Czechoslovakians Buy Capitalism

JUST three months ago, Czechoslovakians were turning up their noses at the chance to become real live capitalists.

For the nominal price of 1,035 crowns (about $37), they could buy a book of vouchers that would give them the right to become shareholders in Czechoslovakia's soon-to-be-privatized companies.

But the government could find only a few thousand takers.

People wanted guarantees that they would see a return on their money. So, Harvard Capital and Consulting, a private mutual fund set up specifically to invest these vouchers, gave them guarantees.

In an advertising campaign that took the country by storm, the mutual fund promised to pay Czechoslovakians 10 times the original price of their vouchers at the end of one year, if they would let the Harvard fund manage their vouchers. The ad campaign set off a stampede, says Jan Mladek, deputy minister of the Federal Ministry of Economy. About 8.6 million people, or 80 percent of the adult population, have bought vouchers.

Czechoslovakia is unique in Central Europe because it is including the masses in large-scale privatization. Rather than depending heavily on a lengthy process of valuing companies and selling them individually to foreign investors, Prague is emphasizing a speedier route which, in effect, gives ownership directly to the population, explains Val Koromzay, a specialist in Central European economies for the Organization for Economic Cooperation and Development in Paris.

There was also a "philosophical" element involved, he adds, which aimed to let citizens enjoy some of the fruits themselves after decades of hardship under communism.

Each Czech or Slovak over 18 years of age can buy a book of vouchers that can be later exchanged for shares in private companies.

Czechoslovakians are limited to one book each for the first wave of privatization, which is expected to begin around the end of March and involve the auction of 2,283 enterprises.

About two-thirds of the voucher holders are expected to use their vouchers to buy shares in newly created mutual funds, which will then do the investing for them (and spread the risk).

The rest will use their vouchers to acquire shares directly in whatever enterprise they choose. Complicated logistics

Mr. Koromzay praises the program for its speed and the technical obstacles surmounted. But he questions whether dispersing ownership among millions of Czechs and Slovaks will really provide the kind of control needed to keep management in line and performing.

"You run the risk of perpetuating a system where managers are not under ownership control," Koromzay says. Although the mutual funds will be the main players, he says, they see themselves mostly as traders of shares, not hands-on managers. Taking a calculated risk

Harvard Capital and Consulting fund's president and founder, Viktor Kozeny, agrees that many funds are not interested in playing an active role in managing the companies they invest in. But his firm is not one of them, he said in an interview at the fund's headquarters here in Prague. In the next year, he said, he plans to import 250 managers from the West to help run the firms his fund will invest in.

Mr. Kozeny - who was born in Czechoslovakia, defected in 1980, and went on to graduate from Harvard University - is in the hot seat. The astronomical gains promised by his fund's advertising campaign, and the firm's consequent leap to 50 percent of fund market share, got the government's attention. The government amended the privatization regulations so that a fund must spread its investment among at least 10 enterprises, and may not own more than 20 percent of any one enterprise (40 percent in some case s).

"There was some jitter and some hysteria on the side of the government with regard to our market share," Kozeny says. "They simply got scared that this unknown 28-year-old guy, who came from the US, who went to Harvard, suddenly is going to control assets with a market value of several billion dollars."

Mr. Mladek of the Ministry for Economy is highly skeptical of the country's new mutual funds. "There is a problem with credibility," he says, adding that regulation of the funds is poor.

Harvard Capital's Kozeny predicts 50 percent of the funds will fail within a year. With 460 having sprouted, there are simply too many funds, and many of them are being run by "inexperienced" managers, he says.

Yet Kozeny is convinced the Harvard fund will succeed. His investment team, over half of whom have experience in Western markets, has "crunched the numbers" on every single company coming up for auction in the first round of privatization, he says.

Although data on the companies are incomplete, Kozeny's fund has roughly figured a maximum share price for each company, beyond which it would no longer make economic sense to bid. If bidding for the country's "crown jewel" companies runs beyond the Harvard fund's maximum price, the fund will look elsewhere, Kozeny says. Meanwhile, he says that he is not above buying companies just to liquidate them.

Kozeny explains that his fund is able to guarantee a 10-fold return on vouchers because the vouchers are enormously undervalued. It's as if someone is going to give you a house, says Kozeny. The house has a value of 100,000 crowns, but you are getting it for 1,000 crowns.

Likewise, he says, the estimated worth of the Czechoslovakian industry to be privatized is set at approximately 260 billion crowns - but the population is being allowed to "buy" it for only 10 billion crowns. New market pricing

Kozeny says the public still has trouble understanding that the worth of their shares will be much higher than their purchase price. The 10-fold "put-option," as it's called, is only a floor, Kozeny emphasizes.

"We strongly believe the value of the shares is going to be much greater and it is not advantageous for the shareholder to exercise this put-option."

However, because of the country's complete inexperience with capital markets, he says, it's quite possible that people will want to collect their 10-fold increase anyway.

He's hoping that education of the public, active trading of shares, and a high tax on income from the selling of shares will combine to discourage hoards of people cashing in their shares at year's end.

But if it doesn't, he says, his fund has covered itself. It is 100 percent insured through Western credit to cover a 10-times payback of everyone's vouchers. He adds that he would like to find serious, sophisticated investors for the mutual funds as well, but admits that in this first year of business, that's not likely. On that count, m rather pessimistic," he says.