by Marcus How, Head of Research & Analysis, ViennEast

Poland has undergone significant political changes in recent years. Once deemed the poster child of the New Member States of the European Union, the United Right coalition – led by the Law and Justice Party (‘PiS’) – has taken the country on an altogether different course since entering government in 2015, courting no small amount of controversy along the way. 

The change has been economic and institutional, as well as cultural. Under the leadership of grey cardinal Jaroslaw Kaczysnki, PiS has sought to transform Poland from a post-communist outsourcing center into a high-income economy with a homegrown industrial base, anchored in Catholic conservative ideals. From championing a greater state role in the economy, to pioneering generous social spending programmes for families, and restructuring the justice system, interventionism is clearly no longer a dirty word. 

Critics both at home and abroad argue that this has resulted in centralization, toxifying independent institutions such as the judiciary with political influence. The European Commission has attempted punitive action against Poland, albeit unsuccessfully so far.

Yet United Right remains a formidable electoral force. In 2019, it won an unprecedented 45% of the vote in the parliamentary elections, maintaining its absolute majority of seats in the Sejm – the lower chamber of parliament – despite losing control of the Senate to the unified opposition. If it can win the presidential election in June 2020, its unilateral politics will continue until 2023.

Sound and fury?

Foreign investors have similarly shrugged off much of the disruption since 2015. At first, the headlines did not look good: banks and insurance companies were subjected to a special tax; capital transferred abroad by individuals and corporations faced an exit tax of 19%; restrictions on the trading of agricultural land were imposed; large retail stores were banned from trading on Sundays; the state increased its share in certain companies, including the second largest bank, Pekao SA; and privatizations in strategic sectors, such as energy, were halted. 

Foreign investors were among those who took the brunt of these protectionist measures, which have variously increased contract and taxation risks. Elsewhere, Mateusz Morawiecki – a former international banker who served as minister for both development and finance before assuming the prime ministership in December 2017 – is the mastermind of the government’s economic strategy. He has advocated strengthening domestic companies through a proactive industrial strategy and reducing foreign ownership of the economy. 

The impact of this interventionist approach is reflected in Poland’s decline in the World Bank’s Ease of Doing Business rating, with the country falling from a record 26th place (out of 190 economies) in 2016 to 40th in 2019, its worst performance since 2013.

Yet the qualitative attractiveness of Poland as a country in which to do business has not fundamentally changed. Structural conditions remain favorable for most investors. Poland was the largest recipient of EU Cohesion and Structural Funds under the 2014-2020 Multiannual Financial Framework, drawing some EUR 105 billion (approximately 2% of annual GDP). Geographically, it is a logistical hub, a gateway status that the government is seeking to expand through major infrastructure projects such as the Central Communication Port (‘CPK’). 

Incentive schemes for foreign investors are also generous. The government suspended geographical restrictions on the establishment of its Special Economic Zones (‘SEZs’). Investment costs of up to 50% may be deducted from corporate tax for projects lasting at least five years. Spending on research and development is similarly tax deductible, while property tax may be waived on projects in underdeveloped regions. Free assistance is also available for the completion of investment formalities. These incentives and structural advantages will become even more critical with the looming recession in Poland as a result of the economic impact of the Covid-19 pandemic.

More generally, it is possible for investor-state disputes to be resolved via arbitration. Poland does not have an arbitration law, but the Code of Civil Procedures contains provisions that are aligned with international standards. Courts must confirm and enforce arbitration rulings but seldom dispute them. There have been 17 cases of international arbitration in Poland since 2010, according to the United Nations Conference on Trade and Development (‘UNCTAD’), one of which has concerned the energy sector.

A different kettle of fish?

Nonetheless, energy is one of the more challenging sectors in which to conduct business as it is politically sensitive, and a large share is under state control. The four main power producers – namely, PGE, Enea, Tauron and Energa – are all state-owned. Coal accounts for 80% of power generation currently. Under PiS, there is a moratorium on privatizations of strategic companies such as these. Furthermore, state-owned enterprises have actively bought up foreign-owned power and heating assets.

Since December 2019, governance of the energy sector has been reorganized to reflect the government’s (relative) shift away from coal towards renewables. The Ministry of Energy and Environment was previously responsible for legislation, but its portfolio has been folded into a department of the Ministry of State Assets, which manages state enterprises and property. The newly established Ministry of Climate is primarily responsible for environmental policy. The Ministry of Development oversees the prosumer aspect of energy policy.

In terms of barriers to market entry, there are few regulatory obstacles for investors seeking to obtain a license to operate in the energy sector. The prospective licensee must have: 

• its seat in the EU, European Free Trade Area (‘EFTA’), Switzerland or Turkey; 
• sufficient financial resources to ensure proper performance; 
• registration as a Value-Added Tax (‘VAT’) payer;  
• a clean criminal and tax record;
• appropriately qualified staff. 

Meanwhile, the Office for Competition and Consumer Protection (‘OCCRP’) – and, where there is a community aspect, the European Commission – must vet mergers and acquisitions for potential competition concerns. 

The Energy Regulatory Authority (‘URE’) is responsible for the oversight of all energy markets. In this capacity, the primary mandate of URE includes the:

• issuance of operating licenses (which include all activities barring the trading of electricity on the Polish Power Exchange); 
• setting of tariffs for electricity, gas and heating; 
• management of the auction system, which determines the allocation of state subsidies for projects; 
• implementation and enforcement of legislation, including through the imposition of financial penalties for non-compliance. 

This is a limited scope of action when compared with other states in the Organization for Economic Cooperation and Development (‘OECD’). Indeed, the OECD calculates URE’s scope of action at 0.5 (out of a maximum of 6 points), below the average of 1.5. 

In terms of its independence, URE scores slightly below the OECD average of 1.8 points. Although the president of the URE is selected via an open process on the basis of merit, the prime minister finalizes the appointment, potentially undermining independence and impartiality. Nonetheless, the current president of the URE, Rafal Gawin, is a technocrat with professional expertise in the energy sector. URE has previously challenged the PiS government, raising competition concerns over state acquisitions of power and heating assets, and criticizing electricity price caps. It also rates highly in terms of its accountability, scoring 3 points against an OECD average of 1.6.

Policy direction 

Coal is (still) king in Poland, but global realities are forcing a rethink. The Energy Policy of Poland for 2040 (‘EPP 2040’) envisages that the share of coal in the generation of electricity should fall from 80% to 56-60% by 2030, with the share of renewables rising from some 11% to 21-23%. These are modest steps, which are in any case non-binding and therefore subject to potential changes in the political winds. The targets also fall below those of the European Commission, but the government argues that the structural dominance of coal puts it in a uniquely difficult position. 

It is likely to secure some leeway on this point, given the heavy economic impact the Covid-19 pandemic will have on industries such as coal. For this reason, increased fiscal support for such companies may be expected in the one- to two-year outlook. Yet the pandemic is likely to accelerate the trend away from fossil fuels in the longer term. Propping up the coal industry, the profitability of which is being eroded by the fact that imports are cheaper, will become increasingly unsustainable.

The declining profitability of coal will prompt a shift towards low-carbon technologies, namely renewables and nuclear. Deficiencies in low-carbon technologies, rising electricity prices on the wholesale market, and competition from other EU Member States provide strategic openings for early movers. Furthermore, as part of its PLN 93 billion (approx. EUR 20 billion, or 4.5% of GDP) public investment programme to counteract the economic impact of the pandemic, the government will prioritise environmental protection projects, creating opportunities for (foreign) investors with expertise.

The trend is towards feast rather than famine, no matter the stalling in which the government may engage. 

READ FULL REPORT: Poland's Energy Industry 2020