of banks to finance development/ income-generating projects Less open More open POL SVK BUL ROM CZE HUN BAL SRB New developments 2013 Income generating properties 2013 CEE Property Lending Barometer 2012 CEE Property Lending Barometer 2011 Source: KPMG in CEE Property Lending Barometer 2013 Banks sector preferences in providing development financing by asset class ROM HUN CZE POL SVK BAL BUL % Office Industrial/logistics Residential Retail Hotel, resort Note: The longer the coloured bar, the more preferred the asset class is for the banks. Source: KPMG in CEE Property Lending Barometer 2013 The majority of banks still consider the financing of income-generating projects as being more appealing than development projects.

19 Audit KPMG Forum 19 The combined impact of the global economic crisis and the Eurozone sovereign debt crisis has been detrimental to the financing of the real estate sector outside core markets, especially in the CEE region. The survey considered banks opportunities to manage real estate loans where debtors cannot pay their capital and/or interest on time, or there is technical breach of contract terms. considered banks opportunities to manage real estate loans where debtors cannot pay their capital and/or interest on time, or there is technical breach of contract terms. Current state and future expectations for impaired loans Based on responses collected this year, the largest proportion of impaired real estate loans are in Hungary. This is followed by the Baltics and Bulgaria, while the highest proportion of fully compliant loans are in Poland, the Czech Republic and Slovakia. The provision levels for impaired loans are considered less than adequate in Hungary and Serbia, while they are considered adequate in Slovakia, Poland and Bulgaria. Czech and Baltic banks indicated moderately higher than adequate provisions. The level of loan provisions (loan value adjustments) is not expected to decrease significantly in any of the countries surveyed in the near future. However, a slight decrease is expected in the Baltics and in Slovakia. In all countries, most bank representatives think that a significant proportion of impaired loans may Proportion of impaired real estate loans per country % CZE POL SVK SRB BUL BAL HUN Regional Regional Regional Regional Fully compliant real estate loans average average average average Minor impairment Source: KPMG in CEE Property Lending Barometer 2013 Serious impairment Proportion of impaired real estate loans that may be managed successfully through restructuring SVK BAL SLV POL HUN SRB ROM BUL CZE % Source: KPMG in CEE Property Lending Barometer Regional average 2012 Regional average 2011 Regional average 2010 Regional average

20 20 KPMG Forum Audit be managed successfully through restructuring. Based on the results over the 4-year history of our surveys, it is clear that banks in the region are more inclined to manage their real estate portfolios through restructuring than looking for immediate foreclosure. The rescheduling or restructuring of loans is thought to be a good approach, at least in the short term. While it is still unclear whether restructuring will be an effective long-term solution, banks continue to choose this option. Conclusion Overall banks are open to provide financing for qualifying real estate investments, in particular in Poland, the Czech Republic and Slovakia. Based on a ranking of the surveyed countries for each of the 10 issues covered by our survey, the rankings have been calculated for the last 4 years. Currently, the prospects of the Eurozone seem less gloomy than last year. Prospects for macroeconomic development among the surveyed countries vary greatly, therefore the recovery of the real estate sector, is different in each country. Overall, the results of our survey show that, while there is financing available for high quality real estate projects, the appetite for financing is still not close to that of the pre crisis years. Property Financing Sentiment Index Overall ranking in: Poland Czech Rep. Czech Rep. Czech Rep. 2 Czech Rep. Poland Poland Slovakia 3 Slovakia Slovakia Bulgaria Poland 4 Hungary Romania Romania Romania 5 Bulgaria Serbia Hungary Bulgaria 6 The Baltics Hungary Slovenia Serbia 7 Romania Bulgaria The Baltics Hungary 8 Slovenia The Baltics 9 The Baltics Slovenia Steven Baxted Partner, KPMG in Poland Head of the Real Estate and Construction group in Poland and a member of the CEE KPMG Real Estate Steering Committee More than 19 years of experience with KPMG providing Audit, Acquisition/Disposal and other attestation services to clients Assisting clients in Poland since 1999 and previously in Canada from 1993 to 1999 Responsible for the annual publications CEE Property Lending Barometer and Construction in Poland ( Budownictwo w Polsce. )