This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 WARSAW 000240 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EUR/NCE DAVID KOSTELANCIK AND MICHAEL SESSUMS 
USDOC FOR 4232/ITA/MAC/EUR/JBURGESS, MWILSON, JKIMBALL 
TREASURY FOR OASIA MATTHEW GAERTNER 
FRANKFURT FOR TREASURY JIM WALLAR 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PREL PL
SUBJECT: Poland's Stabilization Pact - What it means for the 
Economy 
 
REF:  WARSAW 177 
 
This cable is sensitive, but unclassified, and NOT for 
Internet distribution. 
 
------------------------ 
SUMMARY AND INTRODUCTION 
------------------------ 
 
¶1. (SBU) On February 2, the ruling conservative Law and 
Justice (PiS) party signed a stabilization pact with two 
opposition parties - Self Defense (SO) and the League of 
Polish Families (LPR).  The pact includes a list of bills 
the parties agree to support, and a shorter list of those 
they will discuss.  Details of bills related to the economy 
are sketchy, with most no more than general goal statements. 
Some of the proposed bills are pro-business, but others 
reflect the new government's desire to increase control of 
the economy and expand the social safety network.  At a 
minimum, the bills convey the impression that the GOP will 
not place initial priority on serious tax reform or cuts in 
public spending. 
 
-------------------- 
What is in the Pact? 
-------------------- 
 
¶2. (U) In agreeing to the stabilization pact, PiS, LPR and 
SO agreed to support a package of approximately 144 bills in 
2006, and to send another more controversial group of 15 
bills, mostly developed by SO, to a working group composed 
of representatives of the three parties for consultation. 
This smaller set of controversial bills would be submitted 
to the Sejm only after consultation and agreement by the 
parties.  This cable will concentrate on the economic bills 
included in the pact. 
 
¶3. (U) The majority of the economic bills listed contain 
only a few words stating the bill's general intent.  The 
pact says little about the specific content of draft 
legislation.  As a result, local analysts must look to draft 
bills written by PiS, SO, and LPR during the previous 
session of the Sejm for clues to the likely intent of the 
legislation. 
 
¶4.  (U) The Stabilization pact originally included three 
appendices listing draft laws.  The first appendix includes 
a listing of the bills the three parties agree to support. 
The second appendix includes the 15 controversial bills that 
will be referred to a joint working group for analysis.  The 
third appendix lists other agreements reached by the 
parties.  Our analysis is based on the limited information 
on the bills available at this time and discussions with 
individuals familiar with PiS, LPR, and SO legislative 
priorities. 
 
¶5. (SBU) The proposed bills from Appendix One (those that 
will be voted on by the Sejm and supported by the three 
parties) that could impact the economy can be divided into 
four groups: (1) bills that will further liberalize the 
economy or remove bureaucratic obstacles faced by investors; 
(2) bills that are expected to negatively impact the Polish 
economy or U.S. business interests; (3) bills with the 
potential to adversely affect Poland's economy depending on 
how they are written; (4) and bills that do not directly 
relate to the economy, but may have economic consequences. 
 
--------------------- 
First - The Positives 
--------------------- 
 
¶6.  (SBU) A number of bills are likely to have a positive 
effect on Poland's economy when passed.  These include: 
 
-  A law to simplify procedures for establishing a company; 
 
-  Tax breaks for entrepreneurs undertaking innovative 
projects; 
 
-  Legislation to allow supplementary voluntary insurance 
for health care; 
 
-  Streamlined European patent issuance; 
 
-  Promotion of investment in Poland and of Polish companies 
abroad; 
 
-  An amendment to the energy law that will bring it into 
line with the EU on cogeneration and natural gas supply; 
 
-  A proposal to introduce transparent procedures for 
appointing members of supervisory boards; 
-  The establishment of a "basket" of health care services 
to receive guaranteed public funding, an act which will 
finally demarcate the financial borders of the current open- 
ended public system. 
 
-------------------- 
Next - The Negatives 
-------------------- 
 
¶7. (SBU) Local economic analysts expect the following bills 
to have negative impact on Poland's business climate or 
fiscal situation.  These include: 
 
-  A draft bill on "Supply Agreements for State Defense and 
Security" which "aims to ensure the more effective 
harnessing of offset agreements for the country's economic 
development".  Depending upon the final wording, this bill 
could place a greater burden on foreign defense firms to 
make broad "off-set" trade and investment deals in order to 
win a Polish defense tender; 
 
-  A bill requiring the replacement of the separate 
supervisory bodies currently regulating banks institutions, 
insurance companies, investment funds, and pension funds by 
a single watchdog agency -- the Financial Supervision Office 
(UNF).  The UNF would absorb the Securities Commission, the 
Insurance and Pension Fund Supervision Office, and starting 
in January 2008, the Banking Supervision Commission.  The 
proposed UNF chief 
(tipped to be Finance Ministry Under Secretary Cezary Mech) 
will report directly to the prime minister and have broad 
authority, including the right to submit legislative 
proposals directly to the prime minister and to conduct 
criminal investigations.  (Comment: Many observers fear that 
this would lead to a decrease in regulatory autonomy and 
increased politicization of these key sectors.  End 
Comment.); 
 
-  A bill to providing fuel excise tax refunds to farmers; 
 
-  A bill to expand unemployment benefits for those unable 
to find work; and 
 
-  The indexation of pensions to inflation and wage 
increases.   (Note:  Preliminary estimates are that this 
provision alone will cost over 3 billion zloty or around US 
$1 billion.  End note.). 
 
------------------------------ 
Then - Positives or Negatives? 
------------------------------ 
 
¶8.  (SBU) There is a large group of bills about which we 
don't have enough information to determine whether they will 
have a negative or positive effect on the economy including: 
 
-  A proposed change to the Central Bank (NBP) charter 
obliging it - like the US Federal Reserve - to consider 
economic growth as well as inflation in its decision-making; 
(Comment:  This bill could limit the NBP's independence - a 
goal of both PiS and SO.  Przemyslaw Gosiewski, Chairman of 
the PiS parliamentary caucus, recently stated that the 
number of Monetary Policy Council (MPC) members also remains 
an open issue.  Dissolution of the MPC is not likely as it 
is a constitutional body.  End Comment.) 
 
-  An amendment to the law on public tenders which would 
bring Polish regulations in line with EU laws and liberalize 
procedures.  The proposal would raise the contract threshold 
above which a public tender is mandatory from 6,000 to 
60,000 Euros.  The contracting authorities will only be 
obliged to draw up contract regulations ensuring fair 
competition and equal treatment of bidders.  Critics fear 
that this new law could invite increased political 
interference and corruption. 
 
-  Tax reform remains a huge question.  The pact only 
mentions six tax laws that will be amended.  PiS originally 
promised a draft tax reform package at the end of January 
2006, which has been delayed until March.  Signals from the 
Ministry of Finance the need to pay for new social programs 
such as the one-off payments for child-bearing will preclude 
tax cuts.  Amendments to the VAT Act are also promised and 
these may include simplifications the Ministry of Finance 
previously has been reluctant to accept.  The proposed law 
on inheritance and gift taxes will reportedly eliminate the 
taxation of assets inherited within a nuclear family. Solid 
taxpayers (e.g., state-owned enterprises that have been 
operating for a specific time and are not expected to 
unexpectedly shut down) would reportedly receive extra tax 
privileges; 
 
-  A provision to lengthen maternity leaves; 
 
-  A proposal to turn-over the supervision of State-owned 
companies to gminas (the lowest level of territorial 
administration in Poland). 
 
----------------------------------------- 
The Unknown Impact of Non-Economic Bills 
----------------------------------------- 
 
¶9.  (U) These bills are the hardest to quantify as, with 
most of the other bills, details are still unknown. 
However, bills that may affect Poland's economic and 
financial picture although not strictly financial bills 
include: 
 
-  A draft bill creating a Central Anti-Corruption Office, 
which includes provisions for disclosure of discrepancies in 
operations of institutions receiving public funding; 
 
-  A draft bill on State security requiring the secret 
services to submit reports to the government and Sejm on 
economic and energy security, as well as an assessment of 
privatization deals from an economic security perspective. 
 
-------------------------------------------- 
The 15 items to be discussed at a later date 
-------------------------------------------- 
 
¶10.  (U) The GOP has released no details of the 15 bills to 
be discussed by the working group other than names of draft 
laws included in the agreement.  Many appear to be laws that 
Samobrona (SO) previously introduced in the Sejm during the 
election campaign.  Most would increase government control 
of the economy or expand the social safety net, thus 
increasing the fiscal deficit - if passed in a similar form. 
(Note: Some observers think these bills are unlikely to be 
passed any time soon and that they have been included as a 
face-saving gesture for the LPR and SO supporters of these 
populist measures.  They include: 
 
-  A law to establish a turnover tax on all businesses; 
 
-  A law on developing a system of benefits for the 
unemployed; 
 
-  A law to establish additional benefits for the poorest 
pensioners; 
 
-  A law on large-sized retail centers (note: we believe 
this would attempt to limit hypermarket development.  End 
note.); 
 
-  Laws to provide additional pension benefits to local 
administration heads and veterans; 
 
-  A law that would provide incentives to farmers to produce 
and use bio-fuels. 
 
------------------------- 
Comment - A Costly Puzzle 
------------------------- 
 
¶11. (SBU) The Stability Pact has been described as a 
hodgepodge of ideas cobbled together to satisfy various 
eclectic constituencies.  Neither PiS nor the Ministry of 
Finance has been able to quantify the fiscal impact of the 
bills.  Many of the bills, if implemented, will boost social 
spending, but do little to increase revenues or cut outlays 
in other areas.  Thus it is unclear how these ideas would be 
financed.  For example, the proposed new unemployment 
benefit alone could cost more than current GOP expenditures 
on national defense and public security, and only slightly 
less than spending on healthcare. 
 
¶12. (SBU) Business is disappointed that the majority of 
initiatives seem to strengthen the state's role in the 
economy and support rural development, rather than focusing 
on tax cuts and structural reform.  Local economists 
generally agree that the bills are at best unclear in their 
effects and at worst might increase the fiscal deficit and 
throw sand in the economic gears.  Post believes that the 
stabilization pact's economic legislation represents further 
fiscal drift, rather than reform.  At a minimum, the bills 
appear to indicate that the GOP is not considering at this 
time serious tax reform or cuts in public spending.  In the 
final analysis, the devil will be in the details.  However, 
the preliminary impression which has been created is that 
the GOP intends to expand the scope for administrative 
interventions in the economy and increase Poland's already 
excessive rate of social welfare spending. 
 
ASHE