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

Outrage at such practices was directed not only at foreigners involved in local business, but also at the local elites who stood to profit, such as high officials in privatization ministries (or their family members) who set up consulting firms that did business with the ministries. Sociologist Antoni Kamiński has described this practice in Poland as “post-Solidarity-style corruption.” In one case, a deputy minister who was in charge of joint ventures from 1989 to 1992 also owned and operated a consulting firm that specialized in joint ventures. When, in 1990, Prime Minister Tadeusz Mazowiecki issued a decree forbidding members of his government from owning consulting firms, the deputy minister signed the firm over to his wife. Many of his colleagues employed similar subterfuges.59

That local officials were thus ideally positioned to clinch deals with foreign consultants in return for sizable fees did not escape the notice of state regulatory bodies. NIK, the Polish government’s auditing agency, devoted some attention to the issue. One of its classified reports found many links between representatives of local enterprises responsible for the enterprises’ liquidation or privatization who also were interested in “acquiring” the enterprise, and consulting firms valuing the assets of those enterprises.60 Lech Kaczyński, director of NIK during the crucial reform years of 1992 to 1995, identified “almost a union between a ministry [supervising privatization] and … three of the Big Six accounting firms involved [in asset valuations].” He added: “I expect that they [the Big Six firms] behaved differently here than in the States. There was one very reputable international firm – I couldn’t open a NIK privatization [audit] report without [seeing] the name of that firm [in association with questionable practices].”61

In 1991, managers of Polish companies undergoing privatization were told by government officials that if they used the Western firms that the officials selected to do asset valuations, the privatization or sale of their companies would go smoothly. Industry-wide concern grew among the foreign-trading companies that made up most of Poland’s export potential when the Ministry of Foreign Economic Relations, which oversaw them, pushed three USAID-supported consortia by placing them at the top of its list of approved consultants. Representatives of the companies suspected that the favored firms had paid off the ministry officials with money or perks and that the companies would receive undue benefits from doing the valuations.62 NIK confirmed this. It also concluded that accepting the recommendations of consulting firms with respect to asset valuations sometimes resulted in significant losses for Polish enterprises and harmed the national treasury.63

When foreign advisers engaged in asset valuations at the enterprise level, there seemed invariably to be controversy, however inadvertent. A case in point was Monor, a large Hungarian state farm producing agricultural goods. Monor was made a priority for privatization by the Hungarian government in January 1991. Seeking to get its privatization program under way and to launch high-profile projects that would attract the attention of the international community, USAID brought in a Big Six accounting firm to help.

At the end of 1991, Monor, like many Central and Eastern European state-owned mega-firms, still was made up of small unrelated concerns producing commodities from pork and wheat to cooking oil and corn chips. One task of the State Property Agency, the government agency that was founded in January 1991 to convert state-owned property into private hands, was to break up such mega-companies into smaller ones.

Like many new managers in the region, Dr. Rozália Krizsa, an economist who was appointed the managing director of Monor, inherited a mess. A petite, brunette woman in her 50s, exuding empathy, she was at once gentle and authoritative, despite daily crises stemming from inattention and lack of investment over the years. Some 700 employees expected her to help them achieve job security. Monor, like many state-owned enterprises in the region, was entangled in a chain of debt: The company owed money to companies from which it bought raw materials. It also sold products to companies that were indebted to Monor.

In the course of working with the USAID-paid consulting firm, Dr. Krizsa and her assistants at Monor said they spent weeks compiling the information the firm requested and briefing its representatives, most of whom flew in from London. But Monor managers expressed that they were less than satisfied with the consultants’ cooperation and products of their work. The short report the consultants produced provided little new information or analysis, according to management.

While the foreigners were writing their report, Monor’s management, in consultation with the State Property Agency, conducted its own valuation in 1991. Management also hired an independent group of Hungarian and Western management specialists to assess the value of the company and devise a plan for its restructuring and privatization. At Monor, word circulated that the foreigners’ valuation of Monor resulted in an exponentially lower figure than the two other valuations that had been conducted, and that the aid-paid firm had arranged for one of its clients to enter into a joint venture with Monor and purchase more than 50 percent of the company. “Of course,” Dr. Krizsa surmised, “this is because foreign firms want to buy Monor at the cheapest price.”64

Had the Central and Eastern European governments developed some standards for conducting valuations, such standards could conceivably have helped to allay fears that state properties were being undervalued by foreigners and their local partners. Instead, valuations continued to take place amid considerable confusion in policy, public administration, the economy, and the rule of law. Whether allegations of undervaluation were justified in any given case or not, transactions made in the absence of clear-cut valuation criteria were bound to raise eyebrows. Anatol Lawina, a former official at Poland’s NIK, believed the governments of Central and Eastern Europe had to accept some of the responsibility. “We, too,” he conceded, “are at fault for failing to come up with any standards and guidelines for controversial tasks such as asset valuation.”65 Why was it so difficult for Central and Eastern European officials to establish standards? Often, they lacked the requisite resources, were legally and institutionally ill equipped to monitor valuation activities, or, as indicated, stood to benefit personally from them.

MISSING THE BOAT

The story of the Polish state-owned enterprise Ursus illustrates the frequent lack of understanding of the real problems facing large, state-run enterprises in the region and the controversies to which Western consultants often contributed when they tried to assist in privatizing them. Ursus, one of the largest tractor factories in the world, located about 20 kilometers from central Warsaw, fostered both agricultural productivity and socialism. Domestic sales to private farmers accounted for most of its market. But in 1990-91, domestic demand collapsed due to a severe recession that hit agriculture especially hard. The recession was connected to administrative decisions of Finance Minister Leszek Balcerowicz’s economic reform program.

Still, in 1991, Ursus, located on the dotted landscape of the great plains of Central Europe, appeared much the same as it had in its communist heyday. The roar of factory machinery was interrupted only by the occasional sputtering of shabby state buses driving past. On breaks workers milled about the grounds smoking unfiltered cigarettes. In the lobby of the administrative office building, a red tractor sat in stately splendor, a monument to the achievements of socialism. Photographs of the proud winners of workers’ productivity competitions, sponsored by the factory’s former communist management, adorned the walls.