Poland: Barriers to business

Poland: the battle over Warsaw's Skra stadium For 90 years, Polish and international athletes have been running, throwing and jumping at the Robotniczy Klub Sportowy (Skra) sports stadium in the heart of Warsaw. Crowds have seen national records broken and domestic champions crowned.

The site today has no sense of that history. Instead snapped, broken and warped wooden benches scar the crumbling concrete bowl as litter piles up against the rusted railings. Its long-abandoned broadcast tower is peppered with broken windows and shattered concrete.

How this stadium - prime real estate worth tens of millions of euros at the heart of Poland's capital - fell into such disrepair is at the centre of a bitter legal battle pitting Warsaw's city authority against a foreign investor that says its eviction from the site is a crude example of Polish protectionism.

Poland has seen a dramatic transformation since democracy came to the country in 1989. The process has accelerated in the decade since it joined the EU, as foreign direct investment poured in, making Poland a fast-growing, rapidly-globalising central European state.

Between 2004 and 2013, €160.5bn of FDI came to Poland, almost three times the amount that entered the country between 1989 and 2003, according to World Bank statistics. That surge helped Poland become the only EU state to avoid recession after the 2008-09 financial crisis. Since 2004, annual net inflows as a percentage of GDP almost exactly track the fluctuations of Poland's GDP growth.

But some of these foreign investors are complaining of unfair treatment in Poland. The Skra episode is one of an increasing number of disputes between Polish authorities and disgruntled foreign investors who condemn what they say are attempts by national or regional bodies to promote domestic rivals.

High hurdle

"Would I like to come in and invest in Poland again?" asks Michael Holland, who represents the Irish group that bought ownership rights for 60 per cent of the Skra complex in 2006. "Point blank: no."

The plan was to build a modern sports arena with a sprawling park on the site. But it came to an abrupt halt in January 2014, when Mr Holland's group, Global Partners Investment Fund, was told that it no longer had rights to the 52-acre plot.

Mr Holland claims the company was deprived of its legal rights by a local authority that decided it did not want a foreign investor to redevelop the site, ripping up legal precedent in the process, according to its lawyers. The local authority denies this.

"Being a foreign investor has affected us," says Mr Holland. "We are horrified that this can happen in Poland, a country which is in the EU."

Despite a net outflow of FDI in 2013 due to the eurozone crisis, Poland is still seen by many investors as an attractive proposition, thanks to its large population, rising prosperity and its geographic position at the centre of Europe. German manufacturers have turned western Poland into a vast supply chain for their factories across the border. Its banking sector is 70 per cent controlled by overseas lenders. Many US and European financial services companies have set up outsourcing operations in the country.

But its stock market, industrial footprint and workforce are still dominated by powerful state-run companies operated by bureaucrats tasked with ensuring earnings flow into the national coffers. Seven out of the 10 largest companies in Poland are controlled by the state. And in Polish and international courts, some foreign companies allege that the country's desire to protect national interests mean domestic considerations are taking priority over the rights of overseas capital.

Abris Capital Partners, a Luxembourg private equity fund, is suing Poland for at least €500m after the state-run regulator decided it was not a fit and proper owner of a local bank. A Canadian miner is taking the government to court alleging that a state-controlled company was given special treatment, while a British company is making similar allegations to the EU.

Invenergy, a US energy investor, says a unit of Tauron, another state-controlled company, has reneged on binding contracts. That has spurred a group of US congressmen into warning Warsaw to think twice about tarnishing the two countries' investment relationship.

"If the financial community sees Poland as a place where contracts do not have legal strength, it calls into question whether investors into the country will be able to get financing," says Joe Condo, Invenergy's general counsel. Tauron insists that its decisions are "consistent with Polish laws and regulations". Although no company has alleged that the government is against foreign investors, the legal disputes are an awkward distraction at a time when Poland is promoting its investment potential.

"In terms of financing, foreign investment is a very important part of our economy, and Poland needs sources of long-term financing to keep up positive growth momentum," says Andrzej Klesyk, chief executive officer of PZU, Poland's biggest insurance company. "It is not only about treating foreign investors correctly and fairly, it's more about making sure the conditions are right so that in the future, foreign investors continue to come here."

One sector that has seen an exodus of foreign investors is the country's shale gas industry. Once a promising investment proposition for major global oil and gas groups, reams of red tape and bureaucratic oversight have seen seven out of 11 foreign investors pull out of the country after spending a cumulative $500m since 2010.

The energy and natural resource fields feature frequently in skirmishes between foreign investors and Warsaw, which appears reluctant to allow overseas companies access to these industries. Late last year Janusz Piechocinski, Poland's deputy prime minister, appeared to suggest domestic companies should be given priority in these fields. "For me it is inconceivable that we involve external players, if we can do it alone," he said.

Energy security

Robert Zajdler, partner at a Warsaw law firm that specialises in the energy industry, says Poland - like many countries - is hesitant about allowing foreign investors into sectors seen as important for energy security.

"We do not want, as a country, to give concessions widely to unknown investors," says Mr Zajdler, who in the past has represented the Polish state in international arbitration cases. "We like to have a certain amount of control."

But desire for control is no defence if EU laws are broken. Such a breach, British company Darley Energy alleges, occurred during a tender process for a mining permit awarded last year.

Darley applied for a licence to mine potash on Poland's northern Baltic coast in November 2012, and no counterbids were submitted for more than four months. But after the tender process was stretched beyond the stipulated deadline, KGHM, the state-owned mining company, submitted a bid and it was granted the rights to the site on October 1, almost 700 days after Darley's submission.

EU rules against "state aid" - which Darley says Poland has infringed - prohibit members from providing goods and services on preferential terms, interventions that give specific companies an advantage, or decisions that distort competition.

"Poland has made a consciousdecision to actively back its national champions," says Philip Jeffcock, a Darley director. "This is not going to encourage international investors to look to Poland. Why would people take their money there if such things can happen?"

The government says the length of the tendering process was extended because four companies ultimately bid for the licence. "While assessing applications the order of submitting does not matter," the environment ministry said. "In the opinion of the minister of environment the proceeding of application was in compliance with the law."

Canada's Miedzi Copper has filed a similar case after it won two mining concessions, only to see them withdrawn after KGHM lodged an objection.

The environment ministry insists it does not favour local companies over foreign investors and says the tender process would be re-run due to a lack of information provided to bidders.

"In principle, the government will say that it wants to attract foreign investors," says PZU's Mr Klesyk. "But in practice, on a case-by-case basis, for the past 25 years Polish authorities have not always stood by that principle and instead sometimes move to protect their special companies."

State control

The Organisation for Economic Co- operation and Development wrote in a February report on Poland that further work was needed to "lower barriers" to boost market competition and reduce the influence of state authorities in the economy to improve competitiveness.

"National and local governments still play an important role in many potentially competitive segments of the economy," the report said, recommending "privatisation in competitive segments of the economy, notably for mining and chemical companies".

According to OECD rankings, Poland's economy has the highest level of state control of any EU member. Of the international countries surveyed, only India had a higher level of restrictive public ownership.

Darley and Miedzi's court cases are expected to rumble on for years. And while many in the Warsaw business community have sympathy for foreign investors, some say that such risks are part and parcel of investing.

"It is very easy to show up overconfident because you have been successful elsewhere and not realising how blind you are," says Preston Smith, partner at CEE Consulting Group, a Warsaw-based corporate intelligence agency.

If Mr Holland's fund is permitted to bring the Skra stadium dispute to Poland's Supreme Court, as he hopes, questions of contractual loyalty and proper practice will feature heavily in his lawyer's arguments.

Warsaw city authorities say they were entitled to seize control of the site because the Irish investors failed to ensure it was well-maintained. Global Partners counters that the city rejected permission for it to carry out the required maintenance work.

"To maintain these buildings orcarry out work on them, you have to apply for a building permit," says Mr Holland. "So on one hand they arecomplaining that we are not maintaining the place. But on the other hand they are blocking us from carrying out the maintenance."

Bartosz Milczarczyk, spokesman for the City of Warsaw, said that the company's repair proposals were rejected because they also included applications to construct residential buildings.

While the Skra dispute heads for a potentially long and drawn-out case in the country's highest court, Warsaw's only dedicated athletics stadium lies close to ruin. The city's investment plan for 2015 does not include any investment in the plot.

"The capital city of Warsaw is convinced that the situation with Global Partners Investment Fund will not harm co-operation with potential investors," says Mr Milczarczyk. "We encourage entrepreneurs to invest in our city all the time."

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