Patricia Koza in Warsaw -

Poland's Treasury has said it wants to float three of the four energy groups it's creating by the end of 2008 - including one IPO this year. But Poland's ambitious plans face immense hurdles, including government shake-ups that have nearly halted the planning process and political interference that could scare off foreign investors.

The government announced plans last year to consolidate the mostly state-owned power sector into four major holdings, which will lump together power plants with coal mines and other infrastructure.

The largest of them will be a company called PGE, or Polska Grupa Energetyczna - a mammoth that will control 55% of Poland's electricity market. Also to be created are Grupa Energetyczna Poludnia, or GEP, built around the PKE power holding, Poland's second-largest energy group, and two smaller groups. One will be built around energy distributor ENEA, power plant Kozenice and Bogdanka coal mine, and the second will consolidate distributor Energa with power plant Ostroleka. All four energy groups would remain under state control.

It is one of these groups that might debut yet this year. But the two deputy ministers that developed the energy plan are no longer in the government. Tomasz Wilczak, deputy minister of economy, was dismissed in February for "lack of decisive action in the energy sector." His counterpart at the Treasury, Piotr Rozwadowski, resigned last year over differences with his boss, Wojciech Jasinski, an ardent supporter of Prime Minister Jaroslaw Kaczynski, who has previously cancelled several planned utility privatizations.

In a recent interview, Rozwadowski said "chaos" reigns at the Treasury. To compound the problem, the Polish press is awash with rumours that Economy Minister Piotr Wozniak, who has taken over the energy sector restructuring portfolio, may be on the way out the door as well.

Since announcing the restructuring plan, the government has withdrawn from several planned privatizations of power plants, leaving foreign investors in the lurch. Spanish power company Endesa won a heavily contested tender for the state-owned Dolna Odra power plant only to have the state back out of the deal last year. Instead, Dolna Odra will be folded into the new PGE.

Politiking in business

While the announcement about the floatation of the energy groups is good news, there is concern that political manoeuvring will make their shares less attractive to Western investors.

The government expects to formally establish PGE by the end of this year from the assets of the Belchatow-Opole-Turow coal and energy holding, Poland's largest, plus Dolna Odra, the state power grid company PSE and eight power distribution companies.

"We are particularly hopeful regarding PGE, which in the future could play a role in the region similar to the Czech Republic's CEZ," Minister Wozniak has said, adding that the goal of restructuring is "to raise the sector's credibility."

Andrzej Dudek, PSE's deputy chief executive, announced in February that the Treasury expects to float 35% stake of PGE in the second or third quarter of 2008. Also, Treasury Ministry Undersecretary of State Michal Krupinski told the Polish news agency PAP that in all, three of the companies may debut by the end of 2008.

Analysts said floating a large company like PGE would doubtless attract Western investors, who have flocked to the Czech power giant CEZ since its debut.

"If it goes through the stock exchange it could be well received by Western investors because you'd get exposure to the Polish energy sector, which is an exciting market where not much has been privatized," says Tibor Bokor, an energy analyst at Wood & Co. in Prague. "But they must do it like in CEZ, where the management is professional and there's no political influence. This is still a big risk in Poland and Russia."

The record so far is not encouraging; infighting is reported between ministries, sector players and even within state-owned companies. The Economy Ministry, which oversees energy security, has proposed to the prime minister that it take over the entire restructuring process, then give the sector back to the Treasury to administer when all is complete. It also seeks to control all transmission assets - including PERN Przyjazn, operator of the Polish stretch of the Druzhba (Freedom) oil pipeline between Russia and Western Europe and the PSE grid operator, now supervised by the Treasury Ministry. Naturally, the Treasury doesn't agree.

There are also reports of conflicts between Dudek at PSE, an appointee of a previous prime minister, and his immediate boss Jacek Socha, former head of the Warsaw Securities and Exchange Commission, and between the BOT power holding and PSE over how it will be folded into the new PGE.

Another example of possible political interference is the government's recent criticism of one of the most successful state-controlled companies, cash-rich copper giant KGHM, which it accuses of not efficiently investing its earnings.

The criticism came just days after KGHM was mentioned as a possible buyer of a 38% stake in the ZE Patnow-Adamow-Konin power plant, which was sold to Polish conglomerate Elektrim SA in 1999, but which Elektrim wants to sell back to the state. Analysts have warned against forcing state-controlled KGHM to involve itself in a sector not within its field of activity, regardless of how attractive the investment is.

But the government is clearly not disposed to letting foreign investors get their hands on ZEPAK, which provides about 14% of Poland's electricity, despite past expressions of interest from Sweden's Vattenfall, CEZ and Germany's RWE Energie.

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