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Poland will slash its revenue target from privatisations this year, the treasury minister warned on July 14, as Warsaw struggles to offload the smaller companies still on its roster in a market beset by challenges.

"One can expect a significant correction," Treasury Minister Wlodzimierz Karpinski told the Polish edition of Bloomberg Businessweek, according to Reuters. "Privatisation is not a goal in itself," he said, sounding remarkably like his predecessor in the former PiS government when it was criticized by the current ruling Civic Platform for dragging its feet on getting the state out of the economy. "We are concentrating mainly on building the value of our strategic companies." 

The 2014 budget originally aimed to bring in PLN3.7bn from the sale of state assets in total. A draft of the financial plan released in September showed the treasury hoped to reap PLN2.5bn via listings on the state-controlled Warsaw Stock Exchange, with the remaining PLN1.2bn to come from other sales. 

Explaining the huge drop since it sold PLN22bn in assets in 2010, the treasury said at the time that it has sold the most sought-after assets. Warsaw struggled to meet the PLN10bn target for 2012, as well as last year's PLN5bn. Only the PLN2.4bn IPO of a 34.2% stake in Energa, Poland's fourth-largest utility, in December pushed it over the line.

More important than the politicking is that the lowered target is likely to be bad news for the government's efforts to rein in the budget deficit. A host of CEE states have managed to escape the EU's excessive deficit procedure (EDP), but a rise in the budget gap to 4.3% last year (from 3.9% in 2012) kept Warsaw captive. At the same time, state debt is close to constitutional limits - a ceiling that has drawn complaints from officials who want to borrow more to take advantage of Poland's currently low borrowing costs.

As well as the lower privatisation revenues, the 2014 budget also forecasts the government's income from dividends will fall to PLN5.1bn this year, compared with PLN6.9bn in 2013. 

Warsaw spent the first years of the decade pushing for state companies to raise payouts as a major plank in its fiscal consolidation efforts. However, with the need for economic growth taking precedence last year as the Eurozone crisis finally caught up with Poland, and Warsaw urgently driving for greater energy security, companies controlled by the treasury are being driven instead into huge investment projects.

On top of that, the Ukraine crisis has cast doubt on the economy this year, with Poland heavily exposed via exports to Russia and Ukraine. Efforts to drop the deficit last year also saw the government implement a controversial pension reform which transferred bond assets from private pension funds to the state. Those funds are a mainstay of the Polish equities market. The tapering of quantitative easing by the US Federal Reserve has also dragged on emerging markets.

Different approach

That uncertainty has weighed heavily on the WSE, with the WIG 250 having shed over 10% in the first half of the year, despite a significant upturn in macroeconomic data compared with 2013. The first six months of 2014 has seen asset sales bag just PLN770m. 

By way of contrast, the sale of a 3.5% stake to institutional investors in national utility PGE in early July reaped PLN1.33bn. The pattern is familiar from the past couple of years. Warsaw has struggled to offload smaller companies, and has been forced to rely on selling stakes in blue chips in order meet its privatisation targets.

However, the treasury will see none of the cash from the PGE sale. Revenues from the sale of shares in blue chips like PGE, PKO Bank and insurer PZU are now reserved to feed infrastructure fund Polskie Inwestycje Rozwojowe (PIR), which was set up last year in a bid to attract private investment into large projects and thus boost economic growth. 

"We now have a different approach to privatisation," Deputy Treasury Minister Wojciech Kowalczyk told reporters in Warsaw in the wake of the PGE sale, according to Bloomberg. "If we are to sell bigger stakes, the proceeds will support the investment program." However, he insisted there are no plans to sell further blue chip stakes this year.

That might offer the space for the treasury to push its "own" sales, but without a turnaround in investor appetite it looks unlikely. The treasury is left to try to offload smaller, lower quality assets on a market clouded with uncertainty. 

Warsaw has previously said it hopes to offload a PLN500m stake in soda ash producer Ciech this year. It also wants to finally find a strategic investor for real estate holding PHN. After several failed attempts, the treasury finally got an IPO of a minority stake in the property company off last year. However, concern over the quality of some of the assets it holds saw the volume of the offer cut and a planned simultaneous sale to a strategic investor delayed.