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Email Dr. Palms
Sovetnik Pravitelstva CWA, Tovarichestvo Palmsa, Inc.
Investment Bankers. Washington, United States of America.
Those in the former Soviet Union accustomed to and familiar with the
"Command System" of capital allocation experience difficulty
in understanding the uncertainty of the capital allocation process in the
"Market Economy System ".
Under the "Command System", there existed someone in the government
with decision power over the allocation of the government budgets. For
such person and for those seeking capital, all that was necessary to provide
capital was for this individual to recognize a "need" and approve
(allocate) capital. The "need" could consist of nothing more
than the "feeling" that it would be useful to have something.
"Need" did not have to be justified with economic "viability"
or "feasibility". In other words whether the project would produce
more in economic benefit than it cost, or, once created, whether it could
support itself, were not necessarily pertinent questions.
In a Market Economy there is a great deal more fact finding required,
because the question of economic viability and feasibility are paramount
to the question of whether approval is likely to be forthcoming. Decisions
are pragmatic ones involving alternative risk reward choices on financial
merit.
This creates several differences in the process of securing capital.
Determining whether a project is economically viable or feasible takes
time, requires knowledge, and costs money. The questions have to be answered
scientifically by means of empirical method. Accurate Mathematical and
demographic data have to be gathered and interpreted. The questions of
a market system are very different from a command system. Many who have
technical competence in their field of science do not necessarily have
financial competence in market systems.
Under the 'Command" system a poetic answer was acceptable. The
criteria of the decision maker were not pragmatic. If it was socially popular,
or the consensus of a group of "nomenklatura" was that it was
useful to do it, it was approved on that basis.
The differences in these systems determine the basic fundamental differences
in the tasks to be performed to secure financing. Those experienced in
the "command" system have to consider these differences and change
their mind-set, if they wish to have success with capital search in the
market system.
The proposers must, at their own risk and expense compile the evidence
of viability and feasibility in order to present to "private"
capital ownership a strategy and plan which meets the norms for private
capital investment decisions. The criteria of the market are the production
of an ROI (return on capital investment) which compares favorable and competitively
with alternative uses of capital, commensurate with the level of comparative
risk. Failure to conform to standards of competence in this decision making
are subject to loss of the decision makers employment and occasionally
personal liability for malfeasance in the performance of duties of the
position. The influence of "blatt" is largely absent since the
empirical process eliminates most of the discretion of the decision maker.
Responsibility for decision making is centralized in one person who is
held responsible by investors for results.
One should not confuse Western government economic aid projects funded
with public tax budgets, with the investment decision process of privately
owned capital. The Western economic aid projects decisions are in many
ways similar to the "command" system and have little to do with
private capital investment decisions. The government may subordinate economic
criteria to other considerations that make loss of capital an acceptable
cost. private investors do not have non-economic consideration. It is important
that capitalization efforts by Russian companies take into account that
difference.
The preparation of empirical evidence is waived and the project approval
is made with "government" or "public" money owned by
no one, without concern for potential risk of loss and without the requirement
that the outcome produce any "profit". All that is needed is
the psychological, or political or social perception that what is being
done is "wanted" by a segment of the population. Such decision
is not subject to any future criticism of the type that are imposed upon
decision makers under the market system.
Under a market system, failure to create and produce convincing evidence
of viability and feasibility of the project precludes it from competitive
consideration. However, projects may be rejected even when they "justify"
a positive investment decision. Alternatives may more positive. There is
therefore no certainty that a "deserving" project will get what
it "deserves" Life can be cruel. Some of the reasons for failure
can be:
Therefore the professionals, who are hired by the seekers of capital
to prepare their "story" according to norms, can not guarantee
absolutely the results. The best they can do on the basis of their experience
is to examine the available facts and express the opinion that...."The
elements appear to be present that are necessary to meet norms and therefore,
based upon the potential rewards, it is justified to make the decision
to take the risks involved in spending the money to document these facts.
A competent professional will detect hopeless cases and convince them to
save the time money and effort of an effort that fails to offer acceptable
reward for the risk involved. There is always a calculated risk. The history
of the investment banker can be more useful in securing capital than the
business plan itself. Those who have made profits in the past are likely
to listen to the advice of the Investment Banker who provided such past
opportunities.
In the Command System, evidence of viability and feasibility are not
required and are not a factor in the decision. The certainty of capital
allocation is established immediately by a subjective process that requires
only that the decision maker decide between those projects he will and
will not approve. On occasion, "Blatt" rather than empirical
evidence is permitted to be the basis for selection process. The decision
maker(s) is not subject to criticism for his decision and his (their) performance
is not measured against the results of other decision makers or performance
of other investments. Frequently decision making is a group function which
eliminates individual responsibility. No one is responsible.
In a "command system", there is no need for experts in the
science of attracting capital on a competitive basis from private capital
sources. The decision maker has both the power and the access to capital
and can commit, promise and guarantee to meet the request of the capital
seekers without any norms. Capital seekers may tell whatever "story"
they wish. in whatever form they wish and with whatever content they wish
and the decision maker may consider, or may not consider, such "story"
as suitable and acceptable and "complete" and make a decision,
without further delay. No empirical preparation is required.
Because of conditioning by the command system, Russian businessmen who
search for capital may not understand why, under the market system, an
expert is needed to develop a strategy that meets the norms and successfully
competes for limited available capital resources, nor how such strategy
must be used to locate and gain the attention of capital sources. Under
the command system the strategy was irrelevant and the decision was made
or not made without costs of empirical documentation.
The introduction of the need for expenditures, without guarantee of
results, is a new experience for Russian industrialists. Also, under the
command system no one was in possession of private resources with which
to pay for such expenses "privately. All major expense were paid by
the government. Now under the market system private owners of private projects
are expected to pay privately for the expenses of their private economic
progress with private funds. This is a new idea for those accustomed to
a command system which used to provide such resources.
Under the command system the decision maker guaranteed success. If anything
was paid to obtain a decision, it assured access to capital. Under such
conditions guarantees were possible. In a market system the ability to
provide such guarantees is absent. In fact guarantees do not exist in a
market system. Far larger commitments of capital actually have occurred
under the market system then were ever made under the command system and
the results, in terms of economic progress, under the market system have
been successful. When investors succeed they are willing to continue and
invest again, so the competitive system generates its own momentum and
is self-perpetuating, while any system that fails, by definition exhausts
resources and eliminates possibilities for subsequent investment and even
the capability of having access to resources with which to make such commitments.
1. The expert is needed because he knows what to do and how to do it.
2. He can correct mistakes in the strategy so that the proposal will meet the norms of the capital markets
3. He can eliminate the objections of the investors by designing solutions that remove their objections
4. He can bring both sides together in their negotiations by creating
compromises.
All these things are important , but the most important service of the
expert is his "credibility". Credibility means:
The use of an expert in the market system is very much the same as was
the use, under the "command" system of someone to introduce you
to the decision maker. But the methodology and criteria are very different.
A investment request that is refused if it is brought to an investor
by stranger, may be approved and accepted if it is brought by a competent
and trusted expert, who has always brought good things. That service is
one of the most valuable that an expert can provide to someone who is looking
for capital.
A reputable expert will not sell this influence which differs from "blatt".
He does provide assure the investor that it is a competent decision, in
a form the investor accepts. Those seeking capital have to convince their
expert that their strategy is something that will work. To accomplish that
the expert has to know as much about your business as you know. This makes
your relationship with your expert an intimate and intensive process. An
expert will ask you many questions and help you to prove the correctness
of your answers. His reputation and future ability to attract capital hangs
in the balance with your performance.
Is there a way to get capital without spending money "Mosjabiet,
Ja niz najoie. My experience is that life involves risks? Instead you really
ought to ask yourself this question. "Do you believe strongly enough
in what you want to do and in your expert, to risk something to get what
you want? The answer will determine the direction you chose. Remember this.
The rewards of success belong to you and so do the risks. It is not the
experts function to assume your risks. It is his function to identify the
risks and help you survive them.
One of the hallmarks of a "service business economy" is the
evolution of experts for specific tasks. Using competent experts will greatly
reduce you chances of failure. The power remains with you. You make the
ultimate decision. A wise man follows the advice of competent advisors.
For discussions in Russian language in Moscow 7-095-324-6134 æÁËÓ 7-095-324-4249, Alexander Wislobokov
For discussions in Russian language in United States of America, Washington D.C., Tel: 1-703-818-0508 Fax: 1-703-818-00236 , Email: sanich@juno.com Alexander Goldenberg
For discussion in English or Dutch: 1 425 828-6774 E-mail: palms@PeterPalms.com Dr. Pyotr Joannevich van de Waal-Palms
Offices in Vilnius Lithuania E-mail serg@novatex.lt,
Grigorij Kolesnikov
2012 Vilnius, Zirmunn 58-41, Fax: (3702) 42-54-40 Tel: 3702 72-11-34
Other e-mail: root@gigrin.aiva.lt or novatex@taide.lt
Offices in Gomel, Belarus: David Sticknety, E-mail david@belarus-online.com
IAEWP I.L. U.N. P.O. Box 97 Gomel 246050
Tel: 375-232-54-4404, Pager (Russian only) 375-232-53-9130 - A770
Office in St. Petersburg: Tate Ulsacker, Dun & Bradstreet Nord, Tel: ( ) , Fax ( ) E-mail <idcinfo@cityline.ru palms@m16.medport.ru
UKRAINE Oleg Jourin PhD
P.O. Box 25 Lutsk-23 City Volyn Region, Ukraine 262023
Tel: 380-3322-45521 Fax: 380-3344-30631
http://www.theoffice.net/patron
E-mail: patron@theoffice.net
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Date last Revised: September 10, 1997