Special Economic Zones in Poland
To kickstart development in the underperforming regions of Poland, the new government made the decision to develop an extensive regional policy aimed at rural areas. As part of this policy, it created SEZs: “to accelerate the economic development of regions; manage post-industrial property and infrastructure; create new jobs; and attract foreign investors to Poland”.
To establish these zones, the Polish government signed off a bill in 1994 to create SEZs in a number of different regions. An SEZ “is an uninhabited part of the territory of the Republic of Poland separated in accordance with the provisions of this Act within which economic activity may be conducted under the rules determined herein”. The rules themselves define how business activity may be conducted under preferential conditions. As of 2018, there are 14 different SEZs in operation, spanning over 25,000 hectares, which constitutes 0.08 per cent of Poland's territory.
Initially, these zones had the “aim to revive the Polish economy and stimulate employment growth during the period of transformation of the Polish economy that started in 1989”. In order to achieve that aim, the original assumption was to “create a total of 175,000 jobs - that correspond with about 5 percent of all industrial workers in Poland [within 10-15 years]”. The government intended SEZs to be a tool that was “based on a mix of financial support (tax incentives mainly targeted at investment expenditure), non-financial support (the regulatory environment is business-friendly), and investment in public infrastructure, which aims at attracting investors and businesses with a focus on specific sectors”.
The government achieved this via the creation of the following incentives to encourage economic activity in SEZs:
- Complete tax exemptions for companies operating in SEZs for the first 10 years of the zone's activity, and no more than 50 percent taxes thereafter. Later on, this was changed to a 50 percent tax exemption only)
- Real estate tax exemptions
- Allowances to cover investment costs.
As the initial policy compromised Poland's EU membership negotiations, the government made several reforms to alter the original policy. SEZs were established for a set period of time (usually 20 years), and the system had to be “renewed” via policy reforms in parliament on a semi-regular basis.
While the original 1994 law allowed for a 100 percent cut in income tax, this was incompatible with EU rules on state aid regulations. Therefore, the government altered the SEZ regime during reforms in the early 2000s to set the maximum corporate tax exemption at 50 percent.
In 2018, the Polish parliament agreed a law aimed at turning “the entire territory of Poland into a special economic zone”. The current regime is intended to expire by 2026, and the new law aims to give preference to investments in all struggling and medium-sized towns in Poland and not just those allocated in the previous SEZs. This means that SMEs and other companies would no longer have to move their operations around Poland to benefit from investment incentives in specific areas.
The challengeIn 1989, after the end of the Cold War, Poland declared independence from the Soviet Union and reintroduced a capitalist market system. Part of the challenge for the new Polish government in the early 1990s was the high level of unemployment in the country’s economically underdeveloped regions. In 1994, the unemployment rate in Poland was 14.44 percent, the highest rate among its European peers at the time. Almost half (45.6 percent) of all unemployed Poles lived in rural areas, and many had previously been employed on state-owned agricultural farms [Państwowe Gospodarstwo Rolne] (PGRs). This was a pressing socioeconomic problem that the Polish government needed to address urgently.
The public impact
SEZs recently celebrated their 20-year anniversary. During this time, their impact has been significant. The current prime minister, Mateusz Morawiecki, praised SEZs as “the longest functioning investment incentive in Poland [with] an impressive legacy”.
By 2012, SEZs had generated over EUR20 billion in total value investments and created over 186,000 jobs. They had transformed Poland and its economy into an attractive investment destination for foreign capital, which supported its transition to democracy.
The figures that the Polish parliament published in 2016 confirm the significant regional impact of the different SEZs. “At the end of 2016 the companies operating in Polish SEZs had 2,263 permits to conduct business activity within that year. The Ministry of Development estimated that in 2017, 14 SEZs may have attracted EUR5 billion in investments with 16,000 jobs. At the same time, every fifth project is implemented by a small or medium-sized company.”
The internal stakeholders - such as rural communities, regional governments and local NGOs - did not have a great deal of involvement in setting up the SEZ regime, whose success largely depended on national politicians creating the right legal environment for external investors.
It was hard for local stakeholders to be involved in the decision-making process of setting up SEZs, because Poland had just become an independent democratic country after being a satellite state of the Soviet Union. Poland has a structure of strong church communities and “quasi-self-governing” local authorities, but these were not used to engage in politics at the national level. Similarly, cooperation between NGOs and local governments was relatively poor. In the early 1990s, local stakeholders existed, but their engagement in policymaking was confined “to a very limited extent”. For this reason, local stakeholders were not as much involved with setting up SEZs, and local authorities only got to play a role later on, when taking on administrative tasks for the different zones.
However, the Polish Investment and Trade Agency (PAIH), which was established in 1992 and operated at the national level, played a major role in managing and promoting the SEZs both internally and externally. Therefore, the SEZs' success was first and foremost driven by the involvement of the external investors who set up companies in these zones.
When the Act Of 20 October 1994 On Special Economic Zones passed into law, external stakeholders became more involved, especially the European Commission and other institutions with which the Polish government negotiated its impending membership of the EU. They played an increasingly important role in shaping Poland's SEZ policy in order to make it conform to the rules of the European Single Market.
The core conflict between Polish and EU competition law was that the 1994 SEZ regime infringed EU limits on financial state aid. “EU law clearly states that state aid cannot exceed 50 percent of the cost of the investment for large firms and 65 percent of the cost of investment for small and medium-sized enterprises. At the time, the firms that were investing in Polish SEZs had already or would have in the near future exceeded these limits. Based on the EU's objection to SEZ legislation, in February 1999 Poland agreed to amend the law on SEZs and those modifications took effect on 1 January 2001.” (See also Clarity of Objectives.)
Soon after independence, Poland began to liberalise its state-planned economy. These unprecedented changes, e.g. the complete liberalisation of prices and a vast reduction in state subsidies, pushed many Polish enterprises into financial trouble, unable to compete under these new conditions. Thus, the state quickly had to reinstate economic subsidies and aid programmes, which “led to a situation where the majority of State aid granted in Poland in the early 1990s was not connected to any long-term policy but was ad hoc and unfocused”. SEZs are seen as part of that broad drive toward market liberalisation, which was supported by the majority of Polish politicians and parties.
Under the elected leadership of former communist politicians, Poland had a relatively stable government between 1993 and 1997, until a new government with its origins in the democratic Solidarity movement was elected, eight years after the fall of communism. From 1997 onwards, these political leaders faced the challenge of implementing a sustainable and deep-rooted transformation of the Polish economy, while struggling with political instability. However, throughout these changes of government, all politicians remained committed to the principle of SEZs.
There is no direct public opinion survey available on the establishment of SEZs in Poland. However, opinion polls from the early 1990s about attitudes towards economic privatisation and EU membership indicate that the Polish electorate supported the economic policies and liberal directions the country was taking at the time.
At the beginning of the Polish transformation process, Polish citizens had just voted in the first election in decades and were ready for large-scale transformation. In 1997, a survey on citizens' attitudes towards the new regime showed that 70 percent of the population agreed that the political shift towards capitalism and democracy was positive. This was especially true of individuals with higher qualifications: “the communist system has negative connotations first of all for those who adapted better to capitalism because of their high professional qualifications or education”.
A June 2003 referendum on whether Poland should join the EU saw a 77 percent approval by the electorate for joining the bloc on a 59 percent turnout. Bearing in mind the role SEZs played in Poland's negotiating access to the EU (see Stakeholder Engagement and Clear Objectives), this indicated that, in embracing EU membership, the Polish electorate had accepted the proposed changes to SEZs.
Clarity of objectives
The Polish Council of Ministers set out the objectives of the SEZs in 1994, with the Act on Special Economic Zones. This Act had seven broad objectives to be achieved mainly through 100 percent income tax relief:
- “The development of certain areas of economic activity
- “Development of new technical and technological solutions and their use in the national economy
- “Export development
- “To enhance the competitiveness of manufactured products and services
- “Fitting the existing assets of the industrial and economic infrastructure
- “Creation of new jobs
- “Management of unused natural resources while maintaining the principles of ecological balance.”
However, after Poland applied for EU membership, it adjusted its policies to those of the European internal market and European competition policy. This meant that it had to alter the rules and objectives of SEZs significantly, so that they did not disqualify Poland from EU accession. These amendments to SEZs were set out in the statutes adopted on 16 November 2000 and 3 October 2003 respectively. Accordingly, “the 2001 modification[s] [set] caps on the aid which before was virtually limitless... The businesses investing in the SEZs after 31 December 2000, needed to comply with a number of factors, set separately for each zone, in order to qualify for any type of exemption. This meant that they were no longer automatically relieved of the 100 percent income tax for the first ten years of operations and 50 percent for the following 10 years.”
Strength of evidence
There is no direct evidence on the Polish government's influences in constructing SEZs. However, SEZs as a tool of state aid and regional development had been increasingly used in other Soviet satellite nations in Europe such as Hungary, which had created industrial free-trade zones in collaboration with Austria as early as 1982, as well as in countries such as the Republic of Ireland.
With China starting its broad economic transition in the late 1980s, its model of establishing SEZs served as valid evidence for Poland and other Eastern European countries to deploy a similar regional development tool. For example, the Czech Republic introduced a system of investment incentives in 1998.
The very first Polish SEZ was in the Mielec region in 1995. “In the following years, new zones were created, some of them merged or ceased to exist. Finally, in 2001 there were 14 zones [in operation]”. The Mielec SEZ was used as something of a testing ground from which other regions were able to learn. Over time, this led to a merging and rearranging of the final 14 zones to the most effective structure.
The SEZs have their own individual governance and staffing model, which is supported by the PAIH at national level. Each individual zone tries to construct new infrastructure and buildings and have qualified staff available, because they are trying to make their SEZ as attractive as possible to prospective investors. Therefore, providing good services is crucial to their success. For example, the Suwalki SEZ sees its main attraction in “the comprehensive service provided to investors by the Suwałki SEZ staff [and] business-friendly local governments”.
Additionally, investment incentives have been provided by the European Development Fund and the Multi-Annual Support Programme from the Polish government, which wants investors to create new jobs and infrastructure in regional areas. In the years 2007 to 2013, Poland was granted EUR67.3 billion from EU cohesion policy funds, which went directly towards building new infrastructure and thus indirectly supporting the success of SEZs.
One of the most common mechanisms for investing in a SEZ is via “greenfield investments”. The government provides a piece of land with no existing infrastructure, where investors can then build offices, roads and factories on their own initiative rather than occupying pre-existing buildings. This has been important for local development and enabling SEZ management to collaborate with local authorities. Investors need guidance through the complexities of local regulations and administrative processes, which has been provided by the PAIH.
The management of SEZs has remained to a large extent with the investment companies themselves and with the local SEZ management authorities, which are overseen by the PAIH. A company or investor must obtain a permit from the SEZ administration to operate within a zone; all 14 operating zones therefore have their own management unit. Foreign investors can obtain help with the permit process from the PAIH.
Specific regulations are also in place that apply a region's own local requirements. “Regulations applicable to a particular SEZ may specify the minimum investment value required or the number of employees that must be hired to benefit from the tax exemption”. Additionally, SEZ management units “provide assistance to investors by, among others, facilitating their contacts with local authorities or State administrative authorities in matters such as the purchase of land for investment”. This model works well, such that in a 2012 survey 82 percent of companies operating in Polish SEZs perceived them as a positive resource.
Individual SEZ management units track key performance indicators (KPIs) annually via the PAIH website. Further, many ad hoc reports from public and private institutions ensure that there is a robust assessment of KPIs and of the development of SEZs as a whole.
Each year, individual SEZ units publish a report on “the effectiveness of their zone overall”, which includes annual data such as the number of jobs created, total investment volumes, and the number of business licences granted. The PAIH website also introduces the zone to investors and showcases the companies that are present within each zone. The Ministry of Development keeps track of KPIs such as unemployment levels and the number of valid permits granted.
Furthermore, the Ministry of Economy published an ad hoc report on the SEZs in December 2012 to set out what they had achieved in the previous 18 years, which was presented to the Polish parliament. There also exist a number of independent studies from academics, professional consultancies and law firms, which monitor the performance and effectiveness of SEZs and are available to advise potential investors.
Each SEZ has a different management style and caters to its own local environment. However, across all SEZs, there are certain common practices that align them with the broader regional development goal, which is to tackle unemployment in rural areas. SEZs compete for investors by offering them quality service and benefits such as a connection with universities, vocational training, and cooperative agreements for qualified student workers.
Several of the 14 operational SEZs have developed specific programmes to support the development and education of the local labour market and to tackle unemployment in rural areas. For example, the Kamienna Góra SEZ established an “educational cluster” that forecasts labour market demands and matches students with companies for internships. Kostrzyn-Slubice SEZ designs its own specialised university degree courses in partnership with local universities, companies and students to further develop the local labour market, and the other 12 SEZs have similar initiatives, where they collaborate with local government and the local community. SEZs have realised that a well-qualified workforce is an attractive resource to offer prospective investors, and they are actively trying to align with universities and educational authorities to provide it.
Furthermore, several SEZs ensure that their management team is highly qualified and has contacts with the local administration. The management team is responsible for connecting with investors and guiding them through local regulations, and for integrating the SEZ with the local area. For example, Kostrzyn-Slubice SEZ participates in the Polish-German partnership and “it is also the main sponsor of [the] women's basketball club, AZS PWSZ Gorzów”.
 Do special economic areas matter in attracting FDI? Evidence from Poland, Hungary and Czech Republic, Claudia Guagliano and Stefano Riela, 2005, Istituto di Studi Latino-Americanie dei Paesi in transizione (ISLA) - Department of Economics, Università Commerciale “Luigi Bocconi”, Milan
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