THE ECOLOGICAL SEMAPHORES FOR FOURTEEN PATHS OF OWNERSHIP CHANGES IN POLAND

PIOTR SYRYCZYNSKI, Ph.D.

Chief lnspectorate for Environmental Protection, Control Department, 00-922 Warsaw, 52/54

Wawelska Str., POLAND

INTRODUCTION

The paper deals with the experience of the last year in coordinating the environmental law enforcement with the process of privatization of the formerly state-owned enterprises. In view of tremendous growth in the number of sale deals and liquidation proceedings, environmental protection agencies are currently preparing new methods which will establish revised operating policy. These methods will consist of various so called 'ecological semaphores' - the law or administrative check - points for supervision or steering this process. The above solutions were worked out by a comparatively narrow staff of lawyers, economists, people involved in environmental protection and those having industrial experience. These solutions are the inconspicuous attempt to settle ecological problems, set or left during stormy, involving millions of people process of ownership transformations in Poland. It is necessary to add that the solutions presented in this article are being fought against by a considerable group of people involved in this process. Even some foreign specialists are against them because they create difficulties and modification of invented by them "the only just" solutions. As an example, during one sectoral privatization program only 3% of funds has been used for evaluation the present environmental condition of the enterprises.

1 THE REVIEW OF THE EXISTING SITUATION

To accomplish its aim of improving the condition of the environment, the Polish State

Inspectorate for Environmental Protection (PIOS) participates in the process of the ownership changes. Whenever the most environmentally detrimental state-owned factories are prepared to the above - mentioned process, PIOS utilizes a wide array of tools to enforce the desirable direction of technological changes. Prompt and effective action on the part of PIOS depends deeply on the quick selection of the appropriate legal decisions issued during this process.

In order to put this discussion in the proper context, there must be an understanding of the present situation within which we are working. The privatization process goes independently from an enforcement action. This process has its own laws and regulations which does not contain the relevant ecological clauses. On the other hand Polish ecological law was created in the different industrial, economical and political situation. This law has not yet adjusted itself to the quick ownership changes. On both sides we can find the insufficient knowledge of many legal acts and the practice of their implementation. The typical examples are following:

· undersigning the privatization contracts which infringe the ecological acts or

· fixing the ecological taxes and rules which slow down the privatization process of some Polish industrial sectors.
Any established practice is hard to change. In recent months at least the four centers inside the administration in Poland have increasingly taken the biggest responsibility for the implementation of the privatization process:

· Ministry of Finance, which supervises the state-owned banks and makes big deals, in which part of debts guaranteed by the government is being taking over.

· Ministry of Industry and Trade, which supervises the majority part of Polish state-owned industry, especially the heavy industry, and participates in the joint-venture deals.

· Ministry of Ownership Changes, which represents the State Treasury and sells the stocks of the previously state-owned plants or the assets remained from liquidated enterprises.

· The vojevods (district governors), who are responsible for issuing permits (decisions) and represent the State Treasury in the process of privatization of small and medium sized enterprises.

The ownership changes occur by fourteen different ways. The given amount of various methods is approximative, in fact there are many modifications, non-typical means of transformations, which sometimes are on the edge of the law. The process of transformations is not static, some paths are temporarily more predominant and there are "rush hours" because the considerable amount of enterprises pass them at the same time. Some time later new paths take the leadership.

At the beginning of this process at least three kinds of state-owned enterprises can be found. These are so-called normal enterprises, acting on the basis of general rules (i.e. common enterprises, making about 70% of a whole), state-owned enterprises joined (many years ago) into the big groups ("copper", "sulphuric", "air", "pharmaceutical" etc.) and enterprises acting on special rules (railway, airports, harbours, banks, defensive industry etc.).

The final result of this process are numerous compositions (joint-stock companies, limited liability companies, cooperatives, societies, foundations involved in economic activity, agencies or firms with foreign capital etc.). They possess the mixed ownership structure, they often produce something different from their predecessors. In addition, they are not always full legal successors of firms, from which they originated. Sometimes on the basis of property of one previously state owned firm several (in extreme cases several hundred) firms came into existence. They profit together from the remnants of the former plant. Some investors try to cut out the most profitable part of the factory (usually the newest unit) and to let loose the remnants (e.g. old power plant, land with accumulated wastes, old unit with the majority of workers etc).

Rapidity and spontaneousness of this process cause that the environmental protection agencies have problems with proper identification of economic entity which is a party of legal proceedings. The examples of such cases are the following:

· joint use of one chimney by many new economic entities, emitting substances from similar production processes,

· delivering of dangerous wastes to the area rented from other company, financially dependant on parent company, the producer of those wastes,

· complicated forms of renting (leasing) of technological installations, sometimes even the parts of one production line.

· taking over the management of the state-owned enterprise by other companies or persons (liquidator, syndic, commissioner-manager etc.).

Past experience indicates that at present we deal with continuum of various forms of ownership from full state ownership to private ownership. The only common characteristics of those subjects is that in their activity they aim to maximize their profit. When a state-owned enterprise is concerned its aim is to maximize earnings of the staff. In those enterprises the board of management is under the strong influence of the Council of Workers.

Not all of the legal instruments of enforcement produce effect in case of such instable process like the process of ownership transformations. The rudder sufficient for steering a long

Viking boat would be useless for steering a catamaran.

In order to show how different are the processes of ownership transformations a dozen or so typical examples are given below:

· commercialization of the state-owned enterprise into so-called "one man company of State Treasury" and then offering its stocks to the new owners,

· liquidation of the enterprise and lending (renting, leasing) of its property to a new company, at which at least 50% of owners are the previous workers of the enterprise,

· liquidation with selling the assets to many new owners,

· giving the management of a state-owned enterprise to a group of managers appointed by another company, sometimes with the participation of the former board of directors,

· giving the management of a state-(100%)owned joint stock company to other company for indemnity in a form of a part of stocks,

· giving the part of property of a state-(100%)owned company in exchange of the debts, which were encumbered with the former enterprise or State Treasury,

· creating on the basis of one unit (producing department) a joint-venture company, using the infrastructure of all the remaining enterprise,

· simultaneous transformation and possible sale of several enterprises with similar range of production to various investors within one branch of industry,

· programme of grouping of a dozen or so enterprises within national investment funds (so called mass privatization programme),

· disposal of the property of the former enterprise on the basis of insolvency (bankruptcy) law,

· setting the new enterprises on the basis of taking over licenses (concessions) for excavating minerals,

· increasing of equity capital of existing state-owned company by a new investor,

· division and uniting enterprises within existing law.

Please note that some of these processes are connected with signing by a new owner various obligations. The examples of these obligations are the obligations to create new jobs or to invest the agreed amount of money. As it was mentioned earlier, under the terms of many bills, the different organs of state administration i.e. vojevods or ministries have the right to act on behalf of State Treasury.

2 ENFORCEMENT TOOLS VERSUS PRIVATIZATION PATHS

It was established that some enforcement tools are not effective for some privatization paths or they give the opposite effects for them. Some important examples are given below, I

hope they will carry this point.

2.1 Charges or ecological taxes

The existing system of financial tools consists of collecting charges from (mostly state - owned) enterprises in order to finance capital investments of protective equipment in other enterprises. Charges are paid for the amount of emission which is within the range of the obtained permit. In practice it is the considerable redistribution of capital which can be allocated to various aims. At present substantial part of foreign investors, which want to take over the enterprises, demand temporary releasing from charges, usually until they recover the invested capital. Previous payers, i.e. the big state-owned firms which are in the difficult economic position, cannot bear the due charges. This situation puts slowly the whole system out of order. New payers, which are small private enterprises, are numerous but very little, sometimes the expenses of obtaining the charges exceeds their value.

The only privatization path, on which charges gave the significant result is the capital privatization method. Potential investors stated that the existing level of charges is an effective encouragement to modernize technology quickly. The charges stimulate to build proper protective installations. Pulp and paper industry and heavy chemistry industry can be the examples.

Conclusion:

The imposition of charges for the using of the environment is the appropriate tool for achieving the desired direction of restructurization in the capital privatization process. This tool is not valid for the paths where numerous little firms are converted.

2.2 Monetary fines and other administrative penalties

It was established that the penalties inflicted for single offenses areas a rule much more low in value then existing obligations among enterprises. These debts exceed many times those inflicted fines. Additionally the biggest debtor of the enterprises is often State Treasury. The debt of the Treasury and the mutual debts of the enterprises disturb the influence of fines. Some debts of the state-owned firms are, at the moment of transformation, taken over by the Treasury. Some of the enterprises know it, they do not even appeal against fines but they do not pay them.

The powers of the enforcement agencies are defined by law. There are some other administrative tools among them, too. The agencies can order the firms to install new sampling and monitoring devices or to design and to build new, proper waste collecting facility. The firm managers can be compelled by additional fines to meet the obligations. Ministry of Ownership Changes hold sway over the managers of the firms. During the preparing to the sale deal the managers cannot to undertake to start new big investments. For example the managers of the big pulp facility has obtained the written ban on starting the new waste water treatment plant until the sale deal is over.

Conclusion:

The imposition of monetary fines is not the useful tool during ownership changes process when there exists the big amount of mutual debts between State Treasury and the state-owned enterprises. The administrative orders for new environmental protection units are not the efficient tools if this firm is going to be sold recently.

2.3 Strict administrative prohibitions, among them bans on some kinds of imports, exports and the preferential customs duties

In Poland many administrative rules concern the materials and products in aim to achieve:

• the better sanitary control,
• elimination of products which contain environmentally dangerous substances,
• suppressing the production of some kinds of wastes,
• concessions for firms dealing with some kinds of substances.

All this bans are easy to impose. The practice shows that the majority of work is for the customs officers not for the environmental protection agencies. This type of ban would be advantageous if the customs were without of job but it is hard to achieve when there are many neighbor countries with different economic situation. The customs must prevent the smuggling of more important items e.g. arms, narcotics etc.

Those bans have the strong influence on the industrial practice, not only on the ecological situation of our territory. The ban on import of wastes deteriorated the economic situation of paper industry but its influence on the ecological situation In the whole was small. So far this ban has not given the stimulus for collecting the paper wastes. The ban on import of all kinds of scrap gives the job for little smelting factories abroad. The ferrous and nonferrous scraps are processed into bars or plates before entering Polish territory. The lifting of this ban would give much more cheap metal in our market and the bigger unemployment in the Polish mining industry, too. The diminution of customs duties on coal tar (for stopping its production in Poland) has caused the overproduction in Poland. Polish coal factories have not been able to sell their tar, which every day was produced as an additional by-product during the production of coke. The diminution of customs duties on asbestos - containing products (for stopping their production in Poland) has caused that the prices of imported asbestos-cement pipes were lower than the other iron or PVC pipes. The administrative bans or preferential customs duties can be applied only for simple, clear situations. At the process of ownership changes majority of foreign investors attacks this system. It does not give them the feeling of stability although their investment would be good for ecological situation. All administrative bans are unpredictable, they depend on the political ideas.

Conclusion:

Bans against the import of selected items or preferential customs duties have achieved the results only in some cases. The abuse of the bans gives many bad side results, especially during the ownership changes process.

2.4 Suspending of some types of production or decreasing its scale

Stopping of the unlawful production activity is possible but very rare. Usually it concerns only little and unimportant units or machines. All the processes of ownership changes are connected with the painful process of conscious changes. Millions of people have found themselves in the market economy for the first time in their life. They try to preserve their jobs. Their protests grow stronger and more desperate. In such circumstances instead of the direct stoppage of production there can be used some other indirect methods. The best example is the situation of one southern district (vojevodship). In this area at least 60% of all workforce is connected with mining and smelting industry. For the economic reasons at least half of them ought to be made redundant. For the ecological reasons the output of this mine and smelting enterprise ought to be reduced by half. Approximately 70% of the workforce in this enterprise ought to be dismissed because of the economic and ecological reasons. This would leave 42 % of the working population temporary unemployed in this area. Such decisions would cause high political instability.

Conclusion:

The stoppage of the production by administrative orders is not the best method against the

big state-owned enterprises.

2.5 Indirect methods

The first indirect method has been applied. The representatives of environmental agencies (PIOS, Ministry of Environmental Protection) has participated in the committees preparing the restructurization programmes for some industrial branches. Such programmes are connected with liquidation of some enterprises and assigning credits for some other ones. Such participation can be much more efficient now.

Our agency possesses as detailed information as Ministry of Industry about the present situation and production of the industry. At present, on the basis of new act, passed in August 1991, the new, centralized and efficient structure of the State Inspectorate for Environmental Protection has been established. It consists of 49 inspectorates with the laboratories and inspection teams. The regular inspections of the biggest industrial enterprises give the possibility to evaluate the basic economic and ecological changes in the various industrial branches. These data, aggregated in the computer system of the Chief Inspectorate, can help during the discussion with the Ministry of Industry and Trade and other governmental and non-governmental agencies. The only problem is the implementation of our opinions in the final decisions.

The second indirect method has been proposed quite recently. It is cooperation with banks, especially the banks which analyze the credits for new industrial activities. At present the nine biggest banks make the "restructurization" of their credit portfolios. They want to stop credits to the worst enterprises and they need the most detailed information in this subject. The stoppage of the credits for the old enterprise is sometimes the good, quick and efficient method of fighting against pollution. It is the better method than the imposition of administrative orders done by environmental agencies. There has been organized the first course for the credit department employees recently. They have been informed about the new rules and their future implementation.

The third indirect method is considered now. It would be the cooperation with the State Commission for Securities. This agency controls all the documents of the firms, whose stocks will be in the public trade. This commission can suspend its decision until the firm will obtain all the needed environmental decisions and agreements. If any firm try to sell its stocks, it will be obliged to show the proper environmental audit. The sale of stocks to the public ought to be connected with the proper information for the potential buyers. This method can be applied to the minority of privatization paths only. Not all of them go through this public sale of stocks. This method is the most efficient on the path named "manager contracts", where the reward for the managers is paid as an agreed percentage from the value of the sold stocks. It can be applied for the paths named "the employees in a leveraged buy-out" and "mass privatization", too.

The fourth indirect method originated after the agreement between Ministry of Environmental Protection, Natural Resources and Forestry and Ministry of Ownership Changes had been signed. This agreement proposed to organize the Constant Interdepartmental Team for solving the problems on the border between the privatization and ecology. This team will help to exchange the information and it will propose the changes to the existing privatization and ecological acts. At present majority of potential foreign investors wants to obtain the information about the ecological situation of the enterprise which is put out for sale. This information ought to show some kind of "compliance schedule" for every part of this enterprise.

Conclusion

There are many indirect methods which can be applied by environmental agencies during

the ownership process. They can give the desired results if the appropriate tools are chosen.

2.6 Compliance schedules

Compliance schedules would be supervised agreements between environmental agencies and enterprises. There are some practical problems which suppress the implementation of this tool:

• The Polish administrative code does not give the permission for the government agencies to sign the agreements with the firms or private persons. The agencies can only give administrative orders, although some of these decisions can be more flexible with data of their implementation. No agency can give the permission for temporary repealing the law.

· It will be possible if the parliament changes this above mentioned act.

· The multi-year experience of Polish ecology is against the above mentioned agreements. The managers of Polish enterprises have not taken into consideration some of the previously signed agreements. They are under influence of workers, Ministry of Industry and Trade and the deteriorated economic situation of their factories. There is a lack of efficient fines for not executing this schedules.

· The Polish ecological law is based on administrative law. It gives high possibility of political influence on decisions. The agreed schedules would be opened to influence during the course of their implementation. The civil law is usually much more independent from political changes.

· Every schedule must give the permission for not paying the fines and charges during its implementation. It gives the economic entity involved better situation than the other ones. It can be very important factor during the sale of the whole industrial branch for the foreign investors. The privileges for one enterprise will be the reason for obtaining this same privileges by others. The whole system of collecting the fines and charges can be destroyed.

Conclusions:

The implementation of the compliance schedules needs the changes in Polish ecological and privatization law. It gives much more power into the hands of negotiators but it will decrease the amount of fines and charges paid by enterprises. This money has been used for new proecological investments. The compliance schedules ought to be done with some kind of judicial procedure and the agreements ought to be signed under the civil law. In this way they would not be Susceptible to the political influence.

2.7 The other underestimated tools

There are many provisions in Polish law which gives the possibility to implement some enforcement decisions.

· Article 432 of Polish Commercial Code gives the opportunity of increasing the capital of joint stock company. It has been used as a tool for investing into new protection unit for one zinc and lead processing plant.

· Article 21 of Polish Privatization Law gives Ministry of Ownership Changes the power of the enforcement of organizational and technical changes in state-owned joint-stock companies. PIOS tries to achieve the substantial technological change in one of the biggest Polish non-ferrous metal processing plant.

· Article 20 of this Privatization Law gives Ministry of Ownership Changes the power to state the scope of economic and technical reviews of state-owned enterprises. It can be used for implementation of the environmental audits for every privatization path.

The State Inspectorate for Environmental Protection aims to implement the environmental audits for all privatization paths. It is needed especially for liquidation path, where some wastes, buildings and ground are left. Although environmental impact assessment exists in the Polish law, it is not suitable for application in all privatization paths.

The lack of the special provisions impedes the judicial enforcement of the privatization mistakes. I think that civil judicial enforcement is the last and only way for "liquidation" route connected with the dissolution of an enterprise. After the liquidation or bankruptcy of the enterprise only the fines against the last managers of this firm can give the desired effect.

Conclusion

It is imperative to change the Polish bankruptcy and liquidation law and to implement the solutions known from other countries. At present bankruptcy law is from the year 1934 and it has no ecological provisions.

3 ENVIRONMENTAL AUDITING

Polish environmental protection agencies have proposed the method of environmental audits for the privatized or proposed for privatization enterprises. It is based partially on "Generic Protocol for Environmental Audits at Federal Facilities" from USA and on the basis of own experience of its authors. This instruction has not been implemented yet. Ministry of Ownership Changes has not agreed yet for implementation of the audits. Only one path (so named "capital privatization") is connected with environmental audits.

This is partly due to the fact that the use of the Privatization Law has brought some deficiencies to light, on the other hand problems are caused by the fact that some political forces try to speed up the whole process.

There are the problems of money for those audits and finding the specialized teams. These technicalities can be solved with cooperation with many Funds and Programmes for Help for Central and Eastern Europe.

I think that the environmental audits during the privatization ought to answer the five or six questions:

1 . What is the present ecological situation of the firm?

2. What ought to be done for achieving the compliance with the Polish (and EEC) rules?

3. What kind of the administrative decisions are needed?

4. How much will the whole restructurization process cost?

5. Who will be responsible for implementation of the results of the audits (new owner, State Treasury. Ministry of Privatization etc.)?

6. What kind of legal tools ought to be implemented during the sale deal?

The majority of audits gives only the answers to the first question. The audit of the Polish oil and gas industry is the best example of this type of audit.

The answer to the second question needs collecting the environmental requirements from various involved parties. The answer for the third question is crucial for new investor who wants to have the stable situation. The answer for the fourth question is important during the sale deal of the firm or the assets. The fifth question is connected with the problem: 'Who will announce the inevitable shut-downs?" The sixth question can be answered by the legal advisors to the government of Poland.

The more complicated issue is the implementation of the results of those audits. Their results give the big job for Ministry of Ownership Changes. It must restructurize these enterprises, to divide them or/and to clean their area. It must change the normal way of their sale and negotiate the special contracts. Nobody likes having more work. If you want to sell the car you ought to repair the tyres, to adjust the engine and to wash the body. Ministry of Ownership Changes would achieve the better prices if it made this effort on the basis of the results of the audits.

Environmental audits would give the new requirements for these enterprises. Ministry of Ownership Changes would be obliged to consider them during the sale.

Environmental requirements will be put forward by:

· firms performing these audits,

· inspectors carrying out normal controls of these facilities,

· voivodes and environmental division subordinate to them,

· independent ecological organizations,

· other law entities, which are personally interested in this matter.

Environmental requirements will be determined before the consent for a particular stage of ownership transformation is given. In many cases environmental requirements will be a matter of negotiations with potential investors. I am convinced that such an approach will be approved by those who want to understand the obligations they will have to fulfill, as well as by banks which prefer to avoid granting credits for investments, whose accomplishment, for ecological reasons, will not be possible.

The examples of determination of those requirements are:

a) For plants operating on the basis of old-fashioned technology, with a lot of "past contamination" cases, there can be imposed the following conditions:

i. until a deadline, eliminating past pollution which still endanger people.

ii. sharing of costs for eliminating other kinds of pollution which do not directly endanger people can be negotiated if by a certain deadline the plant will modernize its technology to the level meeting the environmental standards.

b) The plants overexploiting natural resources will for sure have to limit their production to the level ensuring reasonable management of those resources.

i. the deadlines for recultivation of degradated areas and waste disposal sites can be negotiated.

c) For the plants whose legal situation would qualify them to be closed (due to the lack of water permits or exceeding the standards for emission to the air), the main requirement will be the deadline to satisfy legal requirements. This date will be determined as technically possible and comparable with deadlines imposed in such cases in EEC or USA.