Most large Polish firms already have foreign partners but there are still some investment opportunities around, particularly in the manufacturing, telecoms and financial services sectors. Charles Olivier reports.

Poland has been a popular investment destination for multinationals for more than a decade. Since it threw off the shackles of communism in 1989, it has attracted nearly $55bn of FDI – more than any other country in eastern Europe.

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Most of the money has gone into the automobile, telecoms, food processing and financial services industries but significant amounts have also been invested in the media, logistics and construction sectors.

German and US companies have been the most prolific investors in Poland but in the past two years French, UK, Spanish and Swedish firms have become much more active.

The majority of international companies that have invested money in Poland seem glad to have done so. “I cannot think of many foreign investors that have been disappointed,” says Michael Davenport, head of the commercial section of the British Embassy in Warsaw.

Steady as she goes

The economy has grown steadily at around 5% a year – twice the European Union average. As a result, a large middle class has emerged with the disposable income to afford a wide range of western consumer goods and services.

At the same time there have been no wild swings in economic policy despite several changes in government. Import tariffs and corporate tax rates have been gradually lowered, the zloty has stayed relatively stable, and no restrictions have been imposed on the repatriation of profits.

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The liberalisation of the Polish economy has been carried out quickly and relatively efficiently. Almost all state-owned companies have been sold and their monopolies abolished. Most price controls and subsidies have also been eliminated.

But is Poland a good place to invest money now? Following the global slowdown the economic outlook is certainly not as strong as it once was.

Economic slowdown

According to the National Bank of Poland, GDP growth fell to 0.9% on an annual basis in the second quarter of this year. Most local economists do not expect the Polish economy to grow by more than 3% a year for the next two years.

“Poland has a high budget deficit that must be reduced before it can gain entry into the EU. The only way to do this is to cut public spending – an action that will make people feel poorer,” explains Katarzyna Zajdel, the chief economist of Citibank Handlowy.

Election uncertainty

The country’s political situation has also become more uncertain following the failure of any party to win an outright majority in the recent general elections.

The new government is led by the Democratic Left Alliance (SLD), the former communist party which won 42% of the vote, in a coalition with the Polish Peasants Party. The new cabinet won a parliamentary vote of confidence last month and obtained conditional support from the Self Defense Party, a farmers group that has previously opposed agricultural reform.

However, it is likely to find it difficult to implement reforms as effortlessly as previous administrations. Most of the other parties in parliament oppose radical reform and would like to see more concessions granted to miners and farmers.

EU difficulties

This in turn will make it harder for the government to reach agreement with the EU on issues such as agricultural subsidies, foreign ownership of land and the restructuring of Poland’s heavy industries.

The impact of these problems on Poland’s attractiveness as an investment destination should not be over-stated. Its growth rate may have slowed, but so have the growth rates of other emerging markets.

When the global economy recovers, there seems no reason why Poland – by far the largest domestic market in eastern Europe with 50 million people compared with 10 million in Hungary and the Czech Republic – should not return to 6% a year growth rates.

Competitive again

Meanwhile, despite the recent lowering of investment incentives on the instruction of the EU – Poland remains just as competitive a place to make goods for export to western Europe as it was in the 1990s.

According to the Polish Agency for Foreign Investment (PAIZ), it costs just $2.60 an hour to employ a skilled manufacturing worker in Poland, including social security contributions.

This is twice the per-hour rates paid to skilled Polish workers in the early-1990s but still much lower than the $19 and $22 paid to skilled workers in France and Germany, respectively.

Anecdotal evidence suggests that productivity levels are now close to western European levels. “Our factories are as efficient as any in the EU,” says Jonas Borup, managing director of Pilkington Glass’s Polish operations.

Like other emerging markets, Poland has its drawbacks as a European export hub. Very few people speak fluent English, for example, and the country’s roads and railway lines are in need of repair.

But these are minor points considering Poland’s overwhelming production cost advantage and that it has duty free access to the EU and most of eastern Europe on almost all products apart from agricultural goods.

Export successes

Witness the huge success of firms such as Fiat and Toyota – both of which export more than $1bn of cars a year to the EU each year from their Polish factories.

“We have the skills, the labour force and the geographic location to become one of Europe’s major manufacturing hubs,” says Adam Pawlowicz, president of PAIZ.

Investment opportunities vary from sector to sector. There is not much room for new entrants to the Polish financial services industry, for example. Almost all the large Polish banks now have foreign partners and no longer need international know-how or capital. PZU, the state-owned insurance company that is coming up for sale later this year, is a notable exception.

Chief executives hoping to break into the Polish retailing market might also find the local competition tougher following the recent arrival of firms such as Tesco and Carrefour.

Multinationals such as Heineken, Carlsberg and Heidelberger have also snapped up most of the leading Polish brewers, cement companies, paper manufacturers, cable TV companies and mobile phone operators.

However, there are still opportunities for international companies in sectors such as telecoms and tourism.

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