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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: 074 - (19/06/03)

Political turbulence
The political situation in the Czech Republic is fragile and could change at any time. Ministers are on the point of resignation, about to jump from what they fear is a sinking ship.
Last year the country lost a strong premier in Milos Zeman, leader then of the Social Democrats, but had an aloof figurehead of a president in the admirable ex-dissident Vaclev Havel. Now the tables are turned. The premier, Vladimir Spidla, Zeman's successor, is leading a weak coalition of his Social Democrats and a parliamentary group led by Christian Democrats. The new president, on the other hand, is the old strongman and for long rival of Zeman's, Vaclav Klaus, a former finance minister and premier. 
Klaus is prepared to unseat Spidla if he can and get a new government of his allies among the Christian Democrats (whom he once led) and other groups, including some communists, who voted for him as president. The communists obtained 19% of the vote in last year's parliamentary elections, a strong third party showing, and are a force to be reckoned with. The government has barely survived a vote of no-confidence in parliament. Unless Spidla puts in a firmer performance quickly, one can expect upsets.

Economy in trouble
The trouble for the premier, a more engaging personality than Klaus, but far less experienced and wily, is that the economy is doing poorly. GDP growth is forecast to be less than 2% for the year by the IMF, after once having been expected to be 3.2%. GDP in 2004 is expected to rise by 3%, but this depends heavily on general EU developments.
The country is due to join the EU in May next year. Before then the die is likely to be cast for the government.
The IMF has a somewhat more optimistic estimate for the medium term. It makes clear, however, that this is conditional upon the political will "to deliver fiscal consolidation and institutional reform." With reasonable progress in these areas then annual growth of 3.5 - 4% can be expected, it says. But here again it all boils down to politics. 

Government barely survives
Spidla's three party coalition is mired in a fiscal crisis, unable to contain a ballooning state budget deficit, which is 6.3% of GDP and threatens to become 6.6% of GDP in 2004 unless there is reform.
The crisis ensued from backing out of the hard-hit banking sector by the previous government. It is unfair for Spidla to be picking up the bills; but political life is unfair. An increasing proportion of state funds - 82% - consist of social transfers that can only be reduced by legal amendments. Spidla's own past commitments to pensions and the like also hampers the government.
Elections are not due until 2006, but they could come much sooner if the budget crisis worsens. So far the government is delaying a decision until after the referendum on EU membership was held. The banks keep lending the treasury the money to finance the deficits, which are after all partly their doing also. The government is like a man falling from a window. The crunch is next but it says "so far, so good."

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State to collect over 20bn crowns with public reform

Czech Finance Minister, Bohuslav Sobotka announced extra tax revenues generated from the public finance reform would help the state collect over 20bn Czech crowns in 2004, New Europe reported. The proposal is pending approval, the minister added, CTK reported. 
"Tax revenues could bring to the state budget next year an additional amount of more than 20bn crowns," Sobotka was quoted as saying. Failure to introduce reform could result in a budget deficit of 190bn crowns. This is not acceptable," he said. "My goal is to submit a budget with a deficit which will be smaller than the 2003 deficit. This year's budget deficit is expected to reach 11.3bn crowns," he added. "Changes could be made in the proposed public finance reform up to the end of June." Such changes should not obstruct the general trend of shrinking the budget deficit to four per cent in four years' time, he said. 

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Electronics giants go for Czech launchpad

Asian electronics companies are using the Czech Republic as a production launchpad for sales in an enlarged European Union. Operations are being transferred from home bases and from existing sites in old EU member countries, the Financial Times reported on June 6th.
"The Czech Republic is at the centre of wider Europe," says Jim Chang, head of the Czech operations of Foxconn, the Taiwanese contract electronics manufacturer. "We will continue to grow here and we will move more and more manufacturing from other parts of the world to here."
Many of these electronics investors are already among the country's largest companies. Foxconn - owned by Hon Hai Precision Industry - only started producing computers for Hewlett Packard in Pardubice, east Bohemia, in 2000, but last year had a turnover of Kc37bn (US$1.09bn) putting it in 10th place nationally. Matsushita's decision in 1996 to build its TV assembly plant in Plzen, west Bohemia, was a breakthrough for Asian investors.
"Japanese companies follow each other," said Hosef Lebl, senior advisor at CzechInvest, the Czech investment promotion agency. "As soon as there is a big famous investor, the others start to consider the possibilities."
Jetro, the Japanese trade and investment promotion agency, estimates there are now 45 Japanese manufacturers in the country, with commitments to invest US$2bn and employ more than 23,000. Many of these plants are in the electronics sector, often linked to the car industry.
CzechInvest says another 25 Japanese companies including Toshiba and Samsung, are currently negotiating potential investments.
The main reason Japanese and other Asian electronics companies have chosen the Czech Republic is geography, rather than low wages.
"Wages are a minor cost - less than 5% of the total," Mr Chang said. "Geography is more important. End customers are much more sophisticated than before and when they want a product, they want it now."
The Czech Republic is the closest country among the new EU accession states to western Europe - the main market of the Asian electronics companies. In the future, helped by its good infrastructure, the Czech Republic will also be able to serve the growing east European market.
Many electronics companies have therefore transferred operations from Asia to the Czech Republic. Foxconn, for example, has moved some output from its Chinese plants. Low wages explains why some Asian manufacturers have also decided to move production from western Europe to the Czech Republic.
Britain - one of the main beneficiaries of Asian investment in the 1960s and 1970s - has suffered the most. Matsushita, for example, drastically cut back production at its TV assembly plant in Cardiff, and shifted work to Plzen. Foxconn closed a facility in Ireland last year and has scaled back another in Glasgow.
Another important draw is the Czech Republic's strong electronics tradition and its technical universities. The Czech Republic was once one of the electronics hubs of the old Soviet bloc. Telsa, the communist electronics giant, used to employ about 300,000 workers throughout Czechoslovakia.
Several electronics investors have based themselves in or near old Telsa plants, taking some of the former workers. Foxconn bought the huge site of the bankrupt Pardubice Telsa plant, while LG Philips, the Dutch-Korean television tube joint venture, built its factory in Hranice, central Moravia, close to an old Telsa TV facility.
With Czechs voting to approve EU membership, the wave of Asian electronics investment is expected to continue, though perhaps at a slower pace. CzechInvest remains optimistic, but Jetro says Poland, Hungary and Slovakia are becoming tougher competitors to the Czech Republic.
Another worry, CzechInvesst said, is that some of these electronics companies will decide to move further east as Czech wages (and the appreciating koruna) bring costs closer to western European levels.
Brno, Moravia's biggest city, was shocked last year when Flextronics, the Singapore-registered contract electronics manufacturer, closed its two-year-old plant, which had employed 2,400, because of lower global demand. LG Philips recently told half its 1,300 workforce to stay at home when demand weakened for its jumbo TV sets.

Japan group first to invest in Czech industrial zone

Oiles Corp of Japan, a major supplier of seal and self-lubricating bearing components to the big automobile firms, will be the first investor in the new Kadan, Czech Republic industrial zone, according to Interfax News Agency. 
Oiles will invest €6-7m over the next three years in the production of seal and self-lubricating bearings from graphite and plastics. The first phase of the project will employ 50 workers, which should increase to 100 in the future. The plant is to begin production in October 2004. The price of the land will be subsidised. Oiles spokesman, Shohei Nakamoto, says Kadan was chosen because of the infrastructure, educated labour force, and location near Germany, where the company has its biggest customers. 
Headquartered in Tokyo, Oiles has 1,000 employees. It had turnover of €24m in 2001 and sales volume of €290m. Oiles counts among its customers, Toyota, Honda, Nissan and other major automobile makers.

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Prokom group wins tender for PVT 

A three-way consortium of Polish systems integrator Prokom Software, Slovak financial group J&T Invest and the Dutch Middle Investment Group recently won the privatisation tender to acquire the Czech republic's largest systems integrator, PVT, Prague Business Journal has reported.
The consortium will pay Kc1.55bn for the state's 96.5% stake in the company, Marek Jelinek, from tender organiser, Patria Finance, said recently. The 96.5% shareholding was made up of state-owned shares and the approximately 60% stake held directly and indirectly by Ceskoslovenska Obchodni Banka (CSOB).
Patria Finance's Jelinek confirmed the winning bid was preferred over a rival offer from a consortium of Czech software company, Unicorn, and Czech and Slovak financial group Penta, which allegedly made a lower bid than Prokom and its partners.
According to the terms of the tender, the Prokom consortium has to pay 10% of the purchase price when the contract is signed and 90% after the transaction wins government approval. Jelinek was unable to specify when the cabinet could clear the sale. "The government's decision was expected sometime during June, but it could also be in July," he said.
According to the Czech News Agency (CTK), PVT management welcomed the choice of the new owner. They hope it will help boost the systems integrator's position on the Central European market. Prokom's representative, Ryszard Krauze, said his company will further develop PVT's core business, CTK reported. PVT employs about 1,600 people.
PVT is part-owned by the state bailout agency Czech Consolidation Agency (CKA), which holds a 37% stake transferred from CSOB. The Prvni Investicni fund, controlled by CSOB, holds another 30% stake, and the rest of the shares are held by Cayman Islands-registered structures also controlled by CSOB. PVT owns many buildings in Prague and the rest of the Czech Republic and has about KC700m on its accounts.
In the first quarter this year, PVT made a profit of Kc6.7m, some 60% less than in the same period a year earlier. Sales rose 2% to Kc428.6m.

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Cesky Telecom gains permission to buy Eurotel

Cesky Telecom (CT) has allegedly been given a green light by its partners to proceed with its acquisition of their 49% stake in Eurotel, the number one mobile operator in the Czech Republic, Interfax News Agency reported. 
Sources wishing to remain anonymous were quoted as saying they were "familiar with the result of the CT board meeting." The sources' comments noted the telco would prefer to pay less than the US$1.285bn it initially offered. Eurotel's shareholding structure includes CT, Verizon Communications and AT&T Wireless. "The sellers have shown their interest to sell and now talks on the price and other items are ongoing," a source was quoted as telling the news agency. Eurotel reported a three per cent jump in last year's profits, totalling 6.3bn Czech crowns.

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Rebirth of an idea 

Two vastly different views are taken of the centuries-old idea of connecting Vienna and Hamburg via a new, extensive canal network. It's either seen as an environmentally reckless plan that should have died long ago, or a visionary project that will bring jobs and reduce transport problems in south Moravia, the Prague Business Journal reported.
Largely as a result of regional lobbying for it and backing from the Czech ministries of transport and regional development, the plan for the canal resurfaced in April. It would stretch 250km from north to south Moravia, with a separate link to Bohumin in the north, before joining the Elbe at Pardubice in east Bohemia.
Environmentalists, and Minister of the Environment, Libor Ambrozek, in particular, are strongly opposed to the plan, citing the damage that would be done to protected landscape areas.
"The Environment Ministry has had an adverse opinion on this idea for ages," Ambrozek said. But he warned conservationists not to underestimate the new wave of pressure in favour of a canal. "These plans look absurd at first sight, but when they are submitted again and again over a long period, somebody could take them seriously."
To create the Czech sections of the Danube-Oder-Elbe waterway would require a Kc200bn investment, experts estimate. The size of the investment was enough to scare off the government of Vaclav Klaus in the mid-1990s.
Now it is back on the table. "It's a real opportunity to connect up with important European waterways and contribute to regional development," said deputy local development minister, Petr Forman.
The first stage of a new canal, costing around Kc25bn, would link south Moravia and Vienna, including a new river port at Breclav, the start of the Czech end of that section. Annual capacity of the Breclav port could be 3-5 million tonnes of goods, including agricultural products and coal from north Moravia, said Jaroslav Kubec, head of the Danube-Oder-Elbe association, a long standing lobby group in favour of the project. In order for cargo to be transported, a canal has to be at least 50m wide and 4-5m deep. Using the existing Morava river would considerably reduce costs to around €6m-€8m (Kc188m-Kc251m) per kilometre, Kubec said.
The exact route south from Breclav is still unclear. By the end of the year, the Transport Ministry wants to complete an assessment of three possible routes to connect the country to the Danube. One of the options would head to Vienna through Austrian territory. Slovak waterways would be used.
Regional representatives are enthusiastic. "The project is a matter of European importance, and it is a challenge for us," said south Moravian governor, Stanislav Juranek.
Vice governor of the Zlin region, Libor Lukas, is an enthusiastic supporter. "The waterway belongs to the transport network, like roads, railways and airports," he said.
The European Union also backs the plan and, more importantly, is prepared to offer financial support. Brendan Buckley, the transport expert with the European Commission delegation in Prague, said EU funds could cover 85% of the costs of the project. "The Union is afraid of the development of road traffic and is trying to shift cargo to railways and waterways," he said. "European roads are jam-packed and aren't safe."
Buckley, however, warned that a basic evaluation of the environmental consequences of the project, through a so-called Environment Impact Assessment (EIA), will be crucial for any funding. The EIA study should be completed next year and, according to the Transport Ministry, will be financed by the EU.
Environmentalists say the proposed canal would damage the protected landscape areas Litovelske Pomoravi, Poodri and other areas in the Morava river basin. "The canal is a big mistake from an ecological as well as an economic viewpoint," said Ivo Machar, head of the Litovelske Pomoravi protected landscape authority. "The driving force behind this idea is a desire to use all the concrete that will be left over after the completion of Temelin nuclear power plant."
Ambrozek says the factor fuelling renewed interest in the canal is regional authorities' belief that the canal will create many new jobs. "Regional representatives are very taken by words like 'development plan' or 'new jobs'," he said. "Those are phrases that have influence on regional governors."
He expressed scepticism that a canal would create new jobs. "How many jobs are created by the Elbe waterway?"
Canal construction would start in south Moravia, but there is a similar project being considered for the north of the region as well. Poland is considering building a dam that would raise the water level in the Oder river to make it navigable up to the Czech border and allow a connection to the proposed Czech canal system. While regional authorities on the Polish side are keen on the project, money is in short supply.
Bohumin, on the Czech-Polish border, which was promised an international road and rail terminal under now-stalled plans for a new freight rail link to Siberia, would become an important port under this plan. It is a very financially demanding project, and the Polish side must be interested in it because they would share in the main costs," said Miroslav Fabian, an official from the environmental department of the Moravian-Silesian regional authority. He doesn't believe a canal link between Bohumin and south Moravia is feasible.
The last part of canal construction would be the 200km long Elbe branch, which is also the most expensive part of the project. Local officials also have doubts. "The canal is inconvenient for the region," said Petr Silar, a Pardubice regional councillor responsible for environmental policy. "We can't say that it is totally unrealistic, but it is such an economically demanding project that it won't pay off at all."
The whole Czech waterway system could look like this: The Oder and Danube would be connected by a canal that would run alongside the D47 highway in north Moravia. The Moravia River would be used for the stretch in central and south Moravia. Between Otrokovice and Hodonin, the canal would follow the path of a 50km long canal built by the Bata company in the 1930s. A new canal would be built between Hodonin and the Danube. The last link would be between Olomouc, central Moravia, and Pardubice with a new canal running up to Moravska Trebova and the waterway then following the Ticha Orlice river basin to the Elbe river.

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