Press cuttings - The Polish Legal Environment: The Twisting Road to Reform by Jerzy Radziwill
06.03.2001
The road to legal reform in Poland, as in many other countries, is full of twists and turns and obstacles which need to be removed. In this article we will look at the road that the Polish Third Sector has been travelling on and where it may lead.
Subsidiarity and the Third Sector
There are at least two reasons why civil society and the Third Sector constitute an essential element of modern democratic societies. The first reason, well-known in classical economics, is market failure. The second reason concerns human nature and human rights.
Due to market failures, there are many important needs of society that cannot be satisfied by market forces. In such situations, Third Sector organisations are often more effective in fulfilling these needs than the public sector. This is especially true in such areas of public life as the social welfare system, community economic development, local infrastructure, education, and others. However, in Poland today, the public administration still aspires to deal with everything on its own directly, and many policymakers continue to believe that this is the proper way to proceed.
At the same time, it is human nature to care not only about one's own interests. Caring about others is the basis for philanthropy. Modern philanthropy is not only about the rich supporting the poor; it is a broad range of not-for-profit actions performed for the common benefit of others - whether a specific community or society as a whole.
It is human nature too, not to like state and/or other interference in one's life - as long as one can take care of one's own interests. This is the basis for the principle of subsidiarity which
holds that responsibilities should be devolved to the lowest possible level, with higher level entities having only those responsibilities which cannot be handled at a lower level alone.
Subsidiarity also extends to the right of individuals and families to make their own choices.
The principle of subsidiarity forms the basis for Western political systems and for the relationship between the European Union and its member states. Since 1997, it has been the basis for the Polish constitution, which refers to this principle in its preamble. The Polish constitution also guarantees the right of individuals to associate.
In view of the above, one might expect that the Third Sector in Poland has a favourable legal and political environment and, therefore, is developing rapidly. The recent administrative reform reinforced such trends, with significant steps taken towards decentralisation and practical implementation of the principle of subsidiarity. The Third Sector in Poland is indeed developing rapidly. However, the development of the sector lags behind the development of both the public sector and the market economy. The legal and political climate for the Third Sector in this country remains rather unsatisfactory.
Lack of Public Awareness
For 50 years, after World War II, the fundamental principles of the political system in Poland were exactly opposite to those described above: both public life and the economy were completely centralised. The concepts of civic society, self-governance, and subsidiarity were entirely absent, unknown, and prohibited. The democratic reform initiated in 1989 covered all three sectors. However, it turned out that building civil society was more difficult than creating democratic institutions or introducing a free market. This was due to the fact that out of the three sectors, civil society is the sector most dependent on public awareness, and public awareness is very difficult and painstaking to change. The process usually lasts for at least a generation.
The conservatism of public awareness in Poland is visible in both active behaviour and passive opinions. Many Poles are not used to taking care of their own fate and future; they keep expecting the government or "somebody" to solve their problems and fulfil their needs. At the same time, many people do not understand or appreciate the idea of civil society or the role of not-for-profit organisations. Unfortunately, this is evident at all levels and in all areas of public life, from uneducated peasants or workers, through public administration, up to some politicians, policymakers, and state officials. Consequently, it is extremely difficult to introduce appropriate legal regulations for the Third Sector.
Deficiencies in the Legal System
The regulatory system in Poland is a result of a compromise between quality and urgency. The official journal in Poland for the year 2000, contains almost 8,000 pages. Even if one recognises that most regulatory debates are conducted by parliamentary commissions, it is still a huge workload for parliament to review and adopt all these regulations through parliamentary commissions and plenary sessions.
Similarly, a major effort is required to draft new laws. A considerable portion of these laws are drafted by civil servants who are not necessarily competent, yet there is strong pressure from public opinion to limit expenditures on the state administration. As a result, public servants are not necessarily the most competent experts. It would undoubtedly be cost-effective to pay high salaries to state officers responsible for public spending and drafting of laws. But how to design a mechanism that would uniquely relate compensation to quality, and would eliminate incompetent state or local administration officers still receiving high remuneration?
There is nothing to complain about. This is a consequence of emerging challenges and possibly the best that can be done, given the circumstances. However, as a result, the Polish legal system is far from being clear, well-structured, and unambiguous.
A classic example is a uniquely Polish institution called "law from the duplicator". This term is used to describe essential decisions and interpretations made by various public institutions, including the Ministry of Finance, and communicated to other public institutions like tax authorities in the form of duplicated circulars never published in official journals, sometimes not disclosed and often contradictory. There are hundreds of cases that have never been regulated in a formal procedure by parliament or by an empowered minister. There are also hundreds of examples of important rules that are interpreted differently and applied differently by various institutions of state or local administration.
The case of the Foundation for Polish Science is an excellent example of ambiguity in the Polish legal system. For over ten years, all foundations and other public benefit organisations invested spare funds in bonds and shares. It would have been wasteful and highly irresponsible to act otherwise. All these organisations believed that they were authorised to do this by law, and that this did not violate their rights to tax exemptions. For more than ten years, no public institution, including the Ministry of Finance, various tax authorities, or public auditing agencies, expressed a different opinion. Unexpectedly, one of the tax offices had a different interpretation and decided that funds invested by the Foundation for Polish Science were taxable. Unexpectedly again, the Supreme Administrative Court confirmed this interpretation. As a result, all public benefit organisations who were thrifty enough to invest their funds may have to pay tax, for the last five years, on all their expenditures on bonds and shares, with interest at a penalty rate. Some of them will go bankrupt and discontinue their activities. Several new ideas and local organisations like community foundations will disappear. The institution of an endowment will no longer exist in Polish reality unless effective measures are found to remedy the situation and overcome the court opinion.
The attitude of most Polish regulators is highly pragmatic. Many of them used to say that law is not for those who respect it but for those who are going to abuse or circumvent it. Again, nothing to complain about. Unfortunately, this attitude is often at the expense of those who respect laws, while others usually find a way to benefit from the drawbacks and loopholes in the legal system.
One example is the recent idea of the Senate to introduce a new rule requiring that all organisations receiving public funds go through a professional audit. This is an excellent idea developed in order to avoid fraud, except situations where an organisation receives a grant worth 1,000 Euros from a local authority and has to cover costs of an audit worth 5,000 Euros. This example illustrates another weak point of the policy of Polish regulators who try to extend financial control to an entire beneficial organisation rather than simply requesting the public administration to perform its duties and monitor the use of public funds.
The deficiencies in the Polish legal system often encourage various institutions to introduce their own rules and policies, not necessarily justified by existing laws. An example is the registration court for foundations. This court has its own policy and requirements concerning statutes of foundations that are not specified in any regulation. It is probably motivated by goodwill with the intention of limiting abuses, but this is not necessarily appropriate in a democratic state where laws should be enacted by parliament. Similar unjustified polices are often created and applied by other public institutions such as tax offices, the Ministry of Finance or local administration at various levels. It has a lot in common with the above-mentioned "laws from the duplicator".
For many reasons there is no comprehensive and modern law for the Third Sector in Poland. One reason is the urgency of other matters that the Polish parliament and Polish politicians have been dealing with over the last ten years. However, a more significant reason is probably the limited awareness of the role and importance of the sector and limited knowledge of modern concepts and solutions in this area among a large segment of the population, as well as among policymakers and Third Sector organisations. An initiative by several NGOs to draft and pass an appropriate law has been underway already eight years, producing several versions of a draft law and never-ending discussions, with no conclusion whatsoever.
A direct consequence of this situation is the lack of important tools that would enable the full use of the dormant potential of civic society. There are no provisions for many forms of not-for-profit activities, while existing forms are often used in a strange way, different from the original intention. Sometimes there is room for abuse or fraud. Sometimes it results only in missed opportunities.
Confusion of Concepts
Due to limited experience with the concept of civil society as well as limited public awareness and the limitations of the legal system, certain concepts are often misunderstood and confused with each other. It is not only the average citizen, but also policymakers, lawyers, the media and the Third Sector itself who are guilty of this confusion.
In Poland, the word "foundation" does not necessarily mean a grantmaking foundation. In most cases it is an operating foundation that funds its own activities. In some cases it is a state-treasury foundation which can be a piece of the state budget taken out of strict public control. In many cases it will be an instrument to collect additional fees for public services, as in the health care system. It can be also a consulting company or any other service company that selected this legal form to benefit from tax exemptions. In a local community and at the state level it can be an instrument of a political party or group of interests. This can mean, for example, reasonably paid jobs for politicians who currently are in the opposition and do not have public jobs.
Almost nobody in this country can distinguish between non-profit (where profit is not generated) and not-for-profit activities (where profit may be generated but is not the goal). Top-level officials cannot imagine a not-for-profit economic activity. Local authorities who would like to create a community development organisation have to create a trading company, an association or a foundation, since no adequate institution is envisaged by the law. There are no legal provisions for mutual banking, mutual insurance or loan funds outside the banking system.
Those who would like to contribute their energy, vision and resources to public benefit are hampered by a lack of appropriate instruments and understanding. In many cases, they are suspected of having unfair and dishonest intentions. The array of instruments used for the development of modern societies through Third Sector institutions cannot be effectively applied.
Can Reform Become Reality?
When I briefed a colleague of mine from another foundation about the situation of the Foundation for Polish Science, the immediate reaction was "what crooked thing did they do?" When I talked to a person at the parliament about regulations for the Third Sector, and specifically about tax exemptions for funds invested in bonds and shares (for endowment-building purposes), the immediate reaction was to ask "why should we encourage fraud and abuse?" Fortunately, there were also other reactions. However, the atmosphere is dominated by suspicion and allegations of guilt. What is even worse is the lack of understanding of the benefits that can result from Third Sector activities.
The ambiguity of the legal system, as well as the lack of comprehensive laws and provisions for many important institutions of the Third Sector, are the realities we have to deal with. There is no reason to blame the legal system for this situation. This is a natural consequence of competition with other important matters requiring new regulations and a natural state of affairs during the extensive transformation that is taking place in Poland. However, it is now time to address the problems affecting the Third Sector.
With regard to the recent interpretation of the tax code by the Supreme Administrative Court - in the case of the Foundation for Polish Science - a group of large foundations in Poland has decided to make a concerted effort to change the wording of the relevant regulation and remove the ambiguity concerning taxation of investments by public benefit organisations in bonds and shares. The core of this group consists of Polish members of the European Foundation Centre (EFC), and this initiative is a follow-up to meetings and discussions during the Annual General Assembly of the EFC that took place in September 2000 in Krakow, Poland.
The same group of foundations is going to proceed with comprehensive, consistent, and enabling legislation for Third Sector activity. The Polish government is close to completing its version of a draft law. On the one hand, the draft contains many concepts and approaches that NGOs proposed in their various versions of this law over the past eight years. On the other hand, it contains many concepts and approaches that Third Sector organisations find questionable. The confusion is even stronger due to the fact that there is no consensus among Third Sector organisations themselves. Neither is there a clear mechanism to discuss options and work out a common position. Moreover, the situation could entirely change after parliamentary elections this summer. In the worst case, everything may have to be started from scratch if the new law is not adopted before the elections. The months immediately before elections may not be the best time to raise such issues. Nevertheless, the Third Sector in Poland is now better prepared and determined to make a final push towards comprehensive new legislation.
After resolving the most pressing matters and after developing reasonable laws for the Third Sector, there will be time for reforming the existing legal system, to make it clear, well-structured, and unambiguous. It will take a couple of years and will bring the country to a mature stage of development. The greatest challenges will be to raise public awareness, educate communities, and build a true civic society.
Jerzy Radziwill is Project Manager at the Rural Foundation (Fundacja Wspomagania Wsi) in Warsaw, Poland.
Tel/Fax: (48 22) 632-0076,
0602-325-505 (mobile)
E-mail: jradziwill@fww.org.pl