FT SPECIAL REPORT Investing in Poland

Monday November 25 2013 www.ft.com/reports | @ftreports

In a reform that will be completed by the end of this year, the government aims partly to undo pension reforms Inside » carried out in 1999. The plan is to strip privately run Bruised pension funds of their holdings of government bonds, which would Pension reform reduce public debt by about 8 percent- age points and lower borrowing Fears for bond requirements. markets as state However, this has produced screams economy of anguish from the funds, which will takes control of see their size, and the fees they are investments able to charge, shrink sharply. The plan has also raised concerns Page 2 about the liquidity of the Polish gov- ernment debt market, the region’s largest, and worries about the effect French fry maker plots return on the Warsaw stock exchange, where the pension funds had been large and boosts farmers stable buyers of equities. Why the potato is “I’m disappointed that the Polish pension fund system is being sacri- responsible for ficed on the altar of fiscal concerns,” modernisation says Matthias Siller, investment man- to fast track Page 2 ager at Baring Emerging Europe.

Poll ratings fall ‘It was a great error and an Prime minister lags The government has acted swiftly to reverse injustice that people were rival as voting sluggish growth, though support has waned for shoved into potentially looms, though still prime minister Donald Tusk, says Jan Cienski risky investments‘ has all to play for Page 3

ost of Europe has spent during the first phase of the crisis in The government insists the initial the past five years swing- 2009 shut their wallets, and banks pension reforms were badly thought Crisis aids coal’s ing in and out of reces- were unwilling to lend more to keep out, and that the change is needed to sion, as waves of troubles spending high. rebalance public finances. rise to power have buffeted the conti- Sluggish growth pushed up unem- “I think that we are in a sense More incentives Mnent’s economies. During this time ployment – to 13 per cent at last count repairing a historical harm,” Jacek Poland has survived without a single – and strained public finances. Rostowski, who has since been needed to replace contraction and now looks set to Poland fell foul of the EU’s deficit replaced as finance minister, said in a ageing equipment resume significantly faster growth. curbs, aimed at reining in public radio interview after the change was That is not to say that central spending among member states, and announced. “In 1999, it was a great Page 4 Europe’s largest economy is emerging was given an extended deadline, until error and an injustice that people unbruised. 2014, to put its fiscal house in order. were shoved into potentially risky Growth slowed to only 0.5 per cent This is despite the government’s investments with no choice.” Property in the first quarter of this year, but sharp reduction in spending, which Rating agencies have been fairly that appears to have been a trough, saw the deficit fall from 7.4 per cent in sanguine about the changes, but the Global investors with the economy staging a faster- 2009 to a predicted 4.2 per cent this reform has left a sour taste with the aim to build than-expected recovery in subsequent year. business community. months. Estimates for the third quar- With its back against the wall as The move has also not helped Don- on a reputation ter showed annual growth of 1.9 per public debt approached a legal limit of ald Tusk, the prime minister, and his for stability cent. 55 per cent of gross domestic product, Civic Platform party, whose support Meanwhile, the doughty shoppers the government took the controversial Page 4 who kept the economy growing step of revamping the pension system. Cause of discontent: demonstrators criticise Donald Tusk’s government AP Continued on Page 2 2 ★ FINANCIAL TIMES MONDAY NOVEMBER 25 2013 Investing in Poland Fund aims to spur infrastructure projects Bruised

who is sitting in his office largest, and state-control- economy is showing signs liminary agreement with gate any such projects. economy plots Partnership on the fifth floor of War- led, bank. Another 10bn of revival after hitting a low state-controlled Lotos Petro- Still, Mr Grendowicz is saw’s stock exchange build- zlotys was sent to the Bank point in the first quarter. baltic to invest 563 zlotys of upbeat about the prospects: Development ing. He has a stunning view Gospodarstwa Krajowego, a When the programmes do a 1.6bn zloty project to “We have a chance to popu- investment vehicle of a white building next state-owned development get going, they would be exploit oil deposits in the larise the PPP formula in return to door that, before 1989, bank, which is supposed to likely to overheat a recover- Baltic sea. Mr Grendowicz Poland.” gets off to slow start, housed the Central Commit- leverage this sum to 40bn ing economy, and critics says the venture fits PIR’s PIR’s presence as an writes Jan Cienski tee of the communist party. zlotys in lending. say they run the risk of requirement to invest in investment partner is also The slow pace of getting The government’s plan is stoking inflation, rather schemes with limited risk. aimed at assuaging fears of fast track PIR up and investing is a for PIR and BGK to act as than protect the economy In keeping with this, PIR undue bureaucratic inter- A ring on the bell brings a far cry from the optimistic minority partners to the from a downturn. plans to focus on midsized ference in large projects rustle on the other side of note struck by Donald private sector, spurring “It was a good idea,” says projects, such as waste and could bring some con- the door, which is opened Tusk, Poland’s prime minis- investment in power plants, one investment banker, incinerators, something for sistency to project financ- Continued from Page 1 by Mariusz Grendowicz, the ter more than a year ago, roads, ports and airports as “but it is always the same which there is a growing ing. president of Polish Develop- when he announced the for- well as hydrocarbon trans- thing in Poland – there is a need in Poland, before tak- Currently, local govern- base has shrunk. Young ment Investments (PIR), a mation of an investment port and production. completely different under- ing on larger schemes such ments devise their own urban voters, dismayed vehicle designed to boost programme that would keep The hope was that the standing of time compared as power stations. approaches to projects, with with the slow pace of eco- infrastructure investment. the economy growing dur- agencies would increase with other countries.” Once PIR is more estab- different bodies coming up nomic and social reforms, The former banker is not ing the looming slowdown. spending at a time when Mr Grendowicz admits lished, it could be a spur to with widely varying paper- have abandoned it, while just answering his own “For a responsible gov- the 2007-2013 EU budget was progress has been slow. “In creating public-private part- work requirements and the rightwing opposition office door. He is also ernment, which wants winding down but the next the private sector, you first nerships, or PPP. While assigning differing levels of Law and Justice party is involved in hiring staff – he growth, and to keep people budget, with almost €106bn work on a project and when such combinations of pri- risk to public and private using increasing discontent has nine employees so far – working, the key is to find in structural and farm it is ready you announce it. vate business and public partners. This makes it dif- over the economy to pose and ordering their desks as ways of financing develop- funds for Poland, was not In politics, you make an sector has been successful ficult for large international its most significant chal- he tries to get PIR going in ment and growth,” Mr Tusk yet in place. announcement first.” in some countries, it has financial institutions to lenge in years. the face of sluggish govern- said at the time. The boost in investment He has a team examining yet to be introduced in take part. “PIR is to be a The fiscal response to the Jan Krzysztof Bielecki ment bureaucracy. The idea was to establish would also help the econ- more than 100 potential Poland. body to bring the first, or slowdown was preceded by “Who else can do these PIR, which is owned by the omy through the economic investments, although he The reason is, as the the last, zloty, alongside the a sharp change in monetary sorts of things? So far, I’m treasury department, turbulence caused by the says most proposals are “lit- Polish joke goes, “in Poland private sector money, to policy. The Polish central The government plans to the only one in the organi- fuelled by 10bn zlotys eurozone crisis. tle more than loose ideas”. there is always a fourth P, enable projects that would bank was the only one in boost spending through its sation with signing author- ($3.2bn) from the sale of The programmes have PIR has embarked on its the prosecutor” who otherwise not take place,” the EU to raise rates in own investment pro- ity,” grins Mr Grendowicz, shares of PKO BP, Poland’s been slow to start and the first project, signing a pre- quickly begins to investi- says Mr Grendowicz. 2012, trying to stamp out gramme, Polish Develop- inflation stuck above the ment Investments, a special bank’s guidelines. purpose vehicle, and a As the economy slowed, state-owned bank, which is the bank changed course, expected to help attract pri- sending its benchmark rate vate money into important to a record low of 2.5 per infrastructure and energy cent. projects. Pension reform Action in both fiscal and Although government monetary policy, combined promises to deregulate have with signs of a lacklustre come to little, the private revival in the eurozone, is sector has been transformed laying the groundwork for by the slowdown, which is stronger growth in Poland. likely to make it more com- plays out in Jan Krzysztof Bielecki, a petitive during any return former prime minister and to growth. Mr Tusk’s leading economic For example, Nowy Styl, adviser, says: “We aren’t an office furniture maker, committing any striking was hit hard by the drop in portfolios monetary policy mistakes, sales in 2008 and responded and, on the fiscal side, we by restructuring, acquiring aren’t brutally suffocating foreign competitors, build- our economy. ing a highly automated fac- “We have this shock tory, and overhauling its absorber of the exchange computer system. Debt The transfer of bonds may affect rate, and the German econ- Many companies are keen omy is oscillating at around to grow beyond the domes- demand in the future, writes Neil Dennis zero. That means it is prob- tic market, taking advan- able the Polish economy tage of a weak zloty and a will function 150 basis skilled labour force still sig- ension reform proposals tapering of its $85bn-a-month asset points better than the Ger- nificantly cheaper than in have created turbulence on purchase programme. man economy, as it has western Europe, to gain Polish equities and capital The transferred bonds will eventu- over the past decade.” market share. markets since rumours first ally be cancelled to help reduce the The government predicts For example, Pesa, a roll- drifted across trading desks public debt by about 8 percentage the economy will expand by ing stock manufacturer Pin March. points to nearly 47 per cent of gross 2.5 per cent in 2014, up from from Bydgoszcz in northern Stocks hit year lows in April, as the domestic product in 2014-15. 1.5 per cent this year, but Poland, has won a €1.2bn government announced that reforms Meanwhile, the private funds, some data suggest there may be a contract to supply locomo- were on the way. of them run by financial services com- more ebullient recovery. tives to Germany. There was more to come. Donald panies such as Aviva and Allianz, will “Given increased fiscal Despite the global slow- Tusk, the prime minister, announced keep their equity holdings, which space, we see chances of down, Poland continues to in early September that, pending were – according to Bloomberg data – GDP accelerating above 3 interest foreign investors. approval by parliament, the govern- worth 111bn zlotys at the end of July. per cent next year,” says Greenfield investments ment was to transfer about 120bn zlo- The three main rating agencies – Piotr Kalisz of Citi Re- fell by 7.6 per cent to tys ($38bn) in Polish government Moody’s, Standard & Poor’s and Fitch Busking on: an important in price setting, leaving Losses for the Polish currency search. $11.6bn last year, but the bonds held by state-guaranteed pri- – have said the pensions overhaul elderly accordion Poland more exposed to global trends should be contained, however, by the Although lending growth government’s investment vate pension funds to the state Social works out to be neutral for Poland’s player in Warsaw. – an especially dangerous proposition interest rate outlook. has been decelerating, the agency expects this to rise. Insurance Office as part of a plan to sovereign debt rating, given that any Moves to transfer at this particular point in the cycle.” At the same time, the return of the banking sector is healthy, Real estate investment is improve public finances. reduction in liquidity will be balanced pensions upset Fears of looming equity market doves at the Fed is expected – at least with a capital adequacy expected to hit €3bn in 2013, The market reaction to the move by an improving debt profile. markets Getty outflows from foreign investors drove in the short term – to drive a revival ratio of 15.7 per cent. the best result since 2006, as was immediate. The WIG 20, War- Some analysts are more wary and the WIG 20 down by 4.6 per cent on of risk appetite for emerging markets, The country is also pre- investors are pulled in by saw’s blue-chip stock index, suffered warn that the transfer and cancella- the day of the announcement, hitting from which Poland should benefit. paring itself for another higher growth than in its biggest daily reverse in two years. tion of government bonds will limit a session low of 2,166 – just 16 points Further hopes that reforms will cash infusion from the EU. many other EU countries Bond prices also took a fall, which liquidity in the debt market and the off its weakest level of the year. have a muted impact on the markets It was the largest benefici- combined with lower risk forced yields higher and left the zloty reduced supply will in turn crimp The market has regained some are highlighted by the example of ary in the 2007-13 budget than is usual for non-EU vulnerable to the emerging market demand. poise, but remains more than Hungary. cycle, receiving €68bn. emerging markets. sell-off that has afflicted the deficit- “Reduction in public debt is not a 6 per cent lower on the year – In 2010, it switched some Ft3tn The money helped trans- David Reid, co-manager of worn currencies of Asia and Latin game changer for credit ratings, but although the broader WIG index, (which amounted to about $14bn at form the country, where it BlackRock Emerging America. poses significant risks to the local which has a smaller weighting of the time) from mandatory private was used to build highways, Europe, which invests The yield on the benchmark 10-year bond market in a post-[quantitative financial stocks, remains nearly 6 per pension savings to the state system. water treatment plants, £1.3bn in regional equities, bond hit a year high of 5.04 per cent, easing] world,” comment Mai Doan, cent higher on the year. “Reform in Hungary did not trigger ports and airports. says he is keen to do more while the zloty fell to its lowest levels Raffaella Tenconi and Arko Sen at Concerns remain that funds, unable massive outflows from foreigners, Poland will again be the business in Poland. in nearly two months. Both have Bank of America Merrill Lynch. to balance their portfolios with bond despite the large macro imbalances largest recipient and will “We had historically been since recovered some ground, as has Analysts at Brown Brothers Har- purchases, will add to volatility in the and political jitters,” says Mr receive €73bn in structural underweight in Poland ver- the equity market. riman agree: “The lack of demand for equity market. “Changes in [pension Borowski. funding. sus Russia and Turkey. But The 10-year yield has recovered to public debt from pension funds is funds] will adversely affect the prices Poland’s pension reform bill, which That, added to the now that we see the market 4.40 per cent, helped, not least, by the expected to have a negative result for of shares, thus contributing to depre- has critics within the government and €28.5bn in Common Agri- returning to growth, we are US Federal Reserve’s decision, on the local fixed-income market. ciation pressure on the zloty,” says the central bank, is expected to be put cultural Policy funds, will more likely to be increasing September 18, to retain its easy mone- “In particular, it would make the Jakub Borowski, chief economist at before parliament in the coming send another modernising our Poland position rather tary stance and delay the expected role of foreign investors even more Crédit Agricole Bank Polska. months. jolt through the economy. than reducing it,” he says. French fries producer stimulates growth of domestic farmers

Agriculture when Soviet troops were Instead, a site under the look for additional suppli- stationed across the region control of a young and ers. The problem was that and its future direction was enthusiastic city govern- local farms were small and The Baltic appeals to very much an open ques- ment in Lembork was cho- inefficient, growing only 15 potato processors, tion, it was not so evident. sen, even though it is 35km tonnes of potatoes per hec- Using his experience in away, a lesson that has tare instead of the west-Eu- writes Jan Cienski running a joint venture been repeated many times. ropean standard of 40 supplying Dutch fries to Cities with effective local tonnes. Moreover, there was Japan, Mr Lehmann-Baren- governments, such as Wroc- something wrong with Can the humble potato take klau approached Farm law in the southwest, have Polish potatoes. some of the credit for Frites, a Dutch frozen fry attracted large amounts of Mr Lehmann-Barenklau Poland’s startling moderni- producer, and started look- foreign investment, while says: “They were round, sation over the past two ing across the region for a others with a more mixed like tennis balls. For fries, decades? A look at the location to set up a busi- record, such as Szczecin on they have to be long to Farm Frites Poland factory ness. the Baltic coast, only 150km make the strips wanted on the Baltic coast would He settled on Poland as it from Berlin, have not. by companies such as suggest that it can. had cheap farmland, a big McDonald’s.” While the world was population and a tradition Measure of But foreign interests mesmerised by the sight of of potato farming. The com- development: spotted the opportunities the Berlin Wall tumbling in pany put in a bid for a 4,000 McDonald’s and farmers from the Neth- November 1989, Ernst hectare former collective has more erlands, Germany, Belgium Christoph Lehmann-Baren- farm on the Baltic coast, than 300 and Scotland leased large klau, the company’s chief where the sea breezes cre- Polish outlets tracts of land in northern executive and president, ate good conditions for Poland to supply the fac- had something much more growing potatoes. tory. As Poland modernised, prosaic in mind: that the Nearby, a joint venture At first the farm seemed local farmers also started to countries of central Europe between Farm Frites and enormous to the Dutch, expand their operations would quickly move to Aviko, another Dutch who were used to much while upgrading their tech- adopt western ways, includ- potato processor, invested smaller properties, but it nology and growing tech- ing eating fast food. $50m in 1993 to build what turned out to be far too lit- niques. And that meant they was then one of Europe’s tle land to feed the factory’s Today, out of 50 contract would need lots of French most advanced production appetite for potatoes, while farmers supplying the fac- fries. “There wasn’t much facilities for French fries. the company also underesti- tory, only two are foreign. of a frozen French fries The factory’s location was mated the capital needed to When the factory was market, but we knew it was something of a test for the run the place. being built, Poland had coming,” he says. local authorities. A possible The farm produced about only four McDonald’s res- With hindsight, the idea site near the farm was 40,000 tonnes of potatoes a taurants. Now there are that central Europe would abandoned because officials year, only 20 per cent of the more than 300, and the fast- become more westernised were too slow to respond to plant’s capacity. food chain takes about half seems obvious, but in 1989, the foreign investors’ needs. This forced the owners to of the factory’s production. FINANCIAL TIMES MONDAY NOVEMBER 25 2013 ★ † 3 Investing in Poland Tusk’s poll ratings fall as voting marathon looms

Politics The outcome of 2015’s parliamentary ballot is not a foregone conclusion, a senior adviser to the prime minister tells Jan Cienski

oland’s government may Mr Kaczynski’s powerful lieutenant, have seen it through two Antoni Macierewicz, has also been in economic crises in the past the news, propagating his controver- five years, but people have sial thesis that the 2010 air disaster become jaded with Donald that killed Lech Kaczynski, Poland’s PTusk, the prime minister, and his president and Jaroslaw Kaczynski’s team just as the country is preparing twin brother, was no accident. for a long bout of electioneering. Instead, a bomb brought down the air- Voters will have to endure politi- liner, he says. cians campaigning for four elections, There is no evidence to support this starting with those for the European theory, and Mr Macierewicz’s credibil- parliament next year and ending with ity suffered a blow when it turned out a parliamentary poll in 2015. that scientists working on his investi- Mr Tusk attempted to jolt some life gation had gained their experience in into his administration last week by air accidents through gluing toy mod- reshuffling his cabinet, including els together and peering at aeroplane replacing veteran finance Jacek Ros- wings while flying as passengers. towski with the relatively unknown “Macierewicz and his experts are an economist Mateusz Szczurek. enormous asset for Tusk,” says Mr Opinion polls show Mr Tusk’s cen- Markowski. trist Civic Platform trailing the right- However, Mr Tusk cannot rely on wing opposition Law and Justice the opposition imploding to carry him party, but Jan Krzysztof Bielecki, a to a third term. His team hopes the former prime minister and head of Mr economy will recover sufficiently to Tusk’s council of economic advisers, lift the national mood. Growth bot- says there is still all to play for. tomed out in the first quarter but has “It’s not a foregone conclusion,” since regained strength, and the econ- says Mr Bielecki. “If someone says omy should end the year with GDP they won’t vote but hasn’t shifted to growth of as much as 1.5 per cent. voting for another party, I think they However, unemployment is still high can still be persuaded.” at 13 per cent, with youth unemploy- Mr Bielecki, who headed a centre- ment even higher. right government in 1991, puts much Mr Bielecki says of 2014: “A 2.5 per of the blame for Civic Platform’s cent growth rate seems realistic. In decline on one of Mr Tusk’s key eco- the short term, I don’t see many prob- nomic reforms, the gradual lifting of lems, but challenges remain.” the retirement age to 67, from 60 for One of those challenges is to fire up women and from 65 for men. Poles with a vision of the country’s “From the political point of view, future. Mr Tusk has spent most of his pension reform has been a gigantic two terms in government managing loss for the government,” says Mr crises and mending holes in public Bielecki. “You can see how the oppo- finances – lately through a controver- sition is using it to build their support sial move to trim privately managed with one motto: ‘If you vote for me pension funds. His critics have lam- and I return to power, I’ll immediately basted him for promising Poles “warm cut the retirement age’.” water in the taps” as an example of Retirement age reform has been Silent protest: marchers at a demonstration organised by the opposition Law and Justice party and the union Solidarnosc in Warsaw Reuters his caution over deeper changes. unpopular – tens of thousands of Mr Bielecki says: “I think the prime union activists who protested in cen- minister made it clear that this tral Warsaw in September stated that term premier in Poland’s democratic is a good time to show the ruling leaders in the mountain resort town mocked vision of warm water in the reversing the changes was one of history. But in recent months the party a yellow card,” he says. of Krynica a day after Mr Tusk an- taps was actually a very ambitious their main goals – but there is a spark seems to have gone out of Mr Working in Mr Tusk’s favour is the nounced the end of the downturn and plan for the deepest economic crisis in deeper sense of malaise around Mr Tusk, who has been beset by gloomy nature of the Law and Justice party thanked business for its role in keep- 70 years, because that effort to stabi- Tusk’s administration. poll numbers and a rebellion by con- and its mercurial leader Jaroslaw ing the crisis at bay. lise the situation meant we were the The 56-year-old prime minister is servatives within his party. Kaczynski, who served as prime min- Mr Kaczynski gave a fiery interview only country in eastern Europe not to the dominant figure in his party. It Radoslaw Markowski, a political sci- ister from 2005 to 2007. While many of in which he compared many entrepre- fall into a recession.” was his charisma and ability to com- entist with the Polish Academy of Sci- Mr Tusk’s former supporters may be neurs to lords exploiting their work- ‘The second year of a term Whether Mr Tusk is re-elected as municate with ordinary voters that ences, sees nothing unusual in Civic unenthusiastic about him, they are ers as if they were feudal serfs, and is a good time to show the prime minister could well depend on brought his party an unexpected vic- Platform’s loss of support. “It’s just terrified of Mr Kaczynski. called on the government to impose his ability to put a good enough sales tory in 2007 followed by a second term like everywhere in the world – the The opposition leader gave them “punitive taxes” on companies that ruling party a yellow card’ pitch together to persuade voters to in 2011. This made him the only two- second year of a parliamentary term good cause at a meeting of business did not raise salaries. support him again. Foreign investors find tidy sum hidden down back of the sofa

zlotys ($317m) this year. As Export markets the business has gone upmarket, so has its use of The manufacture of technology. Nowy Styl is furniture is now building a factory in Jaslo in the southeast that will a big business, allow architects and design- reports Jan Cienski ers to send orders directly to the plant. The desks and chairs will be sent to clients A long line of towering within a few weeks. machines and smaller This ability to deliver robots that move corru- goods quickly, and make gated cardboard and wood fast changes to designs, has between them make up the Made in Poland: an Ikea customer stocks up on furniture allowed Poland to stay production line of the Swed- ahead of cheaper rivals in wood factory in Lubawa, Asia. northern Poland. About 90 per cent of the About 18 per cent of all of “Furniture can be turned This mechanical work- furniture made in Poland is Ikea’s products are made around from order to force is building shelves exported, and Mr Wiktorski here. delivery in about three and other pieces of furni- expects total export reve- Foreign investors such as weeks – that is impossible ture that will be sold by nues will reach €6.9bn this Ikea have helped bring from China. Asian products Ikea, the Swedish furniture year, up from €6.6bn in modern furniture produc- are sent to Europe by group, in its shops around 2012, as the slow eurozone tion technology to Poland container in much larger the world. recovery improves sales. but, as wages have risen, numbers,” says B+R’s Mr What is striking is the Poland’s initial advantage both foreign and domestic Wiktorski. “By contrast, a almost complete lack of was cheap, educated labour, manufacturers are increas- table made in Poland on human supervision, a dem- something that brought ingly automating systems. Friday can be used to serve onstration of the high level Swedwood to Lubawa in “Poland is no longer a a meal anywhere in Europe of technology used in pro- 1992, three years after cheap place to make by Monday.” duction in the country, as Poland’s return to democ- things,” says Adam While Poland has done well as a reflection of rising racy. Lubawa already had Krzanowski, chief executive well by carving out a share wage costs, which make it state-owned furniture mak- of Nowy Styl, a leading of the European furniture inefficient to take on extra ers, as well as a large European office furniture market, it still has difficulty workers. number of small, family- maker. building strong interna- Equipment such as this owned furniture businesses. “In the past, it didn’t tional brands. All of Swed- has helped to make Swed- “Poland was always inter- matter if we had five people wood’s products are obvi- wood – Ikea’s production esting for Ikea,” says Zbig- standing on a production ously sold under the Ikea unit – into Poland’s largest niew Niklewski, managing line instead of spending label, although there is a furniture producer and director of the Lubawa $100,000 on a machine so “Made in Poland” sticker exporter, and a key part of factory. that only one person would attached for those who an industry that makes up “I think the fact there be there. It didn’t pay. Now want to look. about 2 per cent of the was furniture production it does.” Even companies such as country’s GDP. here, and experienced work- Mr Krzanowski started Nowy Styl have found it Foreign investors, cou- ers, as well as access to raw his business in 1992 with makes sense to buy existing pled with fast-growing materials, was important. his brother, Jerzy. brands. domestic companies includ- We’re also pretty close to When Swedwood was For example, the com- ing Black Red White and European markets.” building a greenfield pany took over two German Nowy Styl, have made Poland has long had ties factory near Lubawa, the furniture companies but is Poland the world’s fourth- with Ikea – state-owned fac- Krzanowskis were uphol- keeping the manufacturing largest furniture exporter tories started to produce stering chairs with their base in place, while saving by value, after China, Ger- furniture for the company mother and girlfriends, money by shifting back- many, Italy, and have put it in 1961. It began to build its before driving them around office functions to Poland. ahead of the US, says own factories in Poland to sell in furniture shops. “For our German clients Tomasz Wiktorski of B+R starting in the 1990s, and it They now have a business it is very important to have Studio, a furniture industry now employs 8,600 people in that is likely to generate a `Made in Germany’ label,” analysis firm. production alone. revenues of about 1.2bn says Mr Krzanowski.

Contributors »

Jan Cienski Adam Easton Adam Jezard For advertising details, Warsaw and Prague Warsaw correspondent Commissioning editor contact: Jim Swarbrick, +44 correspondent for the BBC (0)20 7775 6220, email: Andy Mears [email protected], or your Neil Dennis Andrew Kureth Picture editor usual FT representative. Markets reporter Freelance journalist living in Poland Steven Bird All FT Reports are available Design on FT.com at ft.com/reports 4 ★ FINANCIAL TIMES MONDAY NOVEMBER 25 2013 Investing in Poland

Power generation High employment costs hamper Crisis puts coal on top of the heap industry restructuring and renewal

Nine hundred metres below ground, an problem is the very high employment automated plough is crunching its way cost. Prime Minister Donald Tusk has horizontally across a coal seam at just said coal will remain Poland’s key Electricity Utilities need incentives to replace ageing generating facilities, writes Adam Easton Poland’s privately owned Lubelski fuel. It’s not a good idea to start Wegiel Bogdanka mine in Puchaczow, in cutting miners’ wages before elections, the southeast. Once extracted, the coal so there is deadlock.” oal remains the fuel of Powering up: a view of the hurtles away down a conveyor belt. Silesia’s mines employ more than choice to power Poland’s Belchatow power station, run There are only a handful of miners 110,000 people and successive Polish economy and, perhaps more by PGE, in central Poland Getty overseeing the operation. governments have concluded that surprisingly, to meet its The coal seams in the Lublin basin restructuring would be political suicide. requirements under the are almost all horizontal so, in 2010, Miners have also been hit by low- CEU’s climate regulations. “When we look at electricity price Bogdanka invested in the automated cost coal imports; it is cheaper to Burning hard coal and brown coal, forecasts for the next three to five system. It broke the world record in transport Russian coal to northern also known as lignite, are relatively years, we don’t see much chance of 2011 for daily longwall production – a Poland than Silesian coal. In addition, a cheap ways to produce electricity and them significantly exceeding 200 zlo- mining process whereby operators cut slowing economy has led to falling Poland has abundant reserves. About tys per megawatt hour. This price through the coal seam in slices. demand; as a result, stockpiles at 90 per cent of the country’s electricity level will not guarantee a return on This geological structure gives the collieries have reached record levels. is produced from these two fuels. your investment,” says Krzysztof highly mechanised Bogdanka a huge Silesian miners doubled their exports While this is cheap, the carbon emis- Zawadzki, Tauron’s chief financial advantage over the Upper Silesian in the first half of this year to reduce sions are high. officer. “In my opinion, introducing heartland of Polish coal mining. those stocks and the country may The EU’s climate policy, under mechanisms such as a capacity mar- Poland is Europe’s largest coal become a net exporter of coal in 2013 which Poland has committed to ket seems necessary. The question is producer, but output has been steadily for the first time in six years. reduce greenhouse gas emissions by what form will the model take.” declining from more than 178m tonnes However KW, Europe’s largest coal 14 per cent and increase energy con- Low prices and the economic crisis in 1980 to 78m tonnes last year. miner, made a net loss of 295m zlotys sumption from renewable sources by are hindering the government’s main However, Bogdanka is bucking that in the first three quarters of 2013. The 15 per cent by 2020, would apparently scheme to reduce coal’s dominant trend and plans to increase its output, company plans to reduce its 15 mines threaten king coal’s dominance. share in the fuel mix, namely building from between 8.4m and 8.6m tonnes to eight through mergers and lay off Poland could reduce emissions by Poland’s first two nuclear power this year to 12m tonnes in 2016, by about a third by building coal-fired plants. The cost is so huge that the investing 600m zlotys ($191m) a year. ‘We do have a power plants that are more efficient government is likely to have to subsi- Bogdanka is planning to eat into its serious problem and less polluting to replace old ones, dise it and provide first loss guaran- Silesian rivals’ market share to increase and it’s not according to Krzysztof Kilian, until tees to early investors. Many market its slice of the country’s thermal coal because our recently chief executive of PGE, the participants think this is unlikely in sales market from 14 to 20 per cent coal reserves country’s largest power company. Polish electricity the current climate. Gas is an expen- over three years. Polish miners have a are depleting Continuing to produce cheap electric- Production 2012, TWh (annual % change) Generation (TWh) sive alternative as Poland must captive market. In 2012, 58 per cent of rapidly’ ity from coal-fired plants will keep the import two-thirds of its needs and the the country’s electricity was produced Others economy competitive, he said. (-7% ) (+4%) 150 country’s shale gas reserves are com- by burning hard coal. About 90 per Natural cent of Bogdanka’s thermal coal administrative staff. Management has PGE’s flagship coal investment is gas mercially unviable for now. the construction of two 900MW units Poland is increasing renewable production is sold under long-term promised miners will not lose their jobs. at its hard coal-fired Opole plant at a Lignite- energy production, mainly with supply contracts to power plants. KW’s smaller rival KHW may end the cost of 9.4bn zlotys ($3bn). fired Hydro onshore wind farms, but growth has Zbigniew Stopa, Bogdanka’s chief year with a small profit as falling Hard The project has an eventful history. plants 100 stalled because of regulatory uncer- executive, says: “We’re talking about production is offset by increased sales coal-fired PGE shelved it in April, saying it was 55.6 Oil tainty. The government announced increasing volumes to clients with of premium coal grades. plants uneconomic to proceed because of low 84.5 more than two years ago that it was whom we already have contracts. We Silesia’s other big miner, the publicly electricity prices, down almost 20 per changing the state support system but also want new customers, not only listed Jastrzebska Spolka Weglowa, cent in the past two years, and weak Industrial 50 Coal/lignite plans have been changed and the from the energy sector, but chemical expects to break even this year, but Hydro-electric demand; energy consumption fell by plants* details are still not finalised, so companies too. We have increased this is primarily because its coal is plants 0.6 per cent in 2012 because of the 9 (-0.1%) investment decisions are on hold. sales to smaller clients and we’re mainly used in the production of coke, 2.3 (-11%) slowing economy. But the govern- Regulatory uncertainty deters for- seeking more individual customers.” a key ingredient in steel manufacture. Gas-fired plants ment railroaded the state-controlled Wind farms 3.95 (+41%) 4.5 (+3%) 0 eign companies. The US-based AES, a Bogdanka almost closed 20 years When economic times are good, JSW company into continuing, saying it worldwide developer of power-genera- ago because of low profitability, but the can sell more coal than it can produce. was essential for energy security. 1960 70 80 90 2000 12 tion projects, has not entered the mar- sale of non-productive assets and Mr Stopa believes there is potential Just under half of Poland’s power * Mostly hard coal-fired, producing solely for their own use Sources: PSE; OECD ket as expected. Denmark’s Dong and employee lay-offs have seen it generate for growth in the Polish market. generation plant is more than 30 years Spain’s Iberdrola pulled out, mainly to profits and increase production. Its “Poland’s production potential is old and will soon need replacing. The cut costs, but the uncertainty in the mining costs per tonne are 40 per cent sufficient to meet the needs of the crunch will come in 2016-17, when the Building hard coal-fired units with a investment in replacements. PGE and Polish market did not help. lower than state-owned Silesian whole energy sector. The problem in grid operator estimates there could be life of 40 or more years locks Poland Tauron, the second-biggest utility, Foreign investment in Polish power competitors, Kompania Weglowa and Polish mining is posed by the large power shortages at peak times into a long-term embrace with coal. If have applied to PSE, the grid opera- has been underwhelming because it Katowicki Holding Wegiel, whose mining companies, KW and KHW, which because utilities are not building emissions permits, which cost less tor, for payments to keep units open has remained state dominated and management has been reluctant to face serious restructuring problems. enough capacity to replace the units than €5 per tonne now, rose to €40 per in case they are needed in times of there has been little opportunity for restructure, because of strong trade “Efforts should be taken to remedy that are being retired. tonne – a figure used by Janusz Stein- limited supply. companies to obtain a large enough unions, while increasing salaries. these problems, but will those efforts PGE is sufficiently healthy to hoff, former economy minister, in an Both companies hope some form of slice of the market. Indeed, there has Pawel Puchalski, head of equity happen soon? Frankly speaking, it’s a finance Opole from its balance sheet. interview – coal would become much capacity market – under which utili- been something of a move to renation- research for BZ WBK Brokerage, says: political decision, because they are However, as a publicly listed company less competitive. ties would also be paid to build new alisation, with assets held by Dong, “Poland does have a serious problem state-owned companies.” that must answer to its shareholders, One solution is capacity payments capacity – will be created and that Iberdrola, and Vattenfall, Sweden’s and it’s not because coal reserves are it is analysing ways to increase its to allow utilities to keep unprofitable this will enable them to cover state-owned company, bought by depleting rapidly. Here and now, the Adam Easton rate of returns on the investment. units operating and to stimulate fixed costs for new investments too. Poland’s four state-controlled utilities.

Global investors seek to build on nation’s reputation for stability

Allianz, and the sale of the new supply is “a concern”, Property New City office complex in says Marty McCarthy, chief The growing interest Warsaw for €127m to Hines ‘The market is executive of Valad Europe, Global REIT, a real estate at the bottom an investment manager has reinvigorated investment trust. whose Polish portfolio The creation of a joint of the cycle, just includes retail and logistics activity, reports venture between developer properties. “We won’t go Andrew Kureth Prologis and Norges Bank ready to come up’ chasing after offices.” Investment Management, Other investors take a which runs Norway’s sover- more sanguine view, noting Poland’s commercial prop- eign wealth fund, included that Warsaw’s office market erty market is set to reach the sale of about 590,000 sq is shallow, at only about 4m €3bn in transaction volume m of logistics space in sq m, so new stock can this year, the highest level Poland. The official figure push up vacancy rates dis- since 2006, as international for the transaction was not proportionately. investors flock to the coun- disclosed, but has been esti- Economic growth is try looking to diversify mated at about €100m. expected to increase over their European portfolios. The money is coming the next few years and “Investors indicate that from around the globe. prime assets generally have Asian markets are over- German and US funds have little trouble attracting ten- heating and that they’ve been particularly active, ants, says Mr Brendgen. missed the opportunity in but Asian and Middle East In the retail sector, the US,” says Neil Gregory- investors’ interest is shopping centre saturation Eaves, head of investment increasing, too. Qatar Hold- remains below western services in eastern Europe ing bought a large class-A European levels – 435 sq m at Colliers International, office building in Warsaw per 1,000 residents in War- property advisers. “Now in 2011. One of the buyers saw. To fill the vacuum, they are looking to invest in the Silesia City Center three big centres with a in the European recovery.” deal was Chinese. total of nearly 1m sq m of Funds are satisfied with “There is even some con- retail space were con- their exposure in the main cern about overpricing,” structed this year. European markets of Ger- says Stefan Brendgen, chief Tenants continue to many, the UK and France, executive of Allianz Real absorb prime stock in and prefer Poland’s relative Estate Germany, which has expectation that retail sales economic and political sta- €600m allocated to Poland will keep growing. Louis bility to countries where for this year. Vuitton, the luxury retailer, there is more uncertainty, The growing investor opened its first Polish store such as Italy and Spain. interest has reinvigorated in Warsaw in June. Investment activity is development activity. Some Meanwhile, logistics prop- high. This year there may 600,000 sq m of office space erties are increasingly be as many as 60 large is under construction in popular. The sector transactions in the Polish Warsaw alone, though the accounted for as much as 17 market, compared with the vacancy rate remains rela- per cent of the total trans- typical 40-45 annually, says tively high, at about 10 per Big deal: the sale of Silesia action volume last year and Michal Cwiklinski, head of cent. City Center in Katowice was reached 16 per cent in the investment at property firm A potential rise in this year’s largest at €412m first half of this year, Savills in Warsaw. vacancy rates as a result of Getty according to Cushman & But supply is tight for the Wakefield, a property con- ultra-secure assets that the sultancy. big funds are looking for. This represents a rise on Most of Poland’s standing previous years, when logis- prime properties have been tics accounted for only sold in the past few years. about 6 per cent of transac- Competition for those tion volume. that remain has driven up Since 2009, logistics devel- prices, pushing yields to opers have eschewed specu- new post-2009 benchmark lative development alto- lows. They have already gether, opting instead for fallen below 7.5 per cent in built-to-suit schemes. the logistics market and As a result, there is not below 6 per cent in the much open space in the retail market, while the market, but rents are still benchmark yield in the low. However, that could office market is expected to change in the near future, fall below 6 per cent later as the rapidly growing this year. e-commerce sector drives The biggest property demand for warehouses. deals in Poland so far in Ben Bannatyne, manag- 2013 include the sale for ing director for central €412m of Silesia City Europe at Prologis, says: Center, a shopping mall in “The market is at the the southern city of Kato- bottom of the cycle, just wice, to a consortium led by ready to come up.”