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FY 1997 Assistance to Central Europe Request: $40,000,000
Introduction.
Poland was the first country in Central and Eastern Europe to declare its independence. U.S. assistance with its transition to democracy and free markets began in 1989 with the inception of Support for Eastern European Democracy (SEED) Act support. Debt restructuring and debt relief from the U.S. and other creditors has been a major factor in helping Poland through the transition. Poland has served as a leader in the political and economic transition of the region. Despite resulting social hardship, it was willing to use shock therapy at the earliest critical point in its transition which succeeded in breaking its initial hyper-inflation crisis. With a population of 38.5 million, Poland is the largest market for U.S. exports in the region. Its early accession to European Union (EU) membership is important to U.S. security and economic interests in Central Europe.
The Development Challenge.
Poland has regained its fundamental economic strength. Inflation and debt are now contained at manageable levels and pre-1990 output has been re-established. The Polish real GDP expanded by 5.2% in 1994 and an estimated 6% in 1995 (according to the World Bank), and Poland is second only to Albania in having the highest rate of economic growth in the region. As the largest domestic market in the region, Poland has great potential for attracting foreign investment, now that economic stabilization is completed and growth is steady. However, per capita direct foreign investment to date is still low, even compared to smaller countries like Hungary.
In October 1994, Poland reached agreement with commercial creditors to restructure $14.4 billion in external debt. Debt reduction amounted to $8.4 billion or 59% of the nominal amount restructured. Prior to this agreement, during 1991-94, write-offs of some official obligations by Paris Club members had also occurred. Nevertheless, the country remains the largest debtor in Central Europe with an estimated $42.1 billion external debt at the end of 1994. Although the country is classified as severely indebted by the World Bank, the burden of debt has been reduced as a consequence of the debt reduction agreements and large increases in currency reserves and exports.
With U.S. assistance, Poland has seen an impressive increase in privately owned businesses (producing over 56% of GDP and 61% of employment by the end of 1994) and an improved policy climate for the further growth of the private sector, greater competition within the banking sector, expansion of mortgages and development of new financial products and capital markets, and the introduction of models for environmental improvement, housing privatization, and delivery of key services. Though a number of business management training programs are in place and graduating to self-sufficiency, there is still much to do to develop indigenous business support organizations that will continue to foster private sector growth.
The large informal sector still allows massive tax evasion, and there is a lack of confidence in the zloty and the banking system. Fewer than 50% of households have bank accounts and cash transactions predominate. Resulting savings and investment rates remain low (less than 20% of GDP) compared to other high growth economies and needs. Government treasury bills and notes still dominates capital markets and crowd out private efforts to raise capital. Banks are overly conservative in their lending practices. To address this, more diversified financial instruments are being developed, financial markets are being further deepened, and programs are underway to make banks more efficient and user-friendly.
U.S. assistance has also strengthened democracy in Poland through its focus on the role of local governments, and the broadening of participation, notably through non-governmental organizations. Much still remains to be done to develop capacity in local government, especially for revenue generation and budgeting, service delivery, and economic development, and to develop models for public-private partnerships in all of these areas.
Poland enacted the most profound reforms in the region, notably, more enterprise restructuring and shedding of excess labor, resulting in major productivity increases at the enterprise level. Hence, in 1994 private sector industrial output rose by 23%, while that of State enterprises expanded by only six percent. U.S. funding levels have declinedannually since 1992, in recognition of this progress, and Poland is now expected to graduate from additional SEED Act assistance in the year 2000. Assistance is oriented toward preparing for this graduation.
Other Donors.
The European Community appropriately provides the largest and thematically broadest share of technical assistance to Poland. The U.S. provides the next largest share of grant assistance. The World Bank provides $4 billion in loans with emphasis on infrastructure improvement in the transport sector (roads, rail, ports), and the European Bank for Reconstruction and Development provides loans for private sector investment (85% of its current portfolio). The British Know-How Fund provides a small program of assistance to the financial sector and local government. Germany, France and Japan finance modest programs focused on scientific and cultural exchanges and growth in trade and investment. In September 1995, Japan acknowledged the success of Poland's debt management and repayment record by reopening its trade credit and guarantee windows to Poland. The U.S. collaborates closely with all of these donors and lenders in its definition of program strategy.
FY 1997 Program.
Poland has graduated from International Monetary Fund assistance, and it is expected to become a member of the Organization for European Cooperation and Development before the end of 1996. During the last quarter of 1995, in view of Poland's stage in moving through the transition, the decision was reached to focus the future USAID program on three strategic objectives: stimulating private enterprise at the firm-level, establishing a competitive and efficient financial sector, and making local government effective, responsive and accountable. This intensifies efforts on aspects critical to Poland's progress in moving towards EU membership, and its graduation from U.S. assistance after FY 2000.
Strategic Goal: Economic Restructuring
Poland has the potential to become the largest and most diverse economy among the Central and Eastern European countries. Achievement of this goal is dependent on private sector development and the establishment of a private financial sector. Progress in FY 1995 includes: the creation of 15 National Investment Funds, the launching of a Mass Privatization Program, bank privatizations, business skills and privatization training, and the creation of a special small business credit program.
Future economic restructuring activities in Poland will focus in the future on stimulating private sector development at the firm level and creating a competitive market-oriented private financial sector. More state-owned banks will be privatized, bank supervision will improve, and the percentage of housing constructed by the private sector will increase. Longer term capital will be provided for municipal projects through commercial bank lending and the issuance of municipal bonds. The creation of a credit rating agency will better inform investors of the risk in buying debt investments and will improve pricing of debt issues. Help will be furnished to make the over-the-counter market operational so that it serves as an effective alternative way of raising financing. Further work will proceed in deepening capital markets by developing institutional investors such as private pension funds. Energy activities will be refocused to support power privatization and private enterprise development. The establishment of post-graduate training programs in business management in Warsaw, Gdansk and Lodz will be completed.
Strategic Goal: Democratic Transition
Democracy in Poland has developed rapidly, and the necessary laws, media, and legal institutions to support democratic processes are in place. Local governments have assumed greater responsibility and are demonstrating increased creativity and capacity in their use of resources and management services. The NGO sector is increasing in diversity, growing to over 12,000 organizations since independence.
Remaining problems include unfunded mandates for service delivery at the local government level, the need for:capacity-building in local government, economic development finance, and greater influence on local decision-making by neighborhoods, local businesses, and NGOs that represent these and other groups.
Cross-cutting and Special Initiatives
There are four cross-cutting or special initiatives in Poland: English language training; U.S. graduate degree support; small democracy program grants; and a re-employment fund for worker re-training. Each of these small, but critical programs either provide basic skills and opportunities, such as retaining for laid off workers and advocacy on behalf of the handicapped and abandoned children; or compliment activities associated with Poland's three Strategic Objectives, such as graduate degrees in business and citizen's committees for strengthening schools.
|
Strategic Objectives |
Economic Restructuring |
Democratic Transition |
Social Stabilization | Cross-cutting / Special Initiatives | Total |
| Privatization | |||||
| Fiscal Reform | |||||
| Private Enterprise | 15,350,000 | 15,350,000 | |||
| Financial Reform | 11,750,000 | 11,750,000 | |||
| Energy | |||||
| Citizens' Participation | |||||
| Legal Systems | |||||
| Local Government | 11,750,000 | 11,750,000 | |||
| Crises | |||||
| Social Benefits | |||||
| Environmental Health | |||||
| Cross-cutting / Special Initiatives | 1,150,000 | 1,150,000 | |||
| TOTAL | 27,100,000 | 11,750,000 | 1,150,000 | 40,000,000 |
USAID Representative: Suzanne Olds
Purpose: Local Government becomes effective, responsive, and accountable.
Background: Poland is graduating from USAID assistance under all other USAID/ENI democratic objectives. Though major responsibilities for service delivery in key sectors like health, education, and housing have been delegated to the local level, these are severely under-funded mandates. Ownership of key land and buildings that could contribute to economic development have also been transferred to the local government level, but at that level there is little capability for planning, applying for financing for infrastructure, or instituting incentives in support of privatization and economic development. Public-private partnerships will be essential for both service delivery and economic development, at the local level, but models do not yet exist for such partnerships.
USAID Role and Achievements to Date: Currently between 30-50% of local government revenues are self-generated, primarily through property taxes and user fees. Recognizing the importance of strong local government in a democracy, USAID has concentrated on public administration activities, and housing and urban development. As a result, municipal associations and support institutions have been strengthened, including creation of a Municipal Development Agency; task-based budgeting is being disseminated throughout the country; and a $50 million loan from the World Bank and a $4.0 million ECU grant have been leveraged for infrastructure. In addition, local government lobbying has improved, which has led to changes in the housing allowance law to more fairly reflect the differences among cities' housing stock and burden.
Description: Activities under this objective will be expanded to 15 partner cities specially selected as representative of the range of city sizes and development contexts in which U.S. models for local government innovation and public-
private partnerships in economic development and service delivery can be most effective. Pilot activities will focus on cities and their support organizations and training institutions, specifically: increasing their internal resource management capacity, strengthening their financial and legal authority, increasing citizen involvement, improving service delivery, developing capital budgeting, economic development and land use planning capacity, and increasing locally-generated revenues. New degree programs in city and regional planning will be established in key universities to develop a cadre of local government economic development professionals. USAID support for NGOs, neighborhood and business associations will be initiated to promote cooperation between NGOs and the local government in service delivery and economic development.
Host Country and Other Donors: The British Know-How Fund supports a small program of pilot local government projects. EC PHARE also provides some assistance to local governments. USAID is the major donor supporting this objective. The GOP recently enacted the Local Government Law which gives cities and towns the authority to borrow from banks and float municipal bonds to finance development projects, but as of February 1996, only one large city had issued a municipal bond.
Beneficiaries: All 2,400 gminas (local governments) covering the entire population of Poland will benefit from the models developed and extended, the national policy and new urban development finance options, and long term degree programs created by this assistance. Fifteen partner cities and their residents will benefit most intensively from the actual models tested.
Principal Contractors, Grantees, or Agencies: USAID implements activities through direct grants to two Polish local government support organizations, sub-grants to many other Polish NGOs, contracts with two U.S. universities and five U.S. contractors, and sub-grants and sub-contracts to many other Polish firms and organizations.
Major Results Indicators:
Baseline Target
1. Percentage of cities using
public-private partnerships for
service delivery TBD (1996) 10%(2000)
2. Percentage of cities using
public-private partnerships for
economic development TBD (1996) 10%(2000)
3. Percentage of cities using bank or
bond financing for economic development TBD (1996) 10%(2000)
2. Same as above.
3. Sample survey of banks and local governments in 1996 by Polish institution and annual follow-up sample surveys thereafter.
Sources:
1. Baseline survey by DAI, 1996, and follow-up surveys annually by Polish institution.
PROGRAM: POLAND
TITLE: Financial Reform, 180-S001.4
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 1997: $11,750,000 SEED Act
INITIAL OBLIGATION: FY 1989; ESTIMATED COMPLETION DATE: FY 2000
Purpose: A competitive and efficient private financial sector is established.
Background: To complete Poland's transformation to a market economy integrated with the European Union, the Polish financial sector will have to play a greater role in mobilizing savings and efficiently allocating investment. Depositors' and investors' confidence in financial institutions must be established. More accurate and complete information must be made available to creditors and investors. Competition among financial institutions and between debt and equity markets needs to be encouraged, and markets need to be deepened. Financial institutions still lack skills in corporate finance, risk analysis, and mortgage lending. Poland has yet to develop a full range of financial instruments.
USAID Role and Achievements to Date: Four of Poland's nine state-owned commercial banks have been privatized. An on-site bank examination manual has been developed for the Polish central bank, and examiners have been trained in its use. A modern collateral law is under consideration in Poland' legislature which would provide greater surety to banks in lending against assets. A bank training institute is now delivering professional banking courses using Polish rather than expatriate staff. Polish brokers have agreed to form an over-the-counter market which will provide an alternative to the Warsaw Stock Exchange for raising equity capital, especially attractive to less well-known companies. Financing for housing construction, municipal development, and home purchase is slowly becoming more available.
Description: The U.S. will continue to strengthen the ability of Poland's central bank to carry out its bank supervision responsibilities. New initiatives will create a legal and regulatory framework and enforcement capability for the over-
the-counter market, municipal bond issuance, spot and futures commodity trading, and private pension funds. Banks will improve their corporate finance capabilities. A decentralized cooperative banking system will remain autonomous. A licensed warehouse receipt system will become functional, facilitating commodity trading, and allowing farmers to borrow against stored produce. A new activity will promote financial services for small businesses. Improvements to the payments clearing system will be instituted, and information on the creditworthiness of firms and municipalities will become more readily available.
Beneficiaries: First line beneficiaries will be the Polish financial institutions including banks, brokerage houses, commodity traders, private pension funds, stock and commodities exchanges, and the entities that regulate them. Their client depositors, investors, and borrowers will all be indirect beneficiaries including businesses, both large and small, individuals and families, and at least five municipalities.
Principal Contractors, Grantees, or Agencies: USAID implementors include: the U.S. Department of Treasury, KPMG-Peat Marwick, Price Waterhouse, Crimson Capital, Barents, First Washington Associates Ltd., Credit Union National Association, Volunteers in Overseas Cooperative Assistance, Agricultural Cooperative Development International(ACDI), Financial Services Volunteer Corps Inc., Eastern Europe Real Property Foundation, Urban Institute, and PADCO.
Major Results Indicators: Baseline Target
1. Number of large banks inspected
on-site by Central Bank 0 (1/96) 5 (12/99)
2. Regulations and supervision
of private pension funds established 12/97
3. Law, regulations and supervision
of futures & commodity exchanges established 12/97
4. An independent membership-governed
cooperative bank system functioning. 12/98
5. Number of banks using more advanced
techniques for credits & investments 15 (12/98)
Sources:
1. National Bank of Poland data.
2. USAID contractor reports.
3. Same as above.
4. Same as above.
5. Same as above.
PROGRAM: POLAND
TITLE: Private Enterprise, 180-S001.3
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 1997: $15,350,000 million SEED Act
INITIAL OBLIGATION: FY 1989; ESTIMATED COMPLETION DATE: FY 2000
Purpose: Private Sector Development Stimulated at the Firm Level.
Background: Over the five years since independence, Poland's small and medium-sized enterprise (SME) sector has grown dynamically. In Poland today, the private sector employs 60% of the labor force and generates approximately 50% of GNP. Between 1990 and 1994 the level of employment in private enterprises increased by approximately 1.5 million persons, thereby alleviating some of the negative social effects of the restructuring of state-
owned enterprises. There are still some factors in the Polish economy, notably poor credit and onerous tax systems, that constrain the private sector, especially SMEs. Technologies are outdated and knowledge of modern management techniques and skills is still lacking.
USAID Role and Achievements to Date: USAID advisors have assisted with the conceptual and regulatory design of the Mass Privatization Program under which 513 firms have been privatized. They have helped stimulate interest in privatization of State-Owned Enterprises (SOEs) and conducted trained 1200 SOE workers, owners, and 293 managers. USAID's advisors have contributed to a revision of Poland's commercial code, especially provisions on tax administration, public procurement, and bankruptcy. They have helped the newly created Polish foundation for the support of SMEs develop a formal strategy for small businesses and helped draft a modern collateral law. They also mounted a strong public education program for passage of the law. USAID has contributed to the rapid expansion of the private sector by helping over 650 Polish small businesses to develop business plans and to improve their marketing and overall enterprise management. Polish capacity to train entrepreneurs in business skills has been strengthened by establishing seven Polish management training institutions.
Description: Privatization of SOEs under the Regional Transaction Support (RTS) Program will continue. Based on the success of the Pilot Program in one region, this effort will then be enlarged to include at least five additional regions. A pilot effort in five sensitive sectors will begin and, based on its findings, be followed by direct privatization assistance in one or more of these sectors. Continued support will be provided to the SME Foundation and to lobbying efforts in support of SMEs. Assistance will also continue in the following areas: judicial and commercial law reform; legal training; public procurement from the private sector; and in assisting in the establishment of national registries for collateral and asset-based lending in Poland. Legal assistance and registration for SMEs will also be provided. In view of the progress made by the SME sector in Poland to date and the remaining gaps in technical know-how constraints still facing the sector, greater emphasis will be given to improving and strengthening indigenous business support organizations, especially private firms and NGOs that can provide quality consulting and training to Poland's SME's. Secondarily, USAID will continue to provide technical assistance to selected Polish SMEs to improve their planning, management, marketing and production capabilities.
Host country and other donors: USAID collaborated with EC assistance program to Eastern Europe (PHARE), the British Know-How Fund, the International Finance Corporation (IFC) and other donors who also provide assistance to SMEs. Host country legal and regulatory changes in support of SMEs have been undertaken with USAID assistance. Host country regional development initiatives are being planned and USAID activities under this objective will contribute to their success.
Beneficiaries: Over 1300 businesses and 25 business support organizations will benefit directly from this assistance. Indirect beneficiaries will include the future clients of these business support organizations.
Principal contractors, Grantees, or Agencies: U.S. assistance is delivered by a wide range of institutions and mechanisms -- grants to two U.S. universities, the U.S. Treasury, an international organization (IDLI), and several U.S. PVOs; contracts with U.S. private firms, and grants to the Polish-American Enterprise Fund.
Major Results Indicators: Baseline Target
1. Per cent of remaining SOEs 6000 SOEs left to 600 SOEs privatized privatized with U.S. assistance privatize (1/95) (12/99)
2. Number of legislative 0 (1/92) 14 major laws passed initiatives passed with broad (12/99)
and positive impact on the
SME sector
3. SME sector fixed 5% of real GDP 25 % of real GDP
asset investment rate (1/92) (12/98)
4. Per cent change in the 0 (9/96) 15 % increase
real value of sales by SMEs (12/98)
5. Number and type of indigenous
self-sustaining:
(1) business training centers 0 (1/92) 8 (12/99)
(2) business support institutions 0 (1/92) 25 (12/99)
6. Number of enterprises that use 650 (1/95) 1300 (12/98)
new business plans, management
techniques, marketing and
production methods
Sources:
1. Price Waterhouse and Ministry of Privatization data.
2. Reports by Ministry of Industry and Trade, Ministry of Justice, and GEMINI.
3. Baseline study by new Polish institutional contractor, plus annual follow-up surveys.
4. Same as above.
5. USAID 1/96 baseline data, plus future Business Support Program contractor's annual reports.
6. Same as above.
PROGRAM: POLAND
TITLE: Cross-cutting and Special Initiatives, 180-S004
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 1997: $1,150,000 million SEED Act
INITIAL OBLIGATION: FY 1989; ESTIMATED COMPLETION DATE: FY 2000
Description: There are four Special Initiatives in Poland.
First, indigenous capacity to teach English language at the college level will continue to be upgraded and the number of secondary schools offering English as a foreign language will continue to increase.
Second, Muskie Scholarships will continue to fund higher degrees in the U. S.
Third, the Democracy Commission Small Grants Program will continue to provide small start-up or democracy program grants up to $24,000 to eligible Polish NGOs. Initiatives likely to receive funding: training of trainers for civic skills, advocacy on behalf of the handicapped and abandoned children, women's organizations, environmental awareness groups, and citizens' committees for the strengthening of schools.
Fourth, the U.S. Department of Labor will receive a final tranche of funding for the establishment of a Re-employment Fund that will retrain coal miners likely to be laid off in Silesia. It will also complete assistance to three union-owned training centers for skilled workers.
Principal Contractors, Grantees or Agencies: Activities are principally implemented by other U.S. government agencies -- USIA and the U.S. Department of Labor.
Major Results Indicators:
Baseline Target
1. Number of self-sufficient 0 (1/96) 3 (12/97)
union-owned centers training
skilled workers
2. Mechanism established in Silesia 12/98
for retraining redundant coal
miners
3. Number of new NGO democratic 100 (12/97)
initiatives
Sources:
1. Department of Labor reports
2. Department of Labor reports
3. USIA reports