Fortin: much more than physical reconstruction
From 1968-1972, Fortin served as first secretary of the Canadian Embassy in Poland. He arrived just after the spring student riots, witnessed the food riots of 1970 and the shopping spree that led to Poland's indebtedness. In 1985-87 he was Canada's chief representative at the Paris Club negotiations. Today, as resident representative, Fortin and his staff monitor EBRD's $1 billion loan and equity portfolio in Poland.
Q: Many consider EBRD as the Marshal Plan for Eastern Europe. How do you assess EBRD progress so far in Poland?
A: In Western Europe after the war you were talking about physical reconstruction. Here you are talking about much more than physical reconstruction ... You're talking about changing the economic system, the social system, the legal system, and everything ... So what you have here is that the transfer of capital is much more selective both in terms of the demand side in Eastern Europe and ... the donor side and the motivations of Western countries ... The restoration of democracy in Eastern Europe is enshrined in the charter of the bank. To go further, the countries of Eastern Europe have to pass the democratic test to qualify for financing ... For EBRD to work well, it has to work in a country where there is a strong commitment to reform.
Q: How about the motivation of the Polish government to help itself? How is EBRD doing?
A: In Poland we have been quite successful ... If you look in relative terms, we have achieved quite a lot here. For example, in the banking system we have been involved in two large bank privatizations. The first was Wielkopolski Bank Kredytowy in Poznan ... It gave a very strong confidence boost. Then there was more recently the privatization of Bank Przemyslowo-Handlowy (BPH) in Krakow in which we became a shareholder in an underwriting arrangement.
Q: Are you taking any role in terms of management in BPH?
A: Yes, we will have at least one representative on the BPH board. We have not made the appointment yet but this is under consideration. We have two on the board of Wielkopolski Bank Kredytowy because we own 28.5% of the shares ... It is important to us to have representation on the boards. When we participate in a privatization we have two broad objectives. One, help the government achieve the objective of privatization. But in addition, we also want to help with the achievement of the gains, or benefits, of privatization.
Q: Most purely private companies use profitability measures to assess their performance. How does the EBRD judge its success in Poland?
A: We measure success first by the number of investments and the number of companies we are financing. Everything is relative in the world ... At some point, the EBRD has directly or indirectly influenced one-third of the foreign investments in Poland, and that is quite significant.
Q: You've criticized former Prime Minister Waldemar Pawlak for going too slow in the energy and telecom sectors. What do you envision in your present working relationship?
A: I think "criticize" is too strong a word. Obviously what we've been trying to impress upon the government is that there are things EBRD can do to help them achieve certain objectives that we believe are worthwhile. Governments are sovereign ... The voters elected the Pawlak government and you have to work with the Pawlak government or with whatever government the Poles would elect. But we believe there are objectives that the government will pursue and for which we could help.
Q: I understand you are not here to dictate the pace of things. But how do you see working with Prime Minister Jozef Oleksy?
A: We are optimistic that things should be clearer in terms of the process of reform and the process of privatization. But I wouldn't expect a sea-change because you are still dealing with a government that has a certain program. And you're dealing with a left-wing government. But we believe the government will give a new breath of life to the reform process.
Q: What is your involvement in mass privatization.
A: We have a number of initiatives. One of them is a loan that has already been approved by the board for financing the working capital of the national investment funds in the first years of their operation. We have budgeted $3.2 million per fund. During the initial stages they have expenditures to meet. So they have to have access to some financing to get started ... Now that the contracts are beginning to be signed with the national investment funds and the supervisory boards have been established we are beginning to have action.
There is of course the whole issue of financing for the companies ... For the mass privatization companies we're talking about two forms, basically equity and loans. We are working now on a kind of early equity investment program. This has yet to be approved by our board of directors. But the idea is that the board would approve a certain amount of money that would be used by the bank to invest in a number of companies in the very early stage of the mass privatization program. This has been discussed with the ministry. This is for fairly quick action. It would be for eight or nine companies. But I think it would be very important to show at the very early stage that the program can attract financing .
Q: Aren't you also investing in equity and venture capital funds that target mass privatization.
A: We have a practical issue to be mindful of, that is, we don't want to be represented on the board of 50-60-75 companies. This is something we are prepared to do for the bigger companies, but for smaller companies we think the funds can do a better job.
Q: There is some criticism that EBRD's Warsaw office is weak. Most of the projects involve London teams coming in and doing due diligence and then working up the projects in London. The mass privatization program is going to take a lot more work and money to bring those people in.
A: It is true that at the initial stage the office here was still quite small and was mainly a representational office. We have four professional staff, which is little considering the size of our portfolio in Poland. But there is a deliberate policy in the bank to strengthen the local presence. And that local presence can take various forms. That can be a strengthening of the office here. It can mean an enlargement of the number of bankers stationed here. It can mean the establishment of special credit units ... but it would be a very special purpose operation, self-contained and would be dealing only with mass privatization companies.
Q: Jan Krzysztof Bielecki has stressed that EBRD should not be looking to foreign investors, but that it should be looking to Polish investors here. Is this being pushed by EBRD?
A: We have to be driven by market forces in the sense that Poland needs foreign investment. And we did finance a number of joint ventures that were led by foreign investors because in the first period of transition after the communist system broke down - if you wanted to privatize relatively large enterprises ... there were no Polish investors that had the capital ... There are people who criticized that saying EBRD basically financed only foreign investments. But I certainly do not see that as a problem. It is, I understand, still the official policy of the government to attract foreign investment.
Q: Is there any direction in EBRD to work with Polish investors?
A: Foreign investors have probably bought what they wanted to buy in the last four years. Perhaps the more interesting opportunities have already been seized. Foreign investors are now turning their attention to greenfield investments rather than to buy in the framework of privatization although the process of privatization is by no means over. But you also have the situation where the transition to a market economy is working ... We can now see Polish companies bidding to buy in the process of privatization and entering very credible bids ... That means there is an increasing number of opportunities for EBRD to deal with Polish companies ... We now have 17.6% of Heros shares. This is an insurance company owned by Polish investors.
Q: The Stabilization-Restructuring-Privatization (SRP) program was something of a maverick program. EBRD's mandate has been privatize first, then restructure. But this program is restructure first, privatize later.
A: The SRP is a little bit of what you said, but it is nevertheless a privatization program. It's objective is privatization. In the very early days of the bank, it was privatize then restructure. Otherwise you will sink into a morass of restructuring ... We're quite adamant that many of the companies, which are viable but had fallen on hard times, could not really be offered for privatization ... Even if the government had wanted to sell these companies very cheaply or even given them away, they probably would not have found takers. But some of these companies have good potential for survival and growth, if they are restructured and re-capitalized before they are offered for privatization.
Q: But not much has happened so far.
A: Not much has happened because we floated the idea about two years ago and there's been a lot of difficulty - changes in the government and so on. But there was a framework agreement that was approved by the Council of Ministers last fall and now we are in the stage of implementation.
Q: Do you envision it starting up this year?
A: Yes, I think implementation is started but you have to go through the creation of investment vehicles, create SRP Polska, recruit people, go through all the legislative processes and this is what is going on now. Two banks have signed for participation: the Powszechny Bank Kredytowy of Warsaw (PBK) and the Bank Depositowo-Kredytowy of Lublin. Other banks may sign later. So we already have two banks that will bring their clients ...
Q: Is it frustrating to see the reversion to a socialist system when the EBRD's mandate is generally to promote private enterprise?
A: My first comment is that ultimately, the course of policy is determined by the electorate ... We have to respect that mandate even if it brings temporary setbacks in terms of the process of privatization, certain frustrations, certain marking time in doing things that are unavoidable in the medium and longer term ... You have the same phenomenon happening in Western countries, which often think of themselves as very sophisticated politically and where you have governments that promote sound economic policies that are defeated. We bring back people who advocate easy money and are more tolerant of inflation and more tolerant of budget deficits ... It is not surprising what is happening in Eastern Europe. It is frustrating because perhaps there is a need of more profound reforms and more transformation than the Western economies.
Q: The EBRD has been involved in financing in the power sector. A major obstacle has been getting the government or someone to provide indemnity guarantees. How is that financing developing?
A: The power sector like most of the physical infrastructure will be very difficult to finance without reliance on the private sector. And the amounts involved are very, very large and cannot be found exclusively in Poland ... The question is how to attract that private sector financing.
Q: In absence of price reform can there be any step forward?
A: Of course price reform must continue if the government wants to attract private financing. But it must also provide assurances in the form of indemnity guarantees. The government tells us that under existing Polish laws it is not possible to provide such guarantees ... I understand that this (indemnity guarantee) has been agreed to in principle by Deputy Prime Minister (and Finance Minister Grzegorz) Kolodko. This is potentially quite useful because if Poland in fact prepares such a law and the contents of the law are adequate to give would-be financiers the assurances they are asking, then it means that for the EBRD it would be much easier to try to start preparing certain power projects in partnership with other international banks. In a nutshell, it appears there has been progress.
Q: EBRD made a major investment in Hungary's telecommunication system. What's the holdup in Poland?
A: Of course, the needs of Poland are very high. By every recognition of the Ministry of Telecommunication, Poland needs to invest a billion dollars a year. They're not coming close to doing that. In spite of the amount they are investing ... it means the investment effort is falling behind. They are reluctant to rely on external financing. ...Here in Poland the idea of maintaining the TPSA monopoly is the preferred option.
Q: Have you given up on that one?
A: We have to wait for the government to make its decision. It's a political issue.
Q: Many consider EBRD as the Marshal Plan for Eastern Europe. How do you assess EBRD progress so far in Poland?
A: In Western Europe after the war you were talking about physical reconstruction. Here you are talking about much more than physical reconstruction ... You're talking about changing the economic system, the social system, the legal system, and everything ... So what you have here is that the transfer of capital is much more selective both in terms of the demand side in Eastern Europe and ... the donor side and the motivations of Western countries ... The restoration of democracy in Eastern Europe is enshrined in the charter of the bank. To go further, the countries of Eastern Europe have to pass the democratic test to qualify for financing ... For EBRD to work well, it has to work in a country where there is a strong commitment to reform.
Q: How about the motivation of the Polish government to help itself? How is EBRD doing?
A: In Poland we have been quite successful ... If you look in relative terms, we have achieved quite a lot here. For example, in the banking system we have been involved in two large bank privatizations. The first was Wielkopolski Bank Kredytowy in Poznan ... It gave a very strong confidence boost. Then there was more recently the privatization of Bank Przemyslowo-Handlowy (BPH) in Krakow in which we became a shareholder in an underwriting arrangement.
Q: Are you taking any role in terms of management in BPH?
A: Yes, we will have at least one representative on the BPH board. We have not made the appointment yet but this is under consideration. We have two on the board of Wielkopolski Bank Kredytowy because we own 28.5% of the shares ... It is important to us to have representation on the boards. When we participate in a privatization we have two broad objectives. One, help the government achieve the objective of privatization. But in addition, we also want to help with the achievement of the gains, or benefits, of privatization.
Q: Most purely private companies use profitability measures to assess their performance. How does the EBRD judge its success in Poland?
A: We measure success first by the number of investments and the number of companies we are financing. Everything is relative in the world ... At some point, the EBRD has directly or indirectly influenced one-third of the foreign investments in Poland, and that is quite significant.
Q: You've criticized former Prime Minister Waldemar Pawlak for going too slow in the energy and telecom sectors. What do you envision in your present working relationship?
A: I think "criticize" is too strong a word. Obviously what we've been trying to impress upon the government is that there are things EBRD can do to help them achieve certain objectives that we believe are worthwhile. Governments are sovereign ... The voters elected the Pawlak government and you have to work with the Pawlak government or with whatever government the Poles would elect. But we believe there are objectives that the government will pursue and for which we could help.
Q: I understand you are not here to dictate the pace of things. But how do you see working with Prime Minister Jozef Oleksy?
A: We are optimistic that things should be clearer in terms of the process of reform and the process of privatization. But I wouldn't expect a sea-change because you are still dealing with a government that has a certain program. And you're dealing with a left-wing government. But we believe the government will give a new breath of life to the reform process.
Q: What is your involvement in mass privatization.
A: We have a number of initiatives. One of them is a loan that has already been approved by the board for financing the working capital of the national investment funds in the first years of their operation. We have budgeted $3.2 million per fund. During the initial stages they have expenditures to meet. So they have to have access to some financing to get started ... Now that the contracts are beginning to be signed with the national investment funds and the supervisory boards have been established we are beginning to have action.
There is of course the whole issue of financing for the companies ... For the mass privatization companies we're talking about two forms, basically equity and loans. We are working now on a kind of early equity investment program. This has yet to be approved by our board of directors. But the idea is that the board would approve a certain amount of money that would be used by the bank to invest in a number of companies in the very early stage of the mass privatization program. This has been discussed with the ministry. This is for fairly quick action. It would be for eight or nine companies. But I think it would be very important to show at the very early stage that the program can attract financing .
Q: Aren't you also investing in equity and venture capital funds that target mass privatization.
A: We have a practical issue to be mindful of, that is, we don't want to be represented on the board of 50-60-75 companies. This is something we are prepared to do for the bigger companies, but for smaller companies we think the funds can do a better job.
Q: There is some criticism that EBRD's Warsaw office is weak. Most of the projects involve London teams coming in and doing due diligence and then working up the projects in London. The mass privatization program is going to take a lot more work and money to bring those people in.
A: It is true that at the initial stage the office here was still quite small and was mainly a representational office. We have four professional staff, which is little considering the size of our portfolio in Poland. But there is a deliberate policy in the bank to strengthen the local presence. And that local presence can take various forms. That can be a strengthening of the office here. It can mean an enlargement of the number of bankers stationed here. It can mean the establishment of special credit units ... but it would be a very special purpose operation, self-contained and would be dealing only with mass privatization companies.
Q: Jan Krzysztof Bielecki has stressed that EBRD should not be looking to foreign investors, but that it should be looking to Polish investors here. Is this being pushed by EBRD?
A: We have to be driven by market forces in the sense that Poland needs foreign investment. And we did finance a number of joint ventures that were led by foreign investors because in the first period of transition after the communist system broke down - if you wanted to privatize relatively large enterprises ... there were no Polish investors that had the capital ... There are people who criticized that saying EBRD basically financed only foreign investments. But I certainly do not see that as a problem. It is, I understand, still the official policy of the government to attract foreign investment.
Q: Is there any direction in EBRD to work with Polish investors?
A: Foreign investors have probably bought what they wanted to buy in the last four years. Perhaps the more interesting opportunities have already been seized. Foreign investors are now turning their attention to greenfield investments rather than to buy in the framework of privatization although the process of privatization is by no means over. But you also have the situation where the transition to a market economy is working ... We can now see Polish companies bidding to buy in the process of privatization and entering very credible bids ... That means there is an increasing number of opportunities for EBRD to deal with Polish companies ... We now have 17.6% of Heros shares. This is an insurance company owned by Polish investors.
Q: The Stabilization-Restructuring-Privatization (SRP) program was something of a maverick program. EBRD's mandate has been privatize first, then restructure. But this program is restructure first, privatize later.
A: The SRP is a little bit of what you said, but it is nevertheless a privatization program. It's objective is privatization. In the very early days of the bank, it was privatize then restructure. Otherwise you will sink into a morass of restructuring ... We're quite adamant that many of the companies, which are viable but had fallen on hard times, could not really be offered for privatization ... Even if the government had wanted to sell these companies very cheaply or even given them away, they probably would not have found takers. But some of these companies have good potential for survival and growth, if they are restructured and re-capitalized before they are offered for privatization.
Q: But not much has happened so far.
A: Not much has happened because we floated the idea about two years ago and there's been a lot of difficulty - changes in the government and so on. But there was a framework agreement that was approved by the Council of Ministers last fall and now we are in the stage of implementation.
Q: Do you envision it starting up this year?
A: Yes, I think implementation is started but you have to go through the creation of investment vehicles, create SRP Polska, recruit people, go through all the legislative processes and this is what is going on now. Two banks have signed for participation: the Powszechny Bank Kredytowy of Warsaw (PBK) and the Bank Depositowo-Kredytowy of Lublin. Other banks may sign later. So we already have two banks that will bring their clients ...
Q: Is it frustrating to see the reversion to a socialist system when the EBRD's mandate is generally to promote private enterprise?
A: My first comment is that ultimately, the course of policy is determined by the electorate ... We have to respect that mandate even if it brings temporary setbacks in terms of the process of privatization, certain frustrations, certain marking time in doing things that are unavoidable in the medium and longer term ... You have the same phenomenon happening in Western countries, which often think of themselves as very sophisticated politically and where you have governments that promote sound economic policies that are defeated. We bring back people who advocate easy money and are more tolerant of inflation and more tolerant of budget deficits ... It is not surprising what is happening in Eastern Europe. It is frustrating because perhaps there is a need of more profound reforms and more transformation than the Western economies.
Q: The EBRD has been involved in financing in the power sector. A major obstacle has been getting the government or someone to provide indemnity guarantees. How is that financing developing?
A: The power sector like most of the physical infrastructure will be very difficult to finance without reliance on the private sector. And the amounts involved are very, very large and cannot be found exclusively in Poland ... The question is how to attract that private sector financing.
Q: In absence of price reform can there be any step forward?
A: Of course price reform must continue if the government wants to attract private financing. But it must also provide assurances in the form of indemnity guarantees. The government tells us that under existing Polish laws it is not possible to provide such guarantees ... I understand that this (indemnity guarantee) has been agreed to in principle by Deputy Prime Minister (and Finance Minister Grzegorz) Kolodko. This is potentially quite useful because if Poland in fact prepares such a law and the contents of the law are adequate to give would-be financiers the assurances they are asking, then it means that for the EBRD it would be much easier to try to start preparing certain power projects in partnership with other international banks. In a nutshell, it appears there has been progress.
Q: EBRD made a major investment in Hungary's telecommunication system. What's the holdup in Poland?
A: Of course, the needs of Poland are very high. By every recognition of the Ministry of Telecommunication, Poland needs to invest a billion dollars a year. They're not coming close to doing that. In spite of the amount they are investing ... it means the investment effort is falling behind. They are reluctant to rely on external financing. ...Here in Poland the idea of maintaining the TPSA monopoly is the preferred option.
Q: Have you given up on that one?
A: We have to wait for the government to make its decision. It's a political issue.
