By Siân Green

The cancellation of the Czech electricity sector sell-off in January won the government support from voters but further frustrated the efforts of investors. Can this deal be rescued?

Czech Republic prime minister, Milos Zeman, announced in January that the government had abandoned the privatization of the country’s electricity sector. The final round of bidding fell short of government expectations, and was the last straw in a much-criticized privatization process that frustrated investors keen to gain a foothold in this market.

The government rejected final bids from Electricité de France (EDF) and a consortium of Italy’s Enel and Iberdrola of Spain. Both companies were asked in December to submit improved offers; EDF reportedly bid Kc213bn ($5.7bn) while Enel-Iberdrola is said to have offered in the region of Kc136bn.

While EDF’s bid met the government’s minimum asking price of Kc200bn, it was rejected because the French group would not agree to terms for the purchase of lignite and also asked for extra guarantees regarding the Temelin nuclear power plant. The Enel-Iberdrola bid was not much of an improvement on its first offer.

Zeman stated that the government will now re-assess the privatization, and will draft a new strategy by 28 February, 2002. It seems unlikely, however, that the sale will be completed before the general election, due to take place before June.

In privatizing its electricity sector, the Czech government is looking for a single ‘strategic partner’ to take on a package of assets that include a 67.6 per cent stake in power utility CEZ, control of the national power grid as well as majority stakes in six of the country’s eight regional electricity distributors.

The government was keen to complete the sale before the elections, but it seems that it failed largely due to the conditions that it imposed on bidders in terms of the price, the package, and guarantees. It remains to be seen whether the government will alter these terms to make the sale more palatable to potential bidders, or stick to its guns and please the voting population.

The government initially hoped to raise some $5.4-6.8bn to lower its budget deficit and prepare the industry for impending EU entry. However, it became clear that this was more than bidders were prepared to pay.

In the first round of bidding, Enel offered Kc136bn, while EDF’s bid was not opened as it failed to meet tender criteria. Nevertheless, both companies were invited to re-submit their bids, and in spite of an improved offer from EDF, the government was adamant that it would not accept undervalued bids.

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This attitude undoubtedly won favour for a government looking for re-election. In addition, the price obtained in the sell-off of Czech natural gas company Transgas – f4.1bn ($3.5bn) – evidently led the government to believe that it could achieve the same with the power industry.

The price of the assets also seems high in light of the package that is being sold. To companies like EDF, the prospect of running coal and nuclear generation, transmission assets and distribution companies is probably attractive, but to other companies, it is perhaps too much of a challenge. There are not many companies around with the full set of skills to run all of the assets on offer, and this only served to reduce the number of bidders competing in the privatization.

The government’s refusal to break up the assets into different packages caused three of the five original bidders to pull out – Electrabel, International Power and E.ON. For German energy giant E.ON, the presence of the Temelin nuclear plant in the package was far too controversial. Electrabel also cited the political uncertainty surrounding Temelin as too much of a risk (see PEi November 2001).

With just Enel-Iberdrola and EDF left in the bidding, the Czech government did make some concessions, including allowing the payment to be made in instalments. However, it kept conditions on future production, coal buying and a ban on selling assets for eight years after privatization.

EDF, Enel and Iberdrola will now have to wait and see what the government decides to do. Its options amount to a double-edge sword: it could attempt to re-launch the sale before the election by easing the conditions of the sale, and risk losing popularity; or it could gamble on re-election and try again to obtain its Kc200bn asking price. If the government loses the election, a new administration is likely to favour an altogether different model for privatization, with parts of the industry sold separately.

This would open up opportunities for some of the original bidders such as International Power and Electrabel, as well as other international energy companies. It would enable them to cherry-pick the assets that they are genuinely interested in and to which their skills are best suited, and would surely give the government a better chance of meeting its Kc200bn price tag.

Whatever happens, EDF and Enel are likely to remain interested in the country’s 13 000 MW of low-cost generation capacity and exports to neighbouring countries. EDF, however, remains tight-lipped about its plans for another bid.

“We cannot say yes or no at the moment because we don’t know what the conditions of the sale will be,” said a spokesman for EDF. “We don’t know if they are going to sell the whole package or if they are going to sell it part by part. We will have a look when [the strategy] is announced.

“It is a very strategic market and [CEZ is] a very interesting company. But it is up to the government to decide how to proceed and we must wait and see.”