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Slovenia Business Week no. 41: Government Releases Blueprint for Country's Strategic Reforms

The blueprint includes a series of measures to implement Slovenia's Development Strategy, a document the government adopted in June

The government released on Friday, 7 October its blueprint for economic and social reforms as drafted by more than 200 members of the Joze P. Damijan reform committee. The blueprint includes a series of measures to implement Slovenia's Development Strategy, a document the government adopted in June.

The proposed reforms cover the priorities as set out in the Strategy in a bid to make the Slovenian economy more competitive, focusing especially on "the most critical areas where reforms can do most to secure economic growth and employment", according to Damijan.

A priority of boosting competitiveness and economic growth should be achieved through privatisation, the development of the financial system, public finance restructuring, tax system reform, measures to improve the EU fund-phasing capacity, and the liberalisation in the field of public utilities.

The second development priority is to make knowledge useful to the economic development and create quality jobs, which should be achieved with a higher education reform and a series of measures for a better use of knowledge and innovation.

A more efficient and cheaper state is the goal of the third development priority. It should be achieved through streamlining the public sector and upgrading the drafting and implementation of the budget in addition to introducing measures for a more efficient use of EU funds.

The last development priority includes measures for a more flexible labour market, a higher level of employment and a more just system of social transfers motivating the jobless to find a job. Changes to the pension system and the national health system are also among the measures in this group.

The reform committee outlined its proposals to the government on 6 October, with a broad public debate expected to follow. Having been met with criticism as soon as announced some time ago, a flat tax rate and the changes to social benefits are bound to be met with severest opposition.

  • Tax Reform to Bring Flat Tax Rate

The government reform committee says that the government should introduce a flat tax rate and simplify tax procedure to take the tax wedge off the economy and make it more competitive.

All income of natural persons would be taxed at a new, 20% rate, with the same rate applying to the VAT, proposes the reform committee, adding that a tax reform must be accompanied by a reform of social transfers.

The elimination of the progressive taxation of natural persons' income would, according to the committee, reduce the tax wedge for those with higher education levels.

All tax brakes would be done away with, but a new general tax break would be introduced to the amount of 110% of the minimum cost of living. A tax break for surviving dependents would be replaced by a uniform tax deduction.

To cushion the effect of the flat tax rate, the committee proposes that gross basic wages as set down in collective bargaining agreements are adjusted so that net wages remain unchanged, which would not entail any extra cost for the employer.

The existing 8.5% VAT rate is bound to disappear under the planned reform, to be replaced with a flat 20% (or lower) VAT rate, brining the state over SIT 100bn (EUR 417m) in budget revenues more a year.

Since food is the main goods taxed at 8.5%, the committee proposes a rise in social transfers for low income earners.

Corporate income tax would be substantially changed to encourage non-residents and foreign investors to invest here by making fiscal conditions more transparent.

Tax procedure would be simplified, and real estate taxed, to bring an additional SIT 30bn (EUR 125m) in budget revenues a year. The committee also suggests that the tax and customs offices be upgraded and united under one roof.

  • Withdrawal from State-Owned Companies Should Be Gradual

The state should withdraw from the economy transparently and gradually and by pursuing business logic. Its two funds, KAD and SOD, should transform into investors with a globally dispersed portfolio, according to the government reform committee.

The committee proposes partial privatisation of large companies, with the state keeping at least a 26% stake, or the right to veto.

This would apply to all four major planned cases of privatisation, national telco Telekom, the leading insurer Zavarovalnica Triglav, the largest- and second-largest banks, NLB and NKBM.

In order to protect small shareholders, however, the companies should be first listed on the stock market. The reform committee also says that preparations for floating Telekom and the NLB should get underway immediately.

Further analysis should be made to see if and what strategic partner Telekom would need. Its privatisation strategy would be ready by the end of 2005 and its sale carried out in 2006. The state's 72.4% stake in the telco is valued at EUR 0.94 to 1.1bn.

The reform committee maintains that at this stage Triglav "almost certainly does not need s strategic partner to further develop". The question with the NLB, however, is whether its strategic partner, Belgium's KBC, would raise its stake in it.

Before the state goes about privatising the financial sector, it should resolve the issue of its ownership. The committee, for instance, says that the KAD, the SOD and the EBRD should be excluded from strategic talks on the NLB between the state and the KBC.

Moreover, Triglav and the NLB should get listed before any talks on their capital links begin. And if they should go ahead with forming a group, the project should be feasible not only from the aspect of politics, but also business logic.

The reform committee also suggests that a timetable should be worked out for the KAD and the SOD to sell their investments to domestic and foreign portfolio investors. After that, their combined stake in an individual company should not exceed 10%.

  • Reforms to Make Labour Market, Education System More Flexible

A set of measures was designed to make the labour market more flexible, motive the unemployed to find a job, and make the education system and businesses to work more closely together.

To achieve this, obstacles to the employment shorter than the regular eight hours a day would be eliminated. Collective layoffs and the procedure to sack an employee who did something wrong would be simplified, and the period of notice prior to resignation shortened to one month.

The jobless would be encouraged to find a job with the elimination of unemployment benefit as a social transfer. They would nevertheless qualify for financial support, but would have to take any offered job or join an employment programme.

In a bid to make the use of knowledge more efficient, technology and innovation policy would come under jurisdiction of one ministry only. Moreover, the share of money spent on science and technology would rise to 3% of GDP by 2010.

The higher education system would be reformed so as to respond to market demand, making it oriented more towards students and companies. Educational establishments would no longer be financed on the basis of their programmes, but performance.

A national scholarship system would be upgraded with the introduction of a schooling allowance, and the establishment of a scholarship fund. The nostrification of foreign university degrees would be done away with, and students' work is planned to be taxed at the same rate as any other form of temporary work.

  • Pension System to Encourage Workers to Retire Later

The planned government reform of the pension insurance system would encourage workers to retire later.

The years of service when one qualifies for a pension would be prolonged, and those of women gradually equalised with men's (who now work longer).

Another measure to encourage staying longer on the labour market would be a progressive scale of bonuses, meaning the retired would get more for every additional year of service.

Moreover, the employers would be exempt from paying part of pension contributions for older workers.

In a bid to promote voluntary pension insurance, a special tax break for pension insurance paid by individuals (not employers) would be introduced, thus separating them from collective insurance schemes.

A new group of workers would be included in the pension insurance system, namely those who work occasionally, temporarily or without a fixed-term contract, among them many students.

  • Lower Expenditure, No Deficit in 2010

To provide the efficient financing of development priorities, the reform committee says that general government expenditure should be reduced to 43.5% by 2008 and 41.5% by 2012. This would also reduce the general government deficit, which is to amount to 1.4% of GDP in 2006 and disappear until 2010.

In addition to being reduced, expenditure should also be restructured towards development, such as co-financing of EU-funded projects. Stricter rules should apply when a rise in expenditure is planned, the committee says.

Furthermore, the committee suggests the government should adopt an ambitious plan to cut its operating costs by 10% in a three-year period, and labour costs by 1%.

Meanwhile, the private sector should be introduced to the financing and management of large infrastructure projects.

To ensure efficiency of the use of EU funds, the committee suggests that all cohesion funds projects should be large-scale projects.

The share should be 70% for the projects financed from structural funds. The committee also suggests that only one institution should watch over EU payments in Slovenia.

  • Better Business Environment and Power Utilities

The government reform committee proposes a set of measures to improve the business environment by making access to information for business people easier and cheaper. It also proposes certain measures for the liberalisation of public utilities, which it considers ineffective.

Slovenia should be made more attractive for domestic and foreign investors by setting up three to five state-controlled business zones, says the committee, which calls against monopoles and for a positive attitude toward globalisation.

According to the committee, the government should back companies and individuals which have shown potential on world markets and establish a fund for financing emerging hi-tech companies in their early stages.

Labour market flexibility, deregulation of professions and lower taxes for highly qualified staff as well as financing of on-the-job training are also among the planned measures.

A reform of the infrastructure would include selling motorways to investors who would finalise them in two years. The committee also suggests the building of a state network of wireless broadband mobile access to the Internet.

Public utilities, especially in the power industry, should be subjected to market rules as soon as possible to become more competitive, the reform committee proposes.

While the EU reform of this sector is to enter the final stage in 2007, the situation in Slovenia has gone in a different direction, with power utility Holding Slovenske elektrarne having too much market power.

The committee proposes that power producers and distributors get ready for potential privatisation, while a second energy group would be formed around the Nuclear Power Plant Krsko (NEK).

  • Reforms to Improve Efficiency of Health System

Free market mechanisms should be implemented across the entire health system, or, where such a move would be impossible, selective market elements should be introduced. The government, however, should retain its supervisory function, the government reform committee proposes.

First and foremost, the existing sources should be utilised to their full extent, while changes to the obligatory health insurance system would ensure its economic sustainability without raising health insurance contributions.

The committee thus proposes a limit to the length of sick leave, and a ceiling for sick-leave pay, maternity leave and child nursing benefits.

The reforms also envisage an institute of health economics, which would analyse the costs in implementing new services and medicines in addition to drafting employment and investment policies for the sector.

The institute would be tasked with preparing national standards for all areas of health and define the priorities in the field, as well as analyse the quality and cost efficiency of health institutions.

Government reformists also gave their thoughts to increasing the work efficiency of health care workers, namely by removing the levelling of wages. Instead they will be paid out in accordance with the performance level and quality of work of individual worker.

The management positions in the health sector would, according to the proposal, require a managerial education or proven managerial abilities of the applicants.

The reformists also propose a private hospital pilot project, and call for gradual privatisation of hospitals, under suitable supervision.

Source: Slovene Press Agency STA

Author: STA