Privatization 101
"The pace of privatization has stalled in Poland... and the Polish authorities need to take decisive action to accelerate privatization."
- EU Commission Report November 5, 2003
Last week the current Minister of the Treasury, Zbigniew Kaniewski, announced the government's intention to privatize over 200 state-owned companies within the next nine months in an effort to raise zł.8.8 billion in revenue. The goal is ambitious, considering the government's track record. In 2003, only 86 state-owned companies were privatized. In 2002, the number was 98. According to the EU Commission's Report on Poland's preparation for membership, Poland must quickly restructure the "coal mining, gas, electricity, chemicals, steel and defense sectors." No surprise then, that included in the list of 200 are Polish Oil and Gas (PGNiG), Southern Energy Concern (PKE), the Enea power plant group and vodka producer Polmos Białystok.
What exactly does privatization mean? The sale of state assets? Or does it mean the sale of shares? Or perhaps a combination of the two? The answers are found in the Commercialization and Privatization Act (the 'CPA'). The CPA defines privatization as either (1) "taking up shares in increased initial capital of sole shareholder companies of the State Treasury, established as the result of commercialization" or (2) "the disposal of all tangible and intangible assets of a State enterprise or company..." In other words, privatization can be accomplished by either selling shares of stock in a state-owned company to the general public (Indirect Privatization) or by selling the assets of a state-owned entity (Direct Privatization). The choice of which method of privatization to use depends on the financial condition and size of the state-owned entity. Generally, state enterprises or companies which have less than zł.25.5 million (E6 million) in turnover in the preceding year and less than zł.9.5 million (E2 million) in cash are eligible for Direct Privatization.
First, let's take a look at Indirect Privatization. Before shares of stock can be sold in a state-owned company, the company itself must first be established by means of a procedure referred to as commercialization. Commercialization, in the simplest terms, means the transformation of a state-owned enterprise into a company. It is at this early stage of the privatization process, during commercialization, that the EU Commission's report blames in part the Polish government for hampering the privatization process. Specifically, the report states that, "the insistence of the government on restructuring state-owned companies first before privatizing them limits the number of firms up for privatization." Such is the case with the coal mining and steel sectors. Once a state-owned enterprise has been transformed into a company, shares of stock in the newly created company are then sold to the general public, or as is most often the case, to a strategic investor with the necessary capital and know-how to operate the company. The actual sale of shares may be accomplished by one of the following methods: by public announcement, public tender, by negotiation following a public invitation.
Employees of the newly privatized company are entitled to receive up to 15 percent of the shares in the new company for free, as long as the value of such shares does not exceed the average monthly income of the employees increased by a factor of eighteen. Additionally, farmers and fishermen may be entitled to receive 15 percent of the shares in a newly privatized food processing company if such farmers and fishermen supplied the company with produce for a period of at least five years leading up to the company's privatization.
Direct Privatization, the sale of a state-owned enterprise's assets as opposed to the sale of shares, may be accomplished by one of the following methods: (1) the sale of the enterprise, (2) the contribution of the enterprise to another company or (3) the giving of the state enterprise as consideration. In addition to the zł.28.5 (E6 million) turnover threshold and zł.9.5 (E2 million) cash on hand limitations referred to above, the Council of Ministers may use Direct Privatization to sell larger state-owned enterprises, in particular if the financial condition of the enterprise is poor. The sale of an enterprise may be accomplished by either a public tender or as the result of direct negotiations undertaken through a public invitation to bid. Similar to Indirect Privatization, employees, farmers and fisherman are entitled to receive compensation from the sale of a state-owned enterprise using Direct Privatization; however, the method of compensation is different, depending upon the manner of sale. For instance, if the enterprise is sold to a private investor, the investor is obligated to contribute up to 15 percent of the price paid for the enterprise to the employees' social fund. If the enterprise is contributed to another company, the State Treasury is obligated to give to the employees up to 15 percent of the shares obtained in the new company.
Another important step in the privatization process, although not provided for directly in the text of the CPA, involves reaching agreement with the trade union(s) regarding employee social packages.
For those of you who may be interested, the list of companies to be privatized this year, may be found on the State Treasury's website: www.msp.gov.pl.
Paul Fogo is a senior attorney with Miller, Canfield, W. Babicki & Partners.
- EU Commission Report November 5, 2003
Last week the current Minister of the Treasury, Zbigniew Kaniewski, announced the government's intention to privatize over 200 state-owned companies within the next nine months in an effort to raise zł.8.8 billion in revenue. The goal is ambitious, considering the government's track record. In 2003, only 86 state-owned companies were privatized. In 2002, the number was 98. According to the EU Commission's Report on Poland's preparation for membership, Poland must quickly restructure the "coal mining, gas, electricity, chemicals, steel and defense sectors." No surprise then, that included in the list of 200 are Polish Oil and Gas (PGNiG), Southern Energy Concern (PKE), the Enea power plant group and vodka producer Polmos Białystok.
What exactly does privatization mean? The sale of state assets? Or does it mean the sale of shares? Or perhaps a combination of the two? The answers are found in the Commercialization and Privatization Act (the 'CPA'). The CPA defines privatization as either (1) "taking up shares in increased initial capital of sole shareholder companies of the State Treasury, established as the result of commercialization" or (2) "the disposal of all tangible and intangible assets of a State enterprise or company..." In other words, privatization can be accomplished by either selling shares of stock in a state-owned company to the general public (Indirect Privatization) or by selling the assets of a state-owned entity (Direct Privatization). The choice of which method of privatization to use depends on the financial condition and size of the state-owned entity. Generally, state enterprises or companies which have less than zł.25.5 million (E6 million) in turnover in the preceding year and less than zł.9.5 million (E2 million) in cash are eligible for Direct Privatization.
First, let's take a look at Indirect Privatization. Before shares of stock can be sold in a state-owned company, the company itself must first be established by means of a procedure referred to as commercialization. Commercialization, in the simplest terms, means the transformation of a state-owned enterprise into a company. It is at this early stage of the privatization process, during commercialization, that the EU Commission's report blames in part the Polish government for hampering the privatization process. Specifically, the report states that, "the insistence of the government on restructuring state-owned companies first before privatizing them limits the number of firms up for privatization." Such is the case with the coal mining and steel sectors. Once a state-owned enterprise has been transformed into a company, shares of stock in the newly created company are then sold to the general public, or as is most often the case, to a strategic investor with the necessary capital and know-how to operate the company. The actual sale of shares may be accomplished by one of the following methods: by public announcement, public tender, by negotiation following a public invitation.
Employees of the newly privatized company are entitled to receive up to 15 percent of the shares in the new company for free, as long as the value of such shares does not exceed the average monthly income of the employees increased by a factor of eighteen. Additionally, farmers and fishermen may be entitled to receive 15 percent of the shares in a newly privatized food processing company if such farmers and fishermen supplied the company with produce for a period of at least five years leading up to the company's privatization.
Direct Privatization, the sale of a state-owned enterprise's assets as opposed to the sale of shares, may be accomplished by one of the following methods: (1) the sale of the enterprise, (2) the contribution of the enterprise to another company or (3) the giving of the state enterprise as consideration. In addition to the zł.28.5 (E6 million) turnover threshold and zł.9.5 (E2 million) cash on hand limitations referred to above, the Council of Ministers may use Direct Privatization to sell larger state-owned enterprises, in particular if the financial condition of the enterprise is poor. The sale of an enterprise may be accomplished by either a public tender or as the result of direct negotiations undertaken through a public invitation to bid. Similar to Indirect Privatization, employees, farmers and fisherman are entitled to receive compensation from the sale of a state-owned enterprise using Direct Privatization; however, the method of compensation is different, depending upon the manner of sale. For instance, if the enterprise is sold to a private investor, the investor is obligated to contribute up to 15 percent of the price paid for the enterprise to the employees' social fund. If the enterprise is contributed to another company, the State Treasury is obligated to give to the employees up to 15 percent of the shares obtained in the new company.
Another important step in the privatization process, although not provided for directly in the text of the CPA, involves reaching agreement with the trade union(s) regarding employee social packages.
For those of you who may be interested, the list of companies to be privatized this year, may be found on the State Treasury's website: www.msp.gov.pl.
Paul Fogo is a senior attorney with Miller, Canfield, W. Babicki & Partners.
