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czech republic

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  CZECH REPUBLIC

REPUBLICAN REFERENCE

Area (sq.km)
78,600

Population
10,400,000

Density
(per sq.km)

132.2

Capital
Prague

Currency
Koruna

President
Vaclav Havel

Private sector
% of GDP

80%

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Background:
After World War II, Czechoslovakia fell within the Soviet sphere of influence. In 1968, an invasion by Warsaw Pact troops ended the efforts of the country's leaders to liberalize party rule and create "socialism with a human face." Anti-Soviet demonstrations the following year ushered in a period of harsh repression. With the collapse of Soviet authority in 1989, Czechoslovakia regained its freedom through a peaceful "Velvet Revolution." On 1 January 1993, the country underwent a "velvet divorce" into its two national components, the Czech Republic and Slovakia. Now a member of NATO, the Czech Republic has moved toward integration in world markets, a development that poses both opportunities and risks.

Update No: 057

The Czechs are in a jam. They have a coalition government with seven highly contentious members and 2002 is an election year. Things are getting rough.
The economy is growing at 3.2% and inflation is at just over 4% in 2002. 
The country has been run by just two figures since independence in 1989 and its constitution as a separate Czech Republic in 1993.One is Vaclav Klaus, the head at present of the opposition, but premier for most of the 1990's. The other is his long-time adversary and foil, Milos Zeman, who has since become premier in his place.
The president throughout this time has been Vaclav Havel, who is certainly stepping down this year. A new era for Czech politics is dawning. 
The Social Democrats (CSSD) in office are unpopular; but so are the Conservatives (ODS) of former premier Vaclav Klaus. The country might be about to see a political re-alignment at forthcoming elections to parliament, due in mid-2002.
The beneficiary of disaffection with CSSD may not be Klaus, who is widely distrusted, but the leader of the 'real opposition,' the newly-elected head of KDU-CSL, Cyril Svoboda, part of the Four Party coalition of small parties and the communists, who are all keen to see an end to the alternation of the CSSD and the ODS, that has dominated Czech politics for years.
The economy is attracting extensive foreign investment, which is almost US$20bn in all, comparable now to Hungary's. The government is persisting with privatisation, putting up the state's 62.99% stake in Unipetrol last September. Gazprom and LUKoil of Russia showed interest in some of Unipetrol's assets. So did Western majors, Shell, Conoco and Agip, which in a three-way consortium already held 49% of Ceska Rafinerska, with Unipetrol holding the remaining 51%. Czech breweries and light industry are also attracting interest.
The main problem is that unemployment is still high at 8.5% nationally, but at 18-20% in certain districts, such as Karniva in North Moravia and Most. The government has opened an industrial park in Karniva, which notched up its second major investment recently, a Swedish health care firm, Moelnlycke Health Care. The first is by Japanese firm, Shimano, which is due to make bicycle parts there.
EU entry beckons, but a problem is that Austria strongly objects to the Temelin nuclear plant in Southern Bohemia, which it wants to see closed. It could veto Czech EU membership if it is not done.
The EU is reprimanding the Czechs for giving public contracts without tenders under their Article 50, which the government has regularly evoked. Public procurement law allows the government to award contracts without tenders in an emergency. This it has done several times this year because time is running out before next June's elections. But potential bidders have been angered and suspicion of corruption raised, which was widely thought to be an endemic problem in the administration in the 1990s. 
Pavel Telicha, the Czech chief negotiator with Brussels, expects the matter to be raised in future negotiations. "We should be more and more limited in the use of the article," he said. 
There are other issues on which the EU has reservations, notably using state aid to restructure the insolvent steel industry, the widening of the government deficit and the delay in passing legislation to establish a professional civil service.
Nevertheless the Czech Republic is likely to be able to close one or two more chapters to the 19 it has provisionally closed already with Brussels. It is probable it will remain a frontrunner to be invited to join the EU by the end of next year.

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AUTOMOBILES

Toyota, Peugeot to build small cars in Czech Republic


The Japanese car manufacturer, Toyota, and the French group, Peugeot, [Citroen] have decided to open a large plant in the east Bohemian town of Kolin to manufacture cheap cars. Both firms are planning to invest nearly 50bn Czech korunas in the new joint venture, Czech Radio1 - Radiozurnal, in Prague, has reported.
Some 300,000 small passenger cars are to be manufactured at the plant every year. The new model, expected to start rolling off the plant's production line as of 2005, is expected to replace the current Toyota Yaris, Peugeot 106 and Citroen Saxo models...

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AVIATION

Government makes it official with Saab-BAE


Reaching the end of a long and potholed road, the Czech government made a decision in the controversial jet fighter tender recently, accepting the bid of the only contender left in the game, Saab-BAE systems International, the Prague Business Journal reported.
The government in the end chose the more modest option of the two considered in the tender: delivery of 24 JAS-39 Gripen aircraft, with support and spare parts, beginning from 2004.
The cost for the aircraft and accompanying package is set at around Kc 50bn, but this is not the final price because the government will have to finance the purchase and pay interest.
Minister of Finance, Jiri Rusnok, said in a TV Prima debate on Sunday 9th December, that the overall cost of the programme might well climb to Kc 100bn.
"From the finance minister's stand-point, I'm naturally not too enthusiastic for such a project," Rusnok said, adding that the main reason he opposed the purchase was that the majority of the payments for it would have to be made at a time when the Czech Republic will be entering the EU and will have to lower the budget deficit.
According to budgetary rules, the government will have to get approval for the massive loan from parliament and Minister of Defence, Jaroslav Tvrdik, and Finance Minister, Rusnok are tasked with preparing the draft law on the loan.
The talks between the government and Saab-BAE consortium are expected to last until April 2002.
A recent government session showed signs of the political battle that lay ahead, with the highest executive body far from united in the vote on jet fighter purchase.
Deputy Prime Minister and CSSD party chairman, Vladimir Spidla, at first voted against buying the aircraft, but changed his mind on the condition that the government includes Parliament in the decision-making process. Minister of the Interior, Stanislav Gross, abstained from voting, while Rusnok and one other minister voted against.
The situation in Parliament also looked volatile. ODS, through its highest-ranking officials, continued to voice its disagreement with the fighter purchase.
Party deputy chairman and parliamentary defence committee chairman, Petr Necas, said that ODS will vote against the fighter purchase in the Parliament.
With the CSSD and KSCM MPs in principle supporting the government, all eyes are turned toward 4K deputies.
In its first reactions, 4K leaders voiced concern over the government's decision, but didn't say how they'll vote when the issue comes before Parliament.
KDU-CSL leader, Cyril Svoboda, said that before deciding whether to support or oppose the government decision, the coalition should find a common standpoint itself.
With the winner picked, some uncertainties remain about the final deal, if it doesn't get shot down in Parliament.
Saab-BAE systems has already made some concessions, most of them to do with promised capital entry into ailing domestic aircraft manufacturer Aero Vodochody.
"We will pull together a team of people that will do the due diligence in Aero," said Gripen consortium's vice president for communications, John Neilson. "We now believe we'll very quickly get a permission to do that."
Results of due diligence and negotiations with the government will determine whether BAE Systems will buy a share in Aero, Neilson said earlier.
Also, the consortium accepted the government's demand that BAE help sell 36 surplus L-159 airplanes, which the government is obliged to buy from Aero. "We won't buy it from them, but we'll help sell them," Neilson said.
However, BAE made it clear that the grace period, scheduled to last four years after signing of the contract, is not likely to be extended to 2009, as suggested in some articles in the domestic press. "I think that would be a little bit sporting," said the BAE Systems regional executive director, Julian Scopes.
The biggest issue before the government remains the offset deals that are supposed to constitute 150 per cent of the contract's value.
The government was recently presented with a list of offsets that were supposed to cover 150 per cent of the contract value for purchase of 36 airplanes. Most of the value of the offset proposals that the consortium filed, and the Ministry of Industry and Trade accepted, consisted of foreign direct investments.
But with a new contract price on the table, the value of offsets is bound to go down. "We would need to tailor the package to the new contract value," scopes said. Also, the question of whether multipliers for regional and industry branch programme placement will be used in the calculation of offset value still remains open.
The Ministry of Industry and Trade has stipulated in its offset rules that coefficients of up to seven will be used in calculating the offset value in general. The government RFP (request for proposals) in the jet fighter tender didn't mention coefficients. "This will be a part of negotiation process," Scopes said.
It's also unclear what the "overall economic effect over 10 years" used to calculate the offset programme value means.
"In our projects we usually take into consideration commitments for the first three years," said CzechInvest investment agency CEO, Martin Jahn. "That's feasible because companies usually know what is in the first three years."
Another program that could raise eyebrows is a programme for a Gripen training simulator that is to be awarded to the company Virtual Reality Media, with a value of Kc 0.98bn. The company isn't listed in the Czech business registry. The company that goes by that name exists in Slovakia, and has won a Kc 100m contract to supply the Czech Air Force with a simulator of the Russian-made Su-22 fighter-bomber in 1999. The Czech Air Force's Su-22 fleet was supposed to be retired by the end of 2001. According to the company's Web site, it spun off its Czech branch at the end of 2000.

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ENERGY

Electricity bidders put government in a tough spot


Faced with a sudden pullout of its US partner, NRG Energy, its abandoned partners put the government in a difficult position by ignoring its sale formula for the state's electricity assets and launching separate, but coordinated, bids for parts of the CEZ electricity package, the Prague Business Journal (PBJ) reported recently.
The UK's International Power, Germany's E.ON, and UK-based British Energy sought to woo the government with coordinated bids that should exceed rivals Electricite de France, and the consortium of Italian ENEL and Spain's Iberdrola, E.ON's local representative, Miroslav Pise told PBJ.
The government encouraged bids for the whole electricity package of production, distribution and transmission companies. However, the newly formed bidding alliance made no secret of the fact that it wanted to split the assets between them in the hope that the government would take the bait of a higher bidding price.
"By this we are saying that we cannot react to the conditions but we are willing to negotiate," said Pise. "It should be something for the government to think about."
The three allies admit that according to the conditions of the tender they should immediately be excluded for diverging too far from the proposed share purchase agreement. However, they expect their high bid will win some flexibility from the government.
"We do not want to burn our fingers with this and we are hoping that none of the bidders would sign the contract proposal the way it was submitted," said another source close to the three companies. He added that the three only really have a realistic chance in the official tender if their combined bids exceed those of EdF and the Spanish-Italian consortium. "This could also confirm the theory of former finance minister, Pavel Mertlik, that a separate sale would generate more," the source added.
Some sources close to the three investors said they have a small chance of success given the apparent preference of the government for the EdF bid.
As part of the "coordinated offers," International Power would buy CEZ's coal-heating and hydroelectric plants, British Energy would take possession of the nuclear plants of Temelin and Dukovany (after having expressed on and off interest in the privatisation in the past), and E.ON would pursue the six regional electricity distributors sold in the package. The German energy giant already owns large stakes in most Czech electricity distributors.

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FOOD & DRINK

Small brewers face bleak future


Pivovar Cerna Hora is one of few independent breweries left in South Moravia, and after 470 years of production is now fighting harder than ever to stay that way, the Prague Business Journal reported recently.
Cerna Hora's beer revenues decreased sharply last year as foreign-owned companies spread their nets wider on the Czech beer market, putting the micro-brewer into a corner with few options: retool and refocus, sell to a competitor or leave the market altogether.
The microbrewery is among the shrinking number of small independent beer makers that struggled to continue operating in the Czech republic in 2001 as cash-rich dominant beer producers boosted their sales.
Pivovar Cerna Hora's general director, Ivo Storek, has resisted pressure to sell to a larger company or foreign investor, which would put an end to its tradition of independent brewing.
"We have received several offers," Storek says. "But for the time being, we want to stay an independent brewer."
More than 70 breweries were speckled across the Czech national landscape and in Prague neighbourhoods prior to 1990. Now, there are fewer than 50.
"It seems as though every industry is combining its powers, finding new markets, lowering costs and extending its affect," said Ivo Trojan, executive director of the Czech Beer and Malt Association.
Cerna Hora reported a 14 per cent drop in beer production year-on-year between January and October 2001, and sales dropped by 6 per cent. But the brewery will persist, Storek says, even if it means redefining itself. "We are partly balancing the drop in beer production with an increase in the production of soft drinks," he said. Cerna Hora produced 400 more hectolitres of lemonade by the end of last October than it had produced during all of the previous year.
The ripple affect of the consolidation of Europe's beer industry has made it difficult for independent or family-owned Czech brewers to stay afloat under the weight of corporate mergers, acquisitions and general flux. Profit margins are thin on the Czech market, and few microbrewers have the financial firepower or distribution network to export. Cerna hora's struggling business is one of 24 independent Czech brewers trying to cope with change.
The two top brewers on the domestic market - Plzensky Prazdroj (the maker of Pilsner Urquell) and Prazske Pivovary (the maker of Staropramen) - are owned by foreign companies that invested billions of crowns this year.
The world's third largest brewer, Belgium's Interbrew, manages the second ranked Czech brewer, Prazske Pivovary, with 13% of the market, and had the brewery under its control for a full calendar year for the first time in 2001.
Interbrew acquired the Prague brewer when it purchased U.K.-based Bass Brewing International in 2000. It quashed rumours recently that it intended to resell the Prague brewer by injecting nearly Kc 3bn into the company, wiping out mounting debts and increasing working capital. "That sum of money had to make itself felt naturally on the market," Storke said.
Prazske Pivovary used the fresh capital to launch a media campaign in the Czech Republic and abroad, targeting Western Europe and Russia. Newly designed labels introduced on the export market are designed to sell the Prague beer tradition, with bright letters indicating the beer is premium, traditional and the capital city's finest.
Interbrew reported that Prazske Pivovary managed to increase its sales 12.6% through September last year, and its operating profit grew 134 per cent to Kc 206m. Exports were up 17 per cent. Under Bass's stewardship, the brewery lost about Kc 800m in 2000.
The country's other big domestic player and maker of Pilsner Urquell is owned by the world's fifth largest beer company South African Breweries (SAB). SAB decided in June 2001 not to pay dividends from its Kc 169m net profit from 2000. Instead, it opted to use the money for long-term loans and investments.
The Pilsner Urquell group, which also produces Gambrinus beer, increased its Czech market share by 1 percentage point to 45 per cent in the first six months of the year and reported a 19 per cent increase in production over the previous year.
Conventional wisdom among analysts and trade publications is that consolidation is sure to continue among the big international players. Recent rumours about the intentions of SAB and Interbrew - both of whom have acknowledged they are looking to swallow a larger share of the market or selectively sell assets to build capital for further acquisitions - signal that Czech brewers will be affected by the next round of global mergers and acquisitions.

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TRANSPORT

Skoda Dopravni technika revives


Skoda Dopravni technika (SDT) railway car manufacturer is gradually solving its problems, which appeared after the breaking up of the eastern markets during the previous decade, Pozitron reported recently. By the end of last year the firm had already achieved contracts for the next two years. The company manufactures tramway cars and components for suburban train sets within its diversification whilst it is involved in the reconstruction of locomotives and underground trains. SDT's biggest contract in 2001 was the reconstruction of coaches for the underground in Prague.
The firm has completed seven sets for the underground, had reconstructed six sets at the end of 2001 and will reconstruct six sets in 2002 and six sets in 2003.
Meanwhile, the company's representatives foresee great opportunities in terms of potential contracts with Russia during the reconstruction of the Skoda locomotives.
At the same time another branch of the group, namely Skodaexport, expected a gross profit of about 30m Czech crowns last year. 

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