Would the real Slovenia please stand up? Justin Keay visits a country with a split personality  This is a tale of a country with two faces. The first face is that of a plucky little land of two million people that heroically broke away from a larger, disintegrating nation after a 10-day skirmish. Since independence it has built a reputation for stability and prosperity, with a per capita GDP some 80% of the EU average and a diversified economy that is the envy of the region. It was the only one of the 10 countries that joined the EU in 2004 to receive an invitation from the European Central Bank to join the euro this January, a process that went more smoothly than anyone dared hope. It has also enjoyed steady noninflationary growth; last year GDP grew 5.2%, with inflation at around 2.5%.
The second face, however, shows a country notorious for complacency and where foreign direct investment (FDI) is low as a result of an entrenched ambivalence towards privatisation, greenfield projects and, most of all, foreign ownership. Despite independence, the old guard remains entrenched in politics and business, which critics say are closely intertwined. Old communist habits prevail in many ways: there is little job mobility, and entrepreneurs are thwarted by bureaucracy and high taxes that until very recently could consume up to 70% of income. In a process that has more in common with, say, Belarus than an EU country, journalists requesting interviews from senior ministers must give weeks of notice and supply a detailed list of written questions, as well as being advised not to stray into areas that may embarrass or appear too negative. The fact that Slovenia has these two faces comes as little surprise to those familiar with this bewitchingly attractive country, but it’s certainly a puzzle to outsiders. One international newspaper recently suggested that far from being a star reformer, Slovenia beat other East European countries to the euro “by retaining elements from its communist past, shunning shock therapy and clinging to state control of banks and telecommunications companies” – and this is a statement with which it’s hard to disagree.  The current Slovenian Democratic Party government of Janez Jansa swept to power in 2004 promising to speed asset sales, remove obstacles to investment and free up the labour market. Three years on, little has changed; the administration’s earlier enthusiasm for reforming the country’s costly social security and pension systems has been dampened by strong union hostility and opposition from the public sector, which still accounts for around 40% of employment. Despite promises to sell state-held assets, the privatisation process has ground to a halt; earlier this year, Belgium’s KBC Group was denied permission to increase its 34% stake in Nova Ljubljanska Banka (NLB) to a majority despite having reportedly been given positive assurances when it invested five years ago. KBC Group retains its stake, though this could simply reflect a struggle to find serious buyers for the now-devalued holding.
With elections due next year (the presidency comes up for grabs this autumn), the centre-right government has indicated that it intends to move forward with asset sales but at its own pace. This is despite its retaining control of Peko (a shoe producer), Nafta Lendava (oil), Slovenské Elektrárne (energy production) and, most significantly, Telekom Slovenije – the sort of companies other countries sold into private hands years ago. In its latest Transition Report, the European Bank for Reconstruction and Development says privatisation is a key challenge, insisting that “the government’s privatisation agenda must be implemented without further delay”. Ministers, however, seem more relaxed. “There’s no need to boost the pace of privatisation,” says economy minister Andreja Vizjak. “Our strategy is not to sell just upon the criteria of price but to find appropriate strategic partners with firm long-term plans for the companies.” Critics suggest that this approach confirms an entrenched desire to retain Slovenia’s largely socialised system, where the focus is on preserving existing jobs rather than creating new ones or fostering an environment conducive to entrepreneurship. They say efforts to speed privatisation and boost FDI will likely fail as a consequence of the mixed messages sent out via the experiences of KBC and others. “The government will do the bare minimum, selling off tiny shares of companies to give the impression that it’s moving forward,” says Matej Steinbacher of the Free Society Institute, a free market think-tank. “With this approach and the negative publicity generated by such cases as NLB, how are they going to get decent prices?” To illustrate his point, Steinbacher points to the latest Heritage Foundation Index of Economic Freedom, where Slovenia came 58th out of 161 countries – well behind most other accession nations.  Others stress the positive. “The government may not have made the changes it said it would, but it also hasn’t made many mistakes,” says Mojmir Mrak, senior professor of economics at the University of Ljubljana. “Growth has been steady and there has been a very good use of EU structural funds, which is more than some other accession countries can boast.”
Mrak suggests that the mood towards foreign investment and enterprise is changing – albeit slowly – as a result of EU membership, where ambivalence to other member countries buying domestic companies is contrary to European Commission regulations. He says the policy until now has been to focus on restructuring and recapitalising companies, but there is growing recognition that the state should pull out of the manufacturing sector. “To be fair, other countries had no choice but to fast-track reforms; we did have a choice, and we acted accordingly,” he concludes. There are, at least, signs that the government has woken up to the need to change Slovenia’s high-tax culture. The top tax rate was reduced by 10% to 60%, sky-high payroll taxes are being lowered (albeit over a four-year period), and last year the government adopted a national programme for entrepreneurship and competitiveness. Whether such policies will be enough to improve the business environment remains unclear. What is certain is that although fast-reforming post-communist countries such as Poland, Slovakia and Estonia have grabbed much of the limelight until now, Slovenia will soon find itself under closer scrutiny. Next January it assumes the presidency of the EU (the first new EU country to do so), and it is expected to change the Mediterranean focus of the outgoing presidency (Portugal) to stress the Balkan region. Slovenia is viewed positively in Europe (despite bad relations with Croatia over still-unresolved territorial and property issues), and companies such as grocery store chain Mercator, pharmaceutical company Lek and energy company Petrol have a growing market presence.  Yet Ljubljana’s hopes of showing its best face to the world have been undermined by the bad blood that currently exists between Prime Minister Jansa and the city’s mayor, Zoran Jankovic, a former chief executive of Mercator. Jankovic took office last October but has since accused Jansa of holding back money he says is needed to spruce up the city, construct a new sports stadium and generally prepare Ljubljana as a national showpiece.
There are also more serious concerns. Slovenia has one of the EU’s fastest-ageing populations and failure to reform the social security system could be a fiscal time bomb, particularly as the government’s own figures show growth slowing to around 4.1% a year in 2009 – a slower rate than most other accession countries are expecting. Critics say Slovenia risks falling behind unless there is a radical change in mentality and a more open attitude towards FDI and entrepreneurship.  Visitors to the beautiful baroque city of Ljubljana look in vain for the likes of Holiday Inn, Sheraton or Le Meridien. Despite there being no shortage of guests who would happily pay for the services of a reliable hospitality brand, two well-known chains withdrew mysteriously in 1998. Now the only foreign-run hotel is part of a little-known Italian group, well away from the centre. Other cities have a similar dearth of brands, suggesting that Slovenia’s ambivalence towards foreign ownership is as evident in tourism as elsewhere, but new flight connections (many from budget airlines like easyJet, Wizz Air and Ryanair, which soon starts regular flights to Maribor) and rising demand – Slovenia now attracts some 2.5 million arrivals a year, a rate that is growing 6% annually – are prompting a rethink.
Dimitrij Piciga, director of the Slovenian Tourist Board, says that despite the country’s growing appeal there are still only 119 hotels – in per capita terms, only around 25% of the amount seen in Austria or Switzerland. The plan is to build seven a year over the next few years, up from the current four a year, with the focus very much on four and five-star accommodation. “We need at least one international name in Ljubljana to help the country’s branding and boost the MICE [meetings, incentives, conferences and exhibitions] market,” Piciga says. One major hotel chain is already taking the plunge – it is set to open a huge, newly renovated Hapsburg-era property at Portoroz on Slovenia’s tiny coast in summer 2008 – and Piciga says others will follow. Money is playing a major part. Some €150m in EU structural funds is available for investment in the tourist sector between 2007 and 2013, provided Slovenia can find a further €400m from the private sector (creating a total of €550m). This seems likely to be forthcoming, even if foreigners must come as part of the package. “We do need to be more flexible as regards foreign ownership in the sector,” Piciga says. “There isn’t that kind of money in Slovenia.” SLOVENIA Population 2 million
GDP €25bn
Per capita GDP at PPP €16,455
Expected GDP growth 2007 5.2%
Anticipated end-year inflation 2006 2.5%
Anticipated BOP deficit/surplus 2007 -1.1%
Investor information www.investslovenia.org
Estimated number of days to open a business Up to 60
Transparency International Corruption Perceptions Index position (out of 163; 1 = least corrupt) 28
CNBC European Business Investor Attractiveness Index score (out of 10) 6 Figures: EBRD, other sources. The CNBC European Business Investor Attractiveness Index is based on macro-economic and other more subjective factors including condition of infrastructure, cost of doing business, ease of access to decision makers, and perceived opportunities. |