An interview with Ján Čarnogurský for The Slovak Spectator.
By Beata Balogová
Ten years ago, it was hard to find a law school graduate in Slovakia who could speak a foreign language perfectly and knew enough about the legal system to hit the ground running. But today that’s not a problem any more, according to Ján Čarnogurský, partner with the law firm ULC Čarnogurský. He spoke with The Slovak Spectator not only about the globalising legal market in Slovakia, but also the prospects for public-private partnership (PPP) projects, legislation to speed up highway construction, changes to the country’s tax system and Labour Code, and the investment environment in Slovakia.
The Slovak Spectator: Recently, the Slovak Investment and Trade Development Agency (SARIO) reported that the amount of foreign investment flowing into Slovakia over the first nine months of 2007 exceeded the total amount for all of 2006. Slovakia obviously remains attractive for foreign investors.
Ján Čarnogurský: It’s the comparison between Slovakia and the surrounding countries that really matters. Comparing the amount of investment flowing into the country this year and last year is not as relevant, because there is a general increase in investment all across Central Europe. The most important thing is whether Slovakia can exceed the average and stand out among the Central and Eastern European competition. Having said this, our practice has shown that there is a prevailing interest of investors in Slovakia.
The Slovak Spectator: Slovakia, for the first time ever, has opted for public-private partnership (PPP) to finance a massive highway construction programme. What are the greatest challenges that private investors and the state face with the PPP model?
Ján Čarnogurský: There have been many failed PPP projects in the world, but also many successful ones. Speaking about long-term projects, only a very few PPP projects have yet reached the mid-point of their planned lifespan, which makes it difficult to assess their potential success. After all, the idea behind PPP projects is great.The private sector is more effective in saving costs, while the state can do a better job at securing future revenues.When you link the two aspects, there is a positive synergy. Problems usually start when one of the parties does not meet its obligations; for example, the state fails to correctly assess the profitability of the project by overestimating the interest of the users or the calculations of the project expenses are wrong. At the same time, when private investors negotiate PPP projects, they try to leave some loopholes in the contract, since the state has no centralised unit that can gather experience with PPPs. So when a serious problem emerges, the private investors can invoke these loophole clauses, and it is the state that gets the short end of the stick. Nevertheless, it does seem that PPP could be a way to finance large projects such as highway construction without putting too much burden on the state budget.
The Slovak Spectator: The state has prepared a package of laws to speed up highway construction. One of the measures stipulates that the state would not need to have all the land ownership rights settled in order to receive a construction license from the transportation authority. It would only need to have all these rights settled by the time the construction is wrapped up and the final review takes place. Critics of the legislation said the draft violates citizens’ constitutional right to private property. What is your opinion about this legislation?
Ján Čarnogurský: It is important to understand that expropriation in the name of public interest, which would certainly include the construction of highways, is already possible under current legislation. The most important question is: at what point in the process is the amount of compensation for the land determined, and when does the landowner get paid? The current legal framework allows the landowner to blackmail the state by stretching out the time necessary for gaining a construction license, and pumping the cost of the land up above the market price. It seems absolutely legitimate to me if the state says: „OK, we will pay you the compensation you are eligible for, and if you do not like the price offered based on the expert assessment, you can go to court. But the construction of the highway can proceed immediately.” The length of the court case should not block the state, because the highway will be built sooner or later. Such a procedure is possible in the case of land expropriation, since the value of the land can be correctly evaluated even after something is built on it. But it would not be possible in the case of a building that must be demolished after expropriation for the purpose of a new construction. The state’s effort to shift the burden of proof of the amount of higher compensation to the owner is absolutely legitimate, because under both the current and the future legislation, the result is that the owner loses his ownership of the land in the public interest for a market price that must be evaluated. The owner still has the option of turning to the court, which will decide on the amount to be paid as compensation under the new legislation just as it decided under the old legislation. In fact, under both the current and the proposed new legislation, the owners will get what they are entitled to in the same period of time and according to the same procedure for determining the amount of compensation. The proposed new legislation only speeds up the process of construction; it has nothing to do with the amount of the compensation or the time within which this compensation should be paid.
The Slovak Spectator: Slovakia is committed to adopting the euro on January 1, 2009. Are there any major challenges that law firms or the justice department will face?
Ján Čarnogurský: It will make our lives substantially easier, because today we are charging our clients for expenses and payments in several currencies, and when we switch to the euro, at least one currency will be dropped and no party will have to absorb the exchange rate differences.
The Slovak Spectator: How has the globalisation of the legal market impacted Slovakia? Has the arrival of large multinational law firms put pressure on local firms?
Ján Čarnogurský: Slovakia is a relatively small market and multinational firms have huge expenses. The number of these firms is relatively low in Slovakia because this market does not allow them to cover their expenses linked to establishing and operating a branch in Slovakia. Therefore, the competition is not that tough. Furthermore, the knowledge of the local market is very important in a small country like Slovakia, and only very few foreigners speak Slovak. This means that only very few large global firms are able to send a qualified lawyer here who could learn Slovak and face the competition from Slovak lawyers. Instead, they have to rely on Slovak lawyers who speak foreign languages. Many of the large clients seek out Slovak lawyers who have a decent knowledge of the Slovak market. Slovak law firms can be pretty successful and face international competition. I think that this situation will last for a while. By the way, some Slovak law firms have already started expanding abroad. My company has already opened a branch in Italy.
The Slovak Spectator: What about the level of lawyers’ training in Slovakia? Is the academic training sufficiently linked to the needs of the practice?
Ján Čarnogurský:Good theory is essential for good practice, and this is where lawyers have to start. I think there are currently five law schools in Slovakia and the number of these institutions will grow. That will create even stronger competition between the law schools.Today it is not a problem to find a law school graduate who speaks at least one foreign language perfectly and knows enough to practice law without any problems. Ten years ago, however, that was a problem.
The Slovak Spectator:The World Bank criticised the recent changes made to the Labour Code, suggesting that they reduced the flexibility of the labour market and worsened the conditions of employment in Slovakia.
Ján Čarnogurský:It was definitely a step backwards. Despite the falling unemployment rate, the state has been trying to make employers’lives tougher while improving the status of employees. Investors’ and employers’ general impressions about labour market conditions have worsened. This most recent revision will miss its target,mainly as far as the government’s goal of preventing the use of fake selfemployed contracts to cover up hidden employment is concerned Only time will tell whether other measures pertaining to the notice period for terminating employment, contracts and working hours will work effectively, and whether the state made the right decision. Perhaps one of the greatest efforts was trying to prevent employers from forcing their employees to work on selfemployed, or trades, contracts and charge for their labour as selfemployed. [Ed. note: this allows employees to cut wage costs, as employers do not pay social and health insurance premiums for the self-employed.] I am more inclined to think that it will not bring the desired results.
The Slovak Spectator:The Slovak government has been working on changes to pension reform, specifically the second capitalisation pillar. Some of the pension companies have said the government is changing the rules at a point when they have already made substantial investments into the system. How do you see these changes?
Ján Čarnogurský:The second pillar was designed to prevent the negative effects of the ageing of Slovakia’s population on the next generations’ pensions. The system [installed by the previous government] was calculated based on complicated demographic data and it has been tuned for decades ahead. I think changing this system after such a short time is unsystematic. It is a populist move and I see it as harmful to the system as such. It prevents the perception of any stability regarding the second pillar and its future, which is negative for all of us who are saving for our pensions in this pillar.
The Slovak Spectator:The rate of corruption in Slovakia is on the decline, but it is becoming concentrated in areas such as justice, the police and medicine, according to the latest Corruption Perception Index from the non-governmental organisation Transparency International. Why is the Slovakia’s justice department still so vulnerable to perceptions of corruption?
Ján Čarnogurský:I have had a very positive experience with the Slovak judiciary, andI have to say that I do not have any experience with corrupt behaviour of judges or other employees of the judicial system.
The Slovak Spectator:The government of Robert Fico has made several changes to the tax legislation, which over the past couple of years was one of the main attractions of the Slovak investment environment for foreign investors. The government has already cut VAT for selected goods. Do you think that changes to the tax system potentially reduce Slovakia’s attractiveness for foreign investors?
Ján Čarnogurský:The greatest difference between our tax system and the tax systems of Western Europe is that in Slovakia, even private individuals pay a flat income tax of 19 percent, while in Western Europe, the rate is often several times higher and most of those countries have a progressive tax system. This is a huge comparative advantage for Slovakia. In practice, in fact, businesses and firms can always manage to somehow control their amount of profit, for example by transferring costs abroad. But highincome managers cannot, because they have a fixed income and it is completely clear where they have their tax domicile. And this actually means that for large companies, Slovakia is perhaps not as lucrative a destination, but for the best-earning managers of these firms, Slovakia is certainly a great destination, compared to other countries in Europe. As far as the VAT is concerned, I think the installation of different rates for a limited number of selected commodities is not really important. The most important aspect is that the flat rate of income tax for private individuals has been preserved,along with the zero tax on dividends and the zero gift tax. However, if the new proposed changes in the Income Tax Act becomes effective in the form drafted in the parliament, Slovakia’s advantage of zero tax on dividends for natural persons will probably be lost.
(In: Investment Advisory Guide 2007 published by The Slovak Spectator)