Austrian investors have dealt a blow to government hopes that tax breaks and legislation changes would flood the country with foreign investment.
At a conference in Banská Bystrica on April 12 members of the Slovak-Austrian Chamber of Commerce made it clear that they were looking to the Slovak government to provide economic stability as the cornerstone for attracting FDI into the country, adding that the government's much-vaunted tax and investment incentives ranked lower on their list of investment criteria.
"Many companies see the paradise of tax holidays and the like, but they forget that the tax holiday is [only] one of many factors in the whole business environment attracting foreign investors. A company's priority should not be in the tax holiday but the stability of the economy and its transparency," said Jaroslav Ružička, President of the Austrian-Slovak Chamber of Commerce.
While recent talk on investment focused on issues such as tax legislation, excessive bureaucracy and the lack of rights for minority shareholders as barriers to potential FDI inflow, the chamber identified a different approach as to how best to attract foreign firms and capital into Slovakia.
With Slovakia's largest trade surplus (11.4 billion crowns) coming through trade with Austria, retaining investment from its Western neighbour is a top priority for the government. "Investment is very important. Investment attracts trade," said Miloš Božek, an analyst with J & T Securities in Bratislava.
Analysts have said that the government must be mindful of the importance of the link between the business and investment climate it creates, not just from further trade and investment, but also for its European Union accession bid. Keeping warm relations with EU-member Austria will be key to any future Slovak ambitions to join the 15-member bloc.
"If there are good trade or business links established between the two countries, of course, it will help with EU accession," Božek added.
Ružička said that the geographical proximity of the two states meant that Austria saw Slovakia as a potential partner.
"Austrian investments in Slovakia represent a broad range of sizes, from small to large. This is not the case in other countries situated further away from Slovakia. We have to see the geographical situation of Austria and the ease of access to reach our market. There are different logistical factors directing companies from Vienna [as opposed to] those in a city such as London."
Ružička added that economic stability could not be underestimated as a criteria for investors because the nature of any economy is defined by change and a country must prove itself to be adaptable.
One problem Slovakia faces, he said, is that stability must be built up over years and years. He explained that Slovakia wanted to be ranked alongside the likes of Germany and France in terms of stability but that in such a short space of time this was impossible.
Government delays
Bernard Reibel, one of three managing directors for EMG, an Austrian-based heating business with subsidiaries and holding companies throughout Slovakia, said his company had several problems working in Slovakia because of the lack of economic stability.
Reibel explained that EMG had had particular problems with collecting subsidies owed to it by the Slovak government. He said that for the years 1997, 1998 and 1999, EMG was still waiting for payments totalling 200 million crowns.
"This is a very big problem for us - we have occured losses because of the government. We are bringing a great deal of work and money into the country and it's not possible for our shareholders to give their consent to investments abroad if they can't expect a normal rate of return," he said. "Our shareholders will not give us the consent to make further investments if they do not have the returns from their first investments."
EMG holds approximately 7% to 8% of the district heating market share in Slovakia, with annual revenues of about 450 million Austrian Schillings (1.4 billion Slovak crowns). EMG investment since its establishment in Slovakia in 1995 has amounted to 1.5 billion Slovak crowns.
Ruzicka said that while problems related to tax legislation existed in Slovakia, if the government hoped to decide on a tax policy, there would need to be sufficient economic stability to enforce it.
He added that difficulties also arise when policies do not evolve with the business environment. "A nightmare for foreign investors is when a country introduces incentives for investors and after a certain period of time, they are replaced with totally new incentives, but from the standpoint of starting from the very beginning. This creates a ceaselessly changing situation that remains stalled, or instability in the market," Ružička said.
Instability in the market for EMG was also seen in the discrepancy between federal and local regulations, with price fixing being a particular concern. Under federal regulations the fixing of prices should justify the costs of production.
Riebel explained that competition - rather than fixing - set the prices on the Austrian market.
"The problem is that the fixing of prices must be in response to certain rules established by the Slovak authorities," he said. "If the fixing of prices of the local authorities doesn't correspond with the principles of the national rules, you can't have a fair price. And some of those problems occur for us in smaller cities," Reibel said.
