Revisiting Poland.


Article from Jim Wrethman at Solna Leisure,

The Communist Government had given permission for State entities to dip their toes in the capitalist waters and Orbis P.P. a tourist organization and major hotel operator in Poland, invited us to discuss the possibility of operating casinos in their establishments.

 Though recognising 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 were in negotiations to form a casino company with Casinos Austria, a state sponsored monopoly in their 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 they took a 44% stake but agreed that 50% of their 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 SkanskaAB another Swedish company who would take a 5% 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 on the day, and at the very moment, they were excitedly breaking the news to colleagues of the resignation of the Communists from Government. An event which heralded the first fully democratic administration in Poland since pre-war times. We happily joined them in the unbridled celebrations.

Amid the continuing euphoria the Victoria Casino opened on September of that year after receiving assurances that all joint venture agreements and operating permits would be honoured by the new Government. The casino was an instant success as indeed was the competing operation at the Marriot Hotel run by Casinos Poland, the Lot/Austrian joint venture.

To further improve our profitability and comply with the original objective to enhance the image of Poland as a tourist destination and increase hard currency earnings we embarked on a junket programme. This also proved to be a tremendous success. Then followed the expansion of operations to Cracow, Sopot, and Sczecin 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 excitedly grasped the opportunity to meet Poland’s new president Lech Welesa. The occasion was a foreign investor’s forum held in the Royal Castle in Warsaw, where we were able to say that 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.

 So it seemed to some that Cherry, with a successful launch of their 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.

The Tax officeoriginal 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-investment programme and licensing conditions met with intransigence. Our subsequent request to, at least, discuss the definition of ‘gross earnings’ received an example of their 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.

 An even more worrying development had taken place. A foreign company called Kings Casino, that had no pedigree and at least one dubious individual within their management team, 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 their Joint Venture partners met with the disingenuous reply 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 Kings Casino had in fact no legal basis and must close. Nevertheless by September 1990 they had miraculously received a permit to operate in Warsaw, Poznan and Katowice.

The Ministry in authorising the latter had inconceivably chosen to ignore the fact that Orbis Casino Ltd the Cherry J.V. had already been issued with a licence 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% of the profits of the Polish partner and 50% of Cherry’s profit for a renovation programme. Curiously, the hotel management decided instead to accept an undisclosed offer from Kings Casino.

Facing further investigation after protests from various quarters Kings Casino, we were told, had formed a new company with S.O.S., an organisation connected with a prominent member of Solidarity during the communist era. The new company had in effect been through a sex change, having now become Queens Casino. While in Warsaw they had moved to a new prestigious location in the Place of Culture.

Frequent representations were made by us to Government Ministers until finally it was announced that the General Prosecutor would investigate the case.

On October of 1991 we learnt that a court decision had been made which found Queens Casino to be illegal. Amazingly, the justification for the verdict did not even touch on points such as their doubtful origins or 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 indecent haste by the Sejm(Parliament).

This new legislation excluded foreign companies from participating in the gambling industry and magnanimously gave the existing companies the right to sell their share to Polish operators before the determined deadline. A wonderful negotiating position!

Thus, the new Government were able to, in effect, expropriate foreign company assets and put them in the hands of their own chosen few.

Interestingly, with the habitual double standards they apply when viewing matters that concern bona fide tax-paying gambling companies, the Western press and political community chose not to see this as a policy more typical of a totalitarian regime than the new shining 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 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, would seem 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 licence holders in Poland could well be their own newly elected right wing, religious leaning Government. But 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 – Dziekuje.

Jim Wrethman

Chairman of Solna Leisure

Gaming Management and Consulting