Poland has little wealth so it has to use it effectively

Paweł Dobrowolski (PFR, Public domain)

CE Financial Observer: You once wrote that Poland’s MinFins proposals to increase investment would not substitute private investments. Do you still think so, even as the chief economist of the state-owned Polish Development Fund?

Paweł Dobrowolski: In the media, the Polish Development Fund (PFR) is presented as a bag full of cash, from which investments worth millions or even billions of PLN are realised and, owing to the Keynesian multiplier effect, from each invested PLN more than PLN1 will return to the economy. I do not trivialise these amounts but I want to draw attention to the fact that the GDP of Poland is over EUR401.8bn. From this point of view the PFR investments are not the most important.

Then what is?

A series of positive changes, which, thanks to the PFR, may happen in the market. I will give you an example – venture capital funds (VC) are taxed in Poland twice – there is a tax on profit and on the sale of shares. It means that for bigger investments the whole structures are taken abroad and taxed there. There are market practitioners working in the PFR who know this and who are looking for ways to remove such obstacles.

Was it necessary to establish the PFR to remove such obstacles?

It is only one of the examples. Let’s pause at VC. VC is investing, and what is even more important, supervising the companies in their development to finally sell them. It is a particular process, and it does not entirely work in Poland. Of course, we have quite a lot of VC funds, but each of them believes that it is faster, easier and better to make one transaction for EUR4.7m than 47 transactions for EUR1m. Such an approach closes the market for small businesses, which are not only seeking money, but also contacts to the customers, the possibility to implement prototypes, etc.

This is the task for the PFR – we want to create a whole string of investments in companies – from really small, which sometimes only need contacts, to funds which will be able to pay EUR47.2-70.1m for European or world expansion of more developed companies. This should also attract foreign investors who have not considered investing in Poland yet.

In Poland, there is no problem with funds for investments except for a few niches. The point is that those niches may turn out to be crucial in the future – the leaders in completely new markets can be born from today’s start-ups.

Is the equity gap really the biggest when it comes to start-ups? The PFR wants to spend on them as much as EUR661.7m, and there are private funds on top of PFR’s ones.

In truth, only time will show if, compared to, for example, Israel, France or Germany, we have spent too much or too little. At this point it is impossible to say. I believe, however, that this amount defends itself because, as I said, it is about a system – the more start-ups at the beginning, the bigger the chance that some of them will go further and in the future, they will need EUR47.2-70.1m for expansion in the world. Of course, the investment with the participation of the PFR should be only one of the options here.

What are other options?

The capital market, debt market, just like everywhere else in the world. The more options the better, and the lower the financing cost will be. After all, before venture capital joins the company, it asks itself one question: who will I sell it to in a couple of years? There are two answers: a sector investor or a financial investor. With the weakness of our stock exchange, the latter option is generally lost. So, building a stronger capital market is a task that brought me here.

Why?

I have been writing for years that the development of the capital market is crucial in the context of demography. We will not change the fact that it is terrible. In the sixties there were still a dozen or so people in production age for one pensioner. Now there are three. Out of those three, not everyone pays taxes or pays taxes in full. In total, it is way too little to maintain one pensioner in the future. Therefore, we have to save more money for retirement and the stock exchange is one of the tools to keep our savings in good value in time.

So far, the biggest PFR investment was the takeover of Bank Pekao shares for almost EUR1bn. What do you think about this transaction?

It reminds me of a scenario from 2008 when during the financial crisis, the banks with headquarters abroad limited their financing of Polish companies, and only one bank controlled by the state financed them on a large scale – PKO BP. Let’s consider how many entrepreneurs we will be able to save during the next storm with the help of banks with their headquarters in Poland. How many workplaces will we save? Organised human resources and knowledge will be retained in the Polish economy.

The “re-polonization” of banks does not guarantee that they would make only good decisions.

Of course, there is no such guarantee. However, I’ve already mentioned that the variety of financing sources is important. It is important that when a company needs funds for development, it may go to a foreign bank, a Polish bank, to the stock exchange and issue shares, or to a brokerage house and issue bonds, and everywhere it will find proper instruments and proper liquidity. This tissue of the financial market is significant.

And is building it the biggest challenge?

These are only means to an end. Whereas, the goal is to increase the wealth of Poles and Polish companies. On purpose I do not speak of savings, because these were even generated during the communistic Polish People’s Republic, but the system could not use them effectively. When speaking of wealth, let’s take Eurostat data and create a simple indicator based on adding fixed assets and the net investment position and dividing the result by the number of citizens. It will turn out then that Poles, with a result of EUR8,295, are four times less wealthy than the Greeks (EUR37,456) and as much as 15 times less wealthy than Germans (EUR126,754). This has real economic consequences. When an employee has a good idea for a start-up, the chances that he/she will leave his/her job and start financing it for two years are much higher in Germany than in Poland, because savings that allow someone to survive for two years without a job are not rare there.

It also works at the company level – the wealth of German companies is bigger, and therefore they can mobilise much bigger debt capital, which can have a colossal importance with costly investments in technological change. German companies will simply be able to afford to buy the necessary innovations, whilst Polish companies will not necessarily be able to do so. We still do not have enough wealth, so we have to use it in the most productive way. There are no simple answers what it means in practice. They need to be found by trial and error.

There are only few profitable projects that private capital has not yet invested in. Isn’t it also a limitation for the PFR?

This is a common conviction – that the number of profitable projects, not only in Poland, is not really big. It does not mean, however, that we should stop looking for them. When similar funds started in the US, at the beginning they mixed business and social goals, and not everything was precisely defined. Finally, they worked out an effective model of VC funds.

At the beginning I said that I do not pay much attention to media coverage relating to the PFR investments, but I think that the numbers have a large educational significance. If someone is at a university today and thinks about an innovation, or has an idea for a company, he or she does not need access to funds in Warsaw, but may apply to a public institution which should help. Maybe this will allow them considering the option of more entrepreneurial activity and the number of these projects will increase.

How much time do we have for all these changes and investments? In your published works you wrote that the peak of interest rate increases in USA has always resulted in an economic crisis in Poland.

One of the commandments of economists says that if we foresee something, we should not speak of the future. If we have already spoken about the future, we should not say the number precisely, and if the number was mentioned, then we should not say when the number will be observed, and if the first, the second and the third was spoken, then it is our fault. And remembering the stipulation that the future is unforeseeable – indeed, in the last half of the century it was like that – each time the Fed reached the maximum of interest rate increases, capital fled from semi-peripheral countries, such as Poland, to the economic metropolis. This scenario will surely repeat, but maybe in two years or maybe in ten. Let’s remember that central banks are trying to withdraw from the policy of loosening, which was unprecedented, so it is hard to say how long it will take. Until then, we should invest as much as possible and as effectively as possible.

Paweł Dobrowolski is the chief economist of the Polish Development Fund.

Paweł Dobrowolski (PFR, Public domain)

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