15 06 2008

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Investment boom but…

Canadian & U.S. Investors Mistreated in Poland

 Bu David Dastych  Saturday, June 14, 2008

WARSAW, POLAND: Good news about doing business in Poland. According to “European Attractiveness Survey 2008,”released by Ernst & Young on June 5, 2008, Poland has been ranked the most attractive destination for new foreign investment in Europe. Moreover, Poland was placed in the 2nd position in Europe in the job-creation ranking and in the 7th place in the foreign direct investment ranking. Poland scored top in Europe as a potential investment location (18%) leaving behind, among others, Germany (16%), Russia (12%), France (11%), Romania (10%) and the UK (9%). Poland may also boast about a very high job-creation rate. Last year, due to new foreign investment projects, 18,399 new workplaces were created, giving Poland the 2nd place in Europe after the UK. In terms of number of foreign investments, Poland was placed in the 7th position in Europe with 146 projects realized in 2007.

But not all is as bright as it looks like at its face value. The 10th Global Survey on Corrupt Business Practices, published in May 2008 by the same global American business services company, whose roots go back to the 19th century and to its  founders Arthur Young and Alwin C Ernst, revealed that “Almost every fifth Polish company (18%) experienced an incident of corruption, which is more than double the figure reported in developed markets (8% affirmative responses). The level of corruption in Poland is twice as high as in developed countries.”
“But it is in Western Europe that 25% of companies perceive corruption as a major threat to business, while only 16% of companies in Poland share this opinion. Companies operating in developed markets have more trust in the effectiveness of law enforcement agencies (85%) than their Polish counterparts – only 54% of Polish companies share this approach. According to Mariusz Witalis, Fraud Risk Management Director of Ernst & Young Business Advisory, the survey findings clearly indicate that the awareness of threats related to corruption is not accompanied by appropriate steps taken by companies in order to implement mechanisms that would prevent the occurrence of such risks. “We realise corruption is a problem,” says Mariusz Witalis, “but we are not really sure how to deal with it.”

It Takes Two to Tango

The recent Ernst & Young survey encompassed 1,180 senior executives from major companies in 33 countries worldwide. It was not focused on foreign companies exposed to corruption practice in the respective countries in which they were doing their business. In Poland, there is still deeply embedded a “post-Communist” way of doing business, especially when business is being made between state-owned and private enterprises. Polish state-owned companies are mostly run by politically appointed managers, who display loyalty not to their own firms but to their political parties, the state administration and also to informal political-business groups which sometimes could be simply called mafia-type organizations.
 After the regime change in 1989, Poland embarked on a large-scale privatization drive. Selling state property to Polish and especially to foreign private business provided a unique opportunity to dishonest state administration officials, local government officials, some managers and political party activists to quickly enrich themselves on state property. Secret deals were being arranged, involving forced bankrupcy of some enterprises to be sold at the lowest posssible value, with bribes paid to their “privatizers.”  Much have changed to better since the early 1990s, but still there are several opportunities for corrupt businessmen and officials. Their methods became more “sophisticated” but their purpose remained the same: to make quick money or to obtain positions of control over state property turned private.
Foreign business is not without blame, either.  As the fight against corruption in Poland has been intensified and several special services are now involved in the investigation of these crimes, many cases of bribing officials by big international corporations and powerful foreign national firms are under investigation. These include bribing physicians, hospital managers and even high government officials by known pharmaceutical companies, suspected sales of major Polish industries to foreign firms (below their real value),  and even some attempts to create “cartels” to impose higher prices of some indispensable industrial products, like cement.
Bribes are not the only problem, but corruption certainly requires “two to tango” in order to complete a dishonest deal. A link between Polish state-owned companies and foreign investors provides many such opportunities. A clear example of corruptive environment, still prevailing in Poland,  could be the case of an unfinished grain terminal in the Baltic port of Gdansk, a joint American-Canadian investment.

EuroPort’s Grain Terminal Project

A Press-release of the London-based European Bank of Reconstruction and Development (EBRD) reported in December 1997: 
“Loan of US$ 65 million to be provided on a 50/50 basis by the EBRD and the Royal Bank of Canada to finance construction of a grain terminal in the under-utilized modern deep-sea North Port of Gdansk.  The project involves the construction of the modern grain terminal in the North Port of Gdansk. The main objective is to provide trading companies and shippers with a deep-water facility and fast loading and unloading equipment to allow a much more efficient trading flow (import and export) of grain, seeds and oil through Poland and other central and eastern European countries. Total project cost: US$ 86.6 million. (…) Europort Inc. Poland Sp z o.o. is a limited liability company incorporated in Gdansk, sponsored by Saskatchewan Wheat Pool (large Canadian grain company and manager of the terminal), Strait Crossing Group Ltd. (Canadian construction company in charge of the construction work), Joseph D’Andrea, and Dessaport International Corp. (…) The Company was incorporated for the purpose of construction and development of the grain handling and storage facility in the under-utilized North Port of Gdansk. The terminal is expected to start operation in spring 2000.” [State-of-the-art grain terminal in Gdansk will increase competition in Polish economy with EBRD assistance, Press Release, 2 December,1997].
In the late 1990s, this was the biggest investment at the Polish Baltic coast and it was highly praised by the state and local authorities and by the media:
“The repercussions of a modern and ice-free deep-water port in the Baltic are enormous. Feasibility studies conducted by the port authority indicate that the pier’s completion has the potential to dramatically change European cargo routes. Not surprisingly, this goes down well with Marian Switek, president of the Gdańsk port board. “We believe the terminal developed [by EuroPort Inc.] will revive the historic role of Gdansk as a grain gateway to Europe and the Commonwealth of Independent States countries,” he said in a prepared statement. The pier was built by Polish engineers in the early 1970s … but the project was never completed. The pier remained for the last 25 years unused and is a prime example of communist inefficiency. Aside from rebuilding the pier, EuroPort will also develop 59 hectares of land in the port with an eye to cheap and efficient grain and cargo storage. In the works are new silos, flat-storage facilities and other value-added projects such a soybean processing plant.” (Warsaw Voice, November 1, 1998).
The construction of the Grain Terminal in the Port of Gdansk began in the fall of 1998 and went on smoothly for about two years. Then a major obstacle stopped the works.  Saskatchewan Wheat Pool (SWP), a large Canadian grain-trading company, a partner of EuroPort Inc. Poland and a future operator of the Grain Terminal, withdrew from the projects in Poland and Mexico. It was a hard blow because, after that withdrawal, the European Bank for Reconstruction and Development (EBRD) changed its previous decision to support EuroPort by loans. Until that time, the investors from the United States (represented by Mr. Joseph D’Andrea) and from Canada (represented by Mr. Donald LeBlanc) pumped about 24 million US dollars from their consortium money and from bank credits into the construction of the grain terminal. A large part of the infrastructure had been already built and the project was to be finished in a relatively short time. The investors and the port management began to look for new partners to replace the SWP and for new banks to provide the necessary funds. Negotiations with Nordea/Fortis Bank resulted in a preliminary credit agreement to be offered to EuroPort Inc. Poland in April 2002. But the American and Canadian investors got no chance to complete the project.

Hostile actions against EuroPort

 A lawyer by profession, then the President of the Managing Board of the Port of Gdansk Authority, Mr. Marian Switek, told me that from the very beginning there was an underground fight against the EuroPort’s grain terminal project. Already a draft of the Lease Agreement with EuroPort Inc. Poland was under (unofficial) attack. Then, before the Agreement was finally signed in December 1995, it took seven months to get it approved by the Ministry of the Treasury and the Ministry of Transportation, as many obstacles and opposing actions had been involved.  The lease of almost 60 hectares of the port’s ground to the Canadian-U.S. owned company for a period of 25 years, with a possible extension to 50 years, provided a stable opportunity for the investment worth over $ 80 million, but at the same time it was considered strong competition to other privatization plans envisaged by local and larger Polish political-business groups.
Following the parliamentary elections in Poland in autumn of 2001, won by a post-Communist coalition (SLD), there were personal changes in the management of large state-owned companies. Such change happened also in the Port of Gdansk. In August 2002, a new Management Board was installed and Mr. Andrzej Kasprzak became its president. Known for his fierce opposition to the grain terminal in Gdansk and favoring the privatization of a similar (but smaller and not deep-water) Baltic Grain Terminal in Gdynia, Mr. Kasprzak discarded EuroPort’s agreement with other banks and decided to drop the Grain Terminal project.
In a blatant interview granted to a local paper on December 6, 2002, the new President of the Board launched an open attack on the American and Canadian investors. He said he had been “against the construction of EuroPort from the very beginning” and—in opposition to Polish and foreign studies confirming the feasibility and profitability of the Grain Terminal Project in Gdansk—and in support of local interests of a business group from Gdynia, he discarded the project as a “daydream” allegedly to serve non-existent imports of grain by Russia and the Ukraine and therefore redundant. When asked “what will happen to the unfinished project,” Mr. Kasprzak replied: “The investor is supposedly still struggling. If they do not resume construction works in the following days we will take steps aimed at terminating the [lease] agreement.”
But how the investors could resume the construction, when the Port Authority Management Board was against their project and they dismissed a credit offer from new banks? Mr. Kasprzak even accused EuroPort of being the main cause of an alleged “cold war” between the ports of Gdansk and Gdynia, the neighboring Baltic coast cities. Further development of events, recorded in the documents of EuroPort Inc.Poland, reveal a series of brutal attacks on the investors to chase them out of the port of Gdansk, forever and with no compensation. These attempts included illegal deprivation of EuroPort of a part of the terrain leased for 25 years, mobbing and other forms of intimidation, making impossible new agreement to finance the project and to continue the construction of the grain terminal (with a new terminal operator, a  German company Getreide AG, and financing it by Rabobank Polska S.A.), organizing public tenders to lease the EuroPort’s land to other companies and initiating a series of lawsuits against EuroPort Inc. Poland, based on the unpaid rent for the leased ground they couldn’t use. The American and Canadian investors did not pay the rent for several reasons, the most important being that their company had been deprived of the use of the leased ground and of any possibility to finish the project, and also that they had been treated unequally versus other companies, like Rudoport S.A., which leased a neighboring terrain, did not invest at all and still enjoyed huge rent remissions. These examples of discrimination and unequal treatment of the foreign investors vs. Polish ones, were at variance with the “Treaty between the United States of America and the Republic of Poland Concerning Business and Economic Relations” and with the “Agreement Between the Government of Canada and the Government of the Republic of Poland for the Promotion and reciprocal Protection of Investments”, both signed in 1990.

Lawsuits and claims

The post-Communist dominated Management Board of the Port Authority of Gdansk lasted from August 2002 to September 2006, when President Andrzej Kasprzak was finally dismissed. These people caused a huge damage to the American and Canadian investors of EuroPort, destroying all positive efforts aimed at the realization of the grain terminal Project in Gdansk, the only strategic port of Poland, which is in  83% the property of the State Treasury. The North Port terrains, which were idle for the past 25 years, when the EuroPort project began, remain unused until now, rendering no profits to the Port Authority, to the investors and to the country.
Instead of solving the problem, the port’s Management Board engaged in legal struggle against the EuroPort investors for not paying the rent to the Port’s grounds they in fact couldn’t use and had been even deprived the access to. In July 2005 the  Board of the Gdansk Port Authority demanded over $ 19.6 million from EuroPort for settlement of their claims.  But in November 2005, the Board lost the legal battle to evict EuroPort from the leased terrain, which – in time – shrank, due to illegal land concessions for the new Gdansk Container Terminal Project. In November 2005, the Court of Arbitration in Warsaw ruled that EuroPort Inc. Poland should pay the due lease arrears to the Port Authority amounting to about $ 5.6 million, plus interest, while the value of the EuroPort’s investment then exceeded $ 34 million. 
After prolonged “arm-twisting” and many Court of Arbitration sessions, the last decision of President Kasprzak (before he was dismissed) was to effectively cancel the EuroPort’s lease on the 7th of April 2006, ignoring the EuroPort’s lawyers’ arguments of unequal treatment and leaving the real property constructed by this company and the purchased machinery on that site. It could be interpreted as an “arrest” of the American and Canadian investors’ property as “hostage” to the port’s financial claims.
In November 2006, EuroPort Inc. Poland delivered to the Prosecutor in Gdansk a “Report Concerning Suspicion of Crime” by the Board of the Port Authority. The Report listed all hostile actions against the American and Canadian investors and their company, including breach of laws and criminal deeds, committed by some people and institutions. A subsequent Police investigation lasted several months and was discontinued. The Gdansk Court definitely dismissed the case in August 2007, without the right of appeal.
The Management Boards of the Gdansk Port Authority did nothing to solve the situation, which lingered on for almost 10 years, after the construction began. The losses of the American and Canadian investors amounted to about $ 75 million, as indicated in EuroPort’s new counter-claim lawsuit to the Court of Arbitration at the Chamber of Commerce in Warsaw of February 2008. In the meantime, the claims of the Port Authority rose to some $ 18.7 million. So far, no positive solution has been found.

Is there a way out?

Sure, there is, because the present situation is untenable both for EuroPort and its investors as well as for the Port Authority of Gdansk, the Polish Ministry of the Treasury (the main owner of the port) and the Polish economy. The former President of the Board and the initiator of the Grain Terminal Project for the Port of Gdansk, Mr. Marian Switek, argues that the construction of the Terminal should be finished with a due consideration to EuroPort’s investment input. Any settlement should consider a fair compensation to the American and Canadian investors.  He told me recently that he could “solve the claims problem in three months,” provided he had enough influence upon the Board’s decisions.
 Could the recently appointed President of the Management Board, Dr. Ryszard Strzyzewicz, begin a positive action? Possibly yes, because in a recent interview he declared:  “I am not alone in being surprised that five – if I recall correctly – successive management boards of the Gdansk port failed to close the problem of ill-judged investments. All that is left from the idea of building the biggest terminal on the Baltic designed for handling mainly grain for… Russia and Ukraine – today’s exporters of this commodity – and iron ore for Polish steelworks is a squalid pier and concrete warehouse structures. And of course the continued lawsuits. I feel the urgent need to put an end to both issues. The access roads for motor vehicles, railroads and provided infrastructure must start bringing profits to the port (…) The Port must – in the most natural sense – combine interests of the companies operating on its premises into a cohesive whole, at the same time generating new perspectives for growth in the region. Such measures could be exemplified by the efficient realization of the Pomeranian Logistics Centre in the port hinterland or the aforementioned power plant. As concerns the LPG and grain terminals you have mentioned, we will address these issues in our own capacity by granting support to the companies that have already undertaken to build them.”
The statement of the new President, though positive, reveals however that a false assessment the Grain Terminal Project is still disseminated by the past post-Communist Board members. According to many studies carried out by independent organizations and to opinions of big grain-trading companies, operating in Poland, the Gdansk Grain Terminal will not be dependent on trans-shipping of grain for Russia and other post-USSR states. It will increase the access of the Polish farmers to world markets and will facilitate imports of feeds, fertilizers and other agricultural products not only to Poland.  There is a large market to be served by it, both in Poland and in Europe. The deep-water, modern and efficient Grain Terminal in the main Polish port on the Baltic can receive biggest ships throughout the whole year.
Parallel to the continued arbitration, the investors of EuroPort made their first positive overture to the new President of the Management Board and to the Ministry of the Treasury, proposing a settlement of the almost 10-year old dispute. The next move belongs to the Port Authority Board.

Good prospects for Polish-Canadian cooperation

The Honourable Dan Hays, the former Speaker and now Opposition Leader of the Senate of Canada, who traveled to Poland to represent the Prime Minister at ceremonies commemorating the 25th Anniversary Poland’s Solidarity movement in August, 2005, and visited Gdansk, later wrote: “Canada and Poland have strong ties based on shared values, common interests, and a strong commitment to democracy. Our long-standing partnership in international forums, our joint work in international peacekeeping and the growth in bilateral trade and Canadian investment in Poland further this relationship. Trade is growing (up 70% in the last two years), and there have been significant new Canadian investments in Poland (SNC Lavalin, Alcan and Shoppers Drug Mart, among others.”
His views were recently supported by other assessments.” Canada-Poland co-operation in business is strong and well developed. With bilateral trade totaling over $1.29 billion in 2006, Poland is Canada’s most important trade partner in Central Europe. Poland’s growing economy holds many opportunities for Canada’s private sector. Canadian cumulative investment in Poland totals almost $800 million. Opportunities for trade and investment for Canadian firms exist in the agri-food, environment, ICT, transportation, infrastructure, aerospace, defense, S&T and energy sectors. Major Canadian firms already active in Poland include McCain Foods, Royal Group Technologies, Wentworth Technologies, Shoppers Drug Mart, SNC Lavalin, Bombardier Transportation, Nortel Networks and Pratt & Whitney Canada which has been active in Poland for nearly 30 years.”
Bogdan Kipling, a Canadian press correspondent in Washington D.C., wrote in April of this year: “Canadian diplomats in Poland see EuroPort as “the biggest irritant” in Ottawa’s relations with Warsaw and briefed Mr. Harper prior to his dinner meeting – in Gdansk – with Mr. Tusk. Mr. Harper, it seems to me, has made a good start on a link Canada never had in Central Europe. If he persists, he could end up creating a market Canadian businesses have hardly looked at in the past. Poland too stands to gain. Canada is both a good market and a good source of investment capital. But confidence is crucial for that segment to develop, and fair treatment of EuroPort’s Canadian and American backers might just be the ticket.”
Let’s hope that the long-lasting problem of the EuroPort’s Grain Terminal in Gdansk will be solved in the near future. The investors – Mr. Joseph D’Andrea from the United States and Mr. Donald LeBlanc from Canada – certainly deserve a fair treatment and a solid compensation for their building efforts and financial input. And the Grain Terminal in the Baltic port of Gdansk should be finally built.

David Dastych, 66 is a veteran journalist, writing for Polish and foreign media. He was also a businessman and consultant to foreign business, one time an associate director of Japan External Trade Organization (JETRO) in Poland. Now he owns and operates an international media agency in Warsaw. David runs David’s Media Agency.

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