4.2 Structure of the NIF programme

In order to accomplish the main purpose of the programme, two institutions from developed market economies were introduced: closed investment funds and a managerial contract for a legal person (service contract for a managing company). The Act that brought these into being “ the 30 April 1993 Act on National Investment Funds and their Privatization “ constituted a lex specialis in relation to the Code of Commercial Companies, adherence to which was mandatory in Poland. Under the terms of this Act the State Treasury allotted to the National Investment Funds 60 per cent of the shares in each of the 512 state-owned companies included in the programme. Thirty-three per cent of these shares were allotted to one selected fund (the leading package), and 27 per cent were distributed in approximately equal parts to the other 14 funds (the minority packages). Up to 15 per cent of the shares were awarded gratis to employees and the remaining 25 per cent were retained by the State Treasury as a reserve (Figure 4.1).

Figure 4.1: Typical ownership structure of an NIF company. Source: National Investment Fund Program (1995), p. 11.

In legal terms the NIFs assumed the form of a public limited company. The privatized firms supervisory boards retained control of some of the general competences specified in the Code of Commercial Companies until the first general meeting of shareholders (other than the Treasury) took place, after which the supervisory boards position in the companies management system changed significantly.

Over time the nature of the funds altered , with the Treasury s share being reduced to 12 per cent or so, and the funds coming to resemble typical joint-stock companies, as specified in the Code of Commercial Companies. From the start it was intended that the Treasury would hold NIF shares only temporarily, and it was obliged by the Act to make its shares available to the holders of investment certificates. The latter could be exchanged for fund shares, so their holders became fund shareholders.

Thus, the NIFs functioned as closed investment funds and at the same time as stock companies that owned the shares of their portfolio companies. The quantity of these shares was limited by both the size of the fund s share capital and the nominal value of one share.

The objective of the funds, under the terms of the Act on National Investment Funds and their Privatization, was to increase their equity by raising the value of the companies whose shares they owned. According to the Act the funds could enter into agreements on the management of their property with enterprises selected by means of tender. Such agreements were concluded by 14 of the funds, but three later dispensed with the services of management companies. At present the properties of the funds are run by either a management company or a consortium (Figure 4.2), which became possible after a recent consolidation process.

Figure 4.2: NIF structure

The task of management companies was to manage the NIF s assets in such a way as to increase the value of the portfolio companies shares and other assets, including liquid assets. However there was an asymmetry between the obligations and responsibilities of the management companies on the one hand and the funds statutory authorities on the other, causing many disputes and highlighting a fault in the design of the programme itself.

During the first three years all the NIFs had to focus on restructuring the companies in their investment portfolios. The scale of restructuring required is indicated by the fact that at the end of 1995, when the programme was launched, as many as 33 per cent of the NIFs enterprises were making a loss. The distribution of weak enterprises among the NIFs was more or less uniform owing to the method of allocation.

Focusing their efforts on increasing the market value of the portfolio companies, NIFs initiated and controlled restructuring processes in these companies. They did not operate like typical investment funds that could be found in Britain or American economies but rather like restructuring funds. Acknowledging the fact that investment funds usually limit their property rights to monitoring the portfolio companies, we have to admit that it was not possible in the case of NIFs because of the need to implement radical technological, marketing, organizational and cultural changes. Trying to implement the changes in a relatively short period of time, all the NIFs had to act as ˜active owners of the portfolio companies. Considering the NIF s objectives and managerial functions, they seemed to resemble venture capital funds, which focus on the creation of development strategies and control of financial outcomes . Consequently, the portfolio companies were treated as good assets by the NIFs, as they would be treated by all active investors, as long as the companies were able to retain sufficient market value. Otherwise, NIFs sold their companies to external investors and such decisions were often only a matter of time.