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Update No: 058

The Poles did something unusual in the summer of last year. They voted back in the communists. Of course they are no longer communists in the old sense. Indeed their assumption of office was welcomed in Brussels and even by the Wall Street Journal. So times have changed!
The new government under veteran communist politico, Premier Leszek Miller, do not have the political baggage of the Solidarity bloc, the former team in power, which was wiped out at the polls, failing to get even the 5% required for representation in parliament. Solidarity was attached to the trade unions and the old smoke-stack industries, while its Agrarian Party allies were for the cause of the peasantry. The ex-communists had time to think in opposition and now espouse broad reform policies, but `with a human face,' something not unlike Tony Blair's 'Third Way.'
As a sign of the new times Putin came to town in late January, the first Russian leader to do so for eight years. Relations are improving, with both sides keen to see reduced a US$3.5bn trade deficit, which Poland sustains with Russia. Polish businesses are to be welcomed into Russia, which supplies it with most of its energy in the form of natural gas. Nevertheless there are outstanding issues in contention, the Poles being in negotiation with the Danes and Norwegians over alternative sources of natural gas.
Poland remains in a quandary. By the standards of other countries in transition it has been doing well. But the population at large are far from satisfied and are decidedly apprehensive at the prospect of entry into the EU, which is looming ahead. GDP growth was averaging more than 5% per annum for years in the 1990s. But in 2001 growth was only 1.5% and in 2002 a predicted 2.5% might prove to be unduly optimistic; indeed 1% is now the generally anticipated outcome. A resumption of 5% growth is not now expected until 2004.
The most disgruntled of the population are naturally the unemployed, who amount to 17.4% of the work force, according to the latest figures in December, the worst since the collapse of communism in 1989.A World Bank report released in late January noted that the creation of new firms, usually with less than 50 employees, holds out the best hope of growth and the formation of new jobs. The bank is extensively involved in helping finance restructuring in Poland.
Poland is sure to be among the first entrants to the EU, most people assume, but there is one grave problem. The Poles have an inordinate fear of foreigners occupying their land, which in earlier centuries led to national disaster, Poland losing its very independence for two centuries. The new government, like its predecessor, is sticking in its heels at allowing foreigners to buy land in Poland, at least for 18 years. The other entrants have all complied with EU norms in this respect, agreeing a seven-year transition period, but not Poland. An opinion poll in July showed three-quarters remaining adamant in support of an 18-year moratorium, even if this delays EU membership.
The government may be holding out for a compromise of say 10-12 years, a marked concession recognising Poland's special status as easily the largest applicant country and historically the most wronged. The symbolic impact of Poland not being in the first wave would be outlandish. Some sort of deal is highly likely.
The basis of such an agreement is open due to the fact that the EU itself wants to delay offering full agricultural and regional aid to accession states only after 10 years, whereas Polish farmers would naturally like to see the money flowing their way much sooner. A deal needs to be done ahead of a referendum on entry in 2003. Pools show 60% in favour right now. A historic concession to the Poles over land ownership seems clearly called for by Brussels.

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AUTOMOBILES

VW mulls reducing Polish investment activities

Volkswagen AG (VW) is considering reducing planned investments in Poland. The possibility exists that the company may choose instead to produce cars in the Czech Republic, the Polish daily 'Rzeczpospolita' has reported.
The company is deliberating such a move in consideration of high wage costs and the large amount of obstructive bureaucracy in the country, the paper noted, quoted by AFX.
Last October VW announced the construction of a new factory in Pozen, western Poland, creating 5,000 jobs.

Ministry places hopes on team to save troubled Daewoo plants

Poland's economy ministry recently put together a team tasked with saving two Daewoo plants. The ministry has also now confirmed that India-based car manufacturer, Tata Engineering (TE), has expressed an interest in taking over Warsaw's cash-strapped Daewoo-FSO car factory.
The announcements were released following increasing pressure from domestic car makers and dealers who insisted that the government needed to find a solution for the ailing industry. However, the creation of a rescue team headed by deputy Economy Minister, Maciej Lesny, is still pending approval by Prime Minister, Leszek Miller. In the meantime, TE's involvement in Daewoo-FSO is also still tentative, Warsaw Business Journal reported.
"Tata's interest is at a very initial stage, but every type of talks with any potential investor brings us closer to our goal," the Journal quoted ministry spokesman, Pawel Badzio, as saying, adding that the economy ministry would prefer a company whose headquarters are located closer to Poland. Meanwhile, Economy Minister, Jacek Piechota, said on a local radio station that Daewoo-FSO was holding talks with a potential investor - not TE - for the Warsaw factory.
Daewoo-FSO employees have responded with a degree of scepticism to the latest round of announcements, warning they would stage a walkout if the new administration did not come up with a plan to save the plant by the end of February.
Marek Dyzakowski, leader of the Union of Engineers and Technicians (ZZIT), one of Daewoo-FSO' unions that said it would strike, noted "I think Piechota is spreading hyped-up information… The economy ministry is trying to send out signals to the public that there are investors interested and that it has some kind of policy." However, the unions have said they want Miller to support the proposed rescue team. "We want the prime minister to approve the team," Dyzakowski stated.
The government holds a nine per cent stake in the Warsaw-based factory.
Apart from problems the two plants have encountered due to their Korean parent's bankruptcy, sales also tumbled with recession hitting the Polish car market, while imports of used cars, from Western Europe went up. The Polish government owns nine per cent of the Polish factory.

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DEFENCE INDUSTRY

Ministry interested in German offer for free jet fighters

NATO ally, Poland, is interested in acquiring surplus tanks and fighter jets offered by fellow alliance member, Germany, free of charge, Polish Defence Minister, Jerzy Szmajdzinske said recently in Warsaw.
Szmajdzinske said that an agreement on the acquisition of 130 Leopard II German tanks and 23 Soviet-made MiG29 jet fighters could be finalised with German officials in the near future, New Europe reported.
The decision is an about-face for the defence ministry which last year initially refused the German hand-out under pressure from domestic arms manufacturers worried that lost business might lead to bankruptcy.
Contracts for the re-equipping of Polish-made T-72 tanks to meet NATO standards would cost an estimated 5.6m zlotys (US$1.4m) compared to an estimated 400,000 zlotys (US$100,000) to put the mothballed German tanks into service. But with an austerity budget planned for 2002, the German offer has gained new appeal.
Poland is still mulling the terms of purchase of 60 new state-of-the-art fighter jets to achieve NATO standards of interoperability by the end of the decade. Major global aeronautics firms including Saab-BAe, Lockheed Martin and Dassault are in the running for a lucrative contract worth an estimated US$2.5 -3.5 billion.

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ENERGY

Lowered demand for gas to delay BalticPipe construction

The construction of a natural gas pipeline between Poland and Denmark has now been placed on the backburner for at least another two years since Poland will not be purchasing as much North Sea gas as expected, newswire Ritzau's Bureau reported, citing sources at Dansk Olie & Naturgas (DONG).
Polish gas company POGC and DONG recently signed an agreement to continue collaboration on the building of the gas pipeline, BalticPipe. New calculations by Polish authorities reveal that demand for natural gas in the country is lower than the figures used when the decision to build the pipeline was made in the summer of last year, the newswire reported, cited by AFX.
POGC and DONG will over the next few months evaluate how much gas BalticPipe will transport and attempt to bring in new partners to ensure the project's viability. Transport of Norwegian gas through BalticPipe will affect the project's size and economy, DONG explained. The 250 kilometre pipe should have been commissioned in 2003 but will now not be completed before 2005.

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EU ACCESSION

Poland seeks shorter transition

Poland's prime minister described the European Commission's proposal to phase in direct payments to farmers in new member states as "disappointing" and "far from satisfactory." He said Warsaw would push in negotiations for a radically shorter transition period, the Financial Times reported on 31st January.
"Twenty-five per cent is more than zero, of course," Leszek Miller said in an interview. "On the other hand, these are disappointing proposals, especially if the equalisation of these payments to current members' levels is to be spread over a 10-year transition period."
His remarks followed the commission's recommendations that direct payments begin at 25 per cent of the level enjoyed by veteran European Union members and be phased in over 10 years. They mark an opening salvo in one of the most contentious money debates arising from the EU's expected absorption of up to 10 new members in 2004.
Mr Miller described the proposed transition period as "definitely too long," adding that Poland would push for full payments by 2006, when the EU Common Agricultural Policy is slated to come up for review. "The equalisation period should be completed by 2006," Mr Miller said, adding that the proposed 25 per cent starting levels for candidates was "far from satisfactory."
Mr Miller asked his advisers to prepare analysis of the Commission's position by February 15th, on which basis Poland will form an official negotiating stance. He also said he planned to consult on the matter with Viktor Orban, Hungary's prime minister and with other candidate countries from Eastern Europe at meeting of the Visegrad Group, which also includes the Czech Republic and Slovakia, scheduled for late February.
"This document contains proposals which are advantageous for Poland and those that don't meet Poles' expectations, and which demand further discussion," he said. Talks on agriculture - a large and struggling sector in Poland - are slated for completion in the second half of this year. Mr Miller's government, if it accepts the Commission's current proposals, could face attack from Eurosceptic and rural parties, which form a significant bloc in parliament and have criticised it for negotiating concessions made since it took office last October. The League of Polish Families has warned of "moving toward Europe on our knees."
But the prime minister played down the threat of a political backlash. "I imagine that the anti-EU opposition will try to exploit this for their purposes, but the reaction of reasonable people will be calm and serious."

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FOREIGN INVESTMENT

Foreign investors eyeing Poland as rate cuts attract funds

In a positive response to interest-rate cuts, domestic pension funds have recently been reweighting their portfolios toward stocks. Foreign investors, banking on an economic recovery in the second half of 2002, are seen to be directing some of their regional funds towards Poland. Consequently, the buying has sent the Wig 20 index of large companies, which fell 33 per cent last year.
Although the buying spree may appear premature, the majority of forecasters expect Poland's economy, experiencing its worst slowdown in 10 years, to grow barely one per cent this year, FT.com reported. Hit by falling demand and softening export markets, listed companies are almost all reporting earnings ranging from unimpressive to abysmal.
While Leszek Miller's left-wing government has been busy snipping state spending and raising new revenues in efforts to avert a budget crisis, Finance Minister, Marek Belka, has noted that the overhaul of public finance may restore gross domestic product growth of five per cent. However, this is not expected until2004. Good news is that the worst may soon be over if growth starts to pick up in the 2002 second half. Progress on the country's preparations to join the EU is also a strong likelihood for that same time period. As such, funds as well as foreign concerns are expected to help further encourage positive trends.
"We expect the economy will come out of recession, the monetary policy council will cut rates, and pension funds will put more money in the market," Credit Suisse First Boston's, David Aserkoff, noted.

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INFORMATION TECHNOLOGY

iCRM new edition allows for database management

The IT-System team has designed iCRM, the next version of a system used to identify Internet services users. The new edition's emphasis is on the creation and management of a company data-base, Polish Market Review reported. As such, iCRM allows users to track a history of contacts with clients, featuring advanced options for identifying organisations visiting the service, a system for planning activities, organisation recognition and profiling, and targeted direct mailing campaigns. 
The system's main functionality is user recognition, helping customer service departments to target specific customer groups. iCRM is wholly based on an Internet interface that gives authorised access to information personnel or personnel of where the organisation's management personnel or personnel are accessing from.


OP-JTT Computer merger to create Poland's biggest desktop maker

Potimus Technologie (OP) is reportedly intending to merge with JTT Computer, the Polish desktop PC market's number three company. According to various sources, negotiations are at an advanced stage, while a deal may even be finalised as early as March, Europmedia.net reported.
According to reports published by Puls Biznesu, a merge is in the interests of both the companies with such a move leading to the creating of the largest domestic desktop PC producer, with estimated combined annual revenues of more than 900 million zlotys. Neither company has confirmed the report.

New partnership formed

Pattern Communications, a Polish-American company that plans to provide Internet access in Poland, has announced a new partnership with Switzerland's Ascom, producer of powerline communications technology equipment, the Warsaw Business Journal has reported.
The two cooperating companies said they would soon begin testing the new technology with three major electricity providers in Poland. The new service is expected to be available in the second quarter of 2002 in some regions. Pattern Communications is still looking for a financial investor that could facilitate national expansion.

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RETAIL INDUSTRY

French supermarket chain to invest zl.200m

French supermarket chain, E. Leclerc, has announced plans to invest zl.200m (US$48.8m) to develop its retail network. "The money will be allocated mainly for the construction of supermarkets with a floor space of some 2,000 square metres," according or a company representative who asked not to be named.
"This year we will begin building five stores. We plan to complete four or five each year." 
E. Leclerc already operates nine hypermarkets in Poland, each with a floor space of about 6,000 sq.m.

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TELECOMMUNICATIONS

Vivendi Universal eager to sell 49% stake in Elektrim

Vivendi Universal is looking to offload its 49% stake in Polish Elektrim Telekomunikacja (ET) with sources saying the French media group's bankers have already approached several prospective buyers.
Lazard is understood to be leading efforts by investment banks to sell the firm's stake in Polska Telefonis Cyfrowa (PTC), who holds Eastern Europe's largest mobile-phone franchise. A Lazard spokeswoman confirmed that the bank was working for Vivendi on Elektrim. 
A Warsaw court is currently mediating debt-rescheduling negotiations with creditors following Elektrim's default on a bond payment in December. 
However, certain parties are threatening to push the company into bankruptcy, Warsaw Business Journal reported. PTC, which reported 3.77m subscribers at end-2001, is seen to be one of the country's most sought-after industrial assets. However, there are few debt-laden telecoms companies actually looking to buy.
Vivendi has experienced difficulties in Poland since paying US$1.2bn for half of ET's shares in 1999. Relations between the media group and Deutsche Telekom (DT) are strained at PTC, rendering the German company an unlikely buyer for the former's ET shares. Furthermore, DT would have to account for any additional purchases to anxious shareholders.
In other news, Elektrim informed that DT had asked it to declare in "material fault." This would allow DT to exercise a put option on Elektrim's PTC shares.

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TRANSPORT

Polish government plans road tax to finance motorway construction

The infrastructure ministry plans to collect 1.5bn zlotys (US$359.7m) from a new road tax on passenger cars that will take effect as of 1st January 2003, Tadeusz Suwara from the road management told PAP News Agency on 4th February. The road tax on lorries, effective since 1st January 2002 will bring in 0.5bn zlotys annually.
The government plans to introduce the new tax was disclosed by Prime Minister Leszek Miller during an interview for Radio One.
The new tax will replace to-date fees collected from international carriers at border check points, in line with EU requirements providing for equal treatment of home and foreign carriers.
During the three years to come the government plans to spend 36.8bn zlotys for road modernisation and overhaul, of which zl.8-9bn are to come from the new tax. During this period 550 kilometres of highways and 200 kilometres of expressways are to be constructed. Surface of 1,500 kilometres of roads is to be adjusted to EU standards.

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