Companies in the transformation process Companies in the transformation process nFor a development of the Czech economy was very important a development of business sector. nThe position of business sector in the Czech economy was determined by qThe privatization qThe development of banking sector qThe development of capital market Situation in companies at the beginning of the transformation process nAt the end of the 1980’s in Czech companies were concentrated several problems: qIneffective production supported by government aids qWasting of resources: employees, row materials n over-employment about 15% nThe production was quncompetitive in world markets and thus qexported only in shallow eastern markets nIt these markets was considered to be a high quality production nThat all led to decreasing of the labour productivity qThe Czech industry achieved only 80 % productivity of developed countries because of old-fashioned equipments and weak labour organization. Situation in companies at the beginning of the transformation process nPrevious negative effects were caused by a negative motivation of subjects qCollective proprietorship nAnd led to maximalist of imputes and limitation of outputs. nWhole economy was deformed by qorientation in industry (heavy and army industry) nWithout sufficient technology or natural resources qMonopoly structure in all sectors qIndebtedness of companies n80% were near bankruptcy Impact of reforms on companies nLiberalization of trade qCustom duties were limited in 5 % and domestic companies faced foreign competition nMonetary and fiscal restriction qDifficulties in credit granting qStopping of state aids for companies nIn business sector ruled an anarchy qState did not control of management in state companies Support of companies by government nPostponed bankruptcy law nThe state control of wage growth nThe pressure for banks to grant credits for companies nWith the liberalization of trade came into effect import additional charges nLiberalization of prices lowered real interest rates in negative value and inflation erased part of debts in companies. nGovernment established Consolidation bank that qOvertake part of company bad loans from previous regime n Support of companies by government nGovernment policy to companies was not neutral. qOn the one hand nIncrease of competition nThe pressure for companies to be effectiveness qOn the other hand nCompanies got time to change quality of their production nGovernment afraid of misusage of new economic clime by monopoly structure and though that s necessary to companies faced them by a competition. nGovernment wanted to companies orient to demand site of the economy qThe customer demand was in that time satisfied only by foreign importers. n n Support of companies by government nThere are no doubts that impact of reform on companies was serious. nDomestic problems were accompanied by break up of eastern market e.g. nCKD Praha finished in 1989 new assembling line with production of 1800 trams per year (1989 there were produced of 950 trams) but after splitting of eastern markets in the 1990’s total volume of tram sale was only 13 trams per year. nBecause of eastern market break up, CKD production collapsed and total volume of trade decreased in 13 trams in 1991. qOther example nIn 1989 in Czechoslovakia was made 73 million pair of shoes. n75% of production was exported. nIn 1995 shoes production was decreased in 25 million pair of shoes and 80 % export. qOther example: the car producer Tatra Koprivnice nCollapse of Russian oil industry nDebts 4 billion CZK n Shoe industry in the Czech Republic 1989 1996 1999 2001 2003 Shoe production / in million 73,1 25,7 13,5 12,5 7,0 Import / in million 10,9 23,8 30,0 35,9 44,5 Number of employees in the industry / in thousand 36,0 23,0 10,5 9,5 7,8 Support of companies by government nBecause of all troubles the pressure for the government was growing. qTo grant state aids nCompanies reacted to this new situation with qGrowing of intercompany debt qHad no will to pay supplier loans that the suppliers got in secondary insolvency Companies debts Bank loans / in billion Intercompany debts / in billion 1989 12/1989 530,8 6,6 1990 6/1990 533,5 14,5 12/1990 536,0 46,8 1991 6/1991 611,3 123,5 12/1991 646,8 170,6 1992 6/1992 654,0 170,2 12/1992 628,7 Set up of new companies nOne of the most important modification after 1989 was the liberalization of the business activities. nIn early 1990 was adopted act that legalize qPrivate enterprise qPrivate proprietorship n This reflected in immediate growth of enterpriser number. qIn 1990: 157.574 individual enterprisers qIn 1991: 1.423.000 individual enterprisers Set up of new companies nDevelopment of individual enterprisers reflected two factors qSmall and large privatization qEasy conditions for setting up of new companies nFor a Ltd. Basic capital 100.000 CSK nDuring small privatization occurred liberalization of a lot of subjects and similar during large privatization. qPrivatization projects led to brake up of large monopoly structure and establishing of smaller units. nInitial purpose was loosen private business qAt the end of decade condition were getting difficult n↑ Administrative costs n↑ Limitation of a business Restructuring of companies nGrowing number of companies nOrientation of foreign trade in western markets nIn modern economy structure dominate services approx. 70 % lower is the share of industry and the lowest is the share of agriculture. nIn the Czech economy decrease the share of agriculture and industry and increase the share of services. nThe Czech economy achieved modern structure in 1991 when the share of services was higher than the share of industry. qThe reason of this was decline of industry that was strongly effected by the transformation process. qAt the beginning of transformation process the share of industry was high. qHeavy and army industry was replaced by car industry, aircraft industry or electro technical industry. q n Restructuring nVery significant was decline in agriculture qEmployment decline about 60% in 1990-1999 qAnd thus productivity in this sector rose for two times nThe share of services in GDP was growing qIn the initial phase of the transformation the growth of services absorbed large share of unemployment. q Foreign trade Situation before 1989 nForeign trade realized with qExport and import plans nForeign trade was realized by the companies of foreign trade. nIn 1990 in Czechoslovakia existed only 52 companies traded with foreign countries. nMain export markets qEastern markets of communism countries (60-80 % of exports) nIn eastern market were exported products with so called “higher added value” nFrom western markets were imported also products with “higher added value” qTechnologies nFrom eastern markets were imported row materials nCzech economy was relative closed, share of exports to GDP was only 19,4 %. Liberalization of foreign trade nAll important steps for liberalization of foreign trade were realized in first two years of transformation. nThe most important shifts qInternal convertibility of Czech currency qDecreasing of custom duties in level 5 % qImplementation of import additional charges of 20 % to protect Czech market in first years of transformation. nThis additional charge was applied in all consumer goods nIn 1992 decreased from 20 to 15 % and later in 1992 was cancelled. q Liberalization of foreign trade nAt the end of 1991 was made a deal with EC (the European Communities) its part was so called asymmetric liberalization qEC immediately cancelled 70 % of barriers of Czech imports and the rest was liberalized in next 5-6 years qCzechoslovakia cancelled only 20-25 % of all barriers for import from EC countries and the rest was liberalized during next 9 years. nState aids for exporters were limited because government did not support interventions in market economy. qException was establishing of EGAP (Export, Guarantee and Insurance company ) q EGAP nThe insurance company focused on insurance of export risks related with export of goods and services from the Czech Republic. nEGAP provided insurance services for all exporters of Czech goods. nEGAP was established in 1992 and it is fully owned by state. n Changes in foreign trade nIn the 1990’s got significant growth of foreign trade qFrom 339 billion CSK in 1990 to 2.800 billion CZK in 2003. nNowadays Czech economy is considered to be one of the 12th most open economies in the world. nThe basic change was shift of foreign trade from eastern markets to western markets that occurred in 1990. nSectional changes qPermanent growing of imports from other countries with transitive economies e.g. China qGrowing of exports in western countries with share about 80 % Changes in foreign trade Country Export in % Import in % Difference in billion CZK Germany 36,1 40,4 50.360 Slovakia 6,8 7,7 11.340 Austria 5,4 6,0 5.514 Russia 4 1,3 - 65.320 USA 3,7 2,8 - 23.390 Significant deficit with Russia is because of oil and gas imports Changes in foreign trade nIn transformation period was changed the commodity structure of the foreign trade. qImports nDecline of consumer products and imputes – row materials nOn the other hand increase of imported machines and traffic facilities. This group represented the most significant share of Czech imports. qExports nDecline of machines and equipments – traditional Czech exports in first phase of transformation qThis products were uncompetitive in developed markets and qDecline of this product demand in former central planned countries. qGrowth of exports of row materials and intermediate products qIn second half of the 1990’s Czech exports returned in their traditional structure of exports with high share of machines and facilities that achieve higher level than before 1989. q Inflow of foreign capital in the Czech Republic nThe inflow of foreign capital was based on economic characteristics of the Czech economy qRapid economic growth qConfidence of foreign investors qMacroeconomic and political stability nDirect foreign investments nPortfolio investments nAttitude of the Czech government to foreign investments was double-faced. nOn the one hand was evident need of qForeign capital, knowledge and management experiences nOn the other and qRepresentatives afraid about sale of Czech assets in foreign companies qRepresentatives were skeptical to specific business conditions for foreign investors q n n Direct foreign investments nAs direct foreign investments are considered deposits of foreign investors in Czech companies in the value of at least 10 % of basic capital. nThe main condition is permanent interest of investor about management of company. Direct investments nTotal value of direct foreign investments in the Czech Republic got 1,2 billion CZK in 2003 (51% of GDP) nIn the Czech Republic existed 55.000 foreign companies with 1.200 subsidiaries qVolkswagen, Philip Morris, ABB, Ford, etc CzechInvest nIn 1992 was established the agency CzechInvest. nMain aim qPromoting of the Czech Republic as an ideal place for foreign investments qAdministrative support of inflow foreign investments in the Czech republic n Investment Invitation nInvestment invitations were introduced by left oriented government of Milos Zeman in 1998. nWas opened for Czech as well as foreign subjects. nInitial subject investment at least 25 million dollars (was decreasing later) limited a lot of domestic subjects. nInvestment Invitations included qTax advantages (till 10 years) qState grants for establishing of new working positions qGrants for scholarships or requalification qDiscount for selling of state property qZero consumer duties for import of technologies, etc Investment Invitation nCriteria for an acceptation of Investment Invitation qDirection of investment in production at least 50 % financed machines had to be on government list of high tech machines qBuilding of a new factory of modernization of an old factory qSufficient share of investor property value to the value of investment as a whole Investment Invitation nDirect foreign investments came during the 1990’s especially from Netherlands, Germany and Austria q65 % of all direct investments n n Portfolio investments nFluctuation of portfolio investments in Czech republic because of changing of investors interest about Czech securities. nIn 1996 decrease of interest about Czech securities and thus decrease of foreign investments. nIn 1999 and 2000 increase of interest about Czech bonds and growth of portfolio investments. nDecrease of portfolio investments because of Asia crisis and Crisis in Russia. n Portfolio investments nShort-time portfolio investment are generally very volatile. nIn the Czech republic were several factors that attracted investors qHigh interest differential because of fixed exchange rate in 1993 and 1995 nAfter spreading of Czech currency fluctuation belt decrease of foreign capital in 1996 Short-term foreign capital Long-term capital n1993 -1997 significant growth of foreign long-term capital qIn the form of bank loans nDifferent situation 1998 qIn the time of economic recession qDecreasing of demand about investments qIn bank concentrated free financial resources and was not necessary to invite foreign capital. Legislative in case of company bankruptcy nEconomic basic of bankruptcy consists in possibility of resources reallocation. qIf company gets in trouble and gets bankruptcy: nThe new owner of company property is able to use company resources more effectively. qBankruptcy is a process of cleaning the market structure from ineffective companies. qThis process is running all the time but in the time of economic crisis the number of bankruptcies is growing. nOn the other hand bankruptcy offers possibilities for creditors to achieve their rights. The quicker bankruptcy process the higher probability for creditors to get redemption of their costs. n q n Legislative in case of company bankruptcy nIf in economic environment does not go bankruptcy qCompany in trouble increase its liabilities and troubles deepen. nSlow bankruptcy process of Czech companies had negative impact on other sectors qBanks qRestructuring of companies Legislative in case of company bankruptcy nAt the beginning of the 1990’s majority of the companies were near economic collapse. q80 % in bankruptcy qWithout possibility to get credit in market oriented economy nBut development of number bankruptcies did not reflected this situation n q Legislative in case of company bankruptcy Year Number of bankruptcies 1992 1 1993 66 1994 294 1995 727 1996 808 1997 1251 1998 2022 1999 2000 2000 2491 2001 2473 2002 2155 Development of bankruptcy law nBankruptcy law was point of view for several times since the beginning of the 1990’s. qAt the first in 1990 nThe law was postponed because of general fear about mass bankruptcy of companies and strong growth of unemployment. qNext time was slowed process of companies bankruptcy related with slow process of company restructuring qThird time in connection with the mention of cohesion of banking sector and companies after privatization process qAt last one after crisis in 1997 and whole wrong institutional environment Development of bankruptcy law nBankruptcy law was criticized since the beginning of transformation process. nExecution of law was postponed form companies designed for privatization process till 1993. n Development of bankruptcy law nMain reason for careful approach to bankruptcy was fear about qinterruption of privatization process qCascade effect – one bankruptcy led to bankruptcies of other related companies. nAs a result all bankrupt discussion was the legal regulation that protected debtors. qIt is a proof that Czech government did not want to company went bankruptcy. nIn Czech republic bankruptcy law postponed for two times in contrary to situation in Hungary 3.500 bankruptcies in 90 days after adopting of bankruptcy law. Development of bankruptcy law nBankruptcies got in point of view after privatization process. nBanks keep alive a lot of companies that should have gone bankruptcy qRelation between banks, investment funds and companies was considered to be a reason of banks unwillingness to adjudge of adjudicate in companies. nThe main consideration was following qIf small banks let company go bankruptcy qThis bank lost assets of this company collected in bank’s investment fund nLarge banks were state and did not initiate bankruptcies because of fear about growth of unemployment. qI led to the situation when banks granted credits because bankruptcy process was slow. qMarket value of securities were more lower than value of liabilities. nFirst large company that went bankruptcy was Poldi Kladno in 1998 and then Chemapol in 1998. Development of bankruptcy law nGovernment policy in bankruptcy was very careful. nThe government position was problematic qAbout 80 % of all companies in fact in bankruptcy qBut government had to cleaned economic environmental from ineffective companies. nThe low number of bankruptcies at the beginning phase of transformation q66 in 1993 q294 in 1994 nshows that whole process was long and incorrect. nThe number of bankruptcies should have been higher especially in years of economic growth 1994-1996 to cleaning of economic environment. nThe result was that government kept low level of environment and problems spread in banking sector. n n Thank you for attention