The Polish lesson: how to privatise fast and cheap

Large-scale privatisation has always drawn public focus – and Poland was no exception. What’s more, they proved to be extremely lucrative for the cash-starved budgets of post-communist countries. The sale of 35% alone in telephone operator TPSA earned the Polish Treasury $4 billion, but aroused a lot of controversy as well.

All the while, small-scale privatisation enjoyed relatively little attention, despite the segment’s critical importance for regional development. The most consistent and massive privatisation programme in this economic segment, believes Polish treasurer Emil Wasacz, has required only 9 million dollars in PHARE financing (Poland-Hungary Assistance for the Reconstruction of the Economy). No less than 500 companies took part in the programme.

Success apparently came from the traditional independence but it is also owed to the responsibility laid on Polish companies since the times of the first reform attempts in the ’80s, an independence that, this time, meant that privatisation depends on each company in particular and is not a centralised task with a precise deadline.

Many Polish companies owe their survival and even development in an extremely competitive environment to the WIP “privatisation support” programme that began in 1996, funded by PHARE. Experience shows that energy-intensive companies call for specialised privatisation agencies, while a lower-scale approach is suitable for small companies. A centralised privatisation agency is most often only a reflex of the old command-economy times.

Consulting and restructuring companies initially involved in the WIP programme have become an important source of know-how in the Polish economic landscape, and they accelerated in a very natural way the privatisation of small enterprises. So far, more than 1,500 such companies were privatised via these consulting firms, which have “working material” left for several years ahead.

Initially, many state enterprises have been, naturally, hesitant, if not adverse to privatisation – a situation that has been the same throughout all former communist states. Short of management skills, they could not even settle on the best privatisation method. Foreign investors were unavailable for these companies. Most of them could not afford even drafting pre-privatisation documentation. However, the solution was not centralised privatisation, which relies on the illusion that the state can supplant the lack of local competence. After all, the state was afflicted by the same acute lack of management competence, even more so in the post-communist period.

Companies were divided into groups with a common interest, which all underwent a somewhat similar restructuring procedure. For each of these groups, containing 8 to 30 companies, the Polish government selected a consultant by tender, most often a foreign firm, according to the model used for large companies throughout Central and Eastern Europe. The consultant’s role is to examine each company’s prospects and its position on the market, and indicates where it could act with maximum efficiency on the market. Most often, consulting firms also provided training to the personnel.

Covering two-thirds of Poland’s surface, the programme was targeted at small and medium enterprises suitable for direct privatisation. To be included in the programme, these companies need to have less than 500 employees, their sales must stay below 6 million euros, and capital – within 2 million euros. Companies admitted to the programme are not responsible for the expenses, regardless of their nature (consultant’s fees, tender expenses).

Polish privatisation procedures allow three methods of direct privatisation – selling the company, converting company assets into capital contribution from the state to another (private) company, and leasing. The privatisation initiative can come either from the governor of a province (local administration), from the company management or staff, or from the investors themselves who can make a purchase bid for the local administration. In any of these cases, however, the Governor of the province makes the decision to privatise, and the Treasury, which owns state companies, approves that decision.

The privatisation formula depends on each company’s situation. If it badly needs capital to upgrade its technology, and the employees, who have a heavy word, or the management, lack the necessary cash, finding a strategic investor is the best solution. A 15% portion of the investor’s money returns into the company’s employee account.

If the company is of little value, does not require substantial investments, its market position is relatively strong, or the employees association opposes any private investor, the solution for the employees is to set up a company together with the Treasury. This approach will help employees maintain a high degree of control over decision making. Experience shows that a formal involvement of the staff in company business leads to rational economic measures, despite the experience of countries such as Romania, where most often such involvement came through strikes, often violently and only seldom rationally.

Selling assets to the employees association under a leasing scheme is a solution used when the latter has sufficient funds. The employees association must receive the consent of at least half of the members, payment is 20% up front and the rest in instalments, but in any case the actual transfer of ownership takes place two years after the accord is finalised.