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Red tape still major FDI barrier

One year after the Dzurinda government promised to support the growth of the country's small and medium-sized enterprise sector, businessmen complain that little has improved. Many say the most difficult obstacle they face remains red tape - a bureaucracy so tangled and corrupt that some businessmen simply give up in defeat.
In their beef with Slovak bureaucrats, domestic entrepreneurs are supported by foreign investors. The procedural requirements for setting up and running a company in Slovakia are almost identical for Slovak and foreign businessmen, and many foreigners are electing to pack their bags and try another country, rather than patiently go through the bureaucratic hoops.

One year after the Dzurinda government promised to support the growth of the country's small and medium-sized enterprise sector, businessmen complain that little has improved. Many say the most difficult obstacle they face remains red tape - a bureaucracy so tangled and corrupt that some businessmen simply give up in defeat.

In their beef with Slovak bureaucrats, domestic entrepreneurs are supported by foreign investors. The procedural requirements for setting up and running a company in Slovakia are almost identical for Slovak and foreign businessmen, and many foreigners are electing to pack their bags and try another country, rather than patiently go through the bureaucratic hoops.

The latest figures produced by the government show that in the first seven months of 1999, Slovakia attracted only 5.4 billion Slovak crowns ($135 million) in foreign investment, 32.3% less that in the same period of 1998, and far below the $500 million that former Economy Minister Ľudovít Černák set as a goal for 1999. Investment analysts warn that until the government removes bureaucratic barriers to business, FDI will remain dangerously low.

Certificate hassles

Vittorio Wayro is director of the Multi Service Consultancy Venture, a branch of an English company which among other services, helps foreign investors assemble the complicated paperwork they need to run a business venture in Slovakia.

"Many of my clients simply get fed up with waiting for the certificates and bureaucratic approvals they need," he said. "They'd rather go elsewhere than wait."

Wayro said the main problem was the certificates that all companies must obtain from Slovak government ministries licensing each product they produce or import for sale on the Slovak market.

"This process is sometimes needless, because some goods our partners import have already been certified in England or Austria," Wayro said, adding that it was ridiculous that some goods could be imported into every country of the European Union without certification, but not into Slovakia. "I think it's a waste of time, because [Slovak ministry officials] go through the same steps as their colleagues do in Britain, but it takes them three months. Meanwhile, the English do it in a month," he said.

Kamil Katrenič, an equity analyst with Tatra Banka, agreed that the certification issue must be solved if foreign investment and the small and medium business sector were to improve. "[Certification] is expensive and is often useless," he said. "Why do ministries have to certify products which have been imported from OECD countries, for example?"

Roman Minarovič, director of the Slovak Agency for Foreign Investment (SNAZIR), said the certification process was a particular barrier to foreign companies, since many investors were reluctant to provide product information for fear that their trade secrets would be lost. "I know of one Belgian company that wants to produce internal tyre linings in Slovakia, but they don't want to have it certified because they are afraid that the information will be leaked," Minarovič said.

In addition to bureaucracy, Minarovič added, businessmen face another major barrier in unclear laws. "Economic laws are often vague, and neither the Ministry of Finance nor the Ministry of Economy is able to explain them," he said.

Minarovič gave as an example the new draft of the income tax law, which gives tax incentives for companies that manufactured goods not produced in Slovakia.

"The question is how we define the term 'manufacture'," he said. "Is Volkswagen a manufacturer if it only assembles car parts? And if you give these tax breaks to the first producer of a good, it leaves no incentive for other makers of the same product to follow."

Bureaucracy corrupts

Recent studies performed by the US Information Agency and Transparency International have shown that Slovaks perceive corruption in state bureaucracy to be the highest in the central European region.

Minarovič agreed that bureaucratic corruption was a major factor in Slovakia's poor FDI totals, and said that it was closely tied to confused business legislation. "When laws are vague, time plays against the investor and he needs to visit 10 offices to get a clear answer. He would rather do it much easier. Money has been a good tool for a long time, and it still is."

However, some foreign investors were put off by bribery, Minarovič added, and would rather do business elsewhere than pay off Slovak state officials. "There was a foreign investor who wanted to invest in one unnamed city in Slovakia," he recalled. "The state officials of that city told him that they would be more receptive to his needs for a certain consideration. In that one flabbergasting moment, the investor said goodbye and left the country."

Martin Barto, chief of strategy at the state-owned bank SLSP, believes the government should set clear rules for fighting corruption. "The growth of the bureaucracy doesn't reduce corruption, and it must be understood that the sister of corruption is poverty," he said.

In response to criticsm of the Dzurinda government's lack of progress on small and medium business legislation, officials at the Ministry of Economy said on November 17 that they had prepared a document called "Identification of the Barriers to Small and Medium-sized Businesses," which proposed to tackle the problem of bureaucracy, among other issues.

But according to Wayro, the 'problem of bureaucracy' lay as much with the poor attitudes of bureaucrats as with the complicated rules of the business game in Slovakia.

"I see unwillingness to help everywhere," he said. "Those people should realise that I pay for the services they provide. Instead, they look at me as if they were doing me a favour. They need a refresher course on how they should behave to the people who pay for their services."

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