Wednesday, March 17, 2010

The Neverending Story: Or an Introduction to Polish Style Privatisation

This is a topic volumes can be written about, especially since there is nothing more amazing, peculiar or hilarious than "Polish Style" privatisation.

For all of you who live in the nice perfect world of common private property, privatisation is this somewhat silly process when the state arrives at the conclusion that indeed private property is more efficient than state ownership and decides to sell its assets. At other times, cold hard money is needed to finance the budget deficit. All in all, it seems like quite a straightforward process, that is, until you mix in a little politics.

Let's then cover the basic concepts of "Polish Style" privatisation.

Privatisation in Poland only takes place when the finance ministry gets so worried about the state of public finances that it is willing to risk a potential political backlash and bangs on the door of the Treasury (which theoretically "manages" state-owned assets) asking/begging for money. If such money is not proffered forthwith, the ministry threatens eternal damnation, that is, tax controls for everyone. It gets its way.

We are at just such a point. Borrowing needs are going through the roof due to the ever widening budget deficit. To test our little theory, let's take a look at the privatisation receipts: gross revenues are 1.9 billion zloty in 2007, rising to 2.4 billion in 2008 and then to 6.97 billion in 2009. In just January-March, revenues are already 5.2 billion! For the year, the target is a massive PLN 25bn, though in this case the size of the target has nothing to do with its capacity to be hit.

When the Treasury decides to go through the traumatic privatisation process, it usually looks something like the following:

Foreign Nationalisation - the state takes a controlling stake in a state-owned company, preferably a monopoly, and sells it to a foreign state-controlled company. Yes, it is still called "privatisation" in Poland. After all, your badly run, bloated state-owned company must be better than our badly run bloated state-owned company. Surprisingly in this case they are often right.

Best examples: the sale of dominant telecom operator TP SA to France Telecom, takeovers by Sweden's Vattenfall or the Czech utility CEZ.

Domestic Nationalisation - if all else fails Polish state-controlled companies step up to save the day and buy what they are asked to. We suppose that if one's de facto boss comes and says "buy this crappy state-owned company or else", you have to, especially since you are also a crappy state-owned company and want to be bought yourself one day (the secret: employees get free shares). The funniest thing is how this is ultimately rationalised: "long-term investment, strategic cooperation opportunity."

Best example: the gas giant PGNiG and chemical producer Ciech (two smelly companies -- ouch) step up to buy overpriced shares of ZAT, a chemical maker.

Financial Investors
(a.k.a., Sucking Pensioners Dry) - the most recent innovation of sorts -- and the Treasury's "easy money" option -- is to sell minority or even majority stakes to financial institutions, but mostly to the OBLIGATORY Polish pension funds that basically are compelled to buy in. To be honest, at least most of these pension funds are privately owned and independently managed so it is not that bad of a deal, especially if compared with the above alternatives. Risks remain nonetheless.

The latest twist to the story: the same government that offloaded some 10 billion zlotys in state assets to financial institutions in the past several months is mulling "fixing" the pension system in order to, wait for it, decrease the total assets managed by pension funds. Now if this isn't potentially shooting yourself in the foot, privatisation-style, we don't know what is.

Best examples: PKO BP bank, Bogdanka coal mine, Lotos, KGHM transactions this year.

Getting it Right - well it happens, believe it or not. The state actually did sell companies to private investors, foreign non-state investors in a way that turned out to be profitable for those entities being sold, assuring their existence and development in the current day.

Best example: this will be controversial for some Poles, but the privatisation of the banking sector was probably the most successful transition from a state-owned monopoly to a market-oriented, competitive industry that held up very well in the crisis.

Frigging It Up Royally - this also happens, as it does indeed in life. Spectacular failures are not as common as they were once in the hey-day, but Frigging It Up Royally can take place anytime, anywhere, regardless of the method employed to carry out the privatisation task. Corporate lawyers based in Poland and elsewhere (can anyone say international arbitration) tend to like this option the best.

Best examples: the sales of stakes in Polish insurance giant PZU to the relatively unknown Dutch firm Eureko, triggering a roughly 10-year legal battle for control that saw Poland go to all sorts of courts across Europe until a deal was finally reached in late 2009. Populist politicians salivated over this for many years as well ('don't sell our national treasure!').

The sale of a 40% stake in the electricity generator Pątnów-Adamów-Konin and ceding all control over the company at the same time. This was just friggin' brilliant. Someone should get a prize. Needless to say, the state has been trying to sell its 50% stake (without controlling power) for over 10 years now.

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