Private dilemma of the Czechs: Despite giant strides towards economic transformation, lack of capital and weak management are taking their toll. John Eisenhammer reports

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The Independent Online
FORCING the buckled steel door shut, Lubomir Smejkal smiles bravely in the twilight of the weak electric bulb. 'Don't worry, it has never broken yet,' he says, as the lift groans slowly upwards. It stops on the third floor, opening on to a different world - light, humming with activity, coloured by flashes of bright orange as workers flap large garden umbrellas. Mr Smejkal walks proudly among the women cutting and sewing.

The old state firm for which he worked closed on 31 December 1991, and within two days he had moved in the machines and started up OMB textiles, manufacturing garden umbrellas and industrial clothing for customers in Austria and Germany.

OMB now employs 85 people, had sales of nearly 40m Czech crowns (now pounds 900,000) last year with a small profit, and exports everything it produces, such is Western demand for the keenly priced products, thanks to the republic's low wages.

Business is strong. But Mr Smejkal is worried. OMB's workshops are rented inside a vast, rambling textile factory, which was privatised two years ago and has since been desperately looking for a foreign saviour. It could close at any moment. 'It is a constant problem, not knowing where things go from here. The future is so uncertain,' he says.

Mr Smejkal could be speaking for many. The enormous strides made by the Czech Republic over the past four years in transforming its Communist economy have been widely praised; but they have also left some nagging questions unanswered. Prices have been liberalised; by the end of this year over 50 per cent of GDP will be privately generated; a new taxation system has been introduced; and all of this achieved while keeping unemployment around the extraordinarily low rate of 4 per cent.

Having seemingly worked the trick of combining radical change with stability - GDP growth this year is expected to be between 2 and 3 per cent after a slight decline in 1993 - the country has become one of the favourites of emerging market funds. Yet doubts linger as to whether some of the changes are as profound as they appear. Czech privatisation, largely conducted under the so-called voucher system, whereby the state provided vouchers to citizens, who then exchanged them for shares in privatisation auctions, will have transformed the legal ownership of two-thirds of corporations by the end of this year. But the process will have brought barely a single fresh crown to the cash-starved companies, nor changed the old state management.

Corporate restructuring is only inching forwards, one reason why unemployment is still so low. 'Privatisation was the easy part. So far the Czech economic miracle has only really been in services, and especially the tourism explosion, which has absorbed many of the jobs lost in the public service,' says Stephen Bligh of the consultants KPMG in Prague. 'The painful part, restructuring industry, has barely begun. That is the real challenge for the next five years.'

Jiri Pospisil, board member of the Czech central bank, does not disguise his frustration at this snail's pace of corporate change. 'Until this has progressed, it will be difficult to think of making the crown fully convertible,' he says.

Such central bank impatience prompts only a grimace from Armando Tatar, a specialist contact lens maker in Brno, the country's second city. He knows only too well why the speed of business modernisation and change is so slow. 'Everyone will tell you how hard it is to raise money. It is our biggest problem. Banks are afraid. They want 200 per cent security and impose 18 per cent interest. For those without friends, this makes business very difficult.'

The lack of a proper capital market is universally lamented. 'Creating a long-term culture is one of the major difficulties facing former communist societies, where few people trusted anything beyond next month,' says Bohuslav Klein, a corporate lawyer in Prague. 'Nobody will buy long-term bonds, so banks cannot finance long loans. Everything is short-term, and expensive.' For both Mr Tatar and the umbrella-maker Mr Smejkal, the demands of the banks were impossible. The only reason they are in business today is because of a large helping hand from abroad.

During his years as head of the ophthalmic institute in Brno, making contact lenses for difficult cases, Mr Tatar forged good contacts with colleagues in Britain and Germany. When he set up his business in 1992, it was German friends who bought him his machines, for which he has still not paid. When he buys the contact lens blanks from Germany, he has four months to pay. Last year he produced 50,000 lenses, at better quality and lower prices than his three state company rivals.

Similarly, Mr Smejkal's New Year dash to set up the machines for his new OMB company was only possible due to the support of long-standing German clients of the former state firm, anxious to see the low-cost supply lines kept open. The Germans bought the machines and leased them to OMB, and they also made payment guarantees so that Mr Smejkal could raise a DM200,000 (pounds 80,000) credit from the Bayerische Vereinsbank at 11 per cent, a rate most Czech companies can only dream of. 'Financing is everyone's nightmare. We were lucky to have help. For those without it, starting up or trying to improve one's business is a real struggle,' says OMB's head.

The Czechs like to contrast themselves with the eastern Germans, expressing great pride that they are doing things on their own, without help from Big Brother. This spirit of economic nationalism pervades many conversations. But for those without a helping hand, this pride can wear thin.

Oldrich Smid, economics director of the industrial varnish and paint manufacturer Barvy a Laky in Prague, looks like a man in need of a few friends. Ever since Volkswagen took a stake in the Czech car maker Skoda, and ditched Barvy a Laky in favour of more technically advanced German and American suppliers, the paint-maker has been living on borrowed time. The vast works, eerily depopulated, ran at only 40 per cent of capacity in 1993 and is heading lower still. 'The problem is not so much the weak orders, but that we do not have enough money to buy materials,' Mr Smid laments.

He still hopes some foreign investor will fall for Barvy a Laky. 'We just need the money for new technology, and then we can get the Skoda contract back,' he says. A more likely outcome is that the company will be placed in the next privatisation auction pot, and sold off at basement price. But even though its legal status would change, its future would be no more secure, unless fresh capital were pumped in and the old state apparatchiks replaced by new managers.

That this is happening so slowly is partly to do with the enormous influence of the more than 400 investment funds which sprang up as a consequence of voucher privatisation. Since most Czechs had little idea which firms to bid for, they placed their vouchers with funds. The result is that the lion's share of the privatised corporations is held by the funds, whose representatives often dominate management boards.

Some of the funds are extremely professional, and take their management roles seriously, but there are many others, as a recent report from Deutsche Bank notes, which have done little so far to improve the companies' profitability, for example by installing new management.

Antonin Surka is general manager of the Brno Trade Fairs company, and was for many years the deputy under the old system. Nowadays he also runs a profitable sideline as head of the Moravian Fair Investment Fund, in which capacity he sits on the management boards of several companies in which his fund has a significant stake.

He takes a limited view of his management obligations, however. 'Some of the firms are pretty hopeless, as it was not possible only to buy shares in the best,' he said. 'But it is not our job to use fund money to try to improve them. I would rather try to get out.'

(Photograph omitted)