Incentive dispute may land Slovakia in Washington

SLOVAKIA might just end up at the Washington court of arbitration if the Slovak government does not find a way to appease the incentive-hungry suppliers of the Korean carmaker Kia, which is building an auto factory near Žilina.

SLOVAKIA might just end up at the Washington court of arbitration if the Slovak government does not find a way to appease the incentive-hungry suppliers of the Korean carmaker Kia, which is building an auto factory near Žilina.

Earlier this year, the Slovak cabinet decided not to award any investment stimuli to Kia's foreign suppliers. The suppliers in turn protested that they had been promised the aid by former Economy Minister Pavol Rusko, who in the meantime had been fired on suspicion of corruption.

The cabinet's refusal disappointed the suppliers, who say they may take their case to the International Centre for the Settlement of Investment Disputes in Washington if the Slovak government does not reconsider their demands.

Nine mostly South Korean suppliers applied for Sk663.6 million (€18 million) in state aid, of which Sk331 million, or 50 percent, was to be in the form of direct subsidies. The suppliers planned to invest a total of Sk5.2 billion in Slovakia, creating 1,924 jobs.

The cabinet said the suppliers did not qualify for aid under Slovak investment incentive rules.

In an official stand, Kia itself criticized the state on February 26 for not providing subsidies to its suppliers.

Kia Motors Slovakia spokesman Dušan Dvořák said that if the government does not change its attitude, the Kia suppliers are ready to take legal action.

"The suppliers decided to invest in Slovakia based on certain promises, including written ones, that they received from the Economy Ministry, and started building factories so they could launch production along with Kia Motors Slovakia this year. Since the suppliers counted on the stimuli that were promised, their denial could cause them problems and affect their success in Slovakia," Dvořák told The Slovak Spectator.

Economy Minister Jirko Malchárek restated on April 3 that the Slovak government would not fork over the investment stimuli.

"As long as I am economy minister the government will never act under pressure or threats of being taken to the international court of arbitration," Malchárek told suppliers after receiving a letter from them informing him of their intention to take legal action.

"We evaluated the options for providing aid to the suppliers and we simply decided that Slovakia would provide no stimuli," Malchárek added.

Dvořák said that with Hyundai building a plant in the Czech Republic, it was possible that some suppliers would not extend their capacities in Slovakia but would build plants in the Czech Republic instead.

"One of the suppliers, the South Korean SungWoo Hitech, has already dropped Slovakia for the Czech Republic and will build a plant there," Dvořák said.

Kia officials say the cabinet's decision could seriously damage Slovakia's image, as it gives the impression that the country's investment conditions are not stable.

"If the Slovak government does not change its decision on state aid, Slovakia's reputation will be damaged in the eyes of all potential foreign investors," said Kia Motors Slovakia President In-Kyu Bae.

While in the past it was unclear what criteria Slovakia used in the provision of investment aid, since October 2005 the country has had clear rules for providing public money to foreign investors.

According to the rules, Slovakia is divided into three zones - green for poorer regions with unemployment over 15 percent that are in urgent need of investment; orange for wealthier regions with 10-15 percent unemployment; and yellow for areas like Bratislava with under 10 percent unemployment, where FDI has tended to concentrate so far.

The total value of the incentives offered to investors is determined partly by what zone they settle in.

The sectors of the economy are also divided into three categories. Sector A covers the processing industry, distribution and logistics centres. Strategic investments in high-tech comprise Sector B, while Sector C covers research and technology development centres. Again, aid varies from category to category, with the state encouraging investments with higher added value.

Kia presented major complaints about the state's management of its investment in February 2006. The Korean carmaker said that Slovakia had failed to meet several obligations, including road construction and the purchase of land needed for the factory, which has been delayed over 17 months.

Kia officials claim that the company's costs have risen sharply because of the Slovak government's poor management of its investment.

According to a statement sent by Kia to The Slovak Spectator, Soon-Chul Choi, vice-president of Kia Motors Corporation (the headquarters in Korea), and Kang-Suk Chun, the company's lawyer, met with Malchárek on March 30, with Choi urging the government to reconsider. The Korean government supports the position of the Kia suppliers as well, the release says.

The Kia investment, including its suppliers, is expected to create over 7,500 jobs, while several thousand more will be created indirectly.

Kia plans to launch trial operations in May this year, while full production should be launched in December.

Slovakia earmarked Sk5.6 billion (€151 million) in state aid to build the Kia car plant between 2004 and 2005. Of this sum, Sk4.2 billion has already been drawn.

Kia pledged to invest €830 million in Slovakia to build a plant with an annual capacity of up to 300,000 cars.

The Kia suppliers are not the only ones who have had their hopes for state stimuli dashed.

The Korean tire maker Hankook, which initially picked Slovakia as the location for its new factory, changed its mind and opted for Hungary instead after the government backtracked on a promise from Rusko to give the investor support amounting to 21.3 percent of its total investment.

The maximum that the cabinet was willing to give was 6 percent of the total investment, or about Sk1 million (€25,700) per job created.

Its problems with Hankook prompted the government to draw up rules for providing state aid to investors.

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