MD: Poland has three major financial problems that it needs to overcome. The first revolves around its capital markets; they need to be deepened and widened to attract more capital, both foreign and domestic. The second is about how Poland sees its place within the European – and indeed global – economy; this is particularly relevant in light of the 2021-27 EU budget. The third is the spectre of inflation and debt, one for the future, caused by the current government’s redistributionist social and magnanimous fiscal-stimulus policies.
TR: “We Anglo-Poles have a special advantage of being for the most part ‘insider outsiders’. Unlike the typical expat manager who’s in Poland for three years before moving on to their next assignment, we have developed an in-depth understanding of the country, its business culture, its institutions, its history. And unlike most native-born Poles, we have extensive experience of living and doing business outside Poland – in my case, the UK and California – before coming to Poland, so we have a concrete point of reference with which to compare Poland.
“I myself have worked in Poland since the early 1990s, at first on privatisation, having a background in banking in London and institutional real estate management and advisory in California. Having now spent exactly 30 years working in Poland I have just finished a 12-month assignment within the Ministry of Finance as the government’s plenipotentiary for Implementing the so called Strategy for Capital Market Development, after a few years earlier consulting to the Ministry of Development on its “Strategia Odpowiedzialnego Rozwoju” (Strategy for Responsible Development). This has given me, as a private-sector guy, useful insights into how the wheels of Polish government and civil service turn and work together, now. My remit at the Ministry of Finance was to implement a strategy encompassing many areas of reform to allow for more dynamic functioning of the capital markets in Poland. The key word here is “implement”. Problems arose from the outset due to a foggy understanding of how to define ‘capital markets’ in the first place, and the idea that somehow a good market is one that protects everyone and regulates everything. The terminology is recognisable to me but the understanding of the meaning behind them is often rather distorted or incomplete.
“Another problem is understanding the key action word here, ‘implementation’. As it turned out to my surprise, it’s much easier and safer to do yet another analysis than to implement what is often already thoroughly analysed and ready on the plate for implementation. Many analyses are done on a perpetual basis in the Ministry – it’s the traditional fall-back position, if in doubt do another analysis, to show due care and at least some action. A thorough and detailed analysis of course has the additional benefit of taking a long time, especially when those doing the analysis often do not understand the market realities behind a given initiative recommended in the strategy. So in fact there is a disconnect between honest intent and eventual (non) outcome. This is not project management as I know it, required to implement close to 90 separate initiatives recommended in the EBRD-prepared government strategy which was passed into Polish law.
“The result is that the urgent reforms foreseen in the Strategy are barely being implemented, and Poland continues to lose out in capital and financial markets activity, often to its neighbours who have moved faster and further when it comes to creating dynamic markets, and encouraging participants and investors from across the EU and beyond. The Hanseatic spirit clearly lives on in the Baltic countries, ambitious members of the EU community, keen to take full advantage of their new-found freedoms and market access and not scared to create competitive markets of their own.”
Capital as we know knows no boundaries. There is no such thing as ‘foreign capital’, except in some people’s minds. Capital flows globally like water or air around our planet, attracted by higher returns, stability and above all trust. It had initial great success in Poland via a number of channels, including the Warsaw Stock Exchange but not only, bringing with it major injections of know-how and yes, innovation.
MD: Why doesn’t Poland advertise itself better to investors? What does the Polish government actually want? Does it want to encourage Polish investors by discouraging others? If so, which ones?
TR: The Strategy for Responsible Development has identified answers that are applications of universal principles and relevant best practice, but there is resistance from various quarters, including those who would rather see competition at a low level. Fees that a market participant entering the Warsaw Stock Exchange is subjected to are several times higher than the average across Europe and the Middle East. This is one of the many problems identified in the Strategy, a specific action point to be urgently addressed. My attempt to get moving on this was met with resistance. So this fundamental need for reform will probably remain unaddressed in an age where more and more activity is online and of course borderless. Also Poland notoriously over-regulates its capital markets (christened ‘gold-plating’ by those who are responsible for it) and over interprets many simple EU regulatory guidelines, which by the way is of no ultimate concern to other EU players for whom Poland’s restrictions on its own Polish players just make life easier for them. ‘Goldplating’ is really a misnomer for ‘misplating’ and inadvertently facilitates, not hinders, ‘foreign competition’.
MD: How do you see the role of the state in protecting national assets in private hands? We can all see how many British brands have been bought by foreign owners.
“It reminds me of California in the 1980s when I worked there. There was a virtual panic for a few years that the Japanese were trying to buy up everything, mainly real estate. At the time, Japan happened to have an abundance of capital which was naturally seeking healthy yields globally. The US real-estate developers warmly welcomed the new money coming in, but many patriotic Americans were aghast that a country they’d been at war with just 40 years earlier was now “buying them out”. But wise heads prevailed. Foreign capital, it was realised, can own the office blocks and shopping malls, but can’t ship them back to Japan if push comes to shove. We’re hearing the same concerns in Poland now, and not only about Chinese capital.
“We are all aware of Poland’s enormous economic successes over the past 30 years. Individually, Poles are recognised to be smart and resourceful but somehow working together proves to be more challenging. Poland’s economic success generated much goodwill around the world, but that goodwill only goes so far and Poland has not taken full advantage of it in order to get to the next level, a higher orbit. Looking forward, it becomes more difficult to see where future success will come from without fundamental reforms and changes in mindset. Notions such as entrepreneurship and innovation imply an inherent understanding of risk taking and ideally non-state interference.
MD: Innovation is key to Poland escaping the middle-income trap. How should it be fostered?
“That’s the trillion dollar question! To become innovative, you need to have great universities doing great research which can be commercialised with business in collaborative partnerships; you need capital – you need venture capitalists who recognise that 80% to 90% of the start-ups they invest in will fail. Poland has a culture of failure avoidance/risk aversion – caution is the watchword in the banks and government agencies, risks are avoided. Having an innovative idea is just a first step. Entrepreneurship is about converting that idea into a successful profitable business and a laissez-faire, hands-off approach from government if it has nothing to offer.
“The EU Recovery and Resilience Facility offers Poland a chance to make a fresh leap forward, but Poland is running the risk of only paying lip-service to the reforms which the EU expects in order to release these funds.
“Judicial reform is needed to improve the business environment – also identified in the SRRK Strategy. Poland needs commercial courts to focus on commercial cases – at present, these end up in normal courts overseen by judges who are generalists and who need a long time to get up to speed on the specialist matter at hand. As a result, cases take too long, and this discourages investors, as reflected in Poland’s slipping down the World Bank’s Doing Business ranking – from 24th place in 2016 to 40th place last year.
“In Brussels, Poland is seen as being inward-looking, ignoring the opportunity of EU value-chain links, forgetting the single market and open procurement. Above all as not willing to play the game and hence defining itself as an outsider. In Europe and indeed globally, Poland is rarely at the top table promoting itself or negotiating what is very much negotiable – it doesn’t appear to want to. These are not my words.
MD: Inflation will become a worry for Poland. Giveaway budgets, raising taxes, redistribution – the piper will one day need to be paid. Inflation could yet prove to be the beast.
TR: “I am not an economist but from what I hear, investors don’t see how this will be played out, but of course this is not just the case in Poland post covid. Who’ll be paying the taxes in the future? The government’s Polski Ład programme looks likely to hit hard those sole traders and small entrepreneurs whose net income is between 5,000-6,000 złotys a month – hardly a wealthy part of the population. Given the desperate position of so many micro- and small businesses as a result of the pandemic, this is a risky move unless the fiscal stimulus sees immediate and very significant stimulus of business activity.
“It is a great plus that Messrs. Morawiecki and Kościński are world savvy bankers with plenty of market experience, but implementation is the real challenge in many areas as I have highlighted in this interview. A better understanding of and appetite for ‘risk taking’ is the other key challenge.