Inward investment or PAIIZ in the sky?

The new agency charged with attracting foreign investment to the country

is a few weeks old, but from the look of things, it may as well not exist at all. With no website, a staff that won't speak English and a budget that is half that of the Czech investment agency, PAIIZ does not seem to be well-positioned to turn around Poland's shrinking investment numbers. Kamil Tchorek reports.

The word "Paiiz" is, sadly, the title of a track on Tasvir Akhar, a hit album by a stubbled Iranian popstar named Mansour. This is what one discovers when looking Paiiz up in the Google search engine. Though its implied mission objective is to represent Poland to the foreign business community, the new Polish Information and Foreign Investment Agency (PAIIZ) is clearly not making a priority of its own public relations.

PAIIZ does not yet have a website, and its name is an acronym of Polish words (contrast this with CzechInvest, a simple brand immediately understood by the English-speaking investment community), and its front desk staff cannot or will not speak English to foreign businesspeople.

As the Business Journal has reported, PAIIZ is a merger of its defunct predecessors PAIZ and PAI. But the creation of PAIIZ is clearly not, as it should be, a response to the demands of the inward investment market, but a solution to a problem internal to Polish institutions and the way they are financed by the government. The government's inability to prioritize inward investment - by giving the inward investment agencies enough funds - has cost Poland dearly.

Auditing firm Ernst & Young released its annual European Investment Monitor report this month, with good news for eastern Europe as a whole and embarrassing news for Poland, which is evidently not able to keep up with its neighbors in attracting foreign direct investment. Moreover, there was no indication that Poland's relatively sluggish rate of inward investment will be enlivened by its imminent accession to the European Union and its prospects for entering the euro zone.

The annual survey, from Ernst & Young's real estate, hospitality and construction professionals, analyzes inward investment projects into Europe by country, source of investment and industry sector.

Inward investment into Europe, 33 percent of it American in origin, is moving from the 15 EU member states (which recorded a decline of 11 percent in the last year) to the 10 EU accession states (which saw investment increase by 14 percent during the same period). The Czech Republic is a highlight, the only country with two regions (Jihocesky and Severocesky) in the top set of fastest growing inward investment destinations. Poland's share of the region's total is a disappointing anomaly, remaining unchanged on the previous year at 3 percent of the total.

Karen Hensley-Chełstowska, Manager at Ernst & Young's International Tax Services in Warsaw, puts Poland's inward investment agency high on the list of culprits.

"Foreign investors interested in coming to Poland need what has been available in the Czech Republic for years: a one-stop shop, the only people you need to talk to in order to set up a business," she says. "Until now the Polish agencies have tended to send potential investors to other offices around Poland. No customer, anywhere, should be dealt with in that way. In this case the customer is potentially going to be spending hundreds of millions of dollars in Poland - or the Czech Republic."

The domestic press has recently been complaining that CzechInvest is unfairly cunning or even unlawful in the way that it attracts investors at the expense of Poland. But the hard facts show that Poland's self-inflicted failings provide for its small neighbor's successes. In one example this month, Japan-based Oiles Corporation announced it would move its planned E6-million-E7-million (zł. 26.7-million- zł. 31.2-million) investment from Wałbrzych in Poland to Kadao in the Czech Republic. The company's international operations director, Shohei Nakamoto, explained that the final choice was made because of "(CzechInvest's) friendly and well-educated people with the same level of incentives (as Poland)." Given they know how weak their competitor is, it is no surprise that CzechInvest feels so confident.

Two weeks ago Puls Biznesu reported that CzechInvest was planting agents in the Katowice Special Economic Zone in order to lobby inward investor scouts as well as to persuade existing investment to move south. Were the allegations to be proven, CzechInvest would surely be sued. But a conspicuously modest CzechInvest brushed off the accusations by replying that the differences between Poland and the Czech Republic "are not really big enough to make anybody move their business."

This is not entirely true, and CzechInvest knows it. The fact that the agency has sailed so daringly close to the wind is testament to a general, proactive attitude that does win clients - clients who are swayed by details, and clients who make decisions about which single central European country to invest in. CzechInvest's very good website (available in Czech, English, German and Japanese, with a downloadable archive) states that they win every time against the Poles in terms of age range, language ability, and every manner of labor cost.

Clearly, PAIIZ has a lot more on its plate than to compensate for its predessors and to do so with half the budget of its Czech rival. Last year's Eureko affair, the loss of a potential Toyota auto plant and the government's inconsistency on corporate income tax cuts have been major red lights for new investors. Worse still, Poland's Economy Ministry itself admitted that a planned PSA Peugeot Citroen car factory was lost to Slovakia because of Poland's "absence of motorways and express roads," spelling out a major infrastructural shortcoming that threatens to hamper economic development for years.

Korean concern Hyundai Motor is expected to make a final decision on where to locate its central European plant in the first half of 2004. A Polish delegation from PAIZ (the agency formerly charged with attracting foreign investment) was lobbying in South Korea early this month, while, according to the online version of Korean newspaper Chosun Ilbo, Hyundai simultaneously had representatives in clandestine meetings with city officials in Ostrava, Czech Republic. Failed negotiations with Hyundai in the mid-1990s on a plan to build a Polish factory will doubtlessly weaken Poland's pitch.

As Hensley-Chełstowska points out, "Poland is no longer the automatic choice that it used to be. There are ongoing corruption issues, and perhaps more seriously, credibility issues in business and government. Even if the offers that Poland proposes to potential investors are the best in the region, now that Poland is on record as giving inward investors promises it cannot keep, the credibility issue is a big problem. The 10-year, 100-percent tax exemption offer in Special Economic Zones was opposed by the EU, and Poland changed its policy. Overnight up to 700 investment permits became redundant. It's no surprise that business is considering a move across the border. PAIIZ, as a new institution, will have to tackle all these problems. I do not want to say it's too late, but it is a big challenge for the government of Poland to improve their pro-investment policy. The accession to the EU seems to be a good opportunity for a 'new opening,' but it may be the last opportunity."

Some hope is offered by the fact that at the moment, perhaps surprisingly, the United States is in fourth place as an inward investor into Poland. But with the offset program due to take hold in the next few years, the U.S. should leap to first place and represent a sea change in inward investment. Indeed, some bad losers in the unsuccessful PSA Peugeot Citroen competition blamed French bias against America's "Trojan Donkey," something that the heavily biased offset deal should compensate for adequately. It should also bring in some much needed investment into a new sector, namely high tech, which is becoming increasingly vital since the transport and automotive sector, still the largest inward investment sector at 32 percent of all investment, is declining fast. In 1993, Poland manufactured more cars than Slovakia and the Czech Republic combined, but since then the proportions have reversed.

Though overall economic factors are more important in attracting investment than membership or non-membership in the EU and the euro zone, Hensley-Chełstowska also hopes that Brussels will bring Poland a sense of reform and stability.

"What investors will be looking for now is more consistency, higher standards and a more western way of doing business, because of the new regulations that are even now being introduced," she explains.

With around 20 percent unemployment and a well-educated workforce, Poland should be an attractive target for capital investment, because high skill here comes at a low price by pan-European standards, especially as multinationals have a little more spending leverage to compete for the best employees. Nonetheless, real attraction is also dependent on working practices, which include everything from the integrity of the law and the government that writes it, to the first impressions of the government's inward investment agency.