SIGNPOST: Poland govt takes another scalp as PKN CEO fired

By bne IntelliNews January 18, 2007

Nicholas Watson in Prague -

In what is being seen as yet another depressing example of how political patronage in Poland often trumps experience and ability, the supervisory board of state-controlled oil firm Polski Koncern Naftowy Orlen (PKN) fired its chief executive, Igor Chalupec, and replaced him with his deputy, Piotr Kownacki.

Following the meeting, Polish Prime Minister Jaroslaw Kaczynski held a news conference during which he explained that Chalupec had been replaced for "strategic" and "security" reasons.

"There were reasons behind this decision which were maybe not purely business-related but had to do with the strategic importance of that company," Kaczynski was quoted as saying.

But few are under any illusions of the real reason behind the change at the top.

"Mr Kownacki is a close ally of the president and prime minister," says Arkadiusz Wicik, an analyst with Fitch Ratings in Warsaw. "This is part of a trend of the government appointing close colleagues and friends to top positions in business and institutions."

Indeed, earlier this month the government led by the rightist Law and Justice (PiS) of the Kaczynski brothers appointed a relative unknown to the post of governor of the central bank, Slawomir Skrzypek, who happens to be a close ally of the prime minister and his brother, President Lech Kaczynski. The PiS has made changes to management and supervisory boards at state-owned copper producer KGHM, oil group Grupa Lotos and gas monopoly PGNiG.

Analysts say the revolving-door style of management for state-controlled companies, where change inevitably follows parliamentary elections, is an increasingly anachronistic part of the country's business culture. Companies like PKN no longer do business in protected home markets, but must participate in increasing competitive and complex global markets, requiring experienced management to succeed. Analysts point to the success of current and former state-controlled firms like Hungary's MOL and the Czech utility CEZ.

And it's certainly a challenging time for PKN. The company may have completed last month the major $2.23bn acquisition of Lithuanian oil refiner Mazeikiu Nafta, but the asset has been plagued by problems from a major fire and the lack of piped oil from Russia after an alleged oil spill. Additionally, margins for refining, the most important part of PKN's business, are declining, at the same time as the company is leveraged to the hilt.

All this at a time when the EU is scrambling to come up with a strategy to ensure energy supplies in face of aggressive tactics by its major supplier, Russia.

Even if the government is not sure about Chalupec, investors liked him: he had a proven track record of lowering costs and improving PKN's image after years of political interference caused a number of corruption scandals.

"Chalupec, by most accounts, has been a competent leader for PKN, including carrying out the troubled but ultimately successful process of purchasing the Mazeikiu Nafta refinery in Lithuania – although the ongoing lack of oil supplies from the refinery's Russian pipeline could be a black mark," says Matthew Hall, an analyst with the consultancy Global Insight.

By contrast, the new man Kownacki lacks experience both in the oil industry and in corporate management.

"The exact political purposes are, as yet, unclear, although in light of recent disruptions to oil supplies from the Druzhba pipeline and a long-held desire on the part of Poland to diversify its energy supplies away from Russia, the Polish government could well be forming a new strategy in relation to its energy security, of which this management shift could prove to be a part," says Hall.

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