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Debt forcing cities to sell municipal land

Unmanageable debt is forcing Slovakia's three largest cities to begin selling off real estate, something they have been reluctant to do since private ownership first became possible after the 1989 anti-Communist revolution
Banská Bystrica owes 1.3 billion crowns ($27.67 million), Košice 2.2 billion crowns ($46.81 million), and Bratislava a whopping 4.5 billion crowns ($95.74 million). Struggling to balance their budgets and ringed in by creditors, the leaders of all three cities have said they intend to auction city property to meet their obligations.
It's not a decision that has come easily, though. Central Slovakia's Banská Bystrica, which has been taken to bankruptcy court by Slovak-French bank Prvá komunálna banka (PKB), and has had most of its accounts frozen, has been forced to sell off six properties so far, and to draw up a list of 22 sites which it could use to meet PKB's 650,000 crowns in unpaid loans (waiting in the wings are Banka Slovakia with 29 million crowns and Dopravna banka with 8.5 million crowns in receivables). The six sites sold so far (including a run-down movie theatre) have brought in a puny 11 million crowns.

Unmanageable debt is forcing Slovakia's three largest cities to begin selling off real estate, something they have been reluctant to do since private ownership first became possible after the 1989 anti-Communist revolution

Banská Bystrica owes 1.3 billion crowns ($27.67 million), Košice 2.2 billion crowns ($46.81 million), and Bratislava a whopping 4.5 billion crowns ($95.74 million). Struggling to balance their budgets and ringed in by creditors, the leaders of all three cities have said they intend to auction city property to meet their obligations.

It's not a decision that has come easily, though. Central Slovakia's Banská Bystrica, which has been taken to bankruptcy court by Slovak-French bank Prvá komunálna banka (PKB), and has had most of its accounts frozen, has been forced to sell off six properties so far, and to draw up a list of 22 sites which it could use to meet PKB's 650,000 crowns in unpaid loans (waiting in the wings are Banka Slovakia with 29 million crowns and Dopravna banka with 8.5 million crowns in receivables). The six sites sold so far (including a run-down movie theatre) have brought in a puny 11 million crowns.

Things are somewhat less tense in eastern Slovakia's Košice, which is being pressured, not forced, by PKB to cut one billion crowns off its debt; the carrot behind the stick is that PKB will then restructure the remaining 1.2 billion crowns over 15 years to allow the home town of President Rudolf Schuster some breathing room.

And in the Slovak capital of Bratislava, Mayor Jozef Moravčík is confident that a $100 million loan from a Japanese bank will allow him to cushion the worst effects of the city's debt burden. Property will be sold, he says, but the city won't be stampeded into compromising its architectural and development plan.

"Bratislava's not a poor city," he said from his office March 14. "We can handle our debt. We'll sell buildings we don't need, maybe land that could stimulate business activities to investors who want to build a commercial centre or a factory. But we won't touch our basic property fund [vital city properties such as City Hall - ed. note]. That would be dangerous."

Brave words

In the riches-to-rags story of Slovakia's three largest cities, all is not as it seems. City officials may say they are being forced to sell off public heritage by the cruel whip of insolvency, but their critics say the nation's largest urban centres are finally being made to reduce their grip on land, and the power that it confers.

Milan Vajda, spokesman for Bratislava's Old Town district, said that Slovak municipal governments still owned a far higher proportion of land in their jurisdictions than was common in western nations. Bratislava, he said, owned 13% of the land area within city limits, but had only sold 1% of these assets since 1991.

"Sometimes, over the years, it has seemed to me that city council members want to keep this land for themselves," he said. "If big investors are brought into the equation and they can buy land easily, then councillors naturally have fewer assets to draw power from, with their relatives or friends or whatever. But if they make it very complicated to get a construction permit or planning permission, then they can stall the process. I think this is symptomatic of every city in Slovakia."

It's a reluctance to parley that has not gone unnoticed by foreign investors. Laurie Farmer, owner of Bratislava real estate advisory firm Spiller Farmer, says that the city could be doing far more to sell land to interested parties.

"There are requests from our clients to buy property, but it's amazing how difficult it is to get approval to buy it," he said. "They're definitely not interested in selling anything, and would rather find ways of not selling it until the last minute. And it's not exactly land you could do anything with, it's just little pieces, more irritating than anything else".

Indeed, it's not as if Bratislava hasn't had offers - by June 2000, 60.4% of the $2.2 billion in total foreign direct investment that had come to Slovakia since independence in 1993 had flowed into the Bratislava region. Retailers such as the British Tesco, the Austrian Billa, the Belgian Delvita and the French Carrefour stores, in particular, have created a thriving supermarket competition in the capital over the last five years.

For Farmer, whose firm has helped Tesco locate and purchase new sites, the very fact that Bratislava is so popular among investors may have created a certain resistance in the city executive about divesting more property.

"Perhaps in Bratislava there's some feeling that they've got so much going on that they don't have to do much more, a kind of complacency precisely because of their success," he said. "They can afford to be choosy. Five years ago, when the first hyper-markets came, Bratislava was desperate to get one done. Today, the attitude is 'oh, another one? Do you really want to invest another billion Slovak crowns? Come on. Surely you won't make any money.' That's not the choice of the local authority, is it? That's the choice of the investor."

But Bratislava Mayor Moravčík bridled at the criticism, saying that Tesco and Billa in particular had made requests for land that the city couldn't fulfill, if it wanted to prevent traffic chaos and keep some semblance of architectural homogeneity.

"Problems of this kind will always be had by foreign investors who make demands here that would be categorically rejected in their home countries," he said.

Beggars can't be choosers

That kind of rigidity doesn't work in Banská Bystrica, where unpayable debt has forced the city's hand.

"The town is in a desperately critical situation, we're barely meeting our budget, we're selling off property to pay at least part of our debt," said city councilor Miroslav Toman. "But the court-ordered distraint of our property isn't going to be enough - we now have enough money to pay our employees, but nothing more, no road repair, nothing."

Mayor Ján Králik says he has taken the situation to heart, and has been to France, Portugal, Japan and the US in a desperate attempt to attract foreign investment, but without success. The reason for the lack of interest, he said, was that his city had none of the convenient transport infrastructure that Bratislava enjoyed.

"Every investor needs reliable communications, whether it's highways or an airport. We have neither. Investors go only to those places where they exist."

But Toman, who represents the right-wing Democratic Party on the council (Králik was elected for the socialist Democratic Left Party), says that the city's debt was not caused by a lack of investment, but by misuse of funds under the former mayorship of Igor Presperin, who is today the Deputy Speaker of the Slovak Parliament for the leftist Civic Reconciliation Party.

"The greatest part of our loans were racked up under Presperin from 1996 to 1998," Toman said. "Money given to firms for reconstruction of Moyzes Square, for example, was not invested wisely. A contract for rebuilding City Hall was given to a company owned by the mayor's brother, but it was never rebuilt, in spite of the money invested. Money was given out for housing construction, but the housing was never built. Many projects were begun and not completed, and the money went God knows where."

But Mayor Králik would not take the bait. "I'm not interested in arguing over the past. You have to prove something to lay charges, and it's almost impossible to prove something in hindsight."

Past is present

In Košice, according to Deputy Mayor Boris Farkašovský, the past is also a problem, but not in the way that many Slovaks think.

Current President Rudolf Schuster, who served as Košice mayor from 1994 to 1998, has been portrayed in the media as having indebted his city with grandiose reconstruction schemes in order to build voter support for his 1999 Presidential campaign.

But according to Farkašovský, the Schuster face-lift - including major downtown renovations and a fountain that played classical music in time to the rise and fall of the waters - cost only 400 million crowns (the city's current debt is 2.2 billion), and did not result in any city property having to be sold.

Instead, he said, the real problem was that the city had been encumbered with the expense of keeping up its 22 districts, according to a 1991 municipal division, while it never received sufficient state budget funding to meet the new demands. The municipality has to divide its state per-capita subsidy among the districts, but still must cover all expenses for city-wide services such as maintenance, fire department, road clearing and repair, and public transportation.

The burden of providing these services had resulted in a steady financial shortfall, he said, which was exacerbated when Košice city took short-term loans in the 1990s at high interest to bridge the gap.

The result, he added, was a city budget which was steadily losing money. To make matters worse, the moribund national economy and the disinterest of investors in locating in Košice meant that in 1999, the city met only 10% of the revenues it expected to raise through the rental and sale of municipal property.

All of which has brought matters to a desperate head - Košice has sold off a municipal forest, a 66% share in a city incinerator to the Italian Meta firm, and has scheduled for auction the Hotel Hutník - in Farkašovský's words, "one of the most significant pieces of city property".

"Common sense tells you not to sell city property, but the current situation requires us to do so. I sometimes wonder why people, when they talk about municipal debt, only mention Košice, but we have to stop thinking about the past. We need to look into the future and find solutions."

One of the brightest solutions on the horizon, for Bratislava's Moravčík, is an impending reform of public administration that will give cities more money from taxes to allow them to fulfill their additional responsibilities for public governance.

If Slovakia's cities, he said, received a portion of the corporate tax raised from the companies settling in their municipalities, it might give them more incentive to sell off land to attract investors.

"This is the EU norm, that tax money goes to cities first and then the state budget, not the other way around," he said. "But at the moment, all we can do is sell them property, which brings us no direct advantages."

With Chris Togneri in Košice and Lucia Nicholsonová in Banská Bystrica

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