Poland had the unique distinction of being the only EU country to stay out of recession the past two years, a lure for ever-important foreign investors. Now on the outer reaches of a global recession, as economies begin to pick up, Poland’s large-scale privatization push, which was launched in 2008, is providing even more reason for investors to swoop in and snatch assets or stakes in formerly state-owned companies, and the energy sector in particular. But the country’s strategy of promoting growth at the expense of stable public finances could cost it in the long term, analysts say.

Prime Minister Donald Tusk campaigned in 2007 on expediting privatization, even before the crisis hit, and the revenues from the sales, which were planned to be held from 2008 to 2011, are now helping the country cover a budget deficit that could grow to 8 percent of GDP this year, Tusk admitted this month.

Growth in the country has unfortunately not meant stable public finances, then, as the government has, for the moment, relied on the privatization of more than 800 companies to cover costs. Compared with countries like the Czech Republic and Germany, Poland has not adopted austerity measures, preferring instead to continue feeding growth.

"It’s a big question mark for me how Poland will handle it," said András Szalkai, portfolio manager at East Capital. "They could just delay these decisions, but the economy is growing quite fast, and maybe they will be lucky and just grow out of the problems. The Czechs, Slovaks and Hungarians have started cutting deficits, and I’m sure that’s why their growth figures are much lower. Maybe Poland will be the lucky one that didn’t cut too much, that didn’t cool down the economy too much to save some money. It’s hard to tell."

STATE SALE

Source: Polish government

The privatization plan is expected to generate 25 billion złoty ($8.9 billion/6.4 billion euros/156 billion Kč) over four years. Privatization has been a big building block of economies that came out from behind the Iron Curtain in 1989 and began to sell off state-owned assets in the industrial, financial and energy sectors. The method by which each country sold assets has come to shape their economies today, said Marcin Piatkowski, head economist at the World Bank’s Poland office. For Poland’s Treasury Ministry, the preferred method of privatization has been through the Warsaw Stock Exchange (WSE), allowing the government to sell off shares to private investors rather than a single 100 percent sale.

"Over the past 20 years, no one has really had the stomach for wholesale privatization for the power sector," he said.

Czech companies are getting into the game this year with bids on energy companies that are being floated on the WSE. Recently, the Czech Republic’s Energetický a průmyslový holding (EP Holding, a joint investment group between PPF and J&T Holding) offered the highest bid, according to Dow Jones, for a 51 percent stake in Enea SA, listed on the exchange and in which the Polish government holds a 60 percent share. Neither the Polish Treasury Ministry nor EP Holding would comment on the bid. Nevertheless, the Financial Times reported Oct. 13 that EP Holding was no longer in the running, according to anonymous sources, because its bid came with too many attachments.

Czech energy company ČEZ has meanwhile begun to pull out of Poland, announcing Oct. 10 it would postpone investing in construction of a 430 megawatt gas-fired power plant in Skawina, in southern Poland, citing "unclear issues over Polish gas market liberalization [that] pose a risk that return of investment in Poland will be lower than in other countries where ČEZ is preparing new projects," the company said in a statement. ČEZ, however, is consolidating projects abroad in order to focus its resources on completing the Temelín nuclear power plant project.

Left in the Enea bidding process are two French companies and one Polish group. While the Treasury Ministry has stressed national origin is not considered in privatization, experts say the country hopes to keep interests close to home.

In the case of the WSE, which itself will be privatized by the close of this year, the government has spoken to investors abroad but ultimately is seeking an investor whose interests will remain in line with the state’s.

"The idea is to keep ownership largely local," Piatkowski said. "They’ve tried to sell the stock exchange to foreign companies like the Deutsche Bourse, the NYSE, but most of these guys’ strategies on the developing markets are not in line with what the treasury wanted. The treasury wants to continue to strengthen the role of the WSE to be the leading one in the region, whereas foreign investors were treating it as just another trading platform."

The state treasury currently owns a 98.2 percent stake in the WSE, the reason the Prague Stock Exchange (PSE) turned down its offer in favor of the Vienna Stock Exchange’s offer when the PSE was sold in December 2008. The WSE has 384 listed companies as of September, worth a total of 201.36 billion euros. The PSE, in comparison, has 26 listed companies with a value of 26.18 billion Kč.

The difference has been created by Poland’s tendency to float shares of state-owned companies on its exchange, in lieu of wholesales - for example, Volkswagen’s 100 percent buy of Škoda Auto in 2000 after a 31 percent ownership and cooperative agreement created in 1991.

Additionally, the Polish government has created the demand for the market by privatizing pension funds.

"Sure, we should say the way the government has handled privatization has been a big part of this process, but they also have a very large private pension fund system to create the market," Szalkai said. "They created the demand side, and they also created the supply side. They developed the market this way, and it’s been positive for equity investors."

While Poland’s public finances and growth moving forward aren’t certain, "one thing that is clear is the stock market will be the largest now in Central Europe. It’s even taken over as No. 1 from the Vienna Stock Exchange, and they are very proud of it," Szalkai added.

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