Foreign Investments and Developing Countries - Macedonia as a Case Study - VII

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Foreign Investments and Developing Countries - Macedonia as a Case Study - Part VII A dialog with Nikola Gruevski, former Minister of Trade and Finance of the Republic of Macedonia By Sam Vaknin Author of "Malignant Self Love - Narcissism Revisited"

The legal environment is the starting point of serious intentions for attracting large amounts of foreign investments. There is a need for customized laws and/or for the introduction of changes to existing laws, which will give the capital market in Macedonia at least approximately equal conditions with the same in other countries in transition, not to mention more favorable ones.

You can get the impression that the legal environment in Macedonia regarding foreign capital, is made to prevent foreign investments from entering. This is the case with certain regulations under the Law for Business Associations, the Law for Foreign Exchange Transactions, tax laws and other laws.

First of all there is no law for foreign investments as a ''lex specialis''. It is a big lacuna in the legislation in Macedonia. Of course it would mean discrimination against domestic companies, but we must know that if we want foreign investment, the discrimination is unavoidable. Even now there are a few discriminatory articles in the laws of Macedonia (e.g., tax laws), but obviously it is not enough. All East European countries gave strong stimuli (and this means discrimination) to foreign investors. This is our fate.

But Macedonia is an opposite case. In Macedonia, more laws contain discrimination against foreign investors or non-standard legal conditions for investment.

The Macedonian courts must accord faster treatment to all the matters involving a foreign company or a foreign investor.

Sam: Laws are complex things. They are like organisms. They evolve, prosper, die, inherit and bequeath. The legislation in Macedonia is no worse than in other countries. In certain respects it is better. It has been copied - almost verbatim - from the laws of more advanced countries (like Germany). Though it contains a lot of inapplicable provisions - largely, it should have been sufficient. The problem, therefore, is not with the laws. The problems lie in extra-legal matters. To start with, people have no respect for economic laws. They violate them openly, all the time. Then, special interest groups collude with politicians to generate laws suitable for their own, highly idiosyncratic needs, or to change existing laws accordingly, or to prevent potentially harmful legislation, or openly and flagrantly violate them with immunity. The laws that are enforced are subject to the court system. Notoriously over-burdened, inefficient, slow and confused (it is not rare to get conflicting interpretations to the same text by different judges) - the courts are considered by foreign investors to be the problem, not its solution. This means the extra-legal (criminal and private) enforcement systems are likely to develop and this deters investors even further. A court decision is nothing much without an efficient, largely non-corrupt police to enforce it. Special incentives (taxes, grants), special industrial zones and trade zones, off shore banking - all are very important. The ability to operate without too much bureaucracy (permits, red tape) - is also very important. Geopolitical stability counts. But, above all, the investor is concerned about his property and his ability to "repatriate" it in case of trouble. Will he be able to buy the necessary amount of foreign exchange? Will he be able to transfer all of it freely in one day? Is the collateral given to him by his local partner / borrower secure and properly registered? Will his rights as a minority shareholder be fully upheld? Can he get reasonably quick justice from the courts? Can he enforce court decisions in his favour? The answers to all these questions are, unfortunately, still negative.

In the past, I proposed to establish a special court (within the existing court system) for foreign investors. This court will be obliged by law to render a decision and judgement in six months time. Otherwise, it will have all the authority and responsibility of a regular court. This single act may be more important than reams of paper imprinted with the right verbiage of non-applicable laws.

Nikola: I will try to review the more important bits of legislation now. The first is the Law for Business Associations (in the following text LBA):

The most significant change in every legal act that the government must take, if it seriously plans to begin a project of this kind, is to delete paragraph 2 article 290 in LBA. This paragraph gives an opportunity to the managing organs of private enterprises to condition the transfer of shares issued by the company. Instead of that there should be: "the transfer of the shares is free and the managing organs of the associations have no right in any way to condition the transfer of shares, when the buyer and the seller of the shares made a transfer - buying and selling of capital shares- in accordance to the existing legal regulations."

Besides this, in the section dealing with the penal aspects of the same law, there should be serious punishment for the company and for the managing organs in case of a violation of this regulation. The deviations from this regulation should be regulated in details with a law. For example, for performing a transaction with bank shares above a certain percentage, a prior consent is needed from the NBRM. If this consent (permit) is not provided, the managing organs have the right and the obligation to condition the transaction.

The Securities Commission of the Republic of Macedonia asked for an opinion from SEC of the USA, and received the following answer:

"Regarding the provisions of the Macedonian Law for Business Associations concerning the questions mentioned above, we think that the Macedonian provisions are too general and can create confusion and misuse. The regulations do not deal with the permitted limitations, and a conclusion can be reached that they are giving carte blanche to the association or to the managing board. The regulations do not elaborate on the types of notification of limitations which is necessary if they should be applied against another person, especially the persons that according to the American concept would appear as bona fide buyers. Also, the regulations create an unacceptable opportunity to transfer the ownership of the shares to another person, without the consent of the owner, in order to take away significant property rights. (Capital no. 10, the magazine of the SEC of the Republic of Macedonia).

The creators of the Macedonian stock exchange, Mr. Andy Wilson and Barry J. Bird from the consultancy ISC (the first is the former Executive Director of the London Stock Exchange), also estimated that this article is the main reason for the absence of foreign capital in Macedonia in the form of portfolio investments, and for the stagnation in the development of the stock exchange in Skopje.

"It is very difficult to imagine a good reason why an association whose shares are publicly traded, prohibits the legitimate shareholders to sell their shares, except if their intention is not to allow the members of the Board of Directors to buy shares at prices suitable for them."

Most of the stock companies in Macedonia have this regulation in their statute. Most of them even predicted that their administrative organs will determine the price of the shares, which will be sold to the members of the Board.

If the companies whose shares are traded in public must grant permits for any transfer of their shares, than there is a very serious risk that nobody will care to invest in them. This refers, particularly, to foreign investors who don't think that it is reasonable to ask for a prior approval from the business associations to sell their own shares. Members of the board of directors, who want to buy other shares, need to do so in competition with the public, and not to have privileges at the expense of other shareholders. Due to this provision in the Law for Investment Funds in Macedonia it will be very difficult to trade shares. Now the probability that the Investment Funds in Macedonia (whose development is likely to encounter other problems), will not function properly is very high, and that will have inevitable negative results on the saving and on the Macedonian economy.

One of the arguments for including this article in the Law for Business Associations is that this will help the stock companies in preventing unwanted actions. However, it is not a way to achieve that goal; it could be stopped with regulations and a behavior codex in the case of taking over and associating.

Sam: When it comes to introducing new partners into their businesses - especially foreign partners - the Macedonian managers become very defensive. They refrain from disclosing or voluntarily divulging information. They instruct their accountants to hide more than to tell. They assure the workers (most of them uneducated) that they are doing all this so as to prevent mass layoffs. They are waving the scarecrow of the mean, brutal, profit seeking, capitalist, who has no concepts of social solidarity or humanity. This article - and others like it - reflects the mentality, it does not create it. It is a bunker, fortress mentality. People, on all levels, are afraid to face the inevitable shocks of mass redundancies (as industry grows more efficient, technology replaces labour intensive functions and the economy moves up scale). All the major companies that I met and worked with regarded the stock exchange as a threat, not as a source of financing. Today, the managers maintain a monopoly of information. The financial reports are tax driven and do not reflect reality. Inn this kind of environment it is easy to benefit privately. Throwing the company open to all manner of non-collaborating foreigners with their strange notions of equity, justice and transparency - is not good for business.

Nikola: My experience with potential Western investors, shows that to talk about more serious portfolio investments under these conditions is almost impossible and not serious.

This is because of the possibility, given to the Board of Directors of the companies to manipulate the ownership structure. To foreign investors, the possibility that the future of their investment will depend on the good will of a company's administrative organ is unacceptable, not serious, and deters them from investing. There are precedents (for example in Russia). In 1946, the communist government of the " new social order" took away the property of the citizens, "by law". From the legal point of view, everything was fine. Today, in some ex-communist countries, there are still attempts to limit the freedom of the use and disposition of private property.

This problem concerns both foreign investors and thousands of small shareholders in the country.

The most alarming thing in Macedonia regarding this question, is that, until now, not one serious force or lobby appear, that concretely and seriously addressed this issue. Potential candidates include: political parties, journalists, powerful non-governmental organizations, trade unions, the political opposition, the professors' lobby, the management lobby etc.

Sam: this supports my previous thesis, that everyone is content with these calm waters, no matter how infested they are.

Nikola: The government of Macedonia, according to unofficial sources, will be required by the International Financial Institution to delete this article, as a condition for further investments.

This article is a result of the ineffective law of privatization in Macedonia. This fact (the inefficacy of the whole process) is less and less disputed in Macedonia both by those who authored the law and by those who were responsible to implement it.

Once the primary and secondary cycles of privatization in Macedonian ended (and the shares were concentrated at the management levels) - the third cycle of privatization will begin. Then, the defenders of this law will ask for changes in it, because of the impossibility - without foreign capital - to keep up with the industrial development of competitive companies in the countries in the area and worldwide. Unfortunately, many opportunities will been missed by then, and the citizens of the middle and poorer classes of Macedonia are likely to feel the brunt. 90 per cent of the nation belongs to middle and poor class of citizens. There is low probability that this law will be changed till the next parliament elections in Macedonia, so as to avoid conflict between the government and the management lobby. The resolution of this question depends on the pre-election government calculus, on pressure applied by international financial institutions. In the best case it will be changed just before or after the elections. In worst case, only after completion of the privatization process in Macedonia in the year 2001.

When we discuss the Law for Business Associations, it seems that there is a need for a clear distinction between the open and closed types of stock companies, also known as public and private companies of the Anglo-Saxons type of legislation. The first ones should have much more facilities and faculties than the second ones.

Sam: Just so that the wrong impression is not created, such provisions are to be found in laws in many countries, both developing and developed. In the Russian Joint Stock Companies (JSC) Act of 1/1996 it is expressly stated that a shareholder (in a closed company) will not be allowed to sell his shares, or transfer (assign) them to another - unless such a move has been approved by ALL the other shareholders. Shareholders, even in public companies (if the Statute says so) have preemptive (first refusal) rights to buy the shares of other shareholders who wish to sell their holdings. The situation is not much different in the Czech Republic and in Slovenia, to mention but two examples. Actually, even in German legislation we can find traces of this attitude. The USA and the UK are exceptions, in this sense, and not the rule. Even today, limitations apply to the free transferability of shares following a flotation (Initial and Subsequent Public Offerings).

(continued)

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AUTHOR BIO (must be included with the article)

Sam Vaknin ( samvak.tripod.com ) is the author of Malignant Self Love - Narcissism Revisited and After the Rain - How the West Lost the East. He served as a columnist for Global Politician, Central Europe Review, PopMatters, Bellaonline, and eBookWeb, a United Press International (UPI) Senior Business Correspondent, and the editor of mental health and Central East Europe categories in The Open Directory and Suite101.

Until recently, he served as the Economic Advisor to the Government of Macedonia.

Visit Sam's Web site at samvak.tripod.com