PRIVATIZATION IN NACC COUNTRIES Defence Industry Experiences and Policies and Related Experiences in Other Fields COLLOQUIUM 1994 ********* COLLOQUE 1994 PRIVATISATION DANS LES PAYS DU CCNA Experiences et politiques des industries de defense et experiences comparables dans d'autres secteurs Colloquium 29-30 June, 1 July 1994 Brussels ------------------------------------------------------- RESTRUCTURING POLAND'S DEFENCE INDUSTRY Edward Gorczynski Prior to the fall of communism, Poland's defence industry was designed to protect the Soviet Union and the Warsaw Pact, rather than Poland. Edward Gorczynski discusses how the government has set about slimming down the industry to make it more efficient, and to allocate more resources to civilian production. They also have in mind to return the industry to its more traditional function - supplying the arms and equipment to defend Poland itself. Lt.Col. Edward Gorczynski is a chief expert at the Department of Defence Affairs in the Polish Ministry of Industry and Trade The Polish Army should be supplied with essential equipment needed to defend and secure our country, and some production capabilities should be provided to ensure a degree of defence self-sufficiency, the defence industry should be able to import advanced defence technology by using its exportable surplus,and it should stimulate technological development in the civilian industrial sector. Poland's defence industry structure should be adopted to our present defence doctrine in the following ways: - Its production capabilities should meet the present needs of the Polish Army and the State's financial capabilities. - Its new technical and organizational structure should comply with new tasks. - Its non-production and social infrastructure expanded in the past years should be managed. - It should give jobs for highy-skill specialists. The restructuring process should also aim at creating the production potential suited to our present defence doctrine and able to adopt new technologies and standards resulting from present aspirations and priorities of the Polish Army and State; converting the redundant capabilities and social structures into civil production; and making the effectiveness of our defence sector higher by introducing both the privatization process and training in management. Step 1: 1989-1991 ----------------- At the end of the 1980s demand for Polish defence equipment was considerably reduced, not only in Poland but also in other markets. The Polish defence industry consisted of more than 80 state enterprises employing about 200,000 people. Defence production in those enterprises, depending on which branch, was between 10 and 80%. The production capabilities, developed mainly to meet the demands of the former Soviet Union and Warsaw Pact, turned out to be too large, both in proportion to our present needs and to the State's financial abilities. Total defence production in Poland decreased twice in the 1988-1989 period. In July 1989 and then at the end of 1991, the Polish Ministry of Industry and Trade recommended developing individual restructuring programs and introducing them into some defence branches. These programs consisted in changing and limiting defence production profiles. Surplus capacity was planned to be diverted to civil production. The activity was concentrated on only those enterprises where existing production lines could be adapted easily to new needs. It had no significant effects on market production because of the recession taking place in our country. Beside the personnel were extremely dissatisfied because they were facing dismissals (even group dismissals in some enterprises). Today, the failure can be explained by the lack of funds to convert the production profiles from military to civilian activity, the recession taking place in Poland, and the country's lack of experience in realizing such a transformation. Step 2: 1992-1994 ----------------- At the end of 1991, after a detailed analysis of the first step in the restructuring process, the Department of Defence Affairs prepared the complex program for all defence enterprises and submitted it to the Government on January 28, 1992. - The Main points of this program were: - Concentration of production - this means the separation of specified productive capabilities in each of 31 enterprises, which are of particular significance for national security. - Change of organizational structure - this means both the privatization process in which the above capabilities will be transformed into four Treasury-run production divisions according to the production profile. By the end of 1993, five of 31 enterprises were fully switched, the others are to be converted by the end of 1994 or a bit later. - Cancelling the debts of defence enterprises to the budget - this means negotiating with banks in order to find the best way of debt repayment. - Continuation of the individual restructuring programs - this means the successfully completion of the programs with continuous cooperation with consulting firms. - Defence-to-civil conversion - this means that a considerable part of redundant, non-production and social capabilities and assets belonging to the enterprises will be sold, put on lease or converted into civil production. The program was prepared in two variants: an optimum variant of restructuring prepared according to the national defence needs, with the necessary funds guaranteed by the budget; and a budget variant of restructuring prepared with the funds provided for by the budget. The Government chose the budget variant. Present Condition of Polish Defence Industry -------------------------------------------- The Polish Defence Industry consists of 31 enterprises. Five of them have already been converted into the Treasury-run companies. The others will be transformed by the end of this year according to the plan and algorithm prepared by the Ministry of Industry and Trade. The individual programs for particular enterprises are in progress. Official negotiations with banks to find the best way of debt repayment have been completed. A considerable part of redundant and non-productive assets belonging to the enterprises has been sold or put on lease. Based on the existing labour power, new market production with a wider assortment has been started. A program of defence production concentration is just in progress, and employment in the defence sector has been reduced (in relation to the 1990 level) by more than 50% (see table and charts). Average efficiency (sales to employment ratio) of both civil and defence sectors for 31 enterprises is increasing. The legislative process has been completed and the real process of ownership and structural transformations is under way. Restructuring, Step 3: 1995 - 1996 ---------------------------------- The new organizational structure of Polish defence industry, as one of the essential elements of the restructuring process, will be the most important part of future activities (1995 -1996). The program mentioned above includes establishing four production divisions based on the Industrial Groups made up of the manufacturers having the approximate production profiles : - Aircraft division. - Conventional arms, ammunition, missiles and explosives division. - Radar, electronic and opto-electronic division. - Armoured equipment division. However, there are several conditions that should be met to carry this program into effect successfully. The target needs of main customers should be defined. This condition is closely connected with the structural reorganization of the Polish Army because it will be the prime customer of the defence industry. The privatization and the debt cancelling process of the defence industry should be completed successfully; and all barriers for export (except the limitations resulting from UN resolutions) of Polish defence products should be cancelled. Funds required to carry out the process should be provided by the Government. The restructuring process of Poland's defence industry was based on individual programs and business plans prepared by the enterprises with close cooperation with consulting firms. The Ministry of Industry and Trade (Department of Defence Affairs) is acting as a coordinator of the process and an institution responsible for creating the legal base for the restructuring. All activities undertaken are limited to 31 enterprises only, which make up the base needed to create the national defence industry with the production potential suitable to our present defence doctrine and able to adopt new technologies and standards resulting from present aspirations and priorities of the Polish Army and State. Individual programs also include the cooperation links with both local and foreign partners. Now, the enterprises can cooperate with foreign companies directly. They can buy licences, carry out technology transfer, establish joint ventures and organize seminars and managerial training. The present economic condition of the enterprises is still below expectations but there are some things that speak well for the processes just being carried out. Fourteen of the thirty-one enterprises made gross and net profits at the end of 1993, and 26 of them increased their incomes in relation to 1992.The average sales-to-employment ratio of both civil and defence sectors increased, and employment in the defence sector was reduced by more than 50%. The term "restructuring" used here is the general one and it includes all activities (also privatization and conversion) undertaken to increase effectiveness of the defence industry and to adjust its capacity to the needs resulting from the defence doctrine. Polish Defence Industry (%) ---------------------------------------------------------- |ITEM| PARAMETER | 1990 | 1991 | 1992 | 1993 | |--------------------------------------------------------| | 1 |TOTAL SALES* | 100 | 81,97| 83,76|109,64| | 2 |DEFENCE SALES* | 100 | 90,75| 41,05| 56,09| | 3 |TOTAL EMPLOYMENT | 100 | 79,51| 66,51| 59,24| | 4 |DEFENCE SECTOR EMPLOY.*| 100 | 69,49| 51,64| 46,75| | 5 |TOTAL SALES TO EMPLOY.*| 100 |103,02|125,84|184,95| | 6 |DEFENCE SALES TO EMPL.*| 100 |130,59| 79,52|119,31| | 7 |DEFENCE TO TOTAL SALES |27,57 | 30,52| 13,51| 14,11| | 8 |DEFENCE TO TOTAL EMPL.*|35,52 | 31,04| 27,58| 28,03| ---------------------------------------------------------- Copyright 1994 NATO All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means: electronic, electrostatic, magnetic tape, mechanical, photocopying, recording or otherwise, without permission in writing from the copyright holders. Authorization may be requested for redistribution of the text on a non commercial base by research and educational services. Requests should be addressed to the Economics Directorate, NATO, via e-mail 'scheurweghs@hq.nato.int'. First edition 1994 ISBN 92-845-0079-6 This is the latest in a series bringing together papers presented at the NATO colloquia organised by the NATO Economics Directorate and Office of Information and Press on economic issues in the former USSR and Central and East European countries. For further information please write to the Director, Office of Information and Press, 1110 Brussels, Belgium. The articles contained in this volume represent the views of the authors and do not necessarily reflect the official opinion or policy of member governments or NATO.