Warsaw, 18 January 2023

 

Memorandum of the Union of Entrepreneurs and Employers:
Ukrainian energy infrastructure in the face of Polish-Ukrainian cooperation

Since October 2022, Russia has systematically and methodically been destroying Ukraine’s critical infrastructure. The percentage of heavily damaged energy infrastructure is continuously growing and, according to partners of the Union of Entrepreneurs and Employers, already exceeded 60% before Christmas 2022. Thus, Russia is trying to take the entire Ukrainian nation hostage, including entrepreneurs who are still trying to run their businesses, notwithstanding the ongoing war. In mid-December 2022, as part of the “Europe-Poland-Ukraine. Rebuild Together” project headed by our Union, the Union’s Energy Forum organised a round table meeting “Energy in the context of reconstruction of Ukraine”.

Representatives of energy companies, organisations actively supporting Ukraine, as well as industry experts representing both Ukraine and Poland attended the round table, and among special guests were the following dignitaries:

• Mateusz Domian, acting Director of the Representative Office of PKN ORLEN in Ukraine and Director of ORLEN Lietuva
• Sławomir Gładykowski, Vice-President of the Electric Networks Department at MEGAPOL S.A.
• Oleksandr Kharchenko, Managing Director at Energy Industry Research Center
• Wojciech Tabiś, Director at the Polish Power Transmission and Distribution Association (PTPiREE)
• Tomasz Tomasiak, Head of Energy Transition Department at the Polish Development Fund
• Vadim Utkin, Innovation Manager and Energy Storage Lead at DTEK Group

Dominika Taranko, the Union’s Energy Forum Director and the round table’s host, at the beginning of the event asked about the current state of affairs in Ukraine. The participants of the meeting were told, among other things, that Russians were methodically damaging the country’s energy resources by consciously targeting the power grid with missile strikes so as to prevent its uninterrupted functioning. While the authorities and emergency services were trying to mitigate the effects of the bombings and were conducting repairs round the clock, in many cases, it would become impossible to repair energy facilities and restore power. This situation is a result, among others, of a growing deficiency of spare parts. Due to the lack of standardisation of network solutions in Ukraine, some components are difficult to obtain, even on a global scale. In cases like these, it is not price that is key, but time. For example, a declaration of delivery of a given transformer several weeks to several months from now is not really an option considering the upcoming cold winter months. And while the weather has thus far been rather mild (average air temperatures higher than in previous years), the situation is nonetheless dramatic.

As a consequence of no steady electricity supply, Ukrainian businesses and production have suffered severely, which constitutes a major blow to national economy. Oleksandr Kharchenko, Managing Director at Energy Industry Research Center, assured: “We keep a register of all damages caused by missile strikes and we will demand full compensation from Russia”. However, before this may happen, people and their companies must somehow survive. Our guests acknowledged that businesses have been very flexible. The country’s capital Kyiv is a perfectly exemplifies the fact that, even in a district where there is no electricity whatsoever, one can find restaurants, shops, and service facilities powered by small generators. This equipment ensures operations of cash registers making it possible to sell goods or of coffee machines making it possible to brew coffee in cafés, while customers get the chance to charge their mobile devices and phones.

“Businesses of all sizes reach out to people, supporting and supplying them with small power generators. We adapted to the situation as much as possible in order to keep jobs and help people earn a living. I am impressed with how well Kyiv is dealing with power outages, how Odesa is doing, how quickly entrepreneurs in Dnipro joined forces and ordered a huge number of generators to supply SMEs with electricity. In the city, there is now no shortage of these devices, which are able to provide a small private house with light,” commented Oleksandr Kharchenko.

The situation is very dynamic. When Ukrainians are in need of anything that is not readily available at a given moment, sales offers appear within a week or two. When there is considerable demand for certain products and they are relatively easily available abroad, they quickly reach Ukraine. Companies, especially smaller ones, swiftly organise themselves and deliver goods to Ukraine en masse.

Nevertheless, when it comes to medium and large enterprises, their situation is undoubtedly extremely difficult, as ensuring production continuity or their normal functioning under current conditions is impossible.

“What has been said about small businesses is absolutely true. Kyiv and other cities are ‘alive’. We shall not surrender. You can still drink fantastic coffee in a café. Yet speaking of big business, here’s an example. We produce transformers in Ukraine, for instance, at the Zaporozhtransformer plant. It’s a rather large enterprise and we ordered several transformers from them. They can even repair broken devices, but the problem is that they don’t have energy either. Look how it is all interconnected. We cannot get our equipment back up and running quickly despite a local supply chain in Ukraine, because there’s no power. A large business cannot function on a small power generator. Big business required megawatts of power. And for now, that is out of the question,” added Vadim Utkin, Innovation Manager and Energy Storage Lead at DTEK Group.

Our guests, when asked about their vision of the future, that is the reconstruction of Ukraine’s energy infrastructure, emphasised it would certainly not be restored one-to-one for a number of reasons. First and foremost, the post-war map of consumption will certainly be different. For example, the city of Mariupol was completely levelled along with all the production facilities that had operated there. All major energy consumers that used to operate there were destroyed. Is it then possible to restore the supply chain as it was before the war? Surely not.

Furthermore, industry experts are convinced that Ukraine’s energy infrastructure will be rebuilt coal-free. Reconstruction of power generation units as well as the distribution and transmission networks will be carried out in accordance with the principles of the European Green Deal and in line with European standards of energy network development. Virtually everyone who works in the energy sector in Ukraine shares this conviction.

Another aspect one must take into account while rebuilding Ukraine’s critical infrastructure is the constant looming threat from the country’s northern neighbour. The risk of a terrorist attack by Moscow will forever remain with Ukrainians. Therefore, the energy network must be rebuilt in a way that guarantees the security of future supply.

Ukrainians are not, however, considering an island mode of operations comprised of local transmission and distribution systems. They are convinced that the system must be cohesive and connected. Still, what is most important is that all links of this system should be as dependable and as resistant to possible future attacks as possible. Discussions on the subject are already being conducted at the country’s highest levels. The goal is to rebuild the system so that it is not susceptible to outside interference.

The general vision of infrastructure reconstruction in Ukraine is of dual nature. On the one hand, traditional nuclear energy will be developed. The country has expertise in this field, human capital, and an existing structure ready for further post-war development. Energoatom employs a large number of qualified, certified specialists and engineers who have everything it takes to take nuclear power generation to another level.

On the other hand, it is clear that renewable energy sources will also be in the centre of attention of the Ukrainian energy system. This applies primarily to energy from wind farms and biomass combustion.

Ukraine has also for some time been working on concepts of systemic electricity storage, including those based on battery systems.

Moreover, experts expect that energy generation from water will gain significance in the form of pumped storage power plants that might be built after the war in Ukraine has ended.

“Ukraine has a vision how to rebuild its energy infrastructure. Of course, we’ll know more when the war is over, because right now we have no idea what will outlast the war. To precisely determine what we should rebuild, we first need to see our post-war shape and which infrastructure survived,” remarked Oleksandr Kharchenko.

According to our guests, both state-owned energy companies and private Ukrainian companies should now strive for the best possible conditions to restore the energy sector on the following principles: independence from carbon, innovation, energy security, full integration with the European energy network, and maximum cooperation with partners in the EU. Efforts are already being made in this direction.

Polish and Ukrainian energy sectors have much in common. Both in Poland and Ukraine, coal-fired power plants have had until this day a rather large share in the energy sector. An extensive energy transformation has already begun in Poland, and over time, coal-fired heat and power plants will be phased out. In this context, Ukrainian specialists focus not only on the domestic, but also on the Polish market for energy storage systems, including battery energy storage systems, which Ukraine is working on.

Vadim Utkin, Innovation Manager and Energy Storage Lead at DTEK Group, stressed: “Every energy system is characterised by two indices: sufficiency, or how many energy generators we have, and flexibility, whether our generators can address the demand for electricity with no hiccups. In terms of sufficiency, before the war, everything in Ukraine was fine. Our country had numerous nuclear power plants, but flexibility had always been a problem.”

Before the war, Ukraine was of course developing renewable energy, but its share was quite low – approx. 10% of all power. In other countries, problems with flexibility are observed only after reaching a share of at least 30% of RES in the energy mix. Ukraine struggled with grid flexibility with a 10% share of renewable energy in the power grid. As a result, renewable sources were often disconnected from the power grid, what translated directly into inflated costs. This was very disappointing for the green energy supporters, because the efforts and financial resources devoted to increasing the share of RES in the system did not translate into Ukraine actually consuming more clean energy.

For this reason, projects involving the creation of energy storage systems were so necessary in Ukraine. The war became, in a sense, a catalyst for these activities. Currently, Ukrainians are developing several scenarios how to expand the Energy Storage System project. A large part of the infrastructure is planned in the west, close to the Polish border. A major challenge in this project is to guarantee its physical security. Looking at the energy storage system, a seaport comes to mind, as there are numerous containers visible on the surface, which are potential targets for missile strikes.

In this context, ideas of cooperation between Poland and Ukraine are quite obvious. As our Ukrainian experts remarked, there are many municipalities on both sides of the border. Poland also experiences periods of energy deficiency, during which it starts looking closely at foreign exports. But it has also identified challenges on its territory related to the flexibility of the system. Therefore, deploying battery systems in Poland seems like a worthwhile idea, while operators on both sides of the border, working under an agreement, could provide system balancing services. This could prove to be a smart and quite unexpected solution to the problem, effective even in wartime. The issue of the physical protection of such facilities becomes irrelevant in this scenario, since Poland is a member of NATO and its situation is far different from the position of Ukraine.

Ukrainian experts believe that ideas of building underground infrastructure are misplaced. On the one hand, the cost of such projects is exorbitant, because issues related to drainage or temperature control are major problems in such systems. This also applies to energy storage systems and substations. On the other hand, all protection systems have their weaknesses, and the first question should be what we are protecting ourselves from. Are we protecting ourselves from X55-class drones and missiles, which are widely used by the Russians? Or are we protecting ourselves from ballistic missiles? These are vastly distinct levels of protection. And this should also be considered.

Energy storage systems are now extremely sought after in Ukraine, because energy reserves are very scarce. Power reserves and energy storage systems help a lot in such demanding situations when the frequency in the grid drops by 50%, as it did happen on 23^rd October 2022.

During the meeting in December, Mateusz Domian representing the ORLEN Group described the company’s pre-war involvement in the Ukrainian market, and concerned, among others, the fuel market. Presently, one of the problems in Ukraine is the lack of continuity of electricity supply, which is why energy from generators that run on fuel has become a natural substitute. Small business, by using low-power devices such as cash registers or company lights, have the ability to cope with power outages. However, in order to maintain the operation of activities with higher power consumption, such as petrol stations, the waiting time for the appropriate generators equals as much as even 2 months.

Currently, there is no fuel production in Ukraine, and all fuels are imported. The availability of engine fuels in Ukraine has become problematic, there is no indication, however, that they would run out. Not everyone can afford it, but it is available. Generally, in previous years, the period between autumn and winter was characterised by lower fuel supply both in Europe and in Ukraine. However, during the war period, in particular in autumn 2022, the demand for fuels in Ukraine increased by 30%. Due to the greater interest in fuels on the part of our south-eastern neighbour, the price of fuels in Poland and Lithuania also increased, which, however, is not a factor limiting supplies, as the most important thing is to ensure the availability of fuels on all these markets.

Mateusz Domian claimed: “The Ukrainian fuel industry is extremely efficient and there are no serious problems with the availability of fuels”. In fact, the first quarter of last year in Ukraine was difficult and it was hard to come by fuel, for example in Kyiv. At the outbreak of the war, more than 60% of Ukrainian diesel fuel was imported from Russia or Belarus. However, these import channels were rapidly replaced. Currently, fuel reaches Ukraine from many directions, such as Poland, Romania and Hungary. Nevertheless, it is Ukraine itself that must ensure that the channels remain available. The main logistic connections in fuel transport are operated by rail, which requires improvement, for instance on the Polish-Ukrainian border. As of now, half of fuel transports are carried out by fuel trucks, which are currently lacking on the market. Thinking about substitutes for grid power, which is non-operational during the war due to damages, the most important thing is to develop logistics of liquid fuel supply.

This situation will only improve following the restoration of infrastructure (if the Russian shelling stops) or with the beginning of warmer months in March 2023 and a reduced demand for power.

The representative of the ORLEN Group also did not want to elaborate due to the ongoing conflict on the company’s current plans for Ukraine. However, Ukraine has always been of interest to Poland’s domestic multi-energy concern, also in terms of acquisitions. As our guests emphasised, all plans would be implementation-ready when the country become stable again – a problem since 2014. It is expected that the challenges related to economic stability in Ukraine will change from month to month, along with the cessation of hostilities. Only then companies will be able to return investment negotiations and to resume their broad involvement activities on the Ukrainian market. The ORLEN Group sees immense potential in Ukraine, if only because of its population size that is comparable to Poland. The Ukrainian side has also asked the Polish market leader to work hand in hand in fuel market development. However, it is currently difficult to discuss restoring fuel production in Ukraine. Any business can see that in the face of active military aggression by Russia, it is difficult to develop an infrastructure that can be destroyed in the blink of an eye.

Polish Power Transmission and Distribution Association Director Wojciech Tabiś highlighted the fact that cooperation in the field of power engineering with the Ukrainian side had taken place for many years. He pointed out that Poland changed its power system in 1995 to a UCTE standardised one, while Ukraine looked into this process for its own needs before the war broke out. The hitherto long-term cooperation between the two parties resulted in the creation of the so-called Khmelnytskyi Island, which operated in Ukraine within the UCTE system. The current cooperation with Ukraine consists of, among other things, analyses of operations on a voltage of 230V. Before the war, activities were carried out over a long period of time aimed at Ukraine joining the standards of the European Union. The war certainly accelerated these changes.

Currently, the Polish side is receiving lists materials required to reconstruct the power grid in Ukraine on an ongoing basis. The power grid is highly fragmented. The cooperation of Polskie Sieci Elektroenergetyczne (Polish Power Grids) with UKRENERGO and DETEK requires coordinated efforts based on an agreement between the ministries of both countries – the Polish Ministry of Climate and Environment and the Ukrainian Ministry of Energy. What constitutes a challenge is the structure of the Ukrainian energy sector, which is technologically different from the Polish energy sector. In Poland, we have other voltage levels than the Ukrainian power industry and we are therefore unable to provide either equipment or spare parts. The Polish side has already transferred almost all the equipment of the Widełka 750 kW substation (autotransformers, circuit breakers, disconnectors), because it could be applied in Ukraine due to the right voltage levels. We do not have, however, the right equipment of grids of 800 kW, 500 kW, 300 kW that are used in Ukraine. They are non-standard power levels. We are unable to assist our neighbours in this case. Wojciech Tabiś stated: “We hit a brick wall, so to speak, which means that in this case we have already used all the reserves that Polish energy companies had at their disposal. By sending those reserves to Ukraine, we are only left with the bare minimum, a necessary level to, among others, undertake current repairs domestically.”

Therefore, there are no more reserves in Poland that the Ukrainian transmission system could make use of. Consequently, it would be appropriate to approach the problem now from a different angle, namely, to begin cooperation in Poland in terms of production of materials and equipment that would meet Ukrainian standards. The Ukrainian side even asked their Polish counterparts to send them broken switches or disconnectors, but the applicable regulations prohibit the imports of such devices to Ukraine, because according to the law they are waste. This requires an urgent liberalisation of Ukrainian import regulations.

In principle, all energy companies in Poland are open to cooperation with Ukraine. This also concerns, perhaps above all, distributed energy. This branch of energy production, based on renewable sources, has already grown in Poland. It is very difficult to import and produce high-power generation sources, and these are long-term processes, requiring time that Ukraine does not have. However, it is easy to install photovoltaic sources, locate low-power transformers, and build such energy facilities from scratch. It also seems natural that the destruction of the Ukrainian energy system should constitute an impulse to rebuild the network in accordance with the UCTE standard enforced in Europe. Primarily where this infrastructure was completely destroyed.

What also characterises the crisis is the fact that certain processes have accelerated and Ukraine may use this opportunity to rebuild its infrastructure basing on European standards.

As far as the transfers of electricity between Poland and Ukraine are concerned, it was possible to separate the already mentioned Khmelnytskyi Island from the Ukrainian energy system, powered by a local nuclear power plant, which produced energy that was later sent to Poland. Operational tests of this system had already been carried out. However, due to the ongoing Russian aggression, there is currently no exchange of energy between the two countries. The idea of supplying energy from Poland to Ukraine is also unfeasible at the moment, as both high-voltage connections are currently non-operational. At the same time, debates and works are underway to create connections at a lower voltage, for which devices transforming the different Polish and Ukrainian voltages would be necessary. In order to implement this, initiative is required on both sides of the border.

Sławomir Gładykowski, Vice-President of the Electric Networks Department at MEGAPOL S.A., predicts that the reconstruction of Ukraine will take place in two stages. First, power must be restored to industrial production. Second, a national post-war concept must be drafted. However, as it is impossible to foresee the end of the conflict, the network should now be rebuilt with cable lines instead of overhead lines. Building power stations underground is also worth considering. This process is more costly, but it provides greater security.

As far as the post-war reconstruction is concerned, it is a matter of legislation, so the legal foundations must first be laid. It is necessary to define priorities that will allow for faster reconstruction in the Ukrainian reality than it would take place in Poland, in our local legal system.

Tomasz Tomasiak, Head of Energy Transition Department at the Polish Development Fund, is also of the opinion that Ukraine will be rebuilt in two stages. The first stage is winning the war, because there can unfortunately be no question of new investments due to the ongoing military operations and the risk of their immediate destruction. At this stage, Ukraine can count on support and financial aid from EU countries. As for the post-war situation, talks are already in place on the reconstruction of Ukraine, both by the EU countries along with the United States and business communities. Ukraine’s potential as a neighbouring country of the EU is noticeable. And the prospect of it becoming a member of the Community in the near future is real. Other countries and the world of business have already realised this truth. After Ukraine wins the war, funding will surely not be an issue. The Polish Development Fund has two types of instruments at its disposal: aimed at supporting and investments (commercial ones). If the PDF received funds to support Ukraine, it would distribute them. The Fund already now possesses funds that can be invested, but it is difficult to make use of them in rebuilding Ukrainian infrastructure while an active armed conflict is still ongoing. This does not mean, however, that these funds cannot be invested in Poland for such purposes as for instance the production of parts or components for Ukraine’s present needs.

Tomasz Tomasiak also addressed the issue of rebuilding the power system. In his opinion, the example of Ukraine shows that distributed, local, cluster systems, or the so-called energy islands, will be a principal element in Ukraine’s power industry of the future. It seems that these systems are the future, they guarantee energy security for local communities, and at the same time unburden the transmission system. The energy from large power plants can be then transferred to production plants.

Certainly, the goal itself is to standardise the Ukrainian power industry in accordance with European standards. In the power industry, the production of certain devices or equipment that are uncommon required sometimes up to 2-3 years. Meanwhile, standard devices can be purchased directly on the market. Moreover, cheaper, used ones are also readily available.

An essential issue from the point of view of power supply is the availability of power sources, that is fuels or renewable energy. At the same time, greater independence, which works well during a conflict, can apparently be achieved from such sources as water, wind or sun, which do not need to be imported. The use of renewable energy is also related to thinking about energy efficiency, and it often turns out that in winter months considerably less energy is needed to heat a house after thermal modernisation.

Europe’s pursuit of electric solutions, for example switching to electric transport or the everyday use of heat pumps, may also be vital in the reconstruction of Ukraine. The Green Hub project implemented by the Polish Development Fund, which aims to implement Poland’s energy transformation, has already been recognised in the European Union, according to the Fund’s representative. Green Hub could function as a role model for Ukrainian energy transformation. The more so that renewable sources will play a rather key role in its future development.

Gennadiy Radchenko, Director of the Ukraine Business Center at the Union of Entrepreneurs and Employers, was asked to summarise the round table discussion. He pointed out that not only Ukrainians suffer from power outages, but so does the industry. However, the industry was able to adapt to the new reality astoundingly quickly. Entrepreneurs do their best to meet their needs by importing large power generators, for which there is currently a huge global demand, disproportionate to the available supply. It is worth mentioning that the production of energy from power generators costs 10 times more than grid energy, which translates into significantly higher production costs. According to Radchenko, considering the current state of affairs in Ukraine, far-reaching international cooperation should be established between industries in Poland and Ukraine. Business ought to be included in creation of solutions needed on the Ukrainian market. A good answer to present challenges would be to establish production facilities for Ukraine in Poland, which would carry out the most necessary orders for reconstruction. It would be beneficial for both countries. It should be noted that after the war, the entire Ukrainian energy system will turn away from Russian solutions and switch to European standards. At the same time, it is necessary to deal with legal solutions and start executing projects that, while they take time, may materialise soon. Therefore, red tape and bureaucratic barriers to post-war reconstruction should be eliminated as early as now. Because it certainly is much easier nowadays to solve engineering problems than bureaucratic ones.

Radchenko also expressed his gratitude for the support that Poland has given to the Ukrainian nation, stating that we are now in the best time for cooperation between the two nations ever in history.

See more: 18.01.2023 Memorandum of the Union of Entrepreneurs and Employers Ukrainian energy infrastructure in the face of Polish-Ukrainian cooperation

Warsaw, 30 November 2022 

 

How to support SMEs in the public procurement market? Let us not waste this opportunity!

 

• The domestic public procurement market is characterised by insufficient competitiveness. It is therefore desirable – in terms of the economic conditions – to increase the participation of the SME sector in the use of public procurement. Currently, the participation of SMEs as public procurement contractors is disproportionately low in relation to their role in the domestic economy.
• There are a number of legal instruments potentially supporting the SME sector in the public procurement market. The most important of these include the possibility of submitting partial tender offers (division of a contract into lots); refraining from the formulation of conditions for participation in the procedure; non-application of optional grounds for exclusion where it is not necessary; flexible application of tender evaluation criteria; appropriate descriptions of the subject matter of the contract; the possibility to waive the requirement for a bid deposit or to set its amount at a reasonable level; creating contractor-friendly contract templates; the possibility for consortia to submit tenders; no artificial aggregation of contracts; application of Art. 30 sec. 4 of the Public Procurement Law; not reserving the obligation of personal performance of a part of the contract; answering all questions regarding the Terms of Reference; extending deadlines for the submission of tenders; using, where possible, cost estimate-based remuneration or not requiring the submission of documents where contractors’ statements are sufficient. The implementation of at least some of these opportunities could reduce the current disparities with regard to the potential of the SME sector and its participation in the public procurement market.
• Contracting authorities in the public procurement system should use the concept of local content, the essence of which is supporting SMEs (both on a national and regional level). In order to create the right conditions for their increased participation in the system, it is necessary to raise awareness of the existence of the instruments provided for in the Public Procurement Law to facilitate the participation of SMEs in tender procedures.
• It is possible and desirable for contracting authorities to apply the concept of local content to the public procurement system when it is not the primary and only objective, but a secondary objective that takes into account the specific characteristics of SMEs, such as the pursuit of environmental, innovative or social goals. The concept of local content is part of the evolutionary changes taking place in the public procurement system.
• The National Procurement Policy makes it possible to put the principle of local content into practice, as it is itself a source of secondary objectives aiming to increase the level of innovation in the national economy in line with the development of solutions of an environmental, social and health-related nature.
• The concept of local content can be applied to both domestic and EU proceedings. It should then be borne in mind that national contracting authorities must take into account the context of strategic objectives from a state perspective. Since supporting local SMEs is possible at EU level, it is therefore desirable for the domestic public procurement system – provided, however, that the process is carried out in compliance with the principles of EU public procurement law.
• The Public Procurement Law provides contracting authorities – particularly local authorities – with a number of instruments to put the concept of local content into practice. The crucial point in this respect remains the demonstration of significant correlations between the application of the chosen solution and the actual, objective needs and the goal the contracting authority wishes to achieve.

The role of SMEs in the national economy in the face of challenges in the public procurement system – untapped potential

According to European Union figures from 2020, public procurement accounts for around 19 per cent of the Community’s GDP, which translates into an annual figure of around EUR 2.3 trillion. In Poland, their share of GDP is lower, at approximately 10 per cent, which nevertheless accounts for up to PLN 200 billion per year.

Considering the scale of the functioning of the public procurement sector and its contribution to building key economic indicators, attention should be drawn to the insufficient share of micro, small and medium-sized enterprises in the percentage of bids submitted in tenders both below and above the EU thresholds. The figures for contracts awarded also look unfavourable for SMEs.

Meanwhile, according to data from Statistics Poland in 2020, of Poland’s 2.3 million non-financial enterprises, 99.8 per cent were in the SME sector. 97 per cent of the pool of said 2.3 million companies are micro-enterprises with up to nine employees – only 3.7 thousand are entities with more than 250 employees. The trend continues – between 2014 and 2020, the number of micro-enterprises in Poland increased by more than half a million according to Statistics Poland. At the same time, the number of small, medium and large companies decreased by more than 10,000. At the same time, it is the SME sector that has been hit the hardest – due to insufficient financial reserves – by the COVID-19 pandemic, causing the need for support for the sector.

Despite such a significant share of SMEs in the total number of enterprises in Poland, the share of bids submitted by them in public procurement below the EU thresholds in 2020 in Poland was 82 per cent[1]. This is a slightly higher figure than in previous years (82 per cent in 2019, 79 per cent in 2018, 80 per cent in 2017). In 2020, construction contracts were the most sought after by the SME sector (88 per cent). In the case of bids for services and supplies, the SME participation rate was 79 per cent. The most favourable bids from the SME sector were found in 81 per cent of tenders below the EU thresholds in 2020, accounting for 85 per cent of the value of total contracts. 

The situation looks less favourable when contracts with a value above the EU thresholds are taken into account. This is where the percentage of bids submitted by SMEs amounted to just over 65 per cent of the total, with 60-62 per cent being considered the most favourable, which translated into 48 per cent of the total value of the contracts (approximately PLN 69.2 billion). The participation of SMEs as public procurement contractors is disproportionate in relation to their role in the domestic economy.

Increasing the competitiveness of the public procurement market

The Polish public procurement market is characterised by relatively low competitiveness, which is directly attributable to too few bids submitted in public procurement procedures. According to the Public Procurement Office in its Report on the Study on Low Competitiveness in Public Procurement in 2020, an average of just 2.786 bids were submitted for contracts below the EU thresholds.

The above figure represents a low percentage of companies that choose to take part in the procurement process and translates into a limitation of the possibility for the contracting authority to achieve the expected maximum efficiency in meeting the identified need. This situation also contributes to the public procurement market being dominated by the largest companies accounting for only 0.2 per cent of the Polish business market.

The reasons for the reluctance to bid for public procurement contracts can primarily be found in the limited knowledge of the instruments that the Public Procurement Law offers to the SME sector, the excessive complexity of the public procurement market and – as emphasised by entrepreneurs themselves – the hostility of the system towards small and medium-sized companies, resulting in the fear of violating public finance discipline.

There is therefore a pressing need to increase the participation of representatives of the SME sector in the public procurement market, all the more so as, given its size, any disruption to it could translate into a significant slowdown in economic growth. An additional advantage of SMEs is the opportunity to meet the needs of increasing the use of innovative solutions offered by the sector.

Meanwhile, local authorities – which are also the most important purchasers of services, supplies and construction work provided by contractors (51.8 per cent of all contracts in 2020) – are reluctant to take advantage of new opportunities to ensure that the concept of local content is implemented. The effect of this is particularly evident in the construction sector, where the most important contracts tend to be executed by the largest companies using the SME sector as subcontractors, who often have problems receiving payment for their work on time. The inability of the SME sector to bid on its own (as a result of contracting authorities not using instruments such as advance payments or splitting the contract into lots) results in SME representatives competing unnecessarily in terms of price for subcontracts with the general contractor, which translates into lower earnings and reduced profitability for these companies.

When drafting the current Public Procurement Law, the legislator recognised the problem, resulting in numerous amendments to the document, which – contrary to popular opinion – do not exclude the application of the local content principle. The current form of the Public Procurement Law gives the contracting authority a number of instruments to support SMEs both on the regional and national level.

All in the hands of the contracting authorities

Contracting authorities, particularly local authorities – based on current legislation – have a number of instruments at their disposal that potentially support the concept of local content and, at the same time, do not violate the provisions of the Public Procurement Law.

A basic instrument that could be used to increase the participation of SMEs in the public procurement market is – here the contracting authority has discretion in the application of the rules – the possibility to divide the contract into lots. The contracting authority also has the right to limit the number of lots to be awarded to one contractor. Both the Classical Public Sector Directive and the Utilities Directive gave Member States a choice regarding the introduction of an obligation to divide a contract into lots, but Poland did not make use of this option.

The contracting authority – according to the latest formulation of the Public Procurement Law – has also gained the full right – without violating the provisions of the Law – to decide not to formulate the conditions for participation in the procedure. This gives representatives of the SME sector the chance not to submit full documentation and declarations when it is not necessary. De-bureaucratising this element of the procedure – assuming that contracting authorities make use of this privilege – could have a huge impact on increasing the competitiveness of the public procurement market and the role of SMEs in it. The contracting authority may also choose not to apply the optional grounds for exclusion, provided that this decision does not violate the principles of competitiveness and does not create a risk of inadequate performance of the subject matter of the contract. The use of optional grounds for exclusion must always be associated with a clearly defined objective.

Some opportunities for implementing the local content concept are also provided by the bid evaluation criteria. In this case, although the contracting authority may not directly promote SMEs, nothing prevents it from using criteria whose implementation will be simpler from the SME’s point of view – such as, for example, the employment by these entities of staff living in close proximity to the place where the subject of the contract is to be performed, which may translate into a higher efficiency of its performance.

An opportunity for the SME sector to increase its participation in the public procurement market is also provided by the fact that there is no obligation to establish a requirement to pay a bid deposit, regardless of the value of the contract, the type of contract and the mode of the procedure conducted. This is new in relation to the 2004 Public Procurement Law. Given the optional nature of the deposit, any waiver of it by the contracting authority increases the competitiveness of the procedure.

In financial matters sensu stricto, the provision of Art. 442 of the Public Procurement Law, which provides for the possibility for the contracting authority to make an advance payment – under certain conditions – is also of paramount importance. This is a nod to representatives of the SME sector, who usually have less financial capacity than the country’s largest companies. Advance payments fully comply with EU law and increase the competitiveness of the public procurement market in all cases.

Contractors also have the option of submitting a bid as a consortium. This has a positive impact on increasing the potential of contractors to meet the conditions imposed by the contracting authority in the procedure. However, the contracting authority has the option of limiting the freedom of contractors in terms of the fulfilment of individual conditions for participation in the procedure. In order to increase the chances of SMEs to submit the most well-prepared bid, contracting authorities may use the privilege of extending the deadline for the submission of bids – but this must then be consistent with the possibility of properly and fully preparing the bid. Extending the deadlines for submitting bids is one way of putting the concept of local content into practice – longer timeframes mean more realistic opportunities for SMEs, which do not usually have specialised units responsible for quickly preparing a full bid and completing the necessary documentation. Contracting authorities – in order to stimulate SMEs in the field of public procurement – may also use the formula of cost estimate-based remuneration, which, unlike lump-sum remuneration, offers relative certainty about receiving a higher remuneration from the contracting authority in a situation in which the contractor incurs additional costs. Cost estimate-based remuneration is a formula that directly encourages SME contractors to increase their participation in the public procurement market.

Contracting authorities can also implement the local content concept using a number of other instruments provided by the Public Procurement Law. These include the creation of contract templates that are as transparent as possible, the appropriate descriptions of the objects of the contracts, the departure from the popular practice of artificially aggregating contracts, the provision of answers that are as concise as possible regarding the contract specifications or the careful reservation of the obligation for the contractor to perform part of the contract personally.

Conclusions

Local authorities and other contracting authorities, in accordance with the Public Procurement Law, have the opportunity to implement the concept of local content when carrying out both national and EU procurement, which effectively increases the chances of the most numerous group of enterprises in Poland, i.e. the SME sector, to participate in the public procurement market. The use of the aforementioned instruments increases the competitiveness of the public procurement sector and wards off the prospect of the market being dominated almost exclusively by the largest companies.

On the one hand, cooperation between the public and private sectors, based on the principles of partnership and dialogue, can encourage more entrepreneurs – with particular emphasis on entrepreneurs from the SME sector – to participate in procurement procedures. On the other hand, a wider range of companies submitting bids is also an opportunity for contracting authorities to choose the most favourable offer in terms of primary and secondary objectives.

For this to happen, however, there must be a real change in the mentality of the contracting authorities, which must be followed by the willingness – based on real tangible benefits – of contractors, including representatives of the small and medium-sized enterprise sector.

***

[1] Data based on the Report of the President of the Public Procurement Office on the Functioning of the Public Procurement System in 2020.

Warsaw, 19 September 2022 

 

Memorandum of ZPP on the plans to build a nuclear power plant in Poland

 

Familiarise yourself with the memorandum of the ZPP on the development of the Polish nuclear power industry. Get to know:

• the opinion of Polish people on the construction of a nuclear power plant,
• the latest plans of the government in that matter,
• whether it is only the administration that has an idea for nuclear energy,
• whether our neighbours are building nuclear power plants or they are closing them down,
• when and how much electricity will the plant generate,
• whether the plant means expenditure or is it independence and benefits?

An investor for the first large-capacity nuclear power plant in Poland is to be selected in the coming weeks. Projects involving the creation of smaller modular units are also being developed. The social perception of the nuclear power plant, in Poland and abroad, is improving. The neighboring countries also make significant use of nuclear sources of energy. In the opinion of the Union of Entrepreneurs and Employers, despite the great costs and relatively long investment process Poland will need nuclear sources of energy in the future.

The support for nuclear power in Poland is steadily increasing. Based on the CBOS study conducted in 2006, the percentage of people against nuclear energy was as high as 56%. ^[1] Over more than 15 years, the sentiment has changed and, according to the Ministry of Climate and Environment, public support for the construction of a nuclear power plant in Poland was 62.5% in November 2020. ^[2] Moreover, already during the ongoing energy crisis and military actions in Ukraine, according to a study published on 3 August this year (source: ARC Market and Opinion), as many as 64% of the respondents were in favour of speeding up works related to the construction of large nuclear power plants. ^[3]

12 August 1971 can be considered as the beginning of nuclear energy in Poland, as on that day, the government decided to build a power plant. More than half a century later, in December 2021,  the company Polskie Elektrownie Jądrowe indicated the seaside municipality of Choczewo as the site for the construction of the first Polish nuclear power plant.  The construction works are planned to start in 2026, and the first unit of the power plant, with a capacity of approximately 1-1.6 GW, is to be commissioned after six years. The remaining six units, with a total installed capacity of approximately 9 GW, are expected to be commissioned every two or three years. ^[4]

Since 1971, a lot has changed in the field of safety and efficiency of nuclear units. There are also new technical concepts for scaling up a nuclear installation. Parallel to the government’s project to build a high-capacity nuclear power plant, the largest Polish companies are interested in launching the so-called Small Modular Reactors,  as they are considered to be more ”efficient”, both in terms of investment implementation period and management of such reactors. The capacity of modular nuclear reactors, that consist of several individual reactors, can be adapted to local needs and network conditions. Additionally, that type of power plants, due to the variety of technologies being developed, may find a wide range of applications in the future, depending on the needs of investors – starting from the generation of electricity, through the production of heat for technological purposes in large industrial plants, to their use in network heating.

Construction of nuclear power plants as the opportunity for the Polish economy.

The Polish Economic Institute (PIE) estimated that the construction of two nuclear power plants in Poland will cost PLN 184 billion. In its report “The economic aspects of nuclear investments in Poland – the impact on business, labour market and local communities“, the PIE argues that in 20 years, nuclear power will secure electricity supply in Poland at the level of 26 to 38% of the demand. ^[5]

The PIE analysts estimate that the involvement of Polish companies in the construction of the nuclear power plant, in a realistic scenario, may turn out to be from 50 to 70%, which is also mentioned by potential investors from the USA, France and South Korea.

The value of works performed by Polish companies is expected to be approximately PLN 130 billion, which should create from 26.4 thousand to  39.6 thousand new jobs. Those will be jobs not only in the field of construction but also related to the operation of the nuclear power plants over the 50-year operating cycle of the reactors.

The contractor for the Polish nuclear power plant is going to be selected soon

The latest positions of government representatives indicate that the final decision regarding the national nuclear programme is going to be made soon. The project to build a nuclear power plant in Poland is expected to be adopted by the government within the coming weeks (the schedule assumes the third quarter of this year).

So far, the willingness to sell the technology and build infrastructure has been expressed by:

France – in October 2021, the country presented an offer  from the EDF Group which indicated two to three locations for the construction of nuclear power plants in Poland
, with a declared total installed capacity of 6.6 to 9.9 GW,

South Korea – in April 2022,  the Polish government was presented an offer from the Korea Hydro & Nuclear Power (KHNP) concern that assummed the construction of 6 reactors with a total capacity of 8.4 GW,

United States – Westinghouse Electric Company and Bechtel were the last to present a proposal to the government for the construction of nuclear power plants (however, the details of the offer have not been disclosed by the time of the publication).

All the above-mentioned companies have extensive experience in the construction of nuclear reactors and the technologies proposed to Poland are successfully used worldwide:

• four Westinghouse AP1000 units are operating in China and two other, located in the United States, are in the final stages of construction. China plan to build another four such units.
• two Korean APR1400 units are currently in use in South Korea and one is used by the United Arab Emirates. A total of seven other units are currently under construction in those countries.
• the French EPR (European Pressurized Reactor)  is a type of reactor that has been operating for several years in Taishan in China. The following power plants will be completed soon: Olkiluoto in Finland, a unit in Flamanville in France and Hinkley Point in the U.K.

In recent weeks, Prime Minister Mateusz Morawiecki discussed the issue of Polish nuclear power plant with the Vice President of the United States, Kamala Harris, the South Korean President, Yoon Suk-yeol, and the President of France, Emmanuel Macron. After a telephone conversation with the Vice President of the United States, the Prime Minister stressed that the government was analysing the possibilities in detail, both in terms of the construction of a large nuclear power plant and the development of the so-called  small modular reactors.

Earlier, on 30 August 2022,  Mateusz Morawiecki talked over the phone with the President of South Korea, Yoon Suk-yeol. The Chancellery of the Prime Minister announced that economic and military cooperation, energy security measures, including in the area of nuclear energy, were discussed, among other things.

Prime Minister Morawiecki pointed out that partnership with the Republic of Korea was an important element of national foreign policy. In recent months, Poland has closed a number of major deals with Korean partners. The Polish Armed Forces will be equipped with Korean combat aircraft and self-propelled artillery.

On 30 June 2022, the Minister of Climate and Environment, Anna Moskwa, concluded an agreement with the Minister of Trade, Industry and Energy of the Republic of Korea on energy cooperation in the field of, inter alia, peaceful use of nuclear energy, energy efficiency, hydrogen technologies, renewable energy, carbon capture and sequestration (CCS), carbon capture and utilisation (CCU), electromobility and smart grids.

The day before his conversation with the President of South Korea, Mateusz Morawiecki, during his visit to Paris, discussed cooperation in the nuclear energy sector with the President of France, Emmanuel Macron.

Such frequent direct talks between Prime Minister Morawiecki and the three representatives of the governments, who are negotiating the large contract, indicate that the ”winner of the battle” for the construction of a Polish nuclear power plant is going to be announced soon.

Obviously, the choice of such a strategic partner is not only a financial calculation but also a political and strategic issue. Each of the competitors is linked to Poland by economic ties, taking into account the EU structures, NATO or the arms industry. ^[6]

Strategic companies are not waiting for the government’s decision and are taking the initiative  with regard to small modular reactors (SMR).

A parallel path to nuclear energy in Poland may be Small Modular Reactors (SMR), which are smaller than the traditional large nuclear complexes. Such reactors are characterised by lower costs and shorter investment time, compared to the  large nuclear power plants. Individual elements are manufactured by the supplier of technology, as well as by using the so-called  “local content” – that is, companies located in the country where the investment is carried out. The components manufactured in this way are delivered, in the form of larger units, directly to the construction site. The use of modern safety systems, including passive ones, and simplifying the design of those units at the same time, allow for even safer operation and minimise the consequences of shutdown of a reactor, which may be associated with the lack of power supply to large groups of recipients. Thanks to the above-mentioned characteristics, the reactors can be built closer to human settlements, which makes it possible to use them – in addition to generating electricity – to produce heat for district heating systems and process heat for the needs of industrial recipients. Smaller size and modularity of the units, which enables easier expansion of the power plant by adding extra units, gives greater flexibility in terms of adapting the size of the entire park to the electricity and process heat demand of the investors. Moreover, the construction of many smaller units in different parts of the country may help to maintain a distributed energy generation system in Poland in the future.

KGHM Polska Miedź SA and PKN Orlen S.A.  support the SMR technology.  KGHM is the second largest consumer of electricity in Poland. The company’s annual demand is 3 TWh, which translates into an electricity bill of PLN 1 billion. The whole Orlen Group of Companies, which includes refineries in Płock and Gdańsk and the Anwil chemical company in Włocławek, is also a large consumer of electricity. Therefore, it is not surprising that both companies consider nuclear power as a way to make huge savings.

Based on the contracts already signed,  the company’s copper power plant will be powered by six SMR VOYGR reactors with a capacity of 462 MW, from the American company NuScale. Orlen will also use the American technology – BWRX-300, from GE Hitachi Nuclear Energy. ^[7] The first reactors for KGHM and PKN Orlen are to be commissioned by 2029.

Back to nuclear energy on the old continent

Due to the prospect of energy shortages in the winter season, the Europeans consider nuclear energy again. The way in which the demand for energy changes the perception may be demonstrated by the fact of reconsidering nuclear energy by the largest economies, as well as the positive change in the attitude of the citizens of the European Union. Nuclear technology, which until recently was in retreat, is now experiencing its renaissance and its benefits are noticeable against the background of, for example, reactivated coal-fired power plants.

Germany will keep two of its remaining three nuclear power plants, due to the turnaround in its energy policy, and will temporarily extend their operation beyond the assumed shutdown date, i.e.  31 December 2022 – announced Robert Habeck, the Minister of Economy of our western neighbour. ^[8] This move, expected in the EU, resulting from the failure of Russia to fulfil the contracts for the supply of energy carriers, means a shift in the policy of abandoning nuclear energy in favour of renewable energy (Energiewende), which has been developed for two decades. ^[9]

Prior to the energy crisis, in Germany, there was enormous public support for phasing out nuclear energy; however, according to the recent poll conducted by Forsa Institut, three-quarters of Germans support postponing the shutdown of nuclear power plants.

Over the decades, Germany’s western neighbours have become accustomed to using nuclear energy. Fissile material is currently used to generate 70% of electricity in France. Another reactor is under construction on the Seine, and six more are planned to be built. In 2019, the French government postponed the implementation of the plan, by 10 years, the original goal of which was to reduce the share of nuclear energy to 50% by 2025. At some point, France was the largest exporter of electricity in Europe and supplied a significant quantity of electricity to the U.K. and Italy. Currently, the neighbouring countries are closely observing the situation in France, which is facing an internal energy crisis due to the restrictions on the operation of reactors and it is likely to import more energy than export it this year. The situation is considered very serious by the French government and, at the end of July this year,  the National Assembly approved the nationalisation of the nuclear power company EDF.  ^[10]

In the former Eastern Bloc countries, which are now included in the EU structures, several nuclear power plants operate, which meet 15 to 50% of the electricity demand of the economies. In turn, Belgium and the Netherlands, which also use nuclear power plants, abandoned their plans to shut down nuclear reactors after Russia’s attack on Ukraine. In Sweden, six nuclear power plants meet 40% of the country’s electricity needs, while Finland is to launch the sixth reactor by the end of the year. At that time, 60% of the country’s electricity will come from nuclear sources. In Spain, seven nuclear power plants cover 22.2% of the country’s electricity demand. In the EU as a whole, 26% of electricity currently comes from nuclear power plants. ^[11]

What will we gain by using nuclear energy?

Rationally, the unstable prices of gas, coal and other fuels should direct us towards alternative sources of energy that guarantee independence and security. Currently, the structure of the energy mix in Poland is based on coal, which, despite its deposits in Poland, is largely imported for Polish power plants from outside the Community. On many occasions, when referring to Poland’s path towards energy independence, we have stressed the inevitability of achieving climate targets; i.e., the reduction of CO2, particulate matter and other factors that contribute to global warming.  The prices of CO2 emission allowances in the EU make the generation of energy from coal less profitable for energy companies, and the purchase of energy is associated with increasingly higher costs for energy-intensive businesses. It is not a ground-breaking statement that a nuclear power station, the construction of which has been planned in Poland for years, will be a fully-fledged alternative to coal and could also help to stabilise the system in the development of renewable energy sources.

According to Statistics Poland data, in 2021, as much as 11% of all expenditure incurred by households was on energy. ^[12] The years 2022-2023, are associated with a further nominal increase in bills. Most of the expenditure is heating costs in the autumn and winter season. Only the energy transition and diversification of the sources of electricity generation, implemented with great determination, give the prospect of eliminating the spectrum of energy poverty, which involves the poorest households to the greatest extent.

Based on the analysis conducted by WHO – contrary to popular beliefs – nuclear power is the safest source of energy, which is also confirmed by other scientific studies, including those carried out  for Statista in 2020.^[13]

We appreciate that the government recognises the need for an urgent response and it is changing the regulations on the implementation of nuclear investments through fast-track legislation. On 16 August 2022, the Council of Ministers adopted a draft act amending the act on the preparation and implementation of investments in nuclear power facilities and associated investments and certain other acts, submitted by the Minister of Climate and Environment. The first reading of the draft took place on 14 September 2022,  during the meeting of the parliamentary committee for energy, climate and state assets (ESK). The document places great emphasis on the assessment of the environmental impact of power plants; however, the whole process of the construction of a power plant is expected to be faster due to formal simplifications. The investor will be able to contact the administrative bodies to obtain the necessary information in connection with the performance of tasks related to nuclear power facilities and associated investments. Moreover, once the commissioning permit is granted, it will be possible to temporarily operate a nuclear facility. ^[14] Looking to the future and considering the development plans of KGHM Polska Miedź S.A.  and PKN Orlen S.A. for modular reactor technologies, while creating the regulations for investment in nuclear facilities the need to adapt Polish law to the construction of smaller units, which may be built near, e.g., large industrial parks, should also be taken into account.

After decades of discussing alternative energy sources, Poland is still in ”the carboniferous period”. The Union of Entrepreneurs and Employers has emphasised many times that the development of distributed energy and nuclear energy in Poland should be accelerated as much as possible. At the time of the energy crisis in Europe, this acceleration should be absolute. For this to be possible, the introduction of a number of deregulated solutions is necesaary, which we systematically try to emphasise. Also, in our opinion, a public information campaign on this subject is required, which is why, among other things, we are the initiator of such projects as the “Energy for Europe” conference, which will be held in Brussels on 27 October 27 this year: https://zpp.net.pl/events/event/konferencja-energia-dla-europy-jednym-glosem-o-przyszlosci-europejskiej-energetyki/ The conference is one of many undertakings that fit into the long-term policy of ZPP of promoting low and zero carbon energy sources in Poland.

***

[1] https://www.cbos.pl/SPISKOM.POL/2006/K_108_06.PDF

[2] https://www.gov.pl/web/polski-atom/poparcie-spoleczne-dla-budowy-elektrowni-jadrowej-w-polsce—badania-z-listopada-2020-r-625-polakow-popiera-budowe-elektrowni-jadrowych-w-polsce

[3] Source: ARC Rynek i opinia, 3 August 2022. https://www.wirtualnemedia.pl/artykul/wiekszosc-polakow-popiera-budowe-krajowej-elektrowni-atomowej

[4] https://spidersweb.pl/2022/08/elektrownia-jadrowa-w-polsce-historia.html

[5] https://energia.rp.pl/atom/art36882581-energetyka-jadrowa-w-polsce

[6] https://www.wnp.pl/energetyka/wybor-atomowego-partnera-polski-jest-coraz-blizej,619112.html

[7] https://wszystkoconajwazniejsze.pl/pepites/jak-bedzie-dzialal-maly-reaktor-jadrowy-smr-kghm/

[8] https://www.wsj.com/articles/germany-to-delay-closure-of-two-nuclear-power-plants-as-energy-crisis-bites-11662400161

[9] https://businessinsider.com.pl/gospodarka/elektrownie-atomowe-w-niemczech-moga-dzialac-dluzej-niz-planowano/8j5q0l1

[10] https://www.dw.com/pl/francja-elektrownie-atomowe-na-granicy-przegrzania/a-62816418

[11] https://biznes.interia.pl/gospodarka/news-energia-jadrowa-w-ue-niemcy-sie-kloca-inni-stawiaja-na-atom,nId,6201434

[12] Sytuacja gospodarstw domowych w 2021 r. w świetle wyników badania budżetów gospodarstw domowych (The situation of households in 2021, on the basis of the results of the household budget study), Statistics Poland, 2021.

[13] Brook, Barry W., Alonso, Agustin i Meneley, Daniel A. Why nuclear energy is sustainable and has to be part

of the energy mix. Sustainable Materials and Technologies. 1-2, pp. 8-16, 2014.

[14] https://www.experto24.pl/aktualnosci/42117-nowe-przepisy-o-energetyce-jadrowej.html#.YxrrrHZBy3A

 

See: 19 September 2022 The memorandum of ZPP on the plans to build a nuclear power plant in Poland

Warsaw, 31 March 2022

Memorandum of the Union of Entrepreneurs and Employers (ZPP) on the economic situation in Ukraine and its consequences for Polish companies

 

On 24 February 2022, the Russian Federation invaded Ukraine. Hostilities spread over almost the entire territory of our eastern neighbour. The extent of the damage after nearly a month of attacks is counted in the tens of billions of dollars. Almost all critical infrastructure was either destroyed or severely damaged.

The humanitarian disaster in Ukraine brings with it a migrant and economic crisis for the entire region, the economic impact of which will be felt around the world for years to come. Ukraine is one of the largest producers of cereals and vegetable oils. The production crisis will lead to a spike in prices for the food industry on world markets. This has a major impact on Poland’s economy due to the disruption of supply chains and the almost total lack of business opportunities in war zones. Hundreds of Polish companies in Ukraine have been forced to temporarily close or relocate their businesses and offices.

At present, a comprehensive assessment of the foreseeable impact of the situation on Polish business is probably impossible. Polish investors are left to actively monitor changing regulations, assess the safety of conducting business activities and hope that the war ends as soon as possible. 

1. General information about the Ukrainian economy (state before the Russian invasion). Expected reforms and changes to business regulations.

In the first years after gaining independence in 1991, Ukraine was a heterogeneous country plagued by internal conflicts and corruption. The country’s economy regularly faced economic crises, internal power struggles which were not conducive to development and foreign investors’ confidence. It was not until 2014 that the country shifted and chose a Western course for further development which ended in partial Russian aggression. Recent years, however, have seen slow reforms of the judiciary system, a fight against corruption (increasingly successful and producing tangible results), opening more to Western investments and, finally, land reform. The country’s development decisively accelerated after 2018 and even the COVID-19 pandemic did not manage to diminish Ukraine’s very good prospects in the short and medium term. 

*Data does not include GDP of occupied Donbass and Crimea, **Source UKRSTAT

*Data does not include GDP of occupied Donbass and Crimea, **Source UKRSTAT

Based on the above data, we can conclude that the Ukrainian economy has been growing slowly but steadily, despite the large expenditure on armaments since the beginning of the war with the Russian Federation in 2014. Another interesting issue is the level and origin of foreign direct investments over the last 10 years. Even before 2015, Russian capital from Cyprus, where it was mostly legalised, was at the top of the list of largest investors. Following the annexation of Crimea, the structure of foreign capital in Ukraine changed significantly. It should be mentioned that in recent years Poland has not only become one of Ukraine’s main economic partners, but the level of Polish investment in the country itself is one of the highest in history and it has been showing an upward trend. It should be noted, of course, that the rate of investment has slowed sharply in 2020 – 2021 due to the restrictions on economic activity caused by the coronavirus outbreak.

*Source UKRSTAT

*Source UKRSTAT

An example of the changes is the “Dia City” bill, which introduced far-reaching changes and tax reliefs for almost the entire IT sector (the bill came into force on 1 January 2022). “Dia City” aimed to develop the entire IT sector, fight against the grey employment market and introduce low and transparent taxes for foreign investors as well as their employees. The main objectives of the bill are as follows:

a) A company that has passed the verification may choose the method of corporate taxation: 9% of dividend tax, or 18% income tax under the general rules.

b) When profits are distributed by a participant in the Dia City programme to a non-resident founder, the tax benefits provided for in international conventions for the elimination of double taxation shall apply regardless of the corporate tax payment system chosen.

c) Preferential taxation of employees:

based on an employment agreement, personal income tax (hereinafter referred to as “PIT”)
– 5% single social security contribution,

– 22% minimum wage for PIT,
– 1.5% military tax,

if an employee’s total remuneration is higher than EUR 240,000 per year, all income above this limit shall be subject to 18% personal income tax.

d) Dividends paid by IT companies to their founders – natural persons (both residents of Ukraine and non-residents) shall be exempt from taxation in Ukraine provided that the dividends are paid no more often than once every 2 years.

2. The banking system of Ukraine during the war

 The operation of the banking system and the foreign exchange market in Ukraine during wartime is regulated by a resolution of the National Bank of Ukraine of 24 February 2022:

– all banks operating on the territory of Ukraine shall continue to provide their services and operate in their field branches as part of their business,

– banks shall continue to provide both natural persons and companies with access to safe deposit boxes,

– domestic transfers in Ukrainian currency shall be unlimited,

– cash deliveries to ATMs shall takes place without restrictions,

– The NBU shall refinance banks without restrictions to maintain liquidity for up to one year with the possibility of extension for another year.

The relevant resolution also provides for the introduction of temporary restrictions from 24 February 2022, namely:

– suspension of foreign exchange market operations as of 24 February 2022, with the exception of the sale of foreign currency to the bank’s customers,

– UAH exchange rate freeze as of 24 February 2022,

– Limiting cash withdrawals from a customer’s account to UAH 100,000 per day (except for salaries and social benefits), except for enterprises and institutions ensuring the implementation of mobilisation plans (tasks), the Government and individual authorisations of the National Bank of Ukraine,

– prohibiting the transfer of funds from customer accounts in foreign currencies, except for enterprises and institutions ensuring the implementation of mobilisation plans (tasks), the Government and individual authorisations of the National Bank of Ukraine; on 4 March 2022, Resolution No.: N36 of the National Bank of Ukraine lifts the prohibition on the transfer of funds (except for Russian and Belarusian roubles) to residents’ accounts in banks for export transactions.

– introducing a moratorium on cross-border payments in foreign currencies (with the exception of enterprises and institutions ensuring the implementation of mobilisation plans (tasks) and individual authorisations of the National Bank of Ukraine),

– suspension of spending operations conducted through the banks’ operation on the accounts of residents of the country that invaded Ukraine.

On 8 March, the NBU eased restrictions on the foreign exchange market by introducing Resolution no. 44 of the NBU Board of Directors of 8 March 2022. Martial law requires the NBU to gradually ease and clarify the list of restrictions on the foreign exchange market. For this purpose, from 8 March 2022, the National Bank of Ukraine:

– provided banks with the possibility to open accounts for soldiers and to carry out their identification and verification on the basis of a call-up paper,

– enabled customers in areas at risk of occupation by an aggressor state to withdraw cash
in domestic and foreign currency without quantity restrictions, and to purchase cash in foreign currency and precious metals with physical delivery, subject to the availability of cash or precious metals at bank branches. The decision to carry out such an operation shall be made by the General Manager of the bank. The General Manager may also delegate this right to a Branch Manager of the bank,

– established that the prohibition of transactions in Ukraine using the accounts of residents of Russia or Belarus and legal entities whose ultimate beneficial owners are residents of Russia or Belarus does not apply to social benefits, salaries, utilities, taxes, fees and other mandatory payments,

– extended the possibility for residents and non-residents to make transfers to charitable foundation accounts not only in hryvnia but also in foreign currency. This applies to charitable foundations whose purpose and areas of charitable activity are the promotion of defence capabilities and state mobilisation readiness, support of the Armed Forces, territorial defence of Ukraine, social protection, health care and other pressing martial law issues,

– clarified that settlements of documentary and standby letters of credit / guarantees / counter-guarantees granted (confirmed) from 24 February 2022 are prohibited. The NBU made an exception only for the cases of payments for critical imports, settlements with MFIs and other operations of bank customers, the list of which is set out in points 2-6, paragraph 14 of Resolution no. 18 of the NBU Board of Directors of 24 February 2022.

The NBU also decided that the bank may exchange funds in Russian or Belarusian roubles coming from abroad for the purposes of export and import of goods into another currency on the international foreign exchange market and continue to book them on customers’ accounts.

3. Settlements with the Ukrainian tax authorities during the war

In Ukraine, a moratorium on penalties related to non-compliance with tax obligations has been introduced for both natural and legal persons, as confirmed by the authorities responsible for assessing emergency situations:

“Ukrainian Chamber of Commerce and Industry confirms that the circumstances of martial law from 24 February 2022 until the official end of the war are extraordinary, unavoidable and objective circumstances for business entities and/or natural persons under an agreement, separate tax and/or other obligations, which were performed in accordance with the terms of the agreement, statutory or other regulations, the performance of which became impossible within the prescribed period due to the occurrence of such force majeure (force majeure).”  The occurrence of force majeure is confirmed by the Ukrainian Chamber of Commerce and Industry on the basis of Art. 14, 14-1 of the Law “On Ukrainian Chambers of Commerce and Industry” of 2 December 1997 № 671/97-VR, Statute of the Ukrainian Chamber of Commerce and Industry.

The law exempts taxpayers from financial liability for tax offences and violations of other regulations resulting from force majeure (paragraph 112.8.9 of the Tax Code of Ukraine; CC), provided that the Ukrainian Chamber of Commerce and Industry confirms the occurrence of force majeure. In the case of force majeure, the tax authorities shall not apply penalties if the taxpayer is not able to perform the following actions on time:

1. pay taxes and charges,
2. file tax returns,
3. register tax invoices and calculations of adjustments made to them in the Unified Register of Tax Invoices,
4. register excise invoices and calculations of adjustments made to them in the Unified Register of Excise Invoices,
5. submit electronic documents containing data on actual fuel residues and volumes of fuel/ethanol traded, etc., but as soon as the state declares the force majeure to have ceased, the taxpayer must fulfil his/her tax obligations.

At the same time, the Government of Ukraine issued an appeal to all companies operating on the territory of Ukraine to make every effort to conduct (as much as possible) normal operations
in order to minimise losses to the Ukrainian economy and supply.

In addition, the Verkhovna Rada of Ukraine passed a law on 17 March 2022 providing for a simplified taxation system for big business, abolishing excise duty on fuel and VAT, exempting private individuals from paying the single social security contribution and more. This was announced by Prime Minister Denys Shmyhal – Law No. 7137-d on the website of the Verkhovna Rada. The document provides for a large number of changes affecting various sectors, as well as small and medium-sized enterprises. This preferential tax regime shall last until the end of martial law.

Fuel taxes: From now on, excise duties on petrol, heavy distillates and liquefied petroleum gas are EUR 0 per 1000 litres. The rate of value added tax on fuel imports has been reduced from 20% to 7%.

Big business will be able to take advantage of the simplified tax system and pay one tax. The annual revenue limit was raised from UAH 10 million to UAH 10 billion and restrictions on the number of employees were lifted. The tax shall be 2% of turnover regardless of the type of business activity. The tax relief shall not apply to businesses involved in the sale of excise goods, the gambling industry and the extraction and sale of minerals.

4. The flow of goods and services between Poland and Ukraine. 

The Cabinet of Ministers of Ukraine adopted Resolution No. 234 of 9 March 2022 on uninterrupted supply of imported food and feed under martial law. According to the resolution:

 – entities operating in the food market who, as a result of military (combat) activities, are unable to comply with the requirements of Art. 10 of the Law of Ukraine “On the Provision of Food Information to Consumers”, may sell food in the customs territory of Ukraine that is labelled in a language other than Ukrainian. However, larger consignments must contain basic information
on the origin and ingredients in Ukrainian;

– foreign humanitarian aid entering the customs territory of Ukraine is completely exempt from the obligation to include a description of the goods in the Ukrainian language.

Under martial law, the government established new rules for the export of a number of agricultural products.
In particular, the resolution prohibits the export of:

– oats,

– millet,

– buckwheat groats,

– sugar,

– salt,

– wheat,

– live cattle,

– pork and beef meat products.

In addition, the Cabinet of Ministers of Ukraine is banning fertiliser exports from Ukraine due to martial law in order to maintain balance in the domestic market of important mineral fertilisers. Thus, a zero quota is introduced for their export. This applies to nitrogen, phosphorus, potassium and compound fertilisers:

– mineral or chemical fertilisers, nitrogen (UKT FEA code 3102),

– mineral or chemical fertilisers, phosphorus (UKT FEA code 3103),

– mineral or chemical fertilisers, potassium (UKT FEA code 3104),

– mineral or chemical fertilisers containing two or three nutrients: nitrogen, phosphorus
and potassium; other fertilisers; goods of this type in tablets, in packages of a gross weight not exceeding
10 kg (UKT FEA code 3105).

This entails a de facto total ban on all exports of the above-mentioned products.

Exports of the following products were allowed under a specific declaratory licence:

– wheat and a mixture of wheat and rye,

– maize,

– domestic chickens meat,

– eggs of domestic hens,

– sunflower oil,

Obtaining a declaratory export licence means allowing the export of a particular good in a limited quantity. All other goods can be freely exported according to the standard procedure.

From the point of view of Polish importers, the restrictions in force will not have a significant direct impact on fertiliser prices. However, it is important to remember that the sanctions imposed on Russia and Belarus will already have a significant impact.

On the other hand, it is obvious that Polish exports to Ukraine are facing a slump; many companies importing Polish goods in eastern and southern Ukraine have been destroyed and some are operating to a limited extent. In the central and western regions of the country, most of the retail chains, distribution, logistics and production companies are operating normally. It should be noted that Poland was Ukraine’s third largest economic partner (after Germany and China).

*Source UKRSTAT

*Source UKRSTAT

5. General situation of Polish business in Ukraine

As of 1 January 2022, there were approximately 1,000 companies with Polish capital operating in Ukraine, and the scale of Polish investments in the Ukrainian economy was one of the highest compared to other countries. The largest Polish investments concern the following sectors:

– insurance

– banking

– manufacturing

– construction

– IT

– clothing

– fuel

– pharmaceuticals

– furniture.

For many Polish companies in Ukraine, current events may mean closing their factories, warehouses and offices. A few weeks ago, most foreign companies (not only Polish ones) decided to evacuate key personnel to Lviv in western Ukraine or their home countries. Some companies offered to relocate their employees and their families to other countries and, after martial law was declared, to relocate to areas of western Ukraine.

Many Polish companies with branches in Ukraine also operate outside the country, which means that foreign projects (for men
aged 18-60) are on hold. Only the men who meet the following criteria can leave the country:

– have 3 children,

– are unfit for military service,

– are professional drivers with special authorisation to engage in road transport,

– are the sole guardians of minors,

Some employees also cannot fulfil their professional duties due to being called up for active military service. For IT companies responsible for key infrastructure, there is an option to withhold conscription for 6 months for key employees. However, they still cannot travel outside Ukraine, even temporarily.

The Kyiv School of Economics hired Gradus Research to conduct a study, which found that because of the war, as many as 85% of companies in Ukraine work part-time or are closed, including:

– 1% of companies have closed and have no plans to restart,
 – 35% of companies have suspended operations waiting for better times.

*Source Gradus Reaserch

Some Ukrainian companies have decided to change their business activity for the duration of the hostilities, e.g. leading confectionery manufacturer Roshen – humanitarian aid; Carlsberg Ukraine breweries – bottled mineral water.

*Source Gradus Reaserch

*Source Gradus Reaserch

*Source Gradus Reaserch

To sum up, the situation for Polish business in Ukraine is difficult and deteriorates with every day of hostilities by the Russian Federation. Even at this stage of the war, it will likely take years to rebuild the infrastructure and the economy. Even with substantial financial assistance from Western countries, a return to the past performance by Polish companies is impossible, at least in the short term.

Ukraine is one of the ten most important foreign markets for Polish business; its proximity and untapped potential since the beginning of the 1990s still provide opportunities for development and stabilisation for many Polish companies. It can already be said that a large proportion of Polish foreign investment in Ukraine has been successful. The companies have strong standing, many customers, and in some cases become local market leaders, employing tens or even hundreds of employees. Unjustified aggression by the Russian Federation can destroy the capital built up over many years. With this in mind, we should consider supporting Polish companies that have built up a reputation for Poland as a reliable business partner over the years.

See: 25.03.2022 Memorandum of the Union of Entrepreneurs and Employers (ZPP) on the economic situation in Ukraine and its consequences for Polish companies