In Eastern Europe, Workers Go Sour on Foreign Owners

ELIZABETH WILLIAMSON / Wall Street Journal 28jun02

TECUCI, Romania -- One night in April, while a bodyguard watched over him, Dragos Doru slept in the can factory here owned by his company, F&P Holding Inc. of Temple, Pa. Mr. Doru, F&P's top Romanian representative at the plant, wanted to be sure he was in the factory for a crucial shareholders meeting the next day.

In the morning, two dozen workers carrying shovels and brooms barred the rest of Mr. Doru's security force from entering the plant. He attended the meeting, but workers there shouted him down and voted to oust the factory's American investors. Later, the plant's manager threatened to use a fire hose to drive Mr. Doru out of the plant. Since the meeting, and despite F&P's 92% stake in the factory, workers have stopped the owners from entering.

"We didn't realize what strong-arm tactics would be used," says F&P's chairman, Frederick Giorgi, who bought the can company in the late 1990s from the Romanian government. "If we'd had 20/20 foresight, we wouldn't have gone in."

Across Eastern Europe, a workers' revolt is threatening the continuing sale of old state enterprises -- a sell-off widely considered crucial for the region's economic health. More than a decade of economic reforms and industrial restructuring has given workers a taste of a better life, but a bellyful of the free market's downside: layoffs, production targets and profitability goals, sometimes with scant unemployment benefits. Tired of smartly dressed foreign investors spouting buzzwords and grand plans that often boil down to job cuts, workers are turning against privatization, sometimes with violence. Governments are reluctant to side with investors because politicians need the workers' votes to remain in power and to win coming referendums on joining the European Union.

In Slovakia, 5,000 state railway workers stormed the capital last year to stop the railroad's privatization. In Romania, steelworkers at a newly privatized mill threw chairs at an American manager and locked him in a canteen after he mentioned plans to fire some of them. The Czech Republic tried to head off discontent among energy workers by bundling its entire power sector into one unwieldy package, thus making a sale nearly impossible. This spring, Warsaw's plans to sell off its largest power-generation group stalled when workers produced an old agreement guaranteeing them millions of dollars in payments if they lost their jobs.

"Economic reform is breaking down into a concerted effort to protect one's turf," says John Nellis, a senior fellow at the Center for Global Development, a Washington, D.C., think tank that tracks privatization.

Dire Consequences

Any serious check on privatization could have dire consequences for Eastern European nations. The global economic slump has already impeded their drive to catch up to the West. Their nascent free-market economies can't bear the dead weight of central planning's industrial legacy. State-owned enterprises felt little pressure under communism to operate efficiently, modernize or turn a profit.

Now they are often still managed by communist-era bureaucrats who lack the skills and capital to transform them. These enterprises run up billions of dollars annually in losses, deepening budget deficits and depriving governments of funds they could spend more productively.

"Privatization is a necessary condition for creating viable and profitable industries," says Willem Buiter, chief economist at the European Bank for Reconstruction and Development.

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Percentage of GDP generated by private sector in the 1990's, including privatized businesses and startups

Country		1990	1994	1999
Czech Rep.	12	50	68
Estonia		10	55	75
Hungary		18	55	80
Romania		17	40	60
Central/SE 	11	50	68
Europe/Baltics*
Russia		5	50	70
Armenia		12	40	60
Belarus		5	15	20
Commonwealth	10	20	50
of Independent
States

* Albania, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, 
  Latvia, Lithuania, Poland, Romania, Slovak Republic ,Slovenia

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In the early days, workers welcomed foreign investors. They offered deep pockets and ambitious expansion plans. Foreign investors pumped more than $40 billion into Eastern European privatizations in the first 10 years after the fall of the Berlin Wall in 1989, buying stakes in refineries and textile mills, telephone companies and auto plants.

The process hit snags in Russia, where insider deals and corruption limited privatization's impact. But in much of the region, economies bloomed. In Hungary and Estonia, two of Eastern Europe's most successful privatizers, job skills and living standards rose dramatically during that initial decade, 1989-99. Privatization helped Slovenia emerge as the economic champion of the war-torn Balkans.

Then economies slumped world-wide in 2000. Around the same time, many of the job guarantees offered by foreign investors, typically two to five years, began to expire. In Poland, auto plants that Fiat SpA and Daewoo Motor Co. bought in the mid-1990s cut more than 2,000 jobs last year. In the Czech Republic, Austria's Erste Bank in 2000 began a three-year program to slash 5,000 jobs at the former state savings bank, Ceska Sporitelna. Mr. Nellis estimates that new owners of privatized firms in the region generally fire about 20% of the work force.

In 1997, when F&P bought its initial stake of 51% in the can factory for $1.2 million and a pledge to invest $7.8 million, privatization was surging. The region's three fastest-growing economies at the time, Poland, the Czech Republic and Hungary, sold off $4.4 billion in state assets that year, compared with barely $1 billion five years earlier.

Foreign investment was especially welcome in Tecuci, a run-down city of 43,000 where unemployment approaches 20% and children beg on street corners. The can factory, with 300 workers, ranked as the city's third-largest employer.

The 40-year-old plant, called SC Amep SA, hardly looked like a bargain. The main building was a dilapidated tin-sided shed. Inside, white-washed walls had turned black from an acrid fog of welding gas and machine exhaust. The plant was overstaffed, its equipment outmoded. Many employees were missing fingers from work-related accidents. Romanian officials say Amep was $500,000 in debt and nearly insolvent.

For F&P, though, Eastern Europe seemed to offer bargains. Founded as a mushroom processor in 1928, F&P later branched into the production of packaging, which today accounts for half its business. Looking to expand beyond its Pennsylvania base, F&P bought a tumbledown state can factory from the Polish government in 1989, retooling it to supply Eastern Europe's burgeoning consumer-products industry. Last year, privately held F&P says, its Eastern European division accounted for $350 million of the firm's sales of $500 million. The company won't disclose profits.

F&P hoped to turn the Amep plant into a hub supplying cans to the Balkans and Middle East. The company raised the American flag alongside Romania's near Amep's front gate. F&P decked out workers in blue jackets styled after lab coats, with a new red, white and blue logo on the pocket, and gave them training on modern machinery at F&P's plant in Brzesko, Poland. Workers knew there might be layoffs ahead, but few griped. "We wanted to work and get better," says Gheorghe Toader, a 50-year-old metal stamper.

The Americans turned over day-to-day management to executives from their Polish subsidiary, who quickly fired the plant's longtime director. In his place they named Luminita Mosescu, a factory marketing director. Michal Placzynta, a Polish psychology teacher fluent in Romanian but without business experience, was installed as deputy director. "We thought a teacher would be reliable," says Wieslaw Smulski, one of the Polish executives who oversee Amep and F&P's plants in Poland and Ukraine for the U.S. company.

Supplies and Demands

F&P paid Amep's debt, shipped its decrepit machinery to Poland for upgrades and gave the factory a credit line. When the local managers said they still didn't have enough money to pay for equipment and raw materials that F&P was providing, the Americans agreed to accept more shares in Amep as payment. Workers who were offered new shares didn't buy any. By 1999, F&P owned 92% of Amep.

But Mr. Smulski grew concerned at the unending requests for money and sent auditors to the plant in early 2001. They found a mess of unpaid invoices, unfilled orders and unused inventory. Amep was running in the red, not making the modest profit its management reported in 2000, Mr. Smulski says.

He says he summoned the director and deputy director to Krakow in the spring of 2001 and delivered an ultimatum: They had two years, and an additional $300,000 in credit, to make Amep profitable, or they were out. The Polish executives offered help in achieving this, but rather than accept, Mr. Smulski says, the managers resigned. F&P planned to appoint replacements at Amep's next shareholders' meeting.

The two managers devised a plan to get rid of the foreign investors instead. "We were treated like poor relatives from the countryside, like slaves," says Ms. Mosescu, the platinum-haired, 43-year-old plant manager.

She says she appealed to Amep's unionized work force. Though only weeks before, the managers and union leadership had approved F&P's performance, she now told the workers that the investors were bringing Amep to its knees, starving it of cash and raw materials, supplying it with old equipment and spiriting profits out of Romania.

Zaharia Fotache, the union chief, joined the campaign. He told workers that the investors said it was more profitable to shut the plant than to keep it going. "They came just to steal. ... We were fully cheated," he says.

In early July, two F&P executives met with a group of about 20 foremen and Mr. Fotache to rebut the claims. The executives didn't have any luck. Amep wages hadn't kept up with inflation, about 100 workers had been dismissed since the investors took over, and workers were disappointed that the factory hadn't been upgraded to match the gleaming production lines they had seen in Poland.

"I wanted this town to have a real industry, but instead they're closing us down," says Mr. Toader, the metal stamper, gesturing at an assembly line that he says doesn't work. "The proof is the equipment they brought."

Back in Pennsylvania, Mr. Giorgi was surprised. He thought the workers understood that the improvements would take time. "We tried to explain ... we were in for the long haul," he says.

Throughout Romania, workers had come to believe that privatization was a rigged game. They had reasons: At the same time the Amep workers were battling F&P, steel-mill workers in the city of Resita were rioting because they hadn't been paid for months by the mill's new American owners from Noble Ventures, of Bethlehem, Pa., who were in a dispute with the government over the mill's debts. Privatization critics charge that the government cut a sweetheart deal for the buyer of an aluminum company, and is backpedaling on plans to find a strategic investor for the former state oil company, Petrom. The Romanian privatization program, plagued by scandals and delays, is "institutionally one of the worst" in Eastern Europe, says Mr. Nellis, the privatization expert.

Eight-Month Standoff

At the Amep shareholders meeting in June 2001, five F&P representatives were confronted by shouting workers, according to F&P staffers. Two local notaries hired to record the meeting were so taken aback they walked out. Although F&P owned a majority stake in the company, Ms. Mosescu used a technicality to bar the investors from voting. So voters representing less than 1% of Amep's shares decided that Ms. Mosescu and her deputy, Mr. Placzynta, would stay, taking control of the factory's finances.

Thus began a standoff that lasted for eight months. For most of that time, F&P executives say, they couldn't get inside the plant, which was guarded by off-duty police officers. Malgorzata Podrecka, F&P's Polish foreign-investments director, managed to enter the plant in July 2001. There, she says, three male and one female worker confronted her, threw her against a wall and cut her hand. Ms. Mosescu disputes that account and says Ms. Podrecka beat up the female worker.

Lawsuits piled up in the local courts, as they have across Eastern Europe. In Romania alone, the privatization ministry is sorting through 14,000 cases, many brought by workers who want better terms or in some cases to reverse deals entirely.

F&P wrote repeatedly to government ministries, but the requests for help were rebuffed. "This is a trade union rebellion. ... The conflict is not between me and the buyer," says Ovidiu Musetescu, Romania's privatization minister.

In March, F&P thought it got a break when a regional court ruled that the two managers weren't entitled to run Amep. But before Mr. Doru, F&P's Romania representative, could make it to the factory, the managers had already planned another meeting to reassert their control.

About 35 workers and small shareholders representing about 5% of Amep's shares took their seats on rough wooden benches in a dank conference room at the April meeting. After Mr. Doru unsuccessfully tried to disperse them, he retreated to his office upstairs, leaving F&P's lawyer behind. The workers voted unanimously to reinstate Ms. Mosescu and Mr. Placzynta, raise the two managers' salaries by 30% and bar Mr. Doru from the factory.

"Take your bodyguards and leave," Ms. Mosescu instructed the F&P representatives. Surrounded by hostile workers, Mr. Doru's group departed without a protest.

It's now up to the courts to decide who controls Amep. Unless F&P gets a definitive decision, it will have lost about $7 million, according to Mr. Giorgi, the F&P chairman, who vows, "We're going to put up a fight."