Investors hungry for further reform

GERMAN, Austrian and French investors in Slovakia are somewhat sceptical about how 2009 will pan out and say they expect the year to present more hurdles to the running of their businesses. Despite the scepticism, 84 percent of investors say they would pick Slovakia again as the destination for their investments.

GERMAN, Austrian and French investors in Slovakia are somewhat sceptical about how 2009 will pan out and say they expect the year to present more hurdles to the running of their businesses. Despite the scepticism, 84 percent of investors say they would pick Slovakia again as the destination for their investments.

But in order to remain attractive to investors, further reform of Slovakia’s tax and education systems are desirable, suggests a recent survey by The Slovak-German Chamber of Commerce and Industry, the Slovak-Austrian Chamber of Commerce, the commercial department of the Austrian Embassy and the French-Slovak Chamber of Commerce.

Corruption and problems with law enforcement are also on the list of shortcomings that the investors would like to see evaporate when it comes to doing business in Slovakia.

Though the German, Austrian and French companies in Slovakia are feeling the economic downturn, with 83 percent of the 130 investors surveyed expecting further deterioration during 2009, they also see themselves in a relatively good position to face competition, according to Markus Halt of the Slovak-German Chamber of Commerce and Industry.

According to the survey, 40 percent of those polled expect the business situation to remain unchanged or even improve. Still, the deteriorating situation in the business environment in 42 percent of the foreign firms polled has resulted in layoffs while more than half of those investors surveyed are planning to limit their investment costs, according to findings released on April 16.

“It is the first time that foreign investors from three countries have been surveyed,” Halt told The Slovak Spectator. “German investors have been surveyed annually since 2004. In order to expand the significance of the results, Austrian and French investors were included this year.”

As for the shortcomings detected in the business environment, Halt said that investors are unhappy with the state of corruption in Slovakia.

“Of course, it is much lower here than in countries like Romania or Bulgaria, but it still constitutes a serious problem, especially in the public sector,” Halt said. “We think that recent scandals around the highway toll tender or the bulletin-board tender have sharpened the perception of investors even further.”

According to Halt, another major problem is enforcement of the law.

“Due to the lack of effectiveness of the judicial system, legal actions – because of unpaid receivables, for instance – can easily take years,” he told The Slovak Spectator. “Last but not least, the Slovak system of professional training doesn’t prepare young people well enough for working life. Graduates very often lack practical skills needed for their profession. If Slovakia wants to stay competitive in the next decade it has to arrange professional training in a way which is more oriented to the actual needs of the labour market.”

Nevertheless, Slovakia is still an attractive business location. 84 percent of the companies surveyed would repeat their investment under the current conditions, Halt added.

According to Halt, investors appreciate Slovakia’s membership in the European Union and the eurozone; they are still satisfied with employees’ willingness to perform and their qualifications; and the tax burden is considered to be relatively low.

Based on those surveys to monitor the attitudes of German investors in Slovakia which the Slovak-German Chamber of Commerce has conducted in the past, Halt suggested that there have been some significant changes of attitude, with the most significant relating to the flexibility of the Labour Code.

“Satisfaction with its regulations has drastically declined in comparison to last year’s results,” Halt said.

“The reason for this is that the economic crisis has forced a lot of German companies to reduce production," Halt explained. "The Labour Code doesn’t provide them with enough flexibility to adapt their level of employment to the lower level of production. Short-term work could certainly help employers to maintain a higher level of employment.”

Though the investors said they still appreciate the country’s tax system, tax reforms in Bulgaria and Romania, which have introduced a flat tax system with a low tax burden for companies, have decreased Slovakia’s international competitiveness regarding taxation, according to Halt.

Furthermore, changes to Slovakia’s tax regime made during recent years have complicated the initial flat tax system of 2004 a lot, said Josef Altenburger, president of the Slovak-Austrian Chamber of Commerce, at a press conference on April 16.

This is especially valid for tax treatment of the amortisation of goods, company cars and company housing as well as unpaid receivables, said Altenburger. Recent tax amendments have worsened the system as a whole and are in contrast to international taxation standards.

Radovan Ďurana of the economic think-tank the Institute of Economic and Social Studies (INESS) said that his organisation has long pointed out the shortcomings of the payroll-tax system, which he said complicates the creation of new jobs.

“Over the past three years, there have been no changes to improve [the payroll-tax system] and unfortunately the current situation does not give us reason to hope for any such changes in the near future,” Ďurana told The Slovak Spectator. “Fundamental changes in the payroll-tax system would directly affect public expenditure, but the current government is still resisting these changes.”

Ďurana agrees that the high payroll-tax burden, and the low level of law enforcement in combination with the slow action of courts, is lowering the attractiveness of the Slovak business environment.
There is also one factor which has become more attractive since last year, according to Halt.

“The availability of skilled workers has improved. This is due to the mass layoffs during the crisis, of course,” Halt said.

As for the steps that governments should take during times of economic crisis to maintain the attractiveness of the business environment, Halt suggests that experience from previous economic crises in the 1970s and 1980s has proved that expansionary monetary and fiscal policies are ineffective.

“As long as the expectations of market players don’t improve, governments can spend as much money as they want, but all in vain,” Halt said. “First of all, governments need to gain trust. Most important is to increase the scope for economic activity in the private sector.”

This can be achieved by removing structural deficits, he added. Reducing bureaucracy in day-to-day-business, lowering the burden of taxes and duties, arranging a flexible labour law or an effective educational system (if necessary) and consolidating public budgets are all reasonable options for governments, Halt concluded.

“[The government] should prepare a plan to reform the payroll-tax system, with the goal of lowering the tax burden on labour; then [it should] ease the Labour Code, which would increase the flexibility of the labour market and make the creation of new jobs simpler,” Ďurana said.

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