Jan Cienski in Krynica, Poland -

Aleksander Grad, Poland's treasury minister, has already raised PLN13bn (€3.3bn) so far this year for the cash-strapped government by selling off state assets, but his most significant sale is still to come: the privatisation of the Warsaw Stock Exchange.

"The Warsaw Stock Exchange will have its IPO in the fourth quarter of this year," Grad said on the sidelines of September's Krynica economic forum, a regional conference that gathers political and business leaders from Central Europe in the Polish mountain resort of the same name. "It's an enormous event for our ministry."

The exchange is thought to be worth a bit over PLN1bn, far less than the government has already earned in selling off chunks of PZU, central Europe's largest insurer, 10% of copper miner KGHM and power generator Tauron, but the sale of the WSE is enormously symbolic. That is because the exchange is one of the first market institutions created after the fall of communism in 1989, and has been a core of the formation of the Polish model of capitalism, where the stock exchange plays a much more important role than in the rest of post-communist Central Europe.

The WSE began trading in 1991, with a share turnover of only $2,000 on its first day. In what Wieslaw Rozlucki, the exchange's founder, calls a case of "revenge" the exchange began working in the old headquarters of the Communist Party's central committee building in downtown Warsaw. Now, the WSE has a daily turnover of about €350m and 384 companies are listed. "The Warsaw Stock Exchange is one of the greatest successes of Polish capitalism," says Ludwik Sobolewski, the exchange's current president.

Slow and steady rise

Warsaw took a much more conservative early path than exchanges like that in Prague, which developed very rapidly, allowing enormous numbers of often lightly regulated new listings, before being forced to retrench. The bourse there, embarrassingly, no longer plays a significant role in the economy.

Rozlucki and his team spent much of their time in the WSE's early years ensuring that Warsaw had an adequate regulatory structure, and tried, with some success, to inculcate an investor culture among Poles, while deterring the view that the exchange was an impenetrable lottery. Now, about a third of the exchange's turnover comes from individual investors, and the enthusiasm for IPOs of large companies like Tauron and PZU was so enormous that the Treasury had to limit the number of shares available to each punter.

Warsaw's slow-and-steady approach has allowed it to grow to become the largest bourse in Central Europe, overtaking Vienna and Athens in recent years. As Poland is much larger than Greece and Austria, and has very good long-term growth prospects as it catches up to Western European living standards over the next generation, Sobolewski expects the WSE to significantly surpass other exchanges in the region. "We have noticeably overtaken the other exchanges in the region," says Grad. "We are trying to turn Warsaw in the place in Central Europe with large financial markets, and the WSE is key to that."

Sobolewski has also criss-crossed Central Europe looking for promising companies that would want to list in Warsaw instead of choosing the more expensive option of listing on the London Stock Exchange. The economic crisis put off listing plans for companies from countries like Ukraine and the Baltics, but there is renewed interest as the economy revives.

As part of his plan to grow the exchange, Sobolewski has brought in short selling (despite worries about the whole idea in other parts of Europe), a small companies market called New Connect that now has 155 companies listed, and has also developed the Catalyst bond trading platform. "These are unique products in the region," says Sobolewski.

In the end, though, the biggest drawback in Warsaw's quest for dominance of Central Europe was the WSE's ownership structure, with 98% of the exchange controlled by the Treasury. Government ownership prevented the WSE from taking part in the sale of exchanges in Vilnius and in Prague, and was one of the main factors persuading the Treasury to contemplate selling the bourse.

Despite strong opposition from the Warsaw financial community, the government last year decided to sell the WSE to a larger exchange. However, talks with the Deutsche Boerse broke down late last year over issues of price and over the insistence that Warsaw continue to enjoy a high level of autonomy.

Now, the Treasury has decided that it makes sense to sell the WSE in an IPO through the exchange itself. However, Grad stresses that the treasury intends to hang on to about 30% of the WSE, part of a wider strategy aimed at giving the government a significant say in about 20 key companies across the economy. But with the rest of the region's smaller exchanges now controlled by larger bourses, the issue of government ownership is less crucial than in past years.