What can be done to boost competition in the Polish economy?
Damian Olko
Senior Economist at WKB | Vice President at TEP | economic advisory in the area of competition, merger control, (regulatory) impact assessment, disputes & litigation
WKB Competition Economics Issues #4
The privatization of state-owned companies and improved regulations aimed at reducing barriers to entry are important steps. This applies not only to domestic players but also to foreign competitors. While possessing a robust antitrust law, there is significant room for improvement in its implementation. These changes constitute pivotal factors that could nurture competition and consequently contribute to the development of Poland.
This article is based on the debate of the Association of Polish Economists ( Towarzystwo Ekonomistów Polskich (TEP) – TEP) in the series 'The economy has a voice. 2023". TEP hosted Professor Adam Noga from Kozminski University, Bartosz Turno, PhD from WKB Lawyers and Dr Ma?gorzata Starczewska-Krzysztoszek, PhD from the University of Warsaw. A video recording of the entire debate is available in Polish.
Why competition is important and what limits it
Competition is often taken for granted. It is seen as something which solely operates in the background, and as such requires no specific attention. Yet, it is most often appreciated when it becomes scarce.
Competition in the market would most certainly be appreciated by Polish rail passengers, who notoriously experience the effects of monopolisation of the intercity rail transport market in the form of high prices, poor accessibility, and service quality – all subsided through taxpayers. We have also seen more recently how political decisions have further restricted competition by hindering investment in wind energy and therefore forced an over-concentration in the conventional energy market. This has a much wider societal impact. Yet, it has not stopped there; the latest amendment to pharmacy market regulations may make patients long for competition.
Through an economic lens, we know that less competition leads to:
- the weaker and/or inefficient use of scarce resources (such as capital and labour);
- reduced incentives for innovation and investment; and
- it is more difficult for productive companies to enter and stay on the market, but easier for their less productive competitors to stay.
Data shows that barriers to competition are high in the Polish economy. When compared to 38 OECD countries we ranked 25th in the aggregate Product Market Regulation ranking for 2018 (latest available release)[i]. The two largest facts with a negative impact on our positioning is state ownership - 35th place, and constraining regulations in network industries - 28th place in the ranking.
The strong hand of the state in respect of being involved in the competitive process in Poland is slowing productivity, growth, and consequently, welfare. Analyses by, among others, the IMF clearly show that domestic and foreign private firms operating in Poland have significantly higher productivity than state-owned firms.
For those interested – you can find more data and a literature review on competition in the Polish economy in my report "Creative destruction" vs. "entrepreneurial state". On competition in Poland, issued by the Warsaw Enterprise Institute (only in Polish).
What about mergers & acquisitions?
When analysing the intensity of competition, it cannot be assumed that a small number of suppliers equates to weak competition. A limited number of producers can intensely compete with each other to the benefit of customers, especially when the market is open to foreign competition, innovations occur, and legislators do not create regulatory barriers or favour selected "national champions".
In the same way, in relation to mergers and acquisitions, a superficial assessment of what market shares the merging companies have is not enough. Currently, there are a lot of M&A deals, which may be due to the economic turmoil in recent years, but also to structural changes, e.g., digital transformation. The challenge for businesses and practitioners is that it is unclear what the aim of competition protection in Poland is (what or whom UOKiK wants to protect). As a result, risks on the part of companies are increasing, which may discourage co-operation or M&A investments.
The outbreak of pandemics and wars has further increased the use of state aid, which can distort competition. From 2020-2021 (a period most associated with the COVID-19 pandemic), the number of liquidated companies in Poland was almost 40 per cent lower than the 2008-2019 average. Some of the companies which continued to operate were certainly 'zombie companies'; a company that would not have been able to sustain themselves without state aid.[ii]
What needs to change?
- A return to privatisation is key. Besides ‘pure’ economic rationale it allows for the proper separation of the ownership function of the state from the regulatory function, thus eliminating conflicts of interest.
- There is also a need to review and revise regulations that restrict competition, both horizontal and sectoral. The most important goal should be to lower barriers to entry into markets in order to promote competition, including from foreign companies and start-ups.
- The lawmaking system, including the impact assessment and consultation process, also needs thorough reform.
- The independence of the UOKiK should be strengthened and it should be provided with the necessary resources in order to effectively and efficiently carry out its objective. This should be concurrent with the clear objective of antitrust policy in Poland. Competition law is not bad, but the practice of its application by national institutions, including the courts, needs significant improvement.
The article represents solely the opinions of the author.