Eastern Europe stop 'sweeting' deals: Slovakia, Under Budget Strain, May Reduce Investment Incentives
ELMAT: Eastern Europe stopping subsidizing new industry is ending. Eastern Europe rude awakening start in 2008.
Oct. 21 (Bloomberg) -- Slovakia, under pressure to reduce the budget deficit as it prepares to adopt the euro, plans to scale back tax breaks for foreign companies, ending a practice that has helped fuel economic growth for a decade.
The cabinet will vote on Oct. 26 on limiting state aid, tax breaks and other incentives that lured companies such as Volkswagen AG and Kia Motors Corp. to the country. Poland also says it's less willing than before to offer cash to lure investors.
Slovakia on Oct. 18 lost out on a new plant to be built by South Korea's Hankook Tire Co. because the government rejected the company's demands for state aid to achieve a return of 21 percent on its $600 million investment. Slovakia and other new eastern members of the European Union are struggling to reduce their deficits enough to switch to the euro by the end of this decade.
``The ambition to adopt the euro in 2009 means there is less room in the budget to be too generous with aid for foreign investors,' said Maria Feherova, an economist at Slovenska Sporitelna AS in Bratislava.
Slovakia, Poland, the Czech Republic and Hungary have competed with tax breaks, free lands, and grants for a share of the $192 billion in foreign direct investment that have flowed into the biggest eastern European economies since the end of communism in 1989.
Avoid the Race
``The best thing would be to avoid these races as such,' said Lars Oxelheim, an economics professor at Lund University in Sweden and author of ``European Union and the Race for Inward FDI in Europe,' in an Oct. 18 phone interview from Stockholm. ``Countries should do their homework in due time, have a nice business climate and increase knowledge.'
Seoul-based Hankook in May chose the Slovak town of Levice, 130 kilometers (80 miles) from the capital, Bratislava, to build a factory and create around 1,600 jobs. It said on Oct. 18 that the failure to reach an accord with the government has left it searching for a new site in Poland, the Czech Republic or Hungary.
``My philosophy is not to buy investors, but create conditions for them to come to areas where we need them, such as regions with high unemployment,' Slovak Economy Minister Jirko Malcharek told reporters in Bratislava on Oct. 19.
The cabinet on Oct. 26 will debate and new rules that stipulate manufacturing projects in areas with unemployment lower than 10 percent won't be entitled to incentives any longer.
New Rules
``We are sorry the Hankook plan failed because it would bring benefits for the city especially in road building,' said Levice Mayor Stefan Misak, 52, in an Oct. 19 phone interview from his office in the 850-year-old city of 37,000 people.
City officials are discussing smaller investments with other companies and may be successful, Misak said. The talks may lead to the creation of 450 jobs in the town, he said. The unemployment rate in Levice stands at 15.2 percent, compared with a national average of 11.2 percent in September.
``These investors don't demand so much in incentives,' he said. ``They are aware of the new rules.'
Once, such a contract would have been a boon for the new EU members, whose average monthly gross wages are still just a sixth of the $4,500 in Germany. The average monthly wage in Slovakia is $514, in the Czech Republic $755 and in Poland $762.
Incentives helped Slovakia attract 1.7 billion euros ($2 billion) in 2004, up from 1.2 billion euros in 2003, according to the Economy Ministry. The neighboring Czech Republic pledged aid to persuade carmakers PSA Peugeot Citroen and Toyota Motor Corp. to build a joint factory there. It began production in February.
Less Hungry
Such agreements helped spark annual economic growth of 5.1 percent in the second quarter in Slovakia and the Czech Republic, 4.1 percent in Hungary and 2.8 percent in Poland.
Rising foreign investment and accelerating growth allows domestic companies to boost output and hire new workers, said Todd Bradshaw, a partner at PriceWaterhouseCoopers in Bratislava.
Slovakia's ``hunger for foreign investment has slowed,' said Bradshaw in an Oct. 17 interview in Bratislava. ``It isn't as desperate as it was.'
Poland's Foreign Investment Agency Vice President Sebastian Mikozs said on Oct. 18 his government is no longer willing to overpay to beat the Czech Republic or Slovakia to a contract.
``We would welcome Hankook in Poland and we would support the investments, but not by offering direct financial subsidies, which is the only thing the company is looking for, based on our previous experience,' said Mikosz in a Warsaw interview on Oct. 19. ``We are not interested in buying the investment.'
Oxelheim said the countries should focus on attracting investment for research and development instead of using state aid to lure manufacturing investment.
`Significant' Lure
``If a country manages to get more research and development projects, it can benefit from product and management spillovers,' he said. ``It makes sense to subsidize these projects.'
Some investors in eastern Europe said they probably wouldn't have invested without state aid.
``Our decision would have been different without the incentives,' said Peter Lore, a Budapest-based spokesman for Audi, a unit of Volkswagen that invested about 2 billion euros in Hungary since the early 1990s. ``The cost element is one of the most important in an investment decision. The incentives played a significant part.'
To contact the reporter on this story:
Radoslav Tomek in Bratislava, Slovakia at rtomek@bloomberg.net.
Last Updated: October 20, 2005 19:09 EDT |
