The long road to privatization

On a fine autumnal afternoon, Warsaw practically glows from the pursuit of free market activity. It’s particularly striking, given that only 20 years have passed since the fall of communism. Sure, you can quibble as to whether Warsaw needs a sushi bar on every corner or why decent shoes are still more expensive than everywhere else in Europe. These annoyances, however, only serve to make those reminders of the not-too-distant past much more incongruous, such as dilapidated pre-war buildings, poor roads, or non-strategic state-owned enterprises.

Whether due to budgetary woes or the overall policy of the current government, privatization of those remaining non-strategic state-owned companies appears to have become a priority. While the current government may be keen on privatization, the legal procedures and requirements in a privatization may make investors less enthusiastic.

While Poland is still not the easiest place in the world to do business, it has made steady progress over the last 10 years or so. The Law on Commercialization and Privatization, however, dates back to 1996, and some provisions have not aged well.

The basics of privatization are fairly straightforward. The government sells off a state-owned enterprise to a private company or person. It may do so either indirectly, by selling shares in a company created through commercialization or directly, such as by sale of an on-going business.

For an indirect privatization, a state-owned enterprise must first be turned into a corporation. This is the process of commercialization. In light of the recent debates on commercialization of the health service, I feel a need to confirm that not all commercialized entities must be privatized. Commercialization, however, is a required step toward an indirect privatization. Direct privatization may only be used for smaller enterprises, having sales of less than E6,000,000 in the previous year and a total amount in all of its funds (such as its initial and adjusted capital and retained profits) of less than E2,000,000.

If you’ve kept up with the accusations about irregularities in the privatization of various enterprises, you may be surprised to learn that the Law contains specific procedures for preparing for and conducting privatization. In any case, before an official decision is made to privatize, a legal and financial analysis of the enterprise must be made. Other reports, such as environmental compliance reports, may also be needed.

The sale process itself must be conducted according to a closed list of options. For an indirect privatization, the share sale may be conducted in a number of ways, including through a publicly announced offering, a public procurement, negotiations following a public invitation, auction and sale on a stock market. For a direct privatization, only a public procurement or negotiations following a public invitation come into play.

Also, privatization agreements are public records, and even negotiations are only confidential until they are concluded.

Where the Law really shows its age is the breadth and scope of employee entitlements. On the monetary side, the employees (both those currently employed and those that worked in the company for more than 10 years) get up to 15 percent of the proceeds from the privatization. As to a voice in management, employees of state-owned enterprises that were commercialized have rights to elect their representatives to both the management board and supervisory board of the company.

While the amounts that the government is hoping to gain from the upcoming privatization look impressive, a significant portion of these funds are already earmarked. After the employees receive their share, another 24 percent goes to various funds. The annual state budget is supposed to specify the use of all remaining proceeds.

Judith Gliniecki is a Partner with Wierzbowski Eversheds