Market Scene : Privatization in Poland: One Tough Transition : Independence, in today’s unfriendly economic climate, is proving to be a struggle for even the strongest companies.

Among former Communist industrial combines struggling to make it in the tough new world of private enterprise, Poland’s Mostostal should be a prime candidate for success.

Long before the Soviet Bloc’s collapse, the Warsaw-based heavy engineering company was operating in the West.

In addition to a strong knowledge of Eastern European markets, a list of Mostostal’s foreign work shows more than 70 separate contracts in West Germany alone since the early 1970s as well as work in other Western countries including Britain and the United States.

Last year, nearly 60% of its business was abroad--a performance matched by few Polish industrial concerns.

Still, for Mostostal, the transition is tough.

Over the past three years, executives have watched Poland’s gross national product drop by a frightening 40%. Traditional East Bloc export customers have either disappeared or are broke, Western contracts are harder--not easier--to win, and capital for badly needed investments is almost impossible to find.

The problems are not Mostostal’s alone. Indeed, they are common to most all newly privatized Polish companies as they struggle to stay alive as part of Eastern Europe’s emerging free-market industrial sector.

So far, roughly 10% of Poland’s state-run industrial sector (2,100 of 8,550 enterprises) has passed into private hands, and another 15% has begun to move in that direction.

Passage last week of a long-stalled parliamentary bill setting the rules transferring equity into the hands of private individuals is expected to quickly send 600 mainly large and medium-sized enterprises along the same path. How many of these survive in such an unfriendly climate remains unclear.

In some ways, the fate of Mostostal will say much about the success of privatization, not just in Poland, but throughout the entire region. For if such experienced enterprises working in potential growth industry can’t make the transition from state to private ownership, the prospects for the region as a whole must remain especially dim. Last year, the company turned a tiny profit--about 1.5%--and executives hope they can keep in the black again this year, although they admit conditions are hard.

Like so many newly privatized companies in the region, Mostostal continues to shed employees. About 800 of the company’s original 2,800 workers have already been laid off and 400 more will have to go soon, according to the company’s financial director, Mieczyslaw Kosy.

“We’re slimming down to be ready when real growth starts.”

An important ray of hope has come with signs that Poland’s depression may have hit bottom.

“We’ve managed to halt the decline,” declared the chairman of the country’s Central Office of Planning, Jerzy J. Kropiwnicki, in an interview. He predicted that a marginal growth of 0.5% in GNP last year will be followed by further growth of 2% to 3% this year and by possibly as much as 7% in 1994. Further, he said there are also encouraging signs that both the decline in real income and in the number of jobs in Polish industry has stopped.

Although businessmen like Kosy share the optimism that a revival may be under way, they are consumed by other problems. At the company’s factory in Warsaw--only one of several production units in Poland--plant manager Grzegorz Dudzinksi surveyed the dusty, outmoded steel fabricating yard around him and stated the obvious: “We can’t go on like this. If we are going to survive, we need to modernize.”

But in Poland, there is a catch. The annual cost of borrowing is presently 42%, making capital needed for new investment prohibitively expensive. While minor improvements at the Warsaw plant are under way, any meaningful modernization must wait for a reduction in interest rates.

Laying off employees or even reducing their working hours is also expensive under Polish law, which requires up to half-year’s salary as compensation. As a result, slimming down a company to compete in the private sector means added costs in the short term.

For Mostostal, all-important export markets also remain elusive.

Business with the former Soviet Union--business that once accounted for 20% to 25% of the company’s total foreign orders--has all but collapsed. And the picture elsewhere in Eastern Europe isn’t much better.

Also, in one of the supreme twists of post-Cold War Europe, the fall of the Iron Curtain has actually diminished Mostostal’s business prospects in Western Europe.

After working for several years in West Germany and recently completing work on a power station in Hamburg and an extension to the Opel automobile factory near Frankfurt, Mostostal faces the task of winding up its presence in the lucrative German market.

“There’s work there for us, but the bureaucratic obstacles have become too great,” said Dudzinski. “They (the Bonn government) refuse to issue us the work permits anymore.”

Such incidents are part of a growing tension between the rich and poor nations of Europe as the affluent European Community countries of the West try to protect their markets against energetic, lower-cost competitors from the post-Communist East.

“We need to export to live, but there is a feeling that (Western) Europe and the United States don’t really care about the future of this part of the world,” said Dudzinski.

Kropiwnicki now admits he was naive to believe Western markets were genuinely free. “We’ve learned the world is full of protectionism and people (in the West) only talk of free trade,” he said.

Indeed, he counts the decision of the first post-Communist government to open the country’s borders to free trade as a great mistake that cost domestic producers dearly.

Tariffs have since been introduced, in part, he said, so that Poland has something to put on the negotiating table with Western countries when the time comes.

Despite the list of problems, both domestically and on potential export markets, an inherent entrepreneurial spirit never fully quashed by 40 years of communism has helped make Poland’s budding private sector one of the most dynamic in the region.

Along the Lopuszanska Road in the capital’s western outskirts lies the proof of this spirit. Lining both sides of the road that bisects a makeshift industrial park, signs point the way to a myriad of newly started Polish companies, more established firms like Mostostal and global operations like Sony and the California oil company, Unocal.

“The number of new companies is still growing fast,” said Andrez Wisniewski, chief spokesman at the Ministry for Privatization. “There’s a feeling that people want to take things into their own hands.”