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Energy Environment 16 June, 2017 12:37 pm   
Editorial staff

Supreme Audit Office’s report exposes failures of black coal industry

“The economic and financial collapse of Poland’s biggest coal companies, Kompania Węglowa, Katowicki Holding Węglowy and Jastrzębska Spółka Węglowa, was caused not only by the downturn on world markets, but also by lack of a fundamental reform,” writes Teresa Wójcik, editor of BiznesAlert.pl.

On 12 June, the Supreme Audit Office (NIK) presented an extensive 114-page long report on “The Functioning of the Black Coal Mining Industry from 2007 until 2015 Against the Backdrop of the Government Program.” The report’s general conclusion is that the 2007-2015 program was inaccurate. This assessment was based on a careful, thoroughly documented audit and an analysis of all the activities that in theory were supposed to ensure the black coal mining sector’s profitability.

The inaccurate 2007-2015 program

While presenting the report, NIK’s President, Krzysztof Kwiatkowski, stated that the government program was based on overly optimistic assumptions on income. At the same time costs were marginalized. The 2007 economic situation was taken as a reference point and the possibility of a downturn on the coal market was not taken into consideration. There was no alternative scenario for years of slowdown.

While implementing (inconsequently) the adopted program, restructuring decisions were in essence abandoned, while the few attempts that did take place did not produce any results. The NIK report clearly shows that the 2007-2015 government program did not take into consideration the necessity of restructuring. Coal companies did not have long-term development strategies, only ad-hoc technical and economic plans. “This did not allow for systemic changes,” commented NIK’s president. He stressed that the mining industry’s catastrophe resulted from the lack of determination of consecutive governments. After a successful restructuring conducted by Jerzy Buzek’s government and his Vice-Prime Minister and Economy Minister Janusz Steinhoff, the sector’s issues unfortunately came back. Those include the disregard for efficiency and profits, as well as over-employment, which was decreasing a lot slower than coal sales, and whose costs could only be covered at times when market coal prices were high.

The deadly sins

The economic and financial collapse of Poland’s biggest coal companies, Kompania Węglowa, Katowicki Holding Węglowy and Jastrzębska Spółka Węglowa, was caused not only by the downturn on world markets, but also by lack of a fundamental reform. Both the PO-PSL government and the boards of coal companies are at fault. During their rule the over-employment, which drained the mines’ coffers was ignored. The years of economic upturn were not used to improve the companies’ productivity. Its average was 657 tons per miner annually. Whereas in a privatized coal mine Lubelski Węgiel – Bogdanka, it was, ca. 1700 tons. Efficiency occurs when productivity amounts to at least 1000 tons per miner annually. NIK calculated the financial support for coal mining between 2007 and 2015 and compared it to the amount of taxes and other fees paid by the sector in that period. The support was at PLN 65.7 billion, whereas publiclaw liabilities at PLN 64.5 billion. President Kwiatkowski stressed these were “comparable figures.”

The NIK report also determined that the program did not take into consideration the actual potential of exporting coal. The coal export forecasts (prepared by both the companies and government) were far from reality. These discrepancies were known to the subsequent economy ministers. Their supervision was inadequate. The positive sales results of coal were mostly caused by high prices in the years of economic upturn. Then came the increasing losses.

Investments in coal companies, according to the report, were increased only in 2012-2013, i.e. a time of economic downturn, when financial problems started. Earlier the profits were being wasted. Subsequent ministers of the economy knew about this, but did not use that knowledge. Specific actions by the Ministry of the Economy were taken as late as 2013, but they were overdue and inaccurate. Rescue efforts in 2015 were ad-hoc and detached from the government program.

Privatization necessary? 

The issue of ownership in the coal industry is a contentious one. Both, the report as well as the speech given by Janusz Steinhoff, PhD., and author of the only successful reform of the Polish mining industry, discussed that. A state owner ensures energy security. It does not ensure sufficient efficiency similar to that in private mines (Silesia), or joint-stock companies (Bogdanka). NIK pointed to the fact that concrete plans about the privatization of mining entities, which were included in initial drafts of the government’s program, were in the end replaced with general statements, because of negative opinions expressed by mining trade unions.

In NIK’s opinion, privatization of black coal mining companies, conducted after prior restructuring of the sector and after the 2003 debt-reduction, and with the opportunities created at a time of high coal demand (which lasted until 2011), would ensure competitiveness and further restructuring of the sector. However the privatization process of Polish mining, to a large degree, stopped at the stage of commercialization, i.e. transforming state companies into single-member companies of the State Treasury

Failed or abandoned ownership transformations

The NIK report says that “the strategy of Kompania Węglowa (KW) from November 2007 anticipated the company’s privatization, provided that its economic and financial situation were good and that the process would be agreed on with the social partners.” At the same time, it was assumed that the State Treasury would keep the majority of the stocks and that the privatization would be conducted by the stock exchange. KW’s February 2012 strategy stated that the Company should be ready for a 2015 stock exchange debut.”However, the company never implemented any privatization decisions and did not analyze the potential costs and results of such an implementation. Additionally, no privatization schedule was drafted. The only action KW took up, but did not entirely complete, was the preparation, on the basis of a motion of the Treasury Ministry from 2013, of information on the number of people authorized to receive free State Treasury stocks. The report stressed that the reasons why privatization did not start were, “among others unfinished restructuring process of the company and its extremely difficult financial and economic situation.”

The strategy of the Katowicki Holding Węglowy (KWH) from December 2007 assumed the release of a minority stock package onto the Warsaw Stock Exchange. KWH’s strategy from June 2010 stated that the first stock release would take place in 2011. In the end, this partial privatization also remained unfinished. Jastrzębska Spółka Węglowa was commercialized. Only Bogdanka was privatized on the stock exchage.

Structural errors 

Merging efficient and very unproductive mines into state-owned companies was a huge and recurring error. The report also stressed that tremendous damage was caused by the privatization of almost all companies from the mining sector, e.g. producers of machines and mining equipment, while leaving the key mines in the hands of the State Treasury. This does not facilitate the transparency of mutual trade relations. It causes, among others, significant cost range of machine and mining equipment lease made available to mines by privatized producers. The report cites pathologies and abuses regarding this problem.

“We know the past, we know the present, let’s look into the future,” said Krzysztof Kwiatkowski, Anna Margis, Director of the Mining Department at the Ministry of Energy talked about the future. Experts debated.

Director Margis applauded the NIK report and presented the closer and more remote plans for the future of the Polish black coal mining industry. She stressed that “according to the current government, coal mining ensures the country’s energy security and we cannot abandon it. At the end of 2016 the industry’s results improved significantly and the trend is stable. The cost of coal extraction is going down.”

Anna Margis stated that the work on the 2016-2030 program for mining have started. It is necessary to determine a new direction of development for the black coal industry. The structure of the sector has changed and will continue to evolve. The future program will be authored by a working group, which includes representatives of the government, MPs, businessmen and social partners. The goal of the program will be to ensure energy security, satisfy the national demand for coal, search for new deposits, improve occupational safety, “construct intelligent mines”, promote clean coal technologies.

The project’s draft will be included in the Energy Policy Program that is being compiled. The program will be monitored, “every now and then we will verify how it works,” announced Margis. She stressed that the goal of the current restructuring is, among others, the optimization of employment. Nobody lost their job because of the current changes, we are implementing voluntary redundancy.

The fate of the Polish black coal mining industry will depend, to a large extent, on commercial extraction of methane from coal deposits. On the one hand this is a jackpot for the energy sector, on the other it will increase safety in mines. Additionally, this would also minimize methane emissions into the atmosphere. The participants of the NIK conference stressed in this context the significance of the recently opened (8 June) International Centre  of  Excellence on Coal Mine Methane.