The Polish National Investment Fund Programme: Mass Privatisation With A Difference

The Polish mass privatisation programme (MPP), though debated at length in the early phase of tra nsition, 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 l arge 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 ameliorated to a large extent. Our investigations show that most NIFs have taken their l ead 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 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 has 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. The corporate governa nce at the fund level remains a problem and an effective system is still not developed. With the separation of NIFs from the Treasury, following the general meetings of shareholders in 1998, the monitoring function of the supervisory board appointed by the government may not be pursued to the same degree by their successors. However, over the last few months we have been witnessing signs of ownership concentration in the hands of financial institutions. This would limit the adverse effects of the dispersion of ownership and ameliorate the problem of corporate governance at the NIF level.