Transition   Privatization   

Report on the paper of


Privatization in Poland :

The Problem of Valuation

in Journal of International Affairs. Summer 1991, p 247-269.

by Maria Cassisi

Eastern Europe is currently struggling with the problem of privatization. In order to privatize firms, a method must be devised in which the companies are given a value at which they are to be sold. Unfortunately during the times of the Central Planned Economy in Eastern Europe there were no market forces, thus there is little to no valuable data on the past performance of these firms. No markets existed for raw materials, capital, labor, or prices. Along with these problems, the current economic conditions which are unstable add to the difficulty of giving a value to the firms to be privatized.

In the 1980's in Poland Jaruzelski began to introduce free market factors into the Polish economy. There was autonomy in the local economy. Profit motives and bankruptcies still did not exist however, there was still government intervention. In 1989 Tadeusz Mazowiecki, the Prime Minister of Poland began dismantling the old system. He felt it was time to introduce a free market and begin privatize a free market and begin privatization. The first step in this reform was the stabilization of the economy under the Sachs Plan. The price subsidies were lowered in order to reduce the deficit. High taxes were implemented in order to restrain wage increases. Interest rates became real interest rates meaning that there was no credit available for the inefficient firms. The zloty was devalued by 360%.

As a result of the implementation of the plan the deficit disappeared, the inflation was reduced to 5% a month, and there was a positive balance of trade. However, there were also negative results to the program. Subsidies to firms were gone, the government no longer funded inefficient firms. The industrial input dropped significantly. As unemployment increased the real wages in the country fell. Firms were still in state hands under poor management working inefficiently.

According to Wellisz it is important that this necessary privatization take place rapidly due to uncertainties. The future is very uncertain at this point in time. It is also uncertain as to how much longer the population will tolerate the hardships and social burdens of an extended plan, thus making its completion difficult if not impossible.

Whether the firms be privatized for distribution to the private sector or to be liquidated a value must be placed upon them. A market must be established which has entrepreneurs with free entries and exits to the market. Resource and technological allocations must be efficient. Management's quality must also improve. Privatization must also occur because there is a need for economic reform. The government needs a way to raise money for its debts. There must be a redistribution of income as well. But what is important to remember is that the pace and method in which privatization in a country occurs affects government goals (i.e. profit, quick change in economic structure wanted, getting rid of government owned firms) differently.

Poland has employed various consulting firms to begin the process of valuation. As a result there will be Western methods of valuation used in the process. Thus a fair market price will be found (i.e. cash price, public offering of shares.) The investment value of each firm will be determined (based on the needs of the buyer, government will seek the buyer in n this case.) A book value will also be established (i.e. assets minus liabilities, no estimates of future profits involved.) However the most popular way of discovering value is the discounted future earnings method. It estimates the future earnings of a firm and then uses the discount rate to find its present value. The more risk involved the higher the discount rate used.

Valuation also depends on the diversity in production as well as other factors. The management quality, research and development activities, and amount of capital necessary for modernization play key roles in the determination of a firms value. As can be seen valuation is costly and time consuming. Due to the fact that Eastern Europe's records post W.W.II were not maintained very well data is difficult to find. There was also a Centrally Planned System in place which did not even resemble the market.

The solutions to the problems of privatization are as follows. The first firms to be privatized should be those which already export to the West. All subsidies directed towards firms which show negative profits should be cut. Interest rates should be real positive interest rates. The large enterprises should be broken down into smaller parts before being sold. In order to find values for these firms, similar markets in other countries should be investigated and observed. Management of these firms pre-sale could be entrusted to foreign managers with experience in the market economy. These firms could also be leased instead of sold.

According to Wellisz, valuation has too many problems although many countries are attempting to do this before selling. Eastern Europe may not tolerate the reforms implemented much longer. Thus Privatization should be done through the distribution of shares all at once. This would be politically and socially accepted. If this is not done then there will be inflation, structural unemployment, and stagnant growth. What is worse is that there will be remnants of the communist planning system still in place which would hinder further economic progress.

I believe that privatization should be completed in the Eastern European states. However, it should be done with government intervention. If government The government should distribute vouchers to the population, thus stimulating market forces. The people with their own free will then choose the companies in which they want to invest. In this way the prices will come about naturally. There is no foundation for setting values to these firms and it is too timely to begin researching methods of estimating values. The population will become restless and further reforms will become next to impossible. Thus I believe that the only way to complete privatization is to allow the market to take over and determine the value of each firm.



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