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Republic of Poland: Selected Issues

Author(s):
International Monetary Fund
Published Date:
May 2000
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IV. Recent Developments in Privatization and Real Sector Restructuring1

1. After a slowdown in the pace of structural reforms during the mid-nineties, the present government has embarked on a large unfinished agenda: In 1998, some 3000 state-owned firms employed 25 percent of all workers in nonfinancial enterprises, but produced only 2 percent of their gross profits; total gross profits in the state-owned industrial sector companies were negative, with high losses in mining. Revitalizing the process of privatization and restructuring of the Polish industry, with an emphasis on large enterprises, is regarded by both the government and outside experts as a priority to ensure medium-term fiscal stability and competitiveness. This note describes the key features of the government’s privatization strategy and progress achieved so far, and discusses plans and progress in the restructuring of the economy, focussing on coal, steel, and agriculture.

A. Privatization

2. The government’s main privatization objective is to assure fast and long-term economic growth, with inflows of capital and technical know-how expected to bolster productivity growth, job creation, and living standards. The broad privatization strategy is set out in the government’s privatization program, adopted in July 1998 and covering the period through 2001, with the pace of privatization to be adjusted according to market conditions. The government’s recent privatization strategy can be described as “sectoral”, focussing on finding strategic investors for large-scale state monopolies, such as telecommunications and electricity, with the largest economic impact. In addition, the privatization process incorporates the objectives of “enfranchisement” and “restitution”. The former aims at spreading the benefits of privatization over a large part of the population. It involves some allocation of shares (free of charge) to employees of affected companies, but also captures the support of the social security system through privatization receipts. Restitution involves setting aside shares of privatized companies for potential future compensation payments on property confiscated by the old regime. Implementation of the program is largely under control of the Ministry of the Treasury. However, in 44 enterprises of “strategic importance” (mainly in infrastructure, defense, energy, telecommunications, and transport) privatization requires approval by the Council of Ministers and is expected to be limited, on average, to some 75 percent of assets, in order to maintain some state control over major decisions.

Progress through 1999

3. By end-September 1999 the privatization process had been initiated for almost 5,000 of the roughly 8,500 originally state-owned companies, with some 3,000 cases completed (including 800 completed liquidations). During 1999 substantial progress was made in the privatization of the banking sector. With the sale of an 80 percent stake in Bank Zachodni and 52 percent in Bank Pekao, all major banks, with the exception of PKO-BP (the largest retail bank) and BGZ (the agricultural bank), are now majority privately-owned, and the former is planned to be transformed into a joint stock company by end-2000. While the government has recently made an announcement against selling a controlling stake in PKO-BP to foreigners, the latter have played a key role in bank privatization: banks controlled by foreign investors now account for some 60 percent of bank capital and 50 percent of bank assets.

4. The government has also initiated the privatization of the energy sector, most recently with the highly oversubscribed floating of a 27 percent stake of the oil company PKN. Further sales in 1999 included minority stakes in the national airline LOT and the insurance fund PZU, controlling over 60 percent of the domestic market. Privatization has also begun in the sugar, pharmaceutical, and liquor sectors. However, initial plans to sell majority stakes in two steel mills before the end of the year have been postponed, as interest has faded with the deteriorating market situation following the Russian crisis (see below). Also, the most important project planned for 1999—the sale of 25—35 percent of the Polish telecom operator TPSA following a 15 percent sale in 1998—was not concluded.

Prospects for 2000 and beyond

5. Besides the anticipated sale of the second stake in TPSA, the main planned projects for 2000 include the second stage of the privatization of the oil company PKN (30 percent), the initiation of the sale of two power plants and a number of energy distributors, two large and some smaller steel mills (nine of which are still entirely in state hands), and one or two coal mines. In addition, privatization in the pharmaceutical, sugar, and liquor sectors is expected to gain momentum.

6. Over the coming three years, the government also plans to privatize most enterprises in the defense sector (comprising some 30 companies), subject to security considerations (the 10-15 companies producing special weapons, for example, will remain in state hands). However, the necessary restructuring is just beginning. After 2001, state ownership is anticipated to be largely limited to a “strategic” stake (some 25 percent) in the energy sector (excluding power grid companies, which are assumed to remain in state hands), the entire mail service, parts of the railway system (which is being split into separate sections to facilitate privatization), 50 percent of the airline, part of the defense sector, and some smaller enterprises that are difficult to privatize. The government’s declared objective is to privatize by 2002 more than 70 percent of the total value of its assets held in mid-1999.

Privatization receipts

7. Despite the delay in the second stage of the TPSA sale, total privatization receipts for the budget in 1999 amounted to ZI 13.4 billion (some 2¼ percent of GDP), greatly exceeding earlier projections of Zl 6.9 billion. This compares with ZI 7.1 billion in 1998 (see Table 41 in Statistical Appendix). Privatization receipts in 2000 are estimated to reach some Zl 20 billion (including Zl 10 billion from the planned sale of the TPSA stake). The value of companies’ assets remaining in state ownership was estimated at ZI 138 billion at end-1999, based on market valuation for those companies already listed at the stock exchange and book values for all others. However, this figure does not provide a meaningful estimate for prospective privatization receipts (arising from a targeted sale of some 70 percent of remaining state assets), as the market value can be expected to differ quite substantially from the book value. In the banking sector, for example, the market value exceeded the book value by a ratio of 3:1, whereas the opposite is typically true for companies with financial difficulties. In sectors such as coal mining, steel, railways, and defense, which are in need of substantial restructuring, privatization receipts are likely to be significantly lower than their book value would suggest. In the absence of more reliable information, the government currently projects that privatization receipts in 2001 could reach some Z1 15-20 billion.

B. Industrial Restructuring

8. In the area of industrial restructuring, priority has been given to those sectors that present the heaviest burden for the economy and are least able to cope with competitive pressures. These include primarily the coal and steel sectors. In addition, the defense industry has been identified by the government as a priority area for restructuring, where progress to adapt to the product range and quality standards applicable under NATO has been insufficient so far. Furthermore, there is a need to accelerate restructuring of the railway and reach agreement with unions on the modalities and financing of the required reduction in the work force.

Coal sector

9. Despite past restructuring efforts with sizeable reductions in employment, the coal sector in 1998 remained characterized by overproduction in relation to demand and excessive employment. This, together with wage increases incommensurate with productivity developments, had resulted in huge losses and an accumulation of arrears on taxes and social security contributions. The government’s reform program for 1998-2002, supported by a World Bank SECAL, aims at completing the sectoral restructuring by turning the seven mining companies and two independent mines into profitable organizations (originally envisaged by 2001), with the ultimate intention of privatization. The main elements of the program, as originally approved in June 1998, were (i) the closing of various mines, consistent with a fall in annual production capacity by 25.5 million tons (17 percent); (ii) a reduction in the work force by another 105,000 people (some 45 percent); (iii) restructuring of companies’ finances-including forgiveness of all liabilities incurred to the general government (excluding VAT) before April 1998-subject to certain conditions;2 (iv) improvements in management through incentives and penalties; and (v) progress in environmental performance. In implementing this program, each mining company established a five-year business plan for 1998-2002, consistent with the program’s overall targets, with a detailed closure plan and specific cost reduction measures.

10. So far, companies have exceeded the targets in their business plans in terms of both reductions in production levels (see Table 1) and employment (about 60,000 workers have left the industry in the eighteen months through end-1999, compared with 32,000 anticipated under the program). The companies are also slightly ahead of the business plans in terms of mine closures. However, demand has declined more rapidly than was forecast in the program and business plans, with the result that sales and prices in 1999 were about 10 percent and 13 percent, respectively, below the business plan figures. As a result net losses are estimated to have reached about Zl 3.3 billion Z1 2 billion more than the program estimate.

Table 1.Poland: Coal Industry, 1999
ProgramWorld Bank Estimate (end-1999)
Sales (million tons)116.5106.1
Production (million tons)116.7109.4
Average Price (Zl/ton)133.6115.7
Revenues (billion Zl)15.612.3
Total Cost16.915.6
Net Loss (billion ZI)1.33.3

11. According to the Government’s Program document, the direct cost of the program was estimated at ZI 7.2 billion, expressed in 1998 terms (consisting of ZI 5.3 billion for employment restructuring, ZI 1.7 billion for physical mine closure, and Z1 0.2 billion for job creation and Gmina support).3 The main budgetary impact was to stem from the financial support of severance payments for Miners’ Social Packages (see Box 1). However, because of the higher-than expected losses, the mining companies have been unable to stay current with their payments to the government. For 1999, the total costs to the budget are expected to be on the order of ZI 3 3.5 billion (0.5 percent of GDP), consisting of about ZI 1.7 billion in budgetary transfers for Miners’ Social Packages, ZI 0.3 billion in physical mine closure costs, and an estimated Zl 1 1.5 billion in arrears to the budget, in terms of unpaid taxes and social security contributions.

Box 1.Miners’ Social Packages

  • Miners’ social packages (MSPs) consist of either (a) “miners’ leaves” for those miners eligible for retirement within 5 years, equivalent to 75 percent of the monthly salary, plus other benefits paid up to retirement; (b) social allowances, equivalent to 65 percent of the monthly salary paid up to two years, with the opportunity of retraining and a job offer plus a lump-sum payment at the end of the retraining period; or (c) a higher lump-sum cash payment upon resignation. Above-ground employees are eligible for a (much smaller) lump-sum payment of statutory unemployment benefits.

  • The government’s program originally anticipated that over the period 1998-2002 about half of the packages granted would be miners’ leaves, which is the most expensive package in present value terms but more favorable for companies (relative to the lump-sum package) from a short-term liquidity perspective.1

  • In 1998 the total number of employees accepting social packages greatly exceeded expectations, and particularly the use of “miners leaves” (some 60 percent of all packages agreed) was more than twice the rate expected for that year, resulting in a large carry-over cost for 1999 and later years.2 The Government has attempted to correct this situation by restricting the use of budgetary funds for new packages to social allowances and lump-sum packages. It is now allowing new miners’ leaves to be given only if the companies (not the budget) finance them. However, as companies are also expected to pay a significant part of the lump-sum packages, their severe liquidity shortage may still create incentives in favor of miners’ leaves, which enables them to delay part of the payments into later years.

1 However, the miners’ leave becomes more expensive in cash terms already after approximately 14 months.2 Of all the packages agreed in 1998, some 15,000 were miners’ leaves, approximately 10,000 were lump-sum packages, and a negligible amount (160 in total) were social allowances.

12. In response to the deteriorating market conditions, the government has recently revised its program, in consultation with the World Bank. The revisions include more rapid employment restructuring (by a further 15,000 people); additional mine closures with further reductions in capacity by 11 million tons; close linkage of MSPs to mine closures; a ban on overtime; and further initiatives to cut costs and curb losses, including competitive bidding on external services contracted by mining companies, strict discipline with regard to payment terms for coal sales, strict controls over barter activities, cessation of exports at very low prices, and a ban on new investments at mines being liquidated. The government is also placing strong emphasis, with support from the World Bank, on taking measures that will accelerate the privatization of the seven mining companies, which is likely to start in 2002 or 2003, once the domestic coal market has recovered and the companies have been successfully restructured.4

Steel sector

13. In the steel sector, previous restructuring efforts had resulted in a reduction in the work force by some 60,000 workers to 87,000 in 1997. Of the 24 steel companies, more than half are now partly privately owned, with 8 having private majority ownership. The main problem is posed by the three largest companies, which have remained in state hands and represent over 60 percent of total output. The government’s steel restructuring program, covering the period 1999-2003, targets (i) annual production levels of 11.8 million tons, reduced from a peak of almost 15 million tons in the early 1990s; (ii) a drop in employment to 38,000 by 2003 (from 70,000 at end-1999), with some 15,000-20,000 employees retained in “side companies” that were originally incorporated in the steel sector; and (iii) rapid privatization, targeted to be completed by 2001. The cost of implementing the restructuring program for the steel and iron industry together were estimated at Zl 12 billion over the period 1998-2002 (including ZI 8.4 billion for investments, ZI 2.5 billion for recapitalization of steel companies, Z10.8 billion for severance payments, and ZI 0.3 billion for environmental protection).

14. The prospects for rapid privatization of the three largest steel mills have recently faded with the deterioration in the international steel market, and is further complicated by the fact that most of the steel produced in Poland is of lower grade, which faces insufficient international demand. As a consequence, the government has embarked on a strategy of accelerated employment restructuring supported by social packages agreed with employers and unions, and cofinanced by the budget. These include three basic options: (i) early retirement, available for employees eligible for retirement within four years and equivalent to 75-100 percent of the normal pension (depending on the years left to retirement and the regional unemployment rate); (ii) severance bonuses available at declining amounts for employees working in harmful conditions, who leave voluntarily and whose jobs disappear in the restructuring process; and (iii) retraining. The government expects that the social program will cover some 25,000 people in 1999-2003, including 8,600 people in 1999. The cost in 1999 were equivalent to Zl 230 million, with ZI 160 million financed by the steel mills themselves and the remainder financed by the government. For 2000, the cost are assumed to the broadly the same, with euro 10 million expected to be financed by EU grants.

C. Agricultural Restructuring and Rural Development

15. Probably the most critical area for restructuring is the agricultural sector, which employs an estimated 25 percent of the workforce, while generating 6 percent of gross output. The agricultural sector requires substantial restructuring to improve its competitiveness, and the European Commission has identified Poland’s overpopulated and fragmented farm sector as one of the biggest obstacles on its road to EU accession. The fragmentation of farms has prevented specialized production and rationalization of cost, while the concentration of the rural sector on agricultural production has resulted in a lack of employment opportunities outside the sector and high (open or hidden) unemployment.5 In addition, the income situation of the rural population has deteriorated over the past three years, as a result of depressed producer prices, lower demand from Russia, and increased competition from subsidized EU imports.

16. The key challenges are to improve agricultural productivity and competitiveness, with consolidation and modernization of farms,6 rationalization of labor, and concentration on those areas where Poland has a comparative advantage. This requires, inter alia, improved functioning of land markets (only about 20 percent of the land taken over by the Agricultural Property Agency of the State Treasury in 1991-one-quarter of the total arable land in Poland—has been sold); investments in rural infrastructure; and creation of off—farm jobs to absorb excess employment in the agricultural sector (estimated by World Bank staff to reach 100,000 per year once restructuring is taking place). One key obstacle to a speedy improvement in this areas is the poor standard of rural education, which complicates retraining and employment of farmers in other sectors. In addition, labor mobility is low, reflecting not only skill problems, but also migration costs, including high rents in urban areas, and income traps.

17. So far, the government’s agricultural policy has been characterized by short-term interventions (the system of intervention prices was extended, and support prices for a number of products were raised by more than 10 percent in 1998); preferential credits; and a growing tendency to resort to protectionist measures (including increases in import tariffs in 1999 on a range of products). As a first step toward a long-term solution, the government, in July 1999, has outlined a strategy (the “Coherent Structural Policy for Agriculture and Rural Development”), which identifies priorities and funding but lacks specificity with regard to a detailed timetable and cost implications. The key components of this strategy are (i) facilitating farm consolidations (e.g., through subsidized loans for acquisition of agricultural property); (ii) encouraging closure of unprofitable farms (e.g., through introduction of an early retirement system for farmers, or long-term compensation payments to enable previous farmers to undergo training and find alternative employment); (iii) supporting modernization and improvements in productivity (mainly through preferential credits to finance capital projects, and continued privatization of the agricultural and food industry and agricultural land); (iv) creating favorable conditions for non-farming activities (through tax relief, preferential loans, and financial support for the creation of service institutions supporting new business, e.g., tax counseling); and (v) fostering the development of private wholesale markets (including organization and financial support for creation of producer groups and professional farmer organizations, and for marketing and promotion systems).

18. As part of its rural development strategy, the government is also seeking support from the World Bank and is negotiating a program (to be financed, in part, by EU-pre accession funding under the SAPARD), focussing on three key areas: (i) rural infrastructure (roads, telecommunications, water supply, and wastewater systems); (ii) human capital development (education, provision of employment services, and strengthening of administrative capacity); and (iii) private sector development (e.g., micro-credit and business incubator schemes). Operations supported by the World Bank would be carried out over a 6-8 year period, and negotiations of the first operation are currently being completed.

19. The government has recently provided the EU with its agricultural “position paper”, but has not disclosed any details, pending ongoing negotiations. Controversial issues are likely to include (i) the question of whether Polish farmers would be eligible for direct income subsidies (which are intended to replace price subsidies in existing EU countries) once it joins the EU; (ii) the transition period for Poland to meet veterinary and sanitary standards (and the related issue of border controls); and (iii) the issue of agricultural land purchases by foreigners (for which Poland is expected to request a fairly long transition period).

D. Conclusions

20. The government’s revitalized privatization program is ambitious, and its recent implementation has been progressing well. However, the government needs to ensure that its recent decision against selling a controlling stake in the state-owned bank PKO-BP to foreigners does not reduce the transparency and pace of privatization in the coming years. Significant delays could have potentially adverse effects not only for the efficiency and competitiveness of the Polish economy, but also for the budget and the capital account.

21. The coal sector restructuring program, with substantial planned reductions in output and employment, appears equally ambitious. The aim of reaching a profit by 2001 will not be achieved-it could be 2002 or even possibly later depending on the speed at which capacity can be closed and whether there are further contractions in demand. The government’s latest revisions of the restructuring program (an additional reduction of 11 million tons in total capacity and a further downsizing of the workforce by 15,000 people), while sizeable, may still fall short of what is required to ensure the sector’s profitability and the effectiveness of hard budget constraints, that are currently undermined by continuing arrears on taxes and social security contributions.

22. The government’s strategy for restructuring of the steel sector, which has been adversely affected by the Russian crisis, has been criticized by the EU as insufficiently ambitious and there are doubts whether the privatization targets can be achieved. However, the government has little choice but to continue its restructuring program with the hope of attracting investors for the largest three mills through further reductions in the workforce.

23. The main challenge is posed by the need to restructure the agricultural sector. The government’s formulation of a coherent long-term strategy is an encouraging first step. To be effective, the strategy now needs to be translated into a specific timetable for action, with proper sequencing and full budgetization of the costs over time. A critical issue is whether the government can reach agreement with the EU on realistic pre-accession targets and appropriate transition periods for meeting EU standards and regulations.

Prepared by Christina Daseking.

These conditions relate, inter alia, to limits in wage adjustments, compliance with restructuring measures identified in the companies’ business plans, and timely payment of obligations to ZUS and the Labor Fund.

In addition, the (indirect) cost of debt restructuring was estimated at ZI 8.5 billion.

Privatization is well advanced for the two smaller independent mines (one with EU assistance and one with World Bank assistance), and at least one should be privatized during 2000.

Hidden unemployment in the agricultural sector was estimated at 0.66 million to 0.95 million in 1996; World Bank staff projects that the number of potentially redundant employees could swell to 1½ million in the event of successful restructuring.

This also includes a modernization of meat and dairy plants, in conjunction with upgraded veterinary inspection procedures, to meet EU hygiene and public health standards.

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