THE BLOG
09/05/2014 07:33 am ET Updated Nov 05, 2014

Cement

Fyodor Gladkov published his novel Cement in 1925. One of the first examples of socialist realism, it depicted the post-revolutionary construction of the Soviet Union from the point of view of a cement factory. Gleb, a Soviet soldier who returns to his hometown, discovers that in a few short years everyone has forgotten about the revolution. He throws himself into starting up the cement factory with revolutionary zeal.

Throughout the novel Gleb is in near-constant motion. He "rushed hither and thither, dripping with sweat, laughed, caught up tools, cut, sawed, drilled and could not keep pace with the mad tempo of his heart." The new Soviet state, to survive, somehow had to rebuild the entire country. It needed cement. Even more so, it needed dynamic spirits like Gleb and his equally fervent wife Dasha to energize the torpid countryside. Cement is a humble solid material. But in the hands of Gladkov and the Soviet state, it had revolutionary potential.

Aside from the Soviet Union itself, Poland was a top cement producer in the Soviet bloc. During the economic reform period, the transformation of the cement sector was a top priority. Seung-Hee Nah worked for the World Bank in the early 1990s. She was part of the team responsible for overseeing the privatization of the cement sector. Once again, cement proved to be an essential ingredient in the rebuilding of a country - this time after the failures of Soviet-style Communism. If Gladkov were still around in the early 1990s, he could have written a sequel to Cement set in one of the large factories that played a pivotal role during the economic transition.

"Poland had 15 or 16 cement factories at that time," she told me in an interview in Washington, DC last July. "Under our contract with the government, we did the work in two phases. The first phase was to analyze the entire cement sector by visiting all cement factories in the country and assess their business viability and prospects for sale, and present recommendations for each factory in terms of whether to privatize or not, and if so in what priority. The second phase would be the actual sale of selected factories. We had three or four teams; each team would come back and make a report for the government that provided a clearer picture of the condition of each factory and whether or not it could be privatized as is. We went through that first phase, and out of the 15, three or four were recommended for immediate closure because they were in such bad shape. Out of the dozen remaining, we probably ended up privatizing six or seven."

There were innumerable challenges during this privatization process. Investors had to be found - and these were almost exclusively foreign since no one in Poland had enough capital to buy these large firms. Then there were the negotiations inside the factory, with management and the trade unions. Finally, there was dealing with the Polish government officials.

"In accordance with the guidelines, the potential investor first had to talk with the trade union and get the consent from the head of the trade union," Nah remembered. "They had to sign a piece of paper saying that the trade union was okay with the government starting negotiations with this investor. Often there were a side agreement between the trade union and the potential investor laying out the potential investor's commitments to continuing certain benefits that the employees had enjoyed in the old days. The period of commitments was usually for three years. This was very important to both trade unions and the government at that time. The head of the government division handling the sale at some point said to us, 'We have to make sure that our workers are taken care of forever into the future,' or something like that. So the negotiations with the Polish ministry were sometimes in a way more difficult than the negotiations with the potential investor."

She remembered one official in particular. "He must've been in his early thirties, 32 or 33 probably," she told me. "He wanted to go to America to get his MBA. He was there because he could speak English, and I think he worked at some factory before. We had many discussions to try and explain these concepts to him, and he was resisting so much. Only years later, I started to realize what a difficult position he was put in, because he really didn't have enough understanding of these financial concepts, and he himself must've been worried about his own future and whether his next job would be in jeopardy because of what he said or did. Some nights we were there in his office until 2 am. He would get angry and go home a little before midnight after dealing with us, and we would be sitting in his office till 2 am, waiting for his phone call after he got his anger out of his system."

Could the process have been handled differently, more smoothly? "The one thing that keeps coming back to me was the question of whether it might've been better for the government to come up with some big plan to keep the factories alive, say for two years, and do a massive training of the government officials, the factory managers, and the trade union representatives about building a future for the factory," she concluded. "That might've helped. But then, it would have been very difficult because Poland didn't have money, the government didn't have money, and there was no way they could keep the factories going and pay the salaries."

The Interview

When did you first start working on privatization issues?

In spring 1989 I started working in a new department called Corporate Finance Advisory Services, which was really focused at that time on corporate restructurings in Latin America. During the 1980s, Latin American countries were taking turns overspending, getting over-bloated, and then going over the fiscal cliff. So along with the governments experiencing this deficit problem, companies were experiencing the same thing. When the economy was overly stimulated, the companies would take on too much debt as they overspent or overinvested. When the government got into trouble, corporations did too.

So, in late 1988, the International Finance Corporation (IFC) focused on setting up a unit that would primarily work on helping private sector companies, first in Latin America to try and help them restructure and provide long-term financing. Not even a year after the unit was created, the Berlin Wall fell. Very quickly the focus of the group that was just set up switched to privatization. But during the whole of the 1980s, already the fever of privatization was sweeping across the developing countries. I remember reading something called Privatization International, a publication that was put out by some group in New York, and it was reporting on everything related to privatization -- starting with England, the United States, Canada, Australia, and other countries. So privatization was not something totally new. But it reached a new stage for people involved with privatization. Our group quickly started talking about what we could do and how we could do it. The core skill set necessary for privatization is very similar to that required for corporate restructuring. So that was how our group was told to go to Eastern Europe.

How big a group was it?

At the beginning there were maybe about a dozen people in our group. But as you can imagine with what was happening in Eastern Europe, the group quickly grew. In about a year and a half we had easily 30 people working there. And Poland at that time was the biggest country where we were working on privatization deals. But there were people involved on a hotel project in Czechoslovakia, and other people were also getting involved in projects in Latin America and other parts of the world.

How were the projects chosen?

During 1989 we were very busy writing proposals to submit to governments and big corporations. We were saying that IFC is in this new game, that we could help them, that we could be the honest broker. The investment banking business was growing like crazy, with Goldman Sachs and everybody going around the world and offering to help with privatization and corporate restructuring and also charging large fees. At the same time everybody knew that these investment banks had their clients behind them. When they showed up saying they could help sell what the seller had, then obviously people were saying, "How do we know you haven't already cooked up a deal with one of your clients as a buyer?" This became a very serious point for Eastern European countries because of the background they had come out of. It was very important that they made sure that these state-owned enterprises were sold in a transparent way, in a fair way, with no behind-the-scenes deals. We were in a very good position at IFC to approach especially the seller side and say that we didn't have any buyers attached to us. We were part of the World Bank Group, and therefore we could be the most neutral and most honest broker.

I remember going down to Bolivia. Even though I didn't speak Spanish, I was very lucky to be asked to join a small team to talk with the national airline company there as well as some Bolivian mining projects. We would visit them and offer to play the honest broker if they privatized the companies. In some of the projects you win the bid. In others you didn't for a whole variety of reasons. But in the case of Poland there all these major consulting companies, investment banks as well as the IFC, that were going to the government and offering to help with privatization. Then the government decided to select the priority sectors -- about four or five -- and select advisors on the seller side and assign them to each sector. Booz Allen was assigned to the chemical/fertilizer sector; another company was given pulp and paper. The Polish ministry of privatization talked to a variety of players involved with the process, and then they chose these advisors. I don't think the awarding of these advisory contracts was through an open bidding process.

The IFC ended up winning the contract for the whole cement sector. Poland had 15 or 16 cement factories at that time. Under our contract with the government, we did the work in two phases. The first phase was to analyze the entire cement sector by visiting all cement factories in the country and assess their business viability and prospects for sale, and present recommendations for each factory in terms of whether to privatize or not, and if so in what priority. The second phase would be the actual sale of selected factories. We had three or four teams; each team would come back and make a report for the government that provided a clearer picture of the condition of each factory and whether or not it could be privatized as is. We went through that first phase, and out of the 15, three or four were recommended for immediate closure because they were in such bad shape. Out of the dozen remaining, we probably ended up privatizing six or seven.

When you say you were responsible for privatizing six or seven, the remaining factories were given over to another organization?

To read the rest of the interview, click here.