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Foreign Investments and Developing Countries: Dialog With Former Finance Minister of Macedonia Nikola Gruevski, Part IX

Sam Vaknin, Ph.D. - 2/28/2006

Nikola: The possibility for certain privileges on the basis of the invested foreign capital is provided in the Law of Customs Officials (The Gazette of the Republic of Macedonia no. 20/93, 1/95, 24/95, 31/95,63/95,40/96 and 15/97) and in the Income Tax Law (Gazette of RM no. 80/93……71/96) which are not sufficiently compared to the same laws in some other countries in transition.
At first sight, article 33 of the Income Tax Law provides some benefits, but when one analyzes the article, one sees that only a small number of foreign investors (those who plan to keep the capital in Macedonia for a period longer than 6 years) are able to enjoy these benefits. According to this article, to the three years of tax exemption, at least three more years should be added, in which the capital must not leave the firm of the foreign investor in order not to have to return the tax exemption to the state. Again, the speculators that are needed so much at this moment are discouraged.

It is interesting that the new laws (for example the Law of Business Associations) that replaced some old ones (Law for Foreign Investments) do not have any particular planned modifications for improving the conditions for attracting foreign capital.

The transfers of the deposit and the profits of a foreigner are regulated in article 28 of the Law for Business Associations, paragraph 2 and in article 48 of the Law for Working with Foreign Capital (Gazette of RM no. 30/93 and 40/96). Again, these are all right at first sight, but when it is scrutinized, many unascertained things are revealed.

Some countries, Poland for example, which are very successful in promoting shareholding and their domestic companies, introduced tax benefits in the years when their stock exchanges were forming. They exempted from taxation the capital gain realized with issuing securities through brokerage firms. Besides that, countries like France and Great Britain offered tax benefits for collective investment programs. The objective of Macedonia must be to create the most favorable environment for attracting foreign capital. The means for achieving this, must not have any negative effect on the budget income, and should contribute to the global development of the national economy in the country.

Actually the main problem in the tax sphere is not the low degree of exempting foreigners from taxes, but the large and slow bureaucratic procedures in carrying it out, the indetermination and the ambiguity of the Macedonian laws.

For example, on the question how many percent should the legal persons - foreign investors pay on interest income from bonds, on dividends and capital gains in Macedonia, one Macedonian expert answered: "maybe they will pay 15% and maybe nothing. Many details in this field are not regulated, so if they don't pay nobody will charge them … except, if they are in the way"...

Is it all accidental, or is it a result of a thought-out policy in Macedonia?

Sam: I, personally, am no fan of conspiracy theories. There is a famous "Hanlon's Razor" which says "Never attribute to malice that which can be adequately explained by stupidity". I think that in the case of Macedonia, a shock was involved, so enormous, that it paralyzed the elites. Short term thinking is the daughter of insecurity. People began to seize whatever they could, as though there will be no tomorrow. The legislation reflected the total chaos that ensued. I see no policy in the mess that Macedonian laws are – I see human beings cast into a totally unknown situation, fearsome and awesome, with enormous potential and even greater risks.

Nikola: Besides the provision for unlimited participation of foreigners (in the Law of Business Associations) in an enterprise partly or wholly foreign-owned, foreigners can not obtain a majority stake in other associations.

If this case, the rights of the association which holds the majority will be limited at the depending association based on the number of shares.

The bureaucratic procedure for foreign capital according to the same law is too complicated. The investments of foreigners in the newly founded or the existing association must be registered at the Ministry for Economic Relations with Foreigners. On the request of the foreigner, the authorized ministry will issue a permit for the foundation of an association which is totally in the ownership of one or more foreigners, meaning that they have the majority (article 27 from LBA). If within 60 days from the day of submitting the request, the authorized ministry does not issue a permit then the permit for foundation i.e. foreign holding is deemed to be denied (!!!). When the foreigner does not reach or exceed a major holding, the participation in the newly formed that is the existing association is only registered in the Register of Foreign Investments, in this Ministry.

The question is asked:

What will happen to the prices of the shares of a Macedonian private company on the stock exchange, when one whole Ministry (which means the entire public) will find out that a certain foreign company intends to buy the majority of the shares? (especially if the domestic company is totally privatized through an employee buyout scheme). We must not forget that Macedonia is a small country, and news travel fast. We are forced to conclude that the small shareholders will ask for a higher price for their shares, even before the foreign company asks for a permit from the ministry. This is a serious reason why the foreign investor should reexamine his intention. This method is acceptable (in a milder form) for taking over a domestic bank or specifically determined legal entities which are of a strategic importance for the state. But does Macedonia need this kind of barriers in its present conditions?

Sam: When I go to a hotel with my Macedonian girlfriend, I pay twice as much as she does, in the best case. My passport is confiscated and my details are immediately reported to the police on a special form. This is discrimination, not to say xenophobia. The law should treat locals and foreigners in the same way as far as ownership is concerned. Trading shares, buying and selling them from other shareholders voting rights, capital rights – there should be no difference. That there is still a registrar of foreign investors is outlandish. That a foreign investor should depend for his investment on a bureaucrat who usually is not qualified or educated to deal with these matters is surrealistic. These things, these remnants of a dark past of idiocy should be immediately and unconditionally abolished if Macedonia wishes to become a respectable (European …) member of the family of economic nations. There is nothing to fear. Foreign investors don't bite and most of them do not even have horns. This is provincial thinking of the worst kind.

Nikola: Legislating a law of investment funds is one of the conditions for the creation of a free and liquid market. The investment funds are an ideal medium for saving, through which the domestic and foreign investors will be able to invest money in Macedonia. These funds will allow the potential investors to diversify the risk and through one policy of long-term investments to contribute to the stabilization of the prices.

In the Macedonian law the term "open funds" does not exist, and the status of the trusts is not regulated. Although conditions for proper forming and regulating investment funds can be created with a law, their formation and operation can not be brought about only by a law. Additionally, a market for their functioning can not be provided by making a law in this field.

The segment into which Macedonia can attract foreign investments the quickest, is state and municipal bonds. But the legislator created a "riddle" here both for those who want to issue the bonds and for those who are interested in investing their money in them. In the Law for Changing and Supplementing the Law for Building Terrain (Gazette of RM no. 21/91) the legislator, in article 5 declares: "the terrain in the cities and other regions prepared for housing construction and other complex construction for which an urban plan is made belongs to the republic."

This means that the communities don't nave their own property – in the form of territory, and if they want to construct with their own and/or borrowed money (bonds) they have three negative alternatives:

First, to tear down an old building on already existing locations that belong to them and with an alteration to the urban plan, to construct anew with the taxpayers money. This is a very long and complicated procedure, and in most cases impossible.

Second, to ask the republic (government) to award them a land plot for construction, which is even more complicated and the probability for realizing it is smaller. When one considers the bureaucracy, politics and the incomplete concept regarding when, where and to whom the state can (not) award land… and

Third, not to build, which means to stagnate. This is the most likely variant, judging by my conversations with several mayors of the biggest communities in Macedonia. Who is winning and who is loosing? It seems that everybody is loosing (the state, people, municipality, investors etc.) and nobody is winning.

The arguments "for" this law, which later is incorporated in several other laws, is not to endow the municipalities with greater power, especially those whose leaders have "suspicious intentions". But there are many other methods and means for the state to control the municipalities and their leaders, then to take away their land.

Sam: In very few countries is the majority of the land mass owned by individuals or even by municipalities. In countries as diverse as China, the United Kingdom and Israel the situation is very similar to Macedonia. Again, I think that the problem is not the land, or the construction, or the laws. I think that the basic isue is that of the breakdown of trust. In the USA "munis" (municipal bonds) are issued against future tax receipts or against future income from specific projects. People believe each other, they believe the issuing municipalities and, above all, they believe the financial markets. True, municipalities here do not own land and hardly have any tax receipts and this is bad. But no investor – foreign or domestic – would lend his money to a Macedonian municipality. They are mismanaged, corrupt, unreliable. Would you put your money in a construction project initiated by a municipality, even if the land was owned by it? Allow me to doubt it. The more realistic approach, would be to act in partnership with big private firms within well-defined specific projects with Western advisory services and auditing involved. These projects can be financed by issuing municipal bonds, because they have a projected or even a guaranteed stream of income. Such future income should go into a "sinking fund" under the control of a Western auditing firm. Legally, the whole things has to be tightly wrapped up. Sewage treatment plants, local toll roads, municipal hospitals, water treatment facilities, a shopping mall – all are such possible projects.

Nikola: When a serious investor wishes to invest his funds in another country, among the first things that he does, is to consult an in-house legal expert or to engage a lawyer, to make his idea legally possible and profitable. This lawyer will correspond with a local lawyer who will provide him with all the relevant laws in the country, translated and with his opinion. After joint consultations of both lawyers, the potential investor will develop or forget the idea for investing in that country.

I hope that this explains the present situation with foreign investments in Macedonia, and why the foreign investors are bypassing Macedonia. But that is not all.

(continued)