Poland: Privatisation as the key to efficiency

A thriving private sector is the force behind Poland's buoyant economy, which is now in its seventh year of continuous expansion.l The number , of new private firms soared in the first half of the 1990s and has continued to increase rapidly since. Meanwhile, privatisation has reduced the size of the public sector, which nonetheless is still quite prominent across the economy, with a strong presence in mining, fuels, power generation, defence, heavy chemicals, telecommunications, air and rail transport, sugar, spirits and insurance.

Corporate performance in the public sector has been much weaker than in private enterprises and has acted as a brake on the economy as a whole. Profitability has improved in the private sector since 1995 and deteriorated in the public sector, and while investment in the private sector has soared, it has stagnated in public enterprises. Yet the firms in the public sector have received most of the subsidies. This difference in performance might be partly explained by the fact that privatisation began with the strongest companies, leaving the rest to struggle on under public ownership. However, some empirical studies suggest that there was no such selection bias.

Another possible reason lies in the inherited liabilities carried by some traditional heavy industries which the newly emerged private firms do not have, such as an antiquated capital stock and environmental drawbacks. Arguably a more important cause of the discrepancy in performance is poor corporate governance in the public sector. Even unprofitable public enterprises can award relatively high wages, and spending priorities are not always geared to restructuring, as documented by Poland's Supreme Board of Inspection, which recently published a list of cases of ill-judged expenditure.

In short, financial discipline is an ingredient in short supply in Poland's public enterprises. Wages are negotiated according to a national norm established between social partners. This practice is not that unusual in Europe, but in Poland the leverage of the unions in the negotiations is particularly strong, limiting the influence of market forces on public pay deals. As a result, the national norm, which is intended to act as a ceiling to wage deals, in fact works as a floor. Also, in some firms, the remuneration of managers is set as a multiple of the workers' average wage rather than as a function of corporate performance. Moreover, a number of public enterprises do not honour their tax and social security obligations, which is a de facto and quite perverse form of subsidy. Admittedly, such arrears, and more importantly, outright evasion, are also observed in the private sector.

Although the state or the local government nominally owns those firms, in practice it fails to control them. Its inability to sanction mismanagement is in part due to political pressure from a broad range of sectoral lobbies. The fact that their demands are accommodated quite easily is helped by the lack of transparency in the handling of public money. This is a weakness which a new draft law is trying to correct. On top of that, the public administration is not equipped well enough, whether it be in logistics or skills, to be able to keep up with operations in the several thousand enterprises that are still in the public sector.

The Renewed Momentum

To overcome these problems the govemment, formed after the parliamentary elections in September 1997, has decided to accelerate privatisation. After all, private investors, be they foreign or domestic, would be in a better position than the cash-strapped state to provide the money, skills and know-how Polish firms need to boost their competitiveness. And these new stakeholders would obviously have strong incentives to impose hard budgetary constraints and would, if necessary, be freer to liquidate non-viable activities.

The menu of privatisation formulas on offer is an impressive one, but its diversity has not always helped to speed up the sales. Although the proliferation of schemes to transfer ownership reflects a multi-track approach with strong pragmatic merits, it has in some cases resulted in procrastination, slowing the process down. The new government is determined to push privatisation along quickly, since it faces strong budgetary pressures from ambitious reforms in pensions, health and education, as well as decentralisation. Moreover, the State still owes very large amounts to those whose property was illegally confiscated under communism and on account of past unpaid pension and wage hikes.

After the sale of a major bank and a large copper company last year, a whole series of important enterprises are to be privatised in the near future, particularly in banking, insurance, telecommunications, power supply and air transport. In addition, the government is considering sell-offs in sectors, such as mining, which were previously off-bounds. It is also contemplating removing some of the legal strictures which hold up privatisation, such as the approval of the Council of Ministers, which is obligatory even for some relatively small deals.

Although faster privatisation may be both feasible and desirable in Poland, it will not take place overnight. It is an inherently complex process, involving a redistribution of property and other rights on an enormous scale. It is intertwined with restructuring, deregulation and demonopolisation, each of which is a challenge on its own. Moreover, privatisation alone is not a sufficient condition of good governance; other factors include managerial skills, the existence of performance incentives, transparency and a sound legal and business environment. But can the government really afford delays? Probably not. Poland's own experience to date, as well as that of some other OECD countries, strongly suggests that the benefits of postponing the divestiture of state assets - even for prior restructuring or consolidation into larger entities - would be dwarfed by the costs. Privatising sooner, while the economy is growing strongly, rather than letting the costs build up further, would seem to be the best way forward.

1. OECD Economic Surveys: Poland, OECD Publcations, Parts, 1998

Vincent Koen works in the Country Studies III Division of the OECD Economics Department. E-mail: eco.contact@oecd.org

Copyright Organisation for Economic Cooperation and Development Aug/Sep 1998
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