Tech entrepreneurseye distant shoresA new generation ofstart-ups sets its sightson foreign marketsPage 4

Investing in PolandFT SPECIAL REPORT

www.ft.com/reports | @ftreportsFriday November 28 2014

Inside

PM Ewa Kopacz faces atough first yearTop threeprioritiesare‘elections,elections,elections’Page 2

EconomyThe country needsto shift from beingan imitator to beingan innovatorPage 2

DemographicsYoung people takingtheir skills abroadincreases the age ofthe populationPage 3

Banks ride high oninternet popularitySector appears rosy butcauses for concern liebeneath surfacePage 4

T his was going to be a memo-rable year for Poland evenbefore its prime ministerwas named as the newpresident of the European

Council. Anyone of note making aspeech never failed to include the fact2014 marked 25 years of freedom fromcommunism, 15 years of Nato member-shipand10yearsasanEUmember.

Donald Tusk’s elevation to a top EUpost – to be replaced as prime ministerby a savvy female politician – was themost prominent sign of how far it hascomeasacountry.

With an economy growing at about 3per cent a year, a stable government anda steadily shrinking fiscal deficit, otherEU states can be excused feelings ofenvy. Poland is still the place for inves-tors to be, says Katarzyna Rzentarze-wska, senior analyst at Erste Group, anAustrian bank with interests across

eastern Europe. “If you look at thestructure of the growth, it is driven bydomestic demand, which is one of thestrengths[of its]economy,"sheadds.

However, average unemployment at12-13 per cent is higher than the centraland eastern European average and hasbeen difficult to tackle. Additionally,consumer prices are falling, withOctober recording the steepest rate of deflationfor32years.

Fiscal reforms to unlock furthergrowth are unlikely to be forthcoming.A halfhearted privatisation programmehas boosted some big businesses, butmuch control still lies with bureaucratsand politicians. And part of Poland’sshort-term economic future may hingeon external factors. A long economicstagnation in the EU would worry the nation’s exporters, who rely on the blocforabout80percentofsales.

Most alarming has been the recent

poor performance of Germany, whichnarrowly avoided falling into recessionin the third quarter. More than 25 percentofPoland’sexportsgothere.

The Ukraine conflict, and resultingtrade sanctions imposed on each otherby the EU and Russia, are also takingtheir toll. Moscow’s ban on Polish applessparked nationalistic fruit eating, butthe two antagonists account for 8 percentofPoland’s totalexports.

“Our main concern is always overdomestic demand . . . and that is con-firmed by European forecasts to bedoing well,” says Mateusz Szczurek, thecountry’s financeminister.

“One thing that would be problematicin the current economic environment

would be excessive strengthening of thezloty,”hesays.Thezloty is littlechangedagainst the euro over the past 12months, but a stronger currency, com-bined with weak demand in trade part-ners, would hurt exports. “This is some-thing that would be damaging forgrowth prospects given the lack ofgrowthinsomeofourtradingpartners.”

In politics, the ruling Civic Platformparty (PO), in power since 2007, nowled by prime minister Ewa Kopacz, isquietly confident it can stay in govern-ment after next October’s general elec-tion. It garnered fewer votes than themain opposition in local elections thismonth, but is still likely to win a thirdconsecutive term with support fromcoalition allies, according to TsvetaPetrova, an analyst at Eurasia Group, aconsultancy.

“If PO were to remain in power afterContinuedonpage2

Outside forceslikely to weighon nation inthe short termThe elevation of the former PM to a top EU jobshows how far the state has come, saysHenry Foy

Presidential gaze: Donald Tusk begins his new role in Brussels next month – AFP

TheUkraine conflict andtrade sanctions imposed oneach other by the EU andRussia are taking their toll

2 FINANCIAL TIMES Friday 28 November 2014

Investing in Poland

At the InterContinental hotel on LosAngeles’ Avenue of the Stars a clear signof Poland’s economic self-confidencecould be seen this month. Kicking off aPolish-American Innovation Week inCalifornia, Warsaw officials mingledwith Silicon Valley investors to discussboth the country’s attractions and howitcanbecomea“knowledge”economy.

Go back 25 years and, crushed by debtand 600 per cent inflation, it was ailingeven compared with its communistpeers. The transformation is remarka-ble, says Marcin Piatkowski, senioreconomistat theWorldBankinWarsaw.

“There were few who would have pre-dicted that Poland would do well, as

opposed to countries such as Czechoslo-vakiaorHungary,”hesays.

Thanks to well-handled reforms,Poland has enjoyed unbroken growthsince1992(seeopinion,Page3).

When communism ended, says MrPiatkowski, exports were less than$10bn a year, mostly basic goods. Lastyear, exports were more than $200bn.And while EU and eurozone GDP havehardly grown since the end of 2008,Poland’seconomyis18percentbigger.

That success has been achieved on theback, above all, of large foreign directinvestment flows. This has transformedPoland into a manufacturing centre offinished goods and components forwesternEurope,especiallyGermany.

The factors that attracted that invest-ment persist: a well-educated yet cheaplabour force, and an excellent geograph-ical position. While salaries have beenincreasing in recent years, productivityhas increased more, so unit labour costshave been declining. Add to that institu-

tions which have caught up withwestern standards, says Mr Piatkowski,and the investment case remains com-pelling.

Yet the country faces short andlonger-term challenges. EU economicweakness and the Ukraine-Russia crisisaresqueezingshort-termprospects.

With 80 per cent of exports going tothe EU, says Witold Orlowski, chief eco-nomicadviser toPwCPoland,andonly8per cent to Russia and Ukraine, theformer is more significant. But Russia’sban on EU food imports, in retaliationagainst western sanctions, has hit thefoodindustry.

After growth slowed to 2 per cent in2012 and 1.6 per cent in 2013, analystshad said at the start of the year it wouldrebound to about 4 per cent in 2014, buttheynowforecastabout3percent.

Mr Orlowski says Poland’s relativelylarge population, compared withsmaller neighbours, provides a cushion.“We’ve got the privilege, compared with

the Czechs and Hungarians, that thedomestic market can compensate atleast tosomeextent,”hesays.

Moreover, falling oil prices and anoversupply of food products – fuelled bya strong harvest – have resulted in lowinflation, and even, in recent months,technical deflation. That is boosting real

incomes, and hence domestic demand,whichshouldhelpsupportgrowth.

“Deflation isn’t coming from lowgrowth, what we have is ‘good’ defla-tion,” says Ryszard Petru, president oftheAssociationofPolishEconomists.

With nominal wage growth of 3.5 percent a year, and the consumer priceindex down 0.6 per cent, he says

consumers are feeling “rapidly richer”.Mr Petru adds that growth is also ben-

efiting from a rebound in private invest-ment, which slowed sharply after thefinancial crisis. State investment is set toincrease next year, too, as the govern-ment launches projects backed bymultibillion-euro EU funding that hashelpedPoland’sgrowth.

MrPetru isoptimisticabout theshort-termprospects,butwarierof the longer-term challenge of sustaining growth atthe level needed to close the income gapwithwestEuropeaneconomies.

“We should be growing by 2 percent-age points faster than west Europeancounterparts if we want to catch up totheir levelofdevelopment in20years.”

Thatwillmeanchangingtheeconomyso it can develop innovative, value-added products – rather than being acheap maker of products created else-where. As Mr Piatkowski says, it mustshift“fromimitatingto innovating”.

Analysts say the country has

weaknesses to address. Secondary edu-cation is strong by international stand-ards, but tertiary education lags behind,with a shortage of top-flight universi-ties. That is resulting in a skills gap thatpartly explains Poland’s still relativelyhighunemployment.

Another priority is to nurture properfunding to support the entire productcycle from the earliest-stage researchanddevelopment.

Mr Petru says the government shouldbe cutting support to “old” industriessuch as coal mining, and pushingthrough modernising reforms andderegulation to create an environmentinwhichnewbusinessescanthrive.

“As long as we have this EU moneyflowing in, it’s easy to grow withoutdoing toomuch,”hesays.But theoppor-tunity for superior, catch-up growthmust not be lost, he adds, “otherwisewe’ll end up like Portugal and Spain –poorer brothers to wealthier Europeancountries”.

Shift from ‘imitator to innovator’ needed to join wealthy nationsEconomy

The country remains anattractive place for foreigncapital, says Neil Buckley

Marcin Piatkowski:Poland’s attractivefeatures include awell-educatedworkforce andgood institutions

2015, political and policy continuity willhave a positive impact on the businessenvironment, given [its] business-friendly economic policies,” saysMs Petrova. “On the other hand, given[the main opposition’s] ideologicalcommitment to economic statism and nationalism, a turnover in power in2015 would detract from the currentstable,openeconomicenvironment.”

Poland’s attraction for investors liesin its “emerging market-safe haven”reputation. This oxymoron relies on itsposition as the most robust market inCEE, and its standing in the EU, whichhas pledged more than €100bn in fundstothecountrybetween2014-20.

Erste forecasts Poland’s GDP will grow3 per cent next year and 3.6 per cent in2016, faster thanitsneighbours.

Don Grantham, president of softwarecompany Microsoft in central and east-ern Europe, says: “The rise of the Polisheconomy is a great example of the long-term, positive change . . . driven byinvestment in high-quality educationandlocal innovation.”

Poland’s good use of its large popula-tion during the transition from areliance on manual labour and agricul-ture to a more knowledge- and capital-intensive economy has helped it leap-frog many of its central and easternEuropeanpeers intermsofgrowth.

But entrepreneurs and investors saythe regulatory climate and approach toinnovation is not conducive to new ven-tures. Poland’s investment in researchand development, for example, was 0.9per cent of GDP in 2012, according toEurostat. This is less than half the aver-age in the EU’s 15 most developed states,and a whole percentage point lowerthan the Czech Republic, which has amoresuccessful ITsector.

The country is also behind all itsneighbours in terms of ease of starting abusiness,accordingtotheWorldBank.

There are some encouraging signs,however. Initiatives to pair investorswith migrant 20-something Polesreturning home after being educatedoverseas are tapping an eager audience,while global technology companies areincreasing investment in the country.“Technology is the key to opening doorsfor young entrepreneurs in the coun-try,”saysMicrosoft’sMrGrantham.

Continued frompage1

Outsideforces weighon nation inshort term

3.6%Erste Group’spredicted growthfor Poland’s GDPin 2016

0.9%Proportion ofPoland’s GDPspent on R&Din 2012

E wa Kopacz was smiling as shespoke to her party’s top offi-cials after Poland’s local elec-tions this month, but it wasundeniably forced.

A ballot expected to provide a solidshow of support for the new prime min-ister saw the party attract fewer votesthan the opposition for the first time inalmost a decade, turning the widelyacceptedpoliticalnarrativeonitshead.

Local elections are untrustworthybarometers for parliamentary success,but the warning was clear: with a presi-dential election next spring and the all-important general election nextautumn, the ruling Civic Platform party[PO]cannotrestonits laurels.

“I could feel the mood of the countryis moving in the direction of Law andJustice,” says Andrzej Duda, an MEP forthe party, which forms the main opposi-tion in Poland. “I knew the people havehad enough of seven years of disastrousgovernance.”

PO won in terms of seats, but lost interms of votes. That was not in the scriptafter two broadly encouraging monthsin office for Ms Kopacz, a relativeunknown outside Warsaw’s political cir-cles before she was thrust into the lime-lightasDonaldTusk’ssuccessor.

The stability afforded by the PO-ledcoalition’s seven-year grip on power isseen by most analysts as a key factorbehind Poland’s economic success.Some had feared Mr Tusk’s departurewouldweakentheparty’s standing.

However Ms Kopacz, a former healthminister and speaker of parliament, hasinjected a fresh sense of initiative into

the ruling party, whose unprecedent-edly lengthy time in office was gratingwithvoters.

“She certainly came in at a good time,and has benefited from that,” saysWojciech Szacki, senior political analystat Polityka Insight, a think-tank. “Thelocal elections meant everyone in theparty wanted her to do well, and no rivalparty members were strong enough tochallengeher.”

A chain-smoking doctor with an abil-ity to digest and memorise facts quickly,Ms Kopacz has so far been deft at navi-gatingdangerouswaters.

She returned from her first big Euro-pean summit last month with animpressive victory for Poland on cli-mate change regulation over larger EUnations. She also appeared to have neu-tered her main political rivals while pre-serving the stability of her party with acannyreshuffle.

But this will be challenging year.November’s municipal elections areover,andMsKopaczwillquicklyneedtoreboot the party’s campaign machine torespondtothe losses.

“The government has three priorities

this year: elections, elections and elec-tions,” said a person involved withformulatingMsKopacz’sstrategy.

From a bevy of disparate partiesformed after the end of communism,Polish voters have broadly coalescedaround two: PO and the Law and Justice(PiS) party. Despite the local electionvictory, PiS and its leader Jaroslaw Kac-zynski still trail PO in general electionvoting intentions.

“There is a terrible weakness amongthe opposition,” says Michal Szuldrzyn-

ski, a journalist and commentator atRzeczpospolita, a newspaper. “Forseven years they got used to attackingMr Tusk. Now, [Mr] Kaczynski misseshim the most . . . Everything haschanged,andPiSdoesn’tunderstandit.”

The opposition had hoped internalfactions in PO would be exposed afterMr Tusk’s departure, but by making herbiggest internal rivals foreign ministerand justice minister, Ms Kopacz has tiedtheir fortunestohers.

“She does not waste time, and doesnot let others waste time,” says a front-bench minister. At her first EU summit,Ms Kopacz managed to persuade thetrading bloc that Poland deserved lucra-tive concessions as part of a deal to cutEuropeancarbonemissions.

And when former foreign ministerRadoslaw Sikorski created a storm bysuggesting Russian President VladimirPutin had offered Mr Tusk a plan todivide Ukraine between theircountries,shemovedfast todefusethe issue.

More challenges lie ahead. Poland’sstate-owned coal industry is in a direstate, losing money and chronicallyinefficient. But reform will undoubtedlymean shutting down some mines withthepotential lossof thousandsof jobs.

Foreign investors still argue the needfor furtherderegulation,whiledomesticvoters worry about high unemploymentand a controversial reform of the pen-sionsystem.

Whatever happens in next October’sgeneral election, PO will almost cer-tainly need its coalition partners toremain inpower.

PO’s current junior partner, the con-servative,agrarianPolishPeople’sparty,is regarded as fickle, and some politicalanalysts expect that Ms Kopacz mayneed to bring in a third party, the Demo-craticLeftAlliance, tostay incontrol.

“Youcannotpredict scandalsordisas-ter,” says Mr Szuldrzynski. “But nonatural event that you could predictsuggestsPOis likelyto losepower.”

When pan-European developer Skan-ska sold a building in its Krakow officedevelopment Kapelanka 42 to a Polishinvestment vehicle belonging to ReinoPartners for€29mthismonth, itwasthelatest signofarapidlygrowingtrend.

Poland’s regional cities, long over-looked by property investors in favourof Warsaw, have discovered that smallcansometimesbebeautiful.

The development was Skanska’s firstscheme in Krakow and the buildinghouses back-office operations for UKretailer Tesco, as well as software firmAprisoandITcompanySygnity.

International businesses that operateworldwide can choose to base many oftheir backroom staff anywhere, andPolish regional cities are becomingincreasinglypopular.

Thanks to strong universities, theyhave substantial numbers of well-edu-cated, multilingual young people, andcost-wise they have become competi-tive. “It’s only recently that places suchas Krakow are seeing activity in office

demand and development, being drivenby back-office [services], with quite alot of action coming back [to Poland]from east Asia,” says Robert Martin,head of central Europe at fund managerEuropaCapital.

“We are seeing investment activity intheregionalcities.Wehavebeenwaitingfor 15 to 20 years for the regional officemarket toemerge,”headds.

As a result, investors are clamouringfor assets in Krakow – and Katowice,Poznan,GdanskandWroclaw.

“For the first time this year, Krakowwill have a higher volume of transac-tions than [previous regional leader]Wroclaw,” says Pawel Debowski, a part-nerat lawfirmDentons.

“Investors need long-term leaseswith high-quality tenants, and those

buildings will find five to 10 buyers perproperty.”

Although the emerging regional officemarket is causing the most excitement,it is just thetipofaniceberg.

A “wall of money” has been flowinginto the Polish real estate market acrossthe board since the start of this year,according to Hadley Dean, a managingpartneratestateagentColliers.

“Investors’ appetite is very strong andthe weight of money looking for assets isimmense,” he says. “It’s not just offices –retail, logistics, everything is hot at themoment.”

It is the office market that dominatesinvestment activity, however. Polishoffice investment deals totalled €2.1bnin the first three quarters of 2014, up 8per cent year on year, according to

figures from property advisers CBRE.Neither retail nor logistics came evenclosetothe€1bnmark.

Investors’ appetite comes despite – or,some argue, partly because of – thelingeringtensionstoPoland’seast.

“US investors are nervous aboutwhat’s happening in Ukraine,” Mr Mar-tin says. “Tenants generally are nervousabout making any plans, people don’tknow what’s going to happen and feelnaturally cautious. The fact that theeurozone economy has faltered a littlein recent months also makes peoplecautious.”

But the growing tensions with Russiamean that western Europe will hugPolandmoreclosely,otherssuggest.

“I think we can be a beneficiary of this[Russia] situation,” Mr Debowskiargues. “Our legal and political situationis stable, the population is growing. Weare looking at a record year for invest-ment activity, it is busier than 2007, andat that time I thought it wasn’t possibletobebusier.”

This hubbub of activity may poseproblems in the coming years, however.In Warsaw in particular, overenthusias-tic developers risk killing the goldengoose by throwing up too many build-ings,outpacingtenantdemand.

“If you are a large tenant [looking forspace], you will have fun during2015 and 2016,” Mr Debowski says.

Colliers’ Mr Dean agrees: “The devel-opment community has got a little over-excited, has built a lot of stock andthere’s a lot more in the pipeline. Ten-antswillusethisasanegotiatingpoint.”

But all is not lost for developers: good-quality new buildings are in a betterposition to compete than older, shab-bier rivals, suggests Mike Atwell, a sen-iordirectoratCBRE.

He says: “People are moving fromolder buildings into better qualityspace. Landlords are being competitiveand you can get some very good deals,and occupiers are therefore making costsavings.”

It remains to be seen how long thecapital’s office-building boom will con-tinue, but developers may be pullingback while a growing number of peopleinWarsawstillneedhomes.

Mr Atwell says: “The main developersare just beginning to consider thepotential of office sites for residential[purposes], and residential developersin the past six months are startingto outbid office developers for somesites.”

With Poland’s economy continuing togrow, the likelihood is that any con-struction oversupply will be only a tem-porarymismatch.

“It’s a two-year thing, not a five-yearthing,” argues Mr Dean. “Occupierdemandwill catchup.”

Demand for offices in regional cities begins to take offProperty

Political and social stabilityoffer much to thoseseeking a long-termreturn, says Kate Allen

Kopacz faces tough yearahead as elections loomPolitics The result oflastmonth’s local ballotis a warning for thenew primeminister,reportsHenry Foy

New build: the Kapelanka 42 site in Krakow is home to tenants including Tesco

Charge of guard: Ewa Kopacz is not one to waste time – Adam Jagielak/Getty Images

‘The government hasthree priorities: elections,elections and elections’

Friday 28 November 2014 FINANCIAL TIMES 3

Contributors

Henry FoyCentral Europe correspondent

Neil BuckleyEastern Europe editor

Kate AllenProperty correspondent

Adam EastonWarsaw correspondent for the BBC

Andy KurethEditor of Poland Today

Annabelle ChapmanFreelance journalist in Polandand Ukraine

Adam JezardCommissioning Editor

Steven BirdDesigner

Chris LawsonPicture Editor

For advertising , contact:Jim Swarbrick, +44 (0)20 7775 6220,jim.swarbrick@ft.com,or your usual FT representative.

All FT Reports are available on FT.com atft.com/reports.

Follow us on Twitter: @ftreports

Investing in Poland

I cannot help but be surprised whenone of my European colleagues asksme how Poland’s revival in the past 25years has come about. “Why is it youhave been so successful?”, they say,brows furrowed, genuinely perplexed.

There is a simple answer. Poles justmade the most of the opportunitiescreated by freedom, democracy andthe free market. Precisely the sameideals that made Europe’s revival afterthe second world war possible; thesame ideals that made the EU possible;and the same ideals that made EUenlargement possible.

Not many opportunities are as big asfreedom, which we achieved in 1989.We knew then we could not waste thischance. We reformed our institutions,implemented shock therapy and setthe course for EU membership.

Since this process began, Poland hasenjoyed one of the longest periods ofuninterrupted GDP growth in modernhistory. If IMF forecasts prove correct,and this lasts from 1992-2019, itsduration will break previous records(Germany 1947-66, Korea 1957-79) andequal the uninterrupted GDP growthexperienced by Japan from 1946-73.

At the same time, we have managedto strike the difficult balance betweenfiscal discipline and economic growth.Perhaps that is what surprises peoplemost – but it should not.

Poles’ pro-European – but also

fiercely transatlantic – convictions arepart of the longer answer to theapparent riddle of Poland’s success.

Joining the EU was natural. To thatend, we did what was needed – and thatwas the recipe for economic success.

Surprised as I am by the lack ofunderstanding of the roots of Poland’ssuccess, I have my suspicions as towhere it comes from.

It is bred by the broader crisis oftrust in European values. In Poland weknow how difficult it is to maintainfreedom and democracy, that is whywe defend those values and that is whywe have always encouraged ourpartners in the east to follow in ourfootsteps. Not because we want them toadopt our way of life, dominate themor demonstrate the “presumption of

superiority”, of which the west outsideEurope is often accused.

We just know from experience thatour western values improve our lives.

But as the conflict in Ukraine and thesuccesses of Isis in the Middle Easthave shown, there are nations andreligious groups who reject our values.

But they do not stop there. They aredetermined to fight against all thatEurope and the west stands for,because they see it as a threat to theirway of life. As one pro-Russian fighterin Ukraine said: “This is a war aboutvalues, a war against the west.” Thisview did not come from a fighter in adistant, backward land, but from a

fighter supported by a nuclearsuperpower.

That is why making the most of anopportunity 25 years ago does notallow us to rest on our laurels. Europeand Poland must go further. The Polisheconomy must move towards moretechnologically advanced andknowledge-based industries.

It is all very well being the world’sbiggest apple exporter, but we alsowant to be the country wherecompanies like Apple have the chanceto grow. That process has begun. As oureconomy becomes more innovative,our self-confidence will continue togrow. Events such as Donald Tusk’sappointment as president of theEuropean Council from December area welcome confirmation that suchconfidence is warranted.

Mr Tusk’s new role is important forPoland and good for Europe. Thearrival in Brussels of a leader whoseappointment is based on his country’ssuccess, on strong moral values and afierce commitment to Europe and thetransatlantic relationship can onlybenefit the EU.

Those characteristics – as well ascommitment, self-confidence and faith– we learnt in the Polish opposition. Weharnessed them as dissidents, when weplayed football on the meagre pitchesavailable in Gdansk and other cities.

Perhaps with the arrival of a Polishsuperstar player to head the EuropeanCouncil, not only the morale inBrussels, but also the resolve of theBrussels team to defend Europe’s corevalues, will receive a boost.

The writer is a former primeminister ofPoland and chairman of the primeminister’s economic council

Commitment to freedom, theEUandwestern values are behindPoles’ success

OPINION

Jan KrzysztofBielecki

Jan KrzysztofBielecki: pro-EUconvictions arepart of the reasonfor Poland’ssuccess

P oland, a country of some38.5m inhabitants, hasenjoyed almost uninter-rupted economic growthsince the collapse of commu-

nism in 1989 and it is experiencing itslongest period of prosperity for centu-ries.

But there could be problems ahead,as its population is both ageing andshrinking because of emigration andone of the lowest fertility rates on thecontinent.

Poland has for centuries been a coun-try of emigration and large numbers ofits young people continue to take theirskills abroad. About 2.2m people haveleft since the country joined the EU in2004, according to figures from Euro-stat, thebloc’s statisticaloffice.

The majority of those emigrants areyoung people of child-bearing age andtheir departure is accelerating the speedatwhichthecountry isageing.

Currently, for every non-workingPole, there are three Poles of workingage. By 2040, the ratio is likely to beone-to-one,Eurostat figuressuggest.

The UK and Germany are the mostpopular destinations for Poles. Thefertility rate for Polish women living intheUKis2.13, inGermanyit is2.1.

A number below 2.1 in developedcountries means a falling population. InPoland the fertility rate in 2012 was just1.3,oneof the lowest intheEU.

Krystyna Iglicka-Okolska, a migra-tion specialist and rector of Warsaw’sLazarski University, says labour marketconditions determine people’s willing-nesstohavebabiesoremigrate.Shesaysyouth unemployment – well above theOECDaverageat24percent– isnotcon-ducivetoreversingthesetrends.

She adds: “For young people, thereis no chance to find a decent job andsalary with a secure future. This isnot about changing values in society,it is definitely about labour market

prospects and a lack of security.”A lack of places to live is adding to this

gloomy picture. “The housing problemis also important, but if you ask youngpeople, it’s about being able to supportyourself and your family in a decentmanner,”MsIglicka-Okolskasays.

The government recognised the prob-

lem and in 2012 adopted a migrationpolicy that concluded that what peoplewanted when thinking about leaving orreturning were economic growth,reduced unemployment, increased sal-aries, better living conditions and acces-sible,high-qualitypublicservices.

“This is a challenge that exceeds the

remitsofmigrationpolicy,”saysMonikaPrus, director of the migration policydepartment of the interior ministry.“The government can neither deterPoles from leaving the country nor forcethemtocomeback.”

She says the government’s role is toprovide advice to those seeking to

return and the main tool for that is aninternet portal that gives tips on whereto look for work in public administra-tionandhowtowriteagoodCV.

“The labour market requires deepreform. This is the only thing that willencourage people to return, becausethey are not stupid. They do not need

anygovernmentwebsites,programmes,or any kind of channelled informationthat it’s better here or there,” Ms Iglicka-Okolskasays.

In the second quarter of this yearPoland’s population was 77,000 lowerthan in the first quarter. Poles are wor-ried about war in Ukraine and the UKtightening its immigration law.

“Rightnow, theyknowthe lawmaybechanged in Britain, they know theremay be a war in the east and they arescared,”MsIglicka-Okolskaadds.

She says the government, led by thecountry’s most pro-business party, CivicPlatform, benefits from lower unem-ploymentthankstotheexodus.

This should also make it easier to setup and run a small businesses, and raisethe minimum wage and the level ofearnings thatareexemptfromtaxation.

However, she says that if Polandwants toreverse itsageing trend itneedstoattract140,000immigrantsayear.

Ms Prus says the government is mak-ing it simpler for foreigners tostay inthecountry. According to Eurostat, in 2013Poland issued the highest number ofresidence permits granted to people forthe first time in the EU after the UK,although most of them were to Ukraini-ans, many of whom move back andforth.

Irena Kotowska, professor of demog-raphy at the Warsaw School of Econom-ics, says that reform of the educationsystem is required to make it easier forpeople both to work and raise a family.Polish schools operate a two-shift dailysystem to keep class sizes manageable,so children often leave or start classes atmidday.

The government has increased thenumber of preschools and crèches.Paternity leave was introduced in 2009and since January couples have beenable to take 26 weeks of paid familyleaveoncematernity leaveends.

“The main reasons for migration arerelated to the labour market but I thinkthat more child-friendly benefitsabroad also create incentives,” MsKotowskasays.

“I’m not saying that Poles migrate forbenefits, but the combination of a betterstandard of living and child benefit sup-portaffects theirdecisions.”

Exodus of youth increases population’s age profileMigration Largenumbers continue totake their skills abroad,reportsAdamEaston

Q2, 2014Fertility rates

Top six

Bottom six

EU 28 average

Labour marketEU countries ranked (live births per woman)

0 0.5 1.0 1.5 2.0

Ireland

France

UK

Sweden

Finland

Belgium

EU28

Greece

Hungary

Slovakia

Spain

Poland

Portugal

80

60

40

20

0

Employment rate, %Working age population, 15-64(%)

Poland OECD Germany

12

10

6

8

2

4

0

Unemployment rateTotal labour force (%)

Poland OECD Germany

60

40

20

0

Long-term unemploymentTotal unemployed (%)

Poland OECD Eurozone

Youth unemploymentAged 15-24 (%)

25

15

20

5

10

0

Poland OECD Germany

FT graphic Sources: Eurostat; OECD

2.01

2.01

1.92

1.91

1.80

1.79

1.58

1.34

1.34

1.34

1.32

1.30

1.28

4 FINANCIAL TIMES Friday 28 November 2014

Investing in Poland

Recent events in Ukraine have ledPoland to the conclusion that energysecurity is a more pressing concern thancarbondioxideemissions.

Poland still needs to import Russiannatural gas but its energy security isbasedonitsownextensivecoalreserves.Hard coal and lignite-fired power plantsproduce more than 90 per cent of thecountry’selectricity.

Burning coal is the cheapest way toproduce energy and the country hasbased its much-lauded economicgrowth on carbon. The state-ownedmining companies in Silesia alone

employ 110,000 workers, who comprisea significant portion of the electorate foranygovernment.

In April, Donald Tusk, now EuropeanCouncil president but then Poland’sprime minister, wrote in the FinancialTimes: “Europe should make full use ofthe fossil fuels available, including coaland shale gas. In the EU’s eastern states,Poland among them, coal is synony-mouswithenergysecurity.”

This mantra was picked up by MrTusk’s successor Ewa Kopacz who,ahead of climate talks in Brussels inOctober, saidhergovernmentwouldnotagree to emissions targets after 2020 iftheymeanthigherenergyprices.

The compromise reached at the sum-mit last month allowed Ms Kopacz toargue she had won. In exchange foragreeing an EU-wide 40 per cent cut inemissions by 2030 from 1990 levels, herteam negotiated a deal to give free CO2

allowances to Polish utilities after 2020.

This concession could be worth close to€5bn between 2020-30 to the country’slargestpowercompany,PGE.

European power companies must buyCO2 allowances to cover their emissionsunder the EU’s Emissions TradingScheme. New investments by Polishpower companies may also qualify forfreeCO2 allowances.

But Warsaw still fears that measureswill be introduced that will drive up car-bon prices making it uneconomic toburn coal and forcing it to be dependentonfuel imports.

Krzysztof Bolesta, special adviser forenergy and climate at the Ministry ofEnvironment, says: “We are worriedthata frameworkcouldexistat the[EU]level that actually puts a prohibitiveprice on burning coal, even though ifyou replace existing coal plant with bestavailable technology coal plant you arealready cutting emissions.” Theinstalled capacity of the Polish grid is

about 38,000MW. Poland’s state-con-trolled utilities are currently spending25.1bn zlotys (€5.9bn) building4,698MW of mainly hard coal-firedpower plants. Poland says buildingmore efficient coal plants to replaceolder ones will reduce emissions byaboutaquarter.

The government recognises it mustreduce coal’s share in its fuel mix. Itsdraft energy policy to 2050 estimatescoal’s share will fall from about 90 percent to about 50 per cent. The shortfallwill be covered by increases in renewa-bleandnuclearenergy.

Wind power production is increasing,but the government has drafted a law

that would significantly reduce statesupport forrenewableenergyprojects.

Rafal Hajduk, an energy specialist atlawyers Norton Rose Fulbright, says: “Ithink coal will remain a big portion ofthe Polish mix for a long time, but if thecountry wants the European Commis-sion to support subsidies for new coal-fired plants, it needs to show a commit-menttoreducingemissions.”

Coal offers relatively cheap energysecurity, but Poland imports most of itsoil and gas from Russia. The latter play atiny role in Polish power production,but refineries processing Russian crudeand natural gas supplies are importantfor the chemical industry, while manyhomesusegas forcookingandheating.

Poland’s dependence was based onSoviet-era pipelines that delivered fuelin one direction only, from east to west.Nowithasalternativesupplyroutes.

As for gas, in the past two years inter-connectors with Germany and the

Czech Republic have been built orexpanded and a new reverse flow in theYamal pipeline from Russia means gascannowbepumpedviaGermany.

A liquefied natural gas terminal inSwinoujscie near the German border isdue to be operational next year. ThenPoland will be technically able to importall its gas needs from sources other thanRussia although the dominant Polishnatural gas company PGNiG is contrac-tually obliged to buy supplies fromGazpromuntil2022.

So Poland can now make choicesbased on price rather than dependingsolely on Russian gas. Gazprom deliversabout two-thirds of Poland’s gas needsand PGNiG is its third-largest customer.Lack of alternative supplies in the pastmeans PGNiG pays one of the highestrates in Europe. New supply optionsgive PGNiG a better negotiating positionin its talks with Gazprom, the latestroundofwhichbeganthismonth.

Energy security fears override green targets but keep bills lowPower generation

Warsaw remains worriedthat European legislationcould increase fuelcosts, writes Adam Easton

€1.8bnAmount Poland isspending onrenewing powergenerating plants

50%Proportion ofpower expectedto be producedfrom coal by 2050

The leafy Warsaw neighbourhood ofZoliborz – noted for its pleasant archi-tecture – might not be the obvious placeto lookforPoland’sstart-upscene.

However, one of the attractive, subur-ban 1930s villas in Bohomolca Street isnow the home of Reaktor, a sharedworking space for technology entrepre-neurs. From here, a new generation oftechnology entrepreneurs is eyeinghorizonsbeyondthenationalborder.

BorysMusielak,34, isoneofReaktor’sco-founders. He worked at DeutscheBank and Barclays Capital in Londonand at CoCoNet in Düsseldorf, whichprovides electronic banking services,before setting up Filmaster. This usespersonalisation and optimisation algo-rithms to help cinemas, video-on-demand services, and other customersbetter target their wares at online audi-ences.

The idea for Reaktor was born whenMr Musielak and some friends saw thevilla while looking for office space anddecided to open it to other start-ups.They have secured sponsorship fromfinancial services company mBank andtechnology companies Cisco andAtman.

Mr Musielak says that, as the Polishstart-up market has grown, so has theawareness among the younger genera-tionof theneedforawiderperspective.

“It’s normal for me to do things glo-bally, rather than locally,” he says.Filmaster operates in the US, UK andGermanyandhasworkedelsewhere.

By contrast, entrepreneurs whobegan their careers in the 1990s andwent on to found technology start-upshave tended to remain focused onPoland, says Michal Cieminski, founderand chief executive of Platinum SeedIncubator, a venture capital fund thataimsto linkinnovatorswith investors.

“[These older entrepreneurs] do notperceive themselves as part of a biggermarket: Europe,” he adds. “We shouldsupportachangeofmentality.”

But thinking globally does not have tomean leaving home. Mr Musielak saysHackFwd, a German company thatinvested in Filmaster, considered mov-ing his team there because of the morewelcoming legal framework. However,MrMusielakpreferredtostay inPoland,which he says has many skilled IT grad-uatesandlowcosts.

However, there is room to do more to

help new businesses. Mr Musielak andothers will next year launch StartupPoland, a foundation that will push forchanges in areas such as regulation,education, infrastructure, access to tal-ent (including hiring from outside theEU) and financing (such as simplifyingforeign investmentrules).

Recruitment for a full-time chiefexecutive, who is expected to have con-tacts in the start-up world, in politicsand the media, begins this month. Thefoundation already has Google as asponsor and is on the lookout for moresupport.

Oneof the foundation’s taskswillbe toproduce a comprehensive report on thePolish start-up market, Mr Musielakadds, something lacking at the moment.

Polish entrepreneurs still tend tomeet their potential investors infor-mally, through networks or at eventssuch as the monthly Open Reaktorevening,whenyoungtechtypes listentopresentations by successful entrepre-neursandmingleoverdrinks.

The Google Campus, scheduled toopen in Warsaw next year – like onesoperating in London and Tel Aviv – willalso provide wannabe businesspeoplewith the opportunity to network andmeetadvisersandinvestors.

Not everyone is in a hurry to find aninvestor. InvoiceOcean, an e-invoicingcompany based in the Reaktor building,established itself in Poland beforeexpanding to English-speaking marketsand France, and is now testing servicesin countries including Croatia and Iran.Marcin Stefaniak, chief executive, sayshe is cautious about working with aninvestor, preferring to finance the com-pany from its profits at this stage in itsdevelopment.

Finding an investor is not in itself themain goal, says Dariusz Jemielniak, pro-fessor at Kozminski University, a pri-vate business school in Warsaw, whosince 1999 has been running an internetstart-up, Druid Multimedia – whichpublishes the largest online dictionaryin Poland, ling.pl. Rather, he empha-sises the value of “smart money”, whenfunding comes with guidance, contactsandamorepersonalapproach.

To help budding entrepreneurs avoidcommon pitfalls, Prof Jemielniak islaunching Poland’s first postgraduateprogrammeforwould-beentrepreneursat Kozminski University, and he will beputtinganemphasisoninnovation.

He says young entrepreneurs shouldnot think in narrow terms. “If someonehas an idea that will bring them 15,000zlotys (£2,836) a month, it is not worthtimeoraninvestor’smoney.”

Whether the idea is small or a newSkype, “our aim is to encourage [stu-dents] to think about international scal-ability”,Prof Jemielniakadds.

New generation ofdigital start-upseyes far shoresEntrepreneurs

Young would-be bosses’dreams go well beyondnational boundaries,writes Annabelle Chapman

“I believe that instead of moaningabout how much paper media arelosing in revenue, it is better to rethinkwhat could work better to run publicdebate and embrace opportunities.”

So says Lukasz Mezyk, who is fastbecoming the man Poland’s politicaljunkies wake up to. The 300politkyawebsite he co-founded is as much apart of morning routines as breakfast.

The site gets name-dropped byDonald Tusk, the former primeminister, and cabinet ministers textMr Mezyk if their daily email alert is afew minutes late.

“I guess that one of our main

strengths is being a new kid on theblock. We bring fresh perspectives toour reporting,” says Mr Mezyk.

“Thanks to the flexibility of a marketthat has not been populated by oldand traditional players, it is easier togrow, thanks to good ideas and fillingniches, while taking advantage of theinternet and new technologies,” headds.

Mr Mezyk prefers a MacBook Airand a café over an office, and spendsthe day fuelled by coffee andcigarettes.Henry FoyRead more online at FT.com

Online entrepreneur Fixes for politics junkies

The Biedronka discount store next to acoffee bar in Warsaw’s business districtkeeps a low profile. The name translatesas ladybird and its logo over the door isprominent enough to attract customerson a budget, but not lurid enough toscareawaymorediscerningshoppers.

By promising “low prices every day”,Biedronka has become market leader inPoland. When Jerónimo Martins, Portu-gal’s – and now also Poland’s – biggestfood distribution group, bought Bie-dronka in 1997, it had 243 shops. It nowboasts 2,527 (its main rival, Lidl, hasabout500).

More than 1,000 of the stores wereopened in the past five years, accordingto a Biedronka investor presentationthismonth.

The chain is Poland’s largest privatesector employer with more than 55,000staff, but has faced media reports ofoverworked employees, while a tradeunion has called for it to employ 30 percent more staff. There have also been

stories that smaller rivals have hadtoclose.

The news that a Biedronka shopwould replace Warsaw’s Femina cinemacaused a storm, including a Facebookpage “liked” by 25,000 people. Thecompany has since said a cinema willstillusepartof thesite.

As it has moved into cities, the chainhas been trying to attract wealthiershoppers, challenging the image that“Biedronka is for the poorest people”, asJaroslaw Kaczynski, leader of the Lawand Justice opposition party, said in2011. Some Poles shorten the name to“Bieda”–whichmeans“poverty”.

Alongside discount staples such asdetergents and nappies, customers canbuy more exotic items such as avocadosandScotchwhisky.

“De facto, these are post-discountshops,” says Maria Andrzej Falinski,director-general of the Polish Organisa-tion of Trade and Distribution, referringto how Biedronka and its rivals havegone beyond the narrow ranges usuallystockedbydiscounters.

The group has acquired a reputationfor successfully combining both foreignproducts with good-quality Polish goods– nine out of 10 products in its shopscome from Poland, the company says,and include own-brands. Portuguese

bottles occupy a significant part of thewineshelves.

“In Poland, the group proved that aretailer can be successful in a singlemarket without relying on its globalpower,” says Milos Ryba, senior retailanalyst at IGD, a food and groceryresearcher.

The group’s medium-sized outletshave also enabled it to penetrate moredenselypopulatedareas.

“Biedronka’s strength has been itsability to understand the Polish con-sumer from the beginning and to growwith the country and the way of life thatPoles want,” says Pedro Soares dos San-tos, chairman and chief executive ofJerónimoMartinsGroup.

But Biedronka’s results for the firstnine months of 2014 may have givenJerónimoMartins foodfor thought.

Sales grew 9.7 per cent to €6.19bn,boosted by the opening of 149 shops inthe period. But, like-for-like sales,which do not take account of newbranches, fell 1.2percent.

In the third quarter of 2014, sales rose1 per cent in terms of volume, butdecreased by 1.3 per cent in terms ofvalue.

Meanwhile, net profit at JerónimoMartins – for which Biedronka accountsfor about two-thirds of sales – fell 20 per

cent year-on-year in the thirdquarter. Part of the problem is fallingfood prices in Poland, which dropped2.4 per cent year-on-year in October,according to Poland’s national statisticsoffice.

Customers have also been tighteningtheir belts. “The premium-discountconcept has lost its allure and manyshoppers have moved back to true dis-counters,” says Andrzej Bobinski, abusinessanalystatPolitykaInsight.

Beyond hailing its achievements, Bie-dronka’s investor day displayed a scal-ingbackof thegroup’sambitions.

While the company aims for €11bn insales by 2017, a more modest goal ofopening 300 more Biedronka shops by2017 replaced a previous planannounced last year to operate 3,000shopsbytheendof2015.

The company has plans to invest€700m-€800m in Poland by 2017, withabout 40 per cent going towardsupgradingexistingshops.

While thecompanywill staytrueto its“low prices every day” slogan, it wantsto move from an “efficiency-focusedstoretoengagingfoodstore”.

“The model that we have today con-tinues to be valid,” says Mr Soares dosSantos. “We’ve not changed our strat-egy,we’veonlychangedthecalendar.”

Ladybird struggles to lift off as prices fallForeign investment

Supermarket chain’s plansfor expansion have slowed,reports Annabelle Chapman

A t a discount grocery store inWarsaw, customers whipthrough the checkout, pay-ing wirelessly by holdingtheir credit cards above the

terminal. Above the cash register is aposter proclaiming: “Now you can paywithyourmobilephone!”

Such technologies are still filteringinto many western markets, but theyhave boomed in Poland. Contactlesscardpaymentsarenowthenorm.

Internet banking has been popular inPoland for years. By 2012, more thanhalf of Poles were banking online, com-pared to a European average of less than40 per cent. The country is sixth inEurope when it comes to internet bank-ing penetration, according to Poland’streasury ministry, higher than Ger-many,DenmarkandIreland.

The sector’s quick adoption of tech-nology contrasts with its reluctance touse more modern financial instru-ments. Poland’s banks have long held aconservative risk profile, a strategy thathasservedthemwell.

They were not caught out by thecredit default swaps that brought west-ern banks to their knees, and not a sin-gle Polish bank required a state bailoutduringtheglobal financialcrisis.

In stress tests conducted by the PolishFinancial Supervisory Authority lastyear, all Polish banks but two passed –and they have since increased their cap-ital positions to satisfactory levels, theregulatorsays.

The sector has remained stronglyprofitable. Return on equity reached

10 per cent in 2013, second in the regiononly to the Czech Republic, according toDeloitte,aconsultancy.

The National Bank of Poland reportsthat for the first nine months of 2014,the sector’s total profits came to 13bnzlotys (€3.1bn) – 10 per cent ahead ofthe figure for the same period last yearand on track to beat 15.6bn zlotys byyear-end, which would be the highestlevel since2011.

The rosy outlook belies some under-lying weaknesses, though. Non-performing loans hit 8.5 per cent in 2013–higherthanPoland’sregionalpeers.

Foreign currency-denominated mort-gages, especially in Swiss francs, stillmake up nearly half of Polish banks’mortgage portfolios, exposing them to currencyfluctuations.Analystsarerela-tively unconcerned about this, pointingout that the share of foreign currencyloans has dropped sharply in recentyears, a trend that is expected to con-tinue.

Still, a big change in currency ratescould have far-reaching effects, saysWitold Orlowski, a professor of eco-nomics and a former government eco-nomicadviser.

What worries economists more is amaturity mismatch between liabilitiesand assets. Popular deposits usually

have a six-month maturity, while mort-gage loans last 20-30 years. “There is aneed to increase long-term financing,”says Marcin Piatkowski, senior econo-mist for theWorldBankinPoland.

Mortgage-backed bonds could be oneanswer, but these can be issued only byspecialised mortgage banks, of whichPoland has only two. Regulatory and taxissues have limited the market to 2.6bnzlotys (€620m). But rules expected tocome into effect next year shouldremovethemainbarriers,hesays.

Poles’ propensity for modern bankingmethods could also be a challenge.Using mobile apps to buy products oftenrequires customers to open a digitaldebit account through a mobile serviceprovider, not a bank. This may eat intothe deposits banks attract, while mobileservice providers can begin diversifyinginto financial services. “The fight is onover who will become the client’s firstcontact for financial services,” saysKrzysztof Dresler, an independentbankinganalystatadviser ICRA.

Banks’ margins on mortgages arebeing squeezed as well. Poland’s Mone-tary Policy Council has cut interest ratesnine times since November 2012, to a historic lowof2percent lastmonth.

To make up for the loss, banks areincreasing consumer loans, which havebecome more attractive because ofrecently relaxed regulations. Accordingto Deloitte, consumer loans have beenrising since mid-2013 and are expectedtogrow6.5percent thisyear.

With the economy expected to main-tain healthy growth of about 3 per centover thenext fewyears,andbanks’prof-itability and capital positions strength-ening, this looks a relatively safe move.But the question is whether theincreased risk appetite could backfireonthebanks.

“With the good mood returning to themarket, if there is a big demand forcredit, that could be the problem,” saysMr Orlowski. “We don’t want excessiveoptimism. I’m more afraid of the goodtimesthanthebadtimes.”

Banks turn hightech while usingold-fashionedinvestmentsFinance The outlookmay be rosy, but underlyingweaknesses cause concern, reportsAndrewKureth

Switched on: Poles have been swift to adapt to new technologies – Bloomberg

‘ I’mmore afraid ofthe good times thanthe bad times’