Paweł Borys (pic.: PAP)
CE Financial Observer: What does the Polish Development Fund have to offer other than what is already available on the market? Does it intend to replace it?
Paweł Borys: The activity of the Polish Development Fund was planned in such a way, that it could reach with its instruments the places where it is difficult to obtain financing in the private sector. The point is not to supplant the private sector, but only to efficiently complement it in the market gaps.
What are these gaps?
We have a problem in the market with long-term financing of infrastructure projects, for example for a period of 15 years. If there is a problem with the financing of exports on difficult markets, the Polish Development Fund will provide export insurance. If there is a problem with the financing of innovation at an early stage, we will deploy the instruments in order to provide capital.
This is already done by other institutions, such as the Bank of National Economy (BGK) and the Export Credit Insurance Corporation (KUKE). What is the Polish Development Fund supposed to be then?
In many areas they didn’t effectively reach the stakeholders with the instruments at their disposal. This is, for example, the case with the financing of exports. They did not offer certain services at all. In addition, in the field of capital investments several institutions had overlapping competencies.
Currently, there is a tendency to move away from only providing financial products, such as the credit or the guarantee alone, towards offering comprehensive solutions tailored to the needs of the clients. The integration of Polish development institutions, within the Polish Development Fund group, will allow us to offer such financial and consulting solutions for exporters, SMEs, start-ups and local governments.
In addition, thanks to the shared website we will create a center of knowledge on all the available instruments. Today, it is extremely difficult to obtain information about the available products and services.
We do not want to merge these institutions into a single entity, and therefore it will be the Polish Development Fund group, which is supposed to create an integrated development bank. The Polish Agency for Enterprise Development (PARP) is a government agency, and BGK is a state-owned bank, so they will be affiliated, jointly coordinated, while remaining independent institutions. There will, however, be a coordination of activities of all the institutions and their integration within a single strategy and a single management model. As a result, the group will create comprehensive packages for entrepreneurs, including credit, insurance, consulting and investment instruments.
What is the added value resulting from the integration of the institutions within one group?
The efficiency of the activities will be higher in relation to the costs and the offered products. These institutions are heavily underfunded and require outlays for modern equipment and a strengthening of their organization. In the operational area all these institutions did not make use of synergy, which affects the costs, on the one hand, and effectiveness and safety on the other hand.
We will build a single service platform, which will be utilized for the efficient implementation of various government programs, such as Start in Poland, Home+ or the Capital Accumulation Program.
The set of tools includes credits and guarantees, export insurance, capital investments, consulting and promotion. These are the four main pillars of the group. The first two are the banking pillar, that is BGK, and the export insurance pillar, that is KUKE. Another is the capital investments pillar, covering both investments in large infrastructure projects, as well as venture capital type investments and investments in the field of real estate. The fourth pillar is consulting and promotion, that is the Polish Information and Foreign Investment Agency (PAIiIZ) and the PARP.
If you are an exporter, you will be able to obtain export insurance, export financing, capital for support or promotion. In most cases these instruments will not be offered directly, but through the financial system, mainly the banks and the funds, in order to mobilize private capital and to utilize the multiplier effect. This model has proven to be successful in many markets, including, among others, in Germany and France.
Our strategic partner in the distribution of various types of instruments is PKO BP, which has, for example, the largest share in the financing of SMEs under the de minimis program.
What will determine which investments will be implemented?
We will implement programs which are relevant from the point of view of the economic policy, mainly in the framework of The Plan for Responsible Development. We have already announced our participation in the Start in Poland program, created by the Ministry of Development and dedicated to start-ups and the VC market. Under this program, we are creating an investment funds platform worth PLN2.8bn. This will be the largest venture capital platform in Central and Eastern Europe.
We conduct all the investment activities through the investment funds. We have various categories of funds dedicated to infrastructure investments, local government investments, investments in companies, venture capital investments. We want to conduct large infrastructure projects directly, and, for example, VC or PE projects through private funds. So, for example, we invest up to 50 per cent of the capital in a venture capital fund and the remaining 50 per cent will come from private investors. It is only that fund which then selects companies and invests in them.
The capital market is very weak right now.
This is precisely about supporting the development of a complete capital market in Poland. We want to bring about a situation in which Polish companies have access to capital at every stage of development ‒ starting from venture capital, to the private equity market and later the stock exchange. In the venture capital segment there were gaps, for example in transactions of PLN10-30m, or at the stage of commercialization of technologies, and as a result we lost a lot, because some companies and technologies are fleeing abroad.
Export insurance also didn’t work very well.
The KUKE has 8 per cent of the market dominated by Euler Hermes and Cofface and during the past several years the insurance guaranteed by the State Treasury amounted to approximately PLN3bn, which is a negligible amount from the point of view of the volume of exports. KUKE is supposed to be the export insurance arm and we want to develop this area a lot more. It has the potential to increase the scale of its operations by at least two or three times. It only needs to be modernized in terms of its operations and products.
On the other hand, the PAIiIZ is a very small structure, mainly involved in bringing investors to Poland, but not in the promotion of exports and internationalization of Polish companies. In the field of investments implemented by the Industry Development Agency, the Polish Investments for Development and the National Capital Fund there was some overlap in terms of competences and there was no coherent strategy.
Will the Fund in itself have enough capital for that?
If we were to calculate pro forma, all these institutions have more than PLN13bn in capital. The Industry Development Agency has PLN3bn in capital, BGK has PLN9.5bn. The assets exceed PLN50bn ‒ they are located in BGK, the Industry Development Agency, KUKE, and the former Polish Investments for Development. If we add to this the management of the National Road Fund and the various EU instruments, then we have about PLN70-80bn in assets accumulated within the Polish Development Fund group. This capital is sufficient in the perspective of 2-3 years.
The activities of the Polish Investments for Development went nowhere due to a lack of projects. Are you not afraid that this scenario might be repeated?
I’m cautious about raising expectations with regard to how many investments we will implement. The role of institutions such as development banks is counter-cyclical. This means that when there is economic growth, there is not much need for activity, and when there is a crisis, we need to be involved a lot more and be more active. Then the scale of financing grows.
The pipeline of projects is a key problem, both in Poland and in Western Europe. In the perspective of 2-3 years, there is quite a lot of financing available. There are the EU funds, the Juncker plan, the EIB, the European Investment Fund, the EBRD, and everyone would eagerly provide financing, but the problem is with the number of projects.
We want to implement more than a dozen projects in two years. In the last quarter, we managed to conclude several transactions, i.a. with PESA (producer of trains), the Polish Baltic Shipping Company, and we participated in the capital increase of the BOŚ Bank.
We want to be more active in general. We are currently financing the construction of a waste incineration plant in Olsztyn in the framework of an interesting public-private partnership project. We also want to create financial models for which there have been no standards in Poland thus far. Later they could be reproduced with our participation or without our participation in the market. We will create models for the structuring of more complex investment projects.
You have mentioned that the Polish Development Fund is an institution meant to fulfill a counter-cyclical role, and meanwhile we are in a growth cycle. So why do we need the Polish Development Fund?
During an economic upswing there are also market gaps which we’ve previously discussed. Their scale grows by leaps and bounds during a crisis, as evidenced by the issues with access to credit for SMEs in 2009.
The Ministry of Development has recently announced the Capital Accumulation Program. At the present, moment the so-called Third Pillar of the pension system in Poland is not working. There is also a role for the Polish Development Fund here. It is supposed to coordinate the process of creation of a flagship concept for the Third Pillar, that is, the employee capital plans. This will be a huge organizational project, because such programs will be created by several thousand companies.
There are also large gaps in human capital that we want to address by implementing programs which would promote the development of competences among entrepreneurs. For example, how to manage innovation, how to build innovation portfolios, how to introduce modern management standards, foreign expansion models. These are soft activities, not expressed in volumes of assets, investment or credits. Although they are harder to measure, they are equally important.
In the economy as a whole there is a large deficit of skills in the area of management, risk taking. We want to support the development of entrepreneurship by creating tools for entrepreneurs to acquire knowledge. For example, we plan to create a platform connecting inventors and start-ups with industrial partners, giving entrepreneurs access to various types of companies which are involved in business services.
We are talking about the Third Pillar, and in the meantime we are getting rid of the Second Pillar. What’s next? Won’t there be a gap?
It was a mistake that we built the Second Pillar, instead of building the Third Pillar from the very of beginning. A capital-based pillar of the pension system should have been built on the basis of voluntary private savings which would add new money. The creation of the Open Pension Funds did not lead to new money entering the system. Instead, funds were taken from one pocket to another.
Ever since 2014, when half of the funds were transferred to the Social Insurance Institution (ZUS) and a slider mechanism was introduced (which means that starting 10 years before retirement funds are gradually transferred to ZUS), those going on retirement do not really receive their money from the Open Pension Funds, because it was spent a long time ago on the current pensions. A capital-based system organized in this way does not work, because the funds which I gathered effectively do not exist. In this way, there is also no Second Pillar.
In other words, in this way we do not have a capital-based pension system anymore.
Exactly. In order to increase future pensions new money has to enter the system. We can increase the pension contributions, that is taxes, but that money would then be consumed anyway. Or we could generate additional money in the Third Pillar by popularizing employee capital plans and Individual Retirement Accounts. Contributions to the Employee Capital Plans would be made both by the employee and the employer, with State incentives of approximately 30 per cent.
The transformation of the Open Pension Funds into Open Investment Funds and the recording of the funds existing in the Open Pension Funds to the Individual Retirement Accounts would result in the creation of 16.5 million Individual Retirement Accounts. In three years, we could have 5.5-6.0 million people actively participating in the Employee Capital Plans and several million active Individual Retirement Accounts based on the funds that were in the Open Pension Funds.
This could provide a whole new economic boost through a strong local financial market, because in this way we could create approx. PLN15-20bn in new long-term savings.
In three years we could have a universal Third Pillar of the retirement system, with viable new contributions, with money that would also flow to the Polish stock market, which would make it more liquid. This should positively affect the balance of payments, the debt service costs, improve our net investment position, increase the savings rate and increase the investments. In this way we would also solve the problem of the decrease of future pensions.
Will the Polish Development Fund manage open investment funds?
According to the proposal presented by Deputy Prime Minister Mateusz Morawiecki, 75 per cent of the Open Pension Funds’ assets invested on the stock exchange will go to the Third Pillar, so in this way the open pension fund will be transformed into an open investment fund for Polish stocks. The funds will be managed by the same institutions as today. The assets will be recorded on private individual retirement accounts.
The remaining 25 per cent of the assets, mostly cash, deposits, foreign stocks and bonds, would support the Demographic Reserve Fund, which, as a result, would have approximately PLN55bn in assets. The Fund would remain within the structure of ZUS, but there is an idea for it to be managed by the Polish Development Fund, by our Investment Funds, in the same way the management of investment funds is commissioned.
The Open Pension Funds will have to sell off shares anyway. This will not help the capital market.
The investment policy of the Open Pension Funds is not adapted to the risk profile of the participants, as it is the same for someone who still has 40 years until retirement and for a person who only has 10 years left until retirement. Of course, over time, the holders of the individual accounts may want the investment policy to be more conservative, but the process of change will be spread out over a number of years, so as not to disrupt the stock market, which is also powered by the new flows from the new contributions, from the new employee pension schemes.
What will the Third Pillar look like?
In principle, the Third Pillar is voluntary and private. The employer enrolls all the employees, but they have three months to opt out. They declare a 2 per cent contribution, the employer declares an additional 2 per cent (which is also exempt from the contributions to ZUS) and this is supplemented by an additional subsidy of 0.5 percentage points from the Labor Fund. There is a welcoming contribution from the State in the amount of PLN250.
If we were to add up all these incentives, the State would finance about 30 per cent of the 4 per cent contribution. We can also declare a voluntary contribution of 1 per cent on the part of the employer and 2 per cent on the part of the worker, and so the maximum contribution would be 7 per cent. The closest model to that is the one used in the United Kingdom, where after a few years it turned out that 81 per cent of all employees participate in these programs.
That is for the regular employees only. And what about those who work based on the so-called „junk contracts” – those who are not FTEs?
The program is offered to 7.2 million workers in the enterprise sector. It seems that there is a possibility to include also people working on the basis of contracts of mandate.
And what about the public sector employees?
That is a bigger problem, because it is associated with the impact on the budget. This issue is currently at the stage of debate. The program in its current form is addressed to employees in the enterprise sector.