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SLOVAKIA'S FINANCIAL COMMITMENT TO KIA SINKS IN; THE COUNTRY IS OBLIGED TO COMPLETE ITS HIGHWAY TO ŽILINA

It is now time to pay the piper

EUPHORIA over winning the €700 million Kia Motors investment has quickly slipped into slight anxiety over the money that Slovakia must pour into the Korean carmaker's coffers and the construction of a new highway section linking the Žilina site in northern Slovakia, with the main transportation veins of the country.
Hyundai's Kia Motors, which chose Slovakia over Poland on March 2, became the third global automotive firm, following Germany's Volkswagen and France's PSA Peugeot-Citroen, to pick Slovakia.

EUPHORIA over winning the €700 million Kia Motors investment has quickly slipped into slight anxiety over the money that Slovakia must pour into the Korean carmaker's coffers and the construction of a new highway section linking the Žilina site in northern Slovakia, with the main transportation veins of the country.

Hyundai's Kia Motors, which chose Slovakia over Poland on March 2, became the third global automotive firm, following Germany's Volkswagen and France's PSA Peugeot-Citroen, to pick Slovakia.

Some were still celebrating the South Korean car colossus' choice when, on March 4, the Slovak cabinet approved draft contracts for the investment that set expenditures at Sk8.8 billion (€216.66 million).

Almost Sk6.8 billion (€167.42 million) will go directly to the investor, and the remaining Sk2 billion (€49.24 million) will be other public expenditures linked with the project. In 2004, the project-related costs will amount to Sk2 billion, Finance Minister Ivan Mikloš told the SITA news wire.

He estimates that Sk400 million (€9.85 million) of the investment will return to the state budget via taxes.

The plant, with an estimated annual production of 200,000 cars, is slated to open by late 2006.

However, the Hungarian Coalition Party said such a crucial decision required more time and attention to track all the risks of the contract, which should be signed on March 16 or 17. The cornerstone of the plant could be laid as soon as April 7.

Economy Minister Pavol Rusko said the prompt approval of the draft was crucial, as the State Aid Office must approve the document by March 15 and the European Commission by April 15.

Smer party leader Robert Fico, an incessant critic of the centre-right ruling coalition, immediately demanded that the government disclose to parliament the pledges it has given to Kia and its supplier, Hyundai Automotive Group. Smer says it only wants to ensure the supervision of the spending of state money.

Rusko insists that the cabinet scrutinised all the risks linked to the state assistance, a highway stretch to Žilina, and the financing of related projects through binding items from the state budget.

Apart from other investment stimuli, the government promised to complete the 40 kilometre stretch of the Ladce-Žilina highway by the end of 2006, which will cost Sk22 billion (€542 million) - a sum several times higher than what the state promised the carmaker in financial incentives.

It also means that the government has to adjust its original highway construction plans to the arrival of Kia Motors.

Responding to fears that the adjustment will put off other highway projects, Rusko promised that the construction of the southern link of the Bratislava - Košice highway would not be postponed. Transport Minister Pavol Prokopovič also confirmed that the original highway schedule would be kept, the daily SME wrote.

According to Rusko, clauses that could make Slovakia responsible for the decisions of third parties were left out.

"The risk that Brussels turns down part of the assistance or that some sources are classified as state assistance is always there," Rusko said, adding that, in that case, he would negotiate intensely with the European Commission.

An agreement between the city of Žilina and Kia Motors should be signed in a couple weeks, Žilina Mayor Ján Slota told the TASR news wire.

The city council authorised Slota to negotiate with Kia on the conditions for the investor's business presence in Žilina. According to Slota, Kia Motors does not have any unexpected or above-standard requirements.

The government will provide Kia Motors investment incentives worth Sk1.5 - 1.6 billion (€37 - 39 million) in 2004, Finance Minister Ivan Mikloš told the press.

As the budget reserve is only at Sk260 million (€6.4 million), Mikloš plans to get the cash by partly freezing spending in some other budget chapters.

Slovak officials confirmed that the overall incentives would not exceed 15 percent of the investment, in accordance with the rules of the European Union, which Slovakia is due to join on May 1.

Marek Gábriš, an analyst with the bank ČSOB, told The Slovak Spectator that major benefits from the carmaker's arrival would be immediately visible in the creation of new jobs that considerably push down the unemployment rate in the Žilina region.

"Secondly, the country's foreign trade will benefit from the new export capacities. It is almost certain that all of the production will be exported, which will also boost GDP growth. Last but not least, the inflow of foreign direct investment will help restructure Slovakia's economy and bring in know-how," Gábriš added.

According to analysts, gluing the Slovak economy to the automotive industry does not involve extensive risks. As long as the country benefits from its cheaper labour force compared to other European countries, any global automotive industry crisis should not have a serious impact. Problems may arise when automotive investments expand eastwards to successor countries of the former Soviet Union, or even further to Asian countries, for example India, SITA wrote.

The new plant will strengthen Hyundai's position in Europe. During the first half of 2003, the company boosted its European sales by 34.5 percent year-on-year.

Other Korean investors in Slovakia are Samsung, HAN, Woo One, and YSE.

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