VII. Investment Climate A. Openness to Foreign Investment The Government of Poland has often voiced its belief that foreign investment plays an important role in the modernization of the Polish economy and the rationalization of economic activity in accordance with market forces. Although Poland is not yet a member of the European Union (EU), an association agreement was signed in December of 1991, and trade provisions of that agreement came into force in March of 1992. The agreement is a step towards the ultimate goal of membership in the EU for Poland. It will build an industrial free-trade system, harmonizing legislation, and developing economic cooperation on a wider basis. The EU provides Poland with models on which to base its legislative and regulatory reforms, and the agreement should improve the business climate for foreign investors. Foreign investment in Poland is governed by the Foreign Investment Act of 1991, and subsequent amendments to the Act, which was intended to open the Polish economy to foreign investment and establish a level playing field between foreign and domestic investors. Most tax and other incentives contained in earlier legislation have since been repealed, although some incentives are still available for large scale investments in regions of high unemployment. Under the law, any level of foreign ownership - up to 100 percent - is allowed. There is no screening of foreign investments. Under the foreign investment law, an investor must obtain a permit from the Ministry of Privatization to invest in the following areas: management of sea and airports; real estate agency sales and services; defense industries; wholesale trade of imported consumer goods; and legal services. Under broadcasting legislation, a foreign investor may not own more than 33 percent of a broadcasting enterprise. The acquisition of real estate by a foreign entity requires a permit from the Ministry of Interior. Non-farm real estate may be purchased outright, but foreign entities may only lease farmland for a maximum of 99 years. Foreign investors must also comply with domestic laws. For example, investment in banking requires the approval of the central bank and the Ministry of Finance. Other requirements apply in specific sectors. Polish privatization programs are open to foreign investors and most of the largest transactions have involved sales to foreign firms. These have accounted for a substantial portion of foreign investment in Poland. Forty- eight U.S. firms have invested more than $1 million in Poland, where the United States remains the single largest investor. The exception to this openness to foreign investment is the Mass Privatization Program, which will give control of over 500 state-owned enterprises to a group of national investment funds (NIFs). Shares in the NIFs will initially be sold only to Polish citizens, and only over time will sale on a secondary market be permitted, at which time foreign investors may be able to buy shares. B. Conversion and Transfer Policies Capital brought into Poland by foreign investors may be freely withdrawn from Poland in instances of liquidation, expropriation, or decrease in capital share. Full repatriation of profits and dividend payments is allowed without obtaining a permit. The Foreign Investment Act of 1991 guarantees the availability of foreign currency for payment of dividends to shareholders. However, a Polish company (including a Polish subsidiary of a foreign company) must account for withholding tax to the Polish tax authorities on any distributable dividends unless a double taxation treaty is in effect. Generally, foreign currency earnings from exports must be converted into zloty. The experience of U.S. companies in repatriating profits has been good. The regulation on conversion of export revenues into zloty, however, has become a burden on exporters who need hard currency to settle import bills. C. Expropriation and Compensation The Polish government is in the process of privatizing state-owned enterprises and properties in Poland. There have been no expropriations since the fall of Communism five years ago. D. Dispute Settlement The Polish legal system is based on the French and German systems. No discernable disputes have arisen over the last few years. Even without precedent, it is unlikely that Polish courts would accept without review the decisions of a foreign court. Poland has a commercial code, written before World War II, and U.S. and other foreign business have urged its overhaul. There is bankruptcy law on the books. Monetary judgements are usually made in local currency. Secured interests in property are recognized and enforced, but there are some idiosyncracies to the Polish system. For example, there is no method for recording liens. In the event of there being more than one lien on a property, the most recent has priority, reversing the usual Western practice. Also, mortgages on residential properties are problematic because occupants cannot be evicted unless they are provided an alternate dwelling. E. Performance Requirements and Incentives Performance requirements for establishing or maintaining an investment do not exist, but there are performance requirements for access to tax incentives for investments in areas of high unemployment. These include transfer of technology, creation of employment, and generation of exports. F. Right to Private Ownership and Establishment There is a general right to ownership and establishment. The government's privatization program is transferring ownership of economic entities from the state sector to the private sector. In theory, competitive equality is the standard applied to private enterprises in competition with state-owned enterprises. However, government officials appear at times to give more favorable treatment to state-owned enterprises which they are trying to rescue from bankruptcy. For example, some investment incentives have been more readily approved for investments in existing state-owned enterprises than for competing greenfield investments. G. Protection of Property Rights The legal system in Poland does protect and facilitate the acquisition and disposition of property. However, the government's failure to enact a law on re-privatization (i.e. the return of property confiscated by the Nazis or Communists or the compensation of the owners for property not returned) leaves the title to a great deal of property in Poland in doubt. Protection of intellectual property in Poland has made considerable progress in the last two years, with the enactment of new laws in all key areas. The last law to be enacted was the copyright law, in February 1994. This is generally adequate, although there are some questions about the protection of the rights of foreign copyright holders. Poland has now fully adhered to the Paris Act of the Berne Convention. It has a commitment to the European Union to adhere to the Rome Convention on Sound Recordings by 1997. It has not adhered to the Geneva Convention on Phonograms. H. Regulatory System: Laws and Procedures With nearly half of output still produced by the state- owned sector, and the continued existence of a number of monopolies created by the Communist regime, competition policy is an area of concern. The government of Poland is in theory committed to encouraging the competition necessary for a free- market economy. The government has an anti-monopoly office responsible for the tracking and elimination of monopolistic practices. U.S. investors frequently complain about difficulties in completing bureaucratic requirements and subsequent delays when investing in Poland. While the regulatory requirements clearly are burdensome, it is unclear whether they are more so than in the U.S. or other OECD countries. The tax system is largely neutral regarding foreign investment, with only limited incentives or reliefs. I. Efficient Capital Markets and Portfolio Investment Capital markets are in their infancy in Poland, and the banking system is under-developed. The Polish authorities are receiving assistance from foreign experts in building a modern financial system. The Warsaw Stock Exchange has only been in operation for three years. It was the strongest-performing exchange in the world in 1993, appreciating 1,000 percent (in local currency terms), but investor interest has cooled during 1994 and the exchange is currently trading 10-15 percent below its level at the beginning of the year. In addition to being the only venue in Poland for the public trading of stocks, the exchange also conducts trading in Polish treasury bills. It is premature to speak of free flows of financial resources in Poland. Only a small number of enterprises have access to the stock exchange, and most private firms eschew borrowing because of high nominal interest rates and uncertainties about inflation's impact on costs and revenues. Most private Polish investment is financed from retained earnings, while foreign investment is mainly direct investment, using funds obtained outside Poland by the parent company. The private sector does have access to a variety of credit instruments, but it generally limits its use of them because of the high risk of assuming debt in an inflationary environment. Among the new products appearing recently have been commercial paper issues, but interest in borrowing is unlikely to increase substantially until inflation falls further. Accounting regulations are approved by the Minister of Finance. Poland is moving toward international standards, but is not entirely there yet. Separate regulations govern banks and insurance companies. Financial statements include a balance sheet and profit and loss accounting. The government's goal is to make accounting regulations comply with those of the European Union. With only two dozen publicly traded companies in Poland, there has yet to be an attempted hostile takeover, and it is unclear what defensive measures Polish companies might use in this instance. There are no laws specifically authorizing private firms to adopt articles of incorporation limiting foreign control. J. Political Violence There have been no incidents of politically motivated violence to foreign investment projects in recent years. The entire process of privatization and restructuring which Poland is undergoing is highly politicized, but so far protests have been peaceful. Poland has no belligerent neighbors nor insurgent groups. The Overseas Private Investment Corporation (OPIC) is fully active in Poland. It provides political risk insurance, loans and loan guarantees, and is also involved in equity investing through its Poland Partners Fund, which it has organized in conjunction with U.S. pension funds. K. Polish Outward Investment Polish enterprises are only small outward investors. Most Polish foreign investments are related to export sales of goods, although there are also some investments in manufacturing in the former Soviet Union. As some of Poland's former foreign trade enterprises develop into industrial conglomerates, they are beginning to diversify their holdings internationally. L. Labor Availability Poland has a well-educated labor force with relatively low labor costs. Productivity is low by western standards, but unit cost is still competitive. There are shortages of persons with language skills as well as training in management and finance. Polish workers are usually eager to work for foreign corporations. Most aspects of employee-employer relations are governed by the Labor Code, which lists the rights and duties of all workers, regardless of their industry or line of work.