Changed rules add to uncertainties in the business environment

Through some of the recent changes in legislation, the Slovak government is thwarting the free market, changing the rules of the game for corporations and businesses and adding to the existing level of uncertainty, says Ján Čarnogurský, a partner in the ULC Čarnogurský law firm. Though he expects no positive impacts from most of these changes, neither does he believe that they will crucially change the business and investment environment in Slovakia. And he also sees some changes with a potential for positive impacts, such as the development of e-government, which could make business and personal life in Slovakia easier.

Ján Čarnogurský PhotoJán Čarnogurský Photo (Source: Courtesy of ULC Čarnogurský)

Through some of the recent changes in legislation, the Slovak government is thwarting the free market, changing the rules of the game for corporations and businesses and adding to the existing level of uncertainty, says Ján Čarnogurský, a partner in the ULC Čarnogurský law firm. Though he expects no positive impacts from most of these changes, neither does he believe that they will crucially change the business and investment environment in Slovakia. And he also sees some changes with a potential for positive impacts, such as the development of e-government, which could make business and personal life in Slovakia easier.

The Slovak Spectator spoke with Ján Čarnogurský about the new law on strategic companies, ownership rights, Slovakia’s PPP projects, impacts of the economic crisis on law firms, the overall business environment and several other subjects.

The Slovak Spectator (TSS): The Slovak parliament adopted the law on strategic companies on November 5, enabling the state to take over companies which are in bankruptcy proceedings that the government has labelled as strategic. How do you perceive this bill?
Ján Čarnogurský (JČ):
First, it is necessary to say that it has been shown in the past that the state is not a good owner of companies. This means that, in general, it is not the best idea that the state might again, either via this law or any other, obtain ownership of some companies. On the other hand, the current crisis, or what is understood as the current crisis, has required governments to at least endeavour to pretend that they are doing something about this crisis, i.e.
against the drop in economic growth. The adopted anti-crisis measures have been limited to various subventions, either direct or indirect. This law can also be ranked within the frame of a hidden subvention. I don’t think that this law will have any positive economic impact. It only makes the rules of the game even foggier, adds to existing uncertainty, of which there is quite a lot already, and in spite of restricting the state’s right of pre-emption to companies which have filed for bankruptcy, possibilities for its application are quite indistinct. Thus, I perceive it as a negative step.

Moreover, the definition is very elastic in that only a company that has economic troubles due to the crisis is covered by the law and only life will show for which purposes this law will be used – because often good intentions end very badly.

TSS: The law on strategic companies is not the only one adopted by the cabinet which, according to some opinions, limits ownership rights. In addition to the so-called expropriation law, which the government approved to speed up construction of highways [enabling construction to start on land on which expropriation is not completed], there are also recently adopted revisions to the law on energy and the settlement of land under buildings. Do these laws endanger the ownership rights of citizens?
The state must have the possibility to interfere in ownership rights when it is in the public interest. This is the task of the state because sometimes there are situations, when, for the benefit of all, somebody must interfere and always somebody loses a personal benefit, as it is said, for a higher interest. Certainly no other institution but the state should do this. This interference should be appropriate to the needs. Inevitably, this interference for the public interest must be clearly defined and it definitely should always be for proper compensation.

The biggest problem may arise in the setting of compensation. In the case of the expropriation law to speed up highway construction, which enables the state to expropriate land under highways, I do not see any large risk of price deformation, because prices of these plots are relatively clear; it is known in what locality they are, their financial standing is established and it cannot change so quickly. When the state decides to expropriate land, and if the original owner does not like the offered price, there are standard proceedings enabling a resolution to be reached as if the expropriation were at the very end of this process.

A different situation arises when the shift in the ownership right does not enable a proper setting of the price at the moment of expropriation. This means that there would be a danger that after the change in the holder of the ownership right and after interference such as, for example, real estate in the form of demolition or rebuilding, it would be impossible to set the correct price at the moment of the change in the ownership.

TSS: In Slovakia, two agreements for construction and operation of highways and dual carriageways under private-public partnerships (PPP) have been signed. In the end, because of the economic crisis, the Slovak government has sheltered these contracts with its own guarantees. As well, the number of financing banks is much larger than originally expected. What impacts will this have on the PPP projects? Does this changed situation bring any new risks?
The principle of a PPP project is that, with regards to reducing construction costs, the private sector is better than the public sector, while with regards to guaranteeing the rate of revenues, the public sector is better than the private one. This means that if the state, even with the price of additional guarantees, has reached a good deal in the contracts to enable it to build the PPP projects, in this case highways and dual carriageways, faster and cheaper than it could do it itself, then this will be a success. But only time will show if this is so. Now, when only the contracts are signed, it is impossible to say whether the government has really managed to cut costs as well as construction time. But I think that it is on a good path, at least now, despite the crisis.

For now it is difficult to say whether financing of highway construction would be cheaper. After Slovakia completes at least one highway PPP project, this will enable it to be juxtaposed to highways financed from EU funds and then to say which of the concepts is more successful. I think that the ambitions of Slovakia are quite high.

TSS: How has the crisis affected law firms in Slovakia? Will the crisis in some way cleanse the market of a certain number of law firms?
Our law firm has much more work than at any time before. I don’t know whether this has happened in other law offices, but this is our experience.

Of course, mergers and acquisitions have almost completely disappeared; we have actually done none during the last year. On other hand, there are more restructurings, not only those related to the bankruptcy law, but restructurings in general, as well as loans, claims, consolidation of companies, assets, and mass layoffs. Money has a much greater value now than one year ago and this means taking all the legal steps focused on speeding up and securing payments and protection from creditors’ insolvency. All these services are momentously required by the market.

With regards to cleansing of the market, some large international law firms have already left Slovakia, at least formally. The Slovak legal market has lived through one significant fusion of quite large law offices in the past. But I don’t think that this has been happening due to the crisis. Quite the opposite, I believe that the market simply requires this. Each semester 1,000 to 2,000 law students graduate, which means that the number of qualified candidates eager to find jobs in legal positions continuously grows. This creates pressure on higher competition and viability of individual lawyers, not only the law offices themselves. This excess of lawyers in the market causes a cleansing of the market, higher quality and everything that happened in the western countries a long time ago.

And even when quantity does not mean quality, it is now easier to select quality. We feel that there are more candidates qualified to work in Slovakia. Most of those who studied law abroad and had good language skills in the past – the best – had the tendency to leave Slovakia for abroad, but now it is also possible to find very clever people in the Slovak law market.

TSS: The Business Alliance of Slovakia (PAS) claims that the business environment in Slovakia has been worsening during the term of Prime Minister Robert Fico’s government. How do you perceive the current business environment in Slovakia?
It is possible to feel that this government is trying to behave socially and socialistically when compared to previous governments. This means that intervention of the state into the business sphere has been increasing. But in spite of this, these are not such fundamental interventions which would so worsen the business climate that it would make sense to speak about them. Contrarily, a lot of things have improved during the recent period of time, especially with regards to e-government projects. Today, communication with courts, the land cadastre and many state administration agencies via electronic means is quite common. This makes life easier, reduces costs and moreover, decisions of these institutions arrive faster and earlier.

TSS: PAS also evaluates law enforcement and judicial effectiveness within its business environment index. Entrepreneurs gave this item the second biggest downgrade during the second quarter of 2009 compared with the first quarter. How do you perceive law enforcement and judicial effectiveness in Slovakia?
Lawsuits still take several years in Slovakia but it is approximately the same amount of time as it takes in Western Europe. This means that Slovakia in this area is neither worse off nor, unfortunately, better off. I do not think that law enforcement has decreased over one, two or three years. On the contrary, some instruments, for example the possibility of electronic communication with courts, have brought in some cases an acceleration of proceedings in courts.
In general, I have to say that I’m rather an optimist and my opinion is that law enforcement has remained at the same level.

TSS: The current economic crisis has been increasing the number of past due claims. Does the current legislation adequately address recovery of claims?
The legislation offers a wide range of opportunities to recover claims. Creditors themselves are most often the cause of their inability to recover claims by starting recovery too late. This means that the time from the term of payment until the start of recovery is decisive. When the creditor hesitates too long, then it does not matter how excellent the legal instruments are – the rate of recovery of a claim decreases along with the lapse of time. This is my experience.

Moreover, prevention is better than chasing creditors after the fact. Today, there are a lot of companies which are able to provide sufficiently relevant information on a company which a creditor has never heard of and on this basis it is possible to estimate its financial standing and ability to settle payments. Such information can be relatively quickly obtained. This means that if creditors show such an interest before they clinch a contract with someone who is their future debtor, their position would be even better. Getting information about a potential creditor is first priority, then there is the swiftness seeking recovery of claims, and only in last place is there the legislative frame, which I regard as standard and basically sufficient.

More information about Slovak business environment you can find in our Investment Advisory Guide.

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