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Poland has emerged as the Wunderkind of the central European economies. The drastic reforms launched in January 1990 turned it into the fastest-growing economy in Europe by 1995. At the micro-level, enterprises were subjected to competition from the start. The lesson of Poland is that the restructuring process is affected more by market conditions than by the form of ownership.
"The discipline of the market has been exerted from day one," says Mark Schaffer, a British economist who studies eastern Europe. From early on employees and managers whether in state, private or employee-owned companies have known that their future depends on the performance of their enterprises and that there will be no state-funded bail-out. In Poland's free-market environment, companies which do not pay their bills find that suppliers quickly refuse to do business with them. The word "bankruptcy" may not technically apply, but the consequences are just as harsh.
The private sector has mushroomed in this environment and now accounts for around 60% of GDP (compared with 31.4% in 1990). It has been growing at more than 20% each year and private companies are likely to remain the motor of growth for the economy.
Polish enterprises have been forced into what the EBRD calls the "reactive" phase of restructuring: learning to live with budgetary constraints and market prices. But the spread of what the bank calls the "strategic aspects" of restructuring adopting an export orientation, fashioning a more suitable product mix and instituting management changes has been more a function of sectoral conditions.
Maciej Radziwill, an analyst with UBS in Warsaw, points to the dairy industry as a good example of how a sector can respond positively to market conditions. The opening up of the Polish market meant that local products were quickly displaced by French milk, Finnish butter and a variety of other western European goods. But the Polish industry reorganized, started producing milk that "didn't taste of soap" and won back market share.
This was possible, says Radziwill, because the dairy industry is not capital intensive, and because most companies were not highly leveraged and were able to borrow where they needed to. Despite nominal interest rates of 21% to 23%, inflation has been high enough to ensure that the cost of borrowing has not been prohibitively high. Stephen Pettyfer, an emerging European markets analyst with Merrill Lynch, singles out the cable sector as another successful restructuring story, with companies now able to compete on quality as well as price in export markets.
In other sectors, however, market conditions have not imposed such stark pressures on companies. The garment industry, for instance, was able to avoid a painful and far-reaching restructuring in the early 1990s because it filled the gap created by the disruption of what had been the Yugoslavian garment industry. Without restructuring and investment the sector was vulnerable to buyers shifting their purchases to other, cheaper sources.
The extent to which firms have restructured varies among firms in the same sector. Where companies have undergone management buy-outs (MBOs), the cost of the debt taken on has tended to lead to tough financial controls and a more radical approach to restructuring.
But capital raised from IPOs has not always been used for restructuring. Some companies have embarked on spending sprees and built up large, rambling corporate empires. Some analysts now believe it is time to take a second look at companies such as Elektrim and Rolimpex. Elektrim has moved logically from a trading role into other areas of the power industry and into telecommunications equipment.
Legal and workforce obstacles are not generally the reasons for limited restructuring. "Polish company law is based strongly on German company law and a 51% stake means investors have control," explains Stephen Denyer, a partner in Allen & Overy's Warsaw office. There are a few exceptions where the support of 80% of shareholders is needed as in the waiving of pre-emption rights on share issues and where the government has retained a 25% stake in privatized companies it can block such moves. But investors have a "pretty free hand" once they have secured 51% control, concludes Denyer.
Productivity
In other cases, says Tadeusz Komosa, a partner in the Polish law firm, Consultor, shareholders' agreements give foreign minority shareholders very extensive control. This is usually where Polish shareholders recognize that ceding control is an acceptable price to pay for the foreign technology which is brought in.
Workers' rights do not, in reality, present a serious hindrance to foreign investors. State companies cut more than 10% of their industrial workforce in the first 12 months after reforms were initiated in 1990. Partly as a result, labour productivity is now higher than it was before the transition process began, putting Poland well ahead of, for instance, Russia.
Moreover, labour costs are only a small percentage of overall costs typically between 10% and 12% so even where it is impossible to reduce the number of employees, the costs of not doing so are relatively light.
Agreements which put a freeze on redundancies when a company is acquired last a maximum of three years. Companies can reduce employee numbers once this deadline has passed, as can be seen in those sectors where the government sold off bundles of companies two to three years ago. As agreements expire, so employees are being laid off. Changes to labour law introduced in June 1996 will also, on balance, reduce legal obligations on redundancy.
The stakes that workers hold in companies tend to be relatively small and are seldom voted as a block that presents a serious obstacle to management. In addition, a rapidly growing economy means that workers have more opportunities to leave their existing companies and move on to jobs elsewhere, which reduces worker shareholdings.
Radziwill argues that workers have learnt a lot from their seven years of life in a market economy. They no longer regard the arrival of foreign capital as the worst thing that could happen to them. Instead, he says, there have been cases where workers have even been on strike to demand that companies should be bought by foreign investors in preference to local firms.
Long-term planning
When the Polish chemicals trading company, Chie, bought two local manufacturing companies to build up its production base, the workers favoured the rival bid from French giant Rhone-Poulenc. The reason, Radziwill argues, is that "they see a local bidder would mean that things would be easy for two years, but they know their position wouldn't necessarily be safe in five years' time".
Consequently, investors see that the future of restructuring and corporate performance in Poland rests more on changes in management practices than on changes to the legal environment or the position of the workforce. The biggest weaknesses identified in Polish companies are widely agreed to be in the area of financial management and cost accounting. "Poland needs a whole lot of new finance directors," declares Pettyfer.
Up until now, many companies have muddled through by appointing their old bookkeepers as "chief financial executives". Most of these executives are ill-equipped to take on the role of treasurer or chief financial officer, and to assume responsibility for dealing with banks and investors, and thinking about the cost of capital. Nor are they familiar with hedging techniques or derivatives. "Financial management is the weakest part of the management," states UBS's Radziwill.
But changes are afoot. Marketing is adapting already. International advertising agencies are picking up their first Polish clients. There has been progress in management accounting. Inventory management has improved: the average inventory turnover of the companies in the National Investment Funds (NIFs) Poland's mass voucher privatization scheme came down from 54.7 days in 1993 to 50.8 days in 1994, reflecting changes at large in industry.
From the point of view of investors, analysis of the position of Polish companies has become easier since the adoption of new accounting rules in January 1995. "These go a long way towards meeting international accounting standards," says John-Paul Warszewski, head of the Polish team at Hambros. A few issues remain to be tidied up, such as the treatment of contingent liabilities.
The changes have not been enough to prevent one or two nasty shocks from listed Polish companies, such as Rafako and Espebepe. Both companies produced poor results when they had previously appeared in good shape. The lesson for Martin Gollner, eastern Europe analyst at Nomura, is that the days of "just buying the market" are over and that stock selection is now imperative.
Analysts have had good access to company officers, although the signs are that companies are becoming rather less open. The reasons do not, however, lie in a secretive mentality. Rather, they are the result of, first, foreign investors taking stakes in companies. With investment under their belts and new management coming in there is less need to be open in order to attract investment. Second, Poland is becoming overbroked and management is less willing to spend time talking to analysts.
The outlook for company performance is good. "Underlying profitability is very good," says Merrill's Pettyfer. Although depreciation is increasing and costs are being taken, cash generation is good. As a legacy of the high-interest rate regime of the early 1990s, companies are not burdened with large debts. Although the bad winter in 199596 and the onset of greater competition will eat into profits this year, the health of the economy helps a lot. Poland is expected to record growth of 5% to 7% a year between now and 2000.
All 27.4 million adult Poles are entitled to buy privatization vouchers by a deadline of November 20. This will give them a stake in each of the 15 NIFs, which are themselves expected to list in 1997.
Unlike in the Czech Republic, the voucher exercise is only one part of Poland's "multi-track" privatization route. It has been a complicated and expensive operation, which has led to disputes between the western fund managers brought in to run the 15 funds and their supervisory boards, representing the great and the good of Polish society. Given the different perspectives of the board and the managers, "conflicts were inevitable", says Denyer of Allen & Overy.
Investors, however, are sanguine about problems involving international fund management groups, such as Wasserstein Perella and Yamaichi Regent. "It makes no difference to me," says investment manager Richard Fairgrieve of Hermes Investment Management. "It doesn't affect the value of what's there and, in any case, the problems seem to have been smoothed over a bit." Action by privatization minister Wieslaw Kaczmarek to rein in the supervisory boards has further reassured investors. As a result, says Hambros' Warszewski, the fund managers have "settled down to doing their business".
The 513 manufacturing, construction and trading companies placed in the funds are not the source of investors' immediate excitement. The companies themselves are dismissed by one broker as "rather small-sized, medium-quality, boring". Those selected had no alternative plans for privatization whether in the form of a sale to foreign investors or an MBO.
But the pricing of the vouchers undervalues these assets and that is why investors are getting excited. The funds have already disposed successfully of four of the seven cement companies included in the programme and accumulated significant cash holdings. They have also shown that it is possible to dispose even of loss-making companies.
Around 23 million Poles are expected to take up the vouchers, which means that supply will be less than the theoretical 27.4 million maximum. All this adds up to the potential for substantial appreciation in the price of vouchers after November 20.
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