Slim benefits from Treasury assets

In recent weeks the Treasury  showed up often in public media. Contexts included the creation of the Polish Investments company on the basis of Treasury assets, the liberalisation of the postal services market or, recently, public assistance sought for by the so-called national carrier, i.e. LOT airlines.

Any day now the government is going to publish yet another “Report on the property of the State Treasury”. However, it will present data as at 31 December 2011, which are now slightly out-of-date but are still worth pondering upon, since they give insight into what remains at the disposal of the state as the manager of assets.

Let us enumerate the most important items of State Treasury property:

–       real estate (land and forests), altogether PLN 341 billion as of 31 December 2010,

–       shares and stocks of listed and unlisted companies (PLN 188 billion),

–       buildings, constructions, civil and water engineering structures, mainly roads, bridges and flyovers (PLN 247 billion),

–       capital work in progress – PLN 51 billion (mainly highways, roads, railways),

–       property of higher education establishments (PLN 26 billion),

–       inventories (PLN 20 billion),

–       cash (PLN 20 billion).

The list also includes State Treasury receivables (PLN 54 billion), but their recovery seems dubious at best, at least with respect to some items. This is supplemented by a few other items defined generally as property rights acquired on account of initial capital provided by the State Treasury, e.g. in independent public health care facilities (mainly the Ministry of Interior and Ministry of Defence hospitals), scientific institutes, Bank Gospodarstwa Krajowego (BGK). The list ends with receivables of budgetary units, property of public agencies and funds as well as several minor items.

How much is the worth of State Treasury property?

First, the authors of annual reports do not sum up the provided amounts as particular figures result from the use of very diverse valuation methods, starting from book value estimation, through market value and expert estimates and ending up with replacement value assessment.

Second, certain positions are not evaluated at all, including historic monuments and natural resources, including mineral deposits. Such an attitude may be understandable but the curiosity to know how much all this is worth at the end of the day is equally natural. All in all, a person who wants to calculate the value of property acquired during his or her lifetime also adopts very diverse valuation methods and yet aims at calculating the total value (just as, e.g. statisticians who calculate the net value of households).

Therefore, at the end of 2010, the value of property evaluated by the State Treasury amounted to approx. PLN 1,018.6 billion. On the same day, the debt of the Treasury amounted to  PLN 701 billion. At the end of September 2012, Treasury debt amounted to PLN 791.8 billion, which means that at the end of this year it will exceed  PLN 800 billion.

How much value has the property accrued till now?

And what will the value of Treasury property amount to? Officially we will know only in a year’s time. Still, we can try to estimate a few items.

Real estate. In the last two years, prices of land have increased by approx. 35 per cent (according to the Central Statistical Office, in the third quarter of 2012, a hectare of agricultural land stood at PLN 24.7 thousand).  Every year, however, around  100 thousand ha, i.e. around 5 per cent of Treasury land is being sold. Thus the value of Treasury land will surely increase but not to the same degree as prices. According to reports compiled by the Expander company and the szybko.pl portal, prices of land plots in cities were stable or increased slightly. Altogether the value of agricultural land and urban land plots may have increased by several billion zloty (in 2010 the rise in value amounted to the total of PLN 95 billion, with agricultural land in the countryside contributing PLN 24 billion).

What seems more important than changes in the price of land is the change in the value of forests, since they are worth more (PLN 237 billion in 2010) than agricultural and urban land. How much could the value of forests have increased?  In 2010, a new method of valuation was introduced which takes into account the surface and type of forest as well as the price of a cubic metre of wood. The increase in wood prices since 2010 has amounted to over 20 per cent. Certainly there has also been a net increment in the volume of wood in forests as the indicator of forest clearing to the total increment of tree volume in Poland stands at around 60 per cent. Let us assume that the increase in the value of forests amounted to approx. PLN 50 billion.

Shares and stocks. The WIG 20 index as a measure of economic climate for big companies has dropped approx. 8 per cent since the end of 2010. In addition, Treasury stocks worth a few billion zloty have been sold. On the other hand, such companies as Jastrzębska Spółka Węglowa (a large coal mining company) and Tauron (a large holding company dealing with energy generation and distribution) have been taken public, and now they have market price tags. On the whole, it seems that in the last two years the decrease in the value of stocks and shares held by the State Treasury ranged between a few to a dozen billion zloty.

Receivables of the State Treasury will increase at the end of this year to PLN 65 billion, but as mentioned above, this is a debatable item. In turn, it seems that the so-called consolidation of public finances could have brought down the value of certain items in the list.

Infrastructure value has certainly increased – part of the infrastructure in construction has been completed. Many new and old investment projects are in progress. Al in all, public investment raising the value of Treasury property must be in the range of PLN  20 – 30 billion. The property of higher education establishments must have also risen in value, since they invested a lot.

These estimates show that, mainly on account of an increase in the value of forests and infrastructure, the value of State Treasury property has gone up in the last two years by at least PLN 50-70 billion. This is, however, less than the increase in Treasury debt, not to mention public debt. Still, the value of property remains higher than the debt.

Effectiveness of use – unknown

Is this wealth working effectively? It is difficult to say. Let us start  by saying that the “Poland holding company” has very heterogeneous  assets which are managed in various ways by a host of institutions. Apart from the Ministry of Treasury there are other ministries at play (e. g. those dealing with infrastructure, agriculture and economy, as far as public sector companies are involved, and the Ministry of Finance – as far as cash and receivables are at play), various independent agencies (agricultural and military) and funds, as well as formal and legal oddities like Lasy Państwowe (State Forests), ending with individual health care facilities and cultural, educational and scientific institutions.

It suffices to read the introduction to reports on State Treasury property, in order to realize how complex its management structure and the forms of property use are. Two fragments are particularly worth citing:

“In a functional sense the state holds:

– objects entrusted to state units belonging to the public finance sector, enabling the performance of systemic functions and tasks in such areas of state activity as defence, citizen safety and administration.

– property entrusted to citizens and their organizations in order to support their diverse economic and non-economic activity – including cultural goods, documentation, natural resources and roads;

– fixed assets allocated to be developed by private investors – such as agricultural or military-owned land as well as assets and rights remaining after the dissolution of state-owned organisational units.

– property rights acquired in exchange for capital provided to entrepreneurs and state-owned legal entities established  for the purpose of conducting scientific, cultural, educational and health care-related activity or any other activity provided for in the statutes”.

And here is another quotation concerning land only and describing the components of State Treasury property:

“- pool of State Treasury real estate, in custody of starosts (heads of county executive and administration bodies),

–    land in permanent custody of state organisational units, including land used for the performance of statutory tasks by offices of government and state administration,

–    land in the Agricultural Property Stock of the State Treasury,

–    land managed by PGL Lasy Państwowe (State Forests),

–    land entrusted to the Military Property Agency and Military Housing Agency,

–    land entrusted in perpetual use to legal or natural persons”.

Later on, in the detailed section of the Report, it turns out that in addition, “the land of the State Treasury is managed in perpetuity by the General National Directorate of Local Roads and Highways with respect to land located in the right-of-way of national roads and under the supporting facilities (…) as well as by National Parks with respect to the area of the parks themselves and their protective zones”. The list itself of government offices, entrusted with such permanent administration has 49 entries.

Hundreds of entities, dozens of supervisory bodies

And so it goes on in every chapter and subchapter of the Report. State Treasury property is managed by hundreds of institutions, voivods (province governors) and starosts. It might seem that the situation is  simpler where stocks and shares of the State Treasury in companies are concerned. But it is not and far from it! Representing the State Treasury is conferred on 7 ministers (including the Sports Minister), 3 agencies and Lasy Państwowe, although it is the Minister of Treasury that has most entities under his supervision (though in 2010, for example, he lost PSE Operator  ­– a Polish electricity transmission system operator – for the sake of the Ministry of Economy).

Similar situation prevails in the case of state enterprises (they still exist). The Minister of Treasury supervises, among others, Polsteam, a cargo ship operator. The Minister of Infrastructure controls Polish Airports and the Minister of Defence exercises authority over a design office of its own. Also the voivods still have state companies under their supervision (25 of them), though maybe the situation has already changed in this respect – let us recall that the available information dates back to the end of 2010.

From the qualitative point of view one can say that on the one end we have state enterprises or enterprises controlled by the State Treasury, such as the PZU insurance company or the PKO BP bank, which operate in a competitive market and often perform quite decently, and on the other end, institutions which have to be permanently subsidized or very costly agencies, whose operational expense is comparable with expenses on statutory purposes. Besides, there are budgetary units, which function on a non-profit basis, and whose objective is the provision of socially important services.

An attempt at standardizing requirements concerning the effective use of State Treasury property would therefore be doomed. Nevertheless, thought should be given to how to improve it in particular companies, institutions and agencies. For example, in budgetary institutions, apart from the existing system of quality control, there is need for a regular economic and financial audit. It suffices to look at what is happening with the finances of flagship state hospitals and medical institutes.

In enterprises – if they really must be state-owned like politicians claim – better ownership supervision is needed. In the case of agricultural land, land sale at long last simply must be concluded. It has been going on for 20 years and subsequent governments either have not had the will to bring it to a close, or in those instances when they did not lack will, they favoured small-area agriculturists at the expense of large-area farmers and tax-payers.  Of course, problems with the effectiveness of property use would have been smaller if a substantial part of the still state-owned companies as well as cultural institutions were privatized.

Our income, your taxes

What is unique is the status of Lasy Państwowe, a phenomenon that Financial Observer already described in autumn last year. This huge company with almost  PLN 7.5 billion of revenue in 2011, more than 20 thousand employees and more than PLN 850 million of profit, does not practically pay any income tax or dividend. It is not subject to any kind of economic supervision, and as a monopolist it establishes wood prices at will. In the past it did not want to impose high prices and profits were meagre, now it announces a rise after a rise, and the margin between non-wage labour costs and sales revenues is largely transferred to employees.

In 2011, the average wage (excluding profit-share benefits) in this institution reached  PLN  6,400 (PLN 4,045 in 2006), and administrative costs amount to as much as 35 per cent of total expenditure (PLN 2.8 billion against PLN 1.6 billion in 2007).

Seeking profitability

In 2011, in the Polish economy as a whole, companies (above nine employees) squeezed PLN 176.9 billion of gross profit from assets amounting to PLN 2,348 billion (part of these assets belongs to companies which registered gross losses amounting to PLN 39.3 billion). This means that the rate of return amounted to significantly over 7 per cent. If such a rate of return was applicable to State Treasury property, we should be getting at least PLN 70 billion annually. This is of course a mirage – after all, public establishments of higher education, the National Museum or administrative offices are not supposed to make profit, only to provide services to citizens. Yet, the part of State Treasury property that could and should make profit accounts for markedly more than half of the total.

How much does the State Treasury get out of it then? This year it will receive PLN 8 billion in dividend, and is planning to get another 6 billion next year. As a matter of fact this is the only relatively normal figure in the whole calculation. Looking elsewhere and taking the Agricultural Property Agency, for example, we would discover that the Agency has already paid the amount of PLN 1.9 billion anticipated for this year but this profit had been primarily made on the sale of land, not on its use, tenancy, etc.

Lasy Państwowe retains profits for itself. Higher education establishments are exempted from tax on real estate. Theoretically, profit from property and road investment includes approx. PLN 1 billion annually from via toll payments (they are supposed to increase to PLN 3 billion in 2015), as well as PLN 3.2 billion from the fuel fee transferred to the National Road Fund. This latter fee in reality is simply another tax.

At first sight, this is all that the Treasury manages to get from its property. And the first sight remains the last one too, as a journalist has no way to make a more detailed calculation, which would require checking all the institutions one by one and establishing whether they pay any fees for the right to manage the property that they have been entrusted with. The state does not make that calculation either. The report by the Ministry of Treasury – though it is an interesting, valuable and well-prepared document – does not specify what benefits the state draws from its property.

The Minister of Treasury, Mikołaj Budzanowski during the proceedings of the Treasury Commission of the Sejm on 5 December stated that in the case of the new CSI company operating within the Polish Investments programme, he expects profitability of slightly below 10 per cent. In the report prepared by this commission one can also read that “the CSI will be acting as a capital fund, establishing special purpose vehicles with the participation of investors or local authorities in order to implement particular infrastructural investment projects.

The Polish Investment programme is supposed to participate in the co-financing of infrastructure in the energy and gas industry, road, railway, maritime and urban transport as well as projects in the area of extraction, mainly of shale gas and hydrocarbons”.

The 10 per cent sounds very commendable but it is difficult to believe in this level of profitability when one looks at the way public property in Poland is managed from the point of view of financial effectiveness.