Final play in the end zones
By : Juliet D. Golden
A new law sharply curtailing the incentives offered to companies investing in Poland's special economic zones (SEZ) is expected to breeze through Parliament this month. The move inches Poland closer to meeting European Union (EU) norms and comes after years of intense pressure from the EU.
In the countdown to the final vote, this week the Sejm's economy committee will hash out changes to the government-sponsored bill introduced in the Senate in September. Last week, lawmakers deemed the Senate's changes as largely cosmetic and predicted the bill would glide through committee and full-house votes this month.
"The bill will likely be voted on this month and will likely be passed," said Ewa Freyburg, a Democratic Left Alliance (SLD) deputy who sits on the economy committee.
Anticipated with a degree of dread by the managers of the country's 15 SEZs, the impending changes have long been a foregone conclusion, given the country's aspirations for full EU membership. For the past two years, Poland has come under increasing pressure from the EU to close the special economic zones, which offer investors an initial 10-year tax holiday and a 50% tax exemption for the following decade. According to the EU, the zones create unfair advantages for companies located within them and are against laws that Poland will have to adhere to when it joins the trading bloc sometime in the next decade.
For the EU, at issue is not just 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 a subsidy or tax exemption, Poland's zones permit returns over an extended period of 10-20 years without regard to original investment levels.
The zones are important to the government as they bring in greenfield production companies that spur infrastructure development in hard-hit areas. To date, upward of $7 billion in declared investment has come into the zones, creating roughly 40,000 new jobs, according to the Economy Ministry's regional development office.
In the nation's oldest SEZ, Euro-Park Mielec, set up in 1995, the tax incentives offered have pulled in 31 companies that have invested zl. 1.2 billion ($266.6 million) and have created just under 5,000 new jobs in a region where unemployment reaches 13.5%, according to Teresa Orczykowska, marketing manager at the Industrial Development Agency's office in Mielec.
With the good times now past, some SEZ management and foreign investors are scrambling to sign deals before the new law comes into effect on Jan. 1.
"The situation will change radically next year," said Dorota Lombardi, marketing director at the Lodz special economic zone. "For sure (the present) law is in effect more interesting and beneficial for investors; we are sure that the situation will get worse next year."
Due to the prospect of legislative changes, managers of the Lodz zone have been pushing to attract new investors since the beginning of the year, Lombardi said. And the effort looks to be paying off. The SEZ has pulled in roughly zl. 120 million ($26.6 million) in new investments creating some 702 jobs this year. This brings total investment in the zone to more than zl. 409 million ($90.8 million), he said.
The Katowice SEZ has also undergone an investment boom this year. Since January, the zone has agreed to zl. 442 million ($98.2 million) in new investments, which are slated to bring in an additional 3,275 jobs to the region. Kickstarted by General Motors' initial DM 500 million investment in a showcase production facility in Gliwice, during the past four years the Katowice zone has attracted almost zl. 3.4 billion ($759 million) in new investments and created almost 14,000 jobs in the heart of the struggling coal mining region.
But with the impending changes to the law, the last quarter of this year is moving from boom to a mad dash to complete a landslide of new deals by Dec. 31. In an average year, the Katowice zone holds 10-12 tenders to pull in new investors. By the end of this year, that number is expected to more than double. "I have to admit, letters of intent have been pouring in," said Piotr Wojaczek, president of the Katowice SEZ. "Since the beginning of the year, we have held 10 tenders all together, but we have 15 more planned before the end of the year."
Wojaczek anticipates that investment and employment levels will soar. Judging from the letters of intent, tenders planned for the last quarter will bring in another zl. 500 million ($11.1 million) in investment and create about 1,500 new jobs. Those investment levels could go even higher if Fiat and General Motors finalize a deal this autumn to build an engine factory in the Bielsko-Biala section of the Katowice SEZ worth zl. 1.2 billion ($266.6 million), Wojaczek said. The factory would create 700 jobs.
While next year's new investments might pale in comparison to the spectacular levels reached this year, Wojaczek is not despairing over the change in the law. Altough the ceiling will be lowered on tax breaks offered to companies, changes in the law will also permit a wider group of companies to set up shop in the zones. Under the present law, only production companies that invest a minimum of O2 million can invest in any of the zones. Next year, the limits will be raised and service sector companies such as hotels, business centers, warehouses and logistic centers will be allowed in the zones.
"On the one hand conditions are worsening for investors," Wojaczek said. "On the other hand, the new law will improve the conditions for small and medium-sized investors."
