Unions hold back energy sector privatisation

By Greg Goodale

Privatization bids for Poland's energy sector assets are coming in below government expectations due to costly social packages demanded by trade unions, energy analysts say. Further liberalization of the energy market would increase the drive for efficiency, thereby curtailing the freedom of trade unions to make demands and veto privatization processes.

"Employment costs in the energy sector are several times higher than in (the rest of) Europe - there are too many employees. It is a hangover from the old system," said Eugeniusz Makowski, president of domestic energy consulting firm Geoland. "There is a group of trade unions that behave like they own the assets. But they are also being maneuvered into making these demands to stall privatization. It is a political game."

With Poland's power consumption severely lagging behind its European counterparts, analysts see the domestic energy market as offering plenty of scope for revenue growth. In 2000, per capita power consumption was only 3,224 kilowatt hours, around half that of Denmark (6,484 kWh) or the United Kingdom (5,996 kWh).

But last month Tadeusz Soroka, the deputy treasury minister, complained that the privatization bids received for the Kozienice, Dolna Odra and Ostrołęka power stations were unsatisfactory because of investor concern that it would be difficult to offload electricity on the Polish market as a result of the overcapacity inherent in the domestic power sector.

Market observers see overcapacity as only one factor currently troubling investors, and by no means the most daunting. Poor cost efficiency is a major concern for Poland's aging energy sector, which will have to compete on the European Union market as of next year.

Power generators will face stiff price competition, particularly from the German generating sector, which is currently undergoing fundamental modernization aimed at slashing production costs and boosting profit margins.

The majority of Polish generators have a net efficiency of 30 percent-36 percent, while EU generators can attain a net efficiency of 48 percent with modern coal and lignite power stations and between 52 percent and 58 percent with gas power stations, according to Ireneusz Wesołowski, the director of Opole power station.

According to Makowski, trade union attitudes to privatization are among the biggest barriers to improving the competitiveness of the sector.

"Details of trade union demands should have been published five years ago, but they were confidential," Makowski said. "This would have shown how they thwart the privatization process."

One of the main sources of trade union influence in the energy sector are long-term power purchase agreements (PPAs) between power generators and the transmission network operator, PSE, which fix prices above market levels.

Originally intended to provide generators with a steady revenue stream to entice banks to invest in the sector, PPAs maintain artificial price levels, shielding power sector firms from market forces and removing the pressure for companies to improve their cost efficiency.

If left unattended, PPAs could prove a persistent plague on the industry. Wesołowski estimates that around 70 percent of Poland's electricity market is currently governed by 35 PPAs, the longest of which will run on until 2023.

"Power purchase agreements guarantee to cover costs based on calculations that do not include the need to restructure and cut costs," said Arkadiusz Wicik, energy market analyst at Fitch rating agency. "There is a trend for cost cutting in the (domestic) sector, but I think it could be much more significant."

While the PPA mechanism remains in place, trade unions can afford to block the restructuring of employment in the energy sector.

"Over-employment in the energy sector affects profitability," Wicik said. "Operating margins are lower than they could be. The second issue is the lack of flexibility. If the situation of a given power plant declines, it is not easy for the management to reduce costs through workforce reductions."

This would pose no problem if investors in privatized power firms were free to reduce employee numbers on acquisition. But the unions are loath to allow restructuring, insisting on long-term employment guarantees and generous severance pay.

"Trade unions are allowed to take part in negotiations with investors and insist that no staff cuts are made for 15 years or demand severance pay of $50,000," Makowski said. "These are actual examples. This makes privatization very difficult because investors have to cover these costs, while unions are prepared to stifle negotiations on principle."

Since the Treasury Ministry cannot close a privatization deal without consent from the unions, which are directly involved in privatization negotiations, unions can effectively veto a sale if an investor makes an unsatisfactory offer, or if they disagree with the government's choice of investor.

Trade unions insist that they are flexible on pay demands, particularly when a company's survival is threatened, says Jan Kowalski, vice-president of the Amalgamated Energy Sector Trade Unions (ZZZE).

"Of course trade unions demand what employees deserve and get all they can in negotiations with employers," Kowalski said. "Our members are not just out to get as much as they can. In many companies trade unions agree to salary reductions and to forgo bonuses if this will help to lift the company out of a crisis."

But the ZZZE, Poland's largest energy trade union, does not see privatization as beneficial. The union is concerned that job cuts in private energy companies are aimed to boost profits rather than efficiency.

"Our general policy is to stop the privatization of the energy sector," said Jan Kowalski, vice president of the ZZZE. "The unions that form our association are increasingly voicing a desire to speed up privatization - they are thinking of the money. But once their employment guarantees run out, the problems begin."

Some market observers see the sun beginning to set on trade union influence in the Polish energy sector. The government has drafted new legislation to convert PPAs into a system of compensation payments, which will be debated by the cabinet next week following its approval by the domestic energy regulator, URE. Details of the law and its financial mechanisms have yet to emerge, but government sources claim that it will be passed by parliament before Poland's EU accession in June 2004.