Dirigisme 2.0. The way to go for the region?

Photo: STOKOTA (CC) commons.wikimedia.org

Rather, the European Commission’s attitude suggests that it prefers maintaining the status quo. This is only strengthening already existing inequalities across the common market. At the same time, the Polish case hints at a potential new path of economic development for the region of Central and Eastern Europe – one that we refer to as “Dirigisme 2.0”.

A tale of two refineries

The largest economic experiment of the 20th century, communism, left a bizarre economic legacy in certain European countries. Poland illustrates this phenomenon with several unusual cases. One of them is the existence of two nationally-owned oil companies, Orlen and LOTOS. Their gas-focused cousin, PGNiG, is left out of this story. Of course, Poland is not a petrostate, so the two companies concentrate on refining imported oil into gasoline and other products. Orlen is the bigger player in this pair, being around twice the size of LOTOS in terms of revenue. Neither company is the hegemon of the Polish gasoline retail market, with Orlen and LOTOS respectively operating around 23 per cent and six per cent of all the country’s petrol stations. Technically, the two companies are competitors. However, it comes as no surprise that state control over each has created some peculiarities regarding their competition.

In February 2018 Orlen announced plans to acquire LOTOS. The merger of the two would mean following the same trajectory that oil business giants such as BP and Exxon Mobil followed years ago. Capital is the main strength that both refineries share. Being larger means having a greater chance of successfully entering the global energy game and becoming a multinational corporation. Yet, these plans have alarmed the European Commission which fears a possible monopoly in the union’s East. Following EU competition law, in July 2019 Orlen filed an application for the commission’s approval of the planned merger. In response, the body opened an “in-depth investigation”. As Commissioner Margrethe Vestager said: “The commission is concerned that the proposed transaction would reduce competition in several markets.” A year later, the commission presented its requirements. Instead of a full merger, Orlen would be allowed to acquire 70 per cent of LOTOS. The company would also have the right to only half of the refinery’s production, provided that LOTOS sold 80 per cent of its petrol stations. At the same time, Orlen would have to make a number of other commitments. The most elaborate of these conditions includes the financing of a new Polish jet fuel import terminal that will later be transferred to another company upon its completion. Given these unfavourable conditions, the situation raises several questions surrounding the decision’s fairness. Could this merger really create a new economic leviathan?

As the saying goes in Poland: “The point of view depends on the point of sitting”. Comparing the position of “Orlen-LOTOS”, the potential company that could result from the merger, with other players certainly offers a different perspective. Figure 1demonstrates last year’s revenues for the world’s top five largest publicly traded oil companies, as well as those of Orlen-LOTOS. Even after the merger, the alleged Polish “leviathan” would still remain a small player on the global stage.

Figure 2 shows a similar comparison with middle-sized European oil companies. We can clearly see that even on this level-playing field that the Polish company would still be far from the dominant player. In fact, it would become more or less an average-sized enterprise, remaining in the middle of the pack amongst other companies that wish to join the global energy game’s “premier league”.

Is the threat of an economic leviathan real? It depends on how we perceive it. With the two companies’ combined presence still remaining a minuscule force on the global stage, this threat does not appear to be substantiated. This is especially true when we consider the fact that the two competitors in fact have the same owner, the Polish state. The merger would not change much in that matter.

Disparity in economic power

Why is the Orlen-LOTOS case important? The Polish case is the tip of an iceberg illustrating a much larger problem within the EU. The topic of disparity in economic development between the EU’s East and West is not new. Yet, as living standards across the EU level out, a new problem needs to be addressed. This is the unequal distribution of economic power between the “Old” EU and the “New” EU, i.e. the states that joined after 2004.

Corporate mergers are a natural process in a free-market economy. They lead to the creation of multinational enterprises with global reach, influence and capital large enough to undertake game-changing projects. In a way, the process can be compared to evolution – companies, like cells, combine to create larger corporate organisms. Less profitable ventures perish, whereas stronger companies are favoured and continue to grow. In this context, the main difference between the old and new parts of the EU is where these processes were allowed to take place without interruption. The newer states only re-embraced capitalism three decades ago, whereas its more traditional members have benefited from this system for the past three centuries. This has allowed the evolutionary processes more time there to select the winners and losers of the economic game.

How economically important is the EU’s East on the global scale? A glance at the 2019 Fortune Global 500 list offers a staggering answer. The ranking is a compilation of the world’s largest 500 companies ranked by revenue in any given year. In 2019, there were 113 EU companies on the list, an impressive result which proves the overall economic power of the organisation. Yet, as we look at this number from a closer perspective we might wonder how this power is distributed between the older and newer parts of the union. The answer serves as perhaps the best illustration of the disparities in economic influence facing the EU. Out of the 113 EU companies, only one of them was located in the new EU. This constitutes less than one per cent of the total.

Indeed, the countries of the “New” EU currently have no enterprises that matter globally. As Orlen notes in one of its press releases: “Mergers of oil companies in other European countries have already taken place. Examples of this are … Norway’s Statoil and the resulting Equinor, Spain’s Repsol, Portugal’s Galp Energia, Italian ENI, Austrian OMV and France’s TOTAL.”

What the Orlen-LOTOS case shows is that the European Commission is ignoring the fundamental differences in economic development between EU members. The decision of the commission to dismantle LOTOS and command Orlen to build strategic infrastructure for its competition is justified as follows: “Through this combination of refining capacity and import potential, the purchaser will exert a competitive constraint similar to that of LOTOS before the transaction.” The body is right in saying that on paper the merger would result in a monopoly in the Polish market. However, this attitude, which is also largely applicable to cases of two private companies in a western economy seems to ignore the fact that the two entities already have the same owner and that it has been coordinating their competition for the past 30 years. Also, given the significantly smaller size of the new EU economies, perhaps it makes more sense to replace the country-based approach towards competition laws with one that focuses on the region as a whole. This would help create an environment in which new member states are more likely to finally develop companies capable of competing with the giants in the “Old” EU.

Far from adopting a patronising approach, the commission should acknowledge that late entrants into the free-market economy still need to go through certain evolutionary processes that will allow them to develop globally competitive industries. A one-size-fits-all approach towards competition laws will only prolong and deepen an already unequal share of economic power between the East and West. Blocking the merger also importantly creates a precedent for taking similar decisions in the future.

A step into the past or a path towards the future?

Besides the question of whether a merger of big players in a specific sector is justifiable, another crucial dimension is apparent in this case. This is namely the fact that this merger relates to state-owned entities. The (in)famous Washington Consensus, which provided the guiding “recipe” for economic transformation processes in the CEE region, proclaimed privatisation as one of its central pillars. Privatisation can be defined as the “withdrawal of the state from resource allocation and ownership of production assets”. Therefore, does the process of creating bigger state-owned conglomerates constitute a return to the past?

It is necessary to note two important factors when addressing this issue. Firstly, in the present, there are good examples of the state acting as a central player in crucial economic sectors. Secondly, it is also questionable whether countries like Poland will be able to develop their own capital stock without the state taking an active role in keeping, aggregating, and developing national capital.

The first point is linked to the common perception that state capitalism in Europe naturally resembles a Russian model. If the relationship between business and state is too close, the traditional argument goes, then either side is vulnerable to being “captured” by the other. In such a case, businesses may pursue political objectives or politics may realise the objectives of the business sector. However, it is important to acknowledge the fact that it is not simply the proximity of private companies and the state that defines their subsequent relationship. Ultimately, individual institutions play a key role in this relationship. Javed Burki Shahid and Perry Guillermo defined this as the “rules that shape the behaviour of organisations and the social system. In other words, there is a growing awareness of individuals in a society”.

It is true that in a system without checks and balances, where these rules are subject to the considerations of ruling elites, market mechanisms will suffer in the face of corruption. Gazprom is seen by many analysts as one of the world’s most corrupt companies, with losses due to corruption now amounting to 40 billion dollars annually. Rosneft and Lukoil, Russia’s other energy giants, are also believed to be tools of the Kremlin, although the latter is formally under private ownership. Yet when looking at countries like Finland or Norway, where some branches of the economy are under direct state ownership, it is clear that within a system of strong state institutions, healthy state-owned companies can exist and develop.

Secondly, it is worth looking at the underlying logic and necessity of this merger. With strong and largely transparent state institutions already in place, one might still ask whether this merger could actually bring any tangible benefits. For this, one must admit that capital markets in Central and Eastern Europe are completely different from Western Europe. This is due to the fact that citizens have only been accumulating sizable wealth over the past 30 years. This aspect is reflected in the “net international investment position” of the concerned countries. This indicator shows whether a country’s economic agents, such as companies or individual investors, possess more assets abroad than foreigners in a respective country.

If this is the case, then the position is positive. The global expansion of domestic companies and the subsequent acquisition of groups abroad increases this position and can therefore be seen as a sign of a healthy and competitive economy. Not surprisingly, at the very top of the ranking, one can find traditionally strong and globally-competitive economies, such as Norway, Switzerland and Germany. In this context, claiming that “capital has no nationality” has been shown to be a myth. It also shows that too strong a reliance on foreign investment can make a country more prone to economic shocks.

At the bottom of the table lie countries that are well-known to be less resilient to crises, such as Spain or Greece. Also, practically the whole CEE region has a negative asset position, as seen in the graph below, which shows susceptibility to potential economic shocks and the lack of sufficient outreach of its companies:

Developing national champions

Due to missing private capital the necessary infusion needed in order to build national wealth at a global level must come from the state, which must be capable of redistributing capital for specific long-term investments. Particularly in such a relevant sector as energy, which covers many long-term trends, the state might strategically approach these challenges and create many positive spill-overs to related sectors. This holds true due to the fact that its planning horizon and scope can be much longer, as state-owned capital can prioritise economy-wide planning over specific sectoral aims.

Moreover, once state-owned capital begins to grow it can usually be kept without the need to privatise or sell stakes. This allows for the company to take on regional or even global importance and allows for economies of scale to take effect. This subsequently decreases short-term costs and increases long-term prospects. It is worth noting that societal attitudes towards state ownership and interventionism are favourable in Poland and therefore fit into the general socio-economic context. It should also be remembered that countries like France were characterised at the peak of their economic growth by highly interventionist economic development policies, usually put under the umbrella term of “Dirigisme”. Therefore, a “Dirigisme 2.0”, in a Polish version in particular and a regional version in general, might now be necessary in order to start developing national champions with a global reach.   

As a result, when asking whether the merger between Orlen and LOTOS would constitute a path towards a “Polish Gazprom” – the frame of this question should be changed. Rather, we should ask whether this Polish giant could become the country’s very own Equinor (based on the Norwegian example) and a step towards a more resilient and competitive development model? What makes Gazprom and Equinor differ fundamentally is the environment in which they operate. As such, Poland needs to maintain a high level of institutional transparency, as only then will it be able to move towards a positive European model of partially state-led development policies. This is exemplified by the Norwegian model or a “Dirigisme 2.0”. If this is achieved, positive long-term spill-over and growth effects will be able to take place in the country.

This model could characterise the next step on the development path not only for Poland, but for the region as a whole. Poland, however, due to its critical market size, could lead the way and serve as a role model for other countries to follow suit. This would help it reclaim a position similar to its role during the economic transformation of the 1990s.

Broader perspective

Most countries of the region of Central and Eastern Europe, particularly those that became members of the EU, developed impressively since the collapse of the centrally planned system. However, as the analysis above shows, Poland and other countries in the region still lack their own capital to compete on a global scale. A solution to this is selective state-ownership in crucial sectors, which aims to upscale and develop these companies at the international level. Embedded into a system of strong competition and institutional control alongside transparency, such companies have the potential to follow the Norwegian or former French model – a “Dirigisme 2.0” for the region. Mergers are a natural way to achieve this development and the Orlen–LOTOS should be understood in that broader perspective.

It is a natural and pragmatic step forward as long as the institutional conditionalities are upheld. It can be expected that mergers will take place more often in the future, not least due to the economic fallout created by the COVID-19 crisis. Given the needs of these regional states to pursue greater influence in world economics, the European Commission should ensure competition by removing trade barriers within the single market instead of preventing or complicating potential mergers. The continued existence of disparities within the economic power of the EU also suggests the need to revise the one-size-fits-all approach towards competition laws.

Michael Richter is an EU researcher at the Research Centre for East European Studies within the Horizon 2020 Innovative Training Network (ITN) and a soon-to-be PhD candidate at the Bremen International Graduate School of Social Sciences (BIGSSS). Jakub Bartoszewski is a research assistant at Texas A&M University, an alumnus of New York University Abu Dhabi and a candidate of the Master of International Affairs programme at the Bush School of Government & Public Service.

economy, energy, LOTOS, Orlen, Poland