Financial Observer: What is the implementation status of the Polish Investments programme?
Paweł Tamborski: We have submitted a proposal to the Council of Ministers asking for its approval of the transfer of our assets to Bank Gospodarstwa Krajowego and to the new company which is about to be created.
By assets you mean stocks held by the Treasury?
That is correct. A description of the programme constitutes an annex to this proposal. Once the proposal is accepted, its implementation will start. The company’s Articles of Association have already been drafted.
Is the company’s name going to be „Polish Investments”?
No, this is the name of the programme and the company will be called differently. We have become used to the acronym CSI, that is Celowa Spółka Inwestycyjna, but it is only a provisional name. We shall announce the company’s new name once it is registered in order to prevent an earlier registration of a domain. The company will have its articles of association, a supervisory board, a management board and the CEO. We still need to appoint these bodies. The supervisory board is to be independent. We want its members to be experienced, to be active in the market and independent of state institutions. The board shall approve investment decisions.
Will 100 percent of shares in CSI (let us stick to this name for the moment) be held by the Treasury?
We are considering different scenarios, but our intention is to ensure that the Treasury has a determining influence on the management of the company.
What sort of relations will link CSI and BGK?
They will be operating as two parallel institutions. BGK is governed by the provisions of the Banking Law and the BGK Act. It has its own governing bodies and articles of association. CSI is a commercial company and all decisions will be taken by its governing bodies. Its mode of operation will be modeled on private equity funds. Ultimately, it may be privatized.
Will the Treasury transfer its shares to CSI or to BGK?
To both of them. An investor who is a partner in a private equity fund is required to provide it with a specific amount of capital once the fund’s investment committee has accepted a project. We would like to apply a similar mechanism in the CSI. The Company will be supplied with funds from the Ministry of the Treasury as and when necessary and on the basis of financial plans. The same shall apply to BGK. On the other hand, the transfer of funds is associated with privatization – this falls within the scope of competences of the Ministry of Treasury.
We envisage two procedures for the provision of funds to BGK or CSI. The first one consists in privatization carried out by a team monitoring the process. At the same time, shares are transferred to BGK or CSI. Afterwards, we sell and they deliver the goods. Today, BGK’s concentration limit amounts to approximately PLN 430 million. This is the maximum sum that can be lent for the implementation of specific projects. If the bank receives an additional sum of PLN 10 billion, the concentration limit will be raised to several billion zloty and the creditworthiness will increase as well – we place a conservative estimate at about PLN 40 billion. At the same time, CSI shall be recapitalized.
Wouldn’t the recapitalization of BGK be enough?
CSI will retain capital to be invested in various projects. BGK will participate in the process by granting loans. We also envisage that the company will fulfill other functions, such as project development and arranging funding. It is to act as an active agent of the Polish Investments programme, which means its task is to look for investment projects. It will carry out ownership supervision of SPVs, that are established for specific projects. The idea is not to come up with projects, but to have them elaborated by strategic investors.
Who are strategic investors?
They can be cities, municipalities, companies with the participation of State Treasury. Lotos, together with Azoty Tarnow are already considering the establishment of a joint venture, but will need additional funding. The programme which we are implementing may provide them with financial aid. Private entities, or even entities with foreign capital can also become strategic investors provided that their projects involve the Polish market.
Are these manufacturing or infrastructure projects?
These are infrastructure projects.
For instance, the construction of a road? How is such a project supposed to make money?
It will be possible under a public-private partnership. It is, however, primarily aimed at industrial infrastructure development. We would like the investment to generally involve two situations, namely the provision of the first or the last zloty. There may be a reasonable project somewhere out there with a long-term return on investment, which banks are not willing to finance. This first zloty will be spent by CSI to convince private banks to provide funding for the project. In the second case, a project is well underway, but resources are insufficient to complete it, and the last zloty will be provided by CSI or BGK. The idea is not to replace private investment. I do not think that we should fear that the program will squeeze out private investment.
Is the Polish Investments programme going to finance the development of the energy sector?
It is possible that money will be used to support the modernization of the energy sector. Today, Enea is constructing a plant in Kozienice using its own funds. If a company like Enea did not have sufficient resources to finance it and experienced difficulties in obtaining market financing, the structure that we are constructing could support it.
Will a separate SPV be created for each project?
We assume that our strategic investors will encourage us to become stakeholders in their SPVs. I do not exclude the possibility of funding by a strategic investor, but it would be safer if the funding was provided through SPVs established for each project. After some time, CSI will have a portfolio of shares in such companies. The management board shall determine the method of risk management, to be adopted by the supervisory board and approved by the shareholder.
Is CSI going to exit such SPVs ?
Yes, of course. The idea is to make money work. Currently, it is difficult to obtain long-term financing in the market and finance the initial stages of construction. CSI should therefore be prepared to take this risk and BGK should provide loans. Once the construction phase is completed, the SPV will be able to withdraw from the project. The shares should be redeemed, repurchased, or perhaps sold on the stock exchange. The duration of investments will probably range between 5 and 10 years, and all the details of the investment policy need to be refined and specified by the future management board.
How can BGK increase its crediting potential? It does not, in fact, accept deposits. It must incur loans. Where and how will it be done?
It should sell long-term bonds, perhaps in the international market.
Is the BGK’s capital increase going to serve any other purposes apart from the financing of projects carried out with under the Polish Investments programme? For example financing the National Road Fund?
No. The National Road Fund is primarily a special purpose fund, a bank account, just like all the other BGK’s special funds. The money cannot be „earmarked for other purposes”, BGK has no technical or accounting possibility to transfer it from one special purpose fund to another.
Has the project been consulted with relevant EU institutions?
In Poland, the Central Statistical Office and the Office of Competition and Consumer Protection are in charge of the consultation process in this respect. We remain in contact with these institutions.
Are you expecting any reservations to be raised?
Questions are always asked, but as long as the project is commercially implemented, it will not constitute public aid as defined in the EU legislation.
What amounts are expected to be transferred to BGK and CSI?
We have assumed that each entity shall receive a maximum of PLN 10 billion.
Is there no risk that the sale of large blocks of shares will result in a drop in their prices?
We are constantly facing this situation. In 2012, we are to generate a revenue of PLN 10 billion from privatization, and PLN 5 billion in 2013. We are like a poker player who shows his cards to the market. Everyone knows how much we need to get and how we expect to do it. We have learned to conduct block transactions effectively. In July 2012, we sold 7 percent of PKO BP. We were able to sell it with a 2.5-percent discount. We intend to gradually supply BGK and the SPV with shares. They will not receive PLN 10 billion worth of shares just to sell them the following day.
How long will full capitalization take?
There is no time limit. The anticipated sum of PLN 20 billion that we plan to provide to the two entities stems from the assessment of the potential of companies that can be privatized. The portfolio of companies held by the Treasury and listed on the stock exchange is worth around PLN 100 billion. If we subtract the value of the shares that cannot be sold due to a number of industry-specific strategies from this sum, we are left with PLN 20 billion. There are other companies that are not listed on the stock exchange. We will analyze the possibility of their participation in the programme. As I said, the Minister of Finance expects that next year’s total revenue from privatisation will amount to PLN 5 billion.
Has it been decided which companies’ shares will be transferred to BGK and to the SPV?
I think that these will be the most liquid stocks. We will execute tie-in transactions. Through block selling of shares, we will provide funding to BGK and the SPV, with part of the proceeds to be transferred to the Ministry of Finance.
When is the programme going to be effectively launched? When will the „first” or the „last” zloty be spent?
Operationally, BGK is ready. We are also able to provide funds to the Bank at any time. We still need to establish CSI, appoint members of its supervisory board and management board. The company is to be registered at the beginning of the next year and start operating in the second quarter.
What procedure will be adopted for the appointment of governing bodies?
We are still working on details, but we shall employ an advisor who will help us select members of the supervisory board. Pursuant to the procedure, the supervisory board will need to organize a competition for the members of the management board and the company’s CEO.
Does it mean that the minister will not nominate the management board directly?
Procedures do not allow that.
How many people will be employed in the SPV?
The most important thing is to find highly qualified individuals who are able to draw up the financial structure of projects, e.g. investment bankers with experience in working on large projects. We will also need people who can manage and evaluate risk. Plus a support team: treasury, accounting.
Will the number approach 100 or rather 1000?
Far from that. I think it will be a team of 30-50 people. The structure should be similar to the structure of private equity funds. We are currently working on a precise business plan for the company.
Could the scale of investment financed by the project affect the overall level of investment in Poland, and thus the country’s economic growth?
This question refers to the progress in implementing the projects. In the second quarter of 2013, the SPV will be ready to operate. Until then, we are holding meetings with representatives of local authorities and companies. We tell them that, in a short while, a new tool will be made available to them. And we recommend that they do not hesitate to use it. As far as I know, several projects have already been prepared and they can be launched shortly.
What mechanism will be employed for selecting projects to be implemented? Suppose that several companies or local authorities present their projects and apply for aid . The Polish Investments programme will not be able to finance them all. Which projects will be accepted and which will be rejected?
It is a matter of investment policy whose guidelines have been established. The management board will be responsible for the preparation of this policy and its consequences. The projects to be financed will be approved by the supervisory board, which will be responsible for them.
This will involve spending public funds. Different entities will compete to benefit from them and the selection process will be of crucial importance.
Sure, but it will be a matter of the investment policy and of the criteria to be determined by the governing bodies of CSI. For the time being, basic assumptions, let us say the golden rules, will be sufficient. We support infrastructure investment projects in certain sectors. We are talking about a period of 5 to 10 years. We are trying to establish the expected rate of return on these investments and have a certain idea how it should work. The program must involve investments carried out in Poland. There are a few other details that define the conditions to be met by each project. The company’s governing bodies will assume the responsibility and projects will be approved by the supervisory board, which in turn will be supported by an investment committee, in a manner typical for private equity funds.
How much autonomy will the company’s governing bodies have? Will projects with a value not exceeding a certain level remain at the discretion of the management board and those above it require the Minister’s approval?
The company will enjoy a substantial level of decision-making autonomy. Its bodies will be able to make virtually all decisions regarding the management of the company; nevertheless, a broad scope of competences will be provided to the supervisory board which will approve the majority of decisions taken by the management board. The Minister of Treasury shall not interfere in the operations of the company any more than he does in other companies that are currently in the Ministry’s portfolio. The company will be supplied with capital on the basis of financial plans approved by the Minister.
Will the company’s governing bodies be elected for a specific term of office?
They certainly will.
Will it be technically possible to dismiss them, for example following a change of government and the appointment of a new Minister of Treasury?
Various solutions are applied throughout the world. Sovereign wealth funds (SWF) that exist in certain countries generally operate pursuant to the provisions of special laws that define the process of electing the governing bodies. I believe that the provisions of the Code of Commercial Companies will prove sufficient for our programme. They guarantee the owner the authority to introduce changes. We do not intend to create artificial solutions that would curtail this right simply because the owner is a public institution.
Interview by Witold Gadomski