SLOVAKIA was offered a fair price for a 49 per cent stake in gas utility SPP, no matter what the critics say. And nor did the fact there was only one bidder mean the tender was a disappointment.
The offer of $2.7 billion from a consortium of Gaz de France, Ruhrgas and Gazprom on February 28 was criticised by the political opposition and by the maverick Robert Fico for being seriously below what the SPP stake is worth. But despite the fact these claims could prove enormously damaging for the Dzurinda government's domestic reputation, few arguments have been advanced to expose them as unqualified and populist.
And unqualified and populist is what they are. It's true that the bid was below some earlier estimates, but here you have to ask two questions: Were the people doing the estimating in a position to judge the worth of SPP? And has sentiment on the utilities market changed since people first started guessing what the sale might fetch?
The answer to the first question is no. For one thing, much of the estimating was done by politicians and journalists, none of whom did due diligence on SPP, and none of whom have full access to its contracts and inner workings. For another thing, knowing what SPP is 'worth' requires educated guesses about how quickly gas price deregulation will happen, and thus how quickly you will get your money back. SPP is also worth more in a strategic sense to the firms who are directly involved in exporting and importing the gas that flows through its pipes than to firms looking at the stake as a financial investment.
As to the second question, in the words of Jonathan Stern, a fellow of the Royal Institute of International Affairs: "The world has simply moved on in its enthusiasm for this kind of equity."
What happened to the Slovaks is this: Once a 97 percent stake in the Transgas system in the Czech Republic was sold in December last year, the Slovak offering became less attractive. Part of the reason was that the German gas firm RWE was now in charge of the Transgas system. With RWE saying it wasn't going to bid for SPP, all of a sudden there was no chance the SPP winner could also control the Transgas pipeline and dominate gas transit all the way from Russia to European consumers.
The other factor was that, given the kind of money that European and American investors paid for similar equity in Hungary in the early offerings three or four years ago - prices that were wildly over the top of any price/earnings ratio - investors were gradually coming to understand they had no hope of earning a conventional return on such investments.
The problem is that it's taking central European countries far longer than expected to deregulate utility prices. In Slovakia, for example, SPP annually loses money even on its domestic sales of gas to large industrial consumers, as the state is loath to take the hugely unpopular step of increasing rates to market levels. The government, after having raised regulated prices punctually for three years, has also decided in an election year to leave them where they are.
Investors have also seen that in Hungary, the Czech Republic and Poland - countries that are arguably further ahead than Slovakia in terms of economic and market reform - governments there as well are having enormous difficulty moving utility prices up to cost-based levels, particularly in the residential sector. Utility buyers waiting for domestic market sales to become profit-making are now looking at a wait of not just a couple of years, but maybe five to ten. That's a long time to be tolerating not much if any profit from a multi-billion dollar investment.
In the end, that's why only one group actually bid for SPP. The equity was simply worth much more to the Europeans and Gazprom, who are intimately involved in the trade. Getting SPP was a guarantee of oversight of their exports and imports of gas.
While it was a strategic decision for the consortium, for the US firm Williams and the French TotalFinaElf it was a purely financial investment. And the German E.ON's failure to bid likely had to do with its confidence that it is going to get hold of Ruhrgas and end up in an ownership position with SPP anyway.
The price bid, and the fact there was only one offer in the SPP tender, was therefore not a sign of political instability in Slovakia. It was just further evidence that privatisation, like reform, brings the greatest yields if done early and quickly.
As with the sales of stakes in Slovak banks and its telecom monopoly, the country could have made considerably more if it had disposed of these properties under the 1994-1998 Vladimír Mečiar government. In waiting until 2000 to start selling off 'strategic companies' Slovakia missed the crest of the wave. It's a pity, given what might have been, but it makes sense. Unlike claims that SPP should have brought over Sk200 billion, and that the lack of bids was evidence of corruption and non-transparency.