PoLIcY RESEARCH WORKING PAPER 1324

# Summary findings

Voucher funds have arisen in the transitional economies of Eastern and Central Europe that have used voucher privatization. These funds collect vouchers from citizens and use them to buy shares in enterprises.

In the Czech and Slovak Republics, voucher funds arc typically organized as corporations owned by the citizens who contributed their vouchersm Recently, they have also been organized as unit trusts (cither open-ended or closed). A management company manages the funds under a contract that specifies the managemcnt fee. The management company is typically owned by the initial - sponsor of the fund for example, a bank. Voucher funds can give owners a diversified and professionally managed portfolio. More important, the funds select who sirs on an enterprise's governance boards (which oversee management and profitability).

Although experience is limited, the funds in these two countries have probably stopped most fraud and selfserving by enterprise managers and are beginning to encourage the restructuring needed for profitability. A few funds have replaced poorly performing or dishonest managers; more often, because qualified replacements are few, they encourage managers to improve performance.

There have been complaints about funds' performance. Some have made unrealistic promises to voucher holders and have appointed poorly qualified members to management boards. There is concern about conflicts of interest in bank-sponsored funds and excessive control of enterprises. Funds typically lack capital or expertise to - undertake restructuring but few other potential owners are likely to be better qualified.

Anderson examines 27 regulations that have been proposed for funds. Regulations in transitional economies, unlike regulations in most westem countries, should encourage funds to play a strong role in corporate governance, he contends, as few potential owners have this ability.

Most importan, regulations should require that funds disclose information about their operations so their owners can monitor and control fund managers.

The regulatory regime, he says, should discourage monopolies and anticompetitive behavior; create incentives for fund managers to improve fund performance; discouragc self-serving or fraudulent behavior by fund managers, and conflicts of interest; and eliminate high-risk investments unacceptable to fund owners.

Because there is so litde experience with these funds, the regulatory regime should not be unduly restrictive. As problems arise, regulations to deal with them can be added.

This paper is a product of the Europe and Central Asia and Middle East and North Africa Regions Technical Department, Private Sector and FinanceTeam. Copies of thie paper are available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact Faten Hatab, room HS-087, extension 35835 (47 pages). July 1994.

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