A LITTLE over a year ago it seemed that Korean investors had found an investment paradise in Slovakia. The government loudly celebrated the interest of Kia and Hankook in building plants in Slovakia, while some state officials, perhaps carried away by enthusiasm, made sweet-sounding promises to the potential investors that wooed them to the land under the Tatras.
But as time passed and these promises came to light, they turned Slovakia's paradise into a purgatory, where the cabinet had to renege on some offers that were far too generous for the state's coffers, and where investors opted to try their luck again elsewhere.
Hankook turned its back on Slovakia last October after the state refused to make good on the lavish incentives that former Economy Minister Pavol Rusko had promised the tire-maker. Hankook hoped to see support worth over 21 percent of its total investment, while the state was willing to give only 6 percent.
The over threefold difference between what the investor was expecting and what the state was willing to pay was obviously not just a slip of the pen or a minor miscalculation by the former economy minister.
Many thought that the Hankook tug-of-war was a good lesson to both investors and the state.
The Hankook quandary did make some investors cautious, as it sent the message that Slovakia's official negotiators were offering conditions that the state was not able or willing to honour.
Obviously, not all investors were cautious enough, and the news that one of the "negotiators" had been fired over corruption suspicions did not alarm all of them.
Suppliers of the Kia carmaker are now massively disappointed that the state has refused to grant them the incentives they had been promised during official negotiations with the Economy Ministry. Rightly so.
However, the suppliers should also have taken note of the complications caused by the promises that Rusko had given to Hankook, and should have suspected that the promises Rusko gave them might be just as unrealistic.
In the meantime, the government managed to produce a set of rules for granting incentives to investors. While some objected that the rules would make the state less flexible in attracting investments, the advocates of transparency said that Slovakia's credibility as an investment destination was at stake.
While the state does not deny that investment incentives will remain an important tool in the fight for investors, it is clear that incentives packages should not be left up to the judgment and the conscience of officials alone.
Ministers come and go, especially in countries like Slovakia, where there have been 21 changes in the cabinet over the past four years. Playing by the rules regardless of who is at the helm of the Economy Ministry can increase investor confidence in the stability of the investment environment.
Kia's suppliers have suggested they will drag Slovakia to the International Center for Settlements of Financial Disputes in Washington if they do not get the money they were promised. This will not add to Slovakia's attractiveness for foreign investors.
But unrealistic state promises go back even further than Hankook. The first serious problem emerged after Slovakia promised tax holidays to US Steel (USSK) that exceeded EU limits. A long dispute about the over-production of steel between the European Commission, USSK and the Slovak government ensued.
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 was already clear back in 2005 that some promises given to Kia could not be kept. However, one would have expected the Economy Ministry to try to iron out these wrinkles and ensure that there were no more land mines remaining to hurt the Kia deal.
Kia itself may have far bigger fish to fry at home than a set of incentives denied to its suppliers in Central Europe. The president of Kia Motors Corporation has been banned from travelling due to an ongoing bribery scandal involving Hyundai Motors and its affiliates. The investigation is trying to find evidence linking the companies to slush funds to bribe Korean politicians.
The acts of Rusko's successor, Economy Minister Jirko Malchárek, have been inconsistent as well, not regarding the Kia investment but rather the disposition of the state's shares in oil transit firm Transpetrol.
After taking over as minister from Rusko, Malchárek criticized his predecessor for trying to buy back a 49-percent stake in Transpetrol from the Russian oil refinery Yukos. However, in early April he changed course and said it was possible that Slovakia would buy back the stake from Yukos.
A few weeks ago, the Economy Ministry did another flip-flop and rejected the idea of a buy-back as disadvantageous for Slovakia.
Earlier this year, Malchárek had thought it would be a good idea to sell the shares to Russneft, a company close to the Russian state. But even that opinion was abandoned when the prime minister said it was not such a good idea.
Malchárek then said it would be better to leave the whole problem for the next government to solve, perhaps in a spirit of "the more, the merrier". Because it looks like the Kia suppliers mess won't be the only one the next administration has to clean up.
By Beata Balogová
