Why invest in Poland now … and what challenges to prepare for

Introduction

While supporting foreign investors in their activities in Poland, we can observe five major drivers that compel many of these investors to enter the Polish market or expand their operations in this country.

While in earlier years Poland was primarily considered as a well-located, low-cost production base for Western Europe, more recently many investors are attracted firstly by Poland’s large population, its steadily growing economy and its rising middle class. Poland seems to be establishing itself as one of the EU’s “Big 6” markets, especially in the eyes of investors from outside Europe.

Naturally, the original attractions still stand. Poland remains centrally located at the heart of the New Europe, linking Western EU markets with resource-rich countries like Russia or Ukraine. Land is still amply available at relatively low cost.

The labour force is no longer sought after only in terms of cost levels, but also as it's considered highly skilled, hard working and reliable.

The Polish authorities are mostly appreciated for their steady and supportive policy towards foreign investors, although executives mention that red tape should be cut further.

Last but not least, many investors are keen to take advantage of the truly massive flow of EU funds towards the Polish economy and especially its infrastructure. Poland has been allocated more than € 105 billion in EU funds for the 2014-2020 period, by far the largest amount of all member states.

Nevertheless, investors need to be aware of a number of challenges that are common to most transition economies in the region, including Poland. Although property rights and transparency are deemed relatively strong compared to other countries in CEE, institutional risks still exist, albeit mostly at a local level. While EU membership is gradually bringing stability, legislation is still changing relatively rapidly and is sometimes inconsistently applied. Legal procedures can be inefficient and the administrative requirements for setting up a company or doing business remain cumbersome, although improvements are being noted.

Furthermore, the accessibility, timeliness and robustness of financial and commercial information are not always up to international standards, and the condition of plant and equipment should be carefully considered. Infrastructure quality can also vary and local supply chain limitations can be a challenge for some foreign investors.

Given Poland’s attractive opportunities and strong underlying fundamentals, it is no surprise that many companies are considering expanding into the Polish market. Although the country’s appeal is justified by many factors, any entry does require comprehensive research, due diligence and planning. While the investment prospects may be attractive, decisions made now can have enduring consequences. Whether you are considering an acquisition, a Greenfield investment or a restructuring, you need to understand the strategic and financial impact of your decisions as well as the implementation risks. Understanding where the opportunities and risks lie, the size of each opportunity and what competitors are doing will arm you with the confidence to make a sound investment decision.

Large domestic market with good growth prospects

As the largest economy to join the European Union (EU) over the last decade, Poland’s combination of sustained growth with economic and political stability is drawing a great deal of interest from around the world. Fuelled by the growing number of middle-income consumers and a wave of infrastructure investments, the economic environment has blossomed.

While Poland features among Europe’s growing economies, with some 38 million inhabitants it is also becoming one of the EU’s six biggest markets. Moreover, Poland accounts for four of the largest urban areas in Central & Eastern Europe, including Warsaw (3.3 million inhabitants), Katowice (2.8 million), Cracow (1.5 million) and Gdansk Tri-city (1.3 million).

Poland’s economy, measured in GDP, has grown to become larger than those of Czech Republic, Slovakia and Hungary combined, and accounts for more than one-third of the total GDP of CEE. Based on information from the World Bank, GDP per capita for 2012 was roughly € 17,300 and has reached 66% of the EU average.

Poland has been a leading economic performer in the region since 2005, with annual GDP growth rates ranging between 3.6% and 6.8% in most years. In 2009 it was the only economy in the EU to show positive GDP growth, and it grew by 3.9% in 2010 and 4.3% in 2011. Growth cooled in 2012 and 2013 to 1.9% and 1.6% amidst a renewed Euro-zone dip. However, more recent projections point to a rebound in growth which, according to the European Commission, could reach 3.2% and 3.4% in 2014 and 2015 respectively. According to the latest IMF forecast, Poland’s economy is expected to continue to outperform the majority of its regional peers in terms of GDP development with a projected annual growth rate of 3.5% in the 2014-2019 period. The Wall Street Journal (31/5/2012)explained Poland’s position among neighbouring CEE countries as follows:

 “…Poland is a bright spot compared with Hungary and the Czech Republic… as robust domestic consumption and rising exports helped the country escape the fate of others in Central and Eastern Europe dragged down by the troubles in the neighbouring Euro zone.”

Poland has a large and steadily growing number of middle-income consumers with increasing disposable income. Upper- and middle income groups (earning a gross monthly income above PLN 3,100), currently at 2.7 million, are expected to surpass the 3 million milestone by 2015. Total disposable income in Poland grew at over 7% per annum before the financial crisis, and continued to show notable growth even over the 2009-2012 period, while according to EIU projections, the rate of growth is picking up in the next few years to over 5% per year. Disposable income of upper- and middle income groups is growing at above average rates, with the EIU forecasting over 6% per annum. However, although disposable incomes are growing, they still have a long way to catch up to Western European levels, particularly in rural areas where more than a third of the Polish population lives.

Poland is not burdened by excessive debt and government debt levels are constitutionally capped. The inflation rate was 3.7% in 2012 and slowed to 0.9% in 2013, while the reference interest rate stood at 2.5%, allowing the government to pursue mildly expansionist policies. The Polish banking system has proved relatively resistant to the recent global financial crisis and did not require any financial support from the state.

So strong have been the fundamentals and so steady the growth of the Polish economy that Barclays Capital featured it on its global list of 10 Advanced Emerging Markets – economies graduating from emerging market status, with risks similar to developed nations paired with the higher returns that are typical of emerging markets.

Location at the heart of Europe

Poland is well located, both as a nearby manufacturing base for many companies from Germany and the Benelux, but also as a natural east-west corridor in northern Europe, linking North Sea ports with the resource-rich former Soviet states.

Poland’s infrastructure is still underdeveloped when compared to other EU countries.  This can be viewed both as a challenge and an opportunity. The situation has been improving gradually from the start of the new millennium, especially after Poland joined the European Union. Of the €67 billion of EU funds allocated to Poland for 2007-2013, as much as €20 billion was allocated for immediate priorities relating to transportation infrastructure. Moreover, a large portion of funds related to Regional Operational Programmes has been spent on infrastructure investment at the regional and local levels.

Between 2011 and November 2012, approximately 1,116 km of major roads and city bypasses had been built, with over PLN 21 billion being spent in 2012 on highway projects.

According to official statistics from the Polish Ministry of Transport, about 1,657 km of railways were put into use between 2011 and 2012. Poland’s IT infrastructure is also rapidly being upgraded and can compete with its peers in Europe. For example, the Polish Internet eXchange, the world’s 12th-largest Internet Exchange Point in terms of maximum throughput, is located in Warsaw.

Poland’s solid economy and funding from the EU allow Poland to invest heavily in improving the transport and energy infrastructure throughout the country in the coming years.

High skill – low cost labour

Labour costs in Poland remain substantially lower than in Western Europe, but also lie below those in, for example, Czech Republic or Hungary. According to statistics published by the European Commission, the total hourly labour costs in Euro increased by 1.4% in 2012 compared to 2011. This outperformed not only the EU as a whole (1.7%) but in particular neighbouring Czech Republic (1.9%), Slovakia (2.5%), Hungary (2.7%) and Romania (4.8%). Redundancy costs also compare favourably with most European markets. However, foreign and local investors alike frequently state that labour laws are unnecessarily complicated and at the same time often strictly implemented. Issues mentioned include the definition of working hours being unclear, sick leave regulations and excessive paperwork.

Labour is relatively highly qualified, above the EU average. Poland ranks in the top three in CEE in terms of tertiary education enrolment rates, with 18% of people between the ages of 15 and 64 having completed some form of higher education. Poland also has one of the lowest dropout rates in Europe, with approximately 4.5% of the population aged 18-24 not enrolled in some form of primary or vocational programme – compared to the EU average of 12.8%.

Foreign investors tend to praise the Polish labour force for its craftsmanship and dedication. A Japanese executive I recently spoke with put it aptly: “The technical skills of Polish employees are very developed, to the point that they are comparable to those of Germans”. On the other hand, investors point out that foreign language skills are sometimes limited, especially outside the major cities.

The Polish worker ranks among the most productive in all of Europe. According to data published by Eurostat, Poland is a leader in CEE in terms of real labour productivity, measured as real output per unit of labour input. Poland is also the only country in all of Europe that has maintained a continuous increasing trend in productivity since 2009.

Steady and supportive authorities

The international companies I have worked with often praise Poland’s authorities as steady and investor-friendly. The government is seen as solid, equitable and genuinely pro-business. It is interesting to observe that Polish law and tax regulations, which are commonly criticised by Polish entrepreneurs and perceived as complicated and unclear, are not an insuperable obstacle for many investors from abroad; on the contrary they are seen as stable and fair. In addition, the foreign investment agency PAIiIZ is considered helpful in building bridges with the relevant authorities.

Data from international institutes such as the World Economic Forum confirms that Poland consistently features among the better performers in the CEE region on institutional strength and transparency. Moreover, the country recently rose in the World Bank’s Ease of Doing Business ranking to 33rd place, ahead not only of Slovakia, Czech Republic and Hungary, but also of Belgium. Nevertheless, foreign investors frequently complain about red tape and bureaucracy, for example in customs clearance procedures, or redundant paperwork for tenders, and that all formal communication must be in the local language.

EU funds

The EU promotes the balanced development of its member countries, and of the 28 member countries, the EU has contributed the most subsidies to Poland. Between 2007 and 2013, the EU allocated 38% of all CEE structural and cohesion funds to Poland. From 2014 to 2020, the EU is to increase the amount contributed to Poland to more than €105 billion, of which over €82 billion in structural and cohesion funds. The EU funds are likely to be designated not only to infrastructural works, but also to support entrepreneurship, innovativeness, R&D, training and other areas.

Besides EU funds, the Polish authorities offer a pool of diverse incentives for investors, depending on the type of business, the scale of operations as well as the location of the investment. Prime among such mechanisms designed to support FDI are the Special Economic Zones (SEZ). SEZs are separate parts of the country’s territory where business activity can be conducted under preferential conditions. The main benefit of investing in an SEZ is the possibility of obtaining a corporate or personal income tax exemption. Investors can also obtain real estate tax exemptions granted by local authorities. The tax exemptions for the companies operating within an SEZ are a form of EU-approved state aid. Public incentives in SEZs can also go toward the cost of two years’ employment for newly hired employees. The above support is classified as regional aid and can be cumulated with other forms of state aid such as EU- or state-funded grants. Currently there are 14 SEZs in Poland, covering an area of over 15,000 ha. In 2013 the Government decided to extend the SEZ arrangement from 2020 to 2026.

Investment projects may combine different incentive sources, which require additional negotiations which have to be coordinated with the relevant authorities. At the same time, there are maximum aid limits which differ by region. In Poland, the grants and incentives are allocated on a competitive basis, hence it is crucial to prepare your application well.

Conclusion: Why invest in Poland now?

Whereas most of Europe has been in the doldrums over the last five years, Poland has gained much traction. We can observe that, while inward investment from Europe was slowing, US and Asian investors have made strong inroads into the country. Privatisation is still going strong and the country is awaiting the next wave of infrastructure investment.

EU membership is driving the modernisation of institutions, the legal environment as well as business culture, but good professional advice grounded in local experience is required in getting Poland right.

All told, Poland is a large and attractive market with a growing middle class, which has withstood the economic crisis well and is receiving over €105 billion in EU funds. Labour is highly skilled, increasingly productive and remains relatively cheap. There are not many countries presenting such a great opportunity at less than a day’s drive from the EU’s core markets.