KPMG was established in Slovakia in 1991 and operates today through two legal entities. All the big five are now present in the market. What actually motivated KPMG to set up offices in Slovakia?
The main reason was to serve our international clients. In a certain way we've followed the other big five. Since 1989 they have been opening eastern European offices, beginning in Hungary. We opened an office in Prague in 1990, at the time when it was still Czechoslovakia and in 1991 we opened a branch here in Bratislava. Over the years the focus has changed, our firm became an independent unit within the KPMG family. Now we are not only here to serve international clients, but our focus is on serving the local market.
At the beginning of the 90´s, domestic firms had 80% share of the auditing market. What is the current situation now?
The situation has changed and it is definitely in favour of the big five as the professional resources of the country are limited. Unfortunately the local professionals were not perceived as being as sophisticated as the big five, who adopt methods in compliance with international standards, which is what the investors always require. It is also a trend in other western countries that the big five have the biggest share of the market. It has been difficult for us to cooperate with local firms, as their knowledge was limited to the local standards.
Obviously, Foreign and local firms have now to adapt to international accounting standards. How do local firms adapt to those new requirements?
The local chamber is active, it is part of a working group together with the Ministry of Finance to try and see how International Accounting Standards could be implemented in Slovakia. It is and ambitious project and the funding of it may be a problem. The intention however is there and there is also the realisation and understanding within the local players that this has to be done as a mean to improve their credibility. It is a process that will take some time, but it is already moving in the right direction.
Is this model already being applied in neighbouring countries?
I think in those countries we have basically the same situation, the local institutes have to make some effort to keep up with international standards.
To what extent has the ongoing privatisation process and the restructuring of most sectors within the economy represented a growth opportunity for your business as a consultant?
Definitely, it has had an enormous impact on our activities. On one side the local market recognises that it needs to have expert advice on the process of privatisation, and the Government is also asking for advice from the big five, on the other hand foreign investors are seeking opportunities here and also require advice from us
Foreign investors need to have company accounts prepared in accordance with international accounting standards. Before investing, they surely want to find out what they are supposed to buy. On the other hand we are often asked to advise the government or the companies themselves, and that is the moment when our services are highly requested.
How would you evaluate the way the current Government has handled the privatisation process?
It was maybe a necessity, because state finances were pretty shaky. The Government had to do something about restructuring the economy, particularly in the banking and finance sectors and there was basically no choice, they had to go and find investors from abroad. Now there are no locally owned banks anymore. Is that a good or a bad thing? It's difficult to judge. I think that most investors will be here for a long time, they expressed such intentions and this will be for the benefit of the country. In a short time it has obviously brought a lot of cash into the state that will hopefully be used for some priorities, such as social restructuring and infrastructure. I am not here to judge the activities of the Government, we are here to take the opportunity to advise and that is what we shall do.
Which percentage of your revenues comes from your work on privatisation deals?
I would say that during the last two years it was probably somewhere between 20 and 30% of our revenues. Compared to the other big five we have the advantage of having a very solid auditing base. This results mainly from our good presence in the German and Austrian markets, particularly in the banking and insurance sectors
You are the leader in the banking and insurance sectors for auditing. What pushed KPMG to focus on the financial sector?
There are two reasons: one was the fact that we already had world-wide a strong presence in that particular sector. This was positive for us, because any foreign banking client that came to invest automatically came to us. One other thing is we decided to specialise in that particular sector. We have a group of more than 30 people in Slovakia who work exclusively on banking and insurance, It was a business decision and we also have enormous expertise in KPMG throughout the world that we can transfer here.
Are you trying to diversify your services to your existing clients or are you looking to increase your client portfolio?
We have been weak in the local industrial and commercial sectors. We have recognised the fact that we definitely need to diversify. Over the past three years there were important changes in our practice. Before, we had only three partners, but today we have nine. Three of them are local and two of our foreign partners got married here, so they will stay here for a long time. We are increasingly shifting our attention to the local market.
Do your local partners have also some experience abroad?
All of them have had an experience abroad.
One of them was working as a supervisor in
USA, the other was working in the UK and the
third partner has been working in Germany
for a couple of years. I think it is a necessary
learning experience. Language skills and an
understanding of the local mentality are also
important. We have some good local companies
in our portfolio that work with our local
partners, so we are working also in this direction.
Before our income was 100% from global clients
of KPMG and now it has reduced to less than
60%. |
Do you see many other opportunities for the big five within the consolidation of the Slovak corporate sector? Do you expect M&A, for example, to increase within the next few years?
It is a difficult question, maybe one for the crystal ball! It is difficult to make a good forecast of what is going to happen in the next couple of years. Certainly the banking sector has been privatized and despite this there is still a lot of work to be done including in the big banks. Foreign investors are all interested in improving their profitability and market share. That requires a lot of work and restructuring and we as one of the big five can contribute to that process. A successful restructuring process now will positively influence FDI for the future and will certainly increase the credibility of the country, as historically the country has not been very credible, more for political reasons rather than economic ones.
There are still some issues that need to be addressed particularly in the public sector and the legal system. They need to be completely overhauled to suppress the frustration of foreign investors with the present legal system and with the corruption that definitely exists here. This is probably one of the greatest concerns for FDI at the moment.
One of the positive signs of the changes are the elections in Autumn 2002 when everybody predicts the comeback of the previous ruling party. Six months ago this was seen as a potential disaster, but now the democratic process is so strong that even the come back may not change the direction of country. The country is moving and working hard for admission into the EU. How this process takes place will determine how far we can go. The rate at which we can adopt al EU standards will have an effect on FDI in the future. The potential of the country is enormous. Every day we have potential investors who come to our office to ask for advice, which is more about day to day activities, rather than big projects and that is good.
And what are the most frequently asked questions from those investors coming to your office?
Taxes are the most frequent question. Historically, it has been one of the main problems here. The Government has an investment incentives programme that is quite restrictive, although there are some other ideas for 2002. Without going into details I do not think that these programmes alone will attract investors. We need also to consider that tax incentives are restricted in the EU.
Regarding the taxation regime, there has been a positive sign, the drop of corporate tax rates from 40% to 29% and from January 2002 to 25%. But there is still a need to be careful, because nominal rate is one thing and effective rate is something else. That is because our tax legislation is plated with exemptions about what is tax-deductible and what is not. So a company with nominal tax rates of 29% may find itself paying an effective rate of up to 50%. And there are also some complex limiting rules concerning the utilisation against future profits of tax loss carry-forwards. This needs to be looked at in order to help the inflow of foreign investment, because if local companies may not be bothered too much about it, foreign investor are certainly focusing on these issues.
Do you think that the big five can act as a lobby towards the Government in some areas?
I think we have been doing this indirectly, the Government does not have any of the big five as an advisor. But we have an opportunity to meet regularly people at various Ministries, particularly at the Ministry of Finance and we give hints about what could be improved or what would be more compatible to Western rules, but we have no direct influence, the final decision is always on the Government
When a foreign businessman wishes to invest in Slovakia, is it for operating within the Slovak market or to produce and export?
Generally they set up new businesses or acquire existing businesses here and expand their local market share. This is a small market, we have only 6 million people in this country, but it is in the heart of Europe and there are a lot of advantages for operating here, the potential for export is definitely here. We are not yet in mass production of consumer goods. That is something we are concerned about because our balance of payments is negative. We have to import consumer goods and what we export does not compensate. This country needs to have its own production and this is not happening and will not happen until demand becomes more driven by consumers. There are signs of certain companies beginning to invest, but it is a long-term process
Which sector do you see as the fastest growing in the market?
This is difficult to say, maybe the consumer sector will grow, there is still potential in the energy sector too. Today energy prices are still regulated by the state. When the market opens up we can expect a boost in those sectors. What is difficult to predict is in other sectors such as telecommunication, because it is a mixture of service, infrastructure and consumer goods, but I think that it will follow global trends.
One other thing that could maybe change a lot is the insurance sector. This market has been regulated and limited and now the state insurance company, the largest in the country is going to be privatised. Access to capital has also been an issue. Banks are not very active in the local capital market. If the Government boosts the sector of institutional investors, the situation could change quite dramatically. Partnership with the EU will probably bring the need for change and also access to capital.
We would like to know what have been the most rewarding experience whilst working with KPMG Slovakia?
Probably the people that work for us. Three years ago there were about 120 people working for us, today we have nearly 200. I have seen our people growing professionally and I am very proud that KPMG has recently appointed two new Slovaks partners. They are very young and it is very refreshing and very exciting to see these people building a solid base for the future of KPMG in this country. Slovaks are delightful people. I'm the head of assurance for all Eastern Europe, so I'm in contact with many nationalities, but my personal feeling is towards Slovaks. I'm happy to be here, I came 5 years ago with an idea of staying just temporarily, I stayed and I will for as long as my partners want me to. Slovakia is also a very interesting country, especially regarding its natural beauty.
Note: World Investment News Ltd cannot be held responsible for the content of unedited transcriptions. |
V.I.P. INTERVIEWS 
