Vattenfall – is the state the right and a good owner?

Vattenfall is Sweden’s by far largest utility. In the year 2000, the state owned company left its national territory to become Germany’s third and Europe’s seventh largest electricity supplier. In general it has become a success story. However, not everyone, especially in Sweden, sees it that way, and even less so after the acquisition in 2009 of the Dutch gas company Nuon for €8.5 billion. Some, among them the newly elected leader of the social democratic opposition party, Stefan Löfven, calls it the “worst business transaction in Swedish history”.

Øystein Løseth, President of Vattenfall AB and Chief Executive Officer of the Vattenfall Group
(c) Vattenfall / Andreas Lind
But there is more. Quite a few people, among them politicians, environmentalists and journalists, are now of the opinion that the strategy to expand into Europe has been wrong from the beginning. According to those of this view, Vattenfall (“waterfall” in English), has transformed from a national jewel with a high level of social responsibility and low prices into a profit digging capitalist company without any regards to the green criteria, so cherished in Sweden. The worst example: Vattenfall’s CO2 emissions in Germany alone are bigger than those in the whole of Sweden. And who is in the first hand to blame? The company’s owner, the State. The national daily newspaper “Dagens Nyheter” calls it “the owner without principles”. And the tenor of the last few weeks’ political and media debate: The State (the government at the time) had no control, was weak and incompetent to steer the management and did not ask questions as long as big profits washed into the public coffers. Now, since the “new normal” has arrived and Vattenfall is facing problems, just as the entire energy industry, the state rule of the company is put into question. No one is asking for total privatisation which would be politically impossible. However, there are strong demands for a private partner and eventually the quotation on the stock exchange in order to bring more discipline to Vattenfall.

Pulling competition

The liberation of Sweden’s electricity market at the end of the 1990s brought a drastic change to the industry. It opened the country for foreign competition, and Vattenfall faced an abrupt wake up from a long sleep. From the East Finland’s Fortum knocked on the door, from the West Norway’s Statskraft and from the South Germany’s Eon, and they soon got a considerable share of the market. To withstand the competition and save Vattenfall’s role as the leading supplier of the home market, the Riksdag (Parliament) took a drastic decision: Vattenfall got new strategic guidelines. Vattenfall should go for growth, become a leading European player on the electricity market and deliver a return on equity of 15%. The philosophy behind this strategy: Without expansion outside Sweden, Vattenfall would not be able to generate enough funds for future investments.

CEO Lars G. Josefsson arrived at Vattenfall in 2000. In the coming years, he brought four companies in Northern and Eastern Germany under one roof. Once asked whether it was not difficult to bring German and Swedish business culture together, he answered: “Sweden and Germany is no problem, however, have you tried to bring Hamburgers, Berliners, Saxons and Brandenburgers into the same boat?” Josefsson did it. In the lignite fields of the Lausitz (Eastern Germany),

The State had no control, was weak and incompetent to steer the management
Vattenfall was after negotiations with the Trust Agency, which administrated the former GDR industries, welcomed as the White Knight. And in Stockholm the Finance Minister and his Government colleagues were happy with all the money coming from Germany. Recently, during the media campaign against Vattenfall, a former insider said: “We got our German assets to a very good price, about SEK 70 billion (about €7 billion). Some years later they were valued at SEK 130 billion. And we delivered per year an EBID result of 10 billion.” Within a few years, more than half of the company’s profit was generated in Germany. Lars G. Josefsson told EER: “I am very happy and proud of everything what we have done in these ten years” (until 2010 when he left Vattenfall).

Criticism rose, political colour changed

Despite the fact that Josefsson had been called by Germany’s chancellor Angela Merkel to become one of her two energy advisers, in Sweden he was confronted with heavy criticism by some politicians, some media and Greenpeace. It was claimed he would damage Sweden’s image as a green country and a forerunner of sustainable energy, that he would disregard the culture of some minorities living near the coalfields and destroy nature. The Government however left Vattenfall free hands. One minister in charge of the state owned companies, the Social Democrat Leif Pagrotsky, was especially popular; Lars G. Josefsson described him as someone who “kept himself very well informed, but never interfered”. His successor Leif Östros, he also a Social Democrat, was different. In spring 2006, Vattenfall called for a press conference to announce its new green strategy with investments of SEK 40 billion (ca. €4 billion). However, some hours before, the conference was cancelled and a new date set, since the Minister had let it be known that he would like to preside over the presentation, some month before the election of a new parliament. This interference made media headlines and some top Vattenfall bosses were not only furious, but considered their resignation.

Towards the end of 2006, Sweden got a new government; the Social Democrats lost, and a non-socialist government with the Conservatives, Liberals, Centre Party and Christian Democrats took over. Maud Olofsson, leader of the nuclear power sceptical Centre Party, became Minister of Industry and as such responsible for the state owned companies.

One reason for this change is said to have been the case ‘Nuon’
It is said, she kept a certain distance to Vattenfall, and that she was not very happy with its role in the German lignite industry. Furthermore she said strictly no to the planned acquisition of British Energy and once claimed that Lars G. Josefsson had far too much (Vattenfall-) money in the company’s pockets. In general, Mrs Olofsson’s attitude towards the state owned companies and especially Vattenfall is regarded as quite distanced and it not being her main interest. After the 2010 re-election of the non-socialist government, the responsibility for the state owned companies moved from the Ministry of Industry to the Ministry of Finance, and the Minister of Financial Markets, the conservative Peter Norman, took over. One reason for this change is said to have been the “case Nuon”.

Over the last few weeks, the media, led by the conservative national daily Svenska Dagbladet, have investigated the acquisition of the Dutch gas company Nuon and came up with the main question: What did the government know about this deal and did the minister responsible (Maud Olofsson) handle it correctly? The picture which appeared is quite dubious and shows how confusing the relationship between the government and the state owned companies is. Minister of Finance, Anders Borg, described it like this: “The rules which apply to this sort of affairs are that the Board of Directors takes the decision. The Board informs the responsible Minister. In the Nuon case there has never been – and correctly so – a government decision.” He maintains he had been informed by civil servants, as had the Prime Minister. And Anders Borg added: “We have to remember, if we want the state owned companies to be run in a businesslike way, government and ministers cannot be allowed to go in and take decisions. If it goes well for the company, it is not the government which can claim the success, and if it goes badly, the government doesn’t have to take responsibility. The companies have to be kept at arm’s length otherwise we cannot talk about businesslike conduct.”

However, the “case Nuon” is a strange one. In February 2009, Vattenfall acquires Nuon for €8.5 billion, the largest business transaction in Swedish history. For the Dutch company, Øystein Løseth led the negotiations, and in 2010 he succeeded Lars G. Josefsson as Vattenfall’s CEO. His task as Nuon boss was, he says, “to sell the company, because that was what the owners had asked for”. In his new role, “I have to do the best for Vattenfall and to meet the owners’ objectives”. Some years ago, the Norwegian told EER: “Under the then conditions it was a fair deal.” However, times have changed, and Lars G. Josefsson says, at that time, who could have imagined that we would face four years of declining economic activity? And Løseth concludes today: “If we look at the changes in the markets we can notice that Vattenfall paid too much for Nuon.” But already weeks before the signatures were put under the contract there were warning voices from the Ministry of Industry staff.

Vattenfall had no influence on the German Energiewende
Elsa Widding sent emails to Vattenfall’s CFO Dag Andresen and to Viktoria Aastrup, a civil servant and government’s representative on Vattenfall’s Board of Directors, pointing out that Vattenfall’s estimates were far too optimistic and that the company only could afford to pay SEK 70 billion. Interestingly, Swedish media and politicians are constantly using SEK 97 billion as the selling price, whilst at the time of the deal the agreed € 8.5 billion corresponded to SEK 89 billion. The investment bank Merrill Lynch sat a price span between €4.9 and 9.5 billion. At the same time, there were doubts whether Vattenfall would under these price conditions be able to meet the demand for a 15% return on equity. Maud Olofsson took this issue to the Board and was assured that the company saw no problem. According to the Minister, the Board was united in its positive stand to the acquisition of Nuon, only the Chairman voiced some cautious doubts. When now faced with heavy criticism for not having stopped the deal and having been satisfied with a weak answer, Maud Olofsson replied: “Had I said no, I would have to have sacked the entire Board.” The most intriguing point in this whole Nuon-process is the fact, that Mrs Winding’s arguments never reached the Board. Neither the CFO nor the state representative submitted this information. “We were totally unaware of this”, Lars G. Josefsson told EER.

Next, the political opposition demanded “all cards on the table” in a Parliament debate. It suspected the existence of internal documents which could prove a closer involvement of the Prime Minister and the Finance Minister in this affair, which they dispute. For them, all the responsibility laid with the Board. However, Maud Olofsson has been called to appear before the Committee on the Constitution of the Riksdag to be questioned about the circumstances of the Nuon deal and the role of the owner.

A shattered image of a central pillar

Now, since it turned out that the Dutch adventure resulted in a depreciation of SEK 15 billion (today about €1.8 billion), and that Vattenfall had to adjust its business on the European continent to the “new normal”, the company is under heavy fire in Sweden. No regard is paid to the fact that Vattenfall, though not a perfect operator of nuclear power stations, had no influence on the German Energiewende, which involves its two plants in Germany; that the attempt to get almost CO2 free electricity production in coal fired power stations with the help of CCS was made impossible by the resistance of regional governments and the local population, and that the attempt to cooperate on the CCS issue with other German utilities was unsuccessful. Up to then the Swedes had invested in CCS about € 200 million. These factors combined put lots of pressure on the company as well as on the other competitors. However, the overall attitude is that Vattenfall’s continental adventure has been a failure.

“Sell a minority part and get Vattenfall to the stock exchange”
Furthermore, according to Svenska Dagbladet, Vattenfall has “among German customers and political representatives a deeply rooted bad image as an oligopolist and destroyer of the environment, and that around the country there are strong growing groups of protesters against the state owned Swedish company.” Of course, there are protests against Vattenfall, but also against the other utilities, as Michael Fuchs, deputy leader of the governing CDU/CSU group in the German Bundestag (Parliament) and energy expert points out: “In my opinion, Vattenfall’s image in Germany is comparable to other big energy utilities like EON or RWE. “ He adds: “Vattenfall is the biggest employer in Eastern Germany and plays – together with politics and society – an important role in securing Eastern Germany’s position as an energy region.” Vattenfall employs 8000 people in Eastern Germany. Michael Fuchs also raises another aspect: “With the premature phasing out of nuclear energy, Germany will lose about half of its reliable base load capacity during the next ten years. Due to their fluctuant nature, renewable energies cannot make up for this loss. Coal will keep its important role as an independent, reliable and competitive energy source for many years to come. That holds especially true for lignite, which in 2012 was responsible for 25.6% of German electricity production. Therefore, I consider Vattenfall’s lignite capacities a central pillar of energy supply and security – today as well as in the foreseeable future.”

Possible partly privatisation

In connection with Vattenfall and the telephone company Telia Sonera, where the Swedish State is the largest shareholder and which is suspected to be involved in a corruption case, the future role of the State is widely debated. Finance Minister Anders Borg has already announced: “For us a central issue is to tighten up all processes around major business operations.” However, there are suggestions going even further on how to effectively run state owned companies. Sophie Nachemson-Ekwall, an adviser with a Phd in political economy, says: “The truth is, for a long time there haven’t been any rational reasons for the State to own Vattenfall. It is in the interest of the public, that Vattenfall has a strong enough owner who can act long term and provide return on capital big enough to give space for major investment in renewables, without too much or too little engagement by politicians.” Lars G. Josefsson when Vattenfall CEO was quite happy to be at the head of a state owned company “to avoid the pressure of short term capitalism”. Today he argues together with Dag Klackenberg, Vattenfall’s Chairman 2001 – 2008, for the “liberation of Ministers from direct responsibility for state owned companies”. They should be gathered in a holding company. With regards to the case Nuon they realised, that “no one among the politicians is prepared to shoulder the owner’s responsibility”. Matts Ekman, Vattenfall’s CFO from 2000 to 2007 and a crucial player in the construction of Vattenfall’s European platform, is clear in his view: “Sell a minority part and get Vattenfall to the stock exchange.” He criticises the government’s decision to change the return criteria from 15% on equity to 9% of capital employed, because that takes pressure from the company’s management and does not result in lower electricity prices. Ekman favours the stock exchange quotation because it “puts the company under market conditions” and will get more attention in the media, “which would result in less politics but more focus on business”. “That is what I am missing today.” And there are rumours or even aspirations that the government is planning to put some of the state owned companies into a special holding with an outlook to part privatisation, among them Vattenfall.

By the way: In 2000, when Vattenfall started its expansion drive, the books showed sales of SEK 31.7 billion, profits of 3.4 billion and a paid dividend of 990 million. In 2012, the corresponding figures where 167 billion, 17 billion in profit and 6.7 billion for the State treasury.