United States General Accounting Office

GAO Report to Congressional Committees

August 1995 POLAND

Economic

Restructuring and

Donor Assistance

GAO/NSIAD-95-150

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-261231 

August 7, 1995

This report provides the results of our review of economic restructuring in Poland and the

effectiveness of donor assistance in that country. The analysis in this report highlights 

a number of lessons learned from Poland’s transition experience that merit consideration by

countries such as Russia, Ukraine, and others not as far along the reform path as Poland. This

information should be useful to your committees in their deliberations on the role of U.S.

foreign assistance in the post-Cold War world.

We are sending copies of this report to the Secretary of State; the Secretary of the Treasury; 

the Administrator, U.S. Agency for International Development; and other interested

congressional committees. Copies will also be made available to others on request.

If you or your staff have any questions concerning this report, I can be reached at

(202) 512-4128. Major contributors to this report are listed in appendix V.

Harold J. Johnson

Director, International Affairs Issues
B-261231 

List of Congressional Committees

The Honorable Jesse A. Helms, Chairman

The Honorable Claiborne Pell

Ranking Minority Member

Committee on Foreign Relations

United States Senate

The Honorable Mitch McConnell, Chairman

The Honorable Patrick J. Leahy

Ranking Minority Member

Subcommittee on Foreign Operations

Committee on Appropriations

United States Senate

The Honorable Benjamin A. Gilman, Chairman

The Honorable Lee H. Hamilton

Ranking Minority Member

Committee on International Relations

House of Representatives

The Honorable Sonny Callahan, Chairman

The Honorable Charles Wilson

Ranking Minority Member

Subcommittee on Foreign Operations,

 Export Financing and Related Programs

Committee on Appropriations

House of Representatives

Page 2 GAO/NSIAD-95-150 Poland
Executive Summary

Purpose Since the reform process began in Central and Eastern Europe in 1989,

Poland has undertaken some of the most dramatic economic reforms in

the region. Although the United States now has assistance programs in a

number of Central and East European countries, Poland has received the

largest share of that assistance. GAO’s objectives in examining U.S. and

other donor assistance in Poland were to (1) assess the status and

progress of the country’s economic restructuring in the key areas of

macroeconomic stabilization, foreign trade and investment, privatization,

and banking; (2) describe impediments to these restructuring efforts;

(3) discuss the role donors have played in the transformation process; and

(4) identify lessons learned that could be useful to other transition

countries.

Background Between 1990 and 1994, the G-241

 and international financial institutions2

committed about $36 billion in assistance to Poland. As of

September 1994, the United States had obligated $719 million in grant

assistance to Poland. In addition, the United States has provided about

$700 million in Overseas Private Investment Corporation financing and

insurance for U.S. businesses to facilitate their investment in Poland,

$355 million in Eximbank loan guarantees and investment credits, and

about $2.4 billion in official debt forgiveness.

A large part of the U.S. technical assistance has been provided under the

Support for East European Democracy (SEED) Act of 1989 (P.L. 101-179),

which authorized funding for Poland and other Central and East European

countries for fiscal years 1990 through 1992. The SEED program was

designed to assist Poland’s transformation to a democracy and a

market-oriented economy. Since fiscal year 1993, the assistance has been

funded under both the SEED Act and the Foreign Assistance Act of 1961, as

amended (P.L. 87-195). The U.S. Agency for International Development’s

assistance to Poland has primarily targeted private sector development,

with less assistance being directed at quality of life and democratic

institutions work.

1

The G-24 is composed of Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany,

Greece, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal,

Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States.

2

International financial institutions include the International Monetary Fund and multilateral

development banks such as the World Bank.

Page 3 GAO/NSIAD-95-150 Poland
Executive Summary

Results in Brief Poland has made substantial progress in stabilizing and restructuring its

economy. For example, economic growth has resumed, and the country

now has one of the fastest growing economies in Europe. However,

Poland is still struggling to overcome relatively high rates of inflation and

unemployment. The International Monetary Fund and other major donors

played an important role in the early stages of the reform process by

requiring Poland to adopt tough macroeconomic reforms in return for

receiving substantial donor assistance. However, Poland’s own efforts to

implement tough reform measures and apply consistent macroeconomic

policy over several years have been the critical factors in the country’s

economic recovery.

Poland has achieved significant increases in its exports to the West and a

number of foreign companies have recently made significant investments

in Poland. However, trade barriers hamper Poland’s exports of certain

products to the European Union, and a number of internal obstacles

continue to impede foreign investment. Donor assistance has had only a

marginal impact in facilitating trade and investment. Some of the most

essential improvements in these areas require Polish government or donor

actions beyond the confines of assistance programs, such as removing

Poland’s bureaucratic and tax obstacles to foreign investment and making

markets more accessible to Polish exports.

Poland’s progress toward privatizing its economy has been mixed. The

country’s economic reforms have resulted in a rapidly growing private

sector, but significant portions of the Polish economy remain in the hands

of the government. The United States and other donors are actively

supporting Poland’s efforts to restructure enterprises and implement its

Mass Privatization Program; however, persistent delays threaten

continued donor support.

Poland has fundamentally reformed its banking sector, but several major

problems remain, including delays in bank privatizations, unclear policies

regarding the licensing of foreign banks, and inadequate banking expertise

and bank supervision skills. Donors provided key financial support for

recapitalizing Poland’s state-owned banks and restructuring their problem

loan portfolios. Some early problems with donor technical assistance were

encountered but have been resolved, and donors are now addressing some

of the sector’s most important remaining needs, such as the need for

improved banker training and enhanced bank supervision.

Page 4 GAO/NSIAD-95-150 Poland
Executive Summary

While the situations of other transition countries vary greatly, Poland’s

transition experience offers a number of lessons that merit consideration

by countries such as Russia, Ukraine, and others not as far along the

reform path as Poland. These lessons suggest that while donor assistance

can be important in supporting economic restructuring efforts in certain

key areas, the ultimate success or failure of such efforts is far more

dependent upon the actions of the transition country than it is upon those

of outside participants.

Principal Findings

Early Stabilization Efforts

Have Been Successful

In late 1989, Poland began a major stabilization program that became the

foundation for Poland’s current economic recovery and continuing

restructuring. These stabilization efforts included tightening fiscal and

monetary policy, liberalizing prices, devaluing the currency, and

controlling the growth of debt. Western donors provided substantial

financial support for Polish stabilization, including a $1 billion Polish

Stabilization Fund, debt restructuring and forgiveness as part of the Paris

Club3

 agreement, and International Monetary Fund standby arrangements.

Poland’s stabilization measures resulted in substantial declines in output

during the early years of transition. However, after maintaining consistent

macroeconomic policy over several years, Poland now has one of the

fastest growing economies in Europe. The country’s official gross

domestic product grew by an estimated 5 percent in 1994 and is projected

to grow by another 6 percent in 1995. However, Poland still has inflation

and unemployment problems. The estimated rates for 1994 were

31 percent and 15.9 percent, respectively.

Overcoming Trade and

Investment Obstacles Is an

Essential Task for Poland

Since the reform process began, Poland’s trade with the West, and the

European Union in particular, has grown significantly. For example, in

1988, about 30 percent of Poland’s exports and 27 percent of its imports

consisted of trade with the European Union. By 1994, these figures had

grown to 53 percent and 54 percent, respectively. However, Poland

3

The Paris Club is the mechanism the United States and other official creditors use to reschedule debt

from foreign countries that are unable to meet their external debt obligations. Paris Club meetings are

organized by the French Finance Ministry. Traditional participants of the Paris Club are the industrial

country members of the Organization for Economic Cooperation and Development. Membership

varies and depends on which countries were official lenders to a specific debtor country. The

Department of State represents the U.S. government in Paris Club negotiations.

Page 5 GAO/NSIAD-95-150 Poland
Executive Summary

continues to run a large trade deficit, and while a preferential trade

agreement exists between the European Union and Poland, European

Union protective measures limit Poland’s access to that market for certain

products, such as some steel and agricultural products.

Poland has made progress in removing some obstacles to foreign direct

investment, and the country’s 1991 Foreign Investment Law is generally

regarded as a satisfactory legal foundation for foreign investment.

According to the Polish Agency for Foreign Investment, the value of

foreign direct investment in Poland exceeded $5 billion and another

$5.1 billion had been committed as of March 1995. Nevertheless, a number

of bureaucratic, tax, and other obstacles continue to impede such

investment.

Donor assistance has had only marginal impact in facilitating foreign trade

and investment. For example, donors rejected Polish requests for capital

to fund an export credit insurance agency and instead responded with

little more than numerous consultant studies. In another case, the

U.S.-funded American Business Center in Warsaw lost money and was

closed when comparable services quickly became available through the

private sector. Some of the most persistent impediments to foreign

investment, such as bureaucratic and tax uncertainties, demand the

attention of the Polish government rather than donors. On the other hand,

further reducing European Union trade barriers could help Poland

increase its exports, diminish its trade deficit with the European Union,

and earn additional foreign exchange for further restructuring.

Poland’s Progress Toward

Privatization Has Been

Mixed

Poland’s economic reforms have resulted in a growing private sector.

Many new businesses have emerged and a large number of existing smalland medium-sized retail businesses have been privatized. Poland’s private

sector is now the primary source of the country’s economic growth and a

substantial base of Polish employment. However, the pace of privatization

for larger state-owned enterprises has been slower than expected, and

significant portions of Polish productive capacity and employment remain

in the hands of the government. Privatization has been delayed because of

indecision brought about by changes in the government, the reluctance of

employees and managers at large state-owned enterprises to privatize, and

the poor financial position of many of these enterprises. Many donors have

questioned whether the Polish government is fully committed to the

privatization process.

Page 6 GAO/NSIAD-95-150 Poland
Executive Summary

Donors have demonstrated active support for Poland’s Mass Privatization

Program and continue to commit capital and technical assistance for the

program, despite waning public and governmental support. However,

donors are concerned about continued delays in implementing the

program. If the Polish government fails to follow through on its promise to

move forward on the program in 1995, donor support may erode.

Reforms in Poland’s

Banking Sector

Legislation enacted in 1989 transformed Poland’s old central bank, which

had served as the state conduit of credit to enterprises in the command

economy, into an independent central bank with responsibilities for

macroeconomic policies and supervision of banks. The regional branches

of the old central bank were transformed into individual commercial

banks, some of which remain state-owned and some of which have been

privatized. The government has recapitalized state-owned banks and has

made considerable progress in restructuring their problem-loan portfolios.

Nevertheless, according to the European Bank for Reconstruction and

Development, the International Monetary Fund, and others, bank

privatization has been limited; many private and cooperative banks are

undercapitalized and badly managed; the country’s licensing policies

regarding foreign banks lack transparency; and Poland’s small rural banks

are in poor financial condition. According to the U.S. Agency for

International Development and others, Poland’s bank supervision capacity

needs further strengthening, and bankers need additional training.

Organization for Economic Cooperation and Development officials and

other observers have reported that small- and medium-sized enterprises in

Poland continue to lack sufficient bank credit to develop and expand

operations.

Donors have recognized the lack of available credit for small- and

medium-sized enterprises and have undertaken various activities to help

fill the gap. The U.S.-sponsored Polish-American Enterprise Fund has met

with greater success than other donor programs in this area, at least in

part because the fund trained its own personnel rather than relying on the

existing banking skills in Poland.

Multilateral and bilateral donors have provided strong support for Polish

efforts to recapitalize and restructure the loan portfolios of state-owned

banks. A key feature of the program entails issuing special government

bonds to recapitalize the banks and establishing a fund to service and

redeem the bonds after the banks are privatized. This fund was established

Page 7 GAO/NSIAD-95-150 Poland
Executive Summary

using resources that were no longer needed for the Polish Stabilization

Fund.

According to Polish officials, early technical assistance in the banking

sector resulted in many consultants coming to Warsaw for 1- or 2-week

stays, interviewing officials, and producing reports that merely repeated

what they had been told. However, more recently, donors have better

targeted technical assistance to address Poland’s need for enhanced bank

supervision capabilities and improved credit analysis skills by providing

technical assistance and training to entities such as the Ministry of

Finance, the National Bank of Poland, commercial banks, and the Warsaw

School of Banking.

Lessons Learned Despite tremendous differences among countries in Central and Eastern

Europe and the former Soviet Union with respect to their economies, their

political situations, and a host of other variables, there are a number of

lessons learned from Poland’s restructuring efforts that, at a minimum,

merit consideration by other transition countries and those involved in

assisting them. Taken together, the lessons summarized below suggest

that while assistance can be important in certain key areas, a transition

country’s reform progress depends more upon its own actions than it does

upon those of external donors.

• Poland’s own efforts in coupling tough reform measures with consistent

macroeconomic policy over several years have been critical to the

country’s current economic recovery.

• Some of the most important forms of donor assistance provided in support

of Poland’s transition were those that backed Poland’s early

macroeconomic stabilization and liberalization measures.

• Some of the most important factors for improvement in Poland’s foreign

trade and investment situation require Polish or donor actions outside the

confines of assistance.

• Poland’s early liberalization of foreign trade played an important role in

helping state-owned enterprises adapt to market conditions.

• In the area of privatization, the Polish experience indicates that

encouraging the early development of a dynamic private sector is at least

as important as the timing for undertaking large-scale privatization.

• When imposing hard budget constraints and other market reforms that

include curtailed government-to-industry subsidies for state-owned

industry, transition country officials should be vigilant of state-owned

Page 8 GAO/NSIAD-95-150 Poland
Executive Summary

firms circumventing the constraints and continuing to operate at a loss

because of existing relationships with state-owned banks.

• While the role of donors is necessarily limited in some areas of the

transition process, donors were able to play a useful role in supporting

Poland’s reform efforts in its banking sector.

Recommendations This report contains no recommendations.

Agency Comments In commenting on a draft of this report, the U.S. Agency for International

Development said that it agreed with GAO’s conclusions and that the report

was a fair and balanced assessment of how donor assistance had

contributed to Poland’s economic reform process. The Department of the

Treasury also agreed with the report’s conclusions and offered helpful

technical comments that have been incorporated into the report where

appropriate. Although the Department of State did not provide written

comments, State officials said that they agreed with the report’s

conclusions and that the report accurately depicted Poland’s economic

restructuring progress, as well as the role that donors have played in the

transition process. The Treasury Department’s and the U.S. Agency for

International Development’s comments are reprinted in appendixes III and

IV, respectively.

Page 9 GAO/NSIAD-95-150 Poland
Contents

Executive Summary 3

Chapter 1 

Introduction

14

International Assistance and Donor Coordination 14

U.S. Assistance Program to Poland Has Evolved 16

Objectives, Scope, and Methodology 20

Chapter 2 

Early Stabilization

Efforts Successful

21

Early Polish Stabilization Measures Created Basis for Market

Economy

21

Donors Provided Important Support for Polish Measures 22

Poland’s Economy Is Experiencing Healthy Growth 24

Chapter 3 

Overcoming Trade

and Investment

Obstacles

26

Trade With West Is Increasingly Important for Poland 26

Impediments to Foreign Investment 38

Chapter 4 

Poland’s Progress

Toward Privatization

Has Been Mixed

46

Poland’s Private Sector Is Growing 46

Pace of Large-Scale Privatization Slower Than Expected 48

Implementation of Mass Privatization Has Been Stalled 51

Privatization Delays Have Several Causes 55

United States Adjusts Program Emphasis Because of Delays 57

Chapter 5 

Reforms in Poland’s

Banking Sector

60

Fundamental Reforms Accomplished 60

Several Major Hurdles Remain 62

Donor Assistance Has Been Instrumental in Reforms 66

Chapter 6 

Conclusions and

Lessons Learned

68

Appendixes Appendix I: Methods of Privatization 72

Appendix II: Methods of Restructuring 76

Appendix III: Comments From the Department of the Treasury 78

Page 10 GAO/NSIAD-95-150 Poland
Contents

Appendix IV: Comments From the United States Agency for

International Development

82

Appendix V: Major Contributors to This Report 83

Tables Table 1.1: G-24 Donor Commitments to Poland,

January 1990-December 1994

15

Table 1.2: International Institution Commitments to Poland,

January 1990-December 1994

15

Table 3.1: Share of Polish Exports to Selected Countries and

Regions

28

Table 3.2: Share of Polish Imports From Selected Countries and

Regions

29

Table 3.3: Protectionist Measures Introduced by the EU,

July 1992-December 1993

35

Table 3.4: Ten Largest Company Investors in Poland,

January 1990-March 1995

42

Table 4.1: Donor Commitments to Poland’s Mass Privatization

Program

52

Table I.1: Status of Commercialization & Privatization 73

Table I.2: Method of Direct Privatization 74

Table I.3: Status of Liquidation 75

Figures Figure 1.1: U.S. Assistance to Poland, Fiscal Years 1990-94 18

Figure 1.2: Funds Obligated for Poland’s Economic

Restructuring, Fiscal Years 1990-94

19

Figure 2.1: Official and Corrected Gross Domestic Product

Figures for Poland, 1989-95

25

Figure 3.1: Poland’s Balance of Trade 30

Figure 3.2: Cumulative Foreign Direct Investment in Poland by

Leading Countries, January 1990-March 1995

41

Figure 3.3: Foreign Investment in Poland by Sector,

January 1990-March 1995

43

Figure 4.1: Poland’s Privatization Results 50

Figure I.1: Capital Privatization Process 72

Figure I.2: Liquidation Process 74

Page 11 GAO/NSIAD-95-150 Poland
Contents

Abbreviations

CEFTA Central European Free Trade Area

CMEA Council for Mutual Economic Assistance

EBRD European Bank for Reconstruction and Development

ECE Economic Commission for Europe

EU European Union

FREB Financial Restructuring of Enterprises and Banks

G-24 Group of 24

GAO General Accounting Office

GATT General Agreement on Tariffs and Trade

GDP gross domestic product

IMF International Monetary Fund

KUKE Polish Export Credit Insurance Corporation

OECD Organization for Economic Cooperation and Development

OPIC Overseas Private Investment Corporation

PHARE Poland and Hungary Assistance for Economic Restructuring

SEED Support for East European Democracy

USAID U.S. Agency for International Development

USCS U.S. Commercial Service

Page 12 GAO/NSIAD-95-150 Poland
Page 13 GAO/NSIAD-95-150 Poland
Chapter 1 

Introduction

Since the collapse of communism in Central and Eastern Europe, Poland

has undertaken some of the most dramatic economic reforms in the

region. Donors have actively encouraged Poland in its efforts to make the

transition from a communist-led, centrally planned economy to a

free-market economy and a democratic political system. The United States

has supported Poland’s transition both financially and diplomatically.

International

Assistance and Donor

Coordination

The major industrial countries and the international financial institutions

had committed about $36 billion in assistance to Poland from 1990 through

December 1994. These commitments consisted of emergency,

humanitarian, infrastructure, and economic transformation assistance;

debt forgiveness; private sector investment;1

 export credits; and

investment guaranties. The Group of 24 (G-24)2

 countries committed

approximately $26.8 billion in bilateral assistance to Poland and the

International Monetary Fund (IMF), the World Bank, and the European

Bank for Reconstruction and Development (EBRD) committed about

$8.9 billion.3

 (See tables 1.1 and 1.2.)

1

The European Bank for Reconstruction and Development and the International Finance Corporation,

a component of the World Bank, can take an equity position in private sector companies.

2

The G-24 is composed of Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany,

Greece, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal,

Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States. G-24 assistance

commitments include the commitments of European Union institutions in addition to those of its

individual member states.

3

Although the Organization for Economic Cooperation and Development tracks official aid

disbursements (as opposed to commitments) to Poland and other countries, the latest data available

are for 1993. Officials from the organization told us that they have encountered difficulties in obtaining

prompt and accurate information from donor countries.

Page 14 GAO/NSIAD-95-150 Poland
Chapter 1 

Introduction

Table 1.1: G-24 Donor Commitments to

Poland, January 1990-December 1994 Dollars in billionsa

Donor Commitmentb Percentage

European Commission $1.6 6

European Investment Bank 1.2 4

France 4.2 16

Germany 5.5 21

Italy 0.8 3

United Kingdom 0.9 3

Other European Union countries 1.2 5

Canada 1.5 6

Japan 1.7 6

Sweden 0.8 3

Switzerland 0.8 3

United States 5.5 21

Others 1.1 4

Total $26.8 100c

aCommitments were converted from European Currency Units at a rate of $1.30 per unit.

bCommitments take a variety of forms and may include grants, credits, loans, debt forgiveness,

and investment guarantees.

cFigures do not add due to rounding.

Source: European Commission.

Table 1.2: International Institution

Commitments to Poland,

January 1990-December 1994

Dollars in billionsa

Donor Commitment Percentage

International Monetary Fund $4.3 48

World Bank 3.9 43

EBRD 0.8 9

Totalb $8.9c 100

aCommitments were converted from European Currency Units at a rate of $1.30 per unit.

bA separate figure for the Organization for Economic Cooperation and Development support was

not available.

cFigures do not add due to rounding.

Source: European Commission.

Page 15 GAO/NSIAD-95-150 Poland
Chapter 1 

Introduction

The G-24 countries designated the European Commission, the executive

arm of the European Union (EU),4

 as the coordinator of these assistance

activities. However, the European Commission acts primarily as a

clearinghouse for information on G-24 bilateral assistance to the region

rather than as a coordinator. One of the Commission’s functions is

generating the G-24 Scoreboard of Assistance Commitments to the Central

and Eastern European Countries,5

 a listing of donor assistance pledged to

the region by G-24 countries.

According to an EU official, the main function of the Commission’s

delegation in Poland has been to arrange donor meetings. Donor

coordination is generally handled by the Polish government’s Council of

Ministers’ Foreign Aid Office. However, donors often bypass this office

and deal directly with the relevant ministries, or rely on organizations

outside the government of Poland to implement their programs. For

example, most U.S. assistance programs have been implemented either

directly with the private sector recipients or through contractors and

nongovernmental organizations with little direct involvement on the part

of the government of Poland.

U.S. Assistance

Program to Poland

Has Evolved

The Support for Eastern European Democracy (SEED) Act of 1989 

(P.L. 101-179) authorized funding for Poland and other countries in Central

and Eastern Europe for fiscal years 1990 through 1992. Since 1993,

obligations for programs in the region have been funded under both the

SEED Act and the Foreign Assistance Act of 1961, as amended (P.L. 87-195).

The United States had obligated about $719 million in assistance as of

September 1994 to help Poland’s transformation to a democracy and a

market-oriented economy; the United States has also provided about

$700 million in Overseas Private Investment Corporation financing and

insurance for U.S. businesses to facilitate their investment in Poland,

$355 million in Eximbank loan guarantees and investment credits, and

about $2.4 billion in official debt forgiveness.

Poland was one of the first countries of Central and Eastern Europe to

receive U.S. assistance because it took the lead in the transformation from

communism to democracy and a market-oriented economy. Poland has

4

The EU data in this report refers to Belgium, Denmark, France, Germany, Greece, Ireland, Italy,

Luxembourg, the Netherlands, Portugal, Spain, and the United Kingdom. Effective January 1, 1995,

Austria, Finland, and Sweden became members of the EU.

5

The term “Central and Eastern Europe” refers here to Albania, Bulgaria, Czech Republic, Estonia,

Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia, and the former Yugoslavia

Republic of Macedonia.

Page 16 GAO/NSIAD-95-150 Poland
Chapter 1 

Introduction

received the largest share of U.S. assistance in the region. This assistance

was initially expected to be necessary only for a transition period of about

5 years starting in 1990; however, the U.S. Agency for International

Development (USAID) representative in Warsaw now believes that Poland

will probably need assistance for at least the next 5 years or until the

country is closer to economic integration with the EU.

Pursuant to the SEED Act, the Deputy Secretary of State was designated as

the Coordinator of U.S. Assistance to Central and Eastern Europe in 1990.

The Coordinator was assisted by special advisors from the Department of

the Treasury, the Council of Economic Advisors, and USAID. In 1993, the

Coordinator’s office was placed within State’s Bureau for European

Affairs.

The U.S. assistance program in Central and Eastern Europe was initially

designed with a regional rather than country-specific approach and was

centrally managed in Washington, D.C., with limited authority delegated to

U.S. personnel in-country. However, this approach changed in 1993 as

USAID devolved many of the management responsibilities to the field at the

direction of Congress. The USAID/Poland representative said that he now

has an understanding with USAID/Washington that no projects will be

initiated in Washington without the field office’s concurrence. The USAID

representative also said that he has requested control over all contracts

and work orders, indicating that this oversight and control was necessary

to coordinate and develop strategic plans for future work in Poland.

As shown in figure 1.1, the majority of U.S. assistance to Poland has been

devoted to economic restructuring and assisting in Poland’s

transformation to a market-based economy. The remainder of the funds

have been obligated to support democratic initiatives and quality of life

issues. Democratic initiatives projects included training for parliamentary

and local government officials and grants to support the small and

independent press media. Quality of life projects included technical

assistance for the Polish public and private housing sector, a model

unemployment benefit payment office, and technical assistance to help

improve public sector environmental services.

Page 17 GAO/NSIAD-95-150 Poland
Chapter 1 

Introduction

Figure 1.1: U.S. Assistance to Poland,

Fiscal Years 1990-94 (dollars in millions)

86.4% • Economic restructuring—$619

•

10.8%

Quality of life—$78

•

2.7%

Democratic initiatives—$20

Note: Percentage calculations do not include assistance amounts categorized as

“miscellaneous,” which comprise only a quarter of 1 percent ($1.8 million) of total assistance.

The Polish Stabilization Fund and the Polish-American Enterprise Fund

account for the majority of funds obligated under the Economic

Restructuring Program for Poland. (See fig. 1.2.)

Page 18 GAO/NSIAD-95-150 Poland
Chapter 1 

Introduction

Figure 1.2: Funds Obligated for

Poland’s Economic Restructuring,

Fiscal Years 1990-94 (dollars in millions)

32.1% • Stabilization Fund—$199

40.4%•

Polish American Enterprise

Fund—$250

•

5.6%

Privatization and enterprise

restructuring—$35

•21.9%

Other—$136

Under the SEED Act, the United States provided a $199-million contribution

to the multi-donor $1 billion Polish Stabilization Fund. The fund was

established to (1) support a relatively fixed exchange rate for the zloty

(Poland’s currency) after a sharp devaluation and (2) help ensure that the

zloty would be convertible for current account transactions; that is, to

allow residents to freely purchase currency through authorized foreign

exchange banks. These objectives have been accomplished, and the

United States has authorized Poland to use the $199 million held in

reserves to recapitalize and privatize the Polish state-owned banks.

The SEED Act also authorized the Polish-American Enterprise Fund as a

private corporation with maximum flexibility in implementing the fund’s

investment policies. As of September 1994, about $250 million had been

obligated and the fund had disbursed about $227 million. The fund

primarily makes loans to, or invests in, small- and medium-sized

businesses in which other financial institutions are reluctant to invest.

Page 19 GAO/NSIAD-95-150 Poland
Chapter 1 

Introduction

Objectives, Scope,

and Methodology

The objectives of this review were to (1) assess the status and progress of

Poland’s economic restructuring in the key areas of macroeconomic

stabilization, foreign trade and investment, privatization, and banking,

(2) describe impediments to these restructuring efforts, (3) discuss the

role donors have played in the transformation process, and (4) identify

lessons learned that could be useful to other transition countries.

To address these issues, we interviewed officials of the Departments of

State and the Treasury and USAID in Washington, the Economic

Commission for Europe (ECE) in Geneva, the EU in Brussels, the

Organization for Economic Cooperation and Development (OECD) in Paris,

and the EBRD in London. We also met with officials at the British Know

How Fund as well as Central and Eastern European experts at the London

School of Economics and other organizations. In Warsaw, we met with

U.S. embassy officials, USAID representatives, U.N. officials, IMF and World

Bank officials, EU officials, and officials of the British and Japanese

embassies. We also met with officials from the Polish government,

representatives of the Polish-American Enterprise Fund, representatives of

private sector promotional organizations, and managers from U.S. and

German companies doing business in Poland.

We reviewed pertinent U.S., host, and donor-government documents, as

well as reports and studies by international organizations, academia, and

private sector groups. We also used information from PlanEcon, Inc., an

economic consulting group specializing in Central and Eastern Europe and

the former Soviet Union, and information from the Warsaw Economic

Research Institute, a policy institute at the Warsaw School of Economics.

To describe factors hindering Polish exports, we relied heavily on the

reports and studies of international organizations as well as the opinions

of Polish and international organization officials.

The data presented in the tables and figures of this report were obtained

from a number of different sources. These data should be interpreted and

used with caution since the quality of the data could not be verified in

some cases.

We performed our review from January 1994 through May 1995 in

accordance with generally accepted government auditing standards.

Page 20 GAO/NSIAD-95-150 Poland
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The foundation for Poland’s current economic recovery and continued

restructuring was the major stabilization and macroeconomic reform

efforts, referred to by some as “shock therapy” or “the big bang approach,”

which began in late 1989 and early 1990. The Polish government took a

wide range of actions to encourage stabilization, including tightening fiscal

and monetary policy, liberalizing prices, devaluing the currency, and

controlling the growth of debt. Western donors provided important

support for such reforms and the United States played a key role in

initiating these forms of assistance. Poland’s economy is now experiencing

healthy growth.

Early Polish

Stabilization Measures

Created Basis for

Market Economy

In October 1989, the Polish government began implementing

macroeconomic stabilization and liberalization measures, and accelerated

the reform movement in January 1990. Subsidies to industry and

households, for example, food subsidies, were sharply cut. Public

investment spending was substantially reduced. Money growth was tightly

controlled; the zloty was sharply devalued and made convertible.1

 Wage

growth was controlled with an excess wage tax designed to limit the rate

of increase in the wage bills of state enterprises. Prices were liberalized,

bringing about a one-time jump in the price level corresponding to the

reduction in the real value of the zloty. Additional liberalization measures

included the establishment of a free-trade regime and liberalization of

legal requirements for setting up private enterprises.2

Together, these efforts gave Poland the basic operating features of a

market economy and were widely considered to be essential first steps

toward overall economic restructuring.3

 The stabilization measures

decreased inflationary pressures, lowered government expenditures, and

improved the balance of payments. However, these measures also

contributed to declines in economic output and corresponding growth in

1

A currency is considered convertible when it may be freely exchanged for another currency.

2

David Lipton and Jeffrey Sachs, “Creating a Market Economy in Eastern Europe: The Case of

Poland,”Brookings Papers on Economic Activity 1 (Washington, D.C.: the Brookings Institution, 1990),

p. 112; Jeffrey Sachs, Poland’s Jump to the Market Economy (Cambridge: Massachusetts Institute of

Technology Press, 1994), pp. 48, 49; Andrew Berg and Olivier Jean Blanchard, “Stabilization and

Transition: Poland, 1990-91,”The Transition in Eastern Europe, Country Studies, Vol. 1 (Chicago: the

University of Chicago Press, 1994), pp. 52, 53; and Mark E. Schaffer, The Economy of Poland,

Discussion Paper 67; and Centre for Economic Performance (London: London School of Economics,

Mar. 1992), p. 21.

3

Schaffer, p. 21; and Alan H. Gelb and Cheryl W. Gray, The Transformation of Economies in Central

and Eastern Europe: Issues, Progress, and Prospects, Policy and Research Series, Vol. 17 (Washington,

D.C.: the World Bank, June 1991), p. 7.

Page 21 GAO/NSIAD-95-150 Poland
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unemployment.4 The liberalization measures freed most of the domestic

price system, allowed for corrections in the relative prices of goods still

under state control, removed the state from large-scale detailed direction

of the economy, and provided an environment conducive to the growth of

a new private sector.5

Some benefits resulted from important linkages between specific

measures. For example, Poland’s liberalization of trade subjected the state

sector to foreign competition. Such competition provided international

relative prices that the previous monopolistic Polish firms would not have

offered, thus enabling the government to liberalize prices.6

Donors Provided

Important Support for

Polish Measures

Western support for early Polish stabilization measures is cited by Polish

and donor officials as among the most significant assistance provided to

Poland. For example, the Director of Poland’s Bureau for Foreign

Assistance asserted that some of the most important assistance efforts to

date involved donor support for early Polish macroeconomic stabilization

actions in the form of the stabilization fund, balance of payments support,

and debt restructuring and forgiveness. The IMF’s senior resident

representative in Poland said that these forms of assistance were timely

and critical to Polish macroeconomic stabilization efforts.

The United States took the initiative in 1989 to mobilize $1 billion from the

international community for a Polish Stabilization Fund to (1) support a

relatively fixed exchange rate for the zloty after sharp devaluation and

(2) help ensure that the zloty was convertible for current account

transactions by creating additional foreign exchange reserves. Poland’s

foreign exchange reserves were further bolstered by a $700 million

standby arrangement7

 with the IMF. This balance of payments support

helped allow Polish authorities to introduce in January 1990 a convertible

and stable exchange rate, and the additional backing for the zloty made

defense of the currency more credible.8

4

Berg and Blanchard, pp. 52, 53; and Sachs, p. 56.

5

Schaffer, p. 21.

6

Sachs, pp. 49, 50, 65; and Schaffer, p. 23.

7

IMF standby arrangements provide credit in a number of installments and are conditioned upon

implementing certain macroeconomic policy changes aimed at overcoming balance of payments

difficulties.

8

Lipton and Sachs, p. 118; and Sachs, p. 54.

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Another important form of early assistance to Poland was temporary cash

flow relief from external indebtedness. To increase the chances of

successful stabilization, some believed it was important that debt service

payments be minimized in the early stages of transition.9

 Poland’s external

debt in convertible currencies at the end of 1990 was about $44 billion. An

estimated $33 billion was owed to official bilateral creditors, referred to as

the Paris Club,10 and $10.7 billion, including $1.2 billion of short-term

revolving credit, was owed to Western commercial banks, known as the

London Club. Poland’s gross debt service11 in 1990 was about $9 billion, or

about 80 percent of its convertible currency merchandise export

earnings.12

In March 1991, under U.S. leadership, the members of the Paris Club

agreed to forgive 50 percent of Poland’s official debt. In the first stage,

which was contingent on Poland’s signing an agreement with the IMF to

restructure its economy, the official debt was reduced by 30 percent. In

the second stage, which was contingent upon Poland’s fulfillment of the

terms of the IMF agreement, an additional 20-percent reduction was

authorized in April 1994. As part of the initial 30-percent reduction, annual

interest payments during the first 3 years were reduced by 80 percent.

Principal payments were also limited to less than $600 million annually.

For its part in the agreement, the United States agreed to forgive 

70 percent of its bilateral debt with Poland, 50 percent in the first stage,

and 20 percent in the second, which reduced Polish debt to the 

U.S. government from $3.4 billion to about $1 billion.13

Under the Paris Club agreement, Poland also committed to seeking from

the London Club of commercial banks14 a debt reorganization on terms

9

Ibid.

10The Paris Club is the mechanism the United States and other official creditors use to reschedule debt

from foreign countries that are unable to meet their external debt obligations. Paris Club meetings are

organized by the French Finance Ministry. Traditional participants of the Paris Club are the industrial

country members of the OECD. Membership varies and depends on which countries were official

lenders to a specific debtor country. The Department of State represents the U.S. government in Paris

Club negotiations.

11Gross debt service includes interest and principal payments on short-, medium-, and long-term debt.

12Poland and Hungary: Economic Transition and U.S. Assistance (GAO/NSIAD-92-102, May 1, 1992), 

p. 24.

13GAO/NSIAD-92-102, p. 24.

14Poland reached an agreement with the London Club banks in October 1994, resulting in an overall

rate of debt reduction of slightly more than 49 percent—terms comparable to the Paris Club

agreement. See Tomasz Telma, “Outlook for Poland,”Review and Outlook for Eastern Europe,

PlanEcon (Dec. 1994), p. 125.

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comparable to the Paris Club, allowing Poland to cease servicing this debt

in the interim.15

Poland’s Economy Is

Experiencing Healthy

Growth

After suffering substantial declines in gross domestic product (GDP) during

the first 2 years of transition, Poland now leads post-communist Europe in

economic growth. According to PlanEcon, while Poland has made

considerable progress in reducing inflation from the high levels that

existed when reforms began in 1989, the country’s projected rate of

inflation for 1994 remained relatively high at 31 percent. Poland’s

unemployment rate was projected to gradually decline in 1994 to a level of

15.9 percent by the end of the year. However, the country’s official GDP

grew by an estimated 5 percent in 1994 and is projected to grow by

another 6 percent in 1995. Figure 2.1 shows official and what has been

termed “corrected” Polish GDP levels for 1989-95.16 Although Poland’s

official figures indicate that the country’s GDP has not completely

recovered from the substantial output declines experienced in the first 

2 years of transition, PlanEcon’s “corrected GDP” figures show that the

country’s GDP has recovered from these declines and surpassed its

pretransition levels. The IMF’s senior resident representative in Poland said

that Poland’s early macroeconomic stabilization measures coupled with

consistent macroeconomic policy over several years were critical factors

in the country’s economic recovery.

15GAO/NSIAD-92-102, p. 24; and Lipton and Sachs, p. 118.

16PlanEcon has constructed “corrected GDP” figures by including estimates of GDP generated in the

unofficial (grey) economy and accounting for quality improvements in goods and services.

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Figure 2.1: Official and Corrected

Gross Domestic Product Figures for

Poland, 1989-95

Billions of 1994 dollars

60

65

70

75

80

85

90

95

1989 1990 1991 1992 1993 1994 1995

Year

Official GDP

Corrected GDP

Note: The 1995 figures are PlanEcon forecasts.

Source: Calculated from PlanEcon Report: Polish Economic Monitor, Vol. X, Nos. 35-36, Nov. 4,

1994, and Vol. XI, Nos. 11-12, May 19, 1995.

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Trade is widely viewed as a crucial factor in Poland’s economic

restructuring. Increased trade with the West, and the EU in particular, is

key to Poland’s integration into the world economy, especially since the

collapse of trade among Poland’s former Council for Mutual Economic

Assistance (CMEA) trading partners. Although Polish exports increased in

1994, Poland continues to run a large trade deficit with the EU. Despite the

importance of Poland’s trade with the EU, West European trade barriers

continue to hinder Polish exports of certain products to that market,

thereby hampering restructuring efforts. Donors have rendered limited

assistance to help facilitate Polish exports, and some assistance that has

been provided was of questionable usefulness.

Foreign investment is considered essential to Poland’s economic

restructuring efforts. Although Poland has made progress removing some

impediments to foreign direct investment, many obstacles remain that can

be corrected by only the Polish government. Nevertheless, a number of

U.S. and foreign companies have recently made significant investments in

Poland. Some early U.S. assistance geared toward improving the

investment climate lacked focus because of pressure to spend the money

quickly, and U.S. programs to support Polish investment promotion have

had limited impact.

Trade With West Is

Increasingly

Important for Poland

In 1990, as part of its transition efforts, Poland liberalized foreign trade

regimes. This included eliminating many import restrictions,

demonopolizing foreign trade, allowing free access to foreign currency,

and establishing convertibility of the zloty.

Growth in exports to the West is widely recognized as important to

Poland’s continued economic recovery and integration into the world

economy.1

 In addition to increased imports resulting from opening up its

own markets to Western products, Poland achieved dramatic increases in

exports to the West, beginning in 1990. As Poland entered the initial stages

of reform, exports to the industrialized market economies were essential

to preventing even larger declines in output than had already occurred as a

result of the collapse of trade with former CMEA countries and the drop in

Poland’s internal demand. According to OECD, access to the more stable

OECD area markets is vital for Poland’s continued economic growth and

1

Paul Mylonas, “Integration into the World Economy,” Poland: The Path to a Market Economy,

Occasional Paper 113; IMF, Oct. 1994, p. 69; Economic Transition in Eastern Europe and the Former

Soviet Union, Transition Report; EBRD, Oct. 1994, p. 116; and Poland and Hungary: Economic

Transition and U.S. Assistance (GAO/NSIAD-92-102, May 1, 1992), p. 20.

Page 26 GAO/NSIAD-95-150 Poland
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political stability.2 The ECE has reported that increased access to Western

markets can also act as a powerful stimulant to foreign investment seeking

an eastern base for exporting.3

Of the OECD area markets, the large and geographically close EU market

represents Poland’s most important trade partner. For example, in 1994,

about 53 percent of Poland’s exports and 54 percent of its imports

consisted of trade with the EU. Though the United States represents a

potential market for Polish products, it accounts for only 2 to 4 percent of

Poland’s trade. Tables 3.1 and 3.2 describe aggregate trade for selected

countries and regions between 1988 and 1994.

As indicated in tables 3.1 and 3.2, Poland’s trade with former CMEA partners

has declined in importance. Although a Central European Free Trade Area

(CEFTA) agreement was negotiated among Poland, the Czech Republic,

Slovak Republic, and Hungary and went into effect in March 1993, the ECE

reported that the significance of the agreement has been downplayed

within the CEFTA countries and that few steps have been taken to promote

these trade links.4 OECD officials echoed that sentiment, explaining that

while eastern markets could be very important to Poland in the future,

Polish companies engaging in restructuring currently do not have enough

“margin for error” to emphasize dealings in countries with small markets

and little ability to pay for products.

2

Barriers to Trade with the Economies in Transition, Center for Cooperation with the Economies in

Transition, OECD, 1994, p.9.

3

Economic Survey of Europe in 1993-1994 (New York and Geneva: Secretariat of the Economic

Commission for Europe, United Nations, 1994), p. 149.

4

Economic Survey of Europe in 1993-1994, p. 149.

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Table 3.1: Share of Polish Exports to Selected Countries and Regions (1988-94) 

Dollars in millions

1988 1989 1990 1991 1992 1993 1994

Total value of exports $13,544 $13,528 $13,624 $14,913 $13,186 $15,415 $17,450

Country or region

EU 30% 32% 47% 56% 58% 53% 53%

United States 3 3 3 2 2 3 3

CMEA countriesa 42 31 22 17 15 19 19

of which

CEFTAb 8 7 5 5 5 3 3

USSR/Former Soviet Union 25 21 15 11 9 16 15

Other 25 34 28 25 25 25 25

Total 100% 100% 100% 100% 100% 100% 100%

aCMEA members are countries that were members in 1990. The CMEA ceased to exist on

January 1, 1991; however, we continue to use this designation for the years following to account

for trade involving countries representing the same geographical area. In 1993, this grouping

included Bulgaria, the Czech Republic, Hungary, Poland, Romania, the Slovak Republic, Cuba,

Vietnam, and countries of the former Soviet Union, including the Baltic states of Estonia, Latvia,

and Lithuania. Trade with East Germany is reported with CMEA countries in 1988. Beginning with

1989, Poland does not report separate trade with East Germany but includes this as trade with

Germany. In 1988, trade with East Germany represented 4 percent of Poland’s total exports and

5 percent of its total imports.

bBeginning in 1993, the two separate countries of the Czech Republic and the Slovak Republic

replaced Czechoslovakia. CEFTA did not go into effect until 1993; however, we use this

designation for the years prior to account for trade involving countries representing the same

geographical area.

Source: Compiled from Polish-reported trade figures, International Monetary Fund Direction of

Trade computer database.

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Table 3.2: Share of Polish Imports From Selected Countries and Regions (1988-94) 

Dollars in millions

1988 1989 1990 1991 1992 1993 1994

Total value of imports $13,834 $11,357 $8,974 $17,084 $15,204 $23,169 $24,099

Country or region

EU 27% 34% 43% 50% 51% 53% 54%

United States 2 1 2 2 3 4 3

CMEA countries 44 28 25 19 16 17 17

of which

CEFTA 8 7 4 4 4 2 3

USSR/Former Soviet Union 27 18 20 14 11 15 14

Other 27 37 30 29 30 25 26

Total 100% 100% 100% 100% 100% 100%a 100%

aFigures do not add due to rounding.

Source: Compiled from Polish-reported trade figures, International Monetary Fund Direction of

Trade computer database.

Trade Deficit With the EU Although Polish exports increased in 1994 to over $17 billion, Poland

continues to run a large trade deficit with the West, primarily the EU.

Poland’s 1993 trade deficit of $7.8 billion was the largest in its history, and

$4.2 billion of this amount was with the EU (see fig. 3.1). However, in 1994,

as a result of slower growth in imports versus that of exports, Poland’s

trade deficit narrowed to $6.6 billion, a 14-percent decline compared to

1993. Poland’s 1994 trade deficit with the EU was $3.8 billion, a 10-percent

decline compared to 1993.

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Figure 3.1: Poland’s Balance of Trade

(1988-94) Dollars in billions

-8

-6

-4

-2

0

2

4

6

1988 1989 1990 1991 1992 1993 1994

Year

World

European Union

Source: Compiled from International Monetary Fund Direction of Trade computer database.

Trade Barriers Persist A preferential trade agreement between Poland and the EU is part of the

EU-Poland Association Agreement, which became fully effective on

February 1, 1994. The trade segments of the accord went into force on

March 1, 1992, in the form of an interim agreement, but under the

agreement barriers to trade in certain sensitive areas such as textiles are

to be removed only over a number of years. Major improvement in

Poland’s access to agricultural markets in the EU is not expected soon.5

Further, Polish officials maintain that the EU continues to limit access to

5

Economic Survey of Europe in 1993-1994, pp. 149-157.

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its markets through contingent protective measures such as anti-dumping

duties, countervailing duties, and safeguard actions.6

The Association Agreement is considered a precursor to Poland’s eventual

membership in the EU, and a key feature is the gradual elimination of

tariffs over a 10-year period, leading to a free trade area between the EU

and Poland. The agreement is considered to be asymmetric in that the EU

is required to grant immediate duty free access on many goods, while

Poland has a longer period of time to grant full reciprocity.7

The Association Agreement also provides for immediate elimination of

quantitative restrictions on many industrial products, with the exception

of textiles, coal and steel, which are accorded special treatment as

“sensitive products.” Tariff reductions and phase-out of quantitative

restrictions for these sensitive products will take place more gradually.8

Customs duties levied on exports are also slated for eventual elimination.

While the agreement provides for limited trade preference for selected

agricultural products over 5 years, in many cases, tariffs and tariff rate

quotas will remain in place at the end of the phase-in period, with the

agreement merely calling for the parties to consult on the possibility of

granting further concessions.9

According to a report published by the IMF, the EU decided in 1993 to

further improve market access for Poland and other CEFTA countries in

response to criticism that, under the Association Agreement, the EU was

delaying access to those markets in which CEFTA countries have the

6

Dumping is the sale of a commodity in a foreign market at a lower price than its fair market value in

the domestic market. Dumping is generally recognized as unfair because the practice can disrupt

markets and injure producers of competitive products in an importing country. Article VI of General

Agreement on Tariffs and Trade permits imposition of anti-dumping duties equal to the difference

between the price sought in the importing country and the normal value of the product in the

exporting country. A countervailing duty is a special duty imposed by an importing country to offset

the economic effect of a subsidy and thus prevent injury to a domestic industry caused by a subsidized

import. A safeguard is a temporary import control or other trade restriction that a country imposes to

prevent injury to domestic industry from increased imports. It is designed to facilitate the adjustment

of domestic industries to the influx of fairly traded imports.

7

Summary of the EU-Poland Association Agreement, provided by the Department of Commerce;

Economic Survey of Europe in 1993-1994, pp. 149-157; Paul Mylonas, pp. 69, 70; and Economic

Transition in Eastern Europe and the Former Soviet Union, p. 112.

8

Duties for textiles and clothing are scheduled to be phased out over 6 years and quotas eliminated by

1998. Steel and coal duties are to be removed over 5 years, quantitative restrictions for steel are to be

eliminated immediately and those for coal, with limited exceptions, after 1 year. See the discussion by

Paul Mylonas, pp. 69, 70.

9

Summary of the EU-Poland Association Agreement; and Economic Survey of Europe in 1993-1994, pp.

149-157.

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highest export potential.10 The IMF and ECE reported that this EU decision

(1) accelerated by 2 years the scheduled reduction of EU customs duties on

certain imports of sensitive basic industrial products, (2) increased by

10 percentage points the annual expansion in quotas and ceilings for

certain industrial products, (3) implemented 6 months earlier than

scheduled a reduction in levies/duties on certain agricultural products

subject to quotas, and (4) began exempting from customs duties outward

processing operations in 1994.11 The IMF report indicated that the most

important remaining restrictions appeared to be quotas on textiles,

nontariff barriers on agricultural products, and the threat of resorting to

safeguard provisions or anti-dumping actions.12

Under the Association Agreement, tariffs existing in the EU and Poland as

of February 29, 1992, served as the base from which reductions were to

occur. Reduced tariff levels agreed to in the General Agreement on Tariffs

and Trade (GATT) Uruguay Round replace these tariffs as the base once

such reductions go into effect.13 Certain trade liberalization clauses in the

Association Agreement are contingent on agreements reached in the

Uruguay Round. For example, the ECE reported that, for textiles and

clothing, the agreement provides for the elimination of EU quotas on

imports from Poland over a period equaling half of that agreed to in the

Uruguay Round, but not less than 5 years.14

Poland was a member of GATT before undertaking economic reforms;

however, it was required to accept special terms reflecting the

state-controlled nature of its economy. According to a Polish official,

Poland is now renegotiating its terms of accession with GATT to reflect its

economic reforms,15 and the country became a founding member of the

new World Trade Organization, an outcome of the Uruguay Round

agreements, on July 1, 1995.

Under the Association Agreement, anti-dumping actions and other

contingent protective measures are permitted in accordance with GATT

articles. The EU no longer includes Poland in its list of state-trading

10Paul Mylonas, pp. 69-71.

11Economic Survey of Europe in 1993-1994, pp. 149-157.

12Paul Mylonas, p. 71.

13Summary of the EU-Poland Association Agreement.

14Economic Bulletin for Europe, Volume 45 (1993); (New York and Geneva: Secretariat of the

Economic Commission for Europe, United Nations, 1994), pp. 4,5.

15Economic Survey of Europe in 1993-1994, p. 151; and Economic Transition in Eastern Europe and the

Former Soviet Union, p. 116.

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economies for purposes of determining “normal prices” in anti-dumping

actions, but the ECE has reported that a country’s classification as a market

economy does not necessarily imply that it will be subject to fewer

actions.16

On the other hand, the ECE reported that transition countries such as

Poland will benefit from a Uruguay Round strengthening and extension of

GATT rules and authority, especially if this leads to stricter control of

anti-dumping procedures and contingent protective measures.17 A recent

and as yet unpublished OECD study reported that the Uruguay Round

agreement should bring more clarity and certainty regarding the initiation

of anti-dumping actions. However, another recent, unpublished OECD study

reported that how the new rules are implemented will determine their

actual impact and that Uruguay Round results will probably make only

modest changes to the way anti-dumping regulations are applied to

transition economies such as Poland’s. The report also said that less

stringent conditions on safeguards may cause sufferers of import

competition to choose this method of protection rather than an

anti-dumping investigation.

Polish government and ECE officials told us that Poland’s membership in

the World Trade Organization will help the country become more fully

integrated into the world economy. Poland’s representative for GATT issues

at the Polish Mission in Geneva said that Poland hoped to benefit from the

Uruguay Round and membership in the World Trade Organization in that it

would help the country consolidate its own reforms in trade-related

management and systems, rendering such systems more stable,

predictable, and coherent. An ECE official added that this development

means that Poland is becoming more fully grounded in the market system,

making it more difficult to backtrack on market reforms.

Barriers Hamper

Restructuring Efforts

The Directors of Poland’s Bureau for European Integration and Bureau for

Foreign Assistance, the Director of the Trade Instruments Department of

the Polish Ministry of Foreign Economic Relations, and the Economic and

Commercial Counselors of the Polish Embassy in London told us that they

support the EU-Poland Association Agreement. However, they maintained

that the EU continues to limit Polish access to its markets through

contingent protective measures (anti-dumping duties, countervailing

16Economic Survey of Europe in 1993-1994, p. 155.

17Economic Bulletin for Europe, Volume 45 (1993), pp. 4,5; and Economic Survey of Europe in

1993-1994, pp. 11, 12.

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duties, and safeguard actions) or the threat of such measures. These

officials said that when Poland proves to be competitive in a particular

area, these barriers often come into play. The ECE reported that imports of

certain sensitive eastern goods generated complaints in West European

countries that culminated in a number of import restrictions. The result

was that while standard measures of protection (such as tariffs and

quotas) diminished, contingent protection measures were used more

frequently. They also reported that a steady stream of warnings in addition

to official actions may result in eastern exporters making voluntary

reductions in the growth of sales to reduce the probability of formal

complaints being lodged.18 Table 3.3 lists EU protectionist measures against

Polish imports between July 1992 and December 1993, as reported by the

IMF.

18Economic Bulletin for Europe, pp. 99-116, 122-123, 141-154; and Economic Survey of Europe in

1993-1994, pp. 149-157.

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Table 3.3: Protectionist Measures

Introduced by the EU,

July 1992-December 1993 Product Description

Introduction

date

Silicon EU imposed provisional duties of

32 percent on imports of silicon

after Commission determined

that dumping had occurred. 7/06/92

Frozen black currants and

strawberries

EU imposed countervailing

duties in amount of the difference

between Polish prices and EU

minimum import prices. 10/01/92

Seamless steel tubes EU imposed provisional

anti-dumping duties of 

10.8 percent for 4 months

pending an inquiry. 11/15/92

Steel tubes

EU made preliminary affirmative

determination in dumping case. 11/15/92

Hermalite pig iron EU initiated a dumping

investigation of imports. 12/09/92

Ferro-silicon EU imposed definitive

anti-dumping duties of 

32 percent on imports. 12/14/92

Steel tubes EU extended for 2 months

preliminary anti-dumping duties

on steel tubing. 3/08/93

Frozen black currants and

strawberries

EU amended a regulation

imposing minimum prices on

imports. 4/01/93

Live animals and fresh meat EU imposed import prohibition

on animals and fresh meat

because of cases of

foot-and-mouth disease in Italy. 5/10/93

Urea EU initiated a dumping

investigation of imports of urea. 5/13/93

Urea ammonium nitrate EU initiated a dumping

investigation of imports of urea

ammonium nitrate. 5/13/93

Steel tubes EU imposed definitive

anti-dumping duties on imports

of steel tubes (10.8 percent). 5/15/93

Seamless pipes and tubes of iron

and steel

EU imposed definitive

anti-dumping duties on imports

(11.7 percent). 5/15/93

Cherries EU agreed to introduce minimum

port prices on cherries. 7/19/93

Source: Liam P. Ebrill, Ajai Chopra, Charalambos Christofides, Paul Mylonas, Inci Otker, and

Gerd Schwartz; Poland: The Path to a Market Economy, Occasional Paper 113; International

Monetary Fund, Oct. 1994, p. 107.

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As earlier noted, Polish exports to the EU grew substantially in recent

years. (See table 3.1.) For example, between 1990 and 1993, Poland’s total

exports to the EU increased at an annually compounded rate of 

11.5 percent.19 However, for the selected commodities that were targeted

by the EU contingent protective measures listed in table 3.3, Poland’s

exports to the EU declined at an average annual rate of 8.1 percent during

the same period.20 In 1990, these exports, valued at $429 million,

accounted for 6.5 percent of Poland’s total exports to the EU. By 1993, the

value of these exports had declined to $334 million, or 3.6 percent of

Poland’s total exports to the EU. These data indicate that although EU

protectionist measures did not prevent Poland from expanding its total

exports to the EU, such measures did have an adverse impact on Polish

exports of the targeted products.

According to the Director of Poland’s Bureau for European Integration,

one of the most unfair examples of contingent protection measures

involves the filing of anti-dumping cases. A study prepared for the OECD

found that although EU authorities had agreed to speed up tariff reductions

and enlarge zero-duty ceilings and quotas for some sensitive goods, EU

anti-dumping investigations had the effect of minimizing these actions.21

The above-mentioned Polish official and the Economic and Commercial

Counselors of the Polish Embassy in London said that the idea that Polish

companies can afford to engage in predatory dumping on the EU markets is

not logical.

Another example of contingent measures involves the use of EU health and

sanitation standards to restrict Polish agricultural exports. OECD officials

told us that some EU countries abuse these standards to protect their own

industries, while technically complying with GATT rules. For example, in

May 1993 the EU imposed a 1-month ban on imports of live animals, meat,

milk, and dairy products from across Eastern Europe for sanitary reasons.

The OECD reported that, although EU officials portrayed the action as an

urgent health measure, Polish and other East European officials described

19We used EU reported imports from Poland as a measure of Polish exports. These figures vary

somewhat from Polish-reported exports. For example, freight and insurance charges are handled

differently.

20We used 1990—the year Poland liberalized its foreign trade regimes—as the base year for this

analysis. The latest year for which commodity-level data for EU imports are available is 1993.

Commodity-level data for Denmark was not available for 1993. We used two alternative methods to

approximate 1993 Danish imports of the selected products from Poland. Both methods gave similar

results when combined with the remaining 1993 EU trade data.

21Source: OECD, Paris, 1994.

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it as a protectionist measure.22 The Director of Poland’s Bureau for

Foreign Assistance told us that his government had estimated Poland’s

losses related to the temporary ban at $60 to $80 million. The ECE quotes

reported estimates of Poland’s losses related to the ban at closer to

$30 million.23

Polish officials pointed out that now, when Poland is engaging in the

painful aspects of economic restructuring, the country is in need of export

markets. Limited market access could necessitate extremely disruptive

scaling down, which may be of a magnitude greater than necessary in

some industries. Such disruption makes it more difficult for Polish

politicians to maintain support for reforms. Polish officials added that

barriers such as anti-dumping mechanisms are being employed by the EU

in areas where Poland is undergoing some of the deepest and most

disruptive economic restructuring. Polish officials noted the irony in the

fact that it is necessary to use EU technical assistance to obtain advice on

how to shrink Polish industries that have been negatively affected by EU

trade barriers.

Another problem with barriers to Polish exports is that it makes it difficult

for Polish politicians to resist demands for increased Polish protectionism.

Polish officials told us that recently the government of Poland has paid

increased attention to calls for protecting certain of its own markets.

Indeed, the IMF reported that, in 1992, Poland raised duties on a variety of

products and that, in 1993, Poland further revised its tariff structure,

lowering duties on imported raw materials and semi-finished products and

increasing it on finished products and agricultural goods. Poland also

introduced a tax on sugar content, established licensing requirements on

the imports of chicken meat, milk products and wine, and, in 1994,

introduced variable import levies on several agriculture products.24 The

ECE reported that Polish authorities claim that such measures are a

response to protectionism in the West.25 Some observers fear that

increased Polish protectionism could boost domestic fiscal imbalances

and erode trust and much needed financial support abroad or that such

policies could become entrenched, as they are in the West.26

22Barriers to Trade with the Economies in Transition, p. 18.

23Economic Bulletin for Europe, p. 113.

24Paul Mylonas, p. 70.

25Economic Bulletin for Europe, p. 111.

26Tomasz Telma, “Outlook for Poland,” PlanEcon Review and Outlook for Eastern Europe, July 1994,

p. 149; and Economic Survey of Europe in 1993-1994, p. 157.

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Donor Assistance to

Facilitate Polish Exports

Has Been Limited

Donors have not been helpful in responding to Polish requests for

assistance in establishing an effective export credit insurance program in

Poland. Although numerous donor and Polish officials stressed the

importance of developing Poland’s capability in this area, officials from

Poland’s fledgling export credit insurance cooperation (known by the

Polish acronym “KUKE”) experienced difficulty in obtaining capital or any

other practical assistance aside from consultant-produced studies. KUKE

has established a limited commercial risk insurance program, but it has

been unable to establish a political risk insurance program. While

commercial risk insurance is useful for exporting to the stable OECD

countries, both types of insurance are considered important for Poland to

reenter riskier markets in former Soviet Union countries. KUKE officials

told us that the Polish government had estimated export losses of $2 to

$3 billion per year due to the lack of political risk insurance.

Impediments to

Foreign Investment

Foreign investment is expected to play a major role in the transformation

of Poland’s economy.27 Although Poland has made progress removing

some impediments to foreign direct investment, a number of obstacles

remain. The country’s 1991 Foreign Investment Law is generally regarded

as a satisfactory legal foundation for foreign direct investment, and the

telecommunications and transport infrastructures in large urban areas

have been much improved. Nevertheless, bureaucratic, tax, and other

impediments persist that only the Polish government can correct.

Polish and donor officials as well as foreign investors repeatedly told us

that bureaucratic bottlenecks and indecision at the middle management

level in Polish ministries were persistent obstacles to individual

investment deals. The officials said that while there is strong support for

foreign investment at the highest levels of the Polish government, there is

a large disparity between such high-level support and actual practice

within ministries. Some officials pointed to suspicion about foreign

investment on the part of the Polish people and media as having increased

the wariness of local governments and a middle-level bureaucracy already

deeply steeped in a culture of indecision. A lack of access to credit was

27Foreign Direct Investment in Selected Central and Eastern European Countries and New

Independent States: Policies and Trends in Fourteen Economies in Transition, Center for Cooperation

With the Economies in Transition, OECD, 1993, p. 7; Investment Patterns of Companies from OECD

Member Countries into Central and Eastern Europe and the Newly Independent States, a study

prepared for the OECD by Arthur Anderson, Aug. 1993, p. 2; The Investment Challenge in Central and

Eastern Europe, Chairman’s Summary of “Opportunity East” Conference, OECD, Apr. 1992, p. 1;

Economic Survey of Europe in 1993-1994, p. 134; Economic Bulletin for Europe, p. 85; “Foreign

Investment in Former Communist Central Europe: U.S. Firms Play a Vital Role,”International

Economic Review, Feb. 1994, p. 13; and (GAO/NSIAD-92-102, p. 24).

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also cited as a continuing obstacle to investment—a situation related to

legal impediments insofar as inadequate collateral law and other such

difficulties contribute to the problem. (See ch. 5 for a discussion of

Poland’s banking sector.)

Private sector and investor officials in Poland repeatedly cited

uncertainties and inconsistent interpretation of tax law on the part of

various governmental bodies from the Minister of Finance down to local

tax authorities as a recurring investment impediment. For example, the

Chairman of the American Chamber of Commerce in Poland told us that

he knew of investors that had begun construction on new plants

predicated on the assumption that they would receive certain tax

exemptions, only to see the tax exemptions repealed for all but those

already transacting business. Officials at the Foreign Investors Chamber of

Industry and Commerce28 said that there have been cases where the

Finance Ministry declared that a company was not liable for a particular

tax, only to find several years later that the local tax authority disagreed.

The officials said that the interest and penalties associated with such

multiyear discrepancies are at a level spelling bankruptcy for companies

choosing to acquiesce to the local tax authority.

In another case involving tax obstacles, the investor retreated. In October

1992, Amoco signed a $20-million contract with Poland for petroleum

exploration and exploitation. According to company officials, the

agreement was conditional on the resolution of certain tax issues that

would have involved aligning Poland’s oil and gas taxation with that in

Western Europe and other developed countries. The officials said that they

engaged in negotiations with the Ministry of Finance through December

1993, culminating in high-level meetings with the President, Prime

Minister, and Finance Minister and that progress was slow but

encouraging up until that time. They were poised to sign the final

agreement with the Minister of Finance, when the Prime Minister

dismissed him, followed by a Finance Ministry retrenchment from

previously agreed to positions. After several months of indecision within

the Ministry, in April 1994, Amoco finally relinquished its rights to explore.

According to company officials, if agreement had been reached and sizable

deposits were found, it could have led to a development contract of $100

28This organization’s membership includes about 600 companies in Poland, some of which are wholly

foreign-owned and some of which are joint ventures between foreign and Polish companies. The

Chamber defends the interests of foreign investors, but differs from other such organizations in that it

does not represent one particular country’s companies in Poland; rather, its membership features a

variety of nationalities. Most member companies are manufacturing firms, but the Chamber’s

membership also includes some banks and trading companies.

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to $150 million. Company officials recently told us that although the Polish

government has since resolved the tax issues and the company has

proceeded with other exploration projects in Poland, the original

exploration project will not be resumed.

Foreign Companies Invest

in Poland

Notwithstanding the existing impediments, a number of U.S. and other

foreign companies have recently made significant investments in Poland.

According to PlanEcon, the inflow of investments is expected to

accelerate in coming years now that a London Club29 agreement has been

reached and as more state-owned enterprises are offered for sale.

According to the Polish Agency for Foreign Investment, the value of direct

investment in Poland exceeded $5 billion, and another $5.1 billion had

been committed as of March 1995.30 The United States is the largest

investor country in Poland, accounting for more than one-third of

investments, or $1.7 billion, followed by multinational companies,

Germany, Italy, and the Netherlands. (See fig. 3.2.)

29Poland reached an agreement with the London Club banks in October 1994, resulting in an overall

rate of debt reduction of slightly more than 49 percent. See Tomasz Telma, “Outlook for Poland,”

Review and Outlook for Eastern Europe, PlanEcon (Dec. 1994), p. 125.

30These figures include only those investments that exceed $1 million.

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Figure 3.2: Cumulative Foreign Direct

Investment in Poland by Leading

Countries, January 1990-March 1995

33.7% • United States

• 7.5%

Italy

•

9.2%

Germany

•

6.7%

Netherlands

17.1%•

Multinationals

•25.7%

Other countries

Source: Polish Agency for Foreign Investment, government of Poland.

Many U.S. firms investing in Poland are among the Fortune 500 companies,

including Coca-Cola, PepsiCo, International Paper, and others. German

investors are predominantly represented by small- and medium-sized

businesses, giving Germany the largest number of individual investments

in Poland. In contrast, Italy’s ranking as a leading investor in Poland is

primarily due to the investment of one company, Fiat. Table 3.4 shows the

10 largest company investors in Poland from January 1990 to March 1995.

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Table 3.4: Ten Largest Company

Investors in Poland,

January 1990-March 1995

Dollars in millions

Investor

Funds

invested

Funds

pledged

Country of

origin

International Paper $275 $45 United States

Fiat 260 1,581 Italy

Coca-Cola 235 50 United States

ABB 150 0 International

Thomson Consumer Electronics 147 37 France

ING Group 140 0 Netherlands

Procter & Gamble 113 170 United States

Curtis 100 0 United States

Unilever 98 0 International

Epstein 90 110 United States

Note: This information was provided by the Polish Agency for Foreign Investment. We could not

determine if adjustments for inflation and currency values had been made.

According to the Polish Agency for Foreign Investment, the largest

investment outlays went into the financial, food processing,

electro-mechanical, and telecommunications industries. (See fig. 3.3.)

Polish and donor officials told us that the size of Poland’s domestic

market, with 38 million inhabitants, is the single most important factor in

companies’ decisions to invest in Poland.

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Figure 3.3: Foreign Investment in

Poland by Sector,

January 1990-March 1995

17.3% • Electro-mechanical

17.3% • Food processing

39.4%•

Other sectors

•

4.8%

Telecommunications

•21.2%

Financial

Source: Polish Agency for Foreign Investment, government of Poland.

Some Early Assistance Was

Unfocused

Some early U.S. technical assistance geared toward improving the

investment climate in Poland was unfocused. For example, the United

States launched a program to help Poland improve its commercial law, but

the program design included few specific goals. Rather than designing

projects to complement other efforts addressing key economic

restructuring impediments, USAID simply contracted with a number of

institutes and the Department of Commerce to develop projects that

would fit into several broad areas of commercial law development—an

approach that USAID officials said was driven by congressional pressure to

“get the money spent quickly.” According to USAID officials, the result has

been scattered activities in an area where efforts should be sparing and

cautionary because of the need for new laws to intermesh properly with

existing legal codes.

For example, one project involved having volunteers spend 4 to 6 weeks in

Poland working on specific tasks such as helping to draft legislation. A

USAID contractor working on a related project was critical of this approach.

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He indicated that it was too dependent on the personalities of individual

volunteers who generally have little Polish language ability or lack the

professional stature to work with officials in Poland. As an illustration of

the difficulties posed by such an approach, the contractor cited a recent

endeavor to work with Polish legal associations to establish a commercial

law library in Warsaw. The volunteer in charge of this task, an American

divorce lawyer with no Polish language skills, had difficulty getting the

legal associations to work together effectively, and the project faced

delays in getting started. USAID officials acknowledged that the person in

charge was “not the best person” for the job.

The USAID contractor also expressed concern that Polish officials were

unable to use the results of a World Bank-sponsored project in the area of

collateral law. He said that the Bank sponsored a Western expert to draft

legislation in London but that the work was not useful to Polish officials

because it did not intermesh properly with existing laws. He told us that,

based upon his experience, no important piece of legislation will be

adopted in Poland that is not prepared by Polish lawyers and that, while

Polish legal experts appreciate assistance and guidance from western

specialists, the legislation must ultimately be the work of Polish legal

experts.

U.S. Investment Promotion

Assistance Had Limited

Impact

The United States supported a variety of efforts to help promote

investment in Poland, but many of these activities had limited impact. For

example, the United States established an American Business Center in

Warsaw, and the U.S. Commercial Service (USCS)31 in Warsaw was given

responsibility for running it. The centers were specifically authorized

under the SEED Act and were intended to provide temporary office space,

phone, fax, and copy capabilities on a reimbursable basis to U.S.

companies doing business in Central and East European countries where

reliable services of this sort were not readily available when the transition

process began. The center in Warsaw experienced difficulty in obtaining

property and equipment in a timely manner and found that the USCS office

could not effectively do its own work and run the center. The center

served over 500 firms but lost money, partly because comparable services

quickly became available through the private sector. Nevertheless,

according to a USCS official in Warsaw, the center served as a good test

case for centers opening later in the countries of the former Soviet Union.

31Formerly the U.S. & Foreign Commercial Service.

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USAID also financed a project to (1) support the identification, analysis, and

marketing of large infrastructure projects; (2) promote investment and

trade, joint ventures, and co-ventures; and (3) assist in project packaging

and marketing. However, USCS officials in Warsaw said that the project was

wasteful because it utilized expensive consultants while lacking a clear

plan. USAID officials acknowledged that the project was unsuccessful and

said that they had retargeted it.

The Overseas Private Investment Corporation (OPIC) has provided

$700 million in insurance and financing for U.S. businesses investing in

Poland. OPIC insures U.S. investments in that country against political risks

and provides investment financing in the form of direct loans and loan

guaranties. According to OPIC officials, a 1990 OPIC effort to provide

guaranties for an investment fund targeted toward Poland and other

Central and East European countries was dropped because the investment

company managing the fund was unsuccessful in obtaining the necessary

private, counterpart funds. However, OPIC is now providing debt guaranties

to cover a significant portion of the capitalization for a venture capital

fund to invest in small- and medium-sized private enterprises in Poland.

The fund had raised about $65 million in capital as of May 1995. OPIC is

currently developing three additional investment funds targeted toward

Poland and other Central and East European countries. OPIC also sponsors

investment missions to Poland for U.S. executives to learn about Poland’s

investment climate and to meet with government officials, banks,

prospective joint venture partners, and officials from U.S. companies

already doing business there.

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Poland’s Progress Toward Privatization Has

Been Mixed

Probably the most fundamental change in transitioning from a socialist

command economic system to a market-oriented system is privatization or

changing the system of ownership.1

 Despite numerous reforms, many of

which were intended to lessen the role of government in the economy,

Poland’s record in privatization thus far is mixed. The country’s private

sector has grown and many small- and medium-sized retail businesses

have been privatized. Privatization laws have set the framework for

reducing the rest of the state sector, but the pace of privatization for larger

state-owned enterprises has been slower than expected, and significant

portions of the Polish economy remain in the hands of the government.

The United States and other donors are actively supporting Poland’s

efforts to restructure enterprises and implement the country’s Mass

Privatization Program; however, persistent delays threaten continued

donor support. Changes in government, the reluctance among state-owned

enterprises to enter the privatization process, and the poor financial

condition of many enterprises have delayed privatization efforts.

Poland’s Private

Sector Is Growing

When reforms began in late 1989 and early 1990, Polish reformers and

many Western economists were convinced that, to improve the efficiency

of the Polish economy, the state-owned enterprises had to be converted to

private ownership. By transferring such enterprises to private ownership,

it was argued, the new owners would have a vested interest in the success

of the enterprise and therefore seek to maximize profits by better utilizing

labor, improving management, and investing in capital improvements.

At the outset of reforms, Poland was in a better position with respect to

ownership transformation than most other transition countries in Central

and Eastern Europe. Since Poland had not collectivized its agricultural

sector during the socialist years as other countries in the region had, most

of this sector was already private. Further, the nonagricultural private

sector was allowed to expand between 1982 and 1989 as an element of the

limited socialist economic reform taking place during that period. At the

end of 1989, over 23 percent of the Polish workforce was employed in

private agriculture, over 10 percent was employed in the nonagricultural

1

Mark E. Schaffer, The Economy of Poland, Discussion Paper 67; Centre for Economic Performance,

London School of Economics, Mar. 1992, p. 43; and Mark Schaffer, “Polish Economic Transformation:

From Recession to Recovery and the Challenges Ahead,” Business Strategy Review, Vol. 4, No. 3,

Autumn 1993, p. 61.

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Poland’s Progress Toward Privatization Has

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private sector, and 30 percent of the country’s GDP was located in both the

agricultural and nonagricultural private sector.2

After reforms began, Poland’s private sector grew larger, both through the

privatization of existing firms and through the establishment of new

private firms. Poland’s early privatization efforts, termed “small

privatization,” concentrated on rapidly selling small labor-intensive firms,

such as hotels, restaurants, and shops.3

 Hundreds of thousands of smalland medium-sized retail businesses have now been privatized, placing over

90 percent of this sector in private hands. After legal requirements for the

set-up of private enterprises were liberalized, many new private businesses

also emerged. By December 1993, the number of small businesses had

risen to about 1.8 million, the number of private companies employing

more than 5 people had grown to over 66,000, and about 60 percent of

Poland’s employment and over 50 percent of its GDP were located in the

private sector.4

 Poland’s private sector is now the primary source of the

country’s GDP growth. A World Bank economist estimated that Poland’s

private sector GDP grew by 13 percent in 1993, while its public sector GDP

declined by 4.1 percent.

Despite the increased importance of Poland’s private sector in generating

economic growth, the country continues to rely on state-owned

enterprises for a substantial portion of its industrial production. While the

private sector share of Poland’s industrial output is rapidly growing,

state-owned enterprises still accounted for about two-thirds of the

country’s industrial production at the end of 1993.

The Polish government took steps to encourage these state-owned

enterprises to operate more independently as part of its initial reforms.

The elimination of price controls, the opening of the economy to

international competition, the removal of most state subsidies and the

discontinuance of Central Bank soft money policies encouraged some

state-owned enterprises to become more cost conscious and to search out

market opportunities. A 1993 World Bank paper on the performance of 

2

Mark E. Schaffer, The Economy of Poland, Discussion Paper 67; Centre for Economic Performance,

London School of Economics, March 1992, pp. 44,45; Mark Schaffer, “Polish Economic

Transformation: From Recession to Recovery and the Challenges Ahead,” Business Strategy Review,

Vol. 4, No. 3, Autumn 1993, p. 65; Georg Fischer and Guy Standing, Structural Change in Central and

Eastern Europe: Labour Market and Social Policy Implications, OECD, 1993, pp. 133-135; and

Economic Survey of Europe in 1993-1994 (New York and Geneva: Secretariat of the Economic

Commission for Europe, United Nations, 1994), pp. 199-212.

3

Fischer and Standing, p. 135.

4

Economic Survey of Europe in 1993-1994, pp. 199-212; and Poland: Fundamental Facts, Figures, and

Regulations, Polish Agency for Foreign Investment, Mar. 1994, pp. 20, 25.

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Poland’s Progress Toward Privatization Has

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75 large, Polish state-owned enterprises following the introduction of

reforms reported that two-thirds of the studied enterprises showed signs

of adapting to the new marketplace conditions.5

 One of the paper’s authors

later wrote that two of the most important lessons learned from the study

were that (1) hard budgets and competition can stimulate state-owned

enterprises to restructure before privatization and (2) the incentive effects

of anticipated privatization are very important.6

Nevertheless, Poland’s state sector is being outperformed by the country’s

emerging private sector. According to a 1994 World Bank paper, Poland’s

state-owned enterprises lag behind emerging private firms in output

growth, employment growth, investment growth, and profitability.7

 The

authors used a sample of 40 emerging private firms, 45 privatized firms, 

41 State-Treasury companies,8

 and 81 state-owned enterprises. Leszek

Balcerowicz, Poland’s former finance minister and author of the country’s

1989 and 1990 economic reform program, wrote that while Poland’s early

reform measures induced many state enterprises to adjust to the

conditions of the market economy, an even larger increase in their overall

economic performance could be achieved if they were privatized.

Pace of Large-Scale

Privatization Slower

Than Expected

Notwithstanding Poland’s success in privatizing small- and medium-sized

retail firms, relatively few of the larger state-owned enterprises have been

privatized. The Privatization Law for State-Owned Enterprises of July 1990

established the legal framework for Poland’s privatization program. The

law allows for two methods of privatization: (1) capital privatization9

 for

larger enterprises and (2) liquidation10 for small- and medium-sized

5

Brian Pinto, Marek Belka, and Stefan Krajewski, Transforming State Enterprises in Poland:

Microeconomic Evidence on Adjustment, Feb. 1993.

6

Brian Pinto, “Brian Pinto Explains Why Polish State Firms Are Restructuring,” Transition Newsletter,

World Bank, Sept. 1993.

7

Marek Belka, Saul Estrin, Mark E. Schaffer, and I.J. Singh, Enterprise Adjustment in Poland: Evidence

from a Survey of 200 Private, Privatized, and State-Owned Firms, Sept. 1994.

8

State-owned enterprises are converted into State-Treasury corporations as either joint stock or

limited liability companies through a process called “commercialization.” Among other things,

commercialization establishes a clear supervisory structure, adjusts enterprise operations to meet the

requirements of Poland’s commercial code, and changes the legal status of the enterprise to allow

foreign capital participation. The final step is either the sale of the State-Treasury corporation to

private investors or participation in the Mass Privatization Program. (See app. I.)

9

Capital privatization entails converting the state-owned enterprise to a State-Treasury corporation

operating under the commercial code, followed by sale to a private investor.

10Liquidation entails immediately selling a state-owned enterprise, transferring it to an existing

business, or leasing it in part or whole.

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enterprises.11 The workers and management of the state-owned

enterprises, in consultation with the Ministry of Privatization, select the

method of privatization.

Poland’s privatization program called for the sale of 50 percent of Poland’s

state-owned enterprises over 3 years with the eventual goal of privatizing

80 percent of such enterprises. In December 1994, 4-1/2 years later,

Poland’s Ministry of Privatization reported that approximately 36 percent

of the original 8,441 state-owned enterprises had been transformed under

the privatization process.12 (See fig. 4.1.) In addition, the government

continues to play a significant role in many of these transformed

enterprises. For example, more than 500 of these enterprises are

commercialized corporations belonging to the State Treasury that are

awaiting either capital privatization or participation in Poland’s Mass

Privatization Program.

The World Bank’s Resident Representative in Poland recently

acknowledged some advantages to commercialization of state-owned

enterprises; however, he emphasized that commercialization is not an

effective substitute for privatization. He stated that privatization is one of

the main policies for further developing the productive potential of the

economy and that it is therefore of crucial importance that it be

accelerated rather than slowed down.13

11The small enterprises referred to here were not part of the early “small privatization” of retail shops

and other similar small businesses.

12Transformed here means the status of the state-owned enterprise has changed. This number does not

reflect the number of enterprises still awaiting approval for one of the privatization methods.

13“Privatization Update,” Monthly Digest of Investment Opportunities, No. 26, The Warsaw Voice,

Polish Agency for Foreign Investment, Polish Ministry of Privatization, Polish Development Bank,

Dec. 1994, p. 1.

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Figure 4.1: Poland’s Privatization

Results (as of December 31, 1994)

12.3% •

Direct privatization

1.6%

Capital privatization

•

6.8%

State-Treasury

14.8%•

Liquidation

64.4%•

State-owned

Note: Percentages were calculated using the Polish government’s baseline of 8,441 original

state-owned firms.

In commenting on a draft of this report, the Department of the Treasury

emphasized the importance of large-scale privatization. Treasury said that

while some of Poland’s state sector may have been successful at

restructuring, a still-large state sector continues to promote misallocation

of investment, poor fiscal controls, and excessive monetary growth, and

that repeated delay in the privatization of larger concerns continues to be

a drag on economic growth and inflation control. (Appendix I provides a

discussion of the various privatization processes available to Polish

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enterprises, as well as the number of enterprises that have participated in

each process.)

Implementation of

Mass Privatization

Has Been Stalled

Early in the restructuring process Poland determined that the

restructuring and privatization of state-owned enterprises on an individual

basis would be too time consuming and expensive, and as of January 1991,

only five such enterprises had been successfully sold. Thus, the Ministry of

Privatization sought to develop a program that would privatize hundreds

of state-owned enterprises at once.

On April 30, 1993, the Polish Parliament passed the Law on National

Investment Funds that provides the legal framework for Poland’s Mass

Privatization Program. The goal of the program is to (1) improve the

efficiency and value of several hundred Polish state-owned enterprises,

(2) accelerate the privatization process in Poland, and (3) provide each

adult citizen with a stake in the privatization process.

As part of the Mass Privatization Program, Poland was to establish 20

specially constituted National Investment Funds. These funds were to

assist in the restructuring of Polish companies by holding the shares of

state-owned enterprises taking part in the Mass Privatization Program.14

Each fund, operating as a joint stock company, was to be run by a

management team under contract to a specially selected supervisory

board. The funds were to seek a listing on the Warsaw Stock Exchange

within a year of operation and remain in existence for at least 10 years.

Each state-owned enterprise entering the program is expected to have its

shares divided as follows: 33 percent held by a lead National Investment

Fund; 27 percent distributed equally to all other such funds; 25 percent

retained by the State Treasury; and 15 percent distributed free of charge to

enterprise employees. Special share certificates are to be offered free of

charge to certain pensioners and state employees.

Donor Commitments to

Poland’s Mass Privatization

Program

Ministry of Privatization documents state that donors have committed

approximately $245 million in assistance to Poland’s Mass Privatization

Program. (See table 4.1.)

14The number of funds has since been reduced to 15.

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Table 4.1: Donor Commitments to

Poland’s Mass Privatization Program

(as of February 1994)a

Dollars in thousands

Donor Assistance Amount

World Bank Distribution of share certificates,

fund manager fees, advisors,

printing, etc. $112,500

EBRD National Investment Fund working

capital funds and loans/equity for

companies 110,000b

USAID Common back office and

assistance to companies 11,800c

EU PHAREd Advisers, fiscal agent, printing, and

training 10,140

Know How Fund Distribution adviser 450

Total $244,890e

aSome of the committed assistance has already been provided to the Ministry of Privatization.

bThis figure includes $60 million to support the National Investment Funds and $50 million for

loans and/or equity to companies.

cThis figure includes $10 million in technical assistance to the Mass Privatization Program and

$1.8 million for the post-privatization program. It does not include separate but related work at the

Ministry of Privatization.

dPoland and Hungary Assistance for Economic Restructuring.

eThe Ministry of Privatization did not provide amounts for some assistance projects; therefore, the

actual total could be higher.

Source: Poland’s Ministry of Privatization.

Based on available figures, the World Bank has provided the largest share

of funding and technical assistance to date.15 The EBRD has also committed

a large share of this assistance, mostly in National Investment Fund

working capital and assistance to privatized enterprises. USAID, EU PHARE,

and the British Know How Fund have provided additional advisors and

technical assistance to the program.

Potential Problems in the

Mass Privatization

Program

Continued delays in the Mass Privatization Program have caused many

donors to question the Polish government’s commitment to the

privatization process, and some donors have indicated that they may

consider cutting their assistance in this area. Donor officials have stated

that progress in implementing the Mass Privatization Program is necessary

for continued commitment of assistance.

15In 1991, the World Bank provided a $280-million loan to assist Poland’s efforts to develop and

implement a broad privatization program and implement restructuring.

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In May 1994, Ministry of Privatization officials were confident that the

program would demonstrate satisfactory progress and the National

Investment Funds would begin operation in late 1994. Nonetheless, since

then implementation of the program has slowed. Although by the end of

August 1994, approximately 466 state-owned enterprises had committed to

participation in the program,16 the government of Poland delayed final

approval of the participating enterprises until mid-October. As of

October 1994, approximately 444 state-owned enterprises were approved

for the Mass Privatization Program. However, government differences over

the composition of the National Investment Fund managers continued to

delay implementation until late 1994.

Some donor officials expressed concern about the signal being sent to

state-owned enterprises by delays in implementing the Mass Privatization

Program. An OECD official told us that the beneficial restructuring of such

enterprises will not continue if privatization is put on hold. He said that an

important motivation for some of the state-owned enterprises to

restructure themselves is that they anticipate that they will eventually be

privatized. Without the certainty of eventual privatization, these

enterprises might not continue restructuring but instead might lobby the

government to reinstate subsidies. Another donor official said that some

state-owned enterprises, particularly the larger ones, are avoiding

necessary changes in the hope that the government will announce a

program to alleviate their problems without the enterprise having to go

through privatization.

USAID officials in Poland also expressed concerns about the effect of delays

in the privatization process. According to one USAID official, some

members of the Polish government have discussed a program of mass

commercialization without any specific date for privatization. This

proposed program would involve more than 1,000 state-owned enterprises,

which, once commercialized, would be part of the new “Ministry of

Treasury.” This new Ministry would act as a holding company for Poland’s

commercialized enterprises.17 USAID and State Department officials in

Poland were concerned that such a program could have a negative effect

16According to a USAID official, more enterprises may be added to the program in 1995.

17According to a U.S. embassy official in Warsaw, a new privatization bill passed in the Polish

parliament on June 30, 1995. The bill includes provisions that would provide for commercialization of

state-owned enterprises, while allowing the government to maintain indefinite ownership; however,

the bill does not specifically provide for a new “Ministry of Treasury.” The bill also would not affect

state-owned enterprises that are included in the Mass Privatization Program. A Polish law expert at the

Library of Congress said that the Polish president vetoed the bill on July 17, 1995, but that the

parliment subsequently voted successfully to override the veto.

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on the overall privatization process, potentially creating a commercialized

state sector without a plan for privatization. A Polish law expert at the

Library of Congress agreed that the proposed program would cause

further privatization delays and would allow the government to maintain

indefinite ownership of commercialized firms. Some donors have

indicated that they may consider cutting their assistance in this area if

privatization is further obstructed or delayed.

The Ministry of Privatization has expressed some concerns about

continued donor support for the Mass Privatization Program. A Ministry

official said he was concerned that the EBRD’s Special Restructuring

Project18 would absorb some of the money already set aside for the Mass

Privatization Program. For example, he said the EU PHARE may decide to

reallocate money to the Special Restructuring Project if it is the first

program to get underway. Another official said the EU PHARE has been

upset with the delay in the Mass Privatization Program and may cut or end

all future assistance to the program. According to the EU PHARE

representative in Poland, no additional PHARE funding was provided to the

Ministry of Privatization in 1993 because the Ministry had spent very little

of the earlier assistance. According to the representative, Poland now has

a 2-year funding pipeline of PHARE assistance, and therefore, no new

funding is needed.

U.S. and EBRD support for post privatization was announced in July 1994,

in connection with President Clinton’s visit to Poland. The United States

proposed a new effort to provide $75 million of equity capital and

technical assistance to support Poland’s Mass Privatization Program.

Under the new proposal, the Polish American Enterprise Fund and EBRD

will each commit $15 million for equity investment, USAID will commit

$10 million to technical assistance, and an additional $50 million in

financing will be generated by the EBRD and others. A U.S. Treasury official

familiar with the proposal said the EBRD is expected to put forward the

majority of the capital. The EBRD had already announced that the newly

privatized enterprises were eligible for approximately $300 million in EBRD

restructuring assistance that would be available to any Polish enterprise

on a case-by-case basis.

Although more than 5,000 state-owned enterprises may remain after

implementation of the Mass Privatization Program, Poland and the donor

community expect the program to restart a delayed privatization process,

18The EBRD developed the Special Restructuring Project to assist Polish banks in restructuring Polish

state-owned enterprises. (See app. II.)

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provide millions of Polish citizens with a stake in the transformation

process, and set the stage for continued privatization in Poland. According

to the Department of the Treasury, enterprises in the Mass Privatization

Program account for only 8 percent of the state sector. However, a USAID

official said that the state-owned enterprises being privatized under the

Mass Privatization Program and other privatization initiatives represent a

significant share of Poland’s state sector, with most of these privatized

enterprises coming from the ranks of the larger state-owned enterprises.

Privatization Delays

Have Several Causes

Poland’s slow progress in privatizing larger state-owned enterprises can be

attributed to at least three factors: (1) government indecision brought

about by the changes in Poland’s government over the past 4 years, (2) the

reluctance among state-owned enterprise employees and management to

enter the privatization process, and (3) the poor financial position of many

state-owned enterprises.

Government Indecision The government of Poland announced its Mass Privatization Program in

June 1991, but did not enact laws to make such a program possible until

April 1993. Meanwhile, the rate of privatization slowed as each new

coalition government reassessed the privatization approach in the face of

public criticism of the process. For example, the new government elected

in 1993 reevaluated the country’s privatization efforts, and debates over

revisions to the privatization legislation and the roles of various ministries

in the privatization process have also delayed the process. Also, high

unemployment, fear of foreigners buying up the country’s assets, and

concern over undervaluation of state-owned enterprises have given

advocates of the status quo greater representation in the government.

Reluctance of State-Owned

Enterprise Employees and

Managers

Uncertainty among workers and management at the state-owned

enterprises has also delayed privatization. Under the Privatization Act of

1990, the founding body19 and the managers and workers’ councils at the

state-owned enterprises must mutually agree on a method of privatization

and then apply to the Ministry of Privatization for approval. The Mass

Privatization Program is also dependent on workers and managers

volunteering their enterprise for the program. While a large number of

smaller state-owned enterprises were liquidated in the early years of

reform, the larger ones and related trade unions were able to maintain the

status quo until they were granted a larger role in the privatization

19The founding body is usually either the Ministry of Industry and Commerce or a regional government.

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process. According to one Ministry of Privatization official, the

state-owned enterprises were more or less self-governing under the

Solidarity unions before the privatization process began. Many

state-owned enterprises perceived any change in their status as a threat.

A ministry official said that both management and workers at these

enterprises need to be educated on the benefits of privatization. Some of

the worker and management concerns were addressed in the Enterprise

Pact, a document that came out of talks between the government,

state-owned enterprise managers, and trade unions. The provisions of the

agreement were intended, among other things, to increase employee

participation in the management and equity distribution of privatized

enterprises and encourage the financial restructuring of state-owned

enterprises. The Enterprise Pact was signed by all parties in

February 1993, and implementing the provisions of the pact was a Ministry

of Privatization priority for 1994.20

Poor Financial Condition

of State-Owned

Enterprises

The poor financial condition of many state-owned enterprises has also

delayed the privatization process. A Ministry of Privatization official stated

that many of the healthiest state-owned enterprises have already been

privatized, and before the remaining enterprises will be attractive

candidates for privatization, they need to be restructured—a process that

takes additional time. A number of these state-owned enterprises also

have assets not related to their core business that need to be sold

separately, such as schools, housing, hotels, resorts, and police stations.

Various financial restructuring paths are available to these troubled

state-owned enterprises, all of which may require added time before

privatization can take place. Among other methods, restructuring can

occur under (1) the Law on Financial Restructuring of Enterprises and

Banks, (2) the EBRD’s Special Restructuring Project, and (3) the Ministry of

Privatization’s Restructuring Through Privatization Program. (Appendix II

provides a more detailed discussion of these three methods.)

20According to a U.S. Embassy official in Warsaw, the new privatization bill that passed in the Polish

parliament on June 30, 1995 did not include many of the Enterprise Pact provisions. As earlier noted,

the Polish president vetoed the bill on July 17, 1995, but the parliment subsequently voted successfully

to override the veto.

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United States Adjusts

Program Emphasis

Because of Delays

The United States adjusted the emphasis of its assistance program to

Poland when Poland’s privatization programs experienced delays and

some of the U.S. assistance efforts proved ineffective. The U.S.

government, through its reprogramming of earlier contributions, has

assisted in the restructuring of Polish state-owned enterprises prior to

privatization. In addition, USAID has shifted its assistance program to work

more closely with the government of Poland after USAID’s initial approach

proved costly and time-consuming.

In 1989, both Poland and the donor community were in favor of the rapid

privatization of the country. However, as the financial condition of many

state-owned enterprises became apparent and the pace of privatization

began to slow, the U.S. and donor community responded by helping to

develop restructuring programs. This included using donor resources from

the no longer needed Polish Zloty Stabilization Fund, including the

$199 million U.S. contribution, to establish the $415 million Polish Bank

Privatization Fund. The Bank Privatization Fund was created to support

the recapitalization of Poland’s ailing banks and to indirectly stabilize and

restructure Poland’s indebted state-owned enterprises. (See ch. 5 for a

discussion of donor assistance in Poland’s banking sector.)

The enterprise restructuring being implemented by Poland and the donors

may better prepare some of the state-owned enterprises for eventual

privatization. An October 1994 EBRD report stated that rapid privatization is

“often at the expense of ownership and governance quality,” whereas

financial restructuring prior to the sale of a state-owned enterprise “aims

to attract high-quality owners.”21

USAID’s initial privatization strategy in Poland was based on the assumption

that the privatization process would take only a few years. The USAID office

in Poland supported privatization through assistance to individual

enterprises or sectors with short-term contractors.

USAID provided assistance to a number of large Polish enterprises,

including LOT Airlines, the Huta Warszawa steel mill, and the Sandomierz

glass company. USAID also assisted Poland’s furniture and glass sectors.

According to a USAID official, the agency believed that privatizing a few

large enterprises in the airline, steel, glass, and furniture industries would

have a ripple effect on the economy. Although USAID/Poland noted some

achievements while utilizing this approach, the mission concluded that

21Transition Report: Economic Transition in Eastern Europe and the Former Soviet Union, EBRD,

Oct. 1994, p. 49.

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firm-specific and sectoral assistance was too time-consuming and costly.

For example, the $3.7 million in USAID funding for the glass sector led to

only four state-owned enterprise privatizations, a cost of more than

$900,000 per enterprise privatized. In addition, as of May 1994, only four of

eight targeted enterprises had been privatized under the almost completed

furniture sector project.

USAID’s sector-specific strategy problems were due in part to the Ministry

of Privatization’s unwillingness to relinquish control over certain

state-owned enterprises and withholding of important information related

to the restructuring and privatization efforts. According to a USAID official,

the government of Poland had initially supported the firm-specific and

sectoral assistance, but the Ministry of Privatization wanted to include

these enterprises in the Mass Privatization Program and proved to be a

powerful opposition force to the USAID-supported contractors.

Other USAID projects encountered government unwillingness to follow

through with privatization. For example, USAID spent more than $1 million

restructuring LOT Polish Airlines in preparation for its privatization. This

was USAID’s largest single firm-specific privatization effort in Poland.

Although the assistance has been a restructuring success, the project’s

goal of privatizing the airline has not been met. According to a USAID

official, foreign investors have shown interest in the airline, but the Polish

government has rejected these overtures.

In 1993 USAID’s privatization work in Poland began to shift from the

firm-specific and sectoral assistance approach and toward projects

assisting the Ministry of Privatization with the privatization process.

According to the USAID representative in Poland, the early privatization

efforts were misdirected because they were based on an assumption that

the privatization work was short term and could be performed with a

90-day consultant team.

USAID is now building on its earlier work at the Ministry of Privatization.

Beginning in 1992, USAID assisted the Ministry with the National Investment

Funds as well as share trading and distribution practices. USAID assistance

in late 1993 included a project that placed specialists in corporate finance

as well as mergers and acquisitions in the Ministry to assist with

privatization transactions. Additional projects to assist the Ministry with

the Mass Privatization Program were being planned as of May 1994.

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USAID has also started a regional privatization project with the Ministry of

Privatization to assist Polish regional governments with the privatization

of state-owned enterprises. The Ministry is providing technical assistance

to state-owned enterprises undergoing privatization, assisting the regions

with privatization strategies, and helping to identify possible investors.

USAID is supplying the training component for the overall program, while

the EU PHARE program will provide advisory services. According to a USAID

official, the agency’s Warsaw office is also planning a new pilot program to

assist some of these state-owned enterprises with their privatization

transactions, helping them to become eligible for credit and capital from

the Polish-American Enterprise Fund and other donor programs.

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Chapter 5 

Reforms in Poland’s Banking Sector

Over the last 5 years, Poland has fundamentally reformed its banking

sector. Multilateral and bilateral donors have provided important support

for recapitalizing Poland’s state-owned banks and for restructuring the

banks’ problem loan portfolios. Early problems with donor technical

assistance have been resolved. Nonetheless, bank privatization has been

limited; many small private and cooperative banks are in poor financial

condition; policies regarding the licensing of foreign banks are unclear,

and small- and medium-sized businesses continue to lack sufficient bank

credit to develop and expand their operations. Donors have undertaken

various activities to help.

Fundamental Reforms

Accomplished

Poland’s banking sector has undergone fundamental changes since the

beginning of reforms in 1989. The country’s old command economy central

bank has been transformed into an independent central bank and its old

regional branches have been converted into individual commercial banks,

some of which have been or are being privatized. A number of new private

banks have also been established. The government has recapitalized the

country’s state-owned banks and has made significant progress in

restructuring their problem loan portfolios.

The National Bank of Poland Act and the Polish Banking Act, both enacted

in 1989, provided the framework for reforming the Polish banking system.

These laws transformed the old central bank, which had served as the

state conduit of credit to enterprises in the command economy, into an

independent central bank with responsibilities for macroeconomic

policies and supervision of banks.

The 1989 legislation also transformed the regional branches of the original

central bank into nine new state-owned commercial banks, three of which

have since been privatized. These nine banks dominate Poland’s banking

sector, and, along with four specialized banks1

 that remain from the

prereform era, accounted for over 75 percent of total banking sector assets

as of mid-1993. The remaining banking sector assets are located in about

1,600 small cooperative banks, which existed prior to reforms to serve

agrarian interests, and 60 private and foreign banks established pursuant

to the 1989 legislation.

1

These specialized banks are dedicated to (1)foreign trade, (2) foreign currency, (3) agriculture and

cooperative banks, and (4) savings and home mortgages. A fifth specialized bank, the Polish

Development Bank, was established in 1990. An export development bank was established in 1988 and

privatized in 1992.

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In 1991, the profitability of state-owned enterprises deteriorated following

the collapse of Poland’s trade with its former CMEA partners. As a result,

many state-owned enterprises relied increasingly on debt to finance

operations while their ability to service such debt diminished. The

state-owned banks rolled over credits, capitalized unpaid interest, and

extended new loans to these firms.

In mid-1991, a Ministry of Finance audit of the state-owned commercial

banks revealed a high percentage of problem loans. The audit classified

16 percent of outstanding loans as not recoverable, 22 percent as having

doubtful recovery, and 24 percent as not current, and revealed that the

banks’ capital adequacy ratios were significantly less than those required

by Polish banking regulations. A USAID-contracted study reported that,

despite divergent interests within the government,2

 the Ministry of Finance

directed the state-owned commercial banks to tighten credit discipline

over delinquent enterprise borrowers in 1991 and 1992. By 1992, according

to an IMF study, the quality of the portfolios had stabilized somewhat.

To deal with the bad debts of state-owned enterprises and the inadequate

capitalization of banks, the government of Poland enacted the Financial

Restructuring of Enterprises and Banks Act (FREB), in February 1993. The

FREB approach involved banks in the restructuring of state-owned

enterprises with delinquent debts. In the process, the portfolios of the

state-owned commercial banks3

 were improved, and the banks were

recapitalized in preparation for privatization. In September 1993, the

Polish government recapitalized these banks using special government

restructuring bonds. The bonds held by a particular bank are to be

serviced by the central government until privatization occurs, after which

the bonds are to be serviced and redeemed by the $415-million Polish

Bank Privatization Fund created with resources from the former Polish

Stabilization Fund.

2

There are conflicting incentives within the government as owner of both state-owned enterprises and

state-owned banks. The cessation of state subsidies to the enterprises generated pressure on the banks

to provide credits. However, as insurer of the state-owned banks, the state also had an interest in bank

solvency.

3

Three of the original nine state-owned commercial banks have since been privatized—Wielkopolski

Bank Kredytowy, Bank Slaski, and Bank Przemyslowo Handlowy. The first had its reserves increased

during its privatization in August 1993; the second did not require recapitalization before its

privatization in autumn 1993. According to the Treasury Department, the third was privatized in 1995.

In addition to the state-owned commercial banks, coverage under the FREB was extended to two

special cases, Bank Gospodarki Zywnosciowej (the Bank for Food Economy) and Powszechna Kasa

Oszczednosci (the household savings bank).

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The primary elements of the program required banks to segregate loans by

likelihood of repayment, create reserves against those loans considered

unlikely or doubtful of recovery, set up workout departments to manage

the bad loans, and restructure their loan portfolios.

The restructuring act prohibited giving new loans and advances to

enterprises with loans classified as substandard. Under the act, each bank

was to liquidate or restructure its loans assigned to a problem portfolio by

the end of April 1994, unless (1) the loans had been restructured, (2) the

debtor had been declared bankrupt, (3) liquidation proceedings had been

instituted with respect to the debtor, or (4) the debtor had been servicing

his debt obligations for at least 3 months without interruption.

Considerable progress has been made under this plan, and according to

PlanEcon, by April 1994, the seven state-owned commercial banks had

settled over one-half of the bad debts that qualified for the program.

Several Major Hurdles

Remain

Notwithstanding Poland’s progress in reforming its banking sector, several

major hurdles remain. According to Polish and donor officials as well as

other observers, bank privatization has been limited; many small private

banks are undercapitalized and badly managed; the country’s licensing

policies for foreign banks lack transparency; and Poland’s small rural

cooperative banks are in poor financial condition. According to these

officials, Poland’s bank supervision capacity needs further strengthening,

and bankers need additional training. Also, small- and medium-sized

enterprises in Poland continue to lack sufficient bank credit to develop

and expand their operations.

Bank Privatization Delays Although Poland has made considerable progress in restructuring the

portfolios of state-owned commercial banks, the government’s plans for

reforming the financial sector go beyond improving the banks’ health. A

final goal of the FREB act is to privatize the remaining state-owned banks,

but progress has been slow. Three of the nine original state-owned

commercial banks have been privatized, and another is scheduled for

privatization by the end of 1995. However, PlanEcon recently reported that

those remaining will take more time to privatize due in part to the weak

performance of the Warsaw Stock Exchange.4

 At the end of 1994, the

Polish government was still the largest shareholder in the banking sector,

with over 69 percent of the equity of all commercial banks and control of

almost 80 percent of all assets.

4

PlanEcon Report: Commercial Banks in Poland—Who’s Best, Vol. X, Nos. 46-47, January 31, 1995.

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Small Private Banks Have

Had Problems

According to Polish government and donor officials, between 1990 and

1992, liberal bank licensing requirements led to the establishment of a

large number of small banks, many of which were undercapitalized and

badly managed. Poland’s central bank significantly tightened regulations in

1993, resulting in a decline in the number of new bank licenses issued.

However, donor officials told us that about 25 percent of these banks

remain technically insolvent and qualify for closure; and IMF reports

confirm that many of these banks have loan portfolio problems.

Poland’s central bank has directly “bailed out” some private banks.

However, according to donor officials, the Polish government is reluctant

to close banks without compensating depositors. Because the central bank

is concerned about the cost of closing banks, it is, instead, encouraging the

consolidation of financially troubled banks with banks that are financially

sound.

The government recently made progress on another problem affecting

most private banks—a lack of deposit insurance. In December 1994, the

government passed a law creating the Bank Guarantee Fund, which will

insure deposits at all banks—private and state-owned. Donor officials said

that requirements for banks to submit to the Guarantee Fund’s strict

lending standards and supervision would encourage better lending policies

and provide more stability for private banks.

Licensing of Foreign Banks

Lacks Transparency

Foreign banks currently constitute the strongest portion of the banking

sector; however, a donor official told us that foreign financial institutions

are concerned about a lack of transparency in the bank licensing process.

PlanEcon reported that, despite many applications, Poland’s central bank

had issued only one new license to a foreign bank between March 1992

and late 1994 and that the government’s licensing policy had been unclear.

According to an EBRD official, Poland’s central bank has tried to “force”

Western banks to buy problem banks as a prerequisite for obtaining

banking licenses in Poland. However, he said that this policy has not been

well received by Western banks. The PlanEcon report noted that the

central bank appeared to have become more willing to negotiate the

licensing of foreign banks by the end of 1994.

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Cooperative Bank

Financial Problems

According to Polish and donor officials, Poland’s 1,600 small cooperative

banks serving largely rural areas are also in poor financial condition.

According to an IMF report, about 200 of 1,000 banks examined by the

central bank qualified for bankruptcy as of March 1994.

PlanEcon reported that about 1,200 of the cooperative banks are affiliated

with the Bank for Food Economy, which was recapitalized under Poland’s

FREB program in 1994. However, the restructuring of this bank’s bad debts

has been addressed only recently. Because many of the bad loans were

owed by farmers, restructuring these loans is considered politically

difficult.

The cooperative banks represent only 6 percent of Poland’s banking

assets; however, they are a principal source of banking services for

Poland’s agricultural population. The failure of these cooperatives would

have severe budget consequences as these deposits are guaranteed by the

Treasury. Additionally, given the large number of institutions, they require

a disproportionate amount of supervision from the central bank.

Banking Supervision and

Banker Training

Inadequacies

According to Polish government and donor officials, it is important to

create a cadre of Polish experts in areas such as banking supervision and

credit analysis before good lending practices can be fully integrated into

Poland’s banking system. A USAID-contracted study concluded that while

Poland’s central bank has made rapid progress in building its capacity in

some areas, additional work remained to be done in developing the bank’s

capacity to supervise the banking sector. The study also reported that

training of bank staff in Poland was needed and would continue to be

needed for some time.

Small- and Medium-Sized

Enterprise Credit Shortage

According to Polish and donor officials as well as other observers, smalland medium-sized enterprises in Poland continue to lack sufficient bank

credit to develop and expand their operations. Poland’s emerging private

sector has generally encountered a risk-averse, domestic banking system,

and foreign commercial banks that are unwilling to lend to new Polish

ventures.

According to Poland’s Ministry of Finance, more than 80 percent of the

country’s banking sector’s business continues to take place in state-owned

banks. While state banks have concentrated their attention on working out

the bad debts of state-owned enterprises and providing new loans to the

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Reforms in Poland’s Banking Sector

healthier state-owned enterprises, these banks have remained cautious

about providing new loans to small- and medium-sized enterprises.

According to a development expert at the London School of Economics,

the reluctance to make loans to small- and medium-sized businesses is

compounded by Polish bankers’ lack of expertise in evaluating small

business propositions. He added that poor collateral laws also limit the

amount of credit available to such firms.

The government of Poland expects state-owned banks to continue

focusing on state-owned enterprises. The Ministry of Finance’s “Strategy

for Poland” commits the state banks to supporting such firms in future

years, stating “the government will be using [state-owned] domestic banks

to a larger extent for managing state-owned wealth, for the privatization of

state-owned enterprises, and for bringing them back to health.” The

Ministry’s financial sector strategy says very little about bank assistance to

Poland’s emerging private sector, particularly the small- and medium-sized

enterprises.

Foreign commercial banks in Poland also have been cautious with their

lending. According to an OECD official, the few foreign commercial banks

operating in Poland have limited their activities to larger Western

investors. One Western banking official said his bank would prefer a few

large transactions over numerous small transactions. Some of this

cautiousness was also attributed to the lack of a debt accord between

Poland and its commercial creditors; however, this obstacle was resolved

in October 1994 when Poland and the London Club of commercial

creditors signed an agreement to reduce and reschedule Poland’s more

than $13 billion in private sector debt.

Donors have recognized the lack of available credit for small and

medium-sized enterprises and have undertaken various activities to help

fill the gap. According to Polish government and donor officials, the

U.S.-sponsored Polish-American Enterprise Fund5

 has been more

successful than other donor programs in this area. The Enterprise Fund’s

small loan component, the Enterprise Credit Corporation, has assisted

Poland’s small- and medium-sized enterprises with more than 2,300 small

business loans worth over $56 million. Fund and donor officials attribute

the program’s success in reaching the smaller enterprises to the fact that it

did not depend upon the existing banking skills in Poland, but instead

5

Established under the SEED Act of 1989, the Enterprise Fund promotes private sector development in

Poland through equity investments, grants, loans, technical assistance, and training.

Page 65 GAO/NSIAD-95-150 Poland
Chapter 5 

Reforms in Poland’s Banking Sector

trained and monitored the staff of the banks used as intermediaries. We

reported on the Enterprise Fund’s success in 1994.6

Donor Assistance Has

Been Instrumental in

Reforms

The centerpiece of assistance in the Polish banking sector was donor

support for Poland’s FREB program to restructure enterprises and banks. In

collaboration with the World Bank, the Polish government issued bonds to

recapitalize the banks that are to be serviced and redeemed by the Polish

Bank Privatization Fund after the banks are privatized. This fund was

established using resources that were no longer needed for the Polish

Zloty Stabilization Fund.

The World Bank also provided a $450-million loan to assist in the FREB

program. As part of this effort, the World Bank plans to help the Polish

government supervise an intervention fund. This fund is intended to act as

a “hospital” for state-owned enterprises that are too large to be liquidated.

Donors Provide Technical

Assistance and Training

According to Polish government officials, some early technical assistance

to Poland’s financial sector was of limited value, but many of these

problems have been resolved and donors are now providing more useful

assistance. For example, officials told us that in the early stages of reform,

many consultants came to Warsaw for 1- to 2-week stays, interviewed

some officials, and then produced reports that merely repeated everything

they had been told.

Polish officials told us that donor technical assistance and training is now

addressing some of the most important needs remaining in this area, such

as bank supervision and credit analysis. For example, the United States

has provided long-term Department of the Treasury advisors to various

banks, Poland’s central bank, and the Warsaw School of Banking. In

addition, Peat Marwick-KPMG, through a USAID contract, is working with

the central bank to develop an on-site inspection manual for bank

supervision. The manual development is accompanied by advice on

strategic planning for bank supervision. Peat Marwick-KPMG also

provides advisers to the central bank to help develop operations

procedures for the General Inspectorate of Banking Supervision, the

central bank’s unit for bank supervision and examination.

6

Enterprise Funds: Evolving Models for Private Sector Development in Central and Eastern Europe

(GAO/NSIAD-94-77, Mar. 9, 1994).

Page 66 GAO/NSIAD-95-150 Poland
Chapter 5 

Reforms in Poland’s Banking Sector

U.S. Treasury advisers have been assigned to Polish commercial banks,

the central bank, and the Ministry of Finance. Typically, these advisers are

fluent in Polish, reside in Poland, and are assigned for a year or more.

They provide advice and training on a multitude of subjects. The adviser in

the General Inspectorate of Banking Supervision provides daily assistance

to the officials and staff on all aspects of banking supervision; helps

formulate policy, develop examination techniques, and train staff in

financial analysis and inspections; assists in development of the

supervision manual; and serves as a liaison with donors.

The U.S. Treasury Department also provides a long-term adviser to the

Warsaw School of Banking, along with some short-term instructors,

through a contract with Peat Marwick-KPMG. This school is one of three

banking schools in Poland and focuses on training middle and senior level

managers. With approximately 100,000 to 150,000 banking personnel in

Poland, a primary goal of the school is to develop a cadre of Polish

trainers to multiply the training effect of the Western advisers.

The Financial Service Volunteers Corps is also supported by the 

U.S. program, and provides volunteer technical expertise to countries

making the transition to a market economy. The advisers provided by this

program tend to be short term and have worked on projects such as

drafting legislation and regulations, training bank managers, advising

policymakers, and assisting with the development of basic financial

products and services.

Other bilateral and multilateral donors are also active in the banking

sector. For example, the British Know How Fund supports 14 advisers at 

3 Polish banks and the Ministry of Privatization, and has 2 advisers in the

Ministry of Finance. The fund has been instrumental in the privatization of

a major bank, and has funded training for bank staff at the Katowice

Banking School.

The EU PHARE Program has provided training to many financial institutions,

provided consultants to the workout departments of the state-owned

commercial banks, performed audits, and provided audit assistance to the

General Inspectorate of Banking Supervision.

Page 67 GAO/NSIAD-95-150 Poland
Chapter 6 

Conclusions and Lessons Learned

Since the reform process began in Central and Eastern Europe, Poland has

undertaken some of the most dramatic economic reforms in the region.

While Poland continues to face a number of impediments to its

restructuring efforts, the country has made significant progress toward

economic restructuring in key areas such as macroeconomic stabilization,

foreign trade and investment, privatization, and banking. The United

States and other donors have actively supported Poland in its transition

efforts, although this assistance has been more useful in some areas than

in others.

After 5 years of reforms, Poland’s experience in transitioning to a

market-oriented system offers some lessons that could be of interest to

countries such as Russia, Ukraine, and others not as far along the reform

path as Poland. Because there are tremendous differences among

transition countries in Central and Eastern Europe and the former Soviet

Union as to the size of their economies and populations, their political

situations, their ethnic compositions, and a host of other variables, the

lessons of Poland have differing applicability to each of the other

transition countries. Nevertheless, there are a number of lessons learned

from Poland’s restructuring efforts in several key areas that, at a

minimum, merit consideration by the other transition countries and those

involved in assisting these countries.

Two such lessons involve Poland’s early efforts to stabilize and liberalize

its economy. The first is that Poland’s own efforts in coupling tough

reform measures with consistent macroeconomic policy over several years

were critical to the country’s current economic recovery. The second is

that some of the most important forms of donor assistance provided in

support of Poland’s transition were those that backed Poland’s early

macroeconomic stabilization and liberalization measures. The Polish

government took a wide range of actions, including cutting subsidies to

industry and households, tightening monetary policy, devaluing the

currency, liberalizing prices, establishing a free-trade regime, and

liberalizing the legal requirements for setting up private enterprises.

Donors supported these measures in the form of the Polish Stabilization

Fund, balance of payments support, and debt restructuring and

forgiveness. By creating the basic operating features of a market economy,

Poland effectively set the stage for further economic restructuring and

integration into the world economy. The country is now experiencing

healthy economic growth.

Page 68 GAO/NSIAD-95-150 Poland
Chapter 6 

Conclusions and Lessons Learned

While Poland’s economy is currently among the fastest growing in Europe,

the country’s continued economic growth and integration into the world

economy is widely considered to depend at least in part upon increased

foreign trade and investment. Some of the most important factors for

improvement in these areas require Polish or donor government actions

beyond the confines of assistance. Poland has achieved dramatic increases

in its exports to the West, and a number of U.S. and other foreign

companies have recently made significant investments in the country.

However, Poland continues to run a large trade deficit, trade barriers

hamper its exports of certain products to the EU, and a number of

obstacles continue to impede foreign investment. Some of the most

persistent investment impediments, such as bureaucratic and tax

uncertainties, demand the attention of the Polish government rather than

of donors. On the other hand, further reducing EU trade barriers could help

Poland increase its exports, diminish its trade deficit with the EU, and earn

additional foreign exchange for further restructuring.

In addition to its long-term importance for economic growth, foreign trade

had a more immediate bearing on the success of early reform measures,

and early liberalization of foreign trade played a critical role in helping

state-owned enterprises adapt to market conditions. Poland liberalized

foreign trade regimes as an element of the country’s early stabilization and

liberalization measures. By doing so, Poland subjected its state sector to

foreign competition and provided international relative prices that

monopolistic Polish firms would not have offered in an environment of

liberalized prices. The opening of the economy to international

competition, the removal of state subsidies, and the discontinuance of

central bank soft money policies encouraged some state-owned

enterprises to become more cost conscious and search out market

opportunities.

Poland’s experience in creating market conditions suggests another

important lesson—that encouraging the early development of a dynamic

private sector is at least as important as the timing for undertaking

large-scale privatization. While the pace of privatization for Poland’s larger

state-owned enterprises has been slower than expected, this slow progress

has been offset by the success of the country’s private sector. Poland’s

early measures to remove the state from large-scale detailed direction of

the economy and to provide an environment conducive to private sector

development resulted in a rapidly growing private sector. Many new

businesses have emerged and a large number of small- and medium-sized

retail businesses have been privatized. Poland’s private sector is now the

Page 69 GAO/NSIAD-95-150 Poland
Chapter 6 

Conclusions and Lessons Learned

primary source of the country’s economic growth and a substantial base of

Polish employment.

Notwithstanding the success of Poland’s private sector, significant

portions of Polish productive capacity and employment remain in the

hands of the government. Some are concerned that without the certainty

of the eventual privatization of larger state-owned enterprises, such firms

might not continue restructuring but instead might lobby the government

to reinstate subsidies. Donors have actively supported Poland’ efforts to

restructure enterprises and implement the country’s Mass Privatization

Program despite waning public and governmental support. However,

donors are concerned about continued delays in implementing the

program. If the Polish government fails to follow through on its promise to

move forward on the Mass Privatization Program in 1995, donor support

for the program may erode.

Poland’s experience in restructuring its banking sector offers some

additional lessons. Although several major problems remain in this area,

the country’s banking sector has undergone fundamental changes since

the beginning of reforms in 1989. Nevertheless, even when faced with hard

budget contraints and other market reforms that included curtailed

government-to-industry subsidies, many state-owned enterprises were able

to circumvent the constraints and continue financing loss-making

operations through their relationships with state-owned banks. When the

profitability of state-owned firms deteriorated following the collapse of

Poland’s trade with its former CMEA partners, many such firms relied

increasingly on debt to finance operations while their ability to service

such debt diminished. The state-owned banks reacted by continuing to

lend, rolling over credits, and in many cases capitalizing unpaid interest,

contributing to a high percentage of problem loans and technical

insolvency.

Poland’s experience in restructuring its banking sector shows that donors

were able to play a useful role in supporting the country’s reform efforts in

this area. Multilateral and bilateral donors provided strong support for

Polish efforts to recapitalize and restructure the problem loan portfolios of

state-owned banks, and considerable progress has been made under this

plan. In addition to recapitalizing the banks, the program has contributed

to the restructuring of many of the indebted state-owned enterprises.

Donor technical assistance has also been useful in the banking sector.

Page 70 GAO/NSIAD-95-150 Poland
Chapter 6 

Conclusions and Lessons Learned

Although a great deal of economic restructuring remains to be done in

Poland, the country has made impressive progress toward the goal of

transforming its economy into a full-fledged, market-oriented system.

Poland’s task would certainly have been more difficult without donor

support in certain key areas; however, donor assistance is not a guarantee

of success. Without Poland’s consistent commitment to reforms, its

determination to take early and decisive reform actions, and its

persistence in building the basic institutions and legal infrastructure

required for a functioning market economy, the country’s progress could

not have been as substantial. Poland’s experience suggests that the

ultimate success or failure of reform efforts is far more dependent upon

the actions of the transition country than it is upon those of outside

participants.

Page 71 GAO/NSIAD-95-150 Poland
Appendix I 

Methods of Privatization

Capital Privatization

of State-Owned

Enterprises

A state-owned enterprise undergoing capital privatization must first be

converted into a State-Treasury corporation as either a joint stock or a

limited liability company, a process called “commercialization.” Among

other things, commercialization of a state-owned enterprise establishes a

clear supervisory structure, adjusts enterprise operations to meet the

requirements of Poland’s commercial code, and changes the legal status of

the enterprise to allow foreign capital participation. The final step is the

sale of this State Treasury corporation to private investors within 2 years.

(See fig. I.1.) Some of these State-Treasury companies have also been put

aside for the planned Mass Privatization Program, a program that is

discussed in chapter 4. The government has used capital privatization

rather than liquidation in the case of the larger, more strategically

important enterprises.

Figure I.1: Capital Privatization

Process

State-owned enterprises

Private ownership

Direct sale to 


private investors

Mass Privatization


Program

Commercialization


(becomes a State Treasury company)

The pace of commercialization slowed dramatically in 1993. (See table I.1.)

While the number of ownership transformations into State-Treasury

companies in 1994 compensated for some of the slowdown in 1993, the

pace of commercialization still lags behind the first few years of the

Page 72 GAO/NSIAD-95-150 Poland
Appendix I 

Methods of Privatization

transformation process. However, a new privatization bill passed by the

Polish parliament in June 1995 may increase the number of enterprises

undergoing commercialization.

The number of companies that underwent capital privatization has also

slowed. Although the number of State-Treasury companies sold through

capital privatization increased from 1990 to 1993, as shown in table I.1, this

number decreased in 1994. Another two State-Treasury companies

underwent capital privatization in the first 2 months of 1995.

Table I.1: Status of Commercialization

& Privatization Status 1990 1991 1992 1993 1994 Total

Number of enterprises

commercialized (becoming State

Treasury companies 38 222 220 47 186 713

State Treasury companies that

underwent capital privatization 6 21 24 48 37 136

As the numbers in table I.1 indicate, the majority of State-Treasury

companies still await either capital privatization or implementation of the

Mass Privatization Program.1

 These companies remain state-owned

enterprises, albeit commercialized state-owned enterprises. Even in the

case of the State-Treasury companies that underwent capital privatization,

the government can still retain an equity position in these companies. The

Ministry of Privatization considers a state-owned enterprise to be

privatized when at least 51 percent of its shares are in private hands.

Liquidation of State-Owned

Enterprises

A Polish state-owned enterprise can also undergo liquidation. After

liquidation has been chosen, an enterprise is to be sold, transferred to an

existing business or leased in part or whole. Liquidation can be performed

through “direct privatization” or bankruptcy. (See fig. I.2.) Under the

process called “direct privatization,” a state-owned enterprise is either

sold, transferred to an existing company, or leased in part or whole. The

second option, bankruptcy, is most often used with state-owned

enterprises in poor financial condition. In this case, the assets of the

state-owned enterprise are sold in order to satisfy creditors.

1

Under Poland’s Mass Privatization Program, 444 state-owned enterprises are to be privatized in 1995.

Page 73 GAO/NSIAD-95-150 Poland
Appendix I 

Methods of Privatization

Figure I.2: Liquidation Process

State-owned enterprises

Private ownership of enterprise/assets

Direct privatization Bankruptcy

Leased back 


to


employees/


management

Enterprise 


sold

Transferred 


to an


existing company

Assets sold to 


satisfy creditors

Direct privatization has been more popular than capital privatization,

comprising about 88 percent of all privatization by the end of 1994. Most

enterprises privatized through direct privatization were leased back to the

employees and/or management at the enterprise. (See table I.2.) A Ministry

of Privatization document states that these leased enterprises employed

approximately 220,000 workers at the end of December 1993.2

Table I.2: Method of Direct

Privatization (as of February 28, 1995) 

Direct privatization method used

Number of

enterprises

Enterprise leased back to employees/management 776

Enterprise sold 188

Enterprise transferred to an existing company 49

Combination of above methods 67

Total 1,080

The rate of direct privatization has slowed since the beginning of the

process. The number of state-owned enterprises privatized through direct

2

More current employment numbers were not available in March 29, 1995, documents prepared by the

Department of Foreign Relations of the Ministry of Privatization.

Page 74 GAO/NSIAD-95-150 Poland
Appendix I 

Methods of Privatization

privatization decreased from 1991 to 1994. (See table I.3.) In addition,

although 1,248 enterprises had initiated liquidation by bankruptcy by the

end of 1994, the rate of new cases over this period has steadily declined.

Table I.3: Status of Liquidation

Status 1990 1991 1992 1993 1994 Total

Direct privatization 31 418 270 195 127 1,041

Liquidation by bankruptcy 18 522 317 260 131 1,248

The government of Poland maintains an interest in the state-owned

enterprises that underwent direct privatization. In about 72 percent of the

cases, the enterprises were leased back to the management and

employees, often at a subsidized interest rate.3

 One U.S. embassy official

said since the assets in these new enterprises are held by the government,

the new enterprises should still be considered state-owned. A Polish

government official stated that continued state ownership of these

enterprises may also forestall restructuring and new investment as long as

their assets remain in the hands of the state.

Foreign direct investment has assisted Poland’s privatization efforts.

Foreign investors are offered two methods of investment in state-owned

enterprises. Foreign investors can (1) purchase a state-owned enterprise

through capital privatization or direct privatization, with the invested

capital going to the State Treasury or (2) start a joint venture with a

state-owned enterprise, with the invested capital going to the enterprise

itself. According to the Ministry of Privatization, capital privatization has

been the most successful in attracting foreign direct investment. As of

February 1994, foreign investors had participated in 40 sales through

capital privatization.

3

A U.S. embassy official in Poland told us that these leases will run for about 10 years.

Page 75 GAO/NSIAD-95-150 Poland
Appendix II 

Methods of Restructuring

Bank Supervised

Restructuring

In February 1993, the Polish government enacted the Law on Financial

Restructuring of Enterprises and Banks. This law, discussed in greater

detail in chapter 5, was intended to recapitalize the banks carrying bad

debt from state-owned enterprises and, indirectly, restructure such

bank-supported enterprises. These state-owned enterprises, previously

unattractive for privatization because of excessive debt, now have access

to new credit and debt restructuring if they agree to undergo

bank-supervised restructuring. Once enterprises and their creditors agree

to undergo restructuring, the healthier enterprises will be restructured

while the worst enterprises will be liquidated. The banks performing the

restructuring are entitled to swap the enterprise debt for an equity position

or sell equity in the enterprise to outside investors.

Another element of the Law on Financial Restructuring of Enterprises and

Banks is an intervention fund. This fund acts as a “hospital” for the worst

state-owned enterprises in the bank portfolios. These enterprises are

generally too large to be liquidated. The government of Poland, with the

help of the World Bank, supervises the intervention fund.

Polish Special

Restructuring Project

Another restructuring program, the Polish Special Restructuring Project,

was developed by the EBRD to assist Polish banks with the restructuring of

Polish state-owned enterprises. The project will help to stabilize,

restructure, and privatize about 30 such enterprises. One EBRD official said

the two criteria for entering the program are that a state-owned enterprise

cannot be in the Mass Privatization Program and the enterprise must be in

worse condition than the Mass Privatization Program enterprises but still

be “potentially viable.” The official said he expects some of the project’s

candidates to be former Mass Privatization Program candidates whose

condition has deteriorated while waiting for the Mass Privatization

Program to begin.

In November 1994, the EBRD signed a framework agreement to provide

$40 million in the form of equity investment and another $40 million in

loans to the Polish banks involved in the Special Restructuring Project.

Another $12 million in technical assistance has been committed by the EU

PHARE program. However, according to an EBRD official, no disbursement

had been made under the project as of June 30, 1995. The officials said that

implementation of the project is awaiting final agreements between the

EBRD and the Polish government and between the EBRD and the Polish

banks involved in the project.

Page 76 GAO/NSIAD-95-150 Poland
Appendix II 

Methods of Restructuring

Privatization Through

Restructuring

Another Ministry of Privatization initiative, entitled Privatization Through

Restructuring, allows the Ministry to hire a management group to

restructure and privatize small- and medium-sized state-owned

enterprises. Under the program, such enterprises are expected to be

privatized within 2 years of the assigning of the contract, but extensions

can be granted. An enterprise will be considered privatized when at least

51 percent of its equity has been transferred to private investors. As of

February 1994, 27 state-owned enterprises were participating in the pilot

phase of the program.

Page 77 GAO/NSIAD-95-150 Poland
Appendix III 

Comments From the Department of the

Treasury

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

Now on p. 39.

Page 78 GAO/NSIAD-95-150 Poland
Appendix III 

Comments From the Department of the

Treasury

See comment 1.

Now on p. 46.

Now on p. 53.

See comment 2.

Now on p. 55.

See comment 3.

Now on pp 57 and 61.

See comment 2.

See comment 4.

Page 79 GAO/NSIAD-95-150 Poland
Appendix III 

Comments From the Department of the

Treasury

Page 80 GAO/NSIAD-95-150 Poland
Appendix III 

Comments From the Department of the

Treasury

The following are GAO’s comments on the Department of the Treasury’s

letter dated June 21, 1995.

GAO Comments 1. We agree that large-scale privatization is important. In chapter 4, we

point out some of the concerns related to continued delays in privatizing

larger state-owned firms and note that state-owned firms lag behind

private firms in output, employment, and investment growth as well as

profitability. We also note a World Bank official’s observation that

commercialization is not an effective substitute for privatization and

include his opinion that it is of crucial importance that privatization be

accelerated rather than slowed down. We have added Treasury’s concerns

about delays in privatization to those already noted.

2. We added this updated information to our report.

3. We include the Polish government’s baseline figure of 8,441 original

state-owned firms and note that 64.4 percent of these firms remain

state-owned. We also note that as of October 1994, about 444 state-owned

firms were approved for the Mass Privatization Program and that more

than 5,000 state-owned firms may remain after implementation of the

program. We have added Treasury’s calculation that enterprises in the

Mass Privatization Program account for only 8 percent of the state sector.

4. According to a U.S. embassy official in Warsaw, while the original draft

of the new privatization bill favored a more rapid privatization process, the

version that passed in the Polish parliament on June 30, 1995, is expected

to slow the pace of privatization. For example, one provision in the bill

states that the commercialization of state-owned enterprises does not have

to end in privatization. The official indicated that this provision would

allow the government to maintain indefinite ownership. In addition, while

the original draft bill would have allowed the Ministry of Privatization to

initiate the privatization process without the approval of the enterprises

and founding organs (various ministries and local governments), the bill

that passed states that the founding organs must give their approval. The

bill also states that privatization of “strategic” enterprises must be

approved by parliament. A Polish law expert at the Library of Congress

said that the Polish president vetoed the bill on July 17, 1995, but that the

parliment subsequently voted successfully to override the veto. We have

added a footnote in chapter 4 to reflect these recent developments.

Page 81 GAO/NSIAD-95-150 Poland
Appendix IV 

Comments From the United States Agency

for International Development

Page 82 GAO/NSIAD-95-150 Poland
Appendix V 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Louis H. Zanardi, Assistant Director

Michael J. Courts, Project Manager

Bruce L. Kutnick, Economist

Muriel J. Forster, Senior Evaluator

Bill J. Keller, Evaluator

John D. DeForge, Adviser

European Office Walter E. Bayer, Jr., Evaluator

(711032) Page 83 GAO/NSIAD-95-150 Poland
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