VISEGRAD: Central Europe's privatisation drive

By bne IntelliNews August 10, 2010

Jiri Kominek in Prague -

Faced with the unappetising but unavoidable task of tackling the national deficit and reforming pensions at a time when the Czech economy is crawling out of recession, the new three-party centre-right coalition is looking to slash government spending at every turn and reach for any and all forms of revenue, including privatisation of state-held assets.

Miroslav Kalousek, the nation's hatchet man finance minister of the conservative TOP09 party, said he plans to cut CZK28bn (€1.13bn) in public spending in order to reduce this year's budget deficit to CZK200bn, or 5.3% of GDP, along with further cuts planned for the 2011 budget that would see the deficit fall to CZK180bn, or 4.6% of GDP. Without the cuts, Kalousek has warned this year's budget will hit 6.6% of GDP and the government would not be able to reduce the shortfall to within the EU limit of 3% by 2013. "Understandably, it is absolutely out of the question that the government would allow this to happen," Kalousek told reporters in late July.

Kalousek, known for his sharp wit and rum-fuelled spontaneity, has hinted during recent interviews with local media about the possibility of off-loading various state-held assets, which could include CD Cargo, the freight handler of Czech Railways reportedly worth up to CZK14bn, as well as up to a 5% stake in the national utility CEZ. "This government will have no choice but to face the unpopular chore of reforming pensions and other tasks and the only way to do that is through privatisation of various state assets," Jan Prochazka, head analyst at brokerage firm Cyrrus who was recently appointed to the national economic council (NERV) established to advise the government during the economic crisis, tells bne.

As finance minister in early 2009, Kalousek kicked off the privatisation of Prague Airport and national air carrier Czech Airlines (CSA), only to see the deals aborted after stiff opposition from the Social Democrats and other parties, which ultimately torpedoed the government headed by Mirek Topolanek via a non-confidence vote in late March of the same year. This time round, the three-party coalition enjoys a strong 118-seat majority in parliament, enabling it to take bolder steps and set an ambitious agenda in pursuing reforms. "We all know that any such privatisation projects would require one to two years' preparation, since some of these assets such as Ceska Posta would have to be transformed from state companies into plcs, and by then it's safe to say that we would have already bid the current recession farewell," Prochazka says.

While Kalousek says the privatisation of assets such as Ceska Posta and Prague Airport is possible, he fears a lack of "investor appetite." Indeed, Prochazka says that the prospects of offloading the financially troubled CSA do not appear optimistic in the near future. However, he reckons Prague Airport could fetch up to CZK75bn, while another CZK15bn-18bn could be raised from the sale of the Budvar brewery, which on July 31 won a court battle with Anheuser-Busch over rights to the Budweiser trademark in Europe. It is public knowledge that Czech tycoon Petr Kellner's PPF Group would like to acquire Ceska Posta, and other potential investors are likely to show interest as well.

Other analysts including David Marek, chief economist at Patria Finance, agree that the privatisation of Czech state assets is inevitable. "I can definitely envisage the government pursuing a privatisation strategy, however this will depend on financial markets improving and the fiscal situation [of potential investors]," Marek says.

Slovak sales

In neighbouring Slovakia, the rather fragile four-party coalition headed by Iveta Radicova of the SDKU-DS party has also sent strong signals about its intention to privatise assets to improve the fiscal situation.

Slovak Finance Minister Ivan Miklos said spending cuts won't be enough to meet budget deficit targets, forcing the government to seek an additional EUR600m in revenue for 2011 even as it rules out raising taxes. It is expected the 2010 budget deficit will reach 7.0% instead of the targeted 5.5%, while in 2011 Miklos hopes further cuts and additional revenue will net EUR1.7bn, thus reducing the fiscal budget deficit by 2.5% of GDP.

Transport Minister Jan Figel said the government plans to sell off freight rail handler Cargo Slovakia and Bratislava's M.R. Stefanik International airport, as well as other transportation sector assets, although he said the process shouldn't be rushed and the companies need to undergo restructuring.

In 2009, the previous coalition government headed by Robert Fico's Smer party was forced to inject EUR166m into Cargo Slovakia. The new coalition has reached a consensus that a strategic investor should be brought in to help raise share capital, something that would attract local or foreign private equity seeking safe bets in the region. In late 2007, for example, Bridgepoint Capital purchased CTL Logistics, Poland's second largest rail freight company.

Currently, Bratislava airport is in the midst of undergoing an EUR86m expansion including the addition of a new terminal. The project was launched toward the end of 2008 and should be complete by 2012. "Both companies require intense co-operation on the international market. From this perspective, it makes sense to look for partners, however partners under beneficial conditions who share a common interest in further developing these companies," Figel told Slovak state news agency SITA on August 5.

In 2005-06, the centre-right coalition headed by Mikulas Dzurinda's SDKU-DS party intended to sell Bratislava airport, Kosice airport and Cargo Slovakia for EUR630m, and held an international tender for the airports in which a consortium headed by Vienna's Schwechat international airport, RaiffeisenZentralbank and Czech-Slovak private equity firm Penta Investments were selected. But the general elections in June 2006 were won by Robert Fico's Smer party, which cancelled the sale in favour of investing state funds to modernise Bratislava's airport.

The new government also intends to transfer majority ownership of six regional heating plants to municipalities, who will then search for investors to inject capital and operate the facilities. Earlier efforts to do so by the Dzurinda government in 2006, which had hoped to generate EUR166m, were also overturned by Robert Fico.

Putting polish on the assets

In Poland, the government, still needing to drastically reduce its huge pile of debt, is looking to sell significant stakes in at least two of its largest state-controlled companies, though ministers have indicated that at least 25% will be kept in state hands. "The Finance Ministry would like privatization revenues by the end of 2013 to total around PLN50bn [€1.25bn]," a governmental source told PAP news agency at the beginning of August, ahead of the government's release of its four-year fiscal plan, which includes faster state asset sales, a higher value-added tax and limits on spending growth. "The bulk of this amount could come from the sale of state shares in insurer PZU and bank PKO BP."

Poland controls 41% of PKO BP and 45% of PZU. The government intends to hang on to control of about 20 of the largest and most strategic companies, though the firms will be traded on the Warsaw Stock Exchange to provide transparency and good governance. In the past, state companies in Poland have been vehicles of patronage for whichever party was in power, meaning they were badly managed and management subject to sudden firings when government changed hands.

According to the FT , the government's new management plan is based on the way that Norway organises its state sector. Supervisory board members will be chosen after being vetted by an independent committee. The Treasury would also set up a special body similar to a private sector fund manager to represent its interests. The plan also calls for the scrapping of limits on the earnings of senior managers, which has limited the talent pool of people willing to work for state companies.

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