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. Last Updated: 07/27/2016

Wanted: Saver of Nations

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Wanted: Saver of Nations. $150,000/year. Benefits include your own investment fund.

How would you like the U.S. Congress to set you up with a six-figure salary, swank office space and a government-funded venture capital fund to play with Ч and then make it part of your job to fly around Europe and America trying to launch a second venture capital fund, this one a private affair you can own and operate yourself?

If the private fund flies, then you can be like John Birkelund and Robert Faris, who are, respectively, the chairman of the board and the chief executive officer of the wildly successful Polish-American Enterprise Fund. Those two took $255 million from Congress, invested it and then used their record to leverage $450 million more from private sources, in part via a second fund owned by their team.

Along the way they introduced mortgage and small-business lending in Poland, made millions in profit and even eventually cut the U.S. Treasury a check for $120 million Ч giving them bragging rights as the only foreign aid program ever to pay Washington back (the nearest precedent is Finland paying off its post-World War II Marshall Plan assistance). The Polish Fund team also used its profits to establish a free-market think tank, the Polish-American Freedom Foundation, where Birkelund and Faris enjoy seats on the board.

And if the private fund doesn't fly?

Special Report

Investing, Pentagon-Style
'Shredded, Ignored, Exiled ... and Penniless'
Wanted: Saver of Nations
The DEFТs Portfolio Today ...
... And Investments That Got Away

Well, you've been living the USAID-standard of $150,000 a year, plus housing, moving and travel expenses. You've had the heady experience of betting with millions, while taxpayers covered the risk. So you simply forget the private fund, and settle back to managing whatever has become of the government fund. There is some danger of being hung out to dry by journalists or politicians looking for the next foreign aid scandal Ч but if you've done everything honestly and competently and have been thoroughly audited over the years, you have done exactly as Congress asked. You should be fine.

The Aid Enterprise

That's how an Enterprise Fund works. Eleven such funds have made up a significant chunk of U.S. foreign aid to the former Soviet bloc. They have invested more than $1 billion in money drawn from Congress, and according to an article by Birkelund to be published soon in a foreign policy journal, they have leveraged another $1.3 billion in private capital.

In political Washington, foreign aid programs are fat targets. Critics of the U.S. Agency for International Development, the U.S. government's main aid distributor, complain of "welfare" payments to foreigners with American tax money, or of projects that will deflate as soon as the taxpayer spigot is turned off.

Enterprise Funds are supposed to get around such obstacles. They offer not grants but hard-headed investments. They are designed to self-liquidate, by transferring their portfolio of investments to a private fund.

And in the name of "continuity," the Enterprise Fund team is allowed to set up and own that lucky private fund Ч giving managers strong incentives to join for the long haul, and not just for a two- or three-year educational adventure abroad.

It sounds logical Ч and startling. How can government officials set up and run a taxpayer-funded organization Ч even while all along planning to "privatize" it for themselves?

"Would it not ordinarily be considered a conflict of interest?" asked Doug Bereuter, a representative from Nebraska, at congressional hearings about Enterprise Funds in 1997.

In reply, State Department official James Holmes conceded, "We are in terra incognita." Holmes said, "We do not know precisely where we have been or where we have to go, but we do know that one of the processes through which we have to go [with Enterprise Funds] is privatization."

Remembering Harvard

Consider another USAID program, the so-called Harvard Project. This was a team of economists and lawyers who helped author Russian economic policies. The Harvard Project went down in ignominy amid allegations its managers were using U.S.-funded resources and insider information to build and run their own investments and investment funds; and also amid questions about how the Harvard team could get non-competitive grants from USAID to the tune of $40 million, and also gain unprecedented control over the rest of the government's Russia aid portfolio. The U.S. Justice Department is suing Harvard University and the main actors of the Harvard project for $120 million.

Winning noncompetitive access to USAID money, using government-funded resources and knowledge to build one's own private investments on the side Ч it sounds a lot like an Enterprise Fund.

Of course, one crucial difference is that Enterprise Funds had legal permission Ч indeed, a congressional imperative Ч to do those things. (Another major difference: Enterprise Funds are just investors, while the Harvard team was supposed to be standing above it all and designing the rules for the nation's investment systems.)

The same Justice Department going after Harvard has opined that Enterprise Funds are exempt from conflict of interest law. So instead of sneaking around via Cyprus offshores or hiding behind their wives' maiden names, the Enterprise Funds hide their conflicts in plain sight. They discuss them freely.

A $3 Million-a-Year Investing Education?

The key control mechanism is the board. Every Enterprise Fund has one. Board members are not paid in any way, and the chairman of the board is chosen by the U.S. president himself. The board hires a chief executive officer, who must build a team and invest the fund's money Ч and who can also start building a private company, which will eventually manage the government's business alongside its own.

To head the board of the Defense Enterprise Fund, former President Bill Clinton appointed Randy Reynolds, the former head of Richmond, Virginia-based Reynolds Aluminum (now a part of Alcoa Aluminum).

The board in turn, after a couple of false starts, in 1996 tapped 38-year-old John Nowell Ч a man whose trademark red suspenders and bow ties provided part of the headline for a Financial Times profile of the DEF a few years back that noted they were armed with "bow ties and business plans."

Nowell, now 43, brought in an old friend from Harvard and the U.S. Army, Richard Nordin, 47, and gave him the key job of running the government-funded investments out of Moscow.

Nowell focused his energies on cranking up the private fund. In Delaware he registered Global Partner Ventures, a company owned by him, Nordin and another DEF employee; Reynolds was a chairman of sorts at GPV, but again a non-compensated one.

Soon Nowell, under the watchful eyes of Reynolds and the DEF board, had moved all activity over into GPV. DEF employees were fired on paper, then rehired to GPV, and the DEF board paid GPV a "management fee" of $3 million a year. Out of that, GPV paid salaries and expenses for 50-odd people (with the exception of Nordin and Nowell, who remained U.S. government employees).

There was no competitive bidding process. The DEF board Ч following the road map laid down by the Polish Fund and by Congress Ч waited for Nowell to create an investment fund manager from scratch, and then hired it.

With GPV up and running, Nowell and his bow ties began doing the rounds of FT interviews and European roadshows, trying to drum up $100 million for GPV's new NIS Transformation Fund (NIS for Newly Independent States, or former Soviet republics).

The NIS Fund, Nowell explained back then to the Financial Times, was necessary because the DEF itself was brimming over with desirable business. "We [at the DEF] look at 1,000 pieces of paper a year, we uncover 300 bankable deals, and we fund 10," he said. "With the new fund we may be able to back another 12."

'The Original Horse's Ass'

It didn't work. The private investors never coughed up. Perhaps they were skittish as some of the DEF's showcase investments Ч like the MZA gold-from-scrap project or the MPS-Telekom fiber-optic cable operation (see related article) Ч began to sputter.

Nor did Washington put in any more cash. Early on, there was talk of the DEF getting $150 million or so from Congress. Instead, it never moved beyond its original $67 million grant. It got most of that money from the Pentagon, and the Defense and State departments tossed the DEF back and forth like a hot potato.

"It became an orphan," said Robert Odle, a lawyer for the DEF (and for several other Enterprise Funds). "The foreign assistance people saw it as defense conversion and defense saw it as foreign assistance." (Odie talks about his enterprise fund work.)

The DEF board, disappointed on all fronts, revoked the management contract from GPV and instead hired Russia Partners, a Moscow-based fund manager. The board now pays Russia Partners $2 million a year to husband its six investments, and Russia Partners has hired Nordin for that job.

Today, Nowell looks back ruefully from Richmond, Virginia, where he is, as he cheerfully volunteers, "broke and unemployed."

"You are now corresponding with the original horse's ass," Nowell wrote in an e-mail. "I really believed that we could take a 501 c3 charity [like the DEF] whose mission was to limit Russia's [weapons of mass destruction] effort, make all its enemies in Russia and on Capitol Hill love it, raise another $100 million from professional investors, and save the world while making beeeeg bucks for everybody."

'Busy, Happy, and Not in Iraq'

Matthew Maly, a project director laid off from the DEF, has now taken up a role as angry critic of it. He says Nordin and Nowell would rush headlong into bad investments Ч and argues they did so in part because they were eager to establish the private fund.

Nordin said in interviews that the DEF managers took all proper precautions and due diligence before every investment. But looking back, he does see room for improvement. He said he now believes the DEF/GPV team was overstaffed, in part because it was trying to manage companies "by remote control" Ч by buying minority stakes, then hiring DEF staff to try to influence company managers, instead of taking majority stakes and installing their own managers.

He also said the push for the NIS Transformation Fund was premature Ч and added that even had that private fund taken off, it would not have pursued the DEF's core mission of "conversion" because investments in that field are so risky.

Maly's complaints about the DEF launched an internal report that, among other things, rapped Nowell and Nordin for "lavish" lifestyles. Actually, their lifestyles seem no more or less cushy than those of any other senior USAID officials Ч which perhaps says more about American aid workers in general than the DEF team in particular.

Both Nowell and Nordin earned $150,000 a year, plus benefits like housing. Nordin took an advance against his housing allowance of $96,000 a year to buy a Moscow apartment for himself. And all of the Americans at the DEF could play golf at the Moscow Country Club, where the DEF had purchased a charter membership for a one-off payment of $85,000. (Each executive also had to pay $2,000 a year out of his or her own pocket to make regular use of the greens.)

Maly has asserted that DEF managers flew first class at taxpayer expense, but there is little evidence of this. Nowell said that his predecessor as CEO had once expensed tickets on Ч of all things Ч the Concorde. The ensuing storm of criticism convinced Nowell to tread carefully on expenses. He said both he and Nordin often used their own frequent flyer miles to upgrade to first class, but that as a rule no one billed first class to the DEF. Nowell cited an audit of DEF travel by the U.S. General Accounting Office, the budgetary watchdog of Congress, that found no irregularities.

As an American citizen returning to Moscow in the early Boris Yeltsin years to help with economic reform, Maly's first job back in his homeland was as a $26-a-month adviser to the Economics Ministry. He remembers that as an outlandishly miniscule salary Ч but is just as unhappy with the other extreme he has seen, the American aid worker's expensive lifestyle.

"It may not seem like much if the DEF spends an extra $100 for a night in a hotel or an extra $3,000 for a plane ticket," Maly wrote to a lawyer investigating the DEF. "But in terms of what could have been done with this money, it is a horrendous waste."

A salary of $200 per month, Maly continued, is enough to keep many a Russian scientist "busy, happy and not in Iraq." In other words, simply cutting a $96,000 housing allowance in half would free up annual salaries for about 20 military scientists Ч while still leaving $4,000 a month to rent a Moscow flat.

The Enterprise Funds

Fund

Year Founded

Eligible USAID Funding

Polish-American Enterprise Fund

1990

$240 million
(later $262 million)

Hungarian-American Enterprise Fund

1990

$61 million

Czech and Slovak American Enterprise Fund1

1991

$65 million

Bulgarian-American Enterprise Fund

1992

$55 million

The U.S.-Russia Investment Fund2

1995

$440 million

The Central Asian-American Enterprise Fund3

1994

$150 million

The Western NIS Fund4

1994

$150 million

Romanian-American Enterprise Fund

1994

$60 million

Baltic-American Enterprise Fund5

1994

$50 million

Albanian-American Enterprise Fund

1994

$56 million

Defense Enterprise Fund6

1994

$67 million7

The 11 Enterprise Funds working in Eastern Europe and the former Soviet Union had as of September 2000 withdrawn from USAID or the Pentagon a total of $1.05 billion.

1 - As of 1993, continued only as the Slovak American Enterprise Fund

2 - Created by merging two previous USAID-funded organizations, the Russian-American Enterprise Fund of 1993 and the Fund for Large Enterprises in Russia

3 - Works in Kazakhstan, Kyrgystan, Tajikistan, Turkmenistan and Uzbekistan

4 - Works in Ukraine, Moldova and Belarus

5 - Works in Estonia, Latvia and Lithuania

6 - Pursues military conversion in the former Soviet Union

7 - $15 million from the Pentagon, $52 million from USAID

Sources: Enterprise Fund web sites, USAID press office, the Polish-American Enterprise Fund, MT



.

http://www.saef.sk/e_contact.htm Czech and Slovak American Enterprise Fund

http://www.baefinvest.com/en/ Bulgarian-American Enterprise Fund

http://www.tusrif.ru The U.S.-Russia Investment Fund

http://www.caaef.com The Central Asian-American Enterprise Fund

http://www.wnisefk.com The Western NIS Fund 1994 $150 million

http://www.raef.ro/english.htm Romanian-American Enterprise Fund

http://www.balaef.ee/eng/index.phtml Baltic-American Enterprise Fund

http://www.aaef.com Albanian-American Enterprise Fund

http://commdocs.house.gov/committees/intlrel/hfa45764.000/hfa45764_0.HTM U.S. Congressional hearings on Enterprise Funds.

http://www.cato.org/pubs/pas/pa-260.html Cato Institute article on Enterprise Funds and foreign aid in general.