Balancing EU hopes, state interests

LIEPAJA - Latvia's main foreign policy goal, according to virtually everyone in government, is membership in the European Union (EU). But that doesn't mean the country should turn its back on immediate profit now to fulfill its EU dreams later.

At least, that's what the Parliament's European Affairs Commission decided when it ruled that the Liepaja Special Economic Zone (SEZ) should not be rearranged to comply with EU directives.

The current law on the Liepaja SEZ contradicts EU regulations on state support. As an incentive for companies to invest in their infrastructure and produce qulaity products, Latvian law allows tax reductions to companies that export at least 80 percent of their products.

But the EU says this is considered an export subsidy, which is prohibited by EU laws.

The Finance Ministry proposed to scrap the 80 percent provision in order to meet EU standards, but on Sept. 7, the European Affairs Commission decided to abolish these amendments. Instead, the commission authorized the Liepaja SEZ management to prepare new amendments that would both suit Liepaja and meet EU standards.

The move was met with joy by the Liepaja SEZ board, which governs the special zone. For the past six months, board members have been protesting the Finance Ministry's proposed amendments, accusing the ministry of choosing an easy road to the EU without trying to protect Latvia's interests.

According to Board Chairman Uldis Pilens, board members feel there is no need to change the law until the EU directly asks Latvia to do so.

"This half-year discussion shouldn't have happened because it made many investors cautious," Pilens said. "We'll prepare the amendments when it is necessary, when this question will be one of the conditions for Latvia to enter the EU."

The amendments, he said, would worsen Liepaja's favorable investment climate and impede the city's development.

But the Finance Ministry says the law must be amended sooner or later if Latvia wants to join the EU club.

"This is not a question of the future. We have to change the law as soon as possible," said Aleksandra Cirule, head of the European integration department at the Finance Ministry.

The law on the Liepaja SEZ came into force in March 1997 and will be in effect for 20 years. It's main objective is to help the city out of the economic doldrums.

Before Latvia regained its independence, the Liepaja port was a restricted-access Soviet naval base. The last naval forces withdrew in 1994, leaving behind sunken submarines, dilapidated barracks and an oversized city infrastructure. Liepaja had to start a new life from scratch.

Nowadays, after a company becomes a Liepaja SEZ enterprise, it enjoys 80 percent discounts on property, land and corporate taxes and other tax reductions. The enterprise can be freed from paying property and land taxes completely if the Liepaja SEZ management gives an additional 20 percent discount.

The Liepaja SEZ management signed contracts with 16 enterprises that will invest 22.79 million lats ($37.98 million) by 2000.

The discount for companies which reach the 80 percent threshold for exports, however, is prohibited by the EU Association Agreement. Cirule said this agreement does not allow any export aid, irrespective of the form it takes, because it threatens fair competition.

The Liepaja SEZ management said if this export barrier is removed, the country's inner market will be ruined because companies working in Latvia's other regions won't be able to compete with Liepaja SEZ enterprises.

The Finance Ministry offered to include a restriction on total tax reduction which should not exceed 65 percent of total investment to protect the inner market. This proposal also decreases state support to the maximum allowed by the EU standards.

Pilens said there is no guarantee the EU won't ask to change this barrier for state support when negotiations start, but constantly changing legislation worsens the investment climate.