YOU ARE HERE: LAT HomeCollections

Market Focus : East Europe's Squeaky Old Wheels Scare Off Needed Foreign Investors : Hungary and Czechoslovakia may have the best shot at switching to capitalism from communism. But outdated communications, transportation and banking guarantee a difficult transition.


BUDAPEST, Hungary — To sell a single train ticket for the 3 1/2-hour run to Vienna, the clerk at Budapest's southern rail station must record the transaction by hand in two faded, cardboard-covered ledgers. Then she fills out a carbon-backed ticket form in triplicate, collects the modest fare in two currencies and asks the customer to come back four days later if he wants a reserved seat. Reservations require another three-page order form.

It will likely be years before computerization is introduced for such unprofitable Hungarian state-owned enterprises as public transport. The government is already deep in debt, and foreign business people are not interested in shoring up services with little hope of ever generating profits.

Yet it is just this kind of infrastructural antiquity that is slowing the flow of foreign capital into Eastern Europe's most promising new democracies.

Hungary and Czechoslovakia are described by Western economists as having the best chances of toughing out the transition from communism to capitalism.

Since the peaceful revolutions of 1989, Western investors have been flocking to Budapest and Prague, overwhelming their meager hotel and restaurant capacity. But the trips have been mostly exploratory.

Despite thumbs-up assessments on the outlook for joint ventures and co-production facilities, relatively little foreign cash has been put up for private enterprise in either country.

Hungarian and Czechoslovak economists blame the situation on a wait-and-see attitude on the part of Westerners and confusion on the part of their own industrial leaders over how to sell themselves as promising partners.

It is the sad state of telecommunications, transport and highways that makes the foreigners hesitant, and it is the absence of professional marketing and promotion services that prevent the Easterners from putting their best foot forward.

Investors who have travel agencies or secretaries arrange their transportation into the region are surprised to learn they must often go in person to arrange an onward journey. The hopelessly backward telephone network thwarts many an effort to check in with the home office. The main road linking Budapest to Vienna has not improved much, except for an occasional paving, since the capitals were united under the Austro-Hungarian empire.

"It's easy to get really down here," said Brian V. Murray, a managing director for New York's Bear, Stearns & Co. investment firm and a frequent visitor to Eastern Europe. "The banking system needs work. The privatization laws need work. But you need to look at where they started from."

While he praised the progress Hungary has made over the last year in setting up the legal and governmental framework for foreign ownership, he said the region remains a risky investment suited only to a small pool of financiers willing to take chances for potentially great returns.

Murray last week accompanied to Budapest a group of 66 American pension fund managers representing $600 billion in investments. They claimed to be in Eastern Europe to "kick the tires" and assess the opportunities, but they departed without committing a dime.

The perception that investment has been slow in coming to the region is partly due to unrealistic expectations, Murray said.

"If there is a slowness in the amount of money coming in, it is because the deals aren't thought through enough and the numbers are not polished enough," he said.

East European managers presenting their factories and enterprises to potential foreign partners too often take the approach of "here's my plan, where's my money?" Murray said.

Officials in Prague and Budapest agree that they need to package their proposals and clear away the structural impediments before they can expect a major infusion of money to boost production and hard-currency income.

"We have plenty of foreign offers for direct investment, and we have plenty of interest among our own companies to find foreign partners," said Czechoslovakia's deputy planning minister, Milan Jurceka. "What we need is a more effective means of bringing the two groups together."

Some West European aid programs have been providing technical assistance to Hungary, Poland and Czechoslovakia in reorienting their industries toward Western markets, which Jurceka said has been helpful to a point.

"In the end, it is up to us whether we succeed or not," he said. "Our people have always wanted to live like those in the West, while working like those in the East. They still don't believe that this attitude has to change."

A severe shortage of trained managers has hurt Czechoslovakia's quest for capital, apparent in the fewer than 30 joint ventures concluded over the last year, most of which involve small investments and remain in the starting blocks.

Czechoslovakia's Finance Minister, Vaclav Klaus, said, however, that the pace of foreign investment appeared recently to be picking up, and that hundreds of deals are in the offing.

Los Angeles Times Articles