Bank-Led Restructuring of Problem Enterprises in Poland
In 1993 Poland embarked on an innovative program to restructure its state-owned enterprises--the Enterprise and Bank Restructuring Program. The goals of the program were to separate unprofitable but viable state-owned firms from their nonviable counterparts, liquidate nonviable firms while minimizing the inappropriate liquidation of viable firms, and promote the speedy restructuring and privatization of potentially viable firms. The program forced commercial banks to address problem loans on their books at the end of 1991 through one of five routes: a nonjudicial bank-led workout with the debtor (under a new conciliation process), a judicial workout, filing for bankruptcy of the debtor, filing for liquidation of the debtor under the state enterprise law, or sale of the problem loan on the secondary market.
The objective of this research was to evaluate the impact of the program on enterprise restructuring and exit. The research emphasized the links between expected changes in creditor behavior (brought about by other aspects of the program, primarily bank restructuring and privatization) and enterprise performance. It was part of a larger comparative study on modes of restructuring and exit of financially distressed state-owned firms in several transition economies.
The study addressed the following question: To what extent is the bank-led restructuring component of the program leading to appropriate long-term restructuring of the viable firms and closure of the nonviable firms that are participating in the program?
This general question led to several more specific questions:
To address these questions, the study undertook a detailed survey of the characteristics of firms and the outcomes of the process in a sample of 139 firms subject to the program. The sample was stratified to include a significant number in each of the five categories of outcomes and to ensure representation from each region of the country. The questionnaire used in the survey contained detailed questions on the firms' financial and operational performance from 1991 through 1994 and the characteristics of relevant processes under the program.
Analysis of the bank conciliation process and its outcomes through mid-1995 and of the other resolution paths (court conciliation, bankruptcy, state enterprise liquidation, repayment, and sale of debt) found that the Enterprise and Bank Restructuring Program was an important catalyst in getting banks and enterprises to tackle their bad debt problems. It also found that the program operated according to legal requirements. The program appears to have been generally able to push better firms into restructuring paths and worse firms into liquidation paths.
But each resolution path operated with serious shortcomings. Although it is perhaps still too early to judge results, the bank conciliation process appears to have led to little restructuring in firms subject to it. The bankruptcy and state enterprise liquidation processes are poorly designed and give creditors and trustees little power or incentive to use them properly. Court conciliation also is poorly and inflexibly designed, and sales of debt are impeded by tax rules and limits on purchasers' use of debt. So while the program is a good start, more work is needed to redesign the underlying reorganization and "exit" mechanisms and to strengthen creditors' and debtors' incentives to use them to restructure the Polish economy.
Responsibility: Policy Research Department, Finance and Private Sector Development Division--Cheryl W. Gray (cgray2@worldbank.org). With Arnold Holle, Boston Consulting Group; and Stephan Krajewski, University of Lodz. The Japanese Trust Fund contributed funding for the research.
Completion date: December 1996.
Reports:
Gray, Cheryl, and Arnold Holle. 1996. "Bank-Led Restructuring in Poland: An Empirical Look at the Bank Conciliation Process." Policy Research Working Paper 1650. World Bank, Policy Research Department, Washington, DC.
_____. 1996. "Bank-Led Restructuring in Poland: Bankruptcy and Its Alternatives." Policy Research Working Paper 1651. World Bank, Policy Research Department, Washington, DC.
_____. 1996. "Bank-Led Restructuring in Poland: The Conciliation Process in Action." Economics of Transition 4(2):34970.
_____. 1997. "Bank-Led Restructuring in Poland II: Bankruptcy and Its Alternatives." Economics of Transition 5(1):2544.
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