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The Warsaw Voice » Other » October 22, 2008
Privatization in Poland
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Ample Room for Growth
October 22, 2008   
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Alicja Kornasiewicz, CEO of UniCredit CAIB Poland and Head of the Emerging Europe Area of UniCredit Group's Markets & Investment Banking Division, talks to Witold Żygulski.

You were recently appointed head of the newly established Emerging Europe Area of the Markets & Investment Banking Division. How will this change the role of UniCredit Warsaw office and what will be UniCredit strategy for the entire region?
I do not think that the role of the Warsaw office will change. It will continue operating in the areas it handles now. The new unit, which has been established, will be responsible for 11 countries in Central and Eastern Europe. UniCredit has a very strong position in all these countries and in several-Bosnia and Herzegovina, Bulgaria, Croatia, and Poland- is the market leader in terms of market share. However, investment banking in the region is still not sufficiently developed. This is largely due to historical reasons. On the other hand, UniCredit also focused on commercial and retail banking for a long time. Now, using its presence in Central European markets, the group wants to introduce new products and offer investment banking services to both our existing commercial banking customers and prospective clients. By offering such services, we would like to compete with other financial institutions, which are leveraging the opportunities offered by the region.

Emerging Europe has high potential in terms of capital market development. This segment of the market is substantially less saturated when compared to commercial banking. So there is ample room for growth. All you need to do is reach the clients with the appropriate products. Since we have operated in Poland for years and we have well-developed capital market services, we know what products to offer. So in other Emerging Europe countries we want to achieve the same market success that we have achieved in Poland. This is not to say that the Polish model will simply be duplicated in other CEE countries. After all, in markets such as the Czech Republic and Hungary, the economy has been privatized to a greater extent than in Poland. However, the Polish experiences can be used in countries such as Ukraine-both in terms of privatization and building an institutional infrastructure and legal framework for ownership transformations.

What are the most important areas of UniCredit Markets & Investment Banking Division's operations in Poland?
In recent years, our key focus has been equity capital markets, where for three consecutive years we have held the position of undisputed market leader in terms of new issues. Bearing in mind the current market situation, we are now offering more merger and acquisition (M&A) products, as well as leveraged and structured finance products.

What are UniCredit Markets & Investment Banking Division's development plans in Poland and the region?
In Poland, we will primarily focus on maintaining our current position as a market leader. Our goal will be to reach clients with an expanded range of new products, including equity derivatives and hybrid structures in order to even better adapt ourselves to the situation on the market. It has to be said that the Polish capital market has not been as attractive this year as it used to be in previous years. Hence we have to offer products that will be the most effective for our clients under the present market circumstances.

Many economists say the Polish market is in a crisis today. Do you agree with this opinion?
The Polish market has obviously been affected by the current situation on the global financial markets. Nevertheless, I would rather view it as a difficult market than one that is in crisis. Despite some slowdown, the fundamentals of Polish listed companies and the economy in general remain strong. In addition, a considerable amount of market activity is still taking place, including M&As, buyouts, and takeovers.

How should privatization be effectively prepared under these conditions?
The current market situation certainly makes privatization more challenging. After all, companies' and institutional investors' portfolios have also been affected by the prevailing market conditions. However, this does not mean that it is not possible to carry out an effective privatization transaction today. You just have to do it much more carefully than, for instance, in early 2007, when the buyers-for example, asset management funds and pension funds-were enthusiastic and less demanding. You need a good due diligence and a thorough valuation; the company must be attractive, with a good management board that is familiar with the market and that enjoys confidence on the market. You need a well structured offering-that is, how many shares are earmarked for institutional clients and how many are set aside for retail sales, and how many are intended for domestic and foreign clients. This has to be accompanied by good pre-marketing and a good road show on both the local market and across the region. All these conditions must be met and work together so that there is good communication with the market, so that there is sufficient information, and the buyers' analysts don't have to guess future developments, the direction in which the company is heading, and what will happen to it on the market. Each issue must be defined and presented clearly so that there is understanding and trust on the part of the investors.

How has the attitude of foreign investors changed since Poland joined the European Union in 2004?
First, I can say from my own experience that trust in Poland has grown significantly. EU accession eliminated the political risk that was a very important factor taken into consideration by potential investors.

Second, the situation is slightly different when looking at core and institutional investors. When evaluating the former, it has to be noted that the Polish market is quite saturated in terms of core investors, since they have been entering the market for 15 to 20 years. Big companies were the first to arrive, and they were followed by smaller ones. Institutional investors, on the other hand, are getting increasingly more sophisticated. For instance, financial institutions such as private equity funds are now starting operations in Poland. This next wave of investors is typical for a mature or almost mature market. When you talk to investors today, they no longer ask about political risk and inflation forecasts. The problems the Polish market is facing are similar to or identical to those affecting developed markets. Meanwhile, the rate of economic growth in Poland is still markedly higher than in the "old" EU countries.

Another important factor is that companies that were earlier excluded from privatization are now hitting the market. New privatization opportunities are opening up in industries that are very important for the economy but were earlier closed to privatization, such as the engineering sector, aviation, and the energy industry. Previous governments believed that these industries should not be privatized, but this approach has proved to be wrong. For example, today we know that we should have started to privatize the energy sector some time ago, because nowadays the industry is unable to meet domestic demand and is struggling to compete with its Western counterparts in terms of efficiency.

You were once deputy minister of the Treasury and you also worked in the European Bank for Reconstruction and Development for many years. Given your experience, how do you assess the government's privatization program for the coming years?
First of all, the fact that the program has been developed is in itself a very positive signal after several years of stagnation, when the very idea of privatization was in disfavor. A transparent and comprehensive privation program for the next several years, with a very clear vision of what is going to be privatized, is very good news for the economy. After all, information on what will not be privatized for the time being is also very important to potential investors. Whether the decision to privatize some sectors of the economy, while putting on hold privatization in other sectors is correct, is a different matter. However, it is the government's political decision.

The program offers a detailed plan of privatization in sectors such as the energy and the chemical industry, which is a very good signal because these sectors need to raise capital for investments very soon. They have to develop and become competitive. Otherwise, certain key sectors of the economy might lose their competitive edge or may simply disappear.

When looking at the government's privatization program, no particular risks are evident, apart from those to which any business plan is subject. Of course, there might be some delays, for example those related to the unclear status of assets, but these are standard issues that can be managed.

Today's volatile market conditions definitely make the task of privatization more challenging, but I can remember that things were even worse after the Russian crisis when I was in charge of privatization in 1997-2000. Under such conditions, communication with the market is of primary importance. It has to take place on two levels-the market must receive full information from both the companies that are supposed to be privatized and from the Treasury minister as their owner.

In difficult times, one should also consider expanding the range of privatization methods. For example, if you want to privatize companies by means of the capital market, you can do so by inviting a strategic investor to purchase a stake in the company. They strengthen a given project, and the investors have greater comfort as they obtain a clear signal of what is going to happen to the company. If a company is unfit for privatization through the capital market, the Treasury Ministry should invite strategic investors to negotiations. These may also include private equity or capital funds that are very active in Western Europe and are increasingly interested in the Polish market. They may play the role of a core investor, as they know how to restore value to the company they take over.

Summing up, the fact that the government has announced the program is very good news. Many companies, particularly in the energy sector, are already preparing for privatization. But you cannot expect the results anytime soon-over the next six months or so. Preparing a company for privatization takes at least nine months, and in some cases a year. That is only natural. Private companies need roughly the same amount of time to prepare for a stock exchange listing.

In your opinion, what are the most important obstacles to privatization in Poland today?
Politicians. If they stop getting in the way of privatization, there will be no significant barriers left. For many years privatization has been the easiest way for opposition politicians to attack the government. The political debate on privatization has rarely taken the form of a constructive discussion based on facts. Rather, catchy slogans based on fundamentally flawed argumentation have been used. Meanwhile, as shown by the recent shipyard industry crisis, delays in privatization always result in serious consequences. In my opinion, people responsible for not making the necessary decisions should be held accountable-instead of attacking those who have decided to proceed with privatization.
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