ZaPiSki z czasów dobrej zmiany

Heard the purport of the controversial speech of president Duda in Otwock has been manipulated by the media hostile to PiS. I advise you listen the speech and shape an opinion on it on yourselves. Has Mr president gone too far in diagnosing the ailments plaguing Poland and in insulting his opponents? Is Mr Duda president of all Poles or of one particular party? Up to you to decide…

In February Mrs Szydło’s government celebrated first 100 days of work. Out of five priorities on the government’s agenda only one has been carried through.

1. The 500 plus child allowance programme has been launched and first payouts to parents will be made in April. Undeniable credit to the government for delivering the flagship project, however a truly impressive attainment will be making ends meet in budgets for 2017 and onwards without containing the scale of the program .

2. Decreasing retirement age to 60 for women and 65 for men remains in the realm of promises. Mr Duda promised to submit a relevant draft law and kept his promise, nothing beyond it.

3. In progress is the law setting up free-of-charge medicines for elderly people aged 75 or more. Needless to say the list of medicines will not be endless and only some medications will qualify for 100% reimbursement. According to some estimates, an average pensioner will save no more than 20 zlotys monthly thanks to generosity of PiS government. Wonder whether administrative expenses will be higher or lower than gains of all entitled old-aged citizens.

4. CIT rate cut to 15% for micro enterprises looms far on the horizon. A few PiS politicians brought up the topic, but right now the government is preoccupied with putting out other fires.

5. Raising tax allowance to PLN 8,000 per year also stands no chance of being accomplished in 2016 and feasibility of such move in 2017, given foreseen shortfall of budget revenues, is up in the air.

The festival of traducing Mr Wałęsa was rather short-lasting, but I am sure this has not been the last word. The game is up…

The former CEO of Bank Zachodni WBK has unveiled the Responsible Development Plan, a roadmap for Poland to catch up with the Western Europe and a set of measures to move Poland forward. It is beyond all doubt Poland badly needs a long-term development strategy, yet the strategy must be viable from cover to cover, i.e. it should identify what problems need to be overcome and with what means.

The diagnosis Mr Morawiecki sets is spot-on, but hang on… How do the notions underlying the plan square with PiS’ economic agenda? It is claimed public debt is a drag on Poland’s development, but PiS’ spending spree will sooner or later have to contribute to rising public debt. Demographics is bound to decrease labour force in Poland and to counteract it PiS deputies put forward decreasing retirement age and have raised schooling age from 6 to 7.

Besides, being familiar with specifics of some sectors (e.g. shipyards, automotive, transport, capital goods), I fear goals in the programme might be to beautiful to be realistic. Harnessing banking and corporate sectors’ over-liquidity to boost investment smacks of central planning. All in all, the plan makes a good impression, but I do not believe the government “knows better” than thousands of enterprises. Lending a helping hand and setting strategic objectives for the development should remain the core areas of government’s involvement in the economy. Let’s not go beyond them and let the free market do its job.

The cursed soldiers, for years forgotten, in the days surrounding 1 March were glorified more avidly than veterans of the Home Army (not to mentioned those out of luck to join the Home Army). I have not against commemorating victims of Stalinism, tortured and murdered between 1945 and 1956, they do deserve our remembrance, but the cursed soldiers are not a uniform group and historians (other than IPN-affiliated) vary in their assessments of cursed soldiers’ deeds after the Home Army was dissolved in January 1945. In 1945, as Poland became subjugated to the Soviet Union, warfare was officially over. Some people came to terms with the fact Poland could be at best a satellite country of the Soviet Union and under those circumstances began to rebuild the country from ruins, combat illiteracy, electrifying countryside, while others did not lay down guns. The problem I have with them is that they did not fight the Soviets, but they killed their compatriots, not only the ardent functionaries of the new systems in MO, UB, PPR uniforms, but also representatives of the ethnical minorities, Jews and civilians who did not resist the new order or benefited from it, e.g. peasants granted land as part of the agrarian reform.

Romuald Rajs “Bury” and Józef Kuraś “Ogień” are two most glaring examples of bandits venerated today. I would strongly prefer the whole truth is told about those people. Locals in Podhale or near Białowieża, especially ancestors of civilians killed by brigades of “the stalwart” put up the biggest resistance when IPN- and PiS affiliated , yet their voices are rarely audible.

Besides, come to think of it with cool head. Imagine someone hiding in a forest. What would they live off? How would the procure nutrition? How would they survive harsh winters in the second half of 1940s? Locals tired of six years of privations of war did not need to embrace the idea of helping out the forestmen by offering them board and lodging…

A tyre popped. Had it happened in an ordinary Pole’s passenger car, it would have passed unnoticed. But the tyre popped in a BMW carrying president Duda; consequently the vehicle went into a skid and landed in a roadside ditch. Fortunately, the head of state came of the accident safe and sound and after the voices of conspiracy theorists (assassination could not be ruled out) and vulgar haters faded, it transpired the tyre had been produced in 2010 and should have long been out of use. Jaw drops open. Within four months PiS have managed to replace most officials in ministries and state-controlled companies and launched several opening audits to reveal irregularities and havoc wreaked by their incompetent predecessors, but they have failed to inspect fleet of vehicles carrying the statesmen.

Why did this happen? The technical conditional of the vehicle is one side of the coin, the driving style of BOR being the other. Many doubt the column of vehicles, including with Mr Duda on board, was moving within the speed limit of 140 kmph, witnesses speak of the speed of 170 kmph or even 200 kmph. BOR vehicles according to the Polish law enjoy the status of privileged vehicles, just like ambulances, fire engines and police cars. This means they do not need to follow traffic regulations. Let’s have a glance at how the column of vehicles moved at National Road DK5 before turning into A4 motorway where the accident took place. 

I know the road well, its surface if flat, has not ruts, but the road is narrow, winding, hilly and on many sections visibility is poor. Does such way of moving around contribute to safety of Mr Duda (or whoever is a passengers) and other innocent road participants?

Last Sunday a supplementary election to the upper house was held in Łomża – Suwałki constituency. Anna Maria Anders, backed by PiS won the seat in the parliament, but if you bear in mind three facts:

1. Mrs Anders’ score (47%) was mere 6 percentage points ahead of PSL-affiliated, PO- and Nowoczesna-backed Mr Baginski’s result,

2. the turnout in the election was 17%, meaning only 8% of citizens entitled to vote cast their votes for Mrs Anders,

3. Mrs Anders had been endorsed by all prominent PiS politicians involved in her campaign, while PO, PSL and Nowoczesna had not lifted a little finger to support their candidate (shame on you, Mr Schetyna, Mr Petru and Mr Kosiniak-Kamysz),

the victory is anything but swingeing and should rather be interpreted as a warning sign than as declaration of strong support.

The VeniceCommission has issued a report on recent changes in law pertaining to the Constitutional Tribunal. The final document is somewhat toned down in comparison to the draft which had leaked to the media in February. The Commission blames both the previous and the current governments for paralysing the Tribunal and urges the Polish government to rectify the wrongdoing. Commentators keep on talking about the political compromise to be worked out to reverse the unfortunate legislation. This twaddle fills me with dread. There is no room for give-and-take, politicians from all parties present in the parliament have to make a concerted effort to bring the laws in line with constitution. The PiS government is slowly realising it cannot mess with everyone around. Hope the opposition realise this time for the benefit of Poland they will need to collaborate with the government, not to reach any compromise, but to restore the legal framework spoilt in two stages by PO-PSL, PiS and president Duda.

Marching towards common happiness

Those guessing I would be writing on personal life this time have been misled. I am launching a new tradition in which the first post in a month will be dedicated to attainments of PiS-government and their president (who officially is also the president of Poland). Since the blog is by no means objective, I will hold back from describing facts (assuming they are known, though all media, no matter if straightforwardly pro- or anti-PiS, seem to distort the reality to shape the communication to their audience) and focus on my observations instead.

Disclaimer: I am employed by a financial institution and hence my professional and financial well-being might be impacted by some of the events I comment on, especially by financial institutions tax.

PiS, in express-fast pace, have pushed their new constitutional tribunal law through both houses of parliament and their notary (Mr D.) signed the law without further ado, despite harsh condemnation from nearly all representatives of judiciary power and despite doubts whether the amendment was in breach of constitution. Brushing aside all the errors made by PO in June 2015 and the whole turmoil in late November 2015 around swearing in newly elected five tribunal judges, we need to see the end that justified the means. The tribunal, the strongest representative of judiciary power (legislative and executive already taken over by PiS) had to be pacified. The tribunal was not just a stronghold of elite which had ruled Poland over the last 25 years, it was a hindrance for the good change being brought about by PiS. This has been said by Mr Kaczyński. Whoever stands on their way to unfettered power will be wiped out. The notable style of manipulation is typical for PiS: sling mud at your enemy, make people believe your enemy embodies evil, to justify an impetuous crackdown on them.

The banking tax draft law has gone through both houses of parliament and now awaits the notary’s (my apologies to all notaries, you at least read documents before you sign them) signature. The banking tax (actually financial sector tax) will take effect on 1 February 2016 and will be equal to 0.44% of an institution’s asset, with allowance for assets up to 4 billion PLN and government securities. The tax should fetch proceeds of 4.4 billion PLN (wonder whether this calculation takes into account lower CIT inflows from banks and enterprises) to finance pro-family policies. Effects will be analysed here in a few months, let’s give them the chance. My only comment is that banks have worked hard for their miserable reputation, but the tax base the government has applied will bring more harm than good, since banks will have a disincentive to pump money into the economy, especially the asset base with the best credit profile (and running on the lowest margins) is likely to cease to grow. It is naïve to think banks will not pass the tax into customers (they are already doing so). To make the criticism constructive, it would be wiser to: (1) apply a higher CIT rate for financial institutions – let’s tax profits not assets, (2) curb numerous ways of transferring money into Polish institutions’ head offices (and thus decreasing pre-tax profits).

Similar is the status of the supermarket tax. The proponents have shifted from shop’s area to turnover as tax base, a move in a good direction. Critics of the new tax argue it will translate into higher prices. My view is a bit more sophisticated. It will be partly absorbed by retail chains, partly by customers, but those hit the most will be suppliers (small entrepreneurs), already now exploited by their off-takers having incomparably higher bargaining power. Dear small entrepreneurs who deliver goods to powerful retail chains, prepare for even lower margins and even more stretched out payment terms.

The media law, bringing public radio and television to the heel, is also likely to take effect before long. Public media, bastion of anti-PiS journalists, overly supportive to PO and Nowoczesna, will soon be brought into “balance” by nominees of the ruling party. The goal is to restore the balance in the public media. Still too early too assess the outcome of the new law. Let’s wait a few months to behold the cure!

The government is working to undo the reform pushing six-year-old children to start education. Finally, the defenders of the nation’s offspring will disallow the evil people to take away a year of childhood. Does not matter demographics is relentless, does not matter in most European countries children start schooling at the age of six (are Polish children intellectually inferior to them?). Most parents are happy. Instead, work should be done to make schools more friendly to six-year-old children, since teaching methods should be adjusted to the age of pupils.

The flagship project of the government, 500+ child allowance programme is in consultancy phase and likely to kick off in 2Q2016. The later the scheme comes into force, the bigger the relief to the public finances, so I hope its introduction is deferred by a few months more. Had the draft been ready as Mrs Szydło claimed during the campaign, while she waved a pile of documents subsequently shown to nobody, the progress of the scheme introduction would have been better. It needs to be noted, if PiS went back on its main promise, many of the voters, bribed by the 500 PLN monthly per child, supported PiS and secured outright majority in the parliament for the party. Once they turn their back on PiS, the party will be in a fix. By the way, if somebody offered me a job change in return for 500 PLN or 1,000 PLN monthly pay rise, I would laugh off and reject the proposal!

One thing that cannot be denied to the new deputies is that they work as arduously as no other parliament before. One thing I have learnt over five years spent in the corporate world is that while you work furiously fast (I have experienced it many times), the risk of making mistakes rises greatly. However, with all safety valves (independent president, independent judiciary power) disconnected, no stumbling blocks lie on the path towards lifting Poland from ruins into which it slid, run by PO-PSL government and president Komorowski.

On 22 October 2015, Mr Kaczynski said: To musi być czas pracy ludzi władzy. Polska niech się bawi, ale władza musi pracować. We must not forget those words. Prezes told us between the lines to have fun, mind our own businesses and let them take care of the country. The message is not to interfere, while they are doing their vicious job. Much of nation have turned out to be disobedient. Thousands of people taking to the streets to defend democracy are now displaying their strength and representing millions disgruntled with PiS machinations, but how long before they run out of steam? Meanwhile millions of other people are enjoying what they had been waiting up for – PiS bringing Poland into order. Waiting for the good change to come.

Polish mining industry on the edge

If you believe a more appropriate subject for this week’s posting would be the decision of the Swiss National Bank to effectively float the CHF, I advise you revisit this post, especially in the light of some politicians’ proposals to help out over half a million mortgage borrowers (and also currency speculators who have shorted the CHF) thumped by skyrocketing Swiss currency.

If not, I suggest we go back in time by 30 years, to bring back backdrop of miners’ strike in the UK in 1984 – 1985 which led to closures of several unprofitable mines. The atmosphere in the UK those days was in some aspects similar to what is happening in the Polish mining industry. Some commentators have attempted to equate Polish prime minister, Mrs Kopacz, to Mrs Thatcher, a comparison for many out of place. Needless to say, just as British mining industry was in deep need of turnaround, the Polish one also calls for it, while the treatment it receives might be named overhaul at best.

The current situation has deep historical roots. Back in PRL the mining industry, one of focal points of heavily industrialised socialist economy, was pampered. Miners, the pride and joy of comrades were granted numerous privileges then. Mines were developed regardless of economic legitimacy, actually in the same manner as all companies in the socialist economy were managed. In the wake of the shift into free-market economy rules of the game have changed, but not for everyone. Most mines have remained a stronghold of the PRL. In late 1990s one programme of winding down unprofitable mines was launched. Later on no comprehensive strategy for the Polish mining has been pursued. In the meantime, miners excelled at defending their fulsome privileges (at the expense of Polish taxpayers), thus decreasing competitiveness of Polish mines. Fluctuating coal prices for some time allowed the government to sweep the problem under the carpet. Coal market slumped severely in 2009, but quickly bottomed up and mines had enough capital and cash reserves to ride out the short crisis. Coal prices rebounded in early 2010 and despite well-blown-out costs Polish mines remained profitable until late 2012. Since mid-2012 coal prices gradually declined and according to market forecasts, are unlikely to substantially recover in the foreseeable future…

To examine the distress of Polish mining industry, let’s have a glance at some facts:

1. Mining is a commodity business, thus above-average volatile and exposed to price fluctuations. Each mine, with quite rigid costs (little flexibility on technological and human resources sides) is a price-taker. It means when good times roll in, a mine swims in cash, but faced with a downturn, it can go under quickly. A prudent financial manager should run a company in such way that effects of price movements are smoothed out.

2. Environmental policies, including those imposed by the EU, hit the coal industry. Preferences for low-CO2 emission energy sources bring down global demand for coal.

3. Despite EU regulations, Polish energy sector is doomed to use coal and key fossil fuel, given scarcity and prices of other resources. Therefore, power and heating plants will remain the key off-takers of Polish coal mines.

4. Mining is one of most heavily unionised industries in Poland. Trade unions in some of the mines have sprawled into pathological size. Their power must not be under-appreciated, since they are capable of bringing most of the mines into standstill. Their bargaining power in negotiations is amazing, given track record of consecutive governments of giving in and subsequently maintaining status quo in the industry.

One could reasonably ask why some mines are profitable, some not and why mining companies are profitable and others incur sizeable losses. All companies in the industry are affected by falling coal prices, but for some market environment means much lower profits, for others barely breaking even and for the worst, threat of going bust. I have taken the trouble to unravel the puzzle of why some companies fare much better than others, found several factors, but no comprehensive answer. Just to name a few reasons for varying incomes between companies:

1. poor corporate governance in state-owned companies; this includes incompetent, too quickly turning over management, lack of clear-cut strategy, strategic decisions made on the basis of political influences rather than business analyses,

2. different technology-related cost of coal extraction (in some mines drilling and extracting is much more costly than in others) and different calorie-count of extracted coal which impinges on its price – for this reason the same number of people may produce fewer tonnes of coal of worse energetic quality,

3. low work efficiency and overmanning, both underground as well as in overground administration,

4. one-side linkage between profitability of mines and remuneration of miners. Personnel costs account for about 50% of mines’ operating expenses, therefore the item has crucial impact on break-even point for mining companies. While miners demanded to quickly privatise profits of companies when coal prices were running high (bonuses, profit-sharing schemes), when market went down, they reach out for the state aid and refuse to give up on their privileges,

5. miners’ privileges which appear excessive in comparison to what other workers enjoy. Most hard-working people in this country of course do not have to work underground in heavy conditions, but also do not enjoy guaranteed 13th and 14th pay and several allowances and fringe benefits.

The current slump on coal market has forced the government to take steps to bail out the ailing industry. The restructuring programme is much belated and therefore has to be implemented in haste. A long-sighted manager (a rarity in the public sector) would gently launch such programmes when coal prices were high and industry was capable of absorbing restructuring costs from cash surpluses. For obvious reasons, such move would have been inconvenient for everyone… It must be underlined, the originally proposed restructuring programme treated the distressed industry really mildly.

After several attempts to defer insolvency of 100% state-owned Kompania Weglowa, the biggest mining company in Poland, running 14 mines and employing almost 50,000 people, the government was driven up against the wall. Either they had throw a lifeboat to it, or let it go under, with all consequences. The determination of the government to avert the bankruptcy of KW served as water to the mill of protesting miners… The insolvency of Kompania Węglowa would actually benefit nobody. In the scenario of mine liquidation the Polish energy sector would lose the biggest supplier, more than 100,000 people would be affected by redundancies. Economic consequences would include lower proceeds for the government from personal income taxes and social security contributions and higher social security spending. It could actually benefit predator investors who would buy single mines after asset-stripping and turn them around (maybe not the worst scenario)…

In some media reports I read some 70% of Poles support miners fighting to save their jobs and blame the government for collapse of mining industry. In contrast, when I look at comments under articles on the issue in the Internet, I notice growing anger and discontent towards privileges miners enjoy, blackmailing methods they resort to and meekness of the government. No wonder ordinary people feel disgruntled. If their employer had to be downsized, they could not count on generous severance packages. Most of them would get what they must be paid (salary for their notice period plus severance pay in the equivalent of one or two monthly salaries) and could not dream of two-year salary. Most of them would not boast about above-average earnings and for most of them, bankruptcy of their employer would be their, not government’s problem… In the market economy if your employer goes bust or downsizes and you are laid off, you have to go it alone! It seems miners are totally detached from the market economy. For them it does not matter whether anyone wants to buy the coal they extract, regardless of what invisible hand of free market shows, their jobs must be saved… Who is going to pay for it is beyond their interest.

Here comes the question about the dissimilarity between Poland today and Great Britain in mid 1980s. Mrs Thatcher had social support for her crackdown on unprofitable mines. But does Mrs Kopacz have support of Poles for closure of loss-making mines?

Yesterday the government and representatives of trade unions nailed down an agreement on mining recovery. The government succumbed to trade unionists and amended some of the provisions of restructuring plan:

1. there would be significant reshuffles in the ownership structure: merges, purchases, buyout, all designed to inject the cash to mines from wherever cash surpluses can be found,

2. instead of 4,000 job cuts, no one will be made redundant, however some salary cuts will have to be accepted,

3. severance packages for those employees who will voluntarily come forward to quit have been raised.

If somebody’s impression is that the government has just buggered it up, well… some things sound better left unsaid.

During a long discussion on how to turn around the Polish mines one modest proposal stood out. It was mentioned by former prime minister, Mr Marcinkiewicz, who put forward to hand over the unprofitable mines to trade unions and let them take charge of the business. Representatives of the trade unions quickly agreed to accept such gift, provided on top of mines they receive 3.2 billion PLN the government intends to spend on restructuring of the taken over mines! Some things sound better left unsaid…

Time will tell whether government’s turnaround strategy for the Polish mining proves successful. For the time being even the weather seems to be against the industry. For more than a week temperatures have not dropped below zero and a few times nudged to +10C.

Pension reform takes shape

4 September 2013 might go down in the history as the day when privatisation of social security management was effectively dismantled…

Last Wednesday the government unveiled a draft of proposed changes in the pension system. The proposal is a combinations of two out of three variants presented to the public in late June. In brief, the fundamental changes are:

- 51.5% of assets amassed in pension funds will be transferred to state-run social security fund – this portion represents treasury securities currently held by the pension funds, which will be cancelled upon the transfer; thus the borrowing needs of the government and “overt” public debt will decrease and its contingent liabilities towards future pensioners will increase, on the other hard, the government will lose a strategic creditor, who could step in when other institutions were reluctant to buy new issues of government debt,

- private-run pension funds will be prohibited from buying securities bearing sovereign credit risk of Poland, i.e. treasury bonds and debt securities guaranteed by the government – this move increases risk profile of the pension funds,

- other assets amassed in the pension funds will stay intact (for the time being…),

- Poles will have three months from the date the new pension law comes into effect, to decide, whether to transfer 2.92% out of 19.52% of gross salary to private-run pension funds, or to transfer the whole pension contribution to the state-run social security system; those who do not bother to submit the declaration, will have the whole contribution automatically transferred to state-run pillar of the system; the decision will be irrevocable,

- assets from pension funds will be moved in ten tranches to the state-run fund over ten years prior to retirement,

- internal benchmark (setting minimum required rate of return) and investment limits are to be lifted,

- fees charged by the pension fund managers are to be slashed by 50% and capped on such level.

Markets’ reaction was predictably revengeful – on Wednesday and Thursday:

- share prices on Warsaw Stock Exchange plummeted – on Wednesday WIG20, index constituting of 20 blue chips, dropped by 2.5%, on Thursday it closed over 4.5% below Wednesday’s close, hitting intra-day low of over –6.0%, on Friday it rebounded by over 2.5%,

- zloty depreciated slightly against major currencies,

- yields on Polish government bonds rose sharply, with yields on 10Y securities reaching 5.0%, much more than 3.6% at the peak of bygone rally on Polish treasury securities…

The government’s representatives said they had predicted the turmoil and Poland would not lose on the rise of debt service costs, as 85% of borrowing needs for 2013 had already been financed at much lower cost.

I personally can also boast about predicting the little market crash. Unlike in 2011, when the crash after US sovereign rating downgrade was more severe, I sold out of almost all of my stock holdings and bought back much of them at almost 10% lower prices, when panic on the market was reaching its height. The stock market might stay volatile, but given the current economic recovery, if stock prices keep going down, this will only create an even bigger ‘buy’ opportunity. In the mid-term I believe I will personally benefit from the impact of the reform on the stock market. Fundamental value of a company does not depend on obligatory participation in private-run pension funds. Market pundits might tell you pension funds will not generate additional demand that used to drive stock prices up, but it is no reason to worry. From now they will stop inflating valuations of companies artificially and I find it a favourable change for the capital market. Remember, every bubble has to burst sooner or later. It has not swollen yet, however, if status quo was retained, demographic changes (increasing outflows from and decreasing inflows to pension funds) would exert downward pressure on stock prices anyway. So that unpleasant moment has been brought forward and its magnitude lessened.

Actors on the political arena in unison hold the view pension system needs a reform, but their assessment of government’s plan vary:

- Leszek Miller, president of SLD pledged to support the government in winding down the reform engineered by Mr. Buzek and Mr. Balcerowicz, therefore the ruling coalition faces no risk of the new law being voted down in the parliament, even though it cannot reckon on support from Civic Platform’s conservative flank – the key outsider / dissenter, not yet ousted from the party, Jarosław Gowin announced he would not cast a vote in favour of the reform,

- PiS politicians, who for a long time have called for freedom to choose whether to participate in private-run part of social security system, when the government pursues the project they have long advocated, refer to a (true) reasoning the government pursues the reform only to loosen the tightness on public finances, not out of care for future pensioners – the matter of the foremost rationale is clear, but if the government implements the vital part of their agenda and they try to oppose it, it means pursuit of power and making politics in more important for them than welfare of Poland,

- Janusz Palikot called for deeming the assets in pension funds owned by Poles and giving them the right to handle them at their discretion…

Media coverage was somewhat biased. Key headline were crying out “SKOK NA KASĘ” (literally: “gripping / seizing the money”), so audience of such news could have been convinced the government is about to steal their savings, while from the legal point of view the government is just relocating means within public finance system and takes them over not from private owner, but from private manager. Imagine a state-owned motorway which until now has been administered by a private manager and paid an administration fee for road maintenance. Is moving the motorway under government’s administration and depriving the private company of its fee a nationalisation? Oddly enough, there are economists, including a renowned chief economist of Credit Agricole Polska, who say the change is neutral for future pensioners. And Moody’s rating agency in its comment issued on Friday also presents a balanced picture of the reform. I must say pension funds managers’ lobby is powerful and effective in crying out its outrage at depriving them of state-secured huge revenues. May it exercise its right to run an informational campaign encouraging citizens to stay in pension funds and showing benefits of such decision. If it happens, do expect to have it dissected on this blog.

Now baffled citizens have a dilemma what to do with their future pension contributions. I do not feel entitled to advise to what to do. If you favour interest of your state (i.e. fellow taxpayers) and following ethical principles in business (the government should not guarantee income to privileged companies), you probably should have your whole pension contribution transferred to state-run social security system. If you believe in superiority of private management (that should have its investment restrictions and government guarantees for minimum pension benefit lifted) and discern pension funds keep assets, not just book records, you should have part of your contribution transferred to private-run pension funds.

To be sincere with you, I have not taken the decision yet. What the government presented recently is just a draft of proposed reform, lacking important details that can impact my decision. Only after I read the new law, I will be properly informed to make any judgement. The key issue for me will be probably the level of fees pension fund managers would be allowed charge. I recently took the opportunity to summarise the pension account allocated to me and learnt on 19 July 2013 (date is not incidental, as I used to be a “member” of Polsat OFE, taken over by PKO Bankowy OFE and 19 July was a merger completion date), after 3 years of paying contributions, market value of settlement units allocated to me was 104.10 PLN (or some 2%) higher than sum of my contributions (now, after yield on Polish government bonds have gone up and stocks lost a few percent of their value I fear the balance of this account dropped below the amount of contributions paid). The worst savings account in the worst bank would fetch a higher return, even after taxes! In the meantime, sum of load fees only was 175.71 PLN. I cannot count in management fee, as it is included in settlement unit valuation, but it seems gain for my future pension would have been at least three times higher, had it not been for the exorbitant fees… The far too high fees are the key factor contributing to built-in efficiency of pension funds. Even if underlying assets bring the desired rate of return, in the long-run exceeding pace of economic growth, management costs will eat up the excess return, making the whole fuss not worthwhile…

The meek and the outraged

Once upon a time there was a prosperity...

In one country in which several years ago one could rise from rags to riches, everyone, including drunkards having no jobs, no assets and no income, could get a mortgage without having to prove their creditworthiness. They could buy dreamt-up houses they had never afforded to buy and everyone was happy.

In another, once poor country, government, trade unions and employers entered into a social partnership, which gave rise to over a decade of fast, yet sustainable growth. When natural growth ran out of steam, economy was boosted by construction boom that did not last long, as everything what is credit-fuelled and based on low-efficiency sectors. They government would run budget surpluses thanks to rising property taxes and people could afford to buy houses despite prohobitive prices, thanks to easy credit conditions. Everyone was happy...

Once a country, which was facing bankruptcy in 1998, got up off its knees and rose to prosperity thanks to huge revenues from export of gas and oil... Only tycoon were happy... The rest were only proud of their new empire.

Another country, which joined the European Communities in 198,1 could rig statistics, wheedle out subsidies from the EU and live off the backs of German taxpayers. But actually eveyone was happy.

Once the biggest CEE economy was run by reckless politicians who at the same time cut taxes, raised government spending and despite this had a nearly balanced budget. But people weren't happy and in early election kicked out those magicians.

The times of living beyond one's means are gone. Good times will roll in sometime, but I suppose not before long. Come to terms with it, there's no such option as 'ship out' now.

Then the house of cards fell apart and Mr Crisis knocked on our doors. Believers of American Dream were evicted from their over-mortgaged houses and complex securities engineered by brainy quants from investment banks turned out to be a load of junk scattered all over the financial system. The government rushed to help out the troubled, but those bailed out were financial institutions. The case was that someone had been arranging the world in such way that banks had grown too big to fail and their collapse could trigger a knock-on effect, i.e. their bankruptcies would wipe out the 'real economy'. Thus the bankers were helped out and got away with the punishment and things went on.

At that time voices of people outraged at policies focused on big players, rather than ordinary people, were heard. But nothing, virtually nothing has changed.

As part of tacking the crisis, zillions of money wer pumped into financial system and some money was even injected into real economy. Economies somehow revived, but did not thrive as good as the financial system did. Drip of newly printed dollars flowed into banks' balance sheets and the banks did not, as the decision-makers had intended, turn them into loans for firms and individuals, but put them on financial markets. Between late winter of 2009 and mid-spring of 2011 stock prices doubled and commodity price tripled, not really reflecting economic recovery (often, like oil prices, threatening to hamper it).

In the meantime countries using fiscal stimuluses to prop up their economic, nations living beyond their means and those whose growth prior to the crisis had been totally unsustainable (these were the countries that had experienced property booms) fell into trouble. In 2011 banks are solvent (unless they have bought up too much "risk-free" Greek bonds), in 2011 the governments are about to go bust.

Poland got off the first wave of the crisis lightly. In early 2009 it was the only economy in Europe that did not contract. Neither the current (PO-led), nor previous (PiS-led) government could take credit for it. Accolades go to resilient Poles and their remarkable consumer confidence (in fact verging on profligacy), sound monetary policy pursued by the Polish central bank, wise financial supervision that curbed lending and resilience of Polish entrepreneurs. But lower budget proceeds and higher expenditures and inevitable in economic slowdown and so Poland as well has to tighten the belt...

But not only us. People feel it and someone roused up and discerned that ordinary people are paying for the crisis, while bankers, still untouched, are doing well. In 2008 Barack Obama won by promising the 'change'. The matter (or rather lobbyist) proved too resistant, and the change has not been brought about, leaving more and more people livid. They gathered in one New York district and dubbed themselves Wall Street Occupiers. The movement gained popularity in many countries, but I didn't think it would fell on a fertile fround in Poland. Yet for a moment it did. On 15 October hundreds of protesters marched through Warsaw's streets, but who were they? As right-wing journalists claimed, those were children of wealthy parents who thought it would be fun / trendy to protest again cruel capitalism and spent afternoon in such way. They even received support from a prominent leftist politician who came to the demonstration in his brand-new Jaguar...

In all countries they protested against the palpable distortions of capitalism, yet did not come up with any counter-ideas. Some of their postulates are even self-contradictory - how can you raise public spending and cut public debt at the same time? I don't feel affinity with those people. We are simply worlds apart, and not because we have different descents, but because our mindsets are worlds apart. I have a job that gives me a lot of satisfaction and offers me financial independence (limited, as without ruining my personal finances I cannot afford to move out from my parents' house) and... I'm afraid of losing the job, for reasons other than my performance. They are often jobless and with bleak future prospects. But where we are now is a result of how we got there and this in turn is a testimony of effort or lack of it over the past years.

And no, you are no longer entitled!

While others are outraged, I stay disturbingly meek. VAT increased by one percentrage point - other fulminate against the government, I say it is essential to bring extra revenues to the state budget. Raising the retirement age - my colleagues say they won't make it until they hit 67, I declare to toil away even longer without murmur to make budget'e ends meet. Scrapping tax deductible expenses - others are livid as they will not be allowed to claw back some money from the state, I happily commend the idea which simplifies tax system. I was even asked by my colleaugue, with a big tinge of malice, how I would be fixed for shortening paid holidays by some five days each year, cutting sick leave benefit, raising social sickness benefit contributions and restoring tax rates and brackets effective until 2008 (19% / 30% / 40%). Without much hesitation I said I would approve this, if only the money collected thus was spent wisely, i.e. on investments in infrastructure, education or, above all, contributed to reduction of public debt.

All in all, I have all makings of a ruthless technocrat who could turn an almost bankrupt country around and leave the office after four years, hated by 95% of the society. Or am I simply a naive sucker?


PS. This post written without effort. Was it read without pleasure?

Effectiveness or justice – in taxation

During my studies I’ve almost always been taught those two things are mutually exclusive on the macroeconomic level. Nevertheless, economic policy-makers still strive for a fair balance between those two features people expect from the economy.

Today I’ve been pondering upon combining effectiveness and justice in taxation. Effectiveness is usually defined as obtaining as much as possible from the certain resources, or using as little resources as possible to obtain the certain effect. In case of taxes the effects might be collected revenues, the resources might be acted as by the taxation rate, but also costs of running the collection system, or the influence of taxation rate on economic activity. Justice, in turn, refers to the fair distribution or redistribution of goods, based on the given criteria. When it comes to taxes, the considered issue is the taxation system (the most popular ones are progressive and linear).

Still the most relevant criterion taken into account when speaking about effectiveness is the bearing, which the taxation rate has on economic activity. If taxes are low, people are more motivated to work and less likely to evade them – in such countries the level of redistribution is low, usually, because when a country is a tax haven, it draws capital from abroad and small per cent of big sums bring ample revenues. The theory of higher revenues from cutting taxes has been elaborated on by an economic advisor of Ronald Reagan – Mr Laffer, who devised a Laffer curve. Higher taxes are linked to the higher rate of redistribution and as it is argued – they tend to discourage people from working. Some critics of high taxes claim also they put people off earning more – here I can’t agree – cause there are thresholds, over which the additional income is taxed at higher rate, I think it never happens that the higher taxation rate applies to the whole income after exceeding a threshold.

There are plenty of criteria, according to which justice in taxation is perceived. In two most frequent ones the individuals should pay the same per cent of their income (flat tax) or the richer should pay higher share of their earnings (progressive tax). Flat tax is often misidentified with the system where everyone pays the same amount of money in a form of taxes. Such systems are the thing of the past these days – but in case of flat taxes the richer still pay more than the poor, but their burdens rise linearly.

As we went through with the theory, it is time to present my proposal for taxation system in Poland, which in my opinion is a fair combination of effectiveness and justice. I would put forward a flat tax with rate of around 18 – 22 per cent and annual tax allowance of 10 – 12 thousand złotys, with no other deductions and relieves (worth considering are different thresholds of deductible income for single taxpayers, couples and payers with dependants). Rings a bell? Yes, this is similar to the first proposals of American economists from the late seventies. This would introduce an element of justice – the system would be simple, would not discourage people from working and would give much less room for abuses and tax evasion. Under a new system, with the flat rate of 20 per cent and deductible amount of 10 thousand zlotys, the effective taxation rates for a payer:
- who earns 1 000 zł a month would be (12000-10000)*0,2/12000=3,33%
- who earns 2 000 zł a month would be (24000-10000)*0,2/24000=11,67%
- who earns 3 000 zł a month would be (36000-10000)*0,2/36000=14,44%
- who earns 8 000 zł a month would be (96000-10000)*0,2/96000=17,92%
- who earns 15 000 zł a month would be (180000-10000)*0,2/180000=18,88%
Such system would decrease the tax burdens for the poorest, provide the fair, “creeping” progression and would guarantee considerably low taxes for the richer. No deductions and exemptions would mean that tax declaration forms could, as proposed, consist of one page. Much could be saved on the tax collection system – just imagine most of those people currently working for IRS who carry papers from one pile to another and hinder your life, are sacked. The army of clerks given the boot would result in lower budget expenditures for tax collection apparatus. However, some of the saved money should be spent on enforcement tax police – in my opinion tax evasion should be severely punished and penalties should be severe enough to dissuade taxpayers from tax avoidance.

Why is it impossible to put my idea into practise?
Firstly, ordinary citizens perceive it unjust, though in my view this is the most just solution
Secondly, the rich prefer the systems which create the illusion of justice but give a lot of room for abuse, that’s why in the States a CEO of a big company has a lower effective taxation rate than his secretary – he can afford to hire a specialist who’ll reduce his income.
Thirdly, regarding corporate income taxes, there is a big business of tax advisory services, tax optimisation solutions and consultancy firms – such great lobby has a vested interest in the status-quo of the present complicated corporate tax law, on which they can make money.

Quo vadis SGH?

Totally out of the blue, almost three weeks ago, on 22 July the Senate Curriculum Commission congregated and… I don’t know if unexpectedly, but passed a resolution on the changeover in the curriculum of Bachelor’s and Master’s studies (I start the latter in October so the reforms will affect me). The heated discussions about the direction my university should evolve have been held in public for months and the next step was just the par for the course, but… But I somehow deluded myself that the bureaucracy-stricken structure of my school would put off implementation of the reform, all in all it didn’t happen. Sadly I can only fall in with the scholars, students and other members of our academic community who disapproved of the drafts of changes, claiming Warsaw School of Economics was drifting towards a vocational school. So once again I sympathise with the ones who call out “Nie róbcie z SGH zawodówki!”.

The modification of the curriculum can’t be rather categorised as common-sense-based. The course of studies in the academy of economics which has pretences to be a member of elite and wants to compete with the best schools of economics abroad can be simplified in the way it is being done. Why were the advanced micro- and macroeconomics erased from the curriculum of Master’s studies? Is the managerial economics going to substitute for it? What was the main reason for crossing out specified specialisations from the curriculum? Should we pick the lectures on our own, yes, this is the step towards more freedom, but how about the specialisation note which appears on the diploma?

On Bachelor’s studies the changes will take a heavy toll on the knowledge of the graduates. Just take a first glance. Even in the times of communism, when Warsaw School of Planning and Statistics was called a “Red Fortress” (PL: Czerwona Twierdza), the distinguishing mark of the school was teaching two foreign languages on relatively high level. The current graduates of BA studies had to go through five semester long course of “language I” (the candidates are expected to have the command of this language on B2 level) and six semester long course of “language II” (here candidates should be on B1 level). The quality of teaching and all the stereotypes linked to it are the topic for the separate endless post, but let’s focus on the shot in foot, which is cutting down the length of both courses to four semester. Altogether 180 learning hours less than before! And the grasp of languages represented by students of SGH, although relatively good still leaves a lot to be desired. Nevertheless the command of two languages has given us the edge over the graduates of other universities. Why do the authorities want to take away one of our assets? The students will have the opportunity to carry on learning under the pool of learning hours and credit system, maybe it will be better to let them take the matters into their own hands? Why aren’t some courses like sociology or economic history compulsory. The proponents of the reform pointed out they’re not necessary or the students should have been given more freedom in making choices. After two years which elapsed since I’ve completed those courses I have conflicting feeling – many freshmen students find those lectures tedious and superfluous and treat as a ball and chain on their way to career and here we reach the heart of the matter – graduates of the prestigious Warsaw School of Economics should apart from strictly professional knowledge have broad mind, horizons, during their studies they should develop the passion to explore and the habit of critical looking at economic phenomena from different perspectives, taking into account psychology. A modern-day economist is not just a mathematician whose over-reliance on models and patterns leads up to bungled forecasts, it’s rather an open-minded person who has a thorough understanding of psychology, social factors influencing the economy, historical background which underlies some stances and be aware of many more things, unlike the callous traders closed in the dealing room who lump together Poland and Hungary when it comes to financial stability of both countries.

I don’t want my school to churn out graduates lacking general education. Narrow-minded people as far as I observed are more likely to try to outwit the others when it comes to financial matters and are more likely to be ignorant of obvious phenomena – they also led to the current crisis, they fuelled stock bubbles disregarding fundamental factors and elementary laws of economics. The two excellent examples of something what was missed out on are LTCM and the current investment results of Superfund (hedge fund managed by computer system operating on the basis of econometrical model)

For a conclusion – do the today’s drop-offs on stock exchanges herald the deeper correction? If so, I wouldn’t be surprised…

The greatest deal ever struck...

The first association for some of you should be “a conspiracy theory”. “The greatest lie ever sold” (rings a bell?) is a title of the most recognized film about the events of 9/11 , which implies US government was involved in the attacks on WTC and Pentagon. That’ll be probably the topic for another post, but a few days ago I found myself in a state of let’s say elation at the news of our government’s decision to shave the commissions charged by companies which manage pension funds (Powszechne Towarzystwa Emerytalne). As future client, coerced to sink my money into such fund I was delighted to hear this, my joy is probably shared by millions of other Polish present and future participants of new pension system. The officials from Labour and Social Policy Ministry made indeed a step forward, but I have to say solutions implemented in Poland ten years ago still leave a lot to be desired.
Don’t think I’m against the reform – the previous pay-as-you-go system was undeniably cumbersome, was meant to collapse sooner or later due to the demographic changes (ageing of society), leaving millions of people destitute or weighing down the budget to the unbearable degree. I’m against the shape of what we call a second pillar of the new pension system – open pension funds. Let me present it divided in points:

1) Until now that was the state that forced us to pay several taxes, premiums and other kinds of “fines”, but the state was the recipient of all these transfers, in case of pension funds state entered into an agreement with private businesses and forced citizens to pay them their money, leaving only the choice which fund to choose – that’s the aforementioned “struck deal”.

2) The choice payers were given was illusory, because – as I think and as the example of Chile, where the pension reform was implemented in 1980 – funds in the long term report similar returns – so where is the difference?

3) Until today the pension funds’ managers were entitled to charge 7 per cent distribution fee. Obviously, the lobby of managers slated the authorities’ decision immediately, arguing that lowering distribution fee from 7 per cent to 3,5 per cent will have a miniscule effect on the future capital amassed by pensioners and will surely translate into lower management quality – are they going to spite us? Traditional mutual funds of similar profile (stable growth funds) charge people about 3%. For sure substantial commissions are reaped by the agents who take up to 900 zloty if they convince members of other fund to transfer money to the fund they represent. Here we have the first lot of spongers to get rid of… In the ideal scheme, funds should be entitled to charge only minimal fees and the lion’s share of their revenues should be made up by profit – sharing programmes – i.e., so if funds investments turn a profit of 15%, the participant would get let’s say 13,5%, the rest would go to the pension company as a remuneration. That would be an undisputed incentive for the managers, now they get their dough, irrespective of the fund’s performance. I know it’s cruel but it’s meant to protect particular interests of pensioners.

4) The next question that occurs to me is who exactly owns the money we pay into pension funds? A young, well-educated economist defied the legal obligation to pay his money into pension funds. After numerous legal tussles, the court has dismissed his case. In its ruling we’d read that it was not his money – as a result he had no right to have them in his command. Sorry, but I don’t get it. If I decide to invest in a mutual fund, I become an owner of a fraction of fund’s assets. In case of pension fund I think I am also an owner of a certain part of fund’s assets. If not the pensioners, if not the state, if not the pension companies, then who has a legal right to this money?

5) The cited economist argued he would invest his money better than pension fund and I share his belief, because I think I’m able to assess the risk (adjust it to my eagerness or aversion to take a risk), investment horizon, my needs etc. Pension funds lumping all the premium together the deprive us of the key choice. Regulators imposed various limits and set guidelines to the funds, as a consequence their portfolios consist mostly of government bonds and stocks listed on Warsaw stock exchange. Their performance is, therefore exactingly related to the performance of our national financial markets. The tumbling indices sparked off the discussion about the investment policies of pension funds. If people were given any choice regarding form of investment, some of them would not lose a single zloty within last 18 months. Besides, when somebody wants to acquire units of typical investment fund, she or he is bound to sign a document, in which she or he confirms she / he accepts and is aware of the risk taken by the fund and that it is possible to lose a part of invested sum… In pension fund we don’t even have to be aware that fund may turn a loss I estimate up to 20 per cent a year.

6) Ewa Lewicka, a president of Pension Companies’ Association asserts that government’s move to reduce to distribution fees is “an interference into an economic freedom”. How the hell can we speak about economic freedom when people are forced to sink their money is a flawed undertaking? The government has once given the pension companies the guarantee they’ll be able to sponge on our money. They’ll always be paid the commissions, simply because the number of new system’s participants will be increasing…

7) Some regulations were passed to protect the interest of future pensioners, One of them is the minimal rate of return, calculated on the 3-year-basis. If funds fails to fetch a minimal return, the pension company is obliged to pay into the fund. I only wonder what’s going to happen in about a year, when KNF announces the minimal rate much below zero. Some funds will be boasting they would have beaten the benchmark (the benchmark was minus 10 percent, but I’ve lost only 5 per cent of your money – dear client, aren’t you pleased?)

8) A few days before the last drawing (if someone doesn’t choose a fund within 6 months from taking his first job the person is drawn and her premiums are transferred to one of the funds) one of the funds advertised itself as one of the biggest. I just clutched my head… The bigger pool of assets has the fund, the more harder it is for the managers to modify the portfolio. It’s obvious that if you have 100 shares it’s easier to trade them than 100 shares. With time, we’ll probably witness deteriorating performance of the funds and the pension funds will resemble a bull in a china shop… Why the hell did they take pride in their size?

So called economists say people are stupid, so given the freedom they would consume the money they’re now obliged to save in pension funds. Some would surely do so – but why interfering in somebody else’s business? If you want to retire and scavenge – fire away! But don’t force me to sink my money into the wallets of fund managers – in fact into losers’ wallets. Participation in the new system will remain obligatory, so under these circumstances I can only put forward liberalisation of participation’s terms. The solutions in the second pillar should be similar to the ones in the third one. One should decide how to invest his money. The choice is wide – bank deposits, long-term insurance policies, investment funds of various risk profiles… I’m just yearning for more freedom…

And what do you think about or pension system? I consider this post extremely important so if something is blurred I’ll try to make it clear.