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Military aimsto moderniseUpgrade plansdrive competitionfor contractsPage 3

PM fails togalvanise votersRivals put CivicPlatform partyunder pressurePage 5

TourismNation looks toshed its imageas the destinationof last resortPage 6

FT SPECIAL REPORT

PolandWednesday May 22 2013 www.ft.com/reports | twitter.com/ftreports

Four years ago, the Polish gov-ernment held triumphantpress conferences showing amap of Europe as a sea of redwith only Poland in green to

underline its status as the sole EUcountry whose economy was stillgrowing.

The atmosphere in Warsaw today isgrimmer as the economy stalls in linewith the rest of Europe. Polish excep-tionalism seems to be over. The coun-try is not experiencing outright reces-sion – the latest gross domestic prod-uct estimates show a negligible 0.4 percent expansion in the first quarter –but the lacklustre economy is exertinggrowing pressure on business andpolitics.

Donald Tusk, Poland’s longest serv-ing democratic prime minister afteralmost six years in power, is scrab-bling to hold together his governingcoalition and trying to stamp out

rebellions within his Civic Platformparty, while watching his poll rank-ings sag to the opposition’s level.

The country is still riding on theinternational recognition it gained bybucking the recession in 2009, attract-ing foreign direct investment as wellas continuing easily to place its gov-ernment debt – although the latter hasmore to do with a return of risk appe-tite among investors than any particu-lar merits of the national story.

The government is devoting most ofits attention to ensuring the economyemerges from the downturn and thatpublic finances improve, but there islittle sense of a wider plan as towhere the country should be goingover the medium to longer term.

“There seems to be a lack of visionof what to do with the economy,” saysMiroslaw Gronicki, a former financeminister. “The government does nothave a pro-development policy. We

spend a lot on social services butresearch and development is very lowand the situation with spending onuniversities is dramatic.”

The lack of direction can even beseen in EU matters, despite Polandconsistently being one of the mostenthusiastic members since joining in2004. Buffeted by its own economicwoes and worried about the continu-ing eurozone crisis, it has blown hotand cold over how fast to movetowards joining the euro.

Mr Tusk has said Poland shouldjoin “as soon as possible”. Jacek Ros-towski, the powerful finance minister,is more cautious, preferring to con-centrate on making the economymore flexible and competitive so thatPoland can benefit from being in theeuro in the same way that northernEuropean countries have.

“We should not rush into the euroat any price, but we should rush toprepare for accession,” he told arecent conference.

In domestic policy, Mr Tusk haslong shied away from politically divi-sive reforms, opting for improvementsat the margins. However, that has lefta growing number of unmet chal-lenges, such as pulling farmers intothe normal pension system instead ofa heavily subsidised separate scheme;encouraging improvements in lowlabour participation rates; boosting agross savings rate that, at 17 per centof GDP, is below rates in advancednorth European countries, and slash-ing red tape.

Failure to make progress in theseareas has real economic consequencesand is pulling down Poland’s long-term potential growth rate. Before thecrisis, Poland was able to grow stead-ily at more than 4 per cent a year.Now many economists think it cangrow at only about 2.5 per cent a year.

“There are growing doubts that a4 per cent tempo can be maintainedbecause there are too few reforms,”says Stanislaw Gomulka, a formerdeputy finance minister.

Poland has made progress in im-proving its business environment – itrose 19 places to 55th in the world inthis year’s Doing Business rankingsfrom the World Bank – but it still falls

Continued on Page 2Enthusiastic Europeans: young Poles at an annual Warsaw celebration in honourof Robert Schuman, a postwar architect of European unity AP

Sluggisheconomydemandsbold reformRecession remains at bay though the eurozonecrisis is taking its toll, says JanCienski

For more news,video andcomment onPoland, visitft.com/poland

On FT.com »

2 ★ FINANCIAL TIMES WEDNESDAY MAY 22 2013

behind many other EUnations, to the frustrationof business.

“Over 10 years we can seethe number of barriersgrowing instead of shrink-ing and unfortunately wecan already see that 2013will be no better in thatrespect,” said Lewiatan, theconfederation of Polishemployers, which puts outan annual “black list” ofobstructions to business.

Administrative delays arealso affecting the shale gassector, supposedly a govern-ment priority because itcould reduce Poland’s de-pendence on Russianenergy imports. Two com-panies pulled out of Polandthis month and gas indus-try insiders blame slownessin granting drilling permitsand creating a regulatoryand tax framework for thesector as some of the rea-sons why potential foreigninvestors are leaving.

For more than 20 yearsPoland has grown largelybecause of its skilled, cheapworkforce and the ability toimport technology, invest-ment and managementtechniques from moreadvanced economies. How-ever, that model is runningout of steam and Poland isstill a long way away frombeing able to generategrowth through innovation.

Spending on research anddevelopment is just below0.8 per cent of GDP, one ofthe lowest in the EU, andthe culture of venture capi-

tal and innovative start-upsis still in its infancy.

“We now need a secondgeneration of structural andinstitutional reforms totake growth to a new level,”says Nicholas Spiro ofconsultancy Spiro Sover-eign Strategy. He adds thatthe reforms needed wouldbe more difficult to imple-ment than those that fol-lowed the end of the com-munist era 24 years ago.

The pessimism can beoverdone. Poland is richerand more secure than atany time in its past. It is anincreasingly influential EUmember, and has forged aclose relationship with Ger-many, symbolised by theclose personal ties betweenMr Tusk and Angela Mer-kel, the German chancellor.

In a sign of the tangledpaths of central Europeanhistory, one of Mr Tusk’sgrandfathers was a con-script in the German armyin the second world war.One of Ms Merkel’s grandfa-thers served with the Polisharmy in the 1920 waragainst Soviet Russia.

The private sector hasbeen a success story inspite of bureaucratic hur-dles. Since the end of com-munism in 1989, entrepre-neurs have created growingcompanies making andexporting everything frombuses and software to cos-metics and coffins. Ger-many owes part of itsexport success from havingpart of its production chainin low-cost central Europe.

“Poland is like a 20-year-old,” says Jacek Siwicki,managing partner of Enter-prise Investors, one of theregion’s top private equityfunds. “It’s no longer ateenager with raging hor-mones but it is still a verypromising emerging mar-ket.”

The Polish private sectoremerged from a sharp slow-down in 2000-01 withrestructured companiesable to provide the countrywith a decade of solidgrowth.

There are hopes the cur-rent downturn will have asimilarly beneficial effect.

“I think the economy willstart to recover by the endof this year,” says LeszekCzarnecki, an entrepreneurwho has built the country’ssixth largest bank, GetinNoble Bank, in under a dec-ade. “It is not a question ofif, but rather of when therecovery comes.

““We still have a bit of acatch-up complex and weare still willing to workmuch harder than mostpeople in western Europe.”

Continued from Page 1

Sluggisheconomydemandsreform

‘We are still willingto work muchharder thanmost people inwestern Europe’

Poland

When Poland’s PresidentBronislaw Komorowskicelebrated Europe Day withFrench president FrançoisHollande on May 9, thePolish flag fluttered besidethe French tricolour alongthe Champs-Élysées.

The sight symbolised notjust Poland’s emerging alli-ance with France, but itsposition as an ardent Euro-pean integrationist. In adecade, it has shifted frombeing an aspiring EU mem-ber to one that has ambi-tions of a leadership role.

The goal is not unreason-able. Poland is the EU’ssixth-most populous coun-try and seventh-biggesteconomy (or sixth in termsof purchasing power par-ity). Its unbroken growththrough the financial crisishas increased its economicweight within the EU.

Nato and EU membershiphave also made Poland argu-ably more secure than everbefore and, as RadoslawSikorski, the foreign minis-ter, noted in an annualaddress to parliament thisyear, it has “never beenmore prosperous”.

But it faces a big obstacleto becoming part of the“core”: it is not in the euro,nor is it set to join soon.Warsaw dropped a 2012entry target when the glo-bal financial crisis struck.With eurozone states mov-ing towards greater integra-tion to prevent future cri-ses, Poland risks findingitself for some years in theEU slow lane, sidelinedfrom key decisions.

“There is a dilemma forforeign policy, over whetherit is sustainable to keep act-ing as a model European,and to want to be treated assuch, while at the sametime not actually commit-ting in strong termsto membership of theeurozone,” says MarcinZaborowski, director of the

Polish Institute of Interna-tional Affairs.

Partly to bolster its claimto be part of the EU core,Poland this year relauncheda debate on what it must doto get its economy in shapeto join the single currency.

“Even though we arealready a member state tobe reckoned with, to furtherboost our significance weshould be ready to adopt theeuro. But only in a way thatbolsters our economy,” MrSikorski told parliament.

There are, though, domes-tic hurdles to single cur-rency membership. WhileEU membership is highlypopular, with about 80 percent support, only 30 percent of Poles currentlyfavour embracing the euro.The country must alsochange its constitution.

So, seeking other ways ofbolstering its EU position,Poland has also forged thestrongest partnership in itshistory with its traditionalfoe, Germany. The coun-tries, says Mr Sikorski,“share a strategic vision . . .and see eye-to-eye when itcomes to finding a way outof the [economic] crisis”.

And since Mr Hollandecame to power, Poland hasbuilt an alliance withFrance, with which it agreeson the importance of forg-ing a strong European secu-rity and defence policy.

Indeed, sandwiched as itis between Germany andRussia, and more than oncein its history wiped off themap, Poland still has a moreacute sense of its security

needs than many of its westEuropean counterparts.

It has nurtured close rela-tions with neighbours Hun-gary, the Czech Republicand Slovakia in the Viseg-rad Group – and plans adefensive Visegrad battlegroup by 2015. “In Nato andin the EU we [in the Viseg-rad Group] often take thesame position and that isnoticed when four countriesspeak together on a singleissue,” says Tomasz Siemo-niak, the defence minister.

Poland has also madeefforts at reconciliation withRussia, though ties havebeen strained by disputesover the 2010 Smolensk aircrash that killed Lech Kac-zynski, the former presi-dent, and dozens of seniorPoles. Lingering distrust ofMoscow has led Poland tofoster security co-operationwith Nordic and Balticstates. This autumn it willhost the first Nato exerciseswith the Baltics to be heldon Polish territory.

Russia and neighbouringBelarus will, meanwhile,hold joint exercises in Octo-ber, called Zapad [West]2013. Alexander Lukash-enko, Belarus’s authoritar-ian leader, is deepening mil-itary co-operation with Mos-cow, with plans to deployRussian anti-missile batter-ies and even a Russian airbase.

That shows the limits toprogress in another initia-tive supported by Poland –the EU’s Eastern Partner-ship with former Sovietrepublics. The partnershipaims to draw Belarus,Ukraine, Moldova, Armenia,Azerbaijan and Georgia intopolitical and trade agree-ments with the EU. The EUhad hoped to sign such adeal with Poland’s big east-ern neighbour Ukraine thisNovember.

Officials including formerPolish President AleksanderKwasniewski and Mr Sikor-ski have spent considerableenergy trying to persuadeUkraine’s President ViktorYanukovich to make thepolitical reforms needed toget the agreement signed.Kiev, however, seems moreintent on playing the EUand Russia off against eachother than allying moreclosely with either.

Eyes remain on lead EUrole despite euro delaysForeign policy

Hold-up in currencymembership couldmeanWarsaw is leftout of key decisions,reports Neil Buckley

Sikorski: ‘We should beready to adopt the euro’

After defying gravity for solong, it was perhaps inevit-able that the Polish econ-omy would eventually fallback to earth. So far it has

had a soft landing not a crash.Since 2008, it has been by far the

EU’s best performer and is still theonly economy to have avoided anycontraction. Even now, most econo-mists are not forecasting it will gointo outright recession.

“Poland has been such an outper-former, if you look at the GDP level, itlooks like it is on a different conti-nent,” says Mateusz Szczurek, chiefeconomist for central and easternEurope at ING Bank Slaski.

The capital markets have alsoapplauded the country’s efforts toreduce a budget deficit that balloonedto 7.9 per cent in 2010. As Jacek Ros-towski, finance minister, tweetedrecently: “Yields on our 5-year bondsbroke another record: 2.55 per cent –half the rate a year ago. Proof of confi-dence in the Polish economy.”

Yields have been pushed down,however, by the European CentralBank and US Federal Reserve’sunconventional monetary policy thathas spurred large portfolio inflowsinto emerging markets includingPoland. The big question is how longthe slowdown will last. With flash fig-ures this month showing first-quarterGDP grew only 0.4 per cent year-on-year, there are concerns the weaknesscould persist.

The deceleration has had severalcauses. One was the end of the invest-ment boom stemming from Poland’sco-hosting of the Euro 2012 footballchampionship with Ukraine last June.

As investment weakened in the sec-ond half of 2012, the worsening euro-zone outlook damaged exports –though a relatively bigger domesticmarket makes Poland less severelyexposed than smaller neighbours suchas Hungary and the Czech republic.

Consumer spending growth alsofinally slowed, with real wageincreases failing to keep pace withinflation and unemployment edgingup to 14 per cent by March.

Witold Orlowski, chief economicadviser to PwC, says the situation isless alarming than when the globalfinancial crisis began five years ago.But he warns that Poland benefitsless from two factors that helped itride out the 2009 global recession.

One is zloty depreciation. A slide ofabout 20 per cent in the currency’svalue during the last crisis helpedkeep exports flowing.

This time, Poland still has a floatingexchange rate and the central bank isin an easing cycle. But the heavy port-folio inflows that have led to recordnon-resident ownership of Polishbonds are keeping the zloty firm.

Some economists are concernedabout the level of foreign ownership –and the danger that those flows couldquickly reverse if the economic cli-mate changes.

“I am getting a bit afraid that weare just seeing another bubble here,especially in the bond market – andthe government is aware of it,” saysRyszard Petru, president of theAssociation of Polish Economists.

The second factor is that Poland haslittle scope for fiscal stimulus. Lasttime, the budget deficit was allowedto mushroom from 1.9 per cent in 2007

to 2010’s 7.9 per cent, in what MrOrlowski calls a “typical Keynesianstimulus”. Thanks to slowing growth,the deficit overshot the government’s3.5 per cent target last year, coming inat 3.9 per cent, though it is still seenas being under control.

There is little scope to increase thedeficit, however, not just because ofEU and market pressure, but alsobecause government debt is only acouple of percentage points below aPolish legal threshold of 55 per cent ofGDP. Breaching that would triggerlegal obligations to reduce the deficit.

“We now look more like a westernEuropean country, because we havegot to deal with a major slowdown inGermany as our trading partner, withthe [export sector] not being sup-ported by the real exchange rate, andwith limited room for manoeuvre infiscal policy,” says Mr Orlowski.

The Polish central bank’s easingcycle may help boost consumer spend-ing. It trimmed its benchmark rate by25 basis points to a record low of 3 percent in early May after cuts of 1.5percentage points since November.

Poland remains heavily reliant on apick-up in the eurozone to boostexports, reduce unemployment andrestore confidence. Meanwhile, thegovernment is taking steps to supportinfrastructure spending. It will use

future privatisation revenues toincrease the capital of state-ownedBGK bank to enable it to supportstrategic investments.

Economists say the governmentmay also be able to create room forfurther stimulus by reform of its com-pulsory private pension funds, the so-called “second pillar” of the pensionsystem, shifting some contributionsback to the public sector. The govern-ment has begun pension reforms bygradually raising the retirement ageto 67 from 65 for men and 60 forwomen. It is anxious not to repeat themistakes of Hungary, which unnervedinvestors when it renationalised itscompulsory pillar in 2011. Warsaw’sstock exchange has underperformedin recent weeks because of worriesthat pension funds may have lessscope to invest in equities.

Some economists say the govern-ment should be tackling more ambi-tious structural reforms to enhancePoland’s competitiveness coming outof the slowdown. “What happenedwas that after the governmentincreased the retirement age, theystopped reforming,” says Mr Petru.

ING’s Mr Szczurek says Poland stillremains more competitive than mostof Europe. “That provides for an eas-ier recovery, once this domesticdemand situation eases.”

Europe’s bestperformer haslittle room forfiscal stimulusEconomyHopes of an export boost depend onrecovery in the eurozone, reportsNeil Buckley

‘I am getting a bitafraid that we arejust seeing anotherbubble here,especially in thebond market’

Ryszard Petru,President of the

Association of PolishEconomists

Ageing population:pension reformswill raise theretirement ageto 67 Alamy

FINANCIAL TIMES WEDNESDAY MAY 22 2013 ★ 3

Poland’s economicconferences are usually atime for business leadersand government officials tohobnob with their peerswithin the country andfrom near neighbours suchas the Czech Republic andGermany.

However, for this year’sEuropean EconomicCongress, held earlier inMay in Katowice,invitations were also sentto trade ministers fromacross Africa as part of adrive by JanuszPiechocinski, the economyminister, to increase thenumber of destinations forPolish exports.

“We need to look for newmarkets, new sources ofgrowth,” says MrPiechocinski, who is alsodeputy prime ministerand leader of the PolishPeople’s party, a juniormember of the governing

coalition. The value ofimports and exports withAfrica, which accounts forless than 1 per cent ofPolish foreign trade, hasgrown slowly from $2.2bnin 2007 to $2.5bn in 2011.

The search for marketsis bearing some fruit.Though the EU accountsfor about three quarters ofexports, the nation’s tradewith the bloc has beenstagnant and was basicallyflat in the first quartercompared with 2012. WithPolish first quarter exportsup 5.6 per cent in euroterms, almost all of thegain has come from tradewith emerging markets –which rose by more than30 per cent – and Russia,Ukraine and Belarus.

“Over the past year therehas been a reorientation.We have a very strongdynamic of increasingexports to less-traditionalmarkets,”thedeputyprimeminister

told the FT. Any signs ofeconomic revival arecrucial to the futureelectoral chances of MrPiechocinski’s party.Opinion polls show itssupport falling below the 5per cent needed to winseats in parliamentaryelections scheduled for2015.

Mr Piechocinski tookover the party six monthsago, ousting long-timeleader Waldemar Pawlak ina leadership vote.

He has shown no sign ofwanting to end his party’srelationship with the CivicPlatform party of DonaldTusk, prime minister. Thetwo have been in acoalition since 2007.

“It turns out that evenduring the European crisis,during global uncertainty,the same coalition wasable to hold on to itsposition,” Mr Piechocinskisays.

There are frictionswithin the coalition as MrPiechocinski attempts toincrease the party’svisibility before a run ofelections beginning withthat for the Europeanparliament next year.

The People’s party hasmost of its support insmaller towns and villages.Although it has longdeferred to Civic Platformin economic policy, theparty opposed a reform ofthe court system promotedby Mr Tusk, fearing theoutcry from towns thatwere likely to lose high-status courts in thereshuffle.

Mr Piechocinski’s MPsbroke ranks this monthwith the government andsupported the opposition inkilling the measure.

The party leader is alsocautious about reformingpart of the pension system,which may see obligatorytransfers to private pensionfunds shifted in part to thepublic retirement system.The result would lowerPoland’s public debt butcould cause an adversereaction in the financialmarkets, where pensionfunds are a steady sourceof investment.

“We aren’t talkingnonsense – we understandwhat [the funds] mean forsavings, what they meanfor long-term investment,for the stock market, foreconomic stability,” saysMr Piechocinski.

Despite this attempt tomaintain some sort ofnormality for the financialmarkets, the hoped-for

economic revivalremains elusive, andthe governmentcontinues to loseground in opinion polls.

As a result, MrPiechocinski’s task insecuring his party’sfuture seems to be at

least as difficult asPoland’s attempt

drastically toboost trade

links withAfrica.

Poland

Junior partnerfights to surviveNewsmaker

People’s party chiefJanusz Piechocinskineeds a poll boost,writes Jan Cienski

Jan CienskiWarsaw and Praguecorrespondent

Neil BuckleyEastern Europe editor

Adam EastonLiam NolanFT contributors

Adam JezardCommissioning editor

Andy MearsPicture editor

Steven BirdDesign

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‘Even duringglobal uncertainty,the same coalitionwas able to hold onto its position’

Poland has embarked on oneof the biggest defence spend-ing increases of any Natomember. The programmewas launched by Bronislaw

Komorowski, the president, in a sign-ing ceremony that symbolically tookplace not far from the Belarus border.

It was over that border that Belarusand Russia staged a joint war game in2009 called Zapad [West], which somereports suggest included a simulatedpre-emptive nuclear strike on Poland.The two countries, joined by otherex-Soviet republics, will hold anotherlarge exercise this autumn.

“Poland will be more secure andmore credible as an ally and a keycountry in our part of Europe, able todefend its own territory and able tohelp others,” Mr Komorowski saidduring the ceremony in April.

At a time when most Nato militarybudgets are under severe strainbecause of the economic crisis, Polandis undertaking a thorough modernisa-tion of its armed forces which isexpected to cost 140bn zlotys ($44bn)over the next decade. This hasattracted interest from defence con-tractors around the world.

“We are in the lead when it comesto the European Union,” says TomaszSiemoniak, the defence minister.“This is a programme that is notice-able from abroad.”

Poland spends 1.95 per cent of grossdomestic product on defence. Becauseits economy has coped better with thefinancial crisis than most Nato mem-bers, that means the total amount thecountry spends is rising steadily.

The programme also shifts empha-sis from spending on personnel toupgrading equipment. Until nowPoland has spent about 16 per cent ofits military budget on tanks, rocketsand guns but about a third will nowbe allocated to military hardware.

That will mean something of a revo-lution for the military. About 60 percent of the Polish armed forces’ equip-ment dates back to Soviet times,including MiG-29 and Su-22 fighters,as well as antiquated T-72 tanks.When the procurement programme iscomplete, about 70 to 80 per cent ofequipment will be modern.

The defence shopping list has 13key programmes, the most expensiveof which is building a short-range

missile defence system that will costanywhere from $5bn to $9bn, dwarf-ing the $3bn spent on acquiring USF-16 fighters – the previous recordoutlay for the Polish military.

The system will protect Polandagainst missiles not caught by the US-led missile defence system, which tar-gets medium and long-range rockets.One perceived threat is Russia’sIskander tactical missile system,which Moscow has threatened todeploy to its Kaliningrad region justnorth of Poland in response to USmissile defence plans.

Three consortiums are reportedlyvying for the contract, one of them ledby France’s MBDA. Israel’s Rafaelwith its David’s Sling system and theUS Patriot system built by Raytheonare its rivals. “So far it looks asthough the Israelis are in the lead,”says one senior defence consultant.

Other big programmes include

revamping the navy, which bought itslast new ship in 1985, and buying newhelicopters, transport planes,unmanned aerial “drones”, jet train-ers, armoured personnel carriers andmodernised tanks.

The key for Mr Siemoniak is thatPoland gets a big share of the con-struction of the military systems itplans to buy. “We very much wantthe production to take place in Polandand for there to be a real transfer oftechnology, not simply assembly,” hesays. “Whoever promises us a greatershare of the technology transfer andwork in Poland will be favoured.”

Mr Siemoniak will have to treadcarefully to avoid falling foul of EUdefence procurement regulations,which make it difficult openly tofavour domestic producers.

Yet one of the biggest winners fromthe defence programme is likely to beBumar, the state-owned military

equipment maker which controlsabout half of the Polish defence mar-ket. That share is expected to growwith the likely consolidation of mostof the rest of the defence industryunder Bumar’s umbrella.

“We will have a single very strongPolish defence contractor who will beable to take advantage of the situa-tion,” says Krzysztof Krystowski,Bumar’s chief executive. “I think wehave the same conviction as the min-istry of defence, that the defenceindustry is an integral part of a coun-try’s defence capabilities. The condi-tion of the industry is an element ofthe state’s security.”

Mr Krystowski expects Bumar’s rev-enues to double from 3bn zlotys nowto 6bn zlotys by 2018. “We intend togrow along with our market and wewant to use this opportunity to have agreater presence on internationalmarkets,” he says.

Military prepares for modernisationDefenceProgramme to upgrade ageing equipment drives competition for contracts, reports JanCienski

Cleared for take-off: funding for missile defence will soon dwarf the previous record military outlay of $3bn on US F-16 fighters Reuters

‘Poland willbe moresecureand morecredibleas a keycountry inour part ofEurope’

JanuszPiechocinski:friction incoalition

4 ★ FINANCIAL TIMES WEDNESDAY MAY 22 2013

Poland

Just a couple of years ago,Polish government officialswere optimisticallyspinning visions of thecountry becoming anenergy superpower,generating enough wealthfrom potentially hugereserves of shale gas tohelp lower public debt andeven to become a gasexporter.

The reality is turningout to be much moredifficult. Poland’s shaleexploration programmeremains stuck at a veryearly stage. Only about 10per cent of the test wellsthat are needed to assessthe scale of reserves havebeen drilled. Argumentsabout creating a newregulatory and taxstructure drag on andhave prompted someforeign companies thatrushed into Poland inrecent years to pull out.

“Polish resources couldbe attractive but theregulatory arrangementsmake it impossible toexplore on a low-riskbasis,” says Grzegorz Pytel,an energy expert with theSobieski institute, a Polishthink-tank.

ExxonMobil left Polandlast year. Canada’sTalisman and MarathonOil of the US decided topull out in early May.

“After an extensiveevaluation of thecompany’s explorationactivities in Poland andunsuccessful attempts tofind commercial levels ofhydrocarbons, MarathonOil has elected to concludeoperations in the country,”the company stated.

There are alsoaccusations that Polishregulators are making lifeuncomfortable for foreignenergy companies, hopingto keep most of the shaleindustry in the hands ofPolish companies.

The two leading Polishcompanies hunting forshale, PKN Orlen, arefiner, and PGNiG, theformer gas monopoly, areboth controlled by thestate.

US and Canadiancompanies have mostexpertise in extractiontechniques, pioneering themethod of liberating gastrapped in rock formationsdeep underground bypumping in high pressurewater to fracture the rock,hence the name: hydraulicfracturing or “fracking”.

Energy industry insidersaim particular criticism atPiotr Wozniak, the deputyenvironment minister andPoland’s chief geologist,who has become thecountry’s shale gas tsar.“He needs to be pro-industry, not just pro-Poland,” complains one.

Mr Wozniak rejects thecomplaint, insisting thatUS companies will betreated equally withEuropean ones, andpraising US technicalabilities.

Much industry criticismis directed at planned

legislation because it wouldcreate a government-ownednational minerals operatorthat would get anautomatic stake inconcessions. There areworries that taxation willbe too high and that theregulations do not takeinto account the expensiveand high-risk nature ofexploring for shale.

“There are a lot ofproblems with thelegislative framework,”says Agata Hinc, managingdirector of Polish think-tank DemosEuropa.

Despite the worries, MrWozniak is confident thatPoland will create a viableshale gas industry.

“We know where the gasis, we know where theshales occur – this ispurely an issue of money,”he says.

So far the governmenthas issued 109 explorationconcessions but just 43 testwells have been drilled,providing too little data toget an accurate sense ofPoland’s reserves and ofthe cost involved inextracting it.

Questions also arise overexpenditure needed forexploration. It costs morethan $15m to drill a singletest well, while billionswill be needed to build theproduction and distributioninfrastructure.

The government ispushing state-controlledcompanies such as KGHM,

the copper miner, whichhas no energy expertise, toget involved financially.Furthermore, thegovernment is creating aninvestment vehicle thatwill put money into biginfrastructure projects,including shale.

Although the road toextracting shale has turnedout to be complicated,much enthusiasm remainsabout Poland’s potential.

The US EnergyInformation Administrationset off Poland’s shalefrenzy in 2011 when itestimated that the countryhad possible reserves of5.3tn cubic metres, thebiggest in Europe.

More recent estimates bythe Polish geologicalinstitute have been moreconservative, suggestingthat shale gas reservesmay be in the range of346bn to 768bn cubicmetres.

“We need to do a lotmore exploration butenough wells have beendrilled to be certain thatthis is a gas-rich area,”says John Buggenhagen,exploration director forSan Leon Energy, whichtook over Talisman’sPolish concessions whenthat company pulled out.

If there are commerciallyviable quantities of gas,they could significantlychange Poland’srelationship with Russia.Poland currently importsabout two-thirds of the17bn cubic metres of gas ituses every year, most ofthat from Russia.

Pressure risesin search forshale gasEnergy

Slow explorationprogress andregulatory rowsdeflate early hopes,writes Jan Cienski

‘We know wherethe gas is, we knowwhere the shalesoccur – this is onlyan issue of money’

Growth in Poland’s boom-ing wind energy industry isexpected to slow this year,as developers hold off oninvestment decisionsbecause of uncertainty overa proposed green law.

Poland’s government saidtwo-and-a-half years ago itwas going to change thesupport system for suchprojects by writing a dedi-cated renewable energylaw. Industry lobbying anddisagreements between

three ministries have led todifferent draft versions ofthe law appearing, leavingdevelopers uncertain aboutwhat support they willreceive. As a result, banksare reluctant to agree loansfor projects.

“Investment in new windprojects has slowed down,”says Arkadiusz Sekscinski,vice-president of the Polishwind energy association(PWEA). “In 2012, 880MW ofnew wind energy capacitywas connected to the grid.This year I would say itmight be half that because,right now, it is almostimpossible to find financingfor new projects.”

In the first quarter of thisyear, 148MW, or 6 per cent,more wind capacity wasconnected. However, invest-ment decisions for theseprojects were typically

taken more than 18 months’before projects came online.

The ministry of the econ-omy is writing a renewableenergy law to implement anEU directive that sets thecountry a target of produc-ing 15 per cent of its finalenergy consumption fromrenewable sources by 2020.

Poland has the EU’s larg-est coal reserves and pro-duces more than 90 per centof its electricity in heavilypolluting power stationsfuelled by lignite and hardcoal. Renewable energy con-tributes 4 per cent of powergeneration.

In April, Donald Tusk,Poland’s prime minister,said the EU target would beachieved in a way thatwould not cause electricityprices to rise steeply. Thatmeans reduced support for

expensive renewable energyand continued reliance onrelatively cheap coal.

Wind energy has drivenPoland’s growth in renewa-bles. It already accounts formore than half of the coun-try’s renewable energy andits capacity has grown 30-fold since 2005. Poland hasjust 2.6GW of installed windcapacity, while neighbour-ing Germany, which hassimilar wind conditions,has more than 10 timesthat.

There are signs thatgrowth is slowing. WhenDong, the Danish energycompany, sold its Polishwind assets for around 1bnzloty ($315m) in February atleast one foreign investordecided not to bid becauseof the regulatory confusion.

The government pub-lished its first proposals in

December 2011. Thosechanged substantially withthe second set of proposalsin April 2012. A furtherdraft appeared in July andanother in October. The lawwas supposed to be passedin January but 2014 seemsmore likely.

Rafal Hajduk, a partner atinternational lawyers Nor-ton Rose, says the delaysraise doubts for investors.“It worsens the perceptionof Poland as a place toinvest. It creates a negativeperception of the Polish reg-ulatory regime.”

The uncertainty hasaffected a significant sourceof income for renewableenergy projects: the price oftradable green certificates.Renewable energy produc-ers receive one green certif-icate for every megawatthour of electricity that they

produce. Poland’s powerutilities are required to buya quota of green certificatesannually or pay a substitu-tion fee. Renewable energyproducers generate cash byselling the property rightsto their certificates on themarket or direct to utilities.

Market participants wereexpecting that the law

would resolve the largeoversupply of green certifi-cates. The repeated delayscaused a panic in January,resulting in the certificates’price tumbling by 30 percent. They have reboundedsomewhat since but themarket remains volatile.

The medium-term outlookfor the Polish wind sector

remains positive, how-ever.Iberdrola, the Spanishenergy company, sold itsPolish wind assets recently.The fact that PGE andEnerga, the Polish state-controlled power utilities,bought both Dong and Iber-drola’s existing and plannedprojects suggests the newlaw will not harm investors.

The PWEA says the gov-ernment’s approval of thefinal draft of the law wouldact as a positive signal tothe market that a stableregulatory framework willsoon be in place.

The government says thecountry should have morethan 6GW of wind capacityconnected to the grid by2020.

Despite the currentinvestment lull, the PWEAsays achieving that targetwill not be a problem.

Investors await legislation details to see which way the wind blows

EU membership has been ahuge success for Poland.Its significance has beentransformational,anchoring the country’smodernisation process andopening new markets. Suchhas been Poland’s sense ofachievement that its policymakers have joked thatthey invented a newspecies – a happy farmer.

For a long time, Polandseemed to be insulatedfrom the eurozone crisis.Its economy has grown bya cumulative 18 per centsince 2008. Attitudes toEurope remainedcorrespondingly positiveand it is only this year,when the slowdown finallyarrived, that Poles becamemore sceptical about the

EU, although they stilloverwhelmingly support it.

Poland was caughtoutside the eurozone in atype of sequencing trap. In2005, when an opportunityexisted, it coincided with ayear-and-a-half-long rule bythe eurosceptic Law andJustice party, which madeantagonising Poland’s EUpartners into a sport. Theirsuccessors, under currentprime minister DonaldTusk, announced a fast-track euro entry strategytwo weeks before LehmanBrothers collapsed inSeptember 2008. Theproject has been on iceever since.

Still, the logic ofPoland’s European policysince 1989 points toeventual eurozonemembership. Warsaw hasalways wanted to be at theheart of Europe, mostly for

geopolitical reasons, as itis the EU’s eastern frontierstate. Drawing attention tothis, Jacek Rostowski, thefinance minister, told theparliament in Februarythat if the UK had beenwhere Poland was, itwould have signed thefiscal compact and knockedon the eurozone’s door.

Unlike the UK, Poland isuneasy remaining outsidethe eurozone. It is paranoidabout having to adaptwithout the right to shapedecisions. Relying on itsclose relationship withGermany, it has been ableto influence much of thereform of the eurozonearchitecture in areas ofconcern to it, mostrecently the bankingunion. The strategy fornow is to closely shadowthe eurozone until joiningbecomes an option.

Poland’s transformedrelationship with Germanyis nothing short of amiracle. It is only a fewyears ago that distrustruled. This has now beenreplaced by a cosyrelationship between thecountries leaders and tightpolicy co-ordination. Moststrikingly, Poland andGermany are now on thesame wavelength aboutRussia where there used to

be a massive divide.Neal Ascherson, a British

journalist and writer, oncecalled on Poland “to bedifficult” when it joinedthe EU in 2004. Andindeed, for the first twoyears, trying to shoot downkey provisions of the thenconstitutional treaty on thevoting rights, it was.Although happily in themainstream on importantissues now, Poland has noproblem expressing itsopposition to EU policywhen it disagrees stronglywith it. Warsaw continuesto veto the more ambitiousEU emission reductiontargets on the grounds ofeconomic rationality andthe need to preserve thecompetitiveness ofEuropean industry.

Entertaining a web ofalliances inside the EU,including with the Weimar

triangle with Germany andFrance and the regionalVisegrad group, Poland hasput all its eggs in the EUbasket. It is a greatbeliever in the “old”Europe – one based onsolidarity and the singlemarket. It dreams ofmaking this strategic byfederalising EU foreignpolicy and developing athirst for global power inEuropean capitals.

Before that happens,Poland’s entire geopoliticalidentity is tied to thesurvival of the Europeanproject. This meansWarsaw will fight for thesuccess of the EU’s post-crisis reconstruction. Itwill do so hand-in-handwith Berlin.

The writer is president ofDemosEuropa, a Warsaw-based think-tank

Firmbeliever in Europe puts eggs in one basket

It has been a bruising year so farfor the image of Polish food prod-ucts. In January, Mette Gjerskov,Denmark’s minister for agricul-ture, angered Polish exporters and

officials when she tweeted thatimporting more Polish food productswould mean “more pesticides, badanimal husbandry and less pay”.

In February, following the discoveryof horse DNA in beef products for theIrish market, Simon Coveney, Ire-land’s minister for agriculture, namedPolish meat suppliers as the source ofthe problem.

All of this vexed Stanislaw Kale-mba, Poland’s minister for agricul-ture. “There should never be a situa-tion in the EU where one memberstate makes charges against anotherone without enough evidence. Thecharges are detrimental to the imageof this country,” he said at the time ofthe Europe-wide scandal.

Mr Kalemba’s latest run-in was withhis Czech counterpart, Petr Bendl,who in April said Poland shouldimprove quality control checks onfood exports. The two ministers heldtalks in Prague on May 6 and issued ajoint statement on future co-operationin an effort to defuse the dispute.

Mr Kalemba’s trenchant defence ofthe Polish agri-food sector – whichemploys about 400,000 people – is easyto understand. Food exports, valuedat €17.48bn in 2012, account for12.3 per cent of the country’s overall

foreign sales and have been climbingevery year since Poland’s accession tothe EU in 2004, when food exportsamounted to €5.2bn.

The country’s €870m beef exportmarket, which accounts for about80 per cent of beef production, hasbeen hit. “There has been a noticeabledecline in demand for Polish beefafter the media’s interest in this proc-ess [adulteration with horse meat]even though, by all appearances,Polish companies have been cheated,”says Jerzy Wierzbicki, president of thePolish beef association. He adds thatthe current price of beef exports is4 per cent lower than in May 2012 andthat slaughterhouses have complainedof weakening demand.

UK-based research group BusinessMonitor International estimates in itsPoland Food & Drink Report 2013,that high grain prices may also affectbeef production. “We forecast [Polish]beef production growth tostall . . . limiting the country’s exportpotential out to 2016-17,” says the BMIreport. “In fact, we now forecastbeef production growth to average2 per cent annually after 2013-14,

down from 3.5 per cent forecast previ-ously.”

Poland’s general veterinary inspec-torate (GIW) is responsible for findingthe source of horse meat adulterationin exported beef products. At the endof February, it announced that testson warehouses had revealed threepositive samples of equine DNA froma total of 121 sample tests. Threemonths later, GIW is still investigat-ing and has not yet released thenames of the three companies thattested positive.

Warsaw’s Institute of Agriculturaland Food Economics (IAFE-NRI) fore-casts that the value of agri-foodexports in 2013 will increase further to€18.3bn, a 4 per cent rise on 2012.Expenditure on imports, says the insti-tute, may grow by less than 1 per centto €13.4bn, leaving the exchequer witha tidy surplus of €4.8bn. Last year’ssurplus was a record €4.2bn.

Wieslaw Lopaciuk, a seniorresearcher at IAFE-NRI, shrugs offsuggestions that the scandal affectedthe performance of food exports ingeneral as “press noise” and says itwill have a “marginal effect” onyearly beef exports.

On the Warsaw stock exchange, thehorse meat saga has not tainted theperformance of listed Polish food com-panies, whose annual revenues aver-age 100-300m zloty (€24m-€72m).

“The export market is not a domi-nant driver in the food industry,” says

Monika Kalwasinska, analyst withWarsaw-based DM PKO Bank Polski.She does not forecast a worsening offinancial performance this year butsays small- to medium-sized Polishcompanies that try to increase theirpresence in foreign markets face prob-lems scaling up their operations.

Despite Poles’ penchant for pork –they consume 42kg per person peryear compared to 2.3kg of beef – thepig sector is deteriorating after twounprofitable years. The trend is likelyto continue in 2013 as many small-scale producers have been unable tocope with higher grain prices.

According to the ministry ofagriculture, the pig population dwin-dled by 12.4 per cent in 2012, becauseof continuing high cereal prices. Thisled to an increase in the importof piglets, which are then fed forslaughter.

At present, EU countries buy 78 percent of Polish agri-food exports withGermany alone importing 20 per cent.Polish exporters seek new markets tothe east with Chinese imports ofPolish meat jumping from an averageof €319,500 in the first six months of2012 to €6.77m per month by Novem-ber and December.

The image of Polish meat may havebeen damaged in recent months bythe European horse meat scandal butit appears its impact on the perform-ance of the country’s wider agri-foodsector remains limited.

Exports of foodremain healthyin spite ofscandal-hit beef

Agriculture Sector insists that fallout from thehorsemeat controversy has not caused damageon a broad scale, writesLiamNolan

Stalled: scandaland grain pricesaffect beefproduction AP

‘An EU member should notaccuse another withoutenough evidence’

Renewables

Confusion overfuture subsidies ismaking it hard tofind project finance,says Adam Easton

Poland’s installed wind energy capacity

Source: URE (Polish Energy Regulator) *Q1

MW

0

1000

2000

3000

2005 06 07 08 09 10 11 12 2013*

View PointPAWEL SWIEBODA

Pawel Swieboda

FINANCIAL TIMES WEDNESDAY MAY 22 2013 ★ 5

Poland

For Modest Amaro(pictured), the issue is notthat his native cuisine has abad reputation. It just doesnot have one at all.The owner and head chef

of the Warsaw’s AtelierAmaro, the first Polishrestaurant to beawarded a prestigiousMichelin star, is tryingto change that.When he worked

abroad he was alwaysasked aboutPolish cuisineand herealised itsdishescould notcomparewithFrenchor Italianones butit had anabundance of

flavoursome ingredients. Thecountry is the fifth-largestproducer of wild herbs andflowers and almost a third ofits territory is covered inforest.At a table in his 30-seat

restaurant, decorated inunderstated brown andgreys and overlooking aWarsaw park, he saysPolish cuisine was atasty mix of Russian,German, Jewish, Italian

and Frenchinfluences, butundercommunismit becamestodgy.At first

he turnedto 15th and

16th centuryrecipes. Hedid notchange the

ingredients but cooked themdifferently, for example atlower temperatures.Mr Amaro regularly

forages for ingredients in thecountryside and he set aboutcreating new dishes basedon natural areas, such aslakes, seas, rivers, forests,fields, farms and mountains.He created a mushroomsoup based on forestflavours that British chef andwriter Nigel Slater told himwas the best he had evereaten. It is a successfulformula as the restaurant isfully booked for at leastthree months in advance.

Atelier Amaro,ul. Agrykola 1Phone +48 22 628 57 47mobile +48 607 97 00 00.Email: heart@atelieramaro.pl

Adam Easton

Cuisine Chef aims to put national flavours on world’s top table

Polish banking recorded arecord net profit in 2012.However, with the economyslowing, commercial andretail borrowers skittishover acquiring more debtand banks cautious aboutlending, it appears likelythat the result for 2013 willfall short of last year’s16.2bn zlotys ($5.1bn).

“In this phase it is obvi-ous that banks are underpressure when it comes toprofits,” says LuigiLovaglio, chief executive ofBank Pekao, Poland’ssecond largest lender and aunit of Italy’s UniCredit.“At the moment there is ageneral consensus this yearwill see a fall in profits of10-15 per cent, volumes willnot be growing and in thebest case lending may growby 3 per cent, largely due toindividual borrowers as thecorporate sector will con-tinue to show negativeeffects when it comes tovolume growth.”

While profits may fallslightly, banks are continu-ing to strengthen their bal-ance sheets, preparing for aresumption in growth inthe likely case the economyshows greater signs of lifeby the end of the year.

Banking is undergoing aslow improvement in itsoverall loan-to-deposit ratio,which is now 111 per cent,down from 113 per cent in

late 2009. This is reducingthe need for local banks toseek funding outside thecountry.

They are cleaning up thelegacy of foreign currencylending which was particu-larly prevalent during thereal estate boom precedingthe start of the economiccrisis in late 2008. GetinNoble bank, the country’ssixth-largest by assets, wasan enthusiastic lender inSwiss francs and has seen amarked improvement in itsbooks.

Swiss franc loans madeup about 70 per cent of thebank’s portfolio in 2009,while such loans are now

only 30 per cent of out-standing loans, and no newloans are being issued.

“There were deep prob-lems with that portfolio,”says Leszek Czarnecki,head of the bank’s supervi-sory board. “Every year weare making a reduction inwrite-offs, which has a posi-tive impact on our bottomline.”

The bank has a loan-to-de-posit ratio of 82 per cent.After acquiring two smallerbanks, the Polish opera-tions of Germany’s Dexiaand the retail arm of Nor-way’s DNB Nord, it expectsto increase profits in 2013.

“This year will be betterthan 2012,” says Mr Czar-necki.

The past few years havebeen a time of growing con-solidation in Polish bank-ing, as institutions ownedby groups that have gotinto trouble in their homemarkets sell their Polishsubsidiaries.

In recent years suchtransactions included AlliedIrish Banks and Belgium’sKBC, both of which soldtheir local operations toSpain’s Santander.

Although there are notexpected to be many morelarge transactions, midsizeduniversal banks will con-tinue to feel pressurebecause of the slowingeconomy, says KrzysztofPietraszkiewicz, head of thePolish bank association.

Poland’s banks are wellbuttressed in case of furthershocks. The sector has atier one capital ratio, a com-mon measure of a bank’ssecurity, of 13.8 per cent,well above that of mostother European countries.

However, despite beingwell-capitalised and liquid,banks are still reluctant tolend, despite steps by thebanking regulator to loosensome of the restrictionsimposed after the start ofthe crisis.

A recent survey by thecentral bank found that amajority of banks are stilltightening lending require-ments, especially for smalland medium-sized compa-nies.

“Expectations for thecorporate sector are veryweak – we even predict anegative trend in thatsector,” says Mr Lovaglio.

Banks boost reservesand hold back on loansFinancial services

Jan Cienski findsthat recent yearshave been a time ofconsolidation

‘There is a generalconsensus thatthere will be a fallof 10-15 per cent inprofits this year’

In recent weeks Donald Tusk hasfired two important ministers,become embroiled in a fight withhis junior coalition partner, dealtwith an internal revolt by

conservative party members andalienated a growing number of liberaleconomists. Such are the signs of thePolish premier’s growing difficultiesas he nears the end of his sixth yearin power.

Mr Tusk’s Civic Platform party isbeing buffeted by the country’seconomic fortunes – growth of justover 1 per cent and unemployment of14.3 per cent is sapping voter enthusi-asm – and his party is losing supportin the opinion polls.

After winning 39 per cent of thevote in 2011 parliamentary elections,Civic Platform is neck-and-neck withthe rightwing opposition Law andJustice party at about 30 per cent,according to a recent survey.

Mr Tusk’s troubles are mirroredacross Polish politics. Law and Justicehas been unable to break into thepolitical centre, largely because itsleader, Jaroslaw Kaczynski, and othersenior party members cling to the out-landish idea that the 2010 air crashthat killed Poland’s president, whoalso happened to be Mr Kaczynski’stwin brother, Lech, was a coup, not anaccident.

A government investigation showedthat the crash was caused by under-trained pilots attempting to land theirairliner in a dense fog at a decrepitRussian military airport in Smolensk.However, an investigative committeeheaded by charismatic parliamentar-ian Antoni Macierewicz and staffedwith experts in areas such as civilengineering, medicine, underwaterwelding and other specialismsthat have little to do with air disas-ters insists the Tu-154 airliner was

brought down by a series of explo-sions.

Mr Kaczynski has also had to putdown several party revolts that haveseen many Law and Justice MPs tryto set up splinter parties, so far with-out much opinion poll success.

The political left is also in trouble.There the ex-communist DemocraticLeft Alliance, led by former premierLeszek Miller, is fighting for leader-ship with the forces of Janusz Palikot,a businessman who abandoned CivicPlatform to set up his own eponymousparty running on a platform of druglegalisation, gay rights and economicliberalism.

“We have a crisis encompassing thewhole political spectrum whichstrengthens Tusk as it does not allowfor any likely alternative to CivicPlatform,” said Aleksander Smolar,head of the Stefan Batory Foundation,a Polish political think-tank. “Still

that does not mean [Civic Platform] isguaranteed to win the next election.”

Mr Tusk won the 2011 election inpart because he was able to persuadecentrist voters of the danger of allow-ing Mr Kaczynski to return to power.Law and Justice ruled from 2005-2007using many of the same democrati-cally questionable methods employedby Hungary’s Viktor Orban, such aspoliticising the justice system andfilling media and government institu-tions with loyalists.

The strategy of scaring thepublic with Mr Kaczynski is startingto wear thin, especially as the latterlimits his public appearances.

Mr Tusk has failed to galvanise vot-ers with a long-term goal for the coun-try. In his first term in office the gov-ernment pushed through a change tothe pension system but now it isfocused on pulling the countrythrough the economic slowdown and

not causing stress for the electoratewith uncomfortable reforms. It is alsoincreasingly difficult for Civic Plat-form simply to hope that an eventualrebound in the economy will changeits fortunes.

The government’s reputation foruncharismatic competence is now tar-nished. The treasury minister, MikolajBudzanowski, was fired after beingunaware of unauthorised Polish-Russian talks over expanding gaspipelines. Mr Tusk removedJaroslaw Gowin, the justice ministerand leader of Civic Platform’sconservative wing, after several ideo-logical battles, for instance over anattempt to push through a civil part-nership law aimed at heterosexualand homosexual couples.

Economic liberals are increasinglydisheartened with Mr Tusk’s caution,and with his government’s lacklustreattempts to reduce the red tape that

hampers business. Other problems,such as growing delays in buildinglong-promised highways, annoy vot-ers. Mr Tusk single-handedly turnedaround the 2011 election by venturingacross Poland in his Tuskobus (a busnamed after him), and using his low-key charm to woo voters.

That will prove to be much moredifficult in the rush of coming elec-tions – to the European parliamentnext year, followed by local govern-ment elections and then parliamen-tary and presidential polls in 2015.

For now, Mr Tusk’s greatest assetsare his unpalatable opponents.

“I’m not thrilled with what Tusk isdoing, but I’m still going to end upvoting for Civic Platform,” saidStanislaw Gomulka, an economist andformer deputy finance minister who issceptical about the government’s eco-nomic policies. “Kaczynski’s existencejustifies Tusk’s policies.”

Unpalatablerivals proveto be Tusk’sbiggest assets

PoliticsPrimeminister has failed to galvanisevoters with his policies, writes JanCienski Mixed fortunes: Donald Tusk’s Civic Platform party is neck-and-neck in the polls with the rightwing opposition Law and Justice party at about 30 per cent Getty

6 ★ FINANCIAL TIMES WEDNESDAY MAY 22 2013

Poland

Everybody makes mistakes,even successfulbusinessmen, but whenthey blunder theconsequences can beenormous – as JerzyWisniewski, founder of oneof Poland’s leadingconstruction companies, isfinding out.

Mr Wisniewski’scompany, PBG, is fightingfor its life and being forcedinto a restructuring afterbanks cut off credit.

The company is trying tonegotiate a compromisewith bond-holders and isinvolved in costly disputesover highway and stadiumconstruction deals.

“I wasn’t as careful as Ishould have been. I shouldhave known the marketbetter,” says a chastenedMr Wisniewski.

Mr Wisniewski embarkedon his adventure inbusiness in the late 1980salong with hundreds ofthousands of others whograbbed the opportunityoffered by the collapse ofcommunism in 1989 tobuild companies.

In Mr Wisniewski’s case,that meant going into thegas business. He was anengineer who worked forthe state gas monopoly inthe city of Poznan. Likemany others in the 1980s,he supplemented hisridiculously low wages byworking abroad – in hiscase picking grapes inFrance.

“It was humiliating,” hesays. “I had a responsiblejob in Poland. It made nosense – one day of workingas a grape picker earnedme as much as two weeksof work as an engineer.”

In 1994 he ended upusing the proceeds fromhis grape picking, as wellas his wife’s and parents’assets, to take a bank loan.He bought specialised gasequipment in the US,unknown in his countryand much more efficient,which he sold on to thegas monopoly.

He quickly branched outinto contracting, gettinginvolved in ever larger gasand pipeline projects.When Poland joined theEU in 2004 there was amassive inflow ofstructural funds and hebroadened the business toinclude water andsewerage projects to takeadvantage of a

countrywide upgrade ofdilapidated municipalinfrastructure that did notmeet EU standards.

A few years later he tookthe plunge into highwayconstruction and other bigcivil engineering projectsas Poland finally beganbuild modern highways. In2009 and 2010 thegovernment road buildingagency opened 140 tendersworth 70bn zlotys ($22bn);in 2004, the agency hadinvested just 6.2bn zlotys.

“It seemed a one-waybet,” says Mr Wisniewski,whose company ended upwinning 3.7bn zlotys worthof road projects. “Therewas a danger of losing thatmarket if I didn’t jump in.”

His vision was to followin the tracks of Spanishconstruction giants such asFerrovial and use thePolish road constructionprogramme to become aglobal company. OtherPolish businesses had thesame idea.

But instead of goingglobal, Poland’s entireconstruction sector hasbeen brought to its knees.

In a race to wincontracts, constructioncompanies underbid eachother, counting on the roadbuilding agency to beflexible in case they raninto trouble.

However, as asphalt,steel and fuel costs soared,the agency took a toughline and refused torenegotiate prices.

The result was a cashsqueeze that led tofinancially stressedcontractors walking awayfrom half-completedprojects. “The governmentis focused much more onsticking to its budget andless on the final result,”says Mr Wisniewski.

A report by Ernst &Young, the consultancy,spells out the scale ofdamage. Poland’s fourbiggest building companies,PBG, Polimex, Budimexand Mostostal Warszawaare losing cash hand overfist.

Only Budimex (thePolish subsidiary of Spain’sFerrovial Agromán)managed to make a smallprofit last year, while allfour together had anegative cash flow ofalmost 2bn zlotys for 2011and the first nine monthsof 2012. Most midsizedcompanies are also losingmoney.

PBG tried its hand atbuilding stadiums,undertaking to build threeof the four venues used inlast year’s Europeanfootball championships.The stadiums were allfinished on time but thecompany is locked in a400m zlotys dispute overthe national stadium inWarsaw.

“I will hazard a guessthat the national team willnever win there until I’mpaid,” says a rueful MrWisniewski.

PBG last year posted aloss of 2.85bn zlotys onrevenues of 1.84bn zlotysand has seen its shareprice plummet by 98 percent over the past twoyears, from 150 zlotys ashare to 2.89 zlotys.

Mr Wisniewski is tryingto rebuild his company andrepay his debts byreturning to the energybusiness.

“I made a decision tostep back and retreat backto gas and energyprojects,” he says. “All I’mleft with from our roadsand stadiums are disputesand memories.”

Sour deals that broughtroad builder to its kneesProfileJerzy Wisniewski

The PBG founderadmits to JanCienski he shouldhave taken more care

Own goal: Wisniewski’s company is in a dispute over thebuilding of the national football stadium in Warsaw

Miles of golden sandybeaches, snowy moun-tains, dense pine forestsand beautiful, historiccities are not the first

things many people associate withPoland.

Indeed, surveys conducted for thePolish tourist organisation (POT)have found that the French, Germansand British tend to think of greyness,cold weather and dilapidated roads.

Changing tourists’ perception of thenation of 38m is a big challenge.“Our first target was to make Polandbetter known,” says Elzbieta Wasow-icz-Zaborek, POT vice-president. “Itused to be that we had to tell peoplewhere Poland was. Now, when wevisit trade fairs, nobody asks us thisany more, and that’s changed duringthe past five years.”

Poland ranked 11th in Europe in2011 in terms of the number of visitorsaccording to the World TourismOrganisation, above smaller but morerecognised tourist destinations suchas Croatia, the Czech Republic andSwitzerland. While business trips

remain the leading reason peoplevisit, more tourists are coming. Lastyear arrivals increased by 11 per centto 14.8m. That was helped by Polandco-hosting the European footballchampionships with Ukraine. Evaluat-ing the economic benefits of hostingsuch events is tricky but nearly700,000 people came to Poland, manyof whom would not have done sowithout the football. Between 85-90per cent said they would considerreturning for a holiday.

Hosting the event raised the qualityof the country’s creaking infrastruc-ture. The rush to get everything readyfor the tournament meant that roads,rail, air transport and hotels wereimproved two to three years earlierthan otherwise would have been thecase.

When asked why tourists shouldvisit Poland, Ms Wasowicz-Zaboreklists its culture, cuisine, friendlypeople and its large accessible forests,lakes and beaches.

The Polish countryside is moreunspoilt than many of its westernEuropean counterparts. Bison roam

the continent’s last primeval lowlandforest, brown bears can be spotted inthe Tatra mountains and elk, wildboar and lynx live in the nationalpark on Warsaw’s western boundary.

Agritourism is increasingly popularand offers the chance to cycle, swim,sail or kayak in clean rivers andlakes. Polish cities have become a des-tination for weekend breaks, espe-cially Krakow, with its medieval oldtown, home to Europe’s largest mar-ket square.

Lakes, forestand lowlandbison help tocharm visitorsTourismDiverse destination seeks to improveimage abroad, says AdamEaston

On the trail:Poland boastsbeautiful, unspoiltcountrysideDreamstime

Given Poland is unlikely to competewith Europe’s most popular destina-tions, such as France, Italy and Spain– it has neither the weather nor thedepth of historic attractions – it issetting more modest goals.

Ms Wasowicz-Zaborek says: “Weknow we won’t be a first-tier Euro-pean destination. It’s a second choicedestination, but it’s a fresh destina-tion because many people have neverbeen here and it’s diverse, it’s gotsomething for everyone.”

Poland offers visitors avariety of fun activities. Aprime example is one of theworld’s last steam commuterservices, that even lets trainenthusiasts drive thelocomotives.This is not a narrow-

gauge steam train ferryingtourists around a nationalpark but one of three 1950sengines that transportcommuters on scheduledjourneys between thewestern city of Poznan andthe town of Wolsztyn, about40 miles away. Alongsidethe two-man crew, you canshovel coal into the boilerand be shown how to usethe controls.Howard Jones, a former

travel company director, hasbeen taking tourists (mostlyfrom his native Britain) onto the footplate since 1998.There are also shuntingcourses on which you candrive a 2-8-2 tank engine.Money from the courseshas kept Wolsztyn’s depotopen and funded therestoration of historiclocomotives.If medieval tournaments

are your thing, then everyweekend throughout thesummer you will find themat castles across thecountry. You can dress upin chainmail and dog-facedhelmets to batter otherparticipants with bluntedsteel swords. There are alsoarchery, jousting, crossbowand riding contests.One of the largest

tournaments is held atGothic castle in Malbork, thelargest lowland fortress inEurope. There is also afour-day event that recreatesthe siege of the castle in

1410, when the combinedPolish and Lithuanian forcesunsuccessfully tried tocapture it from the Teutonicknights. As many as 10,000people watch there-enactment.Even more people attend

the recreation of the battleof Grunwald. This precededthe siege when the Polesand Lithuanians defeated theTeutonic knights, who thenfled to Malbork.Tourists from across

Europe take part in theevent, which attracted200,000 visitors to its600th anniversary in 2010.It is said to be Europe’slargest medieval battlere-enactment, with up to6,000 taking part as knightsor peasants.

Adam Easton

Holidays Knights and other delights