EU funds are a huge unused potential

  • 30. October 2008

Worldwide, PPP projects are used in different spheres from highways to operating prisons. An interview with Ján Čarnogurský for The Slovak Spectator.

By Jana Liptáková
Spectator staff

The Slovak Spectator (TSS): The Business Alliance of Slovakia has said that the quality of the business environment in Slovakia has deteriorated in the past two years. How do you assess it?

Ján Čarnogurský (JC): The volume of investments flowing into Slovakia has been declining in general while the slowdown in economic growth seems to be a worldwide trend. This also implies a general deterioration of the business environment in Slovakia. There are more firms which have run into financial trouble, and it is becoming more difficult to obtain finance for further investments. All these developments make business more difficult than it was two years ago. These are the objective parameters. The subjective parameters are that we have a government with a socialist agenda and, as such, it aspires to improve the living standards of lower-income citizens to the detriment of profitable companies. This trend has been clear for the past two years in Slovakia. Several steps taken by the government have illustrated this trend, the most evident ones being the act banning health insurers from paying out profits and the introduction of a second rate of VAT – though it applies to only a few goods. .

TSS: What should the government do to improve the business environment?

JČ: I personally see a huge unused potential to draw on EU funds, which could provide an impulse for further development of the business environment. It seems that, so far, the government has not succeeded in securing full transparency of their allocation, and nor has it paid the funds on time to successful applicants.

TSS: Public-private partnership (PPP) projects are being piloted in Slovakia to fund construction of the highway network. Lawyers and experts warn that with PPP contracts being signed for 30 years, it is crucial that they are prepared well. What do you think is most risky about PPP projects?

JČ: This is the largest PPP project to be completed so far in Slovakia. It is crucial that people who manage PPP projects learn the lessons, in particular from unsuccessful PPP projects abroad. There are several examples in the Czech Republic, as far as highway construction is concerned, but also in Portugal and Hungary. By taking a close look at the reasons behind the failures of these projects, one could prevent similar mistakes in Slovakia.

Generally, it is true that the state is a worse manager than the private sector. Also, it is not clear whether the process of defining the parameters and conditions for PPP projects was sufficient to secure the most advantageous position for the state in negotiations. This will only become clear in the future.

Once stretches of the new highways are opened we will learn in a relatively short time whether the profit that Slovakia makes in economic growth thanks to the new highways will be sufficient to cover the costs which Slovakia will have to repay investors.

TSS: Do you think that the state could use this system of financing in other spheres?

JČ: Worldwide, PPP projects are used in different spheres, from highway construction to operating prisons. We will see how the first Slovak PPP projects end up and, if they are successful, it is a possible option for Slovakia in the future. But I think highway and infrastructure construction can be covered from EU funds: PPP projects should be chosen only after it is clear that EU funds cannot be used to pay for them.

TSS: The government has pledged to speed up construction of highways in Slovakia. This should be helped by legislation simplifying the process of expropriation of land to allow for construction. What kind of legislation would be best to settle this problem?

JČ: It is not problematic when the state immediately expropriates plots of land, since the price of them can be determined even after the expropriation, the price becomes known during the due administrative and court proceedings and the result is the same for the landowner as it is under current legislation. This means that the land is expropriated and compensation paid – unless they make an agreement with the state – as decided by the court. The only difference between the current and the amended legislation is that land ownership status is being transferred to the state sooner so that it can start construction sooner. For the owner, nothing really changes as far as the amount of compensation is concerned, which is still decided by a court, sooner or later.

A problem arises if we pose the question: should we expropriate buildings in the same way? If a building was demolished and, later, a highway was constructed on the site, it would be very difficult to determine the status of the building at the time of expropriation, and more importantly, its value.

I think the current legislation enabling speedy expropriation is all right as long as it applies only to the expropriation of land. If it also includes expropriation of other real estate, for example buildings, I think it could violate one’s right to property and possibly other constitutional rules.

TSS: According to Justice Ministry statistics, the average time to taken to reach a verdict in civil litigation is about one-and-a-quarter years in Slovakia. How do you regard this figure, given that the ministry admits that delays in court proceedings remain a problem?

JČ: Thanks to some legislative changes, the time taken for some court proceedings has been reduced, especially by shifting the burden of proof and the responsibility to be better acquainted with the law to the disputing parties. In criminal proceedings things have gone perhaps even further: now there is the opportunity for a settlement covering guilt and sentence, something which was not possible before.

The duration of legal proceedings is not exceptional in Slovakia; it is not longer than elsewhere in Western Europe, on average. I have no specific statistics, but proceedings often take several years there too. In many important [Slovak] cases, court proceedings have been lingering for years or even dozens of years. Unfortunately, I do not know of any general prescription for cutting all proceedings. The simplest way would be to increase the number of judges. This would definitely help, and very swiftly. However, until the state budget finds enough resources to pay for this it will not happen.

TSS: Prime Minister Robert Fico has repeatedly warned energy companies they could be expropriated, unless they halt what he calls disproportionate increases in energy prices. Does current Slovak legislation allow him to act on these threats?

JČ: This is quite a nice populist stance, directed at ordinary citizens. Expropriation is possible at an appropriate, i.e. market, price, and since energy prices worldwide are high, so the price for expropriation would also be quite high, and all citizens would have to pay for it. It is difficult to say what would be cheaper – to pay for expropriation, or to pay for the electricity or gas, for energy. Mr. Fico will have to evaluate these options. Furthermore, expropriation is possible only when it is in the public’s interest. The government will be hard pushed to show this.

Every investor will certainly consider, when assessing political risks, whether statements such as the prime minister’s will have a negative impact on their decision to invest in Slovakia. It is not a legal issue how individual investors will assess this.

TSS: How do you view the introduction of a ceiling on the expenses for consumer loans, which principally reduce the price of so-called fast loans? Will this provision meet the government’s expectations and protect less-solvent clients from “expensive” loans?

JČ: Firstly, it depends on whether the government manages to define the price of money, or of such a loan, in a sufficiently clear way so as to prevent the regulation being bypassed or skipped. Secondly, it is important that the government finds the limit, within this price regulation, between usury and the business profits of the providers of these credits. Thirdly, I think that it should make this step only if the market fails to find the natural price of a fast loan. So if the government has learned that the market has failed to play its role in this sphere then yes, in this case it is necessary that it intervenes – but only in this case. If the contrary is true, such a regulation could lead to a general price increase, and the equalisation of the prices of these fast loans.

TSS: The Press Code, in effect since June 1st, has caused heated debate. Big concerns prevailed, especially in the media community, that in its wording the act limited freedom of speech. What is your view of the Press Code?

JČ: In Slovakia, competition in the print media, and even among broadcast media, is not very well-developed. This implies that self-regulation, or the prospect of a better position for media which have a correct approach to writing about people, cannot be achieved only via the market itself. Libel lawsuits still tend to last for several years in Slovakia before resulting in a valid verdict. This means that if the media writes about someone while violating his or her personal rights, this person has really very few possibilities left to redeem or defend themselves. I think that the current Press Act does not interfere with press freedom and, after all, it has so far been used just a few times so I do not think that its intervention in public life and the state of information in Slovakia will be fundamental.

We act for several clients in libel disputes against the print media, and all these were launched before passage of this last Press Code, which establishes the right of reply. It is very probable that these law suits would not have arisen if our clients had had the right to reply. This means that they could have used it at the time their personal rights were affected and their answer would have been published in compliance with this law. I personally think that this law is positive.

TSS: The ULC Čarnogurský law firm recently opened a branch in Kiev, Ukraine. Along with a branch in the Italian town of Brescia (since 2004) this is the second foreign branch of your firm. What makes the Ukrainian market interesting for law firms generally, and your company in particular?

JČ: We opened the branch in Ukraine because of our clients, whom we already had before it was opened. The first months of its existence have shown that it was the right step. The Ukrainian market continues to grow, as do investments in Ukraine. Ukraine is a much bigger market than Slovakia and it is geographically close –today we are already seeing the positive results of our decision, which show opening a branch in Kiev was right. Kiev is not the last branch that we will open abroad; we plan to open branches in other destinations, but it is premature to say now where these will be.

(In: Investment Advisory Guide 2008 published by The Slovak Spectator)
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