| Lescek Balcerowicz | ||||||
Most Polish assets are now in private hands – 76% of assets in the banking system are foreign-owned, for example – but some prize assets are still state-owned. The government has been frank about the fact that it wants to review some of the sales that were pending under the direction of the previous government, particularly in the insurance, banking, oil and power sectors.
Among these, the new government has said it will block the sale of the four remaining major state-owned banks: savings bank PKO Bank Polski, co-operative bank Gospodarki Zywnosciowej, Bank Gospodarstwa Krajowego and postal bank Bank Pocztowy.
It wants to do this because it feels that the privatize-at-any-cost strategy pursued by the previous government led to some misguided disposals. And now there is the additional pressure of the rising unemployment rate, which already stands at 18%. Privatization typically brings a short-term increase in unemployment and it’s not clear how much more joblessness the electorate can stomach.
Trying to balance the short-term pain of restructuring and lay-offs at newly privatized entities against the long-term gain of greater competitiveness and productivity is a delicate task for the new government. It’s an issue that has senior government ministers tying themselves up in knots.
“We are not going to decelerate privatization, we look at privatization as one of the most popular implements of restructuring but we are not going to continue to sell out fodder,” says Marek Belka, the country’s finance minister.
So he is going to re-examine privatization? Won’t that be bad for the economy in the long run? Belka seems to want to have it both ways. He rather confusingly adds: “I would like to say that this very simplistic view that decelerating privatization immediately has a negative impact on economic growth is simply not true.”
Whatever the government’s official line, the perceived slowdown has concerned private investors and multilateral lenders alike. For a start, the government has planned to reap Zl6.6 billion ($1.6 billion) from privatization this year, revenue it desperately needs.
Backtracking on privatization will not just rob it of short-term financing flexibility, it is also seen as detrimental to plans to achieve 5% growth in two years’ time. Private-sector analysts say that hobbling privatization would cause a slowdown in achieving the competitiveness that should ultimately drive this projected growth.
In a discussion draft on its country assistance strategy on Poland published in March 2002, the World Bank identifies the forceful implementation of further structural reform as one of the key priorities if the government is to invigorate the economy and curtail government borrowing.
In the same report, it comments that the government is “ambiguous about intentions to move forward with the remaining substantial agenda for privatization, except for ruling out the early privatization of the remaining state-owned banks and proposing some consolidation of state-owned industries before privatization, a move which could be costly, delay privatization significantly and militate against post-privatization competition.”
The strange tale of PZU’s sale
At least one large private investor is also more than a little concerned at the moment – the company caught up in the contentious sale of a further stake in Poland’s biggest insurer, PZU.
| Wike Groenenberg | ||||||
In 1999, Dutch-based insurance group Eureko took a 30% stake in PZU along with its domestic partner BIG Bank Gdanski and set about running the business. Almost from the moment the deal was struck the degree of Eureko’s management control over such a key financial institution – relative to its minority ownership – was a contentious issue in Poland. An agreement was made with the outgoing government that an IPO, through which Eureko could increase its stake to 51%, would be completed by the end of 2001.
Now, though, new treasury minister Wieslaw Kaczmarek has announced that he will postpone the IPO of PZU until 2003 at the earliest, to the outrage of Eureko and the Dutch government, which say that the new Polish government has violated a binding agreement and a contract worth around $680 million.
Kaczmarek postponed the IPO on the basis that the position of the company needed to be clarified after one of its former bosses was arrested on suspicion of fraud and one of PZU’s board members said his signature on the document containing listing details for the IPO had been forged.
But Kaczmarek has also been quite open about the fact that PZU, with assets of around Zl20 billion, is one of the most profitable state-owned industries and that the government wants to have some say over where those assets are invested. His argument is that there is no reason why funds from profit-making state-owned industries should not go to support government-sponsored projects rather than the global empires of foreign companies.
Long after Poland’s robust and swift embrace of free markets and even as it closes in on admission to the EU and even to the single-currency system, to a foreign investor it all smacks of Soviet-style central planning.
Eureko has complained about the case to the EU and threatened to take the dispute to international arbitration in September if an agreement with the Polish government cannot be reached by then. The EU has already warned the Polish government about the case.
In fact, it might seem unwise of the Polish government to have picked a high-profile fight with a foreign investor when it was on the verge of closing the controversial pre-accession EU chapter dealing with land sales.
The EU investigates
At least the EU did provisionally agree to this in March. However, it did so on condition that Poland gave the EU assurances that it would treat foreign investors fairly. And the EU is sufficiently concerned to have launched an investigation into how Poland handles privatization, which will report back in May.
It is not totally clear where this leaves PZU. Belka is concerned that the case is on the brink of being put to international arbitration. “This is unfortunate but emotions are now flying so high over this, internationally as well as in Poland, that we will have to wait for a while until both parties have time to come to terms with each other.”
Lorrie Morgan, spokeswoman for Eureko, is none the wiser as to what the immediate future of Eureko’s investment is, other than it will pursue international arbitration if necessary. “I have no idea what the government’s agenda is, other than to limit our involvement in the company,” she says wearily.
Nevertheless, it’s not clear how much support Kaczmarek has from the rest of the cabinet. And he will have to get cabinet approval to scrap the deal completely. When Dutch deputy prime minister Anne Marie Jorritsma-Lebbink met Belka, she said that she had received assurances from him that the agreements regarding Eureko and PZU were binding.
Belka is certainly a lot more upbeat than Kaczmarek about the transaction. “PZU controls 60% of the market and you are selling this to a company which was more of a financial company than an insurance giant. Many doubts were raised, but I do not share these doubts,” says Belka. “I think that Eureko is a solid company and an effective partner for PZU but this was going to be partnership where PZU was one of the legs of a multinational empire. This pledge of partnership was somewhat forgotten, instead there was a rush to take a majority shareholding. But we have an agreement and the last thing I would agree to is to unilaterally break this.”
But then in defence of Kaczmarek, he points out: “Let’s acknowledge that the whole process of privatizing PZU was loaded with mistakes, scandals and even crimes. One of the two bosses of PZU is in jail, the case has developed and new wrongdoings are released. In any country, the process would be stopped to clear up the situation. PZU is a bucket of scandals. That’s not the fault of Eureko, of course, but neither is it the fault of Mr Kaczmarek and the whole government.”
Belka is at pains to point out that this was an exceptional case and atypical of the privatization process as a whole but analysts are also concerned about the situation in other companies.
Poland’s leading oil company, PKN Orlen, is an example. The Polish treasury had been due to sell a 17.6% stake to either Hungary’s Mol or Austria’s OMV (see story on page 60). Now the ministry has stalled this process, as it has with the long-awaited sale of another oil concern, Rafineria Gdanska. UK company Rotch Energy, the preferred bidder for Rafineria Gdanska, has still not secured $1 billion of financing it needs for the deal and the government has said that if backing for the purchase is inadequate it could bring Gdanska’s assets into the PKN Orlen group.
“There was a wide expectation that the process of the PKN sale would be finished by the end of the year but now it will either be privatized or merged with Rafineria Gdanska,” says Rafal Jankowski, sector analyst in oil and gas at Pekao brokerage. The second option is looking more and more likely as it is consistent with the new government’s stated aim of consolidation in certain sectors between existing state-owned industries before privatization.
Some western analysts have said that this policy will create national monopolies that will hinder the restructuring process and become an even greater drain on government resources. Jankowski, however, thinks this particular combination could be value creating. “A PKN/Rafineria merger could be good for value of the companies on the stock exchange and I see plenty of opportunities for synergies,” he says. But whatever the value of this strategy, finding a buyer to get involved in the two combined companies could be protracted and difficult, even if the government decides to go ahead with it.
Under new management
PKN Orlen and PZU also share another rather worrying characteristic. The previous managements at both companies have recently been ousted in favour of government-friendly executives appointed by Kaczmarek.
The former chief executive of PKN Orlen, Andrzej Modrzejewski, who was appointed by the former right-wing government, was ousted in February after being accused of insider trading. He has been replaced by new chief executive Zbigniew Wrobel, a protégé of Kaczmarek. At PZU, Kaczmarek replaced the previous chairman, Zygmunt Kostkiewicz, who was accused of fraud, with government-friendly Zdzislaw Montkiewicz.
A cynic might argue that the alleged incompetence of both managements was an unlikely coincidence. Jankowski thinks the case of the PKN Orlen management reshuffle is overstated but says that this is not so in yet another company, non-ferrous metals producer KGHM, where the government exerts undue pressure on company policy.
“With KGHM, the situation is different. There are plenty of decisions that should have been taken in KGHM that have been influenced by the government.” But whether the former managements were guilty or not, it provided a convenient excuse for the new government to increase its influence.
Although the government argues that this is the best way to ensure the smooth running of these companies, before eventual privatization, this is not a sentiment shared by many observers. In its March report on Poland, the World Bank stated that “corporate governance, especially in state-owned industries, doesn’t function well” and goes on to say that there is a clear conflict between the functions of ownership and social protection by the state, which erodes profitability.
Wike Groenenberg, director of eastern European research at Schroder Salomon Smith Barney, goes further: “It’s never a good sign for company managements to be packed with close friends of the government. These politically appointed managers may not be the best to run these companies.” It also raises the question whether these companies are not just eroding profitability in favour of patronage but are being kept in line to serve the interests of the government and its economic goals.
It has not gone down well with investors either. PKN Orlen’s stock has fallen 10% since the state-orchestrated management reshuffle on fears that the state had taken too much control.
Belka is unapologetic about distributing patronage in these companies, something he says every successive government has done. “The opposition will always say that ‘they’ve replaced our people’. I am unmoved by Kaczmarek promoting people. So what? Kaczmarek will promote good people that he knows but if you see people who are incompetent, then you are entitled to say that there are illegitimate reasons behind it.”
Belka concedes that he does not admire all Kaczmarek’s political appointees but says the agenda behind the appointments is not to slow up privatization. “In two years the critics of Mr Kaszmarek will say that he is speeding up with the privatization process because he wants colleagues to be promoted.”
Not all analysts disapprove of the new government’s privatization strategy, either. “There is no doubt in my mind that privatization will continue – the question is all about the timetable,” says Jankowski. “In my view, the former government’s strategy was a little bit too quick.” It is true that by 2005 Poland aims to have just 10% to 15% of assets in state hands, in line with the rest of the EU. And there is nothing wrong with caution about selling assets when there is high unemployment.
Despite the EU’s concern, there is nothing in the acquis communautaire that says a country must privatize all its state-owned companies, just that the state must not provide them with subsidies and that competition is supposed to exist in all aspects of the economy.
A hole in the public finances
Lescek Balcerowicz, president of the National Bank of Poland, and the man behind Poland’s former shock therapy and rapid-fire privatization is, perhaps unsurprisingly, less convinced. He says: “The best response is to complete privatization. Not to do so overburdens state finances and is an invitation for political interference.”
The government will have to sell some of its key assets if it is going to meet its budgetary target of gleaning Zl6.6 billion from privatization this year. Unfortunately most of the assets the World Bank report mentions as the key ones the government could do with selling – PZU, railways services, steel, coal mining and the savings bank – are the ones the government is intent on hanging on to.
“It’s not clear whether the government will privatize sufficiently to meet this year’s target,” says Groenenberg. “Certainly the news on PZU that there will be no sell-off this year seems to suggest that the government will privatize very little in 2002, and that would have negative implications for the budget and economic growth.”
