The likelihood of the state entering the CEZ deal seems small.
Taxpayers will hardly agree to pay a billion leva for the acquisition
The selected buyer Ginka Varbakova can hardly decline the participation offered by the state. The hesitation seems to be come from the ranks of the government
Besides the main problem with the state's inability to manage a business, including an energy one, the issue of whether CEZ wants such a change in the transaction (very unlikely) and whether taxpayers are willing to pay an amount that in the most generous version is the huge figure of 1 billion Leva, remain. Therefore, the more probable response of the state seems to be the adoption of a new regulation to stop or at least keep a close look on the selected future owner Inercom of Genka Varbakova.
If the state is going to buy a stake in CEZ's Bulgarian business at all, then the plan is for the nationalization to happen through a stake in "Inercom Bulgaria". At the meeting with the Prime Minister and the two ministers, they asked for the entire ownership, but they also gave an option for 34%, the sources of Capital said. But the official version is that the government is seeking control over the asset – i.e., the state must have a minimum of 50% plus one share in Inercom. Given the price contained in the draft agreement of around EUR 320-340 million and the subsequent tender offer to small shareholders for half of the sum, this would mean a total cost of EUR 500 million. Thus, in order to obtain control, the state will have to provide more than half of the amount, i.e. BGN 500 mln. Therefore, the "comfort" of the government would cost taxpayers between half and 1 billion BGN or, an amount sufficient for example, to finish the Hemus highway.
The potential involvement of the state has a side effect - it will heal Inercom’s reputation and thus the deal will become more acceptable for bank funding of the buyer as well. If the government becomes a partner, the political risk will become much more acceptable for the funding institutions. If it is assumed that the basic payment will consist of the loan provided to the company of Ginka Varbakova (from a bank consortium led by Unicredit), the state and Inercom will have to find at least EUR 100 million of own funds. And the state mantra that it will not take money from the budget but will find a loan, is not a solution, because the loan will also have to be paid by the taxpayer.
The question is whether the price negotiated by Varbakova is too high and if so - why the state would accept to pay it. The remaining bidders and the seller’s own estimates indicate that the amount is well above the market price. If we accept the multiplier of five times the operating profit (70 million EUR for 2017 for the two big companies in the package - Cez Elektro and Cez Razpredelenie), it turns out that 100% of the two companies should cost about 350 million EUR, i.e. the 67% sold by CEZ would amount to EUR 235 million, or about 100 million more than the price offered by Inercom. Here, the difference is that every buyer must include a regulatory risk. As far as the state itself writes its rules and appoints the regulator, it can hardly be expected to withdraw its own license or to constantly sanction itself, so this con is not included in the state’s list.
Most lawyers believe that if a share from Inercom is acquired, an authorization must be required from Brussels for state aid. However, obtaining such an authorization takes months.
The deal has another big unknown element.
Arbitration plus and minus
In mid-2016, CEZ referred to the ICSID arbitration tribunal (International Center for Settlement of Investment Disputes) in Washington with a claim against Bulgaria for "hundreds of millions" without specifying the amount. For the time being, the proceedings have not reached the middle stage of the case, judging by EVN's much earlier claim on the same occasion. The Austrian owner of the other EDC, which serves Southern Bulgaria, turned to the arbitration court in 2013, and the parties' hearings finished in the end of 2016, but there is still no judgment, i.e. the dispute takes at least five years. It is precisely the award of the arbitration tribunal on the claim of EVN that will be a test for the responsibility of the Bulgarian state. The initial claim against Bulgaria was for EUR 600 million, but after NEK and EVN concluded an out-of-court settlement on one of their disputes in Bulgaria, the claim was probably reduced by at least EUR 100 million.
The EVN case will show how much the state's legislative and regulatory decisions putting pressure on electricity prices, have costed. Then comes the case of Energo-pro and the award on the dispute with CEZ will be pronounced in 3-4 years.
In the Czech case, Bulgaria has some advantage. The reason indicated by two attorneys in front of Capital is that CEZ has hired a Czech law firm without any experience in arbitration cases, chosen because it is close to the former Czech prime minister.
Candidates who participated in the negotiations for the deal with the Bulgarian assets argue that one of the main reasons for CEZ to hurry with the sale, is precisely the arbitration. If the company condemns Bulgaria and still has a business in the country, the state has many ways of "offsetting the fine," CEZ managers said.
Now the Czech media claim that there is a cooperation clause in the "Inercom" contract, and that would make CEZ object to the country's participation in the deal. The reason: if any more documents are needed from Bulgaria, they will have no access to them. "It will be a highly unorthodox situation where the defendant will have a contractual obligation to provide assistance to the other party in the claims against himself, which is a true conflict and will probably not work in practice," a lawyer told Capital.
If it enters the company, the state can find new arguments in its favor. And if CEZ has intended to use managers from its Bulgarian companies as witnesses, this would become almost impossible.
In theory, if due to the statements of the Bulgarian government, the deal with "Inercom" fails (for example, because of the banks' hesitations over the political risk), CEZ may seek exercising its rights before another arbitration court due to lost profits.
The European trump card of Bulgaria
The situation becomes more complicated because of a judgment of the European Court of Justice in Luxembourg from 6 March. It concerns precisely arbitration rulings based on bilateral agreements for investment protection. The judgment concludes that arbitration decisions are illegal because they create a system of judicial control beyond the EU's legal order. The court repeats the long-standing argument of the European Commission that arbitration agreements are contrary to public order in the EU, which is a ground for refusal of enforcement. For example, in 2014, the European Commission banned Romania from enforcing a Washington arbitration award filed by a Swedish company. The EC then concluded that the enforcement of the arbitration award would mean giving unlawful State aid, something that would not have happened if the case had been dealt with by a regular court. That is why in 2015 the EC asked five EU countries to terminate their investment protection agreements with other member states.
At present, lawyers have disputes about the arbitration courts affected by the decision of March 6th. The majority of the lawyers we consulted, agree that the arbitration awards on bilateral investment protection agreements will no longer be recognized. However, the question remains with Washington ICSID, since it is established by an international agreement and its decisions are automatically enforced. However, the ICSID principle is the same as the one of bilateral agreements, i.e. non-European judges look into disputes between European companies / countries. That is why there are cases where the EC imposes prohibitions on the implementation of the awards (just like in the Romanian case). The practice, however, shows that this only happens when they explicitly violate European law in the field of state aid.
Two other lawyers, specializing in this type of disputes, told Capital that the judgment does not lead to anything concrete in the case of CEZ and other cases against Bulgaria in Washington. ICSID decisions remain valid, and Bulgaria will have to pay if convicted, unless it proves that the award breaches the European law.
"The new court judgment concerns arbitrations in Chambers of Commerce, not the Washington arbitration court, which is departmental, and its awards are automatically enforced," said Ivaylo Dermendzhiev.
According to Parvan P. Parvanov, also a lawyer practicing international arbitration law, the Bulgarian defense should use the ruling of the European Court and transfer it to the ICSID arbitration. "The text of the judgment of the European Court of Justice is too general, but it will give rise to jurisdiction disputes. Although the tribunal on CEZ's case complies with the Energy Charter, which is a multilateral international treaty to which the EU is also a party, I see no reason not to make the functional argument that the new rule also includes cases where parties to the arbitration proceedings are from two countries –members of the Union. When countries win this type of arbitration proceedings, this is usually due to arguments about jurisdiction. At least the issue will bring additional uncertainty in CEZ about the outcome and Bulgaria will gain some more time. I will not be surprised to see such a development."
All of the above shows that the outcome of the arbitration proceedings is unclear both with regards to time and direction. Despite being obscure, the resolution of the issue with the new owner of the Bulgarian companies of CEZ will be known by the summer. So far the bets for Ginka Varbakova (with or without a partner in the face of the state) to buy or not, seem equal.
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