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Gas rises galvanise SPP sale opposition

Slovak gas giant SPP could face a 20 billion crown ($400 million) loss on domestic gas sales, and a threat to its overall profitability, unless the government approves a contentious 20% proposed rise in regulated gas prices.
Leaders at SPP (Slovenský plynárenský priemysel) issued the warning after the coalition council - a senior government decision-making body - failed to agree on the Economy Ministry's proposed rises September 19. The gas rises have opened a rift in the ruling coalition that political observers say is likely to widen as September 2002 national elections approach.
Economy Minister Ľubomír Harach and Deputy PM for the Economy Ivan Mikloš, who have backed the rises, have in doing so lost the support of the trade unions. Union umbrella group KOZ, lead by Ivan Saktor, has joined forces with the ruling coalition Civic Understanding (SOP) and Democratic Left (SDĽ) parties in refusing to support the rises.

Slovak gas giant SPP could face a 20 billion crown ($400 million) loss on domestic gas sales, and a threat to its overall profitability, unless the government approves a contentious 20% proposed rise in regulated gas prices.

Leaders at SPP (Slovenský plynárenský priemysel) issued the warning after the coalition council - a senior government decision-making body - failed to agree on the Economy Ministry's proposed rises September 19. The gas rises have opened a rift in the ruling coalition that political observers say is likely to widen as September 2002 national elections approach.

Economy Minister Ľubomír Harach and Deputy PM for the Economy Ivan Mikloš, who have backed the rises, have in doing so lost the support of the trade unions. Union umbrella group KOZ, lead by Ivan Saktor, has joined forces with the ruling coalition Civic Understanding (SOP) and Democratic Left (SDĽ) parties in refusing to support the rises.

The KOZ has also threatened a strike if poorer families are not adequately protected against the effects of price hikes.

Since coming to power in October 1998, the government has raised gas prices by 100% in a series of austerity packages. Each rise, among the more socially unpopular economic reforms the government has implemented, has provoked sharp debate in the coalition, with the socialist SDĽ leading the opposition to price increases.

The latest dispute, and the possible failure of the government to push through the rises, comes just months before the planned sale of a 49% share in SPP, the world's second largest gas distributor. Those involved in preparing the SPP sale say the unrest is jeopardising both the privatisation and the planned full liberalisation of the energy market before Slovakia enters the European Union, possibly in 2004.

"No one will enter privatisation without clear plans on price rises. If the prices are not raised then it could affect the price," said a source close to the SPP sale process. Sale advisors Credit Suisse First Boston said September 24 that the stake would fetch a lower price if plans for deregulation appeared to be faltering.

However, the government and SPP itself have moved to reassure investors that the sale, expected to be one of the biggest privatisations in Europe this year, remains on track. "We think that not raising gas sale prices at the moment should not affect the course and success of SPP's privatisation; nor should the price for the 49% SPP share be impaired in any way," said Dana Kršáková, spokesperson for the company.

"I'm confident that a solution can be found," added Vladimír Tvaroška, advisor to Mikloš.

The stake has been estimated by sector experts as likely to fetch between $2 and $3 billion.

Economic reality

SPP chiefs had originally asked for a higher rise in prices as of October 1 - 30% for households and 25% for companies. The company recorded a 7 billion crown pre-tax profit for the first half of this year, up on the 3.06 billion crowns for the same period last year.

However, prices of gas from Russia, which SPP imports to feed domestic customers, have gone up, and while the company remains profitable from the huge revenues it rakes in from the transport of nearly 90 billion cubic metres of gas to the West from Russia, it cannot go on sustaining huge losses on domestic gas sales, SPP has said.

Last year it lost 17.2 billion crowns on domestic gas sales; this year it expects to lose 20 billion. SPP this year also has to transfer a special 5 billion crown payment to the state budget.

The Economy Ministry argues that price rises are necessary in light of the rising cost of gas imports. "Costs are going up, therefore prices should go up. The increase in [gas import] costs have to be passed on to customers," said Peter Benčúrik, spokesman for the Economy Ministry.

"We want to create conditions that are favourable for investors into SPP by correcting the deformation in gas prices on our market. This is necessary not just from the point of view of investors, but for SPP as an entity itself."

An independent energy sector regulator is due to start operating in January 2003, setting gas prices according to a formula to be drawn up by the government's advisors on the sale and presented to bidders this month.

The coalition council is due to meet in early October to discuss the latest price rises again. The Economy Ministry has drafted a proposal that will include what it says is "adequate compensation" for lower income families that may struggle with the 20% rise, one the ministry estimates will cost the average household an extra 119 crowns ($2.50) a month.

But with SDĽ leader Jozef Migaš confirming his party's opposition to the rises after a meeting with KOZ representatives September 24, political and economic analysts forecast more uncertainty over the SPP sale. The situation grew even cloudier when Labour Minister Peter Magvaši, an SDĽ member, said September 25 that the government's plan to sell 49% should be replaced by another privatisation model in which only 25% would be sold.

An official from Credit Suisse First Boston dismissed the statement as "political populism", but said it cast "unfortunate" doubt on the cabinet's decision to sell SPP.

"With elections approaching only a few parties are prepared to do things that could affect their political [voter support] positions," commented Pavol Ondriska, an analyst at Slávia Capital brokerage house.

However, government officials said that no matter what SDĽ ministers said, the SPP privatisation could not be stopped. "What Mr Magvaši said is nothing more than a political gesture. The whole process is too far down the line, and at such a stage that it cannot now be stopped," said Tvaroška.

Approval of the SPP sale requires a simple majority in the 20 member cabinet, where the SDĽ holds six seats. The party will not, government sources say, gain enough support from other parties to block or overule the sale.

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