You can also listen to the article in audio version.
The editors of Seznam Zpráv managed to obtain the text of the expert opinion, which justified the high payments for advertising between the Agrofert group and Farma Čapí hnízdo.
It is a document from January 2011 prepared by the Prague company Proscon. It was her expert opinion that played an important role in the police investigator’s decision that he would no longer deal with the suspicion that Andrej Babiš’s holding had illegally cut taxes through spending on advertising on the Hornet’s Nest.
The editors provided the text of the opinion for evaluation by a renowned expert from the University of Economics. He stated that the approximately twenty-page material has fundamental professional deficiencies.
“In my more than fifteen years of experience as an expert and as a teacher, this is one of the lowest quality I’ve seen,” Docent Pavel Svačina, who lectures at the Department of Finance and Enterprise Valuation at the University of Economics and Business Administration and is one of the top domestic academics in the field of valuation, told Seznam Zprávy.
The assessment from the company Proscon Svačina specifically criticized a number of fundamental shortcomings (read more in the infobox below). According to him, this document “cannot reasonably be taken as solid evidence” when assessing whether the price for advertising on the Sparrow’s Nest was justified.
The opinion of the university expert partially undermines the argument of the public prosecutor’s office as to why it was okay for the investigator of the so-called “advertising branch” of the Čapí hnízdo case to postpone the investigation in June after three years.
Summary of disputed facts of the “advertising” case:
In this case, the police worked with a total of five expert opinions, including two that they commissioned themselves. The public prosecutor’s office emphasized that everyone was treated critically and dealt with. However, it mainly pointed to the disputed report from 2011.
Although the plaintiffs did not directly name the author of the report, it is nevertheless clear from their description and other information that it is a document from the company Proscon. Seznam Zprava got its text despite the fact that Prague prosecutors have repeatedly refused to provide it in the past.
The opinion determines the justified price range for advertising services on the Horned Nest. It is of key importance for Agrofert – it supports his version that the high sums that companies from the holding company paid for promotion in the just-starting center in the central Bohemian countryside were not exaggerating on purpose.
Between 2010 and 2013, according to publicly available information, companies from Agrofert placed advertising on Čapí hnízda for a total of 272 million crowns. Thanks to this money, the farm could then show sufficient returns and give the impression of an independent viable business. This was one of the conditions for reimbursement of the subsidy from European funds, the granting of which is resolved by the main case of the Sparrow’s nest, which will be dealt with in court for the first time this month.
Comment on the postponement of the case:
In a related but separately conducted “advertising” case, the issue was suspicion of tax crime.
It was based on the fact that Agrofert companies charged the amounts paid for advertising to their costs. As a result, they thus reduced the basis for calculating income tax. According to the opinions of some tax experts, they thereby committed the crime of tax evasion, because Agrofert was closely connected with Čapí hnízd (personally through the owner Andrej Babiš and his family, economically at least as a guarantor of hundred million bank loans for the farm). From this point of view, Agrofert practically invested “in itself” by paying for advertising.
The opinion from the company Proscon justifies the large sums for advertising on the Sparrow’s Nest. He determines the authorized price range by deriving it from the amount of sales of Agrofert as a “strategic partner” of the farm.
“For the period 2010-2011, from consolidated and individual sales, the reviewer determined an economically justified margin that Farma Čapí hnízdo, a.s. could invoice the strategic partner and individual companies for the services provided, as indicated below, at: 0.1-0.2% from annual consolidated and individual sales,” reads the final statement of the report, which was signed by the co-owner of Proscon, Naděžda Krátká.
Interview with the public prosecutor:
However, according to Pavel Svačina from the University of Economics, this approach to valuation, which is based on the so-called license analogy method, is “completely inappropriate” for advertising on the Hornbill’s Nest.
“In the case of advertising spaces, it is generally either movable or immovable things and their rental, or it is a secondary matter of the creation of certain advertising spots, most likely to order. The similarity of the lease of these spaces with a trademark license is completely absurd, just as it is absurd that an independent advertising client is willing to pay a percentage of his (total!) sales for these advertising spaces,” said the expert.
Neither the investigator Pavel Mikšovský nor the prosecutor František Partík, who solved the case with the advertisement on Čapí hnízda, questioned the method used by Proscon. Nor was it an obstacle for them that the report was prepared more than a year after Agrofert started sending Čapí hnízd money for advertising.
“Although the report was drawn up in 2011, it retrospectively assessed to what extent and in what reasonable amount the advertisement could have been implemented in 2010. These conclusions, in the opinion of the public prosecutor, can also be applied to the period of the following years, and as part of the examination it was found that at least some of them were aware of this opinion and also followed it,” reads the press release of the Prague City Council.
According to the public representative Partík, it was important when assessing the case that at least part of the companies from the holding followed the assessment and that the customers paid a lower price than the assessment stipulated.
“The reason for the postponement of the case is the failure to fulfill all the elements of the factual nature of the crime under investigation, namely the subjective and objective aspects of the crime. On the subjective side, the point is that the persons negotiating the advertising and filing the tax return had at their disposal and were guided by the expert opinion, which established the interval of the price for the advertising performance, while the agreed price for the advertising performance was below the interval determined by the expert opinion,” answered Partík in July to the News List inquiry.
Four reasons why the review for the Stork’s Nest does not stand up
The full text of the commentary by valuation expert Pavel Svačina from VŠE on the professional quality of the expert opinion of the company Proscon from 2011 on the determination of rent for advertising for Farma Čapí hnízdo:
1. Of the total 23 pages of the text, 20 pages are descriptive, and three pages are analytical. It must be clear even to an ordinary layman that estimating a not entirely simple review assignment on three pages of text is, ironically speaking, a superhuman task.
If we take into account the fact that only the 1st method is relevant for the given estimate (see below), then the estimate itself was made on only 1.5 pages (pages 18 and 19 of the report). This is completely unacceptable. Today, solid valuation reports are designed the other way around – a brief methodological part and a relatively detailed analysis that clearly argues how the resulting estimate was created.
2. The expert opinion builds on the relationship between Čapí hnízdo (provider of advertising areas/carriers) – Agrofert Holding (strategic partner). Therefore, if I understand correctly, the rent is to be determined mainly with regard to the interests of these two parties, who are supposed to be independent, that is, they will behave as normal market parties to the transaction. The report should therefore clearly document what facts would lead a huge conglomerate like Agrofert Holding with huge bargaining power to pay an estimated 86-172 million CZK for advertising placed in a newly built center like the Sparrow’s Nest. The report should therefore clearly document whether other interested parties were also willing to pay comparable amounts for these advertising areas, who possibly ensured the sale of this advertisement, etc. In other words, it should be somehow documented that the Sparrow’s Nest was a center that would be able to market to provide such income.
3. From my point of view, only the first approach used in the assessment, i.e. the hypothesis that the economically justified rent is given by prices for comparable areas in comparable locations, or at least at the level of the costs of creating advertising spots, etc., is applicable to the valuation of the given object (advertising space). Unfortunately, as I mentioned in point 1), this approach is carried out so briefly, vaguely and without clear and verifiable sources that it is not at all clear how the resulting estimate of this approach at the level of 32-87 million CZK was gradually created.
4. The second used valuation approach, the license analogy method, from which the resulting spread of the estimated rent is paradoxically based (0.1-0.2% of the tenant’s sales) and whose description makes up most of the text of the expert opinion, is completely inappropriate for the given valuation. In the case of advertising spaces, it is generally either movable or immovable things and their rent, or it is secondary to the creation of certain advertising spots, most likely to order. The analogy of renting these spaces with a trademark license is completely absurd, just as it is absurd that an independent advertising client would be willing to pay a percentage of their (total!) sales for these advertising spaces.
If any expert opinion should be used to verify the economic amount of the rent, it should be based on a well-executed first approach.
Seznam The News once again approached the City Prosecutor’s Office with the question of how the investigator and the prosecutor evaluated the method used and the procedures of the expert opinion from the company Proscon. However, the spokesman of the public prosecutor’s office limited himself to referring to the July press release. He also emphasized that the so-called preparatory phase of criminal proceedings is closed to the public.
The decision to postpone the case of advertising on the Hornbill’s Nest is still being examined by the High Prosecutor’s Office in Prague led by Lenka Bradáčová.
The editors also asked the two co-owners of Proscon, Naděžda Krátká and Václav Šubrt, who prepared the expert report for Čapí hnízdo Farm. However, even after the emergency, they did not answer the questions sent to their work emails.
In the past, Proscon cooperated with Andrej Babiš on other operations that attracted attention. In 2007, she drew up an opinion on the purchase price of the shares of Čapího nízd (still under the company name ZZN AGRO Pelhřimov), for which Babiš’s two older children and his then girlfriend Monika bought the company.
In 2010, Proscon helped Babiš in an operation with the shares of the company Profrost, thanks to which he “extracted” more than half a billion crowns from Agrofert in the form of a purchase price. While Babiš sold 80 percent of Profrost’s shares to his concern for 527 million crowns, he sold the remaining share to Agrofert manager Simona Sokolová’s company for more than six times lower price.
In its references on the company website, Proscon also lists anti-corruption police units, courts or the High Prosecutor’s Office in Prague as clients.