POLAND 2009 REPORT ECONOMY

Transcription

1 MINISTRY OF ECONOMY POLAND 2009 REPORT ECONOMY WARSAW 2009

2 MINISTRY OF ECONOMY Prepared by: Ministry of Economy Analyses and Forecasting Department Agnieszka Albrecht, Michał Drobniak, Andrzej Grabarczyk, Agnieszka Kalisiewicz, Monika Krupa- Leończyk, Diana Łukaszek-Rozpendowska, Małgorzata Mendyk, Kazimierz Miszczyk, Marcin Mucha, Wiesław Stempkowicz, Maria Szkutnicka-Pieniążek, Elżbieta Szułczyńska, Michał Szymczuk, Monika Walczak, Krzysztof Wójtowicz, Marcin Zelman In cooperation with: Economic Development Department, Economic Regulations Department, Energy Department, European Affairs Department, European Funds Department, Electronic Economy Department, Mining Department, Nuclear Energy Department, Oil and Gas Department, Support Instruments Department, and Trade Policy Department Supervised by: Aneta Piątkowska Director of Analyses and Forecasting Department Translation: GTC AMG sp. z o.o. ul. Rolna 155 a Warszawa ISSN

3 POLAND 2009 REPORT ECONOMY Contents SYNTESIS...7 PART I POLAND AND THE WORLD PRINCIPAL TRENDS IN THE WORLD ECONOMY GENERAL DESCRIPTION OF THE SITUATION IN THE WORLD ECONOMY IN ECONOMIC SITUATION ON MOST IMPORTANT WORLD MARKETS USA Japan Western Europe and the Eurozone Developing Asian markets The Commonwealth of Independent States REAL INCREASE IN THE GLOBAL TRADE IN GOODS IN PRICES AND EXCHANGE RATES IN THE INTERNATIONAL TRADE IN GOODS IN 2008 _ World prices fluctuations Exchange rate fluctuations Changes in the trade in goods in main regions PROSPECTS OF THE WORLD TRADE DEVELOPMENT IN COUNTERACTING THE GLOBAL ECONOMIC CRISIS USA Japan Western Europe and the Eurozone Developing Asian markets The Commonwealth of Independent States POLAND IN THE EUROPEAN UNION OVERALL ASSESSMENT OF THE POLISH MEMBERSHIP TO THE EU Polish economy Implementation of common EU programmes Recovery Package Convergence Programme Common economic regulations Streamlining legal regulations State aid element of the competition policy Environmantal package - the so called green revolution LISBON STRATEGY INTERNAL MARKET Free movement of goods and services Free movement of persons Horizontal industrial policy Energy and climate package Adjustments in the energy area Internal market and relations with third countries COMPETITIVENESS OF THE POLISH ECONOMY INTERNATIONAL COMPETITIVENESS RANKINGS POLAND COMPARED TO OTHER EU MEMBER STATES 60 3

4 MINISTRY OF ECONOMY 4 GROSS DOMESTIC PRODUCT GDP AND GROWTH DRIVERS INTERNAL DEMAND IMPACT OF INVESTMENTS ON GDP DYNAMICS IMPACT OF EXPORT ON GDP DYNAMICS ROLE OF SECTORS IN GDP FORMATION EFFECT OF GLOBAL FINANCIAL CRISIS ON ECONOMIC GROWTH IN GROSS DOMESTIC PRODUCT PER CAPITA IN POLAND COMPARED TO SELECTED COUNTRIES 75 5 LABOUR MARKET EMPLOYED PERSONS UNEMPLOYMENT AND UNEMPLOYMENT RATE STRUCTURAL MISMATCH ON THE LABOUR MARKET FOREIGN MIGRATION FOR ECONOMIC REASONS 81 6 FOREIGN TRADE TRENDS IN POLISH FOREIGN TRADE IN GEOGRAPHICAL STRUCTURE OF FOREIGN TRADE TURNOVER CHANGES IN COMMODITY STRUCTURE OF FOREIGN TRADE FOREIGN TRADE IN THE FIRST MONTHS OF THE EXCHANGE RATE AND ITS INFLUENCE ON COMMODITY TRADE 96 7 INFLATION AND MONETARY POLICY PRICES Consumer prices Prices of industrial production and construction/assembly production MONETARY POLICY Basic factors influencing the implementation of monetary policy Monetary policy implementation in Instruments of monetary policy implementation THE PUBLIC FINANCES STATE BUDGET PUBLIC FINANCE MEETING THE TREATY OF MAASTRICHT CRITERIA INDUSTRY DYNAMICS AND STRUCTURE OF INDUSTRIAL OUTPUT Industrial output dynamics Quarterly output dynamics in the manufacturing industry The structure of output in different sections and branches of industry Output dynamics in the first half of

5 POLAND 2009 REPORT ECONOMY 9.2 ESSENTIAL PROBLEMS OF INDUSTRY. DEVELOPMENTS IN SELECTED SECTORS Horizontal industrial policy Sectoral policies Hard coal mining Automotive sector Chemical sector (including pharmaceuticals) Iron and steel metallurgy sector Electronic sector The light industry sectors (textiles, wearing apparel and leather) Wood-based sectors Shipbuilding industry POLAND'S ENERGY SECURITY SITUATION IN THE FUEL/ENERGY MARKET Security of the Polish power system Situation of the energy sector in Renewable energy sources (RES) Efficiency of the use of energy in economy European Union Greenhouse Gas Emission Trading System Nuclear power Security of oil sector Security of gas sector IDENTIFYING THREATS CONSTRUCTION GROSS VALUE ADDED AND PRODUCTION OF CONSTRUCTION INDUSTRY Macroeconomic factors behind the dynamics and production volume of the construction sector Dynamics and structure of construction and assembly production RESIDENTIAL CONSTRUCTION General problems of the residential housing industry Residential housing in ASSESSMENT OF THE CONSTRUCTION INDUSTRY PERFORMANCE SERVICES SECTOR VALUE ADDED (MARKET AND NON-MARKET SERVICES) GENERAL CHARACTERISTICS OF THE SERVICES SECTOR TRADE AND REPAIR ELECTRONIC TRADE TRANSPORT AND COMMUNICATION GENERAL PROBLEMS OF THE SERVICES SECTOR 159 5

6 MINISTRY OF ECONOMY 13 ENTERPRISES OWNERSHIP STRUCTURE AND OWNERSHIP TRANSFORMATION IN STATE-OWNED COMPANIES Ownership transformation in state-owned enterprises Number of enterprises covered by the ownership transformation procedures and the number of privatised business entities Revenues from privatisation and budget revenues from dividends Development of small entrepreneurship FINANCIAL STANDING OF COMPANIES Revenues, costs and results on individual types of activities Financial situation in the economy sectors Investment expenditures and possibilities of their self-financing Debt INVESTMENT EXPENDITURES AND POLISH FOREIGN INVESTMENTS Investment expenditures Polish foreign investments FDI INFLOW TO POLAND Role and importance of the enterprises with foreign capital FDI inflow to Poland FDI by countries of capital origin FDI inflow by sectors INNOVATIVENESS OF POLISH ENTERPRISES AND THEIR ENVIRONMENT Innovativeness of Polish enterprises Innovation of Poland as compared to other countries Institutional environment of Polish enterprises ENTREPRENEURSHIP AND BARRIERS TO ENTERPRISE DEVELOPMENT Economic regulations Barriers to enterprise development Instruments for enterprise support Instruments supporting innovation of enterprises Financial instruments for supporting exports Financial support for investments Special Economic Zones Public aid Instruments for developing a network of institutions in the business

7 POLAND 2009 REPORT ECONOMY SYNTHESIS A general evaluation of the condition of Polish economy in 2008 may not be unambiguous. In the first half of the year, the economy developed quite fast despite the fact that the downward trend in the dynamics of GDP growth from quarter to quarter, observed already in 2007, continued. However, in the second half of the year, and in particular in the fourth quarter, the economic growth rate slowed down considerably. This unfavourable trend was also observed in the first half of The economic situation of Poland in 2008 was determined by its economic condition in the second half of the year. During the year, the growth rate of GDP, of industrial production, and of market and nonmarket services declined. The dynamics of foreign trade turnover declined, both of exports and imports. At the same time, the situation on the labour market was relatively favourable. Employment increased and salaries grew fast. Registered unemployment rate declined. An increase in employment and salaries led to acceleration of the consumption dynamics which did not, however, compensate for a decrease in the growth rate of investments by over two times. As a result, the dynamics of domestic demand slowed down. Lower production dynamics were accompanied by faster salary growth which stimulated a fast increase in inflation. Polish zloty depreciated considerably against primary currencies. However, this did not result in a visible increase in exports due to a decline in demand experienced by our partners and to an increase of labour unit costs in Poland. Financial performance of companies deteriorated. Lower production caused a decline in planned budget revenues. At the same time, the deficit of public finance sector exceeded its maximum amount assumed by the Maastricht Criteria. The reason behind the economic slowdown in Poland was the global financial crisis which evolved into the world economic crisis. Negative crisis effects hit Poland in the second half of 2008, a few months after the crisis had become visible in leading world economies. However, it should be pointed out that whereas these countries were affected by recession, the situation in Poland can be described as a considerable slowdown. The reason for a relatively better situation of our country is the relatively high domestic demand and, surprising as it may seem, rather low share of foreign trade in Poland s GDP. The financial crisis affects Polish economy acting as an external shock. Therefore, it is experienced only indirectly, mainly by a credit and trade channel. Polish banking system is not a matter of concern, but risk revaluation and more severe credit criteria resulted in lower credit availability, and in an increase in the cost of money on the capital market for households and companies. Economic downturn affecting our main partners constrained external demand. The impact of the financial crisis on Polish economy was somehow compensated also by the foreign exchange rate. A decline in the foreign exchange rate of Polish currency was conducive to competitiveness of Polish exports, leading to considerable decline in imports. Net exports became the main growth factor in the first half of A better economic situation in Poland, as compared to that of other European Union countries, resulted in decreasing economic development gap. GDP per capita in Poland increased to 57.5% of the EU average. However, a considerable gap in economic development between Poland and leading European Union countries still exists. To eliminate it, it is necessary to create friendly environment for entrepreneurs and to assure effective management of public funds by efficient public institutions. The implementation of this objective will result in growing competitiveness and will assure high and sustainable economic growth. 7

8 MINISTRY OF ECONOMY EXTERNALITIES. After a few years of a high growth rate, the economy was affected by an economic slowdown. Starting in the second half of 2007, the US economy, being the main world economic growth stimulator, faced a crisis on the real estate market and turmoil on the financial market. Initial problems were related to sub-primes, and in particular to excessive liberalisation in providing credit to low-income customers. As a result, house prices declined, which in turn brought about problems for the banking sector: a mortgage bank Lehman Brothers went bankrupt, and Fed agreed to take over the government sponsored enterprise Fannie Mae and Freddie Mac. With time, the financial crisis evolved into the economic crisis, causing recession in the US economy. The US demand for imported goods and services declined considerably. To prevent further deterioration in the US economic situation, stimulating packages were introduced. These packages amounted in total to USD 1 trillion. A drastic fall in the US imports (USA is the largest importer on the world market) could not remain without influence on the global economy. Countries exporting to the US market were forced in 2008 to limit their production and imports. Global demand, and related production, started to decline in the majority of leading economies. The world trade turnover decreased by 2.6%. Global economic growth slowed down from 5.2% in 2007 to 3.2% in World stock exchange markets were affected by significant falls in stock prices and in primary stock indices. No considerable change in the situation was observed also in the first half of Worldwide trends also have an effect on the Commonwealth of Independent States. The situation on developing Asian markets is still good, though worse than before the crisis. The GDP growth rate in China shrank from 13% in 2007 to 9% in A decline in global demand affected Asian economies largely based on exports. However, relatively high demand in China and India forced Asian entrepreneurs to focus on domestic market. The global crisis destabilised the European Union economy. Almost all the Member States saw negative growth in the second half of 2008 and at the beginning of Due to a difficult situation on the financial market, domestic demand decreased from 2.4% in 2007 to 0.6% in A decline in global demand and in goods prices resulted in a fall of inflation in the Eurozone to zero in May The European Union tries to stimulate the economy with anti-crisis packages. Member States undertook common activities in the fourth quarter of 2008, based on economic rescue plan - EU EERP (European Economic Recovery Plan), which assumes that as much as EUR 200 billion will be spent to stimulate demand and create favourable conditions for the European economy to return to the fast growth path. Since Polish economy is closely linked with European Union Member States, the economic activity in these countries is of particular importance for domestic economy. Economic decrease of 2008 resulted in a decline in the growth rate of Polish exports to the EU market. In the fourth quarter of 2008, exports to this market even decreased, and after five months of 2009 their decline amounted to as much as 23%. In 2008, the European Union accounted for 77.8% of the Polish exports. The European Union countries are not only Poland s main trade partners, they are also key foreign investors in our country. The economic downturn caused a decline in total FDI in to PLN 11.3 billion (by 32%). COMPETITIVENESS OF THE POLISH ECONOMY. The competitiveness of the economy reflects the importance of national economy on the world market. Competitiveness is a very complex notion, defined by several partial indices relating to micro- and macroeconomic aspects of conducting business activity. According to the majority of international rankings, the competitiveness of Polish economy is fairly low. In every ranking, Poland is behind the majority of EU-27 countries. 8

9 POLAND 2009 REPORT ECONOMY The weaknesses of the Polish economy include unfavourable conditions for starting up business, difficulties involved in paying taxes, and long period of recovering claims. Low position of our country is also due to ineffective public institutions, poorly developed infrastructure, and a lack of innovativeness. Low labour market flexibility, low employment rate and high administrative charges imposed on entrepreneurs are negatively assessed. Factors which have a positive influence on the competitiveness of the Polish economy include: easy access to credit, low inflation, good quality of higher education and trainings, large market and macroeconomic stability. Reports also give a high note to the Polish fiscal, monetary and trade policy. It should be pointed out that competitiveness rankings are based on statistical data collected approx. two years ago. Therefore, not all the information specified about is relevant for the present situation. ECONOMIC DEVELOPMENT. Since 2003, the Polish economy witnessed strong development in all of its main sectors. In 2007, the GDP growth amounted to 6.8%. Economic prosperity continued also during the first half of 2008 when GDP increased by approx. 6%. It was only in the second half of 2008 when the upward trend slowed down. In the third quarter, the GDP growth rate slowed down to 5.0%, and in the fourth quarter to 2.8%. As a result, the annual GDP growth amounted to 4.9%, and was lower than in the previous two years. Nevertheless, the growth rate in our country belongs to the highest economic growth indices observed in the European Union. The main growth driver in the recent years has been domestic demand, stimulated by increasing employment and real salaries. In 2008, employment grew by 3.7%, and real salaries by 6.0%. Total consumption went up by 5.9% (in 2007 by 4.6%), mainly due to growing individual consumption. However, in 2008, the dynamics of domestic demand slowed down to 5.4% (from 8.7%), first of all due to limited investments. Gross fixed capital formation grew by 8.2%, as compared to 17.6% in In the first half of the year, they increased by approx. 15%, and in the second half by mere 4%. The growth rate of real salaries exceeded the GDP growth rate which resulted in an increase in labour unit costs by 3.5% as compared to 0.5% European Union average. Due to the world economy slowdown, the growth rate of imports and exports declined. In the second half of the year, strong depreciation of Polish zloty contributed to increasing competitiveness of Polish goods (an increase in labour unit costs had an opposite effect), and consequently, to developing exports, and limiting negative results of the economic slowdown in main trade partners of our country. The most significant impact on the GDP growth in 2008 was made by consumption (4.6 p.p.), followed by gross accumulation (1.0 p.p.), including gross fixed capital formation (1.8 p.p.). The impact of net exports was adverse, as in the previous year. The growth in gross value added amounted to 4.9% (as compared to 6.7% the previous year). Value added of market services grew by 5.9% (as compared to 6.5% the previous year), and in the industry - by 3.9% (as compared to 10.1% the previous year). The growth in total gross value added in 2008 can be attributed mainly to the market services sector. INVESTMENTS. Investments reflect the condition of the economy and its development prospects. Growing investment outlays of companies along with the inflow of foreign direct investments show that the economy is in a good shape and its development prospects are promising, making gains for enterprises possible. On the other hand, poor condition of the economy and unfavourable prospects for its further development cause a fall in investment processes and lead to outflow of investments to other regions, where prospects for the future seem better. The level of investment determines economic 9

10 MINISTRY OF ECONOMY development, and is a condition for growing competitiveness of the economy and of its individual sectors. Increased investments in production machinery and equipment fundamentally contribute to the modernisation of, inter alia, industry sector, to increasing the effectiveness of production processes, and to improving the quality of products. There was a steady growth of expenditures on investment projects observed since 2003, and a substantial increase in investment expenditures (by 16.8%) came in The following year, the increase growth rate accelerated even faster - reaching 20.4%. In 2008, as a result of global recession, the growth rate of investment decreased to 8.7%, mainly due to a reduction in investments in the second half of the year. Investment expenditures reached PLN 213 billion that year. The most significant increase was observed in expenditures on machinery and equipment (by 10.5%), and on vehicles (by 9.9%). As in previous years, investments were financed mainly by own funds of entrepreneurs. A downturn in global prosperity, a slowdown in the economic growth rate in our country, and an increase in labour unit costs resulted in a reduced FDI inflow. Whereas in 2007 foreign investors invested EUR 16.6 billion, the corresponding figure for 2008 is EUR 11.3 billion. In the first half of 2009, this situation became even worse. INDUSTRY. In 2007, the growth rate of industrial output amounted to 11.2%. The growth rate in industrial output was also relatively high, though gradually diminishing in the first half of 2008 (8.5%). In the second half of 2008, the global economic crisis started to exert a negative impact on our economy. In the third quarter, production grew by 3.3%, and in the fourth quarter it fell by 5.2%. Its growth amounted to 3.3% during the whole year. A downward trend has continued also in the first half of 2009 (decline in production by 8.3%). Various changes relating to production took place in 2008 in manufacturing sections. The largest section, i.e. manufacturing, determining changes in industry as a whole, was marked by a lower production increase change from 12.4% to 3.7%. Mining was the only section where growth accelerated (from 1.3% to 2.7%). Electricity, gas and water production and supplies declined by 0.9%, as compared to 2.1% in Significant changes in the production dynamics were observed in manufacturing divisions. In 13 out of 23 manufacturing divisions in total, the production increased, while a decline was observed in the remaining ten. The largest increase was observed in production of radio and television equipment (by 26.1%), of office machines and computers (by 24.2%), as well as of machinery and equipment (by 16.2%). The first two are referred to as high-tech divisions. The most considerable decline in production affected manufacturing of tobacco products (approx. 35%), three divisions of the light industry (approx. 10%), as well as the production of basic metals (5,1%) and chemical products (4.0%). The annual production dynamics in 2008 in individual divisions of manufacturing were determined mainly by the situation in the second half of the year, and in particular in the fourth quarter. The Analyses and Forecasting Department selected twelve largest divisions (out of 23) whose contribution to the production of manufacturing industry exceeds 85%. In as many as nine out of the twelve divisions selected the production declined in the fourth quarter. Most considerable falls were observed in production of basic metals (by 34.5%), and of vehicles (by 14.4%). 10

11 POLAND 2009 REPORT ECONOMY As regards divisions and groups of industries that manufacture products considered to be the carriers of technological progress, production growth amounted to 12.4% in 2008, as compared to 14.0% in The production dynamics in this group was significantly influenced by the volume of sale of radio and television equipment. The share of the carriers of technological progress in total industrial output in current prices increased from 16.2% in 2007 to 16.5%. Labour productivity in terms of production sold per employee in the industry was at the same level as in 2007, whereas an average real salary increased by 4.9%. CONSTRUCTION. Economic slowdown can be seen in all segments of the economy. Construction is not an isolated island. Gross value added in the construction sector grew in 2008 by 11.0%. Following relatively fast growth in the first half of the year (by approx. 17%), the growth rate slowed down to 10.9% in the third quarter, and to 5.0% in the fourth quarter. A downward trend in the dynamics of gross value added continued also in gross value added grew in the first quarter by 3.1%. In 2008, 165 thousand dwellings were completed, i.e. over 23% more than in An increase in the number of dwellings completed related to almost all forms of dwellings, dwellings completed in public building society construction. As compared to 2007, the most significant increase (in absolute figures) was observed in case of dwellings completed in construction for sale or rent, as well as dwellings completed in private construction. FOREIGN TRADE. First three quarters of 2008 did not indicate a change in foreign trade. Poland s exports grew rapidly during the period (increase by 19.8%). The collapse took place as late as in the fourth quarter of 2008, when exports decreased by 1.2%. Annual exports amounted to EUR billion, i.e. 14.1% more than in the previous year. As compared to 2007, the growth rate of exports was lower by 1.7 p.p. A similar situation was observed in imports. In the first three quarters of 2008, the growth rate of imports amounted to 23.8%. In the fourth quarter, it slowed down to 3.7%. On annual basis, imports (EUR billion) increased by 18.3%, i.e. by 4.2 p.p. faster than exports. The trade balance was negative and amounted to EUR 26.2 billion (as compared to EUR 18.5 billion in 2007). During the year, a negative balance increased by EUR 7.7 billion. A downward trend in the trade of commodities has continued also in During the first five months of the year, exports declined by 23.7% (to EUR 37.2 billion), and imports by 30.9% (to EUR 40.5 billion). The trend of more rapid growth in imports than in exports, observed in , which caused an accumulation of the negative trade balance, reversed. As a result, the negative balance diminished to EUR 3.3 billion. The reduction in the trade deficit was influenced by depreciation of Polish zloty by over 14% in the fourth quarter of 2008, and by 15.8% in the first quarter of Rapid depreciation of Polish zloty caused cost shock to imports. Developed markets remain the primary destination for exports of Polish goods. Their share in Poland s exports in 2008 amounted to 83.0% and was slightly below the 2000 level. 77.8% of exported Polish goods were sold within the European Union countries, and 10.5% found their customers in the Commonwealth of Independent States. The main source of Polish imports is the European Union whose share accounts for 61.9%. The share of Russia and China is also considerable. The highest deficit is still generated in the trade with China and Russia amounting to EUR 10.6 billion and EUR 7.8 billion, respectively. As regards the trade with the European Union countries, a positive balance was generated in 2008 (EUR 2.3 billion) - EUR 0.7 billion below the 2007 figure. 11

12 MINISTRY OF ECONOMY The products of electromechanical industry account for the highest value both of Poland s exports and imports (43% and 38%, respectively). Imports of this group of products grew faster than exports which deepened - by EUR 1.7 billion - the negative trade balance, which reached minus EUR 4.8 billion. The next group of exports comprises metallurgic products and chemical products, and as regards imports chemical products and mineral products. A significant deterioration of trade balance in 2008 resulted mainly from mineral products, electromechanical products and products of the electromechanical industry. LABOUR MARKET. Most significant prosperity related factors influencing the situation on the labour market comprise the economic growth rate and investment dynamics. The situation on the Polish labour market in 2008 improved. In 2008, employment grew by 3.7%, and unemployment rate, according to the LFS figures, amounted to 7.1% as compared to 9.6% in In 2008, employment ratio for people aged reached 59.2% (increase by 2.2 p.p. as compared to the previous year). According to the Lisbon Strategy, the average employment ratio in the European Union should amount to 70% by the end of Unfortunately, Poland is far from meeting this objective. The reason is a large percentage of non-working older people and low professional activity of women. The lowest professional activity can be observed in the group of people aged (which is due to poorly developed educational system for adults) and those aged The highest employment rate and the lowest unemployment rate is observed in the group of people with higher education and with vocational education, while the worst figures relate to people with rudimentary education. There is a lack of qualified craftsmen, engineers and specialists. The reason for structural non-adjustment on the labour market consists in slow changes in the education system. Higher technical schools do not respond fast enough to the growing demand for engineers communicated by entrepreneurs. Instead, such schools open humanistic faculties, such as management and administration. Furthermore, Poland is characterised by extensive geographical differences in unemployment rate. This is due to low mobility within the country. Since 2004, when Poland s joined the European Union, many people have emigrated in looking for a job. However, this trend slowed down during the last year. Due to the crisis, less and less Poles decided to go abroad searching for a job, and many others came back. In 2008, migration directions changed. The importance of the Netherlands, Luxembourg, France, Belgium, Denmark and Norway as destination for job migration increased. In 2008, the share of people working in industry and construction sectors increased. At the same time, a slight decline was observed in the share of people working in agriculture and services. PRICES. Keeping inflation at a low level has been one of the major goals of our economic policy. It is also one of the conditions for entering the European Monetary Union. At the end of 2007, the growth rate of consumer prices accelerated. This was related to a faster increase in salaries than in labour productivity in the country, as well as in food and fuel prices on the global market. The average annual inflation rate in 2007 amounted to 2.5%. In 2008, the increase in prices was even faster and reached 4.2%, which is more than the figure adopted in the Budget Act (2.3%). The reasons for price increase in 2008 are the same as in the previous year. However, it should be pointed out that the difference between an increase in salaries and an increase in labour productivity became even bigger. 12

13 POLAND 2009 REPORT ECONOMY Average annual prices of industrial output increased in 2008 faster than in 2007 (2.2% as compared to 2.0%) 1. A slower increase in prices was observed in the manufacturing sector (0.8% as compared to 1.5% in 2007). At the same time, a higher growth rate was observed in the mining sector (10.8% as compared to 3.3% in 2007). In 2008, prices in the manufacturing sector grew mainly in the production of coke and oil refinery products (18.8%), as well as of chemicals and chemical products (6.9%). The average annual prices in construction and assembly production sector grew in 2008 by 4.8% (as compared to 7.4% in 2007). MONETARY POLICY. In Monetary Policy Guidelines for 2008 the risk was pointed out that the worldwide economic slowdown would have an impact on Poland due to decreasing external demand. The main objective of monetary policy in Poland was defined as maintaining inflation around the medium-term inflation goal (2.5%). The growing inflation resulted in more tightened monetary policy. The Monetary Policy Council increased interest rates a number of times in In November, the Monetary Policy Council lowered the interest rates, because the inflation was slowing down (from 4.8% in July and August to 3.7% in November on an annual basis) and the economic activity was diminishing. At the end of 2008, the reference interest rate amounted to 5.0%. In the first months of 2009, the Monetary Policy Council reduced interest rates a number of times. The reference interest rate stood at the end of July 2009 at 3.5%. PUBLIC FINANCE. Good condition of public finance is one of the priorities of Polish economic policy. The situation of public finance may be assessed based on the general government deficit and debt-to- GDP ratio. In 2007, both indicators were falling. In the period of fast economic growth, tax revenues grew rapidly. The general government deficit-to-gdp ratio declined from 3.8% in 2006 to 2.0% in 2007, and the debt-to-gdp ratio fell from 47.7% to 45.2%. Since the accession to the European Union Poland was covered by the excessive deficit procedure (the share of the general government deficit in GDP exceeded 3%). In July 2008, the Council of Ministers of the European Union decided to end the excessive deficit procedure against our country, due to the fact that the general government deficit in GDP declined below 3%. The global crisis, which arrived in Poland in the second half of 2008, had a very negative impact on the situation in public finance sector. The deficit of this sector increased to 3.9% GDP, and the sector debt to 47.0%. Due to exceeding the reference level of public finance sector deficit, the European Commission again started the excessive deficit procedure against Poland in June The slowdown in economic growth experienced by Poland in 2008 resulted in a considerable fall in budget revenues which were much lower than those assumed in the Budget Act. Budget revenues amounted to PLN billion, i.e. 89.9% of the planned revenues. Budget expenditures amounted to PLN billion, corresponding also to 89.9% of the planned figure. A large share of fixed expenditures in total budget expenditures (predetermined arising from statutory regulations or previously undertaken liabilities within legal frameworks amounting to as much as 72.7% of expenditures in 2008) makes it impossible to introduce any significant changes on the expense side of the budget. The budget deficit reached PLN 24.3 billion (89.9% of the planned figure). As at the end of June 2009, budget revenues amounted to PLN billion, i.e. to 44.3% of planned revenues 2. Budget expenditures (PLN billion) formed 47.0% of planned expenditures. The budget deficit after six months amounted to EUR 16.7 billion (91.6% of planned figure). 1 Production prices indices were presented according to the PKD 2007 classification. 2 Figures for the first half of 2009 were compared to the Budget Act adopted by the Parliament on 23 January On 17 July 2009, the Parliament amended thebudget Act. 13

14 MINISTRY OF ECONOMY OWNERSHIP STRUCTURE OF THE ECONOMY. Since the beginning of the transition process, fundamental changes in the ownership structure of the Polish economy have occurred. Polish stateowned companies were subject to intensive privatisation. In mid-90s, the private sector gained a dominant position in Polish economy, and its dominance over the public sector increases every year. In 2007, the share of the private sector in gross value added amounted to 77%. In the years , the ownership transformation of enterprises was completed. In April 2008, the government adopted Privatisation Plan for the years which assumes privatisation of 740 entities within four years. In February 2009, the list of companies to be privatised was extended to include 802 entities. On 11 August 2009, the government took a decision to speed up the privatisation processes. A list of key companies to be privatised in the years was prepared. This list comprises 54 companies (including 15 to be privatised by the end of 2009, and further 39 - in 2010). The Council of Ministers decided that the State Treasury retained full control and corporate supervision over major enterprises, namely: KGHM, Tauron, Lotos and PGE. Privatisation is expected to help out many State Treasury companies in a difficult economic and social situation, to make them more effective, to support our economy, and to increase budget revenues in the years Between 1991 and 2008, privatisation revenues amounted to over PLN 96 billion. As at 11 August 2009, revenues reached PLN 3.2 billion, which is approx. 27% of planned revenues. Privatisation revenues in the years are assumed at PLN 36.7 billion (PLN 11.7 billion in the second half of 2009, and PLN 25.0 billion in 2010). ENTREPRENEURSHIP. Entrepreneurship results in efficiency necessary in day-to-day operation of the company, and creates basis for its development. Entrepreneurship depends on various external business environment factors such as: legal regulations, tax system, labour costs, road and telecommunication infrastructure, and financial as well as judicial system. There are many barriers hindering the growth of entrepreneurship in Poland, including, inter alia, complicated law and bureaucracy. To limit a negative influence of these factors, several proposals and plans for reforms have been prepared. The first of them, namely a three-stage programme Better regulation is aimed at simplifying mandatory regulations, assuring high quality of adopted law, and reducing administrative burden. The Package for the Entrepreneurship, on the other hand, aims at simplifying starting and running business. The package comprises over 20 amendments of acts, relating inter alia to freedom of economic activity, accountancy, special economic zones, tax ordinance, code of commercial companies, bankruptcy law, and public-private partnership. In order to better identify barriers to development and to overcome them, the economic situation is reviewed regularly based on surveys addressed to entrepreneurs. In 2008, as in previous years, entrepreneurs specified the amount of taxes and fees, as well as complicated legal regulations as the most significant barriers to development. Factors, which proved less important in previous years, were lower turnover and competition from small and large enterprises. Such responses were given by entrepreneurs due the worldwide crises. In the light of the economic slowdown, companies perceive labour costs and problems of irrelevant employee qualifications as less important. 14

15 POLAND 2009 REPORT ECONOMY Micro-enterprises become more and more important for the economy. Their number increases every year. In 2007, there were 1.7 million enterprises employing less than 9 employees (increase by approx. 4%). Revenues and the number of employees in micro-enterprises have been growing. The survival ratio, i.e. the percentage of enterprises which were not closed down within the first year of activity has increased as well. INNOVATIVENESS. One of the indices showing the development level and competitiveness of the economy is innovativeness of a given country. As regards this criterion, Poland occupies a remote place in international rankings. According to the European Innovation Scoreboard 2008 (EIS), Poland belongs to the chasing countries as the level of the Summary Innovation Index is lower than the average for all European Union countries, but the growth rate of this index exceeds the average figure. In this ranking Poland placed 23 out of 27 countries. The main barrier to further development of innovativeness is insufficient financing. Expenditures on R&D amounted in 2007 to PLN 6.7 billion (increase by PLN 0.8 billion as compared to the previous year). The expenditures on R&D-to-GDP ratio has remained at a similar level of 0.57% for the last couple of years. Expenditures on R&D are largely financed by budget funds which places Poland among less developed countries. The share of high-tech products in Poland s foreign trade turnover in 2007 accounted to 4.2% for exports (increase by 1.1 p.p.) and 10.8% for imports (increase by 1.6 p.p.). Analogical figures for the EU are 16.7% and 23.0%, respectively. In 2007, 2,392 patents were submitted for patent protection (more than in 2006). The number of patents submitted per 1,000 inhabitants in the EU is, however, a few times higher than in Poland. FINANCIAL RESULTS OF ENTERPRISES. In the first half of 2008, a positive trend from the previous year continued. Revenues grew (by 13.9%), as did the result on business activity (by 0.9%). The second half of the year was characterised by considerable deterioration in economic and financial situation. The worldwide economic crisis arrived also in Poland which resulted in the deterioration of macroeconomic indices, slowing down the growth rate of revenues to 9.0% in the second half of the year. Total annual revenues increased by 11.3% and amounted to PLN 2,3 trillion. Costs of revenues increased by 13.5% as compared to The result on business activity amounted to PLN 99.0 billion and was lower than obtained in 2007 and amounting to PLN 28.6 billion (by 22.4%). The main reason for such drastic deterioration of the result on business activity were high losses generated on financial activity. For the whole year, they amounted to PLN 21.9 billion (as compared to PLN 4.0 billion of profit in 2007). Whereas in the first half of the year, the result on this activity was positive (PLN 1.2 billion), in the second half of the year it became negative (PLN 23.1 billion). The annual loss on the financial activity in 2008 (PLN 25.9 billion) accounted for 90.6% of the total decrease of the result on the financial activity. Largest losses on the financial activity were suffered by manufacturing (PLN 12.1 billion), trade and repair (PLN 4.6 billion), transport, storage and communication (PLN 2.8 billion). Gross financial result reached PLN 99.2 billion (decline by 22.3%), and net financial result amounted to PLN 78.6 billion (decline by 25.7%). All profitability indices went down. The main source of financing for investments by entrepreneurs are their own funds. Therefore, the deterioration of financial situation (along with other reasons) had a direct impact on the dynamics of incurred investment expenditures. In the first half of the year, expenditures increased by 13.9%, and in the second half of the year remained at the same level as in the second half of

16 MINISTRY OF ECONOMY CHALLENGES. The year 2009 is the 20 th anniversary of systemic, economic and social transition in the Eastern and Central Europe, as well as the 5 th anniversary of Poland s accession to the European Union. Both these dates encourage us to make summaries and balances, but surprisingly as it may seem, current analyses and economic reports do not focus on them. A visible deterioration of economic situation worldwide in 2008, followed by growing negative changes, is the reason why the majority of publications relate to the economic crisis and its impact on individual spheres of life. However, it is worth pointing out that the present condition of Polish economy was considerably influenced by the above mentioned reforms resulting from the transformation process, and from Poland s accession to the European Union. The combination of the transformation effect and entry to the European Union assured stability. The systemic transition process, started in the early 90s, resulted in, not only a crucial change of the political system, but also in some significant changes in the rules guiding Polish economy. Transforming the centrally planned economy to the free-market economy required, first of all: changing the ownership structure of economic entities through privatisation, abolishing state control over foreign trade, liberalising financial flows with abroad, implementing legal regulations stimulating the development of entrepreneurship and competitiveness on the domestic market, liberalising prices, and implementing internal exchange of Polish zloty and uniform exchange rate. The period when Poland was preparing for the accession, as well as the EU membership, involved very important market reforms needed in order to incorporate our economy to the European Union Single Market, i.e. reforms relating to the free movement of goods, services, capital and persons, as well as to competition rules, and social and ecological requirements. The European Union membership strengthened institutionally the process of change, and it opened new development possibilities, supported by European funds. At present, main challenges for Poland and for Polish economy in the long term are related to existing global trends, and the resulting dangers. Factors which are particularly taken into account in this context include: globalisation processes, which build up competition pressure on the economy, entrepreneurs and citizens; demographic factors, such as aging of the societies and the resulting need to change models of professional activity as well as migration; challenges related to elimination of negative results of human impact on environment. A significant part of activities started by Poland, having long-term consequences, arises from the integration and from the liabilities towards the European Union. All EU members are obliged to implement the Lisbon Strategy a multiannual programme of reforms and structural changes whose aim is to make the Community the most competitive economy in the world. To meet these requirements, it is necessary to achieve dynamic economic growth and to increase employment. The programme for implementing reforms was presented in the National reform programme (KPR) for the years The planned structural reforms would influence a potential economic growth rate as well as increase the immunity to economic shocks. They would also improve competitiveness and employment in the economy and have its long-term meaning. Priority areas of the National reform programme, which should assure appropriate conditions for the development of society and citizens, include: active society, innovative economy and efficient institutions. A long-term economic growth may be achieved thanks to development of a highly innovative branch of industry, while effective use of public funds will make efficient implementation of the pro-development policy possible. 16

17 POLAND 2009 REPORT ECONOMY The most significant areas, in which reforms and actions should be undertaken, comprise: Public finance: systemic reforms should guarantee that the convergence criteria are met, which will enable Poland s accession to the European Monetary Union. The activities undertaken should also lead to a decrease in the share of predetermined expenditures in total budget expenditures. On 16 July 2009, the Parliament (Sejm) adopted the Act on public finance. It was submitted to the second chamber of the Parliament (Senat). Competitiveness of Polish companies: to improve Poland s competitiveness and innovativeness as compared to the European Union, it is necessary to reduce administrative burden and to increase expenditures on R+D. The activities undertaken should create the image of Polish economy as knowledge based economy with high quality intellectual capital. Furthermore, significant importance is given to assuring friendly legal and institutional environment for entrepreneurship, innovativeness and investments. Labour market: National reform programme assumes an increase in the employment ratio as well as in the ratio of professional activity of women and older people, inter alia, by trainings and developing the habit of life-long learning. Furthermore, it is assumed that the informational society will develop, wide-bank internet access will be provided, and IT competences will be improved. Infrastructure and network sectors: appropriate infrastructural potential is one of the necessary conditions for proper economic development. Furthermore, the objective of the reforms is to assure energy and climate security. It is crucial to increase the share of alternative energy sources in final energy to 15%, and to use innovative solutions in the field of environmental protection. Modernisation of social security system: it is necessary to put into practice the assumptions of social insurances system reform, and to take actions postponing in time the period of employee deactivation. Health care system: reforms assume that the efficiency of the health care system will improve. Creating a modern and effective system for promoting Poland and its economy. Regional cohesion: Poland is strongly diversified geographically in terms of economic development. It is crucial to (inter alia) eliminate the differences in economic development between various regions by setting up Special Economic Zones, and by using state aid properly. Implementing economic policy conducive to the increase in work and capital productivity, as well as to higher mobility and adaptability of employees and companies, requires that focus be placed on four main pillars: infrastructure, education and science, economic regulations, and institutional and organisational solutions, in particular in the area of labour market. In the short term perspective, the main focus is placed on projects aimed to prevent the economic slowdown from affecting our country, and to direct Polish economy towards the high and sustainable development path. To achieve that objective, it is necessary to undertake some ad hoc measures to counteract direct symptoms and results of the crisis, to create new regulatory frameworks as well as to ensure synergy with structural reforms necessary. 17

18 MINISTRY OF ECONOMY Anti-crisis actions are being undertaken at various levels, within undertakings coordinated both at the EU and national level. On 28 November 2008, the European Commission presented the Rescue package for the EU economy, for which it assumed the budget of EUR 200 billion, i.e. 1.5% EU GDP. In response to the Rescue package of the European Commission, Polish government adopted the Plan for stability and development strengthening Polish economy in the light of the world economic crisis. The main objectives of the Plan are to: (1) assure stability of public finance; (2) take measures aimed at stabilising the financial sector and (3) take measures supporting the economic growth. The activities of the Ministry of Economy for stability and development comprise the following intervention areas: to increase consumption and investment demand, to strengthen the system of financing companies, to improve regulatory environment of companies, to accelerate investments from the EU funds, to develop innovativeness, and to make the labour market more flexible. 18

19 POLAND 2009 REPORT ECONOMY Table 1 Basic indicators of the economic situation 1995, (dynamic, previous year = 100) No. Specification Unit Gross domestic product (current prices) PLN billion , , , Gross domestic product (fixed prices) % Domestic demand (fixed prices) % Individual consumption from personal income (fixed prices) % Gross fixed capital formation (fixed prices) % PLN billion Industrial output % Prices of industrial output (annual average) % Prices of consumer goods and services (annual average) % Prices of consumer goods and services (dynamics December to December) % Construction and assembly PLN billion (fixed prices) % Dwellings completed thousand Total investment expenditures (fixed prices) % Gross turnover profitability rate % of which industry % Net turnover profitability rate % of which industry % Exports of goods (according to SAD and since May 2004 following SAD and EUR million 22, , , , , , , , , ,243.8 INTRASTAT) 12.1 Dynamics (previous year = 100) % Imports of goods (according to SAD and since May 2004 following SAD and EUR million 29, , , , , , , , , ,447.9 INTRASTAT)) 13.1 Dynamics (previous year = 100) % Trade turnover balance EUR million -6, , , , , , , , , , Balance on the current account of the balance of payments EUR million ,181-5,924-5,924-4,878-8,166-3,016-7,445-14,586-19, in % GDP %

20 MINISTRY OF ECONOMY No. Specification Unit Employed in national economy thousand 14,590 14,735 15,018 14,924 (annual average) person 12,729 12,663 12,615 12,728 12,880 13,334 13, Dynamics (previous year = 100) % Average employment in the economy thousand 8, , , ,050.2 person 8, , , , , , , Dynamics (previous year = 100) thousand person Number of registered unemployed (as of thousand the end of the year) person 2, , , , , , , , , , Dynamics (previous year = 100)) % Registered unemployment rate 3) (as of the 18.0 % end of the year) Average nominal monthly gross salary in the national economy PLN , , , , , , , , , in the enterprise sector PLN , , , , , , , , , Average real monthly gross salary in the national economy % in the enterprise sector % Dynamics of labour productivity (as gross value added per 1 employee % (previous year= 100) 23. State budget balance PLN million -10,100-15,391-32,358-39,403-37,043-41,417-28,361-25,063-15,956-24, in % GDP % The indicator of production volume and prices of industrial output for the years has been calculated using base prices. For 1995, it was calculated on the basis of producer prices. Profitability indicators in the whole economy and in the industry sector are calculated for businesses exceeding 50 employees in the mining, quarrying and in the manufacturing sectors, while in other sectors they are calculated for businesses exceeding 20 employees (in 1995); data is calculated for businesses exceeding 49 employees in all economy sectors data takes into accounts both workers on individual farms in the sector of agriculture using the results of the National Agricultural Census 1996 (numerator), the National Population and Housing Census 2002 and the National Agricultural Census 2002 (denominator). Data on the amount and dynamics of foreign trade in 1995 is given in USD million. Source: CSO, NBP and Analyses and Forecasting Department, Ministry of Economy calculations.

21 POLAND 2009 REPORT ECONOMY PART I POLAND AND THE WORLD 1 PRINCIPAL TRENDS IN THE WORLD ECONOMY 1.1 General description of the situation in the world economy in 2008 The situation in global economy in 2008 was influenced mainly by the increasing impact of financial crisis. The financial crisis is related to the collapse of subprime 3 loans in the United States. Excessive liberalisation of regulations on granting mortgage loans to low-income people, coupled with successive lowering of basic interest rates, resulted in the demand for such loans growing rapidly. In effect, the prices on real estate market were skyrocketing, leading to growing speculation on this market. After a period of liberal monetary policy, which had led to occurrence of overheating symptoms, Fed raised interest rates to 5%, thus increasing interest burden for the borrowers and reducing attractiveness of investments in real estate. Between the third quarter of 2005 and the third quarter of 2008, the number of houses sold on the primary market fell by 2/3, and on the secondary market by 1/3. Investment funds started to move their funds to commodity markets, bringing prices of crude oil, metals and some food products to the level far from reflecting the demand-supply relation. Due to lower attractiveness of investing in real estate, the growth rate of prices slowed down already in from 16% at the beginning of the year to 0% at the end of the year; from August 2008 prices of real estate in USA decreased by over 25%. Such decline in prices caused a fall in the value of credit securities. CMO 4 bonds, secured by mortgage loans, became uncovered. At the time of real estate market boom, CMO became the most important form of asset bank securities (ABS), i.e. securities covered by debt, sold by financial institutions to institutional and private entities. Issuing CMO, banks reduced their risk that mortgage loans will be repaid on time, and subsequently eased excessively their control of credit eligibility, as well as of credit intermediates. A commissionbased broker remuneration system favoured the highest possible number of credits without due care of safe credit policy principles. 3 Sub-prime credit credit granted to a borrower with bad credit history (e.g. untimely repayment). 4 CMO (Collateralized Mortgage Obligations) procedure of issuing obligations secured with mortgage credits. Banks do not have to keep credits in their portfolios until their full repayment date, they may sell them, including related risk, to other institutions operating on the financial market. 21

22 MINISTRY OF ECONOMY Credit liberalism in USA caused significant indebtedness of approx. 32 million households for the amount exceeding USD 13 trillion (almost the equivalent of the US GDP). It is estimated that approx. 10% accounts for sub-prime loans. Such large amount of potential losses came as a surprise to all financial institutions. The first victims of the crisis were two hedge funds belonging to the Bear Stearns bank. On 15 September 2008, the fourth largest American mortgage bank Lehman Brothers went bankrupt, and a week earlier, Fed agreed to take over (providing protection from bankruptcy) Fannie Mea and Freddie Mac with debt exceeding USD 1 trillion, and it increased the capital of the world largest insurance company AIG. Due to financial market globalisation, the crisis spread quickly over the whole world causing distrust among entities performing financial operations. Following the collapse of Lehman Brothers the largest investment bank the financial crisis transformed into a rapid decline in the real economy. Economic prosperity in the world quickly deteriorated, along with falling trust of consumers and entrepreneurs, as well as with more restrictive credit conditions. At the end of 2008, the largest developed economies simultaneously entered the recession stage (for the first time since the end of the Second World War). Furthermore, the slowdown strongly affected the emerging markets, for which former turmoil on financial markets in developed countries had limited consequences. In the fourth quarter, demand in developed countries declined faster and its growth dynamics in emerging countries slowed down considerably. As a result, world trade turnover fell by 2.6%. At the beginning of 2009, a downward trend in international trade strengthened. In the first quarter, the world trade turnover decreased by over 15%. The size of decline in demand in developed countries and in emerging countries was very similar. One of the reasons for the decline in demand was the crisis of financial sector, which caused a strong reduction of crediting in the real economy. All the above factors were reflected in subsequent, more and more pessimistic, development scenarios in all areas of global economy, presented by world analytical and forecasting centres. Decline in domestic demand arising from the crisis directly influenced the global slowdown of economic growth rate from 5.2% in 2007 to 3.2% in Table 2 GDP growth rate in fixed prices as compared to the previous year World USA** Europe* EU The Commonwealth of Independent States Africa Developing Asian countries China Japan** India New industrialised Asian economies *** * IMF, May 2009; ** OEC, June 2009 ***Hong Kong, Republic of Korea, Singapore, Taiwan Source: Analyses and Forecasting Department, Ministry of Economy based on the IMF data from April Economic growth in Europe slowed down from 3.9% in 2007 to 1.8% in In 2008, economic growth declined in developed European countries by 2 p.p. to 0.9%, and in emerging countries - by 2.5 p.p. to 4.3%. The economic growth rate in the Commonwealth of Independent States declined from 8.6% in 2007 to 5.5% in 2008, with Russia, the largest market in this group, slowing down from 8.1% to 5.6%. 22

23 POLAND 2009 REPORT ECONOMY Slowdown symptoms were observed also in developing Asian countries. In 2008, GDP grew in these countries by 7.7%, i.e. by nearly 3 p.p. less than a year ago. Two largest economies in this region, China and India, still developed relatively fast in the previous year, but the growth rate in these countries, with 9.0% and 7.3% respectively, was considerably lower than a year ago. The world financial crisis had also a very negative impact on the global FDI inflow. According to the preliminary UNCTAD estimates, it declined in 2008 by 15% and reached approx. USD 1.6 trillion. The largest decline was observed in the group of developed countries (by over 25%), including Europe by 39.3%, and Japan by 15%. At the same time, transforming countries and developing counties saw a rapid growth in the FDI inflow - according to the preliminary UNCTAD estimates, by 23.8% and 7.2% respectively. 1.2 Economic situation on most important world markets USA In 2008, the US economy was still negatively affected by the real estate market crisis, by successively disclosed large losses generated by banks, by bear capital market and by growing concern about unemployment and recession. A very tense situation on the financial market caused by a rapid reduction in crediting by commercial banks, as well as weak performance on the domestic market, negatively influenced basic macroeconomic indices. Economic growth in USA amounting to 2.0% in 2007, decreased in 2008 to 1.1%, though a decline in GDP by 0.8% was observed in the fourth quarter of 2008, as compared to the analogical period of the previous year. The slowdown was mainly due to the world financial crisis and a related significant decrease in investment expenditures, i.e. by 3.5%. The share of investments by residents in GDP fell in 2008 to the lowest level in the last 50 years. At the same time, domestic demand fell by 0.3% (as compared to an increase by 1.4% a year ago), including a decline by 1.9% in the fourth quarter of Private consumption slightly increased, but was much slower than in the previous year (by 0.2% as compared to an increase by 2.8% in 2007). A radical slowdown in the US economy started already at the beginning of It affected most considerably the housing sector, mainly due to the reduced availability of credit. In 2008, real prices of flats fell by 6.1% (as compared to a decline by 0.6% the previous year). In further months the slowdown moved to other areas of the economy, labour market and consumption. The unemployment rate increased from 4.6% in the years to the highest level in the last 26 years, i.e. to 5.8% in Deteriorating performance of the US economy forced federal authorities to take immediate actions to limit the negative effects of the crisis. This resulted in a series of packages of stimulating measures worth in total USD 1 trillion. Main beneficiaries of this aid were banks and other institutions from the financial sector, which in turn were expected to assure adequate level of crediting. Furthermore, some actions were undertaken to elaborate legal regulations strengthening the financial supervision. 23

24 MINISTRY OF ECONOMY Table 3 Basic growth indices of the US economy (as compared to the previous year) in % (forecast) (forecast) GDP Domestic demand Private consumption Collective consumption Gross fixed capital formation Consumer prices Unemployment rate Exports (goods and services) Imports (goods and services) Current account balance (% GDP) Source: Analyses and Forecasting Department, Ministry of Economy, based on OECD data from June The US exports remained at a relatively high level, as compared to other world trade powers, and increased in 2008 by 6.2%. At the same time, imports declined during this period by 3.5%. As a result, the current account deficit decreased from 5.3% of GDP in 2007 to 4.7% of GDP in Japan In the fourth quarter of 2008, GDP of Japan fell by 4.4%, and in the whole 2008 by 0.7%, whereas 2007 brought an increase of 2.3%. It is estimated that the present collapse of Japanese economy, arising from the world crisis, is the most severe one in the post-war history of this country. According to the June OECD projection, Japanese GDP will decline in 2009 by 6.8%. In 2008, private consumption increased by 0.6% (as compared to 0.7% in 2007), though it fell in the fourth quarter by 3.1%. A decline in private consumption was even bigger in the first quarter of 2009, and amounted to 4.2%. According to the estimates, in 2009 private consumption is expected to shrink by 1.7%. At the same time, public consumption increased in 2008 by 0.8% (as compared to 1.9% in 2007), and in the fourth quarter by 6.5%. Its increase in 2009 is estimated at 2.6%. Unemployment rate in 2008 grew by mere 0.1 p.p. as compared to the previous year, reaching 4.0%. Its increase to 5.2% is forecast for Table 4 Basic growth indices of the Japanese economy (as compared to the previous year) in % (forecast) (forecast) GDP Domestic demand Private consumption Collective consumption Gross fixed capital formation Consumer prices Unemployment rate Exports (goods and services) Imports (goods and services) Current account balance (% GDP) Source: Analyses and Forecasting Department, Ministry of Economy, based on OECD data from June

25 POLAND 2009 REPORT ECONOMY Negative effects of the world crisis severely affect Japan also due to the fact that its economy is largely dependent on foreign trade. In 2008, Japanese exports grew by mere 1.8% (as compared to 8.4% in 2007). In the fourth quarter of 2008, exports (on a quarterly basis) decreased by approx. 47%, and in the first quarter of 2009 by 70%. It is estimated that in 2009 Japanese exports will fall by over 32%. Imports grew in 2008 by 0.9%, as compared to 1.5% increase in Furthermore, a negative impact on the falling trade turnover was exerted by appreciation of Japanese yen towards US dollar by over 12% as compared to Western Europe and the Eurozone In 2008, GDP in the Eurozone increased by 0.5%, i.e. more than five times slower than in 2007, whereas in the fourth quarter of 2008, it fell by 1.7%. Among countries in this group, the fastest GDP increase was observed in Greece (by 2.9%), the Netherlands (by 2.1%), and Austria (by 1.7%); whereas a decline in GDP was observed in Ireland (by 2.3%), Italy (by 1%), and Luxembourg (by 0.9%). Economic growth of our main trade partner Germany was lower by 1.6 p.p. than in 2007, and amounted to 1%. In 2008, especially in the fourth quarter, the Eurozone suffered from recession. Domestic demand declined, due to a difficult situation on the financial market - by 2.4% in 2007 as compared to 0.6% in Private consumption increased by mere 0.3% as compared to an increase by 1.5% the previous year. At the same time, unemployment rate remained at the level similar to that in 2007, and amounted to 7.5%. Data for the beginning of 2009 indicate that economic condition of the Eurozone is deteriorating. Total domestic demand decreased in the first quarter by 6.7% as compared to the fourth quarter of The industrial production sector suffered most considerably, and its production fell by 1/5 as compared to the previous year. Retail sales also diminished, though this decline was not so extensive. Incertitude as regards financial liquidity of European and American banks caused a dramatic decline in the trade turnover on the money market which resulted in more restrictive crediting by commercial banks and in higher cost of credit. This situation negatively influenced the condition of business entities in the Eurozone as they depend much more than those in USA on external financing. The reason behind global decrease in prices of commodities and shrinking global demand was a gradual increase in inflation in the Eurozone (HCPI), which amounted to zero in May In order to prevent deflation, the ECB decided to lower interest rates to 1%. Despite this, the conditions necessary to get a credit in commercial banks still do not permit increase in domestic demand of the Eurozone. Table 5 Basic growth indices of the Eurozone economy (as compared to the previous year) in % (forecast) (forecast) GDP Domestic demand Private consumption Collective consumption Gross fixed capital formation Consumer prices Unemployment rate Current account balance (% GDP) Source: Analyses and Forecasting Department, Ministry of Economy, based on OECD data from June

26 MINISTRY OF ECONOMY Along with occurrence of economic problems, the Eurozone countries implemented a discretional fiscal policy to stop the increase in unemployment and social dissatisfaction. However, this did not have an impact on the deteriorating situation in public finance. Aggregated governmental budget deficit of the Eurozone countries in 2008 amounted to 1.9% GDP. It is estimated that the deficit will reach 5.5% in 2009, and 7.0% in Such large expenses may in future cause problems with repayment of national debt. According to the OECD forecasts, the economic downturn in individual countries of the Eurozone, as well as the lasting incertitude in the world economy, will result in a decline in GDP of the Eurozone in 2009 by 4.8%. This will be a direct effect of the slowdown in investments and private consumption. According to the OECD, the economy of the Eurozone countries will be affected by recession until the end of The economic situation is expected to improve from mid-2009, due to the measures undertaken to stimulate economic growth at the end of 2008 / beginning of Developing Asian markets The slowdown in world economy in 2008 and in the first half of 2009 had a surprisingly extensive impact on Asian countries. The countries most significantly affected by the economic crisis include: Singapore, Taiwan, Hong Kong, Republic of Korea, Malaysia and Thailand, where GDP is expected to fall in In China, the main development driver among the developing Asian countries, the GDP growth rate slowed down to 9.0% in 2008 as compared to 13.0% in A key factor influencing the present slowdown in the region is a decline in global demand, mainly for products of electronic industry and of car industry. This situation led to a dramatic decline in global industrial production, where emerging Asian economies have a significant share. At the same time, continued high demand in countries such as China and India attracted Asian entrepreneurs to the domestic market. Another result of the present crisis is growing incertitude on the global inter-banking market, which results in depreciation of regional currencies against EUR and USD, as well as in a difficult situation on the real estate market (Singapore, China). Furthermore, a decline in prices of many goods reduces the inflation pressure which, taking into account further price decreases, may lead to deflation in some countries of the region. To counteract such difficult situation, central banks of Eastern Asian countries decided to lower main interest rates in order to stimulate crediting, while strong depreciation of some regional currencies forced central banks to intervene on the international capital market. Despite the slowdown, the Chinese economy is still one of the most dynamically developing economies in the region. Thanks to relatively low share of exports and governmental actions, consisting in expansive fiscal and monetary policy, resulted in the GDP increase in 2008 by 9.0%, and the forecast for 2009 is an increase by 6.5%. Countries belonging to the Association of South East Asian Nations (ASEAN) were severely affected by the results of a lower global demand and by a difficult situation on the global financial market. The GDP growth rate of the whole group of ASEAN countries amounted to 4.9% in 2008, and was 1.4 p.p. slower than in the previous year. 26

27 POLAND 2009 REPORT ECONOMY A decline in global demand had a relatively insignificant influence on the GDP growth rate in India (and also in China) due to a relatively low share of exports in GDP. Nevertheless, the financial market crisis had a negative impact on the companies and on the banking sector, mainly due to the problems with servicing foreign financing. The economic growth rate in India amounted to 7.3% in 2008 as compared to an increase by 9.3% in In 2009, the slowdown is expected to continue and reach 4.5%. Table 6 GDP growth rate and consumer prices (as compared to the previous year) in % GDP Consumer prices (forecast) (forecast) (forecast) (forecast) China India Pakistan Indonesia Thailand Philippines Malaysia Vietnam Republic of Korea Taiwan Hong Kong Singapore Source: Analyses and Forecasting Department, Ministry of Economy, based on IMF data from April In forecasts of changes in the situation in the region, the focus is put on methods applied by governments of individual countries to combat the crisis. There exists a risk that large fiscal expansion, along with tax reductions, may result in an increase in interest rates, to which private sector is very sensitive, and that such expansion may cause problems in the future with repaying the public finance sector debt. At the same time, a long-lasting recession in developed countries may lead to a situation where Eastern Asian counties, in long term perspective, will base their economies to a lesser extent on exports to the countries of Western Europe and North America The Commonwealth of Independent States In 2008, GDP of the Commonwealth of Independent States grew by 5.5%, which means that it slowed down as compared to 2007 when market grew by 8.6%. Turmoil on the world market in the second half of 2008 negatively influenced the countries in this region, in particular due to a limited access to external financing. Economic slowdown in the Commonwealth of Independent States is also related to a dramatic fall in demand in developed countries. A decline in prices of energy raw materials, in particular of crude oil, as well as of prices of other goods, was yet another negative factor leading to the economic slowdown on the markets of the Commonwealth of Independent States. The economic downturn on the global market contributed to a decline in the growth rate in 2008 in the majority of Commonwealth of Independent States economies. A higher GDP growth rate was observed only in Belarus (10.0% as compared to 8.6% in 2007) and in Moldova (7.2% as compared to 4.0% in 2007). A considerable slowdown in economic growth was observed in the so far rapidly growing economies of Azerbaijan (by 11.8 p.p. to 11.6% in 2008) and of Armenia (by 7.0 p.p. to 6.8%). 27

28 MINISTRY OF ECONOMY As regards markets of the biggest Poland s trade partners in the countries of the Commonwealth of Independent States Russia and Ukraine the economic growth rate fell by 2.5 p.p. to 5.6%, and by 5.8 p.p. to 2.0% respectively. The last quarter of 2008 brought a serious breakdown in the economies of these countries which continued also in the first quarter of 2009 when, according to the preliminary estimates, Russian GDP shrank by 9.5%. An overall collapse observed in the Russian economy results from a number of factors, including decline in prices of raw materials, in salaries and in real income, leading to a decrease in domestic demand, devaluation of Russian rubble, State protectionism to protect the domestic market, a decline in investments, and no access to credits for business. Table 7 GDP growth rate and consumer prices (as compared to the previous year) in % GDP Consumer prices (forecast) (forecast) (forecast) (forecast) CIS Russia Ukraine Kazakhstan Belarus Turkmenistan Armenia Azerbaijan Source: Analyses and Forecasting Department, Ministry of Economy, based on IMF data from April Turmoil on the world financial markets had also a negative impact on the economies in the region, affecting forecasts for their growth in GDP in the countries of the Commonwealth of Independent States is estimated to decline by 5.1%. The largest decline in GDP of this region is expected in Ukraine (by 8.0%). Russian GDP is expected to fall by 6.0%. It is expected that in some countries of the region which so far grew relatively fast the GDP growth rate will slow down, though it will remain positive. An increase in GDP in 2009 is estimated in the following countries Azerbaijan by 2.5%, Uzbekistan by 7.0%, and Turkmenistan by 6.9%. 1.3 Real increase in the global trade in goods in 2008 The real increase in the world trade in goods in 2008, initially estimated by the WTO at 2.3% for exports and 1.7% for imports, turned out to be much lower than in the previous years, and amounted to 0.9 p.p. and 1.5% p.p. respectively; it was also lower than the global product growth rate in Central and South American imports of goods increased in 2008 (in fixed prices) by 15.5%, i.e. at the same rate as in 2006, and by 2.2 p.p. less than in At the same time, exports of this region increased in 2008 by mere 1.3%, i.e. by 1.9% p.p. less than in the previous year. Moreover, the growth rate of imports was 9 times higher than that of world imports, and the growth rate of exports was almost two times lower than that of the world exports. Imports of the Commonwealth of Independent States increased in 2008 by 15.2% as compared to 19.9% in Exports of the Commonwealth of Independent States increased by 6.2%, i.e. by 1.2 p.p. less than in the previous year, and at the same time, by 3.9 p.p. less than the growth rate for the world exports in

29 POLAND 2009 REPORT ECONOMY Table 8 The rate of changes in the world volume of trade exchange in the years (as compared to the previous year) Growth (exports) Growth (imports) World North America USA Central and South America Europe EU The Commonwealth of Independent States Asia China Japan Source: Analyses and Forecasting Department, Ministry of Economy, based on WTO data. The volume of exports in the Asian countries grew by 4.7%, i.e. faster than the volume of imports (increase by 4.2%). As a result, differences between the growth rate of Asian imports and exports, observed in previous years, decreased considerably. Whereas in 2006 it amounted to 4.8 p.p., the respective figure for 2007 was 3.3 p.p., and in 2008 it was 0.5 p.p. A visible slowdown in the foreign trade was observed in China. Exports increased by 8.5% (by 11.2 p.p. less than in 2007), and imports by 3.8% (by 9.9 p.p. less). Trade dynamics in Japan remained at the level, below the average for the whole region. Exports grew by 2.4% (as compared to 9.5% in the previous year), and imports fell by 0.8%. As regards the trade exchange in newly industrialised countries of the region, i.e. Hong Kong, Singapore, Taiwan and South Korea, the increase in the volume of trade exchange differed significantly among these countries. A lower growth rate in exports in the Asian region was observed in the two first of the above mentioned countries. At the same time, exports and imports in Korea grew faster than the average, and in Taiwan trade turnover declined (3.0% in exports and 4.3% in imports). In 2008, real exports of goods in North America grew more slowly than the world exports. Imports declined by 2.7%. A considerable difference was observed in the dynamics of trade turnover in the countries of this region similar to the situation observed in Asia. The volume of exports in USA increased by 5.5%, and of imports fell by 3.9%, whereas in Canada the volume of exports decreased by 6.0%, and of imports increased by 0.2%. The real increase in exports in Europe turned out to be one of the lowest as compared to other regions, and it amounted to 0.4%, while imports decreased by 0.9%. Trade turnover in the EU deteriorated even more, with an increase in exports by only 0.2% and a decline in imports by 1.2%. The growth rate in intra-community exports (2.4%) was at a similar level to the growth rate in world exports, while a decline in intra-community imports (by 0.8%) was similar to a decline in European imports. 29

30 MINISTRY OF ECONOMY 1.4 Prices and exchange rates in the international trade in goods in World prices fluctuations In 2008, world prices changed in phases. The global financial crisis in the second half of the year, and its spreading into the real economy, led to rapid price changes on many markets, in particular on raw materials markets where consequences of the financial crisis became visible first and to the greatest extent. In the first half of 2008, prices of raw materials continued to grow fast, in line with the trend observed in previous years. This increase in prices related in particular to energy raw materials, steel and raw materials for iron metallurgy industry (iron ore, scrap, coke coal), as well as cereals and oilseed crops. As a result, in July 2008, when raw materials boom reached its peak, prices of raw materials were over 4,5 times higher than their average level in 2000, and prices of non-energy raw materials over three times higher. Three phases can be distinguished in the development of the situation on the world markets of raw materials in the subsequent months: Phase one (August and September 2008) symptoms of falling prices of raw materials were observed, which had been visible already before the outbreak of the financial crisis (prior to the bankruptcy of Lehman Brothers). The reason for a decline in price quotations consisted in gradually deteriorating evaluations of the condition and prospects of world economy. A negative growth rate in prices was at that time relatively moderate (approx % per month for energy raw materials and 5-7% for non-energy raw materials). In phase two (October-December 2008), prices of raw materials decreased rapidly, in effect of spreading financial crisis and its increasingly stronger impact on the real economy (deteriorating macroeconomic indices and growing pessimism of forecasts). This led to a slowdown in the growth rate of demand for raw materials worldwide. As a result, existing supply shortages were replaced by increasing supply surpluses. A decline in prices of raw materials was also supported by the outflow of speculative capital (financial crisis radically reduced supply of available capital, and investing it in transactions with raw materials was very risky), as well as a change from depreciation to appreciation of USD primary currency in the international trade with goods. A particularly strong decline in prices of raw materials was observed in October (as compared to September by 25% for energy raw materials, and by 18% for non-energy raw materials). In November and December, a negative growth rate in prices was lower than in October, though still high (for energy raw materials, it exceeded 20% per month). Phase three (January-February 2009) consisted in a slowdown in the downward trend in prices slight increase in January and insignificant decline in February. It could be influenced by seasonal strengthening of demand, in particular for energy raw materials, as well as by a significant reduction in output, implemented by producers of many raw materials. However, permanent price stability is doubtful. 30

31 POLAND 2009 REPORT ECONOMY The increase in prices of raw materials exported and imported by Poland (by 33.7 and 37.4% respectively) was higher than the increase in world prices (by 33.0%). At the same time, according to the Institute for market, consumption and business cycles research (IBRKK) estimates based on the expectations of the Association of European Conjuncture Institutes (AIECE), the decline in prices of exported raw materials in 2009 (by 43.1%) and of imported raw materials (by 43.8%) should be lower than the decline in world prices (expected to reach approx. 50%). According to a preliminary forecast of the Institute for 2010, prices of raw materials in Poland s foreign trade turnover, both in exports and imports will decline further (by 8.5% and 5.2% respectively), while average world prices will become stable. The reason for variations between the price dynamics in Polish trade turnover and the price dynamics on the world market is the fact that changes of average prices of raw materials in Polish trade turnover depend only on changes in prices of a number of goods. As regards exports, these goods are steel, copper and coal, which in 2007 accounted for over 70% of total Polish exports of raw materials, and as regards imports crude oil, steel, natural gas and aluminium (80% of total Polish imports of raw materials). A lower increase in prices of exported than imported raw materials in 2008 negatively influenced Poland s terms of trade of raw materials. This indicator amounted to 97.2 as compared to 100 in the previous year. In 2009, due to the expected lower decline in prices of exported than of imported raw materials, the above mentioned indicator will improve and reach At the same time, in 2010, due to an accelerated decline in the prices of exported goods as compared to prices of imported goods, this will result in an unfavourable ToT indicator, returning to Expected changes of the overall terms of trade indicator are the result of price relations in individual groups of goods: In the group of energy raw materials, in contrast to other groups of goods, very favourable terms of trade (in 2008 over 130) will remain still positive in 2009, decreasing afterwards below 100 in 2010 due to deterioration of the coal price to crude oil price relation. Unfavourable terms of trade for metals in the years 2008 and 2009 will change positively in 2010 as a result of faster increase in prices of exported copper than of other imported metals. Unfavourable terms of trade in the group of agricultural raw materials and food articles in 2008 will improve radically in 2009 and An increase in prices of raw materials on world markets in the period preceding the crisis had a negative impact on Poland s trade balance. In 2007, when world prices of raw materials increased by 13%, a negative balance effect was USD 1.5 billion, and in 2008 over USD 6.3 billion, i.e. 1.2% GDP. At the same time, the estimated decline in world prices of raw materials in 2009, on average by approx. 50%, 2009 is expected to lead to a growth of trade balance by nearly USD 10 billion (i.e. approx. 1.9% GDP), which will be mainly due to a decline in crude oil prices Exchange rate fluctuations Large volatility of USD prices in international trade in 2008 was due to exchange rate fluctuations arising from the deteriorating situation on the world financial markets and related increasing aversion to risk, limiting USD supply. The average annual exchange rate of US dollar at that moment mainly in the second half of the year appreciated both against the main European currencies and the currencies used by largest exporters of mining industry products. 31

32 MINISTRY OF ECONOMY In Asia, the situation in this respect is more complex. The majority of local currencies lost in value against USD, while Japanese yen and Chinese yuan were the only currencies in the region which appreciated against USD in by 15% and 5% respectively Changes in the trade in goods in main regions 5 In 2008, the value of world exports in USD increased by slightly over 15% and reached USD 16.1 trillion. Like in the previous year, the region with the highest dynamics of trade in goods was the Commonwealth of Independent States, with exports and imports increasing by 35.4% and 30.8% respectively, i.e. faster than the increase in world trade in goods by 2,3 times and 2 times respectively. As compared to 2007, exports of the Commonwealth of Independent States grew by 15 p.p. faster, and imports by slightly over 4 p.p. slower. In result, the share of the Commonwealth of Independent States in the world exports in goods grew from 3.7% in 2007 to 4.3% in 2008, and in world imports from 2.6% to 3.0% in A relatively big increase in the trade in goods was observed in South and Central America. Exports increased in this region by 21% and imports by 30%, i.e. much faster than in the previous year, and at the same time 1,4 times and 2 times (respectively) faster than in the world. The growth rate in Brazilian trade in goods, accounting for over 30% of the trade in goods in this region, reached over 23% for exports and 44% for imports. In Europe, the USD value of trade in goods grew slower than in the previous year, and also slower than the growth rate of the world trade in goods. Whereas in 2007 both exports and imports grew by approx. 16.2%, in 2008 they increased by 11.5% and 12.3% respectively. Even more considerable slowdown was observed in the European Union, where exports grew by 10.8% and imports by 11.9%, as compared to 2007 increase by 16.2% and 15.9% respectively. This contributed to the increase in the deficit of the trade in goods by USD 92 billion which reached USD 356 billion. In North America, the growth rate of exports remained in 2008 at the level similar to that of the previous year and amounted to approx. 10.5%, while imports grew (by 7.5%) - slightly faster than in The same trend for a faster increase in imports and a slower increase in exports was observed in the USA. At the same time, like in the previous year, the growth rate of exports was higher than that of imports, though the difference shrank from 6.8 p.p. in 2007 to 4.7 p.p. in The deficit of the trade in goods grew by USD 7.5 billion and reached USD billion in Exports of goods in Asia in 2008 grew by 13.9%, i.e. slower than in the previous year, and also slower than the increase in world exports in At the same time, the growth rate of imports in 2008 (19.3%) was by over 4 p.p. higher than in 2007, and also higher than the growth rate of world imports in This led to a decline in the trade surplus by nearly 2 times - to approx. USD 166 billion in The situation in trade in individual countries varied. India reached the highest growth rate of the trade in goods among the countries in this region, with an increase by almost 22% for exports and 34.5% for imports. An increase in exports over the world growth rate was also observed in China (by 17.2%). At the same time, the growth rate below the world growth rate was observed for exports in Japan (9.5%) and in newly industrialised countries: Korea (by 13.6%), Singapore (by 13.0%), Hong Kong (by 6.0%) 5 There are certain differences between the growth rate of exports and imports presented in point 1.2 and , which results from various origins of statistical data. Data used in point 1.2 originate from the OECD, and in point from WTO. 32

33 POLAND 2009 REPORT ECONOMY and Taiwan (by 3.6%). In those countries imports grew faster, and the growth rate in China (by 18.5%), Korea (by nearly 22%) and Singapore (by 21.5%) was higher than world average. The share of China in the world trade in goods grew insignificantly by 0.2 p.p. and reached 7.9% in At the same time, its trade in goods exceeded the total trade of Japan and South Korea, i.e. the second and third largest trade partners in Asia, for the second time in a row. Table 9 International trade in goods in 2008 Exports Pos. Value Share Country (USD (in %) billion) Pos. Country Imports Value (USD billion) Share (in %) 1. Germany 1, USA 2, China 1, Germany 1, USA 1, China 1, Japan Japan Netherlands France France United Kingdom Italy Netherlands Belgium Italy Russia Belgium United Kingdom Republic of Korea Canada Canada Republic of Korea Spain Hong Kong Hong Kong Singapore Mexico Saudi Arabia Singapore Mexico Russia Spain India Taipei Taipei United Arab Emirates Poland Switzerland World 16, Poland World 16, Source: Analyses and Forecasting Department, Ministry of Economy, based on WTO data from March Prospects of the world trade development in 2009 Deterioration of the economic situation in the second half of 2008 resulted in the fact that prospects for growing world trade in goods in 2009 became very uncertain. The results of global recession became clearly visible in the world trade in goods already in November and December 2008 (decline by 5.3% and 7.0% respectively as compared to the previous month). The largest fall in imports was observed in the emerging markets (by 11.9%), and in exports in Japan (by 9.9%). As compared to the years , when the largest falls in the trade volume did not exceed 2% (month to month), the present decline is unprecedented. In the fourth quarter of 2008, the world trade in goods declined by 22% as compared to the analogical period of the previous year, and by 6% as compared to the previous quarter 6. 6 Figures presented in the present point come from the IBRKK study presented based on the data of the Association of European Conjuncture Institutes (AIECE). 33

34 MINISTRY OF ECONOMY In the first months of 2009, the volume of the trade in goods worldwide continued to decline. It is expected that in further months of 2009 the downward trend will slow down, and at the end of the year it may even change to a slight increase. The reason for an improved situation of trade is seen in a relatively fast growing consumer and investment demand in developing Asian countries. According to the June 2009 OECD estimates, the world trade volume is expected to shrink by 16% in 2009, and afterwards to grow by 2.1% in Table 10 Forecast of the growth rate of the trade in goods in the years * 2010 * Exports Imports Exports Imports Exports Imports Germany France Italy United Kingdom Netherlands Poland USA Japan Russia China *-forecast Source: Analyses and Forecasting Department, Ministry of Economy, based on OECD data from June Counteracting the global economic crisis The negative effects of global crisis, whose origins can be traced back to the collapse of mortgage credits market (sub-primes) in USA in 2007, spread very quickly on nearly the whole world economy, due to the multi-level scheme of dependencies in international economic relations. The scale of the crisis became visible already in the second half of 2008, in particular its last quarter, when the economies of developed countries noted a significant decline in GDP. Already at the end of 2008, the majority of countries, trying to limit as much as possible the negative results of financial crisis, designed and implemented a series of anti-crisis measures. They comprised both governmental actions in the area of fiscal expansion, and actions of central banks to liberalise the monetary policy USA First actions aimed at limiting the crisis results in USA were initiated already in December 2007 when, in order to maintain a desired level of liquidity in the banking sector, the Federal Reserve applied a standard solution in the form of short-term loans granted to commercial banks. By the end of November 2008, the costs of this operation amounted to USD 150 billion. 34

35 POLAND 2009 REPORT ECONOMY As the scale of the problem became gradually more recognisable, the US federal authorities took further steps to ease tensions on the financial market. This resulted in the elaboration and implementation of the USD 700 billion worth aid plan to help US economy. The objective of this plan was to buy the socalled toxic debts from banks which considerably limited capital resources of these institutions. Furthermore, to prevent a rapid collapse of the domestic financial system, the authorities were compelled to increase capitalisation of local banks facing the risk of going bankrupt. It is estimated that the costs of this operation exceeded USD 250 billion, i.e. approx. 37% of the value of the first stimulation plan. The Federal Reserve, seeking to maintain the capital level appropriate for the US economy, as well as the solvency of US financial sector institutions, and striving to reduce the cost of money, increased the money supply, by setting the basic interest rates at the end of 2008 at 0.25% (a decline in the period September-December by 1.75 p.p.) and purchasing securities under open market operations. Furthermore, American authorities undertook to carry out an active policy to protect and create jobs. Its objective was to reduce the growth of unemployment and to stimulate domestic demand. It is estimated that the costs of fiscal anti-crisis actions in USA in 2009, focused inter alia on investments in infrastructure, excluding burden resulting from the support granted to the financial system, will reach USD 283 billion, i.e. 2% GDP Japan The global crisis, characterised by a lower growth and often even by a decline in domestic demand, largely reduced the growth potential of export-oriented economies. In the fourth quarter of 2008, this affected, inter alia, Japan which additionally had to cope with appreciation of local currency, which lead to a decline in exports - by nearly 50%, which automatically led to a decline in production in December by 9.8%. December was the second month in a row when a record decline was observed, resulting from the falling demand for cars and state-of-the-art equipment. The Japanese government started to ease the crisis results already in August 2008 when it announced that the first plan stimulating the economy, USD 12 billion worth, is to be implemented. As regards the monetary policy, the Bank of Japan initiated a series of cuts in basic interest rates, determining them at 0.1% in December 2008 (a decline in the period September-December by 0.4 p.p.). Due to the constantly deteriorating condition of Japanese economy (in the second week of October, the credit crisis caused losses on the Tokyo stock exchange amounting to USD 670 billion in market value), in October 2008 the government announced another draft anti-crisis package, worth USD 20 billion. Its main objective was to support funds for the unemployed, for the employers in regions most severely affected by the crisis, as well as for those offering permanent employment instead of part-time jobs, which were becoming increasingly popular. The package also offered the so-called new local subventions, which were to be used to finance public works in environmental protection and agriculture. In December 2008, the Japanese prime minister presented the third, worth USD 20 billion, plan of actions to stimulate Japanese economy. Its main objective was to support domestic financial sector institutions. It is estimated that in 2009 the funds used to combat the crisis in Japan will reach USD 76.8 billion, i.e. 1.4% GDP. 35

36 MINISTRY OF ECONOMY Western Europe and the Eurozone The deteriorating situation on US financial market had a very negative impact on European stock exchange markets, due to exceptionally strong investment relations. The outflow of capital and increasing aversion to risk considerably reduced liquidity of the financial sector in the Eurozone. The European Central Bank responded by a series of cuts in interest rates, which were reduced between October and December 2008 by 1.25 p.p. and reached 2.5%. As regards fiscal support in the Eurozone and in the whole European Union, Member States prepared their own stimulation packages whose assumptions were based on the European Economic Recovery Plan, elaborated by the European Commission in November The objective of actions performed by Member States, according to this document, was first of all to stimulate demand and confidence of consumers, reduce costs of economic slowdown, assist in preparing for future economic growth, and accelerate transition to the low-emission economy. This plan was based on the Stability and Growth Package, as well as on the Lisbon Strategy. It comprises, inter alia, an immediate budget incentive in the amount of EUR 200 billion (1.5% EU GDP), including extension of the budgetary discipline in Member States by EUR 170 billion (approx. 1.2% EU GDP), and supporting immediate actions from the EU funds in the amount of EUR 30 billion (approx. 0.3% EU GDP). Specific actions taken by the governments of the EU Member States, which is by the Eurozone, consisted mainly in preventive measures such as governmental guarantees or supporting individual commodity markets. The most expensive economy support package among the Eurozone countries was the one applied by Germany (EUR 480 billion). It consisted in supporting the liquidity of financial sector (EUR 70 billion), bank guarantees aimed at regaining a desired level of crediting, subsidies to new cars, and structural investments. At the same time, the aid funds in United Kingdom amounted to GBP 400 billion, in Ireland to EUR 480 billion, in France to EUR 360 billion, and in the Netherlands to EUR 200 billion Developing Asian markets The results of global crisis in Asia, due to strong links between financial and commodity markets in the region and capital originating from the USA and the European Union, severely affected emerging local economies. In the fourth quarter of 2008, GDP in the region, excluding China and India, declined by nearly 15%. Anti-crisis actions undertaken to stimulate Asian markets were based on two key elements: maintaining stability of the banking system, and reducing a negative impact of the falling exports on production and domestic demand. In the second half of 2008, the largest regional economies among developing countries (China and India) focused their activities with the aim to ease the crisis results first of all on assuring a proper level of capitalisation in the financial sector. The total support granted in the form of recapitalisation of Chinese banks amounted in this period to USD 141 billion. The estimated value of the plan to regain liquidity of the financial market in India is approx. USD 2.4 trillion (including actions planned for 2009). 36

37 POLAND 2009 REPORT ECONOMY Furthermore, as regards monetary stimulation, the Bank of China reduced basic interest rates in the period August-December 2008 by 2.16 p.p. to 5.31%, and the Central Bank of India cut interest rates in the same period by 1.0 p.p. to 5.0% The Commonwealth of Independent States In the countries of the Commonwealth of Independent States, the global economic crisis was characterised mainly by financial markets breakdown, which automatically caused a decline in crediting, and reduction in investment and in consumption demand at the end of The outflow of foreign capital, arising from increasing aversion to risk, had a negative impact on the condition of local banks, which in many cases faced not only the problem of insufficient liquidity, but also of insolvency. In the fourth quarter of 2008, the countries of the Commonwealth of Independent States did not follow the worldwide trend to decrease basic interest rates to limit the outflow of capital. This was particularly visible in Russia which not only liberalised its monetary policy, but even made it more restrictive by increasing interest rates at the turn of November and December by 2.0 p.p. - to 13.0%. The purpose of this action was to maintain a stable exchange rate of the Russian currency. In 2008, the scale of fiscal support of economies in the countries of the Commonwealth of Independent States was insignificant. This was due to the lack of funds to stimulate investment and consumption demand by increasing budget expenditures. Furthermore, the high interest rates limited money supply on already flat financial markets. In the last quarter of 2008, Belarus and Ukraine started efforts to obtain external funds (inter alia from the IMF and World Bank) to stabilise the economic situation. It is estimated that funds used in 2009 to stimulate prosperity of the largest economy in the Commonwealth of Independent States the Russian economy aimed at supporting small and medium-sized enterprises, construction market, strategic industry branches and tax cuts - will reach approx. USD 24 billion. 37

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39 POLAND 2009 REPORT ECONOMY 2 POLAND IN THE EUROPEAN UNION 2.1 Overall assessment of the Polish membership to the EU On 1 May 2004, the European Union accepted 10 new Member States, including Poland. Five years have passed since that event, which is an impulse to evaluate the effect of the accession and the changes that the economy has undergone. It is difficult to perform an unequivocal evaluation of the economic effect of accession, since integration runs parallel to processes of globalisation, economical cycle, and implementation of economic policy adopted in previous years in order to facilitate the EU accession. The immediate results of the EU accession that need to be mentioned are: transfers from the EU budget, mainly under the Common Agricultural Policy and Cohesion Policy, lowering of the investment risk connected with direct foreign investment, and opening the market for goods and services as well as labour market Polish economy Between the years 2004 and 2008, Polish economy was developing rapidly in all sectors (i.e. services, industry and construction). This economic development results from Polish accession to the European Union, which led to a growth in exports. The increase in exports stimulated a growth in production and employment, which led to a rise in domestic consumer demand. Taking into consideration the past few years, the diversified growth rates of different aggregated components of domestic demand led to changes in the GDP disposal structure, resulting cumulatively in diversified contribution of these components. It should be noticed that higher increase of investment, which resulted in a rise in the available capital. This, in turn, led to an increase in the number of technical devices to support an employee, which is a main contributor to the real convergence process. A significant increase in investment resulted from a good financial situation of enterprises, as well as from a positive forecast and the necessity to increase production capacity. Increasing use of EU funds prompted growth in business investment. These processes are conducive to development of production capacity, which expands the potential of Polish economy. The growth foreign trade, which is higher than GDP growth, results in an increase in the share of exports and imports in GDP. The negative balance of trade in goods and services remains on a safe level, and is covered by the capital inflow in the form of direct foreign investment. Rising competitiveness of Polish goods, resulting from the fall in real unit labour costs, has stimulated Polish exports. The strengthening European integration and globalisation in trade made it possible for the Polish exporters to spread to foreign markets. Except from real unit labour costs, prices and the exchange rate determine the competitiveness on the external market. These factors proved to be favourable to the Polish exports in comparison with other European countries. 39

40 MINISTRY OF ECONOMY While analysing the demand factors of economic growth, attention should be paid to the following factors: balance increase in specific GDP components, stable growth in household consumption, highly dynamic growth in investment, stable increase in the export of goods and services that counterbalances the increase in import. The market services sector is the most stable one in Polish economy. Both, in the periods of slowdown and of growth, it has the strongest positive impact on economic growth. The remaining sectors are subject to stronger fluctuations. Industry, where fluctuations mainly reflect the changes in economy, remains particularly important. Also the construction sector relies to a considerable extent on the investment market, and is subject to strong fluctuations. Agriculture has had only a slight effect on the economic growth despite being influenced by the EU accession extremely positively. Financial support from the EU budget, granted under the Common Agricultural Policy, has led to an increase in agricultural income, as well as in restructuring and modernisation of agriculture and the entire food sector. A substantial increase in the exports of agricultural and food products to other EU countries shows that Poland has managed to deal with the competition on both the European and the global market. Joining the EU has accelerated the process of catching up with the economies of highly developed countries. The mean annual GDP growth rate in Poland was 5.3% in the years , compared with 3.1% in the years As a result of the real convergence process, the difference of GDP per capita has been reduced. Compared with other Member States, this indicator has increased in Poland from 49.0% in 2003 to current 57.5%. Positive economic results achieved in the last 5 years by Poland and by the EU have been impeded this year by the consequences of the global financial and economic crisis. The scale of the world markets crisis, which started in the second half of 2008, as well as its implications on the real economy has led to a significant slowdown of the economic growth (the GDP growth was 0.8% in the first quarter this year, with a decrease of 2.6% in EU-27). According to uncertain forecasts concerning the global economic growth, the economic slowdown in Poland will continue this year, whereas the actions taken on the EU and national level should alleviate the economic and social effects of the crisis Implementation of common EU programmes Polish membership to the European Union entails participation in common EU programmes. Actions taken under the programmes of the EU, common for all Member States, facilitate the creation of stable financial, monetary and structural basis for the economy. The range of common policy areas and projects is expanding. Currently, it would be difficult to name an area that has not been influenced by the Polish EU accession. From the current perspective (in macroeconomic approach), the most important challenges include ensuring conditions for rapid economic growth, while at the same time reducing the negative effect of the crisis on the economy; and preparing Polish economy to enter the Eurozone. The initiative to improve the competitiveness of individual EU economies, and simultaneously the economy of the entire EU through the implementation of structural reforms, through streamlining legal regulations, and supporting economic operators, as well as the energy and climate change package, are extremely significant areas of cooperation within the EU. 40

41 POLAND 2009 REPORT ECONOMY Recovery Package In the fourth quarter of 2008, the EU has undertaken recovery actions. On 7 October, the ECOFIN Council promised to take every possible action necessary to improve the condition and stability of the financial system in order to restore its reliability and proper functioning. It was also agreed that although decisions concerning state intervention are taken on the national level, they have to be coordinated according to a number of common EU rules. On 28 th November 2008, the European Commission presented the European Economic Recovery Plan EERP. The amount of EUR 200 billion, i.e., 1.5% EU s GDP was allocated for the implementation of the plan. This amount includes EUR 170 billion from the Member State budgets (ca. 1.2% of the EU s GDP) and EUR 30 billion from the EU funds (ca. 0.3% of the EU s GDP). The strategic aims of the Recovery Plan are to: swiftly stimulate demand and boost consumer confidence; lessen the human cost of the economic downturn; create favourable economic conditions for European economy while it returns to the path of fast and competitive growth on the global scale ; expedite the shift towards a low carbon economy; In response to the recovery plan of the European Commission, the Government of the Republic of Poland adopted the Stability and Development Plan strengthening the Polish economy in the time of the world financial crisis. Its aim is to ensure the stability of the public finance and to undertake actions to retain the stability of the financial system, as well as to stimulate the economic growth. The government recovery plan has been supplemented by the action plan, adopted and implemented by the Minister of Economy in order to directly reduce the negative economic effects of the crisis. The goal of the Ministry of Economy Measures for Stability and Development is mainly to increase consumer and investment demand, and to support entrepreneurship, which stabilizes economy in crisis and helps restore fast economic growth Convergence Programme Each Member State that is not a member of the Eurozone is obliged to present (and update on a regular basis) a convergence programme to the European Commission, showing the process of meeting the requirements of the Stability and Growth Pact. The convergence programmes include the so called General Economic Framework that specifies the direction of the EU's macroeconomic policy. The main element of the General Economic Framework is a medium-term objective adopted by a given Member State as a part of the Stability and Growth Pact. Each Member State is obliged to achieve this objective. Medium-term objective regards the so called structural deficit of the public finance sector, i.e., the deficit after excluding the effect of economic situation and temporary economic turmoil. Acceptable structural deficit in Poland is 1.0% of GDP, to be achieved by The last Convergence Programme Update 2008 was adopted on 30 December This Update maintained the main goals and aims of the government s economic policy presented in the Update 2007, with the fulfilment of conditions necessary to adopt euro being the priority of the government s medium-term strategy. The most significant challenge of the fiscal policy is to reconcile the objective of maintaining the fiscal result on the level necessary to fulfil the fiscal convergence requirement by Poland in the long run with the necessity to take actions that mitigate the consequences of the crisis. 41

42 MINISTRY OF ECONOMY Moreover, the Roadmap for Poland's Euro Adoption was presented in October The document assumed the entrance of zloty into the Exchange Rate Mechanism (ERM II) in the middle of this year. The final change of the currency and introduction of euro into circulation was scheduled for the beginning of However, due to economic conditions much worse than assumed while drafting the document, it was necessary to postpone the deadline. The current economic conditions and the unfavourable effect of the global crisis require a revision of the Convergence Programme Common economic regulations Streamlining legal regulations The process of reforming the Polish economic law had started in times of transformation, and was supplemented with the implemented European law already in the pre-accession period. The overregulation of the European law and poor establishment of Polish business law led to difficult conditions for the operation of enterprises. Low quality legislation which is too complicated and difficult to understand is a serious obstacle to the development processes that take place in the economy. Among the existing barriers bureaucracy is often indicated as a factor that limits the entrepreneurship of the Polish inhabitants, hinders running business operation and discourages foreign investors. Entrepreneurs more and more often advocate for the elimination of concrete legal barriers to running business activity. Actions to streamline the existing legal regulations were taken both on the community and national level. In response to the obligations incurred at the summit of the European Council in March 2007, measures were taken to specify the rate of reduction of the administrative burden in the fourth quarter of It was suggested that the goal be specified by the governments with respect to the regions that have already identified and measured the burden. Ultimately, the government specified a reduction target of 25% to be achieved by the end of The government decided to include the following areas of law in the reduction plan: environment, planning and spatial development, social welfare, business law, hallmarking law, tourist services, and labour law. Measures undertaken by the Ministry of Economy in 2008, and continued so far with respect to the Package for the Development of Entrepreneurship, include amendments of more than ten acts with a view to streamline the existing provisions of law and to improve the conditions for running business State aid element of the competition policy State aid for enterprises is an instrument by which the State exerts an active influence on the economy. The State is able to stimulate positive processes by means of the aid tools applied in market economy. Public aid must be granted in compliance with the eligibility rules specified in the provisions of law. Otherwise, it could become a source of serious distortion of competition among economic entities. Since 1 st May 2004 substantial changes have been implemented to the legal regulations governing public aid. Since the EU accession, Poland has been obliged to apply the Community rules concerning public aid directly, in particular those laying down eligibility conditions and the procedure before the European Commission. On 31 st May 2004, the Act of 30 th April 2004 on the procedure to be adopted in cases related to public aid entered into force. The Act regulates the public aid procedure. 42

43 POLAND 2009 REPORT ECONOMY In 2005, the European Commission announced its intention to review the Community rules and principles for granting public aid. The review is carried out by stages, and it is to be completed in A reform of public aid principles should help focus public aid on horizontal measures, including in the first place those supporting innovativeness, research and development, stimulating entrepreneurship, investing in human capital and environment protection. According to the reports of the Office of Competition and Consumer Protection the overall value of State aid granted in Poland in 2007 was PLN 6.5 billion, compared with 28.6 billion in 2003, and 16.4 billion in This means that the share of State aid in GDP was 0.6% in 2007, compared with 3.5% in 2003, and 1.9% in State aid is being gradually reduced and controlled more scrupulously, while its structure is shifting towards horizontal aid, with the state aid reduced in sectors, which limits its influence on the disturbances of competition. In response to the current economic situation, the provisions regulating granting of State aid have been relaxed - Communication from the European Commission Temporary Community framework for State aid measures to support access to finance in the current financial and economic crisis (OJ C 83, , p. 1). On the basis of this document, measures are being implemented to support affected enterprises also in the process of restructuring Environmental package -the so called green revolution Initiatives for protecting the environment, undertaken in recent years, are systematically developed. They are going to be one of the foremost factors affecting economic development in the coming years. Ecological requirements imposed by community law require additional expenses in economy for its sustainable development in the future. The measures implemented currently regard the following areas in particular: Climate and Energy Package aiming at the reduction of CO2 emission, and at a significant increase in the use of renewable energy sources; safety of production and trade in chemical products under REACH programme aiming at the reduction of negative effect of chemicals on health and environment; protection of water and air, and implementing the agri-environmental policy. Gradual implementation of the regulations of environmental package will have an effect on several economy, due to the necessity to increase expenses. However, at the same time, the regulations may prompt the development of new technologies and engineering. While presenting the above aspects of the influence the EU accession has had on Polish economy, it is necessary to underline its diversified consequences and a positive effect on the medium-term macroeconomic results. The coordination of actions taken on the European level in order to alleviate the effect of the crisis has also been evaluated positively. 43

44 MINISTRY OF ECONOMY 2.2 Lisbon Strategy Lisbon Strategy is a long-term socio-economic programme of the European Union including a number of reforms and structural changes. Its strategic goal, adopted at the summit of the European Council in March 2000, was to transform the EU into the leading world economy by In result of implementing Lisbon Strategy, the EU was to become the most competitive economy that develops dynamically, is based on knowledge, able to maintain sustainable development, create new jobs and strengthen social cohesion. A Mid-Term Review was performed after five years of implementing the Lisbon Strategy. The Review showed that the actions taken are insufficient, on both the community and national levels. Therefore, in March 2005, the European Council recommended to focus the Lisbon Strategy on two main goals, i.e., economic growth and employment. In order to stimulate the implementation of the renewed Lisbon Strategy, the Member States obliged themselves to develop three-year national reform programmes (NRP) to emphasize their mutual responsibility for implementation of the Strategy on the national level. On the EU level, actions towards the renewed Lisbon Strategy are implemented within the framework of the Community Lisbon Programme. At the summit on 19 and 20 March 2009, the European Council pointed out that in times of economic crisis the renewed Lisbon Strategy, along with the integrated guidelines, still provide effective framework to support sustainable economic growth and employment. The implementation of the National Reform Programme was completed in On 18 November 2008, the Council of Ministers adopted the National Reform Programme for NRP stipulates that the standard of living and the activity of citizens will improve, provided that proper conditions for socio-economic development of the country are ensured. This will be possible if favourable conditions for development of entrepreneurship are created, and the state funds are effectively allocated by efficient public institutions. Therefore, the reforms under NRP focus on three priorities: 1. Active society - reforms aiming at providing appropriate conditions for the development of society and citizens through: development of the education system, active labour market policies, modernisation of social security and healthcare system (continuation of the pension scheme reform), changes in the health care system, creating conditions for the development of social economy; 2. Innovative economy - measures to create proper conditions for the development of an economy ready to introduce innovation. The measures include: providing favourable regulatory and institutional environment for entrepreneurship, innovation and investments, providing transport, transmission and electronic communication infrastructure appropriate for the needs of modern economy, improving the quality of higher education, 7 NRP was adopted by the Council of Ministers on 27 December

45 POLAND 2009 REPORT ECONOMY implementing solutions supporting pro-innovative activity, as well as research and development (R&D). 3. efficient institutions reforms comprise mainly the development of modern administration and efficient use of public funds. The European Commission monitors the implementation of the renewed Lisbon Strategy and carries out annual evaluation of the progress of putting the reforms into practice. On the basis of the conclusions included in the annual report of the European Commission, the European Council adopts detailed recommendations for individual Member States. In the recommendations adopted by the European Commission at the summit on March 2009 it was indicated that in Poland several measures were taken to increase competitiveness in network sectors, to develop active labour market policies, streamline legal provisions on enterprises, and adjust education and training to the labour market requirements. Taking into consideration the European Commission s evaluation of the progress made by Poland, The European Council recommended that the implementation of structural reforms should be continued, in particular with respect to: maintaining a medium-term budgetary discipline, and introducing successive mechanisms for the increasing expenditure control, mostly by means of reforming the system of farmers social insurance; continuing the reform of public research sector with the view to intensify research and development, as well as innovation, and to encourage the private sector to develop research and innovation; accelerating investment in energy and transport infrastructure through efficient use of structural funds; elaborating an integrated, flexible model of labour market and social security (flexicurity) by implementing a strategy to increase activity of the elderly people, undertaking further actions to develop active labour policies, in particular with respect to the underprivileged, reviewing the social benefit system in order to encourage more people to take up employment, and launching a life-long learning strategy. While the Lisbon Strategy is focused on actions to increase competitiveness, accelerate economic growth, and stimulate job creation, the aim of the EU Sustainable Development Strategy is rather to achieve long-term goals, in areas such as natural environment protection, social cohesion (including the standard of living), as well as the fulfilment of EU obligations on the international scale. Both the above-mentioned strategies include economic, social and environmental goals that may have a mutually stimulating effect. Therefore, they should be implemented parallely in order to use the synergy effect. To meet the above-mentioned challenges, the economic policy should concentrate on the promotion of global standards for environmental protection, labour conditions, open trade, education, and approach to innovation. 45

46 MINISTRY OF ECONOMY 2.3 Internal market Free movement of goods and services The creation and operation of the internal market is one of the most significant and effective achievements of the European integration. In 2008 and the first half of 2009, several actions were taken in order to implement all the provisions regulating the internal market, on both the community and national level, including actions regarding the free movement of goods and services. Box 1 Directive 2006/123/EC on services on the internal market The main aim of Directive 2006/123/EC on services in the internal market is to eliminate legal barriers that affect access to or exercise of a service activity. The solutions stipulated in the act transposing the provisions of the Directive on services provide better legal security and improve the institutional and legal environment, in which all the service providers and recipients operate, e.g., through streamlining procedures of granting licences, or limiting the obligation to submit original documents only to situations justified by primary public interest. New provisions shall facilitate setting up and operating a service activity in Poland by entrepreneurs from other EU and EEA Member States, as well as for Polish entrepreneurs. On the basis of the Directive on services in the internal market, the Member States of the European Union are obliged to establish and maintain Single Contact Points for service providers and recipients. The main purpose of a Single Contact Point is to give service providers the opportunity to complete all the formalities and procedures connected with starting and perform service activities by electronic means. It is as important for the citizens as the necessity to provide a wide range of information through points of single contact regarding requirement of running service activities. Poland has already started preparatory activities in order to identify the procedures connected with service activities to be converted to the electronic environment. On the 13 August 2008, the Goods Package was published. It includes new horizontal regulations regarding the proper implementation of the principle of free movement of goods on the internal market. They reinforce the principle of free movement of goods on the internal market specified in the EC Treaty. 1. Regulation (EC) No 764/2008 of the European Parliament and of the Council of 9 July 2008 laying down procedures relating to the application of certain national technical rules to products lawfully marketed in another Member State and repealing Decision No 3052/95/EC regards products that are not regulated by the harmonised community law. According to these provisions, a Member State on its territory may not prohibit the sale of products which are lawfully marketed in another Member State, even where those products were manufactured in accordance with technical rules different from those to which domestic products are subject. Under the regulation, a Member State is also obliged to establish a system of Product Contact Points 8. 8 The Economic Regulation Department at the Ministry of Economy was appointed as a Product Contact Point in Poland. 46

47 POLAND 2009 REPORT ECONOMY 2. Regulation (EC) No 765/2008 of the European Parliament and of the Council of 9 July 2008 setting out the requirements for accreditation and market surveillance relating to the marketing of products and repealing Regulation (EEC) No 339/93 was issued in order to: ensure a uniform level of competence of bodies assessing the compliance of products with the requirements of the community law (laboratories, inspection bodies), ensure a uniform level of market surveillance (surveillance of the marketed products) in the entire EU, increasing the role of CE marking. 3. At the same time, decision No 768/2008/EC of the European Parliament and of the Council of 9 July 2008 on a common framework for the marketing of products, and repealing Council Decision 93/465/EEC introduces the so called New Legislative Framework, i.e. a set of rules and provisions (definitions, obligations of economic entities, conformity assessment procedures, requirement for notified bodies) that shall be applied to individual directives, depending on the specification of the type of products. The New Legislative Framework shall facilitate the free movement of goods by eliminating loopholes and inconsistencies with the community law. In effect the trust in products available on the internal market should increase. The European Commission started to work on adjusting individual New Approach directives to the provisions of the above decision. The work shall take 3 to 4 years. Box 2 Product Contact Point Product Contact Points shall, at the request of, an economic operator or a competent authority of another Member State, provide information on: Polish technical rules applicable to a specific type of product; requirement for appropriate authorisation to introduce a specific product on the Polish market; the contact details of Product Contact Points in other Member States; the particulars of the competent authorities responsible for supervising the implementation of the technical rules in question in the territory of the Republic of Poland; the legal remedies generally available in the territory of Poland in the event of a dispute between the competent authorities and an economic operator. SOLVIT network monitoring programme is a secure tool to assess the access to the market. It is an instrument used to solve problems of citizens and enterprises in the European Economic Area (EU, Norway, Island, and Lichtenstein) resulting from misapplication of community law by public authorities in other Member States. Between 1 January 2008 and 15 June 2009, Polish SOLVIT Centre solved 4 cases regarding access to the service market. Three cases were reported by Polish enterprises and regarded disputes with public administration in Belgium (2) and France (1). At the same time, there was one case against Polish administration reported by an entrepreneur from Portugal. The complaints indicated the following barriers in the freedom to render services: the authorities of a Member State denied the right to render services on its territory; the authorities of the Member State imposed additional requirements before they allowed the service to be rendered in the Member State; the authorities of the Member State delayed the issue of licence to render services on its territory. Polish SOLVIT Centre solved also 7 cases regarding the market access for products. Two complaints were lodged by Polish entrepreneurs, and concerned the administration of other countries (Slovenia and Germany). There were also five complaints lodged against Polish administration by entrepreneurs from 47

48 MINISTRY OF ECONOMY the Czech Republic (4) and Finland (1). The entrepreneurs encountered the following obstacles hampering the free movement of goods: the authorities of a Member State refused to market or make available for use a product that is not subject to any requirements specified in the community law, and that was produced in another Member State, public authorities refused to market or make available for use a product that has CE marking which, implies the assumption that the product complies with a proper New Approach Directive. The Single Market Review: one year on, published by the EC on 16 December 2008, provides a kind of summary of actions regarding the single market. The document includes also a review of initiatives that are going to be developed in 2009, with the main aim to develop and fully implement the principles of the single market. According to the EC, the consistent implementation of these ambitious plans will facilitate overcoming difficulties that the current financial crisis entails. Therefore, it is extremely important to consider the document along with The State Aid Action Plan: a roadmap for reform and recovery approved by the European Council on 12 December The first part of the document presents actions and initiatives that implementation of the Lisbon Strategy for economic growth and employment involves, such as: 1. actions regarding consumer protection policy (reinforcement of the consumer rights resulting from the agreement provisions; in 2009 the EC is to issue a communication on the consumer protection in the conclusion of cross-border agreements; in 2009 the EC is to publish a White Book on the compensation for damage caused by the violation of fair competition; easier access to cheap medication 10 December The EC presented a set of actions in this respect; actions limiting the geographic segmentation of the markets - in autumn 2009, the EC is to publish a report on monitoring the retail sale market, proposing concrete solutions; 2. actions to inform citizens about their rights on the single market (at the beginning of 2010, the Single Market Assistance Service project is to be completed; its aim is to organise and gather all the information and consulting tools available on the community level, operating via Internet, such as SOLVIT, Eures, ECC or Europe Direct); 3. actions regarding retail financial services (simplifying the procedure of changing a bank account agreement in the banking sector of the EU of 5 November 2008; easing of the procedure of making cross-border payments EC Communication of 13 October 2008; initiatives to support and protect citizens investing in retail investment products - in 2009, a White Book is to be issued); 4. actions regarding services (the implementation of the Service Directive by the Member States by the end of December 2009, including, among other things, establishment of Single Contact Points); 5. actions regarding support and development of information and communication technologies (within the next two years, the Member States, in cooperation with the EC, are to implement provisions on the electronic signature and identification and achieve their full interoperability in the EU); 6. actions concerning the free movement of knowledge (in 2009 the EC is to publish a report on the progress in opening 6 sectors onto innovation; continuing actions to introduce the Community patent; counteracting electronic piracy); 7. actions regarding commercial relations with third countries (enhancing the initiative to improve the access of the European SMEs to external markets, free trade agreements with key partners). 48

49 POLAND 2009 REPORT ECONOMY Assuming that the main goal of the single market policy is to create conditions favourable to businesses, and to reduce the business costs, especially for the SMEs, the following actions have been taken in order to help companies at the time of recession: European Private Company Statute (COM(2008) 396); Small Business Act (SBA, COM(2008)394); actions to reduce administrative costs for SMEs; in 2009, the EC is to present solutions to significantly reduce the burden for microenterprises of the obligation to book many of their operations, which will cut the administrative costs by as much as EUR 5 billion; in 2009, the EC is to announce a legislative initiative aiming at providing help to SMEs with receiving payments on time; actions to promote e-invoicing are expected to reduce the costs by about EUR 18 billion; the EC is to introduce a pilot project to make sure that legal provisions on running business come into force at a number of specific dates during the year; moreover, SMEs shall be informed about significant changes introduced to the EU law through the Enterprise Europe Network established in 2008; actions to improve the access of SMEs to public procurement (specified, among other, in SBA). The EC has also put forward a number of actions connected with Renewed Social Agenda: Opportunities, Access and Solidarity (COM(2008)412). These actions are consistent with the goals of the Internal Market Review, as according to the latter, social policy remains a significant part of the internal market policy. The second part of the document describes actions that regard the management of internal market in terms of internal market monitoring (in 2009, the EC is to publish reports on the results of monitoring the retail sales market, including on-line sales, sales of electric power and pharmaceutical products, extended studies regarding some national markets, monitoring of the construction service market on the EU-level, monitoring of the automotive market and environmentally-friendly technologies), as well as in terms of administrative cooperation (appointment of national coordinators of the internal market; implementation of the Internal Market Information System project) Free movement of persons Under the provisions of the Accession Treaty between Poland and the European Union, the EU 15 obliged to liberalise the access to their labour markets gradually. Since 1 May 2004, labour markets of three countries, namely the United Kingdom, Ireland and Sweden, have been opened to Poles. Next Spain, Portugal, Finland and Greece opened their markets - on 1 May 2006; followed by Italy - 31 July On 1 May 2007, the access to the Dutch market has been liberalised, with the Luxembourg market opened on 1 November On 1 July 2008, the access to the French labour market was liberalised, whereas on 1 May 2009, Belgium, Denmark and Norway opened their labour markets. Currently, only Austria and Germany are imposing the so called transition period, i.e., limitations in the access to their labour markets, which are to expire finally on 30 April However, these countries have introduced a number of facilitations in the access to their labour markets for certain groups of employees. Since 16 October 2007, German employers are allowed to employ electrotechnical engineers, machine and vehicle construction engineers, and graduates of German higher schools without the obligation to prove that there are no candidates for a given job available on the domestic 49

50 MINISTRY OF ECONOMY market. On 1 January 2008, the access to the Austrian labour market was liberalised for specialists of 50 professions, with another 15 professions added to the category on 1 July The crucial condition conducive to the free movement of persons and to undertaking employment abroad is the cross-border recognition of diplomas and qualifications. The basic rule of the system for recognising qualifications is treating an employee that is fully qualified to work in a specific profession in one of the Member States as equally qualified to work in the same profession in another Member State. If the pursuit of a specific profession is not regulated, the qualifications authorising to practice a given profession are automatically recognized in another Member State. On the other hand, access to professions which are subject to regulations abroad depends on the fulfilment of qualification requirements and conditions specified in the provisions of national law in a given Member State. The number and type of professions subject to regulations differ among Member States. For some professions subject to regulations, such as architects, midwives, nurses, pharmacists, doctors, dentists, and veterinarians, the requirements regarding professional education are specified in regulations, whereas the fulfilment of the requirements results in the automatic recognition of qualifications. With respect to other professions subject to regulations, the recognition of qualification is subject to a general system of recognition of professional qualifications. Depending on the profession, the criteria include the adequate duration of education and appropriate professional experience Horizontal industrial policy Horizontal industrial policy is one of the political priorities of the European Union. As a result of expanding globalisation and international competition, the European Commission has taken a new approach to the industrial policy that was to meet the needs of the European industry. The directions of the new industrial policy in the European Union were determined in the following communications issued by the EC: a 2005 Communication on the integrated approach to industrial policy 11 and a 2007 Communication on the medium-term review of the new industrial policy 12. The aim of the integrated approach to industrial policy is to respond to the challenges of the modern world posed by the climate change, technological progress, low-energy and low-co2 economy, and raw material resources. The integrated approach, taking into consideration not only the specific character of particular sectors but also horizontal issues, was introduced for the first time in the European Commission Communication of 5 October It was noted that the aim of industrial policy is to provide an adequate framework for 9 The list of professions is available on the website of the Embassy of the Republic of Poland in Wien ( 10 The procedure to recognize professional qualifications is carried out in each Member State by its authorized bodies. The bodies competent for the recognition of professional qualifications are ministers responsible for particular department of government administration or their subordinate organizational units, professional self-government bodies, economic organizations or register authorities. Detailed information concerning the recognition of qualifications in specific EU countries is available at information centres. The Bureau for Academic Recognition and International Exchange plays the role of such an information centre in Poland ( Information on the subject is also available on the European Commission websites ( 11 Communication from the EC - Implementing the Community Lisbon Programme: A policy framework to strengthen EU manufacturing - towards a more integrated approach for industrial policy (COM(2005) 474). 12 Communication from the EC:Mid-term review of industrial policy: A contribution to the EU s Growth and Jobs Strategy (COM(2007) 374). 50

51 POLAND 2009 REPORT ECONOMY development and innovativeness of enterprises, to make the EU an attractive place to invest, and to create jobs in industry. The analysis of horizontal issues has been performed under seven intersectoral policy initiatives concerning: 1) intellectual property rights and fraud, 2) competitiveness, energy and environment protection, 3) external aspects of competitiveness and access to market, 4) streamlining the legislation, 5) upgrading workforce qualifications, 6) management of structural changes, 7) research and innovation. Regardless of horizontal initiatives, the industrial policy of the European Union takes into account the conditions of individual industrial sectors. This is reflected in the competitiveness analyses of 27 industrial sectors, and in sectoral initiatives for the automotive (CARS21), electronic (ELECTRA), biotechnological, space (GMES), engineering industry (EnginEurope), and industry related to fashion and design. The 2007 European Commission Communication supports the aim of industrial policy outlined in 2005 and underlines a specific role of small and medium-sized enterprises in the area of industrial investment and creation of new jobs. Furthermore, it points out that an effective industrial policy in the European Union has to be based on consistent and coordinated efforts at the European and national level, specified in Article 157 of the Treaty establishing the European Community, as many elements having a substantial impact on the European industry competitiveness are adopted at a national level (the measures that cannot be taken or are insufficient at the national level, such as establishing open and competitive common market or industrial policy measures in the field of energy and climate change, are taken at the European level). Among horizontal initiatives, the following are of particular importance: lead markets initiative and the Sustainable Consumption and Production and Sustainable Industrial Policy. The first one is intended to promote modern markets which have an immense development potential and may ensure dynamic development of many industrial sectors. The European Commission indicated six markets which may become a basis for dynamically developing sectors of the European economy in the future. These include: e-health, sustainable construction, protection textiles, recycling, bio-products, and renewable energy resources. The second initiative is related to sustainable industrial impact on the environment, including using market possibilities created by the sustainable development policy. The abovementioned measures are complementary to already existing policies concerning the improvement of the environment characteristics, the energy efficiency of products in particular. They also fulfil the need to provide an additional stimulus to the production processes, specified, among other things, in legal regulations regarding industrial pollution (IPPC directive), and in regulations on the greenhouse gas emission allowance trading scheme to reduce the resources dependence and encourage optimal resource use and recycling. The connection between the enterprise competitiveness and corporate social responsibility (CSR) as a response of the private sector to the sustainable development challenges, was noted by the European Commission in the Communication of 2008 on the European Competitiveness Report Apart from the CSR, the European Commission underlines the significance of sustainable production and consumption, as well as sustainable industrial policy, indicating the necessity to convert to low-carbon economy that uses the natural resources efficiently. The European Commission notes that the development of CSR may contribute to the increase in competitiveness, both on the regional and 13 Communication from the European Commission COM(2008)774 of 8 December

52 MINISTRY OF ECONOMY national level, e.g., by the increase in trust towards enterprises. As a result, it would be easier to achieve a political agreement leading to the reduction of excessive administrative burden on business (on the basis of the so called voluntary agreements). The Report stresses also the positive effect of the CSR on the competitiveness of enterprises, first of all in terms of human resources management and creation of the company s image. Secure access to resources is becoming a more and more important factor of the EU competitiveness. In the context of limited access to raw materials and high dependency on delivery, the raw materials initiative 14, proposed by the European Commission, indicates the necessity to take actions to increase efficient resource exploitation, as well as their recycling and reuse, as factors significant for the economic and social development. The communication underlines also the necessity to continue actions for rational exploitation of raw materials through the introduction of innovative solutions, especially in terms of extraction technologies, taking into consideration higher standards of environment protection and social responsibility, particularly in terms of improving workers rights and combating child labour. The question and potential of the ICT in the pursuit of the low-carbon economy that uses natural resources efficiently were noted by the European Commission in its communication on mobilising Information and Communication Technologies to facilitate the transition to an energy-efficient, lowcarbon economy 15, and the communication addressing the challenge of energy efficiency through Information and Communication Technologies 16. The European Commission regards the ICT as one of the crucial instruments to achieve the ambitious goals of the Community in terms of energy efficiency, and has announced the publication of detailed guidelines in this respect. There has been an increase, moreover, in green public procurement that may have an effect on strengthening the competitiveness of enterprises that have introduced eco-innovative solutions Energy and climate package In December 2008, as a result of the agreement between the European Parliament and the EU Council, the so called Energy and Climate Package was adopted. The aim of the document is to implement objectives set by the European Council in 2007 with regard to fighting the climate change. The package stipulates that by 2020 the European Union shall: reduce green house gas emission by 20% (with a possibility of 30% reduction, if appropriate international agreements are made) as compared with 1990 levels; boost the share of renewable energy sources in final energy consumption by 20%; boost energy efficiency by 20% as compared to the forecast for 2020, increase the share of biofuels in the total transport fuels consumption to 10%. According to the provisions of the document, Polish electric power plants (operating on the market as of the data of 31 December 2008) are to purchase only a part of the allowances at auctions in the years Starting from 2013, it will be only 30% compared to their annual emission rates between 2005 and Starting from 2014, the amount of free allowances is to be gradually reduced. 14 Communication from the European Commission COM(2008)397 of 16 December Communication from the European Commission COM(2009)111 of 12 March Communication from the European Commission COM(2008)241 of 13 May

53 POLAND 2009 REPORT ECONOMY Free allowances will also be granted to newly developed projects of investment in power engineering that were started before the 31 of December All power plants that are granted free allowances between 2013 and 2020 will be obliged to use these free allowances for the production of electric power. They will not be entitled to sell them without producing power. This will minimise the rise in electric power prices resulting from the participation of electric plants in Emissions Trading Scheme of the EU. It is assumed that power plants will be obliged to purchase 100% of allowances at auctions in However, in 2018 Poland has the right to submit a request to the European Commission, which may result in the extension of the transition period for Poland. In the transition periods, Poland will be able to apply the performance benchmarks, depending on the fuel (hard coal, lignite, mineral oil, oil) used to produce electric energy. The benchmarks will be used to determine the amount of free allowances available to power plants in Poland. They will show the most effective and cleanest installations in the territory of the EU. Moreover, between 2013 and 2016, Poland will be able to use its income from the sales of allowances to build highly effective power plants. 15% of the investment costs will be subsidized for the new enterprises equipped to capture and store CO2 that do not exceed the efficiency values specified in Annex I of Commission Decision of 21 December 2009 (2007/74/WE). The Ministry of Economy in concert with the Ministry of Environment, KASHUE, professional associations and statistical offices collect data on industrial emissions, energy use during production, and on trade in industrial products. The European Commission will use the data to identify sectors susceptible to carbon leakage. The list of sectors susceptible to carbon leakage will be adopted by the end of The EU s energy and climate package will force technological progress. The possibility to develop clean carbon technologies is of particular importance for Poland. Two pilot projects are to be carried out in Poland to install CCS (Carbon Capture and Storage) - in Bełchatów (completion of installation for the capture, transportation and storage of carbon dioxide is planned for 2015) and in Kędzierzyn-Koźle, where the construction of polygeneration power plant is planned that will also be equipped to produce clean carbon energy, syngas and heat, as well as the sequestration of CO2 produced in the manufacturing process Adjustments in the energy area On 10 April 1997, the Act Energy Law was passed. It regulated the rules of operation of energy sector in Poland. The Act specifies the rules for energy policy of Poland, the rules and conditions of supply and use of fuels and energy, including heat, and the operation of energy enterprises. It also indicates the institutions competent for issues connected with fuel and energy management. The above-mentioned act was amended, among other things, in order to transpose EU regulations into Polish legal system. The amendments regarded such provisions as the Directive of the European Parliament and of the Council concerning common rules for the internal market in electricity. A system to support electric power produced from renewable energy sources and cogeneration was established. On 12 May 2009, the Council of Ministers adopted a draft act amending the act that transposes Directive 2005/89/EC of the European Parliament and Council of 18 January 2006 concerning measures to safeguard security of electricity supply and infrastructure investment. 53

54 MINISTRY OF ECONOMY The aims of the amendment include: to make it possible for the operators of energy networks to undertake effective action in case of power shortages in the network; introduction of the division of responsibilities, and rendering all significant users of the energy network and public administration authorities responsible for safeguarding security of electricity supply, including imposing an obligation on the President of Energy Regulatory Office to draw up a report (every four years) on the conditions of operation of electricity companies; the obligation to appoint an operator of all networks and energy installations, and ensuring their independence. These changes are of crucial importance for the development of competitiveness and security of gas fuels and electric energy supply. They also fulfil the obligations imposed on Poland by the European Union (Directive 2003/55/EC) Internal market and relations with third countries In times of political and economic transition in Poland after 1989, the aim of Poland s actions in foreign trade was to enter the global trade system through adopting the rules and principles of the World Trade Organisation (WTO) in the mid-90s. Later the actions taken by Poland were determined by our aspiration to become a Member State of the European Union (starting with signing the association agreement with the EU, until being granted full membership in 2004). Polish accession to the EU in May 2004 brought about substantial change in terms of development of Polish commercial policy. Under the provisions of Article 133 of the Treaty establishing the European Community, the common commercial policy of the EU is based on uniform principles and lies within the competence of the Community. This means that the instruments of the EU s commercial policy, i.e., regulating trade among the EU and third countries, are determined by the Council of the European Union or the European Commission, by means of decisions and regulations applied directly. Polish accession to the EU also resulted in Poland s entering the Common European Market. As a consequence, trade inside the EU is not subject to any custom duties or any other instruments of commercial policy that could restrict trade between Poland and other Member States of the EU. EU foreign trade instruments, covering a wide range of activities, support the competitiveness of enterprises in the EU, as well as Polish enterprises on both the EU and third country markets. A significant role of these instruments is to improve the access of EU goods and services, also Polish, to third country markets, to reduce the delivery costs of components that are unavailable on the EU market or available in limited amounts, and that are used by the EU industry to produce final products, to safeguard the supply of raw materials from third countries, and to combat unfair import of goods to the EU, e.g. through dumping. Therefore, it is necessary to note the significance of the current multilateral trade negotiations according to Doha Development Agenda (DDA) under WTO. Their aim is to liberalise world trade (lower custom duties and barriers in trade in goods and services, as well as to provide new solutions facilitating trade, along with actions to provide protection against unfair trade practice of importers). The current key negotiation areas of DDA WTO are: agriculture (market access, export subsidies, internal support for the agricultural sector), market access for non-agricultural products (NAMA), trade in services (GATS), WTO regulations, protection of intellectual property rights (TRIPS), dispute solving, trade and environment, implementation (performance of WTO agreements) and trade facilitations. 54

55 POLAND 2009 REPORT ECONOMY An important element of actions taken by the EU with respect to its common commercial policy is entering into free trade agreements (FTA) with third countries, which improves the access to third country markets, also for the Polish goods and services. Moreover, it is important to secure beneficial agreements on the access to raw materials from third countries, both during the WTO negotiations and negotiations to conclude FTA agreements. Currently, the key EU partners during FTA negotiations are South Korea, India, ASEAN, Mercosur and Ukraine. South Korea is the most advanced negotiation partner. According to the EC, Russia and Persian Gulf countries (GCC) are partners with a significant potential. The issue of starting negotiations on the FTA with Canada and Japan has been touched upon more and more frequently. Member States have an influence on the common commercial policy also due to the modification of the EU customs protection to provide protection against unlawful trade practices performed by third country suppliers, and to liberalise the customs protection when it is necessary to lower the costs for the suppliers of components that are unavailable on the EU market or available in limited amounts and that are used for manufacturing of final products by the EU industry, also in Poland. Poland had submitted over 170 motions to change EU customs protection, also in the pre-accession period. More than 75% of the motions filed by Polish industry were taken into consideration in the EU regulations. These motions regarded most of all products, such as: raw materials and substances used in pharmaceutical industry, components used in electronic and automotive industry, raw materials for metals, chemicals, metallurgy and textiles. In the last 3 years, Poland has submitted 52 motions, 37 of them have been recognized. Moreover, Polish representatives have opposed some of the proposals presented by other EU Member States. In the last 3 years Poland has raised 61 objections, with most of them being recognized. Lower custom duties on the imports of raw aluminium to the EU are a good example of main Polish achievements. Owing to its actions in the EU Poland managed to safeguard the aluminium industry s access to raw materials and intermediates used for manufacturing. At the same time, some actions were taken to prevent unfair practices of third country suppliers. Currently, there are 130 definitive anti-dumping measures implemented (anti-dumping custom duty and price undertakings), as well as anti-subsidy measures (countervailing duty and price undertakings) that aim at maintaining equal position of the EU industry products and imported goods in terms of competition. 55

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57 POLAND 2009 REPORT ECONOMY 3 COMPETITIVENESS OF THE POLISH ECONOMY 3.1 International Competitiveness Rankings According to international competitiveness comparisons and rankings, Polish economy is ranked rather low, with some rankings indicating a downward trend of Polish economy every year compared to other countries. The usefulness of the presented rankings may be limited due to the fact that most of them show the result of data assessment dated one or two years before the publication date. Below the results of assessment of the competitive position of the Polish economy in comparison with other countries are presented, based on prominent publications. World Bank Report and IFC 17 - Doing business The Word Bank Report is one of the best known and most frequently quoted reports of this type. World Bank experts evaluate solely microeconomic aspects of running business. They are essentially connected with regulations in 10 regions considered crucial for running business. According to the results shown in the latest edition of the Doing Business 2009 report, Poland is ranked 76 out of 181 countries - based on a synthetic evaluation of the ease of doing business. As for sub-rankings, Poland was given the lowest score in Getting credit category (rank 28 -drop by 3 places) and effective governance 19 (rank 38 drop by 5 places). The procedures involved in international trade were ranked relatively positive (rank 40 higher by 1 place). As in the previous year, Poland was rated lowest in terms of the formalities regarding obtaining construction permits. According to the authors of the report, the procedure is extremely time-consuming (308 days), entails complex formalities (30 were determined) and is expensive (137% income per capita). As a consequence, Poland is ranked extremely low in this respect, as it holds 158 th place (drop by 2 places). The Member State that was granted the best rates in this respect is Denmark (7 th place), with Estonia granted highest ranks out of the EU Poland was ranked extremely low in the Starting a business category (145). Despite relative improvement of sub-indices (reduction of the starting up business cost from 21.2% to 18.8% of GDP per capita and the level of capital required from 196.8% to 168.8% of GDP per capita) Poland dropped by 17 International Finance Corporation 18 The assessment regards the condition of 1 June 2008, except for the part on tax based on the data from the period between January and December Protecting investors category. 20 EU Member States since

58 MINISTRY OF ECONOMY 11 places in the ranking. This shows that the process of streamlining the procedure of starting a business in other countries was much more advanced than in Poland 21. Poland received similarly low rates with respect to the easy of paying taxes. It took 142 nd place in the sub-ranking, with a drop by 9 places. According to the estimations made by the authors, an entrepreneur that intended to act in compliance with the Polish legal system would have to make 40 payments totalling 40.2% gross profit, which would consume 418 hours a year. Estonia was the country ranked highest out of all Eastern and Central Europe countries (34 th place). Despite the tax system reforms introduced in the past by Slovakia, allow position of this country (126) draws attention. According to the authors it results from a high total tax rate due (47.4% of gross income). In terms of enforcing contracts, Poland maintained its last year s position (68). The extremely long duration of winning contractual claims is still a drawback for Poland (830 days). It is, though, significantly shorter than some years ago (ca days 22 ). Latvia is ranked highest out of the EU-12 countries in this respect (4 th place). Poland was ranked 84 in terms of registering property, with a drop by 3 places. The main reason for such a low rank is an extremely time-consuming registration process (197 days). In Lithuania, which was ranked highest (4) in this category out of the EU-27, the completion of all the registration procedures take 3 days. Poland was ranked 82 nd in the categories Employing workers and Closing a business. It should be added that the category Closing a business was, except for international trade, the only category where Poland was ranked higher than in the previous year, by as many as 9 places. Table 11 Ease of Doing Business Ranking United Kingdom Germany France Spain Lithuania Czech Republic Italy Slovakia Poland 2008 ranking * ranking * data updated In order to ensure comparability with 2009 ranking. Source: Analyses and Forecasting Department, Ministry of Economy based on Doing Business 2008, Global Competitiveness Ranking of the World Economic Forum The Global Competitiveness Ranking is a crucial component of the World Economic Forum s annual Global Competitiveness Report. It is based on the evaluation of the Growth Competitiveness Index (GCI) which measures the overall competitiveness of the economy. The Index was estimated on the basis of 100 sub-indices, grouped into three main categories: microeconomic competitiveness, spatial infrastructure and public institutions, and macroeconomic policy. Most of the sub-indices that the evaluation was based on were specified according to the results of a survey conducted among entrepreneurs/managers between January and May It was also partially based on statistical data, mostly from the years 2006 and Since the World Bank Report presents data on the condition of 1 June 2008, it did not include legislative changes under the Package for the Development of Entrepreneurship, e.g., tenfold reduction of the initial capital required for a limited liability company or the introduction of the so called one-stop-shop. 22 See Doing Business Report. 23 The study performed in Poland included 85 top management representatives, with 59 of them representing companies employing up to 100 workers. 58

59 POLAND 2009 REPORT ECONOMY The evaluation of Poland in the last WEF ranking has not changed particularly. Poland fell by 2 places (from 51 to 53 out of 134 countries). It dropped only by one place excluding three new countries subjected to the evaluation. At the same time Poland is ahead of 5 EU countries, i.e., Latvia (54), Hungary (62), Greece (67), Romania (68) and Bulgaria (76). The factors that contribute to Poland s low rating are public institutions (rank 95 in the sub-ranking), infrastructure (96), the development level of financial markets (68), effectiveness of product market (65), innovation (64).. Such categories as the market volume (20), higher education and training (34), health and elementary education (37), and macroeconomic stability (50) received the highest notes. Poland s low position in the Public institutions category resulted from such factors as high level of administrative burden (127), low transparency of the government policy (128), wasting public funds (115), limited trust towards politicians (113), and low efficiency of legal framework (109). According to WEF report, infrastructure was the only score significantly differing from the mean score of the countries defined as economies on the transition level between efficiency and innovation 24. Apart from road infrastructure (place 127 in sub-ranking), Poland received lowest notes for awarded to such items as the number of telephone lines (41), the number of seats per square meter offered in air transport (49), the quality of energy infrastructure (54). As for macroeconomic stability Poland was ranked 50, with only interest rate spread 25 (20 th place in the sub-ranking) and inflation level (38) granted high notes. Poland received low notes (88) in terms of the budget surplus/deficit. It was also ranked low (80) in the category of public debt 26. Table 12 Ranking based on the Business Competitiveness Index (BCI) United Czech Kingdom Germany France Spain Lithuania Republic Italy Slovakia Poland ranking ranking Source: Analyses and Forecasting Department, Ministry of Economy based on Global Competitiveness Report , Index of Economic Freedom Heritage Foundation and Wall Street Journal The authors of the report also evaluate the freedom of business operations, trade policy, tax burdens, budgeting policy, labour market policy, the level of corruption, etc. In the current edition of the economic freedom ranking, 179 countries were evaluated, with Poland placed 82 nd, improvement by 1 place. At the same time, it is the lowest position among the EU-27. Like in the previous years, the main factors affecting economic freedom in Poland include: high level of corruption, excessive intervention of the government in economy, limited freedom of business operations, and ineffectiveness of economic judiciary. On the other hand, the commercial policy and monetary policy were highly appreciated. 24 According to WEF such economies include Poland, Russia, China, Baltic countries, Hungary, Slovakia, Croatia, and Turkey. 25 Defined in the report as the difference between the interest on credit and interest on deposit. 26 However, it should be underlined that 2% budget deficit in Poland in 2007 resulted from its reduction by as much as 1.8% compared to the previous year, so it was a factor significantly supporting macroeconomic stability. During the period of the study there was also a considerable decrease in the debt of the government and self-government institutions in relation to GDP from 47.6% of GDP in 2006 to 44.9% of GDP. 59

60 MINISTRY OF ECONOMY Table 13 Ranking of economic freedom United Czech Germany France Spain Lithuania Kingdom Republic Italy Slovakia Poland 2008 ranking ranking Source: Analyses and Forecasting Department, Ministry of Economy based on Index of Economic Freedom 2008, 2009 Word Competitiveness Yearbook International Institute for Management Development (IMD) The Report of the IMD entitled World Competitiveness Yearbook evaluates the competitiveness of 55 countries, based on 331 detailed criteria. The factors taken into account in the assessment include economic performance (economic growth, foreign trade performance, employment, level of prices), public finances, fiscal policy, quality of business legislation, efficiency of businesses (among other things, productivity, corporate finances, management, innovation), infrastructure (technological, scientific, health and educational). In the current comparison of the most competitive world economies Poland was promoted from 52 to 44. However, among the EU Poland was ahead of only Romania (45) and Italy (46). Table 14 IMD Ranking United Czech Germany France Spain Lithuania Kingdom Republic Italy Slovakia Poland 2007 ranking ranking Source: Analyses and Forecasting Department, Ministry of Economy based on The World Competitiveness Scoreboard Report on the implementation of the Lisbon Strategy The Lisbon Scorecard VIII Centre for European Reform (CER) For several years now, the Centre for European Reform in London (CER) has drafted reports showing the progress made in the implementation of the Lisbon Strategy. In the current 2008 ranking Poland was ranked 24 and left behind Bulgaria, Malta, and Romania, jumping up 2 places. The main weaknesses include low employment rate, low labour market flexibility, heavy administrative burdens imposed on entrepreneurs, poor liberalisation of the telecommunication service market, and competition policy faulty in some respects. 3.2 Poland compared to other EU Member States Structural indicators are an important instrument in assessing the progress made by EU states in the Lisbon Strategy implementation, indicating the competitiveness of their economies. The list adopted by the European Commission in 2005 includes 14 basic structural indicator grouped into 5 main categories. The values of structural indicators for Poland compared to the entire European Union (EU-27, EU-25), as well as the old fifteen (EU-15). Good economic performance in last few years has been reflected in the improvement of macroeconomic and labour market indicators. However, a large number of indicators illustrating the structural changes are in minus compared to the EU average. 27 Latvia, Malta and Cyprus were not included in the ranking. 60

61 POLAND 2009 REPORT ECONOMY Box 3 Structural indicators 1. GDP per capita is the amount of GDP per one inhabitant as referred to the purchasing power parity(ppp), which facilitates international comparison. The indicator is the key measure for the standard of living. 2. Labour productivity measured as GDP (according to the PPP) per one employed person. The indicator reflects labour productivity in relation to the EU-25 average, which equals 100. Labour productivity is the fundamental measure of competitiveness. 3. Employment rate is the ratio of the working population aged to the overall number of population from the same age group. 4. Employment rate of older workers is calculated by dividing the number of persons aged in employment by the total population of the same age group. 5. Youth educational attainment is the percentage share of young people aged who have achieved at least upper secondary education attainment level (educational level of at least ISCED 3-4) in the overall population of the same age. 6. Gross domestic expenditure on R&D reflects the share of gross domestic expenditure on research & development in the GDP. It takes into account business enterprise expenditure, higher education expenditure, government expenditure and private non-profit expenditure. 7. Comparative price levels indicate relative levels (EU ) of consumer goods purchased by households (including indirect expenditure). This index is calculated as the ratio between purchasing power parities and the market exchange rate for each country. 8. Business investment is the share of gross fixed capital formation of the private sector in the GDP. 9. At risk-of-poverty rate is defined as the percentage of persons with disposable income below the riskof-poverty threshold in the entire population. The threshold is set at 60% of the national median equivalised disposable income (after social transfers). 10. Long-term unemployment rate is the percentage of long-term unemployed (12 months and more) in the workforce of the country (aged 15-64). 11. Dispersion of regional employment rates reflects the range of differences between the unemployment rates in regions (NUTS 2). The higher the indicator the larger the disparities between regions (with no disparities the index would equal 0). 12. Greenhouse gas emissions are the emission volumes of the 6 main greenhouse gases compared to the base year (1990=100). The Kyoto Protocol obliges the EU-15 states to reduce greenhouse emissions in 2010 by 8% compared to the 1990 level. The base year for Poland is 1988 and the required reduction rate is 6%. 13. Energy intensiveness of the GDP is defined as the ratio between gross inland consumption of energy and the GDP calculated for a calendar year. Gross inland consumption of energy is calculated as the sum of consumption of the 5 types of energy: coal, electricity, oil, natural gas and renewable energy sources. The GDP figures are determined according to constant prices, with 1995 as the base year. The indicator is measured in kilograms of oil equivalent for EUR Volume of freight transport relative to GDP is calculated as the ratio between ton-kilometres of transport (transport of a ton of freight over a kilometre) and the GDP (measured in constant prices for 1995). It covers transport by road, rail and inland waterways. Road transport is based on all movements of vehicles registered in the reporting country. Rail and inland waterways transport are based on movements on national territory, regardless of the nationality of vehicle or vessel. 61

62 MINISTRY OF ECONOMY Table 15 Structural indicators of the EU Poland compared to the EU No. Indicator Indicator value* Year Poland UE-27 UE-25 UE-15 Overall economic situation 1. GDP per capita according to the PPS (s) (f) (f) (f) Labour productivity per 1 worker (f) (f) (f) (f) Employment rate Employment Employment rate of older persons Innovation and research 5. Youth educational attainment Domestic expenditure on R&D 2007 no data 1.83 (s) no data 1.91 (s) (s) no data 1.91 (s) 7. Comparative price levels Economic reforms Business investment Social Cohesion 9. At risk-of-poverty rate (ps) (s) Long-term unemployment rate Dispersion of regional employment rates no data no data 10.5 Environment target 94.0 no data no data Green house gas emissions Energy intensiveness of economy Volume of freight transport relative to GDP (s) (s) (s) (s) (s) (s) (s) * the Symbols at the figures indicate: (f) forecast (p) provisional value, (s) estimate data. Source: Eurostat. 62

63 POLAND 2009 REPORT ECONOMY PART II POLAND S ECONOMIC DEVELOPMENT IN GROSS DOMESTIC PRODUCT 4.1 GDP and growth drivers The period of strong economic growth in all main sectors (i.e. services, industry, and construction) started in 2004 and continued until the middle of The growth impulse was connected with Poland s accession to the European Union. The related benefits, as well as, surprisingly, concerns, have translated into a relatively high growth of the quarterly GDP at the beginning of that period. Increased economic activity continued over successive years, reaching its highest point in 2007, with a 6.8% increase in GDP. The upward trend experienced a slight slowdown in 2008, in comparison to the previous years. Chart 1 GDP growth in the years % Source: Central Statistical Office. In 2008, the GDP increase was 4.9% and was lower than in the two previous years. After three quarters of 2008, the economic growth was 5.7%, whereas the last quarter showed a slowdown, with the GDP growth rate dropping to 2.9%. On the basis of the analysis of current conditions and the cycle of economic development, the growth rate is expected to drop in the next quarters of 2009 (in the first quarter of 2009 the growth rate was 0.8%). 63

64 MINISTRY OF ECONOMY Taking into consideration unfavourable economic conditions around the world (financial crisis that started in 2007 in the USA) the result should be considered positive. It should be noted that it was one of the best results in the EU countries (the climax of the crisis took place in the last quarter of 2008). In 2008, domestic demand was the main growth factor. Throughout the year there was a high growth in individual consumption, which resulted mainly from positive changes in the labour market (increase in employment and pay). An increase in the growth of real disposable income was conducive to further development of consumer credit market, with simultaneous increase in household deposits. On the other hand, inflation had an influence on consumer demand. Table 16 Growth rate of the GDP and domestic demand in the years (constant prices) Trade across Domestic Consumption Accumulation borders demand Years GDP C including including Gcf Ci Cp Gfcf DD E I C total consumption DD domestic demand Ci individual consumption E export of goods and services Cp public consumption I import of goods and services Gcf gross capital formation (accumulation) GDP Gross Domestic Product Gfcf gross fixed capital formation (investment) Source: Central Statistical Office The factors leading to an increase in investment expenditure are first of all the level of the use of production capacity and an increase in the use of EU funds, and continually high profitability of business. Chart 2 Demand decomposition of GDP in (in p.p.) 10% 8% 6% 4% 2% 0% -2% -4% -6% 1 q q q q q q 2008 Individual consumption Public consumption Gross fixed capital formation Inventories Net export GDP Source: Calculations by Analyses and Forecasting Department, Ministry of Economy based on Central Statistical Office data 3 q q q

65 POLAND 2009 REPORT ECONOMY In the last quarter of 2008, the inventories were to a large extent adjusted to the lower business activity. As a consequence, their negative contribution to the economic growth was close to 3 percentage points. In the first quarter of 2009, this process continued, whereas the negative contribution to the economic growth was close to 5 percentage points. The adjustment of inventories to lower economic activity shows that enterprises adapt to changing conditions, and reduce the operational costs connected with the storage of goods and semi-products. In 2008, there was a decrease in the growth rate of both imports and exports. The decrease in trade, resulting from the recession on markets to which Poland exports, especially the markets of Poland s trade partners, was an additional factor restricting the sales opportunities for many goods. As a consequence, the external imbalance of Polish economy was increasing, with a negative influence of the net exports on the GDP growth. Taking several years of time horizon into consideration, the fluctuating growth rate of the aggregated demand components contributed to changes in the GDP distribution structure, which resulted in a diversified input of particular factors to the economic growth. During recovery phases, the rate of economic growth is determined by high dynamics of domestic demand. This is what happened in Poland in the years Only in 2005, i.e., one year after the accession, the net export had a positive impact of economic growth. Table 17 Demand decomposition of GDP in (in p.p.) Total consumption, including Individual consumption Public consumption Gross capital formation, including Gross fixed capital formation Inventories Net export, including Export Import GDP Source: Calculations by Analyses and Forecasting Department, Ministry of Economy based on Central Statistical Office data An analysis of economic growth factors, carried out using neoclassical production function, allows for the identification of the main factors of economic growth in successive years. Decomposition of the labour factor makes it possible to observe the demographic changes, the professional activity of persons at working age, as well as the changes in the hours worked per week. The analysis reveals that the productivity growth of production factors remains the main cause of economic growth. At the same time, the analysis does not take into consideration changes in the quality of labour force resulting from progressive increase in the level of education. The demographic factor connected with the increase in the share of working age persons in the entire population, which was significant at the beginning of the decade, has currently much less influence on the GDP growth rate per capita. The negative downward trend of professional activity came to a halt in The increase in activity prevented another positive trend connected with unemployment rate decrease. At the same time, the average number of hours worked per week kept declining. The employment rate, relatively low compared to other countries, indicates the capacity for further improvement of the basic indicator of social wealth, i.e. the GDP per capita. In the years , the capital expenditure growth rate was observed, causing an increase in the capital in economy. A high growth rate of fixed capital formation is particularly important due to high extreme capital productivity that is the main factor stimulating the economic growth in the countries that strive to achieve the balanced level of economic development. 65

66 MINISTRY OF ECONOMY Table 18 Employment rate in Poland among persons aged in comparison with the EU (in %) UE UE Poland Source: Eurostat Table 19 An average annual effective working time per one employee per week in Poland in comparison with the EU Member States (in hours) UE UE Poland Source: Eurostat. Table 20 Economic growth factors in Poland in (in p.p.) Real GDP per capita Total factor productivity (2) Capital (1) Share of working age population Activity rate Employment rate Number of hours ) Due to the delayed effect of fixed capital formation on the growth of production the dynamics indicators were put 1 year forward. 2) Calculation according to the neo-classical function of production: u lnl/pop + (1-u) lnk/pop + lna, where: Y Gross Domestic Product L Labour resources (annual average of persons employed in the economy) L=population *activity rate*employment rate*number of hours K Capital resources (the value of gross fixed assets in the economy) u and (1-u) weighting of both production factors: Labour factor u=2/3 and capital factor (1-u=1/3) A The so-called Solow s Rest or the total productivity of production factors (TFP total factor productivity) Source: Central Statistical Office, BAEL (Labour Force Survey), Eurostat, and calculations by Analyses and Forecasting Department, Ministry of Economy. 4.2 Internal demand Domestic demand has been the main factor of economic growth in the last few years. Its share in economic growth was highest in 2007, but in successive quarters of 2008, it kept decreasing. The decrease was particularly noticeable in the last quarter of 2008, whereas in the first quarter of 2009, a negative share of internal demand was observed, in result of the adjustment of the level of inventories. Individual consumption was a factor stabilizing the growth rate of domestic demand, with a growth of total consumption in the second half of In 2008 the total consumption increased by 5.6%, which led to a significant increase in individual consumption (5.4%). The consumption growth rate was highest in 10 years. The factors that determined the scale of this increase are first of all a 3.7 % rise in employment and 6 % rise in real salary. The social benefit fund has increased by 9.2%. The increase in the income of households resulted also from subsidies under Common Agricultural Policy. 66

67 POLAND 2009 REPORT ECONOMY Chart 3 Contribution of domestic demand and foreign demand in the years % 8% 6% 4% 2% 0% -2% -4% Domestic demand External demand GDP Source: Central Statistical Office Chart 4 Contribution of domestic demand components to the GDP growth in the years % 5% 0% -5% 1 q q q q q q q q q 2009 Individual consumption Public consumption Gross fixed capital formation Inventories Domestic demand GDP Source: Central Statistical Office. Increasing income entailed an increase in the tendency and opportunities of households to incur debt. The nominal growth rate of household credit increased from 139% in 2007 to 145% in A high share of foreign currency credit, as well as significant fluctuation of PLN value in 2008, hampered the analysis of the increase rate of household credit. The value of foreign currency mortgage more than doubled (increasing from PLN 65 billion to PLN 135 billion), mostly due to PLN depreciation. According to the Polish National Bank, the real increase rate of household credit was over 30% in In the second half of 2008, financial markets suffered the consequences of the crisis in the form of an increase in credit margins, fees other than interest, and the obligatory own contribution. However, the most significant factor limiting granting credit was lower availability of SFr credits, which affected the structure of new credits. 67

68 MINISTRY OF ECONOMY In 2008 the nominal value of household debt associated with consumer and home credits rose by PLN 115 billion (in 2007 by PLN 71 billion), reaching a total of PLN 369 billion. Due to the currency fluctuation the structure of household debt changes significantly. Mortgage credits in foreign currency constituted almost 70% of home credits compared to last year s 55%. The household assets remained at a level close to last year's. However, their structure changed. The share of deposits and cash increased, whereas the share of the stock exchange shares and investment funds assets decreased significantly. The increase in gross fixed capital formation was slower than in the previous year (8.2% compared to 17.6% in 2007), which along with the adjustment of inventories led to a slower growth rate of accumulation. The growth rate of domestic demand is to a large extent determined by economic development cycles. Changes in investment capital result in considerable fluctuation of this aggregate. In 2008, the drop in the growth rate of investment capital was also connected with the consequences of the financial crisis on the credit market and the perspectives of the sales of goods in the future compared to the scale of the global slowdown. The expenditure connected with structural funds and the organisation of European Football Championship 2012 should stabilize the increase rate of investment, reducing the investment slowdown caused by economic downturn. In 2008 the growth rate of domestic demand experienced gradual decrease in successive quarters from 7.3% in the first quarter to 3.5% in the fourth quarter. The annual growth rate was 5.4%. Individual consumption remained relatively stable. In the first half of the year its increase rate was 5.6% only to fall to 5.2% in the second. Fixed capital formation saw a more significant drop, as it increased at a rate of 15.1% in the first half and only by 4.2% in the second. In the fourth quarter the inventories decreased, which, along with the drop in individual consumption, led to a decrease in the internal demand. Lower pressure from the domestic demand resulted in lower growth rate of import. Chart 5 Changes in annual private consumption (data adjusted seasonally) and the Consumer Price Index % q q q q q q q q q 2009 Individual consumption CPI Source: Central Statistical Office. 68

69 POLAND 2009 REPORT ECONOMY While analyzing the demand factors of the economic growth, it should be noted that the economic growth in the first half a year of 2008 was balanced. It was based on private consumption, investment capital, as well as on exports (despite the unfavourable PLN appreciation). In the second half of the year, the two latter factors decreased, with the consumer demand remaining the primary economic driver. The decrease in investment demand and PLN depreciation contributed to the reduction of the growth rate of import. 4.3 Impact of investments on GDP dynamics High acceleration of investment recorded in 2006 continued through the first half of However, the growth rate of investment capital has been decreasing since the first quarter of 2007, reaching 15.2% in the first two quarters of The annual increase of investment capital was 8.2%. Table 21 Accumulation and investment rates as compared with the real growth of GDP and gross fixed capital formation in the years GDP growth rate Growth rate of gross fixed capital formation Gross accumulation rate Gross fixed capital formation rate Source: Calculations by Analyses and Forecasting Department, Ministry of Economy based on Central Statistical Office data. The increase in investment in 2008 resulted from continuing investment processes from the previous years. The structure of credit to enterprises shows that the share of credit for land purchase has dropped, whereas the growth rate of investment debt increased. The structure of fixed capital formation did not change significantly, although there was an increase in housing construction and transport investment. The investment dynamics was maintained, due to a favourable, although deteriorating financial situation of enterprises resulting from the advancement of the crisis, and an increase in the exploitation of EU funds. The accumulation rate remained high. Such processes are conducive to the development of production capacity, which expands the potential of Polish economy. Chart 6 Dynamics of gross fixed capital formation (left axis) and GDP (right axis) in years % q q q 2007 Source: Central Statistical Office. 4 q q q 2008 Gross fixed capital formation 3 q 2008 GDP 4 q q %

70 MINISTRY OF ECONOMY In 2008 the enterprise debt in the banking sector rose from PLN 172 billion to PLN 223 billion. The growth rate of enterprise deposits remains high (PLN 149 billion at the end of 2008) and allows for the continuation of investment processes based on own funds. However, apart from more difficult credit lending, the main factors contributing to the investment slowdown is the current economic recession and negative assessment of the prospects for economic development. Table 22 Investment capital structure in the years (in percentage) Agricultural products Machinery and equipment Transport means Housing construction Other construction Other products Source: Eurostat. Surveys show that the rate of continuing investment is dropping, whereas the interest of enterprises in launching new investment projects is decreasing. It is expected that the growth rate of investment, particularly in the private sector, will decrease further in Impact of export on GDP dynamics Export of products and services was the main factor of economic growth in the years The stable impact of export on the economic growth was maintained until the third quarter of In the last quarter of 2008, its impact on the economic growth was slightly negative for the first time since the beginning of recovery. A decrease in domestic demand in the first quarter of 2009, particularly importintensive investment, resulted in even more significant drop in imports. As a consequence, the net export had a positive effect on GDP (analogically to the situation observed in the slowdown phase in the years ). Chart 7 Effect of the export and import of goods and services on economic growth % 8% 6% 4% 2% 0% -2% -4% -6% -8% 1 q q q q q q q q q 2009 Export Import Net export GDP Source: Central Statistical Office. 70

71 POLAND 2009 REPORT ECONOMY Since the increase rate of the export of goods and services grows faster than the economic growth rate, the share of export in GDP, indicating the degree of the openness of economy, is increasing. However, it still remains on a relatively low level compared with other smaller economies of the region. The increase in competitiveness of Polish products, resulting from real unit labour cost reduction, has stimulated Polish export since the beginning of the decade. The development of European integration and globalisation processes were also factors that supported exports. In 2008, the downward trend of unit labour costs reversed. It is estimated that the costs increased by 3.5%. In the second half of 2008, the growth rate of global economy plummeted, entailing a dramatic drop in international trade. Apart from the unit labour costs, prices and currency exchange rate also determine the competitiveness on foreign markets. Since the beginning of 2007 until the summer of 2008, PLN appreciated against EUR, which had a negative effect in the competitiveness of Polish products on foreign markets. In the second half of 2008, PLN depreciated by ca. 30%, with further depreciation in the first months of This reduced the effect of global economic slowdown on export, and significantly limited the growth rate of import. Table 23 Changes in real unit labour costs in Poland compared with the European Union in years * ** UE UE Poland *data for Poland in 2005 were subjected to methodological changes. ** an estimation for Poland for Source: Eurostat STRIND. Chart 8 Growth rate of export of products and services (left axis) and economic growth (right axis) % 15 8 % q q q q q 2008 Export 2 q q 2008 GDP 4 q q 2009 Source: Central Statistical Office. 71

72 MINISTRY OF ECONOMY 4.5 Role of sectors in GDP formation The gross value added in 2008 rose by 4.9% compared to 2007, i.e., at a rate equal to the increase in GDP. It constituted ca. 87.8% GDP. The remaining part constituted tax on products, reduced by subsidies to products. Market services had the largest impact on the increase in value added. The value added in construction rose more rapidly than the total value added. The role of industry was less significant than in The increase in the sector of market services was stable and resistant to major fluctuations. It still remains the most reliable source of value added growth. It moderates the increase in value added in times of slowdown, and it stimulates the economic growth in times of recovery. Other sectors, particularly industry which grows faster in times of high economic growth, are more susceptible to fluctuations. The last three years witnessed a boom in construction which is also susceptible to economic fluctuations. The growth in value added of this sector was around 11%. Non-market services and agriculture also play a slight role. Table 24 Growth rate of the GDP and gross value added in the years (%) Specification GDP Value added including: - industry construction market services Source: Central Statistical Office. An analysis of the structure of value added formation shows structural changes in Polish economy. There is an increase in value added in market services, with an increase in construction in the recent years, resulting mainly from economic fluctuations. However, the role of such sectors like agriculture and industry is decreasing. The downward trend of the share of these two sectors was interrupted by a rapid growth in their share resulting from the economic growth in Table 25 Changes in the structure of value added in in current prices Agriculture Industry Construction Market services Non-market services Source: Calculations by Analyses and Forecasting Department, Ministry of Economy based on Central Statistical Office data. The knowledge of sectoral structure of GDP formation and the growth rate of the value added in particular sectors allows for a sectoral decomposition of the economic growth factors. In 2008 the market service sector, trade and repair in particular, had the largest influence on the economic growth. It resulted from a high increase in household consumption. The contribution of industry was almost three times higher than in the previous year. The share of construction was higher than in the previous year as a result of the household demand on flats. The share of the remaining sectors in economic growth was slight but positive. 72

73 POLAND 2009 REPORT ECONOMY Chart 9 Sectoral decomposition of GDP in the years % 6% 4% 2% 0% % Agriculture Industry Construction Market services Non-market services GDP Value added Source: Calculations by Analyses and Forecasting Department, Ministry of Economy based on Central Statistical Office data. 4.6 Effect of global financial crisis on economic growth in 2008 The effect of the crisis on Polish economy was reflected mainly in trade, as well as in stricter criteria for granting credit, which reduced the growth rate of credits for enterprises and households. A dramatic slowdown of global economic growth rate, particularly with respect to Poland s main trade partners, resulted in a decrease in export of goods in the last quarter of 2008, and in continuous downward trend in the first quarter of In the first three quarters of the year, the increase in export exceeded 10% despite the economic slowdown in the Eurozone already in the third quarter of Chart 10 Changes in the volume of the export of goods and services in the years % 8% 6% 4% 2% 0% -2% -4% -6% -8% 1 q q q q q q q q q 2009 Export Import Net export GDP Source: Central Statistical Office. 73

74 MINISTRY OF ECONOMY A rapid growth in export was achieved despite the appreciation of the real effective currency exchange rate. On the other hand, the PLN depreciation seen in the second half of the year was conducive to the increase in the competitiveness of the Polish exports, reducing the negative consequences of the slowdown at Poland s main trade partners. In the second half of 2008, there was a decrease in the growth rate of household and corporate debt, resulting from PLN depreciation, with the downward trend continuing in the first half of The expansion of the crisis led to a stricter lending policy of banks. The following factors should be mentioned: an increase in credit margins, higher own deposit by real estate purchase, the requirement of more severe guarantees, as well as a shorter maximum financing period. Chart 11 Real effective currency exchange rates in the years M M03 Source: Eurostat. 2007M M M M M M M M07 Real effective currency exchange rates (1999=100) 2008M M11 Chart 12 Growth rate of corporate and households credit in the years % M M M M M09 corporate credit 2007M M M M M M09 households credit 2008M11 sty 09 mar 09 maj 09 Source: Calculations by Analyses and Forecasting Department, Ministry of Economy based on Central Statistical Office data. 74

75 POLAND 2009 REPORT ECONOMY 4.7 Gross domestic product per capita in Poland compared to selected countries In 2008 GDP nominal value amounted to PLN 1,271.7 billion. With the money purchasing power GDP per capita increased from the average level; of 50.6% for the EU-27 in 2004 to 57.5% in Since 2004 the real convergence process has expedited. According to the estimates of Eurostat, GDP per capita increased in Poland in 2008 by 5%. In the euro zone it increased by 0.7%. Table 26 Poland s gross domestic product per capita in compared to EU states in accordance with the purchasing power parity (UE27=100) Euro zone Czech Republic Germany Hungary Poland Slovakia Source: Eurostat STRIND. Table 27 Gross domestic product per capita in thousand EUR in accordance with the purchasing power parity in selected countries in UE Euro zone Czech Republic Germany Hungary Poland Source: Eurostat. 75

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77 POLAND 2009 REPORT ECONOMY 5 LABOUR MARKET 5.1 Employed persons The economic growth continuing in 2008 had a positive effect on the nature and direction of changes on the Polish labour market. It was another year since 2004 when an increase in the number of employed persons (by 3.7%) was recorded. Across the sectoral structure of employment the main tendencies for changes continued. In 2008, the share of the employed in industry and construction increased. At the same time, the share of persons employed in agriculture decreased. Table 28 Persons aged 15+ employed in economic sectors in Total Agriculture Industry and Services Agriculture Industry and Services Years construction in thousand construction % ,116 2,452 4,127 7, ,594 2,304 4,374 7, ,241 2,247 4,681 8, ,800 2,206 5,036 8, Source: Central Statistical Office, Labour Force Survey. In 2008, the employment rate indicating the share of working population in the age range in the total population in the same age range in the national economy amounted to 50.4% and was 1.9 p. p. higher than in Traditionally, the lowest employment rate was in the age group 45-59/64, although a visible improvement in this group has been recorded in the recent years. The substantially lower rate compared to the other EU Member States still mainly results from changes entailed by the deactivation policy pursued in the 1990s. In 2008, the difference between the employment rate for the groups aged 45-59/64 and (where the rate is the highest) was 24.6 p.p. and decreased by 0.1 p.p. as compared to Table 29 Situation on the labour market in in the age group of 15-59/64 (%) Specification Economic activity rate Employment rate Source: Economic Labour Force Survey, Central Statistical Office, calculations by Analyses and Forecasting Department, Ministry of Economy. What is characteristic of the Polish labour market (especially when compared to the European Union Member States) is the relatively low employment rate in the lowest age group. This results from the prolonged education period of young persons on account of their high educational aspirations and growing availability of educational services on the market. Yet, also here changes have been recorded 28 Economic activity rate is a percentage share of professionally active population (the working population or the unemployed) in the total population of the specific category (aged 15+). The employment rate is the percentage share of the working population in the total population of the specific category, whereas the unemployment rate is a percentage share of the unemployed in the professionally active population. 77

78 MINISTRY OF ECONOMY in recent years. As a result of the availability of diversified and flexible forms of education, along with the increasingly popular paid studies, students more and more often combine education and professional career. It translates into a slight growth in the employment rate among people aged In 2008, the rate was 27.3% and was 1.5 p.p. higher than in the previous year. Despite the dynamic growth in the employment rates in different age groups (except the 60/65+ group), Poland has still the lowest employment levels in the EU-27 (mean employment rate in the EU-27 was 65.9%). In view of the priorities of the Lisbon Strategy, which aims towards achieving 70% employment rate in the Member States by 2010, the implementation of an employment stimulating strategy in Poland will be a major challenge for the economic policy in Poland, in particular in view of the ageing Polish population and low economic activity of older persons. In 2008, the employment rate measured by average employment rate in enterprises increased by 4.8% compared to 2007, and amounted to 5,398 thousand. There was an increase in employment rates in almost all sectors of economy. In 2008, decline in the number of employed (as in the previous year) was observed only in the sectors of production and supply of energy, water and gas, which resulted from the restructuring process in these branches. The highest increase in employment was seen in real estate service, construction, trade and repair, hotels and restaurants. Table 30 Average employment in the enterprise sector (in thousands) / /2007 Total 4,918 5,150 5, Industry 2,480 2,565 2, Mining and quarrying Manufacturing 2,098 2,189 2, Production and supply of electric energy, water and gas Construction Trade and repair Hotels and restaurants Transport, storage and communications Real estate, renting and business activities Source: Statistical Bulletins of Central Statistical Office for Unemployment and unemployment rate According to LFS data (Labour Force Survey concerning the economic activity of the population), in 2008, the average unemployment level in Poland was thousand persons, i.e., 7.1% of economically active people, with the unemployment rate of 8.0% for women and of 6.4% for men. Compared to 2007, the number of the unemployed dropped by 25.0%. According to the registered unemployment statistics, thousand persons remained out of work at the end of The registered unemployment rate was 9.5%, i.e., 1.7 p.p. lower than in The most significant economic factors, which determine the labour market, include, among other things, the rate of economic growth and investment. The dynamic growth trends observed since 2004 also continued throughout 2008 despite an economic slowdown in the last quarter. However, the extent of the consequences of the global economic crisis was limited and had no significant effect on the employment in enterprises. 78

79 POLAND 2009 REPORT ECONOMY Chart 13 LFS unemployment rate and registered unemployment rate at the end of the quarter in the years % I q 2005 II q 2005 III q 2005 IV q 2005 I q 2006 II q 2006 III q 2006 IV q 2006 I q 2007 II q 2007 III q 2007 IV q 2007 I q 2008 II q 2008 III q 2008 IV q 2008 I q 2009 II q 2009 LFS unemployment rate Unemployment rate registered (at the end of the quarter) Source: Statistical Bulletins of the Central Statistical Office, LFS, calculations by Analyses and Forecasting Department, Ministry of Economy. 5.3 Structural mismatch on the labour market Structural mismatch consists in incompatibility of the labour demand structure and labour supply structure. It is typical of developing economies. Dynamic modernization and restructuring processes result in changes of labour demand structure, since new jobs usually require different professional qualifications and abilities than the jobs reduced. Changes in the labour demand usually take place more rapidly than changes in labour supply, resulting in some structural mismatch. The main goal of socio-economic policy is to prevent any long-term structural mismatch by creating legal and institutional conditions that stimulate the adjustment of labour supply to labour demand. Despite a noticeable improvement on the labour market since 2004, the greatest problems still facing the Polish economy include low employment rate and significant mismatch between labour demand and supply, in particular compared to the EU Member States. Poland experiences a surplus of low-qualified and a shortage of highly-qualified workers. The majority of the long-term unemployed are unqualified persons, with less and less demand for their labour due to technological development. In 2008, the highest unemployment rate (11.9%), and, simultaneously, the lowest employment rate (17.9%), were recorded among persons with elementary or incomplete elementary education. The highest employment rate (77%) and lowest unemployment rate (3.8%) were recorded among persons with higher education. At the same time, the increase in employment rate in recent years was highest among persons with secondary vocational education and basic vocational education, which shows a growth in labour demand for medium- and low-qualified specialists, probably as a result of extensive emigration of such workers abroad. Structural mismatch on the labour market results also from discrepancy between labour demand and supply, depending on the profession. It translates into relatively high unemployment rates among certain professional groups and in a shortage of workers in other professions. It results mainly from a relatively low flexibility of the Polish education and salary systems, which react quite slowly to structural mismatch. The education system for adults providing them with professional mobility is underdeveloped, 79

80 MINISTRY OF ECONOMY whereas the salary system, in the government sector in particular, is little sensitive to changes in the relation between the labour demand and supply on the market. Chart 14 Employment rates according to the level of education in % university secondary cvocational secondary comprehensive vocational elementary and incomplete elementary Source: LFS, Central Statistical Office, calculations by Analyses and Forecasting Department, Ministry of Economy. Spatial concentration of unemployment, caused by a relatively low mobility of labour force, also leads to structural mismatch. Underdeveloped regions, where labour demand is lower, have highest unemployment rates in the country. At the same time, there are shortages of workers in dynamically developing regions, in large urban agglomerations in particular. Due to relatively low labour force mobility around the country, the scale of migration from regions of low labour demand to regions with high labour demand is relatively low. Internal migration of population is hampered to a large extent by a poorly developed transport infrastructure (making commuting to a workplace difficult) and a difficult situation on the housing market. Additionally, economic emigration is often more attractive than seeking employment in a different region of Poland. Box 4 The Act on promoting employment and labour market institutions and amending other acts New legal basis for the implementation of new programmes and the instruments of labour market policy was created by virtue of the amendments to the act of 19 December The aim of new solutions stipulated in the act is to increase employment rates by making it easier for the unemployed and job seekers to find employment or start their own business. The amended act provides legal solutions regarding: the improvement of the quality of service rendered by employment agencies, creation of professional mobilization centres at employment agencies, improvement of mobilization activities performed by public employment authorities, increasing the number of persons entitled to use labour market services funded by the Labour Fund in order to enhance qualifications, amending the structure of unemployment benefits and shortening the period of their payment, extending the scope of assistance rendered by employment agencies to employers with respect to professional counselling and information, reducing the costs of hiring unemployed aged 50+ incurred by employers, redressing the costs of equipping and retrofitting of workplaces, increasing the single benefit granted to an unemployed person to start their own business, increasing material incentives for the unemployed to undergo training, Moreover, in case of a monitored dismissal the employer is obliged to undertake action to provide the employers to be dismissed the access to labour market services. 80

81 POLAND 2009 REPORT ECONOMY In recent years, there has been a significant decrease in unemployment rates both in rural and urban areas. In 2008 the unemployment rate in rural areas was 7.0% (compared to 9.2% in 2007). The unemployment rate in urban areas reached 7.2% in 2008 (compared to 9.8% in 2007). A slightly lower unemployment rate in rural areas may result from low professional activity in these areas, as well as hidden unemployment. The structural mismatch on the labour market may also result from limited labour demand with respect to young persons with poor professional experience and persons at the age of 45+. In 2008 the economic activity rate for persons aged was 33%, so it was at the same level as in the previous years. The employment rate in this age group was 27.3% and was 1.5 p.p. higher than in The economic activity rate for persons aged 45+ was more less the same in 2008, reaching 39.6%, with the employment rate of 37.4%. The relatively low professional activity of women, reaching 46.6% in 2008 compared to 62.7% among men, has a negative effect on the adjustment of labour demand and supply. At the same time, in 2008 women were much more susceptible to unemployment, with the unemployment rate among women reaching 8.0% compared to 6.4% among men. Women also sought employment for 0.8 of a month longer than men (12.5 compared to 11.7 months). In 2008, women amounted to 45% of the employed, which shows that the gap between working men and women is still almost 10 p.p. 5.4 Foreign migration for economic reasons Poland s integration with the European Union considerably facilitated the access to the EU-15 labour markets for Poles and contributed to an increase in the number of people who take the opportunity to work abroad. As a result, the number of Polish citizens leaving the country for work has systematically increased in the recent years. However, in 2008 there were significant changes in migration behaviour of Polish people. In 2008, the economic situation of Western Europe countries, such as United Kingdom, Ireland, Germany or Spain, which were the main destinations for many Polish migrants, drastically deteriorated as a consequence of the global financial crisis. The drop in production and bankruptcy of companies resulted in a considerable increase in unemployment rates on local markets. Consequently, the demand for migrant labour decreased. The deteriorating situation on the labour market and concerns in United Kingdom and Spain regarded the migrants as competition, who worked for lower salary and under worse social conditions than the citizens of these countries. Therefore, it was more and more difficult for Polish citizens to find employment abroad. Employment possibilities abroad were additionally affected by the fact that the financial crisis hit construction and manufacturing in particular, with a significant number of Polish citizens in Western Europe working in these two sectors so far. In countries such as United Kingdom, Spain, Ireland, Norway or Germany there was a significant outflow of Polish workers in Despite the crisis, there is still a strong foreign labour demand in agriculture in the Southern and Western Europe. However, this work is usually seasonal and does not require changing the place of residence or emigration. It only entails leaving the country for a short period of time. An analysis of data on economic migration of Poles to the EU MS and EEA countries in 2008 shows a visible drop in the interest of Polish citizens in going abroad, as well as further diversification of the 81

82 MINISTRY OF ECONOMY destinations that migrants choose as a result of opening labour markets to new EU Member States by the Netherlands (1 May 2007), Luxembourg (1 November 2007), France (1 July 2008), Belgium. Denmark, Norway (1 May 2009). The Polish emigration to the most countries is either stable or drops. In 2008 the scale of emigration to United Kingdom, Ireland, the Czech Republic, Denmark, and Austria decreased compared to On the other hand, the number of Polish citizens that undertook employment in the Netherlands and Spain in 2008 was higher than in the previous year. Polish emigrants have still little interest in such countries as Portugal, Romania, Slovienia and Hungary due to low salaries. Box 5 Employment of Poles in Germany In 2008, the following work permits or work permit exemptions for students were issued to Polish citizens, (2006 data in brackets): seasonal workers 190,582 (224,078) persons employed on touring events 3,706 (4,729) guest-employees 154 (316) domestic helps 2,254 (2,249) students during holiday time 3,971 (5,406) The number of persons employed to perform services in the non-liberalised construction sector is gradually declining. In the last reporting period between October 2007 and September 2008, an average quota of workers per month was allowed by Germany. 42% of the quota was used. On average, there were 5.9 thousand Polish workers in Germany a month, i.e., 28% less than in the previous period (7.5 thous.). There are no specific data on the persons running their own business in Poland and performing single construction projects in Germany. According to the registry kept by the Social Insurance Company (ZUS) on delegating workers to Germany, the total number of insurance certificates issued amounted to thousand, i.e. 6% less than in 2007 (it should be noted that one person could be delegated to Germany more than once a year). Source: Ministry of Labour and Social Policy (2008), Information on the employment of Polish citizens in EEA countries and Switzerland; Warsaw, April Also the interest of Polish entrepreneurs in rendering service on the EU MS markets has decreased. In 2008, there were 231 thousand E-101 forms (242 thousand in 2007) issued to the employees of Polish businesses and self-employed working abroad under the cross-border provision of services to confirm participation in the Polish insurance system. It should be borne in mind, however, that not all people, who decide to work abroad, apply for such a certificate. Many Polish citizens decided to return to Poland due to the deteriorating situation on the EU labour markets. It is difficult to determine the scale of return migration since there are no reliable registers while the available data is incoherent. According to LFS data, 580 thousand citizens returned to Poland between 2004 and 2008, mostly from Germany, the United Kingdom, Italy and the USA, where the economic situation deteriorated significantly in the last year. The British Institute for Public Policy Research estimated the number of people, who returned to their country in the years at 388 thousand. On the other hand, Money.pl reported that 22% of economic migrants returned to Poland. Data regarding persons reporting to employment agencies in Poland with E-301 and E-303 forms certifying the period of time required to receive unemployment benefits or to be entitled to the unemployment benefit in another Member State, indicate an increase in citizens returning to Poland. In 82

83 POLAND 2009 REPORT ECONOMY ,650 E-301 forms and 1,510 E-303 forms were submitted (in ,761 and 305). However, in the first three months of 2009 as many as 6,093 E-30 forms were received 29. Table 31 Main destinations of the migration of labour from Poland to Europe (in thousands) Destination Austria Belgium Czech Republic Denmark Finland 0 30 no data 4 5 France no data Spain Ireland Island 11 The Netherlands Germany Norway Switzerland 4 8 no data 32 6 Sweden United Kingdom Italy no data 33 no data Source: Ministry of Labour and Social Policy, Information on the employment of Polish citizens in EEA countries and Switzerland and of the EEA countries citizens in Poland; Warsaw, April 2008; Home Office (2008), Accession Monitoring Report, May 2004 March 2008, London., May In 2008, Polish citizens migrated from the EU countries that were more heavily affected by the economic crisis to the EU countries, where foreign labour demand remained strong. The report drawn up by the organization of Polish Minority, the Polish Federation 34, shows that the Poles who left United Kingdom migrated to Norway and the Netherlands. Box 6 Employment of the Poles in the United Kingdom In 2008, over 102 thousand employees of Polish origin were registered in the UK, i.e., 32% less than in Currently, Poles account for 59% of all foreigners from the EU-8 officially employed in that country. The percentage of Polish migrants employed in particular sectors was as follows: Administration, business and management 41% Restaurants and hotels 18% Agriculture 9% Manufacturing 7% Food, meat and fish processing 5% The majority of foreign employees in all these sectors were Polish citizens. Source: Home Office (2007), Accession Monitoring Report, May 2004-March 2007, London, May In view of an increasing wave of returns, a range of actions was taken to facilitate the settlement of Polish emigrants in Poland. The returns of Polish citizens may lead to an increase in labour force supply on the labour market and the reduction of labour shortages in such industries as renovation and 29 E-301 and E-303 forms may be submitted in Poland also by the citizens of other EU countries. However, it may be assumed that their number has had no significant effect of the studied issue labour permits were issued to Polish citizens in This number includes both the permits issued for the first time and prolongation of the expiry period of permits issued earlier. 32 Despite the official request of the Polish Embassy, the Federal Migration Office did not grant access to information on the scale of employment of Polish citizens in the country in According to the information provided by the Italian Ministry of Internal Affairs in the nearest future it will not be possible to update the statistical data on the migration of EU citizens on the territory of the entire country due to the decentralization of the registry, as a result of which the data is only available in specific census departments in individual Italian communes

84 MINISTRY OF ECONOMY construction, medical services and trade. It will have a positive effect on the development of enterprises and economic development in Poland. Box 7 Actions concerning returning citizens 1. The Act of 25 July 2008 on special solutions for taxpayers obtaining some of income outside the territory of the Republic of Poland. The aim of this regulation is to abolish the tax imposed on persons working abroad, resulting from the discrepancies between the methods of the avoidance of double taxation. The Act stipulates: abolition of unpaid tax as a part of personal income tax with respect to tax payers who have not made a tax settlement provided that they submit a tax return. income tax refund with respect to the tax payers who made a tax settlement and paid the tax; abolition of unpaid tax and tax refund with respect to tax payers who paid only a part of the tax. This regulation shall apply only to the period of due to the expiration period of tax obligations. 2. Creation of the internet portal The portal shows information significant for the returning citizens concerning the news about Poland, labour market situation in particular regions, contact data of important institutions. It is also possible to obtain additional information by sending a question to an expert. The answer is received not later than within 14 days. 3. Publication titled Powrotnik. Nawigacja dla powracających [Returner. A guide for returning citizens] The publication includes a guide containing a range of practical and intelligible information regarding: formalities to deal with after returning, the organisation of the move, effective job seeking in Poland, setting up a business, tax procedures connected with moving of the entire family, the transfer of social benefits to Poland, the rules regulating the access to public health care in Poland. Powrotnik. Nawigacja dla powracających was printed and delivered to public institutions that the returning migrants need to report to, with its electronic version available on the portal Source: Analyses and Forecasting Department, Ministry of Economy The scale of economic migration is expected to stagnate in the next few years, and it may even decrease as a result of deteriorating economic situation in countries that are frequent destination of Polish economic migrants. Moreover, further dynamic increase in migration is limited by the exploitation of the so called migration potential. As a result of the considerable scale of migration in the recent years, the number of people living currently in Poland that might be potentially interested in migration has decreased. A large number of people do not consider a possibility to undertake employment abroad due to their age, inability to speak foreign languages, family obligations in the country, or being satisfied with the social status they have achieved. At the same time, due to the deteriorating economic situation of the countries that were the most common destination of economic migrants a wave of Polish citizens returning to Poland may be expected in the next few years. Many of them had assumed they would leave only for a specified period of time and would return after earning a certain amount of money. Others return due to difficulties on the local labour market that made it impossible for them to achieve a stable living situation abroad. 84

85 POLAND 2009 REPORT ECONOMY 6 FOREIGN TRADE 6.1 Trends in Polish foreign trade in 2008 The first symptoms of financial crisis were observed on the USA mortgage market already in the first half of 2007, but only when the Lehman Brothers a leading Wall Street investment bank fell (in September 2008), the crisis extended from the financial sector to American real economy, and from there it spread to developed economies, and then also the developing ones. In the fourth quarter of 2008, the growing economic disturbances and uncertainty on financial markets resulted in significant decrease in assets, both in developed countries and on emerging markets, causing extensive and deep breakdown in domestic demand and global product, as well as in trade, in almost all regions of the world. General fall in consumption and investment expenditures resulted in the reaction of markets in the real sphere, especially in the form of severe reduction in employment and trade turnover breakdown. When compared to the disturbances in economic situation and crises of various scale and scope experienced within the last two decades, the current crisis hit international commodity trade much faster and more acutely. Several factors were decisive in this context, such as: the breakdown in demand was far more extensive than in the past, because the economic slowdown was abrupt and occurred at the same time in almost all areas of world economy; networks of cooperative connections, mainly vertical, between producers and participants of commodity exchange in different regions and in different countries, much extended in the last years and not recorded before, which resulted in the extension of cross-border exchange networks at the stage of producing final products (beyond the traditional exchange between the producing country and the consuming country), and broaden the interdependencies between different, even very remote markets; deep crisis of confidence in the financial sector seriously restricted access to bank loans, which are necessary to finance trade transactions, and which are particularly important for the operation of small and medium-sized enterprises, usually more creative and flexible in crisis situations; escalation of protectionist trends in some leading world economies, which may strongly hinder the process of overcoming crisis and delay market revival. The breakdown in domestic demand on major EU markets, which took place in the fourth quarter of 2008, affected Polish commodity exchange in the last 2 months of 2008, as well as in the subsequent months of While in the 1 st 3 rd quarter of 2008 Polish exports (in EUR) rose by 19.8%, i.e. by 4 p.p. faster than in 2007 and by 3 p.p. faster than the average rate in , in the 4 th quarter of 2008 it fell by 1.2%, which resulted from exports breakdown in November and December Consequently, the average yearly exports growth rate in 2008 slowed down to 14.1%, i.e. it was by 1.7 p.p. lower than in

86 MINISTRY OF ECONOMY The severe fall in exports became even sharper in the first two months of 2009 when it reached over 22%. However, the next months of 2009 saw some stabilisation, and even a slowdown in the exports fall rate. The fall in exports was followed by a fall in imports, sharper with every subsequent month. After a relatively dynamic growth in the first three quarters of 2008 (growth in EUR reached nearly 23.8%, and was faster by 4 p.p. than in exports), a slowdown to 3.7% was recorded in the 4 th quarter. As a result, the average imports growth rate in 2008 decreased to 18.3%, i.e. remained 4 p.p. higher than in exports. However, as predicted by the Ministry of Economy, from the beginning of 2009, the imports fall rate started to outdistance that of exports. When the trend to higher imports growth rate, which lasted for three years, was reversed, the fall of imports in the 1 st quarter of 2009 (by 26.8%) was almost 7 p.p. deeper than of exports. The disproportion became even bigger in April and May The import slowdown is of relatively long-lasting character, and it is strongly connected with the crisis, e.g. through the fall in world prices of raw materials (especially energy resources), the decrease in FDI and cost shock in imports caused by deep zloty depreciation, especially in the situation of more difficult access to bank loans. Table 32 Poland s commodity trade in Jan 2008 May 2009 Dynamics in % Period in million EUR the same period in prev. year =100 data adjusted seasonally Exports Imports Balance Exports Imports Exports Imports January ,280 10,941-1, February 9,758 11,472-1, March 9,575 11,827-2, st Q 28,613 34,240-5, April 10,601 12,589-1, May 9,590 11,749-2, months 48,804 58,577-9, June 10,095 12,594-2, nd Q 30,286 36,931-6, July 10,027 12,391-2, August 9,268 11,390-2, September 11,105 13,349-2, rd Q 30,399 37,130-6, October 11,170 13,543-2, November 8,738 10,942-2, December 7,038 9,662-2, th Q 26,946 34,147-7, Year , ,448-26, January ,159 8, February 7,657 8, March 8,094 8, st Q 22,910 25,071-2, April 7,298 7, May 7,033 7, months 37,241 40,496-3, Source: Analyses and Forecasting Department, Ministry of Economy, based on Central Statistical Office data. 86

87 POLAND 2009 REPORT ECONOMY Therefore, it could be said that apart from many different negative implications for Polish economy and foreign trade conditions, the crisis brought about a significant reduction of an exceptionally high and dynamically growing commodity trade deficit of the last few years. The commodity trade deficit, which, after 3 years of dynamic growth, reached an unprecedentedly high level of EUR 26.2 billion at the end of 2008, was reduced during 5 months of 2009 to almost EUR 3.3 billion. It means that the average monthly level of deficit was reduced from EUR 2.2 billion in 2008 to EUR 0.7 billion in 5 months of 2009, i.e. 3.1 times. Three periods can be distinguished in Poland s commodity trade between January 2008 and May 2009: I. three quarters of 2008 dynamic growth of turnover; II. the fourth quarter of 2008 and the first two months of 2009 slowdown and then growing breakdown; III. the last 3 months (Mar May 2009) for which statistic figures are available, when we can speak of stabilisation of some kind, i.e. the breakdown is not getting worse. Chart 15 Monthly dynamics of exports and imports in Jan 2008 May I II III IV V VI VIIVIII IX X XI XII I II III IV V 60 I II III IV V VI VIIVIII IX X XI XII I II III IV V export export (seasonally adjusted) import import (seasonally adjusted) Source: Analyses and Forecasting Department, Ministry of Economy, based on Central Statistical Office data. Chart 16 Monthly commodity trade balance in Jan 2008 May ,000 10,000 mln EUR 5, ,000 I II III IV V VI VII VIII IX X XI XII I II III IV V eksport 9,280 9,758 9,575 10,601 9,590 10,095 10,027 9,268 11,105 11,170 8,738 7,038 7,159 7,657 8,094 7,298 7,033 import 10,941 11,472 11,827 12,589 11,749 12,594 12,391 11,390 13,349 13,543 10,942 9,662 8,095 8,264 8,712 7,911 7,515 saldo -1,662-1,714-2,252-1,987-2,159-2,499-2,365-2,123-2,244-2,373-2,204-2, Source: Analyses and Forecasting Department, Ministry of Economy, based on Central Statistical Office data. 87

88 MINISTRY OF ECONOMY 6.2 Geographical structure of foreign trade turnover Markets of developed countries prevail in the Polish exports. Their share in overall exports in 2008 was 83% - by 1.1 p.p. less than in In this group of countries, the European Union has the biggest share in total Polish exports 77.8%. After Bulgaria and Romania joined the European Union in January 2007, the EU has strengthened its position as Poland s dominating trade partner. However, the share of the Old EU market (EU-15) in total Polish exports decreased from 62.9% in 2007 to 61.6% in At the same, the share of the new EU markets (EU 9+2) slightly increased (by 0.3 p.p.) to 16.3% in In 2008, the share of the following markets in total Polish exports decreased most: Germany by 0.8 p.p. to 25.1% and Italy by 0.6 p.p., to 6%. The share of Slovakia, in turn, increased the most by 0.3 p.p., to 2.5% in The European Union also holds a dominating position in Polish imports, although its share in 2008 (61.9%) was lower by 2.3 p.p. than in It resulted from a decrease in the share of Old EU markets (EU 15) in imports to Poland from nearly 55% in 2007 to 52.8% in The share of the new Member States (EU 9+2) remained on a similar level 9.1%. In 2008, Poland exported to the EU markets more than EUR 90.4 billion worth of commodities. The value of imports from these markets was EUR 88.2 billion. Among 15 countries which are the largest recipients of Polish exports there are as many as 13 EU Member States. As regards imports, there are 10 such Member States. The largest growth of exports in absolute terms was recorded in the case of: Germany - by EUR 2.8 billion (by 10.4%), France - by EUR 1 billion (by 16.2%), The Czech Republic - by nearly EUR 1 billion (by 17.5%), The Netherlands - by EUR 0.8 billion (by 20%), United Kingdom - by over EUR 0.6 billion (by 10.7%). The leading products in the growth of exports to the EU include:: electric machinery products - by EUR 4.3 billion (by 12.7%), chemical industry products - by EUR 1.7 billion (by 19.4%), agricultural and food products - by EUR 1.3 billion (by 16.5%), metallurgical products - by EUR 1.2 billion (by 11.2%). Polish exports to the EU markets expressed in EUR grew by 12.6% in 2008, i.e. by 1.5 p.p. slower than the overall exports growth rate, and at the same time 1.6 p.p. slower than the imports from the EU (growth by 14.2%). Thus, the trend, which started in 2007, of Polish imports from EU states growing faster than exports to these states, was sustained. As a result, a decrease in commodity trade surplus with the EU, by EUR 790 million to EUR 2.3 billion, was recorded. In the case of trade with the Old EU states, the deficit increased by EUR 1.7 billion, to EUR 3.6 billion in 2008, while the surplus in trade with EU 9+2 amounted to EUR 5.9 billion and was EUR 0.9 billion higher than in the previous year. 88

89 POLAND 2009 REPORT ECONOMY The overall results of trade with European Union countries were significantly affected by the deteriorating economic situation of Poland s most important economic partners, in particular Germany, in result of financial crisis. The Polish exports growth rate to this market remained almost identical as in the previous year, i.e. 10.4% (in 2007, it was 10.5%), and the imports growth rate decreased from 19.6% in 2007 to 13.2% in As in the previous year, the imports from Germany in absolute terms increased (by EUR 3.8 billion) much more than exports (by EUR 2.8 billion). Consequently, the deficit of EUR 2.6 billion recorded in 2007 grew to EUR 3.6 billion in Worsening situation was recorded in the exchange with 10 EU states, including 9 of the EU-15 Member States and one of the EU 9+2 states. The deficit in trade with Italy increased significantly (by ca. EUR 790 million, to EUR 2.3 billion in 2008), the same as in the case of Finland (by EUR 284 million, to more than EUR 1.1 billion). In 2008, for the first time since 2004, there was a deficit recorded (of EUR 170 million) in trade with Spain, where a surplus of EUR 375 million was recorded in There was, however, an improvement in exchange balance with 16 EU states, in particular with France (by EUR 437 million, to EUR 487 million in 2008), the United Kingdom (by EUR 356 million, to almost EUR 2.7 billion), and Hungary (by EUR 280 million, to EUR 704 million). As in 2007, the growth rate of imports from developed countries in 2008 was higher than the growth rate of exports. Consequently, a small surplus in exchange with these markets in 2007 (EUR 32.5 million) transformed into a deficit of EUR 2.2 billion. An important factor affecting the balance deterioration were changes in trade with the countries of the Eurozone (deficit increased by EUR 2.1 billion to EUR 7.5 billion), as well as with Japan (deficit increased by EUR 0.6 billion to EUR 2.7 billion), and the United States (deficit increased by ca. EUR 400 million to slightly over EUR 1.4 billion). The lower trade balance with Japan was recorded for most commodity groups. A particularly acute rise of deficit was recorded in electric machinery products, dominating in trade with this market (by over EUR 0.5 billion to EUR 2.4 billion in 2008). The biggest rise in deficit in trade with the USA was recorded in mineral products (by EUR 0.2 billion) and electric machinery groups (by EUR 119 million). While in 2007 a reduction of deficit in trade with CIS countries by ca. EUR 1 billion was observed, in 2008 the deficit increased by nearly EUR 2.3 billion, and it reached over EUR 5.5 billion. This was caused by a record increase in prices of energy resources imported from Russia (the negative balance in trade in mineral products with this market dropped by EUR 2.4 billion to EUR 10.2 billion in 2008). In 2008, the relation between exports and imports growth rate was reversed. The exports growth rate to CIS countries in 2008 was lowest in the last 5 years and amounted to 18.9%. Imports from CIS, in turn, increased by over 31%, while a year earlier it increased only by 8.3%. As a result, the share of these markets in total Polish imports rose from 11.2% in 2007 to 12.4% in 2008, and in exports from 10% to 10.5% in Among the CIS countries Russia, Ukraine and Belarus had the highest share in imports to Poland. However, the exchange situation was different for each of these countries. In 2008, the balance of exchange with Russia significantly decreased. The deficit of EUR 5.8 billion recorded in 2007 grew to more than EUR 7.8 billion in The reduction of trade with Russia resulted from a significant acceleration of imports from this market, which rose by 32.2.% (nearly EUR 3.4 billion), ca. 24 p.p. faster than in Whereas exports to this market rose only 3.3 p.p. faster than in the previous year (by 28.5%, by over EUR 1.3 billion) 89

90 MINISTRY OF ECONOMY In the imports from Russia mineral products traditionally prevailed, with the share similar to that in 2007, i.e. a little more than 74%. As for metallurgical products, there was a fall in their share in imports by 2.2 p.p., to 3.9% in The dominating share in Polish exports to Russia belonged to electric machinery products. As compared to 2007, their share increased by 8.5.p.p., to 44.3%. The share of chemical industry products and agricultural and food products, in turn, decreased by 2 p.p. to 18.7%, and by 1.7 p.p. to 8% respectively. It is worth pointing out that the deficit in trade with Russia, amounting to EUR 7.8 billion, accounted for 30% of the total Polish foreign trade deficit in In 2008, there was a slowdown in the previously dynamically growing Polish exports to Ukraine. While in 2006 the exports to that country rose by over 50% and in 2007 by 27%, in 2008 it increased only by 7.7%. The imports in turn rose by over 27%, i.e. slightly more than 9 p.p. faster than in The trend of faster growth rate of exports than of imports in trade with Ukraine, which started in 2003, was reversed. As a result, the surplus in trade with this market, which grew systematically since 2003, remained on the same level in 2008 as in the previous year, i.e. EUR 2.8 billion. Among all commodity groups in trade with Ukraine, the trade balance of metallurgical products, a dominating group in imports, deteriorated most surplus decrease by EUR 110 million to EUR 13.4 billion in Negative trade balance with Asian countries had a significant share in the exchange deficit in Although their share kept decreasing in recent three years - from 94.6% in 2006 and 85.2% in 2007 to 78.3% in 2008, the deficit in absolute terms increased from EUR 15.9 billion to EUR 20.5 billion in China had the highest share in the deficit (the negative trade balance in 2008 increased by further EUR 2.7 billion to EUR 10.6 billion). A significant rise in deficit was also recorded in trade with Korea (by EUR 0.7 billion to EUR 3.3 billion), and with Japan (by almost EUR 0.6 billion to EUR 2.7 billion). In 2008, the share of China in total Polish imports increased by less than 1 p.p. to 8%, while its share in exports remained on a similar level as in the previous year (ca. 0.7%). As in previous years, a further increase of the trade deficit with that country was recorded, from EUR 7.9 billion in 2007 to EUR 10.6 billion in It resulted from a significant rise in imports with a disproportionately lower growth in exports. Imports from China rose by 33.3%, i.e. ca. EUR 2.9 billion to EUR 11.5 billion in 2008, while exports in this period rose by 20.1%, i.e. only by ca. EUR 145 million to almost EUR 0.9 billion. A significant growth of imports from China was recorded in electric machinery products (by 41.8%, i.e. by EUR 1.9 billion) and light industry products (by 37.1%, i.e. by EUR 431 million). The trade deficit with China increased in almost all commodity groups (except metallurgical products, in case of which the deficit decreased by EUR 43 million to EUR 600 million) was also another year in a row when the trade with the Republic of Korea deteriorated. The imports growth rate amounted to 25.3% (in absolute values, an increase by EUR 0.7 billion to EUR 3.5 billion in 2008). The dynamic growth of imports resulted in a further increase of deficit in trade with Korea, which together with the deficit in trade with China accounted for 53% of the total deficit in Polish foreign trade in

91 POLAND 2009 REPORT ECONOMY Table 33 Changes in the geographical structure of Polish trade Changes 2008/2007 Exports Imports Balance Exports Imports Balance Balance Exports rise Imports rise impr. (+) (+) fall (-) (-) fall (+) deter. (-) Poland overall 116, , , , , , , , ,653.3 prev. year = Developed 96, , , , , , , countries prev. year = share including: EU 90, , , , , , , , prev. year = share including: Germany 29, , , , , , , , ,053.4 prev. year = share Italy 6, , , , , , , prev. year = share France 7, , , , , prev. year = share Czech Rep. 6, , , , , , prev. year = share UK 6, , , , , , prev. year = share Other developed 3, , , , , , , countries prev. year = share including: USA 1, , , , , , prev. year = share EFTA 2, , , , prev. year = share Other countries 19, , , , , , , , ,384.6 excl. developed countries prev. year = share including: CIS countries 12, , , , , , , , ,294.1 prev. year = share including: Russia 6, , , , , , , , ,035.3 prev. year = share Other countries 7, , , , , , , , ,090.5 prev. year = share including: China , , , , , ,721.4 prev. year = share Source: Analyses and Forecasting Department, Ministry of Economy, based on Central Statistical Office data. 35 In order to ensure comparability with 2006, Romania and Bulgaria were treated as EU Member States. In real terms, in 2006, the share of the EU in Polish exports and imports amounted to 77.4% and 63.2%, respectively. 91

92 MINISTRY OF ECONOMY Chart 17 Share of individual market groups in Polish exports Other countries 6.5% CIS countries 10.5% Other developed countries 5.2% European Union 77.8% Source: Analyses and Forecasting Department, Ministry of Economy, based on Central Statistical Office data. 6.3 Changes in commodity structure of foreign trade The dominating commodity group in Polish foreign trade consists in electric machinery products, which accounted for 43% of exports and over 38% of imports in The exports of these products increased by 15.8%, i.e. 2.5 p.p. slower than imports. As a result, the negative trade balance for these products increased by almost EUR 1.7 billion to ca. EUR 4.8 billion. The increase in deficit in Section XVI mechanical appliances and electrical equipment (by almost EUR 1.5 billion to over EUR 5.6 billion) contributed the most to the increase of deficit. Exports growth in this group amounted to 13.1%, and imports growth 16.2%. Whereas in Section XVII vehicles, aircrafts and vessels although the imports growth rate (by 20.6%) was 1.1 p.p. higher than exports growth rate, the surplus increased by EUR 454 million to EUR 3.6 billion. In trade in mineral products, the exports growth (by 26.2%) was 8.1 p.p. lower than that of imports. Consequently, the trade deficit increased by EUR 3.4 billion to EUR 12.4 billion. Despite a slightly decreased mineral oil import volume (by nearly 100 thousand tons), the expenditures increased by almost EUR 2 billion in 2008, as a result of significant rise in prices of mineral oil (as much as 95 EUR/t) also saw an increase in expenditure on imports of gas (ca. EUR 1.3 billion), mainly because of a rise in prices (by 103 EUR/thousand m 3 to ca. EUR 316 EUR/thousand m 3 ), but also because of the growth of its import volume (by ca. 1 billion m 3 ) 36. In Section XV - metallurgical materials and products unlike in the previous year the exports growth (11.5%) was much faster than imports growth (5.3%), which contributed to the reduction of deficit (by EUR 739 million to nearly EUR 1 billion). 36 Data from Energy Market Agency. 92

93 POLAND 2009 REPORT ECONOMY Chart 18 Commodity structure of Polish exports in 2008, compared to 2003 and 2007 Electric and machinary goods Goods of chemical industry Mineral products Metalurgical goods Agricultural and food products Miscellaneous and unclassified goods Goods of light industry Goods of wood and paper industry Ceramic goods Leather % Source: Analyses and Forecasting Department, Ministry of Economy, based on Central Statistical Office data. Chart 19 Commodity structure of Polish imports in 2008, compared to 2003 and 2007 Electric and machinary goods Goods of chemical industry Mineral products Metalurgical goods Agricultural and food products Miscellaneous and unclassified goods Goods of light industry Goods of wood and paper industry Ceramic goods Leather % Source: Analyses and Forecasting Department, Ministry of Economy, based on Central Statistical Office data. A significant increase in commodity trade deficit was recorded in 2008 (by almost EUR 7.7 billion to EUR 26.2 billion), which resulted from the decreased exchange balance in almost all commodity groups. This was mainly caused by unfavourable changes in commodity trade balance in the following groups: mineral products (Section V), where the deficit increased by EUR 3.4 billion to almost EUR 12.4 billion, electric machinery products (Section XVI, XVII and XVIII), where the deficit deepened by almost EUR 1.7 billion to almost EUR 4.8 billion, chemical industry products (Section VI and VII), where the traditionally high deficit deepened by almost EUR 1.2 billion to almost EUR 8.9 billion, food and agricultural products (Section I, II, III and IV), where the surplus was reduced by EUR 0.6 billion to EUR 1.4 billion. 93

94 MINISTRY OF ECONOMY Chart 20 Commodity structure of foreign exchange balance in 2008, as compared to 2003 and 2007 Mineral products Goods of chemical industry Electric and machinary goods Goods of light industry Metalurgical goods Leather Miscellaneous and unclassified goods Ceramic goods Goods of wood and paper industry Agricultural and food products mln EUR Source: Analyses and Forecasting Department, Ministry of Economy, based on Central Statistical Office data. The list of 30 most important commodities groups in Polish exports (aggregated at the level of 4- digit CN codes), as in the previous year, was dominated by cars, car parts and accessories, which accounted for 10.7% of total Polish exports. The commodities whose exports exceeded EUR 1 billion in 2008 (there were 16 such products in 2008, and 15 in 2007) included automatic data processing machines, the exports of which grew 8 times, and furniture whose export slightly decreased. 6.4 Foreign trade in the first months of 2009 In the 1 st quarter of 2009, the breakdown in foreign commodity trade recorded starting in October 2008 deepened. The decrease in trade in the subsequent months was deeper in imports than in exports. In January, the exports decreased by 22.9%, and imports by 26%, in February the respective figures were 21.5% and 28%, and in March % and 26.3%. The deeper fall in imports than in exports positively affected the level of stability in commodity trade. After the first quarter of 2009, the foreign trade deficit amounted to almost EUR 2.2 billion, and was over 2.5 times lower than in the first quarter of In the period between January and May 2009, the overall decrease in Polish exports amounted to 23.7%, and in imports to 30.9%. In this period, the exports to EU markets decreased by 23%. In the case of Eurozone states, the exports decreased by 20.7%, and in the case of other EU states by 28%. Exports to the most important recipients of Polish products, i.e. Germany, Italy and France, decreased by 19.7%, 13.1% and 18.6% respectively. Imports from EU markets decreased by 34.1%. Other significant changes were recorded in the case of CIS markets. While in the first quarter of 2009 the decrease of exports to CIS countries exceeded the decrease in imports by 3.3 p.p., after 5 months the trend was reversed the exports breakdown (by 39.9%) was smaller by 1.4 p.p. than imports breakdown (fall by 41.3%). The trade deficit with this group of countries decreased by EUR 1 billion to EUR 1.3 billion. 94

95 POLAND 2009 REPORT ECONOMY Table 34 Changes in the commodity structure of the Polish foreign trade, EUR million 5 months of months of 2008 Changes Section/commodity group Exports Imports Balance Exports Imports Balance Exports rise + fall - Imports rise + fall - Balance impr. + decl. - I TOTAL 37, , , , , , , , ,518.6 Live animals and animal products 1, , II Plant products , , III Fats and oils IV Prepared foodstuffs 2, , , , (I-IV) Agricultural and food products 4, , , , V Mineral products 1, , , , , , , ,494.9 VI Chemical industry products 2, , , , , , , VII Plastic and rubber products 2, , , , , , (VI-VII) Chemical industry products 4, , , , , , , , ,352.0 VIII Leather and leather products IX Wood and wood products , X Wood pulp, paper and paperboard 1, , , , (IX-X) Wood and paper industry products 2, , , , XI Textiles and textile articles 1, , , , XII Footwear, headgear, umbrellas (XI-XII) Light industry products 1, , , , XIII Articles of stone, plaster and cement , XIV Pearls, precious metals, jewellery (XIII-XIV) Ceramic products , XV Metallurgical products 3, , , , , , XVI Mechanical appliances and electrical equipment 9, , , , , , , XVII Vehicles, aircrafts and vessels 7, , , , , , , , ,665.9 XVIII Optical instruments and apparatus , , , (XVI-XVIII) Electric machinery products 16, , , , , , , , ,728.6 XIX Arms and ammunition XX Miscellaneous 2, , , , XXI Works of art XXII Other , , , , Unknown or wrong CN Miscellaneous and other products 2, , , , Source: Analyses and Forecasting Department, Ministry of Economy, based on Central Statistical Office data. A similar situation was recorded in trade with China, where the breakdown in exports in the first quarter was still higher by 7.3 p.p. than in imports. However, after 5 months exports to this market decreased by 1.1%, and imports by 8%. The deficit in trade with China amounted to EUR 3.6 billion, i.e. EUR 341 million less than in the same period of

96 MINISTRY OF ECONOMY After 5 months of 2009, as in the first quarter of 2009, the biggest falls in trade were recorded in mineral products: nearly 48% in exports and slightly over 50% in imports. The second place, as regards the scale of breakdown in trade, was taken by metallurgical products, where the falls in both exports and imports reached over 42%. Whereas, in the dominating group of products electric machinery products the decrease in exports reached 21% and in imports 31.6%. As a result, the deficit recorded in this group of products after 5 months of 2008 (EUR 1.6 billion) turned into a surplus of EUR 1.1 billion. It is worth pointing out that while in the first quarter of 2009 the falls in exports did not yet affect agricultural and food products, after 5 months the breakdown in exports was recorded in all commodity groups, including agricultural and food products (decrease by 2.4%). It resulted mainly from a significant fall in exports (by 16%) in Section I live animals and animal products. 6.5 The exchange rate and its influence on commodity trade 37 The factors which have direct influence on the price-effectiveness of foreign trade include, in particular, transaction prices in exports and imports. Changes of such prices are determined by changes in foreign currency prices (some of which depend on world prices), and on the nominal exchange rate of PLN in relation to the basic currency basket (mainly EUR and USD). The crisis has caused serious changes in transaction prices, in particular in exports. The prices increased in the first quarter of 2009 by 21.4% as compared to the third quarter of 2008, i.e. the period before the crisis. Such a significant rise in transaction prices, despite a quite significant fall in foreign currency prices, caused by the crisis, was possible due to a deep depreciation of PLN in relation to the main foreign currencies also as a direct consequence of the crisis. The decrease in foreign currency prices in exports by 12.4% in the first quarter of 2009, as compared to the third quarter of 2008, was more than compensated to exporters by a relatively sudden and deep depreciation of PLN, which occurred after the crisis reached Poland. Consequently, the fall of PLN was a very favourable buffer, which mitigated negative effects of the bad economic situation and of the fall in foreign currency prices on the financial situation of many exporters, in particular SMEs. At the same time, a significant and rapid depreciation of PLN resulted in a serious price shock in imports, in particular in imports for the domestic market and in supply imports meant for production for exports with a relatively long production cycle, when the cost of financing reserves in the situation of limited and more expensive external financing, as well as the risk of losing the market during crisis become very high. Despite the fall in currency prices in imports (by over 9% in the 4 th quarter of 2008 and by 7.9% in the 1 st quarter of 2009), transaction prices in imports in the 4 th quarter of 2008 and in the 1 st quarter of 2009 rose by 6% and 9.3% respectively. 37 All percent indicators provided in this subsection regard changes in relation to the previous quarter 96

97 POLAND 2009 REPORT ECONOMY Chart 21 Changes in transaction and currency prices growth rate in exports compared to changes in the real currency exchange rate (4th Q 2000 = 100%) % Transaction prices Foreign currency prices Changes in the effective FX rate IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I Source: Analyses and Forecasting Department, Ministry of Economy, based on Central Statistical Office data. Chart 22 Changes in transaction and currency prices growth rate in imports compared to changes in the real currency exchange rate (4th Q 2000 = 100%) % Transaction prices Foreign currency prices Changes in the effective FX rate IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I Source: Analyses and Forecasting Department, Ministry of Economy, based on Central Statistical Office data. 97

98

99 POLAND 2009 REPORT ECONOMY 7 INFLATION AND MONETARY POLICY 7.1 Prices Towards the end of 2007, the consumer prices growth rate accelerated, which resulted mainly from a revival both in consumer and investment demand, and from the increase in global food and fuel prices. In 2008, the inflation processes were affected mostly by external factors related to globalisation. The average annual inflation in 2008, which amounted to 4.2%, was higher than expected and assumed in the Budget Act. Its growth was driven by high prices of energy resources and food on global markets, as well as by the increase in domestic demand and wage pressure. The inflation was decreased by a fall in imported commodities and commodities strongly affected by globalisation, as well a strong position of PLN in the first half of the year. Such commodities are most exposed to globalisation pressure, in particular due to competition of producers from countries where production costs are very low. The process has been taking place for a longer period already. Chart 23 Changes in the Consumer Price Index in % CPI (year-to-year) CPI (December-to-December) 3.3 Source: Central Statistical Office. The increases in interest rates in 2007 were continued also in the first half of 2008, and consequently brought a decrease in inflation. The rise in prices in December 2008, as compared to previous December, was lower than in the previous year (3.3%). 99

100 MINISTRY OF ECONOMY In 2008, inflation was shaped by many different factors, having various effects 38. They include: increase in prices of food, fuels and energy carriers, not only in Poland but in all countries, situation on global markets, i.e. low supply of grain due to unfavourable atmospheric conditions, growing demand for food and raw materials in emerging markets, fall in prices of many commodities exchanged in foreign trade, resulting from strong competition (in particular prices of footwear and clothing, household appliances, means of transport, audiovisual, photographic and computer equipment), continuing good situation on the Polish labour market, which reflects in high real dynamics of wages and rise in employment, real appreciation of Polish currency (during the first half of the year) contributing to a decrease in prices of import commodities and mitigating the consequences of tensions on world markets, gradual tightening of monetary policy (in the 1st half a year) Consumer prices The average annual growth in consumer prices in 2008 amounted to 4.2% and was bigger not only than provided for in the Budget Act (2.3%) but also than that observed in the previous year (2.5%). In the first half of 2008, a gradual acceleration in the annual growth of consumer prices was observed from 4.0% in January 2008 to 4.8% in July and August. A slowdown in the price growth rate was observed in the last four months, whereas in December the indicator was 3.3%. The reason for this consists is the higher rate of changes in food and fuel prices, and in result of the prices of transport services. Chart 24 Consumer price growth rate in comparison to the same month of the previous year 5 % I II III IV V VI VII VIII IX X XI XII I II III IV V VI Source: Central Statistical Office. 38 Report on the implementation of the State Budget 2008, Ministry of Finance. 100

101 POLAND 2009 REPORT ECONOMY Higher level of inflation in 2008 resulted, among other things, from the dynamic growth in world prices of food and fuels, which in some way limited the possibility to reduce inflation by increasing interest rates. Furthermore, the inflation path was preserved by intensified domestic demand resulting from the households' income growth and better situation of enterprises. In 2008, the highest impact on the evolution of the annual average Consumer Price Index was exerted by the growth in the prices of food and non-alcoholic beverages, as well as goods and services related to housing, which drove the overall index up by 1.55 p.p. and 1.84 p.p., respectively. A fall in the prices of clothing and shoes drove the index down overall by 0.39 p.p.. 39 Box 8 New measure of core inflation In March 2009, the National Bank of Poland started to calculate and publish regularly the new measures of core inflation: - core inflation excluding administered prices (excluding prices which are not determined by markets but are subject to different forms of regulation, i.e. such goods and services whose final prices are fully or to a large extent determined by government and self-government institutions and regulatory bodies), - core inflation excluding the most changeable prices (excluding the effect of the most disturbed prices, i.e. prices of such goods and services that are particularly susceptible to different types of demand and supply shocks and/or vary seasonally by nature generally most food products (especially fresh and low-processed fruit, vegetables and meat), energy products (fuels, gas, heating), Internet access services, state administration and legal services), - core inflation excluding the prices of food and energy (prices of commodities which are particularly susceptible to internal and external demand shocks, i.e. prices of food, non-alcoholic beverages and energy), - 15% trimmed mean. In 2008, the prices of food rose by 6.2% on average, mainly bread (11.5%), oils (10.5%) and dairy products (9.5%). The high prices of energy resources (growth by 9.9%) were determined by the increase in prices of heating (by 15.6%), electric power and gas (over 10%). The increase in fuel prices (by 4.7%) resulted in the growth of transport prices (by 3.1%). The dynamics of prices of tobacco products accelerated significantly (13.4%). The prices of clothing and shoes fell by 6.9%, and the prices of sugar by 9.3%. The prices of audiovisual, photographic and computer equipment dropped considerably (by 13.5%). Table 35 CPI and core inflation in 2008 and in subsequent months of Months I II III IV V VI VII VIII IX X XI XII I II III IV V VI CPI A B C D A core inflation excluding administered prices (according to the ECB definition they include the components of the CPI the final prices of which are fully or to a large extent determined by government units (central, regional, local) and regulating units); B core inflation excluding most changeable prices (prices of goods and services which are particularly susceptible to different demand and supply shocks and/or vary seasonally by nature); C core inflation excluding food and energy prices; D 15% trimmed mean (after applying a symmetrical cut by 15% on the left and on the right side of the distribution curve of indices corresponding to the prices with highest and the lowest rate of change). Source: NBP. 39 Central Statistical Office, Information on economic and social situation

102 MINISTRY OF ECONOMY Throughout 2008, the core inflation excluding food and energy prices remained below CPI level. This situation resulted from a high rise in food and energy prices, as well as from administered prices, which were affected by the rise in housing rents and prices of energy carriers Prices of industrial production and construction/assembly production 40 The average annual prices of industrial output grew in 2008 by 2.2%, at a faster rate than in 2007 (2.0%). The prices in manufacturing industry grew slower (0.8% compared to 1.5% in 2007). In all other sections a higher growth of prices was recorded. The highest growth was recorded in mining and quarrying (10.8% compared to 3.3% in 2007). Chart 25 The rate of changes of industrial output prices in comparison to the same months of the previous year % I II III IV V VI VII VIII IX X XI XII I II III IV V VI Source: Central Statistical Office. The rise in prices was recorded in 10 out of the 21 manufacturing industry divisions. In 2008, the highest growth was seen in coke and refined petroleum products division (18.8%), which had recorded a negligible increase in the previous year. Furthermore, the prices manufacturing chemical products also rose (6.9%). Only the production of metal products was maintained on the same level as in Comparing December 2008 to December 2007, the prices of industrial output grew by 2.7% (1.9% in December 2007). The annual average prices of construction and assembly production increased in 2008 by 4.8% (in 2007 by 7.4%). In December/December terms the prices rose by 2.9% (by 7.6% in the previous year). Since the beginning of 2008, a slower growth of prices has been recorded due to the halt in the demand increase recorded in this sector in the previous year. This was caused mainly by the breakdown in world property market, which also affected the situation in Poland. The reduced access to external financing resulted in market participants delaying their decisions related to investment and housing. 40 Production price indicators are provided according to the Polish Classification of Economic Activities

103 POLAND 2009 REPORT ECONOMY Chart 26 Rate of changes in prices of construction and assembly production in comparison to the same month of the previous year % I II III IV V VI VII VIII IX X XI XII I II III IV V VI Source: Central Statistical Office Monetary policy Basic factors influencing the implementation of monetary policy In its Monetary Policy Guidelines for 2008, the Monetary Policy Council (MPC) underlined the threats related to a higher-than-expected fall in prices of real property on the US market, and to the continuing high fluctuations on international financial market, which could result in deterioration of the world economic growth, and affect Polish economy through decreased external demand. Box 9 Steps taken by the NBP to counteract the effects of financial market crisis In October 2008, taking into account the increase in tensions on domestic financial markets resulting from the effects of the situation on world markets, the NBP has taken additional steps as part of the Confidence package. They were focused on three goals: to make it possible for banks to acquire PLN for more than one day, to make it possible for banks to acquire foreign currency, to increase the possibility of acquiring liquidity in PLN by banks through extending collaterals for transactions with the NBP. The NBP started to supply the banking sector with domestic liquidity through repo transactions with up to 3 months maturity, and continued issuing 7-day money bills as the basic instrument for absorbing over liquidity. At the same time, the NBP extended the range of assets which could constitute collateral for refinancing operations with the NBP, and made it possible for the banks to obtain currency liquidity in currency swap transactions. The dynamics of economic growth recorded in 2008 was lower than in the previous year. The GDP increased by 4.9% compared to 6.8% in The GDP growth rate recorded in subsequent quarters was lower with each quarter. Until the 4th quarter, some growth of activity was observed in the conditions of growing inflation, expectations related to inflation, wage pressure, and gradually improving situation on the labour market. The situation of State Budget was better than assumed in the Budget Act, while the situation in balance of payments deteriorated. The relation of current account deficit to GDP increased from 4.7% in 2007 to 5.5% in was also a subsequent year in a row when the deficit in Polish foreign trade increased. 103

104 MINISTRY OF ECONOMY Negative tendencies also prevailed in Poland s surroundings. Already in the last quarter of 2007, the downward trends in EU Member States could be noticed. In 2008, many of them, in particular in the Eurozone, recorded a substantial economic slowdown. In Germany, which is our main trade partner (25% of Polish exports), the GDP rose by 1% in 2008, which translated into the results of the Polish economy. The information coming from the labour market in the last quarter, which indicated a fall in employment and an increase in unemployment, as well as lower wage dynamics in the enterprise sector, induced The Monetary Policy Council to slacken its restrictive policy. Throughout the whole year 2008 the interest rates were raised four times (by 100 base points in total) and twice reduced (also by 100 base points in total). Consequently, the main NBP interest rates reached the same level as in the previous year: the reference rate 5.00%, the Lombard rate 6.50%, the deposit rate 3.50%, and the rediscount rate 5.25% Monetary policy implementation in 2008 The basics for interpretation of the inflation target is the Consumer Price Index (CPI) calculated as a change in consumer prices in a given month compared to the same month of the previous year. In analysing and explaining inflation processes, the Monetary Policy Council (MPC) also extensively applies core inflation measures. Chart 27 CPI and net inflation indices as compared to the adopted inflation target, and the range of acceptable oscillation % I 2006 III V VII IX XI I 2007 III V VII IX XI I 2008 III V CPI net inflation inflation target upper/lower limit Source: Central Statistical Office, National Bank of Poland. The main goal set forth in the Monetary Policy Guidelines for 2008 was to keep inflation near the midterm inflation target (2.5%). In order to achieve this objective, the Monetary Policy Council launched a series of increases in the interest rates in April 2007, and, since no improvement was achieved, it increased interest rates further at the beginning of Not until November has the MPC decided to reduce interest rates. 104

105 POLAND 2009 REPORT ECONOMY Instruments of monetary policy implementation Interest rates The short-term interest rate was the main instrument used by the National Bank of Poland in 2008 to implement the DIT 41. The Monetary Policy Council determines the level of NBP interest rates, which determine the interest of monetary policy instruments, i.e. open market operations, required reserves and standing facilities 42. In 2008, the Monetary Policy Council changed the NBP interest rates six times. In the first half of the year, it increased basic NBP interest rates by 1.0 p.p. in total, while in November and December it decreased the interest rates by 1.0 p.p. 43. At the end of 2008, the reference rate amounted to 5.0%. Chart 28 Interest rates and CPI % /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/2008 lombard rate rediscount rate reference rate deposit rate CIP Source: Central Statistical Office, National Bank of Poland. The Council took into account the growing disturbances on world financial markets, which strongly affected the situation on the domestic market, and the actions taken by banks. In the situation of growing uncertainty and lack of confidence on the interbank market, the banks due to caution left high surpluses on their own accounts, which led to a decrease in overnight currency price. Furthermore, the monetary policy was tightened due to the high level of inflation related, inter alia, to a significant growth in the dynamics of food and fuel prices, as well as due to forecasts that wage and inflation pressure will continue. 41 Direct Inflation Target Strategy applied by the NBP since The main NBP rate is the reference rate, which determines the level of open market rates with the maturity period similar to the maturity of basic open market operations. The NBP deposit and Lombard rates set the range of deviations for overnight interbank interest rates. 43 NBP, Report on the implementation of the monetary policy in

106 MINISTRY OF ECONOMY Open market operations Open market operations are the main instruments enabling to keep short-term interest rates at a level in line with the inflation target set by the MPC. The NBP may apply basic, fine-tuning and structural operations. In 2008, as part of its basic open market operations, the NBP issued once a week money bills with maturity date of 7 days. The measures related to implementing the Confidence package also included fine-tuning operations, such as repo transactions, providing liquidity to the banking sector. In 2008, six repo transactions were conducted. In average yearly terms, the level of repo transactions amounted to PLN 2.1 billion. At the end of 2008, the banking sector received PLN 15.3 billion from repo transactions. The NBP also issued additional money bills for shorter periods than the maturity date of basic operations. Initially, only 13 most active banks had access to fine-tuning operations, but since November all banks which fulfilled the conditions necessary for participating in basic operations had access to them. There was no need to change the long-term liquidity structure of the banking sector, and the NBP did not conduct any structural open market operations. Reserve requirement In 2008, the reserve rates were not changed and amounted to 3.5% of total liabilities, except for the reserve ration for funds received from repo transactions was 0%. The level of required reserve as at 31 December 2008 amounted to PLN 21 billion and, as compared to the state as at 31 December 2007, it grew by PLN 4 billion (24.3%). The growth in reserve requirement was largely determined by the growth, by 23.4%, of the deposits constituting the basis for its calculation. Standing facilities Standing facilities are aimed to prevent fluctuations of the interbank interest rates. These operations include the deposit facility and the lombard facility. These operations are initiated by commercial banks and they are a source for a short-term supplementation of the banking sector liquidity, and also allow banks to make overnight deposits of heir surplus liquidity with the NBP. The total amount of overnight deposits placed by the banks in the NBP equalled PLN billion and was 2.5 times higher than in The average overnight level of deposit at the end of the day amounted to PLN 1.4 billion, as compared to PLN 0.5 billion in the previous year. The total amount of lombard facility used per year amounted to PLN 5.2 billion as compared to PLN 6.7 billion in The average overnight level of the facility used amounted to PLN 14.3 million as compared to PLN 18.5 million in

107 POLAND 2009 REPORT ECONOMY 8 THE PUBLIC FINANCES The comprehensive reforms and restructuring activities pursued in 1990s required substantial funds and placed a heavy burden on the public finance sector. In recent years, the situation in terms of public debt and deficit has significantly improved, and consequently the situation of public finance ceased to threaten the stability of economic growth. Unfortunately, in the face of economic slowdown and world crisis, the situation of public finance in 2008 deteriorated. The performance of the public finance sector depends to a large extent on economic fluctuations. As a rule, during a period of fast economic growth the receipts on taxes grow dynamically and some categories of public expenditure drop due to improved economic situation of the population. Similarly, in case of an economic slowdown receipts from taxes fall while some categories of public expenditure rise. This regularity could be observed in Poland in 2008 and in the first half of 2009 an unfavourable macroeconomic situation translated into a deteriorated situation of public finance, which was reflected in the worse relation of budget deficit and public debt to GDP as compared to the previous year. 8.1 State Budget In 2008, both the receipts and the expenditures of the state budget were 10.1% lower than planned. As a result, the actual deficit figure was PLN 24.3 billion, i.e. lower than planned by PLN 2.7 billion. State Budget receipts As a result of the deteriorating economic growth of Poland in 2008, the actual state budget receipts were lower than planned. They amounted to PLN billion. As compared to 2007, the state budget receipts grew by 7.3% in nominal terms, and by 2.9% in real terms. The ratio of budgetary revenue to GDP in 2008 was 19.9%. The state budget tax receipts amounted to PLN billion and were 3.8% lower than the amount planned in the Budget Act. They accounted for 86.6% of total receipts. The non-tax receipts amounted to PLN 19.3 billion, which accounted for 7.6% of total state budget receipts. The main factor behind the lower than planned tax receipts was the receipts on indirect tax, which were lower by PLN 11.2 billion (6.8%) than the figure expected in the budget. The planned non-tax receipts were exceeded by PLN 0.9 billion (4.9%). Non-tax receipts were higher due to, among other things, higher income of budgetary units (by 12.7%). In 2008, state budget receipts from dividends amounted to PLN 3.3 billion, which accounted for 94.6% of the amount planned in the Budget Act and 91.6% of the amount executed in Contributions of local government units accounted for 100% of the amount planned in the Budget Act, i.e. PLN 2.2 billion. The amount of EU and other non-reimbursable funds was lower in 2008 by PLN 20.6 billion i.e. by 58.2% as compared to the Budget Act, which was, among other things, the result of: a delay in drawing up and selecting projects for implementation due to the introduction of a new system of programme implementation as part of the Financial Prospect NSRF ; delays by the European 107

108 MINISTRY OF ECONOMY Commission in accepting projects, which in turn caused a delay in implementation of the expenditure schedule, and consequently delayed the receipts; delays in implementation of the projects; long periods for completion of projects and annulments of tender procedures. Table 36 Budget receipts and expenditure in * Plan Execution Plan Execution PLN billion PLN billion % PLN billion PLN billion % TOTAL RECEIPTS Tax receipts Indirect tax Corporate income tax (CIT) Personal income tax (PIT) Non-tax receipts Foreign receipts Payments from the EU TOTAL EXPENDITURE Fixed expenditure Subsidies to local government authorities 2. Public debt servicing Subsidies to the Social Insurance Fund (FUS) 4. Subsidies to the Agricultural Social Insurance Fund (KRUS) 5. Subsidies on national defence EU budget contributions (projects financed partly with EU funds) 7. Other fixed expenditure Flexible expenditure DEFICIT/SURPLUS* *Percentage data are based on amounts in PLN million Source: Ministry of Finance. State Budget expenditure The total state budget expenditure in 2008 amounted to PLN billion. Compared to 2007, the expenditure was higher by PLN 25.6 billion, i.e. by 10.1% in nominal terms and by 5.7% in real terms. The share of executed state budget expenditure in the estimated GDP accounted for 21.9% in At the time of planning the budget, it was estimated that its share in the budget would amount to 24.8%. As in the previous years, most of the budgetary expenditure was fixed expenditure, i.e. expenditure required under statutory provisions or legally binding commitments entered into previously. Its share in total expenditure in 2008 amounted to 72.7% and was by 0.4 p.p. lower than in In 2008, the share of expenditure determined by law in total budget expenditure decreased, while its nominal value once again increased. The most essential fixed expenditure included: Subsidies to local government units (20,1%), Public debt servicing (12,4%), Subsidies to the Social Insurance Fund (16,4%), Expenditure on national defence (6,8%), Subsidies to the Agricultural Social Insurance Fund (7,4%), Contributions to the EU budget and expenses reimbursed from the EU budget (12,5%). 108

109 POLAND 2009 REPORT ECONOMY In 2008, 27.3% of overall state budget expenditure was allocated to flexible expenditure. Compared to 2007, the expenditure was higher by 11.8% in nominal terms. Table 37 Structure of budgetary expenditure (%) Fixed expenditure Flexible expenditure Source: Ministry of Finance. The current structure of budgetary expenditure, marked by a high, multi-annual dominance of fixed expenditure, limits the possibilities of the government to model the level of budgetary deficit. Statutory provisions and legal commitments assumed beforehand require that the following categories of fixed expenditure are covered: public debt servicing, subsidies to local government units, and support for the institutions managing specific-purpose funds. Budget deficit The state budget deficit in 2008 amounted to PLN 24.3 billion, which represents 89.9% of the amount planned under the Budget Act and 1.9% of the GDP. Domestic financing of the budget deficit amounted to PLN 20.8 billion, which accounted for 103.5% of the amount planned under the Budget Act. Foreign financing reached PLN 3.5 billion, i.e. 50.6% of the planned amount. As at the end of June 2009, the state budget receipts amounted to PLN billion (44.3% of the annual receipts planned in the Budget Act for 2009). The advancement of expenditure is higher than the receipts and accounts for 47% (PLN billion). The budget deficit after six months amounted to PLN 16.7 billion (91.6% of the amount planned in the Budget Act for Public finance Currently, the improvement of public finance is a major challenge for Poland s economic policy. The key objective is to reduce the spending of public finance sector and its deficit. The poor condition of public finance adversely affects the state budget. A long-lasting deficit leads to a growing public debt and has a negative impact on the country s economic situation. Thus, the long-lasting high deficit of the Polish public finance sector, exceeding 4% of GDP in , with even more than 6% in 2003, is alarming. In 2006, the ratio started to improve and initially amounted to 3.9%. In 2007, the public finance sector deficit was significantly reduced to 2.0% of GDP due to faster economic growth and lower budget deficit. According to preliminary estimations of the Central Statistical Office, the general government debt in terms of ESA 95 amounted to PLN 49,537 million in 2008 (3.9% of the GDP), and it was higher than in 2007 by PLN 27.4 billion. As compared to 2007, the general government debt increased by 2 p.p. in relation to GDP The results of the 1st half-year were compared to the Budget Act passed by the Polish Sejm on 23 January On 17 July, the Sejm passed a revised Budget Act. 45 According to the communication of the Central Statistical Office on deficit and general government debt in 2008 (the socalled fiscal notification) of 22 April

110 MINISTRY OF ECONOMY Chart 29 Budget deficit and public finance sector deficit bn PLN Budget deficit (PLN billion) Public finance sector deficit (% GDP) Public finance sector deficit (PLN billion) Budget deficit (% GDP) 5 % Source: Analyses and Forecasting Department, Ministry of Economy, based on Ministry of Finance data.. Table 38 State Treasury debt and public finance sector debt* (PLN billion and % of GDP) PLN billion State Treasury debt % of GDP General government debt % of GDP * The State Treasury debt includes domestic and foreign liabilities of the State Treasury (securities issued on the domestic and foreign markets), credits and loans obtained and matured liabilities of budgetary units. The debt of the sector of government and self-government authorities (pubic debt, public finance sector debt) includes the State Treasury debt and the remaining debt of the sector of government bodies (including the debt of the social insurance sector) and debt of the selfgovernment sector. Source: Ministry of Finance. Box 10 Amendment to the Budget Act On 23 January 2009, the Sejm of the Republic of Poland passed a Budget Act for The budget for 2009 was based on the assumption that GDP growth rate would amount to 3.7%. The execution of the budget in the first half of 2009 showed that the assumption concerning GDP growth rate were too optimistic. In the first half of 2009, the extent of world economy breakdown, and the resulting deterioration of current situation as well as of prospects for Polish economy proved much more extensive than expected, which was reflected by the deteriorating situation of state budget, in particular the state budget receipts. The extent of these changes made it necessary to pass an amendment to the Budget Act for The amendment was adopted by the Polish Sejm on 17 July Under the new assumptions of the Budget Act, the decrease in economic growth rate to 0.2% should result in an overall fall in receipts by PLN 30.1 billion (to PLN billion), and in expenditure by PLN 21.1 billion (to PLN billion). According to the amended Budget Act, the budget deficit increased by PLN 9.0 billion, i.e. to PLN 27.2 billion. The state public debt (general government debt) increased substantially in the years , following the economic downturn. In 2000, the public debt-to-gdp ratio was 36.8%, while in 2003 it reached as much as 47.1%. In 2004, the rising trend of public debt-to-gdp ratio was curbed to 45.7% of GDP. The three years in row again saw a rise of this ratio. At the end of 2008, the debt amounted to PLN billion, which accounted for 47% of GDP, and the rise in debt, as against the previous year, amounted to 13.3%. 110

111 POLAND 2009 REPORT ECONOMY At the end of May 2009, the State Treasury debt amounted to PLN billion 5.7% more than at the end of Meeting the Treaty of Maastricht criteria Like most of the other new EU Member States, Poland has not yet adopted the common currency 46. In order to join the Eurozone the convergence criteria set out in Article of the Maastricht Treaty have to be met. The convergence criteria consist of macroeconomic indicators which, once met, mean that a country is prepared to join the common currency zone. The convergence criteria can be divided into fiscal and monetary (inflation, exchange rates and interest rates). Fiscal criterion The fiscal criterion determines the percentage share of deficit and debt of general government (central and local government institutions) in GDP. The deficit-to-gdp ratio measured in market prices should not exceed 3% in the year preceding the evaluation whether the criterion has been met. The public debt-to-gdp ratio should not exceed 60% in the year preceding the evaluation. In 2007, the indicators for Poland were below the reference thresholds. The general government deficit share in GDP was 2.0%. The extent of reduction of fiscal imbalance compared to 2006 amounted to 1.8 p.p. The general government debt share in GDP was 45.2% (as against 47.7% in 2006), still substantially below the reference threshold. However, it cannot be determined whether the fiscal criterion was met, since the excessive deficit procedure was imposed on Poland. This procedure was abolished on 8 July 2008 by the Decision of the EU Council of the Ministers of Finance. However, at the end of 2008 the share of general government deficit in GDP once again exceeded the reference threshold of 3%, reaching 3.9%. As regards the general government debt-to-gdp criterion, in 2008 Poland remained substantially below the acceptable threshold (60%), i.e. at 47.1% 47. Taking into account the results of public finance sector in 2008, on 24 June 2009 the European Commission initiated an excessive deficit procedure against Poland. At the same time, it recommended that Poland should reduce its public finance deficit by 2012 to the level required under the Maastricht Treaty (3% of GDP). According to the Commission s economic May forecasts, this deficit in Poland will rise to 6.6% of GDP in 2009, and the next year s deficit will exceed 7%, which means that deficit is not temporary. Inflation rate The inflation criterion sets the limit for permissible inflation rate. The average inflation rate in the year preceding the evaluation should not exceed by more than 1.5 p.p the arithmetic mean in the three countries with the lowest (non-negative) indicators. In line with the adopted methodology, inflation should be measured using the Harmonised Index of Consumer Prices (HICP). 46 From amongst the new EU Member States, the following countries joined the eurozone: Slovenia (1 Jan 2007), Malta and Cyprus (1 Jan 2008) and Slovakia (1 Jan 2009). 47 According to the ESA'95 methodology - General Government (GG). 111

112 MINISTRY OF ECONOMY In the first half of 2008, Poland met the inflation rate criterion, for which the reference value for the year preceding the evaluation, i.e. 2007, was 2.8%. Between February and September 2008, the level of inflation equalled the reference value, and in the fourth quarter of 2008 it exceeded the reference value. According to the data for May 2009, Poland does not currently meet the inflation criterion. The reference value for this period was 3.0%, and the HICP (average for 12 months) in Poland reached 4.0% 48. Exchange rate Meeting the exchange rate criterion is a condition for participating in the ERM II mechanism. According to the criterion, the Member State should be capable of keeping its currency without any major tensions within the normal fluctuation limits provided for under the exchange mechanism for at least two years prior to the evaluation of the convergence criteria. The criterion is considered met when a Member State has kept its currency rate within a certain limit (+/- 15%) as part of the European Exchange Rate Mechanism for at least two years prior to the evaluation. In 2008, Poland did not meet the exchange rate criterion. Interest rates This criterion is met when the average nominal long-term interest rate in the evaluated country does not exceed the reference value, set as the arithmetic mean of interest rates in three EU Member States with the highest price stability (the lowest non-negative HICP indicator) increased by 2.0 p.p. Interest rates are calculated on the basis of long-term bonds or similar securities, and the average nominal long-term interest rate is set as the arithmetic mean for the last 12 months. Table 39 Meeting the Maastricht criteria by Poland * Criterion Poland Criterion Poland Public finance sector deficit-gdp ratio * (in%) Public finance sector debt-gdp ratio ** (in%) Inflation (HICP in %) Interest rates * According to the data available in the second quarter of 2008and European Commission s forecast. ** Using ESA'95 methodology - General Government (GG). Source: Analyses and Forecasting Department, Ministry of Economy. At the end of 2008, the profitability of Polish government bond yields with a 10 years maturity did not exceed the relevant reference value of 6.44% and amounted to 6.07%. Similarly, in May 2009 the relevant figures were 6.39% and 6.11% respectively Source: Calculations of the Analyses and Forecasting Department, Ministry of Economy, based on Eurostat data 49 Source: Calculations of the Analyses and Forecasting Department, Ministry of Economy, based on Eurostat data. 112

113 POLAND 2009 REPORT ECONOMY 9 INDUSTRY 9.1 Dynamics and structure of industrial output Industrial output dynamics The positive trends in economy, observed in 2007, also continued in the first half of In this period, the industrial output increased by 8.5% 50. In the second half of the year, in particular in the fourth quarter, negative effects of the global economic crisis reached Poland. In the third quarter, the industrial output growth rate decreased to 3.3%, while in the fourth quarter production decreased by 5.2%. As a result, the rise in industrial output in 2008 amounted to 3.3%. Chart 30 Industrial output changes (in %) in each quarter of (compared to the same quarters of the previous year)* % q 2 q 3 q 4 q *Enterprises with more than 9 employees Source: Central Statistical Office, Information on socio-economic situation The output growth rate of industry as a whole is determined by the dynamics of its different sections. As in the previous year, the growth of industrial output resulted from the increase of output of the manufacturing industry (by 3.7%). Mining and quarrying output rose by 2.7%, while for electricity, gas and water supply it decreased (by 0.9 %). The trends observed in Poland, as regards industrial output dynamics across the sections, are in line with the trends observed in developed countries. The growth of output is the fastest in the manufacturing sector which determines the dynamics of the whole industry. On the other hand, mining and quarrying activities are being reduced in the long run. In 2008, the industrial output increased by 64.2% as compared to 2000, while the output of manufacturing sector increased by 74.7% and mining 50 Statistical data on annual output refer to the whole statistical group of entities, while information on output in separate periods refer to entities with more than 9 employees. 113

114 MINISTRY OF ECONOMY and quarrying output decreased by 17.6%. At the same time, the electricity, gas and water supply section output grew by 15.0%. Chart 31 Changes in industrial output by sections and ownership sectors of industry in (compared to the previous year) % Industry Section C Section D Section E Section C mining and quarrying, Section D - manufacturing, Section E electricity, gas and water production and supply, Source: Statistical Yearbook of the Central Statistical Office The output dynamics across the divisions of the manufacturing section is diversified. In , the highest growth rate was recorded in the manufacture of radio and television equipment (almost 400%) and manufacture of office equipment and computers (over 350%). It is worth noting that these sectors belong to high technology sectors. There was also a rapid growth in the manufacture of motor vehicles (almost 300%). The manufacture of machinery and equipment, rubber and plastic products, metal products and medical and optic instruments increased by ca. 250%. There was a decrease in the output of: tobacco products (by ca. 40%), clothing (by ca. 27%), coke and refined petroleum products (by ca. 17%), as well as leather products (by ca. 10%). In 2008, as compared to 2007, the highest output growth was observed in the manufacture of: radio and television equipment (26.1%), office equipment and computers (24.2%), as well as machinery and equipment (16.2%). In 10 of 23 sectors a fall in output was observed, including three light industry divisions (almost by 10%), manufacture of tobacco products (almost by 35%), manufacture of chemical products (4.0%), and manufacture of machinery and electrical apparatus (by 1.8%). As regards divisions and groups of industries which manufacture products referred to as the carriers of technological progress 51, growth of production in 2008 amounted to 12.4% as against 14.0% in Sales of radio and television equipment had a significant impact on the output dynamics in this group. The share of technological progress carriers in the total industrial output in current prices increased from 16.2% in 2007 to 16.5%. The dynamics of the industrial output by main industrial groups in 2008 was also diversified. As in the previous year, the highest growth rate was recorded in production of consumer durables (15.2% as against 18.2%) and capital goods (10.4% as against 16.8%). 51 Entities with more than 49 employees. 114

115 POLAND 2009 REPORT ECONOMY Chart 32 Changes in the production of goods by main industrial groups in 2007 and 2008 (in comparison to the previous year) % Intermediate Capital goods Consumer goods Consumer nondurables Source: Statistical Bulletins of the Central Statistical Office Energy Labour productivity in industry measured by output per one employed person remained on the same level as in A rise in productivity, although at a slower rate than in 2007, was recorded only in mining and quarrying (by 1.4%). In other sections a fall in productivity was recorded. Chart 33 Labour productivity changes by sections and ownership sectors of industry in 2007 and 2008 (in comparison to the previous year) % Industry Section C Section D Section E Source: Statistical Yearbooks of Central Statistical Office and Statistical Bulletins of the Central Statistical Office, calculations by Analyses and Forecasting Department, Ministry of Economy The average nominal gross wage in industry rose by 9.3% in 2008, and the consumer price growth rate amounted to 4.2%. Thus, real wages increased by 4.9%, while labour productivity did not change. 115

116 MINISTRY OF ECONOMY Quarterly output dynamics in the manufacturing industry As mentioned before, the manufacturing industry is the section which determined the dynamics of industrial output, and the fourth quarter of 2008 was decisive as regards a significant reduction of annual industrial output growth rate compared to Out of 23 branches of manufacturing industry, 12 largest branches were selected, which accounted for 85.2% of the manufacturing industry output in 2008, and 73.2% of the overall industrial output (in current prices). An analysis of the quarterly output dynamics in 2007 and 2008 in the selected branches is presented below. Table 40 Output dynamics in selected branches of the manufacturing industry * Sectors Quarters of 2007 Quarters of 2008 I II III IV I II III IV Manufacturing Production of food Manufacture of wood Manufacture of coke and refined petroleum products Manufacture of chemical products Manufacture of rubber products Manufacture of other nonmetallic material products Manufacture of basic metals Manufacture of metal products Manufacture of machinery and equipment Manufacture of machinery and electrical apparatus Manufacture of motor vehicles Manufacture of furniture, other types of activity * Entities with more than 9 employees Source: Source: Central Statistical Office, Information on socio-economic situation In each quarter of 2007, fall in output was recorded in no more than two branches as compared to the same quarters of In the first three quarters of 2008, the situation was similar (no more than 3 branches with dynamics below 100%). However, a decrease in output growth rate in the manufacturing industry was observed, in particular in the third quarter (from 9.2% to 3.5%). In 8 out of 12 analysed branches, a decreased output dynamics was recorded in the third quarter of In the fourth quarter of 2008 there was a significant deterioration. In as many as 9 branches the dynamics fell below 100%. Only in three branches the output increased: the manufacture of rubber products, the manufacture of machinery and equipment and the manufacture of products from other non-metallic material. Only in the third of these branches the dynamics was higher than in the fourth quarter of The highest fall was recorded in the manufacture of metal products (o 34.5%), followed by the manufacture of motor vehicles (by 14.4%). The decrease in output in these two branches was much higher than in the manufacturing industry as a whole. As a result, the share of metal products output in manufacture industry output decreased from 5.2% in the fourth quarter of 2007 to 4.2% in the fourth quarter of 2008, and the share of motor vehicle output decreased from 11.4% to 10.0%. 116

117 POLAND 2009 REPORT ECONOMY The structure of output in different sections and branches of industry The diversified dynamics in industrial output across sections and branches results in the change of its structure. Compared to 2007, in 2008 the changes were only slight. The share of electricity supply in industrial output in current prices remained on the same level as in 2007 (9.4%), while the share of mining and quarrying increased from 4.6% to 4.7%, while the share of manufacturing industry decreased (from 86.0% to 85.9%). Changes in the structure of output in current prices are associated with the movement of prices and output dynamics. Price fluctuations occurring at various rates distort the analysis of output structure. A correct analysis of output structure, its changes and underlying trends, should be based exclusively on real figures and should cover a period of at least a few years. For the purpose of this report, such an analysis was made for Chart 34 Share of industry branches in output in 2000 and 2008 in current prices and fixed prices of 2000 (in %) % Mining and quarrying Manufacturing Electricity, gas and water supply Structure in 2000 (current prices) Structure in 2008 (current prices) Structure in 2008 (prices of 2000) Prices indices (2000=100) Output indices (2000=100) Source: Statistical Yearbooks of Central Statistical Office, Statistical Bulletins of the Central Statistical Office, calculations by Analyses and Forecasting Department, Ministry of Economy. The shifts in output structure in the relevant period in current prices show a declining share of mining and quarrying (by 0.9 p.p.), as well as of electricity, gas and water supply (by 0.7 p.p.), and a slight increase in the share of the manufacturing industry (by 1.6 p.p.). Such an analysis is distorted by price fluctuations. In the relevant period, a decline in the output of mining and quarrying in real terms (by 7.6%) was accompanied by an upward price movement by 93.0%. In electricity, gas and water supply the output in real terms increased by 15.0%, whereas the prices increased by 57.9%. In both of these sections the price dynamics was significantly higher than the production dynamics. The situation was opposite in the manufacturing industry, where the output growth by 74.7% in real terms was accompanied by a relatively low rise of prices (by 12.9%). These relationships between the price and output dynamics led, in current prices, to an excessive share of fuel and energy industry in industrial output with a correspondingly lower share of manufacturing industry. In real terms, (in fixed prices of 2000) the share of manufacturing rose by 5.5 p.p. with a simultaneous fall in the share of mining and quarrying by 2.5 p.p., and in electricity, gas and water supply by 3.0 p.p. This trend corresponds to the trends observed in the developed countries. 117

118 MINISTRY OF ECONOMY Table 41 Volume of output, output and price dynamics, and output structure by the manufacturing industry branches in 2007 and 2008 Content Production in Price dynamics Dynamics Structure in % PLN billion in % 2007/ 2008/ 2007/ 2008/ Manufacturing Production of food Manufacture of tobacco products Manufacture of textiles Manufacture of clothing Manufacture of leather Manufacture of wood Manufacture of paper Publishing Manufacture of coke and refined petroleum products Manufacture of chemical products Manufacture of rubber products Manufacture of other non-metallic material products Manufacture of basic metals Manufacture of metal products Manufacture of machinery and equipment Manufacture of office equipment and computers Manufacture of machinery and electrical apparatus Manufacture of radio and TV equipment Manufacture of medical instruments Manufacture of motor vehicles Manufacture of other transport equipment Manufacture of furniture, other types of activity Waste processing Source: Statistical Yearbooks of Central Statistical Office and Statistical Bulletins of the Central Statistical Office, calculations by Analyses and Forecasting Department, Ministry of Economy. In 2008, production of food and beverages (19.3%), manufacture of motor vehicles (10.4%), and manufacture of metal products (7.8%) had the highest share in the manufacturing industry output in current prices. These three branches generated 37.5% of the manufacturing industry output. The greatest positive changes in the structure (in current prices) was observed in production of coke and refined petroleum products (their share increased from 5.7% to 7.2%), food and beverages (increase from 18.6% to 19.3%), and in production of machinery and equipment (increase from 6.6% to 7.0%). On the other hand, the most discernible downward movement occurred in metal products (decline from 5.6% to 5.1%) and electric machinery and apparatus (fall from 4.0% to 3.6%). In 2008, the price indices in the industrial manufacturing section were rather varied - from 91.2% in radio and TV equipment to 118.9% in coke and refined petroleum products. In 2007, the differences were greater, ranging from 86.4% in radio and TV equipment production to 120.6% in tobacco production. 11 branches (out of 23) recorded an increase in prices, while the remaining branches recorded a decline, with 7 of them having recorded a decline also in

119 POLAND 2009 REPORT ECONOMY Output dynamics in the first half of In the first six months of 2009, the economic situation in Poland was still affected by the global crisis. Industrial output decreased by 8.3%. However, it is worth pointing out that with each quarter the decrease in industrial output was getting lower. In the first quarter, the output decreased by 10.0% (as against growth by 8.2% in 2008), and in the second quarter it decreased by 6.7% (as against growth by 7.0%). In the first half of 2009, there was a decrease in output in all four industry sections the highest in mining and quarrying (by 15.3%), and in energy, gas and water supply (by 9.9%). In manufacturing industry, the output decreased by 8.0%. Out of 23 surveyed manufacturing industry branches, a decrease was recorded in 14. The highest decrease was recorded in the production of metal products (36.8%), motor vehicles (by 21.5%), and coke and refined petroleum products (by 14.3%). A substantial output decline was also recorded in light industry branches (by ca. 15%). The share of metal products in manufacturing industry decreased as compared to the first half of 2008 from 6.0% to 3.9%, and in vehicle production from 12.9% to 12.3% (in current prices). The highest growth was recorded in the production of pharmaceutical products (by 13.8%), other transport equipment (by 10.2%), and computer, optical and electronic products (by 6.9%). The first and the third of the abovementioned branches belong to high technology group. 9.2 Essential problems of industry. Developments in selected sectors Horizontal industrial policy Industrial policy on the national level is consistent with the priorities of the policy on the European level. It is characterized by a strong stress on horizontal issues common for all industry sectors such as the regulatory and administrative reform, support for enterprises in terms of investment, innovativeness and research and development, as well as educating the public in the Member States to improve the quality of the human capital. It also covers environmental aspects and employment policy under the policy for sustainable economic development. In view of the current economic, financial and environmental situation, strong and developing competition on the European Union single market, as well as the progressing globalization, Poland is facing a very ambitious challenge to effectively support the long-term growth and development of Polish industry. Therefore, Concept for Horizontal Industrial Policy in Poland was developed and adopted by the Council of Ministers on 30 July In line with the horizontal approach, the industrial policy should be constantly subject to improvement in quality of framework conditions of industrial activity through actions common for all sectors with the goal to increase the competitiveness of industrial enterprises. 52 Since 1 January 2009, a new Polish Classification of Economic Activity (PKD 2007) is applied in statistics, while until the end of 2008 PKD 2004 had been applied. Consequently, the data for 2009 are not comparable to the data for the previous years presented above. The information concerns enterprises with more than 9 employees. 119

120 MINISTRY OF ECONOMY The aim of these actions is first of all to increase innovativeness and technological advancement in enterprises, to improve the quality of human capital and adjust its structure to the market requirements, as well as to remove any legal and administrative barriers hampering the economic growth. The horizontal approach to industrial policy applies first of all to sectors with predominant or total private ownership. These sectors include in particular: biotechnological, chemical, wood, electronic, pharmaceutical, ICT, light, furniture, machine or automotive industries. At the same time, the instruments stipulated in the horizontal industrial policy will create conditions favourable to the development of new sectors of high growth potential. These sectors emerge where traditional industries meet, and are based to a large extent on the results of scientific studies and research. These sectors include: industry connected with biotechnology, nanotechnology or information and satellite technologies. Box 11 Concept for Horizontal Industrial Policy in Poland (the executive part) The executive part of the Concept for Horizontal Industrial Policy in Poland is based on four pillars: 1. combination of the support tools for enterprises coming funded by state; currently there are 64 support instruments for the following areas: innovation, investment and environment protection, entrepreneurship, promotion, training, data bases, restructuring, warranty, guarantee, financial institutions, labour market. 2. competitiveness analyses of industries usually include studies of general conditions under which industrial enterprises operate, examination of development trends, analysis of legal regulations specifying the rules of running business, as well as recommendations on how to increase competitiveness. These analyses are carried out using methods complying with both national 53 and EU 54 documents. An analysis of the competitiveness of light industry sector was performed in By the end of 2009 analyses of electronic, pharmaceutical industries, as well as construction materials are to be carried out. 3. technological foresight of industry is to forecast future change in trends, as well as technical and technological possibilities resulting from the most recent scientific discoveries. Currently, actions are being taken to indentify priorities of scientific studies and research that will accelerate the socio-economic development for many years. Moreover, an analysis is performed to assess the significance of scientific studies for economy and the potential of their absorption by the economy. The development of Polish scientific policy has to be adjusted to the requirements of the European Union and based on the knowledgebased economy as an element of the development programme of the Lisbon Strategy. Therefore, the longterm development trends are to be specified as an information basis for entrepreneurs to use while developing their own strategy. So far nine regional and seven industrial technological foresights have been performed in Poland. 4. Polish Industrial Development Strategy devised as a result of the finished actions under the first three pillars. The Ministry of Economy in cooperation with entrepreneurs will provide the enterprises subject to the horizontal industrial policy guides regarding the instruments, competitiveness analyses and analyses of the development of technological trends (technological foresight). There has been an increase in green public procurement in the EU policy that may have a positive effect on the competitiveness of enterprises introducing eco-innovative solutions. The value of public procurement in Poland in 2007 was more than PLN billion compared to PLN 79.6 billion 56 in On 30 January 2007, the National Action Plan for Green Public Procurement was adopted. It identifies the tools for the implementation and the guidelines for monitoring of changes with respect to green public procurement. 53 National Reform Programme for ; National Development Strategy ; National Strategic Reference Framework 54 A new industrial policy: Making the EU a more attractive place for industry and European Industry: A sectoral overwiev. Technical Update Report on the operation of public procurement system in Report on the operation of public procurement system in

121 POLAND 2009 REPORT ECONOMY The promotion of the new approach to public procurement includes actions taken in order to create a new modern system that would guarantee that the public funds are allocated in a way that helps stimulate the development of innovative economy aiming at the advancement of entrepreneurship and sustainable development. The Ministry of Economy in concert with the Public Procurement Office drew up a document called A New Approach to Public Procurement. Public Procurement in the context of small and medium-sized enterprises, innovation and sustainable development 57. This document includes guidelines for increasing the participation of SMEs in the system of public procurement in Poland, demand for innovative products (also environmentally-friendly), the extent of the use of electronic devices in the process of granting public procurement, at the same time taking into consideration social issues. Currently, an Action Plan in this respect is being developed. Moreover, the Guidelines of the Action Plan for Sustainable Production and Consumption are being devised. They will be used as a basis for developing the Action Plan. The document will include the results of the compliancy analysis of the Strategy for changing production and consumption patterns for patterns conducive for the implementation of sustainable development principles, adopted by the government in 2003, and the National Development Strategy , as well as actions enhancing sustainable production and consumption, implemented on international level, among other things, in connection with the development of the so called green economy. Environment regulations, Energy and Climate Package of December 2008 in particular, have particularly significant effect on the competitiveness of Polish industry. The obligation to meet EU requirements entails industrial threats, including the risk of carbon leakage and a rise in electric energy prices Sectoral policies Hard coal mining In over past ten years, actions directed to hard coal mining have been determined by general changes in the Polish economy. At the beginning of 1990s, mining along with other sectors of economy was subject to significant changes. The free market was their foundation stone. Hard coal mining was characterized by extensive organizational and management centralization. The industry also performed other activities, not connected with hard coal extraction. Hard coal mining was also characteristic for its heavy geographical concentration. Due to a wide range of the necessary changes and to the concentration of social action on a small area, the mining restructuring process required state participation and assistance. Without the state assistance, the sector of hard coal mining, with its obsolete management structure and massive debt, would have not been able to function in the market economy and to meet the requirements connected with Polish accession to the European Union. After 20 years of the performance of successive restructuring processes, hard coal mining has undergone enormous changes. Since 1989, the number of active hard coal mines decreased from 70 to 31, with the employment down by 300 thousand people. The total output decreased from million tonnes in 1989 to 83.4 million tonnes in 2008, i.e. by 53%. 57 Document adopted by the Council of Ministers on 8 April 2008<0} 58 Under the provisions of the Act of 6 December 2006 on development policy rules 121

122 MINISTRY OF ECONOMY In the restructuring actions taken so far not enough attention was paid to the fact that not only the reduction of production costs but also the reconstruction of exploitation fronts was necessary, which seriously affected the amount of funds allocated for the purpose. Therefore, Polish mines are underfinanced, with a shortage of reserve exploitation fronts. Currently, the Strategy for the hard coal mining sector in Poland in adopted in July 2007 is being implemented. In the last two years, the situation on hard coal market was subject to unexpected changes, contrary in character. Until the third quarter of 2008, the hard coal mining experienced an increase in demand, whereas currently, in result of the global financial crisis and of dramatic economic slowdown, there is oversupply of hard coal. The period of economic growth, and resulting positive financial results of specific hard coal companies, led to high expectations towards mining. An increase in the prices of goods and services, the salary demands, as well as decisions in court disputes concerning the interpretation of regulations on taxes and mined out voids different than they used to be resulted in a rise in the fixed costs of coal production. Hard coal output was almost 83.4 million tonnes in 2008, which was less by 4.4% compared to The energy coal output was 71.4 million tonnes, whereas the charred coal output was 12 million tonnes. Total hard coal sales were 82.7 million tonnes in 2008 and were by 4.6% lower than in Domestic hard coal sales were 89.9% of the total sales. At the end of 2008 the coal reserves in mines amounted to thousand tonnes. It was less by 24.9% than in the previous year. In 2008, coal companies were unable to meet the coal demand of the energy sector. Therefore, energy companies imported more coal than before in order to gather appropriate coal reserves, which also filled the delivery gap resulting from insufficient supply. In 2008 hard coal import to Poland was 10.1 million tonnes and was 75.0% higher than in At the end of 2008, the employment amounted to thousand people (increase by 2.8% compared to the previous year) thousand miners were working underground. The investment outlays were PLN 2.5 billion in 2008 and were by PLN 0.6 billion higher than in Mining companies used their own funds, environment protection funds and other resources for the investment activities. In 2008 the positive net result of hard coal mining was PLN million and was PLN million higher than in 2007, mainly due to the PLN million increase in the coal sales compared to The results of the hard coal mining in times of economic slowdown during four months in 2009 are characterized by: the downward tendency of the sales to professional power engineering, dramatic decrease in the coal sales to coke plants, increase in the coal reserves in coal storage yards, lower coal prices in world markets, decrease in the production and use of electric energy produced from hard coal. During four months of 2009 there was a 7.6% decrease in hard coal extraction compared to the same period of time in 2008, amounting to 26.4 million tonnes. 122

123 POLAND 2009 REPORT ECONOMY Management boards of mining companies are implementing recovery plans, including cost reduction, introduction of flexible working hours and obtaining external financing in order to prevent the consequences of the crisis, i.e., to maintain the financial liquidity, to avoid collective redundancies, and to continue investment to ensure reserve fronts Automotive sector At the end of 2007, there were 403 enterprises in the Polish automotive sector, i.e. 8 entities more than in the previous year. These entities employed ca. 130 thousand people in total, i.e. almost 1% more than a year ago. In 2008, Polish automotive sector manufactured a record number of vehicles almost 1 million cars, lorries and buses, i.e. 14% more than in the previous year. As a result, the revenue from the overall activity increased by 5.7% and amounted to PLN 91 billion, i.e. nearly 11% of industrial manufacturing revenue. The profitability of the gross turnover for the entire sector declined in comparison with the previous year and amounted to 2.1%. There are 4 car and van manufacturers operating in Poland, i.e. Fiat Auto Poland, General Motors Manufacturing Poland, Volkswagen Poznań and Żerań FSO S.A., which produced 99% of all vehicles. Following a few years of stagnation, the production of lorries is gaining pace due to new investment of MAN in Niepołomice. In 2008, the company produced nearly 13.3 thousand vehicles of TGA TGX and TGS series. It is five times more than in the previous year. Poland is also a significant bus manufacturer. MAN, Volvo, Solaris, Scania, Autosan, Kapena, Jelcz, Solbus and AMZ produce city, intercity and tourist buses. In 2008, they produced 4500 buses, i.e. 25% more than in Currently represented by the majority of top world s producers, the automobile components industry is an important part of automotive sector. They produce components both for the Polish market and for export. The most advanced technologies, which came with green-field investments, highly-qualified Polish staff and relatively low labour costs are the main factors that allow companies to compete in the area of quality and product prices on world markets. During last few years Poland has become an important European producer of the following components and sub-systems: motor-car engines in Poland there are 5 large motor-car engines factories, four of which produce a high-pressure engines, metal drawn and welded pieces elements of body (drawpiece, reinforcements), plastic elements such as bumpers, fuel tank, door panels, boards, instrument panels, soundproofing, cab equipment elements, groups of electric wires, casts and forgings, car windows. Most important entrepreneurs include Delphi, Faurecia, Lear, TRW, Valeo, Kirchhoff, TENNECO, SEWS, Toyota, Volkswagen, Ispol, Fiat GM Powertrain. 123

124 MINISTRY OF ECONOMY According to the preliminary data concerning foreign trade in 2008, the direct export in the automobile sector was worth ca. EUR 19 billion and was by 11% higher than in the previous year. For many years now, this sector has had surplus in foreign exchange operations, which amounted to over EUR 6.9 billion in The share of automobile industry exports in the Polish industry export amounted to 17% in The leading trade partners in Polish export include Germany (EUR 5.1 billion), Italy (EUR 3.1 billion), United Kingdom (EUR 1.2 billion), France (EUR 1.1 billion) and Spain (EUR 0.9 billion). In the EU Member States the vehicle sales dropped by 1 million (8%) in comparison to the year In view of a more stringent credit lending policy of the banks (a lot of cars are purchased on the basis of various credit options), the 2009 forecasts expect a decrease in sales on the European markets by further 10-20% in the car segment, and by up to 30% in the lorry segment. These factors are extremely significant as Polish automotive industry is based on the sales on external markets, where 97% of almost 1 million produced cars and lorries are placed. The global economic crisis has also had a slightly delayed negative effect on Polish economy, particularly on the automotive sector which to a large extent depends on the foreign demand. Since October 2008, there has been a decrease in production and job redundancies in this sector. On the basis of the Ordinance of the President of the Council of Ministers No 128 of 21 November 2008, the Inter-ministerial Team for Improvement of the Competitiveness of the Automotive Industry was established. Its tasks include: the performance of actions connected with the coordination of government coordination for the implementation of the conclusions of the Council of the European Union with respect to the Communication from the Commission on CARS 21, the monitoring o f the implementation of community projects and national regulations included in the Communication from the Commission on CARS 21, the development of a proposal of legislative solutions to be implemented on the national level in order to increase the competitiveness of the market and develop the automotive production. It facilitated the performance of coordinated actions to stabilize the operation of the automotive industry, which will reduce job redundancies Chemical sector 59 (including pharmaceuticals) In 2008, there were 1824 chemical industry units, including 1,457 profitable enterprises, compared to 1759 in 2007, including 1392 profitable ones. The number of profitable companies producing pesticides, washing agents and cosmetics has increased. Also the number of employees increased from thousand in 2007 to more than thousand in The total revenue of chemical sector increased from PLN 99.1 billion in 2007 to PLN billion in The highest revenue dynamics was recorded in the manufacture of pesticides (180%), pharmaceutical products (111.7%) and plastic products (105.5%). At the same time the net financial result of the production of chemicals decreased from PLN 4.1 billion in 2007 to PLN 3.4 billion in 2008, whereas of the production of rubber and plastic articles from PLN 2.3 billion in 2007 to PLN 1.2 billion in The chemical industry includes NACE 24 (manufacture of chemicals and chemical products) and NACE 25 (manufacture of rubber and plastic products). Data concern business operators with more than 9 employees 124

125 POLAND 2009 REPORT ECONOMY In 2008, the gross turnover profitability rate decreased to 7.2% (8.5% in 2007) in section 24 and 3.5% in section 25 (6.1% in 2007). The highest decrease in the rate was noted in chemical fibre production which is typical for running business deficit. In 2008, the total investment outlays in the chemical industry increased as compared to 2007, and amounted to PLN 7.1 billion. The investment outlays increased only with respect to the manufacture of other chemical products, basis chemical substances, pesticides, pharmaceutical products, paints and lacquers, as well as plastic products. The chemical industry provided raw materials for manufacture of modern products. The use of chemicals in the economy is growing. As a result, there is an increasing demand for plastic products, rubber, paints and lacquers, and, as a consequence, for basic petrochemical materials (i.e. petroleum products). Unfortunately, the national production is unable to cover the demand for these substances. Therefore, the already high foreign trade deficit is increasing. Polish chemical industry is typical of high growth rate of import and negative foreign turnover (EUR billion in 2008). The export in chemical industry in 2008 was EUR 13.7 billion, whereas import EUR 22.4 billion. Box 12 REACH system According to the provisions of regulation (EC) No 1907/2006 (REACH) in the period from 1 June to 1 December 2008 a preliminary permanent registration of chemical substances is to take place. The obligation of preliminary registration applied to enterprises importing from outside the EU or producing on the territory of the European Union over 1 tonne of chemicals per year. The substances (and products containing these substances) that were not registered in the preliminary registration cannot be marketed after 1 December During these 6 months the entrepreneurs from the EU (as well as Norway, Island and Lichtenstein) registered almost 3 million substances. More than 2.4 thousand of Polish businesses took part in the preliminary registration and registered almost 173 thousand substances Iron and steel metallurgy sector In 2008, the iron and steel metallurgy sector included 83 companies 60. The core of the group includes 29 typically metallurgical companies. At the end of 2008, the employment amounted to 29.4 thousand, and it was 2% higher than in On 31 December 2006, the process of iron and steel metallurgy sector restructuring conducted under the Programme Restructuring and development of iron and steel metallurgy in Poland until 2006 was formally completed in Poland. Following the iron and steel metallurgy sector restructuring success, organisational changes and privatisation processes it has become modern and was given a possibility of further sustainable development. On 14 February 2008, the Council of Ministers approved the final implementation report concerning the Programme Restructuring and development of iron and steel metallurgy in Poland until 2006 with recommendations for further monitoring of the restructuring process until The report pointed out that the ongoing restructuring processes will be continued in the future by metallurgical enterprises, as this is a necessary condition to preserve their international competitiveness. 60 According to the Polish Classification of Activities (NACE) manufacture of cast iron, steel and ferrous alloys (Group 27.1), manufacture of pipes (Group 27.2) and other types of steal pre-processing (Group 27.3), enterprises with more than 9 employees 125

126 MINISTRY OF ECONOMY In 2008, the iron and steel metallurgy sector was affected by the financial crisis significantly. In 2008, the production of crude steel was 10.6 million tonnes (ca. 8% more than in 2007). The product sale revenues amounted to 34.7% and were 9% higher than in However, the increase in business costs was significantly higher (20%). As a consequence, the net profit fell by as much as 47% compared to 2007, with low net profitability of 5.4%. Trade balance is unfavourable both in terms of quantity and value. In 2007, Poland imported ca. 8.2 million tonnes of steel products in total and this number was comparable to 2007, with a 0.1% increase. In 2008, Polish export of metallurgical products amounted to ca. 5.4 million tonnes and increased by 5.1% compared to In 2008, overall expenditure on investments and modernization amounted to PLN 2.1 billion whereas expenditure on ecological undertakings amounted to PLN 141 million. The implemented technologies and modern manufacturing equipment improve the competitiveness of domestic metallurgy products at the European level. Further technological and production development of the sector will depend on, among other things, division of CO2 emission allowances. On 22 February 2008, the Communication from the Commission to the Council and the European Parliament on the competitiveness of the metal industries (COM(2008)108) was published. Communication includes a comprehensive presentation of the issues associated with preservation and reinforcement of metal industry competitiveness, including iron and steel metallurgy, non-ferrous smelting industry as well as industries manufacturing metallurgy products in the value added chain, such as: construction, automotive and shipyard sector. The European Commission propositions include measures aimed at enhancing metal industry competitiveness by: ensuring energy supply at competitive prices, through well functioning energy markets, creating conditions to allow the sector to meet the Community s environmental objectives and to adapt to the requirements of its climate change objectives, encouraging R&D, innovation, and high qualifications. creating open and competitive global markets and removing distortions in trade in metals and raw materials. While presenting the problems with key factors influencing the results of the metal sector, the European Commission proposed measures that would improve the competitiveness of this industry in the future, at the same time contributing to the implementation of the greenhouse gases emission reduction objectives by On 8-9 June 2009, the 66th Session of the OECD Steel Committee was held, where it was determined that the economic difficulties in the sector caused by the global financial crisis resulted in a risk of negative trends. Tool such as subsidies may violate fair competition, whereas customs duty manipulation and the barriers other than tariffs, such as unjustified quality and certification requirements, may result in distortions of foreign trade. According to some views if the negative trends in the sector spread, they will affect the current economic slowdown Electronic sector The electronic sector is one of the fastest developing areas of global economy. It stimulates technical, technological and organizational progress, and in a wider perspective it determines the development of civilization. It has an effect on the ability of a national economy to meet the requirements of global competition and entails the development of other economic sectors with high potential. 126

127 POLAND 2009 REPORT ECONOMY In the Polish electronic sector 61, in the area of manufacture there were ca. 7.4 thousand businesses, with 95% microenterprises. For the enterprises from NACE 30 and 32 divisions the increase in production marketed between 2000 and 2008 was three and half and four times higher respectively. In 2008, the 32 division showed the highest increase compared to 2007 (26.1%) and among all other industrial manufacturing divisions, as well as a higher increase rate than after three quarters. The electronic sector was significantly less affected than other sectors by the current global financial crisis, with the 32 division reaching a 12.2% increase in the sold production still in December However, a decrease may be expected, especially with respect to products and groups of products based to a large extent on export. In 2008, there was observed a 10% increase in the exports of electronic sector (corresponding approximately to CN 85 division) as compared to the previous year, reaching EUR 14.1 billion. For example, the export value of the TV sets (HS 8528) was EUR 3.92 billion (increase by 17.2%), of TV set spare parts (HS 8529) EUR 1.28 billion (19%), stationary telephones (HS 8517) EUR billion (46.8%). In 2008, the gross financial results was PLN million for division 30, and PLN 74.2 million for division 32. The net results were PLN million and minus PLN million, whereas the sales profitability rates 4.9% and 2.2% respectively. For a few years now, Poland has been a leader in field of TV sets manufacture in the European Union. In 2007, more investment was carried out in this area, including that started or planned before. In 2008 the production of TV sets in Poland was over 16.7 million pieces and increased by 27.1% compared to Almost the entire production is intended for export, mainly to the European Union countries. The most important investors in the manufacturing sector included the American producer Jabil Kwidzy (TV sets, electronic components - until 2004 the Philips plant), LG Electronics (TV sets and other consumer products), Daewoo Electronics (TV and DVD sets) and three other producers of electronic equipment: Siemens, Alcatel, and Lucent Technologies. Also other concerns have invested in Poland recently and will start or have recently started manufacturing flat TV sets. These include: Sharp, Funai, Humax, JVC, Orion, Pronox, Toshiba and TPV. Several dozen of consumer-electronics distributors are present on audio-video market, ensuring the presence of all significant global makes on the Polish market. In the case of audio-video equipment (except TV sets), import practically amounts to 100%. In Poland, the computer equipment production is very fragmented and dominated by so called small assembly enterprises. Small and medium-sized enterprises prevail in the market. Apart from well-known global makes such as IBM, HP, Dell, there are also a number of recognised domestic trademarks. Particularly, they include the following companies: NTT System, Optimus, Action, DTK Computer and Vobis. In the electronic office equipment segment the fiscal equipment is the only product manufactured in the country. As far as printers and multifunctional equipment, photocopiers and faxes are concerned, 61 Under the statistical classification NACE-2004 (applicable only to data from 2008) the electronic sector may be understood as NACE 30 (manufacture of office machines and computers) and NACE 32 (manufacture of radio, TV, and telecommunication equipment and devices). 127

128 MINISTRY OF ECONOMY virtually 100% of equipment is imported. There are over 20 companies operating in the country that deal with fiscal equipment segment; 11 of them are producers. Main fiscal equipment manufacturers include: Novitus (former: Optimus IC), Elzab, Posnet, Innova, UPOS, Emar. Only a small number of fiscal equipment produced in the country is exported. The production of household articles should also be mentioned 62. In the last few years, there has been a significant direct foreign investment inflow to Poland from well-known leading concerns, which resulted in Poland becoming an important producer not only of flat TV sets, but also household articles (intended for export to a large extent). In 2008, 2.3 million coolers and freezers were produced in Poland (3.1% less than in 2007), 2.5 million automatic washing machines (28.7% more) and more than one million gas cookers with a stove (18.6% more). Hardware, software, telecommunications, electronic office equipment, other consumer articles, as well as different types of subassemblies and electronic technologies are used for other products, creating new or extended possibilities for their users. Therefore, the importance of electronics and electronic products for the economy and society significantly exceeds the share of electronic products in manufacturing total The light industry sectors (textiles, wearing apparel and leather) At the end of 2008, the number of light industry enterprises in Poland was ca. 1.3 thousand (0.8% less than in the previous year), with the employment level exceeding 134 thousand persons, i.e. 13% less than in In 2008, the revenue of the light industry 63 from the overall operations decreased to PLN 19.7 billion (with the 2008/2007 increase rate of 99.6%), with a 17% increase in revenue in the wearing apparel industry, and 14% and 5.4% fall in the revenue of the leather and textile industries respectively. There sales profitability rates decrease for the textile industry from 4.0% to 2.8%, wearing apparel from 3.4% to 2.6%, and leather production from 5.3% to 4.8%. The profitability of the light industry is much lower than the average profitability of the entire manufacturing. The economic situation on the fourth quarter of 2008 had a crucial effect on the above-mentioned revenue and profitability rates for the manufacture industry in 2008, including the light industry. In 2008, the foreign trade turnover for the light industry showed a drop in exports of light industry products by ca. 8.2%, and a drop in imports by 17.3%. The leather industry revealed the highest drop of ca. 14%. The wearing apparel industry showed a decrease in exports by ca. 9%, with a drop in textile exports by ca. 6%. The foreign trade turnover balance for the light industry is positive, both for the entire sector and for individual sub-sectors. The financial crisis has had the following negative effects on the light industry: a drop in export orders, a drop in domestic orders, limited access to operating credit, limited access to investment credit, limited cash flow due to a drop in sales, payment problems, no access to credit, job redundancies. 62 This manufacture is classified as NACE However, in NACE2007 it is included in division 26 that along with division 27 may be regarded as electronic sector. 63 Economic-financial data apply to enterprises with more than 9 employees. 128

129 POLAND 2009 REPORT ECONOMY The current situation may lead to job redundancies and limited potential of the industry, which will be difficult to repair once the market restores its growth rates. It should be noted that even before the crisis the sector was experiencing a shortage of qualified mid-level and executive staff. In the last few years the industry has undergone a process of complete technical, technological and organizational overhaul. The light industry required assistance in the reduction of the negative consequences of the financial crisis. In 2008, the Action Plan for the Light Industry Sectors was drafted and adopted. The Action Plan was based on the recommendations included in the Competitiveness analysis of the light industry adopted by the Ministry of Economy on 9 April The Action Plan comprises 22 actions that address specific problems of the light industry sectors, identified on the basis of horizontal areas defined in the Concept of the Horizontal Industrial Policy in Poland, such as research and development, innovativeness, human capital, streamlining and improvement of the legal regulation system, environmental protection-sustainable development, access to the market, outlets and protection of industrial property Wood-based sectors Polish wood-based sectors have a significant meaning for the development of the economy. Before the current financial crisis, their share in the GDP generation was 4.3%, and in the gross value added ca. 3%. They generated over 11% industrial output sold, and employed 391 thousand people. Wood material and products constituted ca.10% of Polish exports and nearly 5% of imports. The current crisis affects individual wood-based sectors to different extent, depending on the degree of their sensitivity to the economic situation and their dependence on export. The sectors depending on construction investment or foreign demand have been affected the most (furniture, wood-based panels). Sectors less sensitive to the economic situation, which have a net gap in domestic production covered by imports (which is shrinking on a global scale, leading to an increase in the trade balance), are also significantly less susceptible to the consequences of the crisis (cellulose-paper industry). However, the situation is changing every month and it is difficult to predict the annual scale of the drops. The competitiveness of the wood-based sectors on the home market has remained strong for a long time. Compared to other manufacture industries, the wood-based sectors have so far shown high and still growing increase rates, higher share of value added in the production and economic and financial results above average. In comparison with global markets, the competitiveness of Polish wood-based sectors is relatively strong due to forest and wood resources as well as its importance for the global production and trade of Polish furniture and wood-based panels. Poland is the third producer of porous fibreboards, the sixth producer of chipboards and hardboards. Polish furniture is ranked 10 th in global production and 4 th in global export. The global potential of Polish wood-based sectors is confirmed by: existing relatively strong international capital relationships (globalisation of technology and finance/capital), high importance of international trade (particularly export), markets and strategies globalization, life styles and consumption models assimilation. Industries with the biggest global potential include wood-based panels and the furniture industry. Development of the Polish wood market depends to a great extend on the global economy situation and on the condition of main trade partners, which experienced significant deterioration as a result of the global financial and economic crisis that started in the middle of

130 MINISTRY OF ECONOMY Wood market demand is limited by the trade barriers with the third countries. These particularly include: high customs duties (depending on the weight) in the furniture trade with Russian Federation, technical limitations in trade between EU Member States and the USA, phytosanitary requirements in wooden packaging trade. Development of wood-based sectors is also determined by crucial conditions concerning supply. Availability of wood from domestic material base and the possibility of enhancing the production capacity of processing are particularly important. Moreover, the situation in the countries-suppliers, which are key foreign trade partners, is of big importance. The timber supply on the Polish market strongly relies on the monopolistic position of state forests and the principle of sustainable forest management implemented under the Act of 28 September 1991 on forests (Dz.U ). It significantly limits the requisition possibilities of timber necessary for the Polish wood industry. A high increase in demand for wood recorded in the recent years until the third quarter of 2008 mainly results from the extension of timber market to EU Member States, i.e. from the demand of foreign enterprises and the power engineering sector. Global economic crisis led to a temporary decrease in the timber deficit seen so far. Wood imports may only be a partial solution for the wood sectors supply problems, first of all due to the high transport costs, and also the barriers in the timber and wood material import (e.g. export custom duty for the import from the Russian Federation). The supply on the wood market increased until the mid-2008 due to the production capacity development. Foreign capital transfer in the form of direct foreign investment has significantly contributed to this process. So far, mainly the cellulose-paper industry, furniture industry and the woodbased panels industry were the objects of foreign investors' interest. Despite the financial crisis, the investment processes in the cellulose-paper industry continue due to the home production gap and lower sensitivity of this sector to the economic situation. Despite the improvement, the level of innovativeness in wood-based sectors is unsatisfactory. This partially results from low susceptibility of some wood industries to innovations because of the specificity of technological processes (e.g. relatively simple phase of wood sawing). The European Union funds and the existing domestic support instruments provide an opportunity for the increase in wood sectors innovativeness. A systematic growth in the demand for the majority of wood materials and wood final goods can be expected in the long run, which will result in the moderate increase in their production. Particularly, the following should be expected: sawn timber market stimulation, further stable growth of the wood-based panels manufacture and use (however, of different scale and range of changes depending on the level of this industry products innovativeness and possibilities of new application), growing demand for and production of such final wood products as: windows, doors, furniture, paper and cardboard and processed products. The final character of the industry is represented by the traditional wood packaging manufacture (boxes, crates, barrels, etc.). 130

131 POLAND 2009 REPORT ECONOMY Shipbuilding industry 64 The Polish shipbuilding industry is a sector of high exporting possibilities (the share of exports accounts for over 90% of total output). Similarly to other EU states, it plays an important role for the economy in the light of highly competitive global market. In 2008, the total revenue from operational activities was PLN 7.6 billion, with an increase by ca. 5% compared to the previous year. The number of enterprises in the sector was 149 (14 more than in 2007). The Polish construction and repair shipyards employed 16.5 thousand persons in December Due to the difficulties in the last four years, there was a decrease in employment rates, particularly in the three largest production shipyards (Stocznia Szczecińska Nowa Sp. z o.o., Stocznia Gdynia S.A., Stocznia Gdańsk S.A. and Stocznia Północna S.A). The entire shipbuilding industry employs approx. 70 thousand persons, with approx. 800 Polish industrial enterprises and service providers associated with shipyards by cooperation agreements. In 2008, the shipyard produced 20 ships worth USD 700 million (in 2007 the shipyards delivered to ship operators vessels worth USD 950 million). In recent years, there has been a significant decrease in the share of Polish shipbuilding industry both in the production and the number of ship orders. In 2004, Poland was the second in Europe in terms of orders received after Germany, and third in terms of the ships produced. In 2008, Poland came eighth and ninth in Europe respectively. Starting in 2004, there was a decrease observed in the number of new ship contracts concluded by Polish shipyards - from 0.8 million CGT in 2004 to 0.1 million CGT in 2007 and Since 1 June 2005, the European Commission carried out the investigation procedure concerned with the state aid in restructuring of Stocznia Gdynia S.A., Stocznia Szczecińska Nowa Sp. z o.o. and Stoczna Gdańsk S.A. On 6 November 2008, the Commission issued a decision saying that the state aid was granted to the shipyards in Gdynia and Szczecin in violation of Article 88 (3) of the EC Treaty, and ordered the shipyard assets to be sold within 7 months in the course of open tender. In order to implement the provision of the decision, an Act on compensation procedure in companies of special importance to Polish shipbuilding industry was adopted, specifying, among other things, the rules, conditions and the way of selling the components of shipyards' assets, as well as the principles for job redundancies. By virtue of this decision, the assets of two shipyards were put up for sale in an open tender that ended on 31 May New owners will decide on the production profile and the number of employees in these companies. Stocznia Gdańsk S.A. developed a restructuring programme, approved of by the European Commission on 22 July The repair shipyards, i.e. Gdańska Stocznia REMONTOWA S.A., Szczecińska Stocznia Remontowa GRYFIA S.A, Stocznia Remontowa NAUTA S.A. in Gdynia and Morska Stocznia Remontowa S.A. employ 5 thousand persons and are, except for Gdańska Stocznia REMONTOWA S.A which was privatized in 2001, companies wholly owned by the State Treasury. 64 According to NACE 35.1 the shipbuilding industry includes construction and repair of sea vessels, as well as recreational, sports, motor, sale boats, etc. 131

132 MINISTRY OF ECONOMY They operate on a market other than the shipbuilding industry, with 70% of ship repair intended for export. The economic situation of these shipyards was good at the end of However, in 2009 it was affected by the global financial crisis. The European shipyards, including Polish shipyards, are considered to advantage in technical terms over their world competitors, although the threat of the Asian producers is growing. The strategy for the industry is included in the Community programme referred to as Leadership 2015, which assumes a growth in the competitiveness of the sector through innovation, knowledge and entrepreneurship. Europe may achieve a competitive edge in the segment of highly-specialised vessels. Therefore European shipyards, including Polish ones, are geared towards construction of technologically advanced, high-quality and environmentally friendly vessels (e.g. car carriers, chemical cargo carriers, passenger ferries). 132

133 POLAND 2009 REPORT ECONOMY 10 POLAND'S ENERGY SECURITY 10.1 Situation in the fuel/energy market Security of the Polish power system Due to a steady increase in demand for electricity, the issue of ensuring adequate power production capacity, with the use of domestic primary energy resources, gains key importance. This requires new capacity to be developed in the immediate future. Given ecological requirements resulting from EU legislations and the provisions of the Accession Treaty, it is necessary to withdraw the power units which fail to comply with relevant standards. Withdrawal of old coal-fired power units should be done by replacing them with modern units that use highly efficient coal combustion technologies. Furthermore, the environmental requirements impose increased share of electricity and gas-fired power plants and CHPs, wider use of renewable energy sources (RES) and possible construction of nuclear power plants while respecting the premises of sustainable development. The security of the National Power Grid (Krajowy System Elektroenergetyczny) depends mostly on the level of the network infrastructure development necessary to secure continuing power supply. The current level of cross-border network in Poland does not secure the effective operation of electric power market. The position of a transit country requires diversifies actions to be taken in order to develop transmission capacities. It is still important to reduce power loss in the National Power Grid through an increase in the power lines throughput, improvement of the energy distribution and limiting of transmission by means of 110 kv power lines over long distances. Extension of the connections with neighbouring countries is also planned in order to increase transmission capacity. The increase in transmission capacity of power networks and the reduction of power loss in transmission are essential elements for creating a competitive energy market Situation of the energy sector in 2008 In 2008 the basic indicators that characterise the power industry were as follows: 1. Total installed capacity at the end of the year of which power plants: - public (including RES) - industrial 2. Achievable power at the end of the year of which power plants: - public (including RES) - industrial 35,847 33,476 2,371 35,372 33,292 2,080 [MW] [MW] [MW] [MW] [MW] [MW] 133

134 MINISTRY OF ECONOMY 3. Total production of electric power of which power plants: - public (including RES) - industrial 4. Supplies to final customers of which customers: - of high-voltage (HV) - of medium-voltage (MV) - of low-voltage (LV) including households and small farms 154, ,862 7, ,783 26,826 40,659 52,298 28,269 [GWh] [GWh] [GWh] [GWh] [GWh] [GWh] [GWh] [GWh] Export of electricity in 2008 amounted to GWh, while import was GWh. At the end of 2008, the total length of power lines amounted to thousand km. For particular voltage levels the lengths were as follows: high voltage (WN) total including: - highest voltage ( ) kv - high voltage 110 kv thousand km thousand km thousand km medium voltage (MV) total thousand km low voltage (LV) total thousand km Power of network transformers 135,000 MVA Renewable energy sources (RES) The strategic objective of Polish power policy with respect to growing use of renewable energy sources consists in implementing the provisions of the Energy and Climate Package, based on the conclusions adopted by the European Council in March The Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC is one of the elements of the package. It stipulates an increase in the overall share of energy from renewable sources by 20 % in the final energy balance of the European Union in 2020, with a 15% target for Poland. At the same time all Member States should increase the share of renewable energy in transport to 10% by Biomass will remain the main renewable energy source in Poland. Therefore, further actions will be taken to use this potential under the so called distributed generation in small highly efficient cogeneration units (first of all in biogas installations). Recently actions have been undertaken regarding regulations on the process of co-incineration of fossil fuels with biomass. These initiatives aim to reduce the possibilities of using forest biomass, at the same time to increase the use of waste biomass and biomass from bioenergy drops. Wind energy is another renewable energy source with a high development potential and showing a high growth rate. On the other hand, further development of water energy will be based mostly on the so called small water power plants, as the construction of large plants requires substantial financial means, with the necessity to meet certain environment protection requirements. Other technologies of renewable energy sources will be developed, including solar and geothermal power. 134

135 POLAND 2009 REPORT ECONOMY Table 42 RES electricity generating plants by concessions valid as of 31 December 2008, and the amount of power generated in these plants confirmed by the origin certificates issued (of 29 April 2009) Installed power (MW) Amount of generated energy (MWh) Type of RES Number of installations Biogas-fired power plants ,044 Biomass-fired power plants ,883 Wind power plants ,288 Water power plants ,153,863 Co-combustion ,538,747 Total 1, ,079 6,218,825 Source: The Energy Regulatory Office. Box 13 System of the so called green certificates The main support mechanism in the form of the system of the so called green certificates was specified in the Act on Energy Law of 10 April 1997 (Dz. U of 2006, No 89, item 625, as amended). The mechanism consists in an obligation imposed on energy companies that sell power to final consumers to obtain and present a certain amount of certificates of origin of electric energy generated from renewable energy sources to the President of the Energy Regulatory Office in order to write them off, or to incur a substitute payment. This mechanism is supplemented by the obligation imposed on energy companies that are official power sellers to purchase all the electric power generated from renewable sources connected to a network and located on the area where the seller operates for an average energy price on the market. Table 43 Biocomponents basic information for 2008 Specification Unit of measure ment Total Bioethanol Ester Pure vegetable oil biocomponents produced by all producers t 385,482 86, , ,413 biocomponents sold within the national territory t 303,718 70, ,107 76,178 biocomponents sold to foreign entities t 65,833 5,612 1,502 58,719 Source: The Energy Regulatory Office. An important element in the growing share of renewable energy sources in the Polish fuel and energy balance is also the increasing share of biocomponents in the market of fuels used in transport resulting from two acts of 25 August 2006: on biocomponents and liquid biofuels and on the system of monitoring and controlling the fuel quality, in particular from the introduction of the obligation of a specific share of biocomponents on the market of engine fuels on 1 January 2008 stipulated in the first of the acts (the so called National Index Target, NIT). The scale of increase is confirmed also by the 3.66% level of the NIT implementation in 2008, with the binding NIT for 2008 of 3.45%. To show this increase rate it should be noted that the share of biocomponents in the transport fuel market in 2007 was solely 0.68%. Table 44 Liquid biofuels basic information for 2008 Specification Unit of Ester (selfcontained Based on Based on measure Total petrol diesel oil ment fuel) liquid biofuels produced by all producers t 95, ,353 49,079 liquid biofuels sold within the country t 120, ,914 75,847 liquid biofuels intended for use in selected fleets and consumed for own needs t 10, ,013 Source: The Energy Regulatory Office. 135

136 MINISTRY OF ECONOMY Box 14 Funding the RES promotion The possibility of winning subsidies for actions connected with the use of RES is an element of promoting renewable energy sources. The EU funding is provided most of all under the Infrastructure and Environment Operational Programme, particularly under Priority 9: Environment-friendly energy infrastructure and energy efficiency that stipulates reduction of the effect the energy sector has on the environment, improving the efficiency of energy production, transmission and distribution, as well as the improvement of energy efficiency in the process of energy use and an increase in the use of energy from renewable sources, including biofuels. Three measures under the above-mentioned priority most important for the development of the renewable energy sources should be underlined: Measure 9.4 Generation of energy from renewable sources; Measure 9.5 Production of biofuels from renewable sources; and Measure 9.6 Networks facilitating reception of energy from renewable sources. Additionally, a possibility of granting support for the development of the industry manufacturing renewable energy equipment is provided for in Priority 10 Energy security, including diversification of energy sources, and particularly in Measure 10.3 Development of industry based on renewable sources of energy. The subsidies are allocated for the construction of modern technological lines producing equipment for the generation of electricity and heat from renewable energy sources, biocomponents and biofuels. EU subsidies will also be granted under Regional Operational Programmes (ROP) carried out by the administration of particular voivodships. The subsidies may be provided for projects connected with construction of units using all known types of renewable energy, including wind power. Regions organize a competition to select the above-mentioned projects to be subsidized. An application may be submitted only on the date indicated in the notice of recruitment put on the website of the institution implementing a ROP. At the same time, it should be noticed that subsidies may be granted from the funds of the National Fund for Environmental Protection and Water Management gathered from penalty payments and substitute payments connected with the obligation to secure a share of power from renewable sources imposed on the basis of the Act on energy law Efficiency of the use of energy in economy After the first increase in the mid 1990s, and the highest level in 1996, the primary energy and final energy consumption in the years significantly decreased. The drop in energy use resulted then from the implementation of modernisation programmes, economic restructuring, and temporary reduction of economic activity. Also the programmes carried out to improve energy efficiency and the introduction of free energy pricing policy also took effect. In the next years there was a slow increase in energy consumption, which soared in Changes in the structure of final energy consumption in the main economic sectors reflect the directions of economic development. Industrial overhaul and economic actions to reduce energy intensity resulted in a decrease in energy consumption in this sector. The participation of these road transport and service sector in the national energy consumption shows a constant growth due to the continuing development of these sectors. The introduction of the insulation system and an increase in the efficiency of heating systems between 1997 and 2007 led to significant reduction of energy consumption (18%). Changes in agriculture, such as liquidation and privatization of formerly state-owned farms and creation of modern, large farms, did not lead to any savings in energy consumption which remains at the same level. 136

137 POLAND 2009 REPORT ECONOMY Chart 35 Primary energy and final energy consumption 120 Mteo Primary energy consumption Final energy consumption with climatic correction Final energy consumption Source: Energy efficiency in the years , Central Statistical Office, Warsaw, Chart 36 Final energy consumption in Poland depending on the sector % Industry Transport Households Agriculture Services Source: Energy efficiency in the years , Central Statistical Office, Warsaw, Industrial energy consumption The final industrial energy consumption showed the same fluctuation as total energy consumption. In the second half of the 1990s, a decrease in energy consumption started, reaching 15 Mtoe in Since then, it has slightly increased. The primary metal, chemical and mineral industries account for 60% of total energy consumption. This share has not changed significantly over the last 10 years. Chemical and paper industries showed an increase in their share in consumption structure. On the other hand, industries producing food, textile, machine and equipment showed a drop in energy consumption. There was a significant decrease in energy consumption by steel industry. These drops did not result from modernization activities to reduce energy consumption but mainly from the limited production (steel, sulphur). 137

138 MINISTRY OF ECONOMY Chart 37 Final industrial energy consumption depending on the carriers Mteo Others Heat Electricity Coal Natural gas Liquid fuels Source: Energy efficiency in the years , Central Statistical Office, Warsaw, The highest improvement of energy efficiency was recorded in machine and transport means sectors, as well as food and textile industries. The primary metal, paper, wood and chemical industries show slowest changes. Household energy consumption The share of household energy consumption in the final energy consumption is about 32-33%, and shows a slight upward tendency. The surveys performed by the Central Statistical Office in 1993 and 2002, concerning particular gaols of energy use, do not show any significant changes in this period. The decrease in energy consumption for heating and cooking is connected with the replacement of lowefficient coal with gas and electric ovens. On the other hand, the increase in energy consumption for lighting and electric appliances results from equipping households with electric appliances, and from the changes in habits of their users (e.g. changes in the intensity of using such equipment as washing machines, dishwashers, TV sets, or computers). Chart 38 Household energy consumption structure depending on its purpose 100% 80% 60% 40% 20% Electrical equipment Lighting Cooking Water heating Heating 0% Source: Energy efficiency in the years , Central Statistical Office, Warsaw,

139 POLAND 2009 REPORT ECONOMY Energy consumption in the service sector The service sector is typical for the most stable energy efficiency indicators. After a decrease at the beginning of the 1990s, the energy intensity of the value added has remained almost unchanged. The scale of improvement is lower, both compared to average economic rates and to industrial rates. However, at the same time it is the most energy-efficient sector generating national income. The energy-intensity rates show more significant changes, but just as in the previous case, they remain stable. Chart 39 Changes in the energy-intensity rates (left axis) and electro-intensity (right axis) of value added in the service sector kgoe/eur Energy intensity of value added Electricity intensity of value added Source: Energy efficiency in the years , Central Statistical Office, Warsaw, Energy consumption in transport kwh/eur00 Almost 94% of energy used in transport is used in road transport, with ca.3% used in rail transport. The remaining 3 % of energy is consumed by air transport, with trace amounts used for the inland and inshore water transport. In the years there was a continuous increase in the fuel consumption in road transport (at a rate of ca. 5.1% per year), with a simultaneous considerable decrease of energy consumption in rail transport. This results from changes in the means used for the transport of people and goods European Union Greenhouse Gas Emission Trading System In 2008, the total CO 2 emission allowance allocation under the European Union Greenhouse Gas Emission Trading System was thousand tonnes (average per annum allocation plan for the years ), with the real emission amounting to thousand tonnes, which is 101.6% of the allocation (one allowance equals one tonne of emissions). 139

140 MINISTRY OF ECONOMY Table 45 Allowance allocated and real CO2 emission in Code Installation Total allowance allocated thousand tonnes Total emission in 2008 * thousand tonnes E1 Fuel combustion installation of a nominal power of over 20 MW (except for installations for the incineration of dangerous and municipal waste) 171, ,599.2 E2 Mineral oil refineries 3, ,996.1 E3 Coke ovens 2, ,667.9 F1 Metal ore (including sulphide ore) roasting or sintering installations 1, ,656.0 F2 Installations for the production of pig iron and steel including continuous casting with a production capacity of 2.5 tonnes per hour 5, ,309.9 M1.1 Installations for the production of cement clinker in rotary kilns with a production capacity exceeding 500 tonnes per day 10, ,501.9 M1.2 Installations for the production of lime in kilns with a production capacity exceeding 50 tonnes per day 2, ,015.9 M2 M3 O1 O2 Installations for the manufacture of glass, including glass fibre with a production capacity exceeding 20 tonnes per day 1, ,462.2 Installations for the manufacture of ceramic products by firing, with a production capacity exceeding 75 tonnes per day and kiln capacity exceeding 4 m 30 cm and density exceeding 300 kg per m3 of kiln Installations for the production of pulp from wood or other fibrous material 0 0 Installations for the production of paper and cardboard with a production capacity exceeding 20 tonnes per day 1, ,209.9 *Verified emission according to KASHUE data. Source: KASHUE (National Administration of the Emission Trading System) Nuclear power Diversification of energy production structure through the introduction of nuclear power is one of the six main objectives of the planned Polish Energy Policy until The detailed actions concerning the introduction of nuclear power are presented in the Appendix Action Plan for the years These actions include: appointing Government Commissioner for Nuclear Energy and establishing an institutional basis for preparing and implementing the nuclear energy programme, defining essential changes to the legal framework of implementing the nuclear energy programme, preparing and coordinating the changes, drafting a report on nuclear energy which will become the basis for public consultations; holding the consultations and presenting the Nuclear Energy Programme to be approved by the Council of Ministers establishing a nuclear inspection office at the National Atomic Energy Agency, implementing a personnel training programme for institutions dealing with nuclear energy, preparing and holding an informational and educational campaign on the nuclear energy programme, location analyses for nuclear energy plants, location analyses for the radioactive cemetery, its design and construction preparations, building research and development base and supporting work on new reactor technologies and nuclear-coal synergy, preparing the program of Poland s participation in all phases of the fuel 65 Code arrangement according to the Ordinance of the Minister of Council f 1 July 2008 on the adoption of the National Plan for the Allocation of CO2 emission allowances in the years under the European Union Emission Trading Scheme (Dz. U. No 202 of 2008, item 1248). 66 Currently (mid-2009) the interministerial agreements and social consultations are reaching their final stage. 140

141 POLAND 2009 REPORT ECONOMY cycle, preparing Polish industry s participation in the nuclear energy programme, preparing plans of adapting the transmission grid for the need of nuclear power plants, exploring uranium deposits in the territory of Poland. On 13 January 2009, the Council of Ministers adopted a resolution No 4 on actions taken with respect to nuclear power energy. By virtue of this resolution, at least two nuclear power plants will be built in Poland. One of them should start operating by Polska Grupa Energetyczna S.A. is responsible for the construction of nuclear power plants. Actions connected with the introduction of nuclear power in Poland will be carried out in compliance with the recommendations of the International Atomic Energy Agency based on the experience of countries that have successfully and with public approval implemented programmes for the development of nuclear energy Security of oil sector Security of the oil sector consists in securing stable sources of supplies (crude oil) and in such development level of oil companies operating in the sector as to guarantee continuity of market supplies with liquid fuels and establishment of crude oil and liquid fuel reserves. Because of the geographical location and the transmission infrastructure, Russia is the main source of oil supplies to Poland (19.2 million tonnes, 92.6%, first quarter of this year: 5.8 million tonnes, 95.1%). Supplies from this country are ensured by the Druzhba pipeline, which is the property of the Przedsibiorstwo Eksploatacji Rurocigów Naftowych Przyjaźń S.A., a joint-stock company owned by the State Treasury. The capacity of the pipeline along the section between the Belarus border and Pock is 50 million tonnes of oil per year (the third pipeline, now under construction, would allow to increase the capacity up to 63 million tonnes annually). In 2008, the net import of oil and oil products amounted to 20.8 million tonnes (6.1 million tonnes in the first quarter of this year), whereas the export of oil was 0.2 million tonnes (0.1 million tonnes in the first quarter of this year). In 2008, oil consumption (processed in refineries) was 20.8 million tonnes (6.3 million tonnes in the first quarter of this year), with 14.2 million tonnes processed by PKN ORLEN S.A. refinery in Płock (4.8 million tonnes in the first quarter of this year), and 6.2 million tonnes by GRUPA Lotos S.A. refinery (1.4 million tonnes in the first quarter of this year). An alternative infrastructure for oil imports is ensured by the Gdańsk seaport. Its transhipment capacity amounts to 34 million tonnes of oil annually, which covers the whole domestic demand for this raw material by sea. To guarantee security of supplies by sea, in 2005, the ownership structure in Przedsiębiorstwo Przeładunku Paliw Płynnych Naftoportu Sp. z o.o., which ensures logistics of oil terminals in the Gdańsk seaport, was changed so as to increase the share of Przedsiębiorstwo Eksploatacji Rurociągów Naftowych Przyjaźń S.A. that belongs to the State Treasury. As regards final petroleum products, the logistics infrastructure of liquid fuels consists of fuel depots and terminals, pipelines for products, railroad transport and road tanker-based transport. The main entity on the market is Operator Logistyczny Paliw Płynnych Sp. z o.o. (fuel bases, fuel terminal in Dębogóra) established in 2006 to ensure access to the logistics infrastructure of liquid fuels and conditions for the development of a logistic system of liquid fuels to all participants of the oil market. 141

142 MINISTRY OF ECONOMY Polski Koncern Naftowy ORLEN S.A. is the largest Polish company operating in the petroleum sector. It owns one of the largest and most modern petroleum refinery and petrochemical complexes in Europe (also owner of ORLEN Deutschland, refinery in Możejki in Latvia AB Mazeikiu Nafta, majority owner of Inowrocawskie Kopalnie Soli and the Czech Unipetrol which comprises, among other things, refineries in Kralupy and Litwinovo and the distribution company Benzina). Grupa LOTOS SA is the second largest business entity operating in the petroleum sector. Rafineria Gdańska of LOTOS Group has a production capacity of 6 million tonnes annually, and a further increase of production capacity to ca million tonnes annually is planned by Grupa LOTOS S.A. also includes, among others, the Petrobaltic S.A. Grupa LOTOS has also acquired 100% of shares in the newly established business entity LOTOS Exploration and Production Norge AS. Box 15 Legal regulations on the fuel supply security on the market The fuel market security is protected under the provisions of the Act of 16 February 2007 on reserves of crude oil, oil products and natural gas, and on rules for conduct in a situation of potential threat to fuel sector on a nationwide scale, and disruptions in the oil market. The act along with executive acts lays down measures to counteract disruptions in oil and fuel supply, and specifies in detail procedures for their instigations and mechanisms for implementation. Pursuant to this act companies, which trade in or produce crude oil and fuels, including LPG, are covered by the obligation to establish and maintain required reserves. The Ministry of Economy started works on a new act on financing intervention oil and liquid fuel reserves. The Ministry is planning to reduce the obligation imposed on entrepreneurs to physically keep the reserves in return for a payment made to an institution specially appointed for this purpose. This means that the physical obligation to keep intervention reserves, which would be imposed on an institution appointed for this purpose, will be separated from the financial obligation to create reserves, which would be imposed on institutions that are currently responsible for the creation and maintenance of obligatory oil and fuel reserves. The planned changes are compliant with the modification of the EU provisions (Council Directive imposing an obligation on Member States to maintain minimum stocks of crude oil and/or petroleum products COM(2008) 775). In view of the level of oil consumption by refineries in Poland in 2008, it may be assumed that the current production capacity of Polish refineries suffice to meet the demand for engine petroleum and light and heavy fuels, and around 80% demand for diesel fuel. Since 1998, oil and liquid fuel reserves have been kept in order to secure the continuous supply to the market. On 30 March 2009, the intervention reserves counted as final products amounted to 5.5 million m 3 (4.5 million tonnes), which is sufficient to meet all the EU and IEA requirements with respect to the size of reserves Security of gas sector In 2008, 4.3 billion m 3 of natural gas were extracted in Poland (in the first quarter of 2009 the national amount of gas obtained was 1.1 billion m 3 ). At the end of 2008, the minable reserves of natural gas in Poland were ca.93.3 m 3. In 2008, the consumption of natural gas in Poland amounted to 14.2 billion m 3, which clearly shows that Poland imports gas. The structure of natural gas supply to the Polish market in 2008 was the following: 9.8 billion m 3 (2.3 billion m 3 in the first quarter of 2009) imported from the East (also through the Yamal-Europe gas pipeline), the remaining import (Germany, the Czech Republic) was 0.9 billion m 3 (0.3 billion m 3 in the first quarter of 2009). In 2008 the natural gas export in Poland was 36.9 billion m 3 (Germany), (16.59 billion m 3 in the first quarter of 2009). 142

143 POLAND 2009 REPORT ECONOMY The active capacity of underground gas storage facilities in 2008 amounted ca. 1.7 billion m 3. Such a volume of gas reserves, depending on the season, corresponds to ca days of national demand and constitutes 11.6% of the annual consumption in Poland. An increase of storage capacity to 2.8 billion m 3 by 2012 is planned. The obligatory natural gas reserves of million m 3 were specified for the period from 1 October 2008 to 30 September These reserves cover 11 days of a daily transit. Over the last few years, there have been significant changes in the organizational structure of Polish natural gas market. The direct cause for introducing these changes are the EU provisions implemented directly or transposed to the Polish legal system. The Directive 2003/55/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in natural gas and repealing Directive 98/30/EC, as well as the necessity to reorganize the natural gas market through separating the transit and distribution from turnover, resulting from the directive, are of particular importance. PGNiG S.A is the largest company dealing with natural gas exploration and extraction. The company is also a licence holder for storage of gas fuels, and it is the owner of all underground storages of natural gas in Poland. On 31 December 2008, the President of the Energy Regulatory Office appointed PGNiG S.A. as the operator of the gas fuels storage system (OSM) for the period between 1 January 2009 and 31 December PGNiG S.A. is also the market leader in natural gas trade, and it is the main importer of natural gas to Poland. There are other energy companies operating on the Polish market as well, having a little share in the market. The companies operating most actively in 2008 include: Grupa Kapitałowa G.EN. GAZ ENERGIA S.A., Media Odra Warta Sp. z o.o. (MOW), KRI S.A., CP Energia S.A. OGP GAZ-SYSTEM S.A is a company owned by State Treasury and listed as one of the companies of strategic importance for the Polish economy 67. The company is responsible for the security of gas supply through the transit networks. Pursuant to the provisions of the resolution of the Council of Ministers No 3/2006 of 3 January 2006 on measures intended to diversify the energy carriers supplies, OGP GAZ-SYSTEM S.A took over 100% shares of Polish company LNG Sp. z o.o. that is responsible for the construction and exploitation of the terminal of liquefied gas in Świnoujcie. Natural gas is distributed in Poland through ca km long transmission network, administered by OGP GAZ- SYSTEM S.A. System Gazociągów Tranzytowych EuRoPol GAZ S.A. is the owner of the Polish segment of the Yamal- Europe gas pipeline. In 2008, around 27.7 billion m 3 of natural gas were transmitted through the Polish segment of the pipeline for OAO Gazprom Export, and 2.6 billion m 3 for PGNiG S.A. The shareholders of SGT EuRoPol GAZ S.A. are OAO Gazprom Export (48%), PGNiG S.A. (48%), and Gas-Trading S.A. (4%). 67 Ordinance of the Council of Ministers of 18 January 2005 on the specification of state companies and companies wholly owned by the State Treasury of particular significance to the national economy (Dz. U. No 15, item. 123); Ordinance of the Council of Ministers of 30 September 2008 on the list of companies of particular significance for the public order ad security (Dz. U. No 192, item 1184). 143

144 MINISTRY OF ECONOMY 10.2 Identifying threats The overall condition of the power sector is the resultant of evaluation made of the condition in individual subsectors. Each of them is characterised by a specific combination of opportunities and threats to its operations. It is presumed that the main threats for functioning of subsectors are as follows: Production subsector to meet EU requirements concerning the levels of NO x and SO 2 emissions; method for awarding rights to CO 2 emissions which does not allow to meet the obligations within a given period of time; lack of sufficient liquidity for financing investments related to e.g. environmental protection; essentially tighter competition in the heat market owing to: liberalisation of trade, savings in heat consumption, firms being wound up, and development of distributed cogeneration; enormous burden of expenditure incurred when building new power production capacity. Transmission subsector necessity to incur large financial outlays for investments in the transmission network; time-consuming procedures associated with implementation of infrastructure projects. Distribution subsector generation of additional costs leading to an upward trend in prices and decline in competitiveness of services as a consequence of adaptation of the Act on Energy Law to directives of the European Union and the associated restructuring of the technical, teleinformatic and organisational infrastructure; necessity of having to bear considerable outlays on the development of electric power network; difficulties in meeting requirements concerning energy quality and security of supplies arising from economic and technical ageing of the energy infrastructure in rural areas; obstacles that hinder the implementation of linear investments. Electric power trade subsector high costs arising from the need of meeting commitments related to the purchase of certificates of origin for electricity generated from renewable energy sources and cogeneration (green and red certificates); prospective problems of satisfying the demand for electricity by decreasing production capacity, in the event of insufficient investments in new production capacity; concentration of trade companies with capital ties to electric power producers holding a big market share may limit competitive strength of independent trade companies; development of the supplier market with strong competition among trade companies may reduce the margins of those companies. The basic threat to the power security in the oil sector in Poland is a low level of diversification in oil supplies sources. It is necessary to seek to increase the possibilities of receiving oil supplies from various regions of the world, from various suppliers, using alternative transport routes. In order to avoid the threat, the Polish enterprises attempt to obtain access to their own oil deposits outside the country and plan to increase the domestic oil output. The structure of supplies showing a strong dependence on one producer and supplier Russia - may lead to stoppages in supplies. Although the possibility of 144

145 POLAND 2009 REPORT ECONOMY stoppages in oil supplies is significantly smaller than in the case of gas, such a situation may happen, as it did in the past. Potential threat may also include the change in the routes of oil transport by the largest supplier, i.e. Russia, related to the works on the construction of BTS-2 pipeline aimed at increasing the exports of Russian oil through the port in Primorsk, which may lead to the reduction of oil transport by the Druzhba pipeline. The system of maintaining intervention reserves of oil and fuels (Act of 16 February 2007 and works on a new act on financing intervention stocks of oil and liquid fuels) and the accession of Poland to the International Energy Agency (25 September 2008) contributed to a significant increase in the energy security of Poland. The constant and unforeseeable threat to the power sector consists in a possibility of a technical or natural disaster which may cause disruptions in supplies of energy carriers both to individual consumers and enterprises. A terrorist attack on the elements of transmission, processing and storage infrastructure is an important issue (in the context of Poland s dependence on oil supplies, each attack on a third country territory may directly affect the energy security of Poland). In the case of a crisis, Poland has no real possibility to replace oil with other types of fuels, so-called fuel switching. A risk factor is also lack of stability of oil prices, which is not entirely caused by purely economic reasons. Furthermore, due to the increasing dieselisation of the fleet structure of vehicles, in the years to come Poland will experience a constant lack (ca. 25%) of diesel oil, which will have to be imported. A significant dependence on supplies of natural gas from the East still occurs. In 2008, there occurred a threat related to the stoppage of natural gas supplies to Poland, as a result of misunderstanding between the Russian Federation and transit countries (mainly Ukraine). Due to the above, in order to reduce the threat of disruptions in natural gas supplies to Poland, it is necessary to implement diversification projects, namely, the construction of LNG terminal and Baltic Pipe and Skanled gas pipelines. The development of infrastructure in the natural gas sector is of key importance for ensuring security of supplies. The necessity to increase the active capacity of underground natural gas stocks, which ensure continuity of supplies in the case of disruptions in supplies, needs to be emphasized here. The transmission system also requires constant development, particularly in the regions with a limited flow capacity, i.e. the so-called bottle necks. These regions include: north-west Poland (the region of the influence of the Odolanów-Kotowo-Police gas pipeline; the region of the influence of the Piła-Koszalin-Słupsk gas pipeline); the Częstochowa region and the area to the south-east of Piotrków Trybunalski (the Piotrków- Lubienia gas pipeline); the area of the eastern part of Poland (the region of the influence of the Rembelszczyzna- Białystok gas pipeline); the area of the northern part of Poland - the Pomorskie and Kujawsko-Pomorskie voivodships (the Tuchola-Chojnice-Człuchów gas pipeline). Due to the scale of flow capacity limits of the transmission system, in 2008 OGP GAZ-SYSTEM S.A. undertook organisational and technical measures in the north-west of Poland involving inter alia increasing gas tapping from System Gazociągów Tranzytowych in the Lwówek junction up to thousand cubic metres/h, while maintaining the conditions for gas transmission to Mallnow, construction of the gas compressor station in Goleniów and construction the Szczecin-Gdańsk gas pipeline. 145

146 MINISTRY OF ECONOMY 11 CONSTRUCTION 11.1 Gross value added and production of construction industry Macroeconomic factors behind the dynamics and production volume of the construction sector Construction industry provides services for investment processes in the economy. The value and dynamics of gross fixed capital formation are strictly correlated with the volume and dynamics of the gross value added of the construction industry. From 2004 onwards, the gross capital formation has been increasing gradually. In 2008, its growth rate fell to 8.2% as a result of the economic slowdown. The gross value added of the construction section was relatively high in 2008 as compared to other sections of the economy and amounted to 11.0% (high growth rate was recorded particularly in the first two quarters of 2008). Chart 40 Increase in gross fixed capital formation and gross value added in the construction sector in the years (in % compared to the previous year, in fixed prices) % gross fixed capital formation gross value added Source: Central Statistical Office. In the first quarter of 2009 gross fixed capital formation and gross value added in construction sector grew by 1.2% and by 3.4%, respectively. 146

147 POLAND 2009 REPORT ECONOMY Dynamics and structure of construction and assembly production In 2008, gross value added in the construction sector amounted to PLN 87.0 billion, which accounted for 7.8% of the total gross value added (compared to 7% in 2007 and 6.4% in 2006). The value added grew by 11%, as compared to the 10.8% growth in 2007 and 11.6% in In the quarterly terms, a gradual increase in gross value added growth rate in the construction sector was recorded in the period between the first quarter of 2006 and the first quarter of The growth rate slowed down in the following quarters of The year 2008 was characterised by a relative high growth rate in the first three quarters and a marked decline at the end of the year. Chart 41 Increase in gross value added in the construction sector in the years (in % compared to the analogous quarter of the previous year, in fixed prices) % Source: Central Statistical Office. I q II q III q IV q In 2008, the sales of the construction and assembly production of all construction companies increased by around 11% as compared to the previous year, against an increase of 16.5% in 2007 and of 15.9% in As in the previous years, the structure of the total construction and assembly production was dominated by the works carried out by enterprises owned by domestic natural persons (an increase in their share from 66% to 77%) and carried out by domestic private companies (despite a decrease in the share from 22% to 18%). In 2008, the sale of the construction and assembly production (in enterprises employing more than 9 persons) was at the level of PLN 74.9 billion, which marks an increase of 12.9% as compared to This increase mainly resulted from an increase in works with restoration character sale - by 20.5%, and to a lesser extent in works with investment character sale by 9.9%. The share of investment works in the total construction and assembly production was slightly lower than the level recorded in 2007 and amounted to 70.1%. The increase in production was recorded in all groups of construction enterprises. The highest increase was recorded in companies whose main activity consisted in site preparation and in entities performing building completion, with their share in the structure of construction and assembly production being insignificant. 147

148 MINISTRY OF ECONOMY In the first quarter of 2009, the construction and assembly production fell by 1.3%, out of which by 6.8% in enterprises involved mainly in the construction of buildings, by 5.7% in entities dealing in construction of civil engineering facilities and by 4.6% in specialist construction companies. 68 Table 46 Sale dynamics of the construction and assembly production (in fixed prices) in the years in construction enterprises with more than 9 persons employed (previous year = 100) Total of which: Construction works: Investment Renovation Groups of enterprises, the basic type of activity of which is: Site preparation Building of constructions; civil engineering Building instalation Building completion Source: Information on the social and economic situation of Poland, year 2008, Central Statistical Office Residential construction General problems of the residential construction industry For many years residential construction has remained a very serious social and economic problem in Poland. Although residential construction has been developing dynamically for several years, its size is still not sufficient to meet the increasing needs of the society. Currently almost 12 million Poles live in overcrowded dwellings and taking into account the current condition of the housing market, the deficit of flats is estimated at over a million of dwellings. The number of people living in substandard conditions (i.e. without the sewage system; without water-line system; overcrowded: more than 3 persons per room; old buildings, in bad technical condition) exceeds 6 million and only one in three Poles lives in conditions corresponding to housing conditions in Western Europe. Moreover, Poland is still at the last place in Europe in terms of the number of flats per 1000 inhabitants, and the funds allocated for housing in the budgets of local governments did not exceed 0.1% in Poland in Residential construction has enjoyed a period of excellent situation in the past years, but from mid 2008 a slowdown of this market segment may be observed. Despite the record number of dwellings put into use at the end of 2008, the number of dwelling construction permits issued and launched housing investments has fallen. In the fourth quarter of 2008 the housing sector loan market collapsed. Banks suspended the financing of new projects for developers and for their customers. It was significantly more difficult to receive a loan for purchase of a dwelling on the secondary market. All this was translated into a drop in demand for dwellings and the suspension of new projects. Moreover, numerous administrative and legal barriers still encountered by the construction sector and a high cost of one square metre of a dwelling as compared to the average salary result in a huge difference between the potential demand for dwellings and the effective demand. 68 From 1 January 2009 onwards, the data are presented according to PKD 2007 (Journal of Laws No 251, item 1885, as amended) and are not fully comparable with the date for earlier years. 148

149 POLAND 2009 REPORT ECONOMY The latest data show that the number of dwellings whose construction just started declined further at the end of the first half of The number of dwellings being built and of building permits for dwelling construction is also lower than in the first half of Due to the decrease in demand for dwellings and the suspension of numerous new projects, as well as in view of increasing difficulties on the financial markets, the amendment of the Act on financial support for families in buying their own dwellings, passed by the Sejm at the beginning of 2009, may be of importance for persons planning to buy their own flat or house. The Act introduced two changes allowing more people to use the Family on its own programme and more dwellings to meet the criteria of the programme. The first change allows the persons from the closest family to accede to the preferential loan agreement, which has a marked impact on the increase in creditworthiness of persons who will use subsidies to interest. The second change guarantees the growth of the multiplier used to calculate the limit of the price of the cost of one square metre of usable area of the real estate financed by the loan. In 2008 a total of 6,600 loans for the amount of almost 853 million zloty were granted under the Family on its own programme. It is estimated that in 2009 around 19,000 loans for the total amount of 2.5 billion zloty will be granted under the programme. A potential further deterioration of the situation on the loan market, as a result of, among others, increased budget deficit, may be a threat for the housing market. A significant threat may also be the worsening situation on the labour market, as a result of economic slowdown. Visible signs of greater stability in the global financial systems are a chance for improvement Residential construction in 2008 In 2008, more than 165,000 dwellings were completed, i.e % more than in 2007 (where the growth was 15.9%). Table 47 Number of dwellings completed by type of construction in the years Type of housing No. of dwellings 2005= =100 No. of dwellings 2006= =100 No. of dwellings 2007= =100 Total 115, , , Private 57, , , For sale or rent 37, , , Co-operative 9, , , Public building 6, , , Municipal 4, , , Company Source: Residential housing, Q1-Q4 of The increase in the total number of dwellings in 2008 resulted mainly from an intensified activity in the area of private construction as well as construction for sale and for rent. A decrease in the number of finished dwellings was recorded in public buildings. As compared to 2007, the share of dwellings for sale or for rent in the structure of dwellings completed for use increased, while the share of private housing declined. 149

150 MINISTRY OF ECONOMY In 2008 the building permits for 220,000 dwellings in 109,000 new buildings were issued, as compared to 237,000 dwellings in The building permits issued to individual investors concerned over 110,000 dwellings (as compared to 107,000 dwellings in this type of construction in the analogous period of 2007). The decline was the largest in the case of building permits for co-operative dwellings, while the increase was the highest in the case of public buildings. Construction of 175,000 dwellings was started, i.e.10,000 (5.6%) less than in A decline in the number of recently launched dwelling projects was recorded in: housing for sale or for rent, co-operative and company housing, while private and municipal construction recorded an increase. It is estimated that there were 687,400 dwellings under construction at the end of December 2008, i.e. 1.4% more than at the end of December Over 76,000 dwellings were commissioned for use in the first half of 2009, i.e. 9.7% more than a year earlier. However, a significant decline in the number of launched dwelling projects was recorded (by 28.3% to 67,800 dwellings). The number of building permits issued also declined (by 21.4% to 90,400) Assessment of the construction industry performance Construction is a sector which meets the needs of investors, and, therefore, the scale and direction of changes in the construction and assembly production are strictly correlated with the investment processes in the economy. A gradual increase in the investment outlays growth rate recorded in previous years clearly slowed down in At the same time, despite the signals pointing to the deteriorating situation on the part of construction companies, the construction and assembly production was higher than a year before (12.9%), which resulted from high indicators from the beginning of the year. A markedly lower investment growth rate, deterioration of financial standing of enterprises, necessity of savings, difficulties in obtaining loans or a barrier for making investment decisions resulted in the negative assessment of the situation by the construction companies. The analyses of the situation in the construction sector clearly show that from mid 2008 onwards the assessments of general business climate deteriorated and in December the value of the indicator became negative for the first time in over four years. This resulted from unfavourable assessments of the current and future order portfolio, the construction and assembly production and financial standing. The conditions for the functioning of private companies, and mainly of small companies which are the most numerous in the construction sector, grew increasingly difficult. The deterioration of the situation in the public enterprise sector was relatively smaller. The slowdown of the construction sector s growth rate stems also from the powerful impact of barriers. According to the data of the Central Statistical Office, the percentage of enterprises that do not experience any barriers to the construction and assembly activities amounted to 3.7% in December (and increased to 4.8% by May 2009). Difficulties related to costs of employment were reported by 56% of respondents, while 41% of them pointed to the shortage of qualified workers. Another important barrier was the cost of construction materials, although the significance of this barrier diminished as compared to the previous year. As compared to December 2007, the importance of the barrier related to the deficit of qualified workers decreased (from 57% to 41%), while the importance of barriers related to insufficient demand and competition from other companies increased (from 17% to 30% and from 48% to 58%, respectively). 150

151 POLAND 2009 REPORT ECONOMY Profitability in the construction sector remained relatively high, despite the growth of the number of deficit enterprises. The growth rate of prices of construction production declined due to the decreasing demand and a drop in the prices of construction materials. In view of the crisis, construction companies intend to compete on the market mainly at the price level. Entrepreneurs declare that they look for cheaper suppliers of materials and subcontractors and renegotiate prices with current contractors. Moreover, enterprises will look for savings by reducing administrative costs, employment or better management of their machine resources. To sum up, despite the decreasing GDP growth rate, the value added in the construction sector remained at a relatively high level, much better than in the other sections of the economy. However, taking into account high correlation between the growth rate of the construction and assembly production and the growth rate of the GDP, a slowdown in the construction sector is inevitable. The trend is noticeable in quarterly data on the gross value added of the construction sector and the sale dynamics of the construction and assembly production at the beginning of 2009 (the construction and assembly production declined by 1.3% between January and March). On the other hand, it is worth noticing that the Polish construction sector, including residential construction, has been affected by the global crisis to a lesser extent than other countries. Chart 42 Construction production in selected EU countries, Q Q % 20 II q2008 III q IV q2008 I q euro zone EU27 Belgium Czech Republic Denmark Germany Estonia Irleand Spain France Italy Lotva Lithuania Hyngary Austria Poland Portugal Slovenia Slovakia United Kingdom Source: Eurostat. 151

152 152

153 POLAND 2009 REPORT ECONOMY 12 SERVICES SECTOR 12.1 Value added (market and non-market services) The services sector has the largest share in generating gross value added and GDP in Poland. Approx. 65% of gross value added is created by this sector. The situation of the services sector in Poland gradually resembles the one observed in OECD countries, where the participation of market services 69 and non-market services 70 in generating value added in the economy amounts to approx. 50% and 20% of value added respectively (Poland: 50.8% and 13.9% respectively). In 2008, gross value added in the services sector in current prices amounted to PLN billion, including 78.5% in the sector of market services and 21.5% in the sector of non-market services. An increase in value added in the services sector (in current prices) amounted to 9.3%, including 10.4% in the sector of market services and 5.5% in the sector of non-market. An increase in gross value added in current prices in the sector of market services in 2008 amounted to 5.9%, and in the sector of nonmarket services - to 1%. In the period of economic slowdown, the importance of the services sector is growing. This sector is usually less prone to deterioration of economic prosperity. In the first quarter of 2009, an increase in value added in current prices in the services sector amounted to 11.1% as compared to the first quarter of the previous year, whereas the respective figure for the whole economy was 8.6%. Value added of market services grew faster (11.7%) than that of non-market services (9.1%). The lowest increase was observed in trade and repair (5.0% as compared to 16.6% in 2007) General characteristics of the services sector The vast majority of the employed in the Polish economy work in the services sector (approx. 60%). In 2008, average employment in the services sector increased by 4.3%, from 5.5 million to 5.8 million people, whereas an average increase in employment in the whole economy in 2008 amounted to 4.0%. Over ¾ of business entities (2 857 thousand) registered in the REGON system in 2008 operated in the services sector (3% more than in 2007). The vast majority of the entities in this sector are private companies (95.8% in 2008), and the biggest group (over 60%) are entities operating in the following sections: wholesale and retail trade as well as real estate, renting and business activities. Similar to the whole economy, micro-enterprises are dominant also in the services sector. They account for 95.7% of entities operating in this sector, while small entities, employing between 10 and 49 persons, represent 3.6%, and medium-sized and large enterprises (with the number of employees over In sections: trade and repair; hotels and restaurants; transport, storage and communication; financial intermediation, real estate, renting and business activities, other community, social and personal services. 70 In sections: public administration and national defence, compulsory social and health insurances; education; health and social works. 153

154 MINISTRY OF ECONOMY persons) less than 1% of all companies. Taking into account the size of operating entities, significant differences exist between the sector of market services and sector of non-market services. In the sector of market services, micro-enterprises represent 97.1% of all entities, whereas in the sector of nonmarket services their share is by 13.4 p.p. lower. It should be pointed out that the sector of market services is in 1/3 composed of institutions operating in the education sector which has the largest share (approx. 28%) in the group of small and medium-sized enterprises (approx. 26%) in the whole services sector. At the same time, the sections of health care and administration are most significant in the group of entities employing over 250 persons accounting for approx. 42% of entities in this group. Table 48 Business entities in the services sector by ownership sectors and by NACE sections in the years * Public sector Private sector Public sector Private sector Sector of market services Wholesale and retail trade; repair of motor vehicles, motorcycles and personal and household 503 1,149, ,135,963 goods (section G) Hotels and restaurants (section H) , ,274 Transport, storage and communications (section I) , ,459 Financial intermediation (section J) , ,018 Real estate, renting and business activities (section K) 61, ,543 48, ,702 Other community, social and personal service activities (section O) 6, ,897 6, ,107 Sector of non-market services: Public administration and defence; compulsory social security (section L) 10,823 16,018 10,752 16,213 Education (section M) 46,409 48,998 45,333 51,848 Health and social work (section N) 7, ,132 7, ,059 *relates to business entities, registered in the REGON system. Source: Central Statistical Office, Structural changes in the groups of entities in the national economy in 2008 Domination of micro-enterprises and the private sector in trade and repair determines the choice of the organisational and legal form of enterprises. The most frequently chosen form of conducting business are enterprises of natural persons (70%) followed by partnerships - approx. 7.4% and commercial law entities and companies 6.2%. Micro-enterprises (shops) operating in the trade and repair section account for ¼ of all entities in the national economy. Table 49 Average employment in the services sector (in thousands) = 100 Sector of market services Wholesale and retail trade; repair of motor vehicles, motorcycles and 1, , personal and household goods (section G) Hotels and restaurants (section H) Transport, storage and communications (section I) Financial intermediation (section J) Real estate, renting and business activities (section K) Other community, social and personal service activities (section O) Sector of non-market services: Public administration and defence; compulsory social security (section L) 1, , Education (section M) Source: Central Statistical Office, Small Statistical Yearbook

155 POLAND 2009 REPORT ECONOMY Over 60% of the employed in the services sector worked in the sector of market services, where average employment grew in 2008 by 6.6%, as compared to barely 0.9% in the sector of non-market services (mainly due to the lack of changes in the number of the employed in education) Trade and repair The section of trade and repair is a significant section which generated in % of gross value added in the whole economy and 37.2% in the sector of market services (in current prices). In 2008, gross value added (in current prices) in trade and repair amounted to 11.7% and was by 4.3 p.p. higher than in the previous year. Value added of trade and repair in fixed prices increased in 2008 by 4.8%, and in the first quarter of 2009 by 1.9%. Average employment in this section amounted to thousand persons, i.e. by 6.9% more than in The number of the employed at the end of 2008 stood at thousand persons (increase by 6%). Table 50 Business entities in the section of trade and repair* by the number of employees and NACE division in the years * Number of employees Number of Number of 2006= =100 Wholesale and retail trade; repair of motor vehicles, motorcycles and personal and household goods (Section G) of which: Sale, maintenance and repair of motor vehicles and motorcycles; retail sale of automotive fuel Wholesale trade and commission trade* entities entities total 1,149, ,136, ,115, ,101, , , , , and more total 132, , , , , , and more total 273, , , , , , , , and more total 743, , , , Retail trade * , , , , and more * Abbreviated name. Relates to business entities registered in the REGON system. Source: Central Statistical Office, Structural changes in the groups of entities in the national economy in 2006 and Trade and repair is the largest section in the entire services sector both in terms of the number of entities and employment. In 2008, approx thousand entities were registered in this section, which constituted 30.2% of entities in the entire economy. However, it should be pointed out that the number of entities in this section has been decreasing for the fifth year in a row. This process is due to a systematic decline (by 2.3% in 2008) in the number of micro-enterprises operating in retail trade. The largest divisions in the section of trade and repair are entities dealing with retail trade (64%) as well as 155

156 MINISTRY OF ECONOMY wholesale and commission trade entities (23.4%). Entities operating in the section of sale, maintenance and repair of motor vehicles represent 12%. Similar to 2007, the number of entities increased in the section of sale, maintenance and repair of motor vehicles and motorcycles also in 2008, mainly due to a high demand for second-hand cars imported from Western Europe. Micro-enterprises, i.e. entities employing up to 9 persons, are the most numerous group of entities as they account for over 97% of entities operating in the trade and repair sector. In terms of ownership the section is not homogenous private sector entities account for nearly 100% of all entities, being mainly natural persons conducting business activities. Table 51 Number of employees in trade and repair by NACE sections as at the end of 2008* Specification Number of employees =100 in thousands w % Total trade and repair, including: 1, Sale, maintenance and repair of motor vehicles and motorcycles; retail sale of automotive fuel Wholesale trade and commission trade Retail trade, repair of personal and household goods * Relates to enterprises which employ more than 9 persons. Source: Statistical Bulletin of the Central Statistical Office, No.12 of In 2007, the average monthly gross salary amounted to PLN and accounted for approx. 82% of the average monthly gross salary recorded in the entire economy (PLN 2 944). Nominal salaries increased by 9.4% as compared to 2007 and as compared to 10.2% in the entire economy. The majority of entities which operate in trade and repair are micro-enterprises employing up to 9 persons with salaries usually lower than in the remaining sections (with the exception of hotels and restaurants). Concurrently, considerable differences may be noted between particular ownership sectors. Salaries in the private sector are much lower than in the public sector. In 2008, the growth rate of retail sales was lower than in previous years. Retail sales (in fixed prices) decreased in 2008 by 9.9% as compared to 13.9% in The largest increase was observed in sales of clothing and footwear (32.7%), sale of press, books and other in specialised stores (by 29.7%) and in non-specialised stores (by 28.7%). In 2008, sales of food, beverages and tobacco products (3.6%), fuels (6.7%) as well as motor vehicles and motorcycles (6.7%) increased the less. Wholesale of trade companies (in current prices) increased by 8.6% as compared to High increase in sales was recorded in tobacco products (by 55.9%), food (24.7%), intermediate and nonagriculture products, wastes and scrap (22.5%). The highest increase was observed in alcoholic and non-alcoholic beverages (by 4.7%) as well as in sale of cosmetics and pharmaceuticals (7.4%). The international situation and crisis on the financial market influenced the economic standing of entities operating in trade and repair. In 2008, costs increased slightly more than revenues (by 0.7 p.p.) which was the reason for deterioration of financial results. A similar situation took place in 2008 in the whole economy, whereas costs are expected to grow here by 2.2 p.p. more than revenues. At the same time, after years of high the growth rate of financial results, both in gross and net figure, in 2008 this trend collapsed and the performance deteriorated. It should be borne in mind that falls were one-digit only, whereas they were double-digit for the whole economy. Net financial result in the section of trade and repair declined by 9.2%, and gross financial result by 6.9%. A decline in net and gross financial result for the whole economy amounted to 22.3% and 25.7% respectively. Net financial result declined in the sale, maintenance and repair of motor vehicles and motorcycles and retail sale of automotive fuel (by 34.4%), as well as in wholesale trade and commission trade (except for trade in 156

157 POLAND 2009 REPORT ECONOMY motor vehicles and motorcycles) by 9.5%. Net profit in the section of retail sale (for trade in motor vehicles and motorcycles) and repair of some articles increased by 5.1%. No changes took place in financial liquidity though indices are still below average figures for the whole economy. Indebtedness of enterprises in the section of trade and repair was higher by 15.2% at the end of 2008 as compared to the previous year and amounted to PLN billion, i.e. to approx. 22% of total indebtedness in the whole economy. The ratio of debt to revenues increased Electronic trade Electronic trade is a relatively small, but fast growing modern segment of the B2C (Business to Consumer) retail trade and B2B (Business to Business) wholesale trade. The electronic trade market is estimated at approx. 1% of retail trade and approx. 6% of wholesale trade. In 2007, net sales through an internet website or automatic data exchange amounted to PLN million 71 as compared to PLN million in In 2007, every fourth examined enterprise performed transactions via computer networks. Small enterprises more often select traditional methods of trade transactions. Every fifth small enterprise, every third medium-sized enterprise and every second large enterprise was involved in electronic trade. Electronic purchase-sale transactions will play an increasingly important role in business relations, which will be favoured by the stabilising situation in equipment with information and telecommunication technology. In January 2008, 95% of enterprises used computers in their activities, whereas for medium-sized and large enterprises this percentage amounted to 99.9%. A high percentage of enterprises uses also internet access in held by 93% entities. Every fifteenth enterprise examined in 2007 declared receiving orders via internet. Electronic transactions are performed more often by enterprises in the section of IT (63.8%), post and communication (48%), science (47.7%) and sale, maintenance and repair of motor vehicles and motorcycles (37.9%). Electronic transactions are most frequently used as a supplementary form of placing or receiving orders to a traditional form. The share of transactions carried out via computer networks in total net order value exceeding 25% was observed only in 3.7% of enterprises. Such percentage was declared in 2007 by 3.5% of small, 4% of medium-sized and almost 6% of large enterprises. Sales to other enterprises (B2B) on special internet markets is declared by almost 1% of examined entities. Entrepreneurs are more and more aware of the fact that business in internet is safe, but this awareness increased relatively slowly. The share of enterprises using security protocol (SSL or TSL) for accepting orders via internet increased from 2.5% in 2006 to 2.8% in Enterprises in Poland are not sufficiently aware of an effective and efficient use of computer networks for electronic trade. Internet is used mainly for banking or financial purposes (over ¾ of entities). In the group of 56.6% enterprises having their own websites, only every fifth enterprise offers the possibility of placing orders via website, and every thirteenth makes it possible to make payments on-line. The most significant barriers to the development of electronic trade comprise high costs of professional software, i.e. integrated IT systems, and as regards regulations lack of unequivocal legal regulations relating to 71 Using information and telecommunication technologies in enterprises in 2008, Central Statistical Office. 72 Using information and telecommunication technologies in enterprises in 2007, Central Statistical Office. 157

158 MINISTRY OF ECONOMY e-trade, inter alia, deliveries, payments, tax issues. Another factor which does not support popularisation of electronic trade is unsatisfactory condition of supply logistics. The response to the challenges faced by the popularisation of electronic trade is the Action programme for supporting electronic trade and services for the years adopted by the Council of Ministers on 30 December It comprises instruments implemented to improve insufficient adaptation of IT technologies in Polish enterprises, small share of electronic trade in total trade turnover, less developed digital content market, insufficient security of electronic transactions and insufficient inter-operational character of used IT systems. Actions specified in the Programme are aimed at creating proper environment for electronic trade and e- business. The objective is to extend electronic application in business activities and more extensive use of electronic contents of business character. As a result, it should create an additional incentive enabling acceleration of economic growth and a change in the structure of the IT market in Poland. The Programme will also support performance of safe electronic transactions, in particular by entrepreneurs from the SME sector Transport and communication In 2008, the sector of transport, storage and communication generated 13.6% (in current prices) of gross value added in the sector of market services and 6.9% in the whole economy. In 2008, an increase in gross value added (in fixed prices) amounted to 6.6% and was by 3 p.p. higher than in the previous year (in current prices it amounted to 6.7%). In the first quarter of 2009, gross value added increased by 11.6% - in current prices (0.3% - in fixed prices). Average employment in this section amounted in 2008 to thousand persons, i.e. by 4.9% more than in The number of the employed at the end of 2008 amounted to 808 thousand persons (increase by 4.5%). The number of entities operating in this section increased (by 2.2%). The structure by the size of entities operating in the section of transport, storage and communication is similar to the one observed in the section of trade and repair. The dominating share is held by microenterprises and approx. 90% of entities are enterprises of natural persons. Average gross monthly salary in the section of transport, storage and communication was, in nominal terms, higher than in 2007 by 10.7% and amounted to PLN In the case of entities with the number of employees exceeding 9 persons, an increase amounted to 11.6% and average gross monthly salary amounted to PLN In 2008, entities operating in the section of transport, storage and communication generated much worse financial results than those observed in the whole economy. An increase in revenues was lower than in the whole economy, and a decrease in net financial result was much higher (43.0% as compared to 25.7%). 158

159 POLAND 2009 REPORT ECONOMY Table 52 Important economic and financial data for the section of transport, storage and communication by NACE divisions in 2008 in the enterprise sector Costs of Net Number of Revenues Number of Average total financial Employees at from total entities at employment activities result activities year end * (thousands) (PLN (PLN (thousand) (PLN billion) billion) billion) transport, storage and communication (I), of which: - land transport; transport via pipelines Gross financial result (PLN billion) 269, ** 460** , water transport air transport transport supporting activities 24, post and 8, *** 157*** telecommunication * According to REGON ** section of transport and storage (NACE 2007) *** division: information and communication (NACE 2007) Source: Central Statistical Office, Structural changes in the groups of entities in the national economy in 2008, Statistical Bulletin of the Central Statistical Office, No. 5 of 2009, and database of the Social and Economic Information Centre of the Ministry of Economy on the basis of F-01 reports of the Central Statistical Office data on entities with the number of employees exceeding 9 persons General problems of the services sector Although in the light of economic slowdown, the growth rate of value added generated by the services sector did not change significantly in 2008, it should be pointed out that the economic situation of enterprises deteriorates. In the sector of market services, the majority of sections, except for community, social and personal service activities, registered deterioration of financial indices. The growth rate of total costs exceeded the growth rate of revenues which led to a decline in financial results. The most significant decline in a net financial result was observed in financial intermediation and the less significant in the section of wholesale and retail trade, repair of motor vehicles and motorcycles. Furthermore, indebtedness increased and the majority of sections reduced their investment plans. The situation in the section of trade and repair in 2008 can be evaluated as stable. Investment expenditures increased as compared to the previous year. It seems that unquestionable leader of retail sales are so-called discount shops whose number grows very fast. At the same time, the number of large-space retail shops becomes stable. Continuously low innovativeness of service providers is one of the barriers of their future development. Enterprises from the services sector are characterised by a slightly lower share of entities implementing innovations than in the industry: 21.2% in the years , whereas in the industry it amounted to 23.2% 73. Small entities operating in the services sector with the number of employees between 10 and 49 are much more innovative than those operating in the industry: 16.9% of 73 Innovative activities in the years , Central Statistical Office

160 MINISTRY OF ECONOMY service providers implemented technological innovations and 13.9% - industrial innovations. Innovation pioneers are entities dealing with insurances and pension funds (without legally guaranteed social protection), as well as with financial intermediation, except for insurances and pension funds. Expenditures on innovative activities of the services sector are much lower than in the industry. They account for 46.3% of expenditures on innovative activities incurred in the industry. The most significant position in the structure of expenditures on innovative activities are expenditures incurred on research and development activities, i.e. on elaborating new and significantly improved products and processes. Enterprises of the services sector spent much more funds on R&D than industrial ones. Investments on R&D are made by every ninth service provider and every eleventh industrial enterprise. Economy based on knowledge and development of the information society creates many challenges for the services sector. The growing number of enterprises provides services via channels related to electronic exchange of information, via internet, and the role of e-trade significantly increases. Creating more and more flexible forms of organisation and work is positively influenced by the growing demand of consumers. In this context, particular attention should be paid to a new image of the sector of specialist services, generating high value added arising from changes in processes related to business activities, i.e. creating so-called BPO s (Business Process Outsourcing and Business Process Off-shoring at a global level). They constitute a very narrow segment of the services market, but are characterised by a high growth rate. The development of business centres is supported by the state policy in the form of tax relieves since 2005 BPO s can be located in special economic zones. 160

161 POLAND 2009 REPORT ECONOMY 13 ENTERPRISES 13.1 Ownership structure and ownership transformation in state-owned companies The purpose of economic transformation is to adapt the economy to market conditions with the dominant role played by the private sector as the most effective and flexible sector which can most easily meet difficult competition requirements. Changes in the economy structure took place by privatisation of state-owned enterprises and creation of new, private business entities. An increase in the share of private entities in the total number of enterprises was accompanied by a growing share of the private sector in the national economy. In mid-90s, this sector gained a dominant position and its share in the economy grows every year. Chart 43 Share of the private sector in total gross value added in the selected sectors of the economy in 1995 and 2007 (in %) % Total Industry Construction Trade and repairs Transport, storage and communication Source: Statistical Yearbooks of the Central Statistical Office, calculations by the Analyses and Forecasting Department, Ministry of Economy. Table 53 Share of the private sector in the basic economic categories over the period (in %) Gross value added x Employees (annual average) / Investment expenditures Gross fixed assets x Exports Imports Source: Statistical Yearbooks of the Central Statistical Office, Statistical Bulletins of the Central Statistical Office, calculations by the Analyses and Forecasting Department, Ministry of Economy. 74 In 2002, the calculation method of the number of employees in the private sector changed. This is the reason for a steep decline in the number of employees working in the economy and for a decline in the share of the private sector in the number of employees. Numerator figures comparable with years prior to 2002, denominator after

162 MINISTRY OF ECONOMY Ownership transformation in state-owned enterprises 75 Privatisation is an indispensable element of systemic transformation and a tool of a long-term economic policy. The main objective of privatisation is to form the base for accelerating economic growth. As a result of the implementation of the privatisation policy Poland should attain an ownership structure resembling that of developing countries, in which the participation of the private sector in the economy amounts to 80%-90%. On 22 April 2008, the Council of Ministers adopted the Privatisation plan for the years The document specifies the number of entities to be privatised within four years at 740. The implementation of privatisation projects in 2008 confirmed, as in previous years, a complex character of these processes. Furthermore, a sharp breakdown of economic prosperity on the world financial markets in the second half of 2008 caused visible deterioration of privatisation conditions, and consequently, postponing or stopping some privatisation projects for the time being. One of the effects of the financial crisis is a significant reduction in availability of financing for investments by potential strategic investors who under different circumstances could be interested in the privatisation offer of the State Treasury. Very unfavourable conditions related also to investments on the Warsaw Stock Exchange S.A. Companies subject to the listing often did not succeed in gathering the assumed amount of capital. However, despite a difficult situation on financial markets and on the Warsaw Stock Exchange S.A. there was a successful listing of two companies with a shareholding of the State Treasury, i.e. of Zakłady Azotowe w Tarnowie Mościcach S.A., which gathered almost PLN 300 million, and of ENEA S.A., which obtained approx. PLN 2 billion. In 2008, as in previous years, measures taken by the Minister of State Treasury resulted from the sectoral programmes and strategies for individual industries, elaborated and adopted by the Council of Ministers Number of enterprises covered by the ownership transformation procedures and the number of privatised business entities. Ownership transformation of state-owned companies is carried out using three following methods: commercialisation, i.e. transformation of an enterprise into a sole-shareholder company of the State Treasury, the next stage being indirect (capital) privatisation, direct privatisation, liquidation due to economic reasons. The ownership transformation method depends on the size of the enterprise, the type of its operations, its economic and financial standing as well as the importance of the company for the national economy. 75 The present chapter was prepared based on: the document of the Ministry of State Treasury: Evaluation of the progress in privatisation of the State Treasury property in 2008 and based on the study by the Central Statistical Office: Privatisation of state-owned enterprises in

163 POLAND 2009 REPORT ECONOMY Until the end of 2008, ownership transformation comprised state-owned enterprises. The highest number of enterprises was subject to transformation at its beginning stage (1 258 enterprises in the years and 1402 in 1992). In the following years, their number decreased and amounted to 35 in In 2008, the number of privatised enterprises amounted to 72. Until the end of 2008, the main group of enterprises subject to ownership transformation were manufacturing enterprises (45.1%). The number of construction entities and enterprises dealing with trading and repair was much lower (17.0 % and 11.5%, respectively). Enterprises covered by direct privatisation amounted to 37.6%, whereas liquidated and commercialised enterprises amounted to 33.1 and to 29.3%, respectively of all privatised entities. The highest number of enterprises was subject to transformation in the Śląskie (818), Mazowieckie (697), Dolnośląskie (519) and Wielkopolskie (501) Voivodship. Commercialisation and indirect (capital) privatisation By the end of 2008, state-owned enterprises were commercialised (out of which 52 in 2008), including 388 enterprises commercialised using indirect method (out of which 10 in 2008). 115 companies were privatised with the participation of foreign capital. Companies privatised in 2008 operated as sole-shareholder companies of the State Treasury for 4.8 years on average. Table 54 Number of companies subject to ownership transformation * 1. State-owned companies subject to ownership transformation a , b - from the beginning of privatisation Total Total processes Commercialisation Direct privatisation Winding up a Total b 5,809 1,701 2,184 1, Effects of ownership transformation Total a , b from the beginning of privatisation Indirect Total Direct processes commercialisation Winding up commercialisation (capital) a Total in absolute figures b 3, ,105 1,073 Efficiency in % (2b : 1b) * excluding state-owned companies of the agricultural economy incorporated into the Resource of Agricultural Property of the State Treasury. Source: Privatisation of state-owned enterprises in 2008, Central Statistical Office. Direct privatisation In the years , direct privatisation comprised state-owned enterprises (including 10 in 2008), and privatisation processes were completed in enterprises, i.e. in 96.4% of enterprises privatised with the use of this method (efficiency of indirect privatisation is much lower and amounts to 22.8%). The privatisation period from the privatisation beginning date until removing the company from the National Court Register usually took approx. 4 months. Until the end of 2008, 62.6% of privatised entities were offered for use with remuneration (employee lease), and 23.9% were privatised in the form of property disposal. In recent years, these proportions started to reverse. In 2008, 8 out of 15 privatised enterprises were sold (53.3%). 163

164 MINISTRY OF ECONOMY Liquidation of companies for economic reasons In the years , out of state-owned enterprises declared liquidated, in companies (55.8%) winding up processes were completed. In 2008, 10 enterprises were wound up. The winding up procedures in the companies whose liquidation was completed in 2008 (29 enterprises) took 5.5 years on average Revenues from privatisation and budget revenues from dividends Largest revenues from privatisation were generated in 1999 and In total, they yielded almost 40% of total revenues from privatisation in the transformation period. As of 2001, privatisation processes slowed down and revenues from privatisation envisaged in the successive budget acts were not actually obtained. The sole exception was 2004, when a single large enterprise was privatised (PKO BP S.A.). Privatisation revenues exceeded the plan figure not earlier than in 2008 by 3.1% and amounted to PLN 2.3 billion. In 2008, indirect privatisation revenues amounted to PLN 1.9 billion, while direct privatisation revenues amounted to PLN 0.2 billion. Out of privatisation revenues obtained in 2008, approx. PLN 1 billion was transferred to the state budget. Pursuant to the Act on commercialisation and privatisation, the remaining sum (being the responsibility of the Ministry of State Treasury) was divided among the following funds: Enterprise Restructuring Fund, Reprivatisation Fund, State Treasury Fund, Polish Science and Technology Fund and Labour Fund. Planned income of PLN 2.9 billion from dividends was not achieved and actually reached 91.4% of the planned amount. Privatisation revenues planned for 2009 amount to PLN 12 billion. As at 31 June of this year, revenues actually obtained amounted to slightly below PLN 0.5 billion, i.e. 4.1% of planned revenues Development of small entrepreneurship In 2008, the number of new enterprises registered in the REGON system amounted to 317 thousand, i.e. by 20 thousand more than in At the same time, 245 thousand entities were removed from the register. Chart 44 New registered and deregistered entities in the national economy under the REGON system thousand Units: new registered deregistered Source: Structural changes in the groups of enterprises in the national economy in 2008, Central Statistical Office Warsaw. 164

165 POLAND 2009 REPORT ECONOMY The majority of registered entities were natural persons conducting business activity. The number of newly established companies amounted to nearly 30 thousand and was slightly below the 2008 figure. In total, the number of entities registered in the economy already reached thousand (however, it should be kept in mind that only approx. half of these entities are active). Situation of micro-enterprises in 2007 In 2007, there were 1.7 million operational micro-enterprises, i.e. by nearly 4% more than in the previous year. Total revenues increased by 5.5%, and costs by 3.5%. As a result, income per enterprise increased from PLN 42 thousand in 2006 to almost PLN 50 thousand in Such considerable increase of the generated income influenced an increase in investment activities. Investment expenditures in 2007 reached a record amount of over PLN 17 billion. The number of employees in micro-enterprises in 2007 amounted to 3.6 million persons, i.e. by almost 120 thousand more than in An increase in the number of employees was observed in almost all voivodships (except for the Śląskie, Warmińsko-Mazurskie and Zachodniopomorskie Voivodship). Table 55 Revenues, costs, income and investments in micro-enterprises (nominal values) Total revenues in PLN billion Revenues per 1 enterprise in PLN thousand Total costs in PLN billion Costs per 1 enterprise in PLN thousand Total income Income per 1 enterprise in PLN thousand Gross profitability of sales % Total investments in PLN billion Source: Economic operation of companies employing up to nine persons ( ) Central Statistical Office Warsaw. Situation of small enterprises established in The studies on the newly established small enterprises carried out by the Central Statistical Office show that in the recent few years climate for entrepreneurship improves. More and more enterprises are established every year, their survival rate, i.e. the percentage of enterprises which did not wind up within one year from the registration date, also improves. Table 56 Newly established enterprises in Poland in the years Year Number of newly established Number of enterprises active in Survival rate enterprises the following year , , , , , , , , Source: Conditions for establishment and operation of Polish companies set up in and their development prospects in the years Central Statistical Office Warsaw. 76 Based on: Conditions for establishment and operation of Polish companies set up in and their development prospects in the years Central Statistical Office Warsaw. 165

166 MINISTRY OF ECONOMY Out of 273 thousand small enterprises set up in 2007, the vast majority (94%) were enterprises of natural persons. An increasing number of established construction enterprises was observed (in 2007, the number of newly established such enterprises was by over 50% higher than in 2006). However, their survival rate was slightly lower than the average for the whole population. The source of financing for undertaken business activities for the vast majority of enterprises are own funds (in 2007, 2/3 of companies financed their start-up in this way). However, in contrast to previous years, many more enterprises obtained funds from other sources in Credit facilities provided by banks were used by 8.5% of enterprises (as compared to 4.1% a year ago), loans from family or friends - by 8% (4.3%), and other sources by 17% (7%). Chart 45 Structure of newly established small enterprises in % 3.9% 4.5% 1.9% 9.7% 11.3% Industry Construction Trade and repairs Hotels and restaurants Transport 4.1% 5.6% 4.4% 36.6% Financial intermediation Real estate, renting Education Healthcare Other service activities Source: Conditions for establishment and operation of Polish companies set up in and their development prospects, Central Statistical Office, Warsaw Financial standing of companies 77 In 2008, Poland s economic situation suffered from a significant deterioration. Macroeconomic results for the first half of the year did not indicate a slowdown in economic growth. However, in the second half of the year, and in particular in the fourth quarter, the world financial crisis reached also our country. Deterioration was observed in all macroeconomic indices. Economic slowdown resulted in deterioration of economic and financial standing of business entities Revenues, costs and results on individual types of activities Total revenues amounted to PLN billion and were by 11.3% higher than in The global financial crisis, which started to produce its adverse impact on our economy in the second half of the year, resulted in a diversified growth rates of revenues, costs and results in In the first half of the year, revenues increased by 13.9%, and in the second half by mere 9.0%. 77 Information presented in the present chapter relates to business entities with the number of employees exceeding 9 persons. 166

167 POLAND 2009 REPORT ECONOMY Costs of revenues on total activities (PLN billion) increased by 13.5%, i.e. by 2.2 p.p. more than revenues. In the first half of the year, the growth rate of costs exceeded that of revenues by 0.9 p.p., and in the second half of the year by 3.3 p.p. These tendencies in revenues and costs led to financial results generated in 2008, which largely differed between the first and second half of the year. Annual financial result on business activities amounted to PLN 99 billion, including PLN 64.1 billion in the first half, and PLN 34.9 billion in the second half of the year. As compared to 2007, it deteriorated by PLN 28.6 billion (by 22.4%), including an increase in the first half of the year by PLN 0.6 billion (by 0.9%), and a decline in the result in the second half of the year by PLN 29.2 billion (by 45.5%). Chart 46 Financial result on business activities in 2007 and 2008 bn PLN H 2H Year Sources: Social and Economic Information Centre, Ministry of Economy based on the data of the Central Statistical Office, calculations by the Analyses and Forecasting Department, Ministry of Economy. Sales of products, goods and materials are the main component of total revenues. In 2008, they amounted to PLN billion and increased by 11.2%. Costs of revenues grew faster than revenues (11.8%). Result on sales (PLN billion) increased by 1.2%. Table 57 Revenues, costs and results on individual types of activities (PLN billion) Revenues Costs Result Revenues Costs Result First half of the year Sales of goods and materials , , Other operating activities Financial activities TOTAL BUSINESS ACTIVITIES , , Second half of the year Sales of goods and materials 1, , , Other operating activities Financial activities TOTAL BUSINESS ACTIVITIES 1, , , , Year Sales of goods and materials 1, , , , Other operating activities Financial activities TOTAL BUSINESS ACTIVITIES 2, , , , Source: Social and Economic Information Centre, Ministry of Economy based on the data of the Central Statistical Office, calculations by the Analyses and Forecasting Department, Ministry of Economy. 167

168 MINISTRY OF ECONOMY A higher increase in costs (by 18.6%) than in other operating revenues (by 4.8%) caused the result on this position to fall from PLN 11.4 billion to PLN 7.4 billion (by 35.1%). An important position for many entities in their profit and loss account in 2008 were also financial activities. Revenues on this type of activities (PLN 41.5 billion) increased by 22.1%, and costs (PLN 63.4 billion) by 111.3%. Consequently, the result on these activities deteriorated by PLN 25.9 billion (from plus PLN 4.0 billion in 2007 to minus PLN 21.9 billion in 2008), and what should be pointed out, all losses were incurred in the second half of the year. In the first half of 2008, profit was generated on financial activities (PLN 1.2 billion). However, a high level of costs in the second half of the year (increased by over 2.5 times) led to a loss on financial activities in the second half of the year (PLN 23.1 billion). Table 58 Financial results on individual types of activities (PLN billion) Type of activities First half of the year Second half of the year Year Sales Other operating activities Financial activities TOTAL Source: Social and Economic Information Centre, Ministry of Economy based on the data of the Central Statistical Office, calculations by the Analyses and Forecasting Department, Ministry of Economy. Chart 47 The scale of impact of individual types of activities on a decline in the result on business activities in the second half of 2008 (in %) Sales 2.4% Other operating activity 13.0% Financial activity 84.6% Source: Social and Economic Information Centre, Ministry of Economy based on the data of the Central Statistical Office, calculations by the Analyses and Forecasting Department, Ministry of Economy. As regards individual sections of the economy, largest losses on financial activities were incurred by manufacturing PLN 12.1 billion (including PLN 13.0 billion in the second half of the year), followed by trade and repair PLN 4.6 billion (including PLN 4.2 billion ) and transport, storage and communication PLN 2.8 billion (including PLN 2.4 billion). The only section which generated a profit on financial activities in 2008 is electricity, gas and water supply. 168

169 POLAND 2009 REPORT ECONOMY Small, medium-sized and large enterprises incurred losses on financial activities, and the larger the enterprise, the higher the loss. Gross financial result amounted to PLN 99.2 billion (decline by 22.3%), and net financial result to PLN 78.6 billion (decline by 25.7%). These results were also significantly differentiated in both parts of the year. Table 59 Results on financial activities in the economy sectors (in PLN billion) First half of the year Second half of the year Year TOTAL Industry mining and quarrying manufacturing electricity, gas and water supply Construction Trade and repair Transport, storage and communication Out of total: private sector public sector Out of total: - small enterprises medium-sized enterprises large enterprises Source: Social and Economic Information Centre, Ministry of Economy based on the data of the Central Statistical Office, calculations by the Analyses and Forecasting Department, Ministry of Economy Profitability indices declined: sales profitability to 5.1%, gross profitability to 4.3% and net profitability to 3.4%. Chart 48 Profitability indices in 2007 and 2008 % profit on sales gross profit net profit Source: Social and Economic Information Centre, Ministry of Economy based on the data of the Central Statistical Office, calculations by the Analyses and Forecasting Department, Ministry of Economy 169

170 MINISTRY OF ECONOMY Financial situation in the economy sectors Mining and quarrying Total mining and quarrying revenues in 2008 amounted to PLN 46.5 billion, i.e. increased by 13.3% as compared to The growth rate of total costs (14.8%) outpaced the growth rate of revenues. Sales increased at the same rate as total revenues. An increase in exports was much lower (by 4.2%), and their share in sales declined to 20.9% (from 23.0%). A high growth rate of sales observed in mining and quarrying is due to growing prices of mining and quarrying output which increased in 2008 by 10.9% (2007: by 3.1%). The result on business activities (PLN 6.6 billion) increased by 4.4%. The result on sales (PLN 7.8 billion) increased by 21.6% (by PLN 1.3 billion). Improvement (by PLN 0.3 billion) was also observed in the result on other operating activities (loss on these activities decreased to PLN 0.8 billion, i.e. by 26.5%). The result on financial activities deteriorated significantly (by PLN 1.3 billion). In 2007, these activities generated a profit amounting to PLN 0.9 billion, and in 2008 a loss (PLN 0.4 billion). Gross and net result amounted to PLN 6.6 billion and PLN 5.4 billion respectively, and increased by 4.5% and 6.4%. Sales profitability increased from 16.9% to 18.1%. Other two profitability indices declined gross profitability from 15.3% to 14.1% and net profitability from 12.5% to 11.7%. Manufacturing Manufacturing is the largest section of the economy. In 2008, it generated sales amounting to PLN billion, i.e. by 6.6% higher than in This was the lowest increase in revenues among all sections of the economy analysed in the present section. Manufacturing output prices increased by 1.3% (2007: by 1.9%). A relatively insignificant increase in sales results from a high share of exports in total manufacturing revenues. Economic slowdown resulted in the second half of the year mainly in the decreasing growth rate of exports. On an annual basis, exports amounted to PLN billion (increase by 5.4%). The growth rate of total sales decreased from 11.7% in the first half of the year to 1.9% in the second half of the year, and the share of exports in sales fell from 36.2% to 35.2%. Such sales figures had an impact on financial results. The result on sales amounted to PLN 44.1 billion and declined by 13.7% as compared to 2007, including a decrease by 6.2% in the first half of the year and a decrease by 21.7% in the second half of the year. Deterioration of results, in particular in the second half of the year, was also observed in other types of activities. The result on other operating activities declined by nearly 60% (by PLN 1.3 billion), the result on financial activities by PLN 12.8 billion. As a result, annual result on business activities declined by 39.0% (to PLN 32.9 billion), including a decrease by 4.6% in the first half of the year and a decrease by 77.4% in the second half of the year. As compared to 2007, gross financial result (PLN 32.9 billion) decreased by 39.0% and net financial result (PLN 25.8 billion) by 42.6%. All three profitability indices decreased sales profitability from 6.5% to 5.3%, gross profitability from 6.7% to 3.8% and net profitability from 5.6% to 3.0%. 170

171 POLAND 2009 REPORT ECONOMY Chart 49 The scale of impact of individual types of activities on a decrease in the result on business activities in 2008 in manufacturing (in %) Sales 32.9% Other operating activity 6.2% Financial activity 60.9% Source: Social and Economic Information Centre, Ministry of Economy based on the data of the Central Statistical Office, calculations by the Analyses and Forecasting Department, Ministry of Economy. Table 60 Financial results on individual types of activities in manufacturing (in PLN billion) Types of activities First half of the year Second half of the year Year Sales Other operating activities Financial activities TOTAL Source: Social and Economic Information Centre, Ministry of Economy based on the data of the Central Statistical Office, calculations by the Analyses and Forecasting Department, Ministry of Economy. Out of 23 examined sections of manufacturing, an increase in total revenues was observed in seventeen sections. Revenues decreased in the production of: tobacco products, leathers as well as in the production of textiles, wooden products, metal products, machinery and electrical appliances. In the second half of the year, the growth rate of revenues decreased as compared to the first half of the year in eighteen sections. Positive results on business activities were generated in 21 sections and negative in two sections (production of radio and television equipment and production of other transport equipment). The result on these activities improved in two sections: in the production of office equipment and computers (increase in a positive result by 64.8%) and in the production of radio and television equipment (decrease in a negative result by 7.8%). The result declined in 21 sections. The highest results in business activities were generated by the following sections: production of food products and beverages (PLN 5.3 billion), production of non-metallic raw material products (PLN 5.2 billion), production of chemical products (PLN 4.2 billion) as well as production of metallic products (PLN 3.5 billion). 171

172 MINISTRY OF ECONOMY The largest decline in the result on business activities was observed in the following sections comprising the production of: coke and refined petroleum products; the result decreased from PLN 5.2 billion to PLN 0.1 billion and affected all types of activities; metals (though this is one of just a few sections where the result on financial activities improved; food products and beverages; motor vehicles; machinery and equipment. The main factor which contributed to a decrease in the result on business activities in four out of the above five sections (similar to the majority of manufacturing sections) were financial activities. In all 23 examined sections of the economy, the result on basic activities was positive. In six sections, the result increased and in seventeen sections declined. A positive financial result was observed in 21 sections and a negative result in two sections (production of radio and television equipment as well as production of other transport equipment). Gross result improved in two sections (production of office equipment and computers increase in a positive result, and production of radio and television equipment decrease in a negative result). In 21 sections the result declined, most considerably in the production of coke and refined petroleum products (by 97.4%). Changes in net financial result as compared to 2007 were similar to the above described changes in gross result. Electricity, gas and water supply Total revenues in 2008 amounted to PLN billion and were by 21.7% higher than in Costs of revenues increased by 23.5%, i.e. faster than revenues. Costs of revenues also grew faster than sales. A high growth rate of sales was mainly due to an increase in output prices which in 2008 amounted to 8.4% (as compared to 4.0% in 2007). The result on business activities declined by 5.0% and reached PLN 8.2 billion. The only factor which contributed to a decrease in the result on business activities were other operating activities (the result declined by PLN 0.5 billion (the loss on these activities increased almost five times reaching PLN 0.7 billion). The result on sales remained at 2007 level and amounted to PLN 8.0 billion. Gross financial result (PLN 8.2 billion) and net financial result (PLN 6.5 billion) decreased by 5.0% and 12.1% respectively. All three profitability indices deteriorated. Sales profitability declined from 6.1% to 5.0%, gross profitability from 6.3% to 4.9% and net profitability from 5.4% to 3.9%. Other sections The financial standing of individual sections is usually determined by many specific factors. At the same time, macroeconomic trends in the economy were so strong in 2008 that their influence on finances of entities in construction, trade and repair as well as in transport, storage and communication was almost one-direction only. 172

173 POLAND 2009 REPORT ECONOMY Despite a relatively high growth rate of revenues, an increase in costs of revenues turned out to be higher in all three sections. This limited the improvement of the result on business activities in construction and caused a decrease in other two sections (by 7.0% in trade and repair and by 40.4% in transport). The factor behind an increase in the result in construction as well as in trade and repair were main section activities. Deterioration of results or even losses were observed in other positions. The worst situation is in financial activities. A positive result generated by construction in 2007 (PLN 0.5 billion) changed to a loss (PLN 1.6 billion) in 2008, a loss in trade and repair increased by almost six times (from PLN 0.7 billion to PLN 4.6 billion), and a loss in transport incurred in 2007 increased by more than four times reaching PLN 2.7 billion (by PLN 2.2 billion). As a result, gross and net financial result in construction increased in 2008 by 9.2% and 4.3% respectively, whereas two other sections were affected by considerable deterioration of results. Sales profitability improved only in construction. At the same time, gross and profitability indices declined in all discussed sections. 173

174 Table 61 Results on business activities in manufacturing sections in 2007 and 2008 (in PLN million) 2007 result on: 2008 result on: Change to 2007 NACE divisions other business other business financial financial sales operating activities sales operating activities : 5 % activities activities activities (total) activities (total) Production of: - food products and beverages 7, , , , , , , tobacco products textiles clothing leather and leather products wood and wooden products 1, , , pulp and paper 1, , , , publishing and printing activities 1, , , coke and refined petroleum products 3, , , , , , , , chemical products 5, , , , rubber and plastic products 2, , , , , other non-metallic raw material products 6, , , , , metals 5, , , , , , metal products 3, , , , , machinery and equipment 2, , , , , , , office equipment and computers machinery and electrical equipment 2, , , , radio and television equipment x - medical and optical instruments vehicles, trailers and semi-trailers 3, , , , , , , other transport equipment x - furniture, other production activities 1, , wastes processing Source: Central Statistical Office.

175 POLAND 2009 REPORT ECONOMY Investment expenditures 78 and possibilities of their self-financing In 2008, investment expenditures amounted to PLN billion. They were by 5.3% higher than in 2007 (in current prices). As compared to 2007, the growth rate of investments declined considerably 79. Main reasons behind it are economic slowdown and pessimistic economic forecasts for several coming quarters. Last but not least, this is also influenced by deteriorating financial standing resulting in a reduced inflow of funds and difficulties in obtaining external financing. As slowdown effects strengthened during the year, the growth rate of investments declined with time. In the first half of the year, investment expenditures increased by 13.9%, whereas in the second half of the year they remained at the level observed in The share of expenditures incurred in the second half of the year in annual expenditures decreased from 61.2% in 2007 to 58.0% in Investment rate was largely differentiated in all examined expenditure breakdowns. As regards the breakdown by the economy sections, the highest growth rate was observed in construction (33.0%) and in fuel and energy industry (approx. 25%). The only section where expenditures decreased (by 0.5%) was transport, storage and communication. Investments in public sector grew by 17.3% and in private sector by mere 2.3%. As regards the breakdown by the enterprise size, a relatively high growth rate was observed in the case of small entities (21.5%). Investments of large entities increased by 6.4% and of medium-sized entities decreased by 4.9%. Table 62 Investment expenditures (in PLN billion) and their growth rate in 2007 and 2008 (in %)* First half of the Second half of Year year the year (3:2) (6:5) (9:8) TOTAL Industry mining and quarrying manufacturing electricity, gas and water supply Construction Trade and repair Transport, storage and communication Out of total: - private sector public sector Out of total: - small enterprises medium-sized enterprises large enterprises * Note. Growth rate indices were calculated for figures in PLN million Source: Social and Economic Information Centre, Ministry of Economy based on the data of the Central Statistical Office, calculations by the Analyses and Forecasting Department, Ministry of Economy. 78 Including purchase of second-hand tangible fixed assets (differences between data discussed in this part and in Section result from various methodologies applied). The growth rate of expenditures is calculated in current prices. 79 In 2007, investment expenditures grew by 27.2%. 175

176 MINISTRY OF ECONOMY Chart 50 Growth rate of investment expenditures in the first and second half of 2008 in the economy sectors % Mining and quarrying Manufacturing Electricity Construction Trade and repairs Transport 1H Source: Social and Economic Information Centre, Ministry of Economy based on the data of the Central Statistical Office, calculations by the Analyses and Forecasting Department, Ministry of Economy. In 2008, the possibilities of self-financing potential investments declined. Investment surplus 80 amounted to PLN billion and was by 1.9% lower than in The ratio of surplus to expenditures incurred declined from 1.43 to Electricity, gas and water supply was one of just a few sections of the economy, in which surplus was lower than expenditures incurred (ratio of 0.98). A similar situation occurred only in public sector (0.95). 2H Debt At the end of 2008, debt of business entities amounted to PLN billion and grew faster than sales (by 18.9% and 11.2% respectively), causing deterioration of its repayment possibilities. In 2007, revenues from 117 days were needed to repay debt in full, and in 2008 revenues from 125 days. The main reason behind an increase in the debt repayment indicator is deteriorating financial standing of business entities. The debt repayment indicator declined in three sections of the economy: mining and quarrying, electricity, gas and water supply as well as in transport, storage and communication. In other examined sections, both ownership sectors and three groups of entities by size, indices grew. 80 Net profit and depreciation (net profit, and not net financial result) 176

177 POLAND 2009 REPORT ECONOMY Table 63 Financial data for business entities: 2008 and growth rate as compared to 2007 Revenues in PLN billion Financial results in PLN billion Profitability in % * a - year b - growth rate; 2007 year = 100 total sales exports on sales gross net on sales gross net Financial surplus in PLN billion Investment expenditures in PLN billion TOTAL a 2, , b Industry a 1, , b mining and quarrying a b manufacturing a b electricity, gas and water supply a b Construction a b Trade and repair a b Transport, storage and communication a b Out of total: - private sector a 1, , b public sector a b Out of total: - small enterprises a b medium-sized enterprises a b large enterprises a 1, , b Note: Growth rate indices were calculated for figures in PLN million * for profitability instead of growth rates; absolute change compared to 2007 Source: F-01 financial report from the Social and Economic Information Centre, Ministry of Economy based on the data of the Central Statistical Office, calculations by the Analyses and Forecasting Department, Ministry of Economy. Debt in PLN billion 177

178 MINISTRY OF ECONOMY 13.3 Investment expenditures and Polish foreign investments Investment expenditures The level of investment is a very important element which reflects the general condition of the economy and its development prospects. Investments foster modernisation of the economy and its proper development, and also improve its competitiveness and efficiency. They also result in increasing the production of state-of-the-art products. After a period of a decline in investment expenditures in the years , which was related, among others, to the general economic decline and deteriorated financial condition of companies, as well as relatively high interest rates on credits, a constant increase in investment expenditures has been recorded since was another period of a significant increase in investment expenditures in the Polish economy. Investment expenditures of all surveyed entities grew by 8.7% and totalled to PLN billion. Expenditures on buildings and premises have a predominant share in the expenditures structure. They increased by 13.9% (in current prices) and their share amounted to 55.4%. Expenditures on transport means and on machinery and equipment grew by 8.3% and 6.5% respectively. As compared to previous years, the growth rate in investment expenditures was much lower. A decline in demand and exports, which was particularly significant in the last quarter of 2008, negatively influenced both financial results and growth rate of investments. Chart 51 Increase in investment expenditures in the years in % (as compared to the previous year), fixed prices % Complete statistical population Entities with the number of employees exceeding 49 persons Source: Statistical Yearbooks of the Central Statistical Office, Statistical Bulletins of the Central Statistical Office Investment expenditures in the entities employing more than 49 employees 81 amounted to PLN billion and were by 9.2% higher than in the previous year (in fixed prices). The most significant increase was observed in expenditures on buildings and premises by 10.5%. This was related to the continued 81 Information in the further part of the present chapter relates to investments of enterprises, in which the number of employees exceeds 49 persons. Data for the economy sector and sections are based on NACE

179 POLAND 2009 REPORT ECONOMY construction of new production plants from the very beginning. Investment expenditures on machinery and technical equipment increased by 7.9%, constituting almost 50.0% of total investment expenditures. Table 64 Investment expenditures in the years (in PLN billion) Expenditures on tangible fixed assets Including: Years Total Total Buildings and premises machines and equipment Transport vehicles Other expenditures Total population Entities with more than 49 employees Source: Statistical Bulletins of the Central Statistical Office. As compared to an increase for the whole economy, a relatively high increase in investment expenditures was observed in mining and quarrying by 27%, including hard and brown coal mining by 29.0%. A big increase in expenditures occurred also in trade and repair by 21.8%. Investment expenditures grew also in construction. Table 65 Investment expenditures in individual sections of the economy in PLN billion, current prices Description Growth rate 2008/2007 Economy Industry including: Mining and quarrying Manufacturing Electricity, gas and water supply Water supply, wastes management and recultivation Construction Trade and repair Transport, storage and communication Source: Statistical Bulletins of the Central Statistical Office A positive tendency is that investment expenditures in manufacturing have been growing systematically for several years. In 2008, their largest increase was observed in the following sections: production of coke and refined petroleum products, production of chemicals and chemical products as well as production of non-metallic raw material products. At the same time, the largest decline in investment expenditures affected the production of computers, electronic and optical appliances by 54.4%. This results from the fact that in previous years, in particular in the years , many foreign companies undertook investments in this area. This is the case of companies such as: Toshiba, Sharp, Funai, Orion, Korean LG. These investments resulted, inter alia, in a big increase in the production of TV sets in Poland from 6.6 million in 2005 to 16.7 million in This branch continues investments extending its production capacity, even though the scale of these investments was much smaller. The second important section, in which investments declined was the production of motor vehicles. Despite a decline in expenditures in 2008, they were at a fairly high level, as compared to other sections, amounting to 8.3% of all investment expenditures in manufacturing. Furthermore, it should be taken into account that investment expenditures in this section of the economy in 2007 belong to the 179

180 MINISTRY OF ECONOMY highest investment expenditures in the whole economy and dynamics amounted to 163.3%. Investment expenditures in automotive section, which grew in recent years, resulted in the growing production figures. In 2008, the number of passenger cars manufactured in Poland was 842 thousand, while in thousand, and in thousand. Table 66 Investment expenditures in manufacturing by NACE divisions in PLN million Description Growth Structure rate 2008 = /2007 Manufacturing, including production of: 38,704 41, food products 4,798 4, beverages 1,212 1, tobacco products textiles and clothing leather and leather products wood and wooden products 1,443 1, paper and paper products 1,523 1, printing and reproduction of recorded media coke and refined petroleum products 2,459 4, chemicals and chemical products 1,752 2, pharmaceuticals rubber and plastic products 2,925 2, non-metallic raw material products 3,066 4, metals 2,867 2, metal products 2,378 2, computers, electronic and optical products 2, electrical appliances 1,712 1, machinery and equipment 2,000 2, vehicles, trailers and semi-trailers 3,842 3, other transport equipment furniture 1,355 1, Source: Statistical Bulletins of the Central Statistical Office. The following business entities carried out the largest investments in : PGE Polska Grupa Energetyczna, Lublin - PLN 4,124.3 million PKN Orlen - PLN 3,937.9 million (PLN 3,694 million in 2007), Telekomunikacja Polska S.A - PLN 2,579.0 million (PLN 3,677 million in 2007), PGNiG - PLN 2,566.5 million (PLN 2,943 million in 2007), Grupa Lotos - PLN 2,485.7 million (PLN 399 million in 2007), Polkomtel S.A., Warszawa - PLN 1,421.2 million (PLN 1,460 million in 2007). In 2008, a significant increase was recorded in the number of new investments in the economy. The number of new investments grew by approx. 14.5%. This was a result of new investments (mainly in electrical and gas connections) in the section of electricity, gas and water supply by 21.2%. Despite an increase in the number of new investments, their estimated value decreased slightly (by 0.8%). The majority of new investments are carried out in the industry. Its share in the number of new investments was 70.8% of their total estimated value. As regards the industry, both the number and estimated value of new investments grew, which results, inter alia, from the scale of investments in mining and quarrying and the energy sector. Manufacturing was marked by a growing number of new 82 Lista 500 ; Rzeczpospolita, 29 April

181 POLAND 2009 REPORT ECONOMY investments, but their estimated value declined. The sections in which the estimated value of new investments increased as compared to the previous year comprise the production of: paper and paper products - PLN 1,976 million (PLN 1,638 million in 2007), metals - PLN 2,190 million (PLN 1,529 million in 2007), coke and refined petroleum products - PLN 1,221 million (PLN 893 million in 2007), motor vehicles - PLN 1,080 million (PLN 893 million in 2007). Table 67 New investments in individual sections of the economy Description Economy a 105, ,605 b 30,284 37,746 Industry, including: a 87,404 90,262 b 20,748 25,330 - Mining and quarrying a 1,113 1,021 b 2,107 3,205 - Manufacturing a 15,487 16,314 b 11,667 14,824 - Electricity, gas and water supply a 70,784 72,927 b 6,974 7,301 - Water supply, wastes management and a - - recultivation b - - Construction a b Trade and repair a 4,112 6,374 b 2,248 2,819 a/ number of new investment projects, b/ estimated value of newly-commenced investments in PLN million (current prices). Source: Statistical Bulletins of the Central Statistical Office. 134,041 44, ,223 24,741 1,185 1,463 18,147 17,429 88,891 5,849 4,560 2, ,262 3, ,504 44, ,659 31,200 1,286 2,794 19,543 16, ,778 8,699 6,052 3, ,581 4,936 Growth rate 2008/ Due to a slowdown in domestic demand and a decreasing external demand as well as difficulties in getting access to credit 83, many companies declare to resign or reduce the scale of investments in Companies revise down their investment plans. The investment forecast indicator decreased in all groups of enterprises (general indicator fell to the lowest level in history) 84. Furthermore, reductions in investments are more often declared by exporters than by entities offering their products on the domestic market. Companies are also less interested in starting new investment projects. This relates, in particular, to construction. Small and medium-sized enterprises plan much less investments than large enterprises 85. The main source of financing investments of enterprises have been, and will remain, own funds. In 2008, financial surplus (net profit and depreciation) in the economy amounted to PLN billion (PLN billion in 2007) 86. However, companies used more and more bank credits. 83 Based on the survey research conducted by the Ministry of Economy in the second half of 2008, banks implemented more restrictive criteria for granting credit facilities more than 50% of companies were refused credits (as compared to mere 20% in the previous half of the year). Micro-enterprises had most significant difficulties in obtaining credits in this group, banks responded positively to only 41% of surveyed companies (Development trends of the SME sector as evaluated by entrepreneurs in the second half of 2008 (number 1/2009), Ministry of Economy, March 2009). 84 Development trends of the SME sector as evaluated by entrepreneurs in the second half of 2008 (number 1/2009), Ministry of Economy, March Information on the condition of the enterprise sector, with particular consideration of economic prosperity in the first quarter of 2009 and economic prosperity forecasts for the second half of NBP, April Applies to entities with the number of employees exceeding 9 persons. 181

182 MINISTRY OF ECONOMY Table 68 Value of credits granted to Polish enterprises in the years in PLN billion Description Growth rate w % 4 : 3 4 : Credits for companies, including for : operating activities investments real estates Source: Report on the situation of banks in 2008, Commission for Banking Supervision, At the same time, deposits held by enterprises in banks as at year end amounted to PLN billion and increased by PLN 4.3 billion as compared to the previous year, which indicates considerable possibilities for financing investments with own funds Polish foreign investments Polish foreign direct investments, though not exceptionally high when compared to other countries 88, have been a considerable item of the balance of payments for several years and become more and more recognisable in everyday business environment. The growing value of foreign direct investments indicates a growing potential of Polish enterprises which decide to carry out capital expansion also beyond the country s borders, perceiving these activities as a supplement to their activities on the domestic market. The main reasons for carrying out investments by Polish enterprises abroad are as follows: capacious local markets, lower unit labour costs, possibilities of wider export expansion to neighbouring markets, additional possibilities of export to the investment market, securing own competitive position, consolidation within the branch. In the years , the value of Polish foreign direct investments remained at a relatively low level, usually not exceeding EUR 50 million per year. In the subsequent years, Polish foreign direct investments accelerated and the value of capital transferred abroad on this account grew from EUR 0.2 billion in 2002 to EUR 2.7 billion in The year 2006 was a record year in this respect. The outflow of Polish capital in the form of FDI amounted to EUR 7.1 billion. In 2007, according to the preliminary data of the National Bank of Poland, the outflow of net capital due to direct investments amounted to EUR 3.4 billion. Such considerable increase in direct investments in the recent years resulted from a few large investment projects carried out by Polish enterprises abroad. A considerable influence was also exerted by a rapid growth in capital in transit 89, which amounted to approx. 40% of Polish direct investments both in 2006 and Report on the situation of banks in 2008, Commission for Banking Supervision, According to the World Investment Report developed by UNCTAD, Polish foreign direct investments of EUR million (USD million in 2007) constitute merely 0.17% of world capital flows due to investments made abroad. 89 Capital in transit is defined as the inflow of foreign funds increasing equity of domestic direct investors. Further, these funds are invested by domestic companies in subsidiaries and companies set up abroad. 182

183 POLAND 2009 REPORT ECONOMY Table 69 Polish foreign direct investments in the years (EUR million) Year * Amount 2,730 7,052 3,420 2,465 * preliminary data Source: NBP. Preliminary data for 2008 shows that the record amount of Polish foreign direct investments recorded in 2006 will not be exceeded. The amount of Polish investment projects abroad was also lower than in In 2008, Polish enterprises invested abroad EUR 2.5 billion, though the final figure may be higher following data adjustment. A lower amount of investments in 2008 resulted mainly from a slowdown in economic activity in the last quarter of 2008 caused by the financial crisis. In geographical terms, as at the end of 2007, the biggest value of receivables due to Polish FDI was recorded in the European Union Member States (61.2% of all receivables on this account, i.e. EUR 8.1 billion). By individual countries, the biggest receivables in this respect were recorded for Luxembourg (EUR 2.8 billion, i.e. 21.2%), Switzerland (EUR 2.6 billion, 20.1%), Netherlands (EUR 0.9 billion, 6.8%), Czech Republic (EUR 0.9 billion), Lithuania (EUR 0.8 billion), and United Kingdom (EUR 0.8 billion). By the type of activities, the highest receivables related to Polish foreign direct investments in 2007 were recorded under the category: other, not elsewhere classified (EUR 8.5 billion, increase by 17.3% as compared to 2006); total services (EUR 2.5 billion; increase by 15.7%) and manufacturing (EUR 1.4 billion; increase by 29.1%). Box 16 Polish foreign investments in The activity of Polish direct investors on foreign markets in 2008 was slightly lower than in the previous year, however, they more often started greenfield investments. 70 large investment projects were carried out or started (as compared to approx. 85 in 2007). 11 out of them are investments from the very beginning (whereas 7 such investment projects were implemented in the previous year). In the FDI breakdown by branches, the dominant role was played by take-overs of foreign companies from the IT sector, investments in exploration of energy resources, purchase of real estates and production of construction and finishing materials. Main locations of Polish FDI in Country Number of projects Estimated/ declared value (EUR million) Romania 8* 150 Dominant branches real estates, production of construction and finishing materials Germany 7 50 IT, electronics, retail trade China 4 18 production of chemical products, machines for mining Norway concessions for crude oil extraction Russia 4** 200 wooden industry, pharmacy Slovakia 4 4 IT Ukraine 4 30 retail trade, banking * one of the projects related to transactions between Polish entities. ** due to a difficult situation in world economy, the completion of one of the projects was suspended in Estimates by the Analyses and Forecasting Department, Ministry of Economy. 183

184 MINISTRY OF ECONOMY It may be expected that investment activities of Polish enterprises on the foreign markets will increase in the subsequent years. In the coming years, due to a global economic slowdown, intensity of these activities may decline slightly. Nevertheless, this trend will remain and the presence of Polish investors in other countries will be more and more visible. This would be associated with increasing experience on the operating principles of these markets and acquisition of abilities related to seeking appropriate markets with growth potential for Polish enterprises. This confirms development of the Polish economy and the increasing activity of Polish enterprises seeking possibilities for operation on foreign markets, not only in traditional way, such as trade or commercial representative offices, but also by direct capital engagement Moreover, along with an increase in the number of implemented investment projects, the outflow of capital on this account would be increased through growing credit trade with foreign investment companies, as well as with respect to profits gained and reinvested by them FDI inflow to Poland Role and importance of the enterprises with foreign capital Nowadays. it would be difficult to imagine operation of the Polish economy without the participation of foreign entities. This, in particular, relates to sectors such as automotive or electronic industry. The role and importance of enterprises with foreign capital in the Polish economy keeps growing systematically. In , revenues of enterprises with foreign capital (total population) amounted to PLN billion and were higher by 15.2% than in the previous year. The highest revenues from total activities were generated by manufacturing enterprises PLN billion (46.8% of revenues generated by all enterprises with foreign capital) and in trade and repair PLN billion 92. Enterprises with foreign capital spent much money on investing and extending their activities. In 2007, these enterprises spent PLN 75.1 billion (i.e. by 13.7% more than in the previous year) on the acquisition of new tangible fixed assets. The largest funds were invested by manufacturing enterprises. Their share accounted for 40.4% of expenditures on tangible fixed assets by all entities with foreign capital. Next positions were occupied by entities dealing with property and business management as well as with trade and repair, whose share amounted to 21.1% and 13.3% of expenditures on tangible fixed assets respectively. Companies with foreign capital play also an increasing role in turnover of the Polish foreign trade. In 2007, export activities were carried out by business entities, i.e. 44.1% of all companies with foreign capital. Their exports was by 14.3% higher than in the previous year. Foreign companies have also an increasing share in Polish imports. The value of imports increased by 21.4% as compared to the previous year. The most important items in import include raw materials, materials and semi-products for production purposes 47.3% of total imports. As regards manufacturing, imports of raw materials and materials for production purposes amounted to 78.3% of total imports data will be presented by the Central Statistical Office at the beginning of This relates to total statistical population. 184

185 POLAND 2009 REPORT ECONOMY Table 70 Basic financial categories of companies with foreign capital with the number of employees exceeding 10 persons as compared to entities submitting balance sheet in the years (as at year end) in PLN million Description entities submitting balance sheet including: companies with foreign Number of companies Total revenues Including exports Financial result (balance) Number of entities which generated profit Number of employees thousand persons gross net gross net a 44,426 1,655, ,295 79,902 63,615 35,292 34,677 4,533.0 b 45,346 1,863, ,074 99,060 81,068 37,351 36,859 4,747.6 c 46,603 2,143, , , ,433 39,901 39,412 5,028.5 a 6, , ,263 33,092 26,199 4,658 4,593 1,159.2 b 7, , ,521 41,370 33,958 5,034 4,962 1,285.1 capital. c 7, , ,276 56,476 46,368 5,409 5,350 1,425.4 a 3, , ,015 19,223 15,598 2,230 2, industry b 3, , ,955 24,524 20,204 2,388 2, c 3, , ,014 28,770 23,965 2,469 2, a 1, ,451 3,109 5,374 3,996 1,238 1, b 1, ,002 2,867 7,520 5,980 1,301 1, ,7 trade and repair c 1, ,876 3,808 10,971 8,909 1,417 1, a/ data for 2005.b/ data for c/ data for 2007 Source: Business activities of companies with foreign capital in 2007, Central Statistical Office, December As compared to previous years, the share of foreign companies in imports is declining. At the same time, however, their share in exports is growing. As compared to 2004, the growth rate of imports of foreign companies operating in Poland amounted to 163.5%, and the growth rate of exports to 215.3%. Respective values for our whole foreign trade are as follows: 172.3% and 185.0%. Such ratios in exports and imports confirm that business activities of foreign companies in Poland are also exportoriented. Table 71 Value of exports and imports and share of foreign capital in Polish foreign trade turnover (in PLN million) Value of Polish foreign trade Companies with foreign capital Share of foreign companies in Polish trade turnover (%) exports imports exports imports in exports in imports , , , , , , , , , , , , , , , , Source: Central Statistical Office. Many large foreign companies operating in Poland belong to the group of the largest exporters. These are mainly automotive companies. Foreign investments have a positive impact on the labour market, in particular when they are investments from the very beginning (greenfield). The share of such investments in total FDI have been increasing in the recent years. The number of employees of companies with foreign capital amounted as the end of 2007 to thousand persons. Over 50.0% of the employees worked in companies dealing with manufacturing. As compared to the previous year, this figure increased by thousand persons Business activities of companies with foreign capital in 2007, Central Statistical Office, December Data relates to total population of companies. 185

186 MINISTRY OF ECONOMY Table 72 Sales, share of exports in sales and employment rate in selected foreign companies in Poland in the years Share of export in sales Employment Sales in PLN million Company in % (full-time) Fiat Auto Poland 9,224 11,854 15, ,740 4,173 5,853 Volkswagen Poznań 8,776 7,947 7, ,584 5,889 6,133 Volkswagen Polkowice 4,301 4,623 3, ,087 1,207 1,171 Fiat-GM Powertrain Bielsko-Biała 4,520 4,459 3, ,389 1,416 1,382 Philips Lighting Poland, 3,116 3,671 3, ,915 8,239 7,230 BSH, Warszawa 2,562 2,703 2, ,284 1,312 1,372 GlaxoSmithKline 2,237 2,685 3, ,627 1,635 1,665 Electrolux 1,556 2,322 2, ,391 2,616 3,429 Indesit, Łódź 1,320 1,750 2, ,379 2,001 2,889 Toyota Motor Manufacturing, Wałbrzych 2,023 2,167 2, ,000 1,877 2,064 Total 39,635 44,481 47,235 x x x 27,396 30,365 33,188 Source: List of 500 largest companies in Poland according to Rzeczpospolita newspaper FDI inflow to Poland 2007 was a record year in terms of the FDI inflow to Poland. According to the data presented by the National Bank of Poland, FDI amounted to EUR 16.7 billion and was by 6.4% higher as compared to the previous year. According to the NBP preliminary estimates, the FDI inflow to Poland in 2008 amounted to EUR 11.3 billion 94. A decline in the value of foreign investments in Poland results from general deterioration in prosperity worldwide. Difficulties observed recently, in particular in automotive industry and in other industries whose production is mainly exported, will negatively influence financial performance of these companies in Poland, and as a result, their possibilities of financing investments. Chart 52 FDI inflow to Poland in the years in EUR billion bn EUR , Source: NBP, 2008 estimates. 94 Detailed data relating to the FDI inflow in 2008 will be published by the NBP at the end of

187 POLAND 2009 REPORT ECONOMY Comparing the FDI inflow to Poland in individual years, it is important to take into account their structure. In the recent years, large privatisations had a significant impact, but the percentage of such investments has been declining since In 2007, acquisition of shares accounted for only 18.5% of the FDI inflows (whereas in 2003 it was 70.2%). The significance of other FDI items is growing, including reinvested gains 95 and capital in transit 96. An increase in the first item confirms a very good financial condition of foreign investors and plans of foreign companies relating to further investments and extending the scope of activities in Poland. In 2007, the value of reinvested gains declined by EUR 2.1 billion, i.e. by 46.7% as compared to the previous year. Good economic prosperity in Poland and related increase in profits generated on conducted business activities favoured new investments and growing production capacities of foreign companies. At the same time, the value of funds due to capital in transit amounted to EUR 1.3 billion, i.e. 8% of the FDI inflow to Poland. Table 73 Structure of FDI inflow to Poland in the years in EUR million Equity Conversion Year Capital in the form of: purchased stocks, shares and contributions in kind credits for shares of other liabilities to shares dividends for shares real estates Reinvested profits Investor credits Total capital inflow , , , , , ,715 1,958 8, , ,510 5,318 15, , , ,614 4,486 16,582 Source: Foreign direct investments in Poland in 2007, NBP, January In 2009, forecasts on the FDI inflow are less optimistic. This is related to the growing financial crisis worldwide. A weak economic growth rate in the European Union Member States, from which 80% of foreign investments flows to Poland, surely hampers the FDI inflow to Poland. Some investors postpone their projects to a later date, but do not abandon their investment plans in Poland at all. On the other hand, the crisis is what encourages foreign companies to invest in Poland and to move production to Poland. A decline in investments will affect those sectors of the Polish economy whose production is focused on export, i.e. automotive and electronic industry. An increase in investments may be anticipated in those sectors of the economy, in which foreign companies search possibilities for operating cost savings, i.e. broadly understood services. Investments of this type are much less capitalintensive and create a relatively high number of jobs. A period of worse economic prosperity is also a good time for mergers and acquisitions. The branches where the activity of investors may increase are, inter alia, energy sector and broadly understood health care. Economic recovery is expected also in retail and wholesale trade as well as in industrial production. 95 Reinvested profits are calculated only for direct investments. They do not apply to portfolio investments or other investments. In accordance with principles of preparation of the payment balance, reinvested profits are treated as if they were paid to a direct investor and only then reinvested by him. This results from the fact that a direct investor, due to the ownership of a significant shareholding at a direct investing company (at least 10%), has an impact on the decision to leave the profit within the company which generated it.. 96 An inflow of foreign funds which increases equity of foreign enterprises observed in a given reporting year and invested in the same reporting period by domestic companies in established branches or companies with registered office abroad. 187

188 MINISTRY OF ECONOMY FDI by countries of capital origin The biggest investments in Poland have been made in the recent years by enterprises from European countries, mainly from the European Union. In 2007, investments of the EU countries accounted for 80.6% of the total FDI inflow to Poland. The highest value of capital was transferred from Germany, France and the Netherlands EUR 2.8 billion, EUR 1.8 billion and EUR 1.7 billion respectively. Out of EUR billion invested in Poland until the end of 2007, the largest part of capital came from the European Union Member States 84.5%. The highest amounts were invested in Poland by companies from: the Netherlands EUR 22.1 billion, Germany EUR 19.1 billion, France EUR 13.4 billion. Table 74 Geographical breakdown of the FDI inflow to Poland by countries of investment capital origin and liabilities as at the end of 2007, in EUR million Pos. Country Liabilities as at the end of Europe, including: 9, , , , ,5 1.1 EU-15 9, , , , ,0 1.2 Austria , ,5 1.3 Belgium ,9 1.4 Denmark ,0 1.5 Finland ,7 1.6 France 2, , , ,7 1.7 Greece ,0.3 48,3 1.8 Spain , ,8 1.9 Ireland , Luxembourg , , , , Netherlands 1, , , , Germany 1, , , , , Portugal , Sweden , United Kingdom , , Italy , , Cyprus , Slovenia , , Switzerland , Norway ,44.8 -, , Ukraine , , Russia -, ,31.5 -, , Hungary , , Czech Republic -, ,0 North American 2 countries, , ,4 including: 2.1 USA ,1 3. Asia, including: ,4 3.1 China ,9 3.2 Singapore , ,4 3.3 Japan ,1 3.4 South Korea , ,9 Total ,8 8, , , , / data relates to Belgium and Luxembourg (jointly) Source: Foreign direct investments in Poland, NBP. 188

189 POLAND 2009 REPORT ECONOMY Chart 53 Liabilities due to FDI as at year end in the years bn EUR Source: Foreign direct investments in Poland in 2007, NBP, January FDI inflow by sectors Until the end of 2007, foreign companies invested most funds in industry EUR 43.8 billion, which accounted for 36.6% of the total FDI in Poland, mainly in manufacturing EUR 40.0 billion. As regards production, largest funds were located in the production of transport vehicles section dominated by foreign capital. Investors in automotive sector are large international automotive groups such as: Fiat, General Motors, Isuzu, Volkswagen, Toyota, Volvo, Man and others. The vast majority of the production manufactured by automotive companies is sold abroad. A fast growing production of cars in Poland also favours an increase in the production by contractors. Foreign companies, including those dealing with the production of transport vehicles, belong to the world top exporters. Electronics have been another important investment target in the recent years. In 2007, American company Dell started the production of computers at its plant in Łódź. Very large investments were carried out by companies manufacturing TV sets such as Toshiba, Sharp, LG, Funai, Orion and others. Owing to investments of these companies, Poland became a leader in the production of modern TV sets. It is estimated that in 2010, when full production capacity will be achieved by plants, Poland will manufacture as many as 38 million TV sets, which will satisfy 77.0% of European demand for this equipment. Over 80% of TV sets manufactured in Poland will be exported. Other important investment areas, in addition to manufacturing, were: property management, financial intermediation as well as trade and repair. Both in 2007 and in previous years, a significant amount of investments was carried out in the broadly understood services sector. A particularly high increase in FDI was observed in accounting services, management and advisory. The value of FDI in this area amounted to EUR 2.2 billion in 2007 alone. The scale of these investments confirms that Poland has become a significant services centre. A lower amount of foreign investments which came to Poland in 2008 results mainly from global economic slowdown. This does not mean deterioration of the position of our country as a potential destination for investments. Further rankings published by various international research centres 189

190 MINISTRY OF ECONOMY indicate that Poland is perceived as an interesting and important country for foreign investors, in particular for investments in broadly understood services centres. Table 75 FDI in Poland by sections and divisions of NACE in the years and FDI liabilities at the end of 2007 by types of activities (EUR million) NACE sections and divisions Capital invested in FDI at the Structure end of the in % year 2007 Industry, including:: 2, , , , Electricity gas and water supply , Mining and quarrying Manufacturing, including production of: 2, , , , vehicles, trailers and semi-trailers , other transport means food products and beverages, tobacco products , office equipment and computers -, electrical appliances, radio and TV equipment, optical equipment , wood, paper, publishing and printing , chemical products -, , rubber and plastic products , coke and refined petroleum products metals and metal products , , textiles and textile products and clothing -, machines, not elsewhere classified , Construction , Total services 5, , , , Financial intermediation, including: - insurance activity 2, , , , , Trade and repair 2, , , , Transport, storage and communication, -, , including: - Telecommunication -, , Property management, IT, including: - property management - accounting, management and advisory 1, , , , , , , , , , Hotels and restaurants Property purchases and sales , Agriculture and fishery Total 8, , , , Source: Foreign Direct Investments in Poland, National Bank of Poland, Table 76 Major items of the Polish export in EUR million Exports Description growth rate exports balance exports balance exports balance 2008/2007 (in %) Motor vehicles 5, , , , , , Spare parts and accessories to motor vehicles 3, , , , , Fuel and piston engines with compression ignition 2, , , , , , TV and radio receivers 2, , , , , , Furniture 2, , , , , , Source: Central Statistical Office. 190

191 POLAND 2009 REPORT ECONOMY According to the Ernst & Young report presented in June this year on the Europe s investment attractiveness, Poland ranked fifth in Europe and first in Central and Eastern Europe in terms of new foreign investments in 2008 and second in terms of new jobs created owing to the inflow of foreign direct investments (FDI). According to the report, 176 new foreign investments were located in Poland in 2008, which means an increase by 21% as compared to the previous year. In this category, the only European countries that place better than Poland are: United Kingdom, France, Germany and Spain. Poland remains the leader in Central and Eastern Europe. In terms of the number of jobs created owing to foreign investments, our country places second following United Kingdom with 15 thousand new jobs. According to the forecasts, the authors of the report state that the popularity of Central and Eastern Europe in the coming three years will increase and this region has every chance to become the world most attractive investment destination. Investments will be located in this region not only due to attractive labour costs and conditions for conducting business, but also due to staff quality and a large internal market Innovativeness of Polish enterprises and their environment Innovativeness of Polish enterprises 98 Innovativeness of the Polish industry, measured with different standard indicators, remains relatively low. In the years , the Innovation Index measuring the share of innovative enterprises in industry, defined as enterprises which introduced new or substantially improved products and/or processes (the data refer to business entities with more than 49 employees), amounted to 36.7% of all enterprises. In the years there were 42.5% such entities. In 2007, outlays for innovative activity in industrial enterprises (sections C, D and E according to the Polish Classification of Economic Activity PKD 2004) with more than 49 employees amounted to PLN 20.2 billion. It means growth by 21.7% as compared to The share of entities which were involved in innovative activity, i.e. spent funds on this activity, was 31.8% lower than in 2006 (37.3%). The level of innovation in economy is shown by the share of sales of new-to-market products in total industry output sales. This ratio has been subject to significant fluctuations lately, from 16.7% in the years , 20.7% in the years , 20.9 in , 21.8% in , 18% in and 14.7% in The share of enterprises which collaborated with other enterprises or institutions in innovative activities in the years was 21.0% - less than in , when 23.9% industrial enterprises declared collaboration. In 2007 there were no significant changes in the structure of output sales of enterprises according to their technical level. However, it should be noted that the total share of medium-high-tech and high-tech products systematically increased from 28.5% in the year 2003 to 31.5% in 2007, and at the same time the share of sales of medium-low-tech and low-tech products decreased. 97 Europe s investment attractiveness is a periodical study conducted by Ernst & Young since 2004,. This year s edition comprised 800 managers and representatives of investors from 42 countries. The report takes into account their opinions and figures on foreign investments in the year preceding the publication of the report. 98 The source of data provided in this subsection is the Central Statistical Office, Science and Technology in 2007, Warsaw

192 MINISTRY OF ECONOMY Innovation processes in the environment of enterprises are measured in the same way as the innovation processes in enterprises. Basic indices in this respect are, inter alia: the share of gross outlays on R&D in GDP, balance of payments in technology, trade in high-tech products between a country s economy and the abroad and the number of inventions reported for protection. Table 77 Gross Domestic Expenditure on R&D (GERD) to GDP ratios according to institutional sectors in the years total expenditure (GERD/GDP) government expenditure (GOVERD/PKB) business expenditure (BERD/PKB) higher education expenditure (HERD/PKB) Source: Science and Technology in 2007, Central Statistical Office. R&D outlays in current prices rose from PLN 5.9 billion in 2006 to PLN 6.7 billion in At the same time, the Gross Domestic Expenditure on R&D to GDP ratio in remained on a stable low level (0.56% in 2007). In Poland, budgetary funds still dominate in total outlays on R&D (58.5% in 2007). The level of innovativeness in economy is also shown by the share of high-tech imports and exports (based on the OECD list of sectors of 1995) in total imports and exports. Within the last 10 years, the share of high-tech products in the foreign trade in Poland remained basically at the same level, and in 2006 the share of these products amounted to 4.2% in exports and 10.8% in imports. The same indicators for the EU were 16.7% for exports (2006) and 23.0% for imports (2000). Important measures of innovation processes are intellectual property protection indices. The number of inventions reported for patent protection each year in the Polish Patent Office by the so-called residents was 2,392 in 2007, i.e. more than in 2006 (2157). In 1990, 4105 inventions were reported for protection Innovation of Poland as compared to other countries In comparison to other countries, just like in the previous editions of the European Innovation Scoreboard (EIS2008) 99, Poland was counted among catching up countries, which have lower level of Summary Innovation Index (SII) than the average level for all EU countries, but higher SII growth rate. In the group of catching-up countries, Poland was placed after Malta, Hungary and Slovakia and before Lithuania, Romania, Latvia and Bulgaria. 99 January

193 POLAND 2009 REPORT ECONOMY Chart 54 Summary Innovation Index (SII) for each EU Member State Bulgaria Lotva Romania Lithuania Poland Slovakia Hungary Malta Italy Greece Portugal Spain Czech Republic Słowenia Estonia Cyprus EU Netherlands France Belgium Luxemburg Irleand Austria United Kingdom Denmark Grermany Finland Sweden Source: Pro Inno Europe, Inno-Metrics, European Innovation Scoreboard Comparative analysis of innovation performance, January Chart 55 Convergence in innovation performance between EU Member States according to EIS 2008 Source: Pro Inno Europe, Inno-Metrics, European Innovation Scoreboard Comparative analysis of innovation performance, January Comparing to the previous EIS report, the following indicators have improved for Poland: increase in Participation in life-long learning per 100 population aged from 4.7 to 5.1, increase in Venture capital as % of GDP from to 0.017, increase in SMEs innovating in-house from 13.8 to 17.2, increase in Community trademarks per million population from 24.7 to

194 MINISTRY OF ECONOMY Table 78 Innovation Indices for Poland and EU based on EIS 2008 EIS indices Poland EU-27 ENABLERS Human resources S&E and SSH graduates per 1000 population aged S&E and SSH doctorate graduates per 1000 population aged Population with tertiary education per 100 population aged Participation in life-long learning per 100 population aged % of population aged having completed at least upper secondary education Finance and support Public R&D expenditures (% of GDP) Venture capital (% GDP) Private credits (% GDP) Broadband access by firms (with at least 144 Kbit/s capacity) (% of firms) FIRM ACTIVITIES Firm investments Business R&D expenditures (% of GDP) IT expenditures (% of GDP) Non-R&D innovation expenditures (% of turnover) Linkages & entrepreneurship SMEs innovating in-house (% of all SMEs) Innovative SMEs collaborating with others (% of all SMEs) Firm renewal (SMEs entries + exits, % of all SMEs) Public-private co-publications per million population Throughputs EPO patents registered per million population Community trademarks per million population Community designs per million population Technology Balance of Payments flows (% of GDP) OUTPUTS Innovators SMEs introducing product or process innovations (% of all SMEs) SMEs introducing marketing or organisational innovations (% of all SMEs) Resource efficiency innovators, the average of 2 indices: - Reduced labour costs (% of firms) Reduced use o f materials and energy (% of firms) Economic effects Employment in medium-high & high-tech manufacturing (% of all employed in industry and services) Employment in knowledge-intensive services (% of all employed in industry and services) Medium-tech and high-tech manufacturing exports (% of total exports) Knowledge-intensive services exports (% of total exports) New-to -market sales (% of total sales) New-to -firm sales (% of total sales) Source: Pro Inno Europe, Inno-Metrics, European Innovation Scoreboard Comparative analysis of innovation performance, January As presented in the EIS 2008, within the last 5 years the main determinants of improvement of innovation level in Poland were the following groups of factors: Human resources, in particular growth in the number of doctorate graduates in Science and Engineering (S&E) and Social Sciences and Humanities (SSH) per 1000 population aged lat from 0.53% in 2001 to 0.86% in 2006, groups of indices related to the protection of intellectual property, referred to as Throughputs in the EIS, in particular growth in the number of: patent applications in the European Patent Office (EPO) per million population from 1.5 in 2001 to 3.1 in 2006; new community trademarks per million population from 0.2 in 2001to 33.2 in 2006 and new community designs per million population from 2.0 in 2002 to 45.5 in

195 POLAND 2009 REPORT ECONOMY Institutional environment of Polish enterprises The innovativeness of an economy is strongly influenced by the institutional environment supporting innovative activities of enterprises, which includes many different types of institutions, for instance: training and consulting centres, centres for the transfer of technologies, business incubators, loan funds, technological parks, etc. The activities of the institutions supporting innovation provide strong stimuli for development in form of: strengthening market structures with new technological enterprises with high competitive potential due to the ability of implementing innovations which allows constant adaptation of new products and technologies, the so-called industrial diffusion resulting from the incubation of new enterprises using skills from local cultures, development of industrial complexes with high technology and innovation incubation systems in city agglomerations with scientific base. Chart 56 Innovation and business centres in Poland in Source: Prepared by the Ministry of Economy on the basis of: (1) Polish Business and Innovation Centres Association, Krzysztof B. Matusiak, Business and Innovation Centres in Poland, PBICA Report 2007, Łódź/Kielce/Poznań 2007; (2) PBICA Conference Materials Human Capital Innovations Business, The role of business and innovation centres in the new EU programming period, Krynica Zdrój Nowy Sącz, 7-9 May The business and innovation centres are dedicated to the following areas of support for entrepreneurship and innovation processes: dissemination of knowledge and skills through consulting, training (training and consulting centres), transfer and commercialisation of new technologies (centres for transfer of technologies), financial support (seed and start up) in the form of bank-like loans and credit guarantee funds for persons who are starting economic activity and young companies with no credit history, advisory and technical assistance and support in the form of premises for newly established companies in business incubators and technological centres,, creating business clusters through integrating business services and various forms of assistance to companies within technological parks, business zones and industrial parks

196 MINISTRY OF ECONOMY The number of business and innovation centres has been growing systematically over the last few years. However, the high increase in the number of business and innovation centres in Poland does not translate into a proportional growth in the level of innovation of the entire Polish economy, as the centres usually only carry out training activity. According to the information provided by the Polish Business and Innovation Centres Association in Poland (SOOIPP), at the beginning of 2008 there were 710 such entities in Poland, including: 327 training and consulting centres; 95 centres for the transfer of technologies; 51 academic entrepreneurship incubators; 85 local and regional loan funds; 47 business incubators; 19 technological incubators; 16 technological parks. There is a structural gap between the institutions supporting innovation in Poland and the EU countries and other developed countries, which results from the lack of institutions supporting the entities implementing innovative projects following the R&D stage prior to actual implementation Entrepreneurship and barriers to enterprise development Economic regulations Low quality legislation which is too complicated and comprehensive is a serious obstacle for the development processes that take place in the economy. The existing barriers, especially bureaucracy, limit the entrepreneurship of the Polish citizens, make business operations more difficult and discourage foreign investors. More and more often the entrepreneurs call for elimination of specific legal barriers to business activity. The Better Regulation programme The aim of the Better Regulation programme is to create stable basis for long-lasting socio-economic development through a reform of legislative management and to ensure that entrepreneurs and citizens are satisfied with effective state and law. The aims will be achieved by, on one hand, simplifying the existing regulations, and on the other by ensuring higher quality of new laws. The methods of achieving the programme objectives include: modification of the law-making system (including facilitating the system of Regulatory Impact Assessment), reduction of administrative burden, simplification of law. The Better Regulation programme provides for a reform of economic regulations and has been divided in three stages. In 2008, legislative initiatives intended to improve the legal environment were executed. The first stage consisted in measures aiming at identification and measurement of administrative burden and facilitating of the Regulatory Impact Assessment system (trainings in compiling the RIAs). The consultation mechanism was also enhanced by creating consultation guidelines. The second stage of changes to law will concern carrying on modifications to the legislative system. The following actions are planned: Unification of responsibilities associated with drafting acts, regardless of the body which has the legislative initiative, Enhancement of the legislative process planning, 196

197 POLAND 2009 REPORT ECONOMY Modification of provisions concerning the legislative process within the framework of the operations of the Sejm and Senate (including, among others, modification of principles of submitting drafts acts and amendments), Ensuring the execution of the obligation of making a new Regulatory Impact Assessment (RIA) before drafting an act, including estimation of costs of implementing administrative obligations for the addressees of the law. Simultaneously, educational and promotional programmes consisting in social education and promotion of positive activity will be carried out through: promotion of undertakings carried out in the form of Public-Private Partnership, including demonopolization of public administration,, promotion and support for arbitration courts,, promotion of ethical and moral norms in business. The measures applied at this stage will also include departing from the extension of the system of orders, prohibitions and punishments in favour of a social dialogue and consultations, education projects concerning increasing social awareness, for example in the area of civil rights, entrepreneur rights and consumer rights. Administrative burden The plan of reducing the administrative burden is implemented in accordance with the guidelines of the Ministry of Economy. Measures implemented by 2008 include measurements of administrative burden in seven priority legal areas in which the administrative burden is to be reduced by 25% by This concerns the following areas: natural environment, land development planning, social security, labour law, tourist services, assay law and business law. The survey indentified over 700 requirements of providing certain information in 50 acts. The requirements included: filling in questionnaires, submitting applications on recognising the applicant s ability to run a certain type of business, submitting reports, registering measurements, applying for permits, drawing up periodical reports, participating in controls. The key areas, in which the identification and measurement have already been conducted, are not the only ones which may have the potential for reduction. Thus, in 2008, a research was conducted which aimed at defining the legal space in which the reduction will be carried out. After analysing 492 universally applicable legal instruments (acts, orders, directives) almost 6000 requirements of providing specific information were identified. The process of examining the legal space was necessary for making the base measurement, i.e. measurement of administrative costs for identified requirements of providing specific information. The measurement will be carried out by the end of 2009 with the standard cost method, consisting in examining four factors: the time needed for fulfilling these requirements by a regular entrepreneur, cost of staff employed for this purpose, number of employees required to fulfil the requirement, frequency of such requirements during each year. The base measurement will help to determine the real reduction potential and prepare reduction plans both in global and in sector perspective. 100 It should be emphasised that this reduction programme outdistances the EU initiative according to which the reduction in European law should be achieved by the end of

198 MINISTRY OF ECONOMY Regulatory Impact Assessment (RIA) One of the key aspects of the regulative environment is the application of the Regulatory Impact Assessment (RIA). Trainings conducted among central administration officers by the end of 2007 were dedicated to applying the Regulatory Impact Assessment tool. The trainings covered 600 administration staff involved in the legislative process in compiling RIAs and analytic department workers who support the factual aspect of thorough analyses of costs and benefits of new regulations. The second stage of the trainings will cover over 3000 people involved in the activities mentioned above and will be conducted in the years The Ministry of Economy sees the need for stronger highlighting of the part of RIA which concerns the impact of the regulations on the SMEs (micro-, small and medium-sized enterprises). The practice applied to date has indicated that the impact on the business sector (in particular the SMEs) is assessed only vary casually. Thus, in 2008, the Ministry initiated works on strengthening this element of assessment. As in other EU and OECD states, it was established that such strengthening should be executed through creating a special body, e.g. within a government agency, which would conduct the RIAs for the SME sector, draw up periodical summary reports and evaluate the existing solutions and provide analytical support during the process of drawing up legislative solutions, the so-called help desk. The Ministry of Economy intends to create such structures and start their operation at the end of In facilitating the RIA system, it is essential to define more precisely the present rules of consulting administrative actions (including drawing up legal instruments) with social partners. Consultation Guidelines were included in the guidebook: Guidebook for conducting consultations at different stages of problem-solving. It introduces clear rules of asking social partners for their opinion and organizes the legal situation in this field. The guidebook significantly strengthens the consultation mechanism and should contribute to the improvement of law-making quality in Poland. The obligation of observing the rules of consultation will be introduced by a resolution of the Council of Ministers. Simplifying law The problem of overregulation and regulative burden which is disproportionate to the needs related to consumer safety, the economy, state security and other socio-economic conditions, has been raised many times, not only by entrepreneurs but also by observers, analysts of economic life. The analyses conducted by the Ministry of Economy confirmed that there is a lot of space for reducing the existing restrictions. The main aim of the Package for entrepreneurship, covering over 20 amendments to existing acts, is to facilitate starting and running business (the amendments concern in particular economic and tax law in a broad sense). The measures aiming at facilitating doing business for SMEs include: access to capital, commercialisation of technology, running R&D activities and creating technological enterprises. Most solutions provided for in the Package for Entrepreneurship have been in operation since 2008 or They include: The Act amending the Act on freedom of economic activity The 1 st stage of amendment to the Act on freedom of economic activity introduced 5 groups of legal solutions, including two key instruments: the option to suspend business activity for the period from 1 month to 2 years; extension of provisions on binding interpretation of law. Another important instrument introduced by the amendment is the extension of entrepreneur s rights towards public administration, e.g. through the principle that a public administration body may not refuse to accept incomplete applications or demand documents which are not required directly by law. In addition, the amendment reduced the fee for interpretation of tax law from PLN 75 to

199 POLAND 2009 REPORT ECONOMY The 2 nd stage of amendment to the Act on freedom of economic activity in the first, transitional period it introduced the so-called one window principle, according to which all formalities related to starting a business could be settled at one window in the municipal office. What is important, the registration is free of charge, and one integrated registration form was introduced instead of 4 different registration forms. The target solution is the no window principle, i.e. full online service, without the need to visit any offices. An IT platform called the Central Record and Information on Economic Activity will be created for this purpose. Furthermore, checks in enterprises were simplified and reduced. This required amendments to several dozen other acts apart from the Act on freedom of economic activity. The Act amending the Accounting Act it helped SMEs in settlement with the tax office, raised the annual income threshold above which small entrepreneurs are required to maintain full accounting books from EUR 800,000 to EUR 1.2 million. Due to this change, more enterprises are allowed to keep their accounting according to less complicated procedures, which reduces the costs of business activity. The Act amending the Act establishing the Polish Agency for Enterprise Development (PARP) The amendment extended the list of responsibilities of the Agency in the area of implementing EU funds. The new tasks include, above all: innovative activity, support for development of entrepreneurs potential for adaptation, analysis of the role of micro, small and medium-sized enterprises, as well as analysis of barriers to enterprise development. The Act amending the Act on special economic zones it enhanced actions for the growth of investments by increasing the limit of special economic zone area to 20,000 ha. This created a possibility for more potential investors to use more favourable investment conditions. The Act amending the Act on some forms of supporting innovative activity is intended to stimulate the growth of innovativeness of Polish enterprises. It enhanced the possibilities of supporting innovative undertakings with private funds. For example, technological loans may be granted to enterprises by commercial banks, and the National Economy Bank (Bank Gospodarstwa Krajowego) can participate in loan repayment in the form of a technological premium. The Act amending the Tax Ordinance Act introduced the presumption of honesty of taxpayer. Under the new regulations, the citizen does not have to face negative consequences of suspected violation of law until a final decision or a legally binding court judgement is issued. Thus, for instance, a tax payer is not obliged to pay a tax unless the decision of the tax office on its collection is final. The Act amending the Act on economic chambers increases the freedom of association of enterprises in economic chambers. Moreover, it helps the chambers divisions conduct their statutory activities better also through creating ways of obtaining legal personality by local chamber units. The Act amending the Civil Code and the Currency Law meets the expectations of entrepreneurs regarding fluctuations of the Polish currency in relation to foreign currencies. It abolished the currency matching principle in Poland. It introduced a rule that entrepreneurs can settle their payments in exchangeable currencies other than PLN without the need to obtain a permission of the NBP President. It makes settlements much easier, without the need for bureaucratic and costly procedures of converting foreign currencies into PLN and it contributed to lower exchange risk. The Act amending the Code of Commercial Companies it eliminated the obligation of transforming civil law partnerships in commercial companies against the will of partners and reduced the obligatory initial capital in limited liability companies from PLN 50,000 to PLN 5,000 and in joint-stock companies from PLN 500,000 to PLN 100,

200 MINISTRY OF ECONOMY The Act amending the Insolvency and Rectification Law (consumer bankruptcy) it introduced bankruptcy of natural persons which are not entrepreneurs. It is a chance for debtors who became insolvent without their own fault. The beneficiaries of the new solutions include also entrepreneurs who are creditors of insolvent debtors. The Public-Private Partnership Act (PPP) the new act eliminated unnecessary administrative burden and excessive limitations regarding the subject and content of the agreement. The proposed solutions do not require conducting any analyses they leave the decision to the interested parties. Works are under way on new projects in the Package for Entrepreneurship, including the Act on eliminating administrative barriers to business. The new projects are intended to remove all unnecessary restrictions concerning running a business from the Polish legal system (permissions, permits, licenses, etc.) and barriers in establishing and running a business. The aim is to increase economic freedom and simplify the regulations. The works on the Act should be completed in Barriers to enterprise development In 2008 the entrepreneurs assessment of economic situation and the barriers in running business which they pointed changed with the economic slowdown 101. In the second half of 2008, as compared to the first half of the year, the share of complaints concerning insufficient turnover increased This was considered the most significant barrier by every five respondents (it is the highest share since 2003). Still, the barrier which is most often mentioned by entrepreneurs are the taxes rates and fees prescribed by law. However, in the recent survey less than 30% respondents mentioned it, which was the lowest percentage in the survey s history. It does not necessarily mean that entrepreneurs feel the situation has improved, but rather that other barriers are becoming more essential. As in the previous surveys, every tenth respondent complained about complex legal provisions. The falling demand for goods and services also forces entrepreneurs to strongly compete with each other. The share of complaints on competition of other small enterprises rose twice as compared to the first half of In addition, almost every tenth respondent complained about the competition of large enterprises (this barrier was mentioned most often in the group of medium-sized enterprises). The barriers related to the labour market, in turn, which were often mentioned by entrepreneurs in the previous surveys, ceased to be important for them in the second half of While in the second half of 2007 the total share of complaints concerning labour costs and relevant qualifications of the labour force amounted to 15%, it reached only 8% in the present survey. Opinions on the applicable tax law regulations are mostly negative (as expressed by almost half of the respondents). A positive development is that the share of negative opinions has been decreasing with time (in the second half of 2006 there were 55% negative opinions, while in the second half of %). No entrepreneur considers the existing provisions perfect, and only every tenth considers them good. 101 Trends in development of the SMEs according to entrepreneurs in the second half of 2008 (No. 1/2009), Ministry of Economy, March

201 POLAND 2009 REPORT ECONOMY Chart 57 The most serious barriers to development of enterprises in the second half of tax rates insufficient turnover complex legal provisions competition from large companies competition from small companies bureaucracy labour costs suitable qualifications of the labour force conditions related to company premises long payment-awaiting time other difficult to say Units: medium-sized small micro Source: Poll survey of the SME sector. Ministry of Economy. January % 10% 20% 30% 40% Opinions on labour law are also negative. Every third respondent considers them bad, and half of the respondents think of them as average. However, unlike in the case of tax law, the share of negative opinions is not decreasing (in the recent survey it was the highest in two years). As with tax law, no respondent considered them perfect. Every second entrepreneur considers provisions concerning economic judiciary average, almost 40% assess them negatively, and slightly over 10% positively. The survey does not show any substantial improvement in this field. As for the regulations and procedures related to controlling business activity, the number of positive opinions drops, and the number of negative opinions remains on the same level (the number of moderate answers grows). Chart 58 How do you rate the existing regulations and procedures in: excellent good average bad very bad Settlements with contractors Inspection over economic activity Operations of judiciary Labour law Tax law 0% 20% 40% 60% 80% 100% Source: Poll survey of the SME sector. Ministry of Economy. January

202 MINISTRY OF ECONOMY Of all subjects which the survey touches upon, the best rate was given to settlements between enterprises almost 30% of all respondents considers them good or perfect. However, no improvement has been observed in opinions concerning this field. Chart 59 How do you rate the changes in the existing regulations and procedures which took place in 2008? Settlements with contractors Inspection over economic activity Operations of judiciary deterioration no changes improvement Labour law Tax law 0% 20% 40% 60% 80% 100% Source: Poll survey of the SME sector. Ministry of Economy. January The results of assessment of changes introduced in the second half of 2008 in enterprise sector are unambiguous. On one hand, as much as 20% of the respondents recorded improvement in tax law (a percentage which was never recorded in previous surveys). On the other hand, more or less the same number of respondents believe that the existing regulations and procedures in labour law have deteriorated. The results of NBP s survey of economic situation also show that the problem of low demand is becoming more and more serious. As many as 30% of the respondents mention this barrier, which is the highest percentage in the history of the survey. Table 79 Barriers to development (the table shows the moments when indices have the highest values during the survey Frequency of problems reported in: Low demand Exchange rates, including fluctuations Poor economic conditions, the crisis Increase in prices of materials and raw materials Payment delays, liquidity problems High and growing competition Difficulties with obtaining bank loans Unclear regulations, changes to the law Maximum values in the history of surveys I Q II Q III Q IV Q I Q II Q III Q IV Q I Q Source: Information on the condition of the enterprise sector, including the economic climate Q and forecasts for Q 2, 2009, NBP. 202

203 POLAND 2009 REPORT ECONOMY Chart 60 Indicator of expectations for the tears conditions for conducting business , , , , ,0 17, ,5 0% 5% 10% 15% 20% 25% Source: Study of the business atmosphere in Poland under EUROCHAMBRES European Economic Survey 2008, Polish Chamber of Commerce, Warsaw, November The survey conducted by the association of chambers of commerce EUROCHAMBRES 102 shows that Polish enterprises looked slightly better compared to enterprises from other European countries. The indicator measuring predictions concerning the conditions for running a business was positive, which means that more Polish companies expected that the conditions would improve than that they would deteriorate. Although, compared to the survey of 2007 the expectations decreased, Poland is still on the eight place among European countries. Chart 61 Expectations regarding conditions for conducting a business in 2009 Polska Zachodniopomorskie Wielkopolskie Warmińsko-Mazurskie Świętokrzyskie Śląskie Pomorskie Podlaskie Podkarpackie Opolskie Mazowieckie Małopolskie Łódzkie Lubuskie Lubelskie Kujawsko-Pomorskie Dolnośląskie 0% 20% 40% 60% 80% 100% deterioration no changes improvement Source: Study of the business atmosphere in Poland under EUROCHAMBRES European Economic Survey 2008, Polish Chamber of Commerce, Warsaw, November The highest number of positive answers was obtained in the Świętokrzyskie voivodeship, while the lowest number in the Opolskie voivodeship. 102 The survey of enterprises conducted by the National Economic Chamber is the part of the European Enterprise Panel. Entrepreneurs in all countries are asked the same questions, which makes it possible to compare the conditions for running a business in Poland and in other European states. The survey described in the text was conducted in November

204 MINISTRY OF ECONOMY Instruments for enterprise support The policy of supporting entrepreneurship in 2008 was set for specific actions in the field of legislation, included in particular in the Package for entrepreneurship. Its aim was to create a more businessfriendly legal and institutional environment, with application of the principle Think small first. Many changes beneficial for entrepreneurs were introduced as a practical response to the postulates which have been voiced for years by business circles: introducing a possibility of suspending business activity, facilitating starting business by the one stop shop, facilitating and reducing controls in enterprises, reducing the level of mandatory initial capital in limited liability and joint-stock companies, simplifying the form of public-private partnership, simplifying regulations in the field of tax on goods and services, increasing the entrepreneurs rights against public administration through an obligation of accepting incomplete applications and prohibition of demanding documents which are not required by law, introducing a presumption of honesty of a taxpayer, extending the regulations concerning binding interpretation of law. Most of the reforms entered into force at the end of 2008 or at the beginning of Thus, it is yet too early to assess their effects from the entrepreneur s point of view. Legislative changes have also been overshadowed by the world financial crisis Instruments supporting innovation of enterprises The largest catalogue of instruments of support for innovative activity has been included in the Operational Programme Innovative Economy (OP IE), , which aims at developing Polish economy on the basis of innovative enterprises. The aim is to be achieved through more detailed aim, i.e.: increasing innovativeness of enterprises, increasing competitiveness of Polish science, increasing the role of science in economy, increasing the share of innovative products of Polish economy in the international market and creating stable and better jobs. Achieving these aims requires implementing several measures leading to the increase of innovativeness in the economy. They include in particular: investment in R&D works on the highest level, the results of which is beneficial to the economy, supporting new innovative enterprises, increasing access to capital for SMEs, in particular on initial growth stages, investments in technological and organizational innovation, strengthening collaboration between entrepreneurs and business environment institutions. Measures included in the OP IE aim directly at stimulating innovation and R&D activities in enterprises. The OP IE supports measures in the field of product, process, marketing and organizational innovation, which directly or indirectly contribute to the establishment and development of innovative enterprises. It supports innovation on national and/or international level. Innovative measures of this nature and range generate the highest value added for economy and enterprises, and consequently contribute to the largest extent to strengthening the competitive potential of Polish economy in international dimension. Local and regional measures are supported by Regional Operational Programmes and The Operational Programme Development of Eastern Poland. Several instruments for supporting innovation are implemented by the Polish Agency for Enterprise Development (PARP). in 2008 the PARP continued the implementation of the technostarters support 204

205 POLAND 2009 REPORT ECONOMY pilot project. The second stage of this programme involves direct support for technostarters for starting innovative activities at the maximum of PLN 180,000 (up to 90% of qualified costs). There were also grants for training and consulting centres for providing free consulting services related to enterprise management and providing information on running business to technostarters who obtained support from this programme. At the second stage 29 applications were filed with the total amount of PLN 4.8 million. 16 of them, with the total amount of PLN 2.7 million were recommended for support. In addition, in 2008 the PARP initiated two new programmes financed from the state budget: Bon na innowacje (A Voucher for Innovation) and Innovation Express. The aim of the programme A Voucher for Innovation, announced to the public in September 2008, is to initiate contact links between entrepreneurs and research circles. It provides help to micro- and small enterprises which, in the year of application and in the 3 years before the application, have not used services of any research unit in R&D works. Entrepreneurs can obtain support in the maximum amount of PLN 15,000. In 2008, 193 applications were filed, with the total amount of ca. PLN 2.9 million. Contracts were signed with 94 beneficiaries. 82 applications were recommended for financial aid, and the total amount of payments exceeded PLN 1.2 million. In effort to meet the expectations of potential beneficiaries, from 2009 the support programme will cover not only R&D activities (as it was in 2008), but generally services towards innovation, connected with implementation or development of a product or technology. PLN 7.65 million was allocated for the programme in The Innovation Express programme provides support for international collaboration of clusters with foreign partners in the field of research, technological development or innovation. The programme is implemented in cooperation with foreign partners, as part of the INNET project financed from the 6 th EU Framework Programme. Each partner finances clusters in his own country/region. PARP will continue accepting applications for support until the funds allocated for the project are spent. In 2008, at the first stage of submitting applications on the Pro Inno Europe website, 9 applications were filed, 5 of which were filed also at the second stage. In 2008 no support contract was signed. PLN 3.15 million was allocated for the programme in In 2008 the Technological Credit Fund (TCF) established by the Act of 29 July 2005 on some forms of supporting innovative activities (Journal of Laws No. 179 Item 1484, as amended) continued in operation. The Fund is meant to encourage entrepreneurs to undertake innovative activities and increase the transfer of new technologies from research centres to enterprises. Until 2008, the funds from the TCF were used to grant technological credits. In credit agreements were signed, for the total amount of ca. PLN 48.2 million. In total, during the whole period of the Fund s operation, 72 credit agreements were concluded for the amount of ca. PLN million. On 30 May 2008 the Polish Sejm passed the Act on some forms of supporting innovative activity regulating new rules of granting technological credits and technological premiums (Journal of Laws No. 116 Item 730). This instrument will be implemented as part of measure 4.3 of the Operational Programme Innovative Economy (OP IE), for which the National Economy Bank (Bank Gospodarstwa Krajowego, BGK) acts as the Implementing Institution. The BGK will grant technological premiums to small and medium-sized enterprises to pay part of the technological credits for technological investments granted by collaborating commercial banks. The premium cannot exceed PLN 4 million. Over EUR 409 million was allocated for measure 4.3 OP IE. On 1 January 2009 the Technological Credit Fund became a government special purpose fund managed by the Minister of Economy. Furthermore, the amendment to the Act on some forms of supporting innovative activity introduced changes to the instrument of granting the status of Research and Development Centre to enterprises, which is meant for the development of the private R&D sector and for the increase in 205

206 MINISTRY OF ECONOMY demand for R&D services through linking the status of R&D centre with tax incentives. The status of an R&D centre is granted to enterprises which receive at least EUR 1.2 million from sales of commodities, products and financial operations in the financial year preceding the year of application. The basic criterion of granting the status of an R&D centre requires that the entrepreneur receives at least 20% 103 of income on sales of R&D services or intellectual property rights provided by him. The entrepreneur who obtained the status of an R&D centre is subject to exemption from taxes as far as they are related to research and development works (property tax, agricultural tax, forestry tax). At the same time, each centre establishes an innovation fund based on monthly contributions not exceeding 20% of the income gained by the R&D centre in a given month. These funds constitute its costs of gaining income, which allows for one-time or accelerated depreciation of fixed assets and deducting current costs before actually incurring the costs, under the condition that the amounts from the innovation fund are spent for covering costs of research and development works. Due to the fact that certain conditions connected with the amount and structure of income must be fulfilled, it should be recognized that the R%D centre status is an offer for: foreign investors who wish to locate their R&D centres in Poland, Polish enterprises operating as private research institutions, and some transformed and commercialized R&D units. To date, 10 such R&D centres were established. The next instruments for supporting R&D activities are amendments to the provisions on Personal Income Tax (PIT) and Corporate Income Tax (CIT). The changes aim at reducing the existing barriers and creating tax incentives for investments in the purchase of or inventing new technologies. It means that all R&D works, also unsuccessful ones, can be included in costs. The period of depreciation of completed development works was reduced from 36 to 12 months. The amendments also introduced the possibility of deducting expenses on the purchase of new technologies from the tax base. The tax relief amounts to 50% 104. In 2007, the tax relief on the purchase of new technologies was used by 117 natural persons running business and amounted to PLN 66,000 in total (the average deduction was PLN 564), and by 19 enterprises PLN 4.4 million (the average deduction was PLN 233,000) Financial instruments for supporting exports The support of exports takes part in two dimensions: in the narrower sense by implementing specific instruments, and in a broader sense by promoting Polish economy on a macro scale. The Commerce and Investments Promotion Divisions of Polish Embassies and Consulates (WPHiI) operating abroad, have a system of promotion instruments both in economic cooperation and on the micro scale the promotion of Polish enterprises. Support in this field is provided by the Internet information portal started on 1 July 2008 by the Ministry of Economy The website is a compendium of knowledge and an extensive source of information for Polish entrepreneurs interested in developing business activity abroad, as well as for foreign enterprises who want to invest in Poland and establish trade contacts with Polish partners. The website contains important information on the rules of trade with EU states and the rest of the world and tries to monitor the latest initiatives concerning the improvement of conditions for enterprise development. Moreover, Polish entrepreneurs will find there information on the rules of granting support to activity connected with internationalisation of companies and a presentation of relevant financial instruments % after introducing the amendment to the Act of 30 May The amendment to the Act of 29 July 2005 on some forms of supporting innovative activity introduced changes to tax reliefs for the purchase of new technologies. Before, entrepreneurs could deduct from the tax base half of the price of a new technology bought only from a research unit. After the change, they can deduct half of the price of a new technology bought from any entity. Furthermore, the amendment defined new technology in more detail in such a way, that entrepreneurs can deduct not only the price of a technology bought but also the price of a license to use a technology. The amendment was passed on 12 May 2006 and entered into force retroactively on 1 January

207 POLAND 2009 REPORT ECONOMY The Polish Exports Promotion Portal in turn is an on-line public database containing useful information for Polish entrepreneurs who plan to export their goods/services to foreign markets. The Exports Promotion Portal provides to Polish exporters access to current information on foreign markets and instruments for supporting Polish exports, establishing trade contacts with foreign contractors and offers free promotion of enterprises and its exports offers. The aim of the website is to support Polish exports by integration of dispersed Internet sources on economy which are essential for Polish exporters, providing free access to reliable, current and easily available economic information on foreign and Polish markets to Polish exporters and foreign contractors, facilitating trade contacts with foreign importers to Polish entrepreneurs and promoting Polish exports offers. Trying to meet the needs and expectations of Polish entrepreneurs in the field of internationalisation, the Ministry of Economy has prepared a package of instruments 105 offering the possibility of obtaining support in the following areas: financial grants for participation in promotional projects within a particular branch of trade The aim of this programme is to promote products and commodity groups with high exports potential. In 2008, PLN 826,600 was allocated for financing 34 such promotional trade projects. In 2009, 67 applications were submitted and the budget for the programme amounts to PLN 1.45 million; financing costs of export certificates The aid is granted in the form of subsidies covering part of costs connected with obtaining product certificates required on foreign markets. In 2008, 112 applications were accepted, with the total amount of PLN 665,000. The amount allocated for this instrument in 2009 is 750,000, and 98 contracts were signed by 10 June; financing costs of promotional undertakings The aim of the programme is to provide support in the form of subsidies to entrepreneurs covering part of the costs connected with organizing seminars, conferences, collective shows and presentations of military defence products. In 2008, 22 applications were accepted, with the total amount of PLN 386,300. Due to the fact that all financial resources allocated for 2009 (PLN 450,000) were spent, the applicants could apply only until 20 March; financing of promotional publications and materials In 2008, 30 applications were accepted, amounting to PLN 230,000 in total. By the end of April 2009, 30 applications were submitted. PLN 280,000 was allocated for this purpose in Instruments for supporting exports are also implemented as part of the 6 th Priority Polish economy on international market of the Operational Programme Innovative Economy : Sub-measure Support for networks of investor and exporter service centres (IESCs) OP IE aims at facilitating access to counselling service in the field of exports and investments to entrepreneurs and encouraging enterprises to extend their international contacts and look for collaborators. Enterprise databases will be purchased for the purpose of the IESCs. The services offered by COIE will be standardized. Experts working in IESCs will have an 105 Pursuant to the provisions of executive acts on the abovementioned subject, subsidies can be granted from 31 December 2013 and constitute de minimis aid, which means that in the current calendar year and in the two preceding years an entrepreneur cannot obtain de minimis aid, if its gross value, together with the aid for which he applies, would exceed EUR 200,000, and for entrepreneurs operating in the road transport sector, if it would exceed EUR 100,000. All exceptions concerning the aid are listed in the Commission Regulation (EC) No. 1998/2006 of 15 December 2006 on the application of Articles 87 and 88 of the Treaty to de minimis aid (OJ L 379 of ). Legal instruments and detailed information concerning subsidies to trade promotion projects, product certificates, promoting and supporting exports or sales in the Single European Market are available at 207

208 MINISTRY OF ECONOMY opportunity to use the experience, patterns and know how of foreign partners in the area of entrepreneurs system and service. Measure 6.5 Promotion of Polish economy OP IE The aim of this measure is to improve Poland s image and increase the significance of Poland and Polish entrepreneurs in world economy. The projects includes selection of branches of economy which can become Polish export specialities due to a potential for domestic production and the possibility of creating positive associations with the country of origin. Financial instruments for supporting exports are very important for trade exchange processes. In Poland, the Ministry of Economy provides official support for export credits in the following forms: guaranties and warranties for pro-exports activities granted under the Act of 8 May 1997 on warranties and guaranties granted by the State Treasury and by some legal entities; export insurances guaranteed by the State Treasury the rules of export insurances were specified in the Act of 7 July 1994 on export insurances guaranteed by the State Treasury; subsidies to export credit interests on 8 June 2001 the Act on subsidies to export credit interests with fixed interest rates was issued. According to the new system, banks granting export credits directly can receive from the State Treasury, through the National Economy Bank (BGK), subsidies to export credit interests, ensuring stabilisation of export credit interest on the level of fixed reference rates; government loans for financing exports of goods and services credits in the form of the socalled package support are meant financing contracts on supply, from the Republic of Poland to the receiving country, of machines, equipment and materials produced in Poland, as well as services, including technologies Financial support for investments Financial support for new investments is granted in the form of a multi-annual programme, based on the System of financial support for major investment projects modified by the Council of Ministers on 23 September The document specifies in detail the principles of granting financial aid to new investments in the form of multiannual programmes. Investors will obtain support in the form of subsidies, under a bilateral agreement concluded with the Minister of Economy and an entrepreneur under a resolution adopted by the Council of Ministers. The maximum support for projects executed in special economic zones cannot exceed 15% of qualified costs of the investment and 30% in the case of projects executed outside these zones. Entrepreneurs who plan investments in the following sectors can apply for the subsidies: automotive industry, electronic industry, aviation industry, biotechnology and modern services in particular IT, BPO and telecommunications. The system of incentives also covers enterprises which carry out R&D projects. Public aid within the framework of the System will be granted for the execution of initial investment projects, for the costs of new investments and for creating new jobs. In order to apply for aid for the costs of new investment, an enterprise must undertake to execute investments with qualified costs of at least PLN 160 million and creating at least 50 new jobs. If a project does not belong to any of the sectors specified in the document, the entrepreneur must undertake to execute an investment with qualified costs of at least PLN 1 billion and creating at least 500 new jobs in order to obtain aid. 208

209 POLAND 2009 REPORT ECONOMY In order to apply for aid for the costs of creating new jobs, the entrepreneur must execute a new investment in one of the priority sectors which would create at least 250 new jobs with overall costs of investment of at least PLN 40 million. Unless the project belongs to one of the priority sectors, the investor must create at least 500 new jobs, and the minimum costs cannot be lower than PLN 1 billion. R&D investors can also apply for financial aid, provided that they create at least 35 new jobs for persons with higher education with minimum overall costs of investment of PLN 3 million. Box 17 Changes to the System of financial support Currently, works are under way to adjust the System to the requirements of the amended Act on the principles of development policy (making multiannual programmes equal to development programmes). At the same time, in the light of the economic crisis, the principles existing so far will be simplified in order to increase the availability of the System to potential investors through: extending the catalogue of sectors in which projects are supported, simplifying the criteria of entry (the minimum value of declared investment outlays and the minimum number of declared jobs will be reduced), in justified cases, greater flexibility in cases when a project is not possible to carry out in line with the declared parameters, shortening of the whole procedure. In 2008, the Council of Ministers adopted 9 multiannual programmes. The value of investment outlays declared by entrepreneurs exceeded PLN 1 billion, and the number of new jobs 4,500. The amount of aid granted within the framework of these programmes in the years is PLN 40.4 million. 34 multiannual programmes for financial support of investment projects adopted by the Council of Ministers in the years were in operation in As part of these programmes, investors undertook to create ca. 34,000 new jobs and invest PLN 9.7 billion. The total aid granted from the state budget in the period amounts to PLN million, PLN million of which was allocated for aid for creating new jobs and PLN million for investment costs Special Economic Zones Special Economic Zones (SEZ) are an instrument for the support of regional development and promotion of creating new jobs. The rules and conditions for investing within Special Economic Zones and the benefits from conducting business activity within such areas are laid down in the Act of 20 October 1994 on special economic zones (consolidated text: Journal of Laws of 2007 No. 42 Item 274, as amended). Under the Act, the Council of Ministers created 17 SEZ for a period of 20 years in the years As a result of changes (liquidation of two zones and merger of another two) 14 zones are now in operation. In December 2008 the period of operation of all zones was prolonged to until As at the end of May 2009, the total area of SEZ amounted to 12,400 ha, with the upper limit of 20,000 ha. The zones are located within the territory of 126 cities and towns and 165 municipalities. As at the end of 2008, valid permissions for business activities within SEZ were held by 1,196 enterprises. In 2008, 205 such permissions were granted, which accounts for 17% of the total number of permissions. By the end of 2007, enterprises operating in the zones invested over PLN 56.7 billion. Compared to 2007, the value of investments grew by ca. 23%. These entrepreneurs assure a total of ca. 210,000 jobs, of which over 74% are new jobs created by investors following permission for operation in a zone, resulting directly from implementation of new investments. 209

210 MINISTRY OF ECONOMY Box 18 Rules and conditions for granting public aid to the enterprises operating within the SEZ Entrepreneurs, who locate their businesses in special economic zones, may benefit from public aid in the form of tax relief for: 1. costs of new investments. The amount of aid for with the costs of new investment is calculated by multiplying maximum aid intensity specified for a given area and qualified investment costs to be covered by the aid. In order to obtain aid to cover the costs of a new investment: business activities have to be carried out for at least 5 years, and in the case of small and mediumsized enterprises 3 years, ownership of assets to which investment expenditures were related has to be kept for at least 5 years (for SME 3 years).. As regards large enterprises, eligible costs to be covered by aid may include only acquisition costs of new tangible fixed assets.. 2. creating new jobs. The amount of aid for creation of new jobs connected with a given investment is calculated by multiplying a maximum aid intensity and 2-year gross salaries of newly employed employees increased by all mandatory payments related to their employment. The entrepreneur using this aid is obliged to keep newly created jobs for the period of 5 years, and in the case of small and medium-sized enterprises 3 years. The maximum aid intensity for investments executed in the following voivodeships: Lubelskie, Podkarpackie, Warmińsko-Mazurskie, Podlaskie, Świętokrzyskie, Opolskie, Małopolskie, Lubuskie, Łódzkie and Kujawsko- Pomorskie, amounts to 50%. In the remaining voivodeships it amounts to 40%. As an exception, the maximum aid intensity for Warsaw was determined at 30%. In the case of small enterprises and mediumsized enterprises the aid may be increased by 20 p.p. and by 10 p.p., respectively. Aid intensity cannot be increased for transport sector enterprises. The basis for using public aid is a permission granted by the zone Manager as a result of a tender procedure or negotiations 106. The biggest share in investments is held by companies with Polish and German capital (18% each). They are followed by US, Japanese, Italian and French investments. The industry sector is still dominated by the automotive sector. Investments made in this sector constitute almost 29% of the total value of investments in the zones. Further positions are occupied by manufacturers of rubber and plastic products (10.2% of investment value) and metal products (10.1%). The most significant investments for which permissions were granted in 2008 included investments of: FIAT Powertrain Technologies Poland, Fabryka Maszyn FAMUR in the Katowice zone BALL PACKAGING EUROPE, Firma Oponiarska Dębica, MTU Aero Engines, Goodrich Aerospace Poland in the Mielec zone, Euroglas, ATM, CORRECT in the Łódź zone, Lafarge in the Pomeranian zone, G-K amd Zakłady Azotowe PUŁAWY in Starachowice zone, Polimex Mostostal in Tarnobrzeg zone, Cadbury Wedel, Advanced Diesel Particulate Filters and Creaton Polska in Wałbrzych zone, Stora Enso in Warmia-Mazury zone. 106 It is possible to conduct activities in special economic zones without permission, however, income generated on such activities is not subject to income tax exemption.. 210

211 Table 80 Location and impact of the SEZ Pos. Zone Zone area (ha) 1 Kamiena Góra Katowice 1, Kostrzyń- Słubice 1, Kraków Voivodeship Zone location Number of valid permissions Dolnośląskie, Wielkopolskie Śląskie, Małopolskie, Opolskie Lubuskie, Zachodniopomorskie Wielkopolskie Małopolskie, Podkarpackie 5 Legnica Dolnośląskie 6 Łódz 1, Mielec Łódzkie, Wielkopolskie, Mazowieckie Podkarpackie, Małopolskie, Investments (PLN million) New jobs Employment Maintaine d jobs cities/towns: Jawor, Jelenia Góra, Kamienna Góra, Kowary, Lubań, Ostrów Wielkopolski, Piechowice municipalities: Janowice Wielkie, Kamienna Góra, Lubawka, Nowogrodziec, Odolanów, Prusice, Żmigród 44 1, , cities/towns: Bielsko-Biała, Bieruń, Częstochowa, Dąbrowa Górnicza, Gliwice, Jastrzębie-Zdrój, Katowice, Kietrz, Knurów, Lubliniec, Rybnik, Siemianowice Śląskie, Sławków, Sosnowiec, Strzelce Opolskie, Tychy, Zabrze, Zawiercie, Żory municipalities: Czechowice-Dziedzice, Czerwionka-Leszczyny, Godów, Koniecpol, Myślenice, Pawłowice, Siewierz, Ujazd , ,611 7,981 cities/towns: Gorzów Wielkopolski, Gubin, Kostrzyn nad Odrą, Nowa Sól, Poznań, Zielona Góra municipalities: Barlinek, Buk, Bytom Odrzański, Chodzież, Czerwieńsk, Goleniów, Gryfino, Gubin, Karlino, Lubsko, Międzyrzecz, Nowy Tomyśl, Police, Przemęt, Rzepin, Skwierzyna, Słubice, Strzelce Krajeńskie, Sulęcin, Swarzędz, Zielona Góra 110 3, ,157 5,289 cities/towns: Bochnia, Gorlice, Kraków, Krosno, Limanowa, Nowy Sącz, Oświęcim, Tarnów municipalities: Andrychów, Bochnia, Dobczyce, Gdów, Książ Wielki, Niepołomice, Słomniki, Wolbrom, Zabierzów, Zator 47 1, ,744 1,955 cities/towns: Chojnów, Głogów, Legnica, Lubin, Złotoryja municipalities: Gromadka, Legnickie Pole, Polkowice, Prochowice, Przemków, Środa Śląska 54 4, , cities/towns: Bełchatów, Koło, Konstantynów Łódzki, Kutno, Łęczyca, Łowicz, Łódź, Ozorków, Piotrków Trybunalski, Raciąż, Radomsko, Rawa Mazowiecka, Sieradz, Skierniewice, Tomaszów Mazowiecki, Turek, Warszawa, Zduńska Wola, Zgierz, Żyrardów municipalities: Aleksandrów Łódzki, Brójce, Grodzisk Mazowiecki, Kleszczów, Koluszki, Ksawerów, Nowe Skalmierzyce, Opatówek, Ostrzeszów, Paradyż, Przykona, Sławno, Słupca, Stryków, Tomaszów Mazowiecki, Ujazd, Widawa, Wieluń, Wola Krzysztoporska, Wolbórz, Wróblew, Zduńska Wola, Żabia Wola, Żychlin 109 5, ,062 5,921 cities/towns: Dębica, Gorlice, Jarosław, Leżajsk, Lubaczów, Lublin, Mielec, Ropczyce, Sanok, Zagórz municipalities: Dębica, Głogów 106 3, ,321 3,

212 8 Pomeranian 1, Słupsk Starachowic e Suwałki Tarnobrzeg 1, Wałbrzych 1, Warmia- Mazury Lubelskie Pomorskie, Kujawsko-pomorskie, Zachodniopomorskie Pomorskie, Zachodniopomorskie Świętokrzyskie, Mazowieckie, Opolskie, Łódzkie, Lubelskie Podlaskie, Warminsko- Mazurskie, Mazowieckie Podkarpackie, Mazowieckie, Świętokrzyskie, Lubelskie, Dolnośląskie, Małopolskie Dolnośląskie, Opolskie, Wielkopolskie, Lubuskie Warmińsko- Mazurskie, Mazowieckie Employment Małopolski, Jarosław, Laszki, Leżajsk, Ostrów, Trzebownisko cities/towns: Gdańsk, Grudziądz, Kwidzyn, Malbork, Stargard Szczeciński, Starogard Gdański, Tczew municipalities: Barcin, Chojnice, Człuchów, Gniewino, Kowalewo Pomorskie, Krokowa, Łysomice, Sztum, Świecie, Tczew 62 3, ,213 5,332 cities/towns: Koszalin, Słupsk, Szczecinek, Wałcz municipalities: Debrzno, Rogoźno, Słupsk, Żukowo , cities/towns: Ostrowiec Świętokrzyski, Puławy, Skarżysko-Kamienna, Starachowice municipalities: Iłża, Końskie, Mniszków, Morawica, Sędziszów, Suchedniów, Stąporków, Szydłowiec, Tułowice cities/towns: Białystok, Ełk, Grajewo, Suwałki municipalities: Gołdap, Małkinia Górna, Suwałki cities/towns: Jasło, Pionki, Przemyśl, Przeworsk, Radom, Siedlce, Stalowa Wola, Tarnobrzeg, Tomaszów Lubelski municipalities: Gorzyce, Janów Lubelski, Jasło, Jedlicze, Kobierzyce, Łuków, Nisko, Nowa Dęba, Ożarów Mazowiecki, Pilawa, Połaniec, Poniatowa, Rymanów, Staszów, Tomaszów Lubelski, Tuczępy, Wyszków ,555 3, , , , ,039 6,499 cities/towns: Bolesławiec, Dzierżoniów, Kalisz, Kłodzko, Kudowa-Zdrój, Leszno, Nowa Ruda, Oleśnica, Oława, Opole, Świdnica, Świebodzice, Wałbrzych, Wrocław municipalities: Brzeg Dolny, Bystrzyca Kłodzka, Długołęka, Góra, Jarocin, Jelcz-Laskowice, Kluczbork, Kłodzko, Kobierzyce, Kościan, Krotoszyn, Namysłów, Nowa Ruda, Nysa, Oława, Praszka, Prudnik, Skarbimierz, Strzegom, Strzelin, Syców, Szprotawa, Śrem, Świdnica, Święta Katarzyna, Twardogóra, Wiązów, Wołów, Września, Ząbkowice Śląskie, Żarów 131 9, ,638 9,286 cities/towns: Bartoszyce, Ciechanów, Elbląg, Iława, Lidzbark Warmiński, Mława, Mrągowo, Nowe Miasto Lubawskie, Olsztyn, Ostrołęka, Ostróda, municipalities: Bartoszyce, Dobre Miasto, Iłowo- Osada, Morąg, Olecko, Olsztynek, Pasłęk, Szczytno, Wielbark 55 2, ,100 3,833 TOTAL 12, ,196 56, ,036 54,507 Source: Support Instruments Department, Ministry of Economy. 212

213 Public aid Public aid for enterprises is an instrument by which the State exerts active influence on the economy. Owing to the aid tools applied to a market economy, the State may stimulate positive processes. Public aid must be granted in compliance with eligibility rules specified by the provisions of law 107. Otherwise, it may become a source of serious distortion of competition among economic entities. In 2008, the Minister in charge of the economy granted public aid amounting to PLN million. The most important directions in granting public aid in the Ministry of Economy are: restructuring of coal mining, promotion of exports, multiannual programmes supporting enterprise development (implemented by the Polish Agency for Enterprise Development PARP) Box 19 Review of Community provisions on public aid In 2005, the European Commission started a review of Community provisions on public aid aimed at directing public aid more towards horizontal measures, in particular for supporting innovation, research and development, stimulating entrepreneurship, investing in human capital and protection of the natural environment. As a result of the reform, a series of new legal regulations were introduced in the years , including significant changes which should contribute to the improvement of transparency, simplification of the rules of granting public aid and increased accessibility of public aid. The most important legal instruments adopted in this period include: Guidelines on National Regional Aid for , Community guidelines on state aid to promote risk capital investments in small and medium-sized enterprises, Community framework for state aid for research and development and innovation, Community guidelines on state aid for environmental protection, Commission Regulation (EC) No 1998/2006 of 15 December 2006 on the application of Articles 87 and 88 of the Treaty to de minimis aid, Commission Regulation (EC) No 800/2008 of 6 August 2008 declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the Treaty (General block exemption Regulation). Table 81 Public aid granted by the Ministry of Economy in 2008 and in the first quarter of 2009 (in PLN million) 108 Details I quarter of 2009 Total public aid (in PLN million) including: coal mining shipbuilding industry promotion of exports multiannual programmes the Zone Fund innovative investments Source: Report on public aid granted. 107 Since 1 May 2004, substantial changes have been implemented to the legal regulations governing public aid. Since the EU accession, Poland has had to apply directly the Community rules concerning public aid, in particular those laying down eligibility conditions and the procedure before the European Commission. The Act of 30 April 2004 on the procedure to be adopted in cases related to public aid (Journal of Laws No.123, Item 1291) regulates the public aid procedure. 108 Concerns aid granted by the Minister of Economy, without the aid granted by the Polish Agency for Enterprise Development (PARP), but including financing aid programmes from EU funds and de minimis aid.

214 MINISTRY OF ECONOMY In 2009 the Minister of Economy initiated public aid for innovative investments within the scope of Measure 4.5 OP IE Supporting investments of significant importance for the economy. The amount allocated for this aid was PLN 99.3 million. As one of the means for supporting enterprise development, the Polish Agency for Enterprise Development (PARP) granted aid in the amount of PLN 2,945.2 million in 2008 and PLN million in the first quarter of Hard coal mining The principles of granting public aid for the hard coal mining sector are regulated by the Council Regulation (EC) no. 1407/2002 of 23 July 2002 on state aid for the mining industry. Public aid is one of the instruments of the Strategy for the hard coal mining industry in Poland for the years (passed by the Council of ministers on 31 July 2007) and the Act of 7 September 2007 onthe hard coal mining industry for the years Under these acts, public aid for financing this sector will be gradually reduced. The support to be granted in the period covered by the Strategy will be mainly used for restructuring post-mining areas liquidation of mining damage and removal of water from the mines. On 3 October 2007 Poland notified to the European Commission the aid programme entitled State aid for the coal mining sector for the years N575/07 and obtained its consent under the Decision (K(2008)864) in the case State aid N575/2007 Poland, State aid for the Polish coal mining sector for the years The amount of aid to be granted in the years , as specified in the programme, will reach ca. PLN 1.3 billion. The value of public aid granted in 2008 was affected by the situation on the coal market and the overall economic situation in Poland and in the world. The rise in the price of coal in 2008 resulted in higher-thanexpected amount of subsidies needed to cover the right to free coal. At the same time, the high level of prices of energy, materials and services, which had been maintained due to the period of economic prosperity almost by the end of 2008, and the increased scope of works (some tasks were moved from 2007), resulted in higher-than-planned expenditure for tasks related to closing down mines and for tasks executed after closing down of mines. Table 82 State aid granted in the form of a budgetary subsidy to hard coal mining enterprises according to the destination of subsidies (in PLN million) January - April 2009 closing down of mines mining damage coal allowances compensation allowances Source: Report on public aid granted. Promotion of exports The Ministry of Economy carries on a series of promotion activities to create a positive image of Polish economy, to develop economic cooperation between Poland and other countries and to stimulate the growth of Polish exports. This is achieved by providing support (in the form of subsidies) for promotion activities undertaken mainly by enterprises and economic self-government organisations, as well as the implementation of promotion projects implemented by Polish diplomatic missions. The value of public aid granted to entrepreneurs for the promotion of exports in 2008 amounted to PLN 26.6 million (of which PLN 23.0 million within the framework of SOP-IEC, sub-measure ), while in the first quarter of PLN 5.4 million (of which 4.4 million within the framework of SOP-IEC, submeasure ). 214

215 POLAND 2009 REPORT ECONOMY Multiannual programmes Public aid under multiannual programs addressed to foreign companies implementing major investment projects in Poland is granted pursuant to the Act on public finance. Financial support from the State Budget may be granted for the creation of new jobs or/and for investment outlays related to a new investment carried out in the following sectors: automotive sector, aviation sector, biotechnology and modern services sector in particular IT, BPO and telecommunications. The system of incentives also covers enterprises implementing R&D projects. Multiannual programme aid constitutes individual (ad hoc) aid as defined by the regulations on granting public aid, and as a result, each project is subject to individual notification submitted to the European Commission 109. Zone Fund The Zone Fund operates under the Act of 2 October 2003 amending the Act on Special Economic Zones and some other acts (Journal of Laws, Dz. U. No. 188 Item 1840, as amended). The Fund has been established in order to partly compensate benefits lost by entrepreneurs operating in the zones under permits granted before 1 January 2001 as a result of the provisions of the Accession Treaty, which substantially reduced the values of tax exemptions granted earlier. Reducing the value of aid means that most entrepreneurs will have to pay higher taxes than according to the previous rules of granting public aid in zones. Due to the introduction of the Zone Fund, entrepreneurs who changed their permit pursuant to Article 6 of the Act of 2 October 2003 amending the Act on Special Economic Zones and some other acts can amass the part of the tax which would not have been due if the rules of granting public aid in zones had not been changed on the Fund account. These funds can then be used as grants for new investments on the territory of Poland (not later than until the end of 2023) by the tax payer (entrepreneur operating in a zone) or an entrepreneur related to him by organization of capital. Supporting new investments means regional aid for the costs of new investments or for the costs of creating new jobs. The rules of granting public aid from the Fund are set forth in the Order of the Council of Ministers of 21 March 2006 on granting support to new investments from the Zone Fund (Journal of Laws, Dz. U. No. 59 Item 409, as amended). The Fund is to operate until the end of Thereafter, The funds that will not have been used by then will be transferred to the State Budget. Innovative investments The aim of Measure 4.5 of OP IE is to improve competitiveness and increase the level of innovation of economy by supporting manufacturing and service enterprises executing high-value investments with high potential of innovation or generating many jobs. Investments connected with initiating or developing R&D activities in enterprises are preferred. In the first quarter of 2009, 5 agreements were concluded within the framework of Measure 4.5 of OP IE amounting to PLN 99.3 million in total. 109 Details on public aid granted under long-term programmes have been provided in subsection

216 MINISTRY OF ECONOMY Instruments for developing a network of institutions in the business Loan funds 110 As at the end of 2008 at the end of, 71 loan funds operated in Poland. These funds managed loan capital of PLN million and from the beginning of their operation they granted in total 171,300 loans amounting to PLN million. As compared to the end of 2007, there has been a continued increase in loan capital and loans granted, both in numbers and in value. In this period, the loan capital rose by PLN million (15.0%), the number of loans rose by 19,600 (12.9%) and their value rose by PLN million (18.3%). The growth rate of the number and value of loans granted was lower than in The average value for all loans granted until 31 December 2008 was PLN 16,400, including loans granted in 2008 PLN 22,300. Among the loans granted from the beginning of the operation of the loan funds until 31 December 2008, loans for investments dominated and accounted for 2/3 of all loans, both in number and value. Most of them were granted to trade and service enterprises, and taking into account the size of enterprises to enterprises with up to 9 employees % of the total number of loans granted and 84.4% of their value. Over 2/3 of the total number of loans (almost 1/4 of their value) amounted to less than PLN 10,000, while the number of loans between PLN 50,000 and 120,000 increased (and accounted for 10.3% of the total number of loans granted and 45.7% of their total value). For the last few years the period for which loans are granted has been extended. The average maturity period was 21.2 months, and for investment loans 22.5 months. In 2008, the average loan maturity period increased to 25.2 months and 26.5 for investment loans. New jobs are a direct effect of financial support granted to small and medium-sized enterprises by loan funds. Loans of PLN 2,816.7 million in total provided by the funds allowed to create 57.8 thousand new jobs. In 2008, with the loans of PLN million, funds contributed to the creation of 6,600 new jobs. Systematic changes have been observed in the loan capital financing structure. Funds amounting to PLN 341,3 million obtained in from the Sectoral Operational Programme Improvement of the Competitiveness of Enterprises had the dominating share in financing the loan capital. At the end of 2005, their share accounted for 10.3%, while at the end of 2008 it was 36.1%. 53 projects worth almost PLN 344 million were implemented as part of Sub-Measure Capitalisation of Micro-loan Funds SOP ICE. They consisted in providing additional capital to loan funds. In 2008, 47 projects were completed and PLN 47 million was paid to beneficiaries. Warranty funds 111 In 2007, there were 51 warranty funds, which held the total capital of PLN 589 million, which is twice more than two years earlier (subsidies paid from the SOP ICE and contributing and taking up shares by the BGK are the main reason for the growth of fund capital). From the beginning of their operation, the warranty funds granted over 24,000 warranties worth over PLN 1.6 billion. Working capital facilities dominated in the structure of warranties in 2007 (73%) analysed according to the type of liability under warranty. The second largest group are investment credits (24%). Trade and services and transport dominated in the sector structure. 110 Based on information in the Report on the state of loan funds in Poland as of 31 December Based on the Report on Warranty Funds in Poland as at 31 December 2007, The National Association of Warranty Funds. 216

217 POLAND 2009 REPORT ECONOMY The largest group among the abovementioned warranty funds operating in Poland are regional and local warranty funds with the share of BGK capital operating within the National Warranty Group (21 entities), holding 52% of the capital of all warranty funds in Poland. From the end of June 2008 they granted 12,600 warranties for over PLN 1 billion. The National Fund of Credit Warranties at the National Economy Bank (Bank Gospodarstwa Krajowego) is another component of the credit warranties system in Poland. It operates on the entire territory of Poland and cooperates with 25 banks. By the end of June 2008 the Fund granted 7,500 warranties for PLN 1.8 billion (working capital facilities PLN 1.1 billion, investment credits PLN 0.7 billion). The BGK system includes also the EU Warranty Fund (Fundusz Poręczeń Unijnych). Its aim is to increase the possibilities of using EU funds by increasing availability of credits and possibilities of obtaining funds from T-bonds for actions co-funded from EU funds. The Fund also grants warranties for proper execution of contracts, as well as guarantees and re-guarantees for completion of undertakings. By , the FPU granted 440 warranties and guarantees for PLN 278 million. Regional and local warranty funds with the share of BGK capital hold share capital dominated by local government units. These entities are being united within the National Warranty Group by accepting the rules set forth in agreements with the BGK and joint actions for disseminating good practice. Since the beginning of implementation of Sub-Measure Capitalization of warranty funds of SOP ICE, PLN million was paid to beneficiaries under 39 contracts for financial support. In 2008, 33 projects were completed. PLN 40.7 million were paid to beneficiaries. Seed capital funds The conditions for investments by seed capital funds under the Sub-Measure are stipulated in The Order of the Minister of Economy of 13 July 2006 on granting financial support to seed capital funds (Journal of Laws, Dz. U. No. 141 Item 100, as amended). The investments can be executed only in companies which belong to SMEs, are currently in an early stage of development and have operated in Poland not longer than for 3 years. On 9 February 2007, the collection of applications under Sub-Measure Supporting the establishment of seed capital funds SOP ICE was completed. 12 applications were submitted, 6 of which were finally selected for support. The total value of support for the selected projects was PLN 65.9 million. Final payments for the projects will be made in Risk capital funds An individual project of the National Capital Fund is implemented under Measure 3.2 Supporting risk capital funds of OP IE. Its aim is to increase access to external sources of financing of SMEs which are in early stages of development, in particular innovative SMEs and SMEs conducting R&D activities. The National Capital Fund will invest in capital, quasi-capital and debt instruments of risk capital funds established for investing in SMEs, in particular in SMEs in initial stages of development, especially innovative SMEs and SMEs conducting R&D activities. The National Capital Fund allocated EUR 180 million for the project. According to plans, the project will provide support to 23 risk capital funds, which will invest in 184 enterprises. On 30 April 2009, the National Capital Fund announced the first Open Tender for the support of risk capital funds. In 2009, the amount allocated for supporting risk capital funds in the tender is not less than PLN 300 million. 217

218 MINISTRY OF ECONOMY Development of the business environment network The main objective of the Sectoral Operational Programme Improvement of the Competitiveness of Enterprises (SOP-IEC) is to increase product and technological competitiveness of Polish enterprises enabling them to compete with foreign enterprises. In order to achieve this objective, the Community aid is addressed not only to enterprises, but also to business environment institutions supporting their operation on the market. The available allocation was divided between 2 priorities: Priority I relates to the development of entrepreneurship and innovation through the support for business environment institutions. Priority II is aimed at direct support for enterprises. The total amount allocated for SOP-IEC is over EUR 2.9 billion 112, of which ca. EUR 1.25 billion comes from European Regional Development Fund (ERDF), EUR 0.46 billion from national public funds and the rest, i.e. ca. EUR 1.2 billion, from private contributions of the Programme beneficiaries. Box 20 Measures of Priority I Development of entrepreneurship and innovation through support for business environment institutions Measure 1.1 Strengthening institutions supporting operations of enterprises. The measure is intended to improve access of enterprises to high quality services provided by business environment institutions. It includes two projects whose beneficiary is the Polish Agency for Enterprise Development (PARP), related to the establishment of an organisation network belonging to the National Service Network for small and medium-sized enterprises (SMEs) and the establishment of a network of Consultation Points under the National Service Network for SMEs. This measure also supports business environment institution projects which provide specialised services to entrepreneurs. Measure 1.2 Improving accessibility to external financing of enterprises investments. The aim of this measure is to improve accessibility to external financing sources by increasing the capital of micro-loan funds, credit warranty funds and through the support for establishing seed capital funds.. Measure 1.3 Creating favourable conditions for development of enterprises. The aim of this measure is to improve conditions for running business activity by enterprises in the form of establishing technical infrastructure and advice with respect to management. Under the measure, support is granted to the development of industrial parks, research and technology parks and technology incubators (including academic incubators). Table 83 Stage of implementation of Priority III and V of OP IE in the contexts of strengthening business environment institutions OP IE (under the Ministry Priority III Priority V of Economy) Total allocation (EUR billion) 4,6 1,5 1,8 from ERDF 3,8 1,3 1,5 Number of contracts signed (by ) Value of contracts signed (by , EUR million) ,2 28,3 Source: European Funds Department, Ministry of Economy The total allocation for measures governed by the Ministry of Economy accounts for almost 75% of the allocation for the whole Programme and amounts to more than EUR 2.1 billion. By 31 May 2009, 135 contracts amounting to PLN 4.7 billion in total were signed under all measures supervised by the Ministry of Economy. PLN 4.6 billion was paid to the beneficiaries of the SOP-ICE. 112 Ca. PLN 13.0 million according to the ECB rates of 28 May 2009, i.e PLN/EUR. 218

219 POLAND 2009 REPORT ECONOMY Support for enterprises and business environment institutions is also provided under the Operational Programme Innovative Economy, The total amount of funds allocated for the OP IE is EUR 9.7 billion, 47% of which is allocated for measures governed by the Ministry of Economy. By the end of May 2009, PLN 65 million was paid to beneficiaries of OP IE measures within the authority of the Minister of Economy. Box 21 Measures of Innovative Economy Operational Programme, Priority III and IV in the context of strengthening business environment institutions Priority III IE OP Capital for innovation Measure 3.1 Initiating innovative activity The aim of this measure is to increase the number of enterprises operating on the basis of innovative solutions. The measure provides for supporting the establishment of new enterprises based on innovative ideas, including spin offs, through providing advice in the field of establishing enterprises, providing infrastructure and services which are necessary for new enterprises and financial support for new enterprises. Measure 3.3 Development of a system facilitating investing in SMEs The aim of the measure is to stimulate activity on private investors market through creating favourable conditions for initiating collaboration between investors and enterprises seeking funds for implementing innovative activities. The implementation of this measure will help in supporting SMEs in their preparations to obtaining external sources of financing, in the form of shares, for innovative undertakings by financing part of the costs of counselling services in the field of preparing documents and analyses necessary for obtaining financial aid. The measure also aims at supporting networks of investors and increasing entrepreneur s awareness of the benefits and services offered by such networks. Priority V IE OP Diffusion of innovation Measure 5.1 Support for the development of supra-regional cooperative relations - The aim of the measure is to strengthen the competitive position of enterprises by supporting the development of relations between enterprises, and between enterprises and business environment institutions, including research units. The support under this measure covers common undertakings of groups of entities aimed at preparing a common innovative product and/or service and its introduction to the market. Measure 5.2 Supporting business environment institutions providing pro-innovative services and its networks of supra-regional importance The aim of this measure is to make complex, high-quality business services which are necessary for running innovative activity more accessible for entrepreneurs all over Poland. The measure includes strengthening the business environment institutions network by promoting collaboration within the network, exchange of experience, joint customer service and extension of the offer of pro-innovative services. Measure 5.3 Support for innovation centres The aim of the measure is to support creating and developing centres located in areas with high development potential. The beneficiaries of the measure are specialised business environment institutions providing services with high market and technology potential, including entities administering science and technology parks, technology incubators, advanced technology centres, productivity centres, and other centres providing specialised services to entrepreneurs, in particular to SMEs. The target group are entrepreneurs. Measure 5.4 Intellectual property management - The aim of this measure is improve the effectiveness of the innovation market and the flow of innovative solutions through spreading the application of intellectual property rights, in particular through obtaining the protection of industrial property. Sub-Measure addressed to business environment institutions provides funds for projects increasing awareness of entrepreneurs concerning industrial property rights and the ways of protecting them, as well as benefits from protecting new solutions. 219

220 MINISTRY OF ECONOMY List of Tables Table 1 Basic indicators of the economic situation 1995, (dynamic, previous year = 100) Table 2 GDP growth rate in fixed prices as compared to the previous year Table 3 Basic growth indices of the US economy (as compared to the previous year) in % Table 4 Basic growth indices of the Japanese economy (as compared to the previous year) in % Table 5 Basic growth indices of the Eurozone economy (as compared to the previous year) in % Table 6 GDP growth rate and consumer prices (as compared to the previous year) in % Table 7 GDP growth rate and consumer prices (as compared to the previous year) in % Table 8 The rate of changes in the world volume of trade exchange in the years (as compared to the previous year) Table 9 International trade in goods in Table 10 Forecast of the growth rate of the trade in goods in the years Table 11 Ease of Doing Business Ranking Table 12 Ranking based on the Business Competitiveness Index (BCI)...59 Table 13 Ranking of economic freedom Table 14 IMD Ranking Table 15 Structural indicators of the EU Poland compared to the EU Table 16 Growth rate of the GDP and domestic demand in the years (constant prices) Table 17 Demand decomposition of GDP in (in p.p.) Table 18 Employment rate in Poland among persons aged in comparison with the EU (in %) Table 19 An average annual effective working time per one employee per week in Poland in comparison with the EU Member States (in hours) Table 20 Economic growth factors in Poland in (in p.p.) Table 21 Accumulation and investment rates as compared with the real growth of GDP and gross fixed capital formation in the years Table 22 Investment capital structure in the years (in percentage)...70 Table 23 Changes in real unit labour costs in Poland compared with the European Union in years Table 24 Growth rate of the GDP and gross value added in the years (%) Table 25 Changes in the structure of value added in in current prices Table 26 Poland s gross domestic product per 1 citizen in compared to EU states in accordance with the purchase power parity (UE27=100) Table 27 Gross domestic product per capita in thousand EUR in accordance with the purchase power parity in selected countries in Table 28 Persons aged 15+ employed in economic sectors in Table 29 Situation on the labour market in in the age group of 15-59/64 (%) Table 30 Average employment in the enterprise sector (in thousands) Table 31 Main destinations of the migration of labour from Poland to Europe (in thousands) Table 32 Poland s commodity trade in Jan 2008 May Table 33 Changes in the geographical structure of Polish trade Table 34 Changes in the commodity structure of the Polish foreign trade, EUR million Table 35 CPI and core inflation in 2008 and in subsequent months of Table 36 Budget receipts and expenditure in * Table 37 Structure of budgetary expenditure (%) Table 38 State Treasury debt and public finance sector debt* (PLN billion and% of GDP) Table 39 Meeting the Maastricht criteria by Poland Table 40 Output dynamics in selected branches of the manufacturing industry * Table 41 Volume of output, output and price dynamics, and output structure by the manufacturing industry branches in 2007 and Table 42 RES electricity generating plants by concessions valid as of 31 December 2008, and the amount of power generated in these plants confirmed by the origin certificates issued (of 29 April 2009) Table 43 Biocomponents basic information for Table 44 Liquid biofuels basic information for Table 45 Allowance allocated and real CO2 emission in

221 POLAND 2009 REPORT ECONOMY Table 46 Sale dynamics of the construction and assembly production (in fixed prices) in the years in construction enterprises with more than 9 persons employed (previous year = 100) Table 47 Number of dwellings completed by type of construction in the years Table 48 Business entities in the services sector by ownership sectors and by NACE sections in the years * Table 49 Average employment in the services sector (in thousands) Table 50 Business entities in the section of trade and repair* by the number of employees and NACE division in the years * Table 51 Number of employees in trade and repair by NACE sections as at the end of 2008* Table 52 Important economic and financial data for the section of transport, storage and communication by NACE divisions in 2008 in the enterprise sector Table 53 Share of the private sector in the basic economic categories over the period (in %) Table 54 Number of companies subject to ownership transformation * Table 55 Revenues, costs, income and investments in micro-enterprises (nominal values) Table 56 Newly established enterprises in Poland in the years Table 57 Revenues, costs and results on individual types of activities (PLN billion) Table 58 Financial results on individual types of activities (PLN billion) Table 59 Results on financial activities in the economy sectors (in PLN billion) Table 60 Financial results on individual types of activities in manufacturing (in PLN billion) Table 61 Results on business activities in manufacturing sections in 2007 and 2008 (in PLN million) Table 62 Investment expenditures (in PLN billion) and their growth rate in 2007 and 2008 (in %)* Table 63 Financial data for business entities: 2008 and growth rate as compared to Table 64 Investment expenditures in the years (in PLN billion) Table 65 Investment expenditures in individual sections of the economy in PLN billion, current prices Table 66 Investment expenditures in manufacturing by NACE sections in PLN million Table 67 New investments in individual sections of the economy Table 68 Value of credits granted to Polish enterprises in the years in PLN billion Table 69 Polish foreign direct investments in the years (EUR million) Table 70 Basic financial categories of companies with foreign capital with the number of employees exceeding 10 persons as compared to entities submitting balance sheet in the years (as at year end) in PLN million Table 71 Value of exports and imports and share of foreign capital in Polish foreign trade turnover (in PLN million) Table 72 Sales, share of exports in sales and employment rate in selected foreign companies in Poland in the years Table 73 Structure of FDI inflow to Poland in the years in EUR million Table 74 Geographical breakdown of the FDI inflow to Poland by countries of investment capital origin and liabilities as at the end of 2007, in EUR million Table 75 FDI in Poland by sections and divisions of NACE in the years and FDI liabilities at the end of 2007 by types of activities (EUR million) Table 76 Major items of the Polish export in EUR million Table 77 Gross Domestic Expenditure on R&D (GERD) to GDP ratios according to institutional sectors in the years Table 78 Innovation Indices for Poland and EU based on EIS Table 79 Barriers to development (the table shows the moments when indices have the highest values during the survey Table 80 Location and impact of the SEZ Table 81 Public aid granted by the Ministry of Economy in 2008 and in the first quarter of 2009 (in PLN million) Table 82 State aid granted in the form of a budgetary subsidy to hard coal mining enterprises according to the destination of subsidies (in PLN million) Table 83 Stage of implementation of Priority III and V of OP IE in the contexts of strengthening business environment institutions

222 MINISTRY OF ECONOMY List of Charts Chart 1 GDP growth in the years Chart 2 Demand decomposition of GDP in (in p.p.) Chart 3 Contribution of domestic demand and foreign demand in the years Chart 4 Contribution of domestic demand components to the GDP growth in the years Chart 5 Changes in annual private consumption (data adjusted seasonally) and the Consumer Price Index Chart 6 Dynamics of gross fixed capital formation (left axis) and GDP (right axis) in years Chart 7 Effect of the export and import of goods and services on economic growth Chart 8 Growth rate of export of products and services (left axis) and economic growth (right axis) Chart 9 Sectoral decomposition of GDP in the years Chart 10 Changes in the volume of the export of goods and services in the years Chart 11 Real effective currency exchange rates in the years Chart 12 Growth rate of corporate and households credit in the years Chart 13 LFS unemployment rate and registered unemployment rate at the end of the quarter in the years Chart 14 Employment rates according to the level of education in Chart 15 Monthly dynamics of exports and imports in Jan 2008 May Chart 16 Monthly commodity trade balance in Jan 2008 May Chart 17 Share of individual market groups in Polish exports Chart 18 Commodity structure of Polish exports in 2008, compared to 2003 and Chart 19 Commodity structure of Polish imports in 2008, compared to 2003 and Chart 20 Commodity structure of foreign exchange balance in 2008, as compared to 2003 and Chart 21 Changes in transaction and currency prices growth rate in exports compared to changes in the real currency exchange rate (4th Q 2000 = 100%) Chart 22 Changes in transaction and currency prices growth rate in imports compared to changes in the real currency exchange rate (4th Q 2000 = 100%) Chart 23 Changes in the Consumer Price Index in Chart 24 Consumer price growth rate in comparison to the same month of the previous year Chart 25 The rate of changes of industrial output prices in comparison to the same months of the previous year Chart 26 Rate of changes in prices of construction and assembly production in comparison to the same month of the previous year Chart 27 CPI and net inflation indices as compared to the adopted inflation target, and the range of acceptable oscillation Chart 28 Interest rates and CPI Chart 29 Budget deficit and public finance sector deficit Chart 30 Industrial output changes (in %) in each quarter of (compared to the same quarters of the previous year)* Chart 31 Changes in industrial output by sections and ownership sectors of industry in (compared to the previous year) Chart 32 Changes in the production of goods by main industrial groups in 2007 and 2008 (in comparison Chart 33 Labour productivity changes by sections and ownership sectors of industry in 2007 and 2008 (in comparison to the previous year) Chart 34 Share of industry branches in output in 2000 and 2008 in current prices and fixed prices of 2000 (in %) Chart 35 Primary energy and final energy consumption Chart 36 Final energy consumption in Poland depending on the sector Chart 37 Final industrial energy consumption depending on the carriers Chart 37 Household energy consumption structure depending on its purpose Chart 39 Changes in the energy-intensity rates (left axis) and electro-intensity (right axis) of value added in the service sector Chart 40 Increase in gross fixed capital formation and gross value added in the construction sector in the years (in % compared to the previous year, in fixed prices)

223 POLAND 2009 REPORT ECONOMY Chart 41 Increase in gross value added in the construction sector in the years (in % compared to the analogous quarter of the previous year, in fixed prices) Chart 42 Construction production in selected EU countries, Q Q Chart 43 Share of the private sector in total gross value added in the selected sectors of the economy in 1995 and 2007 (in %) Chart 44 New registered and deregistered entities in the national economy under the REGON Chart 45 Structure of newly established small enterprises in Chart 45 Financial result on business activities in 2007 and Chart 47 The scale of impact of individual types of activities on a decline in the result on business activities in the second half of 2008 (in %) Chart 48 Profitability indices in 2007 and Chart 49 The scale of impact of individual types of activities on a decrease in the result on business activities in 2008 in manufacturing (in %) Chart 50 Growth rate of investment expenditures in the first and second half of 2008 in the economy sectors. 176 Chart 51 Increase in investment expenditures in the years in % (as compared to the previous year), fixed prices Chart 52 FDI inflow to Poland in the years in EUR billion Chart 53 Liabilities due to FDI as at year end in the years Chart 54 Summary Innovation Index (SII) for each EU Member State Chart 55 Convergence in innovation performance between EU Member States according to EIS Chart 56 Innovation and business centres in Poland in Chart 57 The most serious barriers to development of enterprises in the second half of Chart 58 How do you rate the existing regulations and procedures in: Chart 58 How do you rate the changes in the existing regulations and procedures which took place in 2008?. 202 Chart 60 Indicator of expectations for the tears conditions for conducting business Chart 61 Expectations regarding conditions for conducting a business in List of Boxes Box 1 Directive 2006/123/EC on services on the internal market Box 2 Product Contact Point Box 3 Structural indicators Box 4 The Act on promoting employment and labour market institutions and amending other acts Box 5 Employment of Poles in Germany Box 6 Employment of the Poles in the United Kingdom Box 7 Actions concerning returning citizens Box 8 New measure of core inflation Box 9 Steps taken by the NBP to counteract the effects of financial market crisis Box 10 Amendment to the Budget Act Box 11 Concept for Horizontal Industrial Policy in Poland (the executive part) Box 12 REACH system Box 13 System of the so called green certificates Box 14 Funding the RES promotion Box 15 Legal regulations on the fuel supply security on the market Box 16 Polish foreign investments in Box 17 Changes to the System of financial support Box 18 Rules and conditions for granting public aid to the enterprises operating within the SEZ Box 19 Review of Community provisions on public aid Box 20 Measures of Priority I Development of entrepreneurship and innovation through support for business environment institutions Box 21 Measures of Innovative Economy Operational Programme, Priority III and IV in the context of strengthening business environment institutions