New law to allow state takeover of large firms

THE GOVERNMENT is planning a new law to allow it to take over struggling Slovak companies it deems ‘strategic’. Businesspeople, lawyers and observers say the measure is a Trojan horse that the state could use to take control of major enterprises.

THE GOVERNMENT is planning a new law to allow it to take over struggling Slovak companies it deems ‘strategic’. Businesspeople, lawyers and observers say the measure is a Trojan horse that the state could use to take control of major enterprises.

The philosophy behind the new law, which has already sent shockwaves around the business community, is that if a company gets into financial trouble and is deemed ‘strategic’, then the state will have a pre-emptive right to take over until it picks a new owner for the enterprise. Major energy companies, refineries, heating and water supply enterprises all face the prospect of being classified as strategic enterprises.

Originally, the Economy Ministry drafted the law on strategic companies in response to developments at the troubled chemicals firm Novácke Chemické Závody (NCHZ), one of nine companies hit by a fine of over €60 million by the European Commission for operating a cartel in the sale of industrial chemicals. NCHZ was ordered to pay the largest portion, of almost €20 million, and filed for bankruptcy in September, putting almost 1,800 jobs at risk. However, it was not clear by October 29 whether NCHZ would be deemed strategic under the new law.

The cabinet of Robert Fico passed the proposal on October 28. Economy Minister Ľubomír Jahnátek was quick to describe the proposed law as an anti-crisis measure, which once it is approved by parliament will be valid only until the end of 2010.

However, this has not given much comfort to employers or observers.

They say the legislation significantly interferes in constitutional rights guaranteeing freedom of ownership, business and handling of property.

The government will decide which companies qualify as strategic, Vahram Chuguryan, head of the Economy Ministry’s Communications Department, confirmed to The Slovak Spectator.

Companies which employ more than 500 people or provide energy, gas or heating to the general population will fall into the strategic category, along with firms operating in the oil refining business, or which provide products to the general population or to the rest of industry, according to Chuguryan.

Companies which operate waterworks, waste water treatment plants, sewers or water supply systems, might also be deemed strategic, according to the ministry.

Based on the draft, if the owner of a strategic company plans to sell its business it will first have to offer the business to the state, at a price determined by a licensed expert rather than the market. If the state accepts the offer the sale should be completed within 60 days; after 120 days the pre-emptive right would expire.

The economy or the finance minister will propose companies of strategic importance to the cabinet, and its decisions will be published in the official collection of laws, Chuguryan said.

Prominent lawyer and former president of the federal Czechoslovak Constitutional Court Ernest Valko expressed doubts about the law, suggesting that it might be at odds with EU legislation.

“It remains doubtful if [the law is] compatible with international treaties on support for and protection of investments,” Valko told the Sme daily.

However, the ministry expressed confidence that the proposed law does meet European norms.

“The law is in line with the Slovak Constitution and the legislation of Slovakia and the European Commission,” Chuguryan told The Slovak Spectator.

Though the Association of Employer Unions (AZZZ) said it trusts the intentions of the government, it added that it has doubts about the effect of the legislation. The association warned that the law in fact significantly interferes in constitutional rights guaranteeing freedom of ownership, business and handling of property.

The employers also criticised what they said was the hasty manner in which the law was submitted to the cabinet, without consultation with social partners, employees and unions.

“[It] might deform the business environment and spread corruption and cronyism,” the AZZZ said, adding that the move also opens the door to hidden privatisation.

According to the employers’ association, the legislation does not contain clear rules and gives the state a tool to label as strategic any firm employing more than 500 people.

Klub 500 a lobbying group for firms with more than 500 employees called the draft “legal nonsense” which subverts the principles of a legal state guaranteed by the Slovak Constitution.

“It is unacceptable for us that the state limits ownership rights guaranteed by the Slovak Constitution and influences the operation of private companies,” said the executive director of Klub 500, Tibor Gregor.

However, the government argues that it has merely created a tool to fight the effects of the economic downturn on major companies. The worsened economic condition and insolvency of some companies might lead to the situation when even companies which provide services to the whole of society are not able to fulfil their mission, and that this risks being reflected in the insufficient fulfilment of the decisive role of the state, the Economy Ministry stated.

“The government wants to prevent a situation in which a strategic company gets into economic problems and after its eventual crash the basic needs of society might not be covered,” according to Chuguryan. “It is not acceptable that by, for example, the crash of such companies supplying citizens with water or electricity, citizens would have these supplies cut.”

In its arguments for the law, the ministry argued that the government must also secure the social needs of citizens and eliminate the rise of significant social tension.

According to Peter Gonda of the Conservative Institute, a conservative think tank, the systemic and original causes of the crisis are governmental regulation and extensive monetary expansion by central banks.

“The basic cause of the crisis is thus the visible hand of the state, causing and internally embedding moral hazard; a system, which motivates profit and revenues but nationalises the losses,” Gonda wrote.

The troubled chemical factory

Jahnátek said he does not know yet whether NCHZ would be granted strategic company status.

“This is a premature question. It would be very good for creditors if the state entered such a company, as the sum of their claims would be guaranteed,” Jahnátek said, as quoted by the SITA newswire.

NCHZ filed for bankruptcy on September 17, with managers saying they wanted to protect the company from creditors and preserve production.

“The company has also filed an action with the Court of First Instance in Luxembourg for annulment of the decision to impose the fine and has asked for suspension of enforcement of the decision,” Miroslav Šuba, the chairman of the company’s board of directors and other board members wrote.

NCHZ’s management said the fine of €19.6 million was bankrupting in nature and contradicts EU legislation which states that fines can be punitive and corrective but never so high as to destroy a company.

The EC imposed fines totalling €61.12 million on nine companies on July 22 for violating the European Community Treaty’s ban on cartels and restrictive business practices, according to an EC release. The EC found that between 2004 and 2007 the companies fixed prices and shared markets for calcium carbide powder, calcium carbide granulates and magnesium granulates throughout a substantial part of the European Economic Area. NCHZ manufactures organic as well as inorganic chemicals for further use in various industries. It currently employs 1,764 people. Last year it reported a profit of €363,000 on turnover of almost €230 million. It is owned by a Cypriot company, Disor Holdings Limited, which acquired shares previously owned by financial firms Penta and 1. Garantovaná.

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