Within this context I wish to draw attention to four important rulings: the Administrative Procedure Code that took effect Jan. 1, 2006, the amendment to the Act on the Legal Profession that took effect on Apr. 1, 2006, and the Public Procurement Act and the Act on License Agreements and License Procedure, both which became effective July 1, 2006.

The amendment to the Act on the Legal Profession in particular introduced very significant changes–if not revolutionary ones–to legislation governing legal services in the Czech Republic. In the past, attorneys worked on a contract basis and were not considered as employees. After long discussion, an agreement was reached by which an attorney at law is able to employ another attorney at law. In addition, creating and incorporating limited liability law firms and limited partnership law firms is now permissible. Such amendments to the Act on the Legal Profession were followed by amendments to the Income Tax Act.

Based on the above amendment, the so-called “responsibility agenda” of the Czech Bar Association was altered. The rules for appointing free legal counsel services have been clarified in order to limit their misuse. The Bar may now appoint legal counsel only in cases where legal counsel may not be appointed under given rules of procedures. Furthermore, an applicant for legal aid is obliged to provide evidence of his financial need by completing a questionnaire about his property.

Other major changes have resulted in the strengthened position of the Czech Bar Association in disciplinary proceedings, while disciplinary proceedings themselves have been simplified and become more effective. The amendment allows for the suspension of an attorney who intentionally evades disciplinary proceedings. Moreover, a disciplinary order on the legal profession, similar to the criminal order, has been introduced into Czech law.

Market development

In the last two years the legal services market in the Czech Republic has experienced a dynamic expansion (after the downsizing from 2000 to 2002 in some international firms). Currently, the fate of law firms is changing significantly, as strong competition in the legal services market and certain material shifts are evident.

In the 1990s, international law firms operating in the Czech Republic had certain competitive advantages because of the high quality of services they offered, a result of their long experience in the field; their know-how and diverse international contacts ensured a steady inflow of clients. However, the importance of such advantages is gradually diminishing.

Large Czech law firms now are able to compete successfully with branches of large multinational firms. They offer services of equal quality and have been able to acquire a ready supply of foreign contracts thanks to their membership in independent international associations of law firms, for example Procházka Randl Kubr within Lex Mundi, Peterka & Partners within TerraLex, and Čermák Hořejš Myslil a spol. within TAGLaw. In this respect it must be said that these international associations are a dependable source of international clients only when they are efficient and when their members maintain regular personal contact.

Independence is an undisputed advantage of Czech law firms. Such firms don’t have to respect global internal procedures. Their practice is created on the basis of their client’s needs and their pricing policy is set independently. Global pricing policy and its relatively high costs for an infrastructure now appear as an increasing disadvantage for large multinational law firms.

Czech law firms have competed with international firms by expanding abroad. This growing trend has gone on since January 2001 when the law firm of Peterka & Partners expanded to Bratislava, Slovakia, followed by several other firms, including Procházka Randl Kubr. At the beginning of 2003, the law firm Kocián Šolc Balaštík a spol. opened a branch in Brussels; in April 2006 Brzobohatý Brož & Honsa established a branch in Moscow; and in June 2006 Peterka & Partners opened another office in Kiev. Thanks to their growth and penetration in foreign markets, the competitiveness of Czech law firms is increasing, especially within the Central and Eastern European market.

Aside from the increased competitiveness of Czech law firms, we can point to another trend in the Czech legal services market. Recently, small teams separated from large multinational law firms to specialize in selected branches of law. The law firm Johnson Šťastný Kramařík (split from Allen & Overy in 2004), specializing in public-private partnership projects (PPP), is an example. PPP is a system in which a government service or private business venture is funded and operated through a partnership of government and one or more private sector companies.

In the legal milieu which has formed in the Czech Republic, specialization is a must for large law firms as well. Moreover, the demand for legal services with low-added-value has decreased. Compared to previous years, most such services are performed by in-house lawyers, and outside firms are hired only for more complex cases.

Prospects for 2007

As for development in the legal services market in the Czech Republic, it’s likely that current trends shall continue and further develop. The differences between small-scale and large-scale law firms will become more pronounced, and the structure of large Czech law firms will begin to more closely resemble major Anglo-Saxon law firms. Specialization within Czech law firms will increasingly develop and these firms shall be hired for complex cases that require specific and in-depth knowledge. In this respect, work effectiveness shall be considered as one of the most significant factors.

With regard to legislative changes, several significant legal regulations are expected to enter into effect in 2007. In addition to the Labor Code, the Building Code and the Act on Health Insurance–all effective on Jan. 1, 2007–the Insolvency Act will replace and use different principles than the current Bankruptcy and Composition Act, and is scheduled to take effect Jan. 1, 2008. No significant amendments to the Act on the Legal Profession are planned for 2007.

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The power group recorded Kč 4.7 billion (€ 166.3 million) in earnings before interest, tax and amortization (EBITDA) outside the country in 2006–up from Kč 2 billion in 2005–after acquiring two power plants in Poland and one in Bulgaria last year. Total net profit for the group reached Kč 28.8 billion in 2006.

“Foreign acquisitions continue to show positively in our results,” said ČEZ Chairman and CEO Martin Roman, adding that the group has no specific acquisition targets other than those already reported.

ČEZ made headway into the lucrative, neighboring Polish market when in the first half of 2006 it acquired majority stakes in electric companies Elektrocieplownia Chorzow Elcho (220 megawatts installed capacity) and Elektrownia Skawina (590 MW installed capacity), however, analysts have said these plants are still relatively small players.

The group seeks to expand its capacity in Poland. One option is building a new unit at the Skawina site, said Alan Svoboda, ČEZ’s executive director for sales and trading. “It ‘s possible to build a plant with capacity of up to 500 megawatts,” he said.

In Bulgaria, the group completed its acquisition of the 1,260 megawatt thermal power plant in Varna in October 2006. This year, ČEZ expects to push Varna’s output to 4 terrawatt hours compared to 3 terrawatt hours in 2006.

These three plants contributed Kč 653 million to ČEZ’s profit in 2006, despite not being included in the accounting for the whole year. If they were accounted for the whole year, ČEZ estimated they would have contributed Kč 1.6 billion to EBITDA.

ČEZ also owns distribution assets in Romania and Bulgaria where it sold 8.6 terrawatt hours and 8.2 terrawatt hours of electricity, respectively.

The company also wants become more active in the Balkan countries and Russia, where it was rumored to be looking at a minority stake in a plant owned by energy group RAO UES. “We’re mapping the situation in Russia,” Roman said, adding that although there’s a lot of potential there’s also risk.

The most immediate new project abroad for ČEZ will be in Bosnia and Herzegovina, where it agreed in December 2006 on a joint venture with a state-owned power group to construct a new power plant in Gacko. The Kč 40 billion project in which ČEZ will own a controlling stake, consists of modernizing a 300 megawatt power plant, building a new 500-700 megawatt plant and developing a coal mine at the site.

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Germany-based Tradition Financial Services (TFS) has been running a trading platform in the Czech Republic since 2005. While some in the local power industry have called the MPO’s initiative a “PR move,” others welcome the new exchange, saying it will lead to more opportunities for smaller traders to crack the market here.

In the end, though, the two trading grounds could benefit from some type of cooperation, something that has happened with other electricity exchanges around Europe. “We can either cooperate or compete [with the new exchange],” said Jason Curtis, head broker at TFS’ Frankfurt, Germany, office. He said TFS is looking at cooperating with the new exchange, but didn’t reveal details.

Brokers have found ways to work with other electricity exchanges. For example, the Leipzig, Germany-based European Energy Exchange (EEX) has found ways to cooperate with brokers, including TFS. One approach is allowing access to the exchange’s clearing and settlement system, which in turn brings more business to an exchange.

According to one local trader, who asked to remain anonymous, an exchange’s settlement system is one advantage it has over brokered trades. Through a broker, credit lines must be opened among all counterparties, the trader said, meaning a trader could have several credit lines with different parties. The trader added that, especially with futures contracts, “there are still risks for both buyers and sellers.” However, with an exchange those risks are nearly eliminated. “Traders only have to issue guarantees with the exchange,” the trader said.

Another trader, who asked not to be named, agreed that having a clearing system is an advantage. “An exchange is different,” the trader said. “It offers smaller traders more options.”

The new exchange will be operated by the PSE, which is establishing a new company called Energetická burza to run it. Trading of wholesale electricity on the PSE is expected to begin by June, when energy groups begin scheduling 2008 electricity contracts.

Energy provider CEZ has already agreed to sell electricity on the exchange. The MPO had been critical of the pricing transparency in the current auction method used for wholesale electricity after two summer auctions of CEZ last year saw 2007 wholesale prices shoot up 17 percent to around € 44 per megawatt hour. “Things that are possible at one-off auctions cannot be done on a long-term market,” PSE head Petr Koblic said. “Long-term and continuous energy pricing on the commodity exchange brings more stability and transparency.”

Analysts and energy officials, though, have expressed doubts that a new exchange could influence prices. “There's not much that can be done about [rising] electricity prices [in the Czech Republic],” Curtis said. “Due to connections to other countries, external factors have a disproportionate effect on Czech market prices.”

Curtis also said TFS is transparent; and it posts all necessary information for traders to view. One trader agreed: “[The exchange] seems a waste of time and money when [TFS] provides a transparent market already,” the unnamed trader last month told European Daily Electricity Markets, a publication from European energy data provider Heren Energy.

TFS first appeared on the Czech market in December 2004. In 2006, trading volume was more than 12 terrawatt hours, five times more than in 2005.

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Businesses standing to benefit from the growing prestige of the main Czech fashion avenue have been lifted by confirmation that Britain’s Burberry Group is to follow French fashion house Louis Vuitton Malletier a Paris, and jewelry and watchmaker Cartier in endorsing the address as the only place for a luxury retailer.

The Burberry opening is scheduled for the fourth quarter of this year, the firm said. With Cartier expected to open for business in a shop on the corner of Parížská street and Staromestské námestí (Old Town Square) this spring, the Burberry arrival – at Parížská 13, occupied until February last year by Louis Vuitton, which went on to lease a larger retail space on the street – will be seen by many as final confirmation that Prague’s “Little Paris” is no slouch in the top-end fashion stakes.

Finding space on the boulevard has proved difficult for many luxury brand retailers but a London-based Burberry source said Burberry – founded in 1856 and acclaimed for its check-patterned scarves and signature plaid trench coats – was confident of earning a good return from a 133 square meter space across a single floor. “Having studied the market in Prague we are confident of a strong customer response to our goods,” said the Burberry source who refused to be identified.

To date, both Cartier and Burberry have only distributed goods on the Czech market through authorized dealers, including a multibrand shop at Prague Ruzyne Airport. Burberry, an official supplier of apparel to Britain’s Queen Elizabeth II, first entered Central Europe in September 2005 with an opening in Poland.

The Parížská outlet, said the Burberry representative, will showcase the Burberry Prorsum collection for men and women in addition to the Burberry accessories collection and the Burberry London ready-to-wear lines for men and women. In addition, it will carry the firm’s eyewear, fragrance and timepiece collections.

The image stakes

“The image [of a luxury brand retailer] would be damaged if they opened at a location other than Parížská,” said Lukáš Loskot, PR and event manager at Carollinum, which distributes several luxury brands on the Czech market including Rolex, Patek Phillipe, Cartier, Dunhill and Montblanc. “Some luxury brands have been eyeing Prague for quite a while but they can’t find suitable retail space,” he added.

“They will never go anywhere else than Parížská,” said Martina Lewis, the public relations representative for Louis Vuitton in the Czech Republic. “Luxury brands have to be careful when choosing the right location. Retail space on Parížská is becoming scarce,” Lewis said.

In 1997, Louis Vuitton became one of the first luxury brand firms to open a shop in Parížská. This was hailed as its first shop in Central and Eastern Europe. “At that time [in the late 1990s] it was easier to find retail space on Parížská as there were almost no luxury brands,” Lewis added.

She said Budapest’s Andrassy Avenue was now known for offering lower rents and more retail space than Parížská. Italian fashion firm Gucci Group recently announced its intention to open there.

Dearer rents

Although Parížská street is considered by luxury brands to be the most representative Prague location for their sector, the capital’s Na Príkope boulevard remains the most expensive retail location in the Czech Republic, according to “Main Streets Across the World,” an annual study published by property consultant Cushman & Wakefield.

“This is determined by the revenues of retailers,” said Martin Žížala, head of the retail department at Cushman & Wakefield in Prague. “Mainstream retail brands like H&M and Mango, which operate on Na Príkope, have much bigger revenues than luxury retail brands on Parížská, which sell one to three products per day,” he said.

But Lewis said Parížská has the touch of intimacy required by luxury brands, while Na Príkope is a commercial avenue with more modern buildings.

Smaller capital cities, Lewis said, were more likely to fall in line with the trend that sees luxury brands typically concentrated on only one street. Large leading fashion capitals contained the purchasing power that led to additional fashion streets, she added. In London, for instance, consumers pursuing some of the most expensive luxury items can head for Sloane Street as well as New Bond Street. Nevertheless, said Lewis, although the Czech Republic isn’t such a big country, the opening of more five-star hotels is drawing additional wealthy visitors.

Retail rents on Parížská are the second highest in Prague at about a monthly E 130 (Kc 3,650) per sqm, according to Žížala. This is E 30 less than what is paid for space on Na Príkope. The figures are based on shops covering sales areas of 60-100 sqm. Shops with bigger sales areas pay less, Žížala said.

In the past two years Parížská retail rents have risen approximately 20 percent, after stagnating for several years, he added.

Not London yet

There’s now an identifiable group of Czechs looking for superluxury brands that didn’t exist here five years ago, said Carollinum’s Loskot. These customers, he added, want to be regarded as exceptional and are willing, for example, to spend Kc 300,000– 500,000 on a Dunhill handbag made especially for them. A standard luxury segment handbag costs one-tenth of what a superluxury handbag costs, Loskot said. Nevertheless, despite the local emergence of consumer categories such as superluxury, alternative luxury fashion retailers would currently struggle to make money on the Czech market, according to Loskot.

Despite the “Little Paris” success, this means that Prague will remain a secondary luxury names venue, Loskot said. Even the biggest names therefore have to restrict their offered range. Louis Vuitton’s Prague store, for instance, makes the brand’s complete assortment of footwear and accessories available, except for jewelry because of low purchasing power, Lewis said. Due to space limitations, the line of clothing can’t be offered, she said. Franchise partners of other luxury brands who know they would struggle to sell extravagant collections also select goods for display carefully, she added.

“The Czech customer isn’t so interested in trends, they pay too much attention to price,” Loskot said. But with more Czechs traveling extensively, their fashion consciousness is increasing and they’re beginning to demand more exclusive models, he added.

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