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

The relative success of the Slovak Fund versus the Czech Fund—despite the fact that the former operated in a less propitious region— was attributed to its leadership’s commitment and adaptation to local business and cultural practices. Many more deals were finalized in the Slovak Republic than in the Czech Republic according to the GAO.64 The leadership of the Slovak Fund exhibited much more continuity and interest in local business dynamics than did the leadership of the Czech Fund, which was marked by turnover and exhibited little adaptation to the local business climate.65 A USAID-commissioned evaluation concluded that “the Czech fund has not established a viable program.… [It] has been plagued by an inordinate degree of staff turnover, and has failed to put an effective investment team in place.… The Czech Republic has perhaps the most conducive country conditions in all of Eastern Europe, yet the CAEF [Czech American Enterprise Fund] has one of the worst performance records.”66 In 1995, the U.S. government intervened in the fund, closing the Washington and Prague offices, replacing management, and selling the Czech investment portfolio (at a 92 percent loss of its invested capital). Henceforth the fund focused on Slovakia.67

Further east, astute leadership also was often lacking, although even more crucial. Barry Thomas, who previously had worked for the International Executive Service Corporation and Arthur Andersen under USAID contracts in Russia, explained what happened when he served as the chief financial officer for a company in which the U.S.-Russia Investment Fund (which was created in 1995 from the Russian-American Enterprise Fund and another similar fund) invested $5 million in return for a 50 percent ownership interest. This initial “ill-conceived” investment, reported Thomas, “was made without doing conventional planning and future cash flow expectations.… Certain basic things didn’t seem to be part of the investment process: the assessment and development of a business plan, the expectation of future cash flow. Things were pretty loose.” Furthermore, when the company was “disappearing in an insolvent condition with capital having been consumed and no sources of capital, and major problems with one investment, there didn’t seem to be a reaction of the Russian Investment Fund,” despite the company’s preparation of quarterly reports and budgets specifically for the fund.68

The identity crisis of the Enterprise Funds was reflected in, and appears to have been encouraged by, a lack of clarity as to the desired expertise of fund leadership. The funds generally opted to hire investment bankers, but many of those involved in the funds at various levels suggested that people with straightforward business backgrounds were much more needed. Fund overseers and some principals tended to be enamored of a highflying, seemingly sophisticated “investment” approach, involving finance people with major Wall Street reputations. Barry Thomas, who had dealings with the Russian Fund, explained that those hired were “people maybe knowledgeable in Wall Street but not about business—a lot of people from the young MBA marketplace—aspiring investment bankers [whose] business knowledge and background was limited.”69

Yet taking risks in a tough environment such as Russia did not mean that investments and decisions should be made without calculation, business sense, or preparation. The wrong kind of expertise was emphasized: success in such an environment required strong business skills, knowledge of Russian business conditions, and the ability to work closely with local partners to resolve issues. Instead, as Thomas reported, the fund “got enamored with something, put money into something, and didn’t do proper diligence.”70

Financial and marketing skills alone were not sufficient to run a successful Enterprise Fund operation. Paul Gibian, president of the Czech and Slovak Fund further explained:

I don’t think that sophisticated deal structures that investment bankers have created almost as an art form is what is ultimately most important.… The Morgan Stanleys—the numbers people—that may still have a valid role if you talk to airline or utility or energy or [the Czech automobile manufacturer] Skoda because there you have somewhat sophisticated companies that have a market track record.… But the sector that we are trying to support … has less history, so that’s where the operating experience and management evaluation of local companies become much more important.… We need to end up not only with Western financial wizards, but also to develop local operating experience.71

Indeed, the record of the Enterprise Funds demonstrates that financial and marketing skills alone were not sufficient to run a successful operation. A USAID-funded evaluation of the funds concluded:

The most successful funds are those that have built a strong, capable investment staff in the country. Ideally, the staff should be headed by an investment manager from the host country who also has extensive training and experience in business investing.… The presence of a knowledgeable and competent professional investment staff in the host country, combined with an investment strategy that matches the evolving market conditions, is the most important precondition for success.… As new Funds are started, greater effort should be made to understand local market conditions in those countries and to tailor a program that is consistent with market needs and of an appropriate scale.72

A MORE PROMISING APPROACH?

Aid programs to encourage business and infrastructure development suffered from many of the same problems as the other approaches outlined in chapters 2 through 4. Startup was strained and expectations were created that could not be met. Fund representatives were the targets of much of the same kinds of local criticism as were the consultants featured in chapter 2. Like the previous approaches, the effectiveness of the funds in a given case depended largely on the aid workers’ (in this case, the loan officers’) level of adaptation to local conditions, their knowledge of the local players, the quality of their leadership, and their long-term commitment to the effort. The identity crisis of the funds contributed to the problems: tensions between the goals of small, local businesspeople and those of fund managers (including some local elites) who wanted to look good on balance sheets and also to make money fostered frustrated relations between donors and recipients.

However, a major advantage of loan and equity programs to support business was that they did not have to rely on any one group to implement a program. They were more diversified in terms of whom they worked with, and they cooperated with a broader range of recipient individuals and groups. Thus, although the funds achieved uneven results across time and place, as a model they appeared to be more promising than many other aid strategies pursued in Central and Eastern Europe. As USAID Enterprise Fund adviser Knowlton expressed it: “We have spent a gazillion dollars starting stock exchanges as part of privatization. This was premature because value was difficult to determine and there was no transparency and people had nothing to trade. Programs that encourage local private business are the best way we’ve found to achieve our own goal of sustainability.”73

CHAPTER SIX

Insights from the Second World

Before the century ends, I believe the results in Central and Eastern Europe—as well as in the N.I.S. [Newly Independent States]—will match, if not exceed, the results of the eleven-year Marshall Plan.

—Thomas Dine, Assistant Administrator, USAID, 19951

IN LIGHT OF MANY FAILED RELATIONSHIPS—of misperception, collusion, corruption, and blindness to realities and needs—what were the alternatives to the aid that Western Europe and the United States offered the East? For the West to send none at all? It is hard to imagine that this would have been politically acceptable in the West or satisfactory to the East amid the euphoria of the fall of the Berlin Wall. In the still highly polarized political environment of 1989-90, the radical rejection of communism left the West with a newly manifest destiny. It had little choice but to applaud the efforts of Central and Eastern Europe’s freedom fighters and promise support that it could not always supply. The West was predisposed to give aid, just as the East was predisposed to accept it, enthusiastically.