FDI AND THE CZECH REPUBLIC – WILL NATIONAL SECURITY CONCERNS IMPEDE ECONOMIC PRIORITIES?

  • FDI AND THE CZECH REPUBLIC – WILL NATIONAL SECURITY CONCERNS IMPEDE ECONOMIC PRIORITIES?

    FDI AND THE CZECH REPUBLIC – WILL NATIONAL SECURITY CONCERNS IMPEDE ECONOMIC PRIORITIES?

    These are interesting times in the Czech Republic. The country has been hit hard by coronavirus, with high infection rates leading to drastic new lockdown restrictions in recent days. Health minister Jan Blatný has warned that the crisis threatens to overwhelm hospital capacity to deal with it. Politically, the pandemic has led to a loss of faith in politicians and their ability to handle the crisis; polling by the World Health Organisation and others indicates a high level of dissatisfaction with government efforts to contain the virus, a dissatisfaction compounded by disillusion with corruption scandals. As with other affected countries, there is a continued tension between those who prioritise concerns about the longer-term economic consequences of pandemic-related restrictions and those who fear the consequences of easing those restrictions. Against this background, and with legislative elections looming in October, Prime Minister Andrej Babiš has reason to be concerned about opinion polls showing rising support for the opposition.

    So where is the good news for a government under pressure? The country is keen to attract foreign investors, and has a well-organised programme for doing so, administered through the government-run CzechInvest organisation. Overseas investors who need to navigate the highways and byways of putting their money into the Czech Republic have access to advice and information on taxation, loans, social and other related matters, as well as a programme of financial incentives to encourage inward investment. Transparency is provided on legal matters, as well as investment options – independent set-up or use of a Czech Employer of Record, for example – and related costs and benefits.

    CzechInvest has an impressive list of industry partners and has identified its key strategic investment sectors, with an emphasis on Information and Communication Technology and data centres, Life Sciences research and development, and shared business service centres. It has also established representative offices in 21 countries ranging across North America, Latin America, Europe and Australasia.

    That said, an active investment programme, especially in sensitive sectors, brings with it a number of security concerns- see our earlier article The Balancing Act – National Security and Foreign InvestmentIn line with a number of countries the Czech Republic has been reviewing those concerns and has brought forward legislation to reconcile its economic and security needs. From 1st May 2021 the new Act on the Screening of Foreign Investments will come into force, introducing new reporting requirements for foreign investors in certain sectors, together with government review procedures under certain circumstances.

    For the purposes of the Act a foreign investor is defined as a natural person or legal entity from a non-EU country, or a legal entity or trust fund directly or indirectly controlled by such a person or legal entity. The Act will introduce broad powers of scrutiny by government at the application stage, or subsequently by the Ministry of Industry and Trade, should it decide that there are security or public order concerns regarding the investment. It also treats “control” in the widest sense, even down to reserving the right to review intra-Group restructuring measures in the context of the implications for internal and national security concerns.

    In addition to the usual concerns regarding military equipment and dual-use materiel, a number of attractive investment sectors will come under review. These include but are not limited to: media control (national broadcasters and widely distributed outlets); telecommunications; transport; energy; software development. Given that these are also among the sectors being promoted by CzechInvest and its partners, there are likely to be some interesting case studies of the new law in due course, as economic and security priorities meet, if not indeed compete. Investors therefore now need to have an ever-sharper picture of the risks of engaging in sensitive sectors in the Czech Republic; these are no longer limited to conventional commercial concerns, but to political and security issues, all of which are susceptible to subsequent (post-investment) government review and (re)interpretation. The role of the corporate political risk adviser is assuming ever greater significance as countries continue to review and realign their increasingly inter-related economic and security priorities.

    Mark McGuigan is TSG’s geopolitical risk advisor specializing in the CEE region. He is a former financial sector intelligence consultant and an ex-RAF officer. He writes here in a personal capacity. TSG is a research (including due diligence) specialist, also offering Ethics Compliance and Advisory services to its clients. TSG offers expertise in Eastern Europe, as well as East Asia.