When is a train company not a train company? When its main ambition is to quit running locomotives to become a property tycoon.
State-owned PKP Grupa, comprising holding company PKP S.A. and several operating units, confirmed in early October that it plans to sell a majority stake in PKP Intercity – the country’s main passenger carrier – via an IPO in 2018. Should it get the deal away, the former rail monopolist will have ceded ownership control of all of Poland’s trains and rails over the last few years. “It’s a strange company,” remarks Artur Galbarczyk at Fitch Ratings. “Its main remit is to dismantle itself to leave it managing a property portfolio.”
The strategy to privatise the rail industry is somewhat of an anomaly in Poland, which retains control of numerous giants in banking, energy and other sectors. The country has been criticized for having one of the highest rates of state control in the economy in Central and Eastern Europe – outstripping even Russia. Seven of Poland’s 10 biggest companies are state controlled, according to Henryka Bochinarz, who heads the employers lobby group Lewiatan. “20% of GDP is state-controlled,” she says with incredulity.
However, taking advantage of EU rules on rail liberalisation, Warsaw introduced legislation in 2000 dictating that the state railway monolith should be split into separate operating companies, which would then be sold off. It was no liberal whim, but driven by stark economic reality: creaking infrastructure caused slow speeds and tragic accidents on the Polish railways throughout the 1990s, and losses mounted at PKP, which resulted in a huge build-up of debt. At the same time, the railways lost out heavily in terms of investment to roads.
Others view the restructuring more ideologically. “It was a once-in-a-lifetime opportunity to bring down the last bastion of communism,” proclaims Piotr Cizkowicz, a board member at PKP Grupa.
Yet little changed over the following decade or so until the plan received a shove in 2012 with the appointment of Jakub Karnowski as chief executive and a bevy of other financial, rather than railway, managers. “My job is to restructure the company and to spend EU funds,” Karnowski tells bne IntelliNews of his mission to break apart the former monopolist – though he may not get the chance to finish the job if the new government, as has been reported, forces him out.
The bulk of that funding from Brussels will go towards improving Poland’s infrastructure. “Before our mission started, the railway system in Poland was highly underdeveloped and underinvested,” Cizkowicz tells bne IntelliNews.
Poland has since been feverishly pouring cash into its railways, and in September approved a plan to spend PLN67bn (€15.8bn) by 2023. Karnowski says €10.5bn will be spent overall during the EU’s 2014-2020 funding window, with Brussels picking up 80% of the tab. The largest recipient in the bloc, Poland has been allocated around €67bn in cohesion policy funding for 2007-2013 and €77.6bn for 2014-2020. “We used the opportunity given by the EU funds to make a real change,” Cizkowski explains. “When the new board started its mission, the use of EU funds was at a very unsatisfactory level. Now we are successfully utilising around 95% of the subsidies.”
At the same time, although the plan forms the bedrock for the value of PKP Grupa’s train operator assets, control of the process is far from obvious, says Karnowski. “It’s not clear who is really running Polish rail infrastructure investment,” the CEO laughs. “That’s a good question.”
Poland is one of the few EU states to have unbundled its rail industry, the CEO claims. Infrastructure sits in the hands of PKP PLK, in which the treasury ministry holds a 62% stake. “PLK will not be privatized,” Karnowski stresses.
That leaves the implementation of the massive spending programme looking a bit ad hoc. “I can’t have management control of PLK, but need to be close to the process of course,” Karnowski continues. “Our business depends crucially on this issue. I talk regularly with the CEO of PLK.”
At least Karnowski and his team now appear firmly in control of PKP Grupa’s previously parlous financial state. Management’s restructuring steps have turbocharged the selloff of assets in recent years, despite the uncertainty stalking global markets.
The company’s debt burden has tumbled from PLN4.1bn (€973mn) in 2012 after a series of divestments. Poland’s fifth-biggest power generator, PKP Energetyka, was offloaded this year, while other non-core businesses, including telecom and cable car operators, have also been shed. Karnowski and his team now have a couple of years to bash the passenger unit PKP Intercity into shape before the IPO. “All proceeds from the privatisations have been going to pay down the debt,” notes Galbarczyk. “PKP is scheduled to finish that process by 2018.”
“We have no debt following the sale of PKP Energetyka,” insists Karnowski. “Net debt is positive, and that issue is fully finalised.” However, with the pressure having eased, so has the urgency to plough every single zloty into squeezing down the debt.
Fitch affirmed PKP at ‘BBB’ on November 5, citing “significant deleveraging” since 2012 and state guarantees for remaining debt. “It has sufficient liquidity for debt repayments in 2016 when €180mn in Eurobonds are due,” Fitch said.
However, it also noted that while PKP is in a position to fully pay down its debt, it has instead decided to steer PLN1bn into an increase of share capital at PKP Intercity. Privatisation revenue in 2016-17 is estimated at PLN1bn, all of which will be needed to repay debt due without debt refinancing. PKP will also need to get up to speed as a property wheeler and dealer quickly. “We expect PKP to reach a net cash position in 2017,” the rating agency said.
The company also needs to funnel a lot more cash into the loss-making PKP Intercity to prepare it for the IPO in two years’ time. Karnowski estimates investment demands at the passenger rail unit at PLN5bn, again with the majority to come from EU funds. “But we can also now take on new debt if necessary,” he suggests.
Much has been made of the effort to transform Poland’s sluggish and grotty trains. Executives claim the “Pendolino effect” has brought customers flooding back to the railways. The introduction of the high-speed locomotives in late 2014 is a game-changer, says Cizkowicz, “a symbol of the changes introduced over the last three years”.
Karnowski explains that while Intercity might be unprofitable right now, the problems are not deep seated. “We can definitely combat that and have positive net income by 2017. We’re not looking for a strategic investor – the process will mimic that of PKP Cargo,” he says, referring to the successful IPO of Europe’s second-largest freight carrier in 2013, which raised €1.4bn. PKP Grupa sold a further stake last year to leave it holding a minority 33%, though it maintains operational control. PKP Cargo's share price is around 7% down on the PLN68 listing price, which compares the 16% drop seen in the Warsaw Stock Exchange's main WIG30 index over the same period.
PKP Grupa is looking to build the cargo division into an international player. PKP Cargo bought Czech peer AWT for over €100mn earlier this year, and is looking to extend its reach across CEE via a cooperation agreement with Croatia’s HZ Cargo. That sets up a potential north-south link through the region; the EU-driven Baltic-Adriatic rail freight corridor was inaugurated on November 12.
The company also hopes to build on an agreement to run regular trains connecting Poland with Chinese trade hubs. That grand ambition suggests PKP plans to keep some skin in the rail game. It does not intend to sell any of its 33% stake in PKP Cargo or give up operational control of the company “for the moment”, Karnowski says.
On the right track?
Even so, PKP Grupa sees its future mostly in property. The company owns “around 2,300 railway stations, of which just 600 are currently operational”, Cizkowicz notes. “We also inherited more than 22,000 apartments and more than 100,000 parcels of real estate, of which about 10,000 have commercial potential.”
A real estate fund – Xcity Investment – will sell some plots and develop others, taking on partners on a case-by-case basis. “PKP S.A. will become a real property company,” insists Karnowski. “We can work with private investors, and therefore make no demands on the taxpayer to create value around the assets.”
Xcity should become “one of the biggest real estate funds in Poland”, reckons Cizkowicz, with central stations in cities across Poland offering the potential to create trophy projects. Karnowski says there are already PLN20bn in deals in the pipeline.
However, a huge unknown lurks in the background. Karnowski’s remit to dismantle the state rail monolith was handed down by the market-friendly Civic Platform (PO) government that was unseated in October. The incoming Law & Justice (PiS) administration has a statist economic policy, and the leaders of many state-controlled giants are on tenterhooks over their personal survival, let alone the strategies for their companies.
In fact, in mid-November Polish media quoted sources "close" to PiS as saying that Karnowski is now “certain to leave his post”. He is reportedly to be replaced either by former PKP Intercity CEO Czeslaw Warsewicz, or Andrzej Wach, who was appointed to head PKP Grupa by the left-wing SLD government in 2004 and retained by the last PiS government that governed in 2005-07. PKP PKL and PKP Intericty are also expected to see leadership changes, according to the reports.
Members of PiS have also already threatened to overturn the sale of PKP Energetyka should it take power. They claim the buyer Luxembourg-based CVC Capital Partners could easily sell the company on to Vladimir Putin’s Russia – a bugbear of the populist party and Poles in general. “There’s no chance [PiS could block it] – the deal is finalized,” retorts Karnowski.
But other sources at PKP say it’s not so clear what PiS might think of the wider mission to take the state almost completely off the rails, by reducing ownership to a minority in all companies save the rail infrastructure. Any attempt to halt the process would likely find favour with the unions, who have fought privatisation all the way. “When it comes to the unions, it’s a real struggle every day, but we manage to find a solution,” says Cizkowicz. “[They] strong-arm us through their contacts with politicians.”
However, the effort to beat Poland’s railways into shape relies on the huge waves of cash flowing from Brussels. The IPO of Intercity is planned not only to match PKP’s debt schedule, but is also based on EU legislation calling for passenger rail markets to be fully opened up by 2019.
At the same time, with so many assets now shed, PKP Grupa is unlikely to top the list for PiS as it surveys Poland’s state-controlled giants. The banks will likely come first, followed by energy. “The extent to which PKP is strategic for the state has diminished dramatically,” Galbarczyk points out.
Karnowski, meanwhile, is certain that he and his team are on the right track. “The privatisation of the businesses planned is absolutely the best way forwards,” he insists.