POLAND IMPROVEMENT OF THE COMPETITIVENESS OF ENTERPRISES YEARS

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1 MINISTRY OF REGIONAL DEVELOPMENT POLAND Sectoral Operational Programme IMPROVEMENT OF THE COMPETITIVENESS OF ENTERPRISES YEARS COMMUNITY SUPPORT FRAMEWORK FOR WARSAW, SEPTEMBER 2006 version of 14/09/2006

2 TABLE OF CONTENTS INTRODUCTION THE PRESENT SITUATION OF POLAND'S ECONOMY Economic transformations in Poland in the transition period Evaluation of international competitiveness of Poland s economy GDP per capita Macroeconomic stability The labour market Openness of the economy Description of enterprises The structure of the GDP generation The ownership structure of enterprises The economic situation of enterprises in Poland Investments in enterprises Quality certificates in enterprises Innovation level of Polish enterprises Major indicators of innovative processes in the business environment Research and development expenditures Technology balance of payments Number of patent applications IT in enterprises The business environment Enterprises supporting institutions System of support for SMEs Institutional environment supporting investments and innovations The conditions of the e-economy development THE EX-ANTE EVALUATION Evaluation of the SOP ICE external cohesion Evaluation of the SOP ICE internal cohesion EXISTING MEASURES IN SUPPORT OF THE COMPETITIVENESS OF THE ENTERPRISES The "Entrepreneurship-Development-Work" Strategy Restructuring measures Development-oriented measures State aid THE SWOT ANALYSIS THE OBJECTIVE, PRIORITIES AND MEASURES OF THE SECTORAL OPERATIONAL PROGRAMME The objective, priorities and measures of the Sectoral Operational Programme - Improvement of the Competitiveness of Enterprises and their reference to the Community Support Framework The expected SOP results Relation of the Sectoral Operational Programme - Improvement of the Competitiveness of Enterprises to other Operational Programmes Relation of the Sectoral Operational Programme - Improvement of the Competitiveness of Enterprises to national programmes...57 version of 14/09/2006 2

3 5.5. Cohesion of the Sectoral Operational Programme - Improvement of the Competitiveness of Enterprises with the Community policies Environmental protection Sustainable development The equal opportunity policy Information society Public procurement Employment support policy Competition policy Enterprise policy Priorities and measures of the Sectoral Operational Programme - Improvement of the Competitiveness of Enterprises Priority 1 Enhancement of a knowledge-based economy business environment Measure 1.1 Strengthening of institutions supporting operations of enterprises Measure 1.2 Improvement of accessibility to external financing of enterprises' investments Measure 1.3 Creation of favourable conditions for enterprises development Measure 1.4 Strengthening of co-operation between the R&D sphere and the economy Measure 1.5 Development of a system for entrepreneurs access to information and public services on-line Priority 2 Direct support to enterprises Measure 2. 1 Improvement of competitiveness of SMEs through advice Measure 2.2 Support to product and technological competitiveness of enterprises Measure 2.3 Improvement of competitiveness of SMEs through investments Measure 2.4 Support for investment adapting enterprises to environmental protection standards Technical assistance Measure 3.1: Support to the SOP management Measure 3.2: Computerisation and acquisition of office equipment for institutions involved in the management and implementation of the SOP Measure 3.3: Information and promotion of the SOP measures Measure 3.4: Support to evaluation unit MANAGEMENT AND IMPLEMENTATION SYSTEM Management and implementation Overall responsibility Managing Authority Managing Authority of the Community Support Framework Managing Authority of the SOP ICE Intermediate Bodies Final Beneficiaries (implementing institutions) Final Recipients (beneficiaries) Working Groups for project assessment Management and control Financial management and control Paying Authority Audit and control procedures Winding Up In-depth control (sample checks) Internal audit Irregularity Reporting Financial flows Data collection and transfer Monitoring Membership and role of the SOP ICE Monitoring Committee Quantification of objectives, monitoring indicators Evaluation version of 14/09/2006 3

4 6.5.1 Ex-ante evaluation Mid-term evaluation Ex-post evaluation Building of evaluation capacities, supplementary evaluations, and ex-post evaluation Information and publicity Partnership Annex 1 FINANCIAL TABLES - for THE SOP - IMPROVEMENT OF THE COMPETITIVENESS OF ENTERPRISES... Błąd! Nie zdefiniowano zakładki. Annex 2 THE FRAMEWORK STRATEGIC ENVIRONMENTAL ASSESSMENT OF THE SOP - IMPROVEMENT OF COMPETITIVENESS OF ENTERPRISES Annex 3 COMPATIBILITY OF MEASURES OF THE SECTORAL OPERATIONAL PROGRAMME IMPROVEMENT OF THE COMPETITIVENESS OF ENTERPRISES WITH THE STATE AID RULES... Błąd! Nie zdefiniowano zakładki. version of 14/09/2006 4

5 INTRODUCTION One of the axes of development implementing the objective of the Community Support Framework for (NDP) is developing the growth of, and employment in the enterprise sector. This Sectoral Operational Programme - (SOP-ICE) is the principal instrument for achieving this priority axis. It defines the objectives and priorities and measures in the area of entrepreneurship and innovation, with special emphasis on the small and medium-sized enterprises 1 sector (SMEs), while utilising the resources of the scientific-research sphere and the advantages of modern technologies usage, including IT and technologies supporting environment protection. 1 According to the Commission Recommendation (96/280/EC) of 3 April 1996 concerning the definition of small and medium-sized enterprises [Official Journal L 107 of ] the following definitions have been adopted: Medium-sized enterprises have fewer than 250 employees. Their annual turnover should not exceed EUR 40 mln or their annual balance-sheet total should be less than EUR 27 mln. Small enterprises have fewer than 50 employees. They should have an annual turnover not exceeding EUR 7 mln or an annual balance-sheet total not exceeding EUR 5 mln. Loss of medium or small size enterprise status only occurs if the thresholds are exceeded in two consecutive financial years. Each enterprise must be independent - i.e. 25 % of the capital or the voting rights may not be owned by one enterprise, or jointly by several enterprises, falling outside the definition of an SME or a small enterprise. These thresholds may be exceeded in the following two cases: if the enterprise is held by public investment corporations, venture capital companies or institutional investors, provided no control is exercised over the enterprise by these parties; if the capital is spread in such a way, that an enterprise can legitimately declare that it is not owned in 25 % by one or more enterprises falling outside the definitions of an SME. As from 1 January 2005, the Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises (2003/361/EC) [Official Journal L 124 of 20 May 2003] states: A micro enterprise is an enterprise, that in at least one of the two last financial years: 1) employed on average fewer than 10 employees, and 2) its net annual turnover on the sales of goods, products, services and financial operations did not exceed EUR 2 mln (equivalent of turnover in PLN) or total assets in an annual balance sheet for the end of one of there years did not exceed EUR 2 mln (equivalent of assets in PLN). A small size enterprise is an enterprise, that in at least one of the two last financial years: 1) employed on average fewer than 50 employees, and 2) its net annual turnover on the sales of goods, products, services and financial operations did not exceed EUR 10 mln (equivalent of turnover in PLN) or total assets in an annual balance sheet for the end of one of there years did not exceed EUR 10 mln (equivalent of assets in PLN). A medium size enterprise is an enterprise, that in at least one of the two last financial years: 1) employed on average fewer than 250 employees, and 2) its net annual turnover on the sales of goods, products, services and financial operations did not exceed EUR 50 mln (equivalent of turnover in PLN) or total assets in an annual balance sheet for the end of one of there years did not exceed EUR 43 mln (equivalent of assets in PLN). An enterprise is not considered to be micro-, small- or medium-sized. if entrepreneurs other than other micro-, small-, medium-sized, State Treasury or local authorities claim: 1) 25% and more shares; 2) Right to 25% or more in profit sharing; 3) 25% and more voting rights in shareholders general meeting, annual general meeting of shareholders or annual general meeting of co-operative. version of 14/09/2006 5

6 The funds for realisation of the Programme objectives will be launched with the participation of the European Regional Development Fund (ERDF). The ERDF contribution amounts to EUR mln, the state budget contribution amounts to EUR mln and EUR 51.8 mln from the National Fund for Environment Protection and Water Management. The measures and implementation rules of this SOP are compatible with the Regulation 1260/1999 of 21 st June 1999, laying down general regulations relating to Structural Funds (Official Journal L 161 of 26 th June 1999) and the Regulation 1783/1999 of 12 th July 1999 on the European Regional Development Fund Official Journal L 213, dated 13 th August 1999), as well as with the EU regulations on State aid. The SOP-ICE objective is improvement of competitiveness of enterprises established in Poland, operating in the European Single Market. Improvement of the competitive position of enterprises will strengthen the competitiveness of the economy, defined as the long-term ability of an open, market economy, which is becoming part of the Single European Market, to withstand international competition (on the domestic, the EU and the third countries markets), as well as an ability to adapt effectively to the changing external environment and to achieve a sustainable, levelled economic growth. Achieving this goal should bridge the economic, social and technological gap between Poland and more developed economies of the EU Member States. Taking into account the identified possibilities for improvement of competitive position of Polish enterprises to cope with the challenge and to be able to use the opportunities arising from operating on the Single Market and the areas eligible for the ERDF support, the following priorities have been indicated in the SOP: - enhancement of a knowledge-based economy business environment leading to entrepreneurship development and to increased innovativeness, - direct support to enterprises. The adopted measures under the Priority 1 will allow to create business environment institutions (network) providing high-quality business services for enterprises. The measures under this priority will strengthen co-operation between the R&D sphere and enterprises, thus providing conditions for greater absorption of the R&D results by the economy. Support will also be given to institutions rendering financial service to enterprises, which shall improve enterprise's access to capital. Resources will also be allocated to the building up of a technical and institutional infrastructure, which will improve the conditions of conducting business activity. Support will be given to measures aimed at improvement of the conditions of enterprises' operations through increasing and improving their access to information and on-line services rendered by public sector institutions. The measures under the Priority 2 will allow for an improvement of the competitive position of enterprises, especially through improvement of their product and technology offer (with a focus on SMEs as an engine of employment and economic growth). Support to enterprises investment projects and assistance for placing their operations in the international context are envisaged. In addition, under Priority 2, SMEs will be able to obtain a package of advisory and investment support referring version of 14/09/2006 6

7 to improvement of their ability to operate on the European Single Market and competitive standing on the market. The measures under this Priority shall also allow for enterprises' adaptation to environment protection standards. All these measures shall bring in effect better adaptation of enterprises to operate on the Single European Market. Implementation of the measures in the two above-mentioned Priorities will contribute to establishing a new organisational structure of enterprises, consolidate their economic standing and provide a better ability to compete both on the domestic, the EU and the global market. This will improve access to the knowledge based economy on the one hand, and will facilitate access to capital and stimulate investment on the other hand. These measures shall provide conditions for creating new jobs in sectors of the economy with good development prospects. The support under the SOP-ICE is horizontal and is aimed at all entities meeting the criteria included in the Programme Complement. However, due to the realised structural policy objectives, preference will be given to measures undertaken in the high value-added sectors. The measures proposed under the SOP are compatible with the sustainable development principles conceived as a balance between the economic, social and environment protection objectives. The SOP measures are horizontal and cross-regional. They are complementary to the measures under the Integrated Regional Operational Programme (IROP), which contains a number of measures realised on the regional level, aimed at assisting preparations of business and infrastructure, through promotion of local and regional investment. Furthermore, the measures envisaged for implementation under the SOP will be complemented by i.a. training activities under the SOP Development of Human Resources, in particular in the area of competitiveness improvement and building up a basis of an information society development. version of 14/09/2006 7

8 1. THE PRESENT SITUATION OF POLAND'S ECONOMY 1.1. Economic transformations in Poland in the transition period Transformation of the government system in Poland, undertaken at the beginning of the nineties, signified a radical political change and fundamental changes in the economic and social system. Inclusion of Poland into the Western economic structures and institutions had been considered as the most effective way to make up for development and technological delays and one of the major prerequisites for a sustainable economic growth. One of the fundamental aspects of the transformation was a change of the existing legislation and its adaptation to the mechanisms of a free market economy. As a result of adequate legislative, changes the remains of the former central planning system were abolished, a package of macroeconomic policy measures stabilising the economy and a principle private property protection was introduced. The domestic prices, i.e. wholesale and retail prices were liberalised, the state ceased its control over foreign trade, internal convertibility of the Polish Złoty (PLN) and uniformed exchange rate 2 were introduced, while foreign financial turnover was liberalised. Due to the policy of unconstrained business operation, conditions were provided for domestic competition and establishing new enterprises, also the privatisation process commenced. The result of the economic transformation was a very dynamic growth of entrepreneurship, reflected in establishment of thousands of small, private firms. These firms created new jobs, absorbing redundant labour from restructured stateowned enterprises. Along with a transition from the centrally planned to a free market economy, it turned out that certain sectors are not ready to operate in the new economic environment. This refers mainly to certain industries, such as the mining or steel industry. Despite the measures undertaken by consecutive governments, aimed at adaptation of these sectors to free market rules, the restructuring processes have been not completed yet. Since the beginning of the nineties, economic transformations in Poland obtained a direct financial and technical assistance from the European Union, mainly from the Phare funds. Until the end of 1999 Poland received about EUR 1.2 billion in the form of non-returnable grants. About EUR 400 mln of these funds were designed for programmes realising the regional policy objectives and additional EUR 100 mln were designed for structural measures concerning environment protection, transport, the labour market, support to SMEs. As a result of the adoption of the pre-accession strategy, in 2000 this assistance increased substantially, and until Poland s accession to the EU structures, it was granted under the Phare, ISPA and SAPARD programmes. It is estimated that in the allocation framework of each of the preaccession programmes for Poland may have been granted an assistance of nearly EUR 4 billion. 2 Exchange rates EUR/PLN as following: EUR = PLN, EUR = PLN, EUR = PLN, EUR = version of 14/09/2006 8

9 1.2. Evaluation of international competitiveness of Poland s economy Competitiveness of the economy is understood as a long-term ability of an open, market economy, which is becoming part of the Single European Market, to withstand international competition (on the domestic, the EU, and the third countries markets), as well as an ability for effective adaptation to the changing external conditions and achieving a fast, sustainable economic growth, resulting in reduction of the economic, social and technological distance to more developed European Union economies (EU-15 3 ). A competitive economy generates relatively high incomes from the means of production and ensures stable employment on a solid basis. For an evaluation of the competitiveness of Poland's economy it is necessary to make a comparison with other countries of such aspects as: an ability to generate, as a result of exposure to international competition, relatively high incomes from the means of production and ensuring high employment on solid basis. Most frequently, depending on availability of information, these countries included Germany, France, Great Britain, Italy and Spain. These countries were selected due to comparability with Poland in terms of their area, number of inhabitants or percentage of foreign trade in GDP. As these countries are far more competitive than Poland, the aim of evaluation was to recognise the major causes and scale of delays of Poland s economy. Competitiveness of Poland's economy can be measured by indicators denoting GDP per capita, macroeconomic stability, conditions of the labour market or the level of openness of the economy. The majority of these indicators show a low level of competitiveness of Poland's economy, comparing to the same indicators for the EU- 15 States GDP per capita In 2001 the GDP per capita in Poland (according to the purchasing power parity) amounted to USD and despite a high growth rate over the last decade, it was much lower than in Germany (USD ), France (USD ), and Great Britain (USD ). It also accounted for less than 40% of the average in the EU Member States. The level of this index, regarded as the most synthetic measure of international competitiveness of the economy, points to poor competitiveness of Poland s economy. A drop in the GDP growth rate over the years poses a threat of increasing the distance between Poland and the EU-15 Member States. The economic growth achieved by Poland in 2001 (2.4%) was lower than that of the EU-15 (2.7%) and the growth rate achieved by East and Central European countries. For example the 3 References to EU in chapter 1 are taken to mean to the Union of 15 Member States as of 1 January version of 14/09/2006 9

10 economic growth achieved over the years by Czech Republic amounted to over 5%, and that of Hungary over 7%. In 2003 an acceleration in GDP growth rate was recorded in Poland (GDP growth of 3.8% in the first half of 2003 in relation to the same period of preceding year) Macroeconomic stability The level of competitiveness of Poland's economy depends also on the level of macroeconomic stability. This stability may be assessed through the convergence criteria, established in 1991 by the European Council in Maastricht. Poland meets three of these criteria, i.e. the public debt as percentage of GDP, which in 2002 amounted to 43.3% and was much below the average level in the EU, inflation, which (as annual average) amounted to 1.9% in 2002, and long-term interest rate on government bonds (5.7% in 2002). Other criteria, such as the public finances deficit (3.9% in 2002) and exchange rate fluctuations, have not yet been confined to the established limits. It is expected that along with the termination of inflation tendencies and integration with foreign financial markets, exchange rates fluctuations in Poland shall diminish and the interest rates will approximate to those in the EU countries. The public finance reform under preparation is aimed at, amongst others, reducing the public finance deficit through more strict regulation and cuts of public expenditure in years , in order to prevent continuing growth of public debt, dangerously approaching second prudential limit of 55% set by the law The labour market The structure of employment in Poland is radically different from the structures prevailing in the EU. In 2002 employment in agriculture, forestry and fisheries in Poland accounted for 19.4% of the total employment, and in industry and construction 28.6% and in services 52.0% of total employment. Per analogy the EU average in these sectors was as follows: 4%, 25% and 71%. As at the end of 2001, employment in the pubic sector accounted for 32.2% of the total employment, whereas in the private sector 67.8% of the total employment. The largest changes as regards the level and structure of employment occur in sectors and branches with the greatest scale of restructuring processes, such as hard coal mining, the steel industry and sulphur processing, the coke industry, light industry, chemical industry, pharmaceutical industry, wood industry, the defence industry and energy sector. The available estimates show that employment reduction in these sectors will constitute the main reason for the fall in employment in the whole economy in coming years (till 2005). In turn, an increase in employment shall occur in services and advanced technologies industries. An employment growth in services will relate mainly to services rendered for the society, construction services, building up of motorways and domestic routes, tourist services, financial brokerage and new IT services, contributing to improvement of competitiveness and innovation in the economy. A strongly negative element, from the point of view of competitiveness, is high unemployment. In 2002 the unemployment rate in Poland amounted to 19.9% according to survey of economic activity of population (SEAP) (with a tendency for growth, especially among young people), whereas in other EU countries it ranged from 2.8% in the Netherlands to 10% in Greece and 11.3% in Spain, while in version of 14/09/

11 countries applying for EU membership it ranged from 3.3% in Cyprus, to 13.8 in Lithuania and 8.5% in Slovakia. In Poland the percentage of long-term unemployed amounted to 47,6% in 2002 and was close to the average EU level, although there is an opinion that the relatively high percentage of long-term unemployed in the EU Member States is to a large extent a result of a relatively high level of unemployment benefits in relation to wages and salaries level. A vital element describing the labour market is the percentage in GDP of the labour costs connected with employment. In 2000 this share in Poland amounted to 42.5% and was lower than in the EU Member States; In Great Britain this index amounted to 55.3% and in Germany to 53.8%. It means that Poland maintains a relative advantage in terms of labour costs, however, it is still much lower than it would appear from a direct comparison of the labour costs in individual countries. The highest labour costs of one hour in industrial processing (at a worker s post) were noted in Germany (USD 26.18) and France (USD 17.98), whereas in Poland (according to the market rate of exchange) they amounted to USD 2.99 (in 1999). But this does not take into account differences in labour productivity, which in Poland is much below the level in the EU-15. In the structure of labour costs the wages and salaries costs accounted for about 74% in 2000, similar to Germany and Spain. Another indicator describing the labour market is the percentage of people with university education in the vocationally active population. In Poland in 2001 it amounted to 13.6%, whereas in the EU-15 countries it amounted to 23.2% on average. A still persisting gap between Poland and the EU-15, the gross education ratio with reference to the university education increased up to 46% in 2002, as compared with only 13% in This has been mainly a result of almost over fourfold increase in the number of university students, from 404 thousand in 1990 to 1800 thousand in The number of students per every 10 thousand of population increased to 407 in 2002, against 105 in Unfortunately, the disciplines in education often do not meet the demands of Poland's economy, which causes high unemployment, also among people with university education. Among the university graduates in 2002 the largest number were the business and administration graduates 35.2% (a clearly growing trend, as compared to 9.8% in 1990 and 27.9% in 1999). A large group constituted also the graduates of pedagogic studies 16.1% and social sciences 14.6%. A falling trend has been noted in relation to technical university graduates (from 19.4% in 1990 to 10.0% in 2002). For this reason at present it is of tremendous importance to change the system of education, which should respond more adequately to the demands of a market economy. In particular, it should be oriented towards technical professions and developing innovative and entrepreneurial attitudes. A chance for creating and maintaining jobs is a development through investments in education and knowledge based spheres of the economy, which shall contribute to vocational activation of people and employment growth. As a result of such activities, the employment structure should change towards employment in services and modern industries. version of 14/09/

12 Openness of the economy Poland's economy is becoming more and more open. This fact has been confirmed by a steady growth of Poland s participation in the world s trade: in export from 0.43% in 1989 to 0.6% in 2001 and in import from 0.34% to 0.8% respectively. But in Poland the export value per capita is many times lower that in the EU countries. In 2001 it amounted to ca. USD 1060 in Poland, whereas (in 2001) in Spain to USD 2696, in Italy to USD 4194 and in Germany to USD In Poland the ratio of export to GDP amounted to 28.3% in At the same time in Spain it amounted to 30,0%, and in Italy to 28,4%, that means it stayed at a comparable level as that in Poland. Instead in Germany that ratio was slightly higher, i.e. 37,7%. In the nineties a change of the commodity structure in Poland's export and import was noted. There was a steady growth in the percentage of processed goods in export, from 66% in 1990 to 85% in 2002, and in import from 64% to 82% respectively. The gap between Poland and the EU is also shown in the comparison of the percentage of high-tech products in total export. In 1992 it amounted to 3.2% in Poland, whereas in the EU-15 12% and in the USA 25.2%. In the following years the percentage of high-tech products in Poland's export was even lower (3.1% in 1999), whereas in the EU-15 it increased to 17.1% and in the USA to 27.6%. Services are of marginal significance in Poland's foreign trade, which is a result of, among others, lower liberalisation level of the services market as compared to the industrial products market. During the whole nineties a characteristic feature was a moderate propensity to export and a strong tendency to import, which resulted in a high and growing negative trade balance (reaching a peak of USD 18.8 billion in 1998). In the following years negative trade balance decreased to USD 14.1 billion in 2002 (according to SAD statistics). From a study of the relation of prices obtained by Polish exporters for the respective commodity groups to average prices obtained by other exporters from outside of the EU-15 it turns out, that higher prices than those obtained by other external exporters, are obtained by Polish exporters only in the case of traditional, relatively low processed goods. In turn, for products of science intensive industries in Poland s export very low prices are obtained and no significant improvement in this respect can be seen. The terms of trade (ratio of export to import in given sectors) are generally unfavourable to Poland. For example, exports of science-intensive products are priced very low compared with imports. Only traditional goods with low added value are favourable the terms of trade. The volume of import in relation to GDP is also an indicator of openness of the economy. In the structure of Poland s import the dominating position is taken by supply and investment import (about 78.5% in 2002), enabling development of export production and broadening of the product offer and thus improvement of competitiveness. This means that a high level of import is not a matter for concern, providing that it is facilitating export growth in an increasingly competitive sectors. However it is worth noting, that the financing of import should not be neglected. version of 14/09/

13 An analysis of the import structure by type in the nineties indicates that its high growth contributed to restructuring of the economy, but did not have a sufficient effect on pro-export orientation of Polish economy. In 2002 Poland increased its export (according to SAD) by 13.3% and import by 9.9%. The value of Polish export amounted to USD 40.9 billion and that of import to USD 55.0 billion. Larger dynamics of export over import allowed for keeping the trade deficit on the level of USD 14.0 billion. Despite the continuously high export growth rate, largely exceeding the growth rate in the EU-15 Member States (in Poland on the level of ca. 15% annually in , against the growth of 2 4% in the EU-15 countries over the same period), the level of coverage of import by export is still unsatisfactory. However we have noted a clear growing trend which in 1999 amounted to about 60% and in 2002 reached 74.3% Description of enterprises Competitiveness of Poland's economy is largely determined by the situation of enterprises operating on the Polish market. The ownership and sector structure of enterprises, their investment capacity and innovativeness, understood as an ability and motivation of entrepreneurs to constantly search for and utilise the results of the R&D, new conceptions, ideas or inventions, are those factors, which affect the GDP level and an ability of the economy to generate new jobs The structure of the GDP generation In the structure of the GDP (gross value added, current prices) generation in the nineties positive trends occurred: the share of services increased and in 2002 amounted to 58.1%, while the share of industry and construction decreased to 26.5%, also with that of agriculture, forestry and fisheries, to 2.7%. Since the beginning of the transformation process the role of the private sector in Poland s economy has steadily increased. Its share in the added value increased from 40% in 1990 to over 71.8% in 2001, and in employment from 49% to almost 74.8% in 2001 (i.e. by 25.8%). The main reason why the added value increases slower than employment in the private sector is the fact of low efficiency in agriculture sector, which is almost entirely private. About 25% of the whole working population in Poland is employed in agriculture sector, which produces only 3,3% of the whole national added value. The value of retail sales of the private sector, which has always accounted for a considerable part of total sales, amounted to almost 98% in The private sector s share in the sold production of industry in 2001 was on the level of over 76.2% against 30.8% in Each year the share of SMEs in GDP generation increases. Although in the years this growth was lower than in the preceding years, the SMEs sector is still developing faster than the rest of the economy. In 2001 SMEs generated 48.4% of GDP, of which small firms accounted for 39.4%. However, in comparison with the EU-15 countries, a much lower productivity of Polish enterprises can be observed in the SMEs sector. The EU SMEs, with only a slightly higher employment base, generate almost 2/3 of GDP. version of 14/09/

14 The ownership structure of enterprises System transformation that occurred in Poland in the nineties called for basing the economy on the market mechanisms. This process required sanctioning private property as constitutional basis of the economy. The ongoing ownership transformation process has lead to major changes both in terms of the number of economic entities and in terms of their ownership structure as well. These changes were introduced through establishment of new private economic entities and through privatisation of the existing assets of the state-owned sector. The main goal of privatisation and restructuring of the rest of public property is obtaining efficiency in chosen sectors and enterprises. In this way, the economy and state budget will be less burden by inefficient enterprises which normally has to be subsidized or their due liabilities has to be paid off. It will cause saving up State funds which may support indispensable modernizing processes and new investments contributing to creation of new jobs. At the end of 2001 almost 3.4 mln economic entities were functioning in Poland, including 3.3 mln in the private sector, 110 thousand in the public sector. In comparison there were 1.9 mln and 52 thousand respectively in 1993 (the increase in the number of entities in the public sector was connected to i.a. registrations of communities, districts and voivodships, which being legal persons, had to be incorporated into the register pursuant to the law on public statistics of 29 th June 1995) [Journal of Laws No 88, item 43] 4. The ownership transformation programme has brought a substantial drop in the number of state-owned enterprises which amounted to 8453 in 1990 (as a result of the implementation of different forms of ownership transformation and economic processes: privatisation, liquidation, bankruptcy, ownership cession to local self-government units (communalisation process)). In a period between 1 August 1990 and 30 September 2003 the privatisation processes covered 5503 state-owned enterprises. At the end of September 2003 the Treasury owned 1857 enterprises (registered in REGON). Over this period of time, 1536 enterprises were commercialised The economic situation of enterprises in Poland At the end of 2001 there were almost 3.4 mln enterprises registered in Poland, of which 99.8% were SMEs. It is estimated that about 1.8 mln of enterprises, out of the total number of registered enterprises, are in fact conducting their business activity. In comparison with 1990 the number of SMEs increased by over 330%. Similar to the EU-15, the majority of enterprises are micro-enterprises, estimated as over 95% of total number of enterprises. The largest number of enterprises are firms owned by natural persons, which emerged in branches characterised by low capital intensity and which do not require high labour intensity (mainly trade and repairs 37% of all SMEs - over 1/3, whereas in manufacturing and construction %). Now the SMEs sector employs about 67.1% of the total labour in the national economy (except for agriculture, forestry and fisheries). 4 Amendments of the Act were Publisher in the following Journals of Laws: 1996, No 156, item 775, 1997 No 121, item 769 and No 88 item 554, 1998 No 99, item 632 and No 106, item 668, 2001 No 100, item 1080 and 2003 No 217, item version of 14/09/

15 The average size of Polish SMEs is smaller that in the EU-15, employing 3.3 people on average. But the dynamic process of emergence of new firms was accompanied by excessively slow consolidation processes (transforming into larger units) and too frequent liquidations of small entities, which were not capable to withstand acute market competition. Despite serious development barriers encountered by SMEs, there was a systematic increase in the period of their activity (the percentage of firms active for a year or two has steadily decreased, while that of firms operating for more than five years increased). This was a proof of a slight improvement of the SMEs sector stability and favourable development trends. However, this positive trend was impeded in Low profitability of SMEs is still a problem (the gross profitability index in 2001 was at the level of 1% ). SMEs operate mainly on local markets. Only about 14 thousand of firms are involved in export activities. At the same time, in recent years an increase in their activities on foreign markets has been noted. Export of goods in the SMEs sector in increased from over USD 3 billion, to ca. USD 15.8 billion, and import from USD 6.7 billion to over USD 30 billion. The highest level of turnover was achieved on the markets of developed countries. Despite positive results, the share of the SMEs sector in total export decreased from 47.7% in 1999 to 43.9% in 2001, and in import decreased from 65.4% to about 59.4% over the same period. The drop of the sector's share in total export was mainly caused by export increase of large enterprises. Large enterprises continue to play a significant role in Poland's economy. In 2001 there were about 4300 economic entities employing over 250 people. Although private employers are the majority of the list of 500 largest firms in terms of their turnover (in 2001 there were 265 such enterprises), Poland's economic situation is still dominated by the results of large state-owned enterprises. Almost the whole of the first ten largest employers in Poland are state-owned. The restructuring problems of these companies will affect the situation on the labour market as well as the condition of the public finances sector for many years. The future of thousand employees endangered with redundancies will depend on the ability of large, stateowned enterprises to associate with more effective and flexible private sector and then their transition to this sector as a result of privatisation. The economic results of large private firms (including those with foreign capital) are much better than the average in the economy. This constitutes a chance for creation of a co-operation network between strong, developing large enterprises and the SMEs sector. The largest private enterprises operating in Poland entirely or in the major part are owned by foreign capital, mainly European. The firms with the working control belonging to foreign shareholders, constitute the largest group on the list of 500 largest firms in Poland. Their share in total revenues of enterprises from the list of 500 largest companies in 2002 was significantly higher than that of state-owned enterprises (45% and 35% respectively). The remaining 20% share in total revenues belonged to domestic private companies. This indicates, that Polish large private enterprises were seriously affected by the economic decline. Another reason for this situation is that in preceding years their investment expenditures were smaller than those of foreign enterprises, and so they lost their competitive position in sectors, which require large investment outlays. Foreign private firms and those with the majority of foreign capital also generate better profitability, as well as stronger ability to invest and export. version of 14/09/

16 Large private firms and those with combined ownership and prevailing domestic capital, show better profitability than in the state-owned sector. A relatively large group of very profitable enterprises of this type emerged, operating both in the services and manufacturing sphere. Whereas, the list of the lowest (negative) profitability, includes heavy industry enterprises steel mills and coal mines, because their restructuring process is difficult due to the scale of the necessary change, social effects relating to restructuring and strong concentration of these enterprises in certain regions. Information about the situation of the largest companies indicate, that in the period of economic decline the most serious difficulties are experienced by state-owned companies, with excessively high employment in relation to their incomes and with wages at the same level as those in more productive enterprises under control of foreign capital or domestic private capital. This constitutes the major reason for their lower profitability. The persistent low profitability of these companies points to a deeply structural nature of problems. A considerable number of these enterprises have not restructured enough after the transformation started in 1989, which now makes them unprepared for the fast pace of civilisation change and development of a new model of a knowledge based economy. Polish enterprises without participation of foreign capital face a serious challenge posed by the process of integration with the Single European Market. For large firms it means a necessity to enter international environment and further transformation. They have to acquire the capability to operate on the European market, to learn its rules, methods of acquiring information and first and foremost to adjust to high European standards. Large firms must also be more effective in creating their image in the consciousness of the EU consumers and investors. This will require, amongst others, making initial investment into effective marketing and sales systems, based on knowledge and IT technologies. Large Polish enterprises, in particular stateowned ones, are faced up with a major problem of belonging to sector of no potential for development due to the lack of prospects for increasing demand, or even the risk of falling demand due to globalisation process and technical progress. A variety of barriers and development difficulties confront also small and medium-sized enterprises. While in Poland the base indicators denoting the sector of SMEs are comparable with those of the EU, Polish SMEs are substantially weaker than their EU counterparts in terms of staff, capital and technology. Moreover, these enterprises are basing on traditional comparative advantages Investments in enterprises The economic growth in Poland was associated with a considerable growth of investment expenditures of enterprises, although the rate of this growth in the nineties varied. Since 1998 a slowdown in the investment rate in the economy, followed by general slowdown of economic growth, has been noted in Poland. It was caused partly by economic policy, which was introduced to decrease tensions provoked by excessive demand in 1996 and In 2001 for the first time since 1991 a drop in investment outlays occurred. In 2001 investment expenditures amounted to PLN billion, - a drop by 9.5% as compared to the preceding year. The drop in investment demand is a result of a deteriorating economic situation of enterprises and decreasing own funds of enterprises, which were the main source for investment financing. In effect of deteriorating profitability, many enterprises started to allocate the depreciation funds for financing their current operations. Deteriorated version of 14/09/

17 investment activity of enterprises is unfavourable for competitiveness of the whole Polish economy, as the wear and tear ratio of enterprises' fixed assets is estimated for 62.1% as at the end of It shows that there is still a high demand for exchanging of old and ineffective fixed assets. The drop in investment means that the process of competitiveness improvement and modernisation and restructuring of Polish industry is slowing down. Under such circumstances the funds within SPO - ICE will be essential complement to insufficient national funds allocated to areas mentioned above. The share of investment expenditures of the SMEs sector in total investment expenditures in the economy increased from 37.4% in 1996 to 50% in This growing tendency of SMEs in investments was disturbed in 2001 with the share decreasing to 48.2%. It was mainly due to a sharp decline of the share of medium enterprises, from 23.1% in 2000 to 20.4% in The share of small firms in investment expenditures of all enterprises increased in the same period from 22.2% in 1998 to 27.8% in The restructuring and modernisation of industry in recent years had a positive effect on the environment. Changes in the structure of production, introduction of new solutions in environment protection to industry had a strong impact on reduction of emissions to natural environment. Privatisation of enterprises, restoration of competition in Poland and opening up to international competition, imposition of raw materials and energy free market prices caused positive development towards modernisation of technologies and optimisation of manufacturing processes. However, from 1998 a drop in the outlays for ecological investment in Poland was noted. This refers also to expenditures of enterprises (as a consequence of a general drop in investments undertaken by enterprises). In 2001 they amounted to only PLN 4.6 billion, whereas estimates for point to the fact that annual average investment for environment protection should amount to ca. PLN 12 billion. To meet the requirements relating to environmental protection, resulting from the European legislation, enterprises will have to incur large investment outlays related to modernisation of production, (replacement of machinery and equipment, purchase of new technologies, etc.). In the initial stage of modernisation, certain enterprises forced to compete with stronger entities, may not be able to bear the considerable financial expenditures. However, in case of exchange of depreciated equipment, environmental standards will naturally improve. Expenses of Polish firms for environmental protection are not only connected with investment expenditures for modernisation of production but also with the system of environmental fines and charges. The existing system of recording and monitoring of environment in Poland is ineffective and often does not include all enterprises, especially small ones. Poland's accession to the EU is linked with the necessity to strengthen and seal the system. SMEs have to take into consideration that they will have to comply not only with more stringent emission standards, but they will also be subjected to a more efficient control system. The problems of Polish enterprises with fulfilment of EU requirements in the field of environment protection will be to some extent alleviated by derogations included in Accession Treaty. Poland has different transition periods to fully comply with certain EU Directives, ranging from three to over ten years, for example in the case of industrial waste and emissions of gases. Therefore, during the first years of Poland s version of 14/09/

18 membership in the EU, a strong emphasis on adjusting to environmental protection standards will be put. An important element in the functioning of enterprises is realisation of the provisions of the Environment Protection Law of 27 th April 2001 (Journal of Laws No 62, item 627) 5 related to obtaining integrated permits. Enterprises using technical solutions which do not meet the Best Available Technique standards will have to apply new solutions meeting the emission requirements as defined on the basis of BAT. According to estimates this may relate to ca. 2.5 thousand enterprises. This entails on one hand the necessity to incur large investment expenditures by enterprises, and on the other hand to take non-investment measures, in the scope of competence of the state administration, amongst others establishing a BAT database. A lack of modernisation funds creates one of the most important barriers for enterprises development. The share of bank credits in financing enterprises development in Poland is much lower than in other countries, amounting to ca. 17% (against 70 80% in the majority of developed economies of OECD). Only every ninth firm uses bank financing. Similar relations are observed in case of crediting current operations of enterprises. The volume of credits as a percentage of GDP in Poland is four times lower than the average in the euro zone. Furthermore, in recent time the number of enterprises with no creditworthiness increased. This situation is caused inter alia by high effective interest rates, high transaction costs discouraging banks to credit small projects, lending on collateral requirements and poor quality of enterprise management. Leasing is also an underestimated source of investment financing, estimated at only 6% of total expenditure on purchase of investment goods. Difficulties in access to external financing sources affect also the sector of SMEs. The system of credit guarantee funds and micro-loan funds is suffering from developmental and financial shortcomings. In 2002 there were 39 local and regional guarantee funds and 70 loan funds operating in Poland. The capital of guarantee funds is estimated for PLN 93 mln and the loan funds for PLN 250 mln. The network of these institutions is insufficient, both as to their number and funds, in relation to enterprises' needs. Many of the above mentioned funds is of local nature, operating only in one or a few communities and having a very modest capital. Poland s stock market is also not very supportive in acquiring the capital by enterprises. The role of the Stock Exchange in the economic development is small. The evidence of immaturity of the stock market is a low level of the Stock Exchange capital and insufficient liquidity of the quoted securities. The proportion of capitalisation of the Warsaw Stock Exchange to GDP is 19%, whereas in the developed economies the proportion is 60-80% on average. It is expected that appearance of Open Pension Funds (OFE) as new participants of the capital market will support an increase in capitalisation of the Warsaw Stock Exchange (WSE). Holding PLN 31.5 billion in assets, Open Pension Funds have a share of 30% in the WSE capitalisation. 5 Amendments of the Act: Journal of Laws 2001 No 115, item 1229, 2002 No 74, item 676, No 113, item 984, No 153 Item 1271 and No 233 item 1957, 2003 No 46 item 392, No 80 item 717, No 162 item 1568, No 175 item 1693, No 190 item 1865 and No 217 item 2124 and 2004 No 19 item 177, No 49 item 464, No 70 item 631, No 92 item 880 and No 96 item 959. version of 14/09/

19 Poor development of many segments of the capital market, especially the market of bonds issued by enterprises, and the regulated OTC market in the form of the Central List of Offers, the market of long-term credits for SMEs, as well as poorly developed investment and mortgage banks and venture capital institutions, including the seed capital funds, constitute a serious institutional barrier for Poland s economy, which seriously impediments improvement of its competitiveness. Of major importance for the investment level in Poland and modernisation of Poland's economy (through technology transfer and improvement of access to sales markets) are foreign direct investments (FDI). Since the beginning of transformation to mid 2002 (according to information of the Polish Agency for Foreign Investment - PAIZ) the aggregated FDI value in Poland amounted to ca. USD 65.1 billion, of which 61.5 billion were investments over USD 1 mln. This places Poland on the first place among acceding countries. However from 2001 the inflow of FDIs is diminishing USD 7.1 billion in 2001 and USD 6.1 billion in 2002, while in record year 2000 BIZ amounted to USD 10.6 billion. Poland s position measured by FDIs inflow per capita is thus less favourable in comparison with Estonia, Czech Republic and Hungary.. Foreign investors in Poland exhibit the greatest interest in the manufacturing activity. Until 2002 the total amount invested into this sector accounted for 40.3% of total FDI. The next in line in terms of FDI absorption are such sectors as financial brokerage (21.8%), trade and repairs (12.3%), transport and communication (10.2%). A growth in FDI in the manufacturing sphere allows to improve the quality of goods and services, thus leading to improvement of competitiveness. From this perspective the most favourable are greenfield projects, whose share in FDI is still unsatisfactory. In Poland an important role in attracting FDI is performed by privatisation, which remains the main form of mergers and acquisitions Quality certificates in enterprises A growing importance is attached nowadays in the EU to improvement of product and manufacturing processes quality through the quality assurance systems. The quality system certificate is a confirmation that a company is well organised and managed according to ISO international standards 6. Obtaining the ISO 9000 and ISO certificates brings about external benefits in the form of a company's positive image and the better trust in its products placed on the market. It is of special importance for Poland now, having in mind imminent necessity to compete on Single European Market and on the markets of the third countries. In Poland the number of ISO certificates is still relatively low as compared with the EU-15 Member States. For the total number of 3.4 mln registered companies only 2854 obtained ISO 9000 or ISO certificates, as compared with e.g. Germany 6 ISO organisation (established in 1949) creating international technological and trade standards. ISO is a non-profit, non-governmental organisation. Its members are governmental agencies dealing with standardisation or similar to ISO itself non-governmental standard organisations. At the moment 148 countries are ISO members. The main field of ISO interest is establishing of standards and issuing certificates confirming these standards (so-called ISO 9000/14000). The certificates prove, that the manufacturing process of product or service is consistent with the standard for example 9000:2000 (management of product quality) or (management of environment; environmental protection). version of 14/09/

20 where 45 thousand companies are the holders of such certificates or Great Britain with 70 thousand companies which are holders of ISO certificates (as at the end of 2001). Among Polish companies holders of the ISO 9000 or ISO certificates 6.8% are small enterprises and 14.1% medium-sized enterprises. Respectively, 8.2% and 6.1% of those companies are planning to obtain the certificates. It is worth noting that in Poland emphasis is placed on obtaining the ISO 9000 certificate relating to product quality, disregarding the value of environment management certificates. Enterprises make much less efforts to impose integrated management systems, i.e. quality, environment and work safety management Innovation level of Polish enterprises Many studies conducted so far show that innovativeness of Poland's economy is poor. The consequence of this situation is that Poland's industry has one of the lowest innovation indicators in Europe and the majority of innovative SMEs emerging in recent years is not dealing with advanced technologies manufacturing or modern services. The relatively poor innovativeness level of Polish enterprises and the services sector places them in less favourable position in the competitive struggle on the respective markets. These enterprises do not meet necessary conditions for reaching a competitive advantage, which is achieved through creation of advanced technologies products, manufacturing of quality products with relevant certificates, development of logistic and distribution systems ensuring fast access to clients, raw materials, subassemblies, etc. SMEs in Poland have difficulties or merely cannot introduce innovative solutions. This barrier is connected in the first place with high costs of elaborating and implementing innovations, which largely exceed the capital capacity of the major part of entrepreneurs. A lack of developed infrastructure for commercialisation of results of science and technology works in Poland causes also that investing in new technologies and establishing new companies is associated with exceedingly high risk, which as a consequence impedes the utilisation of scientific research in the economy. This situation is reflected in the value of an indicator describing the share of innovative firms in the population of surveyed industrial enterprises (the innovation indicator). This amount decreased from the level of 37.6% in to 28.9% in and to only 16.9% in The average for this indicator in EU-15 countries amounts to ca. 51% and shows a large diversity, from 26% in Portugal to 74% in Ireland. The least innovative were small enterprises (up to 50 employees), where the innovation indicator amounted to only 10.7% in In case of medium-sized and large companies this indicator amounted to 23.2% and to 54.2% respectively. A disturbing factor is a drop in the percentage of the number of enterprises, which plan to introduce innovations, from 40% in to 21.4% in The drop in the general innovation indicator was accompanied by a drop of this indicator in five most innovative industrial sectors (production of coke and oil refinery products, chemical products, machines and devices, machines and electrical appliances, version of 14/09/