Investing with a straight head

interview by Ewa Boniecka WBJ Observer talks with MARIUSZ GRENDOWICZ, the president of Polish Investments for Development (PIR), about planned projects, PIR functioning and building confidence between the private and the public sector of the Polish economy WBJ Observer: How did you feel when Wprost weekly published private and illegally recorded conversations in which Interior Minister Bartłomiej Sienkiewicz said that PIR is a “pile of stones,” adding also some vulgar words to it? Why was there no public reaction on your part regarding the statement? Mariusz Grendowicz: Prime Minister Donald Tusk reacted sufficiently to the words of Bartłomiej Sienkiewicz, explaining that they were said two weeks after PIR’s registration, so there was nothing that could be added to the prime minister’s words. If you ask on a purely personal level, both I and the rest of the team, who have worked very hard over the past year, simply felt upset. PIR is presented as the leading vehicle for developing investments in Poland based on cooperation between the public and the private sectors. You have held the position of president at PIR for a year and a half. What do you consider to be the most important projects and when will the first one be carried out? Prior to my appointment, PIR’s operational formula was defined very precisely by the government’s decision in December 2012. It was further expanded through PIR’s investment policy, which was widely consulted prior to its finalization in December 2013. The formula calls for a thoroughbred infrastructure fund, which implies that PIR does not have its own projects, but that it supports our partners’ projects. It is they who drive the projects and define their tempo. We can support them by not being a brake, but cannot be the accelerator. Our task is to maximize the funds flowing into infrastructural investments by selecting the right projects from among those presented to us. The selection process is very precisely defined. The projects evaluated positively by PIR have to belong to a closed list of strategically important sectors, but also have to be carried out through a special purpose vehicle (SPV), which has been used relatively infrequently in Poland so far. Structuring such projects anywhere in the world takes years – the projects PIR is working on are no exception. The first project to be signed by PIR is likely to be the B-8 oil production project, jointly developed with Lotos Petrobaltic, a subsidiary of the Lotos Group. The PLN 1.8 billion project, which will enable production of oil from under the Baltic Sea, will be structured on the basis of an SPV. This SPV’s oil sales’ revenue will repay the bank loans and provide returns to shareholders. Poland is currently the only country capable of extracting oil from the bottom of the Baltic and Lotos Petrobaltic is the only company with the relevant know-how in this area. Once the project is operational, as expected at the beginning of 2016, it will deliver 250,000 tons of oil per year. Although it will not substantially reduce Poland’s oil imports, it will certainly help. It will also help secure some highly qualified new jobs. What are the procedures of accepting projects submitted to PIR? The process is based on a detailed analysis performed by our investment team, whose members all come from the private sector – banks, investment banks, investment funds and consulting companies. They are all highly qualified experts with relevant long-term experience. Following due diligence, the project is submitted for approval to PIR’s management board. The second stage is the acceptance of the project by our Investment Committee, formed for each individual project from PIR’s supervisory board. The third and final stage is the approval by the entire Supervisory Board consisting of nine members. So three different voting processes are required before the project is finally accepted and the investment agreement is signed. Do the projects include development of renewable sources of energy, which are so strongly advocated by the European Union, but so poorly developed in Poland? Yes, we are working on several renewable energy projects, but these are still in the early stages. However, the projects are realistic and have a strong chance of being delivered relatively quickly, as they are all being developed by private investors which simplifies investment processes. What does not help is the current uncertainty surrounding the entry of the new renewable sources of energy law into force. The bill is to implement a new support system for renewable sources of energy. Until entry into force is confirmed in January 2016, or at a later date, many investors will hold their projects back. PIR’s financial activity is based on market principles, while the funds for investments are coming from PIR and from the private sector. How do you evaluate the present flow from those two sources ? We have to distinguish between two different fund flows: money to fund PIR and money to fund the projects in which PIR invests. The former comes principally from the State Treasury (98.75 percent) and to a lesser extent from BGK Bank (1.25 percent). Currently, no other investors for funding PIR are anticipated. A completely different story applies in the case of our projects. As stated earlier, we encourage commercial investors to undertake projects and we assist in structuring these projects in a way which maximizes debt funding from banks and involvement of other equity investors. PIR’s involvement contributes to the projects’ stability and credibility, which facilitates this multiplier effect. In the case of the B-8 project, PIR’s involvement of some PLN 430 million will enable a PLN 1.8 billion project to go ahead. The balance will come from the project sponsor and banks. Another case, a PLN 400 million local roads project to be completed jointly with the Kujawsko-Pomorskie voivodship, will go ahead with PIR’s involvement of only PLN 50 million. Again, the rest will come from the private sector investor and banks. There is no doubt, however, that PIR’s involvement galvanized these, and other, projects. To what extent is PIR’s activity dependent on the economic priorities set by the government? In other words to what extent are you politically independent? PIR is an unprecedented and courageous project, which from the very beginning was meant to be apolitical, mainly because of long lead times of the undertaken projects. Power plants, fiber optics networks or motorways are completed over many years. So the traditional “cutting of the ribbons” will not necessarily occur during the current term of the parliament.  Due to linking economic growth with market requirements, PIR will be an institution standing above party politics, functioning for the benefit of our country. How would you compare PIR to public-private economic holdings functioning in other European countries, like French CDC Infrastructure or Fondi Italiani per la Infrastrutture F2I? There are two basic kinds of infrastructural funds. In one model, funds develop a specialization in a few, precisely defined asset classes. Such funds typically take a majority position in a project and are prepared to assume operational responsibility. Most private sector infrastructural funds fall into this category. Some others, including the French state-funded CDC Infrastructure, or the Italian F2I, whose investors include state financial institution Cassa Depositi e Prestiti, but also Italian private sector banks and insurance companies, invest only as minority partners, leaving operational responsibility to the private sector. PIR is much closer to the second model, which enables us to keep our sectoral focus as broad as possible, thus maximizing the potential number of projects. However impatient we may be, PIR’s progress is much faster than that of the other funds created in EU countries in the last decade, also those in the private sector. The role of the state in the economy is growing in EU countries. Is it a reaction to economic crises or an evolution of the whole market economy system? How do you look at it with your experience in the private economic and banking sectors and as the president of PIR, which is an example of a growing state role in the economy? The economic crisis exposed many dysfunctions of the market, especially in the area of long-term investment. The equity funding available for investment in energy and road infrastructure was significantly reduced. The amount of debt funding available from the banking sector for these investments was also reduced due to restrictions contained in the new global banking regulations. The reaction of the state to those dysfunctions was in many cases the establishment of state-funded infrastructural funds, which did not aim to replace the private investors, but rather to encourage them to continue investing in infrastructure. Many traditional investors in infrastructure consider such investments to be long-term contracts entered into with the state. For them, the presence of a state-related entity increases the security factor, so important when investing long term. France and the UK, European leaders in the field of public-private partnership, are clear examples of markets where such a new active role of the state functions well. PIR should perform a very similar role. What are, in your view, the biggest obstacles to PIR’s effective functioning? Two issues spring to mind. First is the very low level of knowledge in the field of project finance, which is the formula on which PIR’s projects are meant to be based. This is visible inside many of the industry investors, our partners in projects, who have traditionally funded large investments through their balance sheets. It is also visible in banks, where project finance competences were rarely transferred to Poland, while in Frankfurt, Paris, or London, the level of know-how in their parent banks is very high. We need to deepen this know-how in Poland in order to speed up investments. Second, particularly important in the case of public-private partnership, is the deficit of confidence. The latest European confidence index ranking shows Poland at an alarmingly low position. And trust is essential for building partnerships in business, also between the public and the private sectors of the economy. u