Czechs but no balances: scandals fray nerves of foreign backers

"Think twice before you invest in the Czech Republic" screamed the display advertisements in The New York Times and The Washington Post. 'The Czech government woos foreign investors, but then abuses them".

This message was splashed across the US press on the eve of Czech prime minister Milos Zeman's visit to Washington in 1999. At the time Ronald Lauder, scion of the Estée Lauder family as well as a media investor who had taken out the ads in response to the alleged "hijacking" of his Czech television station, was viewed by some as hasty in his condemnation of Prague's record on foreign investment. But a string of current investment scandals is making his warning look more measured than rash.

The Czech prime minister was back in Washington last month to meet investors and officials, but according to insiders it was not all smiles and handshakes. In a meeting with Samuel Bodman, deputy secretary of commerce, and Willard Workman, vice president of international affairs at the US Chamber of Commerce, Mr Zeman was told that Prague's forthcoming power and energy privatisation tenders are rigged in favour of Russia's Gazprom and Electricité de France, shutting out the US companies Duke Energy and NRG Energy. Mr Zeman, famous for his lively rep-artee and faux pas, came out fighting, calling the Boeing management team of the Czech aircraft manufacturer Aero Vodochody, in which Boeing holds a 35 per cent stake, "incompetent" and urging their dismissal.

It's not just the Americans who are angry. In November the Japanese bank Nomura announced it would seek international arbitration against the Czech government, claiming that its 46 per cent stake in Investicni a Postovni Banka (IPB) had been arbitrarily sold to another bank. Nomura bosses were surprised to learn in June 2000 that armed, masked police had stormed the offices of IPB, and that the government had ordered its compulsory sale to Ceskoslovenska Obchodni Banka (CSOB), a subsidiary of Belgium's KBC bank. There had been a run on deposits as customers panicked at mounting rumours of bad loans and corruption at the bank, but it was still a strikingly opaque and original move by the government.

Miroslav Kalousek, chairman of the parliamentary commission on the IPB affair, alleged "personal enrichment" of government figures and called for the prosecution of Pavel Mertlik, the finance minister at the time of the takeover. He subsequently resigned. The police later said there was "no suspicion of crime". Mr Mertlik, a mild-mannered academic who is now chief economist at Raffeisen Bank, told The Independent on Sunday that the matter of the IPB sale had not been his business and that "the Central Bank takes these decisions; it was simply fulfilling its duties in the field of supervision". No one at the Central Bank was available for comment.

If, as pundits expect, Nomura wins its arbitration case, it will add to the Czech government's $500m (£350m) bill, which was what an international arbitration tribunal in Stockholm awarded to Mr Lauder in September. His media firm, CME, was a partner with the flamboyant Czech entrepreneur Vladimir Zelezny in TV Nova, the phenomenally successful Prague TV station which pioneered the use of naked weather forecasters. Mr Lauder alleges that in 1999 Mr Zelezny "hijacked" the station, its staff and licence, leaving CME with nothing more than notional assets to show for its investment. Mr Zelezny then started a new, equally successful TV Nova with capital of unknown provenance. In February the International Court of Arbitration ordered Mr Zelezny to pay Mr Lauder $27m. Whether the government will now pay its own half-billion-dollar bill remains open to question, and mired in legal technicalities.

The ongoing government tender for supersonic fighter aircraft has been equally murky, even by the flexible standards of the defence industry. Cynics allege that the Social Democrat government has a sweetheart deal with BAE Systems and Saab to buy up to 36 Saab Grippen fighters for £1.5bn, and that the tender is rigged to exclude competing offers. In just one week in May, all the other bidders – Boeing, Lockheed Martin, Dassault and EADS – withdrew from the tender in what looked suspiciously like a co-ordinated protest, leaving only the BAE Systems/Saab joint bid in the running. To add to the embarrassment, the Nato Secretary- General Lord Robertson has cast doubt on the need for Prague to buy any new fighters, and said it would compromise more urgent defence reform. A £900m contract for 24 planes was awarded to BAE last week, though this has to be ratified by the Czech parliament in April.

Petr Vancura, a former dissident who is now a director of the Prague Institute for National Security, says "the Czech government is positioning itself to buy the Grippen despite having practically no military strategy, and no money for the deal in the military or national budget". BAE Systems is now offering to invest in Aero Vodochody as a sweetener. It has confirmed it will only make the investment if the deal goes ahead. "There is strong domestic opposition to the deal, but the corrupt motivation to buy seems to outweigh the reasons not to. No one is sure which way it will go," said Mr Vancura. This, along with other travails, has given the Czech Republic an unenviable reputation. The 2001 Corruption Perceptions Index, produced by the anti-corruption organisation Transparency International, places it 49th out of 91 countries (Finland is top, Bangladesh bottom and the UK 13th). Among the "Luxembourg group" of countries slated for early EU accession in 2004, the Czech Republic has the worst rating behind Poland, Hun- gary, Estonia and Slovenia. Prague's problems will loom large in talks at this weekend's Laeken summit on the future of the European Union.

Exactly why the Czech Republic should be this way is a thorny question. Some in Prague say Russian influence, with all its political and crim- inal implications, was never satisfac-torily exorcised after the fall of the Iron Curtain, despite robust legislation to exclude former apparatchiks from government. Others would say Poland, Hungary et al are just as bad; it is just that the Czechs have had a run of bad luck, with numerous com- mercial scandals with an international dimension getting publicity.

The country relies on foreign direct investment for 9.7 per cent of its GDP, and is in the middle of a region not lacking in attractive investment destinations. In the early 1990s, the Czech Republic, with its stunning capital, was the first choice for many investors new to eastern Europe, and in 2002 government forecasts showed strong inflows of at least $6.8bn from the controversial power, energy and telecoms sell-offs. But once these juicy assets have been flogged, investment in the country may well suffer unless the government can demonstrate a minimum level of transparency, legal protection and goodwill. In other words, it has to persuade investors that they won't be sandbagged.