September 4, 2001
U.S. Missteps Seen in Wasted Investments in
Central Asia
By BIRGIT BRAUER
LMATY, Kazakhstan — As
Communism crumbled, the United States
set up investment funds to foster start-up
companies and other ventures in fledgling
market economies. But many of these efforts
were undermined, financial experts say, when
Washington appointed individuals with little
business experience — politicians, lawyers and
academics — to make investment decisions.
A case in point is the Central Asian-American
Enterprise Fund. Through a string of bad
business decisions, and possibly fraud, the fund
has lost as much as $80 million that it received
from American taxpayers, resulting in
discussions within the United States about
shutting it down, said a government official
familiar with the fund. The Federal Bureau of
Investigation is investigating several of its
transactions, the official said.
Another person associated with the fund, Donald Nicholson, who headed its
program in Uzbekistan until early 2000, said, "Out of the $110 million spent by the
time I left, I would estimate that probably $80 million have been lost, both honestly
and otherwise."
Stephen J. Solarz, a former Congressman from Brooklyn, headed the fund until
last year. He and a lawyer for the fund, Michael S. Sommer, said in separate
interviews that some of the losses were so questionable that the fund's board
referred them more than a year ago to the Justice Department and the United
States Agency for International Development, which oversees the fund.
"We brought these potentially improper transactions to the attention of the
Department of Justice and U.S. A.I.D. and the fund has been fully cooperating in
their investigation," Mr. Sommer said.
With $150 million in seed money, the enterprise fund was created in 1994 to invest
in small- and medium- sized businesses in five Central Asian republics. Investing
wisely was not an easy task anywhere in the former Soviet Union. But the fund's
record is particularly bleak.
Of the $111 million that the fund spent, a large share went toward salaries for fund
employees and high overhead expenses, the government official said. The fund's
own operating costs ate up 40 to 50 percent of total outlays, whereas investment
funds in developed markets usually spend only 2 to 4 percent.
The list of failed business undertakings is long. Among them is a $5 million loss for
a brick factory in Uzbekistan that was not built, Mr. Nicholson said. There were
also many cases of overpayments to suppliers, often through dubious
intermediaries, he added.
One money-losing proposition involved a $5 million spinning mill purchased from
the agency that was charged with selling off plants and equipment from East
Germany. When the equipment arrived in Tashkent, the Uzbek capital, it turned
out that it could not spin cotton, the country's leading crop, but only synthetic
fibers, and was unusable.
The fund also lost money in Turkmenistan when it bought an intravenous solutions
company in Europe for $5 million. Mr. Nicholson, who had joined the fund at
around the time of that decision, said the company was worth no more than $2.5
million and its annual capacity was far too large for the Turkmenistan market. He
immediately stopped the deal and resold the company, incurring a $3 million loss.
In Kazakhstan, the fund invested about $1.6 million in a proposed dry mortar plant
that was never built, said a person involved with the fund, an episode that led to a
drawn-out court battle.
Another questionable transaction involved the purchase of an Almaty apartment
building two years ago with the fund's money. The cost and the reason for buying
it were not clear, the same person said.
Mr. Nicholson said he had informed the fund's board of such troubling
investments, which led to the F.B.I. investigation. "The magnitude of questionable
activities kept growing," he said. "There was no way I would feel comfortable."
But how many of these actions resulted from bad business decisions or malfeasance
is hard to judge, he said.
A government official in Washington familiar with the inquiry said it was unclear
whether there had been criminal intent or wrongdoing. The investigation, first
reported by The Wall Street Journal last December, has moved slowly because of
the difficulty of locating some of the people involved, the official said.
Many experts believe that the fund's failures lie mainly in the board's lack of
knowledge about business and particularly the local business environment. Also the
fund made mistakes by recruiting people in America who were inexperienced in
international dealings, Mr. Nicholson said. Unfamiliar with emerging economies,
these people frequently overestimated the markets and misjudged local companies,
he said. |
