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State looks to scrap investment incentives

Subsidies for high-tech projects will remain

By Victor Velek
Staff Writer, The Prague Post
April 30th, 2008 issue

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The four largest investments supported by incentives went to automobile plants. According to EU rules, incentives cannot exceed 15 percent of the investment
30 billion Kč Hyundai; Nošovice, north Moravia
29.8 billion Kč Toyota Peugeot Citroen Automobile; Kolín, central Bohemia
19 billion Kč Škoda Auto; Mladá Boleslav, central Bohemia
11.4 billion Kč Nemak; Havraň, north Bohemia

Source: CzechInvest
The Czech Republic no longer wants to court foreign investors — or, at least, not all of them. The Cabinet is pushing to scrap the investment incentives law, making only the investments that include added value or focus on high-tech eligible for public support in the future.
“The government has set about lowering the corporate tax burden,” said Industry and Trade Minister Martin Říman April 21. There are no reasons assembly plants and other facilities employing low-skilled workers should continue to receive special favors, he added.
On the other hand, the existing program supporting investment in information technologies, telecommunications and other advanced industries will expand, Říman said.
Unlike the investment incentives law, which combines tax discounts, subsidies for land purchases and construction and other spurs, the remaining program is based solely on wage subsidies.
Říman has long been an opponent of the country’s investment incentives scheme, which he took a first step toward dismantling last year, pushing through an amendment to the law. The amendment broadened state support to smaller and local firms and earmarked more money to regions with high unemployment rates.
Now the government feels the time is ripe for scrapping the law altogether. If passed by Parliament, the law would likely cease to exist by the first quarter of 2009.
“When the amendment was drafted in the fall of 2006, it was [politically] unrealistic to seek abolishment of investment incentives,” said Tomáš Bartovský, spokesman for the Industry and Trade Ministry.
It may also be difficult to achieve such an abolishment today. The ruling coalition still only has a wafer-thin majority in Parliament and the senior opposition Social Democrats oppose the move.
“We don’t see any reason the investment incentive law should be scrapped,” said Michal Hašek, chair of Social Democratic deputies’ group. “It proved to be good and contributed to our record pace of economic growth.”
The business community is welcoming a possible red light to incentives. Since last year, the Economic Chamber has called on Říman to scrap the law.
“In the 1990s, investment incentives were important and contributed to the development of technologies and boosting employment,” said Jaromír Drábek, the chamber’s president. But they are archaic now, he added.
The labor shortage is already impeding the country’s development and luring any more large newcomers with state support would be a nightmare for many local businesses, Drábek said.
Dark side of incentives
Not only do incentives favor select companies and often support projects based on low-skilled labor, but they often fall short of winning over foreign investors, Bartovský contended.
The ministry refers to a study published last year by Prague’s University of Economics analyzing the impact of incentives on the economy.
Political stability, a robust judicial system, low taxation, good infrastructure and a quality labor force are all more important to a country’s attractiveness for investors than state incentives, the study said.
Moreover, the government-commissioned analysis pointed to harmful effects the investment incentive scheme has had on the economy.
For example, it contributed to widening the gap between developed and underdeveloped regions as most state-supported investment projects targeted prosperous regions like Prague.     
From 2000 to 2006, investors were granted about 139 billion Kč ($8.9 billion) in incentives for investing a total of 344 billion Kč, according to government data. However, the state-sponsored projects make up only a fraction of total foreign investment, which amounted to 1.67 trillion Kč in 2006 alone, based on figures from the Czech National Bank.
In concrete cases, though, incentives often make a difference. One of the biggest foreign investors in the country’s history, the Korean carmaker Hyundai, said incentives played an important role when it decided where to build its new plant.
If the Czech Republic had not offered any incentives, its investment, worth 1.1 billion euros ($1.76 billion/27.5 billion Kč), might have been placed in southern Poland, said Petr Vaněk, spokesman for Hyundai’s Czech arm.
Nevertheless, Vaněk said the decision to scrap investment incentives is a step in the right direction. “There is no more room anywhere in the country for large investment projects such as Hyundai’s,” he said.
The country should be cautious about putting too much hope in advanced industries, since there is global competition for high-skilled labor, he added. “We cannot expect the whole of the Czech Republic to turn into Silicon Valley.”

Victor Velek can be reached at vvelek@praguepost.com


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