Selling the family silver
By : Bogda Zukowska
To analysts, the sell-off of many state-owned behemoths has been a half-hearted affair for several years now.
But with the government struggling to deliver zl. 18 billion ($4.4 billion) in privatization revenue to finance the budget and help push through vital pension reforms, necessity is forcing the treasury to commit to sell-offs in all sectors.
This year some 80 large companies and about 200 small and medium-sized enterprises (SMEs) will go under the hammer.
Energy for sale
But the energy sector holds the key to valuable revenue and it's now the most attractive sector for privatizing. As early as this week, investors can expect a government decision that will allow interested parties to buy majority stakes in several power plants. "The move will boost the attractiveness of the power plants offered for sale," said Aldona Kamela-Sowinska, deputy treasury minister.
To add to the attraction, the treasury has pledged to scrap the 25%-45% cap on stakes in the energy sector sold to strategic investors. "(Treasury) Minister Andrzej Chronowski is committed to lifting this barrier to have a transparent and sound structure for shareholders," said Beata Jarosz, spokeswoman for the ministry.
This commitment comes on the back of the controversy over Powszechny Zaklad Ubezpieczen (PZU), the nation's No. 1 insurer, which is 30% owned by pan-European insurer Eureko, but which holds 50% voting rights in the company. "From the PZU case we have learned that separating power from ownership does not always work well," Kamela-Sowinska said. She said that in the future the treasury wants investors to have a majority stake in privatized companies. "Giving up the offer of a minority stake in favor of selling a majority stake to investors might also be a solution for other industries, including defense," she said. "I will not offer a 29% stake for sale, but a majority package to ensure a clear structure of power in privatized companies."
Enter the dragon: The huge machine, dubbed the dragon, does the digging at the Kopalnia W´gla Brunatnego Belchatow open cast mine.
Within the next two weeks, the treasury is likely to move forward on its privatization plans by selling stakes in the Belchatow brown-coal mine and power plant and LOT Polish Airlines. In mid-March, more decisions are to be announced regarding the privatization of the defense and steel sectors as well as Rafineria Gdanska, the second-largest refinery in the country after Polski Koncern Naftowy Orlen (PKN Orlen).
LOT could be one of the first to have a majority stake sold. To date, the government's so-called LOT bill guarantees that 51% of the carrier remains in the treasury's hands. But analysts said the treasury is considering changing the regulations after realizing that floating only 11.4% of the company's shares on the Warsaw Stock Exchange (WSE) will attract few takers. "In the privatization draft for LOT we might pledge to change this legislation and reduce the state holding in LOT," Kamela-Sowinska said.
Last year, the airline posted a gross profit of zl. 49.7 million ($14.5 million), a modest amount that nonetheless kept it in the black for a third consecutive year. As a result, LOT has met one of the major conditions to float its shares on the WSE. The company could debut on the exchange by the end of this year or at the start of 2002, Kamela-Sowinska said.
Since January, the Treasury Ministry has placed 14 advertisements in newspapers inviting investors to bid for chemical companies, alcohol manufacturers, the defense industry and health spas, as well as four ads for advisers to privatize other companies, among them the national press agency, Polska Agencja Prasowa (PAP).
While many former state-owned firms are now in private hands, such as PKN Orlen, Telekomunikacja Polska (TPSA) and Bank Handlowy, the treasury is looking at the energy and oil sectors as the potential cash cows of the future. "The majority of privatization revenue in 2001 will be generated by the sell-off of energy companies," Chronowski said in December. This year, 17 energy companies, both power plants and energy distributors, are scheduled for privatization. With the expected lifting of stake limits for potential strategic investors, the financial target may be easier to achieve.
"If Poland manages to make it through (autumn's parliamentary elections) without major turbulence, it will be one of the most attractive places to invest in the energy sector," according to ratings agency Fitch.
Of the zl. 18 billion ($4.4 billion) in privatization revenue calculated for 2001, zl. 11 billion ($2.7 billion) is earmarked for financing pension reforms.
Last year, the treasury earned more than zl. 26 billion ($6.3 billion) from privatization deals compared to the zl. 21 billion ($5.3 billion) calculated in the 2000 budget.
Electric avenue: The generating room at Elektrownia Belchatow.
Time to privatize
Analysts agree that the business environment for privatization this year is generally favorable. With the 2001 budget passed and inflation falling to 7.5% in January, investors are likely to view Poland as a safe bet for investment. Leszek Balcerowicz's appointment as head of the central bank has also been optimistically received by pundits.
According to a November survey by the Polish Agency for Foreign Investment (PAIZ), positive growth forecasts, low labor costs and the size of the domestic market are all factors encouraging foreign investors to remain bullish on Poland.
But analyts said time is fast running out for sectors such as chemicals, defense, alcoholic beverages and steel. "We can't wait any longer for the privatization of the defense and chemical industries. If we postpone it for another year, there could be nothing to offer," Kamela-Sowinska said.
She said the treasury should be able to raise money from selling the assets of chemical companies, but the defense industry should be sold as soon as possible before it goes bankrupt. "The defense sector will fail to find investors unless the companies receive orders from the government. And with the tight budget, that's unlikely to happen," said Jacek Chwedoruk, director of Rothschild Polska, a consultancy group.
Two major domestic manufacturers of nitrate fertilizers, Pulawy and Kedzierzyn, are scheduled for privatization this year. Pulawy is the largest with a market share of 50% and is to go public by mid-2001, while Kedzierzyn is hoping to find a strategic investor.
"The sector has been treated like Cinderella and lost opportunities are not likely to be repeated," said Marcin Sojka, an analyst with Bank Gospodarki Zywnosciowej brokerage house.
Just as a sell-off of the chemicals sector looked certain last year, it was hit by gas price hikes, with gas accounting for 40% of the industry's overhead. Another blow came in January when the European Commission imposed anti-dumping duties on certain types of fertilizers produced by Polish manufacturers, including Pulawy and Wloclawek-based Anwil. Additional duties on fertilizers exported by Polish manufacturers on the EU markets would result in price hikes and make the exports less profitable and less competitive.
"I have to put the European Union move on the side of investors' risks," Kamela-Sowinska said. "But we're not going to suspend privatization. It wouldn't help."
But Rothschild's Chwedoruk is worried about future privatization prospects within the sector. "In Europe, fertilizer manufacturers are suffering from a slowdown in demand and East European companies are more competitive than Polish ones as they have lower manufacturing costs," he said.
Looking for the silver lining
But there could be a silver lining as some interested investors manage to cut bargain deals in the troubled chemical industry. "It's the price that will determine the attractiveness of chemical companies such as Pulawy," said Witold Samborski, head of Fortis Securities. "The company is large with a huge capitalization. This is welcomed by capital market players, but there are also big problems."
The best time for the steel sector to attract investors disappeared with the Russian and Asian economic crises of the late 1990s. Demand for steel plummeted and prices dropped by at least 30%. The government's inconsistent strategy is also to blame, analysts said.
Last month potential investors were once again thrown into confusion. While the treasury analyzed the offers of potential bidders that responded to its invitation last December, Deputy Economy Minister Edward Nowak announced a consolidation plan for the steel sector. The plan is aimed at Huta Katowice, Krakow-based Huta Sendzimira, Huta Cedlera and Huta Florian. By mid-March, the treasury is expected to choose partners for these firms. But if Nowak's consolidation plan is accepted, it will put the privatization process on hold once again.
So far Austria's Voest Alpine Stahl is the only potential bidder for any of the steel mills. Luxembourg's Arbed said it is interested but has yet to commit and France's Usinor is also interesed but has no purchase plans, according to a recent report.
The privatization of 28 defense industry companies is scheduled for this year. Analysts said Swidnik, an aerospace parts maker, is probably the most attractive to investors as it is one of the few defense companies in the black. Last year sales totaled zl. 140 million ($34.1 million), 10% more than 1999. Also it has had major dealings with Western aerospace companies such as France's Aerospatiale, Italy's Agusta and Germany's Eurocopter, which account for 30% of sales.
"Due to a very tight domestic defense budget, our companies will not be able to survive on domestic contracts," Kamela-Sowinska said. "And privatization may be the last opportunity to join global players in the industry that would provide the Polish defense industry with modern know-how and access to international markets.
"Polish companies are too small to challenge international markets."
In March, the treasury plans to invite bids for the Krasnik ball-bearings manufactur based in southeastern Poland. The factory reported revenue of zl. 245 million ($60 million) last year, an increase of 12% compared to 1999. It will be the second attempt to find an investor for the plant. "The first one failed last year as the treasury was not happy with the offer by Japan's NSK company, the final bidder," the treasury's Jarosz said.
Companies such as Krasnik and Rafineria Gdanska are now looking more attractive for investors and the fact that Gdanska is now on sale again may be a signal that the ministry is no longer desperate to sell state assets at any price. This is particularly true of companies whose finances have improved in the past few years. "We are quite sure we'll strike a better deal for Rafineria Gdanska than we would have sold it for two or three years ago," said Michal Frackowiak, president of Nafta Polska, a state company in charge of refinery privatization. The first attempt to privatize Rafineria Gdanska in 1998 failed because the treasury was dissatisfied with bidders' offers.
