EDF’s highly charged sale

Oct 24th 2005
From The Economist Global Agenda

France’s government has defied its powerful unions and announced the partial privatisation of Electricité de France. But selling a mere 15% of the giant utility risks infuriating workers without freeing the company sufficiently to compete with Europe’s other energy giants

CHARLES DE GAULLE famously asked of France “How can anyone govern a nation that has 246 different kinds of cheese?” When it came to dealing with the country’s 900-plus electric utilities, his actions spoke louder than his words: in 1946, his government oversaw a merger that took them into public ownership as the vast Electricité de France (EDF). Now, 60 years later, France’s conservative government has finally given the go-ahead for the partial privatisation of EDF. Some 15% of the vast company—the world’s biggest generator of nuclear power—is set to revert to private ownership in the next few weeks.

The sale, which could raise up to €7 billion ($8.4 billion), has proved highly controversial. Unions, particularly the communist-backed Confédération Générale du Travail (CGT), which represents half of EDF’s 110,000 workers in France, have fiercely opposed the move. They fear that jobs and benefits will go if the government loosens its grip on the public sector.

The French government must balance its need to assuage powerful unions with the important task of placing EDF on a firm financial footing as serious competition to its domestic monopoly grows. France’s government has a solid track record of resisting pressure from the European Union to comply with the rules and open its energy market. However, a 2007 deadline is approaching that will open retail electricity supplies across the EU to cross-border competition, and Europe’s leading power firms, such as Germany’s E.ON and RWE, have France in their sights.

Although the French government has dragged its heels over the implementation of past EU directives, the French electricity market has already been partially opened. Non-residential customers, who account for 70% of the market, are now free to choose their supplier. And last year the state guarantee that backed all loans to EDF was lifted after it was found to contravene European law on illegal state aid.

EDF used the gains from its monopoly power to embark on a Europe-wide spending spree, buying smaller utilities in the hope of softening the blow from a potential loss of custom at home.
But this costly and questionable strategy has left EDF in a precarious financial state. Earlier this year the company had planned to cut costs and raise prices in order to improve the look of its books and sweeten its appeal to investors. However, to overcome heated union criticism of its initial public offering—and at the urging of the prime minister, Dominique de Villepin—EDF has now pledged that price increases will be in line with inflation and that it will invest €40 billion over the next five years, half of that in France. The proceeds of the share offering will go directly to EDF, not to the government.

More radical restructuring is unlikely at present. Although EDF’s labour force is considered bloated, none of the cuts that it previously announced will come about through involuntary lay-offs. Forcing large numbers of the firm's workers out of their jobs would almost certainly meet with instant retaliation from the CGT. Furthermore, the government has retreated from previous plans to offer 30% of EDF to investors, so giving it a bigger pot of cash to play with, to alleviate opposition to the sale.

Neither the government nor EDF relishes further battles with the unions. National strikes have brought down French governments in the past. Last year, workers from EDF and Gaz de France, which the government part-privatised in July, took to the streets to protest at state sell-offs and organised a series of power cuts around the country. Earlier this month, some 1m people joined protests against privatisation, new labour laws and low pay. The one-day general strike caused disruption across the country. France’s Socialist opposition, keen to exploit government discomfort, has promised to reverse the privatisation of EDF if it comes to power in elections due in 2007.

Union members have much to fear if EDF decides to cut the perks they enjoy. The prospect of losing cheap meals and holidays and free health care, all heavily subsidised by the company, and the end of jobs for life, not to mention early retirement, is likely to provoke more industrial action. Although the government has promised not to cut any of these benefits, the CGT is rightly worried that EDF will start to peg them back as union contracts are renegotiated once the company is listed on the stockmarket.

Thus the decision to go ahead with the privatisation of EDF is a brave one. French unions enjoy a degree of strength that is far greater than their proportion of members in the workplace should allow, and they are sure to make life difficult. Moreover, the spirit of anti-capitalism runs deeper in France than almost anywhere else in Europe, and EDF is regarded by many as a national treasure that should not fall within the grasp of private investors. If the upcoming public offering goes well, further tranches of EDF shares may be sold, but only the bravest government would pass a controlling interest into private hands. Still, if France is serious about allowing its national champion to compete and become a European champion, that is probably what it must contemplate.

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