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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.

Key Words: Mass privatisation, corporate governance, investment funds, restructuring

Article Type:
Statistical Data Included
Subject:
Privatization (Poland)
Foreign investments (Analysis)
Economics (International aspects)
Author:
Hashi, Iraj
Pub Date:
03/22/2000
Publication:
Name: Comparative Economic Studies Publisher: Association for Comparative Economic Studies Audience: Academic Format: Magazine/Journal Subject: Business; Business, general; Economics Copyright: COPYRIGHT 2000 Association for Comparative Economic Studies ISSN: 0888-7233
Issue:
Date: Spring, 2000 Source Volume: 42 Source Issue: 1
Product:
Product Code: 8525200 Economics NAICS Code: 54172 Research and Development in the Social Sciences and Humanities
Geographic:
Geographic Scope: Poland; United States Geographic Name: Poland Geographic Code: 1USA United States
Accession Number:
62216454
Full Text:
Introduction

With the experience often years of transition behind us, it is now abundantly clear that the speedy privatisation of state-owned enterprises is one of the most fundamental elements of transition to a market economy in former socialist countries. It is also well established that the choice of method of privatisation plays a crucial role in altering managerial incentives and changing the behaviour of state-owned enterprises. In their search for a rapid transition, most Central and East European economies have employed some form of `mass privatisation' as a method of transferring the ownership of a large number of state-owned enterprises to the adult population either free or at greatly reduced prices. But ownership transformation is only the first step in the process of converting poorly managed, inefficient state-owned enterprises to well managed and efficient firms capable of responding to market signals and consumer demand. The more important question is whether or not the chosen method of privatisation ensures the establishment of an effective mechanism of corporate governance.

Mass privatisation, using equal-access vouchers, was discussed publicly in Poland from the early days of transition. Economists associated with the Gdansk Institute of Market Economics saw this as the quickest and fairest method of ownership transformation. They also put forward the idea of establishing intermediary financial institutions (such as holding companies or investment funds) to act on behalf of millions of dispersed new owners and to ensure that voucher-privatised companies are restructured and run efficiently in the interest of their owners. However, despite much discussion and debate, Poland was one of the last countries to embark on her mass privatisation programme -- the funds did not take control of all of their companies until early 1996.

The Polish mass privatisation programme (MPP) was designed to create dominant owners for enterprises in the scheme -- owners who would have the appropriate incentives to force through the restructuring of enterprises and to speed up their ultimate and genuine transfer to the private sector. Fifteen National Investment Funds (NIFs) created by the programme, have taken control of 512 enterprises in the scheme and in a short period of 3-4 years have established themselves as major intermediary financial institutions with a significant knowledge of different sectors of the economy and a massive capability to influence the development of these sectors.

The aim of the present study is to take stock of the initial three years of the operation of the NIF programme. The study focuses on the operation and performance of the funds and not the portfolio companies. It is based on detailed interviews with fund managers or members of the supervisory boards often NIFs, and the analysis of the annual and quarterly reports and accounts of the fifteen NIFs and their share price information. The paper is divided into seven sections. In the first section, we discuss the corporate governance issues associated with mass privatisation programmes. In the second section, we describe the formation of NIFs, the selection of management companies, the distribution of 512 companies amongst the 15 NIFs, and some of the general features and characteristics of these companies. The problem of corporate governance at the fund level and the relationship between funds and their management companies are discussed in the third section. The restructuring efforts of NIFs and the changes they have forced through in their portfolio companies in the first three years of their operations are discussed in section four. The performance of NIFs since their establishment which, to a large extent, reflects their restructuring efforts is discussed in section five. With NIFs floated on the Warsaw Stock Exchange, their share prices have diverged significantly from their net asset values. In section six we estimate the impact of a number of relevant variables on the price of NIFs' shares (and indirectly on the level of discounts). In section seven we draw a number of conclusions and discuss the directions in which the NIF programme will move in the next few years.

1. MPP and Corporate Governance

Mass privatisation involves the free distribution of shares of a significant number of state owned enterprises to the population directly or indirectly. These programmes were embarked upon in most transition counties (Albania, Bulgaria, Croatia, the Czech Republic, Latvia, Lithuania, Romania, Slovakia, Slovenia, Poland, the Baltic States, Russia, many former Soviet Republics and Mongolia) because they were deemed to be speedier and more equitable than other methods of privatisation, and did not require large domestic savings. Moreover, they would involve the bulk of the population in the creation of a `share owning' culture and would mobilise public opinion in favour of the reforming government by offering a tangible benefit to all members of the society (Jermakowicz 1996; Gray 1996). Public participation in privatisation facilitates the change in the `mind set' of the population which is so crucial in the transition from socialism to capitalism.

Privatisation, of course, is expected to be only the first stage in the process of enterprise transformation. The ultimate goal is to alter managerial incentives, change the behaviour of enterprises and raise their efficiency. These are achieved by embarking on enterprise restructuring -- bringing about a fundamental change in the input mix, output bundle, production method, organisational structure, and market positioning. Deep or strategic restructuring (Grosfeld and Roland 1996) requires new resources for investment in machinery, technology and reorganisation which, at least in the initial stages, have to come from sources outside the enterprise. However, mass privatisation, by definition, results in a diffusion of share ownership amongst millions of citizen, leaving the existing management in charge, with increased discretion which may be used for their own self-enrichment at the expense of shareholders. With their position strengthened, managers may not be sufficiently motivated to embark on the urgent task of enterprise restructuring (see Blanchard 1997, Chaps. 2 and 3). Moreover, given the underdeveloped state of financial markets and the legal framework, outside investors may not have sufficient guarantees to invest their resources in mass-privatised companies. The dilemmas faced by creditors, and dispersed shareholders, constitute the essence of the `corporate governance' problem in all transition economies: how can the owners and financiers ensure that the management will not take advantage of their superior knowledge and discretion to siphon off the firm's profit in their own favour?

In established market economies, there are a number of mechanisms that provide this guarantee for owners and financiers. In the German and Japanese model of corporate governance, large ownership stakes by banks and financial institutions enable, and encourage, them to monitor the performance of the firm and give them a strong voice to influence the management. In the Anglo-Saxon model of corporate governance, a well established legal framework protecting financiers, creditors and dispersed shareholders combined with the possibility of exit in a well functioning stock market, and the wide availability of financial information, impose effective constraints on managerial behaviour (Shleifer and Vishny 1997, Mayer 1996).(1) In the Central and East European countries, most of these mechanism are either non-existent or in their infancy, unable to protect the interest of outside stake-holders (shareholders, financiers and creditors). This is why most observers have suggested that the German-Japanese model, involving large ownership stakes, and therefore a strong influence, for banks and financial institutions is a more suitable model for transition economies (Corbett and Mayer 1992; Stiglitz 1994; van Wijnbergen 1994; Shleifer and Vishny 1997).

In addition to their implications for corporate governance, direct mass privatisation schemes also fail to provide voucher holders with sufficient information needed for optimum decision making. Voucher holders are required to bid, or apply, for shares of their preferred enterprise(s) without access to reliable and accurate information on the performance of these companies. Moreover, because of the costs involved, voucher holders cannot engage in information gathering about enterprises in the scheme in order to use their vouchers optimally and obtain shares of `good' enterprises. Only those with insider knowledge of firms (managers and employees, staff of the ministries involved in company affairs and members of the former nomenklatura) would be able to rely on their own superior knowledge and use their vouchers optimally, leaving the general public to make their decisions on the basis of scant, and often inaccurate information in the public domain.

In the early days of transition, and with the initial success of the Czech voucher scheme, it was thought that the intermediary financial institutions, namely investment funds, will be able to resolve the two areas of concern identified above. By accumulating the vouchers of a large number of citizens, funds would have the incentive, and resources, to gather information on enterprises in the scheme, to select those with better prospect, and to try to obtain shares of these enterprises using vouchers entrusted to them by the citizens. They would also have sufficient `voice' based on their large shareholding to influence the management of privatised enterprises (Mladek and Hashi 1993; Brom and Orenstein 1994). However, it soon became obvious that corporate governance problems were not fully resolved by the creation of investment funds (Kenway and Chlumsky 1997; Hashi 1998). First, given the limitations on the proportion of shares of an enterprise which could be owned by an investment fund (originally 20% and recently reduced to 11%), funds were not in a position to influence the managers directly unless they could make alliances with other funds. Second, the problem of corporate governance was shifted from the level of enterprises to the level of funds, i.e., how would the shareholders or unit holders of funds ensure that fund managers act in their interest.(2) Stiglitz (1994) aptly summed this up by asking `who monitors the monitors?'. The financial scandals associated with investment funds and other financial institutions in the Czech Republic, including the so-called `tunnelling' of assets by scrupulous managers in the post-mass privatisation period, highlights the unresolved problems of corporate governance at both `enterprise' and `fund' levels (see e.g., Hashi 1998; Weiss and Nikitin 1998).

The Polish mass privatisation programme, implemented through the National Investment Funds Programme, was devised with a view to responding to, and solving, some of the problem that had developed in the Czech scheme. In particular, it aimed at ensuring that (i) each enterprise has a `dominant' shareholder and (ii) the dominant shareholder may be monitored, at least to some extent, by other shareholders. The programme was based on the establishment of a small number of funds by the state, with appropriate incentives to act as `dominant' shareholders, and with an interest in the restructuring of enterprises in their portfolio. In the Polish MPP, the majority of shares of enterprises in the scheme were distributed not amongst the citizens but amongst the 15 investment funds. The citizens, in turn, were to become the owners of the National Investment Funds through an equal access voucher scheme entitling them to one share in each of the fifteen Funds. The public was spared the information gathering cost and the consequences of information asymmetry. Investment funds, on the other hand, obtained concentrated shareholding and dominant position on the boards of these companies and were able to embark on the process of enterprise restructuring without much opposition from the insiders -- managers and employees.

2. The NIF Progamme

The origin of the Polish mass privatisation debate goes back to the early days of transition and the search for a rapid transformation of ownership.(3) Lewandowski and Szomburg (1990) proposed the distribution of shares of some 500 large companies to the general population through a voucher scheme. Later on, Lewandowski (1991) put forward the idea of the establishment of five to twenty National Property Boards (a kind of holding company) amongst whom 60% of the shares of 400 large companies in `good conditions' would be distributed. The Treasury would retain 30% of shares of these companies with the remaining 10% going to employees free of charge. The Boards were to act as supervisory bodies who would bring in foreign expertise and ensure that enterprise restructuring would take place.(4)

However, despite an early start, the debate on MPP continued unabated throughout the life of two parliaments and four governments, resulting in the longest delay in the implementation of the programme -- in comparison with mass privatisation schemes in other countries. Although the first privatisation law, passed by the Polish parliament in July 1990, allowed for the free distribution of shares of some companies through a voucher system, the legal framework for the precise version of mass privatisation was laid only in April 1993 with the passage of the Law on National Investment Funds and their Privatisation.(5) The debate over the number of state-owned enterprises to be included in the scheme and the number of funds operating the scheme was the main cause of delay both before and after the passage of this law.(6) The law provided for the establishment of 15 National Investment Funds by the state -- unlike the Czech and Slovak investment funds which developed spontaneously by public or private companies and individuals. Given a lack of domestic expertise, NIFs were expected to be managed by financial institutions in which experienced foreign institutions played an important pan. The fund managers were to be remunerated through a combination of fixed annual fee, a performance fee of 1% per year based on the value of their assets and a loyalty fee of 5% of their assets at the end of the 10-year contractual period. This was expected to encourage fund manages to embark on value maximising strategies which aligned their interests with those of the ultimate owners of enterprises in their portfolios.

The law also set the ground rules for the distribution of shares of enterprises in the scheme amongst different stake-holders. The shares of each enterprise were divided amongst NIFs (60%), employees (15%) and the Treasury (25%).(7) The NIFs' allocation was in turn divided between a `lead fund' which received 33% of shares and other fourteen funds, each receiving 1.93% of shares (27% in total). By virtue of their large holdings, the minority funds, employees and the Treasury were expected to engage in a certain degree of monitoring (unlike dispersed individual shareholders in other voucher schemes who cannot engage in monitoring). Enterprises included in the scheme had already been commercialised -- converted into joint stock companies fully owned by the Treasury -- and their employees' councils had agreed to their inclusion in the MPP.

It was only in December 1994 (over 20 months after the passage of the law) that the fifteen National Investment Funds were set up and their supervisory boards appointed by the ruling coalition government (of PSL and SLD).(8) A Selection Commission, established under the National Investment Funds Law had already completed the evaluation and short-listing of the candidates for the Chairmen and members of the supervisory boards of the 15 NIFs and submitted its recommendations to the Prime Minster in June 1994. In order to ensure that NIFs were managed by experienced fund managers, domestic and foreign financial institutions were invited to participate in an open international tender for the appointment of fund managers. The Selection Commission prepared a short list of 19 qualified consortia made up of foreign and domestic financial institutions with whom NIFs could enter into negotiations for the management of their assets. By July 1995, fourteen NIFs had selected their fund management companies and signed 10-year agreements with them.(9) The remaining Fund (NIF No. 9) did not sign an agreement with a fund manager and decided to make its own arrangement for the management of its assets. Table 1 shows the successful fund management companies, together with their parent companies, shareholding and nationalities.

Table 1: Fund Management Companies of 15 National Investment Funds

(1) This was originally BRE/Girocredit Management Sp. z o.o., with Girocredit Mergers Acquisitions Inc. (Austria) having a 49% share, IB Austria replaced Girocredit later.

(2) Since the initial contract with the supervisory board of the NIF, the fund managers have been dismissed or some members of their consortia have left. These funds are now either without a fund manager, or managed by some of the participants in the original fund management companies.

(3) In 1997, Chase bought out the Italian partner and is now the sole partner of the fund management company.

Source: Ministry of Privatisation (1995), updated by the author.

The composition of the successful consortia in terms of shares and roles of their constituents (domestic and foreign banks, financial institutions and consulting firms) were quite interesting. Polish banks were members of nine of these consortia; Polish institutions had a majority share in three of them (NIFs No. 1, 2 and 3). In six cases (NIFs No. 5, 6, 8, 10, 12 and 13), a single foreign institution had a majority control (over 50%) on the management company, and in four other cases (NIFs 4, 7, 14 and 15), the combined shares of foreign partners put them in control of the management company. In one fund (No. 11), no company or identifiable group had a majority control of the management company, and the remaining fund (No. 9) never had a fund manager.(10)

From July 1995, the selected fund management companies began their preparation for deciding on the type of companies they wished to have in their portfolio and also on the monitoring procedures they wanted to institute in these companies. They started with an employment levels of 35-45 at the beginning, though the number has been declining in the last year. In April 1998, NIF No. 6 had the smallest number employees (19) and NIFs No. 1, 5, and 15 the highest (35).

Following extensive political debate and lobbying, the number of enterprises included in the scheme was eventually fixed at 512. The shares of these enterprises were transferred from the Treasury to NIFs in three rounds in September and December 1995 and early 1996. The companies selected for the MPP were, by Polish standard, large and medium size (though not the largest companies), from a wide range of industries and regions with varying performance records. The approximate book value of their assets was over PLN 7 billion (US$ 3 billion at the end of 1994).(11) The aggregate financial position of these enterprises is shown in Table 2.

Table 2: Aggregate Financial Indicators of 512 Enterprises in the MPP 1992-95

(*) New Polish Zloty (equivalent to 10,000 old Zloty) was introduced on 1 January 1995.

Source: Ministry of Privatisation (1995).

It should be stressed that the data on profits and asset values are to some extent fictitious and do not indicate the true financial position of the companies. There were many reasons for this discrepancy, including the old accounting standards used (particularly the use of book values and depreciation rules), the semi-soft budget constraint regime of the early transition (represented by continued open and hidden subsidies, unpaid taxes and social securities and debt to banks), and the decapitalisation process resulting from the absence of active owners.

The 512 companies belonged to a range of different activities, though largely from the manufacturing sector. Table 3 shows the sectoral make-up of companies in the scheme and their share in the total sales of each sector.

Table 3: The Sectoral Origin of MPP Companies and Their Share of Sectoral Sales (end 1994)

Source: Ministry of Privatisation (1995), p.24

The financial position of the companies in the scheme also varied widely, ranging from `highly profitable' to `loss making'. Similarly their size varied significantly, from those with a turnover greater than PLN 100 m ($43 million) to those with a turnover of approximately PLN 10 m ($4.3 million). Table 4 shows the distribution of 512 companies according to their pre-tax profits and their sales turnover. Once again, these figures, particularly the profitability figures, have to be treated with caution.

Table 4: Distribution of MPP Companies According to Pre-Tax Profits and Sales (end of 1994)

Source: Ministry of Privatisation (1995), p.25

There was an attempt to distribute the companies amongst NIFs on a random basis to ensure that all NIFs ended up with approximately equal amount of assets under their control. Distribution was carried out in a number of rounds on four occasions. NIFs had studied the companies in the scheme before hand and had prepaid a list, in their order of preference, of companies they wished to have in their portfolio. However, given the random distribution of companies between funds, it was clear that NIFs could not obtain all or even most of their preferred companies.(12)

In the end, each NIF ended up with 31-35 companies in which they were the `lead fund' and some 480 companies in which they held minority stakes of 1.93%.(13) Although some NIFs wished to concentrate on specific sectors of the economy, in practice, they found themselves in the ownership position of many companies which were not on their original list. Therefore, the degree of `sectoral specialisation' of NIFs varied widely, reflecting both the way companies were distributed and NIFs' own decisions to specialise in a particular sector. Sectoral specialisation, indicating the concentration of a NIF's sales revenue in different sectors, can be measured by a Herfindhal-type index (H) defined as follows:

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

with [s.sub.i] indicating the proportion of a NIF's sales revenue originating from the ith sector of the economy. With s varying from 0 to 100, H may vary from 0 to 10,000. Table 5 shows the value of H for different NIFs at the beginning of the programme.

Table 5: Sectoral Specialisation of NIFs Measured by Herfindhal Index

(*) Portfolio companies were allocated to the following sectors: chemicals, engineering, food, light industry, metallurgy, minerals, wood and paper, other manufacturing, construction, trade, and transport. H may vary between 0 and 10,000.

Source: Author's calculations

Some NIFs (particularly 12, 10, 2 and 6) started their operations with greater sectoral specialisation (and often pursued a policy of further specialisation). Others (especially No. 15, 3 and 5) started with a very dispersed portfolio. Some of these (like NIF 15) decided to specialise at a later stage while others continued the policy of low sectoral specialisation. From the start, most NIFs looked for the opportunity to reorganise their portfolio in order to concentrate on their preferred companies or sectors.

The transfer of the 60% of shares of enterprises in the scheme to NIFs was, of course, only the first stage of mass privatisation. The second stage was the arrangements for the transfer of NIFs' ownership to Polish citizens, i.e., the privatisation of NIFs themselves. The initial instrument for this purpose was created in the form of `universal share certificates' (Powszechne Swiadectwo Udzialowe- or PSU) -as claims to the ownership of funds- to be distributed amongst the adult population. From November 1995 until November 1996, `entitled persons' (Polish citizens permanently resident in Poland who had reached the age of 18 on 31 December 1994) were able to collect one `universal share certificate' at one of the 950 designated distribution centres established by Bank PKO (Powszechna Kasa Oszczednosci -- Bank Panstwowy) for a fee of PLN20 (US$8).(14) By the end of the period, 25,675,000 citizens -i.e., some 95% of those eligible -- had collected their `certificates'. The Law provided that each `certificate' entitled its owner to one share in each of the 15 NIFs -- and that the exchange of `certificates' for NIF shares would take place at a later date when NIFs were admitted for public trading.(15) The `certificates' were in bearer form and could be traded immediately on the Warsaw Stock Exchange and privately. Trading in `certificates' became buoyant quickly with prices starting from around PLN50, reaching PLN 175 in February 1997 before falling back to about PLN 150 by June 1997 (and falling thereafter).(16)

The final piece of the mass privatisation jigsaw was the floatation of NIFs on the Warsaw Stock Exchange, the prelude to the transfer of NIFs' control from the state to private shareholders. In March 1997, the Securities Commission agreed to the listing of NIFs' shares on the Stock Exchange. All NIFs produced prospecti containing the relevant information on the financial position of their portfolio companies for the Commission and the public. In addition to the requirement of the Stock Exchange, the prospecti were expected to provide the market players with an accurate picture of portfolio companies and to enable them to form their valuation of NIF shares. From 12 May, holders of `universal share certificates' were also enabled to convert their certificate to 15 shares, one in each NIF, in order to facilitate their participation in trading. Certificates had to be converted to shares by the end of 1998.(17) The Treasury, which held 100% of shares of NIFs at that point, began the process of transferring 85% of these shares to certificate holders who applied for the conversion of their certificates through a brokerage house. The remaining 15% is kept by the Treasury for the payment of performance and loyalty fees of fund management companies. Trading in NIF shares began on 12 June 1997, and was quite heavy in the early days -- though it involved only some 10% of `certificates' which had been converted to shares (Lewandowski and Szyszko 1999: 56).

Although the book value of the assets of portfolio companies of the 15 NIFs had been approximately equal at the start of their operations in late 1995, estimated to be of the order of US$100 m,(18) their actual endowments, the medium and long term prospects of their companies, and the importance of minority holdings in their total assets varied significantly. These factors, together with the policies of NIFs and their performance in 1996 and early 1997, resulted in the divergence of their financial position and their valuation. The opening price of NIF shares on the Stock Exchange, as well as the price of certificates on that day, are shown in the Table 6.

Table 6: The Opening Prices of NIF Shares on 12 June 1997 (PLN)

(*) NIF Index is the sum of the 15 NIFs' share prices.

Source: Warsaw Stock Exchange database.

Thus, on the first day of trading, the NIF index (the sum of all 15 NIFs' share prices) reached PLN 159.9 which, not surprisingly, was very close to the market price of PSUs on 12 June.

3. NIFs and Their Management Companies

We have already pointed out that, in the Polish MPP, the corporate governance problem is partly shifted from the `enterprise level' to the `fund level', i.e., how are the funds themselves monitored and controlled. The first supervisory boards of NIFs, appointed by the government in 1994, signed a contract with one of the short listed fund management consortia (referred to earlier) to manage the NIFs' assets. The relation between the supervisory boards and fund managers was always expected to be a difficult one. Our investigations and discussions with fund managers and members of NIF supervisory boards confirm this uneasy relationship and the way in which many funds attempted to deal with it. The first group of people appointed to supervisory boards were from business, academic and local government circles, most of them unfamiliar with the intricacies of the operation of investment funds. No doubt some of the them were political appointees of the ruling parties. Many fund managers complained about the amount of time and resources allocated to informing (and sometimes educating) their supervisory boards.

The perception of supervisory boards about their role differed widely from that of fund managers. The main reason for the discrepancy was the legal ambiguity about the objectives of the NIF programme. According to Article 4 of the Law on Investment Funds, the aim of the programme was to increase the value of portfolio companies through restructuring. This formulation is open to differing interpretations. The incentive system built into the programme encourages fund managers to choose policies aimed at maximising the net asset value of their funds. This implies a greater emphasis on short term measures and on the sale of companies where possible. The supervisory boards, on the other hand, had a longer time horizon and were mainly interested in transforming the companies in the scheme (more on this, shortly). The two-tier German style management structure was new to members of supervisory boards and the Polish members of management boards with each side overemphasising their own role. After some time, of course, a modus operandi was established between the two groups and a general agreement on the role of the supervisory board reached though the friction between the two sides did not end. On several occasions, disputes reached a level that made further cooperation between the two groups impossible. Funds No. 2, 4, 7 and 11, for example, dismissed some or all of their fund managers. In Fund No. 13, initially the supervisory board was dismissed by the Minister of Privatisation and, later on, the two foreign members of the fund management company also left the company.(19) With the floating of NIFs' shares on the stock market and their purchase by individuals and institutions, members of supervisory boards are now elected by the annual general meeting of shareholders (and not appointed by the government). The corporate governance problem is now closely linked to the operation of financial markets and the market for corporate control as well as the legal framework governing financial markets, company affairs and the stock market.

In order to ensure that fund managers act in the best interest of the funds and their shareholders, supervisory boards need the basic knowledge of the operation of the financial system as well as access to up-to-date and accurate information on the operation of the fund and its portfolio companies. But fund managers -- who are the subject of monitoring -- are at the same time the main source of information necessary for the monitoring task -- a classic principal-agent problem. Given that supervisory boards of NIFs employ only one or two people (usually only a secretary) and their human and material resources are very limited, they can only monitor the fund managers by relying on their own knowledge and experience, the information available in the public domain (government, media, etc.) and the financial reports provided by fund managers. The law, of course, requires the fund managers of NIFs to produce quarterly reports for their supervisory boards. Moreover, most NIFs have reached agreement with their fund managers allowing the supervisory board to nominate one of the fund's representatives on the supervisory boards of portfolio companies. Although officially representing the fund and its fund managers, this member owes her/his allegiance to the supervisory board and will keep them informed directly of the policies and decisions of the board and the general position of the company. Furthermore, most foreign members of fund management companies are reputable financial institutions who are concerned about their reputation in emerging markets and, therefore, it is expected that they would impose certain standards on their partners.(20)

i) Remuneration of Fund managers

The management fee was agreed separately for each Fund in the process of negotiation between the supervisory board and the fund management company - usually 2-3% of the value of assets. The aggregate fee for all funds was $42m per annum, an average of 2.8% per fund, with a range of 1.%5-4.1%.(21) The fee, payable in dollars and adjustable annually for inflation and certain changes in the portfolio of the NIF, was fixed for the 10-year life of the fund management agreement.(22) In addition to the fixed management fee, the Law also established the rules for a performance-based bonus. This is comprised of two elements: (i) the proceeds of the sale of 1% of shares of the Fund on an annual basis, and (ii) the proceeds of the sale of 5% of shares of the Fund after the 10-year life of the Fund Management agreement as a `loyalty' bonus. The regular management fee, which is much higher than the performance and loyalty bonus, therefore dominates the remuneration arrangement.

The total remuneration of fund managers, approximately 3.5%-4.5% of the value of assets, is rather generous in comparison with Western funds. The reward system was aimed at focusing the fund managers' attention on the value of their portfolio companies and on value-increasing policies (Article 4 of the Law on Investment Funds). There was an implicit assumption that this would result in aligning the interests of fund managers with those of the NIFs and their shareholders, thus mitigating the principal-agent problem. In particular, the use of loyalty bonus was expected to reduce the problem of `short termism' associated with investment funds and emphasise the importance of `long term' for fund managers. However, given the imbalance between the fixed management fee and the performance related element, the reward system may have led managers to be less concerned with the long run health of the company and their share prices.

Although the remuneration of fund managers, and the legal requirements imposed on them, ameliorate the principal-agent problem to some extent, they do not resolve the problem completely. As discussed in the first section of this paper, effective corporate governance is ensured either by efficient financial markets, the take-over mechanism, and an established system of legal protection against opportunistic behaviour by managers, or by concentrated shareholding by active owners. For corporate governance at firm level the Polish MPP relies on the latter method. But for corporate governance at fund level, an effective system is still not developed. Furthermore, by making the take-over of NIFs difficult (at least in their initial stages), the government has weakened one of the mechanisms of corporate governance. It was thought that with the separation of NIFs from the Treasury, the monitoring function of the supervisory board appointed by the government may not be pursued to the same degree by their successors. The general decline in NIFs' share prices, especially since the beginning of 1998, may have contributed to a broadly pessimistic assessment of NIFs and their governance structure by the markets (more on the falling share prices later). However, the early indications are that a number of financial institutions are building up concentrated ownership stakes in most funds, a development which would strengthen the role of active owners and mitigate the principal-agent problem at the fund level. A number of banks (such as Credit Swiss First Boston, Bank Pekao, BRE Bank) and financial institutions (PZU insurance company, Arnold & Bleichroeder, Baupost Group, NIF Fund Holding) have been particularly active. A small number of these institutions own between 30% and 56% of shares of all funds. Table 1 in the Appendix gives the details of the ownership stakes of these financial institutions in each of the 15 funds. The table clearly shows that a clear process of the connection of NIF's ownership by institutions is underway. A small number of institutions have embarked on a large scale purchase of NIF shares. This is a major development, and concern, and should be monitored carefully over the coming year. The impact of this ownership concentration is now beginning to be felt by the market. With Bank Pekao as its main shareholder, NIF 11 has already appointed Trinity Management (a subsidiary of Pekao and the fund manager of NIF3) as its fund manager. The two NIFs have announced plans for a full-scale merger due to be completed by May 2000.

4. NIFs and Their Portfolio Companies

The Polish MPP was based on the principle that NIFs will act as `active owners', take control of their lead companies, embark on policies that will enhance their efficiency and value, turn them into profit making, market responsive firms and, over the ten-year period of their agreement, transform them into genuine `private' institutions, listed on the stock exchange or sold to strategic investors. By the end of this process, NIFs themselves will be turned from `venture capital' type funds, heavily involved in the operations of their companies, to typical investment or mutual funds, which are not directly involved in the affairs of their companies.(23) In this section we shall discuss the policies adopted by NIFs, aimed at influencing their portfolio companies, and the constraints they have faced in this process.

It was clear from the very beginning of the programme that almost all companies in the MPP, even the profit-making ones, were in need of restructuring, and most of them in desperate need of modernisation and new investment. Indeed most companies in the scheme expected NIFs to provide them with, or facilitate their access to, additional capital. Soon, however, they were to find out that NIFs regarded themselves as agents of change (rather than the maintenance of status quo or the provision of new capital). They embarked on policies aimed at changing the management structure, strategy, operations and, more importantly, the dominant culture of their portfolio companies. The main areas of change brought about by NIFs are discussed below.

i) Governance Structure

Although the `lead' fund owns only 33% of shares of a portfolio company, the law enables it to nominate just under half of the members of the supervisory board of the company, including its chairman. The `minority' funds (14 other NIFs) are also entitled to one or two seats on the board (depending on the size of the supervisory board). Together, the Funds always have a majority on the supervisory boards of portfolio companies. The employees and the Treasury, the other two main stake-holders, are also entitled to have their representatives on these boards. Table 7 shows the number of members of the supervisory boards representing each stake-holder group for differently-sized supervisory boards.

Table 7: Representation of Different Stake-holder Groups on the Supervisory Boards of Portfolio Companies

(*) One of the lead NIF's representatives usually assumes the chairmanship of the Supervisory Board.

Clearly, it is in the interest of NIFs to coordinate their actions in order to ensure that they have an effective voice on the supervisory boards. Therefore, right from the beginning, there was an implicit agreement amongst NIFs that the lead fund should also nominate the representative of minority funds. This practice, of course, can increase the likelihood of opportunistic behaviour by the lead fund -- an issue to which we shall return shortly.(24)

Given the overall objectives of the NIF programme and the desire by the state to create effective corporate governance structure, the Treasury had also made it clear that, in principle and except in situations where social issues may be involved, it will act as a `passive' owner and will not use its shareholding in portfolio companies to counter NIFs.

All NIFs took advantage of their legal powers and reorganised the supervisory boards of their portfolio companies. They appointed their own nominees (mostly their own employees and sometimes outsiders hired on a part-time basis) to the chair and membership of the boards and began to determine the short term and long term policies of their companies. One of the first issues they had to deal with was the composition and membership of the management board of portfolio companies.(25) The NIF Law had not laid down any specific rules on the structure of the management boards -which is normally determined by the supervisory board. Under socialism, the management board of state-owned companies was made up of a president, a production director and an `economic' director (an all-embracing post with responsibility for accounts, financial issues, personnel, etc.). This was far from the functionally-oriented management boards of firms in developed market economies. Functions such as marketing, finance and human resources have assumed paramount importance during transition. As one fund manager pointed out, in the previous period, management was only concerned with what went on inside the premises of the company, now they have to start learning about what goes on outside the premises -- in particular output and input markets. Almost everywhere, NIFs used their position on the supervisory boards to introduce a new management board structure -- and in most cases appointing a marketing manager and in many cases also a new president -- or general manager (more on this later).

So far, we have only discussed the role of lead NIFs in the governance structure of portfolio companies. The minority NIFs, too, play a role which at times may be crucial to the efficient operation of the corporate governance mechanism. Through their minority NIFs' representatives, they are expected to be informed of not just the overall financial position of these companies but, more importantly, the developments arising from the decisions of lead funds which may have irreversible consequences for minority owners. Asset disposals, selling of companies, and increasing the share capital (a dilution of minority owners' share) are amongst these developments. On a number of occasions, minority NIFs have suspected opportunistic behaviour by lead NIFs -- allegedly for the personal gains of fund managers.(26)

As the Funds' stake in each minority company is fairly small, these companies attract little of fund managers' time and resources. The irony of the situation of course is that minority holding constitute a significant proportion of the assets of most NIFs. Table 8 shows the share of minority companies in the total assets of each NIF in the 1995-98 period.

Table 8: Share of Minority Companies in NIFs' Assets, 1995-98 (%)

Source: Quarterly accounts of NIFs.

At the end of 1995 and 1996, five NIFs had 50% or more of their assets tied up in minority companies -- over which they had little control. In 1996 the number had increased to six. The general feeling amongst the fund managers has been that they should try to reduce their dependence on their minority holdings. By the end of 1998, 13 funds had reduced the size of their minority holdings below their 1995 level. One development in the area of minority holding was the consolidation of minority share holdings into what became known as `super-minority' holdings. In October 1996, Funds no. 5, 6, 8, 10, 11 and 12 were involved in a process known as `consolidation' in which the 1.93% minority holdings in 137 companies were exchanged with 9.8% `super-minority' holdings in 27 companies. Super-minority holdings were expected to have a premium value over minority holdings as they would reduce the monitoring cost as well as the transactions cost associated with a take-over bid. It would be much easier and quicker to build up controlling stake in a firm if the number of potential sellers is small.

Although consolidation reduced the number of companies each NIF had to be concerned with, the reduction was probably insufficient as they still have minority holding in about 350 companies. In February 1998, therefore, the same six NIFs signed another agreement for share consolidation aimed at further reducing the number of minority companies in their portfolios.

ii) Restructuring

The ultimate aim of the MPP was to enhance the efficiency of the former state-owned companies and transform them to profit making firms which could respond to changing market signals and the new economic environment. Restructuring, as discussed by Carlin, et. al (1994) and Grosfeld and Roland (1996), is the process which enables the new private owners to bring about these changes. NIFs knew that the restructuring of their companies would be their most challenging -- and also rewarding -- task. It is now recognised that, irrespective of their balance sheets, most of the companies in the scheme were in poor shape in late 1995 and early 1996 when they were transferred to NIFs. The uncertainty about future ownership and the absence of new investment in the preceding 2-3 years had resulted in a serious deterioration of their position. The use of old accounting standards, lack of independent auditors and inaccurate data had covered up the true financial position of these companies. Most fund managers interviewed maintained that at least one-third of the companies in the scheme were "worthless" (some believing that up to one-half of their companies had no value).

Fund management companies carried out their restructuring task by assigning each 5-6 portfolio companies to a small team of their employees. The team, headed by an `investment director' or a `portfolio manager', was responsible for helping the company to draw up a strategic plan, embark on process improvement and other changes required to improve its efficiency. The team was also responsible for the monitoring of the company and its management, ensuring that agreed targets were met. Investment directors were the vehicle through which NIFs influenced their portfolio companies. In most NIFs, investment directors were appointed to supervisory boards of companies (sometimes to its chairmanship) and were directly involved in the overall management of these companies. In those companies where NIFs' representatives were not full-time employees of the Funds, investment directors held regular meetings with the chairmen and other directors of portfolio companies to discuss and review policy related matters.

The restructuring efforts of NIFs' investment directors have included a variety of measures designed to improve the performance of portfolio companies. Most fund managers had no prior knowledge of restructuring in transition economies. Most foreign partners did not have much prior experience of the intricacies of restructuring in transition economies either. While they knew that companies had to change their behaviour, they did not know precisely how this should be done. Moreover, there was a general shortage of managerial staff familiar with, or trained in, the operation of a market economy. Gradually, of course, this shortcoming was alleviated and a pool of experienced investment managers developed.

Almost all NIFs have embarked on some form of restructuring right from the beginning of their operations. Interviews with fund managers have particularly highlighted changes brought about in the following areas -- although the intensity of these changes and their impact varied widely across funds.

* Management structure. We have already referred to changes introduced at supervisory and management board levels of portfolio companies. New members of the supervisory boards, appointed by NIFs, were either employees of the fund management companies (their investment directors) or part-time appointees from business and academic circles. Fund management companies with Polish banks as their shareholders relied on the employees of their parent bank to represent them on their boards. Given the geographical dispersion of portfolio companies, the use of bank employees on the boards of companies in their districts was also highly cost-effective. NIFs without banks as their shareholders had to rely on part time staff.

The management board of portfolio companies underwent much change too, not just to their structure but also to their personnel. Although, in general, most funds started with trying to use the existing management personnel because of their job-specific knowledge and expertise, in many cases they found that the old personnel were unable or unwilling to change their behaviour and to meet the needs of the new market conditions. Partial or complete replacement of management boards were therefore inevitable. In some funds, the pace of change was much faster than others. For example in NIFs No. 3, 12, 15, managerial personnel had changed in about one-third of their companies by April 1997 and in one-half of them by January 1998.(27) Further replacement of the management personnel is expected to continue. In addition to the replacement of some members of management boards, new managerial functions (particularly in marketing and finance) were also created in many companies. By the end of 1998, as Table 9 shows, over half of the portfolio companies' top managers, as well as finance and sales directors had been replaced. The scale of change in management personnel had indeed become significant.

Table 9: Changes in the Management Personnel of Portfolio Companies by the end of 1998

Source: Association of National Investment Funds, Annual Report 1998.

Discussions with fund managers in 1998 indicated that many of them (particularly those who took a long term view of restructuring) had reached the conclusion that nearly all former management personnel need to be replaced.

* Management process improvement. Changes in management structure, especially the appointment of finance and marketing managers, was the first step in the process of improving management operations. Regular reporting was introduced by all NIFs, requiring the management and supervisory boards to report the financial position of the company to its lead NIF on a quarterly basis. At the same time, lead funds embarked on a process of requiring their companies to produce budgets for their annual operation as well as long term strategic plans, including capital expenditure plans, to highlight the direction of the company and focus the management's attention on future developments.

The next step, followed by most funds, was the introduction of cost and profitability centres designed to identify loss making and profitable product lines and take appropriate action. They also began to require their companies to introduce a unified cost and management accounting systems in order to better deal with the costing of their output and also with cash flows and receivables. New management contract and a variety of performance related rewards were also introduced by many NIFs. Table 10 summarises the variety of management process improvement measures introduced by the end of 1998.

Table 10: Process Improvement Measures Introduced by the end of 1998

Source: Association of National Investment Funds, Annual Report 1998.

* Changes in output bundle and markets. With new market conditions developing rapidly in Poland, companies could not continue to produce the same assortment of goods that they had produced under socialism. With competition from foreign and other domestic producers, they had to change their output bundle. NIFs used their own expertise, and sometimes brought in management consultants, to help their companies change their product assortments. Changing product lines was one of the strategies used for companies in poor financial position who had lost their market as a result of changes in Poland and former Comecon countries.(28) Table 11 shows the number of companies embarking on changes in their output bundle.

Table 11: Changes in the Output Bundle by the end of 1998

Source: Association of National Investment Funds, Annual Report 1998.

* Spin-offs and disposals. In the first two years, and before their floatation on the stock exchange at least, NIFs' restructuring efforts were directed at improving their companies' financial position and prospects in order to increase the value of their portfolio (from which fund managers also benefit directly). Sometimes, however, the strategy of focusing on particular lines of activity, and also meeting their liquidity needs, resulted in the disposal of a few of the their companies. In some cases, companies that were in poor financial position and also marginal to the main activities of a NIF, were sold to outsiders or management-employees for a nominal price (1 PLN, e.g.). In other cases, parts of bigger companies were separated and organised into separate companies, sometimes sold off at low prices and sometimes kept for restructuring.

Disposals occasionally included the sale of companies as going concerns to strategic investors, often to foreign buyers, for the purpose of raising cash for NIFs' other activities (an increase in the share capital of their portfolio companies, or their modernisation, e.g.). In these cases, both the lead NIF and minority NIFs receive a substantial inflow of cash. In a smaller number of cases, usually one or two per NIF, portfolio companies have been floated on the stock exchange -- which enables the lead NIFs to increase or decrease their holding if they so wish.(29) Table 12 shows the number of disposals and floatations in 1996-1998.

Table 12: Number of Companies Separated from NIFs Portfolio: 1996-98

(*) There are also 6 other companies that were prepared for listing by the end of 1998 but have not been listed yet.

Source: Author's calculation, based on annual and quarterly reports of NIFs, and the Association of Investment Funds Annual Report 1997 and 1998.

Some NIFs have been more active in disposing their unwanted companies than others. In numerical terms, for example, NIF 6 has disposed of some 13 companies and is now left with only 20 companies in its lead portfolio.(30) In money terms, however, NIFs No. 8 and 15 managed to raise the largest amount of money from the sale of their lead and minority companies (PLN 182 million and PLN 170 million, respectively).(31)

* Changes in inputs and assets. All state-owned enterprises were characterised by overmanning, excess capacity and the accumulation of non-productive assets and assets which were not directly relevant to their main areas of activity. While, in general, asset disposal was not a major problem facing the new management, the reduction in the level of employment was an emotive issue which required sensitivity and caution. In many small towns the local community could be severely affected by a drastic reduction in employment. In most cases, therefore, NIFs and their appointed supervisory boards, though determined to reduce employment, did not wish to create public opposition to the programme. As a result, employment reduction took place fairly slowly in all portfolio companies and is also expected to continue at a slow pace. Table 13 shows the reduction in employment levels in the lead companies of selected NIFs in the first two years of their operation.

Table 13: Labour Shedding in Lead Companies of Selected NIFs, 1996-97(%)

Source: Author's interviews with fund managers

Many companies also had land, real estate, social facilities such as apartment buildings, recreational facilities and health centres for their employees which were not necessary to the production process and could be disposed of. The capital raised could then be used to meet the company's other needs. Table 14 shows the number of companies in which asset disposal and employment reduction took place.

Table 14: Changes in Employment and Asset Disposal to the end of 1998

Source: Association of National Investment Funds, Annual Report 1997 and 1998.

* New investment and technology. The most important indicator of strategic, or deep, restructuring (Grosfeld and Roland 1996; Carlin, et. al 1994) is the ability of firms to make new investment and introduce new technology. Their ability to attract foreign investors (as buyers, partners in joint ventures or as strategic investors) also is an indication of their strategic restructuring efforts. Most NIFs have been actively engaged in a search for foreign strategic investors in order to speed up the transformation process in their enterprises or to raise cash for other purposes. Table 15 shows the number of companies in the NIF programme that have allocated substantial sums to investment as well as those introducing new technology.

Table 15: New Investment and New Technology, 1996-98

(*) Up to end of 1997

(**) Without the sale of a majority stake.

Source: Association of National Investment Funds, Annual Report 1997 and 1998.

As Table 15 shows, the progress in the field of investment, including foreign investment, has been much slower than in previous areas of restructuring, reflecting the difficulties faced by firms and their lead NIFs to raise new capital for long term financing from either institutions or individuals investors. The last row of the table should be treated with some caution as it may include fairly minor or routine changes to the production process. It is unlikely that genuinely new technology could have been introduced in even half of the companies -- the proportion that had undertaken new investment.

* Embarking on bankruptcy and liquidation. Restructuring efforts always result in the reallocation of resources from one activity to another (either inside a firm or in the industry and the economy). These efforts do not always lead to the rehabilitation of a company and an improvement in its financial position. At times, restructuring may result in not just the `exit' of resources to a more productive activity but the exit of the firm itself from the market. While in most transforming enterprises restructuring results in mere `downsizing', sometimes the interest of the company as a whole (its owners, including its lead NIF, and its creditors) is best served if the firm exits the market altogether.(32)

Of course, given the position of NIFs and their ability to cross-subsidise a loss making firm by their more profitable operations (as was the case when enterprises were controlled by a branch ministry under socialism), it is possible to rescue loss making firms -- at least in the short run. Indeed, of the 512 companies in the programme, nearly a third were loss making in 1995 -- the proportion increasing in 1996 before dropping to 29% in mid-1998.(33) NIFs recognised that, with better management and some restructuring effort, it may be possible to turn some of these companies round -- as indeed happened with quite a few of them. But, if the market for a firm's products has disappeared and the firm is unable to produce new products or find new markets, or if the company is unable to compete with its rivals for a share of the market, then the most effective means of reducing losses to owners and creditors is to speed up the closure of the firm. The assets and resources of this company can then be transferred to more productive uses elsewhere. The management of an insolvent company may embark on either the `liquidation' path or the `bankruptcy' path. The main difference between the two paths being that, in the former, the management remains in control whereas, in the latter, the courts take charge of the process.(34) During their first three years of operation (1996-98), NIFs oversaw the liquidation and bankruptcy of 34 companies(35) (i.e., 7% of MPP companies and 23% of loss making ones) -- a relatively small proportion of both total number of companies in the scheme and also of those who entered the programme as loss making companies. The main reason for the slow rate of exit has been the social and political considerations associated with closures -- and not a lack of willingness to close down loss making operations by NIFs. Most fund managers believe that the number of liquidations and bankruptcies will increase rapidly in the next two years, reflecting the changing nature of the Polish economy and the required restructuring associated with it.

To sum up the above discussion, it is clear that most NIFs have taken their lead position in the MPP seriously and embarked on some restructuring policies aimed at raising the efficiency and improving the financial and market position of their companies. In a small number of cases, financial distress has been overwhelming and NIFs have had to accept the inevitability of exit and to initiate the liquidation or bankruptcy procedures.

5. PERFORMANCE OF NIFs(36)

After three years of operation (and two years of listing on the stock exchange), it is now time to take stock of the situation and attempt to asses how successful NIFs' efforts have been. Has their restructuring effort made a difference to their lead companies and therefore to their own balance sheets? Have the citizens, who obtained the PSUs and then converted them to shares of NIFs, benefited from their participation in the MPP? There are a number of ways in which the performance of investment funds can be measured -- profitability, labour productivity, asset values, share prices, etc. But given that Polish NIFs are not purely financial funds (such as unit trusts), and that they were charged with the restructuring of their portfolio companies, the performance measures based on profitability may not best reflect their success. We shall therefore look at a range of different performance indicators, discuss their relevance and show the pattern of change in those indicators for different NIFs.

* Profitability. Under normal conditions in a competitive financial market, profitability is one of the best indicators of performance. But in the financial markets of a transition economy with many distortions and imperfections, profitability may be a misleading indicator (indeed, some 31% of the companies in the scheme were loss making). Sound management required NIFs to make appropriate provisions, and create contingency reserves, to cover current and expected future losses and bad debts. Provisions had to be made for the losses of companies likely to go into bankruptcy. After taking control of their companies in 1996, NIFs created much provisions both at company level and at fund level to cover these contingencies. As a result of these provisions, their reported losses increased dramatically, especially in 1996. Losses mount further by the restructuring activities of NIFs -- a common feature of the initial phase of restructuring in all countries resulting from dislocations caused by changes in inputs, outputs, production organisation, markets, etc. Table 16 shows the operating profit/loss of NIFs and the provisions made by each of them.

Table 16: NIFs' Operating Profit/Loss and Provisions(*) (in 1000 PLN)

(*) These are provisions made at the fund level to cover expected losses, bad debts and the cost of potential bankruptcies -- additional provisions are also made at company level.

Source: Annual and quarterly accounts of NIFs.

Here, losses do not necessarily indicate poor performance -- on the contrary, they may arise because NIFs are pursuing prudent policies, establishing proper accounting procedures and engaging in restructuring. What is crucial is to see how losses change between 1995 and 1998 and how much of losses have been due to provisions. As Table 16 shows, all NIFs were loss making in 1995 and their losses increased in 1996. By the end of 1997, all but one of them (No. 2) had become profitable, though by the end of 1998 eleven of them became loss makers again. It is important to identify whether losses are due to the operations of the fund or the high levels of provisions made for possible adverse outcomes. Interestingly, while in 1996 all or the bulk of losses (over 70%) in eleven funds were due to provisions, in 1998 the losses were primarily due to the operations of the funds themselves and not because of the provisions. In other words, the underlying trend shows a deterioration in the financial position of funds.

* Net Asset Value. Unlike the profit/loss element of the balance sheet, the net asset value of all funds increased in 1996 and 1997 (especially in 1996) before showing a decline (in 12 cases) or only a marginal increase (in 3 cases) in 1998. No doubt, the increase was partly due to the general increase in prices in all sectors of the economy (with inflation rates of 9-18% in this period). The method of valuation used by NIFs is another factor influencing the rise in asset values. As long as companies are not floated on the stock exchange their valuation is based on book values, companies and NIFs have some latitude in estimating the value of their assets. The valuation of land, in particular, has caused much debate and controversy and resulted in the setting up of a variety of rules by the government for the proper valuation of assets.

However, despite the problem of valuation, the increased net asset values must partly reflect the improved performance of many of the portfolio companies and improved prospects for funds. As Table 17 shows, over the 1995-98 period, all but one fund experienced a rise in their nominal net asset values, the increase being particularly significant for NIFs No. 4 and 6. However, if inflation is taken into account the assessment of the performance of NIFs will change significantly for the worse, as all but NIFs No. 4 and 6 show a decline in their net asset values. This trend is in line with the increased losses of almost all funds in 1998 discussed above.

Table 17: Change in the Net Asset Value of Funds, 1995-98

(*) Based on changes in the end-of-year CPI in 1996, 1997 and 1998 (a total of 40.3%)

Source: Annual and quarterly accounts of NIFs and EBRD (1999).

* Dividend Payment. One of the main sources of income for NIFs is dividends from their profit-making companies. In 1996, the number of companies paying dividend was fairly limited and the size of dividend payments was also relatively small (on average, just under PLN 800,000 per NIF). In 1997 and 1998, with more companies becoming profitable, NIFs aimed at increasing their dividend income -- which had become a more feasible aim. As one fund manager put it, NIFs made it clear to companies that they had to pay dividend if they expected to get any help or advice. The average dividend in 1997 and 1998, therefore, increased to just over PLN 2.1 million and PLN 2.8 million per NIF, respectively.(37)

In general, dividend payment is an indication of the improvement in the financial position of portfolio companies and their responsiveness to shareholders' demands and expectations. Interviews with fund managers confirmed their determination to force dividend payment, however small, on their companies as a matter of financial discipline. NIFs themselves, of course, have not paid any dividend to their shareholders yet -- a failure which naturally contributes to the poor assessment of NIFs' prospects by financial markets.

* Net Asset Value per Share and Share Prices. The net asset value per share, which is published in the annual report of NIFs also increased for all NIFs, especially in 1996 and in most of them also in 1997. In 1998 though they began to either decline or change very little, reflecting the adverse trends in profitability and asset values. Of course these figures are nominal figures and have not been adjusted for inflation (which would have the same effect on the trend as that in Table 17). As mentioned earlier, although the distribution of companies amongst funds was on a fairly random basis, the assets in each NIF's portfolio were different from those of other NIFs, and their values diverged further as soon as the first annual reports of NIFs were prepared (December 1995). In 1995, the net asset value per share varied between 7.27 and 12.10; by 1998, the variation ranged from 9.34 to 14.02. Again, as with asset values, the figures here are subject to problems arising from valuation methods already referred to. The rise in net asset value per share has also been partly due to the decrease in the number of outstanding shares of NIFs.(38)

Given that NIF shares have been trading since June 1997, it is useful to compare share prices with the net asset value per share of different funds. For all NIFs, there is a positive difference between their net asset value per share and the market price of their shares -- the so-called `discount' (the difference between the two expressed as a percentage of net asset values). Table 18 shows the net asset value per share for all funds in the 1995-98 period, the average monthly price of NIFs' shares in December 1998, and the corresponding `discount' in December 1998.

Table 18: Net Asset Value per Share and NIFs' Share Prices

(*) Average for the whole month

Source: Annual and quarterly accounts of NIFs, and Warsaw Stock Exchange database.

Although the above table only shows the level of discount at the end of 1998, it has to be stressed that these discounts have persisted through the first three quarters of 1999 too. Two issues are of particular interest here: the large discrepancy between the net asset values per share and share prices, and the general trend of share prices. There are a number of explanations for the former, including the following. First, the valuation of NIFs' assets are based on a number of assumptions and procedures which may not stand up to more rigorous methodologies. Most fund managers maintained that the original valuations were far from accurate and have had to be revised. Second, NIFs' assets are not liquid and their expected cash value may not materialise. Third, most funds are still loss making and this would be reflected in their share prices. Fourth, NIFs' policies and their impact on their portfolio companies were largely unknown to outside investors in 1996 and 1997. However, with greater information becoming available, and with NIFs' policies manifesting themselves in the performance of their companies, the level of discount may change. Fifth, the quality of assets of NIFs vary considerably (division between lead and minority, sectoral origin and regional distribution) resulting in different discounts for different funds. Sixth, the more intelligent or informed investors know that management fees are rather high in Poland and will result in lower residual claims for shareholders. Finally, the investors also have some knowledge of the differences in the quality of fund managers which will have an effect on the valuation of their assets.(39)

The second important issue in the present context is the trend of NIFs' share prices. As we have already pointed out, NIFs' shares began trading in a buoyant market in 1997. But, gradually, the novelty wore off and, as Figure 1 shows, a general long term decline began -- affecting almost all NIFs uniformly. The fall in share prices continued throughout 1997 and 1998,(40) though recovering somewhat in the first quarter of 1999. Thus, in so far as share prices indicate the funds' performance and shareholders' wealth, the results have been disappointing, especially when they are compared with the Warsaw Stock Exchange All Share Index -- WIG (also shown in Figure 1).

[Figure 1 ILLUSTRATION OMITTED]

To sum up this discussion, the performance of NIFs in the 1995-98 period has been, on the whole, rather disappointing despite the restructuring efforts discussed earlier and improvements in profitability in the majority of NIFs. In most cases, both the net assets valu-es and the return to NIF shareholders (measured by the change in share prices) have not increased in line with inflation.

6. What Influences NIFs' Share Prices?

In the light of the above discussion about the performance of funds, particularly the large discount, it is useful to try to identify the factors influencing the price of NIFs' shares (and indirectly the discounts). Two sets of contributing factors quickly come to mind: those affecting individual NIFs (their initial endowment, their portfolio structure and the particular features of theirmanagement company), and those affecting the stock market as a whole. More specifically, following factors may be expected to influence the price of each NIF's shares:

* Initial Conditions. On the whole, as we have already pointed out, the distribution of portfolio companies amongst NIFs was fairly random, aimed at allocating approximately equal amount of assets to each of the 15 NIFs. Despite the initial attempt, however, NIFs' portfolios were somewhat different from each other in a number of ways: the regional distribution of their companies were different; their sectoral specialisation (shown in Table 5) were also different; and so were the initial average labour productivity of their companies.(41)

* Type of Fund Management Company. The relevant question here is whether the ownership of fund management companies and the nature of control exercised by dominant owners influence the market's assessment of NIFs' prospects. Fund management companies vary significantly across funds in terms of their ownership, the existence or absence of a dominant owner, the share and role of the foreign partner, their make up and experience (see Table 1). Most of them have at least one foreign partner; some are dominated by the foreign institution(s) while others have a dominant Polish partner; some have had prior experience of `venture capital' activity while others were ordinary commercial banks with little experience of direct involvement with their companies; some have a dominant owner (with a share of more than 50%) while others are owned by several institutions. One fund, No. 9, has not had a fund management company since its establishment. The involvement of foreign partners were expected to inject expertise and professionalism into the scheme and give it credibility. This is, therefore, expected to have a positive impact on the performance of NIFs.

* Size. Despite the fact that the initial value of NIFs' assets were approximately the same, the policies pursued by different funds resulted in the divergence of their size (measured by assets or by employment). Restructuring, the sale of companies, bankruptcies and liquidations, amalgamations and splitting of companies resulted in large variations in the size of different funds. Ceteris paribus, larger funds are expected to represent safer investments and greater assurance to investors.

* Share of Assets in Minority Companies. Over the past three years, almost all funds have reduced their holdings in minority companies either through the consolidation process or sale to interested parties. The volume of assets in minority companies are expected to have two different effects on the market's assessment of a fund's prospects. On the one hand, these holding represent the extent of diversification of funds' assets. The risk associated with a fund's portfolio is reduced by the spread of its assets amongst many funds. Moreover, the involvement of many different market participants (in the form of management companies and representatives of other stakeholders) will increase the extent of monitoring and reduce the danger of opportunism. On the other hand, the assets in minority companies represents holdings over which fund managers exercise little influence and may be subject to opportunistic behaviour by other fund managers. The two tendencies will have opposite effects on share prices and the final effect on share prices is, a priori, unknown.

* General economic and financial environment. All NIFs' share prices are affected by environmental factors which influence the whole of the stock market. These factors are not NIF-specific but impact the extent of demand for shares (including NIFs' shares) in relation to other assets. We have already pointed out that a part of the long run decline in NIFs' share prices may be explained by those factors which affected the Warsaw Stock Exchange Index (WIG) as a whole.

The following basic model has been employed to test the impact on share prices of the factors discussed above.

[SHAREP.sub.it] = f([SPEC.sub.i], [MANAGDUM.sub.i], [NAV.sub.it], [MIN.sub.it], [WIG.sub.t], e)

where:

[SHAREP.sub.it] is the average quarterly share price of [NIF.sub.i]; [NAV.sub.it] is the net asset value of each NIF (as a proxy for NIFs' size); [MIN.sub.it] is the share of each fund's assets held in minority companies, [SPEC.sub.i] is the index of sectoral specialisation at the beginning of funds' operations (measured by the Herfindahl-type index of Table 5); MANAGDUM is a dummy variable representing the type of fund management company (1 if the foreign shareholders hold 50% or more of the company's shares and 0 otherwise);(42) WIG is the value of Warsaw Stock Exchange All Share Index; i refers to funds and t refers to time in quarters (from 2nd Quarter 1997 to 4th Quarter 1998).

Quarterly data on all variables (except the initial conditions and the dummy variable) are available from the Warsaw Stock Exchange and NIFs' published quarterly accounts. The analysis covers the period between the second quarter of 1997 (when NIFs were floated on the stock exchange) and the last quarter of 1998 (seven quarters altogether). We have used both OLS and random effect methods to test the above model. Table 19 represents the results of the estimation of the model. The signs of parameters and the degree of significance of variables are similar, suggesting that the differences between NIFs are not considerable. In addition to the linear model, represented in Table 19, the logarithmic specification was also estimated but the results were not very different and are nor reported here.

Table 19: The Impact of Selected Variables on NIFs' Share Prices

(*) t-ratios in brackets

The model produces some interesting results. Some of these results are in accordance with a priori expectation. Share prices are positively, and significantly, related to the size of NIFs (as measured by their net asset value) and the general environment of the stock market (as it affects the all-share price index, WIG). Initial conditions measured by sectoral specialisation at the end of 1995 (SPEC), on the other hand, do not have a strong or significant influence on share prices. This suggests that, by now, the impact of the initial division of companies between funds has weakened and markets put more weight on the present and future prospects of funds rather than their initial endowment some four years ago.(43) The share of assets in minority companies ([MIN.sub.it]) has a strong and significant positive effect on share prices. This seems to suggest that markets consider the diversification of NIFs (shown both by the share of assets in other funds and by the size of NIFs) as a positive aspect. This, as we have already referred to in previous sections, is in spite of fund managers' wishes to concentrate their holdings under their own control. The most interesting result of the above model, however, is the insignificant impact of the fund management company on share prices. Although one of the basic assumptions of the NIF programme was that the involvement of experienced foreign financial institutions will ensure that NIFs are managed efficiently, in practice there is no obvious difference between the performance of funds managed by domestic or foreign financial institutions.(44) This result may of course be interpreted in two ways. Firstly, that foreign fund management companies have not been any better than their Polish counterparts (or indeed ordinary managers hired directly by funds themselves). Secondly, that the prevailing competitive conditions have forced the Polish-managed funds to match the performance of foreign-managed funds or face adverse consequences.

Although the econometric investigation produced interesting results, these should be treated with some caution as the number of observations are fairly limited (7 quarters for each of the 15 funds). However, as additional data becomes available, it would be possible to expand this analysis and improve the model, its specification and its predictive ability.

7. Concluding Remarks

The Polish mass privatisation programme was implemented with a long delay even though it was formulated, and debated at length, in the early phase of transition. The main reason for the delay was political -- the absence of political consensus about the programme combined with fragmented parliaments and the divided loyalties of various interest groups. The uncertainty about future ownership and strategy resulting from the delay led to the deterioration of the financial and economic position of many of the companies in the programme. Therefore, at least some of the potential benefits of mass privatisation were lost because of the long delay. The first lesson of the Polish programme for other countries is that mass privatisation should be implemented quickly in order to avoid uncertainty and to prevent opportunistic behaviour by enterprise managers.

Mass privatisation programmes in other transition economies, notably the Czech Republic and Slovakia, resulted in the dispersion of share ownership and the consequent problem of corporate governance. In Poland, however, the programme was designed so that privatised companies would have a clear ownership structure, made up of distinct groups, and subject to direct control by dominant owners. By giving investment funds a majority control on the supervisory boards of mass privatised companies, and by linking the funds' income and remuneration partly to the performance of their companies, the programme provided a mechanism for the resolution of the corporate governance problem at the company level. Indeed, with the financial institutions dominating the management organs of the companies, as in the German and Japanese models of corporate governance, it is expected that the interests of owners and creditors will be protected. At the fund level, however, with the dispersion of share ownership following NIFs' separation from the Treasury in 1998, the problem remains unresolved. However, the initial indications are that financial institutions are rapidly building ownership stakes in all NIFs -- an unexpected outcome which may help to ameliorate the corporate governance problem.

The incidence of opportunistic behaviour at the fund level has been much less in Poland than in the Czech Republic. There are three main reasons for this: monitoring by the supervisory board and other large shareholders, specifically other NIFs,(45) the presence of some reputable financial institutions as partners of fund management companies, and the stronger legal system and regulatory framework governing the financial markets and investment funds. However, with the separation of NIFs from the supervision of Treasury-appointed supervisory boards, the situation may change. These boards owed their allegiance to the Treasury and regarded themselves the instruments of public interest -- a perception that has underlined the occasional conflict with the fund management companies.

The present supervisory board members have been elected by the general meeting of shareholders. Given the dispersed nature of NIFs' shareholders, it was initially not clear who will dominate these boards -- will it be the fund managers' nominees (as many observers expected) or will it be those nominated by large shareholders? The absence of serious corporate governance problem in the pre-1999 phase was largely due to the fact that supervisory boards were appointed independent of fund managers. This situation is changing now and the initial signs indicate a move away from a dispersed ownership to a concentrated ownership mode. Stronger measures of protection for shareholders and more strict rules governing transparency, declaration, reporting, and the provision of financial information may be needed to ensure that financiers and dispersed shareholders are protected.

The performance of funds in the first two years of public trading has been rather disappointing. Despite improvements in the profitability (or reductions in losses) of portfolio companies, the net asset value 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. These poor indicators imply that the restructuring task of NIFs will have to continue for a few more years if the financial fortunes of NIFs are to change. Some NIFs, however, have already decided that the first phase of the NIF programme, the restructuring phase, is over and the second phase, that of mutual investment fund phase, has begun. They wish to expand their stock market (domestic and foreign) operations instead of worrying about their portfolio companies.(46) But if NIFs slow down in their pursuit of restructuring and concentrate on buying and selling of companies and shares in order to make short term profit, their poorly performing assets will not undergo the necessary change and their share prices will not recover.

With the conversion of PSUs to NIF shares completed at the end of 1998, the umbilical cord connecting the Treasury to NIFs has been severed. The influence of the state on NIFs and their development is now limited to the scope of the regulatory framework and not through ownership or control of NIFs' shares or their supervisory boards. The state, however, will remain interested in the evolution of the programme and its implications for competition and for financial market developments, and will therefore continue to observe and monitor this evolution, particularly in the following areas.

Mergers and acquisitions. The market for corporate control is one of the most important mechanism of efficient corporate governance. It can identify under-performing funds, change their ownership and control structure, and improve their performance. With NIFs' shares trading on the stock market, it is now possible for individuals or institutions to buy these shares and build a controlling stake in order to embark on a take-over bid. Moreover, as it is generally agreed that, by international standards, Polish funds are relatively small and their management fees relatively high, there is the potential for rationalisation of fund portfolios and management. Most of the fund managers interviewed believed that mergers between funds is a real possibility -- and also more likely than take-overs by outsiders. Funds without a fund management company were thought to be the likely candidates for potential mergers -- as the new fund manager will be able to increase its remuneration radically. Indeed as we have already mentioned, with Bank Pekao as their main shareholder, NIFs 3 and 11 have embarked on a merger -- expected to be finalised by May 2000. Interestingly, in one of the major early reports on the operation of the programme, ING Baring Bank predicted that within six months of their floatation, `a number of NIFs will be taken over by outside investors' (ING Barring 1997: p. 1). Clearly, it has taken much longer than expected for the market for corporate control to begin exerting its influence.

With the present shallowness of financial markets in Poland and the relatively small size of investment funds, the law has provided some degree of protection against hostile take-overs in the first four years of their existence. No single shareholder may own more than 5% of shares of a fund in the first two years of the programme. The proportion rises to 10% and 20% in the third and fourth year. However, with the gradual building up of ownership stakes by institutions such as Credit Swiss First Boston, Pekao, PZU, etc., further mergers and takeovers should not be ruled out. As of mid-1999, financial institutions had ownership stakes in excess of 40% in nine NIFs -- and in excess of 30% in all of them (see Table 1 in the Appendix). Given the dispersion of ownership of the remaining shares of NIFs, the institutional shareholders will be able to exercise a greater degree of influence in funds' affairs than warranted by their actual share ownership. They will no doubt play an important role in any potential merger or takeover.

Corporate governance. As expected in the programme, portfolio companies are being gradually floated on the stock market after the completion of restructuring and their return to financial health. Once floated on the exchange, the corporate governance problem raises its head again, unless banks and financial institutions like NIFs retain a significant shareholding with a view to influencing, monitoring and controlling the management. Of course, a strong legal framework designed to protect the interests of owners and creditors (especially minority shareholders) plays a major part in the amelioration of the corporate governance problem too. At the fund level, however, corporate governance will remain an issue of concern for some time. This concern, combined with high management fees and small size may have contributed to the market's poor evaluation of NIFs' short term prospects and, therefore, their falling share prices. The restrictions imposed by law on the amount of shares an individual investor may hold in the initial four years of NIFs' operations, may also have played a part in their poor performance.

Venture capital and financial investment funds. Right from the beginning of the programme, NIFs were expected to have a dual role: a venture capital role (transforming the operations of their portfolio companies through restructuring and then floating them on the stock market) and an investment fund role (engaging in financial market transactions). The complementary and conflicting aspects of these two roles did not receive sufficient attention when the fund management consortia were selected, and also later on when the supervisory boards of NIFs conducted negotiations with their respective fund managers. Foreign institutions involved in the programme are mainly investment bankers, without much experience of restructuring -- particularly in transition economies. They had to acquire local expertise in restructuring through local banks, consulting firms and influential individuals.(47) Four years into the programme, it is clear that some funds actually see themselves as purely `financial' investment funds, wanting to concentrate more on buying and selling shares and other securities on domestic and foreign markets and less on the affairs of their portfolio companies. This attitude has resulted in a stronger tendency for disposal of companies (good ones floated on the stock market or sold to strategic investors and bad ones liquidated or sold at nominal prices). On the other hand, some funds still see themselves as predominantly `venture capital' funds, emphasising their role as `value enhancers' through restructuring. They prefer to retain the companies in their portfolio and pursue the restructuring policy until it comes to fruition. They also have an interest in acquiring and investing in new companies (largely newly established private companies) and enable them to expand their operations. The conflict between these two roles will develop in future and the current division between funds will become more visible. This may also have an impact on the price of NIF shares and on the level of discounting associated with each NIF.

Low share prices. The price of universal share certificates (PSUs) rose throughout 1996 and early 1997, reaching the 175 PLN level in February 1997. But both PSUs and NIF shares, since their floatation, have been subject to a general downward trend and large discounts. The aggregate share of all 15 funds reached a high of 170 on 13th June 1997 and then followed a gradual decline, reaching an average of 121.7 in December 1997, 98.7 in June 1998, 64 in December 1998 and 58 in September 1999.(48) We have already discussed some of the factors explaining the level of discount attached to the shares of different NIFs. As some fund managers expect, the low price of NIF shares and the reputation of Polish financial markets as cleaner and more transparent, than for example the Russian or Czech markets, may encourage foreign investors to increase their financial investment in Poland and thus help lift the market and improve the prospects for NIFs' shares.

To sum up, mass privatisation in Poland has been different from the schemes in most other transition economies, particularly the Czech, Slovak and Russian schemes. NIFs, though originally set up by the state, have now been fully privatised with their shares trading on the stock market. Although their performance on the financial markets has been somewhat disappointing, they have succeeded in much restructuring work in their portfolio companies, including a certain amount of deep and strategic restructuring. It is still too early to make a definitive judgement about the Polish MPP, but the outcome of their early operations, the absence of any large scale managerial opportunism and fraud (of the scale observed in Russia and the Czech Republic) lead to a positive initial assessment of the programme. Further research on the performance of mass privatised companies is necessary before a final verdict can be reached.

Financial support from the ACE Programme of the European Commission, under grant number P-96-6717-F, is gratefully acknowledged. This project has benefited from the cooperation of the fund managers of ten national investment funds who participated in detailed interviews and shared their views with the author. I am grateful to Maciek Frankowski, Michal Hamryszak (in Warsaw) and Erjon Luci (in Stoke) for their meticulous work as research assistants. I am also indebted to Dr. Ewa Balcerowicz, Maciek Kotowicz and Jacek Lukowski who have supported and facilitated my work in Poland over the years, and to an anonymous referee of this Journal for very helpful comments.

Notes

(1.) The concepts of voice and exit are from Hirschmann (1970). For a comparison of German-Japanese and the Anglo-Saxon modes of governance, see Roe (1993).

(2.) For a comparison of the corporate governance problem of investment funds in Poland, Czech Republic and Slovenia, see Estrin, et.al. (1998).

(3.) For a detailed discussion of the progress of the privatisation debates in the early days of transition in Poland see Myant (1993), especially chapter 6.

(4.) Lewandowski's plan was subjected to much criticism from the whole range of the political spectrum. Many observers highlighted the danger of creating new `super-ministries' or industry-wide holding companies reminiscent of WOGs (large economic organisations, introduced in Poland in the early 1980s) wielding substantial power over enterprises and the market. For a critical appraisal of, see Dabrowski and Blaszczyk (1991).

(5.) For details and a commentary on this Law, see Domanski and Fiszer (1993) and Sztyber (1997); for the privatisation law of 1990, see PIAZ (1993).

(6.) The Ministry of Privatisation, advised by S G Warburg, announced its first proposal for the free distribution of shares to the population via an unspecified number of National Investment Funds in June 1991. The government of Hanna Suchocka reached an agreement with the trade union movement on the procedure for the implementation of the programme and the selection of companies to be included in the scheme. Though the government fell soon after this agreement was reached, and the coalition government of former Prime Minister Pawlak pledged its support for the agreement, the final decision on the details of the scheme were not made until December 1994 -- when the funds were officially set up.

(7.) For a small number of companies, a further 15% of shares were distributed to their contractual suppliers (such as farmers or fishermen). These shares were deducted from the Treasury's allocation of shares.

(8.) The Polish Peasant Party and the Democratic Left Alliance, respectively.

(9.) This Selection Commission was the same as that which prepared the short list of members and chairs of the supervisory boards of NIFs. Proposals from the consortia were evaluated on the basis of their technical and financial characteristics combined with oral presentation by candidates. The World Bank provided advice and assistance for the programme and the selection procedures.

(10.) This was the situation at the beginning of the programme. Since then NIFs No. 2, 4, 6, 7, 11 and 13 have either dismissed, or seen changes in the composition of, their management company.

(11.) A note of caution is required here: book values of portfolio companies may be radically different from their market values and as the shares of these companies were not traded anywhere during this period, it was quite difficult to obtain an accurate picture of the real value of assets. Throughout this paper, we shall use PLN for the New Polish Zloty which replaced the old Zloty on 1 January 1995 at a rate of 10,000 old Zloty to 1 New Zloty. Values are also expressed in million US dollars using the prevailing exchange rate in the period under consideration.

(12.) In the first round, NIFs were arranged in a random order with each NIF selecting one company, usually the most desirable company on their list (provided that it had not been selected by the funds which made their selection earlier). In the second round, the Fund which had been the first to select its company in the first round, would go to the end of the queue for selection; the Fund which had been the second to select its company, would go to the 14th position, and so on.

(13.) NIFs No. 5 and 13 had 35 companies and NIF No. 10 had 31 companies.

(14.) The PLN20 fee was intended to cover the administrative cost of the distribution of `certificates' -- it was not related to the value of these certificates (i.e., the pro rata value of assets of enterprises in the scheme).

(15.) In theory, the certificate holders were also entitled to receive any dividend that may be paid out by the companies in the scheme. Certificate holders were expected to open special accounts with brokers and convert their bearer certificates into `dematerialised' form (a computer record) in their own name through which they could trade their certificates and also receive any potential dividend. In practice no dividend was paid out on the certificates.

(16.) Before any trading started, certificates were valued at about PLN 144. This was based on dividing 51% of the net asset value of the companies in the scheme (PLN 7,228 million) by 25.675 million certificate holders. It should be noted that although 60% of shares of companies in the scheme were distributed to NIFs, the certificate holders were entitled to only 85% of the value of NIFs (the remaining 15% being earmarked for performance related fee of fund management companies).

(17.) A survey commissioned by the Ministry of State Treasury in July 1998 showed that 11% f certificate holders had still not converted their certificates to shares. See Central European Business Weekly, July 17-23, 1998. By the end of 1998, some 300,000 people had failed to convert their certificates to NIFs' shares. So far, the reason for this failure is unclear.

(18.) Based on author's interviews. This figure is also consistent with those presented in Table 2, given that only 60% of the shares of enterprises in the scheme were given to NIFs.

(19.) NIF No. 2 dismissed International UNP Holding Ltd, the main partner of its management company; NIFs No. 7 and 11 dismissed one of the foreign partner of their management company, Lazard Freres and Wasserstein Perella, respectively. Fund No. 4 dismissed its management company Raiffeisen Atkins in late 1998 for entering unfavourable agreement with an Irish investment firm. In NIF No. 13 Yamaichi decided to leave the management company on its own in 1997 and the Regent Group left by mutual agreement in late 1998.

(20.) As one of the fund managers pointed out, unlike the investment funds in the Czech Republic, most Polish fund managers have well known foreign partners whose reputation is at stake and therefore would not engage in the kind of practices observed in the Czech Republic in 1996-97. For a detailed discussion of the role of investment funds, especially the behaviour of fund managers, in the Czech Republic, see Hashi (1998).

(21.) A World Bank loan to supervisory boards, underwritten by the government, was used to pay for the management companies' fixed fees for the first two years. A smaller EBRD loan was used to cover the expenses of NIFs (mainly of their supervisory boards) in their initial period of establishment. The loans are repayable in five years. The management fee figures are based on the author's interviews with fund managers, some of whom refused to disclose their precise fee structure.

(22.) The Law stipulates that once NIF shares have been distributed to individual shareholders, the level of management fee will be reduced to below 2%.

(23.) Unless companies suffer from financial distress in which case institutional shareholders will intervene -- as is the case in established market economies.

(24.) The minority funds representative is still nominated by the lead fund and almost always votes with the lead fund except when issues such as an increase in the share capital or the sale of a portfolio company are involved. These cases may give rise to serious conflicts of interest. More on this later.

(25.) As in Germany, the management structure of Polish companies consists of a `supervisory board' and a `management board' with the former being responsible for the overall, strategic management of the company and the latter responsible for the day to day and short term policies. The shareholders of the company elect the supervisory board which, in turn, appoints the management board.

(26.) A typical example is the sale of a company to a foreign buyer at prices below the level which minority holders may be able to obtain for their stakes. Another example is the sale of real estate belonging to a loss making company at very low prices -- without the explicit knowledge of minority shareholders. Indeed, during our interviews, many fund managers expressed their doubt about the allegiance of the minority funds' representative, complaining that they were not always kept informed about major developments affecting the minority funds. For this reason many NIFs have allocated the task of monitoring the minority companies to one of their investment directors. It has to be stressed that the number of cases involving opportunistic behaviour by fund managers is fairly small.

(27.) By `their' companies, we mean companies in which they have the `lead' fund position.

(28.) An excellent example of this type of restructuring is provided by a food processing plant in the liquidation process which, with the help of consultants hired by its lead fund, NIF Fortuna, was converted into a producer of animal food and soon became a profit making company.

(29.) Lead NIFs are not allowed to increase their share-holding in portfolio companies beyond 33% unless it is through an increase in share capital or after their floatation on the stock market.

(30.) NIF Annual Report 1997 and author's interviews.

(31.) NIFs' Annual Reports of NIFs, 1997 and 1998.

(32.) For a detailed discussion of exit and its relation to restructuring, see Balcerowicz, et. al. (1998), especially Chapter 4 on `Downsizing'.

(33.) Central European Business Weekly, October 23-29, 1998, quoting Jacek Cesarz, the President of NIF No. 3.

(34.) For a discussion of the difference between the two processes and the use of the two provisions, see Balcerowicz et.al. (1998), Chapters 7 and 8.

(35.) Association of National Investment Funds, Annual Report 1998.

(36.) It should be noted that this paper is concerned with the performance of NIFs and not that of their portfolio companies. The analysis of the financial performance of companies in the MPP is a separate subject beyond the scope of the present study.

(37.) All dividend figures are from the annual accounts of NIFs.

(38.) In 1995, NIFs had 33 million outstanding shares, in 1996 just over 31 million, and in 1997 just under 30 million.

(39.) The quality of information produced by NIFs is a good indication of the quality of their fund managers. While some funds produce regular quarterly financial information and many other reports and updates for the benefit of their members and potential investors, others hardly produce anything above the minimum required by the law, and usually very late.

(40.) During this period, PSUs were still being traded on the stock market but their prices also underwent a long term decline, reaching a low of 60 PLN. Trade in PSUs ceased at the end of 1998 when they had to be converted to shares of NIFs.

(41.) See ING Baring (1997) for details of the initial differences between different funds.

(42.) NIF No. 9 is included in the list of funds with Polish majority fund managers.

(43.) Instead of `sectoral specialisation at the end of 1995', we also used `average labour productivity of portfolio companies in 1995' as an indicator of differences between funds at their very start. This indicator also proved weak and insignificant.

(44.) In fact, when we introduced a dummy for NIF No. 9 (which did not have a fund management company at all), that dummy was also not significant.. The significance and sign of other variables remained unchanged.

(45.) This is similar to the concept of `peer monitoring' discussed by Stiglitz (1990). Most of the fund managers interviewed highlighted the importance of monitoring by `minority funds' as a mechanism to prevent the repetition of the Czech experience of `tunnelling'. It should also be added that the employee representative on the supervisory boards of portfolio companies play an important monitoring role on behalf of the employees (who hold 15% of shares). Stiglitz (1985) has highlighted the important monitoring role played by unions and other banks.

(46.) At present NIFs are restricted from engaging in operations on foreign stock markets.

(47.) Funds No. 2, 9 and 15 are examples of the role of influential individuals.

(48.) The average price of PSUs in their last month of trading (December 1998) was 62.

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Sztyber, W. 1997. "The Programme of National Investment Funds in Poland," Economic Discussion Papers No. 37, Warsaw: Faculty of Economic Sciences, University of Warsaw, April.

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Appendix-Table 1: Concentration of Ownership: The Proportion of NIFs' Share Held by Selected Financial Institution (as of June 1999) (%)

Source: Notoria Serwis, various issues

Iraj Hashi Staffordshire University
NIF Name                  Fund Management Co.

First                     BRE/IB Austria
                          Management Sp. z o.o.(1)

Second(2)                 Hevelius Management
                          Sp. z o.o.

Third                     Trinity Management
                          Sp. z o.o.

Fourth                    Konsorcjum Raiffeisen
(Progress)(2)             Atkins -- Zarzadzanie
                          Funduszami S.A

Fifth                     Polskie Towarzystwo
(Victoria)                Prywatyzacyjne -- Kleinwort
                          Benson
                          Sp. z o.o.

Sixth                     Chase Gemina Polska
(Magna Polonia)(2, 3)     Sp. z o.o.

Seventh                   Kazimierz Wielki Fund
(Kazimierz Wielki)(2)     Management Co. A.G.

Eighth                    KP Konsorcjum
(Octava)                  Sp. z o.o.

Ninth                     None
(Eugeniusz Kwiatkowski)

Tenth                     Fidea Management
(Foksal)                  Sp. z o.o.

Eleventh(2)               KN Wasserstein
                          Sp. z o.o.

Twelfth                   BNP -- PBI Eurofund
(PIAST)                   Management Polska
                          Sp. z o.o.

Thirteenth                Yamaichi Regent Special
(Fortuna)(2)              Projects Ltd

Fourteenth                International Westund
(West IF, Zachodni)       Holdings Ltd

Fifteenth                 Creditanstalt SCG Fund
(Hetman)                  Management S.A.

                                                           Share
NIF Name                  Partners                           %

First                     Bank Rozwoju Eksportu
                            S.A. (Poland)                  51
                          IB Austria Securities
                            (Austria)                      49

Second(2)                 International UNP Holdings
                            Ltd (Poland)                   50
                          Bank Gdanski S.A. (Poland)       40
                          Murray Johnstone (Poland)        10

Third                     Barclays de Zoete Wedd
                            International Holdings (UK)    33.3
                          Bank Polska Kasa Opieka S.A.
                            (Poland)                       33.3
                          Company Assistance Ltd
                            (Poland)                       33.3

Fourth                    Raiffeisen Investment A.G.
(Progress)(2)               (Austria)                      26
                          Raiffeisen Centrobank S.A.
                            (Poland)                       25
                          WS Atkins Limited (UK)           25
                          Idea Sp. z o.o. (Poland)          9.5
                          WIL Consulting House Sp.
                            z o.o. (Poland)                 9.5
                          Adin Sp. Z o.o. (Poland)          5

Fifth                     Kleinwort Benson Investment
(Victoria)                  Management Overseas B.V.
                            (UK)                           50.1
                          Polska Grupa Zarzadzania
                            Funduszami Sp. z o.o.
                            (Poland) [a subsidiary of
                            Polski Bank Rozwoju S.A.
                            (Poland)]                      49.9

Sixth                     Chase Gemina Italia srl
(Magna Polonia)             (USA and Italy)                51
(2, 3)                    Wielkopolski Bank Kredytowy
                            S.A. (Poland)                  29
                          Nicom Consulting Sp. z o.o.
                            (Poland)                       20

Seventh                   GICC Capital Corporation (USA)   33.3
(Kazimierz Wielki)(2)     Lazard Freres et Cie (France)    33.3
                          Bank Gospodarstwa Krajowego
                            (Poland)                       33.3

Eighth                    KP International Ltd (USA)
(Octava)                    [a joint venture of Barents
                            (USA), 40%. York Trust (UK),
                            30%, and Kennedy Associates
                            (USA), 30%]                    60
                          Bank Handlowy w Warszawie
                            S.A. (Poland)                  20
                          Paine Webber Inc (USA)           20

Ninth
(Eugeniusz Kwiatkowski)

Tenth                     Banque Arjil (France)            60
(Foksal)                  Agencja Rozwoju Przemsylu
                            S.A. (Poland)                  18
                          Warszawska Grupa Konsultingowa
                            Sp. z o.o. (Poland)            18
                          Bank Inicjatyw
                            Spoleczno-Ekonomicznych
                            S.A. (Poland)                   4

Eleventh(2)               KNK Finance & Investment
                            Sp. z o.o. (Poland)            50
                          Wasserstein Perella Emerging
                            Markets (USA)                  30
                          New England Investment
                            Companies L.P. (USA)           20

Twelfth                   Banque Nationale de Paris
(PIAST)                     (France)                       75
                          Polski Bank Inwestycyjny S.A.
                            (Poland)                       25

Thirteenth                Yamaichi International
(Fortuna)(2)                (Europe) Ltd (UK)              54
                          Regent Pacific Group Ltd
                            (Hong Kong)                    36
                          ABC Consultancy Sp. z o.o.
                            (Poland)                       10

Fourteenth                Bank Zachodni S.A. (Poland)      33.67
(West IF, Zachodni)       Central Europe Trust Co. Ltd
                            (UK)                           33
                          Charterhouse Development
                            Capital Ltd (UK)               22.22
                          Credit Commercial de France
                            (France)                       11.11

Fifteenth                 Creditanstalt Investment Bank
(Hetman)                    A.G. (Austria)                 49.9
                          SCG St Gallen Investment
                            Holding A.G. (Switzerland)     49.9
                          Mr H Percina                      0.1
                          Mr W Behrendt                     0.1


31 December 92    31 December 93
                  PLN(*)m   US$m    PLN(*)m   US$m

Sales              11,044   7,966   12,816    6,974
Pre-tax profit        581     419      400      218
Post-tax profit       222     160        8        4
Net Assets          7,086   4,491    7,059    3,307

                  31 December 94      30 June 95
                  PLN(*)m   US$m    PLN(*)m   US$m

Sales             16,226    7,111   10,563    4,428
Pre-tax profit       677      297      519      218
Post-tax profit      307      135      286      120
Net Assets         7,228    2,966       na       na


No. of     Total Sales      Sales as %
Sector                Companies     (PLNm)      of sector's sale

Chemicals                 42         2,078            20.9
Electro-engineering      150         3,284            15.8
Food processing           62         1,965             8.3
Light industry            67         1,439            23.9
Metallurgical              8           465             5.0
Minerals                  43           845            21.4
Wood and paper            33           809            16.8
Other manufacturing       13           241            17.1
Construction              69         1,108            10.0
Trade                     16           400             0.7
Transport                  9           182             1.8
Total                    512        12,816             8.1


Pre-tax profit   % of no. of           Sales            % of no. of
(PLN mil)         companies          (PLN mil)           companies

5 and over            10                 100 and over         3
2-5                   19                       50-100        12
1-2                   12                        25-50        27
0-1                   26                        15-25        23
Loss making           31                 Less than 15        33
Incomplete
  information          2       Incomplete information         2
Total                100                        Total       100


Index of Sectoral               Index of Sectoral
NIF     Specialisation (H)(*)    NIF     Specialisation (H)(*)

NIF 1           1831            NIF 9            na
NIF 2           2450            NIF 10           2773
NIF 3           1663            NIF 11           1958
NIF 4           1864            NIF 12           2974
NIF 5           1679            NIF 13           1816
NIF 6           2130            NIF 14           1786
NIF 7           na              NIF 15           1502
NIF 8           1996


Share   12 June 97      Share       12 June 97

NIF 1       10       NIF 10            12
NIF 2       8.6      NIF 11            11.5
NIF 3       10       NIF 12            12
NIF 4       12       NIF 13            13
NIF 5       8.5      NIF 14            12.6
NIF 6       10.6     NIF 15            12
NIF 7       7.85
NIF 8       10.5     NIF Index(*)     159.95
NIF 9       8.8      PSU              150


No. of Seats on
                             Supervisory Board

Total membership of which:     5      7      9
Lead NIF(*)                    2      3      4
Minority NIFs                  1      2      2
Treasury                       1      1      1
Employees                      1      1      2


NIF      end of 1995   end of 1996   end of 1997   end of 1998

NIF 1        43            41            35            28
NIF 2        24            35            38            44
NIF 3        36            50            44            34
NIF 4        57            48            39            32
NIF 5        52            52            46            40
NIF 6        43            53            38            30
NIF 7        50            46            33            34
NIF 8        40            41            37            27
NIF 9        50            52            44            37
NIF 10       36            34            31            26
NIF 11       33            44            37            41
NIF 12       42            41            33            31
NIF 13       42            33            32            30
NIF 14       55            52            42            39
NIF 15       31            40            29            27


Number of   % of total no.
                                       companies   of companies
Type of change implemented             involved    in the scheme

Whole management boards                    54           11
President of management boards            265           52
Finance directors                         237           46
Sales director                            263           51
Setting up new marketing departments      283           55


Number of   % of total no. of
                                   companies   companies in
Type of change                     involved    the scheme

Adopting business plans               404           79
Budgeting                             512          100
Product profitability accounting      512          100
Cost and profit centres               358           70
Management information system         255           50
Performance related pay               486           95


Number of    % of total no. of
                          companies    companies in
Type of change            involved     the scheme

New fields of activity       102            20
New profiles                 187            37
New designs                  221            43
New product assortments      455            89


Number of   % of total no.
                                      companies   of companies in
Type of disposal                      involved    the scheme

Floated on Warsaw Stock Exchange         52           10
  or Over the Counter(*)
Sold to strategic investor              133           26
Average income of NIFs from         PLN million
  disposal of portfolio
  companies in 1996-98                  143
of which:
  from sale of lead companies            78
  from sale of minority companies        65


NIF     Reduction   NIF      Reduction

NIF 1      18       NIF 8       13
NIF 2      20       NIF 10      20
NIF 3      15       NIF 12      10
NIF 5      15       NIF 13      20
NIF 6      10       NIF 15      16


Number of   % of total no.
                                     companies   of companies in
Type of change                       involved    the scheme

Changes in employment:
  Labour shedding                       353            69
  New employment                        277            54
Asset disposals:
  Apartment buildings                   287            56
  Land                                  295            58
  Recreational facilities               153            30
  Health centres and kindergartens       87            17
  Other assets                          174            34


% of total
                           Number of      no. of       Amount of
                           companies   companies in   investment
Type of change             involved     the scheme    PLN million

Investment in                 160           31            746
  lead companies
Investment in                 282           55            203(*)
  minority companies
Investment by                  34            7            275
  strategic investor(**)
Sale of company to            133           26            913
  strategic investor
Introduction of               461           90              -
  new technology


1995                   1996

        Profit/                Profit/
NIF     Loss      Provisions   Loss      Provisions

NIF1     -2090       1192       -57102     53670
NIF2     -1198          0       -54658     48507
NIF3      -667          0       -81528     37276
NIF4     -3561       3574       -31617     33145
NIF5     -9788       7837       -64831     51468
NIF6     -8286          0       -42594     39192
NIF7     -5108          0       -18264     13155
NIF8    -22974      23081       -74815     42173
NIF9     40348      41987        -1856      7837
NIF10   -28136      26291       -31771     27465
NIF11    -1203          0       -49749     52772
NIF12   -10054       8868       -38297     30550
NIF13    -7816       6494        24338     30539
NIF14   -14322      11298       -15443     24581
NIF15   -14970      11321      -102927     40712

                1997                   1998

        Profit/                Profit/
NIF     Loss      Provisions   Loss      Provisions

NIF1      4091      18644        1062       5979
NIF2    -58312      78024        -821        543
NIF3     12516      21891      -31419       9965
NIF4     65806      18760        6977      18383
NIF5     11094       1104      -20111       5359
NIF6     20411      35092       10586       2397
NIF7      8116      20555      -26057      10166
NIF8     15256       2678       23839       8573
NIF9      4489      15045       -6605       4822
NIF10     8317      14871      -30547      16826
NIF11    75815      13757      -39458      16044
NIF12     7697      25971      -34799        965
NIF13    21346      18889      -77221       2577
NIF14    54345      39402      -17653          3
NIF15    14651      54060      -80733      36982


Net Asset Value (1000 PLN)

NIF       1995        1996        1997        1998

NIF1    337,944.7   406,417.9   413,136.4   412,523.8
NIF2    399,397.9   454,270.4   395,158.5   394,198.7
NIF3    281,550.4   341,690.5   350,259.4   317,675.0
NIF4    265,058.2   357,757.5   415,652.8   423,030.4
NIF5    277,270.3   293,779.4   306,927.5   286,816.5
NIF6    239,887.2   326,716.1   347,108.5   357,688.6
NIF7    299,486.9   373,052.5   374,941.9   350,952.7
NIF8    278,622.7   338,112.1   352,015.0   376,137.0
NIF9    293,571.0   366,010.3   371,454.2   364,565.6
NIF10   392,886.7   455,635.8   463,722.1   427,164.0
NIF11   311,522.8   372,994.2   442,150.2   386,339.2
NIF12   338,091.2   381,915.3   387,412.4   352,613.5
NIF13   350,735.1   469,942.3   483,207.5   406,918.1
NIF14   269,456.0   332,761.0   373,857.3   352,434.9
NIF15   322,171.9   400,614.7   413,274.4   331,371.2

        % increase 1995-98

                  Inflation
NIF     Nominal   adjusted(*)

NIF1      22          -18
NIF2      -1          -41
NIF3      13          -27
NIF4      60          +20
NIF5       3          -37
NIF6      49           +9
NIF7      17          -23
NIF8      35           -5
NIF9      24          -16
NIF10      9          -31
NIF11     24          -16
NIF12      4          -36
NIF13     16          -24
NIF14     31           -9
NIF15      3          -37


NIF      Net Asset Value per Share (PLN)

          1995    1996    1997    1998

NIF 1    10.24   13.10   13.34   13.43
NIF 2    12.10   14.64   12.84   12.86
NIF 3     8.53   11.01   11.31   10.34
NIF 4     8.03   11.53   13.42   13.76
NIF 5     8.40    9.47    9.91    9.34
NIF 6     7.27   10.53   11.28   11.71
NIF 7     9.08   12.02   12.18   11.42
NIF 8     8.44   10.90   11.35   12.25
NIF 9     8.90   11.80   12.07   11.86
NIF 10   11.91   14.69   15.07   14.02
NIF 11    9.44   12.02   14.37   12.56
NIF 12   10.25   12.31   12.59   11.58
NIF 13   10.63   15.15   15.70   13.22
NIF 14    8.17   10.73   12.15   11.46
NIF 15    9.76   12.91   13.43   10.78

            Share      Discount
NIF        Prices        (%)

         Dec 1998(*)   Dec 1998

NIF 1       3.11          77
NIF 2       2.90          77
NIF 3       3.20          69
NIF 4       5.20          62
NIF 5       4.25          54
NIF 6       5.27          55
NIF 7       3.00          74
NIF 8       6.19          49
NIF 9       5.95          50
NIF 10      4.34          69
NIF 11      3.34          73
NIF 12      4.24          63
NIF 13      5.51          58
NIF 14      5.18          55
NIF 15      2.96          73


OLS        Random Effect
Variables   Parameter(*)   Parameter(*)

Constant       -16.27         -17.96
               (7.75)         (7.89)

NAV              0.72           0.85
               (6.42)         (5.77)

MIN             15.72          18.37
               (5.75)         (7.32)

SPEC         -0.00053       -0.00058
               (1.45)         (0.86)

MANAGDUM        0.180          0.252
               (0.56)         (0.42)

WIG           0.00067        0.00062
               (6.61)         (7.68)

[R.sup.2]        0.62           0.61


Selected Financial Institutions    NIF1    NIF2    NIF3    NIF4

AIB Europea and WBK SA
Arnhold & Bleichroeder,Inc.        4.72            5.32
Bank Austria AG
Bank Pekao and Pekao Leasing               5.07   31.25
BankowyFurzalezny od Kredyt
  Bank PBI SA
Baupost Group                      8.34            6.81
BRE Bank SA                       11.74
Copernicus Investements Ltd.
Credit Suisse First Boston         5.39    1.70    2.31
Everest Capital Funds
Expandia Fin                              10.11
Fund.1 NFI SA
Merrill Lynch                                              3.30
NIF Fund Holdings PCC
Pioneer SA
Poland Opportunity Fund Ltd.
Polskie Towarzystwo
PP FS Holdir and Lubelskim
  Towarzystwem Kapitalowym
PZU SA and PZU Zycie SA                   19.75    4.55   21.05
Raiffeisen Ost Invest                                     14.38
NIF No. 4
NIF No. 5
NIF No. 7
NIF No. 9                                                  9.36
NIF No. 10
NIF No. 13
NIF No. 14

Total (rounded)                   30      37      50      48

Selected Financial Institutions    NIF5    NIF6    NIF7    NIF8

AIB Europea and WBK SA                    20.43
Arnhold & Bleichroeder,Inc.                        5.41    3.29
Bank Austria AG                                    4.94
Bank Pekao and Pekao Leasing
BankowyFurzalezny od Kredyt
  Bank PBI SA
Baupost Group                              5.24            6.05
BRE Bank SA                       14.77
Copernicus Investements Ltd.               9.97
Credit Suisse First Boston         5.33            8.45    2.16
Everest Capital Funds
Expandia Fin
Fund.1 NFI SA                      5.49
Merrill Lynch
NIF Fund Holdings PCC                     18.27           19.80
Pioneer SA                                                 4.49
Poland Opportunity Fund Ltd.
Polskie Towarzystwo
PP FS Holdir and Lubelskim        10.12
  Towarzystwem Kapitalowym
PZU SA and PZU Zycie SA                    2.12    4.95
Raiffeisen Ost Invest
NIF No. 4
NIF No. 5
NIF No. 7
NIF No. 9
NIF No. 10                                         3.94
NIF No. 13                        11.45
NIF No. 14                                         5.64

Total (rounded)                   47      56      33      36

Selected Financial Institutions    NIF9   NIF10   NIF11   NIF12

AIB Europea and WBK SA
Arnhold & Bleichroeder,Inc.                4.13    5.53
Bank Austria AG
Bank Pekao and Pekao Leasing      15.07           32.00
BankowyFurzalezny od Kredyt                                9.09
  Bank PBI SA
Baupost Group
BRE Bank SA
Copernicus Investements Ltd.                               9.97
Credit Suisse First Boston         5.40    6.37
Everest Capital Funds                      3.92
Expandia Fin
Fund.1 NFI SA
Merrill Lynch
NIF Fund Holdings PCC                      4.91           14.62
Pioneer SA
Poland Opportunity Fund Ltd.               8.73
Polskie Towarzystwo
PP FS Holdir and Lubelskim
  Towarzystwem Kapitalowym
PZU SA and PZU Zycie SA           21.34    3.00    3.76
Raiffeisen Ost Invest
NIF No. 4
NIF No. 5
NIF No. 7                                  5.03
NIF No. 9
NIF No. 10
NIF No. 13
NIF No. 14                                 7.63

Total (rounded)                   42      44      41      34

Selected Financial Institutions   NIF12   NIF13   NIF14   NIF15

AIB Europea and WBK SA
Arnhold & Bleichroeder,Inc.                        3.59
Bank Austria AG                                           16.85
Bank Pekao and Pekao Leasing
BankowyFurzalezny od Kredyt        9.09
  Bank PBI SA
Baupost Group                              6.09
BRE Bank SA                                9.78
Copernicus Investements Ltd.       9.97
Credit Suisse First Boston                 9.26    8.09
Everest Capital Funds                              7.01
Expandia Fin
Fund.1 NFI SA
Merrill Lynch                                      5.38
NIF Fund Holdings PCC             14.62
Pioneer SA
Poland Opportunity Fund Ltd.                       9.17
Polskie Towarzystwo                                        4.89
PP FS Holdir and Lubelskim
  Towarzystwem Kapitalowym
PZU SA and PZU Zycie SA                            4.94   19.79
Raiffeisen Ost Invest
NIF No. 4                                                  4.37
NIF No. 5                                  9.66
NIF No. 7
NIF No. 9
NIF No. 10
NIF No. 13
NIF No. 14

Total (rounded)                   34      35      38      46
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