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The Czech government has agreed to slash tax breaks and grants it had promised as investment incentives to Skoda Auto, the Volkswagen subsidiary, in the first case of an applicant country for European Union membership submitting to EU competition rules.
After negotiations lasting almost a year, the government has agreed to cut incentives for the $560m Skoda engine plant at Mlada Boleslav from around $120m to $22m
The Czech Republic is the only country among the EU candidates so far to have signed up to the EU's competition rules, and was therefore the first to test its planned investment incentives against them.
The negotiations are seen by the Czech government as a plus point stored up ahead of the Commission's progress report next month on the country's membership preparations, which is otherwise expected to be highly critical.
"No other candidate country has negotiated on incentives in such a sensitive sector as carmaking," said Pavel Telicka, deputy foreign minister and chief negotiator with the EU. "It will serve as an example for the other candidate countries."
Skoda, which is 70 per cent owned by VW and 30 per cent by the Czech state, said yesterday it would still go ahead with the engine plant as planned.
"Finally we have the green light," said a spokesman. "We are very happy and we will start as soon as possible to build the factory."
The plant is expected to be completed within two years and to turn out 500,000 engines and 500,000 transmissions a year, for use mainly in Skoda models but also in other VW brands.
VW had planned to build a modern engine plant when it took over Skoda in 1991, but the scheme was cancelled two years later when it decided to go for a leaner operation.
The investment is now part of a big expansion at Skoda that includes increasing production to 500,000 cars a year by 2003 and the introduction of two models. The Fabia, a replacement for the basic Felicia model, was shown at the Frankfurt motor show this month and a third model, bigger than the mid-range Octavia, is expected to be introduced by the end of 2003.
The decision on the plant could also open the way for the full privatisation of Skoda. Pavel Mertlik, finance minister, has said the state is interested in selling its stake once the engine plant is approved. VW has yet to respond publicly to the offer.