It seems the construction sector suffered a recession over the past 4 years but the recent annual growth rate may indicate that the recession in the sector is nearly over. What is your evaluation of the economic climate in the Slovak construction industry?
Unfortunately, only few foreign investors that come to Slovakia would invest into industry and production, that means that construction of industrial facilities has in fact ceased to exist, because the few hypermarkets that were built here can't save the sector. No factories are constructed, no infrastructure, an important construction sector is missing. There is a big gap that cannot be filled by constructing fun parks and a few hypermarkets.
There is a great potential but there are no funds, the reason for this lies in the past, in the 90's, the era of privatization. One thing is that the State lacks funds and the second is that factories that came into wrong hands lack funds as well. The primary reason however is that Slovakia isn't really attractive for foreign investors, when we compare it with Czech republic, Poland and Hungary. All these countries have, for the past five years, created investor-friendly environment in form of industrial parks. Slovakia has recently adopted a legislation called Act on Industrial parks but it's miles away from all the incentives that our neighboring countries offer. Problems lie in the fact that here the investors cannot obtain land for the symbolic one Slovak crown as it is in Czech republic, plus land with full infrastructure that an industrial park requires. All other legislation approval processes that are needed are very slow and therefore to develop an industrial park is not attractive. The investor has to purchase land that is very expensive, so his feasibility study is not acceptable. The only thing that the state does is that the decision lies in the hands of some bureaucrat administrative clerk, even if the state provides a 70% grant for building up the infrastructure it is always conditioned by the decision of that bureaucrat whether he grants it to the investor or not. And funds are very limited - all that makes Slovakia unattractive even if there is legislation treating foreign investments. In the end, the investor comes here and gets acquainted with all investment requirements, compares them with Czech environment, where the conditions are of adequate quality. In Czech republic they have an agency called Czech Invest that deliver spread good publicity all around the world, they have offices from New York to Tokyo, the Slovak counterpart, Sario doesn't deliver quality services. Eventually, the investor makes up his mind and places the his investment in one of the neighboring countries, where it is feasible, he builds up there a factory that was originally thought for Slovakia, for example VW or US Steel. Another negative factor is that tax holidays will cease to exist after entering the European Union, so there's nothing we can offer to the investors. That again is all about legislation and about the readiness of state.
To fill the gap between the foreign investor and Slovakia's possibilities we created the company Hornex Development in order to offer leasing and lease-back opportunities to finance development of such projects but of course we come across the same problems as any other investor. Rules are defined but not guaranteed, if the state guarantees to provide a grant for building up an industrial park, that is just a promise and the state official can decide not to grant funds to the investor. So, you cannot prepare a project, you have to make some calculations and when a third-level official of low rank decides not to provide the grant, then my whole effort has been in vain. In the Czech republic the situation is different, there you can purchase land for one Czech crown, infrastructure is already available, grants are precisely specified and the legislation is pro-active.
To show a concrete example, there was a Belgian investor ready to build a factory for luxury yachts, the project was ready and he wanted it to be quick, it started in April and he wanted the factory to be completed in fall. He had ensured supplies and buyers and he needed the legislation approvals to be very fast. Problems appeared when a clerk at the Construction office decided not to issue the territorial decision needed for starting the construction because on document was missing. Although we guaranteed that it will be delivered in the near future the clerk explained that she is not interested in obtaining the document later. The investor of course decided to quit Slovakia and build a factory worth 4milUSD somewhere else. The tragic lies in the fact that there was nobody able to change it.
On the other hand we shouldn't be over-critical, there are however positive cases, if the investors have enough stamina they succeed and in the end they are satisfied here, as is the case of Volkswagen and Morlex, but we have to admit that they are few and we cannot just blame the former government. It is a question of the past. In any case, you need a lot of patience and maybe courage as well.
However, your business here seems to be successful. So, can you give us a brief overview of the steps that marked the development of Hornex since its creation in 1992?
The greatest success is that we are still here. I am one of the first businessmen in Slovakia, I began my entrepreneurial activities during communism, in 1988. I started the business as a physical person, nowadays we are a legal entity, in 1992 Hornex changed into a joint stock company. The major achievement over the past ten years is that we succeeded to rank among the top of Slovak construction industry. Among a few companies, we started as a Greenfield operation. The competition we have are former state companies now privatized. The process of building up a Greenfield company is strenuous but joyful, however if you are surrounded by a good team it's even more pleasant. The positive aspect is that human relations are very good and that is reflected also in the relations to our clients. We are totally client-oriented because we had to start from scratch and we had to persuade our clients that we could master the tasks they required from us.
What is today your market share in Slovakia and your development plan on the national market? How do you differentiate your offer from your competition?
In 2000 we were the tenth biggest company dealing with general contracting. Because we are a Greenfield company without history we could set different objectives and different methods than the competition and that was our advantage. If you want to be successful you don't have to own any property, the only thing that matters is money, common sense and information. In the very beginning we only had sense, then we gathered information and at present we have money as well. When we started we rendered full service to investors and in 1992 there was a market gap in this sector, our offer services ranged from project, construction accomplishment to interior services. Other companies didn't provide such services. That's why in our brand logo you can read construction, civil engineering and architectural design and nowadays we proceeded further and we want to provide financing for our clients as well.
In 2000 Hornex was the fastest growing company in Slovakia. You almost tripled both your revenues and gross profit in two years. Now, what is your expectation for 2002?
What we strive for is absolute transparency, correctness, we want that the expected expansion does not influence human relations inside the company and if we will preserve this, I think the chances that the company will remain successful are great.
How do you finance your construction work?
We are only at the beginning with Hornex Development, we founded the company in September 2001and started to operate in January 2002 but we felt the market's need is great because if foreign clients come here they are interested in financing as well. We already have several projects going on, they are in preparation and we hope that some of them will be successful. We also started to cooperate with banks because they have enough capital available. What we have to offer them are good marketing projects and they will be eager to provide funds because in general, banks in Slovakia don't know how to use capital. Banks approach us and they want to cooperate with us and Hornex has already gained good reputation, they are glad that we founded a pure development company. | To face the difficulties of the current economic situation, some of your competitors are trying to diversify actively such as Doprastav in the underground construction. In which areas of the construction industry are you trying to diversify?
Focusing on financial aspect of a project cannot be viewed as diversification, rather as an expansion, because it is complementary to our complex approach. We do render constructing services, financing and consulting and due to the development of the company we don't feel the need to diversify, at least not yet. On contrary, we want to add more services to become even more attractive. Our advantage should be a complex approach. Whether it will be the mother company or some daughter company is a question of strategy. I think that since the beginning we rather created opportunities than searched for them. We have tried to detect a market gap sooner than the competition does because when we as a developer get access to a marketing work or project than all the branches of our company profit from it. At the same time we can make use of free funds from our mother company, which are not very feasible to draw from banks.
What is your investment policy in terms of upgrading your infrastructure and services?
Firstly, we founded Hornex because a foreign investor that focuses on industrial sector doesn't usually invest capital into real estate, or a ready factory. He rather prefers somebody else to develop the factory and would rent it for the period of our contract. The reason for this is simple, depreciation for real estate is about 40 years, 45 in Czech republic that means that we would have to invest net profit and that is not reasonable economically. Slovak legislation reacted to this and a faster depreciation method is applied when leasing real estate. Nowadays the legislation allows to depreciate 90% of estate in 16 years and this year a new legislation effective from January 2003 enables to do the same in 12 years. And these are the two main reasons for creating Hornex Development that will offer project development under mentioned conditions. Therefore we can offer to the investor full service when it comes to project, economic analyses, civil engineering and design, taking care of all legal processes, project financing, construction implementation via Hornex company, a firm that is already established. Subsequently, we deliver the construction to the investor and he can either lease it via financial leasing, operative leasing or a lease-back, the most common method, that means that the investor puts in some property, we purchase it and he then leases it back. We as a developer take care of how to make use of it later. This is the scheme we operate on. Because our funds are limited we are interested in projects amounting to 100-200milSKK of investment expenses because in this process co-financing has to be ensured and that, in our case, is limited. That means that we can execute large-scale projects but we cannot finance them anymore. So, this could be a cooperation opportunity maybe with foreign banks or foreign large-scale developers to whom we could offer our know-how, projects, civil engineering, design capacities and with their help we could cover projects that exceed our 200mil limit. Nowadays we are not financially strong enough to finance large projects, we have to back up 30% of the project value. We have enough marketing projects but we lack capital, this is what I consider very attractive for foreign investors, it's a good opportunity to place dead capital.
What is your development strategy in the European region?
We think that access to the European Union will be a big opportunity, there will be an influx of investors and of course new legislation. The legislation at present is what represents the biggest obstacle for expanding, compared to Hungary, Poland, Czech republic. Meanwhile, the construction sector will be purified and only firms that will be able to compete on the European level will remain because everywhere in the world there are strong large, medium-sized and small-sized firms living alongside. If we will be a member of the European Union we will rank among strong local players. We definitely appreciate EU entry and we are looking forward to it. We are now working on a company strategy, in all cases we want to remain absolutely transparent. We are very much interested in the fact that for example US Steel will carry out audits with their subcontractors and we offer an opportunity to our clients to have an audit with our company because we don't have anything to hide. For us profit is one of our major parameters and we are not ashamed of our profit. At times I have the impression that some firms are so ashamed of it that they are not able to disclose it.
Are you looking for potential partners in order to develop further some of your areas of activity?
It is certainly one possibility but I cannot decide whether it is the best way to go, it is an ad hoc case but the basis should be such that also a small venture can master the obstacles and not just the big players such as US Steel, Morlex, VW that serve as examples. Smaller firms that lack the stamina and capital to overcome obstacles give up and move to another country but that's where the big potential lies, in the small firms, the middle-sized business and they are very few here. We would like to enter the logistic and industrial construction sector, we are an associate partner with Astron that is active both in Czech republic and Slovakia. But the possibilities of the sector are incomparable with the Czech republic.
To go back to the major foreign investments in Slovakia, they had support from the government and it is impossible that the government intervene in all cases of smaller investments. Smaller firms don't have such contacts and it's a fact that the government cannot cover 5-10mil projects. We feel that there is a great potential for us - industrial constructions have to start one day. You cannot generate GDP by spending money in hypermarkets only, we need to produce money because constructing flats or hypermarkets doesn't contribute to state budget, that's not export, that's import.
As a conclusion, how would you see your company and your sector within the next two years?
We have already considered expanding into the Czech republic, having already received offers from Czech investors that would be glad to execute constructions there. However, we don't really consider this to be an opportunity because we still have enough opportunities on the Slovak market. Above all we want to maintain all our positive features and we want to carry out the expansion according to a detailed plan. We expect a certain boom in Slovakia in the near future and we have to get prepared very well for it. In the past ten years we have been patient and responsible, our shareholders as well, and at present it is starting to pay back, we accumulated capital that the competition lacks. This makes us very stable and of great interest to the investors.
You are toady President of Hornex. Can you give a brief history of your professional experience and what would be your personal challenge over the next few months?
I studied civil engineering, I was born in a village which I consider an advantage because I understand the processes of constructions. I worked on building sites for two years and I have been in business for a long time so I am acquainted with all its aspects and issues. I have always wanted to do this job but I had no idea that one day I indeed will because I finished my studies in 1985 and at that times, during socialism, business was a strange notion. As soon as I came across an opportunity I gripped it. I am very happy that I can do what I do. Our challenge is to strengthen our market position, institutionalize some of our services, in order that the intuitive management disappear, however we have to maintain some intuition because it has proven to be useful.
Note: World Investment News Ltd cannot be held responsible for the content of unedited transcriptions. |
