Bad law can ruin investments

Even in the most regulated industries, the stability and quality of the law is more important than its complexity.

Publikacja: 08.09.2023 01:53

Bad law can ruin investments

Foto: Aleksander Zieliński

The constant revision of the law and its deteriorating quality are among the reasons why entrepreneurs are holding back on investments. Even in sectors of the economy that need to be regulated due to their importance for the security of the state and society, unpredictability and chaos are greater barriers to development than complexity and multitude of regulations. This was pointed out by entrepreneurs and experts during the panel discussion “Between over- and under-regulation. The legislative environment and the stability of doing business”. The discussion took place in the “Rzeczpospolita” lounge during the 32nd Economic Forum in Karpacz.

Regulatory volatility

– “The district heating industry alone, in order to change the state of the infrastructure of the generating sources (many units have been in operation for 20–30 years), needs 300 billion zlotys. Investments in the energy sector are capital-intensive and require several years of preparation”, Tomasz Surma, Regulatory and Public Affairs Director at Veolia Energia Polska, vividly compared the company’s situation to people planning holidays. – “When we plan holidays, we determine where we want to go, how much we are willing to spend, and when we want to go. We usually do this a few months or weeks in advance. In business, predictability is all the more necessary. Today we are deciding on an investment that may take several years to prepare. First, the design is created; then, we obtain the necessary permits (including building permits). The implementation of each of these elements requires expenditure. Only after these can we start investing. Suddenly — and here I’m going to use the analogy with holidays planning — we find out from the organiser that the trip will cost twice the price and it won’t be in July, but in August. Such are the effects of the ever-changing law on the investment process”, added Tomasz Surma.

– “In those industries where the market is regulated, regulations are complicated. This, however, is not a problem for entrepreneurs; they are aware of this. But what is important to them is their stability. This is what companies most often highlight”, added Michał Piekarski, partner at Baker McKenzie law firm.

Too few and too many regulations at the same time

– “Indeed, every two weeks on average, I get a question from our investors, “What is going to happen with the legislative acts?”, added Małgorzata Zakrzewska, executive director of corporate affairs at PLAY. This shows how often the law can be changed. – “We are monitoring the excessive number of regulations on an ongoing basis. With some areas of telecoms activity being over-regulated and others lacking regulation”, she added.

She gave examples of areas where there is too much or too little regulation. The first relates to infrastructure development. Małgorzata Zakrzewska recalled that Poland is ranked 24th in the Digital Economy and Society Index (DESI), which summarises Europe’s digital performance indicators and tracks the progress of EU countries. – “This is a dramatic situation. The telecommunications infrastructure is at the heart of digitisation. Poland needs investment in telecommunications infrastructure. They will not happen under the current legal environment”, believes the panellist.

In her view, investments are slower due to legislative and bureaucratic barriers. As she explained, – “In order to develop stationary or mobile infrastructure, we are obliged to comply with five main acts. These include building act, acts on environmental protection, local zoning, and a dozen specific laws. The result is that we need 6 to 24 months to make the investment of one base station (and we have 11,000 of them in the country). This is not a realistic approach to investment”, added Małgorzata Zakrzewska.

Direct customer contact, on the other hand, is part of telecom companies’ business that is both over-regulated and lacks legal solutions. – “The Electronic Communications Code has been under way for several years. There will be provisions as to how the entrepreneur can price the customer. This framework is not in place and companies are subject to penalties from the Office of Competition and Consumer Protection. They are needed so that at a time of high inflation, companies can make prices more realistic, if only to invest”, argued director Zakrzewska.

Concealed insertions by members of parliament

– “The credit holiday provisions were introduced in the Coal Allowance Act”, recalled Tadeusz Białek, President of the Polish Bank Association. He reminded that banking is the most regulated industry both in the EU and in Poland. – “The regulation of deposits’ prudence is highly extensive. The EU CRD is a piece of legislation of more than 1,000 pages of detailed regulations, providing for dozens of detailed implementing acts”, he gave as an example.

He also drew attention to issues that seem obvious and uncontroversial, but there are no corresponding regulations. – “For years, we have been unable to get regulations that strengthen the security of the flow of funds within financial institutions, fighting criminals. No one wants to support criminals and there is still no regulation that deals with the exchange of information between the banking sector and others, such as insurance. CEO T. Białek also mentioned problems with regulations on behavioural biometrics. – “We are not able to get this regulated. We have to ask customers for eight consents to use this method”.

He pointed out that the problem for business (apart from unpredictability) is the deteriorating quality of lawmaking. Almost 32,000 pages of new law were passed in 2022. This is more than half as much as the year before. 28,200 pages of regulations, 3,000 pages of acts, and 500 pages of international agreements were implemented. Seventy-four laws regulating the conduct of business were published and came into force with a vacatio legis of only 31 days on average. Over a decade, the “preparatory period” has shortened by as many as 22 days. The authors of the analysis recalled that this time also includes days off and holidays. In practice, entrepreneurs have had around 20 working days in 2022 to review and adapt to the changes. The last two decades have seen a marked reduction in the time taken to work on acts. Last year, it took an average of 75 days from the submission of the draft act made by the Parliament to it being signed by the President of Poland. This pace in lawmaking can negatively affect the quality of regulation and creates confusion, believe the authors of the study.

– “The practice of creating pieces of legislation through parliamentary amendments without consultation is extremely incorrect”, the head of the Polish Bank Association added. – “Last year, 21% of legislation was drafted this way, and 42% of acts had no documentation of public consultation”.

No public consultation

– “Key acts in the energy sector are being amended every month or a month and a half, precisely because there has been a lack of public consultation. Furthermore, on the basis of faulty regulations, the companies made payments to one another while it turned out that they should not have done so”, admitted Tomasz Surma. – “The questionable quality of legislation is sometimes due to haste. It does not always happen with the kind of dialogue we would like. Also, regulations often pursue political rather than economic objectives” – noted Małgorzata Zakrzewska. – “I am trying to understand not only the reasons for this behaviour, but also to look for a solution on how to avoid similar situations in the future. Intensive dialogue between the legislator and the social side and the setting of objectives are needed, i.e., to consider why particular regulations are needed and what their overarching objectives should be. In my opinion, investment and security should be at a national and individual level”. – “If the function of the objectives of business legislation were defined in this way, reality would become simpler”, believes director M. Zakrzewska

What about lobbying?

Michał Piekarski drew attention to the function and social perception of lobbying. In his opinion, there is no properly regulated lobbying in Poland: – “We associate it with something corrupting. This is also due to the fact that the regulations are archaic”. In his opinion, – “Improving the quality and transparency of lobbying in Poland would have a positive impact on the quality of legislation”.

In his view, there is a law that has been reasonably adopted. – “There are areas of business where things are not bad, something just needs to be done to make it better”, said Michał Piekarski.

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The constant revision of the law and its deteriorating quality are among the reasons why entrepreneurs are holding back on investments. Even in sectors of the economy that need to be regulated due to their importance for the security of the state and society, unpredictability and chaos are greater barriers to development than complexity and multitude of regulations. This was pointed out by entrepreneurs and experts during the panel discussion “Between over- and under-regulation. The legislative environment and the stability of doing business”. The discussion took place in the “Rzeczpospolita” lounge during the 32nd Economic Forum in Karpacz.

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