PRIVATIZATION | 11.09.2010

Poland privatizes companies to plug deficit hole

Poland's effort to privatize two energy companies has made bumpy progress

Poland is privatizing its major companies to generate much needed revenue. Advocates say a psychological barrier to a more modern economy has been crossed, but critics say the new revenue is being used to delay reforms.

In an attempt to fill budget gaps and offset a soaring public debt, Poland's treasury has announced a push to privatize major companies before the end of the year. It hopes to gain some 6.5 billion euros by doing so.

Analysts, however, wonder how realistic this target is, and some potential strategic investors say that the prices set for some of the companies up for sale are too high.

When the decision to sell a majority stake in two power companies, Enea and Energa, was announced by the Polish treasury last year, both investment opportunities looked like winning propositions. Operating in a recently liberalized power market, they had gone through a restructuring process that had started generating good financial results. Poland itself looked like an ideal place to invest, as the only Europe economy that actually grew last year. But the expected scramble for shares didn't materialize.

Germany's RWE pulled out of an investment deal into Poland's EneaOne potential strategic investor in Enea, German energy giant RWE, pulled out of talks, claiming that the price was too high. Others expressed doubts about Poland's economic future after the country's government revealed that public debt was soaring.

Enea's president, Maciej Owczarek, is confident that his company can still attract a good bid, even if the price needs to be revised.

"Of course, the price of Enea shares fell considerably on the news that RWE had given up its acquisition plans," Owczarek told Deutsche Welle. "But the value of the company seems to have been appreciated by the market nevertheless. A development program launched last year is being continued. In the coming months, I expect the company's market value to grow even further."

Government says it's being upfront

When it comes to the overall shape of Polish finances, Finance Minister Jacek Rostowski says the country's troubles are nothing like those faced by Greece, or the country's closer neighbors Hungary and Latvia.

"Poland is indeed the only country which registered growth in 2009 when all our neighbors experienced recession," he said. "Poland has pursued very prudent fiscal policies."

Finance Minister Rostowski says Poland's financial difficulties have been exaggeratedThe country's deficit is about a third of the Greek one, and fears its economy might spin out of control are grossly exaggerated, according to Rostowski. Instead, the country is simply being upfront about its statistics.

"We've introduced very fundamental reforms, and of course we are determined to improve our fiscal performance, and reduce our deficit over the next couple of years in line with our obligations towards the European Union," he said. "According to European Union figures and projections, Poland will have the third lowest growth in the ratio of debt to GDP during 2010.”

Psychological barrier broken

Some say the fast-paced privatization push has broken an important psychological barrier: for the first time, the Polish government is ready to sell off industries it regards as strategic. Until recently, there was a marked reluctance to put chemical plants and fuel groups up for sale, for fear that they might be snapped up by Russia.

Now, privatization is regarded much more pragmatically as a way of slashing the budget deficit. In addition to the 6.5 billion euros hoped for this year, even more sales are planned for 2011. Half of this year's target has already been met, largely owing to two very successful initial public offerings involving the PZU insurance company and Tauron energy.

Polish Treasury Minister Aleksander Grad says privatization will continuePolish Treasury Minister Aleksander Grad is optimistic more companies will be privatized before the year's end. Financial markets are now calmer than they were during 2009, when not a single sale was made during the first half of the year.

"We expect that the privatization target for 2010 can be met," he said. "An overall figure of 2 billion euros was scored by the end of (2009), and this was nearly doubled in the first eight months of this year. If we consistently carry on the privatization plan, we are confident we can succeed."

Critics call privatization a budget patch

Yet, some critics have described Poland's privatization program as a chaotic attempt to patch up the budget and delay crucial actions like reforming the health care system. There are those who say that ahead of next year's parliamentary elections, the government of Prime Minister Donald Tusk may avoid upsetting voters by not pushing controversial schemes like the privatization of publicly funded hospitals.

However Agata Urbanska, an analyst with ING Bank, believes the Polish government still has a few options left, even if its privatization plans don't fully work out. For instance, Poland could still issue more bonds if asset sales disappoint.

Polish energy company Energa is also slated to be privatized"There are good and bad things about this budget deficit," she said. "What the government did was present the worst possible picture , so going forward there might be positive surprises. The budget for 2010 is based on fairly conservative assumptions about growth and inflation, but the other side, financing, was more optimistic, with assumed privatization revenues quite substantial."

Poland continues to promote itself as the only European economy spared by the crisis. Slawomir Majman, the president of the Polish Information and Foreign Investment Agency, is convinced that Poland's privatization program has a lot going for it.

"Poland is delivering the product which is definitely in short supply and this product is economic stability," Majman said. "That's why a number of foreign corporations from Western Europe – and not just from Western Europe – are now paying much more attention to Poland than ever before. Poland is the ripe and safe harbor for investments in 2010.”

Still, others say that even if Poland does succeed in attracting enough strategic investors, in the long term it will need to do more than sell off its crown jewels to ensure a balanced budget.

Author: Rafal Kiepuszewski (gps)

Editor: Sam Edmonds

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