National Audit Office slams PKP

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Translation of the management summary of the NIK report

The cover page of the NIK report about the PKP group.

(Click image to download the report (in Polish) from the NIK website.

Poland’s Najwyzsza Izba Kontroli (NIK, the National Audit Office) has published a damning report about the management of the PKP group. Following a suggestion from the Parliamentary Infrastructure Committee, NIK decided to examine the way PKP SA, its eight largest subsidiary companies, and the Ministry of Infrastructure, have managed the assets of PKP. The period investigated was 2007 to the 1st quarter 2009.

According to the summary section of the NIK report –

  1. The financial performance of the PKP SA and the subsidiary companies worsened during the audited period.
  2. In addition to the world financial crisis, the reasons for this poor performance were inter alia:
    • delays in pursuing the privatisation of the group;
    • delays in PKP SA’s transferring the real estate necessary for its subsidiary companies to carry out their statutory duties;
    • delays in the disposal of redundant real estate;
    • irrational staffing policies.
  3. The financial reporting and internal auditing processes meet their targets and are reliable. and PKP and the subsidiary companies have maintained an honest approach with respect to their borrowings. The long-term debt of PKP S.A. fell from 10,034.3m PLN (2001) to 3,318.1 PLN (2008). During the same period the long-term debt of the subsidiaries rose fourfold. Short-term debt at the end of the Q.1 2008 stood at 2.833m PLN, of which 1,185m PLN was due to the infrastructure company PKP PLK SA – 567m PLN of this being overdue.
  4. PKP SA performs well in servicing its current debt obligations and the emission of new securities. It has been unnecessary to ask the State Treasury to repay these. (The Treasury guarantees PKP’s debts to the tune of approximately 5,000,000 m PLN.) However, NIK has felt it necessary to warn that the payments of some 2,695 m PLN due in 2010 – 2011 may be at risk if forecast income levels are not met, including income from the sale of PKP Intercity or the disposal of real estate.
  5. PKP SA has not performed well, or diligently, with respect to: the disposal of surplus land; privatising its subsidiary companies; and transferring the real estate necessary for its subsidiaries. In particular –
    • 233 properties (estimated value 62m PLN) which were surplus to requirements, and where the land registry formalities were complete were not offered for sale in 2007, as well as 180 similar properties (value 164m PLN) were not offered for sale in 2008.
    • Of the 129.3m PLN of targeted income from the sale of shares, or privatisation of its companies, only 11.8% was actually achieved. The public issue of shares has been repeatedly postponed.
    • The transfer of land and assets due to its subsidiary companies has not been carried out. In spite of the fact that, as of 31 March 2009, the land registry formalities had been completed for 71.3% of of real estate, comprising railway lines, none of this land had been transferred to PKP PLK . Only 0.02% of the land due to PKP Cargo had been transferred and only 0.25% to PKP Intercity. The remaining land was the subject of leasing agreements.
  6. PKP SA and its subsidiaries have not performed well, or diligently, with respect to utilising all the  funds available. The reasons for this state of affairs include: delays in preparing tender documentation, delays in seeking and obtaining the necessary administrative decisions and delays due to the need to carry out more work than originally specified. For example:
    • In 2007, PKP PLK had 2,279m PLN available for modernisation and refurbishment projects, 2,090m PLN (91.7%) was actually spent. In 2008, 3,341 was available, only 2,502m PLN (74%) was spent. 35 projects had been prioritised in the EU-funded Infrastructure and Environment Operating Programme, but by the end of the control period PKP PLK had submitted the paperwork for just one project.
    • In 2007, PKP SA had 124,6m PLN available for such projects, but only 78% was spent. This figure falls to 63% if Schengen projects are disregarded. In 2008, only 33% was spent of the 77.3m PLN that was available.
  7. Successive ministers responsible for transport have failed to perform well, or diligently,  with respect to –
    • Overseeing and ensuring the transfer of real estate from PKP SA necessary for the PKP subsidiaries to carry out their statutory duties. The additional leasing costs incurred by the subsidiaries are estimated to be not less than 660m PLN. In addition, notwithstanding that 9 years have passed since the passage of the relevant legislation through the Sejm, Ministers have failed to create the conditions which would enable PKP SA to carry out this transfer.
    • Guaranteeing a stable basis for calculating track access charges. Yearly changes to the formula used to charge train operating companies destroys the possibility of any rational planning of train services or developing a long-term strategy with respect to customers. The lack of regulation, necessary to establish track access charges for the long-term, such that the competitive position of rail transport could be maintained, could be a serious barrier to privatisation. Currently track access charges comprise some 25% of the train operating companies costs.
    • Preparing a framework for the way in which the infrastructure management body would operate. This framework has not been prepared notwithstanding that two years have passed since  A strategy for railway transport until 2013 was adopted (envisaging the removal of PKP PLK from the PKP group) and 9 years have passed since the passage of the commercialisation Act. Up to the present time PKP PLK does not enjoy the legal rights of ownership of  railway track. Moreover, as a result of having the status of a user (on the basis of charged usage) it cannot fully carry out its duties as infrastructure manager as laid down in the Railway Transport Act of 28 March 2003.
  8. The negative effect of financial irregularities uncovered during the audit process amounts to 1,140.8m PLN, and the the positive effect amounted to 3.5 thousand PLN.
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