The Polish National Investment Fund Programme: Mass Privatisation With a Difference?

Abstract

The Polish mass privatisation programme (MPP), though debated at length in the early phase of transition, was implemented with a long delay which led to the deterioration of the financial position of many of the companies in the scheme and the loss of, at least, some of the potential benefits of such schemes. The most important lesson of the programme for other countries is that mass privatisation should be implemented quickly in order to avoid uncertainty and to prevent opportunistic behaviour by the managers.

The Polish MPP involved the selection of 512 medium and large enterprises and the allocation of 60% of their shares to 15 National Investment Funds (NIFs) to act as the dominant owner of these enterprises and as intermediaries between the citizens and enterprises. The ownership of NIFs was transferred to the adult population through a ‘universal share certificate’ (PSU) which was later converted to a share in each of the 15 NIFs. By giving NIFs the majority control on the supervisory boards of mass privatised companies, and by linking the funds' income and fund managers' remuneration, to the performance of their companies, the programme ensured that the corporate governance and the associated principal-agent problems at the company level are to a large extent ameliorated.

Our investigations, based on interviews with fund managers and the detailed examination of their financial and other reports, show that most NIFs have taken their lead position in the MPP seriously and embarked on the restructuring of their portfolio companies and brought about major changes in the management structure, output bundle, input combinations and methods of production. Overmanning has been reduced, non-productive assets and spare capacity disposed of, many companies have been floated on the stock market or sold to strategic investors, and some of the loss making enterprises liquidated or entered into the bankruptcy process.

The performance of funds in their first two years of public trading, however, has been rather disappointing. Despite improvements in profitability (or reductions in losses) and labour productivity of portfolio companies, the net asset values of most NIFs have not kept up with inflation. Moreover, share prices have been on a general decline in this period. Indeed the conversion of PSUs to shares has resulted in a loss for their owners. All funds are traded with a large ‘discount’ - a gap between their net asset value per share and their share prices. Our investigations indicate that this discount varies inversely with size and the share of assets tied up in minority companies. The existence of a fund management company, whether it is controlled by Polish or foreign financial institutions, seems to have an insignificant effect on the discount.

Corporate governance at the fund level remains a problem and an effective system is still not developed. The new supervisory boards of NIFs, elected by the shareholders' meetings during 1998, may not pursue the monitoring function as strictly and thoroughly as their predecessors who were appointed by the government. However, over the last few months we have been witnessing the rapid concentration of ownership in the hands of financial institutions. This should limit the adverse effects of the dispersion of ownership and ameliorate the problem of corporate governance at the NIF level.