The verdict from business - they must try harder

No passes awarded in all main subjects

Leszek Miller's government has made few friends in business in its first year in office. While the promise to fuel economic growth through the Entrepreneurship First reform package is now seen largely as self-promotion and as failing to address many key business issues, the U-turn on company tax cuts in the 2003 budget is seen as a knife in the back for private enterprise.
While business anticipated little support from the SLD-led coalition, market observers and entrepreneurs have seen the government come under par in meeting even modest expectations. Political stability within the coalition, labor and bankruptcy law reforms and the stabilization of unemployment have failed to offset the government's failure to privatize state-owned industry, restructure public finance and produce a credible plan for combating the growth of unemployment.

U-turn budget
In his 2003 budget, Finance Minister Grzegorz Kołodko delivered a major sting to the private enterprise economy, springing a company tax U-turn at a time when companies were already hard at work on their budgets for the new financial year, agreeing to cut the tax by only 1% to 27% instead of the expected 24%, while legislating to pump extra cash into inefficient state-owned industries.
Market observers argue that Poland's tax system is stifling economic growth, with a tax burden on companies that is much higher than Poland's EU accession partner Hungary (18%) and Ireland (12.5%), the foremost success story of the European Union (EU).
"With our technological shortcomings, scarce capital and expensive credit, corporate taxes should be lower than in other countries," said Jeremi Mordasewicz, an economics consultant at the Polish Confederation of Private Employers (PKPP). "This means that the government has decided to burden profitable firms by zł. 5 billion ($361 million), reducing their liquidity and their ability to grow. This money will be used to increase benefits and state sector wages … while unprofitable companies do not pay corporate income tax and the government has handed them the Debt Relief Law on a plate."

The budget breaks with the cautious but relatively business-friendly principles established by former finance minister Marek Belka. It has come under fire from economists for shattering the state expenditure cap established by Belka, which limited expenditure growth to 1% above the rate of inflation. In 2003, budget spending will grow from zł. 185.1 billion ($44.6 billion) to zł. 193.5 billion ($46.6 billion).
"By increasing wages in the public sector the government is trying to recover the demand side of the economy," said Stanisław Kubielas, the chief economist at Warsaw's Nicom Consulting. "This is dangerous because we do not know what next year's GDP growth rate will be."
Economists have also criticized Kołodko for failing to initiate restructuring in state sector expenditure, which will remain burdened with a high proportion of fixed expenditures, casting doubt over Poland's plans to join the European Monetary Union.
"About zł. 8 billion ($1.9 billion), or half of our budget expenditure is fixed," Kubielas said. "Without these reforms, it will be very difficult to decrease the share of the budget deficit in GDP to the 3% required to join the EMU. These problems have simply been shifted to the future and will have to be dealt with a year from now."
Market observers also view the government's decision to allocate no additional money for infrastructure and technological development as a shortsighted approach to preparing Poland for EU accession.
"The current budget is less beneficial for the economy," Mordasewicz said. "It contains no increase in expenditure designed to stimulate growth. Budgets for science, research and development and the renovation and development of roads remain the same, while benefits are increasing … It is strange that all this is happening under the slogan of "Entrepreneurship First."
With investment in technology as the only resource left open to increasing the productivity of Polish industry, the government's outlook on research and development will seriously affect Poland's competitiveness in the EU, Kubielas said.
"The potential for Polish firms to increase their competitiveness has been used up," he said. "Labor productivity has stopped increasing, so further increases in efficiency are not possible without investment in new technology … Policies aimed at promoting scientific and technology are still lacking."

Economic policy
Given the slowdown in the global economy and the high interest rates underpinning the draconic anti-inflation measures of the central bank (NBP), economists are not surprised by the government's failure to revive Poland's economic growth.
"We are facing a recession which was to a large extent provoked by the very restrictive monetary police pursued over the last three years, designed to curb inflation, with real interest rates skyrocketing," Kubielas said. "It coincided with the global recession, so we are now in a rather difficult situation."

Privatization
Privatization under the SLD-led coalition has been characterized by the cancellation of all major projects commenced by the previous AWS-led government and the sporadic cancellation and reopening of new tenders. Government estimates of privatization revenue in 2002 have been revised down from zł. 6.6 billion ($1.59 billion) to zł. 3.7 billion ($891 million).
"Privatization has virtually come to a halt," Kubielas said. "The government is more preoccupied with nominating new directors and reshuffling the power structure in the state sector."

Promises. promises
While the budget shows a more ambitious program next year, with projected privatization proceeds of zł. 7.4 billion ($1.78 billion), economists view the promise of increased revenues in 2003 with skepticism, given this year's performance by Treasury Minister Wiesław Kaczmarek.
"There are promises of greater flows next year, but so far their actions do not confirm any will to privatize," said Mateusz Szczurek, a senior economist at ING Bank. "The credibility of such statements is low because this is the third year of major undershooting of such targets."
The government's political opponents see the privatization slowdown as the principal reason for this year's spiraling public sector debt.
"The shortage of privatization revenues means that the government has had to sharply increase its issue of bonds, deepening public sector debt," said Grzegorz Walendziak, a member of Parliament for the Law and Justice party (PiS) and head of the Sejm treasury committee. "This was one of the main reasons for the growth of public debt."

Entrepreneurship first?
While representing the core of the government's pro-business policy, the Entrepreneurship First package of laws, launched with great aplomb in February this year, has not fully achieved its aim of reducing the level of bureaucracy in the economy and making Poland a better country in which to do business.
"It turned out that these reforms contain regulations that make life easier for companies, but also a number that make life harder," Mordasewicz said. "While we were expecting a breakthrough, there are many reforms that don't go far enough."
The biggest disappointment was the reform of planning legislation, which did little to simplify the procedure for obtaining planning permits, mires developers in bureaucracy and makes them less flexible in responding to market demand, Mordasewicz said.
"The reform of the planning law is merely cosmetic, and we see no real will for reform in the government," he said.
Another major headache that Poland's small- and medium-sized companies have not seen the government address are the payment stoppages created when one of a line of contractors delays payment, passing on their liquidity problems to other firms in the chain.
"If at the end of the year a company had unpaid debts under this system, they would do everything possible to cover those debts," said Mariusz Wiszniewski, the president of Warsaw insulation manufacturer Izotherm. "This would really stimulate the financial system and improve the conditions of companies."
But the biggest failing of the program is not the depth of the business law reforms, but the negation of the intentions of the Entrepreneurship First program by the government's fiscal policy, economists say.
"I am not convinced by the government's plans to create a more business-friendly environment because its economic policies are based on transferring funds from small- and medium-sized companies towards big state-owned employers," Szczurek said. "The ones that are making profits will be paying more corporate income tax whereas the others, which do not pay corporate income tax anyway because they make losses, will be bailed out again."

Unemployment
While failing to deliver a consistent policy line on business growth, the government has also made no progress on the most significant barrier to reduce unemployment, which represented 17.4% of the working population in August.
"Poland's high labor costs are significantly swelled by social security and taxes that represent an artificial fiscal barrier to employment growth," said Andrzej Sadowski, the vice president of the Adam Smith Research Center. "Unemployment is only caused by the cost of work, not by the labor law. Unemployment has fallen under previous governments under the same labor law."
Legal analysts have a more positive outlook on the government's performance in the past year. They point to the introduction of Poland's reformed bankruptcy law, inspired by Chapter 11 of the U.S. code, which focuses on keeping companies running during bankruptcy proceedings.

Quantity counts
"The quality of the new legislation is what counts," said Roman Rewald, a partner in the Warsaw office of U.S. law firm Weil, Gotschal and Manges. "Some of the most valuable elements of the new law were added by the current government. This government is very well aware of impact of the law on the business environment. There is a willingness to reform, but perhaps not the ideas."
But while the government understands the role of an efficient legal system in attracting foreign investors on a global market, Polish regulations are of secondary importance to the conviction behind government efforts to attract foreign capital.
"People in government have a very lax attitude towards the need to attract investment," Rewald said. "This attitude can be worse than the law."

See how they scored

Here's how some prominent government watchers rate the SLD-led coalition's handling of headline issues in the first year of its reign.

Corruption
Julia Pitera
President, Transparency International Polska
Score: 2/10
The fact that the justice minister has ordered the archiving of court documents is a big step forward. These documents disappear, and it doesn't matter if they are intentionally misplaced or that the courts are simply a mess, the conclusion is that the courts are badly supervised. On the other hand, I see little in the way of practical efforts. Still, the police complain of political pressure ... Members of organized crime rings escape from prison and manage to flee the country ... Until politicians understand that combating corruption in public life requires authorities independent of politics, it will be hard to say that anyone wants to do anything. I don't believe that without addressing these issues we will be successful in our country's efforts to obtain any kind of funds for investment, loans and structural funds.

Restitution
Michał Sobański
Vice President, Reprywatyzacja restitution agency
Score: 0/10
(During) the first year of the SLD, the UP and PSL coalition fully confirmed that they are still firmly against restitution. While the SLD wants to be seen as the champion of European Union integration, Leszek Miller's cabinet has done nothing to return properties plundered under the previous regime or to compensate those whose property was taken. It is especially irregular that even though the nationalization of many properties actually broke the socialist law, there are no provisions for restitution or compensation. Two years before EU accession, Poland remains a strange country at the heart of Europe. It formally accepts the free market and private property but without restitution. Twelve months after the general election, the question of restitution remains untouched. Will it remain the same in 2003? The mere fact that we have to ask this question borders on scandal.

Business climate
Jeremi Mordasewicz
Economics Consultant, Polish Confederation of Private Employers
Score: 4/10
Looking at the current budget and the package of anti-crisis measures proposed by Kołodko, we could never call the SLD a pro-business party. If you propose to relieve the debt of state companies and back out of cutting corporate tax for effective companies, which are largely private, how can it be called a pro-business party? My expectation was that it would have earned a six.

Privatization
Andrzej Sadowski
Vice President, Adam Smith Research Center
Score: 0/10
An assessment of the government should address not only its current work, but also what it has neglected to do. The government's point for departure must be the current state of the country and its economy. The inability to grasp this, the failure to perceive the need for further transformations in line with those of 1988-1989 means that the government has not yet left the starting line, and scores a zero. The time for the government to act is rapidly running out.