Going, going, gone...
The government finds it easier to auction off ministers in charge of privatization (pictured here at their nomination ceremonies) than the very assets they are supposed to privatize. Wiesław Kaczmarek, Sławomir Cytry-cki and Piotr Czyżewski have all been sent quickly on their way.
Can the new man, Zbigniew Kaniewski, save this year's budget before being 'privatized' himself?
This year's budget will stand or fall by its privatization revenue, says Deputy Prime Minister Jerzy Hausner, the so-called 'superminister' in charge of the economy, labor and social policy. Any failure to raise the zł.8.8 billion expected from privatizations this year could spark a constitutional crisis, sending public debt way over the constitutional barrier of 55 percent of GDP.
Such a scenario, which would be consistent with the current government's track record on privatization to date, would automatically trigger drastic austerity measures, as the government would then be required to run primary budget surpluses, that is before servicing debt costs, for at least three years. Short of changing the constitution - a sure fire way of destroying the markets' confidence in Poland's economic stability - there would be no way of avoiding spending cuts and tax increases, with recession the most likely outcome.
What are the chances of averting disaster? Zbigniew Kaniewski, the new state treasury minister, says he "hopes" that it can be done. The former trade unionist, whose nomination did little to cheer up either economists or businesses, would appear to have no experience whatsoever in matters of privatization. According to Robert Gwiazdowski, an economist at the independent think-tank Adam Smith Center, Kaniewski is, "a completely unknown article, which could well unsettle the markets." A slowdown of the privatization process would be inevitable under such a weak and inexperienced minister, says Bohdan Wyżnikiewicz, deputy president of the Gdańsk Institute for Market Economics (IBnGR).
But it is not gloom all around. There can be no doubt that the 23 percent of the economy still controlled by the public sector includes enough valuable assets to raise billions of złoty over and above the official target. From Warsaw's Służewiec horse race-track (SWK) to the energy distribution concern G8 and on to the country's largest bank PKO BP and insurance giant PZU, a number of state-owned companies are lined up for privatization, and indeed have been for several years.
So what went so horribly wrong that last year's privatization revenue target had to be cut five times over the course of the year, from the original zł.9.6 billion to just zł.4.5 billion - a figure which the government was zł.400 million short of meeting anyway? As Deputy Economy Minister Jacek Piechota told the Business Journal last month, the official mindset has not been conducive to privatization. State Treasury Ministry officials seem to feel as if they actually own the assets they are expected to sell. Others point to a lack of political will on the part of this and (in part) previous governments, as amply demonstrated by the ongoing saga of PZU's privatization, or repeatedly canceled tenders for the position of adviser to the privatization of PKO BP.
Whatever the explanation, analysts are more optimistic about the chances of meeting the target this year, saying that this time round, the government really does have no choice. "The fiscal pressure is just too great," says Piotr Bielski, an economist at BZ WBK.
Below we look at the prospects for some of the largest privatization deals to be completed this year.
It seems that the Treasury Ministry is finally realizing that an element of compromise will be indispensable in its fifth attempt to select an adviser to privatize PKO BP; that is, if it does actually want to sell off what is both Poland's largest bank and one of its most attractive assets.
Past attempts leave open the question as to what the Treasury's intentions are. But positive signals are on the horizon.
"I think we can close the tender in a few months," said Urszula Pałaszek, the director of the financial institutions department at the Treasury Ministry.
Pałaszek is so sanguine because: "We have changed the way of choosing an adviser. Now we will be able to talk to the [potential] adviser."
She explained that the Treasury had scrapped its traditional and much-derided practice of asking banks for advisory offers based on a strict set of guidelines and then failing to leave their offers open to negotiation. Offers were final. Enough said.
This time round, guidelines will be the same, she noted, but after financial institutions send in their proposals the Treasury will invite them for negotiations. This will afford institutions leeway in what many have considered to be a prohibitive tender process.
"We were not able to do it in the past," Pałaszek says, "Now we have permission to change the tender process." She pointed out that the Office of Public Procurement (UZP) recently gave the Ministry the green light for its plan to ease Central Europe's largest state-owned bank into the private sector.
Pałaszek's news dovetails several other developments last month regarding the bank.
PKO Chief Executive Andrzej Podsiadło recently told a press conference that a transaction this year is vital, otherwise the Treasury will have to wait until 2006 following the 2005 general elections. "If we do not get responsibility [for the privatization] then I'm afraid that privatization will not happen this year although, from a technical point of view, it is still quite possible," Posiadło noted.
And with a jot of foreboding, he added, "We are ready to take matters into our own hands."
Keeping step with the chief executive, Minister Kaniewski, added to the debate the following day. "I will do everything in my power for PKO BP to be on the stock exchange this year," he said.
Pałaszek noted that this week the Treasury is in the process of inviting to the tender only those institutions that participated during all of the last four attempts. And she said the Treasury would aim to begin some form of negotiations in March.
Yet, this does not have potential advisers heaving a sigh of relief. They've been burned before, and this might not be enough of a change to bring about a deal, they complain.
One banker who participated in one of the previous tenders said that the privatization could only become "quite interesting" if the treasury ditches the cumbersome tender process altogether and chooses institutions based on merit. The banker said the Treasury could take a leaf out of the Finance Ministry's book. The Finance Ministry selects a list of investment banks through a streamlined process, and then rotates the banks around each of its multi-billion złoty bond deals that occur several times a year, the banker explained.
"With the Finance Ministry no-one can complain; it's done by the best banks," the source said, "But with the Treasury there are always protests."
PZU and its owners, the Treasury (56 percent) and Eureko, in cooperation with Millennium Bank (30 percent), are still embroiled in an ownership battle that, in the short-term, doesn't see the government relinquishing control of the company, which manages zł.20 billion (E4.12 billion) in assets.
In the middle of last year, Cezary Stypułkowski was appointed chief executive of majority state-owned insurer PZU. The usual critics of the insurance company lauded the addition of Stypułkowski, especially given that his track record as the former head of Citibank Handlowy gave credibility to his plans to clean up PZU and change it from being one of the country's most suspect institutions to one of its most transparent. "We need to be like an aquarium," Stypułkowski told the Business Journal last year. "So you can see us from the outside in."
While the company itself might become a more reputable institution, there is less transparency in its future shareholder structure.
The Netherlands-based insurer Eureko filed for international arbitration in October 2002 to resolve a conflict over an April 2001 agreement to have the Treasury sell the Eureko-Millennium group another 21 percent stake of PZU, thereby giving it majority control. That deal was inked with the former Solidarity-led government, but following the Miller government's rise to power, the privatization process has been halted. More negotiations are forthcoming.
Stypułkowski, who replaced Zdzisław Montkiewicz, a Miller protégé, has pledged that he would like to see the shareholder issues resolved. But he has noted that the decision ultimately rests with the Treasury Ministry.
Should any resolution come about, the next steps include two widely circulated scenarios, either floating PZU on the Warsaw Stock Exchange or merging it with a privatized PKO. The idea behind the latter plan is to have a Polish bancassurance giant service the Central European region. But before the virtues of such a plan can be properly debated, the awkward dilemmas of privatization must first be solved. Time will tell.
This year, the Polish energy sector will be dominated by two enormous privatizations, that of the Polish Oil and Gas Company (PGNiG) and the ongoing saga of the 'G8' group of power plants.
PGNiG is currently one of the state's greatest assets, and has two compelling features. Firstly, the skill of the company's workforce, which has been described as 'world class,' most recently by international observers involved with PGNiG's current activity in the Middle East. This description is echoed by foreign specialists working with the company here, suggesting that PGNiG is both marketable to investors and capable of export activity.
Secondly, PGNiG has rights to vast unexplored natural gas fields deep below Polish soil. Current assessment of the extent and value of this buried treasure, possible only now thanks to technological breakthroughs that enable extremely deep geophysical mapping, may determine whether the privatization is to take the form of an Initial Public Offering (IPO) on the Warsaw Stock Exchange or investment bids from major foreign institutional investors.
"Within three years, Poland could be 50 percent self-sufficient in natural gas," says Viktor Boraks, president of Consolidated Oil Services. "We all know what effect that had on Britain and Norway a generation ago and, once the understanding of PGNiG's upside potential is really appreciated both inside and outside the company, this will have a major impact on the way in which it is privatized."
As North Sea reserves deplete, one of Europe's great exploration and production booms is drawing to a close. Capital and industry in the North Sea is confined to a decreasing and overcrowded market. The nearest new market of any real size is Poland, which has already begun to attract the established contenders of the North Sea. Privatization will help speed up this process.
Boraks adds that PGNiG is being held back by the same shortcoming that afflicts all public sector giants, that of marketing. International awareness of PGNiG's true value must begin now, argues Boraks, if the government is to do justice to what could be one of its most valuable privatizations.
The process of privatization of state owned power plants meanwhile has dragged on for many months, and has been marred by spats between government, foreign investors and the nation's banks. However, this year could bring the start of a new positive climate for change and the final conclusion of what has been a painful process.
"There is a new mood of realism in the air," says Igor Muszyński, a lawyer specializing in the power sector. "The government priced itself out of the market for global energy investors, and now it must re-think its strategy." Throughout last year, it was unclear which part of the power sector would be privatized first. The government no longer has the luxury of choice. It has to act fast.
EU membership, less than three months away, will have a real impact on the privatization process, as there is now pressure from Brussels to allow third parties access to Poland's power grid, thus displacing PSE, the state grid, as the main retailer of electricity produced in Poland.
EU involvement will take the form of a formal probe into the government's plans to pay compensation to parties which have long-term energy contracts that could be annulled as part of the privatization process. The sticking point is an idea by the Treasury Ministry to use government bonds as a currency of reimbursement. Last week, the European Commission stated that this arrangement would be against EU law. The government, by failing to find international power investors, alienating financial institutions, and by coming under the scrutiny of the EU, is being compelled to rethink its strategy.
After several canceled tenders, allegations of corruption and months of bad-mouthing in public, WSiP, the country's largest publisher of educational books, is finally heading to the floor of the stock exchange in an initial public offering completely free of any political interference. Or is it?
The zł.400 million privatization of the publishing house, well known to anyone who has ever gone to school in Poland, is hardly the largest or most strategically important of the privatization deals currently underway. But the many disruptions to the process and details of alleged misdeeds that have surfaced following last year's parliamentary investigation into the so-called Rywingate affair, make it emblematic of the roadblocks that have slowed privatization over recent years.
"We don't give bribes," Wanda Rapaczyńska, president of Agora, the country's largest media company and a bidder for WSiP, reportedly told the now infamous film producer Lew Rywin. "I know," came his reply, "that's why you'll never get WSiP." The conversation, reported here based on Rapaczyńska's account, took place in July 2002. And regardless of whether or not Rywin's explanation is to be believed, his prophecy certainly has come true.
Agora, the publisher of the country's largest daily newspaper, saw its bid come
to nothing when the third and last tender for WSiP, to which another private publisher Muza had also been invited, was canceled at the beginning of last year. Muza counts Włodzimierz Czarzasty among its shareholders, who is thought to be an influential figure on the ruling left. The WSiP acqui-sition was meant to be the first step in
the creation of a pro-government media empire.
However, both Muza's plans and Agora's increasing influence proved worrying for many within the country's political establishment. And once Agora outed the details of the ugly political in-fighting, the tender was canceled, as was the case in the two previous tenders. Instead, privatization via the stock market was chosen as the right route for the publisher. An IPO was scheduled for this quarter, but a sudden change of heart at the Treasury Ministry last December looks set to delay the process even further. According to sources close to the deal, the IPO is unlikely to take place in the first half of the year.
WSiP is still gearing up for the floor. According to the company's president, Jan Rurański, pre-IPO negotiations with institutional investors are to begin "within days." This time round, however, the 40-60 percent shares in WSiP will not be offered to strategic investors, but to pension funds (OFEs).
"Apart from the price, the time horizon of an investment will also be a crucial consideration in negotiations with OFEs," Rurański adds. He openly explained that the purpose of the requirement for a fund to remain in the investment for three to five years is to stop control of the publisher passing to either of the previous bidders.
"WSiP cannot be seen as being subject to political interference, since school textbooks must be perceived to be unbiased," Rurański says. Well, it could just be a little late for all that.
Staff report
Can the new man, Zbigniew Kaniewski, save this year's budget before being 'privatized' himself?
This year's budget will stand or fall by its privatization revenue, says Deputy Prime Minister Jerzy Hausner, the so-called 'superminister' in charge of the economy, labor and social policy. Any failure to raise the zł.8.8 billion expected from privatizations this year could spark a constitutional crisis, sending public debt way over the constitutional barrier of 55 percent of GDP.
Such a scenario, which would be consistent with the current government's track record on privatization to date, would automatically trigger drastic austerity measures, as the government would then be required to run primary budget surpluses, that is before servicing debt costs, for at least three years. Short of changing the constitution - a sure fire way of destroying the markets' confidence in Poland's economic stability - there would be no way of avoiding spending cuts and tax increases, with recession the most likely outcome.
What are the chances of averting disaster? Zbigniew Kaniewski, the new state treasury minister, says he "hopes" that it can be done. The former trade unionist, whose nomination did little to cheer up either economists or businesses, would appear to have no experience whatsoever in matters of privatization. According to Robert Gwiazdowski, an economist at the independent think-tank Adam Smith Center, Kaniewski is, "a completely unknown article, which could well unsettle the markets." A slowdown of the privatization process would be inevitable under such a weak and inexperienced minister, says Bohdan Wyżnikiewicz, deputy president of the Gdańsk Institute for Market Economics (IBnGR).
But it is not gloom all around. There can be no doubt that the 23 percent of the economy still controlled by the public sector includes enough valuable assets to raise billions of złoty over and above the official target. From Warsaw's Służewiec horse race-track (SWK) to the energy distribution concern G8 and on to the country's largest bank PKO BP and insurance giant PZU, a number of state-owned companies are lined up for privatization, and indeed have been for several years.
So what went so horribly wrong that last year's privatization revenue target had to be cut five times over the course of the year, from the original zł.9.6 billion to just zł.4.5 billion - a figure which the government was zł.400 million short of meeting anyway? As Deputy Economy Minister Jacek Piechota told the Business Journal last month, the official mindset has not been conducive to privatization. State Treasury Ministry officials seem to feel as if they actually own the assets they are expected to sell. Others point to a lack of political will on the part of this and (in part) previous governments, as amply demonstrated by the ongoing saga of PZU's privatization, or repeatedly canceled tenders for the position of adviser to the privatization of PKO BP.
Whatever the explanation, analysts are more optimistic about the chances of meeting the target this year, saying that this time round, the government really does have no choice. "The fiscal pressure is just too great," says Piotr Bielski, an economist at BZ WBK.
Below we look at the prospects for some of the largest privatization deals to be completed this year.
It seems that the Treasury Ministry is finally realizing that an element of compromise will be indispensable in its fifth attempt to select an adviser to privatize PKO BP; that is, if it does actually want to sell off what is both Poland's largest bank and one of its most attractive assets.
Past attempts leave open the question as to what the Treasury's intentions are. But positive signals are on the horizon.
"I think we can close the tender in a few months," said Urszula Pałaszek, the director of the financial institutions department at the Treasury Ministry.
Pałaszek is so sanguine because: "We have changed the way of choosing an adviser. Now we will be able to talk to the [potential] adviser."
She explained that the Treasury had scrapped its traditional and much-derided practice of asking banks for advisory offers based on a strict set of guidelines and then failing to leave their offers open to negotiation. Offers were final. Enough said.
This time round, guidelines will be the same, she noted, but after financial institutions send in their proposals the Treasury will invite them for negotiations. This will afford institutions leeway in what many have considered to be a prohibitive tender process.
"We were not able to do it in the past," Pałaszek says, "Now we have permission to change the tender process." She pointed out that the Office of Public Procurement (UZP) recently gave the Ministry the green light for its plan to ease Central Europe's largest state-owned bank into the private sector.
Pałaszek's news dovetails several other developments last month regarding the bank.
PKO Chief Executive Andrzej Podsiadło recently told a press conference that a transaction this year is vital, otherwise the Treasury will have to wait until 2006 following the 2005 general elections. "If we do not get responsibility [for the privatization] then I'm afraid that privatization will not happen this year although, from a technical point of view, it is still quite possible," Posiadło noted.
And with a jot of foreboding, he added, "We are ready to take matters into our own hands."
Keeping step with the chief executive, Minister Kaniewski, added to the debate the following day. "I will do everything in my power for PKO BP to be on the stock exchange this year," he said.
Pałaszek noted that this week the Treasury is in the process of inviting to the tender only those institutions that participated during all of the last four attempts. And she said the Treasury would aim to begin some form of negotiations in March.
Yet, this does not have potential advisers heaving a sigh of relief. They've been burned before, and this might not be enough of a change to bring about a deal, they complain.
One banker who participated in one of the previous tenders said that the privatization could only become "quite interesting" if the treasury ditches the cumbersome tender process altogether and chooses institutions based on merit. The banker said the Treasury could take a leaf out of the Finance Ministry's book. The Finance Ministry selects a list of investment banks through a streamlined process, and then rotates the banks around each of its multi-billion złoty bond deals that occur several times a year, the banker explained.
"With the Finance Ministry no-one can complain; it's done by the best banks," the source said, "But with the Treasury there are always protests."
PZU and its owners, the Treasury (56 percent) and Eureko, in cooperation with Millennium Bank (30 percent), are still embroiled in an ownership battle that, in the short-term, doesn't see the government relinquishing control of the company, which manages zł.20 billion (E4.12 billion) in assets.
In the middle of last year, Cezary Stypułkowski was appointed chief executive of majority state-owned insurer PZU. The usual critics of the insurance company lauded the addition of Stypułkowski, especially given that his track record as the former head of Citibank Handlowy gave credibility to his plans to clean up PZU and change it from being one of the country's most suspect institutions to one of its most transparent. "We need to be like an aquarium," Stypułkowski told the Business Journal last year. "So you can see us from the outside in."
While the company itself might become a more reputable institution, there is less transparency in its future shareholder structure.
The Netherlands-based insurer Eureko filed for international arbitration in October 2002 to resolve a conflict over an April 2001 agreement to have the Treasury sell the Eureko-Millennium group another 21 percent stake of PZU, thereby giving it majority control. That deal was inked with the former Solidarity-led government, but following the Miller government's rise to power, the privatization process has been halted. More negotiations are forthcoming.
Stypułkowski, who replaced Zdzisław Montkiewicz, a Miller protégé, has pledged that he would like to see the shareholder issues resolved. But he has noted that the decision ultimately rests with the Treasury Ministry.
Should any resolution come about, the next steps include two widely circulated scenarios, either floating PZU on the Warsaw Stock Exchange or merging it with a privatized PKO. The idea behind the latter plan is to have a Polish bancassurance giant service the Central European region. But before the virtues of such a plan can be properly debated, the awkward dilemmas of privatization must first be solved. Time will tell.
This year, the Polish energy sector will be dominated by two enormous privatizations, that of the Polish Oil and Gas Company (PGNiG) and the ongoing saga of the 'G8' group of power plants.
PGNiG is currently one of the state's greatest assets, and has two compelling features. Firstly, the skill of the company's workforce, which has been described as 'world class,' most recently by international observers involved with PGNiG's current activity in the Middle East. This description is echoed by foreign specialists working with the company here, suggesting that PGNiG is both marketable to investors and capable of export activity.
Secondly, PGNiG has rights to vast unexplored natural gas fields deep below Polish soil. Current assessment of the extent and value of this buried treasure, possible only now thanks to technological breakthroughs that enable extremely deep geophysical mapping, may determine whether the privatization is to take the form of an Initial Public Offering (IPO) on the Warsaw Stock Exchange or investment bids from major foreign institutional investors.
"Within three years, Poland could be 50 percent self-sufficient in natural gas," says Viktor Boraks, president of Consolidated Oil Services. "We all know what effect that had on Britain and Norway a generation ago and, once the understanding of PGNiG's upside potential is really appreciated both inside and outside the company, this will have a major impact on the way in which it is privatized."
As North Sea reserves deplete, one of Europe's great exploration and production booms is drawing to a close. Capital and industry in the North Sea is confined to a decreasing and overcrowded market. The nearest new market of any real size is Poland, which has already begun to attract the established contenders of the North Sea. Privatization will help speed up this process.
Boraks adds that PGNiG is being held back by the same shortcoming that afflicts all public sector giants, that of marketing. International awareness of PGNiG's true value must begin now, argues Boraks, if the government is to do justice to what could be one of its most valuable privatizations.
The process of privatization of state owned power plants meanwhile has dragged on for many months, and has been marred by spats between government, foreign investors and the nation's banks. However, this year could bring the start of a new positive climate for change and the final conclusion of what has been a painful process.
"There is a new mood of realism in the air," says Igor Muszyński, a lawyer specializing in the power sector. "The government priced itself out of the market for global energy investors, and now it must re-think its strategy." Throughout last year, it was unclear which part of the power sector would be privatized first. The government no longer has the luxury of choice. It has to act fast.
EU membership, less than three months away, will have a real impact on the privatization process, as there is now pressure from Brussels to allow third parties access to Poland's power grid, thus displacing PSE, the state grid, as the main retailer of electricity produced in Poland.
EU involvement will take the form of a formal probe into the government's plans to pay compensation to parties which have long-term energy contracts that could be annulled as part of the privatization process. The sticking point is an idea by the Treasury Ministry to use government bonds as a currency of reimbursement. Last week, the European Commission stated that this arrangement would be against EU law. The government, by failing to find international power investors, alienating financial institutions, and by coming under the scrutiny of the EU, is being compelled to rethink its strategy.
After several canceled tenders, allegations of corruption and months of bad-mouthing in public, WSiP, the country's largest publisher of educational books, is finally heading to the floor of the stock exchange in an initial public offering completely free of any political interference. Or is it?
The zł.400 million privatization of the publishing house, well known to anyone who has ever gone to school in Poland, is hardly the largest or most strategically important of the privatization deals currently underway. But the many disruptions to the process and details of alleged misdeeds that have surfaced following last year's parliamentary investigation into the so-called Rywingate affair, make it emblematic of the roadblocks that have slowed privatization over recent years.
"We don't give bribes," Wanda Rapaczyńska, president of Agora, the country's largest media company and a bidder for WSiP, reportedly told the now infamous film producer Lew Rywin. "I know," came his reply, "that's why you'll never get WSiP." The conversation, reported here based on Rapaczyńska's account, took place in July 2002. And regardless of whether or not Rywin's explanation is to be believed, his prophecy certainly has come true.
Agora, the publisher of the country's largest daily newspaper, saw its bid come
to nothing when the third and last tender for WSiP, to which another private publisher Muza had also been invited, was canceled at the beginning of last year. Muza counts Włodzimierz Czarzasty among its shareholders, who is thought to be an influential figure on the ruling left. The WSiP acqui-sition was meant to be the first step in
the creation of a pro-government media empire.
However, both Muza's plans and Agora's increasing influence proved worrying for many within the country's political establishment. And once Agora outed the details of the ugly political in-fighting, the tender was canceled, as was the case in the two previous tenders. Instead, privatization via the stock market was chosen as the right route for the publisher. An IPO was scheduled for this quarter, but a sudden change of heart at the Treasury Ministry last December looks set to delay the process even further. According to sources close to the deal, the IPO is unlikely to take place in the first half of the year.
WSiP is still gearing up for the floor. According to the company's president, Jan Rurański, pre-IPO negotiations with institutional investors are to begin "within days." This time round, however, the 40-60 percent shares in WSiP will not be offered to strategic investors, but to pension funds (OFEs).
"Apart from the price, the time horizon of an investment will also be a crucial consideration in negotiations with OFEs," Rurański adds. He openly explained that the purpose of the requirement for a fund to remain in the investment for three to five years is to stop control of the publisher passing to either of the previous bidders.
"WSiP cannot be seen as being subject to political interference, since school textbooks must be perceived to be unbiased," Rurański says. Well, it could just be a little late for all that.
Staff report
