Two directions

I am certianly not claiming credit but yesterday’s post was followed soon after by the announcement of the new government. As expected the architects of the 4th Republic (the two year period PiS ruled together with Giertych and Lepper) have taken on the so called power ministries (defense, internal affairs, justice) and will pursue imaginary foes.

On the other hand the economy ministries have been taken by sensible, and indeed surprising people given PiS’s populist stance. A new super ministry of development has been created/ proposed which will oversee the ministries of trade and industry and others (but NOT the ministry of finance). The new minister will be Mateusz Morawiecki currently CEO of one of the largest banks – BZWBK (previously owned by AIB and now Santander) with Jerzy Kwieciński as deputy minister (the only deputy to have been announced yesterday). I first got to know Jerzy back in 1993 on the EU PHARE funded export promotion programme. He is highly articulate and knows Brussels inside out. So it does look as if in line with expectations PiS is not interested in controlling the economy. We will wait to see how things actually work out.

by AWK

Waiting for Godot

It is now some considerable time after the Polish general elections in which PiS gained an overall majority of seats. So one would have thought that by now we would know who will be a minister in the new government. But no, the nation is to wait until such time as Kaczyński has spoken. Those who harboured the belief that the nominated Prime Minister (my name is Szydło, Beata Szydło) had a ready list of candidates to present to Parliament should by now have no illusions at all that both the Presidency and the Government will in fact be steered from the back seat by Jarosłwa Kaczyński.

And of course PiS is now back tracking on its election promises to simultaneously reduce taxes, reduce the budget deficit and increase spending.

Interesting times indeed…

(by AWK)

Pensions and the great unknown

Probably better late than never but both Polish Presidential candidates have addressed the issue of pensions and the retirement age. The PiS candidate has of course gone down the populist route of stating that people will have to work till they die. Which completely misses the point that people are living longer with the Polish male now having a life expectancy almost a decade longer than when the Berlin Wall fell.

The incumbent President announced yesterday that he will present a parliamentary bill allowing workers to retire after “clocking up” 40 years “in harness”. What was not mentioned is the fact that there would not be an entitlement to a full pension for people who retire early and this will only accrue fully to those who work until the statutory retirement age. Now there is a difference between allowing people to retire early and bringing down the statutory retirement age. Just don’t expect the average journalist to understand this.

Which takes me back to the “debate” between the then Minister of Finance, the UK educated Jacek Rostowski and the architect of the transformation of the Polish economy Leszek Balcerowicz. Whilst I had a lot of time for Balcerowicz back then he does rather underline a different approach to economics than that espoused by John Maynard Keynes. JMK famously when asked a question as to why he had changed his mind replied “I don’t know about you but when I notice that the world has changed I change my view of it”. Unfortunately Mr Balcerowicz has not noticed that the whole economic paradign has shifted since he last held power and that red in claw capitalism does not provide all the answers.

However the main point is that the debate, which concerned taking back a chunk of pension funding into the State run ZUS from complacent fund managers, completely missed the point. Which is that there is very little difference between a state scheme based on current taxes paying for current penions, a state funded scheme (i.e. the state invests pension contributions to generate future cash flow) and a private investment fund based pension system. In every case pensions will ONLY be capable of payment if the economy in the future generates sufficient value added to support non working pensioners. In the case of an unfunded state scheme by way of taxes extracted from the productive and in the case of funded schemes only if the investments generate income.

In the case of funded schemes investment can be made within the given economy and hence that economy has to perform in the future. Of course some of the economy specific risk can be spread by investing in other economies. Except that what is a constant is that under performing economies sooner or later face devaluation of their currency (unless shielded by the Euro and assuming this strange currency is still with us in the future) and certainly by a higher cost of government borrowing.

So the real debate is actually how to ensure long term economic wealth and not how pensions are funded. And therefore the choise on Sunday is quite clear. Who is the safer pair of hands? The UK electorate has already decided. The Polish electorate has “two stabs at the cherry”, this coming Sunday in the Presidential elections and in the autumnal parliamentary elections.

Get on your bike

Last week Bronisław Komorowski the incumbent President of Poland facing a second round run off with the opposition “stand in” candidate was harangued by a young man asking him how his graduate sister (presumably with a degree in political studies) was supposed to survive on 2,000 PLN per month from her “non” job and how she was supposed to buy her own flat. Komorowski replied that she should: a) get a better paid job and b) take out a mortgage. This reminded me of the response by Norman Tebbit- Maggie Thatcher’s tame rotweiller advising a young man unable to get a job in a Northen town to “get on his bike” and head south. Well as it turns out years later the people heading to where there are jobs were Poles and other Central Europeans.

Actually the key message is that many people believe that governments can and indeed should create jobs. Well the reality is that they can’t. What they can do is destroy jobs. Only entrepreneurs create jobs. When I look at Poland I find that, apart from multinationals, there are a large number of businesses set up by enterprising young Americans, Spanish, Koreans and Vietnamese amongst others who came to Poland and who run succesfull companies. One example I like to quote is Coffee Heaven set up by a young (then) American – one Michael Ovidenko and a UK company brought to Poland by Tesco to set up in store bakeries. As it turned out Tesco pulled out of the idea and my firm put together Michael who had an idea and the UK company who saw potential. Money was raised on the UK AIM market and the rest is history. Now being destroyed by Costa Coffee but that is as they say another story.

Another success story is Allegro, set up by a Dutch citizen leaving e-bay as an also run.

I could cite many other examples including Solaris buses and Raben logistics. Look at major UK companies such as M&S set up by immigrants. What is the common thread? Probably hunger has a role but I guess mainly it is not being bound by local “received wisdom” and thinking outside the box.

Coming back to Poland there are a large number of issues. The key one being education (we don’t need no education – leave the kids alone to quote Pink Floyd). There is no doubt that the Polish system is strong on fact regurgititation. What is is not good at is team work and building social capital. Oh and the mania that you cannot leave school until you are 19 and that 50% plus have to go on to university. Why? Look at succesfull entrepreneurs: Steve Jobs, Alan Sugar, Richard Branson and Bill Gates amongst others. Couldn’t wait to quit main stream education.

So the key issue of the current Presidential elections and the up coming Parliamentary elections should be just what sort of education the government should use OUR money to fund. Not whether in vitro is a good or bad thing or whether the RC church should have a monopoly on ethical education in schools.

How did Tesco value its stores…

Tesco announced today a staggering loss for the last financial year. The loss includes a 3.8 billion GBP write down of property.

This begs a question. As far as I know the UK property market has recently improved.

Which begs the question as to whether Tesco valued its property portfolio on a true open market reflecting land prices and comparative rental values or on discounted future profit streams expected to be generated by the stores? If the latter then that valuation is actually a valuation by default of goodwill (trademark) which in accordance with economic theory allows the company to generate super profit over and above that generated by a no name competitor.

Now unless I am much mistaken you are not allowed to reflect either self generated goodwill or self generated brand value in the balance sheet. And only a significant fall in expectations for future profits could underly such a significant write down of property values. Or maybe Tesco are just admitting that no one will be interested in buying or renting their large hypermarkets should these need to be sold.

Which just goes to show the trap companies fall into assuming values will keep on rising.

Is Lidl the retail future?

UK newspapers have reported that Lidl has now overtaken Waitrose with more than 5% of the market.

Having studiously avoided the discounters when shopping in Warsaw I was intrigued by their Exclusive range. So on Good Friday I went to the local Lidl in Konstancin to see if I could prepare a three course meal for three using only ingedients sourced from Lidl.

And guess what? Very much possible. The starter was Parma ham, pate de fois gras (duck), smoked goose breast, brie, french stick and salted (yes salted) butter. The main course was a very good roast duck, potato gratin and mixed leaf salad. Pud was an excellent cheesecake and Tiramisu. All washed down with a bottle of Prosecco and a bottle of Pinot Grigio. The speed with which the victuals disappeared confirms the quality and whole lot came in just over PLN 100 (18 pounds sterling).

Which just goes to show that a relative upstart (outside of Germany where it all started years ago) can not only source to a very low price point but also maintaim quality and what’s more cater for the less well off as well as attract those more used to shopping at Alma or Piotr and Paweł.

Now theoretically the likes of Tesco and Auchan should not have had much to fear from the upstart. But and this is a great but shopping at Tesco, Auchan etc is a joyless experience, having to tramp around for an hour or more just to do a basic shop. And not knowing which of their discounted products have been “manuafactured to a price point” by sacrificing quality. Whilst at the high end of the market Alma has good quality products the prices are sky high.

So what is Lidl’s secret? Well as far as wines are concerned they buy from smaller vinyards and sell until stocks run out, replacing by something new. The same goes for the Exclusive range which is relatively limited but again comes from small producers. Lidl avoids where it can the large multinational producers who in the main have agreements in place with the majors not to sell at attractive prices to wholesalers and the smaller chains. All perfectly illegal I am sure. As an example the Polish Cadbury plant sold a lot of its production to UK cash and carries as the plant was not covered by price maintenance agreements!

Tesco started life as a “pile it high, sell it cheap” retailer. It then moved upmarket in the UK and recently has lost the plot. Not least because I guess people have better things to do than: battle for a parking space 400 yards from the store entrance, navigate around acres of “special offers” and guess where the mechandising gurus have placed the horseradish sauce. Then wait in the checkout queue. And of course there is the fact that being faced with special offers people over buy and end up binning half of what they bought.

Much more enjoyable to pop into a local convenience store, plan meals around what is fresh and available, take no more than half an hour to shop and have the car parked no more than 30 metres away. And because it only takes half an hour or so you can repeat the experience several times a week buying smaller quantities.

For the “heavy” shop of washing powder, dog food etc there is of course home delivery from the large chains. One wonders what effect the start up of Amazon food sales in the US will have on US hypermarkets.

Ah well it was never going to last (the majors taking an ever greater share of the market). In the current world you have to be nimble with a flatish management structure to succeed. And an ability to listen to what consumers actually want.

Lastly Lidl shows that economies of scale are not all they are cracked up to be!

What will the New Year bring?

With crude oil prices at record lows, the Polish currency regaining streinght and with reasonable growth forecasts will 2015 be a good year for the Polish economy?

The Russian economy in meltdown and the Ukraine facing an uncertain future it would appear that the eyes of Western investors are once more turning to Poland as the country enters the last phase of significant EU contributions to the economy. The new financing round is more specifically targeted and should generate significant growth opportunities for business. On the horizon there are two elections, first presidential in the spring which the current incumbent should win easily and then in the autumn parliamentary elections where although PiS is likely to gain most votes the PO and PSL coalition should gain a working majority. Clearly there is a need for a credible opposition with the capacity to govern rather than being an eternal gadfly on the back of the nation. Will such an opposition emerge is however a moot point as the last several attempts resulted in a once only electoral breakthrough above 5% and were followed by the total collapse of support. But with little alternative available alternatives on the economic policy front and at best irrelevant populist posturing there is actually probably no space for an effective opposition. Such is the modern world linked and voter apathy best described by the French word ennui.


In the words of a former US President “the economy stupid…”.

The real key issue will be how soon European banks in general and Polish banks in particular start once again financing business investment. Or just maybe the old behemoths need to be encouraged to fail and a return to an old style seperation of retail and investment banking reintroduced. And when will banks learn that property values are not predestined to be on a continious upward turn. Maybe adding property inflation indicators to central bank measures of inflation might reintroduce some stability?

The truth is that Polish banks, having in the main part avoided the previous property bubble, are better placed to start financing real growth which is all to do with current and future consumption and not asset financing. As with all assets if no one can afford inflated property related costs and share values unrelated to future performance then we have the perfect recipe for the next crash.