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Update No: 065 - (26/09/02)

The Czech Republic had a nasty jar in August when torrential rains brought floods that inundated the medieval part of Prague and areas of the countryside. Some 100,000 people were obliged to evacuate their homes.

Damage to the economy
Naturally the toll on the economy will be severe, the costs of reconstruction being in the tens of billions of crowns (perhaps over 100bn crowns). Nevertheless, employment in the construction industry will be given a boost.
The economy was floundering anyway as exports to the EU became sluggish. The time is nigh for a fiscal boost, and this is exactly what the reconstruction expenditure will provide.

Economic strategy still uncertain
The government is not yet committed to one course of action to finance reconstruction. Returning to its radical populist instincts is one option, soaking the rich or better-off by a tax hike. This could lead to a brain drain abroad. No longer are Czechs restrained from foreign travel, while their language skills are generally high, especially among the upper strata, who speak German as a matter of course and usually excellent English too.
Another way of funding the reconstruction would be 'flood bonds,' issuing bonds for reconstruction. The same people would be likely to be involved, but as investors not tax-payers, with foreigners chipping in too. Such is the course being urged on the government by orthodox financiers. It should be evident which way it will jump before the end of the year. 

New man at the helm
The social democrats were re-elected earlier this year, but have a new figure in the premiership, Vladimir Spidla. There is also a change due in the presidency for which elections will be held early next year. Vaclav Havel is due to step down. One candidate is likely to be Vaclav Klaus, who was defeated as head of the conservatives in the elections.

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AUTOMOBILES

IPS Skanska says land preparation for carmaking plant on time

IPS Skanska spokesperson, Arne Kejdana, recently noted that the association of construction firms led by it will complete preparations of land for the new plant to be built by Toyota-PSA (TPCA) in the local industrial zone as scheduled.
Carmakers Toyota Peugeot Citroen Automobile Czech will invest 1.5bn Euros in the Kolin-Ovcary industrial zone to construct a plant for the production of super economy cars. Peugeot, Citroen and Toyota will employ as many as 3,000 workers and another 10,000 to 11,000 people indirectly, CTK reported.
Costs of building the plant, subsidised by the government, will amount to 1.97bn Czech crowns. The first car is slated for assembly on January 1st 2005, with annual output being projected at 500,000 units. 

Strong crown sends Tatra into the red

Truck maker, Tatra, slumped under the command of its new US owner to a Kc 33m loss in the first half of the year from a Kc 52m profit in the same period a year earlier. Management of the company in Kopivnice, north Moravia, blamed the firming Czech crown for the reversal. "The strong crown is our main problem," said board chairman, Milota Srkal.
The firm is trying to offset the strong currency with cost-cutting measures and lay-offs, the company said. The parent firm employed 2,982 people at the end of June, 213 fewer than a year earlier.
More than two-thirds of Tatra's sales are generated abroad with sales of trucks and spare parts accounting for around two-thirds of turnover. Sales in the first six months of the year fell by Kc 109m compared with the first half of 2001.
Tartra was earlier this year awarded a contract by the Indian government to supply 1,070 vehicles for the army. With most due to be delivered by the end of 2002, sales for the second half of the year should top 2,000. "Not even this increase in sales and the reduction of costs will make it possible to eliminate the first half loss," Srkal warned. The government sold its 91.62 per cent shareholding in Tatra to US company, SDC International, last November.

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CONSTRUCTION

Devastation spells a profit for construction

The devastating floods in the Czech Republic do not spell bad news in all sectors. Specifically, the construction industry is preparing for a significant boost upon commencement of reconstruction in distressed areas.
The government and the EU have plans to invest billions of crowns in reconstructing damaged roads, railway sand bridges. As Robert McLean, editor in chief of Construction Journal, a Prague-based property development and real estate trade magazine noted, "It's not something they want to go around trumpeting, but in the long term, companies that do infrastructure work will probably do well." 
Wood & Company analyst, Jan Slaby, added: "The highways and streets have to be repaired." However, IPS Skanska, the country's largest building firm, is at this time focussing on charitable flood-relief efforts. "We are offering services to rescue teams…. We've provided lorries and cranes and we've also bought some necessary materials for affected areas," the Prague Post quoted company spokesperson, Arme Kejdana, as saying. 
IPS Skanska has offered help to state railway company, Ceske drahy, as well as to the Prague public transportation authority, Dopravni podnik. While a top priority is "to return the metro to normal operation," Kejdana said that on the national level, "We will have to see how bridges and other big buildings have been affected."
Accompanying a multitude of both legal and administrative changes, the urgency of the nation's situation also implies compromise. While existing legislation stipulates that public works projects in excess of 100,000 Czech crowns require a public tender process, McLean says that the massive scale of construction work required means that "some things have to be done quickly."

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ENERGY

Flood's impact on budget deficit could relaunch CEZ privatisation plans

Ministers still refuse to admit it, but most analysts expect the recent floods to force the government to accept the inevitable and relaunch the privatisation of electricity producer, CEZ, The Prague Business Journal has reported. 
"The floods only support the idea the government has to privatise," said Raiffeisenbank equity analyst, Jindrich Svatek. "This is another reason to speed things up. "
Svatek said the government might well be forced by its deteriorating budget deficit to start considering privatisation scenarios next year. Past indications from the government has suggested privatisation might only be looked at towards the end of its four-year term in office.
Even if a sale were launched next year, it would take at least another year to complete the sale, warned Wood & Company analyst, Jan Slaby,. "The government has to privatise because of the public deficit," he added. "It is just a question of whether it is sooner or later."
Svatek said the ongoing transaction under which CEZ purchases state-owned regional electricity distribution companies creates more time before the power company has to find a foreign strategic partner. The regional distributors are the biggest buyers of CEZ electricity. However, in the long-term, CEZ is still too small on a Europe-wide market and needs a strong foreign partner. "I still think the government will go for a sale to a strategic partner. It would be willing to pay a premium and could help CEZ with electricity exports," he said.
CEZ is one of Europe's biggest electricity exporters.
Milos Zeman's previous government called off the sale of CEZ early this year after no foreign investor was willing to offer the asking price of Kc 200bn, largely due to conditions attached to the sale. A price approaching Kc200bn could still be possible for the government's 68 per cent shareholding, Svatek said, if the conditions, especially on mandatory coal purchases are less onerous.
CEZ's takeover of the regional distributors was still stalled at the end of August. An expert has yet to be appointed to set a fresh price for CEZ's 100 per cent owned transmission company, CEPS, National Property Fund, spokeswoman, Lucie Kralova, said. The first valuation was widely criticised for being too high. The CEPS shareholding is being used by CEZ as partial payment for the regional distributors.
One alternative to a strategic sale of CEZ, floating more of the company's stock on exchanges in either London or Frankfurt, doesn't appear to have progressed far after it was raised in the early summer by company managers. "This was only mentioned as a possibility. We are only investigating what would be necessary for this to happen," said CEZ's chief financial officer, Petr Voboril. "I have no idea if, or when, there might be a decision on this."

Old bidders eyeing Unipetrol again

Suitors for the Czech Republic's biggest petro-chemical group, Unipetrol, emerged recently, including old bidder Rotch Energy, after agro chemical holding Agrofert all but called off its long-stalled purchase, Prague Business Journal has reported.
Within 24 hours of demanding the Czech government agree to fresh conditions for it to buy Unipetrol, Agrofert took a giant step to expand in Slovakia. The Slovak National Property fund approved the sale of chemical group, Istrochem, to an Agrofert subsidiary, paving the way for the Sk 202m purchase (Kc 140m) to be finalised by September 15th. News agency reports, which Agrofert was unable to confirm, said one of the conditions of purchase is investment of Sk 1bn.
Progress on the Slovak purchase followed Agrofert's announcement that it would not proceed with the Kc 11.7bn Unipetrol purchase without new conditions.
Unipetrol is not the same company as Agrofert believed it was buying last December, said Agrofert boss, Andrej Babnis. He cited the deterioration of the group's financial performance and, in particular, disagreements between shareholders at its key refinery company, Ceska Rafinerska, which raise concerns over whether Unipetrol's owner would be able to fulfil contract obligations to supply group companies with refined chemicals. "It is not a problem of money," added Babis, who gave details of financing of up to €346m guaranteed by Citibank for the purchase.
One analyst, who asked not to be named, pointed out that the euro-denominated purchase price of Unipetrol actually fell by around 10 per cent since December in terms of the Czech crown because of the strong appreciation of the local currency.
The two ministers most closely involved in Unipetrol's long-stalled sale, Finance Minister Boyuslav Sobtka and Minister of Industry and Trade, Jiri Ruskno, rejected a renegotiation of the sale conditions. Neither they nor the direct owner of the government share, the National Property Fund, were able to give any indication of Unipetrol's future.
Buyers almost certainly exist for some of the agro-chemical group's choice units, such as Rafinerska and petrol station network owner, Benzina. Conoco teamed up with Agrofert just before it won the tender to buy Unipetrol last December but later appeared to have been sidelined as a party by Polish refinery company, PKN Orlen. A Conoco spokesman told Prague Business News it was still interested in part of Rafinerska and Benzin with or without Agrofert's cooperation.
Rotch Energy, which reportedly outbid Agrofert in last December's tender, said it was still interested in bidding for the state's 67 per cent shareholding in Unipetrol. "We would be very pleased to come back to the table to discuss the question of purchase if we were invited. We are still interested," said Rotch Energy GEO, Keyvan Rahimian.
Austrian oil refinery group, OMV, also tipped to be a possible buyer, did not respond to questions. Agrofert's Babis declined to answer e-mail questions about the Slovak acquisition.

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ENVIRONMENT

EU officials fault Czech ISPA strategy

In spite of massive needs, the Czech Republic has failed to come up with environmental projects that could draw on generous European Union (EU) funding, the Prague Business Journal has reported.
Brussels, bending some of its rules, which in theory, call for equal funding of environmental and transport projects, has masked part of the ongoing failure. However, massive amounts of future EU aid could be endangered unless flaws in identifying and preparing suitable environmental projects are remedied fast.
EU officials told the Prague Business Journal recently that Czech ministries are mainly to blame for failing to implement a coherent strategy for drawing on ISPA (the Structural Instrument for Pre-Adhesion) funds. These funds are aimed at environment and transport infrastructure improvements that help to prepare for EU membership.
Flaws in the Czech approach were highlighted when the EU offered the country a second chance to spend unallocated ISPA funding, mostly from this year, on flood repairs. The offer to draw on €48m (Kc 1.53bn) in unallocated funding for this year revealed just how far short the country had fallen in preparing suitable projects ahead of the deluge. The EU earmarked a total of €73m in ISPA funding for environment and transport projects in the Czech Republic this year, but the onus is on the Czech side to come up with projects that can cash in on the offer.
"There is a challenge in getting environmental projects of the quality we need," said a well-placed European Commission official when asked to sum up the Czech failure to draw on funding. "The key problem seems to be identifying needs and then turning them into projects…. That is a challenge for central government ministries."
The Ministry for Regional Development is the main coordinator, but it works closely with the ministries of transport, environment and agriculture.
The rules for claiming ISPA funding are drawn up in such a way that the EU allocation of cash for environmental and transport projects should be more or less balanced in any year. This means that the Czech's failure to come up with enough eligible environmental projects should have a knock-on effect when it seeks EU cash, for example, for key road or rail links. The EU however, has shown some flexibility on this demand. 
The dearth of environmental projects jars strangely with the huge environmental clean-up and infrastructure improvements required in large parts of the Czech Republic. For example, this year the country was given extra time - until 2010 - to fall into line with EU rules on the treatment of wastewater, although it must be prepared to meet the demands for more, and better, sewage treatment works upon joining the EU.
EU officials complain that the country has so far submitted no demands at all for the clean-up of solid wastes or improvements to air quality. "There have been no applications at all in these areas," said the official.
"The environment appears to be the Czech weak spot," added another Brussels-based official with a wider regional perspective.
The rush by some Czech city councils to fill town hall coffers by privatising the management of local water companies has contributed to the problem of drawing on EU cash.
Only public bodies, including state companies such as Czech Railways or the state roads body, the Management Authorities for Roads and Highways, can qualify for ISPA funding. So Brussels has to run an extra series of checks in the case of public- owned but privately managed water companies to make sure that EU funds are not being channelled into the wrong hands. "In some case we have had to examine the precise contracts between the local authorities and private companies," the official said.
Officials in the Ministry for Regional Development admit too few environmental projects have been forthcoming but add that the Czech Republic is far from alone in this respect among candidate countries. Brussels-based officials admit Slovakia has similar problems, but they are reluctant to draw comparisons.
"It is also more difficult to prepare environmental projects because they are usually smaller in themselves and due to the decentralised nature of many of the applicants and their more complicated ownership structure," the Ministry for Regional Development said in a statement. Individual projects must cost at least €5m (around Kc 160m) to qualify for ISPA funding.

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FINANCIAL NEWS

Analysts, IMF officials express labour concerns

Economic analysts are expressing their rising concern over unabated unemployment and the increasingly unbalanced structure of the Czech Republic's labour market. According to recently released figures by the Labour and Social Affairs Ministry, unemployment reached 9.2 per cent in July. This means 479,241 individuals were without work. Although analysts acknowledge that seasonal factors boost unemployment figures during the summer, they are worried about underlying trends. Joblessness has risen significantly on the same last-year period when 8.7 per cent of the workforce was registered as unemployed. Patria Finance analyst, David Marek, explained that while unemployment does rise in July as the country accepts a new wave of school leavers and university graduates, he says that, behind the seasonal adjustment, structural unemployment is on the rise. Meanwhile, Volksbank analyst, Vladimir Pikora, has noted that a gloomy global economic outlook and the strength of local currency play a major role in increasing unemployment. "The situation in the United States and Western Europe isn't very rosy, and it will also be reflected here," the Prague Post quoted Pikora as saying. He explained that this factor, coupled with the strength of the Czech crown, leads many companies to cut back. As such Pikora expects layoffs to continue, saying that even when seasonal increases cease to be a factor, we can only expect "a mild improvement" in unemployment figures. The latest figures are also disturbing for another reason, they point to a widening gap between the country's richest and poorest regions. While parts of the capital boast unemployment rates as low as 2.4 per cent, unemployment in the Most region of northern Bohemia comes in at 21.4 per cent. The International Monetary Fund commented on this aspect of the Czech labour market: "Structural problems in the labour market seem to be gradually deepening. Large disparities in unemployment rates exist across different regions, age groups, and levels of educational attainment." The IMF further cautioned that, "More than half of the unemployed are now long-term unemployed…. Although not yet an immediate threat, this adverse tendency could limit the economy's ability to attract future foreign direct investment and reduce the scope for sustainable growth over the medium term."

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INDUSTRY

Shoemaker waits to take next step with new owner

A brand of sneaker that survived on the Czech market for 23 years without any redesign or alteration to its basic no-frills concept should soon be taking its next step under new ownership, the Prague Business Journal has reported.
Bids for the Zlin plant producing Prestige sport shoes, machinery, the trademark and know-how, must be submitted by September 13th with price the only factor determining the future owner of this piece of Czech footwear history.
Two other shoe-making facilities are being sold alongside Prestige. The Prestige package belongs to bankrupt shoe company, CEBO, which was itself formed from folded footwear company, Svit, Zlin. CEBO was declared bankrupt in April after it lost a crucial order from US shoe producer and seller, Timberland.
Demand for the distinctive blue and while Prestige sneakers is still strong 23 years after designers came up with the formula for the cheap but hard-wearing show. Those were the days of a largely captive communist-era footwear market. CEBO produced around 200,000 pairs of Prestige trainers last year.
The sneakers survived the arrival of western competition in the form of Nike, Reebok and Adidas, in the early 90s and have been manufactured until now without any interruption or any innovation. The brand even took in its stride attempts by Asian producers to oust the model by producing cheaper copies.

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