Even though situated at the outskirts of the EU, Poland undoubtedly serves as one of the main pathways into the Union’s affluent west. The importance of its infrastructure is reflected in its prioritized investment position. Looking at investments made by the European Investment Bank alone, one could see that out of the EUR 79.8 billion invested in the country since 1990, about 47% went to infrastructure.
In the past few years, those investment practices, while not changing dramatically, seem to benefit infrastructure to a decreasing extent. In 2018, the EIB and the European Investment Fund invested EUR 3.74 and EUR 1.05 billion, respectively, in Poland. The largest portion of that sum, EUR 1.74 billion, went into the country’s infrastructure. In 2019, EUR 1.68 billion out of a total of EUR 5.4 billion was invested in infrastructure projects and, in 2020, another EUR 1.37 billion out of EUR 5.2 billion.
The heavy reliance on EU structural funds has, in a way, shaped and molded the Polish infrastructure development and the wider market itself. Still, with the market evolving at a steady and promising pace, Poland seems to be turning to look more into how private financing avenues and streams can support growth. Diversification of funding streams and methods can only lead to more projects – varying in size and scope – being completed, ultimately benefiting a wide segment of the population.
Looking across European markets, this goal seems to be most readily and consistently achieved via a public-private partnership approach to projects. Securing private funding while maintaining state control over the intended end goal of projects, PPPs have proven efficient in aligning public goals with private interest, and Poland is no exception here. This, of course, most often proves to be the case in those sectors routinely described as ‘key’ or ‘critical’ by governmental officials, usually due to their sensitive nature or ability to engender strong public opinion regarding the course of their development.
Still, even with the potential for increased governmental control and intervention in the development of projects, it remains an open question as to how much the Polish government can, and indeed wishes to, interfere in the infrastructure sector as such. This is particularly the case with local government, where projects are smaller in size and scope and, thus, less lucrative for major foreign investors.
To better understand the evolution of the infrastructure landscape in the country we reached out to several leading legal experts on the Polish market, to get their perspective on the sector that seems to be driving investment for one of the largest CEE countries.
Major Projects and Developments
Even though the Polish government has developed many infrastructure projects on its own, a number of them have been undertaken through public-private partnerships. According to Tomasz Darowski, Partner at Domanski Zakrzewski Palinka, PPP projects have been most numerous in transportation infrastructure, energy efficiency, sports and tourism infrastructure, and water and sewage management. According to Darowski, a total of 90 projects have been developed in those sectors over the last 12 years. He lists the following five projects as the largest ones done in Poland: (1) the PLN 885 million construction of the CHP plant in Olsztyn; (2) Poznan’s PLN 782 million waste management system; (3) the PLN 659 million construction of Krakow’s fast tram line; (4) the Tricity Metropolitan Area’s PLN 625 million waste management system; and (5) the PLN 490 million development of the northern tip of Gdansk’s Granary Island.
Despite the apparently burgeoning infrastructure sector, there is a noticeable downward curve to the EIB’s investments in Poland. The EIB allocated around 40% of its EUR 5.5 billion to Poland’s transportation and telecommunications in 2015, while only around 26% of the funding went to the infrastructure sector in 2020. Notably, according to the EIB’s statistics, from 2015 to 2018 infrastructure was the top priority sector for investments, with most of the funding allocated to its development.
Yet in 2019 and 2020 the largest portion of EIB’s funding went to small and medium-sized enterprises, leaving the infrastructure sector in second place. Despite these figures, Dentons Managing Counsel Tomasz Korczynski says that there is no slowdown to the infrastructure projects in Poland. “Quite the contrary, the market is more mature and developed now than it was two or three years ago, and our pipeline is full,” he says. According to him, a few years ago most of the projects were still in the planning stage, whereas nowadays they began to materialize and come to full fruition.
Also, according to Korczynski, there is no shortage of public-private partnerships. He points to the construction of Port of Gdynia’s outer port, as well as to the planned Ornontowice Polnoc sewage treatment plant, to Dlugoleka Municipality’s wastewater treatment plant, to the construction of roads in Marki, and to other projects as good examples of this growing trend. He explains that some of these projects are in their early stages, some in the procedural phase, and some are being implemented. “By next year, most of the procedures will be completed and most of the private partners will be selected, after which construction will commence,” he says.
Darowski agrees that 2020 was not a lean year, in terms of the number of projects. “The statistics of the Ministry of Funds and Regional Policy show that a total of 13 PPP agreements were signed in 2020, with a total value of approximately PLN 884 million, which is not a significant deviation from the previous number of PPP agreements concluded annually in Poland,” he explains. “Compared to 2019 there was a 44% increase, as only nine agreements, with a total value of approximately PLN 1.3 billion, were concluded that year,” he says and adds that 2020 also saw an increase in the number of initiated proceedings – 31, as opposed to 22 in 2019.
Looking further back, Darowski says that in 2015, out of 61 PPP projects, 23 ended in an agreement. However, only 11 out of 36 and 16 out of 47 ended the same way in 2017 and 2018, respectively. “Based on the above data, it is possible to hold that, despite the increasing awareness of public entities in the field of PPP proceedings, the interest for this form of implementing projects showed a slight downward trend in recent years, with the possible exception of 2018,” he says.
Furthermore, Darowski highlights the change in the situation of PPP projects, for the first two quarters of 2021. “The economic uncertainty caused a significant reduction in the level of investment in the private sector and affected the declined interest in public investment.” For the first two quarters, “only four PPP agreements were concluded and only two PPP proceedings were initiated,” he says.
The obvious question remains: what is the main reason behind the downward trend? “I would say that in those sectors driven by the state there are many ongoing projects, for example in electricity, rail, road, and other sectors,” comments Penteris Partner Agnieszka Koniewicz. “Unfortunately, the state does not use the PPP model for some of its largest and most prestigious projects but is rather developing them directly, and only outsourcing work to the private sector on a contract basis.”
Koniewicz underlines a few reasons for this. “The PPP model requires mutual trust and an understanding of the business conditions, which is often quite difficult to achieve, as the public partners very often want to allocate the majority of the risks and costs to the private partner, without ensuring the appropriate duration and distribution of future profits,” she explains. For certain strategic sectors, she says that the relatively low number of PPP projects stems from the political approach that “key sectors should be operated by the state.” Thus, according to Koniewicz, the government aims to control strategic infrastructure such as roads, railways, electricity and gas transmission infrastructures, and, as of late, even telecommunications.
The government’s effort to retake control over certain strategic projects is confirmed by Darowski. “The government planned the construction of four motorways on a PPP basis,” he says. “The total investment value was estimated to be in the billions of euros and important foreign investors were preparing for those procedures to be launched, since they had been officially announced by the government,” he continues. “Unfortunately, during the presidential election campaign in 2020, the plans were suddenly changed, and it was decided that these motorways would be constructed on a standard public procurement basis,” he says. “This sudden change of plans has greatly discouraged some foreign investors, which have withdrawn from our market for this very reason,” he says.
Local Governments – Local Problems
On the other side, local governments seem to be particularly reluctant to resort to the PPP model, according to Darowski. Local authorities reach out to private partners less often due to, according to him, their lack of familiarity with the PPP model, on one hand, and the abundance of EU funds on the other. Still, the government is trying to alleviate the problem, according to Darowski, so “the Ministry of Funds and Regional Policy holds training events for local governments to promote PPP and to show how it works in practice.” He commends the work that has already been done but acknowledges that a lot more of it is still needed.
It is not just the lack of experience that is holding back local governments, according to Korczynski. “Poland adopted a complex amendment of the PPP act in 2018, which greatly facilitated the whole process and the ministry stepped in to educate local governments,” he says. Despite that, it is occasionally the attitude of local authorities that bogs the process down, as they sometimes “want to have the Ferrari, but can only afford the Fiat,” Korczynski says with a chuckle.
It is difficult to say what the future might hold for the PPP model in Poland, yet some factors might provide an indication as to where it might be heading. “It is expected that due to the decreasing amount of EU funds granted to Poland in the coming years, the importance of PPP will increase, especially after the COVID-19 pandemic which had a very negative impact on local government finances,” comments Darowski and adds that the PPP model would make it possible to finance more projects.
Still, he is optimistic about the development of the infrastructure investment market in Poland. “A significant portion of the EU funds allocated to Poland under the post-Covid economic recovery plan, around EUR 170 billion, will be earmarked for investments in infrastructure, such as roads, railways, offshore wind farms, telecommunications, and ports,” he says.
In a similar vein, Koniewicz assesses that the future of PPP projects in Poland is contingent on, among a number of other things, two factors: the country’s future access to EU funds and prices in the construction sector. “Last year, there were many ongoing projects, so the cost of labor and construction materials (like steel) has increased,” she says. As a result, she explains, many general contractors ran into difficulties.
With all of this in mind, it would appear that the infrastructure market in Poland will continue developing along an upwards trajectory. The trends set over the course of recent years are likely to hold, with more investment opportunities and capital flowing into one of Central Europe’s biggest countries. What remains to be seen is if the government decides more interference is necessary and needed, or if a more laissez-faire approach is the proper course of action. With Europe and most parts of the globe expressing strong hopes of entering a post-pandemic world sooner rather than later – which would only spur strong transactional and investment activity, especially from the private sector and non-official bodies – Poland finds itself in a prime position to seize the moment.
By Djordje Vesic and Andrija Djonovic