DOCUMENT OF THE EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT STRATEGY FOR POLAND As approved by the Board of Directors at its meeting on 17 December 2013 TABLE OF CONTENTS EXECUTIVE SUMMARY ......................................................................................... 1 1. THE BANK'S PORTFOLIO ............................................................................. 3 1.1. Overview over Bank activities to date ........................................................... 3 1.2. Implementation of the previous Country Strategy ......................................... 4 1.3. Transition impact of the Bank's portfolio ...................................................... 7 2. OPERATIONAL ENVIRONMENT ................................................................. 9 2.1. Political context ............................................................................................. 9 2.2. Macroeconomic context ............................................................................... 10 2.3. Structural reform context ............................................................................. 11 2.4. Business environment .................................................................................. 13 2.5. Social context ............................................................................................... 14 2.6. Legal context ................................................................................................ 15 2.7. Energy efficiency and climate change context ............................................ 15 3. STRATEGIC ORIENTATIONS ..................................................................... 16 3.1. Promoting the low carbon economy ............................................................ 18 3.2. Enhancing the private sector’s role in the economy .................................... 20 3.3. Assisting in the development of a sustainable financial sector .................... 21 3.4. Environmental and social implications of the Bank’s proposed activities .. 23 4. ACCESS TO FINANCE ................................................................................... 23 4.1. Private sources of capital ............................................................................. 23 4.2. Cooperation with the European Union ........................................................ 25 4.3. MDB finance and collaboration with other IFIs .......................................... 26 Annex 1 – Political Assessment ................................................................................. 28 Annex 2 – Assessment of Transition Challenges ..................................................... 32 Annex 3 – Legal Transition ....................................................................................... 43 Annex 4 – Technical Cooperation ............................................................................ 47 Annex 5 – Selected Economic Indicators ................................................................. 48 Annex 6 – Gender Equality ....................................................................................... 49 EXECUTIVE SUMMARY Poland is committed to and applying the principles of multiparty democracy, pluralism and market economics in accordance with Article 1 of the Agreement Establishing the Bank. Poland is an advanced transition country which has made significant strides in developing a well-functioning market economy embedded in a stable and accountable democratic political regime. Poland implemented the body of European Union market regulation prior to its accession in 2004, and has subsequently benefited from integration into the EU internal market through substantial capital inflows and growing trade shares with the rest of the EU. Although the country came through the global financial and economic crisis without suffering a recession, Poland’s future growth path now appears less assured than in the immediate aftermath of that crisis. European financial markets still pose risks, as evident in the disruptions to bank ownership to which the Bank helped respond. While a reform agenda is underway, consistent implementation may prove difficult. Substantial EU funds will continue to flow to Poland in the coming seven year financial perspective; however, absorption will be largely dependent on the state’s capacity for mobilising off-budget co-financing. Important sectors of the Polish economy require further modernisation, evident in low energy efficiency and below EU-average private sector involvement. Further restructuring and privatisation in some industrial and infrastructure segments is also needed. In this context the Bank remains highly additional in a number of sectors, and its engagement has been focused on sectors with the highest transition value. The Bank has provided policy advice and support to important reform initiatives, in areas such as capital market development, privatisation and sustainable energy. While Poland is among the most advanced transition countries, transition gaps still remain. Furthermore, graduation has been delayed by the financial crisis. Poland remains committed to graduation which will constitute a recognition of its successful transition path to a well-functioning market economy and a good example for EBRD’s other countries of operation. The Bank’s priorities in Poland will be appropriately targeted to reflect this trajectory as well as the country’s systemic importance in Central Europe, including promoting trade and investment linkages with the rest of the region. Reforms successfully implemented here will have visibility and wider significance in other countries confronting similar challenges. Strategic directions As Poland is an advanced transition country, the Bank’s activities in the next Strategy period will be focused on a limited number of priorities, enabling it to provide support in those areas where transition challenges remain significant and where reforms can be deepened to improve energy efficiency, strengthen Poland’s competitiveness and expand its export potential. In the new Strategy period the Bank will focus its activities on the following cross-cutting challenges in Poland: 1 Promoting the low carbon economy. Coal still accounts for more than 80 per cent of Poland’s primary energy supply and the economy remains among the least energy efficient in the EU. Promoting low carbon solutions, energy efficiency and reduction of green-house gas (GHG) emissions will therefore remain a key strategic priority for the Bank’s operations over the coming years. The Bank will continue to support diversification of energy and fuel supplies (especially in renewable energy) and improving energy efficiency (both on the demand and supply side), together leading toward a more sustainable energy market in the country. Enhancing the private sector’s role in the economy. The Polish state continues to play a significant role in the economy, notably in the power, chemical, natural resources, transport and municipal sectors. Accelerating the implementation of the structural reform agenda is crucial to consolidate transition and support the recovery that has slowed markedly. The Polish authorities have acknowledged the need to push ahead with greater market liberalisation. Moving Poland toward a more resilient economic model built on private investment and productivity increases will also require more innovation, providing risk capital and corporate restructuring (operational and financial), and will include supporting Polish companies in their regional expansion and cross-border investments. Assisting in the development of a sustainable financial sector and capital markets. Although the banking system remained sound in the course of the crisis, a number of systemic vulnerabilities emerged, especially banks’ balance sheet mismatches, lack of sponsors liquidity support and the need for consolidation. In the current environment, high risk aversion by banks and deteriorating credit quality in the economy are leading to substantial financing constraints, in particular for small and medium sized companies and in the poorest regions. EBRD will assist in the development of a more sustainable financial sector by helping banks address crisis-inherited vulnerabilities and promoting the development of local currency capital markets in order to reduce the sector’s dependence on foreign financial inflows. To achieve these strategic priorities the Bank will work closely with other IFIs, commercial banks and other stakeholders to ensure the best use of EBRD funds. The Bank’s approach will be selective, driven by market demand for projects where it can demonstrate both additionality and strong transition potential. 2 1. THE BANK'S PORTFOLIO 1.1. Overview over Bank activities to date As at the end of June 2013 the Bank has signed a total of 314 projects with a Net Cumulative Business Volume of EUR 6,217 million. Approximately 40 per cent of the Bank’s investments were made in the corporate sector, 30 per cent in the financial institutions sector, 18 per cent in the energy sector and 13 per cent into the infrastructure sector. 138 projects representing EUR 1,984 million and 32 per cent of the Bank’s cumulative business volume were equity investments. Reflecting the Bank’s strategic focus on the development of the private sector, the private sector share was 83 per cent. The Bank portfolio at the end of June 2013 consisted of 118 operations totalling EUR 2,565 million. The portfolio is well diversified across sectors with the