Thinking small
Poland could use more companies like Frenoplast. A lot more.
The braking system and railroad car parts manufactured at Frenoplast's two plants aren't necessarily crucial to Poland's development. But the medium-sized firm's competitiveness on the European market and the jobs it provides are.
"We invest in new technologies, and I can say we have everything that big Western companies do," said Bohdan Bułhak, who cofounded the firm in 1985.
The success of companies like Frenoplast will be crucial to Poland's future. Small- and medium-sized enterprises (SMEs) account for two-thirds of total employment, half of the country's gross domestic product (GDP) and half of all exports, according to government and European Union (EU) figures. And as the economy continues its post-1989 transformation and big, state-controlled or formerly state-owned companies seek efficiency by shedding workers, future job creation depends on a dynamic SME sector.
But these companies, all with fewer than 250 workers, face a number of barriers, including a lack of innovation and poor access to financing, according to sector experts. And unlike Frenoplast, recently cited by a Polish government agency as a model SME, many are not fit for harsher competition yet to come once Poland joins the EU.
Frenoplast's competitive streak means that the company's 100 jobs are likely to survive Poland's EU accession, when all barriers to competition from companies in developed EU countries will fall.
"Because 90% of our clients are from EU countries, we actually already are in the EU," Bułhak said from the firm's Szczytno plant. "Poland's accession can only make things easier for us."
But accession will not make things easier for most Polish SMEs.
"That is a challenge for Polish companies, membership is a challenge and companies must prepare for that," said Jerzy Kwieciński, a European Commission (EC) official in Warsaw who oversees regional development programs, including special projects to bolster the SME sector. "But you know they are unaware, they do not know what to do and it will not be easy for them to face competitive forces once Poland becomes a member."
Slowing down, shutting down
The SME sector already is struggling amid an economic slowdown, even before it steps up to the integrated market. With the government estimating gross domestic product growth at a paltry 1.8% in 2001 and 1% this year, firms are finding it difficult to sell on the domestic market. Though SMEs have been the main engine of job growth, preliminary numbers indicate that many of these companies - especially micro enterprises, with five or fewer employees - are closing up shop, according to the Polish Agency for Enterprise Development (PARP), a government agency that answers to the
Economy Ministry and the EU.
"At the moment the number of jobs created by the SME sector is slightly growing, whereas the number of jobs in large companies is decreasing," said Krystyna Gurbiel, PARP's chief executive officer. "But unfortunately this growth of jobs is very low now, it seems the data from 1999 show that the number of jobs created in small companies - employing up to 50 employees - has gone down. Only the medium enterprises have still provided more jobs in net terms. One can be afraid that the data for 2000 and also then 2001 will show a similar situation, that the number of jobs in net terms is decreasing even in the SME sector."
In 1999, the last year for which figures are available, Poland was home to more than 3 million registered SMEs, according to the government. The numbers have been growing steadily since 1990, when SMEs helped pull Poland out of its immediate post-transition recession, according to a 1998 study by the Central Statistical Office (GUS) and the Polish Academy of Sciences. "In general terms it can be said that the decrease of production volume in large enterprises was compensated with a slight excess by the increase of production in (SMEs)," the report said.
This is especially important growth in a country where unemployment is expected to hit 18% this year. But while companies in the past could fill open niches and feed growing demand, firms now face stiffer competition and falling demand.
"Our sales have decreased in Poland; compared to last year we are selling about 20-30% less," said Zdzisław Kopczyński, co-owner and co-founder of Plastpur, in a December interview. Strong contacts in and exports to the East and the West are supporting the firm, though, helping the Bydgoszcz-based manufacturer of plastic furniture and prosthetic body parts stay financially healthy, Kopczyński said.
And Western competition should be no problem for the firm.
"I think we can compete with any similar company from Germany or from Italy," Kopczyński said, naming two countries where his firm has been conducting business for the past five years, when it ventured into the export market.
Show me the money
"But for us it is a problem to find money for improving our company," Kopczyński said, echoing a major concern for SMEs across the country. With only 40 employees and limited assets, Plastpur found it difficult to get financing in the first place, he said. And even now with a good relationship with a bank, the high cost of credit erodes about 13% of the company's profits every month, he said.
The National Bank of Poland's Monetary Policy Council (RPP) maintains the highest real interest rates in the region in an attempt to keep inflation low. The central bank's main rate is 11.5% and November inflation was 3.6%. But even with high interest rates, the lending scene is easing for some firms. The RPP cut rates six times in 2001 amid falling inflation, and commercial banks, with prodding and financial assistance from the EU and development banks, are more and more looking to SMEs as clients.
The EU, the European Bank for Reconstruction and Development (EBRD), the Council of Europe Development Bank (CEB) and Kreditanstalt für Weideraufbau (KfW), a state-owned German development bank, comanage a new SME loan facility announced in December and expect to budget more than 11 billion among 13 EU candidate countries; Poland is expected to get 20-30% of that amount, the EU said.
It's a relatively small sum - about 18 billion was extended to German SMEs in 2000 under the SME promotion heading, according to a KfW press officer. But it is a step in the right direction say officials involved in the program.
Under a separate program, Bank Ochrony Środowiska (BOŚ) and Bank Handlowy signed SME finance facility agreements with KfW in April and August, respectively, and have already seen high demand for loans among firms with fewer than 250 employees - the maximum number allowed under the EU definition of a medium-sized enterprise.
"The main obstacles are with the economic climate, which this year has been worsening because of the slowing economy," said Piotr Kiciński, head of product development for the SME loan project at Bank Handlowy.
Kiciński said that Bank Handlowy expected to close 30 SME loans in 2001 and another "few hundred" this year. The loans range from $20,000 to $10 million. They are attractive to SMEs because, with state support, the bank can offer better financing terms, generally a few percentage points above the Warsaw Interbank Exchange Rate (WIBOR).
Along with lower rates, the specially backed loans offer longer maturity and more time for companies to pay them off, which is more digestible than a typical loan term, said Katarzyna Milewska, financial institutions manager at BOŚ.
But problems remain. On top of the economic situation, many SMEs run into trouble because of inadequate collateral. "It is difficult for small companies to give good collateral," Milewska said. "We cannot grant credit without collateral."
Still, since last May BOŚ has signed 49 credit agreements and another 22 projects had been accepted and were under review, she said in December. According to Milewska, more than half of the loans are for less than 150,000 and more than half of all applications come from regions with the highest unemployment rates, highlighting the need for capital in some of Poland's poorest regions, where unemployment can surpass 30%.
State help lacking
Even with the international programs, SMEs are not enthusiastic about the government's efforts to help out.
"The government supports those companies, if at all, only in a virtual sense, in the media," said Tadeusz Ratajczyk, director of Enitra, a Wałbrzych-based manufacturer of conveyor belts with 60 employees. "It definitely doesn't support them in real life. There is simply no pro-development policy - it's a policy of words, not acts."
The company has been expanding since it was founded in 1996, Ratajczyk said. Large investment projects, worth about zł. 500,000, are implemented in two-year cycles and small investment projects up to zł. 100,000 are implemented on a regular basis, he said.
But even though the company is in good health now, the economic situation and government policy are cause for concern.
"The (economic) situation is stagnant; in the long term it might become dangerous," Ratajczyk said. On top of the macroeconomic picture, some elements of the new government - in office since October 2001 - have been calling for an import tax, a cause of concern for any company that has to import materials, he added.
While looking to raise money with new taxes, the Democratic Left Alliance (SLD)-led government is looking to save money in other areas, including SME development. SLD has slotted zl. 50 million ($12.7 million) for PARP this year, down from zl. 65 million ($16.5 million) in 2001, according to the agency's head.
Even more pressing than a few million zlotys, though, would be a friendlier business environment.
According to officials, the government could also do a lot to reduce regulatory barriers that hinder SME development.
"If you want to set up a business in Poland and run a business in Poland it is still much more complicated here than in the EU," the EC's Kwieciński said. "I am not saying that in the EU it is an ideal environment; it is the opposite. However, when you compare Poland with the EU, it is still much more difficult to run a business here."
Still, company executives and government officials see some room for optimism in Poland's SME sector - the sector that can help lift Poland out of its employment and slow-growth doldrums.
"What I think is interesting is the level of export activities of SMEs in Poland," said PARP's Gurbiel. "There is a large group of companies prepared to operate on international markets even in difficult circumstances - the high exchange rate and with an inadequate level of education and language skills. Still, they prove efficient in that and the fact that half of exports are delivered by SMEs is a factor that gives some optimism when you think about the future of this sector in Poland."
Jeff Sparshott
