New focus on central Europe’s business opportunities

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Ask Lech Jeziorny and Pawel Rey what they think about Poland’s business environment, and the two businessmen will offer a few choice, and not particularly polite, words.

“There is something wrong with the Polish state. It is a thief,” says Mr Jeziorny.

His frustration is understandable. He and Mr Rey spent nine months in jail, and were investigated by the prosecutor’s office for seven years after undertaking a complicated management buyout of a Krakow meat processor. They were cleared late last year, but in the meantime their company went bankrupt and 300 people lost their jobs.

Their example may be an extreme one, but it serves to underline the still risky aspects of doing business in Poland and in much of central and eastern Europe. Although all 10 countries that joined the EU in 2004 and 2007 are now very different, they share a common heritage in having spent more than four decades under communism, with the destruction that system wrought on the law, politics and business interactions.

In the Czech Republic, one of the best-governed countries in the region, almost 60 per cent of small and medium businesses polled by a local business association felt that bribes were necessary to get a stab at winning state contracts.

“The feeling is that to get public contracts you need to give bribes,” says Radim Bures, a project manager at Transparency International, the anti-corruption watchdog.

Distaste at high levels of perceived corruption was one of the factors that prompted many Czechs to turn their back on the country’s two leading political parties in recent parliamentary elections, instead supporting new parties that promised to battle graft. The same cause helped drive Hungary’s Socialists from power earlier this year.

Essentially, central Europe can be split into two regions when it comes to openness and corruption. Bulgaria and Romania, which joined the EU in 2007, are ranked as some of the union’s most corrupt members by Transparency International – although Greece has a similar ranking. In Romania last month, former prime minister Adrian Nastase was charged with accepting bribes, while Bulgaria has had hundreds of millions of euros in EU funds withheld by Brussels for failing to crack down on corruption.

To the north, Poland, the Czech Republic and Hungary are seen as much cleaner. Slovakia, which has a tightly linked political and business elite, as well as a coalition government racked by frequent corruption scandals, is ranked slightly lower.

However, the newer EU members are making enormous efforts to improve, often under fierce pressure from Brussels. In the World Bank’s Doing Business rankings, Romania, Bulgaria and Slovakia are far ahead of Poland and the Czech Republic – although wealthy Italy is even further behind.

“Poland is moving forward, but parts of the region are moving even faster, so Poland is no further ahead,” says Marcin Piatkowski, senior economist at the World Bank office in Warsaw. The office has been hired by the government to try to improve Poland’s business environment.

The country’s regulatory environment, and particularly its fierce bureaucracy, has long been a concern for business. Lewiatan, the employers’ confederation, puts together an annual “blacklist” of barriers to business, which, despite frequent political vows to make changes, rarely seems to shrink.

“The newest list is no shorter that the one we had last year,” Henryka Bochniarz, the organisation’s head, said at a conference to announce the yearly list.

Business complaints centre on the often impenetrable taxation system, a slow and inefficient legal system (it takes 830 days, on average, to resolve a commercial dispute in the courts) and difficulty in registering a company. Another bugbear, and one that helps explain Poland’s low ranking in the Doing Business survey, is the difficulty in obtaining building permits.

The current pro-business government, headed by Donald Tusk, the prime minister, has promised to fix many of these issues. In one of his first interviews after the 2007 election, Mr Tusk vowed to take a “machete” to red tape.

However, results so far have been lacklustre. The head of the parliamentary committee that was supposed to slash bureaucracy proved ineffective, and other measures to free up business remained unresolved.

Changing the way value added tax is administered, or making it possible to register a company in a single office, may seem like dry subjects, but these changes are key to boosting the region’s productivity and returning to the faster growth rates seen before the economic crisis, says Mr Piatkowski.

That is not to say Poland and the other central European countries are not attractive business destinations. Their wages are still far below those of western Europe, while productivity is rising rapidly. Societies are younger than those of western Europe, while the education systems are pumping out qualified workers.

In the Czech Republic, business is optimistic the centre-right parties that won the election will be able to implement reforms. This had been difficult during the previous parliament, which was nearly equally divided between right and left.

“We have so much regulation that the labour market is impacted,” says Jaroslav Mil, head of the Czech employers’ confederation. “But a majority of people voted for change and I’m optimistic.”

Slovakia, despite questions about the impartiality of its judicial system, has a particular advantage over its neighbours – it joined the euro last year, which has spared it the violent currency fluctuations experienced by its neighbours. Volkswagen, one of the country’s largest investors, has cited currency stability as one of the reasons it is continuing to expand production in Slovakia.

Even without the euro, central Europe remains an attractive investment destination. Despite the crisis, Poland last year managed to pull in €8.4bn (£7bn, $10.3bn) in foreign direct investment, only a relatively small fall from €10bn in 2008.

“The Polish employee shows up in the morning ready to work,” says Alon Redlich, president of International Technology Sourcing, which represents US aviation and defence contractors in Poland. “For us, Poland is a good and solid place to do business.”

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