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Eastern Europe: Danish Investment Soars

By Anthony Georieff

Copenhagen, 21 April 1997 (RFE/RL) -- The Danish Investment Fund for Central and Eastern Europe has just issued a report showing that it has invested about $300 million in the countries of that region.

The report lists a total of 171 projects which have been undertaken up to the end of last year in East and Central Europe. An RFE/RL correspondent in the Danish capital Copenhagen reports that these figures mean the Danish Investment Fund (I.O.) is a major Western investor in the former Communist states.

Last year alone, the I.O. invested in 30 new joint ventures in six Eastern European countries. By far the biggest level of investment was made in Poland, followed by the Czech Republic. The number of Danish/Polish joint ventures totaled 77, which puts the I.O. among the 15 largest Western investors in that country. In 1996, the total number of Danish/Czech companies rose to 19. Russia and the Baltic states are next in line, and at the bottom of the list are the Slovak Republic and Ukraine, with just one investment each.

Our correspondent recalls that the I.O. was created months after the fall of the Berlin Wall in 1989 and thereby became the first Western investment fund directly interested in Central and Eastern Europe. Primarily, its resources come from Danish government revenue but private businesses in Denmark have in recent years increased their capital share on the investment market.

The I.O. works in close co-operation with other major western financial institutions such as the European Bank for Reconstruction and Development (EBRD), the Nordic Investment Bank (NIB) and the Nordic Environmental Finance Corporation (NEFCO). The I.O. creates joint ventures mainly in sectors where Danish industry has traditionally been strong, such as medicines, telecommunications and environmental projects.

The I.O.'s activities in the region have resulted in the creation of more than 2,000 local jobs.

Among the joint firms set up in Eastern Europe are Belcare-Plast, a medical precision instruments producer in Belarus, giving employment to 25 staff, UMS Tervel, a food and beverages producer in Bulgaria employing 125, Panonska Pivovara in Croatia, breweries employing 350, Beronit and Ezanova, non-metallic mineral products, in the Czech Republic, employing 350, and Air Latvia, employing 300.

Two years ago, the I.O. received additional government funds for the creation of a separate investment facility, called Environment Investment. Operating on a budget of about $30 million, it has already started up 10 environment projects in four East European states. Five of those are controlled landfill sites in the Czech Republic and Slovakia. These are meant to replace old-fashioned refuse spots that contaminate the ground and cause ozone layer depletion. The projects that are being carried out in cooperation with local authorities in the Czech Republic and Slovakia are expected to raise environmental standards up to their Danish equivalent.

Another successful environmental project was set up in Estonia. A local timber processing factory was reconstructed to make use of wood chips by-products, thus substantially saving on energy consumption. The I.O. lost about $1.5 million in 1996. According to the annual report, this reflects the very large provisions which are automatically required in the short term when investment activity is expanding rapidly. The agency predicts that the number of projects in Central and Eastern Europe is expected to stabilize at its current level in 1997 and in subsequent years, while the amount of investment in individual projects is expected to grow. According to Dan Jensen, the I.O.'s deputy managing director, the philosophy behind the fund's activities is a mixture of idealism and pragmatism: by making short and long-term investments in Eastern Europe, it directly promotes the development of a free market and democracy. Once stable capitalist forces are in operation, the Danish economy will start benefiting by increasing exports and by further investment. As an independent body governed by Danish government regulations, the fund participates as a shareholder in private sector projects. It provides up to 30 percent of the total share capital which, if things go smoothly, it later offers for sale. The I.O. welcomes proposals for the establishment of new ventures. The main condition for new investment, as Jensen puts it, is that the recipient companies must be in a country experiencing a genuine political and economic reform process. An initial approach to the fund must be made in writing either to its headquarters in Copenhagen or to its offices in Warsaw. All investment proposals must be cleared "in principle" by the fund's Administrative Investment Committee and then presented for a decision by the Board of Directors. Once past this stage, a feasibility study on the proposal or on a pilot project is made. If this is satisfactory, the fund issues a legally-binding commitment that means not only assurance for financial backing but also a collateral for further financing and/or governmental approval in the host country. Normally, loans will be granted by the fund for up to five years, but longer or shorter periods may be considered depending on the expected cash flow requirements of the project company.

The fund recommends its partners to put considerable effort into ensuring that shareholders' agreements take into consideration all relevant aspects of the projected cooperation, including the rules for settling future disputes.

A good shareholders' agreement can in itself prevent future disagreements which might otherwise be critical for the joint venture. The fund has great experience in this area and offers advice to interested parties. The fund would expect the private sector partners to be responsible for the day-to-day operation and management of a project, but it would play an active role at board level when required by either party or by force major circumstances.

The Danish Investment Fund's headquarters is at: Bremerholm 4 DK-1069 Copenhagen K. Fax: (+45) 33 32 25 24. The fund's offices in Poland are at: Aleje Niepodleglosci 188b Room 362-365 PL-00-925 Warsaw. Fax: (+48) 39 12 23 59