Coming of age

"Warsaw had its moment, now it's our turn," declared Krzysztof Gorlich, Krakow's deputy mayor, after returning last week from a promotional conference in New York. "This city has become every bit as attractive for investors as any city in Poland - including Warsaw."
City officials are bursting with local pride after signing two deals last month that will bring about $600 million worth of foreign investment into Krakow within the next 10 years.
Motorola announced two weeks ago that it will build a software center and semiconductor assembly plant which will employ up to 500 people and cost $110 million to build on the outskirts of Krakow. And just one week earlier, U.S. property firm Tishman Speyer outbid two other firms in a tender to develop 10 hectares of empty land behind Krakow's railway station at an estimated cost of $480 million.
"Projects of this magnitude put a city on the map. Investors will say, 'Look, Motorola and Tishman Speyer are going to Krakow, maybe something is happening there,' " said Richard Lada, country manager for Motorola, which looked at sites in Wroclaw and Warsaw before choosing Krakow.
But many smaller investors insisted the city has a long way to go before it overtakes Warsaw, or even smaller cities such as Katowice and Poznan, as a business center. Petty development regulations, a slow and centralized bureaucracy and low purchasing power have kept many companies away.
For many firms, Krakow simply remains a pleasant place for a regional office. "There are certain frustrations with doing business in Krakow that don't exist in other Polish cities," said Andrew Dixon, marketing manager at Tesco, a British retail chain that has been trying to develop a hypermarket in the city for the past two years.
"Regulatory obstacles make (Krakow) a very, very difficult place to invest," he said. "And I don't see that changing any time soon."
Krakow officials wasted little time promoting their recent deals with Tishman Speyer and Motorola. During the first week of April, officials were selling the city at conferences in Madrid, London and New York.
"We've signed these deals. We're excited. And we want the world to know about it," said Deputy Mayor Krzysztof Gorlich.
In New York, Krakow received a promotional boost from Tishman Speyer, which has $6 billion in property investments worldwide. The company's regional director for Central Europe, Torben Nielsen, delivered a speech at the conference declaring that Krakow has the size, location and infrastructure to become one of Europe's largest commercial centers.
"That's a powerful statement from a company as influential as Tishman Speyer," said Janusz Kot, director of the city's municipal property and real estate department.
The company also released preliminary sketches of its project, tentatively dubbed the "Krakow Communications Center," which could become the largest mixed-use commercial scheme in Poland. It will contain hotels, office buildings, a conference center, multiplex cinema and more than 100,000 square meters of shops, restaurants and stores.
To top it off, Tishman Speyer President Jerry Speyer took the Krakow delegation on a tour of several office buildings the company owns in Manhattan, including the Chrysler Building and the Avenue of the Americas. The tour ended with a two-hour lunch (paid for by Tishman Speyer) at an art-deco restaurant, called the "Rainbow Room," atop the 65-story Rockefeller Center (owned by Tishman Speyer).
"Warsaw has a tremendous amount of momentum right now. Now we're seeing that same momentum in Krakow," Nielsen said.
For city officials, however, the deal with Motorola was the sweetest. Three other cities - Warsaw, Poznan and Wroclaw - offered property and investment incentives to attract Motorola. Krakow ultimately won the competition when it created a special economic zone - covering the area earmarked for the new investment - that included a full exemption on corporate income tax for six years.
"It took some tough bargaining, but we won. And that's an incredible relief," said Marek Szymonski, physics professor and vice rector at Jagiellonian University, which plans to develop a high-tech campus adjacent to the software center.
Motorola opened a temporary software center last week on property owned by the university. The company has already hired 20 software engineers from a pool of 130 applicants.
Luck, land and tax benefits
A slew of smaller investors, however, have been less enthusiastic about the recent victories by Motorola and Tishman Speyer. Those firms, they noted, benefited from good timing and generous tax breaks that much smaller firms entering Krakow will never enjoy.
"This is good news for Motorola and it's good news for Tishman Speyer, but I'm not sure it signifies any sudden shift of emphasis towards Krakow," said Claus Madsen, president of Thorkild Kristensen, a Danish developer that is constructing two large supermarkets in Warsaw.
Most firms, he said, would not have the "time or patience" to negotiate the terms arranged by Motorola.
It took three years of negotiations for Motorola to sign a deal with Krakow's government, and it only occurred because the city and national governments agreed to set up a special economic zone on the outskirts of Krakow (by order of the Council of Ministers on October 14, 1997). "Had it not been for this (special economic) zone, this deal would have never gone ahead," Lada said.
But it was Jagiellonian's Szymonski who really sealed the deal. Late last year, Szymonski convinced the university's board of directors to let Motorola lease an existing university building, a neo-Renaissance structure that resembles a medieval castle or monastery, until the company completes its permanent facility in the special economic zone.
Software engineers working there will design programs for Motorola's products, which include cellular phones and pagers, and computerized systems for the company's base stations. Motorola is currently designing a local mobile phone network for Telekomunikacja Polska SA (TPSA) on the suburbs south of Warsaw.
"The city of Krakow was more than just helpful. They bent over backwards to bring us in," Lada said.
But how many other investors will receive conditions like those offered to Motorola? The company has already used up 15% of the land earmarked for Krakow's special economic zone. And the land that remains is so far removed from the city center that it lacks even the most basic infrastructure.
Infrastructure is not as much of a concern for Motorola: The university and city government have already agreed to share the cost of building roads, telecom hookups and power lines to the special economic zone. "There was a combination of forces that came together that made this investment unusual," Szymonski said. "Things just happened at the right time at the right location. And of course, luck certainly played a part."
Chaos is good
To some investors, the Motorola deal typifies why it's difficult for small investors to break into Krakow. Generally, deals don't go ahead unless investors are patient enough to curry favor with the right group of city officials and architects.
"Things are more centralized in Krakow than in Warsaw," said Grzegorz Buzek, special adviser to Tishman Speyer and a lecturer on architecture in Warsaw. "That doesn't always work in everyone's favor."
In Warsaw, local planning and development issues usually fall under the jurisdiction of the 11 gminas and many smaller districts. Though this may appear to add another layer of bureaucracy, it also benefits investors: gminas actively compete with each other to lure investors, and their tax money, from neighboring jurisdictions.
Investors in Krakow don't have the same benefit. Gmina governments don't exist, so local decisions are usually made by a handful of officials with the city's strategic planning department. "On the face of it, a centralized bureaucracy would appear to be a good thing," said Tesco's Andrew Dixon. "But a single bureaucracy can be worse than three bureaucracies - especially if they have no incentive to make decisions quickly."
The cranes that dominate Warsaw's skyline are almost nonexistent in Krakow. Not a single new office building is scheduled to come on line this year. Real estate agency DTZ Debehnam Zadelhoff estimates total demand for Class A office space in Krakow to be around 30,000 square meters, compared to more than 200,000 square meters in Warsaw.
"There are far fewer projects (in Krakow) and it takes more research to find tenants," said Eelko Korteweg, managing director for DTZ in Poland, which acted as the sole leasing agent on the Cracovia Business Center, the only Class A office building in the city.
The difference in potential between Krakow and Warsaw is also seen in the number of private sector businesses in each city. In Krakow there were 70,990 at the end of 1996 vs. 205,503 in Warsaw, according to statistics supplied by Krakow.
The restaurant factor
Tesco has been urging Krakow's city government to shed some of its "more cumbersome" regulations since it began looking to develop in the city 12 months ago. The company found out, only after arriving in Krakow, that the city had parking limits on new development, even for those outside the city center.
For a supermarket with 20,000 square meters of space, Tesco was allowed to construct only 350 parking spaces - one-quarter of what is needed for a supermarket of that size. In addition, the city required Tesco to establish a separate register for alcohol sales and 0.6 square meters of personal space for every employee.
"This is not the kind of stuff that will keep us from investing (in Krakow)," Dixon said. "But things like this keep coming up, and it's keeping us from developing as quickly as we would like."
But development hassles didn't prevent Tesco from establishing its Polish headquarters, which now employs 100 people, in Krakow. "It's a pleasant place to live," Dixon said. "There are excellent transportation connections (LOT Polish Airlines now offers direct flights to Chicago and London) and there are good schools. When you're looking for talent, those things make a huge difference."
Kazimierz Karasinski, managing director of Sunley Polska, a construction firm based in Krakow, shared the same view. "Where we established our head office was really not that critical," he said. "So why not go to a place where you can enjoy nice cafes and good food." Despite its location, in a small office building just less than 20 meters from the Old Town square, Sunley Polska has done almost all of its projects outside Krakow. This includes the construction of a chocolate factory for Cadbury Schweppes in Wroclaw and a liquefied petroleum gas plant for Gaspol within the Port of Gdansk.
Ultimately, the question of whether Krakow has become a commercial center - on par with Warsaw - "simply doesn't matter" to most Krakovians, Karasinski said.
"This is the one place in Poland where people aren't impressed if you say you're from Warsaw and you have money," he said. "There's a perspective here, a view that cities aren't just measured in cranes and cubic meters of new construction."