December 10, 1990

EAST GERMANY A CORPORATE NIGHTMARE

ERIC ELLIS, Berlin

FORGET the woes of Australia's Christopher Skase or Steve Cosser, Britain's Polly Peck International or Canada's Campeau Corporation, the world's biggest receivership is here in Berlin.

It's called East Germany. The sheer scale of this liquidation is staggering. Receivers appointed by Bonn and Berlin are attempting the orderly disposal of more than 8000 moribund companies with a collective 500 billion marks ($435 billion) in "assets", seized from the control of a badly-managed, corrupt holding company, the East German Communist Party.

Four million jobs are at stake, and debts and legal claims could run into the hundreds of billions and take decades to settle. In many cases it is the remnants of the party itself that is the claimant. It's difficult to judge whether most of the businesses can be sold as going concerns. Management techniques are 50 years out of date and in many cases there are no accounting records to determine a firm's value, let alone profitability.

Such is the gargantuan task facing the Treuhandstalt, the German Government's controversial Berlin-based, Bonn-controlled body entrusted with selling off and restructuring the economy of the former German Democratic Republic. The Treuhand, which loosely translates from German as "trustee", still has in its nominal ownership 95 per cent of what was the Communist Party-controlled east German economy.

At best it was a 900 billion-mark ($760 billion) enterprise, hailed as the most efficient of what were the COMECON socialist economies. That was before the Berlin Wall came down.

Now unified politically and economically, the "former east German states", as they are euphemistically known in Germany, are bankrupt of money and inspiration and requiring a massive restructure. Bonn has pumped in up to 30 billion marks to tide the Treuhand over but time, money and patience are fast running out. In an interview with the Herald, Mr Helmuth Coqui, director of Treuhand, describes his goal as "saving and making competitive the companies of the former GDR which are savable".

That means trying to ensure that the basic parts of the economy, such as food supply, distribution and electricity supply, keep functioning amid the confusion.

He admits there aren't many savable companies. Perhaps as few as 20 per cent of the enterprises operating in the former GDR can mix it in the new Germany.

Elpro AG is typical of the companies on the Treuhand's books. Under the old, centrally-planned system, whole industries were organised into gigantic firms known as kombinat, which were in turn answerable to the state.

In Elpro's case it was east Germany's monopoly producer of electronic components, with a staff of 60,000 people and its principal markets the other COMECON countries in eastern Europe and the Soviet Union.

In post-war Germany, industry was divided on political and geographical grounds. United pre-war as the AEG electrical group, the group split into state-owned Elpro in the east and AEG in the west.

With the Berlin Wall down, what should have been an industrial fairy tale came to nothing when the mighty AEG entered negotiations earlier this year to reunite with Elpro. AEG's hard-nosed managers took several looks over the vast Elpro complex, which occupies virtually a whole east Berlin suburb, and decided that while the romance was there, the numbers were not.

Elpro was simply a basket case that was too difficult to mend and it was left to sink or swim on its own. Along came AEG competitor Siemens, which paid it perhaps the ultimate insult by saying "yes, we're interested, we'll offer you 2.4 million marks for the rent of your factory space, conditional on cleaning out the old machinery".

The offer was refused and Elpro flounders, its workforce guaranteed work only until the New Year when a deal with trade unions expires. Even now many of its labour force is redundant but come to work each day to do nothing, stand around and play cards, with their wages subsidised by Bonn to help keep down the official unemployment rate and the flow of workers into west Germany. But Elpro, so much a representation of the ills that afflict the wider eastern economy, has even more problems. Next year trade with its traditional markets in Eastern Europe will change to hard currency, an extremely scarce commodity in Prague, Warsaw and Moscow.

According to Elpro directors, themselves former Communist Party members, now the model of smart western businessmen, what markets remain will almost certainly vanish next year. "Perhaps you might know of a friendly Kuwaiti businessman," Elpro managing director Mr Dieter Luft says, twiddling the knobs of his new climate-controlled office.

The Treuhand's Mr Coqui says: "It is one thing to say assets are cheap in the east. It is another when those businesses have no infrastructure supporting them, no phones, no adequate sewerage in some cases, electricity supply problems, trained staff and so on.

"We had the case of a property that was claimed by 10 different institutions operating under the old government. What can you do in a situation like that? There are incredible legal headaches." The matter is still being resolved. Another problem is the accommodation of environmental concerns.

"We simply cannot sell an attractive block of land to a developer in the middle of a residential area without him going and putting a chemical factory up on the site. The old city administration had no real development zoning plan. We are basically using our discretion."

Each day, Mr Coqui gets a list of firms going bust or in desperate need of working capital.

"There was a lot of credit needed from banks to keep businesses afloat but that supply has dwindled. Why throw good money after bad?

"Because we are sometimes operating in the dark it may be that someone who comes to us after a business knows more about it than we do. We have the facility of checking a manager's or buyer's credentials through Bonn as to whether he was a member of the Stasi (secret police), a party member or apparatchik," Mr Coqui says. "But where do you draw the line on political judgments, that we cannot sell to party members because they were party members?" he says, drawing parallels with post World War II Germany, when many former Nazis became successful businessmen in the new Germany.

"Our job is not to distort the normal process of market forces therefore we cannot be too judgmental, too political.

"If somebody comes in to a business we have sold him and sacks everybody, we cannot do anything about it. We can exercise influence with authorities but we have no power under the law to stop such a thing," Mr Coqui says.

"We also have to take consideration of the law, not only of Germany but also of the European Community. We have to waive them in some circumstances."Mr Coqui, an urbane Bavarian manager brought in from Munich for three years of"unique work" with the Treuhand, says he is "basically optimistic in the long run about the restructuring".

"There are incredible opportunities here but there is an enormous amount of work to be done before we can achieve what I would consider a success."