OREANDA-NEWS. The delay in formulating a new equalisation system prolongs uncertainty for Polish local and regional governments (LRGs), Fitch Ratings says. It does not alter our key near-term assumptions for the Polish regions or our view that the main features of the transitional arrangements will be retained.

The Ministry of Finance had planned to propose a permanent replacement of the previous formula for calculating equalisation payments (the janosikowe) in 1Q15, for finalisation by mid-year. However, this has been delayed, and on 27 August, the Polish president signed an amendment to the transitional law that regulates 2015's equalisation payments for Polish regions, extending it to 2016.

Until the permanent system is finalised, Polish regions face uncertainty over how equalisation payments will be set. This can restrict their financial planning ability for the long term.

The transitional law was introduced after the janosikowe was ruled unconstitutional in early 2014. Its main provisions include a cap on equalisation payments from the wealthiest regions, and a formula for calculating payments that incorporates the impact of an economic slowdown on tax revenues.

Our view is that a permanent equalisation law will retain the main elements of the transitional law, which is more flexible and was designed to accommodate the Constitutional Tribunal's judgement. Extending the transitional law to 2016 is consistent with our expectation that those regions that made the largest contributions under the janosikowe will continue to benefit from lower equalisation payments. We think the transitional law could provide a template for any permanent replacement.

The region of Mazowieckie's (which includes Warsaw) equalisation payments have fallen by around 40% under the transitional law. We revised the Outlook on Mazowieckie's 'BBB' Rating to Stable from Negative in May in anticipation of the region balancing its budget and reducing its direct debt. This reflected limits on new spending and debt (preconditions for obtaining a state budget loan) and the substantially lower equalisation payments from 2015.

For those regions that receive equalisation payments, the transitional law has been neutral in 2015 because state grants have made up the shortfall. These grants will continue in 2016 although they will drop from PLN268m (USD71m) to PLN210m. This is a small reduction of around PLN4m per beneficiary region, and the budgetary impact should be clearer when equalisation payments for 2016 are presented by the Finance Ministry by mid-October (lower grants may reflect better-than-expected income for the regions, mostly from corporate income tax).

We affirmed the ratings of Wielkopolska and Malopolska (both 'A-'/Stable) in July and August respectively.