ARCO VARA AS - NASDAQ OMX Baltic

construction agreements. After the construction work have been completed, the customer and the
general contractor inspect the project and hold the project finalization meetings.
The construction supervision operations of Tallinna Linnaehituse AS are performed separately from
the rest of the construction division. To avoid conflicts of interest, the company does not supervise any
projects constructed by Arco Ehitus.
General contracting does not generally involve environmental construction services. These involve
slightly different processes of subcontracting, which are supervised by the contracts concluded with
the general contractor.
Customers
Arco Vara construction division has both one-time and repeat customers. Approximately half of the
division’s revenue is generated from intra-group contracts with the development division (including
the construction of Kolde residential area and the Kerese centre in Narva, which was sold in 2007.
Furthermore, SIA Arco Construction is the main contractor for the Group’s Bišumuiža 1 development
project in Latvia.
Due to OÜ Veemaailm Inc’s expertise within sanitary and environmental construction, Arco Ehitus
has a good reputation for undertaking projects in that construction market sub-segment. Current
projects in progress include the renovation of waste water treatment plant in Toila and the planning
and construction of the water and sewage project in Matsalu National Park.
Competition
Estonian and Latvian construction markets are growing rapidly, mainly driven by the increasing costs
of labour and materials. The construction markets are highly fragmented and competitive with
numerous construction companies competing for the same projects.
According to the Commercial Register of Estonia, there were 5,200 construction companies operated
in Estonia as at year end 2005. Arco Ehitus is a medium-sized construction company and not among
the largest market players in Estonia. Although it lacks a substantial market position, it nevertheless
frequently competes against major local and international companies in the tendering processes.
Market leaders AS Merko Ehitus, Skanska EMV AS, AS Eesti Ehitus and AS YIT Ehitus all have strong
positions in the construction of residential and non-residential properties, collectively accounting for a
substantial share of the construction market.
The competition in the Latvian construction market is similar to the Estonian market, lead by a group
of four or five of the largest companies, such as Skonto Buve, PBLC, RE&RE, SIA Merks (part of
Estonian Merko Ehitus Group) and BMGS.
According to the management of Arco Ehitus, the Group’s construction supervision company Tallinna
Linnaehituse AS is one of Estonia’s leading supervision service providers, the other two being AS
Telora-E and AS TSM.
Environmental construction services in the construction division also possess a strong market position
and their know-how, engineering skills and cleaning equipment are highly valued in the market.
INVESTMENTS
Capital expenditure and investments into land and properties
In the normal course of business, the Group’s principal investments are acquiring land and buildings
for and in connection with real estate development. In accordance with the accounting treatment
104