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Revisiting Poland…

Industry veteran Jim Wrethman looks at how Poland’s attitude to the casino industry has changed over the last 20 years and finds that despite much political activity, it is no further forward than when he first set foot there.

In a desperate search for hard currency to bolster their failing economics in the late  1980s, the Communist governments of eastern europe began to flirt with economic activities previously thought to be ideologically unsound.  One such activity was gambling.  In those years, I was managing director company Cherry foretagen AB and having already extensive operations in Yugoslavia until then a benign regime compared to the Soviet  Bloc – we used that as a base to explore possibilities behind  the rusting ‘Iron Curtain.’

           

      Negotiations were already taking place in Russia, Romania, Czechoslovakia and the Baltic countries, but the peoples’ Republic of Poland was our first major breakthrough.  The communist government had given permission for state entities to dip their toes in the capitalist waters and Orbis, a major hotel operator in Poland, invited us to discuss the possibility of operating casinos in its establishments. 
      Though recognizing the potential of gambling to generate revenue the beleaguered Communists still took a conservative approach.  The casinos would be in hard currency and be open to foreign guests only.  Their choice of potential partners also seemed to be governed by political sensitivities.  Lot Polish Airlines was in negotiations to form a casino company with Casinos Austria, a state sponsored monopoly in its own country, while Orbis chose Cherry from Sweden, a country that in the Communist mind was considered to be the almost acceptable face of western capitalism.

     

Both foreign companies were obliged to agree, in different ways, not to repatriate the full proportion of their profits.  In Cherry’s case, it took a 44 per cent stake but agreed that 50 per cent of its distributable profits during the first three years would be re-invested in the form of a loan to Orbis and this money would be used for the much needed renovation of the state company’s badly maintained hotels.  This renovation would be done by another Swedish company, Skanska AB, which would take a five per cent share in this new casino venture.
      The loan/re-investment commitment was made easier by the promise from the authorities that during this period there would be no gaming tax on gross  revenues  and also a corporate tax  holiday.  By the summer of 1989, we were putting the finishing touches to Warsaw’s first casino, in the Victoria Inter-Continental Hotel.  But even more momentous events were taking place elsewhere.  At the nearby Europieski Hotel, where we had installed our croupiers’ training school while building Victoria’s casino, we were to run into officials  of Solidarity at the very moment of the resignation of the Communists from government, an event that heralded the first fully democratic administration in Poland since pre-war times.  We happily joined them in the unbridled celebrations.

      Amid the euphoria, the Victoria Casino opened in September  1989 after receive ed assurances that all joint venture agreements and operating permits would be honored by the new government.  The casino was an instant success, as was the competing Casinos Poland operation at the Marriott Hotel. 
      To further improve our profitability and enhance Poland’s image as a tourist destination, we embarked on a junket programme.  This also proved to be a tremendous success.  Then followed the expansion of operations to Krakow, Sopot, and Sczein and the opening of a slot salon in the Grand Hotel Warsaw.  To add to the feeling that we were at the centre of a momentous period, I met new president Lech Walesa at a foreign investor’s  forum held in the Royal Castle in Warsaw.  We had already fulfilled some of the key objectives  asked of foreign  companies – investment, transfer of  technical  know how, job creation, and an increase in import earnings.  It seemed that Cherry, with a successful launch of its operations and a new market oriented government in power, would have a long and profitable relationship in the new democracy.

     

But the first treacherous moves were already taking place, by that enemy of all enterprise the tax office.  Their initial demand that casinos should pay a ‘turnover’ tax on gross revenues was bad enough, but hot on the heels of that came another wheeze.  ‘Gross revenue,’ in their  official  interpretation, was to mean all cash or financial instruments exchanged for chips – in effect, the ‘drop’.
      Our appeals against this demand based on our joint venture agreements, re-based on our joint venture agreements, re-investment programme and licensing conditions met with intransigence.  Our subsequent request to, at least, discuss the definition of ‘gross earnings’ received an example of the attitude towards business, the seizure of the disputed amount from our bank account, forcing us to enter into protracted legal proceedings.
      The threat of this tax and the adoption of zloty as the official currency, without provision to permit foreign players to re-convert winnings to hard currency, put an end to the junket programme or any other marketing programme designed to attract foreigners.  Shortly after, a foreign company called King’s Casino received a  permit to operate without apparently having to comply with any of the conditions imposed on Cherry and Casinos Austria.  In Particular it had no Polish partner.  To our astonishment its first casino was located in the Forum Hotel Warsaw: an Orbis Hotel.
      Protests by Cherry to its joint venture partners met with the disingenuous replay that, in the new climate of market economics, individual managers were free to conclude any deal that would increase the income of their hotel.  Official protests to the government brought the assurance that King’s Casino actually had no legal basis and must close.  Nevertheless, by September 1990, it had miraculously received ed a permit to operate in Warsaw, Poznan and Katowice. The Ministry, in authorizing the latter, had inconceivably chosen to ignore the fact that the Orbis Casino and Cherry joint venture had already been issued with a license to operate in the very same hotel in that city.

           

      Under the terms of our agreement, that hotel would have stood to benefit, not only from rental for the area used by the casino, but also have access to 51 per cent of the profits of the Polish partner and 50 per cent of Cherry’s profit for a renovations programme.  Curiously, the hotel management decided instead to accept an undisclosed offer from king's online casino.  Facing further investigation after protests from various quarters, Kings Casino formed a new company with SOS, an organization connected with a prominent member of Solidarity during the Communist era.  The new company had in effect been through a sex change, having become Queen’s Casino.  While in Warsaw it had moved to a new prestigious location in the Palace of Culture.

We made frequent representations to government ministers until it was announced that the General Prosecutor would investigate the case.  On October 1991, we learnt that a court decision had been made which found Queen’s Casino to be illegal.  Amazingly, the justification for the verdict did not even touch on failure to comply with the joint venture terms. Instead a moribund law, enacted by the discredited Communists, was resurrected to throw into doubt the validity of all existing casino companies. This gave impetus to the Ministry to produce a new law, which was enacted with haste by Parliament.
This new legislation excluded foreign companies from participating in the gambling industry and gave the existing companies the right to sell their share to Polish operators before the determined deadline. Thus, the new government was, in effect, able to expropriate foreign company assets and put them in the hands of their own chosen few.
Interestingly, with their habitual double standards, the Western press and political community chose not to see this as policy, instead more typical of a totalitarian regime than the new democrats they had all welcomed. So, for a number of years, the inheritors of this xenophobic legislation have enjoyed a protected life, but is that now threatened? Probably not. In an official report by the european Community on Poland's commitments and requirements for accession to the Union, it said that in the gambling sector, an amendment to the law adopted in April 2003 removed the elements of discrimination against foreign investors, but introduced a discriminatory language requirement for members of the management boards of companies in those activities: it went on to say that this ‘had to be addressed.’ So the protectionism or is it chauvinism? seems to live on. But here they are not alone. Many of the older members of the so-called ‘European family’ already infringe all the principles of free trade in their policies on gambling.
Ironically, the biggest danger to the profits of the incumbent license holders in Poland could well be their own newly elected right wing, religious leaning government. On the other hand, the new administration will probably make investment in gaming so unattractive to foreign companies that they’ll still give them a big ‘thank you’.

Jim Wrethman is chairman of Solna Leisure, a gaming management consultancy.

 

 
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