PLN1 trillion to change the economy’s direction

The Deputy Prime Minister of Poland Mateusz Morawiecki (© PAP)

The plan for Responsible Development provides for Polish drones, passenger ferries, trains and mining machines, but also investments in cyber-security and biotechnology.

The theoretical budget for progress in these industries is PLN1 trillion. In addition to reindustrialization, many institutional changes are also planned.

Deputy Prime Minister and Minister of Development Mateusz Morawiecki has made no secret since his appointment that he is not a fan of the economic model Poland adopted after 1989. “It is a model that has led to excessive stratification in our country and one whose potential has now been exhausted,” he said in February when presenting the “Plan for Responsible Development, ”commonly referred to as the “Morawiecki plan”.

“We want to create an original development path and it will be different from what was offered thus far,” Morawiecki said, while Prime Minister Beata Szydło added: “We are not afraid to say that capital has a nationality,” and “We want Poland to be a brand that successfully competes in the world.”

What is the essence of this new plan, which is to be translated into a government strategy?

To put it in the simplest terms, it involves a departure from a liberalized market where the growth rate was set by foreign investors, in favor of an industrial and regulatory policy where the state has a leading role. It is the state that is to raise money, change the law and encourage companies from specific sectors to innovate, develop, and thus to achieve more profitable exports. After all – as illustrated by the Deputy Prime Minister’s favorite comparison – each kilogram of Polish exports is currently worth EUR1.7, whereas each kilogram of Germany’s exports is worth a lot more.

In order to change that, Poland needs money. The thing is, it is not really lacking funds. In the calculations of the Ministry of Development, Poland receives PLN480bn in EU funds along with Poland’s own contribution, another PLN230bn are funds Polish companies are keeping in bank deposits, PLN75 to 150bn is the investment potential of the State Treasury, PLN75 to 120bn is the investment potential of the Polish Development Fund (which is to be created through the merger of the State Development Bank of Poland, the Export Credit Insurance Corporation, the Polish Agency for Enterprise Development, the Industrial Development Agency, and the Polish Investments for Development), PLN65 to 100bn could be found in the development programs, among others the National Capital Fund, the Polish Growth Fund of Funds and the Foreign Expansion Fund. Another PLN50 to 80bn could be obtained from abroad through programs implemented with the European Bank for Reconstruction and Development, the European Investment Bank, the European Fund for Strategic Investments, the World Bank, and even the Asian Infrastructure Investment Bank. This would be supplemented by PLN90bn of excess liquidity in the banking sector (except for the fact that the strong capital adequacy ratios could deteriorate due to the banking tax, and especially due to the introduction of the law on the conversion of foreign currency mortgage loans).

If we sum up all these sources of financing and their maximum amounts, we get PLN1.25 trillion, which is close to 70 per cent of GDP.

Of course, gathering such an amount is unlikely, which is why even in the title of the presentation the sum of PLN1 trillion is mentioned, and the asterisk next to the PLN230bn figure representing the savings of companies deposited in banks informs that these funds would be partially used by the entrepreneurs. The implication is clear: only as far as the government convinces them and only if they find it profitable.

According to the presentation, eight branches of industry have been identified in which “there is a chance to gain a leading position in the global market” and in which the government is to argue particularly strongly for involvement. These branches include the aviation, defense, automotive parts, shipbuilding, IT, chemicals, furniture and food processing.

The list of potential projects is also interesting. The “Żwirko and Wigura” development program provides for the design and construction of a full range of Polish drones. The “Batory” development program calls for the construction of a Polish passenger ferry. The “Cyberpark Enigma” project is supposed to be a hub for development in the field of cyber-security and data analysis. The “Luxtorpeda 2.0” program involves the production of Polish trains. Four further projects did not get such catchy names: the development of biotechnology, medical products, a mining combine and the development of outsourcing in medium-sized cities.

We should add the adjective “Polish” to each of these ideas. After all, the goal is to use the funds to build the potential of domestic companies. Foreign investors are to be welcomed, but only if they are willing to share their technology and not only benefit from the low labor costs.

550-1

(Infographics: Bogusław Rzepczak)

The list of development programs is, however, only the first pillar of the entire plan, i.e. reindustrialization. There are four other pillars: the development of innovative companies, capital for development, foreign expansion, and social and regional development. All the pillars stand on the foundation of “the efficient state”. A number of concrete activities has been announced within the framework of these slogans.

The activities scheduled for this year include an amendment of the public procurement law (April 2016), a Business Constitution (reduction of the legal barriers for entrepreneurs), the preparation of a package of changes for small and medium-sized enterprises, the launch of a program supporting start-ups and the merger of a number of institutions into the Polish Development Fund.

The reform of economic diplomacy, and a new procurement policy (a single policy for the government as a whole, including a departure from the lowest price criterion in public tenders and preferences for small and medium-sized companies) are planned for the next year.

By 2018 the program of foreign investment and e-administration are to be implemented, and the reform of vocational education is to be completed.

550-1

(Infographics: Bogusław Rzepczak)

The indicators that the government intends to achieve by 2020 are even more ambitious:

  • Poland’s GDP per capita at 79 per cent of the EU average,
  • 25 per cent of GDP allocated for investment,
  • 2 per cent of GDP spent on research and development,
  • Increase in the number of medium-sized and large companies to over 22,000,
  • More Polish foreign direct investment (70 per cent increase),
  • Growth of industrial production is to be higher than GDP growth.

Interestingly, all of that is to be achieved while maintaining public finance discipline. The public finance deficit is to be kept below 3 per cent of GDP in the short term, and is even supposed to decrease further in the medium and long term. On the revenue side, in addition to sectorial taxes, this is to be ensured thanks to boosting tax revenues, illustrated by an optimistic table on the VAT collection rate.

Better effectiveness in VAT-550

(Infographics: Bogusław Rzepczak)

During the presentation of the plan, Morawiecki said that it would favor corporate and not bureaucratic principles, and would be implemented by efficient project managers able to enforce the competencies of various ministries. It is this assumption as to the possibility of an easy victory over the gridlock, red tape and corruption in Poland’s various ministries, which is perhaps the most optimistic element of the plan.

“It is a good thing that the plan was developed; however, its implementation may not be that simple,” is the early opinion of experts.

“Deputy Prime Minister Morawiecki ignores the key role of depoliticization of the economy for the improvement of the business environment. The extent of state ownership and the over-regulation of such sectors as transport, telecommunications, postal services, energy, trade and free professions, may be reducing Poland’s GDP by up to 10 per cent. At the same time, state-owned companies protected from competition are often generating losses, which are then covered by the taxpayers, as is the case in the coal mining industry. In turn, state ownership in the banking sector raises the risk of a banking crisis,” wrote Rafał Trzeciakowski, an analyst at the Civil Development Forum one day before the presentation of the final objectives of the plan.

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