Jan Cienski in Warsaw -

Aleksander Grad, Poland's treasury minister, told bne in a recent interview that he was against the "illusory privatisations" of the previous right-wing Law and Justice government, whereby it sold off a few percent of state companies, unable to countenance losing control of them. And indeed, on June 2, Grad told reporters his government wants to fully privatise all of the four state-owned power groups - PGE, Enea, Energa and Tauron - and wouldn't, as previously expected, keep controlling stakes.

"We expect the four energy groups to be fully privatised," Grad told a business seminar. "We want to conduct the privatisation in such a way that wouldn't change the state monopoly into a private one."

Such thinking marks a complete volte-face in government. Almost 20 years after the end of communist rule, companies in which the Polish state holds a stake still control about a fifth of the economy. That is expected to be slashed to only 10% over the next four years as the centre-right Civic Platform government embarks on a programme to sell off its shares in 740 companies, including the Warsaw stock exchange, Lot Polish airlines, the leading power generating companies, as well as passenger and cargo railways. "We have spent the last six months getting the privatisation process moving again," Grad told bne in an interview.

Half a year ago, when Grad first walked into his ministry, a nondescript stone building tucked into a downtown sidestreet, he found the place in complete disarray. His predecessor from the outgoing right-wing Law and Justice government, Wojciech Jasinski, was a former communist party member who had an ill-concealed distaste about selling off state property. In his almost two years in office, Jasinski sold only a fraction of the assets he was supposed to, instead preferring to squeeze state-controlled companies for dividends. In one case, KGHM, the copper mining company in which the treasury holds a 41.8% stake, had to pay more dividends than it had earned in profits.

Under Jasinski, the process of preparing companies for sale had essentially ground to a halt, says Grad. The last six months has been spent rebuilding the Treasury's ability to get companies prepared for sale, the first of which will begin later this year.

Many of the 740 companies to be sold represent corporations that were sold years ago but where the government has retained a small stake. The ministry weighed whether it made more sense to hang on to those shares hoping to earn dividends or to simply sell them off. "We worked out that it is much better to sell," says Grad.

Such cases are not particularly controversial because they do not provoke nationalists or labour unions, but can be very lucrative. In one example, the Treasury is negotiating the sale of its remaining 4% holding of TPSA, the former telecommunications monopoly, to France Telecom, which owns 48.5% of the company. The sale could generate more than PLN1.1bn (€320m).

But at least 19 of the 740 companies are to be sold through the Warsaw Stock Exchange, including the exchange itself. In the past, many of the sales conducted through the exchange were only partial floatations, ensuring that the government maintained real control of the company while also earning money through the sale. The best recent example was the 2004 sale of 30% of PKO BP, then the country's largest bank, which raised about PLN6bn. But Grad now wants the government to sell all of its shares in the companies that will be floated on the bourse. "I am against illusory privatisations," he says. "We have to get a premium for selling the controlling share of a company. I am not in favour of selling a few percent and then waiting for years to sell the rest."

The Warsaw exchange is already the largest and most liquid market in the region, and the addition of several big listings, like the four recently created energy companies, the airline Lot and BGZ bank will make the exchange an even more attractive venue for investors, says Grad.

Exceptions to the rule

Although Grad says he doesn't see much of a role for the government in owning companies, political realities mean that not everything will be sold. Twenty-five of the most sensitive companies will not be brought to market over the next four years. One is KGHM, which has a very powerful labour union, as well as similarly protected coalmines. PGNiG, the former gas monopoly, and Poland's two leading oil companies, PKN Orlen and the Lotos Group, will also stay under government control. "We are not dogmatic about what has to be sold," says Grad. Some companies like KGHM will be restructured to make their sale possible after the next election, scheduled for 2010.

The government estimates that privatisation should raise at least PLN30bn, and unlike in the past, the money will not all be used to patch holes in the budget. This time, 40% of the money will go to shore up the pension system, with much of the rest going to education and to compensating people for communist-era nationalisations. "We have moved away from using privatisation proceeds for immediate goals," says Grad.

Grad is also working on legislation that would end the current restriction on management pay in state-owned companies. The law - called the chimney bill - was passed eight years ago and limits management salaries to six times the average national wage. The result of the populist measure is that more qualified executives fled for the private sector, while many of those who stayed behind ended up creating elaborate structures of subsidiaries so that they would have more boards to sit on to increase their earnings. Hiring new managers has become increasingly difficult, with many candidates being either inexperienced or unqualified. "It didn't benefit the companies at all," says Grad. "We ended up with people who couldn't manage companies at all."

The government is also holding open contests for many executive positions in state companies, trying to break with the past pattern of stuffing such posts with political cronies. "In the end privatisation is the best medicine for these types of problems," says Grad.

While the political opposition to selling off state assets can be fierce, the economic argument for getting rid of them is strong. Most companies haven't prospered under state control. The best examples are the three coal mining companies that have seen their profits dwindle despite a global commodities boom because of underinvestment in new capacity. Similarly, two of Poland's three shipyards remain in government hands and are flailing while just about every other yard in the world is doing well thanks to soaring demand for shipping. In the cases of the Gdynia and Szczecin yards, the government has promised to sell them, under threat from the European Commission, which would otherwise demand the return of past state aid, forcing both into bankruptcy. However, the one interested buyer recently backed out and the government is frantically casting about for someone to buy them. "The problem is the economic state of the yards - we can't force anyone to buy them," says Grad.

If his ambitious plan to sell off the government's stake in 740 companies succeeds, problems like the dysfunctional yards are likely to become much rarer.

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