PRIVATIZATION AS AN OPPORTUNITY TO ENHANCE COMPLIANCE: POLAND'S PERSPECTIVE

DR. STANISLAW WAJDA

Advisor to the Minister of Environment, Natural Resources and Forestry

1 INTRODUCTION

It is a well known fact that Poland, similarly to other post-communist countries of Central and Eastern Europe (CEE), has inherited a heavily polluting industry and seriously degraded Environment. In addition, Poland has inherited a weak enforcement system and a tradition of noncompliance of the industry with environmental requirements. In spite of the enactment of a number of new environmental acts, the basic environmental law still come from the communist time: the 1980 environmental act, the 1974 water law, the 1982 act on the protection of agricultural and forest lands. Its is needless to say that the laws are not always tuned to new political and economic circumstances. There was, however, a very important legislative development in 1991: it was the enactment of an Act on State lnspectorate for Environmental Protection which empowered the Inspectorate with broad competencies. From the past experience we have learned a lesson that without a firm enforcement of environmental requirements in relation to all economic subjects we will not manage to achieve goals of sustainable development.

2 ESTABLISHING A NATIONAL ENVIRONMENTAL POLICY

Nearly three years ago Poland initiated fundamental changes in her political and economic system. Essential elements of this process include on the one hand privatization of state-owned enterprises, the main source of the environmental degradation, on the other, implementation of the policy of sustainable development. The concept sustainable development found its expression in the National Environmental Policy (NEP) which was adopted by the Government in 1990 and approved by the Parliament in 1991. The main goal of the new policy is "the attainment of a balance between social, economic, technical and environmental conditions in the process of a development". According to the NEP, privatization processes will be used for the improvement of the environment degraded by the industry and mandatory environmental audits will be introduced; the audits will enable to make calculations of costs of the recovery of the environment and they will be essential for negotiation of the price of a privatized enterprise.

The NEP emphasized that; "One of the basic principles of the new environmental policy should be the principle of law-abidingness. This under our conditions means the necessity of reconstruction of the legal system and the system of enforcement in such a way that no opportunities will exist for circumvention of the law for reasons of 'circumstances outside one's control, public interest or impossibility"'.

3 THE PRIVATIZATION OF STATE-OWNED ENTERPRISES

The privatization of the today's dimension was launched by the 1990 Act on the Privatization of the State-Owned Enterprises. Strangely enough, the then widely discussed National Environmental Policy was completely ignored by law makers dealing with privatization. Therefore the 1990 privatization act is void of any express and direct environmental considerations. It soon turned out to be one of the essential defects of the privatization law. This shortcoming of the privatization process has been criticized by the western investor as not allowing him to make sensible business calculations. This shortcoming was quite early realized by the Ministry of Environment which offered the Ministry of Privatization appropriate cooperation and assistance in introduction of necessary changes in the privatization practices, so as to take into account interests of the environment. Unfortunately the level of the cooperation is still low and the pace of progress is too slow, however lastly the situation is changing quickly for better. It is worthy to note that a growing number of environmental NGO's is getting alerted by the unfriendly treatment of the environment in the privatization process.

4 PRIVATIZATION BY COMMERCIALIZATION AND LIQUIDATION

The privatization in Poland as based on the above mentioned 1990 privatization act and the 1981 Act on State-owned enterprises, has two main tracts: commercialization and liquidation. Related to the latter one is bankruptcy (based on the 1934 decree) which is growing in number and which is likely to cause a lot of serious environmental problems if not addressed timely. The privatization through liquidation is the most popular way of privatization. Till the end of March, 1992, the Minister of Privatization had approved altogether 1127 motions for liquidation: 492 were based on the 1990 act and 635 on the 1981 act. There have been some 40 cases of the privatization through commercialization.

4.1 Commercialization

Commercialization as regulated by the 1990 act consists of two stages. First a State-owned enterprise is transformed into a joint stock company or limited liability company of the State Treasury. Second, its shares are disposed to third party (or parties. The second stage constitutes the genuine privatization. In accordance with Article 8 of the 1990 privatization act a commercialized company assumes all rights and duties of the privatized state enterprise, including those deriving from administrative decisions. This is so called general succession. As a rule, the liabilities of the company are transferred on a new owner. This general succession covers liabilities resulting from the past contaminations as well as obligations to comply with binding environmental requirements. It covers also permits and licenses issued for the enterprise before its commercialization. They are automatically transferred on the new owner. In the 1974 water law there is a provision (Article 29) which provides for the same automaticism: " Legal successors of an enterprise assume rights and obligations contained in permits".

There is, however, a possibility to negotiate allocation of environmental liabilities between the investor and the State Treasury. As a matter of facts this occurs when a State Treasury company is purchased by western investors. For the time being, the Polish investor ignores consciously or not consciously potential consequences which may arise from the automatic transfer of environmental liabilities.

A State-owned enterprise, usually small or medium size, can be privatized through liquidation. This can be accomplished on the basis of the above mentioned 1990 privatization act or the 1981 act on state-owned enterprises. The term "liquidation" as used in this context is unclear and confusing. On the one hand, "liquidation" can be understood as a termination of a State-owned enterprise as a legal person on the other, the term denotes disappearance of the enterprise as an economic entity. Under the 1 990 act, the reason for liquidation is change of ownership (privatization), while under the 1981 act, the reason for liquidation is its bad economic situation. Article 37 of the 1 990 privatization act provides that a state-owned enterprise may be converted to private hands in one of the three ways: 1. the liquidated enterprise or integrated parts of its assets may be sold; 2. the enterprise or integrated parts of its assets can be contributed to a company; 3. the enterprise or integrated parts of its assets can be let (lease).

As already mentioned, there are no specific provisions in the 1990 act or the 1981 act (as amended) regulating a question of environmental liabilities for a new owner or the State Treasury. Therefore the question of liabilities has to be considered on the ground of the 1964 civil code. As a rule, the alienation of a state-owned enterprise or integrated parts of its assets entails joint and several liability of the purchaser and the alienator (State Treasury). Generally, the purchaser is liable to the limit of the price he paid for the enterprise. He is liable for everything that he knew at the moment of purchase or that he should have known, unless he is able to prove his due diligence behavior. In this context environmental audit can play an important role as a fulfillment of the due diligence requirements. Unfortunately, it is virtually, it is virtually not performed in this path of privatization.

4.2 Liquidation

In the privatization through liquidation are almost exclusively involved Polish investors, mainly management and workers of the liquidated enterprise. They spend usually all their savings for a purchase or lease of their enterprise and therefore they lack necessary money for proenvironmental investments. It seems that this category of enterprises will have many problems with environmental compliance. This question cannot be left unaddressed any longer.

5 INCORPORATION OF ENVIRONMENTAL ISSUES

Although there are no express or direct environmental provisions in the privatization law, it is possible, basing on a broad interpretation of the 1990 privatization act, to introduce at least some of them. It presupposes however, that environmental issues are considered as equally important as fiscal ones. According to Article 5 § 2 of the 1990 act, a motion for transformation of a State-owned enterprise into a State Treasury company should include economic and financial assessment. Since environmental liabilities, particularly those concerned with past contamination, could be very extensive, it seems logic that the assessment should include also environmental assessment. The latter one could be done on the basis of environmental audit. Therefore it seems justified to consider the invoked article as a basis of environmental audit. Another opportunity to introduce environmental audit stems from the wording of Article 20 § 1 of the privatization act: "Before offering shares to third parties the Minister of Privatization shall order that an economic and financial study be prepared for the purpose of asset valuation as well as establishing whether the implementation of organizational, economic or technical changes is required". Next article of the act (21) constitutes a good ground for requirement of proenvironmental restructuring: "The Minister of Privatization can make it condition that company shares are only offered to third parties after the implementation of changes, as referred to in Article 20 § 1". Unfortunately there are no similar provisions applicable to privatization through liquidation. It seems that the only way to include environmental considerations to liquidation (without amendment of the 1990 privatization act) is enactment of a special decree of the Council of Ministers which is envisioned in Article 25 of the 1981 act.

6 ENVIRONMENTAL AUDITING

As mentioned above, it was the western investor who raised questions concerned environmental issues in the process of privatization in Poland. Similarly to the US or West European practices he expected that environmental liabilities would be discussed on the basis of environmental audit. To meet his expectations, the environmental audit began to be performed. The audits, commissioned by the Ministry of Privatization, are now performed also for the purpose of the so called sectoral privatization (in this plan, enterprises within the same industrial sector are grouped and processed together for privatization). The main aim of the audits is to identify an extent of soil and ground water contamination caused by a privatized State-owned enterprise. The scope of the audits is limited to the area of the enterprise; there are no off-site examinations. Results of the audits constitute part of privatization contracts and as such are confidential. Neither the Ministry of Environment nor any local environmental authorities or environmental NGOs are involved in or have any access to the audits or its results. This situation, as likely to cause public suspicion, is much criticized and it should be changed as soon as possible.

7 RESPONSIBILITIES FOR CLEAN-UP

Environmental audit helps to establish costs of cleanup and control technology. Based on the information disclosed by an audit, the seller and the purchaser can negotiate who will hear responsibility for these costs (as a matter of fact, the State Treasury cannot give to the investor unlimited environmental liability). Such questions are solved on an ad hoc basis. As a rule, adjustments are made in the purchase price to reflect the purchaser's assumption of responsibility for cleanup. Sometimes the government accepts that a portion of the purchase price should be reserved in an escrow account for environmental cleanup. The purchaser agrees to commence environmental cleanup within an agreed upon time and the government agrees to share the costs and expenses of remediation. In such transactions cleanup standards are establish by referencing Western European Standards(l).

It seems that from the perspective of the Polish environmental law, the above policy deserved few words of criticism. First of all, there is no legal vacuum in the field of restoration of contaminated soil. The 1980 environmental act provides in its Article 13 that the polluted soil should be restored to a proper state, however, it is not defined what is meant by the "Proper state". But it is the competence of the local government (wojewoda) to define a level and way of fulfillment of the restoration obligation (Article 82 of the 1980 act). In this context, it is strange that the local government is not involved in negotiations with potential investors and his prerogatives are not respected. A similar situation exists under the 1982 act on the protection of the agricultural and forest lands (article 29 and article 32). In this case, the competent organ to decide on cleanup is situated belongs to the local self-government. One could imagine that disregard for the competencies of the local authorities could cause some problems, mainly if the authorities have varying perceptions of the cleanup. This disregard for the local authorities sends also a bad message to the local population. The new owner should care of his good-neighbor image from the very beginning. There are no doubts, however, that cleanup standards for Poland should be worked out and adopted soon.

8 MANDATORY AUDITING IN THE PRIVATIZATION PROCESS

The Ministry of Environment, almost from the very beginning of the privatization in Poland, voiced the opinion that environmental audit should be a key element of this process. The Ministry believes that within the range of actual needs it should be obligatory both for the commercial and liquidation privatization. In order to overcome shortages of the privatization law, the Ministry of Environment initiated last year a vigorous collaboration with the Ministry of Privatization. Unfortunately, such developments as the elections to the Parliament, change of the Government suspended the cooperation which was resumed again in April this year. In May a joint working group was set up and a formal agreement on cooperation between the two ministries was signed. The main task of the group is to introduce environmental audit into the privatization process as a mandatory requirement, work out rules for allocation of environmental liabilities between the new owner and the State Treasury and establish unit for solution of pending environmental problems emerging in the privatization process. The unit will be composed of some 10 people, highly skilled professionals (audit managers, permit managers, environmental lawyers). The unit will be involved in negotiating of individual privatization contracts concerned with allocation of liabilities for past contaminations and pro-ecological restructuring. It will closely collaborate with the Ministry of Environment, mainly State lnspectorate for Environmental Protection, and local environmental authorities.

9 ENFORCING ENVIRONMENTAL REQUIREMENTS

The State lnspectorate for Environmental Protection will play a vital role in compliance enforcement. The lnspectorate outlined its enforcement program at the Warsaw Conference on

Privatization, Foreign Direct Investment and Liability in Central and Eastern Europe (19-21 May, 1992). It was stated there that the special attention of the agency would be paid to the heaviest polluters which are both on the national and local lists (respectively 80 and 800 enterprises). However, the State Inspectorate, being aware of the backwardness of some branches of the industry will take a balanced approach in specifying environmental requirements for privatized companies. In many cases environmental requirements will be a matter of negotiations with potential investors and the agreed upon environmental commitments will be monitored and enforced by the State Inspectorate. Before a consent for a particular stage of ownership transformation is given, detailed environmental requirements will be put forward. For instance: 1. the plants operating on the basis of outdated technology, with contaminated sites endangering human health, will be required to undertake a cleanup action within a given time. It will be possible to negotiate with an enterprise a sharing of costs of remediation of less dangerous contamination if the enterprise modernize its technology to the required level; 2. the businesses overexploiting natural resources will be required to cut their production to the level guarantying a reasonable exploitation. As in the above case, it will be possible to negotiate deadlines of remediation actions; 3. the plants which are legally qualified for closure (lack of necessary permits or licenses) will be given a chance to meet the required standards. The deadlines for them will be determined as technically feasible and comparable to similar ones in the EEC; 4. the plants whose economic hardship is caused, among others, by the imposed penalty for violation of environmental requirements will be eligible for abatement or inclusion of the penalty to the cost of pollution control investment which will eliminate the reason for the penalty.

10 ENFORCEABILITY

One of the fundamental principles of the successful compliance policy is to ensure that the environmental requirements themselves are enforceable. It is a well known fact that too strict requirements cause delays and delays undermine the credibility of an enforcement program.

Very stringent requirements were introduced by the 1990 Regulation on the protection of air against pollution. The regulation provides for ambient quality standards which are to be met by 1998 and which are stricter than most of those adopted by the OECD countries. The regulation is addressed to conventional power plants. For the purpose of the regulation the plants are categorized into 3 groups: new plants (C), existing-modernized plants (B) and existing nonmodernized plants (A). However, the intention of the 1990 regulation is to apply the strictest standards of emission of S02, NOx and particles is to new boilers only. Others are expected to meet lower standards. The government is aware that in many locations they cannot be met within the next decade or so. The question is what policy is adopted by the government to ensure that the regulation is complied with?

Two key issues have to emphasized in this context, First, a legal basis is needed for regional environmental authorities (wojewoda) to issue realistically enforceable permits for plants operating in non-attainment regions. Second, the permits should include compliance schedules indicating enforceable emission reduction targets of, say 5%-10%, for one or two years intervals, so that regional authorities could monitor improvements and take immediate actions in case of failure. It would be a mistake to merely set reduction targets for distant dates and wait until the polluter comply without a possibility of an administrative action if no progress is demonstrated. On the other hand, there are no technical possibilities for gradual improvements in many plants; a typical abatement investment results in a substantial emission reduction, but only after several years of a "non-improvement" phase. Thus, in order to make sure that gradual progress does occur, as well as to offer financial incentives to those environmental champions who reduce their emissions more than required, the government see emissions trading programs as a necessary element of any viable regional or sectoral restructuring process. A special provision on marketable permits is included in the draft environmental protection act. In the energy sector marketable permits should help large power plants to meet their permit requirements by abating low-stack, dispersed emission sources rather than their ones. One pilot project in Upper Silesia region is already under way.

11 CONCLUSIONS

For many years charges for economic use of the environment (intake of water, discharge of used water, emissions to air, disposal of waste, cutting trees and bushes) were very low and did not constitute an important factor in economic calculations. This situation changed radically last year when a new Regulation on charges for the economic use of the environment was adopted. Certain charges for the most menacing pollutants increased so radically that they endangered economic existence of some industrial sectors (for instance pulp and paper industry), not to say their ability to invest in pollution control equipment. Therefore the reasonableness of the regulation and the industrial policy of the Ministry of Environment became a topic of discussion in Parliament (2). A representative of the Ministry confirmed that the charges imposed by the regulation had not been preceded with cost/benefit analysis. He blamed partly the industry for the situation, because of its weak response and too general comments on the draft regulation. Nevertheless, he added that the Ministry of Environment is ready to amend the regulation so as to make it more feasible for the industry.

The experience with the regulation seems to be a very important lesson both for the industry and the Ministry of Environment. The industry has learned that environmental regulations could decide about their very existence and therefore they should actively participate in legislative process, on the other hand, the Ministry has learned that too tough regulations could bring quite a different environmental result than anticipated.

REFERENCES

1 . R. Greenspan Bell; Industrial Privatization and the Environment in Poland, ELR 2-92 p. 10095

2. 0 oplatach ekologicznych, Gazeta Przemyslowa 12.04.92