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

Everyone is awaiting with apprehension the outcome of elections to parliament this autumn. The government is highly unpopular through no real fault of its own. Any would be in a country going through a painful transition process, weighed down with corruption and crime, in which every successful businessman or operator in public life is suspect.

Meciar recidivus
No-one is actually more suspect than Vladimir Meciar, the architect of Slovakia's independence in 1992 and its premier until 1998. After a series of near dictatorial outrages and numerous undemocratic abuses of his office, he did allow himself to be voted out four years ago.
As head of the opposition he has reaped the benefit of the government's unpopularity. His election looks probable, an event dreaded by most of the population of Bratislava and the areas adjoining the EU. They rightly fear that Slovakia's accession to the EU and to NATO will be put in jeopardy. They fear that the leopard will not have changed his spots and corruption and gangsterdom will thrive. They might well be right.

Meciar defectors form new party
The one thing that could spoil the chances of Meciar and his Movement for a Democratic Slovakia (HZDS) is that defectors from HZDS, easily the largest single party, have formed a new party of their own, the Movement for Democracy (HZD). Its leader, Ivan Gasparovic, is banking on people being wary of Meciar after the EU and NATO made it clear that Slovakia could expect entry into either organisation to be jeopardised gravely were he to come back to power in the September 20th-21st elections.

The interventions by the EU and NATO could have counter-productive effects, however, being seen as unwarranted interference in democratic procedures in Slovakia. Even Gasparovic has been quick to denounce them in that spirit.
He and Meciar are accusing each other of complicity in previous privatisation scams. Cynics would say that they are probably both right. The mud-slinging would seem to rule out any post-electoral cooperation between HZDS and HZD. But in Slovakia everything is possible. Time will tell.

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AGRICULTURE

Interest in Sapard low

By mid-July, only 30 application had been submitted for agricultural funding in Slovakia under the European Union's Special Accession Programme for Agriculture and Rural Development (Sapard). The figure was far below the 880 projects in the Czech Republic and over 1,000 in Hungary because of what agency officials say is a lack of preparation among Slovak agricultural food companies.
Slovakia had cleared the final hurdle to accessing its 19m euro fund this spring but it is very likely that most of the money will go unused, said Sapard's Zelmira Milkova. However, she also added that the agency expects the number of applications to grow significantly by the end of the year. The agency also expects to be eligible for 19.5m euro in 2003.
Although Sapard funds can cover up to 50 percent of some agricultural development projects, some Slovak farmers and food-makers may be discouraged by the programme's strict economic criteria and investment requirements.

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ENERGY

Privatisation of Slovak power plants put to tender

Another huge privatisation started at the beginning of August, Sme has reported. 
The National Property Fund [FNM] announced an international tender for the sale of the Slovak Power Plants [Slovenske Elektrarne]. A decision on the final form of the Power Plants privatisation will only be made in the course of the tender. The state declares that it wants to sell two nuclear power plants in Jaslovske Bohunice and Mochovce, two thermal power plants in Vojany and Novaky and the system of hydroelectric power plants. These power plants produce 85 per cent of the electricity consumption altogether. 
The FNM gave investors a choice. They will either bid for a 46.14 per cent stake in the entire Slovak Power Plants or submit bids for 49 per cent stakes in two power engineering subsidiaries, which do not exist yet. If the latter privatisation model is successful, the state will sell the company operating the nuclear power plants separately from conventional production sources...
The government asked potential strategic investors to declare their interest at the PricewaterhouseCoopers company, the state's privatisation adviser, by 12 August. Then, investors should send their preliminary bids by 26th September.


Slovakia to receive additional payment from gas utility sale

Slovakia will receive an extra 3bn Slovak korunas for the privatisation of 49 per cent of gas utility SPP, an adviser to Deputy Premier for Economy Ivan Miklos told the Slovak news agency TASR on 19th July. 
A consortium of Germany's Ruhrgas and Gaz de France earlier in July paid US$2.7bn (121bn korunas) for the stake. 
The buyers will make the additional payment under a provision of the sale agreement that binds them to raise the purchase prise after auditing the net value of SPP's assets by the end of June. "Though the audit has not been completed as yet, we expect to get another Sk3bn," the adviser said...
The whole transaction should be closed by September. 

Czech SME acquires 50% of Elektrovod Holding

The No.1 power distributor in the Czech Republic, Severomoravska energetika (SME) has purchased a 50 per cent stake in the Slovakia-based Elektrovod Holding, a designer and developer of electric networks, from Penta Group, officials from the three groups told reported, cited the Czech news agency, CTK.
No financial details were disclosed by SME Strategy Director Petr Ivanek because he said it would be "retroactively changed in line with the results of an audit."
The Czech group purchased the shares mostly because it hopes to boost its presence in the area of assembly and repair work of distribution facilities and equipment.
Elektrovod currently holds about two-thirds of the Slovak market and another 20 per cent of the market in neighbouring Czech Republic.
Slovak management group, Elvod, holds the remaining stake in Elektrovod. Elvod and Penta obtained control of Eletrovod more than two years ago. The latter was nearly insolvent and the two companies set out to restructure it.
"The distributor plans to start assembling electric networks and operate telecoms networks," Ivanek was quoted as saying. Elektrovod Holding showed a 24m Slovak crowns profit last year, against a 175m crown loss in 2000. the group's share capital stands at 243m crowns.

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EU ACCESSION

Slovak EU envoy lists problems with closing an EU accession chapter

Slovakia will close on 29th July in Brussels the 27th chapter of the acquis communautaire in the negotiations with European Union (EU), TASR web site has reported.. It is the chapter on regional development. 
Slovakia's main negotiator, Foreign Affairs Ministry State Secretary Jan Figel, spoke to journalists in Presov on Thursday. According to Figel, the regional development chapter is among the more difficult in terms of finances. Figel described the uncertainty around the so-called Slovak regional map (statistical map for the continuous evaluation of the country in terms of EU criteria) as problematic. The Slovak government agreed on a "map" consisting of that splits Slovakia into east, central, west and Bratislava. 
The second problem in negotiations was the question of who will be the officer for payment agencies. This person will be assigned to receive EU aids, and Figel said he appreciates the reality that this role will fall to the Slovak Finance Ministry. 
He said the most serious task that Slovakia has to manage is to accept the National Development Programme, which is susceptible to EU adjustment, by the end of this year. 
According to Figel, recent statements of several politicians that after the creation of the new Slovak government that already-closed chapters will be re-opened, is only "cheap rhetoric" that belongs on the agenda of election campaigning or opposition policy. Figel emphasized that all closed chapters have a built-in transition period, and the public is being informed about their conditions. According to Figel, it is easy to open already closed chapters, but the other side in the negotiations also has the same right.

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FINANCIAL NEWS

Investment tax breaks scrapped

Investment-related tax breaks in Slovakia will end as of September 1st 2002, according to an obscure law quietly passed by parliament at the end of June, the Slovak Spectator has reported.
Because the country's planned entry into the European Union requires the elimination of such tax breaks, investors will henceforth have to rely on the good will of the State Aid Office to see past state tax break commitments honoured and future investment aid dispensed.
A handful of foreign companies have enjoyed generous tax relief of up to 10 years recently, taking advantage of Slovak legislation that allowed them to invest money they would otherwise have paid in taxes.
The new changes have caused deep concern among investors, with most contacted by the Slovak Spectator refusing to comment until the impact of the new tax break rules became clear.
But Radomir Jakubec of the car parts maker, Plastic Omnium, told the Sme daily that "this is something that truly astounds every investor, because it does not create stable conditions and arouses uncertainty."
The EU does to allow the use of tax relief, but does permit other forms of state investment support such as regional state aid, says the European Commission. The EU expects candidate countries to follow suit before entering the 15-member bloc as planned in 2004.
As unhappy as many in Slovakia may be to see the credit vanish, in some cases only nine months after they were approved by parliament, few see any option.
"As I see it, we have no other choice, we have to change these rules," said Jan Toth, senior economist with ING Barings bank.
Legislation for stimulating investments, which has gone through a number of changes since being introduced in 1999, has offered investors as much as 10 years of 100 per cent tax holidays. The country has argued the tax breaks were necessary if Slovakia was to compete successfully for foreign investors with neighbouring countries, which have been offering such holidays for several years.
"The aim of the law has been to attract foreign direct investment," said Ludmila Bizocova, head of the tax section at the Finance Ministry, adding that "in 2001, eight organisations used it."
An amendment to income tax law now cancels breaks to companies founded after September 1st 2002, while tax relief approved before will be converted to a form of state aid under a change to the law on international cooperation and aid in tax administration.
"Tax breaks will be provided under the same conditions as before, only they have to be converted in line with Slovakia's State Aid Law," said Bizocovoa.
The main change in the channelling of state support will be the establishment of a state system to provide aid calculated from the size of investments a given company has made over time.
"Investors will pay all heir taxes, but they will receive state aid from the donor - usually the Economy or Finance Ministry," explained Miroslav Bladik, head of the State Aid Office.
Companies currently using tax relief packages must ask the State Aid Office for permission to continue, but will eventually have to give up the advantage with EU entry, possibly as early as 2004.
"With respect to upcoming EU entry, jour negotiators have already started talks with companies which use the relief. They are planning to convert their holidays to some kind of state aid. After EU entry, only EU legislation will be valid - that's all," said Bizocova. 
Converting tax breaks to straight aid could cause serious problems, as two of Slovakia's most significant foreign investors, Volkswagen and US Steel, are technically ineligible for such aid under EU rules on 'sensitive industries'.
However, because of the key roles these two companies play in the Slovak economy, the European Commission has agreed to allow the conversion of their tax breaks into state aid as well, at least for now.

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FOREIGN LOANS

EU pledges 1.7bn euros towards Slovakia's regional development

The implementation of the public administration reform coupled with entry into the EU, should become a key to the levelling of differences between [Slovakia's] regions, Prime Minister Mikulas Dzurinda said, Radio Slovakia has reported.
He praised the conclusion of the regional policy chapter in negotiations with the EU. The prime minister said that this opened up doors to the final stage when the entire negotiation process would be successfully completed.
Mikulas Dzurinda conveyed the statement by the European Commissioner for regional policy, Michel Barnier, who said in Bratislava today that the EU was ready to earmark 1.7bn euros for Slovakia for the period of three years. This sum will be channelled to regional developments projects.

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INFORMATION TECHNOLOGY

IBM back in treasury tender game

IBM Slovakia has asked Transparency International, a corruption watchdog, to look into Slovakia's troubled tender for the State Treasury's IT system, throwing a wrench into the Finance Ministry's fifth attempt to select a winner, The Slovak Spectator has reported. 
After having its fourth tender cancelled in April because of complaints by Siemens Business Services that it had been unfairly excluded, the Finance Ministry decided in late July to select an eventual winner through closed negotiations with both Siemens and HP, the winner of all previous tenders. 
IBM, however, says they have been unfairly excluded from the contract, although they had submitted a bid last May. 
Officials from the Finance Ministry said they had not accepted the IBM bid in May because the tender had been cancelled, and they had not considered it in July's decision because IBM's 600-page bid had not been evaluated. IBM claims its bid of Sk918 million to provide a comprehensive package of hardware, software and services to the treasury is Sk300 million lower than the cheapest bid in April's cancelled tender.

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MINERALS & METALS

Penta & Co., no longer want VSZ

A group of financial investors - including Penta Group, Istrokapital and J & T - that brought a 22 per cent stake in steel maker, VSZ, last year, has said it is not interested in a further 16 per cent holding under the control of the FNM privatisation agency. US Steel Kosice has indicated interest in the latter stake, which would give it about 40 per cent of shares, but has not yet been able to agree with the government on a price.

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NUCLEAR ENERGY

US firm funds nuclear waste study

The consultancy company, Encon Trnava has received a US$149,000 grant from the US Trade and Development Agency (TDA) to help conduct a feasibility study on a project to handle radioactive waste from Slovakia's two nuclear power plants, the Slovak Spectator has reported.
US-based Environmental Technologies is overseeing the project, which should eventually lead to a plasma enhanced melter facility to process nuclear waste. The feasibility study should be completed by the end of June 2003.
TDA is a US government agency that provides grants and technical assistance to US companies pursuing overseas business opportunities. Since 1991, TDA has granted over US$4m to various projects concerning Slovak economic development.
Encon is a consultancy in nuclear energy directed by Tibor Mikus, former director of power utility, Slovenske elekrarne, and an MP for the opposition HZDS party.

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