Will Hankook saga sour investors' taste for Slovakia?

THOUGH investors seem to appreciate the metamorphosis of the country's investment image from ugly duckling to beautiful swan, it seems the flat tax and cheap and flexible labour is not enough to persuade large companies to take a chance on Slovakia.

THOUGH investors seem to appreciate the metamorphosis of the country's investment image from ugly duckling to beautiful swan, it seems the flat tax and cheap and flexible labour is not enough to persuade large companies to take a chance on Slovakia.

The manner in which recent large investment projects have developed shows that investment incentives granted by the state remain an important factor for foreign investors when deciding where to locate a new operation.

Neither the Korean carmaker KIA nor the French PSA Peugeot Citroen would have come to this country without a little help from a friendly Slovak state.

The investors want to keep, or even increase, their profit margins through reducing costs. This is why they move further east. They also strive to keep relocation expenses as low as possible and the prospect of getting cash grants immediately in return for their investment is a big attraction for them.

But Slovakia cannot play by different rules from its neigbours on Foreign Direct Investment. There is nothing wrong with incentives for foreign investors, if these are offered on the basis of clear local and EU rules.

Complications around the proposed Hankook Tire investment, which only a couple of months ago was celebrated as another victory in Slovakia's economic metamorphosis, makes the need for these rules even more evident.

Following the Slovak cabinet's scuppering of the Hankook deal through its refusal to approve the incentives at 21.3 percent of the investment, which the tyre maker had requested, Hankook has re-opened negotiations with Slovakia's neighbours.

The episode opens up several burning questions: Is it standard practice for the country's official negotiators to promise incentives that the rest of the cabinet consider unrealistic? Were the ministers not aware of what Economy Minister Pavol Rusko was offering to the investor during the official negotiation process? Did they hear the figures for the first time at the cabinet session in which they rejected the figures?

If they did know about the unrealistic figures, why had they not signalled to Rusko prior to the meeting that the proposed package would not go through?

What will other potential foreign investors read into the confusion surrounding the Hankook quandary? Slovakia's official negotiators were offering conditions that the state has not been able to keep. This is certainly not the message that Slovakia wants to transmit in the chase for foreign investors.

Many have asked over the last few day, "So, how much is Hankook worth for Slovakia?"

There is quite a huge gap between the six percent of the investment that Prime Minister Mikuláš Dzurinda indicated as realistic and the sum that Hankook is asking for.

It again goes back to the lack of clear rules on the allocation of investment stimuli.

Finance Minister Ivan Mikloš says he knows about the pain but at this point does not have a cure. He said that local rules concerning foreign investment have been discussed both by the finance and economy ministries. However, the Economy Ministry has not as yet submitted them to the cabinet.

Mikloš thinks that automatically applicable rules on incentive stimuli would be ideal. Claims to investment stimuli would arise only if the investor met several criteria with respect to the amount of investment and the unemployment rate in the region. Higher stimuli would only come through further discussion.

SARIO, the Slovak Investment and Trade Development Agency, has also said several times that its life would be much easier if there were clear rules on how high the promises could be.

This time, however, Slovakia is giving the impression that the volume of stimuli offered to investors is a matter of political mood and down to the decisions of particular ministers.

In certain cases, the lack of clear rules might result in a better deal for an eventual investor, but such an approach promises complications and a rocky road until the deal is signed. And even then, complications could still arise.

The Hankook deal is not the first in which unrealistic state promises have caused problems.

The first serious problem emerged after Slovakia promised tax holidays to US Steel (USSK) that exceeded EU limits, and which resulted in a long-standing dispute about the over-production of steel between the European Commission, USSK and the Slovak government.

Finally the parties agreed to cut the tax breaks promised by the Slovak government by $70 million (€57.05 million) from the originally planned $500 million (€407.5 million) by 2009.

It also appears that some promises given to KIA will not be kept either, such as the promised completion of the highway from Bratislava to Žilina by the end of 2006.

Though the state appears not to be overly concerned about the delay, each broken promise weakens the credibility of the country - credibility which is much easier to lose than it is to gain.

By Beata Balogová

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