Investment incentives bill looks like it’s going to misfire again

Insufficient investment and a dramatic reduction in Foreign Direct Investment (FDI) are indisputably one of the main characteristics of Greece’s business and economic climate. A long-awaited Finance Ministry draft bill, details of which were unveiled last month, supplements and amends certain points of the existing development legislation, law 2601 of 1998, but leaves intact the main body of incentives, which have proved ineffective at mobilizing investment resources. The linking, for instance, of subsidies with the number of jobs created, effectively undercuts the possibility for enterprises to determine their own investment policy, expand and modernize. Given that the introduction of new technology can rarely be combined with more jobs, attempting to tie firms down to increasing employment works as a deterrent to a large number of investments. Moreover, a number of provisions still often require legal interpretation, even by specialized staff. The existing legal framework lays down no fewer than 16 certificates and studies that need to be submitted, along with the application for approval of the investment plan. Additionally, in many instances the inadequate training of staff assigned with the task of checking complex technical and legal details results in considerable delays in the disbursement of subsidies and conflict with investors. Recent revocations of investment licenses under the law can be largely attributed to the lack of a clear monitoring framework which can spot problems in advance and actively guide investors. It is striking that both central and regional departments lack a mechanism for planning and implementing investment policy, carrying out comprehensive studies on the actual effectiveness of the development law, drawing conclusions and proposing legal and administrative corrections. As regards the assessments of ongoing investment plans, these seem to be conducted simply for formalities’ sake, mainly due to the lack of analytical skills on the part of responsible staff. ‘Permanent’ subsidies Another point of friction, mainly for small and medium-sized investors, is the timing of the disbursement of investment subsidies; these must normally be additions (over and above) to investors’ own resources. When the government attempted to create investors from naught by increasing capital subsidies and disbursing sums in advance, it resulted in a waste of resources and countless judicial tangles. The practice of giving up-front subsidies distorts the principle and contributes to the perpetuation of permanently subsidized firms; some of the recently revoked licences concerned such cases. The draft bill seems to be moving in the right direction as regards this shortcoming, despite one loophole – the letter of guarantee by a bank, required for advance disbursement of part of the subsidy. Another weak point in the existing law is that it does not provide for binding dates and deadlines for the submission of progress reports by inspectors. This has led to a large number of malfunctions and has been a serious cause of failure for many investment schemes. The draft bill does not tackle this problem, again leaving open dates for setting up reporting committees. Technological deficit A serious insufficiency of FDI in recent years, which has a strong adverse impact on the competitiveness of the Greek economy, is a worrying sign. Given FDI’s positive contribution to employment, transfer of technology and activation of the so-called multiplier effect throughout the economy, one would expect to see a policy of attracting specialized categories of investment, depending on the country’s comparative advantages. Surely these advantages do not include cheap labor; therefore, an FDI policy with a reasonable chance of success will target those investments that incorporate high degrees of research and technological development (R&D), or concern the banking and financial sector. Portugal and Ireland have a government agency which can negotiate the size and type of incentives with foreign investors, thus promoting capital intensive investment and R&D activities. Similar bodies exist in Italy, Spain and Germany; their common denominator is that supporting innovation and technological development is a basic priority. Such an approach is still absent from the Finance Ministry’s draft bill at a time when the technological gap with the rest of Europe is widening. The 11 development laws that have been passed since 1953 have shown considerable differences in terms of efficiency, due to their inability to deal with certain crucial issues as regards implementation, and failure to keep abreast of economic and technological developments. The authors of the draft bill should take note that private investment no longer seems to be affected by classic determining factors and shows a low degree of responsiveness to changes in interest rates. (1) Dionysis Hionis is assistant professor at the Department of International Economic Relations and Development in the Democritus University of Thrace.