Poland's State Owned Utilities

From Bloomberg this morning:

Poland Riles Capitalists in $4 Billion IPOs Communists May Love

For Jacek and Anna Lesko, Poland's new found capitalism is only skin deep.

The couple bet on the Polish economy in recent years, buying up shares of state-owned utilities that were distributed to employees after the collapse of communism in 1989. While the stock wasn't publicly traded, the Leskos expected to make money when the companies went public. Now the government plans to exclude them from the share sales.

``We bought these shares in a legal trade and now we could lose the profit we were counting on,'' Jacek Lesko said after meeting with similar investors in the southern city of Katowice. ``This kind of legal creativity makes people's lives miserable.''

Investors like the Leskos say the government doesn't understand how free markets work, and have pledged to go to court to protect the 500 million zloty ($175 million) they've invested in power suppliers. A lawsuit may delay the government's plan to raise $4 billion in initial public offerings by the utilities and expand the nation's power network.

At least 300 people like the Leskos flocked to hearings yesterday at Warsaw's Palace of Culture, a gift from Stalin and the city's tallest building. The event was moved from parliament after almost 1,200 people signed up to attend, eight times that of an average legislative hearing.

The outcry is just the most recent criticism of Prime Minister Jaroslaw Kaczynski's government, which is considering early elections after two smaller parties quit the coalition following disputes over spending and corruption.

No Promises

Poland plans to consolidate its power companies in four regional groups then sell shares to the public. The bill authorizing the IPO would allow workers to exchange their shares for stock in the merged companies. Investors like the Leskos would be left with stock in the original subsidiaries, which won't be publicly traded.

Jacek Lesko, an architect, and Anna, a psychologist, both 55, say they stand to lose as much as 40,000 zloty ($14,300) saved for their retirement if parliament passes the legislation.

The government says the shares were a bonus for working at state-owned companies during communism and there's ``no legal basis'' for giving shares in the merged entities to speculators.

``Nobody promised the shareholders that there would be consolidation and that they would be allowed to convert their shares,'' said Deputy Treasury Minister Michal Krupinski, who is in charge of the consolidation program.

What's more, the government blames investors for preying on workers. In July, Deputy Economy Minister Krzysztof Tchorzewski said transfers of shares to people other than company employees were ``incidents of loan-sharking.''

Providing a Service

Marek Chlopek, a partner at Warsaw-based private equity firm Penton Capital Management LLC, said his firm provided a service when it bought utility shares from workers who wanted to convert their holdings into cash for vacations and cars.

``By investing, I took on risk,'' Chlopek said. ``But I can't accept the risk that the state, which is also the majority owner, decides to treat itself better than other shareholders.''

If parliament passes the bill, investors will appeal to Poland's Constitutional Tribunal, said Marcin Juzon, deputy chief executive officer of Secus Asset Management SA, a Warsaw money manager. He cited legal opinions from government advisers who said all investors should be treated equally.

Great Unknown

A lawsuit might reduce proceeds from the IPOs, Juzon said.

``It's hard to imagine that during an IPO, financial investors will be pleased to know that the final number of shareholders in the company isn't known,'' said Juzon, whose company owns shares in the utilities and organized the meeting the Leskos attended.

Governments throughout Eastern Europe distributed shares to their citizens after the fall of communism.

In Hungary, for example, the state sold shares in about 300 companies to workers using subsidized loans to ease their first steps as capitalists. More than 150 employee groups still hold stakes in companies ranging from fine-china maker Herend to former phone monopoly Magyar Telekom Nyrt.

In Poland, investors bought employee shares in other state- owned companies before their IPOs, including PKN Orlen SA, Poland's largest oil company. Shares of Warsaw-based PKN have almost tripled in value since they began trading in 1999.

Until now, all the shares Poland distributed to workers could be sold on the bourse after the companies went public -- a practice the Leskos were counting on. This time is different because the government is creating new companies before selling stakes to the public.

Robert Gwiazdowski, director of the Adam Smith Center, a Warsaw-based economic research institute, said Poland shouldn't have given out the shares in the first place. He calls the practice a ``bribe'' to prevent workers from protesting when stakes were sold to private investors.

``The original sin was giving shares to the employees, and now we have to deal with the consequences,'' Gwiazdowski said.

Eighteen years after the fall of the Berlin Wall, Jacek Lesko says Poland simply hasn't grasped how capitalism works.

``This plan harms Poland,'' Lesko said before picking up the three-page form required to participate in the parliamentary hearings. ``Not just my own interests.''