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EDITORIAL

Corporate restructuring: Painful whatever you call it

The phrase 'corporate restructuring' is not likely ever to enter common parlance, because it's too vague to fire the popular imagination. It gives no hint of the factory closures, the management upheavals and desperate search for cash that will sweep Slovak industry as the government's plans to transform companies into profit makers gathers speed this summer.
There are two reasons, however, why the government might not want a more accurate phrase ('instant industrial Darwinsim'? 'open-heart corporate surgery'?) to be coined: no one in Bratislava really has any idea what it will involve, and they don't want anyone else to know how painful it will be.

The phrase 'corporate restructuring' is not likely ever to enter common parlance, because it's too vague to fire the popular imagination. It gives no hint of the factory closures, the management upheavals and desperate search for cash that will sweep Slovak industry as the government's plans to transform companies into profit makers gathers speed this summer.

There are two reasons, however, why the government might not want a more accurate phrase ('instant industrial Darwinsim'? 'open-heart corporate surgery'?) to be coined: no one in Bratislava really has any idea what it will involve, and they don't want anyone else to know how painful it will be.

But the pain is on the way, and soon will be obvious to anyone who lives or works in this country. Depending on who you listen to (the government vs. independent analysts), between one half and two thirds of Slovakia's 40,000 companies are loss makers. Industrial firms racked up a collective loss of 17.9 billion Slovak crowns last year.

The country's three biggest state banks are virtually unable to extend new loans, leaving firms in a dogfight over the little money circulating in the economy. The only bank which will lend money readily is the Slovak-Russian owned Devín Banka, which is charging around 26% interest. Those who can't afford such expensive money simply stop paying their bills - tax bills, health insurance deductions, privatisation instalments, supplier invoices, even wages. The penalties they accumulate drive them ever deeper into debt.

Or, put another way: the many massive factories built during the communist era litter the lanscape like dying dinosaurs, with their owners unable either to pay for their maintenance and operation, or to finance their renovation into modern production facilities. If you bang a pipe at one end of these empty halls, the noise reverberates over the silent machines to the other end and back - leaving you wondering what massive human undertakings these factories were built to supply.

The managements of many of these companies can't speak any foreign language except for Russian. They don't know how international markets work, but rather than creating marketing departments and taking their goods to the world, they spend fruitless hours loitering around international trade fairs. They don't fully understand how computers and IT systems can change their businesses, and they stoutly resist making information flows transparent.

Who is going to clean up this mess? The government has a vague idea that once it has transferred 107 billion crowns in bad loans out of the three state banks and approves a bankruptcy law, the bad debt will be 'outsourced' (ie. sold) to private firms who will close the doors and sell the assets of any debtors they think can't survive, and prescribe a new business plan for companies which are salvageable (hence the term 'corporate restructuring'). The rest will be left to tough it out on their own, or cast around for a foreign investor.

Is there really no better way than this? If the government is willing to foot the hefty bill for bank restructuring, why can't it find a few billion crowns to teach struggling firms how to survive? For all the resources and ink committed to industrial giants like steelmaker VSŽ or the Slovnaft refinery, can't a little more thought be given to the firms that lie below the cabinet's corporate radar?

But instead of plain talk to the public and coaching for aging executives, the government is once again taking shelter in the myth that 'foreign partners' are going to swoop down on Slovak mid-sized firms once their debt problems have been eased. The truth is that while a fortunate few may be lucky (and skillful) enough to attract a German or Austrian partner, the great majority of firms will have to learn to do without FDI.

Many industrial sectors are plagued by over-capacity across the region. This gives foreign clients the option of subcontracting work for rock-bottom prices rather than modernizing Slovak firms to produce finished western-standard goods. It also means that potential buyers can choose between investing in a factory in Prague, with its bright lights and proximity to Germany, or a similar plant in north-eastern Slovakia's dour and inaccessible Bardejov. What would you choose, if you were a middle-aged footwear executive from Dresden?

The one government-funded body in the country that is doing anything for troubled industrial firms is the Agency for Industrial Development and Revitalisation, which has enough money this year (from the EU) to assist 28 struggling Slovak companies. The Agency's director, Karol Balog, came up with a phrase that for him captured the harsh reality of what lay ahead for many companies. "They either learn or they die," he said.

Beats the hell out of 'corporate restructuring'. The government could use a few more straight-talkers like Balog.

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