A significant investment opportunity

One of the most challenging aspects in transforming the role of the state - which is at the heart of the changes under way in Poland - is how to restructure state-owned enterprises. Privatisation is at the heart of our approach.

We have adopted a pragmatic approach to privatisation, and the characteristic feature of Polish privatisation is its diversity.

Under the two main approaches to privatisation, enterprises can be liquidated and their assets sold, leased or transferred to a new private company; or they can at least be commercialised (by conversion into joint-stock companies or limited liability companies), and then privatised through share sales.

We hope to raise at least US$1 billion in 1997 in direct sales of some of Poland's most successful state companies. They include Polska Miedz, Europe's biggest copper producer, the Orbis travel agency and hotel chain, the Iskra ball bearing plant, the Polar household appliance manufacturer, the Domy Towarowe Centrum chain of some 30 city centre retail stores, plus various chemical, tobacco and brewing interests.

Minority strategic stakes are to be sold in LOT, the Polish national airline, and in 1997 in Telekommunikacja, the telecoms group. A large number of direct equity sales and flotations have been completed and more are planned. As a key element of our economic reform programme, we are entering the final stages of implementation of a unique approach to the mass privatisation of former state assets through the National Investment Fund (NIF) programme.

This programme is designed to achieve a major transfer of state assets to the Polish population for a small fee. It allows over 500 companies to be privatised through, in effect, a single transaction. At the same time it provides, as one of its most important and distinctive elements, a free market mechanism for actively restructuring the companies concerned by harnessing the skills of fund management firms, selected for their experience in traditional fund and venture capital management, industrial management and restructuring techniques and for their experience of Poland.

The NIF programme therefore differs fundamentally from 'mass privatisation' programmes in other Central and Eastern European countries. Voucher-based programmes elsewhere may have enabled the transfer of companies to the private sector, but they lacked a mechanism for achieving the necessary restructuring and change-over to market-driven management. In contrast, the NIF Programme was designed to promote the development of profitable and viable companies operating in Poland.

Fifteen NIFs were established in December 1994. Each fund is controlled by a Supervisory Board charged with representing the interests of its shareholders - those holding the Share Certificates. The Supervisory Board members were appointed by a specially convened Selection Commission. In July 1995 ten-year agreements were concluded by the NIFs (represented by the Supervisory Boards) with fund managers, which were also selected by the Selection Commission following an international tender.

The primary aim of the NIFs, acting where relevant through fund managers, is to achieve maximum growth in the value of their assets. Accordingly, the fund management teams are operating under a ten-year management contract and a performance remuneration structure providing financial incentives to increase the long-term value of the fund through trading assets and by the active restructuring of the companies under management. It is expected that fund managers will concentrate their attention on the companies in which their NIF has lead shareholdings, giving guidance and using their expertise actively to assist these companies to improve their businesses. This may include providing strategic planning advice, as well as assistance to companies designed to strengthen their market position, facilitate access to new technology and capital, obtain foreign and domestic credits and establish and implement contacts with potential foreign and domestic business partners. In addition, fund managers will advise on raising new capital and buying and selling investments for the NIFs.

Some 512 Polish enterprises are participating in the programme. These enterprises come from a broad range of industrial sectors including metallurgy, electro-engineering, chemical engineering, wood and paper processing, foodstuffs, construction and transportation equipment.

Each company initially had the same shareholding structure: 33 per cent was held by a 'leased' NIF, a further 27 per cent was distributed between the remaining NIFs, 15 per cent was distributed to employees, and 25 per cent was retained by the state Treasury. Ultimately we expect to use this state residual shareholding to provide funds to reinforce the social security system.

The 33 per cent lead shareholdings were chosen by the NIFs according to an agreed competitive procedure designed to ensure fairness. Each company is, accordingly, one of 33-35 enterprises held as a principal investment by its lead NIF.

It is expected that many of the companies will undergo substantial restructuring under the NIF guidance. The principal aim is to strengthen their market positions and make them as competitive as possible. Shares in the companies may be sold by the NIFs directly to strategic investors and some companies may be sold in their entirety to Polish or international companies or investors. It is hoped that many of the participating companies will themselves eventually be listed on the Warsaw Stock Exchange.

The participating companies are already attracting international and Polish investing partners. For example, in June 1996 Philips Electronics NV of the Netherlands bought a majority shareholding in Polam Pabianice SA. The US-based White Eagle Industries LP has become a major shareholder and investor in the margarine company Bolmar SA; majority shareholdings have been sold to foreign investors in three large cement works included in the Programme (Zaklady Cementowe sold to Dyokerhoff of Germany, Nowa Huta sold to Rumeli of Turkey and Wierzbica sold to Lafarge of France). The ball bearing division of Prema-Milmer was formed into a new company and sold to Tinken of the US. A number of other negotiations are under way with individual NIFs in respect of companies within their portfolio.

The programme has been designed to enable Polish citizens to be the beneficiaries of the privatisation process. All adult resident Polish citizens are entitled to participate in the programme by purchasing share certificates.

Distribution of the share certificates commenced on 22 November 1995, and the distribution period lasted for one year. During that time each entitled person is able to collect a single certificate upon payment of a fee of PLN20 (about US$7). By mid-August 1996 some 16 million certificates had been collected, representing over 60 per cent of the eligible population, making this already one of the most successful programmes in Central and Eastern Europe.

The certificates are distributed in bearer, physical form and may be treated in that form in non-regulated markets. There is no restriction on individuals trading on the basis of private arrangements between themselves and the certificates started trading on the Warsaw Stock Exchange in July 1996. Holders of certificates will be able to exchange them for a single share in each of the funds when the NIFs are admitted to trading on the Warsaw Stock Exchange in the first half of 1997. By then, therefore, a very substantial proportion of the Polish population will be able to convert their certificates into shares in listed NIFs and thereby become shareholders in the true sense of the word - an important defining moment in Poland's economic transformation.

The programme is being underpinned by a substantial educational campaign to explain the operation of capital markets and to ensure that the population as a whole is well informed about the Programme and its implications for them as shareholders.

Institutional, strategic and private investors from abroad will be able to participate in the NIF Programme in a variety of ways:

• investors can purchase share certificates from those citizens who wish to trade them, either in bearer form, or on the Warsaw Stock Exchange. These certificates will be exchangeable for shares in individual NIFs once the NIFs have been listed on the Warsaw Stock Exchange;
• investors can purchase and trade in shares in the NIFs after they have been listed on the Warsaw Stock Exchange;
• financial and strategic investors can participate in the restructuring of individual companies by purchasing shares in them as and when they become available, by taking part in new share issues, by providing equity and non-equity finance, by acquiring companies in their entirety or by forming strategic joint ventures;
• institutional investors may choose to purchase shares in individual participating companies when they become publicly listed;
• the programme provides substantial opportunities for foreign companies to become involved with individual companies in joint ventures or some other appropriate structure;
• the programme gives foreign investors the opportunity to deal directly with professional fund managers, enabling transactions to be completed speedily.