EU arches back over economic zones, again
Poland's 15 special economic zones were under attack again last week when European diplomats pressed the Polish government to close zones before entering the European Union (EU). The news that the Europeans were again pushing their position on the issue came in the form of a report in daily newspaper Rzeczpospolita, which has a correspondent in Brussels. That article stated that the EU is calling for the Polish government to close the zones and compensate investors for their losses through payments from the national budget.
While any new attack on the government's special economic zones creates an atmosphere of uncertainty, for the time being government officials here and executives running the zones are unruffled over the latest news.
"The fact that the special zones are not well received (by the EU) is not news to us," said Marta Wojcik, marketing assistant at Krakow's special economic zone. She said that the EU often reiterates its position every five to six months as part of a negotiating technique.
The economic zones have been under attack from the EU for the past year and a half. The EU maintains that the zones' existence is not permitted under EU law, which Poland will have to adhere to when it joins the trade bloc around 2004.
For the EU, at issue is not the amount of tax exemption permitted by Polish law, but the rules associated with the investment. While in the EU an investor can receive up to 50-75% in return on the original investment in the form of subsidy or tax exemption, the tax exemption in Poland permits returns over an extended period of 10-20 years without regard to original investment levels. EU officials have said that could result in foreign investors seeing multiple returns. "No one knows how many times there will be a return on investment," said Teresa Koryczynska, vice director of the regional development office in the Economy Ministry.
Despite the rocky road, the special economic zones have attracted some of the most spectacular foreign investments. The zones are especially important to the government because they bring in greenfield production companies that spur infrastructure development to hard hit areas of the country. To date, upward of $2 billion in declared investments have come in through the zones, and, if the investments are realized, they will create 32,000 jobs in some of the most economically depressed areas of the country.
In the copper mining area around Legnica, for example, the special economic zone there has attracted approximately zl. 1.3 billion ($325 million) in promised investments since it started operation in 1997. Last week, automotive parts producer Gates Polska announced that it intends to invest zl. 27 million ($6.75 million) to buy about 5.5 hectares of land there. The zones also help to improve the country's trade balance, Koryczynska said, citing that 70% of goods produced in zones are made for export. "These are not bank or financial-service investments," Koryczynska said.
But given the all-but-forgone conclusion that Poland will enter the EU, the days of the zones in their present form are numbered. The question is how little time is left and whether any decision made regarding future investments will also impact investors who have already laid foundations here.
"There is no question that some compromise will have to be reached," said Wojtek Janczyk, president of Business Management & Finance, a management consulting firm that works with both the government and individual zones to secure new investments. "That compromise will have to protect (existing) investment. Poland can't allow and will not allow losing credibility with investors."
But that does not mean that all investments made so far are completely in the clear. "For a while, from the moment the problem started with the EU, some zones have clauses that don't guarantee the tax exemptions. Each case is different," Janczyk said. "Each investment came at a different time and in a different way. "Those investors who had full guarantees for exceptions can't be treated differently," he added. "That would break all principles to which the EU adheres, and they can't talk us into that."
For future investors, the Sejm is now working on a new law whereby investment in economic zones would take place in accordance with EU laws, meaning that investors would only be able to receive tax exemptions to a certain percent of the total amount originally invested.
But in the zones themselves, the perturbations in Brussels and Warsaw make doing business difficult. In Krakow's special economic zone, management has to deal in an atmosphere of mistrust with potential investors. "Investors are careful. We feel that there is not trust. Even in meeting, you don't sense optimism," Wojcik said.
