Will the new finance minister make a better shareholder than his predecessors?



Brains drained: Ex-CEZ board directors Peter Bodnar and Vladimir Hlavinka

There are three prevailing opinions on Andrej Babis and his significance for Czech politics.

One is that Babis is an unwelcome continuation by other means of the decline of Czech parliamentary democracy started by the cartelisation of the state by political parties. Another is that Babis is the long-awaited replacement of a failed parliamentary model of politics, the beginning of a new, non-partisan era of government led by technocrats and legitimised by referenda in which we choose our favourite policies over an iPhone and at public rallies, a kind of political Eurovision song contest. And a third is that Babis is a correction of the cartel party state, the means by which parliamentary democracy is to be restored to its former healthy condition before the Klaus-Zeman rot set in in 1998.

The million people who voted for Babis subscribe to the last two opinions, which are mutually exclusive. I subscribe to the first. But I have already written repeatedly about the significance of Babis for Czech politics. Today, I should like to look at his significance for state-owned companies, an area in which he can claim with some conviction to be an expert, having worked for one (Petrimex), having tried to acquire one (Unipetrol) and having done business with several (for example, Explosia).

Few would disagree that Babis has been managing his 100 per cent shareholding in Agrofert well. But never mind Agrofert now. As Czech finance minister, he has more important things to worry about, at least more important to the 10.5 million inhabitants of this country, than the value of Agrofert -the falling value of CEZ for example.

Babis has acquired controlling stakes in some 200 companies in the last 15 years. As finance minister, he has now ‘acquired’, on behalf of Czech citizens, a controlling stake in CEZ. How will he protect the value of the state’s majority shareholding in CEZ? How will he enforce the ownership rights of Czech citizens in CEZ?

For starters, he needs to halt the exodus of CEZ’s best managers, and I do not mean Martin Roman. I refer to the ones who actually understand the needs of the energy industry rather than just the needs of local politicians. Have you not noticed? First to leave, this time last year, was CEZ’s head of generation, Vladimir Hlavinka. He was followed a month ago by the firm's head of investment, Peter Bodnar.

Their board seats have been filled by the kind of people Babis went into politics to remove, party political placemen like Ivo Hlavac. Hlavac is an ODS member who has served as deputy minister in the ministries of agriculture, regional development and environment. He spent a few months at the Czech Deloitte franchise as well (see here).

In addition to the brain drain at CEZ, the firm’s new majority shareholder will want to eliminate the kind of sweet dealing that has flourished under the management of Martin Roman and Daniel Benes. The best way to do this is to get at least one of these questionable transactions thoroughly investigated by forensic auditors specialising in criminal fraud.

Here are two such transactions that the finance minister might like to turn upside down and inside out.

Temelin’s nuclear fuel dump

Vladimir Hlavinka resurfaced last week as vice chairman of PSG International. Hlavinka and PSG are well matched. Hlavinka is highly regarded in the energy sector and PSG is one of the most reputable and oldest Czech construction firms.

Today, PSG is a part of the Russian-Czech MIR 1200 consortium lobbying to build two new reactors at Temelin. According to CEZ’s press office, CEZ has awarded contracts directly to PSG with a value of less than Kc 10 million in the last two years, small change in other words. The press office is unable to reveal, however, the value of the work PSG has received as a sub-contractor on contracts placed by CEZ with other firms. So if Rosatom were to be awarded the Temelin 3&4 contract, and PSG were to become a sub-contractor to Rosatom, CEZ's press office could not tell you the value of PSG's sub-contract. In other words, that figure of Kc 10 million mentioned earlier may or may not be indicative of the true extent of PSG's business relationship with CEZ.

For example, PSG was hired by a firm called Central Europe Engineering & Investment (CEEI) to build the spent nuclear fuel dump at NPP Temelin between 2009-2010 (see its website here). We have no idea of the value of PSG's contract with CEEI. And we have not a clue who really owns CEEI either (well, actually I have a pretty good idea).

As some of you will recall, at the time PSG got the sub-contract, CEEI was a Lichtenstein-based shell company represented in the Czech Republic by an ODS member called Jiri Kovar (see here). CEEI was awarded the prime contract worth EUR 60 million or some Kc 1.5 billion by Daniel Benes in 2008. It was chosen because it was the only bidder which had a license from the German company, WTI, to use its state-of-the-art design of nuclear fuel dumps. In spite of the fact that CEZ had decided not to use the German know-how at the time of awarding the contract to CEEI, it went ahead and awarded the contract to a shell company based in lawyer's office in Lichtenstein. Benes opted for a local dump design instead, which had the great advantage of being twice as expensive as the German one. The cost of an equivalent dump in neighbouring Bavaria completed a year earlier was just over EUR 30 million.

This is the kind of decision that Agrofert’s owner would definitely frown upon, unlike his predecessors at the finance ministry.

Now for the really ridiculous part. Neither CEZ, nor WTI, nor PSG are able to recall with whom they were really doing business when they signed their separate contracts with CEEI. All three of them deny any knowledge of who owned the company they worked with for some three years in the period 2008-2010.

And why should they remember, you might ask? After all, it is only a reinforced concrete monolithic structure of over 100000 m3 housing spent nuclear fuel attached to a nuclear power plant close to the Austrian border. And in any case, EUR 30 million is pocket money to top managers of CEZ force-fed like Hungarian geese on share options. It is a handy enough sum to fritter on nice-to-haves like an art poster collection or a stake in a billboard business, or even an academic ivory tower, but it is hardly worth bothering the auditors with.

Unless your majority shareholder is Andrej Babis that is.

Ledvice’s supercritical French boiler

Another sweet deal that CEZ’s new majority shareholder might want to have investigated by forensic accountants is the case of the missing French boiler in Ledvice, but preferably by accountants not employed at the Czech Deloitte franchise, a long term supplier of valuation services to CEZ under Roman and Benes. By the way, anyone following the PORG ivory tower saga two weeks ago might have noticed that the school has a new board director, a representative of parents concerned that Martin Roman might have been misusing the school to promote his own business interests. Martin Buransky is indeed a school parent. But he is also a long standing supervisory board member of PORG with close ties to CEZ. For eight years, he led Deloitte's public sector business division.

But back to that missing French boiler. Just to remind you, in late 2007 CEZ’s daughter company, Skoda Praha Invest, signed a deal with the French firm Alstom to supply a so-called 'supercritical' boiler to CEZ’s Ledvice power plant (see here). The refitted plant was due to come into operation in 2012 but problems with the boiler, which was supposed to have been in place already in 2011, have meant that the plant remains idle to this day, totalement hors d'action.

The Ledvice upgrade is costing CEZ some Kc 30 billion, of which around one third is earmarked for Alstom and its big boiler. It is estimated that each year of delay in commissioning Ledvice costs CEZ a billion crowns in lost income. That’s the kind of money that any shareholder should care about, even the state.

In October 2012, CEZ revealed that the firm was indeed seeking compensation from Alstom. Given the vast sums of money being lost as a result of the delays, this seems only right. And yet there are several aspects to this particular story which should interest Andrej Babis as CEZ’s majority shareholder. The fact that the new boiler house at Ledvice is the tallest building in the Czech Republic is not one of them.

The contract between CEZ’s Skoda Praha Invest and Alstom Power (Stuttgart) and Alstom Brno was signed in October 2007. This is noteworthy because Radek Bencik, the boss of Skoda Praha Invest, left the firm on 25th September 2007. And six months later, Bencik resurfaced as the boss of Alstom Brno, the very division in Alstom that he, as the boss of Skoda Praha Invest, had been negotiating with on behalf of his parent company CEZ. Hlavinka had the good sense to wait a whole year before joining the board of a supplier to his previous employer. I doubt Babis would allow this kind of nonsense at Agrofert.

Another noteworthy fact is that CEZ's press office today maintains that the Alstom boiler will be delivered on time and strictly according to the terms of the contract. But strictly according to which contract? It may very well be true that there is a splendid new contract between Skoda Praha Invest and Alstom which stipulates a delivery date of 2014 (the boiler should be switched on in time for Christmas this year). But this must mean that the original contract signed in 2007 has either been amended or superceded, in either case shifting the deadline from 2011 to 2014. This delay has cost CEZ’s majority shareholder an estimated Kc 3 billion in lost income so far. What's three years and Kc 3 billion between friends after all?

That should get the attention of an unfriendly shareholder like Babis. He might like to ask Daniel Benes about it. Benes was the chairman of the supervisory board of Skoda Praha Invest at the time, and therefore responsible for exercising a supervisory role over the boilerman Bencik (who has since morphed into un homme du gaz at Net4Gas).

The finance minister will no doubt recall what we were all told by CEZ in October 2012, that CEZ was seeking compensation from Alstom. We must assume that it was doing so based upon the terms of the original contract signed in 2007. In which case, it follows that CEZ, successful in its compensation claim against Alstom, went on to amend or to end the old contract. However, there is another explanation, which is that CEZ actually tore up the 2007 contract because it was toothless, totalement édenté. In which case, it would be good to know what exactly was wrong with it. Most shareholders would be pleased to know this kind of detail. Andrej Babis certainly would. So how much has CEZ (or Skoda Praha Invest) won in compensation for the missing French boiler? The finance minister could ask CEZ's press office.

Has CEZ been tunnelled, Mr Babis?

In short and not to put too fine a point on it, there is evidence to suggest that the management of CEZ tunnelled the firm during Martin Roman’s tenure. The case of the Ledvice boiler and the Temelin fuel dump are both evidence of mismanagement, perhaps even of criminal fraud.

The fact that the economic crimes unit of the police are currently investigating both contracts is encouraging. The fact Daniel Benes was intimately involved in both, as supervisory board chairman of Skoda Praha Invest in 2007 and as deputy board chairman of CEZ in 2008, is not, at least not for shareholders.

There may be a legitimate explanation for the late delivery of Ledvice’s boiler and for Radek Bencik’s move to Alstom. There may be a legitimate explanation for the unwillingness of CEEI’s business partners to reveal who owns the firm and the fact that NPP Temelin’s dump was twice as expensive as the equivalent dump at NPP Isar.

Previous finance ministers have adopted a somewhat cavalier approach to scrutiny of the senior managers they appoint at CEZ. This has raised the risk to all the firm's shareholders that the management has been tempted to defraud them while executing CEZ’s gigantic investment plans. At the very least, procurement decisions, such as the choice of contractor to supply the boiler in Ledvice and the nuclear fuel dump in Temelin, strengthen doubts about the commitment of Daniel Benes to maximising shareholder value.

No doubt, this will all change now that CEZ has a majority shareholder who excels in enforcing his ownership rights. If the finance minister will now enforce the ownership rights of the Czech state in CEZ as efficiently as he has enforced his own rights in Agrofert, all will be well.

The finance minister will surely want to know why CEZ is losing its most talented managers, and whether Benes intends to continue to allow group board directors, such as Radek Bencik and Vladimir Hlavinka, to hop into top management positions with suppliers to the group, such as Alstom and PSG.

Above all, Andrej Babis will want to know whether the Czech state’s single most valuable corporate asset has been tunnelled by the politicians and their appointees on the board of CEZ.

This article did not appear first in Lidove noviny. For a start, it is far too long. My apologies!