New Routes
When it comes to buying buses, the city of Wroclaw follows the Marxist credo that "quantity becomes quality," said Jerzy Jarych of the municipality's communications department.
Last year, Wroclaw had only zl. 8.3 million ($3.3 million) from its municipal budget to spend on 25 buses. In 1996, it needs to replace 100, but can only afford 20.
This means high-priced Western buses are out. Hungarian-made Ikarus buses, which are half the price at about $140,000, are in.
But not all Polish cities take a retrograde approach to upgrading their municipal bus fleets.
Gdynia just bought 60 new Mercedes buses, basing the purchase on quality and reliability, says Olgierd Wyszomierski of the Gdynia communications office. The city financed the bulk of the bus order, about $12 million, with Poland's first-ever municipal bond offer.
The differing purchasing strategies have bus makers scrambling for the hearts and wallets of municipal officials in a battle of price versus quality.
There are currently about 12,000 city buses in Poland, and about 1,500 buses need to be replaced this year. But cities can only afford to buy about 300 new buses, given budgetary constraints.
This fiscal dilemma has investment bankers salivating over the potentially huge municipal financing market that could open up as cities look to tap the capital markets for funds.
"The cities will have to take the ones that offer the most advanced features at the best price," said Dick Thornton, general manager of GM Poland. GM is a major supplier of parts, including automatic transmissions, to European bus producers.
Nearly 30% of Warsaw's 1,600 city buses are considered unsafe.
That is a disconcerting fact for the thousands of riders who rely each day on the municipal transport system. But it is a huge opportunity for Western bus makers who want to move into the Polish market and supply cities with high-quality, long-lasting buses.
So far, though, their dream of supplying hundreds, if not thousands, of buses to the market has not materialized.
Cities like Warsaw just don't have the cash to replace buses that are not road-worthy or to meet growing demand for handicapped bus access and vehicles that meet improved environmental standards.
Relying on the already stretched city budget, Warsaw allocated only zl. 25 million ($10.2 million) last year for new buses. That translated into only 70 new vehicles when the fleet required 150.
About 95% of Warsaw's fleet are Ikarus buses, purchased from the Hungarian bus maker, but assembled in a municipal bus authority (MZA) plant in the city. MZA officials say they will probably continue to purchase Ikarus buses because they have a maintenance infrastructure in place.
And, by buying Ikarus, Warsaw can get more buses for its zloty. A new Ikarus bus has an average price of zl. 360,000 ($147,000), about half the price of a Volvo or Mercedes.
"Financing is the big problem. It is the reason the market has not yet taken off the way we expected," said Christoffer Rjunger, managing director of Scania Polska. In early 1995, the Swedish bus and truck maker became the first Western firm to assemble buses in Poland.
But a solution may be in sight.
New bond age
The city of Gdynia recently issued $12 million in municipal bonds, Poland's first municipal bond issue, through a private placement with institutional investors. By diving into this market, Gdynia opened the door on long-term financing that is cheaper than bank financing.
Gdynia has also set the trend for the future of Polish municipal bus financing, analysts say.
The city's bond issue will pay for 50 new Mercedes buses produced in the Wroclaw-based Jelcz bus factory. Gdynia also plans to purchase 10 more buses with other funds.
The floating-rate bonds, managed by ING Bank, were issued in five tranches, with maturities ranging from one to four years. With a par value of zl. 100,000 ($40,800) per bond, the rate for the one-year paper is tied to the price of 12-month treasury bills, plus a 0.5% premium. At the longer-end of the issue, four-year paper is linked to 12-month T-bills plus 1.25%. Based on current T-bill yields, the bonds offer rates of between 22.36% to 23.11%.
"We are sure (the bond issue) is the best way it's not very convenient to buy 60 buses from the budget," said Wyszomirski of the Gdynia Communications Office. The bonds were a better deal than a bank loan, because Gdynia doesn't have to provide a loan guarantee for the bond and bank interest rates were considered prohibitively high. Rates are often set from one to three percentage points above the National Bank of Poland's discount, which is currently at 26%.
"The reason you do a bond issue is that the money is coming directly from investors," says Kyle Spicer, director of debt capital markets for IB Austria, which was involved with the Gdynia issue for ING Bank. "Bank margins are always higher than with investors."
Spicer says the main factors affecting a city's ability to attract investors to bonds are the size of its budget and the quality of the city's management.
For the moment, Gdynia has struck out on its own in the municipal bond market. But others are looking to follow in its tracks and several municipalities are now said to be preparing tenders to choose investment banks to manage issues of their own.
Currently, most cities are left making piecemeal purchases from their budgets or are forced to use bank financing, says Alexander Galos, attorney at Hogan and Hartson.
One example is Poznan, which in December finalized a zl. 90 million ($36 million) loan from Wielkopolski Bank Kredytowy (WBK) for the purchase of 100 buses. The city has 320 buses in its fleet and needs to replace 122 this year. The city will buy its new buses from two German producers, MAN and Neoplan. WBK would not release the details of the loan.
The speed at which cities follow Gydnia's example is especially important to foreign bus makers. Until such financing options are feasible, they will have a tough time competing in a market driven by how little cash each city can spend.
Where quantity reigned
Historically, Poland's bus market has been dominated by Ikarus. The company was the largest supplier to the COMECON countries and currently has 60,000 buses running in the countries of Central Europe. Ikarus remains a player on the Polish market because of price-point advantage. The company has struggled on the verge of bankruptcy since losing its guaranteed buyers under the old command economy. Sales in the region dropped from 8,000 a year in the 1980s to 800 by 1994. But regionally, Ikarus continues to find buyers, like Warsaw, who are dependent on low prices.
Jonas Berg, controller for Volvo, says his job is to convince the cities otherwise; the long-term savings outweighs the initial cost of his products.
"To think that you can come to Poland and compete with prices is uninteresting," Berg said. "We will compete with the product - top quality product and after-market service."
Volvo buses will cost around DM 400,000 ($277,000) compared to the cheapest Ikarus bus at almost than half the price. Volvo's selling point, in the face of competition by cheaper brands, is an estimated road life of 15 years for its buses. Ikarus buses have a life of eight to 10 years.
The quality stake
The Swedish automotive manufacturer, taking a big leap into the Polish market, has invested in a zl. 27 million ($11 million) greenfield plant near Wroclaw to produce buses. While the foundations harden at the new Volvo site, their first buses will be assembled at their truck assembly plant nearby. The enterprise is a joint venture, with Finnish Carrus holding 45% and Volvo 55%. They will produce three types of city and inter-city buses and expect 200 employees by the end of 1996.
Volvo's heaviest competition on the high-quality end of the bus spectrum comes from Polish automotive magnate Sobieslaw Zasada and his partnership with Mercedes-Benz. Zasada produces buses emblazoned with the Mercedes star at the Jelcz bus plant.
The company strategy is "the Mercedes-ization of Jelcz," said Krzysztof Rozenberg, Jelcz-Zasada managing director.
Jelcz-Zasada plans to invest more than DM 50 million ($34 million) over the next three years into production facilities, company officials say. The Wroclaw-based plant builds Jelcz-Mercedes hybrid city buses in addition to an improved Jelcz model. Zasada plans to sell its first 200 hybrid buses this year. Zasada-Jelcz's 60-bus deal with the city of Gdynia got off to a rocky start. The first shipment of 10 buses had defects resulting from the region's low temperature and humidity, but Zasada repaired the problem at no charge, Gdynia officials said.
Bialystok, a city of 700,000 on Poland's eastern border, has a 300-bus fleet and would like to replace over 80% of them in the next four to five years. While considering municipal bonds over the long run, officials are replacing their fleet in the short term with funds from the city pocketbook. Like many other cities buying under tight purse strings, officials are spicing up the old Marxist recipe by adding a touch of quality to quantity.
Last year Bialystok bought 21 buses for zl. 6 million ($2.4 million). While most were the economy model, three Mercedes were part of the purchase because of their safety features and quality brand name, says Jerzy Smulko of Bialystok's Communication Service Office. "They're expensive to purchase, but they're cheaper to use," he says.
Last year, Wroclaw had only zl. 8.3 million ($3.3 million) from its municipal budget to spend on 25 buses. In 1996, it needs to replace 100, but can only afford 20.
This means high-priced Western buses are out. Hungarian-made Ikarus buses, which are half the price at about $140,000, are in.
But not all Polish cities take a retrograde approach to upgrading their municipal bus fleets.
Gdynia just bought 60 new Mercedes buses, basing the purchase on quality and reliability, says Olgierd Wyszomierski of the Gdynia communications office. The city financed the bulk of the bus order, about $12 million, with Poland's first-ever municipal bond offer.
The differing purchasing strategies have bus makers scrambling for the hearts and wallets of municipal officials in a battle of price versus quality.
There are currently about 12,000 city buses in Poland, and about 1,500 buses need to be replaced this year. But cities can only afford to buy about 300 new buses, given budgetary constraints.
This fiscal dilemma has investment bankers salivating over the potentially huge municipal financing market that could open up as cities look to tap the capital markets for funds.
"The cities will have to take the ones that offer the most advanced features at the best price," said Dick Thornton, general manager of GM Poland. GM is a major supplier of parts, including automatic transmissions, to European bus producers.
Nearly 30% of Warsaw's 1,600 city buses are considered unsafe.
That is a disconcerting fact for the thousands of riders who rely each day on the municipal transport system. But it is a huge opportunity for Western bus makers who want to move into the Polish market and supply cities with high-quality, long-lasting buses.
So far, though, their dream of supplying hundreds, if not thousands, of buses to the market has not materialized.
Cities like Warsaw just don't have the cash to replace buses that are not road-worthy or to meet growing demand for handicapped bus access and vehicles that meet improved environmental standards.
Relying on the already stretched city budget, Warsaw allocated only zl. 25 million ($10.2 million) last year for new buses. That translated into only 70 new vehicles when the fleet required 150.
About 95% of Warsaw's fleet are Ikarus buses, purchased from the Hungarian bus maker, but assembled in a municipal bus authority (MZA) plant in the city. MZA officials say they will probably continue to purchase Ikarus buses because they have a maintenance infrastructure in place.
And, by buying Ikarus, Warsaw can get more buses for its zloty. A new Ikarus bus has an average price of zl. 360,000 ($147,000), about half the price of a Volvo or Mercedes.
"Financing is the big problem. It is the reason the market has not yet taken off the way we expected," said Christoffer Rjunger, managing director of Scania Polska. In early 1995, the Swedish bus and truck maker became the first Western firm to assemble buses in Poland.
But a solution may be in sight.
New bond age
The city of Gdynia recently issued $12 million in municipal bonds, Poland's first municipal bond issue, through a private placement with institutional investors. By diving into this market, Gdynia opened the door on long-term financing that is cheaper than bank financing.
Gdynia has also set the trend for the future of Polish municipal bus financing, analysts say.
The city's bond issue will pay for 50 new Mercedes buses produced in the Wroclaw-based Jelcz bus factory. Gdynia also plans to purchase 10 more buses with other funds.
The floating-rate bonds, managed by ING Bank, were issued in five tranches, with maturities ranging from one to four years. With a par value of zl. 100,000 ($40,800) per bond, the rate for the one-year paper is tied to the price of 12-month treasury bills, plus a 0.5% premium. At the longer-end of the issue, four-year paper is linked to 12-month T-bills plus 1.25%. Based on current T-bill yields, the bonds offer rates of between 22.36% to 23.11%.
"We are sure (the bond issue) is the best way it's not very convenient to buy 60 buses from the budget," said Wyszomirski of the Gdynia Communications Office. The bonds were a better deal than a bank loan, because Gdynia doesn't have to provide a loan guarantee for the bond and bank interest rates were considered prohibitively high. Rates are often set from one to three percentage points above the National Bank of Poland's discount, which is currently at 26%.
"The reason you do a bond issue is that the money is coming directly from investors," says Kyle Spicer, director of debt capital markets for IB Austria, which was involved with the Gdynia issue for ING Bank. "Bank margins are always higher than with investors."
Spicer says the main factors affecting a city's ability to attract investors to bonds are the size of its budget and the quality of the city's management.
For the moment, Gdynia has struck out on its own in the municipal bond market. But others are looking to follow in its tracks and several municipalities are now said to be preparing tenders to choose investment banks to manage issues of their own.
Currently, most cities are left making piecemeal purchases from their budgets or are forced to use bank financing, says Alexander Galos, attorney at Hogan and Hartson.
One example is Poznan, which in December finalized a zl. 90 million ($36 million) loan from Wielkopolski Bank Kredytowy (WBK) for the purchase of 100 buses. The city has 320 buses in its fleet and needs to replace 122 this year. The city will buy its new buses from two German producers, MAN and Neoplan. WBK would not release the details of the loan.
The speed at which cities follow Gydnia's example is especially important to foreign bus makers. Until such financing options are feasible, they will have a tough time competing in a market driven by how little cash each city can spend.
Where quantity reigned
Historically, Poland's bus market has been dominated by Ikarus. The company was the largest supplier to the COMECON countries and currently has 60,000 buses running in the countries of Central Europe. Ikarus remains a player on the Polish market because of price-point advantage. The company has struggled on the verge of bankruptcy since losing its guaranteed buyers under the old command economy. Sales in the region dropped from 8,000 a year in the 1980s to 800 by 1994. But regionally, Ikarus continues to find buyers, like Warsaw, who are dependent on low prices.
Jonas Berg, controller for Volvo, says his job is to convince the cities otherwise; the long-term savings outweighs the initial cost of his products.
"To think that you can come to Poland and compete with prices is uninteresting," Berg said. "We will compete with the product - top quality product and after-market service."
Volvo buses will cost around DM 400,000 ($277,000) compared to the cheapest Ikarus bus at almost than half the price. Volvo's selling point, in the face of competition by cheaper brands, is an estimated road life of 15 years for its buses. Ikarus buses have a life of eight to 10 years.
The quality stake
The Swedish automotive manufacturer, taking a big leap into the Polish market, has invested in a zl. 27 million ($11 million) greenfield plant near Wroclaw to produce buses. While the foundations harden at the new Volvo site, their first buses will be assembled at their truck assembly plant nearby. The enterprise is a joint venture, with Finnish Carrus holding 45% and Volvo 55%. They will produce three types of city and inter-city buses and expect 200 employees by the end of 1996.
Volvo's heaviest competition on the high-quality end of the bus spectrum comes from Polish automotive magnate Sobieslaw Zasada and his partnership with Mercedes-Benz. Zasada produces buses emblazoned with the Mercedes star at the Jelcz bus plant.
The company strategy is "the Mercedes-ization of Jelcz," said Krzysztof Rozenberg, Jelcz-Zasada managing director.
Jelcz-Zasada plans to invest more than DM 50 million ($34 million) over the next three years into production facilities, company officials say. The Wroclaw-based plant builds Jelcz-Mercedes hybrid city buses in addition to an improved Jelcz model. Zasada plans to sell its first 200 hybrid buses this year. Zasada-Jelcz's 60-bus deal with the city of Gdynia got off to a rocky start. The first shipment of 10 buses had defects resulting from the region's low temperature and humidity, but Zasada repaired the problem at no charge, Gdynia officials said.
Bialystok, a city of 700,000 on Poland's eastern border, has a 300-bus fleet and would like to replace over 80% of them in the next four to five years. While considering municipal bonds over the long run, officials are replacing their fleet in the short term with funds from the city pocketbook. Like many other cities buying under tight purse strings, officials are spicing up the old Marxist recipe by adding a touch of quality to quantity.
Last year Bialystok bought 21 buses for zl. 6 million ($2.4 million). While most were the economy model, three Mercedes were part of the purchase because of their safety features and quality brand name, says Jerzy Smulko of Bialystok's Communication Service Office. "They're expensive to purchase, but they're cheaper to use," he says.
