PiS-owska economic agenda

Judging by the timing of my postings and delay with which I refer to topical problems, it may seem I am slow off the mark. So instead of writing about mounting Ukrainian crisis, which gets closer to the verge of military conflict, I will refer to the headline-hitting, newly-published agenda of the leading oppositional party.

The document sets out to diagnose the current state of Poland as the utter downfall, to which Poland was plunged under the feckless rule of prime minister Tusk and names the current misery as “system Tuska” and then delineates how, when PiS headed by its leader, JarKacz, take over power, to lift Poland up from this misery and make the country thrive.

I am generally wary of all quick fixes – sort of easier-said-than-done solutions that would turn the country around within mere a few years, make it a land of milk and honey, inhabited by prosperous people, with expanding economy and well-run, efficient government. As a matter of principle, I give such diagnoses a miss. It takes little to make out what is wrong, it takes more wits to pertinently identify reasons why something does not work properly and the biggest challenge is to come up with feasible ideas to set things right.

I deliberately leave out what has been said by numerous critics of the agenda, i.e. PiS politicians promise to spend billions of zlotys, but fail to show how it is going to raise the money for: allowances for families, decreasing pension age, huge investments, health service, tax credits for entrepreneurs and in the meantime reduce public debt. I do not believe in policy of working miracles, because only a miracle could make ends of this agenda meet and I suppose no economically literate recipient of this document (or JarKacz’s speeches) would put stock in hollow promises as his whole story does not even appear to hang together. Even advocates of PiS policies admit widespread giving-out smacks of populism, but over-promising is an ordinarily used tactics even in mature democracies.

I will do my best to dissect all agendas of all political parties whenever they appear, and they should spring up in abundance before 2015 parliamentary elections. As PiS came up with its agenda first, its file came under fire first. I make no claims to be an expert in all areas of life, I generally know little about health service or military forces, but have some notion of economics and as a banking sector employee, am quite well-versed in its workings and limitations, therefore in my analysis I will focus only in the “Economy” section and drill down only some of those paragraphs I am capable of assessing.

The general diagnose on the current state of Polish economy (pages 73 – 74) is that it is stuck in low-growth trap, from which it can break out by unleashing the untapped development resources, with the help and co-ordination of the government, which should pro-actively engage in pursuit of economic policies.

The growth resources are simple and complex. The former are money Poland will receive from the EU funds and… (page 76)

Poza funduszami unijnymi maksymalnie uruchomimy znaczne środki własne i oszczędności przedsiębiorstw państwowych oraz wykorzystamy nadpłynność banków.

What are the „own funds” and how are they [PiS] going to make use of state-run enterprises’ savings and banks’ overliquidity? This all reminds me of acquisition of Lithaunian Mozeiku refinery by PKN Orlen in 2006, the purely political (buy it to spite the Russians) decision, taken, as with hindsight proven, without properly carried out due diligence. The refinery was purchased for 2.34 billion USD in 2006, while in 2013 PKN Orlen was weighing up whether to divest of the Lithuanian operations for 125 million USD. In the meantime, between 2007 and 2011 the oil producer recognised massive impairment losses, reflecting the fact the refinery was purchased well above its fair value. The business failure came to a pass also because, in the act of revenge, Russians cut off the pipeline running to the refinery due to a breakdown in July 2006, while negotiations regarding the purchase were still under way. This did not dissuade Polish decision-makers from pressing ahead with the purchase. Then, in 2008, Lithuanian railroads ripped off tracks running to the refinery, rendering it useless for months, as there was no infrastructure between the facility and the port in Klaipeda. The Lithuanian business began to break even in 2012. The estimated loss to the Polish taxpayers, counting in purchase of assets above their fair value, operating losses, costs of debt service and missed opportunities is estimated at 20 billion PLN, more than 2% of Poland’s general government debt. There are ample examples of flawed decisions on acquisitions made in the private sector, but there costs of management’s inflated ambitions (chief driver of such transactions) are borne mostly by the company’s shareholders, not by taxpayers.

I dread to think how the PiS government intends to crack down on overliquidity in the Polish banking sector. Is it going to coerce banks to lend money?

Zastosujemy także pozabudżetowy mechanizm inwestycyjny z zaangażowaniem aktywów spółek Skarbu Państwa, w tym spółki Polskie Inwestycje Rozwojowe i Banku Gospodarstwa Krajowego, a także specjalistyczne mechanizmy wspierania inwestycji, np. na wzór LTRO (Long Term Refinancing Operation – program Europejskiego Banku Centralnego) i programów proinwestycyjnych na Węgrzech.

Does the author know what LTRO consists in? The definition provided towards the bottom of page 76 does not closely match what I found through search engine. This is not an investment-supporting programme, but a liquidity-enhancing measure and is aimed at helping out banks having too many illiquid, poor-quality assets. Polish banks neither struggle liquidity squeeze, nor have portfolios of badly-performing assets, what is then the reason for application of such measure? As it was rightly noted, Polish banking sector has a problem of excess liquidity, totalling to 30 billion PLN.

When it comes to the banking sector, credit expansion towards SMEs is to be facilitated by guarantees issued by the state-owned bank (BGK, page 77)

Wzmocnienie możliwości gwarancyjnych polskiego BGK w granicach od 65 do 100 mld zł w latach 2015 – 2021 będzie rozwiązaniem bezpiecznym, niewymagającym nakładów ze strony państwa i neutralnym dla budżetu.

When making such move, you should be aware of two facts. Firstly, a bank which lends to a business against a guarantee issued by BGK bears effectively credit risk of BGK, because if a customer defaults, the bank has a claim on the guarantor. This means commercial banks need to have credit limits for BGK, which although not regulatory capped, are in practice limited by ceilings will be imposed by banks’ internal policies. Secondly, issuing guarantees necessitate raising equity to meet capital adequacy requirements, what, assuming BGK stays 100% state-owned, means the government would need to inject money to pay-in the capital, thus making the sentence above from the PiS agenda true, only if current own funds of BGK give enough headroom to issue guarantees in aforementioned amounts. On pages 77 and 78, the document says…

Polscy przedsiębiorcy prywatni ulokowali na rachunkach bankowych (w postaci lokat długoterminowych) środki rzędu 200 mld zł. Jest to znaczny zasób rozwojowy, a państwo ma obowiązek działać na rzecz jego uruchomienia poprzez stworzenie systemu zachęt inwestycyjnych w systemie podatkowym. W przygotowanym Prawo i Sprawiedliwość projekcie ustawy o podatkach dochodowych (PIT i CIT) znalazły się rozwiązania pozwalające na 100-procentową amortyzację nakładów inwestycyjnych w roku ich poniesienia, a w przypadku wydatków na badania i rozwój – nawet na podwójne odliczenie. Szacuje się, że po wejściu tych rozwiązań w życie w ciągu najbliższych 6–7 lat wspomniana kwota 200 mld zł będzie przeznaczona na inwestycje.

During my 3-years’ career I have never seen any company which put its excess money on bank deposits with term longer than 3 months. And mere tax credits are not a cure for businesses’ reluctance to invest. I could argue with more of the statements above, but as both the author of this part of the agenda as I lack strong backing in favour of our assertions, such argument would get us nowhere. Let’s turn to page 79 then.

Kolejnym instrumentem kumulowania złożonych zasobów rozwojowych będzie udomowienie banków. Będziemy wspierać działania upowszechniające polską własność w sektorze bankowym. (...) Pierwszym jest przyrost organiczny, czyli szybszy rozwój banków krajowych poprzez rozwijanie akcji kredytowej i zwiększanie depozytów. Drugi sposób polega na zakładaniu i rozwoju nowych instytucji opartych o kapitał krajowy. W tym celu muszą zostać wprowadzone preferencje dla małych instytucji, w tym spółdzielczych. Trzecim sposobem jest przejęcie banków opartych o kapitał zagraniczny przez podmioty krajowe zaliczane do sektora finansowego, w których Skarb Państwa ma znaczące udziały. Udomowieniu banków będzie towarzyszyła rozbudowa polskiej bankowości o zasięgu lokalnym typu hipotecznego, spółdzielczego lub kas oszczędnościowo-kredytowych. Udomowienie banków zwiększy zaangażowanie polskiego sektora finansowego w rozwój gospodarczy, szczególnie poprzez akcję kredytową, w tym udzielanie kredytów inwestycyjnych.

„Domesticating” the banks is not an entirely new concept. Of course, proportions of capital ownership can be changed by organic growth, but in line with previously mentioned capital adequacy requirements, in order to extend more loans, you need to shore up banks’ equities. How would it be ensured that holders of such equity would be only Polish entities? In order to overtake the risk-averse banks run from their head office abroad, lending standards would also have too be loosed, running the risk of severe losses in the economic downturn. Takeovers executed by state-owned banks are the most controversial idea. Firstly, it decreases competition and even without effective merger which could be blocked by competition watchdog (recall incomplete merger of Pekao and BPH in 2007?), control over the banking sector could be concentrated in one pair of hands. Secondly, it would cost billions of zlotys and if political goals are set above sound business reasoning, state-owned banks are likely to pay over the odds for their targets.

These are just a few examples of flawed or undoable concepts from the economic agenda of PiS. Apart from them it contains several questionable ideas, transferring free-market mechanism of economic self-regulation to the hands of the government and several good ideas, which, if properly implemented, could unleash potential of Polish small and medium companies and make business environment in Poland more friendly. Nevertheless, the approach to the economy is too statist for me. Too many control and co-ordination mechanisms are put forward. The government, whose areas of control or regulation are too wide, is unlikely to be lean, i.e. cheap and efficient.

I am looking forward to newly-released economic agendas of main political parties in Poland. When they are published, I promise to pick out incongruities and share them with you.