Ben Cunningham in Prague -

The Slovak government is preparing to partially bail out hundreds of small and medium sized subcontractors left floundering after the insolvency of construction group Vahostav-SK. But the case once again raises questions about the connections between politicians and business in what Transparency International ranks as the most corrupt country in Central Europe.

Vahostav-SK, Slovakia’s third biggest construction company by revenues, was declared insolvent in October 2014 after it bid on state highway contracts at prices far below their estimated cost and was left unable to pay its large pool of subcontractors.

All told Vahostav-SK owes some €136mn. Commercial lenders are expected to collect all they are owed as their credit is secured by collateral.  But Vahostav-SK has offered to pay only 15% of what it owes to the SMEs, which would drive many of them to the wall.

Prime Minister Robert Fico wants to use cash accumulated from a one-time levy on commercial banks to repay smaller unsecured creditors up to 50c on the euro. The proposals were announced after an April 14 cabinet meeting and fast tracked into parliament the next day. The construction group was slated to meet with creditors on April 30, but Fico now says he hopes to have the law changed before then.

Under the proposed changes to the insolvency law the state’s Slovak Guarantee and Development Bank (SZRB) would pay creditors up to half of what they are owed and Vahostav-SK would be responsible for paying back the SZRB with future profits. 

While the bailout looks set to please thousands of small business owners in the run up to the spring 2016 election, economists fear it could set a bad precedent at a time when Slovakia is struggling to bring its budget deficit within the rules of the Eurozone’s Stability and Growth Pact.

Moreover the changes to the insolvency law would apply to more than just the Vahostav-SK case. Among the major criticisms of the proposal is a lack of clear criteria of what kind of debts the programmes could be applied to, prompting concerns that it could be used in the future to benefit allies of Fico's Smer party.  

“We all knew Vahostav was in trouble and the suppliers continued to supply them, nobody is talking about that,” says Radovan Durana, an economist with the Institute of Social and Economic Studies (INESS), a Bratislava-based think tank.  “Taxpayers paid for the highway and now they look set to pay again.”

“This is not a threat to the Slovak economy, but ad hoc solutions without public discussion are,” he adds.

The haste with which the changes were conceived is not the only thing drawing criticism.

Vahostav-SK has long been tied to Juraj Siroky, a wealthy businessman who is also a major sponsor of Smer. Its insolvency raises questions over why it was so successful at winning construction contracts, when its bids were widely known to be below cost.

To take but one example, in June 2011 Vahostav-SK led a consortium in a successful bid to build a 9km section of road near the city of Levoca for €60mn. Government experts had estimated the project would cost €95mn. At the time Vahostav-SK argued that its below-market bids reflected a desire to keep their work force active during the global financial crisis. 

Now, investigators are looking into whether fraud was the plan all along. Three firms with ties to Siroky have shares in Vahostav-SK and other stakes were traced to shell companies in Costa Rica, Cyprus and New Zealand by Transparency International’s Slovak branch.  

The bailout seems designed to prevent fallout from the Vahostav scandal affecting Smer before next year’s election. “The proposed solution helps Siroky and helps the political image of the government,” Durana says.  

Smer also look set to move against Jan Figel, presently a deputy parliament speaker and the transport minister in the 2010-2012 centre-right government, during which many of the contracts with Vahostav-SK were signed. Figel is the chairman of the rival Christian Democratic Movement (KDH), one of the country’s few right-leaning parties consistently able to mobilise voters.