Energy privatizations highlight treasury dilemma
The Treasury Ministry is expected to sell a 25% stake in energy distributor Gornoslaski Zaklad Energetyczny to Sweden's Vattenfall this week the first time a foreign company has bought into a Polish energy distribution utility.
Another bid to sell a 35% stake in the Rybnik power plant will also be completed this month, Treasury Minister Andrzej Chronowski said. He added that the ministry has already restarted talks with a U.S.-Japan consortium comprising NRG Energy and Marubeni and four other bidders, including the U.S.' AES Horizons, Germany's EnBW, the U.K.'s National Power and Belgium's Tractebel. The ministry and the U.S.-Japan consortium failed to strike a deal in the first round of talks several weeks ago.
But despite new sales in energy privatizations, some foreign analysts are still wary of the government's strategy. "From a foreign perspective, we're needed but not wanted," said Zachariah Allen, managing director of Pan Eurasian Enterprises, referring to the delay in privatization deals and the hesitation over the pace of energy privatization.
Pawel Zach, an energy sector analyst at Citicorp, said foreign investors have been worried about recent plans to reschedule the privatization of the distribution sector. "It has provoked some nervousness because the distribution sector seems more attractive than power generation for foreign bidders," he said.
But Deputy Treasury Minister Jakub Tropilo was quick to reassure investors at a recent EuroForum energy conference in Warsaw that Poland is still committed to completing its energy privatization plans by 2002. He said the ministry's privatization strategy would be a parallel process of privatizing power plants and distribution companies. At the same time, Irish energy group ESB said it wanted to buy a 20-25% stake in a group of eight domestic energy distributors, due for privatization next year.
Renewed interest by foreign companies will come as a relief to the treasury three years after privatization was first mooted in the energy sector. Up to now, the process has been slow with only two power plants and five power and heat suppliers being sold off. Companies still due to be privatized include more than two dozen power plants and combined heat and power suppliers and 33 distribution companies. "We offer a prospective market, so investors should line up for power plants offered for sale," Tropilo said.
Other analysts said that while the industry is ripe for profitable privatization, investors have yet to show a willingness to buy into the sector. "The market remains interesting due to its scale, cost-efficient output and energy-export prospects," Zach said. But he added that investors are interested, but not overwhelmed by the bargains in the sector.
Allen pointed to the flotation of the Bedzin power plant on the Warsaw Stock Exchange as an example of the lukewarm reception given to the privatization of many utilities. He said the flotation had not been particularly successful with only 17% of shares being bought. "The Rybnik power plant is perceived as a top company," he said. "If it has difficulties being sold, then what about the others?"
Rybnik has a 6.5% share in the energy market and is looking for an investor to double that within the next 10 years. Tropilo said the ministry's dilemma is whether to sell "cheap" in exchange for high-investment commitments or to look for the highest possible price in exchange for a strategic stake. Analysts said Rybnik's failure to attract bidders up to now is an example of the ministry's policy of confusing buyers.
For U.S. energy and telecom giant Enron, the major obstacle preventing investors from more active involvement are risks connected to the regulated energy market, particularly to tariffs and non-transparent provisions concerning pricing policy and third-party access. "As long as such regulatory risk exists, the chances that we'll take part in privatization deals are slim," said Jarek Astramowicz, president of Enron Poland.
Jan Popczyk, former head of Polish Power Grid (PSE), said the country's energy sector, worth an estimated $14 billion-$16 billion, will need at least an extra $15 billion in investment for upgrading. To date, the treasury has been relatively successful in attracting the extra funds needed to upgrade newly privatized utilities. Elektrocieplownia Leg, the heat supplier, was sold for $79.75 million to the French utility, EdF, which committed a further $5 million. Elektrim acquired a 20% stake in Elektrownia PAK for $88 million and a capital investment of $1 billion. Early this year Vattenfall bought a 55% stake in Elektrocieplownie Warszawskie, a Warsaw heat and power company, for $230 million. The deal includes a commitment to invest $600 million.
Before privatization, power plants used long-term purchase contracts as collateral for their financial projects. The market share of contracted energy amounts to 70%. It is also a part of the regulated market, but Zach said contracts were the only financial tools to upgrade the power plants, as the receivables payable under the contracts were the main security for bank loans.
Urbanski said massive investment is vital for the utilities to survive in the competitive domestic and European Union markets. He said most companies would soon be up against ruthless competition and only the strongest would survive. He said consolidation would be the way many would manage to turn a profit. "The PAK and Belchatow power plants are well prepared," Urbanski said. "But the majority of domestic electricity generators have similar costs and effectiveness, and soon we will witness cutthroat competition. It will result in consolidation in the sector. At the end of the day there will be five to seven groups."
