POLANDCabin pressureIntense local rivalryhas been a hugechallenge for Lot, the

struggling flag carrierPage 4FINANCIAL TIMES SPECIAL REPORT | Thursday June 14 2012

www.ft.com/poland-2012 | twitter.com/ftreports

Sporting chance is reward for progress

R ising countries have ahabit of throwingcoming-out partiesfor themselves in the

form of big sporting events andPoland is getting its chancewith the Uefa Euro 2012 footballchampionship – an event thatmarks its arrival as a developedeconomy.

The tournament has served asa benchmark for the country’smodernisation efforts over thepast five years, and in mostrespects Poland has done well.

The challenge now is to con-tinue that effort against risingheadwinds both from the crisisin the eurozone, Poland’s largestexport market, and from Polandapproaching the limits of usingits cheap but highly skilledlabour force to power growth.

“We can treat Euro 2012 asproof that we have achieved aleap in civilisation which bringsus closer to the European aver-age,” said Donald Tusk, thePolish prime minister.

A good place to get a bearingon the changes is looking south-east from Warsaw’s royal castletowards the new national sta-dium, a red-and-white confec-tion designed to look like a tra-ditional Polish wicker basket.

Five years ago when Uefa, thegoverning body of Europeanfootball, granted Poland andUkraine the right to host thetournament, the stadium was acommunist-era ruin built on therubble that had been prewarWarsaw – dumped on the rightbank of the Vistula River after1945.

It housed Europe’s largestopen-air market, a place wherevegetables and cheap Chineseclothes were sold alongsidesmuggled vodka and cigarettes,illegal software and the occa-sional machine gun.

Since then, the modernisationplan put into action by three

successive governments haslargely come to fruit.

Poland’s four host cities –Warsaw, Wroclaw, Poznan andGdansk – all have new or refur-bished stadiums that meetinternational standards.

However, direct investmentsin sports facilities (usually theshakiest when it comes to eco-nomic rationale) only made upless than 10 per cent of the morethan 95bn zlotys ($27bn) in tour-nament-related spending.

The biggest impact has comein transport infrastructure, anarea where Poland had longlagged and one that extractedboth a human cost – Poland hasthe highest road death rate inthe EU thanks to a lethal cock-

tail of aggressive drivers andterrible roads – and an economicone as investors spooked bypoor roads, stinking train sta-tions and crowded airports tooktheir business elsewhere.

Although optimistic planscalling for the construction ofmore than 3,000km of highwayshad to be scaled back by two-thirds, the country finally hasthe rudiments of a modern high-way system, albeit with somegaps that still need filling in.

Just a day before the tourna-ment kick-off last week, thefinal sections of the A2 highwayrunning from Warsaw to theGerman border were opened, forthe first time linking the Polishcapital to the rest of the conti-nent with modern roads.

“They said it couldn't be done.Everyone was convinced thatwe wouldn’t make it – but herewe are,” said a triumphant JanKrzysztof Bielecki, a formerPolish prime minister who raceddown the new highwayby motorbike hours after itopened.

Mr Bielecki, 61, headedPoland's government in 1991when the newly independentcountry was a bankrupt basketcase with no highways at all.

While many internationalsports tournaments end up witha lot of white elephants – wit-ness the fate of some of Portu-gal’s cash-strapped stadiumssince it hosted the Euros in 2004– the Polish investments havethe chance to create a more pos-itive impact, thanks in largepart to the country’s previousbackwardness.

Marcin Herra, head of the gov-ernment body responsible forpreparing Poland for the tourna-ment, estimates that Poland willsee an overall boost to its econ-omy of about 2 per cent of GDPby 2020 – largely derived frombuilding airports, highways andtrain stations several yearsfaster than would have been thecase without the deadline of thetournament.

However, once the rush ofhosting the Euro championships

Jan Cienski finds thenation making stridesthanks to Euro 2012and EU money butheadwinds are rising

Fever pitch: Polish fans cheer before the start of the drawn match against Greece last Friday, which opened Euro 2012 Reuters

Inside this issuePoznanHosting Euro2012 bringsthe country’sfifth-largestcity benefitsPage 2

Economy The outlookdepends on eurozone Page 2

Politics Tusk forces reformsthrough and hopes voters willforget quickly Page 3

Foreign policy Makingfriends with neighbours and oldenemies Page 3

Energy Politicians are keen onnuclear power but electoratewary; renewables sector needshead of wind Page 4

Car industry Poles buildnew cars but buy used onesPage 5

Euro 2012Projects brought forward willprovide a long-term boostPage 6

Other articlesPBG collapse, Page 2; Gtechprofile, Page 3; Frackingpotential, and Kruk profile,Page 5

Continued on Page 6

2 ★ FINANCIAL TIMES THURSDAY JUNE 14 2012

Poland

Construction Race to bottom claims big victim

Poland’s ambitious highwayconstruction programmewas supposed to provide alucrative bounty for localroad constructioncompanies: instead it hasturned into a disaster, asyet another contractordeclared bankruptcy thismonth due to problemsresulting from its road work,writes Jan Cienski.PBG, Poland’s third-largest

construction company, andtwo of its subsidiariesannounced they were takingthe step because of liquidityproblems stemming fromtheir road constructioncontracts, delays in gettingpaid for work on Warsaw’snew National Stadium, andproblems negotiating withbanks on new financing.PBG was one of a host of

companies that rushed totake infrastructure contractsassociated with the Euro2012 football tournament,which kicked off last Fridayat the Warsaw stadium.However, in the race to

win contracts, both theconstructioncompanies and thegovernmentseem to haveleft theircalculatorsand theircommonsense at home.Companies wereengaged in arace to the bottom

due to the government’spolicy of choosing thecheapest bid – with neitherside foreseeing the negativeconsequences.The most spectacular

failure was that of China’sCovec constructioncompany, which put in sucha low bid for two sectionsof Poland’s main east-westA2 highway that competitorsprotested to the EuropeanCommission. The protestswere ignored but theChinese ran into financialdifficulty and were kickedoff the site last year forfailing to pay theirsubcontractors.Then DSS, the company

that took over the Coveccontract, declaredbankruptcy this year.Both companies were hit

by higher-than-expectedprices for asphalt and otherraw materials, and the scaleof the task overwhelmedthem.The government has even

raced through legislation tohelp ensure subcontractorsare paid if the leadcontractors get into trouble.Poland’s construction

companies have beenpummelled on the WarsawStock Exchange – theWSE’s construction sectorindex has lost more than 58per cent of its value in thelast year, the worstperformance of any of itssectoral indices.PBG was down 13.8 per

cent at 14.63 zlotys on theWSE when the news wasannounced on June 4 andby the end of last week thestock was down to 6.62zlotys; the stock is downmore than 95 per cent overthe past year.

This is an updated version ofan article that originallyappeared on FT.com’sbeyondbrics blog

ContributorsJan CienskiWarsaw Correspondent

Neil BuckleyEastern Europe Editor

Liam NolanFT Contributor

Kamil TchorekFT Contributor

Adam EastonFT Contributor

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Andy MearsPicture Editor

David ScholefieldRichard GibsonSub Editors

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Basket case: delays ingetting paid for work on

Warsaw’s NationalStadium

causedproblems

for PBG

Poland is known as theonly EU member tohave escaped recessionduring the global down-

turn of 2009. But that statisticno longer fully reflects itsachievement. The country sawcumulative growth in 2008-11 ofnearly 16 per cent – twice asmuch as its nearest EU competi-tor – while the EU economy as awhole shrank 0.5 per cent.

Not for nothing did Ger-many’s Der Spiegel recently callPoland’s economy the “miraclenext door”.

As senior Poles readily con-cede, good luck has helped,including tax cuts by a previousgovernment, a huge inflow ofEU funds – totalling €67.3bn in2007-2013 – and exchange rateflexibility, since the country isoutside the eurozone.

With exports accounting foronly about 40 per cent of grossdomestic product – half the pro-portion of neighbours such asthe Czech Republic and Slova-kia – its larger internal marketalso provided a cushion.

Ironically, moreover, a com-munist-era impulse helpedmaintain domestic demand as itfell sharply elsewhere.

“If there is a crisis, Germanhouseholds want to increasetheir savings,” says AndrzejRaczko, a member of the man-agement board of Poland’s cen-tral bank and a former financeminister. “In Poland, house-holds want to spend money ifthere is a crisis, because theyfear it means there will not beanything in the shops.”

Poland’s banking sector,despite being largely foreign-owned, was also conservative,not venturing into the toxicderivatives that laid westernbanks low or too deeply intomortgage lending in foreign cur-rencies – still a big problem inneighbouring Hungary.

But the Civic Platform-ledgovernment of Donald Tusk isalso given credit for a sure-

footed crisis response thathelped reassure citizens.

The budget deficit did mush-room from 1.9 per cent of GDPin 2007 to 7.9 per cent in 2010 –prompting alarm from someeconomists, and threatening topush government debt above alegal limit of 55 per cent of GDP.

Continued robust growth of4.3 per cent last year combinedwith restrictions on spendinggrowth and some tax increaseshelped it beat its deficit-cuttingtarget last year, reducing it to5.1 per cent of GDP. The deficitis expected to be close to 3 percent this year.

The outlook still dependsheavily, however, on the euro-zone – and whether Greececrashes out of the single cur-rency.

Poland’s government is, fornow, holding to its forecast of2.5 per cent growth this year,though a Greek exit could seethat slow or even tip the econ-omy into recession.

But officials, business leadersand many economists believefactors that helped Polandweather the 2008-09 crisis couldagain make it more resilient

than most European economies.The large proportion of for-

eign bank ownership could be asource of contagion should theeurozone problems trigger awest European banking crisis.But Jan Krzysztof Bielecki,former prime minister and noweconomic adviser to Mr Tusk,believes western banks will doeverything possible to avoidhaving to sell or cut off fundingto their highly profitable Polishsubsidiaries.

“When you have a hen thatlays golden eggs, you don’t killand eat the hen,” he says.

Poland’s banks themselves,moreover, have no exposure toGreek debt, while – unlike inBalkan countries further south– no Greek banks have big oper-ations in Poland.

Dominik Radziwill, deputyfinance minister, says a “disor-derly” Greek exit from the euro-zone would have a “substan-tially higher” impact on Poland.“If it is a controlled exit,” hesays, “this is relatively neutralfor us.”

Concerns over the potentialimpact, however, have put pres-sure on the zloty, whose liquid-

ity tends to make it a proxyamong investors for the widerregion. That has combined withhigh energy prices to keep infla-tion at about 4 per cent –prompting a surprise quarter-point interest rate rise to4.75 per cent by the central bankin May.

Zloty weakness also pushes upthe value of the foreign-cur-rency component of public debt,

increasing the risk of breachingthe 55 per cent threshold, whichwould force the government tomake further spending cuts.

Unemployment is provingsticky, too, at about 10 per centon EU methodology, but 13 percent by Polish measures, despitelast year’s strong economicgrowth. More Polish migrants

returned home last year fromabroad, says Ryszard Petru,economist at Demos Europa, athinktank, than new jobs werecreated.

Mr Petru adds that growthwill inevitably slow because ofreduced domestic investment bywary Polish companies that arehoarding cash, and a smaller EUfunds inflow in coming years.

But Poland, unlike most Euro-pean peers, is still preoccupiedmore with longer-term thannear-term challenges.

The model of being a low-costmanufacturing centre servingwestern Europe has proved apotent way of starting to catchup with the west. As the econ-omy grows and wages rise, how-ever, that model becomes unsus-tainable.

Poland risks, says Mr Raczko,falling into a trap similar to Por-tugal, Italy or Spain, if it allowslabour costs to rise without find-ing new sources of growth andimproving overall productivity.

Mr Radziwill warns this couldhappen quite swiftly; Poland’ssuperior recent growth rate hasalready closed the gap withEurope’s more advanced econo-

mies faster than expected.“There is full consciousness in

the government, and strategiesare being worked out to preparea new wave of growth,” he says.Poland is looking at ways tosupport research and develop-ment through the tax system,he adds, and improve universityeducation.

The government has pushedthrough an important pensionreform that gradually raises theretirement age to 67 for womenand men. However, some pri-vate-sector economists are urg-ing it to undertake more ambi-tious reforms, for example of thelabour market and education.

Janusz Jankowiak, chief econ-omist of the Polish BusinessRoundtable, says while Poland’sfirst round of EU funds helpedpay for important infrastructuremodernisation, those in comingyears must be used particularlywisely.

“We have to use the secondround of EU funds to make theeconomy more productive andcompetitive,” he says. “Other-wise, we will be in the samesituation as Spain a couple ofyears ago.”

Nation avoided recession but risks persistEconomyNeil Buckley explainswhy the outlookdepends on theeurozone

‘When you have a henthat lays golden eggs,you don’t kill and eatthe hen’

Jan Krzysztof Bielecki,Former prime minister

The curving carapace ofPoznan’s Stadion Miejski, orCity Stadium, rises like a giantwhite tortoiseshell amid thesuburban apartments ofPoland’s fifth-largest city.

Until just a few years ago,this was a rooflessamphitheatre, open at one end,with earth banks on three sidestopped by concrete seats.Today, it is a €180m, 43,528-seatstadium, its steep, three-tieredstands seeming to crowd righton to the turf. The biggestvideo display screens in Polandhang at either end from 7,000tonnes of steel superstructurecovered by a high-techmembrane.

Poznan is one of eight venuesspread across Poland andUkraine for the Euro 2012championship. Theinternational spotlight has notbeen trained so strongly onthis spot since a local team,Lech Poznan, came withininches of knockingBarcelona out of the UefaCup Winners’ Cup in 1988,losing on penalties.

The challenges the 550,000-strong Poznan has faced ingetting ready for thetournament are typical of thoseof the host cities across thetwo countries – the first formercommunist states to stage itsince the Iron Curtain fell twodecades ago.

Poznan had already startedredeveloping the old stadium,and had completed one standbefore the award of thetournament to Poland in April2007 forced it to throw out theplans in favour of much biggerstands on the other three sides.

After being starved ofmodern infrastructureinvestment under communism,Poznan has built a secondairport terminal and newtaxiway, which doublesprevious capacity, and a newrail station and four new tramroutes. It has built ormodernised a dozen roads,including two city bypasses.The terminal is onthe new highway linking Berlinto Warsaw, completed two daysbefore the tournament opened.

All told, Zbigniew Talarczyk,deputy executive director ofEuro 2012 in Poznan, saysinvestment totalled 11.5bn zloty(€2.6bn).

“But not one of theseprojects was done just becausethey are going to play a fewgames of football in the city,”he adds. “All the plans existed,but some were broughtforward.”

It has been a scramble,however. The city was coveredin roadworks even days beforethe tournament opened; part ofone bypass is not complete,though Mr Talarczyk says this

will not affect the tournament.Overall, city officials expresssatisfaction that theycompleted 95 per cent of whatwas planned.

Mr Talarczyk says Uefa setexacting standards, and oftensent experts for progresschecks.

“If we have passed this test,it might be a sign for futureinvestors that we meanbusiness and we can makeprojects happen,” he says.

Though hosting a modernsports event poses biggerchallenges and requires moreinvestment for an “emerging”economy such as Poland, italso brings perhaps moreimmediately tangible benefits.

The preparations mean thatPoznan, like other host cities,now boasts infrastructure thatit would not otherwise havehad until the end of thedecade.

Those improvements, plushundreds of new hotel rooms,could be beneficial for the city.Since before the communist eraPoznan has specialised inhosting exhibitions and tradefairs – it hosted UN climatechange talks in December 2008.

It also has ambitions to boosttourism, based on its 1,000-yearhistory and attractive mix ofarchitecture, much of whichhas been given a facelift. Thejewel is the medieval marketsquare, Stary Rynek, whichwas completely rebuilt afterbeing flattened by theadvancing Russian army in thesecond worldwar, and is now a cosmopolitanbustle of restaurants andshops.

Poznan’s success inexhibitions and tourism, inbuilding a healthy network of

small enterprises, and itslocation close to Germanymean that its unemploymentrate is already low, at 3.6 percent. Economic output percapita is about twice thenational average, making itPoland’s second mostprosperous city after Warsaw.

Euro 2012, says RyszardGrobelny, Poznan’s mayor, willenable the city to trumpetthose achievements to theworld.

“It is a perfect opportunityfor us to change the perception

of Poland and of Poznan,especially for those who havenever been to our city,” hesays. As well as enhancing thequality of life for residents, MrGrobelny adds that thepreparations have offered thema chance to increase the senseof community spirit and civicpride.

“One strategy we adoptedwas to give some added valueto the tournament itself, tohave projects which increasedsocial bonds betweenresidents,” he says, citing a

highly successful campaignlinked to Euro 2012 to urgecitizens to donate blood.

In the football world,however, Poznan has alreadyacquired a particular notoriety.Fans of Manchester City, theEnglish Premiershipchampions, liked the way thatPoznan fans celebrated theirteam’s goals when the two metin 2010 – doing a distinctivedance involving turning theirbacks to the field, holdingscarves above their heads, andbouncing up and down. City

fans have adopted the dance,calling it “doing a Poznan”.

But about rumours that sincePoznan’s new ground wascompleted, fan celebrationshave caused nearby apartmentbuildings to shake, RyszardDembinski, a senior city officialinvolved in building it, floatsanother explanation.

“Since about half of theresidents of those buildings areLech fans, I suspect it wasbecause when the team scored,they were all jumping up anddown, too.”

More than merely afacelift for the footballCity ProfilePoznanHosting Euro 2012brings many benefits,says Neil Buckley

‘If we have passedthis test, it might bea sign we meanbusiness and canmake projects happen’

Stary Rynek, Poznan’s medieval market square, is a cosmopolitan bustle of markets and shops Alamy

FINANCIAL TIMES THURSDAY JUNE 14 2012 ★ 3

Poland

When capitalism returnedto Poland, one of the firstthings the new democraticgovernment looked atdoing was upgrading thenational lottery, which iswhy, in 1990, it turned toGtech, a US company thatspecialises in gamingsystems.

Gtech, which is nowowned by Italy'sLottomatica, startedworking in the primitiveconditions of an almostbankrupt country, andwithin two years had builtPoland's largesttelecommunicationsinfrastructure, linkingshops and retail outletsaround the country viaradio or satelliteconnections.

Totalizator Sportowy, thelocal lottery monopoly, hadso little money that Gtechinvested its own funds tobuild the network andinstall computers.

Times were so uncertainthe management worriedthe whole contract mightcome to a swift end in1991, when communist die-hards in the Soviet Unionstaged their failed coupagainst the head of state,Mikhail Gorbachev.

A couple of years later,

as Gtech’s newly formedPolish team worked to setup a lottery system inneighbouringCzechoslovakia, the lattercountry ended up splittingin two midway through theproject.

Despite the turmoil,Gtech has stayed, and hasturned its Polish office intothe hub of its Europeanoperation, with highlyspecialised programmerswho now design lotterysystems for countries suchas Israel, Turkey, Finland,Ukraine, and a host ofothers.

“The company quicklyfigured out that Polishworkers were good – andalso cheap,” says WojciechWlodarczyk, the head ofGtech’s Polish office.

The company now hasmore than 300 employeesin Poland, takingadvantage of the country'sstrong level of technicaleducation – computer skillsare a strong point in aneconomy that generallyfalls short on research anddevelopment – and lowcosts. Jaroslaw Dabrowski,regional director fortechnology, estimatesqualified Polishworkers still costless than half theircounterparts inwestern Europe orthe US.

That is anequation that haspulled many otherinvestors into Poland.The country is nowone of the world’sleading destinations forshared service centres –operations that often beganas simple call centres, but

which now often involveskills such as management,human resources,accounting and computerprogramming.

“We don’t want to beseen as cannon fodder – wewant to be seen asspecialists,” says MrWlodarczyk.

Another advantage forPoland, compared withother outsourcing centressuch as India and thePhilippines, is that Polesdo not need visas to travelaround the EU, they are inthe same timezone aswestern Europe, and sharelegal, linguistic andcultural characteristicswith their customers.

“Polish computerprogrammers are betterthan we require,” says MrDabrowski, adding that hisstaff was

originally mostlyAmerican, but is nowalmost completely local.

Gtech has made an artout of slashing costs, fromsmall measures such assupplying porcelain insteadof paper coffee cups to itsworkers, to locating itshead office in a dismalbuilding overlookingrailway tracks runningthough central Warsaw.

“Our costs are very lowand the quality of ourpeople is very high, sowe’re in a comfortableposition,” says MrWlodarczyk. Those lowcosts prompt the companyoften to replace any staffwho leave from its US orBelgian offices with newhires in Poland.

The relationship withTotalizator continues, andGtech has recentlycompleted work on thethird iteration of the Polishlottery system.

In the process, it hasbecome the largestcustomer of one of Poland'smobile telephone operatorsbecause of the hugeamount of data that flowsthrough the network.

Almost all the work forTotalizator was created

and developed byPolish engineers,including much ofthe system

architecture.“The quality

assurance standardsthat we use around the

world were developedhere,” says Mr Dabrowski.

High skills prompt one-way betForeign InvestorGtechJan Cienski findsWarsaw is the hubof the gamingsystems company’sEuropean operation

Turkey is among countriesfor which Gtech hasdesigned lottery systemsAlamy

Over the past few centuries Polandhas come to expect little good fromacross the German border, which iswhat makes the conversion of thecountry’s ancient foe into a close allyespecially striking.

More than two decades after the endof communism and eight years afterPoland joined the EU, Berlin hasbecome Warsaw’s key ally.

The clearest sign of that was lastyear’s speech in Germany by Rado-slaw Sikorski, Poland’s foreign minis-ter, who called on Germany to take amuch more active role in helping savethe euro. “I will probably be the firstPolish foreign minister in history tosay so, but here it is: I fear Germanpower less than I am beginning tofear German inactivity. You havebecome Europe’s indispensablenation,” said Mr Sikorski.

When Poland regained its independ-ence after 1989 it looked to the US asthe ultimate guarantor of its freedomthanks to Washington’s lead in theanti-communist alliance, but overtime that relationship has withered.

Germany is its largest trade part-ner, and Poland is more important forthe German economy than Russia.

Hundreds of German firms have setup production and service centres inPoland, and Polish companies aretightly integrated into Germany’sexport-oriented economy.

“With Germany, our contacts aredaily at all levels about all issues, notjust about foreign policy but alsoabout the domestic policy of bothcountries,” Mr Sikorski tells the FT ina recent interview. “Whereas the rela-tionship with the US is somewhat one-dimensional. Its most importantdimension is foreign security.”

The security element is also shrink-ing in importance after Washington’s2009 decision to scrap a missiledefence programme that was to bepartly based in Poland – an announce-ment embarrassingly made on Sep-tember 17, the 60th anniversary of theSoviet Union’s attack on Poland.

After being involved in militarymissions in both Iraq and Afghani-stan, Poland is now much more ori-ented to building up its strength inBrussels and on immediate foreignpolicy concerns in its neighbourhood.

In the EU, Poland pushed hard to bepart of the German-led fiscal pact,which puts pressure on countries tokeep budget deficits and public debtlevels under stricter control. Polandwanted to be in the pact to ensure itwas not completely frozen out of thedecision-making affecting the euro-zone – a club it still aspires to join.

“In my opinion we have no choicebut to adopt the euro – there is noquestion that the benefits outweighthe costs,” says Andrzej Raczko, aformer finance minister, now a senior

official at Poland’s central bank.The political cost of not being in the

euro was painfully apparent duringPoland’s EU presidency in the secondhalf of last year, when Poland was leftout of crucial decisions being made bythe 17 members of the eurozone.

The eventual goal is for Poland toplay a similar, albeit realisticallysmaller, position to Germany in theeast that France plays in the west.

“I do think that in a union of 28, itis not enough for two partners, twopistons, to power the Europeanengine,” says Mr Sikorski. “Polandtries to be helpful in representing theinterest of our region, which consistsof 10 countries, and therefore I thinkit would be useful for France and Ger-many to hear Poland’s views.”

The other main direction ofPoland’s foreign policy is eastward,first to improving relations with Rus-sia then to ensure former Sovietrepublics such as Ukraine and Belaruschoose the west over Moscow.

Warsaw and Moscow have made aneffort to overcome bitter issues fromthe past, such as the Soviet murder of20,000 Polish officers in 1940, but tieswere severely stressed after the 2010air crash outside the Russian city ofSmolensk that killed president LechKaczynski and other senior officials.

Senior members of the rightwing

Law and Justice opposition partyaccused Russia of being involved, andthe party’s monthly marches havetaken on an anti-Russian overtone.

“Of course it is a brittle relationshipbecause we are in the course of areconciliation, and you only reconcilewith former enemies,” says Mr Sikor-ski.

However, trade contacts are up.Although imports of Russian oil andgas are three times larger than the€8.5bn in Polish exports, the economicdimension of the relationship isincreasingly important.

But Polish diplomacy, together withefforts by Germany and the EU, failedto persuade Alexander Lukashenko,the dictatorial leader of Belarus, tohold free elections and to allow thepolitical opposition to function. Bela-rus, faced with EU sanctions, hasturned strongly towards Russia.

However, Poland is still hopingUkraine, Poland’s co-host in the Euro2012 championship, will end up choos-ing Europe despite authoritarian wob-bling on the part of its government.

“We have recent concerns over thetreatment of the opposition,” says MrSikorski. “They know we are watch-ing the run-up to the October generalelection very closely. This, I believe,will be the real test of whetherUkraine chooses to approximate andeventually join the EU or whether ittakes a different civilizational path.”

Making friendswith neighboursand old enemiesForeign policyThe eurozone is importantlooking westwards butthe east is still a priority,writes Jan Cienski

‘I fear Germanpower less thanI am beginningto fear Germaninactivity’– RadoslawSikorski

Apopular theory inpolitics posits that ifa government wantsto force down some

foul-tasting medicine, it isbetter to get the nastinessover as early as possible inthe hope that voters will haveforgotten by the time theyhead back to the polls.

That is the basic strategyfor the second term of DonaldTusk’s centrist Civic Platformparty – and opinion poll rank-ings certainly bear out thenegative impact of economicreforms introduced during thepast few months, as the partydropped to its lowest level ofsupport in five years.

Mr Tusk’s first term inoffice, from 2007 to 2011, wasoften criticised for an aver-sion to unpopular reforms,concentrating instead on miti-gating the consequences ofthe global economic crisis atthe cost of sending the coun-try’s deficit and public debtsoaring.

Winning power for an

unprecedented second termlast October, Mr Tusk wasforced by increasingly scepti-cal rating agencies and inter-national markets to promisewide-ranging reforms.

These include slashing theregulations protecting manyprofessions, ending a lot ofpopular tax loopholes, and,most controversially, promis-ing to raise gradually theretirement age from 60 forwomen and 65 for men to 67.

“Some projects have to bepassed in conditions of a con-flict of interests,” Mr Tusktold reporters.

“Not every interest can bereconciled. I am trying not tomake the situation in Polandworse, but when I am con-vinced about a certain project– as I am with pensions ... Iam prepared to defend it withthe awareness of what theprice might be.”

The political price wassteep and quickly apparent.

The rightwing oppositionLaw and Justice party andthe Solidarity labour union –heir to the union movementthat helped end communismmore than two decades ago –rallied thousands of protest-ers on to Warsaw's streets.

As parliament passed theretirement legislation, angrySolidarity activists barred thegates of the building, prevent-ing MPs from leaving.

Just as retirement legisla-tion was working its waythrough parliament, JaroslawGowin, Mr Tusk’s justice min-ister, was pushing his pro-gramme of deregulating up to200 professions.

Mr Gowin told a conferencein Wroclaw the first reformefforts would create as manyas 100,000 jobs.

“We are smashing the wallthat millions of young Polesrun into,” he said.

But the steps have enragedregulated professions, particu-

larly taxi drivers, who feartough exams making it diffi-cult to become a licensed cabdriver will be scrapped, open-ing the door to greater pricecompetition.

Thousands of drivers intheir taxis blocked the streetsof the capital in May, andalmost every taxi in the coun-try sports a sign on the rearwindow warning of the diresafety consequences of dereg-ulating the industry.

The public discontent isreflected in opinion polls.Civic Platform has the sup-port of slightly more than aquarter of the electorate, justa few points ahead of Lawand Justice and far below the39 per cent it won in the lastparliamentary elections.

However, while Civic Plat-form has lost support, most ofthose disaffected voters seemto have shifted into the unde-cided column, as the rankingsof the other parties have notshown much improvement.

“If the party's poll perform-ance lasts more than sixmonths it will be a trend,”says Hanna Gronkiewicz-Waltz, Warsaw mayor anddeputy chair of Civic Plat-form.

“But you can see that thelevels of the other parties arestable – no one is taking overCivic Platform's electorate.”

Law and Justice seems tohave a ceiling of about 25 percent support.

Its voters tend to live insmaller towns and villages,are older and more pious andrespond well to the party’snationalism, its support forthe conservative wing of thepowerful Roman CatholicChurch and to the party’sobsession with the 2010 aircrash near Smolensk in Rus-sia that killed president LechKaczynski, the twin brother

of party leader Jaroslaw Kac-zynski.

The left is divided betweenthe ex-communist DemocraticLeft Alliance and the newparty of Janusz Palikot, abusinessman who last yearfound himself in parliamentat the head of a populist anti-clerical movement.

The two parties each haveabout 10 per cent of the elec-torate, and are locked in abitter struggle over the lead-ership of the left.

The limitations of the oppo-sition are a boon for Mr Tusk,who has not yet stopped dol-ing out the medicine for hisvoters.

Later this year parliamentwill tackle tax breaks popularwith artists and journalists,attempt to end special pen-sion privileges for uniformedservices and miners (benefitsthat miners won by threaten-ing to storm parliament in2005), and a revamp of a sepa-rate medical and pension sys-tem for farmers, the mainstayof the Polish People’s Party,Mr Tusk’s junior coalitionpartners.

Mr Tusk’s party hopes thereforms will be over quickly,giving Civic Platform timeto rebound before electionsfor the European Parliamentin 2013. National parliamen-tary elections are set for2015.

Tusk forces austerity throughand hopes voters forget quicklyPoliticsThe ruling party haslost support oversocial changes, writesJan Cienski

‘We are smashingthe wall that millionsof young Polesrun into’

Jaroslaw Gowin,Justice minister

Poles apart: Solidarity members gather at the presidential palace during a protest against government plans to raise the retirement age to 67 AFP/Getty

4 ★ FINANCIAL TIMES THURSDAY JUNE 14 2012

Poland

When Poland joined the EUin 2004, it brought the lib-erty Poles had been waitingfor since the fall of commu-nism in 1989: the freedom tolive abroad, and get thereaffordably.

An estimated 1m Polesemigrated to the UK andIreland. Many have beencommuting back to Polandever since – for everythingfrom good value dental careto better summer weather.

Thousands of othersflit back and forth, workinga few months aboard,then flying home. Europe’slow-fare airlines – Ryanair,Budapest-headquarteredWizz Air, and others – havebeen the biggest beneficiar-ies of this migration.

The competition hasproven to be an enormouschallenge to Poland’s loss-making flag carrier, LotPolish Airlines, which lastyear carried 4.6m passen-gers and posted a loss of145.5m zlotys.

At a time when other cen-tral European carriers such

as Hungary’s Malev havegone bankrupt, Lot is fight-ing for survival, and thecompetition is growing.

The latest battle centreson the lucrative Warsawmarket, Poland’s largestwith 9.3m passengersserved in 2011, a 7 per centincrease over 2010. Lot haslong seen rivals such asLufthansa siphoning well-heeled passengers fromWarsaw to its own hubs.

Now it is likely to see astronger challenge at thecheaper end of the market.

Ryanair pulled out ofusing Warsaw’s Chopin air-port in 2008 after a disputeover landing fees – MichaelO’Leary, the airline's flam-boyant chief executive,called it a “shocking air-port”.

Instead, the discount car-rier put unpronounceabledestinations on the mapsuch as Bydgoszcz, Rzeszówand Wroclaw, its firstPolish fleet base, tying sec-ondary Polish cities directlyto European destinations.

That approach contrastswith Lot’s hub-and-spokesystem based on Warsaw asits main airport for foreignflights. Lot now faces arenewed low-cost challenge,thanks in part to the infra-structure upgradesprompted by the Euro 2012football championship.

The tournament providedthe impetus for Warsaw’slong-awaited low-cost air-port at Modlin, a former airforce base around 40kmnorth-west of the city cen-tre.

Ryanair begins flightsfrom Modlin on July 16,launching eight new routesit hopes will carry about700,000 passengers a year.Eleven more routes will beadded in the autumn.

Wizz Air has also movedto Modlin, even though theold airport boasts a refur-bished terminal and a newrail link some 20 minutesfrom the centre.

“Wizz Air is moving toWarsaw Modlin to get lowerlanding fees,” says Prze-myslaw Przybylski, spokes-man for Warsaw Chopin.

“But that is fine, WarsawChopin helped establishModlin exactly to cater forthe low-cost airlines whichwere overcrowding ourfacilities, and we remain ashareholder in the new air-port.”

Lot also faces change.The treasury ministry,which owns 68 per cent ofthe carrier, is hoping to pri-vatise it this year.

Plans to sell a 50 per centstake to fast-growing Turk-ish Airlines fell throughthis month, largely overTurkish concerns that EU

rules would prevent it fromtaking full control of Lot.

The treasury may end upprivatising Lot through theWarsaw Stock Exchange,and there are also hopesthat Air China may take aninterest.

As privatisation nears,Lot has been struggling toimprove its bottom line.The carrier’s net loss hasbeen declining while itspassenger numbers havebeen rising at an annualrate of 9 per cent.

The airline says its loadfactor (a measure of effi-ciency) was more than 76per cent last year, in linewith many competitors, andLot predicts an operatingprofit of 52.5m zlotys for2012, which would be itsfirst profit since 2007.

In November, Lot will bethe first European airline toreceive Boeing's new B787Dreamliner, one of the mostfuel-efficient airliners in thesky.

It will serve Lot’s routes

between Poland and NorthAmerica.

This suggests that, withLot facing competitioncloser to home, it will stead-ily build its interconti-nental network.

“Lot knows Europe is get-ting extremely competitive,but it could carve out aniche running long-haulflights,” says Stephen Fur-long, an airline analyst atDavy, an Irish brokerage.

“The arrival of theDreamliner definitelymakes that a possibility.”

The rivalry close to homelooks to be getting evenfiercer.

OLT Express, a newPolish airline, began operat-ing domestic routes inApril. Aiming to competewith Lot’s internal flightsand Poland’s slow intercityrail services, it has cheapprices and frequent flights.

“This is a big country,people are feeling wealthierall the time, and they arestill unsatisfied with theroads and railways,” saysJaroslaw Frankowski,OLT’s managing director.

“Lot didn’t believe mewhen I pitched them theidea two years ago that low-fare domestic flights maketotal sense in Poland. Nowthey’re having to cut fares,and they don't have enoughfleet to compete with us.”

Competitors manage to f ly rings round national carrierAirlinesIntense local rivalryis putting pressureon Lot, writesKamil Tchorek

‘People are feelingwealthier all thetime and they arestill unsatisfied withroads and railways’

Cabin pressure: Lot has been struggling to improve results

A collection of weed-riddled con-crete buildings languish justoutside the village of Zarnowiecnear Poland’s Baltic coast – areminder of the country’s unfin-ished nuclear energy pro-gramme of the 1980s.

The project, like its commu-nist patrons, was brushed asidein 1989.

But nuclear is back in Polandas Warsaw hunts for ways ofreducing its carbon dioxideemissions as part of its EU com-mitments – difficult to do in acountry that relies on pollutingcoal for 90 per cent of its elec-tricity. Poland also hopes toreduce its energy dependence onRussia, which supplies almostall of its oil and most of itsnatural gas.

And, despite the promiseoffered by the country’s poten-tially large shale gas deposits,premier Donald Tusk and hisgovernment are hedging theirbets by committing to build twonuclear power plants by 2035.

Zarnowiec is listed as one ofthree potential sites for thecountry’s first plant, along with

Choczewo in Pomerania, andGaski on the Baltic coast.

Although it is controversial,the nuclear programme enjoysstrong political support – in May2011, the Polish parliamentvoted overwhelmingly in favourof building two plants, whichwhen fully operational, will pro-vide Poland with an extra 6GWof electricity.

Polska Grupa Energetyczna(PGE), the state-controlledenergy group entrusted by thegovernment with overseeing thedevelopment of the programme,plans to start building the firstplant in early 2016 at a cost of50bn zlotys.

The company says that thefirst plant’s three reactors willbe fully operational by 2025.

So, who will foot the bill?Karolina Siedlik, head of

energy practice with the War-saw office of CMS CameronMcKenn, the law firm, says thegovernment would need to find“some very adventurous bankswilling to finance a politicallydifficult project”. Equally, thelarge scale of the programmecould force PGE to increase itsequity, which in turn could seethe group going direct to themarkets specifically for thenuclear project.

PGE Energia Jadrowa, thesubsidiary created to overseethe development of the nuclearenergy programme, is receiving

advice on potential fundingstructures from KPMG, the con-sultancy. One possibility is cor-porate finance lending based onPGE’s balance sheet sturdiness.

A second option is the estab-lishment of a special purposevehicle, but banks may see thisroute as a riskier bet as theywould have no recourse to PGE.

The capital intensity of theproject will prove “a massivestretch on PGE”, says RobertMaj, equity analyst at KBCSecurities in Warsaw.

He points out that the cost ofbuilding two plants could equal13.3bn zlotys per gigawatt,almost three times the plannedcost of the coal-fired Opole gen-erating plant – Poland’s mostexpensive power plant to date.

The tender for the firstnuclear plant’s technology sup-pliers will be formally openedlater this year.

The chance of new business,an increasing rarity in theindustry, has attracted interestfrom the US-Japanese group GEHitachi, France's Areva andWestinghouse, a unit of Japan’sToshiba.

However, there seems to belittle Polish interest in Russiannuclear knowhow. Ms Siedliksays: “Politically, Russian[nuclear energy] technology willnot fly in Poland.”

Getting the money will not bethe only challenge.

Despite broad party support, a2011 ministry of economy sur-vey revealed that only 38 percent of Poles are in favour ofnuclear energy. So convincingPoles that nuclear energy is nec-essary will be the government’snext hurdle.

In March, the ministry ofeconomy launched a three-yearinformation campaign costing18m zlotys, arguing in favour ofthe benefits and safety ofnuclear generated energy.

The argument will be a diffi-cult one to make as nuclearopponents – a broad collectionof local residents, Polish envi-ronmental NGOs and Green-peace – are also mounting theirown public relations campaign.

In a sign of rising opposition,in February residents of the sea-side town of Mielno – 10km fromthe proposed site at Gaski –rejected the location of the pro-posed plant in a locally organ-ised ballot.

In addition, more than 50,000German citizens have filedonline petitions to the Polishministry of economy since Janu-ary, declaring their oppositionto the programme.

Professor Jan Haverkamp, aGreenpeace energy analyst, saysthe environmental group andChoczewo residents will organ-ise a week-long anti-nuclearworkshop in July.

The government is due todecide on the location of thefirst nuclear plant in 2013. Someanalysts believe its constructionphase is more likely to com-mence between 2018 and 2020.

Public debate, protests andthe resulting possibility of per-mit delays, are all likely todelay the government’s andPGE’s plans to lay the first“nuclear concrete” on schedule.

Politicians backnuclear – butvoters still waryAtomic energyWarsaw seeks waysto reduce relianceon Russian gas andcarbon emissions,writes Liam Nolan

‘[Govermentmust find]adventurousbanks for apoliticallydifficult project’Karolina Siedlik

A t first glance, Poland’srenewable energy sec-tor appears to be doingquite well, and the

government’s target of produc-ing 10.4 per cent of the country’sfinal energy consumption fromrenewable energy by 2012 hasalready been exceeded.

But a closer look shows thatthis growth in green energy haslargely been achieved usingmethods that are cheap andeasy, but hardly sustainable.

Poland is the largest hard coalproducer in the European Unionand, together with brown coal,the dirty fossil fuel powers theproduction of more than 90 percent of the country’s electricity.

That means guaranteed highcarbon emissions.

The cheapest way to reducethose is a process known as co-firing. More than half of Polishgreen electricity is produced bythrowing biomass, often simply

wood and straw, into the boilersof the country’s coal-fired powerplants. Co-firing biomass withcoal in Polish power plants hasmore than tripled in the lastfive years.

Ironically, for one of the EU’slarger farming countries, Polandhas already exhausted its ownsources of biomass and increas-ingly imports it.

Bogdan Gutkowski, presidentof the Polish Offshore WindEnergy Association, is witheringin his assessment: “This is atrick, it’s not renewable energy,it’s coal energy. This is the bigenergy companies taking greencertificates from the renewableenergy sector.” But, he adds: “Inthree to five years this will notbe a problem, because co-firingdestroys the boilers.”

Apart from biomass, wind ispowering much of the growth inthe renewable energy sector.

The installed capacity of windenergy in Poland has grown 20-fold in the past six years asdevelopers have taken advan-tage of good wind speeds, partic-ularly in the north-west of thecountry.

“It’s a country with wind. Theenergy prices and the incentivesystem are attractive and webelieve it is an economy withstrong growth. If I have tochoose where to invest in

Europe, Poland is my firstchoice,” says Sigieri Diaz Pal-lavicini, chief executive ofGreentech Energy Systems.

The Danish-based developer,majority owned by Italy’s GWMRenewable Energy, has eightprojects in the pipeline inPoland.

Despite its windy shores,Poland is still a less draughtyplace than Spain, where windfarms account for 60 per cent of

energy output at times, butthere is still growth potential.

Although the growth of windpower is impressive, it stillforms a small part of Poland’senergy mix, accounting for just1.7 per cent of the country’selectricity production last year.

According to the RenewableEnergy Institute (IEO), an inde-pendent think tank, Poland isutilising just 17 per cent of itspotential renewable energyresources, with wind and solar amere 0.2 per cent of potential.

The lack of regulatory clarityhas also harmed development.

The Economy Ministry’sannouncement two years agothat it would change the sup-port system for renewableenergy has frozen the market asbanks wait to see the new pro-posals.

After repeated delays the gov-ernment is aiming to get theRenewable Energy Act into lawin January next year, althoughmost observers reckon it willactually pass in March or April.

For the first time since 2005,growth in the amount of windcapacity connected to the gridslowed last year and those wereprojects that were developedseveral years ago.

“The number of projects thatare waiting is huge. These aregood projects, fully permitted,but the banks are not willing tolend money until they have clar-ity and they will only do so ifthe developers take the risks,”says Rafal Hajduk, a partnerwith Norton Rose, a law firm.

The latest draft of the law sig-nificantly reduces support forco-firing and raises it for micro-generation or small-scaleprojects, which also addressesanother barrier to development,the weakness of the nationalgrid.

The electricity grid is particu-

larly under-developed in north-ern Poland, where most of theonshore and future offshorewind projects are.

Even if the government helpis lavish, there is only so muchspare capacity to connect large-scale renewable projects.

The answer, says GrzegorzWisniewski, head of the IEO, isto promote microgeneration ashas happened in the UK.

“We have only 1,500 installa-tions in renewable energy and70 per cent of those belong tothe big utilities.

“We have no real independentrenewable energy producersbecause small-scale technologywas not developed properly,”says Mr Wisniewski.

“This is an opportunity for usto increase the number of smallproducers.”

If the law encourages thediversification of technologytypes, such as small-scale bio-mass, biogas and wind projects,new jobs may be created, addsMr Wisniewski.

The potential for futuregrowth is enormous.

The Polish renewable energysector has generated around25,000 jobs so far. Europeancountries with a similar propor-tion of renewable energy intheir final consumption havethree or four times that.

Green electricity sector will growfaster when it gets head of windRenewable energyBiomass thrown intocoal-fired boilers toreduce emissions is nosustainable solution,writes Adam Easton

Breeze blocks: windmills near Kisielice in northern Poland – apart from biomass, wind is powering much of the growth in the renewable energy sector Getty

‘These are goodprojects, fullypermitted, but banksare not willing to lenduntil they have clarity’

FINANCIAL TIMES THURSDAY JUNE 14 2012 ★ 5

Poland

Fracking Country ‘has potential’

Poland – along withRomania, Ukraine, and to alesser extent, Lithuania,Hungary and Bulgaria – hasbeen highlighted in a recentreport by KPMG on the“fantastic opportunities,lying beneath peoples’ feet”from shale gas developmentin central and easternEurope, writes KesterEddy.“Based on 2010 annual

consumption rates, theestimated amount of shalegas in CEE, at 4.13tcm, hasthe potential to cover theregion’s gas demands fordecades,” the report by theprofessional services firmstates.Shale gas may have

revolutionised the USmarket in the past 10 years,but there are a number ofreasons why that will beharder in central andeastern Europe, says KPMG.Among these are the

difficulties of finding thefinance, sorting out themineral rights (unlike in theUS, the undergroundresources are typicallyowned by the state inEurope) and meeting tighterenvironmental standards –extracting shale gas by thesystem known as “fracking”,which uses water andchemicals to release theunderground gas, raisesconcerns about pollution ofwater supplies.But, there is “no doubt”

that development of theshale gas industry is“inevitable” in CEE, saysSteve Butler, director atKPMG in Hungary’s energyand utilities advisorypractice, and co-author ofthe report.“There are proven

reserves in severalcountries, and all, withoutexception, are desperate todiversify their energysupplies,” he adds.This – along with rising

demand and dwindlingdomestic energy suppliesacross the region – is thecrucial driver.According to the study,

Poland not only leads thepack in terms ofdevelopment – it hadawarded 111 concessions to

30 companies/consortiumsfor unconventional gasexploration by February thisyear – it also boasts one ofthe larger shale gasreserves, with an estimated770bcm consideredrecoverable.This compares with

annual consumption of just17bcm (2010), of whichalmost two-thirds was fromimports. With demandexpected to rise, especiallyfrom households, domesticshale gas production wouldbe a welcome relief. Polandhopes initial test productionof shale gas will begin in2014, or 2015 at the latest.As the study notes, CEE

countries are all “heavilydependent on natural gasimports, making themvulnerable to supply andgeopolitical risk. Onaverage, 69 per cent ofregional gas consumptionwas covered by imports in2010, of which more than90 per cent was suppliedby Russia.”The risk of having the

taps turned off in midwinter– as happened brieflyin 2006-2009 on theUkraine border – is just toogreat.Exploiting domestic

reserves also creates localjobs and helps the balanceof payments.In addition, as Marcin

Rudnicki, partner at KPMGin Poland, stresses, thedesire to raise livingconditions to “somethingcloser to those in westernEurope” means a long-termincrease in energy demandacross the region.For Mr Rudnicki, who

believes the opportunitiesare “simply fantastic,” thecombination of demand sidetrends means “the decisionto overcome the challengesand tap these deposits canonly be a matter of when,not if”.If Poland can successfully

prove its reserves yieldaffordable shale gas, othersmay be forced to follow.

This is an edited version ofan article that originallyappeared in the beyondbricsblog on FT.com

The growing economic crisis shouldmean fat times for debt collectionagencies, but Piotr Krupa, chiefexecutive of Kruk, the Polish marketleader, is not thrilled at thepossibility of the Polish economybeing dragged down by the problemsin the eurozone.

“Like every businessman, I’mafraid of recession,” says Mr Krupa,a 40-year-old who still has the lookof a graduate student. “There is lessbad debt during a boom, but ahigher repayment rate, while in arecession or in a slowdown there ismuch more bad debt, but therepayment rate is a lot lower.”

A sharp slowdown in the Polisheconomy would mark a change inoperating environment for Mr Krupa,who built his company duringPoland’s long run of prosperity andthe country’s remarkable success infending off the recessions that hitthe rest of the EU starting in 2009.

His business career dates back to1996, when he and a fellow lawgraduate hit on the idea of writinglegal briefs for local law firms, andthen started writing legal guides forworkplaces hiring the handicapped, apopular tax dodge at the time.

Debt collection was a fluke. Thepair, who had by this time acquiredtheir first employee, wereapproached by a retailer sellingwhite goods on instalment plans andhaving trouble getting clients to pay.

In the end, the retailer did not givethem a contract, but the two thoughtthe business had potential and in1999 turned to a mobile operator tosee if they could collect bad debts.

They received 532 problem clientsand were told to do their best.

“We sent them a dry letter usingvery legal terminology, and after acouple of weeks we mailed theletters again, and then again, andthen again,” says Mr Krupa.

When they returned to the mobileoperator, they were told more than40 per cent of the customers hadpaid – a high success rate – and toexpect an email with another list ofproblem clients. “When we openedour email, we saw there were 17,500cases,” says Mr Krupa.

Abandoning book publishing,Kruk bought printers and hired30 people. Within two years, it

had 200 employees and 12 clients.Those clients were interested in

Kruk buying the bad debts fromthem so they could get them offtheir books, but the company lackedthe capital to do so, and theirattempts at getting a bank loan tofinance debt acquisition wererebuffed. Instead, they sent out ateaser note to private equity funds.

“The response was amazing,” saysMr Krupa, whose nondescript officein suburban Wroclaw belies hiscompany’s success.

“We had funds from Iceland, NewYork, Ireland and London – some ofthem were offering us more than$1m for the company we had built.”

Initially, the partners weredelighted to think their companycould be worth as much as $1m, butthey ended up selling for more.

Warsaw-based Enterprise Investors,one of the oldest and largest privateequity funds in the region, paidabout $20m for a 70 per cent share ofthe company.

Kruk, which had not previouslyhad a HR department and whosehiring had been a haphazard processaimed at quickly pulling in warmbodies into a fast-growing company,became much more formal.

The firm also changed its approachto debtors thanks to an extensivesurvey it conducted in 2006.

Mass marketing was very new inPoland and people ended up rushing

into contracts for mobile phones,TVs and other expensive consumergoods they did not understand andcould not really afford.

“We saw that about 80 per cent ofproblem loans were to people whoreally wanted to pay and felt badabout not being able to,” he says.

Instead of demanding fullrepayment of past debts, Kruk begannegotiating long-term schemes aimedat getting people to pay regularlysmall sums they could afford.

The company also blanketed thecountry with advertisements callingon people with financial trouble totake the initiative and contact Krukto work out payment terms.

The company was even workedinto the storyline of Poland’s leadingsoap opera.

Business boomed, and Kruk nowcontrols about a third of the Polishdebt collection market and almost 80per cent of the one in Romania: it isalso expanding into the CzechRepublic and Hungary.

In 2011, it was listed on theWarsaw Stock Exchange, selling369m zlotys ($108m) in shares. Sincethe flotation, Kruk has been one ofthe WSE's better performing shares,gaining about 10 per cent in anotherwise lacklustre market.

Poland’s non-performing loan rateis about 7 per cent, but the steadilyexpanding loan portfolio – whichgrew by 10 per cent last year –means the amount of bad debt isalso rising, hitting 39bn zlotys lastyear. If Poland manages to keep itsrecord of avoiding an outrightrecession, Kruk looks set to continuedoing well.

“I have thousands or repaymentagreements and people are makingtheir payments. If people get intotrouble, there will be problems withcash flow,” says Mr Krupa.

Debt collector took a politeapproach and it paid offCompany ProfileKrukAgency’s rational approachto clients who could notpay returned dividends,writes Jan Cienski

On the case: one of Kruk’s collectors at work

Instead of demandingfull repayment, Krukbegan schemes gettingpeople to pay small sumsthey could afford regularly

A t the Opel carplant in Gliwice,in Poland’s indus-trial heartland of

Silesia, the country’s manu-facturing strength is on fulldisplay. In the body shop,welding robots perform bal-letic movements amidshowers of sparks. Over onthe general assembly line,workers fit engines andother equipment, turningeach steel shell into a fin-ished auto in four hours.

Gliwice’s 3,000 employeesreceived good news lastmonth when Opel’s US par-ent, General Motors, said itwould produce the nextgeneration of its best-sellingAstra car here – largely as aresult of Gliwice’s costcompetitiveness – and atBritain’s Ellesmere Port inthe UK. It will invest €300min the two plants. GM’splant in Bochum, Germany,had been hoping to win thenew Astra.

Among the 12 new EUmembers since 2004, Polandis now the second-biggestcar producer, between theCzech Republic and Slova-kia. Its automotive industrydoes not dominate the econ-omy as much as it does itssmaller neighbours, butstill accounts for about 7per cent of industrial out-put and a sixth of exports.

Poland has lost its nativecar industry, but it hasattracted international car-makers including Opel,Italy’s Fiat, and Volkswa-gen of Germany. It has alsopulled in truckmakersincluding Volkswagen andMan of Germany, Sweden’sScania, and Ford trucks.

Perhaps surprisingly,however, more than 98 percent of production fromOpel’s Gliwice plant,opened in the late 1990s,is exported – in line withPoland’s car industry asa whole. With a populationseveral times that ofthe Czech Republic or Slo-vakia, why is Poland’sdomestic new car marketnot much bigger?

Wojciech Drzewiecki,president of Samar, an autoindustry research group,says many Poles prefer tobuy used cars – often pre-mium German brands suchas BMW or Audi, and big-ger models than the com-pacts that Poland produces.

They are encouraged by asystem of value-added andexcise taxes that the autoindustry says is skewedagainst new car sales. Thegovernment fears that taxchanges could lose reve-nues, though carmakersinsist that any initial fallwould be more than madeup later by stimulating fur-ther new car sales.

Indeed, in 1999-2000,Poland was selling 600,000new cars a year. Despite itseconomic growth, the figurethis year is expected to be270,000 – against used carsales of about 650,000.

Mr Drzewiecki suggests

that Poland could attractmore international auto-makers if it stimulated itsnew car market, therebyoffering something thatsmaller neighbours cannot.

“Since 2000, we have notbeen able to attract anynew production plants intoPoland. The question iswhy? A big role was playedby how political decisionsinfluenced the developmentof the market,” he says.

Wojciech Mieczkowski,Opel’s sales director inPoland, agrees that the“current tax structure inPoland does not supportpurchases of new cars”.

“[That] is discouragingfor the potential investorswho are more willing toinvest in markets wherethey also sell,” he adds, say-ing the auto sector has lob-bied the government toreplace existing excise taxeswith an eco-tax based oncarbon dioxide emissions.

“This, for sure, wouldgive a boost to the car mar-ket in Poland by stimulat-ing the purchase of newer

or new cars,” says Mr Miec-zkowski.

The failure to attract newinvestment into auto-mak-ing helps explain a paradox:Poland’s auto output isdeclining – cars and lighttruck production in Janu-ary-April fell 20 per cent,year on year – despite itshealthy, growing economy.In the neighbouring CzechRepublic, car production is

expected to hit a recordhigh this year, even thoughits economy is in recession.

The argument thatPoland could be doing bet-ter in attracting auto plantsis reinforced by its successin drawing investment incomponent manufacturing,supplying not just the

Polish industry but neigh-bouring countries.

Toyota, Volkswagen andFiat produce engines inPoland, and componentsspecialists such as Delphiand Visteon of the US andFrance’s Valeo also havesizeable Polish operations.

Within sight of Opel’s Gli-wice plant, Nexteer Auto-motive – a steering systemsmaker formerly owned byGeneral Motors and Delphi,and acquired by China’sPacific Century Motors in2010 – is typical. Both itsEuropean plants are inPoland.

Nexteer is growing fast asit shifts from traditionalhydraulic technology tohigh-tech and more fuel-effi-cient electrical power steer-ing systems – which assistdrivers by means of compu-ter-linked electric motors.

Nexteer exported almostthree-quarters of Polish pro-duction last year, and sup-plied customers includingFiat, PSA Peugeot Citroenand Opel, including to Ger-many and Spain.

“Poland is producing verygood engineering gradu-ates,” says Ryszard Iskra,engineering manager. “Ouremployees here are on thesame level as our employ-ees in the US; and Poland isstill very competitive onwages and salaries.” Ger-man labour costs remain upto three times higher, hesays, while Poland com-pares well on costs evenwith new EU members incentral Europe.

That edge may yet helpimprove Poland’s attractive-ness for auto plants, too,even without tax changes.Skoda, Volkswagen’s Czechsubsidiary, was reported inApril to have agreed withunions an average 5 percent wage increase, afterthey pressed to reduce thedisparity between Germanand Czech workers.

With Fiat, like Opel,rumoured to be planning toshift more car production toPoland, analysts suggestthat in coming years thecountry could start to catchup with its neighbour.

Poles buildnew carsbut buyused onesMotor industryNeil Buckley findsthat more homesales would furtherboost auto making

Export drive: almost all the cars made at Opel’s Gliwice plant go to foreign markets Reuters

Among the 12 newEU members since2004, Poland isthe second-biggestcar producer

6 ★ FINANCIAL TIMES THURSDAY JUNE 14 2012

Poland

by the end of this month,Poland will have to getback to grappling with seri-ous economic and politicalchallenges.

The first comes from anexpected drop in invest-ments after Euro 2012 asthe government spends lessenergy on pushing throughinfrastructure projects.

That dovetails with theending of the current 2007-2013 EU budget period thathas pumped more than€67bn in structural fundsinto the Polish economy.This has been one of thefactors that helped Polandbecome the only EU mem-ber to dodge a recession in2009, and which has helpedkeep growth above the EUaverage since then.

The lull should prove tobe only temporary.

Polish officials expect thenext EU budget will be atleast as generous to Polandas the current one,although it will be the lastlarge injection as by 2020the country will be toowealthy to extract muchmore in cohesion funds.

“There is still a hugeneed for more infrastruc-ture spending,” saysMateusz Morawiecki, chiefexecutive of Bank ZachodniWBK, a unit of Spain’sSantander.

He estimates that in addi-tion to completing the high-way network and upgradingrailways, Poland will needto spend 120bn-180bn zlotysto replace decrepit coal-fired power plants withmodern coal, gas, nuclearand renewables.

The country also sits atoppotentially large shale gasreserves that could end theneed for Polish gas importsfrom Russia, helping boththe current account and thebudget.

The economy has bene-fited both from resilientdomestic demand and fromstrong exports, thanks toPoland’s close ties to theGerman economy.

Both now show signs offlagging as the eurozone cri-sis slows growth in westernEurope, and Polish consum-ers and businesses becomeskittish about increasing

spending because of worriesabout the economic future.

“The real potential dan-gers in the short term comefrom abroad. We do not seeanything internally thatcould harm us,” saysDominik Radziwill, a dep-uty finance minister.

That makes it crucial forMr Tusk to do his bit ifPoland is to continue itseconomic catch-up.

A spending rule limitingnew expenditures hashelped bring the budget def-icit under control – thefinance ministry expectsthat the deficit will dropbelow 3 per cent of GDPthis year – and public debtis retreating from its legallimit of 55 per cent of GDP.

But, as the EuropeanCommission has pointedout, Poland labours understructural problems thatreduce the country’s eco-nomic potential.

It has the lowest expendi-ture on research and devel-opment in the EU – only0.74 per cent of GDP – lowlabour participation bywomen and high levels ofbureaucracy.

After spending most ofhis first term focusing onshort-term measures tododge the impact of the eco-nomic crisis, Mr Tusk ismoving to tackle longer-term issues.

The government is gradu-ally increasing the retire-ment age to 67 from the cur-rent 60 for women and 65for men, and JaroslawGowin, the justice minister,is trying to deregulate ahost of protected profes-sions. Next in the line offire are retirement benefitsfor the uniformed services,miners and a separate pen-sion scheme for farmers.

Mr Tusk’s centrist CivicPlatform party governmentis already paying a politicalprice for those reforms – theparty has shed more than10 percentage points of sup-port since last year’s elec-tions. The first electoraltest ahead is for the Euro-pean parliament in 2014,which gives the govern-ment some time to rebuildthe affection of voters.

Mr Tusk will not beharmed by the after-glow ofthe tournament, especiallyif the Polish team (theweakest in the field) doesunexpectedly well.

“For us [Euro 2012] is asymbolic ending of the eraof transformation whichbegan in 1989,” says HannaGronkiewicz-Waltz, War-saw’s mayor.

Progress bringssporting chanceContinued from Page 1

A huge needfor moreinfrastructurespending –MateuszMorawiecki

L ong after the fanshave gone homeand memories ofthe triumphs and

defeats of the Euro 2012football tournament havefaded, the most profoundimpact of hosting the eventwill be the economic benefitof the highways slashingthrough Poland’s flat, greencountryside.

Although the four stadi-ums in Warsaw, Poznan,Wroclaw and Gdansk arereceiving the lion’s share ofattention during the tourna-ment, the government’sfocus was largely on build-ing highways and airports.

Railways received shortshrift, as anyone rattlingalong by train for nearlyfive hours on the 300km tripbetween Warsaw andGdansk can attest.

Slawomir Nowak, thetransport minister, spentfrantic days before the June8 kick-off pushing contrac-tors to have the last sec-tions of the A2 linking War-saw with the German bor-der drivable; completionwill take place once thetournament is over.

The issue is of enormouspolitical significance to thegovernment. Premier Don-ald Tusk promised Poles hewould speed up the coun-try’s anaemic road con-struction in his victorious2007 election campaign, andstaked his prestige on War-saw at least being linked tothe outside world by a high-way as of this month.

Mr Nowak’s pronounce-ments that “we are not justbuilding roads for the fans

of Euro 2012 but for Polesfor years”, were slightlyself-serving as ambitiousplans formulated in 2007,when Poland won the rightto host the tournament,have not been realised. Buthe does have a point in thatthe new roads will providea long-term economic boost.

In 2008, the governmentannounced it planned tobuild 900km of highwaysand 2,100km of slightlylower grade expressways.

In the end, those plans

had to be scaled back andeven the more modest goalswere not fully met – themain north-south highwayhas a gap in the middle, ahighway running from Ger-many to Ukraine alongPoland’s southern borderhas uncompleted bits as itheads east, and the A2 stillneeds extra work.

However, these projectswill be finished in the nextfew months, revolutionisingtransport in a country thathas the highest per capitaroad death rate in the EU,and one where businesseshave sometimes baulked atinvesting because of thetime and expense of movinggoods around the country.

“The poor infrastructureused to be the most impor-tant factor that was dis-couraging investments inPoland,” notes Birgit Neiss-ner, an analyst with Aus-tria’s Erste Bank, addingthat before the tournamentPoland had the fourth-lowest density of motor-ways in the EU.

Marcin Herra, the head of

PL 2012, the governmentbody responsible for prepar-ing for Euro 2012 in Poland,estimates the country willsee a GDP boost totalling18bn-30bn zlotys ($5.1bn-$8.6bn) until 2020, largelybecause transport infra-structure was built aboutfive years faster than wouldhave happened without thespur of the tournament.

“Had it not been for Euro2012 there would have prob-ably been less determina-tion – it helps to have atarget date,” says HannaGronkiewicz-Waltz, War-saw’s mayor.

Her city now has a reno-vated international airport,a rail link from the centreto the airport, a new dis-count airport built north ofthe city, as well as a partlycompleted ring road skirt-ing the city.

In all, Poland spent morethan 90bn zlotys – or morethan 5 per cent of GDP – onprojects associated with thetournament, about a thirdof which came from the EU.

Less than 10 per cent ofthat sum went directly forthe tournament, mostly onbuilding the four stadiumsthat have transformed the

skylines of the country’slargest cities.

Those are usually themost difficult investmentsto recoup, as shown by thefinancial trouble that someof Portugal’s stadiums haverun into since hosting the

Euro finals eight years ago.The direct impact of the

tournament on the econ-omy will be much smaller.

Mr Herra estimates thechampionships will gener-ate about 600m zlotys inshort-term revenues, largely

from tourist visits, enoughto cover the immediatecosts of things such asbuilding fan zones and pro-viding security.

A larger impact could bein changing the perceptionof Poland – a country that

does not have much of aninternational presence asidefrom being the home ofvodka, tasty sausages andLech Walesa.

Mr Herra is hoping forwhat he calls the “Barce-lona effect”, a halo that bur-

nishes a country after host-ing a big sports event.

“This is a once in a life-time chance to exist in theworld’s media for threeweeks,” he says.

And that could producean economic benefit, too.

Roads provide one route to boost the economyEuro 2012Development willprovide long-termeconomic support,says Jan Cienski

Infrastructure wasbuilt five yearsfaster than it wouldhave been withoutthe tournament

Way to go: cars on the new section of the A2 motorway linking Warsaw with the German border EPA