EU mulls law to halt state subsidies
A government law to stop soft financing of Poland's loss-making state industries went into effect last week amid European Union (EU) concerns that the legislation will not be enough to halt state bailouts.
"It is not enough to pass the law and establish a competition watchdog," said a source at the European Commission (EC), who requested anonymity. "Poland has to show a record of implementing the EU's rules on competition."
Under EU law, government aid such as tax relief is limited to 15-30%. Poland, however, intends to maintain tax relief for companies in its special economic zones and for environmental investment projects, both of which are financed by up to 50% with taxpayers' money. In addition, the government extended the list of enterprises eligible for aid this year.
To keep companies competitive, the state hands out subsidies through a variety of sources such as local government funds to the budget, but little of this is monitored something that worries many EU bureaucrats.
A government report by the Office for Competition and Consumer Protection (UOKiK) on state aid in 1999 shows that state subsidies grew to zl. 8.7 billion ($2.1 billion) in 1999 from zl. 6.8 ($1.6 billion) in 1998.
But EU rules on state subsidies are strict and complying with them is at the top of the commission's agenda.
"The policy on competition is such an important matter that it's not recorded on a national level, but directly to the EC," the EU source said. "We have to be sure Poland and other candidate countries fully adopt the EU approach." The source added that negotiations with Poland over its laws on competition could be stalled unless the EU can see the legislation functioning properly. The delay could also undermine the country's plan for EU accession as early as 2003.
A problem with implementing monitoring rules is that the UOKiK is hamstrung in its approval process due to a lack of staff to date it has only 20 employees. "We are due to have 10 more staff and they will be able to do the job," said Elzbieta Modzelewska-Wachal, deputy president of the UOKiK. "We are going to deal with aid pledges exceeding O100,000 within three years."
But she rejected speculation that EU bureaucrats are unlikely to believe the overworked and understaffed unit of the UOKiK can handle the job properly.
Meanwhile, Brussels is becoming more concerned with badly performing state-owned industries. "There could be pressure on our office," Modzelewska-Wachal said. "State aid is a sensitive issue and subsidies can seriously affect the financial standing of some companies.
"It's nothing new that some lobbies are active in fighting for their interests. But the provisions are clear, so I don't think the lobbies' attempts will succeed."
The new legislation bans state subsidies with certain exceptions, mainly for regional aid and as assistance for restructuring programs. As a result, Poland's most troubled sectors are still able to benefit from the budget. According to the 2001 budget draft, agriculture will receive zl. 4.2 billion ($1 billion), coal mining subsidies will increase to zl. 1.5 billion ($357 million), Polish State Railways (PKP) will receive zl. 1.2 billion ($286 million) and the steel industry zl. 40 million ($9.5 million).
"The legislation might be useful as it doesn't slash support generally, but it does help to channel it into the target groups," said Agnieszka Talasiewicz, manager with the tax litigation division of Arthur Andersen. "The problem is that some decisions on state aid in terms of taxation are still of the discretional kind."
Based on her experience, she said the tax authorities were unlikely to approve tax deductions or tax holidays for most companies even before the legislation was adopted and huge state-owned industries were able to avoid paying tax through legal loopholes. "They simply didn't pay taxes if they had no money," Talasiewicz said.
