'Social package' agreed for Polish Steelworks privatisation

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The sale of Polish Steelworks (Poland's largest steel producer) to the Indian-based LNM Group was completed in March 2004, after the new owners reached agreement with trade unions over a 'social package' to protect the interests of the company's 16,000 staff. No such provisions had been included in the original privatisation agreement between LNM and the government. The deal includes employment guarantees and a 'privatisation bonus' for all employees.

The deteriorating condition of the Polish iron and steel industry in the late 1990s and a mounting crisis on world markets compelled the government to modify its restructuring plan for the industry. It thus adopted an update of the restructuring programme in 2001 and then, in September of that year, also adopted restructuring legislation for the industry (PL0310105F).

The key element of the iron and steel industry restructuring programme was the establishment of the Polish Steelworks (Polskie Huty Stali, PHS) holding on the basis of four production companies, along with an acceleration of the privatisation process and the allocation of resources obtained from a bond issue into the financial restructuring of the sector's enterprises. The first step, taken in November 2001, consisted in appointing one person to the position of management board president of Katowice Steelwork (Huta Katowice) and president of Sendzimir Steelwork (Huta im. T. Sendzimira, HTS) (the two largest components of the holding).

For formal reasons, the new organisation created out of four previously independent iron and steel plants could start operations only as a holding and not as a corporation because, at the time of its establishment, a 'composition agreement proceeding' was underway at HTS, which prevented any decisions with respect to its assets. At the same time, the main Katowice Steelwork assets were securing a 'syndicated credit'. After these obstacles were removed, thanks to large-scale involvement by Industrial Development Agency (Agencja Rozwoju Przemysłu, ARP), the general assembly of PHS shareholders decided in August 2002 to transform the holding into a corporation at the end of the year.

The PHS corporation was registered on 31 December 2002. It comprised enterprises which earlier belonged to the PHS holding - ie Katowice Steelwork, HTS, Florian Steelwork (Huta Florian) and Cedler Steelwork (Huta Cedlera). As a result of this operation, these plants lost their independence and became parts of a single enterprise. All decision-making powers, such as those concerning financial matters, trade, supplies, transportation and human resources, were concentrated at PHS corporate headquarters. By virtue of the law, all employees of the annexed plants became employees of PHS, on their previous pay and conditions. The amalgamation had no direct economic or social consequences for the employees concerned.

Today, the PHS corporation is Poland's largest manufacturer of steel products and has a 70% share of domestic production. Currently it has approximately 15,500 employees.

Privatisation

After these changes, the privatisation of PHS became a main objective. Even before it became a corporation, an invitation to participate in the privatisation of the PHS holding was sent out to 13 large steel companies. Initial interest was expressed by Arcelor (Luxembourg/France/Germany), LNM Group (India), ThyssenKrupp (Germany) and US Steel (USA).

Ultimately, only the LNM Group remained in contention, during a privatisation process that took 10 years. In October 2003, an agreement was signed whereby the State Treasury sold its PHS shares to LNM. Under the agreement, LNM made commitments to satisfy the claims of PHS's principal creditors and increase PHS's capital. The agreement guarantees that, up to the end of 2009, the State Treasury will retain influence over certain important decisions concerning the company.

The signing of the agreement met with sharp opposition from the trade unions, which considered that the privatisation transaction had violated the law. The bone of contention related to accompanying social measures for the PHS workforce. Indeed, this was the first privatisation agreement of such large proportions in Poland that had not included any provisions for a 'social package'. The Minister of the Treasury at the time, Piotr Czyżewski, stated that the privatisation agreement had been concluded without a social package because this was the only way to save PHS, which he believed would have gone bankrupt without an investor.

Social package

Following the privatisation agreement, LNM and the trade unions at PHS held several rounds of negotiations over a social package. Disagreements concerned mainly wage guarantees and a so-called 'privatisation bonus' for the personnel. Finally, at the end of February 2004, an accord was concluded between LNM and the 12 trade unions operating in the company, enabling the privatisation process to be completed in March 2004. The agreed social package contains commitments on the part of LNM relating to the protection of employees' interests that might be threatened by privatisation, as follows:

• employees have the right to select two supervisory board members;

• LNM will pay a privatisation bonus of PLN 2,500-PLN 3,000 (close to EUR 800) to every worker employed on the day the package was signed;

• employees will be awarded a pay increase

• present employment status is guaranteed until 31 July 2009 - this means that there will be no collective or individual redundancies at the company for reasons not involving employee performance, irrespective of the nature of organisational, economic or technological changes that occur; and

• the company will draw up an annual personnel training programme and implement it in consultation with the trade unions.

Other provisions include LNM commitments relating to companies dependent on PHS, employment guarantees, social and healthcare guarantees, occupational health and safety, working conditions and cooperation with trade unions.

The fate of companies dependent on PHS caused much controversy. In the accord, LNM has made a commitment to abide by all collaboration agreements concluded between PHS and such companies. In addition, LNM representatives have nine months from the date when the social package comes into effect to study the possibility of adding dependent companies to the PHS structure. Employees of those companies in which PHS holds a 100% stake will also receive the privatisation bonus. LNM also guarantees that the PHS 'service market' will remain the main market for dependent companies, as long as the principle of competitiveness is maintained.

Members of the trade union negotiating team stated that they 'accepted the concluded agreement without enthusiasm'. It seemed to commentators, however, that the lack of enthusiasm was mainly a sign of weariness after lengthy negotiations.

Commentary

According to State Treasury representatives, the total value of the PHS privatisation transaction amounted to almost EUR 1 billion. They also point out that the transaction was the most complicated in the history of the State Treasury and the longest in the making. They are probably correct. The privatisation deal was exceptional for another reason. Signing a privatisation agreement which does not include a 'social package' is a rare occurrence. Provisions protecting personnel interests are traditionally an integral part of every privatisation deal in Poland (PL0209103F). This time, however, the fate of nearly 16,000 employees was put at risk. Hence it is not surprising that trade unions are trying to have social packages enshrined in the Labour Code. (Rafał Towalski, Institute of Public Affairs [Instytut Spraw Publicznych, ISP] and Warsaw School of Economics [Szkoła Główna Handlowa, SGH])