NIF supporters and detractors still debating pros and cons
Seven years after the introduction of the Mass Privatization Program (MPP), contradictory opinions continue to plague the program and its future.
A significant slump in National Investment Funds' (NIFs) share prices on the Warsaw Stock Exchange (WSE) and their lack of transparency is worrisome, analysts said. The NIF index, which measures the total value of all NIFs, decreased by 21% between March 31, 1999 and March 31 of this year.
At the same time, fund managers stressed positive results for some of the companies involved in the program, through which many potentially bankrupt firms were restructured and reintroduced to the market.
Introduced in 1993, the MPP was set up to distribute a portion of the state's assets to all adult Polish citizens in the form of Mass Privatization Certificates, which later could be exchanged into shares in 15 NIFs. The NIFs then served as part owners of 512 formerly state-owned companies. One fund, for instance, had a 33% majority share in 33-34 companies and 1.93% minority stakes in a further 478-479 companies. The Treasury Ministry had an initial share of 100% in each of the funds, but its stake gradually diminished to 16.12% by January 1999.
The ministry's hope was for the funds to increase in value by raising the net worth of the companies they owned, usually via restructuring. Later on, the NIFs were to choose an appropriate investor. The program itself was supposed to take 10 years.
"The program did more than it should have done," said Wieslaw Kaczmarek, Democratic Left Alliance (SLD) deputy and former privatization minister responsible for launching the MPP. Kaczmarek said he realized the program had its failures, but he also stressed its successes.
"Seven percent of Polish industrial assets were involved (distributed to the general public) in the privatization program," Kaczmarek said, referring to the "universal" nature of the MPP where privatization income didn't flow into the state treasury's coffers, but was instead invested in the NIFs. He also noted that about 96% of the populace entitled to take part in the program did so.
By the end of 1998, of the 512 companies involved in the program, 133 were sold to strategic investors, 120 had managed to raise their own capital, 34 found an external investor and 35 went public. Only 37 companies went bankrupt while eight were liquidated or closed down.
In 1995, 60% of the companies participating in the MPP reported net losses, according to the NIF Association. The funds' main task was to restructure them.
"(The companies) saw a demanding owner," said Jacek Cesarz, vice president of Trinity Management and president of the NIF Association. The NIFs asked two main questions, "How much do you produce?" and "How much does it cost?" he said.
By the end of 1997, 71% of the companies were already showing a profit, Cesarz said. "The program was not a panacea," he added. "But it fulfilled its aim."
Not everyone, however, believes the NIFs have been successful.
"The result just breaks even," said Maciej Wiewiorski, an analyst at Wood & Co., referring to the companies participating in the program. If the number of insolvent companies is low right now, it will increase in the future, he said. He added that he couldn't see many companies on the verge of bankruptcy being saved because of the MPP.
"I wouldn't repeat the program," he said. He added that the program didn't teach Poles how to invest or transfer property to individuals because most of the property still belongs to institutional investors who constitute a majority of NIF shareholders.
"It was badly constructed," Wiewiorski said. He said that the program included too many small companies and that since the cost of restructuring a small and a large company is the same, the earnings from selling off a small company are comparatively lower.
Listing the NIFs on the WSE is another controversial issue.
"I don't think an economic entity like a NIF will ever be introduced to the stock exchange," said Witold Radwanski, chief executive officer of AIB WBK Fund Management and vice president of NIF Magna Polonia. That's due to a combination of factors, he said. When the program was introduced, an individual NIF was "an economic entity having leadshare packages in 30 companies, about half of which needed serious restructuring," Radwanski said. Such a company would lose out to other, fully commercial entities when exposed to the tough rules of the market, especially on the exchange, he said.
Their lack of transparency would also discourage investors from plowing money into NIFs on the stock exchange. According to Wiewiorski, transparency is especially important for foreign investors.
"(Foreign) investors don't understand the program," he said. "Nobody wants to spend all that time trying to understand the aims of the program if they can invest in other companies instead."
In terms of the NIFs' future, two trends appear likely, analysts said. One is consolidation, either by the management companies or the funds themselves. Fund management companies BRE/Cresco Management and Everest Capital Polska have announced their merger plans, which will result in one company managing six funds. Officials from the two companies announced that the new firm would focus on venture capital investment. Another two funds, NIF No. 3 and NIF No. 11, managed by Trinity Management, have also merged into one fund called Jupiter NIF. The fund plans to focus on development capital, Cesarz said.
Other changes loom with the approaching end of the 10-year MPP program. The program is set to expire in 2003, and some funds have already started to discontinue issuing new shares, pay out dividends and transfer profit to other companies, Kaczmarek said.
