The Polish Government’s thimble trick with coal
The Polish Government has adapted the illusionists’ old pea-and-thimble trick by taking the assets of a near-bankrupt coal company and hiding them under the cover of another freshly minted state-owned company in the hope that credulous voters will think coal’s glory days will return.
It is a cruel pre-election ploy designed to sell the impression – especially to coal-mining communities in Silesia – that Poland’s energy future will be just like the past.
The ploy though is just the latest stop-gap measure to create the illusion of financial normality when the Polish coal industry is facing an ever-deepening crisis. Polish government data suggests that publicly-owned coal companies have lost US$850 million since the start of 2014. As the global coal price falls and demand slows, the losses grow.
Ahead of the October 25 general election both the incumbent Civic Platform party and the current favourites to form a new government – the Law & Justice party – are unanimous in their support for shoring up the coal industry’s crumbling fortunes. (The Law & Justice party and the influential trade union Solidarity have agreed to “permanent cooperation” in the development of the coal mining industry.)
Last week Polish Treasury officials announced that 11 of the 14 coal mines owned by Kompania Weglowa would be transferred to a new government-controlled fund TF Silesia, which it plans to launch as a new company.
To convert a near-bankrupt coal company into a viable one, the government has been pressing the government-owned electricity utilities PGE and Energa, along with the gas company PGNiG, to invest in the fund.
The Treasury was formally involved in the fund too until the European Commission flagged an investigation could be launched into whether the proposal would breach EU law banning state aid for coal mines operating beyond 2018. Faced with the risk of the deal collapsing, Treasury withdrew.
To establish a new financial base for the company the government has announced that publicly-owned stakes in PGNiG, PGE and the government-owned insurance company PZU would be transferred to TF Silesia. With an additional US$369 million worth of share assets, TF Silesia could then borrow funds to underwrite the ongoing operations of the 11 mines.
“This is the start of building a large fuel-energy concern, which will be created by combining our power plants, energy groups and coal, which is their fuel,” proclaimed Polish Prime Minister Ewa Kopacz.
In short the government’s plan is to add new debt borrowed against shares raided from other nominally profit-oriented government businesses in order to dilute the old debt created by mines which are still losing money. To cap it all off the government has touted plans for attracting hundreds of millions more in private equity for the new company.
Before last week’s announcement the Treasury had sought bids from state-owned utilities for the loss-making mines. Only one bid was received. The power utility Tauron, via a special purpose vehicle RSG, made a token offer for the Brzeszcze hard coal mine, which was one of most unprofitable of all of Kompania Weglowa’s mines. However, RSG’s offer was made on condition the mine be restructured before it was transferred to the utility.
An important part of the backstory is that Poland’s Treasury has a 30 per cent stake in Tauron, with the remainder of the company owned by a disparate collection of pension funds. RSG in turn is a joint venture with FTF Columbus, a company owned by Polish billionaire Michal Solowow.
Last week RSG’s bid was rejected by the government. Then Tauron’s board sacked the company’s CEO and two other senior executives. While the board provided no explanation for the dramatic change, it was interpreted as due to their caution over the purchase of the Brzeszcze mine. Tauon’s Chief Financial Officer then resigned in protest. However, with a new CEO installed, negotiations have restarted over RSG’s proposed purchase of the Brzeszcze mine.
Despite all the government’s shell tricks, changing the corporate name on the door or firing government business executives who knew a dud deal when they saw one won’t make the future of Poland’s coal industry any brighter. Poland’s coal industry is still losing lots of money, the biggest loss-making mines are facing closure and major restructuring and export markets are evaporating.
As the health costs from coal and lignite fired power stations and household coal burning mount and the price of cleaner electricity generation falls, the notion advocated by both the major political parties that an ever tighter embrace of dirty coal will deliver ‘energy security’ seems more fanciful than ever before.