Update No: 064 - (27/08/02)

The political elite in the Czech Republic is haunted in more ways than one by communism. The coup of 1948, engineered by Stalin, saw the communists seize power, despite having a minority of support, fewer than 25% of voters behind them. That percentage of support was the high water-mark of the communists after the pro-Soviet fervour of the Second World War.
In 1968 Dubcek would probably have won outright in the first election after the Prague Spring, had Moscow permitted one. But the communists would have been hard put to win an election if the voters had felt secure from a Russian intervention second time round.
Be that as it may, the Czechs had to endure twenty-one years more of communism. With the Velvet Revolution of 1989, it seemed certain that Czech communism was finished for good.

Communist comeback
In elections in May an extraordinary thing happened. Support for the communists surged to 18.5%. Yet the Social Democrats were well ahead and able to form a coalition government. The premier, Vladimir Spidla, head of the CSSD, and Vaclav Havel are nervously snubbing the communists off. So are the co-signatories of the current coalition agreement with the CSSD, namely the Freedom Party and the Christian Democrats.

The French alternative
President Mitterand of France, who was never soft on communism, was, nevertheless, prepared to give the French Communist party several portfolios when his French Socialist party swept to power in 1981. They were given ministries such as transport and education, dear to their hearts. Consequently, their party leadership was stymied and could not criticise the government. The French CP faded into electoral insignificance as a result.
The Czech political elite then could learn a lesson from Mitterand and allow the Czech and Moravian Communist Party (KSCM) a measure of office, a few not so key ministries, to ease the coalition's path. The country's EU neighbours would understand the ploy.

EU entry nears
The EU beckons as the likely future. 2004 is the earliest that this is likely .The Czechs have plumped for backing the Poles in negotiations with Brussels. They realise that the EU countries cannot keep them out with a clear conscience.
There is a 63 to 30% majority in favour of EU entry.

German complications
Nevertheless, a victory for Edmund Stoiber, the leader of the German Christian Democrats, in September's elections to parliament would jeopardise the entry process. He has demanded an apology from the Czechs, as well as the Poles and Slovaks, for bad treatment of Germans in their midst in 1945.
Remembering who invaded who, and given the role of the Sudetan Germans in 1938 in the build-up to the Munich Pact plus the behaviour of the Germans in the seven intervening years, an apology let alone restitution of property, which Stoiber is mentioning, would stick in their throats. Chancellor Schroeder is of another stamp of German politicians and would leave such issues alone. But his party is trailing in the polls, even as his own rating against Stoiber is superior. September 22nd, the date of the elections, is being eagerly awaited.

Flooded out
The Czechs have experienced appalling floods, the worst since 1890. Some 50,000 people were evacuated in mid-August from Prague, mainly from the mediaeval part of the city, a notable tourist attraction. There has also been heavy rain in the south of the country, forcing the river of Vltava and other rivers to overflow. The government declared an emergency in five regions of the country. 
These developments will almost certainly depress economic growth for the rest of the year as continued flooding is expected, the full extent of the damage not yet evident.

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AUTOMOBILES

Busmaker Karosa taking it on the road

The biggest Czech bus manufacturer, Korosa, has overcome its image of producer of low-quality buses, selling a record 721 vehicles in the first half of this year - an 18 per cent increase year-on-year and the best sales figures since the company's privatisation in 1993, The Prague Business Journal has reported.
Karosa, based in the Eastern Bohemian city of Nove Myto for more than 100 years, tarnished its own name during communism when it flooded the local market with bad buses that wore out quickly. Today, Karosa still dominates the market with almost a 60 per cent market share. But only 30 per cent of its production is sold domestically, most Karosa buses are exported to France. On the local market, Korsa sold 220 buses in the first half of the year compared to 329 for the same period in 2002.
Some analysts see it as a classic case of the cobbler children having no shoes, with so many buses in the local fleet in urgent need of replacement. Local bus operators blame the Ministry of Transport and Communications for failing to provide them with enough state subsidies to buy new buses.
"The ministry of transport and communication has not released the expected subsidy this year," said Antonin Sipek, director of Automotive Industry Association.
Meanwhile Karosa's biggest competitor, SOR Libchavy, with almost 19 per cent market share, increased local sales from 43 buses in the first half of the year to 72 buses for the for the same period this year. "It produces smaller buses which are becoming more popular for their limited capacity," Sipek explained.
Sales on the Czech market depend heavily on state subsidies, so Karosa isn't expecting any increase here this year, said company spokesman, Jindrich Lnenicka. The company isn't alone in feeling the hit; overall sales of business in the first half of the year decreased by 17.2 per cent, from 460 buses sold in the same period in 2001 to 381 this year. Sipek blamed the decrease on "a significant drop in renewal of buses providing public transport."
Among the country's 18,000 registered buses, the average age at the end of last year was 12, Sipek said The problem is that the technical lifespan of a bus is from eight to ten years. "All buses must undergo regular technical inspections and meet the certain conditions, but the quality of testing is different for a 12 or 15-year-old bus than for a five-year-old bus," Sipek said. He added that for passenger comfort and safety, the rate of renewal should be at least doubled from the current 600 annually. But Milan Lab from Karosa's marketing department said that renewal of the bus fleet in general is continually improving. "The collapse of the bus fleet was predicted for 2001, but according to our research the renewal has gotten its second win," Laba said. 

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BANKING

SMEs still struggle to attract bank loans

Although loan volume to small and medium-size enterprises (SMEs) are posting record increases, analysts warn the Czech banks are still in danger of being outflanked in this key sector by international rivals, the Prague Business Journal has reported.
Ceska Sporitelna recorded a 159 per cent increase year-on-year in loans to SMEs in the first quarter of this year. This compares favourably with the 85 per cent year-on-year growth in loans to SMEs given by GE Capital Bank in the first six months of the year.
However, the new risk management systems put in place in the early to mid-1990s that sought to counter reckless lending by Czech banks have yet to take hold, and bank employees still have to be trained to deal with them, contributing to current inconsistent support for SMEs. Poor business plans and information provided by SMEs themselves, as well as gaps in the bankruptcy law that makes it hard for creditors to recoup property and investments when companies go belly-up, are also putting the brakes on Czech bank lending.
Whatever the banks' shortcomings, observers agree that there can be no second chapter to the banking sector collapse of the mid-1990s, which the Czech Consolidation Agency (CKA) estimated will cost Czech taxpayers a total of Kc 300bn (US$10.1bn).
"There's been an evolutionary cycle. In the early 1990s, banks were getting into the swing of things, supporting capitalism and lending wherever they could," said Ross Waetzman of Ernst & Young's corporate finance department. "In the mid-to late 1990s they finally realised the repercussions of some of their actions and in some cases had caused irreparable damage to their balance sheets."

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ENERGY

Biggest US investor in Czech Republic prepares to sell off key energy asset

American-owned NRG Energy, among the largest foreign investors in the Czech energy sector and once a contender to purchase part of energy giant CEZ, is selling its stake in the power plant Energeticke Centrum Kladno (ECK).
Development of the US$400m (Kc 11.8bn) plant is the biggest US investment in the Czech Republic and the second biggest in the electricity sector following the Temelin nuclear power plant. NRG Energy has no other significant Czech assets.
NRG's announcement came as the company launched a fire sale of its non-US assets to help regain its domestic footing in the post-Enron environment. NRG and other US power companies have seen greater resistance at home from energy buyers and investors, who are increasingly scrutinising balance sheets, price contracts and trading practices in the sector after the spectacular collapse of energy trader, Enron.
NRG became a major US investor in the Czech Republic when it teamed up with El Paso Energy International Nations Energy Corp, TECO Power Services and Mosbacher Power Group in 1997 to build the ECK plant.
ECK has more that Kc 1bn in share capital and is owned by two separate companies, the largest of which, Matra Powerplant Holding, has an 87 per cent stake in the generating plant. NRG owns 50 per cent of Matra. The Czech distribution company, Stredoceska Energeticka, is reported to have the remaining 13 per cent in ECK.
CEO of NRG Energy's Czech office, Paul Kaiser, refused to comment on the sale. And the company has been tight-lipped about who might be interested in acquiring the shares. However, a source close to the sale who asked not to be named, said that Houston-based El Paso Energy - NRG's major partner in ECK - will most likely buy out NRG's shares. El Paso is reported to currently control just under one-third of ECK.

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FOOD & DRINK

Czech mineral water giant aims to bridge EU gap with Swiss purchase

Czech producer of Mattoni mineral water, Karlovarske Mineralni Vody (KMV), is gearing up to leap into the hostile waters of the Western European market, The Prague Business Journal has reported.
KMV bought into Swiss mineral water company, St Moritz Mineralwasser Chaunt Blains, and its source in the Swiss resort town, and is looking for a suitable place nearby to build a bottling plant. The acquisition is just a first step in what the company's chairman, Antonio Pasquale, described as a new strategy to ensure the continued growth of the country's dominant bottled water producer.
KMV is still reeling from its failed attempts to merge with smaller bottle water makers Podebradka and Hanacka Kyselka, a deal which would have given the partners nearly 80 per cent of the Czech market.
"KMV finds it necessary to build the brand to create a bridgehead for successful exports of its Czech products by developing or buying mineral water operations in foreign countries," Pasquale said.
If it succeeds, KMV would join a small and select group of Central and Eastern European non-alcoholic beverage companies pushing into Western Europe. Even Pasquale, who says exports are a must for growth, acknowledges the challenge. "Consumers tend not to view a company operating out of a former communist country very positively," he said. "Despite that fact, several export projects have already successfully started."
The company made some recent inroads to Slovakia, Russia, Hungary, Croatia, Switzerland, the United Arab Emirates and the US, but the export part of the business is still young, Pasquale said. He would not elaborate on the projects. "The export quantity is not yet satisfactory," he said.
Few non-alcoholic drink makers in the former Eastern bloc countries have launched in the EU and made a success of it. Even some beer producers are only now capitalising on the fruits of several years of labour in putting foundations in place for distribution in the west. 
Richard Hall, chairman of Zenith International, a global consultancy specialising in the bottled water industry, says it'll be a long climb up a steep hill for KMV, but it can be accomplished if the company maintains a financial balance between capital spending, further innovation, targeted distribution and building consumer knowledge about Czech water.
"I was pleased to see it, but I thought it was a bold move," Hall said. 

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TELECOMMUNCIATIONS

Russian oil Yukos said to be among five bidders for GTS

The sale of the Central European telecoms part of bankrupt KPNQwest has apparently attracted a surprise bidder - a consortium including Russian oil giant, Yukos. So far, only one of the bidders, Dublin-based telco eTel, has confirmed bidding for the Central European operation, while another, said to be led by US investment bank, Lehman Brothers, has been widely reported to be in the game, the Prague Business Journal has reported.
"I can confirm that the Russian company is one of the major bidders," said David Duron, marketing director of KPNQwest/GTS in the Czech Republic. He added that Yukos is not the only company left in the bidding, and that he hopes the sale will take place "in days, or maybe weeks."
Louis Toth, CEO of KPNQwest/GTS Central Europe, wouldn't confirm that Yukos is in the running. However, he said that there are "four to five" bidders in the process, of which two are strategic and two are financial investors.
Toth said all the bidders, except for eTel, have wanted to keep a very low profile and that some reports about other bidders - including Yukos, are nothing more than rumours.
"First of all, I don't think the Czech management is in the position to confirm that," Toth said. "I'd have to say on their behalf that they're speculating; they're not confirming."
He also wouldn't say how long it will take to close the transaction, since the talks are very delicate and include both KPNQwest creditors and the bankruptcy administrators. "I'm hoping to hear something in the next two weeks, that's what I can tell you," Toth said.

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