Establishing a level playing field

In one of the most important economic initiatives for years, the government will make the country one big economic zone, ending the exclusivity of SEZs. Tadeusz Kościński, Undersecretary of State in the Ministry of Enterprise and Technology, talks to Poland Today.

In a nutshell, what are the changes to be made in the new Special Economic Zone law?

The main change is that we’re moving away from geographical limits so the whole of Poland will be an economic zone, not just regional areas totalling 25,000 hectares. The second big change is that quantity will not be a major factor, i.e. how much the investor is going to invest in Poland and the number of jobs he’s going to create. We’re moving towards quality: Is the investment going to represent hi-tech, future-proof technology; is the supply chain going to be developed in Poland; are the employees going to be on full-time contracts, and will the investor provide high-standard and above-average salaries. The third change is about the management of the economic zones. To date they made their money by selling real estate to investors. We want to move away from that – their remit will be to support investors. They will be the first line of contact, a one-stop shop, and they will have to develop a strategy for the area that they manage and work together with business, local government and higher education. One of the problems to date has been that in some parts of Poland there have been no special economic zones anywhere near, and in other places there have been two very close to each other. Going forward every powiat (county or district) in Poland will be apportioned to a special economic zone management board.

At face value, it seems that the existing Special Economic Zones will suffer if the whole rest of Poland becomes one big SEZ. Is that the case?

They won’t suffer – quite the opposite. At the moment they have 25,000 hectares under management, in the future they will have the whole of Poland under management. Of course we’re only talking about land available for investment.

But how will it be in their interest to process investors in another area to their own?

Of course they will be getting fees, which will be strictly registered. We don’t want them to go bankrupt but we don’t expect them to make money on real estate, we want them to make money on helping investors. One other thing I would like to mention is the support period. Current incentives in Special Economic Zones run out in 2026, which means that anyone wanting to go into a current SEZ now would take a couple of years to get a license and a year or two to build a factor and establish a market, which only gives a few years to get their money back on an investment. From now on every investment will have between 10 – 15 years of incentives.

Is there an end period for this?

There’s no end period and also there is no change for current investments in economic zones. If someone has already invested, we’re not giving anything and we’re not taking anything from them.

‘We have double digit unemployment in parts of Poland so we need to attract investors there to create jobs ’

It’s been said that an objective of the new law is to encourage investors to go to eastern Poland. Is that correct?

There are two objectives. The first is that we have double digit unemployment in parts of eastern Poland, especially north-eastern Poland, so we need to attract investors there to create jobs – that’s the most important thing. So we’ll be reducing the amount that’s needed to be invested in these parts. There are other areas of Poland where there is almost zero unemployment, so we’re not going to be encouraging foreign investors to go to these places. In those places it’s not simply a case of creating jobs, it’s about the quality of the jobs: is the business going to be hi-tech; is it going to work with universities; is it going to employ graduates? In high unemployment areas we’ll continue to encourage investors simply to create jobs; in low unemployment areas, it’s more an emphasis on the quality of the jobs and investment.

According to government figures, average expenditure on research and development by companies in Poland does not exceed 1%. With the recent government and EU emphasis on investing in R&D, are companies starting to see the benefits of such investment or not?

Poland is starting to attract more hi-tech business into the country – a very good example is business shared services. Ten years ago Poland was seen as a very good place to set up call centres and back offices because of the low costs and wages, and the qualified workforce. However over the last few years we’ve moved right up the value chain and priced ourselves out of the market for call centres and back offices and we’re now the number one place in Central & Eastern Europe for business shared services such as managing global IT, global marketing, risk etc. Poland is recognized for this. Also in industry we see more and more companies investing in Poland who then open their R&D centres on the back of that. We’re not quite at the stage where companies come to Poland just to do their research and development, but we do have innovation centres – Samsung is a good example in Rzeszów, where they’ve set up such a centre.  

Also according to the government, only 6% of Polish companies are global champions. How do you define ‘global champions’, what would you like to see, and how can the government help?

Polish companies have to be bigger. One example of what should happen is Bank Pekao BP and Pekao SA, which are big in Poland but tiny in Europe. We want to see banks like that merge together so they will be bigger in Europe. Another good example is PKN Orlen and Lotus, where we’re looking at merging them together. Although they’re still separate companies, they’ve got the brief (to merge), so they’re on the road to become bigger companies and potential international champions.

Of course it’s good for a country to have international champions, but in a practical sense, how does it help Poland  if companies merge and create larger companies?

A bigger company will reduce costs. That’s good for Poland because it reduces the costs for consumers in Poland. Secondly, bigger companies can fight foreign competition in Poland better. In Britain you have British banks, in France you have French banks, but in Poland you have banks from elsewhere. Also if a country has strong companies, they can go abroad and compete there, which is good for the country.

In terms of helping Polish companies export, how are you looking to do that?

Of roughly two million companies in Poland – that number includes sole traders – only around 17,500 are exporters. And of these, around 75% are foreign owned. So really, only about 4000 or so Polish companies export. Of Polish exports, around 80% go to the EU, and of that, about 26% go to Germany. So we’re very reliant on the economy of the EU, especially Germany. Our objective is first of all to educate Polish companies that it’s good for them to start exporting. One of the problems is that following the hyper-unemployment we saw at the beginning of the 1990s, a lot of companies were set up, and they tend to be family-run businesses. They tend not to be very ambitious. The owners are happy enough to be a local company and have a nice house, a nice car etc. Going national quite often means allowing external capital in, which of course means losing some of the control. They don’t see the benefit. So we have to educate them about why they have to bring in external capital so they can go national and international – because foreign competition in Poland is coming, and it’s best to fight your battles abroad rather than fighting on your local patch. The second message we need to get across is that if you export to developing markets like South America or Africa, where the economies are growing in double digits, you can get a good market share and compete better in the European markets.

How do you actually help companies export?

We originally set up diplomatic trade offices – 46 of them – attached to Polish embassies, most of which – 26 of them – are in Europe. Because they’re diplomatic offices, the cost of maintaining them is very high – the whole family usually comes – and they can’t offer fee-based services. All of those are being liquidated and we’re bringing in about 70 trade offices built on commercial terms. We’re talking about prospective markets such as Vietnam, Iran, China, South America – Argentina and Mexico. They will be manned by local staff, so the cost of employment and administration will be much lower. They will also provide fee-based services. They will still provide basic services for free, but if a Polish company wants a report on some aspect of the economy, they can buy it, and if they want a matchmaking service to find a particular partner, they can also buy that sort of service.

Is there any wish or drive for a Polish equivalent of AmCham or BPCC – a professional network of Polish chambers of commerce abroad?

Absolutely. At present we have a lot of associations and they seem to be quite dispersed with a very poor cost-benefit. So we need to amalgamate these together so they can be more powerful and have a much stronger voice representing businesspeople. We need to develop Polish chambers abroad. We’ve already started it, for example in the U.S., where there are already chambers – although they’re more linked to the Polonia in the States. We need Polish companies to be the drivers of the chambers of commerce, not the companies based abroad.

For chambers of commerce to be effective, like an ideal civil service, they should not be politically-aligned, not following a particular government line. Do you agree?

I completely agree. Business is business and politics is politics. They do intermingle and that’s not always a bad thing, but I think we need to be open for business for everybody.

‘We can’t just be an assembly line for foreign companies.We need the hi-tech jobs, the R&D jobs.’

What is the government doing about the demographic trap – the ever-shrinking workforce?

Quite a lot, because unfortunately the Polish nation is getting older and there are fewer people working and more people in retirement, so the costs of supporting that is astronomical. First of all, let’s try and stop people leaving Poland, because that’s the worst thing that’s happening. We have the cost of their upbringing and education, then young people don’t see their future in Poland and leave. How do we stop them from leaving? First, let’s give them jobs. If they don’t have a job, they’re not going to stay. And once they do have jobs, they must have better jobs. And that’s what I meant earlier about the quality – we can’t just be an assembly line for foreign companies. We need the hi-tech jobs, the R&D jobs. We’ve also got the 500+ programme which has made a big difference to the birth rate in Poland.

Concerning 500+, why is it that everyone (with more than one child under 18) receives it, including the wealthy. Shouldn’t it be more carefully distributed? Will it be fine-tuned in the future?

The costs of filtering are higher than the costs of paying. Full stop.

Really?

It’s not actually my area of responsibility, but that’s my understanding. Means-testing is a cost, and the cost benefit of that is not great enough. Concerning the demographics, what we’re trying to achieve in Poland is for people to have higher salaries. The more they earn, the more they will be able to spend in Poland and the more likely they are to stay here. So we are moving up the value chain. Allowing in immigrants is a delicate issue. On the one hand we have a lack of people to work in Poland because we’ve got just over 4% unemployment, meaning business can have a problem investing in Poland because they don’t have people to invest in. So either they don’t invest at all in Poland, or they start increasing the salaries they pay. We obviously want (the salaries to increase), but it has to be controlled otherwise there will be salary inflation and that will take us out of the market against our competitors. So using immigrants can actually allow companies to take some of the pressure off in terms of employment, but at the same time keep enough pressure for companies to migrate up the industry 4.0 value chain to automate more, to move away from manual assembly lines to automated assembly lines. There are lots of different perspectives to deal with.

What does industry 4.0 mean for the Polish government?

It’s about getting away from manual labour and looking at the internet of things, big data, cloud computing, automation and robotics. We’re promoting all of these either through direct funding or tax relief.

Tadeusz Kościński is the Undersecretary of State in the Ministry of Enterprise and Technology and is responsible for the development
and implementation of rules governing trade between EU states. He has been working in the banking sector throughout his professional career and is a graduate of the Goldsmith’s University of London.

Special Economic Zones (SEZ) are designated areas in which manufacturing or distribution activities can be conducted on preferential terms. Benefits from obtaining a permit to conducting activities in SEZs include income tax exemption, plot of land at competitive price and free assistance in dealing with formalities. The total area of all 14 SEZs is 25,000 hectares.

The current system will continue to operate until 2026, but only for permits issued prior to the new system coming into force. Until 2026 the two systems will operate in parallel.

New role of SEZ will be critical

Paweł Tynel, Partner, EY: The new law that is planned to be introduced is a fundamental change in the way the government of Poland would like to support investors. Instead of having specific areas covered with SEZ status, the whole of Poland will have that special status. This means that in all locations it will be possible to obtain corporate income tax exemption. The goal is not to award CIT exemption to everyone, but it is a way to search for potential investors across the country. Thanks to these changes, every local leader and entrepreneur will have the same attributes, meaning that they do not have to go through the lengthy process of inclusion of a specific piece of land into an SEZ.

On the one hand, CIT exemption will be more accessible, but at the same time it will be more challenging to receive a decision on investment support. The criteria that the investor will have to fulfil will be far greater in locations with a low unemployment level. Instead of the uniform €100,000 threshold for investment expenditure, there will be different thresholds depending on the location and size of the investment.

Differences will be driven by the unemployment level, but simple creation of new jobs will not be the critical factor. What will be critical is capital expenditure linked to qualitative criteria focused on the quality of jobs, cooperation with scientific units, conducting R&D, level of exports, vocational training etc.

What is also important is that there will be different timescales in which investors will be awarded with CIT exemption, ranging from 10 to 15 years. Such a differentiation based on development levels will motivate companies to look for locations in less favourable locations. The SEZs will be managing and monitoring far greater areas than they are now. Instead of having something like 1000 ha under supervision, they will be managing entire voivodeships or even larger regions. SEZs will be the hubs for those areas, and their role in developing their areas of responsibility will be critical. Their 20 years of experience should certainly be helpful in fulfilling that role.

System re-boot

Paweł Zelich, Associated Partner, Attorney at Law, Noerr Biedecki sp.k. (Member of Noerr Group): The new legislative proposals are a welcome substitute for an increasingly outdated investment support regime. Access to tax incentives anywhere in Poland, and not only in one of the special economic zones, should allow a number of new locations attract valuable investments and provide investors with a more competitive offer to locate their business in Poland and not in other countries in the region.

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