Foreign Assistance: Issues Concerning the Polish-American Enterprise <BR>

Foreign Assistance: Issues Concerning the Polish-American Enterprise TITLE: Foreign Assistance: Issues Concerning the Polish-American Enterprise Fund, GAO/OGC-99-61R, B-283261, September 14, 1999 BNUMBER: B-283261 DATE: September 14, 1999 ********************************************************************** Foreign Assistance: Issues Concerning the Polish-American Enterprise Fund, GAO/OGC-99-61R, B-283261, September 14, 1999 B-283261 September 14, 1999 The Honorable Benjamin A. Gilman Chairman, Committee on International Relations House of Representatives The Honorable Doug Bereuter Chairman, Subcommittee on Asia and the Pacific Committee on International Relations House of Representatives Subject: Foreign Assistance: Issues Concerning the Polish-American Enterprise Fund, GAO/OGC-99-61R In 1989, Congress enacted the Support for East European Democracy (SEED) Act to provide assistance for political and economic development in Eastern Europe. [1] Instead of providing more traditional types of foreign assistance, the Act, among other things, authorized enterprise funds to promote private sector development in Poland and Hungary through grants, loans, equity investments, and other measures. [2] This letter addresses issues raised by your staff regarding structural changes undergone by the Polish-American Enterprise Fund (Polish Fund) and its management company to enable them to operate more like private venture capital companies. [3] Specifically, we determined (1) whether these structural changes were permitted by law, (2) whether the purchase of the Polish Fund?s management company by its employees at book value [4] was permitted by law and whether it favored the employees, (3) whether monies earned by Polish Fund management company employees contravened a $150,000 salary cap, and (4) how proceeds from the sale of the Polish Fund's assets will be distributed. For the reasons discussed in this letter, we concluded that structural changes to the Polish Fund and its management company were consistent with applicable legislation. We also concluded that the purchase of the Polish Fund?s management company by its employees at book value was consistent with existing law and that, under the circumstances, the terms of the purchase were reasonable. Furthermore, we concluded that Polish Fund management company employees can earn more than $150,000 in annual salary as long as additional amounts are derived from sources other than U.S. funds. Finally, regarding distribution of Polish Fund proceeds, the administrations plans to return $120 million to the U.S. Treasury and to provide the balance to a foundation for additional private-sector development in Poland. CHANGES IN STRUCTURE TO THE POLISH FUND AND ITS MANAGEMENT COMPANY WERE CONSISTENT WITH THE SEED ACT A. Background Under the SEED Act, the Polish Fund was formed in 1990 as a private, nonprofit entity. The Fund is governed by a board of directors composed of both U.S. and host country citizens. The U.S. Agency for International Development (USAID) has provided grants to and oversees the Fund, and the Department of State is responsible for overall coordination of U.S. assistance under the SEED Act, including the enterprise fund program. USAID has authorized $264 million in grants to the Polish Fund. As early as 1991, USAID, State, and Fund officials began discussing altering the Polish Fund?s structure. These changes involved spinning off the management of the Fund into a separate management company that would manage both the Fund?s investments and those of an affiliated private fund. A vital part of the plan was to have Polish Fund employees leave their positions and become employees of the management company. According to USAID, these changes were made to set up a structure that more closely paralleled a private-sector investment company that manages multiple investment funds. Polish Fund and USAID officials stated that this kind of structure would better attract private investors who would otherwise be reluctant to provide capital to an entity like the Polish Fund, which could have been perceived as being affiliated with the U.S. government. The changes also were intended to provide former Polish Fund employees with additional compensation incentives. Finally, according to USAID, the changes would lower the Polish Fund?s management costs because management fees would be spread over two funds. After the Polish Fund board of directors approved these changes to the Fund?s structure, Enterprise Investors, L.P., was formed in 1992 to manage investments of both of the Polish Fund and a new private investment fund named the Polish Private Equity Fund. The Polish Fund and the European Bank for Reconstruction and Development owned 60 percent and 40 percent, respectively, of Enterprise Investors.