Janine Wedel - Collision and Collusion - The Strange Case of Western Aid to Eastern Europe

BIG CONTRACTS FOR THE BIG SIX17

The Big Six accounting firms were designated the chief agents of privatization and recipients of privatization aid. The involvement of such a firm, whether it had policy impact in a given case or not, was important to donors and to some recipient players in an intangible way. Big Six firms lent legitimacy to privatization decisions that were made both at the enterprise and the ministry levels and to the economic reforms of the Second World more generally. The Big Six were to play a critical part in cleansing communism.

And so as early as 1990, the donors turned for help to the consultants of the Big Six firms. With contracts from USAID, the EU’s PHARE program, the British Know How Fund, the World Bank, the EBRD, and others, the Big Six began to establish offices in Central and Eastern Europe and to launch commercial activities. The British, given their experience with privatization under Prime Minister Margaret Thatcher in the 1980s, were seen as having special expertise in privatization and took a lead as consultants on the issue.

Coopers & Lybrand, a multinational accounting firm, was among the first of the Big Six firms to be registered in the region. By 1991, the company had offices in Warsaw, Budapest, Prague, Bucharest, Moscow, and St. Petersburg. At that time, an estimated half of the company’s Central and Eastern European business was in foreign aid contracts, according to the 40-year-old David Thomas, a British national who pioneered the firm’s entry into the region. The firm took on myriad aid projects, ranging from managing EcoFund, a large environmental project setup by the United States and administered by the Polish Ministries of Finance and Environment, to assessing the effects of the transition on Polish women. Coopers & Lybrand also worked on foreign aid contracts to assess Azerbaijani oil and gas reserves, a USAID-funded project to come up with a strategy for privatization in the Baltics, a PHARE-sponsored project to do the same in Albania, and a PHARE-funded project to write Romania’s privatization laws. The firm was awarded contracts to privatize the Bulgarian national airline and banks and for Yugoslavian privatization projects and banking legislation. In addition, Coopers & Lybrand received funds for projects from the British Know How Fund, the World Bank, and smaller Danish, Dutch, and Swedish projects.18

With aid contracts to help establish itself, Coopers & Lybrand was among the most successful companies of its kind in the region. Thomas attributed this achievement in Poland to relationships he established with government officials, such as his “good buddies” Krzysztof Lis and Janusz Lewandowski. They were Poland’s first heads of the Ministry of Ownership Transformation, the agency created to preside over the transfer to private wealth of the country’s state-owned properties. The two men helped Thomas facilitate deals, he reported, including two of the largest joint ventures in Poland at the time, worth hundreds of millions of dollars each. One client, Unilever, a British-Dutch conglomerate that bought a soap factory in the Polish city of Bydgoszcz, entered into the country’s largest joint venture, according to Thomas. Coopers & Lybrand did all the preparation for the deal, including asset valuation—an estimate of the market value of a company.19

While competing for, and carrying out, aid projects, the firm also had an expanding business portfolio. When asked in 1991 which areas his firm planned to move into, Thomas replied, “You could ask what areas we aren’t moving into. We have clients in every sector of the economy worldwide who are looking into Eastern Europe to invest or to trade.” Coopers & Lybrand’s clients did business in energy, agriculture, food processing, transportation, and communications.20 The Coopers & Lybrand story was typical of the Big Six firms: they began by winning aid contracts and setting up offices in Poland and Hungary, which then served as a base for scouting out the region and securing further contracts from aid agencies, as well as from private clients.21

AD HOC AID

Ideology appeared to play a role not only in the donors’ efforts to break up the company town and in their legitimizing these efforts through the Big Six: The belief that “private” partners held the key to privatizing state-run enterprises and to unlocking the transition to a market economy shaped some donors’ strategies for delivering aid, notably those of the United States. Three consulting consortia, chosen under “notwithstanding authority” (a directive invoked by USAID’s assistant administrator that enabled competition to be waived)22 and led by three of the Big Six accounting firms (Coopers & Lybrand, KPMG Peat Marwick, and Deloitte & Touche), formed the cornerstone of the U.S. privatization and economic restructuring aid package for Central Europe. These consortia won contracts under the Indefinite Quantity Contracts, or IQCs—a type of USAID contract that was supposed to enable a more rapid response23 for multiple projects in privatization and related activities throughout the region that extended over a five-year period, July 1991 to July 1996, and amounted to some $60 million per consortia.24

U.S. officials emphasized that their philosophy was to assist the “private” sectors of Central and Eastern Europe and to accomplish their goals through it, not through any central bodies or authorities that might be “tainted” communist holdovers. Ambassador Robert Barry, special adviser for East European assistance to the deputy secretary of state, spelled it out in 1992: “We do not have government-to-government agreements.… Our task is to promote growth of the private sector rather than to encourage the growth of new bureaucracies.”25

Although later in the aid effort the United States sent some consultants to work inside government ministries to help design and push privatization efforts, the focus of U.S. privatization aid in Central Europe was generally outside government bodies. Consultants were to work directly with enterprises or sectors. Because privatization aid was to be directed to private entities, it was structured to work around, rather than in coordination with, the recipients’ government-run privatization programs it was supposed to help.

Donors’ concepts of the private sector were drawn from Western models, rather than experience, and often failed to appreciate the complex and diverse relationships between private and state sectors that had evolved in Western societies. In addition, Central and Eastern Europe was largely lacking in one important sector: Prior to the revolutions of 1989, the countries of the region had very restricted private sectors, if any. The state had shaped the structure and workings of whatever private, small-scale business had been allowed. As there were few obvious private-sector partners in the immediate post-1989 aftermath, the U.S. preference for bypassing governments was almost entirely counterproductive when the goal was to privatize state-owned enterprises. Ignoring government agencies responsible for privatization made it virtually impossible to deliver privatization aid effectively, as the GAO also concluded.26 Recipient officials found they had little authority to assess the work of the USAID-paid consultants, determine schedules, or terminate a contract for nonperformance or poor performance. Freelance consultants could bypass the relevant ministries and go right to the field to find and work on privatization projects. Marek Krawczuk, the official responsible for aid in Poland’s Ministry of Industry, compared the situation to that of “a surgeon who comes, does his work without talking with the patient, and leaves without checking to see whether the operation was successful.”27

This setup was also disconcerting to some of the more thoughtful consultants. In January 1992, Jeffry Baldwin, a partner at DRT International, a subsidiary of Deloitte & Touche, explained how he went about finding projects under the IQC program: He wandered around “looking for someone with the authority to be helped, even though they [Poles] don’t have to spend any [of their own] money.” To Baldwin’s credit, he had employed more Polish staff at that point than most other consulting firms in Poland, and he had found that the best way to make contacts was through the Poles he employed, who had contacts because they “[had] worked with someone or [had gone] to school with someone.” Although some useful projects may well have come out of Baldwin’s approach, it highlighted the ad hoc nature of the privatization program.28