Polish rail searching for the right track

By bne IntelliNews July 2, 2012

Wojciech Kosc in Warsaw -

The Polish government offered new timeline guidance on the privatisation of two flagship state rail companies in June. The announcement puts the focus on the challenges facing the new management at state holding Grupa PKP to knock the companies into shape.

Poland has been talking about privatising its railways for at least a decade, but has made little progress down that track. However, with recent accidents blamed on poor management and investment levels - as well as a strong push to raise cash to help with fiscal consolidation - deputy minister of transport Andrzej Massel told local media on June 16 that it is now planned to offload PKP Cargo in 2013, with PKP InterCity set to follow in 2015.

Appointed three months ago, Grupa PKP's new executive team, headed by financier Jakub Karnowski, is tasked with putting the Polish railways on the track towards fast, reliable, and safe service that will attract passengers, cargo customers, and eventually investors. However, given the scale of negligence in the Polish railway sector over the past two decades, Karnowski has a tough challenge ahead.

Armed force

Grupa PKP umbrellas 14 companies, including five carriers, four infrastructure operators, and five service units; a portfolio which has resisted restructuring efforts to date. The appointment of Karnowski - a self-described "manager for hire", with experience in the ministry of finance, National Bank of Poland (NBP) and the World Bank - is aimed at forcing through changes on the road to privatisation.

Karnowski's closest aide is board member Piotr Cizkowicz, who also worked for the NBP, as well as "big four" consultants Ernst&Young. The executive team's third member, Maria Wasiak, is the only link to the old days, having been with Grupa PKP for 12 years, including a stint as the CEO before Karnowski took over.

There's a wealth of tasks ahead of Karnowski that his predecessors have all failed to accomplish. "My priorities will be the comfort and safety of the passengers," he told a press conference on his appointment in April 2012. However, behind that apparently simple ambition stands a tangle of issues involving company debt and finances, development funds, non-core assets, and the opposition of the unions.

"What the government wants is for Grupa PKP to become a real leader of the railway companies in Poland," states Adrian Furgalski of Warsaw transport and infrastructure consultancy Tor. "Karnowski is the transport minister's armed force, tasked with forcing through its plans."

Up in the air

Debt and finance is the first hurdle, but PKP has yet to decide how to approach it. The company has long been burdened by large debt, which currently stands at around PLN4.5bn (€1.05bn). The forthcoming privatisations should potentially give the group the necessary funds to manage its debt effectively, however, the new executive team is also facing a challenge to find the funds to power investment in infrastructure and rolling stock at the same time.

"There will be a need to divide the revenue from the privatisation in a skillful way so that the debt is serviced properly and the companies have the financing to develop, InterCity in particular," suggests Furgalski. "Due to EU rules, there's no way that the public purse can be used."

However, according to Karnowski, the strategy is still up in the air. The CEO has suggested PKP may deal with its debt either by using the money from privatisation, raising capital on the debt markets, or working with international development institutions like the European Investment Bank and the European Bank for Reconstruction and Development. Should PKP plump for the first option, he told local media in April, then the development of the railway companies will need to be secured by the new owners.

That suggests the price guidance offered on the sales of the two assets set to start the privatisation ball rolling are highly speculative. The Treasury Ministry (which holds Poland's state assets) has said that on the back of PKP Cargo's relatively robust profitability - PLN399m (€94m) net profit in 2011 - it expects to raise PLN3.5bn (€820m) from its sale. Delaying the sale of InterCity, which operates long-distance and (theoretically) fast passenger trains, to 2015 is motivated by the need to improve its performance, with the company posting a net loss of PLN27m last year.

Alternative routes

However, there is another possible avenue to find the capital to knock the companies into shape ahead of privatisation, suggests Furgalski, who says Karnowski should put greater emphasis on EU funds. The Polish rail holding has history in this area, having failed to submit projects to absorb €1.2bn in funding from the 2007-2013 EU budget. That prompted the government to ask late last year that it be allowed to divert the cash for road construction instead. The European Commission refused, but PKP now needs use it or lose it before the end of 2015.

The holding can also raise cash by offloading non-core assets, mostly real estate, through which Furgalski estimates PKP could potentially raise enough to cover close to 75% of its debt. However, with the property market far from robust, the disposal programme has stalled recently. Some deals with major real estate developers such as Neinver and TriGranit to develop office and retail centers on PKP land have been sealed, but those were transactions on the cream of the portfolio, located in the heart of major cities. Elsewhere, to cash in PKP will likely need to wait for another property boom, which will block that funding route for some years.

Meanwhile, like any Polish state-owned giant, PKP has its share of powerful trade unions, which are potentially major obstacles to the strategy of the management. "The reforms, privatisation and restructuring of the railway companies will diminish the importance of the unions, and I'm expecting their leaders to inspire employees' protests against pretty much anything," says Furgalski.

So far, however, the unions appear to be taking a cautious stance, expressing hope that Karnowski and his team will find a way to avoid a confrontation. "The key issues are the reduction of debt, a more efficient disposal of real estate, and giving privatisation second thoughts," says Leszek Mietek, head of engine drivers' union ZZM.

Karnowski has suggested he's in no mood to allow privatisation to be delayed, a stance backed by Furgalski. "There are of course state-owned railway companies abroad that are doing well, like Deutsche Bahn, but, unfortunately, our state tends to be a poor owner. The state should only oversee the infrastructure and the regulatory framework," he insists.

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