Wednesday, July 28, 2010
Since the 1990s, Slovakia has experienced a drastic production shift away from the industrial sector and towards
the services sector. In 1998, the proportion of contributions to GDP from services, industry, and agriculture were 62 percent, 33 percent, and 5 percent, respectively. This change has not merely resulted from the 1993 separation of Czechoslovakia, since the Czech Republic has been experiencing similar dramatic shifts. Rather, it is a side effect of the transformation from the central planning of the communist system to a market-based system. The communist system created several large monopoly industries in specific sectors, such as pharmaceuticals and machine production. Once privatized, only some of these industries have been competitive in a free-market environment. While the service sector was given a low priority under the communist system, the free-market environment has demonstrated a strong demand for growth in this sector.
GDP showed generally continuous growth during the 1st decade of the transition. However, some irregularities in the privatization process were among the factors that prevented Slovakia from attaining levels of foreign direct investment (FDI) comparable to that of its neighbors. A restructuring of the government and economic policies in 1998 has brought renewed investor interest in Slovakia. The most famous Slovak industry to survive the transition process is the VSŽ Steel company in Košice, now a partnership with U.S. Steel. Volkswagen also set up operations in Slovakia in the late 1990s.
Under the communist system in Czechoslovakia, Slovakia produced 80 percent of the state's armaments, many of which were exported to eastern-bloc allies. With the end of the Cold War, these factories were shut down. This sector had at one time contributed 5 percent of total industrial production and 12 percent of exports, employing 80,000 people. The closing of the factories was highly unpopular in Slovakia, and played a contributing role to the eventual breakup of the Czechoslovak state. Some Slovak arms production has now been resumed.
The sectors that are projected to have particular growth potential are pharmaceuticals, infrastructure, information technology, equipment and equipment services, business services, and tourism.
One of the earliest human remains we have found was a man on a trading trip who was frozen in the Italian alps; he was carrying tools toward a trading outpost when he fell and died. Trading has been a part of our culture since pre-history times because it satisfies many basic human wants: adventure, socialization, diversity of possessions, reducing hunger and enjoying travel, among many others. It's fair to say that the desire for trade and profits is a basic human desire.
Another basic human desire is to be safe. Most groups of people create governments in order to make their lives safer. We expect that our government will prevent foreign invasions and catch criminals and murderers. Sometimes it happens that the government we create to make us safer also encourages our desires for commercial activities. Unfortunately, sometimes the government we create to make us safe interferes with our desires for trade and business activity.
PURPOSE OF THE INSTITUTE
The McKEEVER INSTITUTE OF ECONOMIC POLICY ANALYSIS (hereafter MIEPA) is a small, privately funded organization dedicated to the betterment of mankind through the promotion of sound economic policies. MIEPA's has created a list of government policies which promote both commercial activity and safety when they are followed.
The policies MIEPA promotes recognize the experience of many countries which have experimented with a wide variety of policy options. MIEPA's policies are based on maximum economic freedom within a country's borders, trade management to prevent foreign currency imbalances and a realistic approach to political systems. MIEPA believes sound economic policies can coexist with a variety of political systems. These policies produce economic growth within any country. They explicitly allow for both non-GNP wealth creation as well as traditional GNP growth. You are encouraged to forward your conclusions about the recommended polices or the effectiveness of any particular government to MIEPA at the addresses beolw.
Slovakia’s economic freedom score is 69.7, making its economy the 35th freest in the 2010 Index. Its score has increased by 0.3 point from last year, with a noticeable drop in labor freedom offset by small improvements in four other economic freedoms. Slovakia is ranked 18th out of 43 countries in the Europe region, and its overall score is higher than the world average.
Performing well in most of the 10 economic freedoms, Slovakia has recorded annual growth of around 8 percent for the past five years. Monetary stability has been maintained, taxes are competitive, and the entrepreneurial environment is increasingly conducive to private-sector development. Regulatory and legal frameworks are more transparent. Foreign investment is actively promoted and subject to few regulations in almost all areas. The financial sector is generally strong and has weathered the global financial turmoil relatively well.
Slovakia’s overall economic freedom remains limited by two institutional weaknesses. The judicial system is inefficient and slow, and Slovakia scores relatively low in freedom from corruption, with only limited progress in recent years.
Background Back to the top
Slovakia became independent following its “Velvet Divorce” from the former Czechoslovakia in 1993. The reforms implemented by former Prime Minister Mikulas Dzurinda at that time have led to low labor costs, low taxes, and political stability, making Slovakia one of Europe’s most attractive economies, especially for automobile and other manufacturing. Very high real GDP growth in 2007 was driven by strong domestic demand and net exports. Global weakness in 2008–2009 caused a significant slowdown. The cabinet of leftist Prime Minister Robert Fico is using interventionism to try to alleviate the effects of the financial crisis. The government is promoting highway construction, pressuring utilities to curb prices, providing loans for small and medium-size businesses, and according domestic suppliers preferential treatment. On January 1, 2009, Slovakia adopted the euro as its national currency.
Business Freedom72.6 Back to the top
The overall freedom to start, operate, and close a business is relatively well protected under Slovakia’s regulatory environment. Starting a business takes an average of 16 days, compared to the world average of 35 days. Obtaining a business license takes less than the world average of 18 procedures but more than the world average of 218 days.
Trade Freedom87.5 Back to the top
Slovakia’s trade policy is the same as that of other members of the European Union. The common EU weighted average tariff rate was 1.3 percent in 2008. However, the EU has high or escalating tariffs for agricultural and manufacturing products, and its MFN tariff code is complex. Non-tariff barriers reflected in EU and Slovak policy include agricultural and manufacturing subsidies, quotas, import restrictions and bans for some goods and services, market access restrictions in some services sectors, non-transparent and restrictive regulations and standards, and inconsistent regulatory and customs administration among EU members. Pharmaceuticals regulation and non-transparent licensing procedures exceed general EU policy. Ten points were deducted from Slovakia’s trade freedom score to account for non-tariff barriers.
Fiscal Freedom84.0 Back to the top
Slovakia’s tax rates are relatively low. Both the income and corporate tax rates are a flat 19 percent. Other taxes include a value-added tax (VAT) and a property tax. In the most recent year, overall tax revenue as a percentage of GDP was 29.7 percent.
Government Spending64.5 Back to the top
Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 34.4 percent of GDP.
Monetary Freedom78.2 Back to the top
Inflation has been moderate, averaging 3.5 percent between 2006 and 2008. As a participant in the EU’s Common Agricultural Policy, the government subsidizes agricultural production, distorting the prices of agricultural products. It also influences prices through regulations and state-owned enterprises and utilities. Ten points were deducted from Slovakia’s monetary freedom score to account for policies that distort domestic prices.
Investment Freedom70.0 Back to the top
Foreign and domestic investments are treated equally under the law. There is no screening, and full foreign ownership is permitted in most sectors. The state owns railroad rights-of-way, postal services, water supplies, and forestry companies. Reforms have further streamlined and improved the transparency of investment rules, but bureaucratic efficiency could be improved. Dispute resolution through the judicial system can be slow, and corruption is a problem. Residents may establish foreign exchange accounts. There are very few controls on capital transactions. Non-residents from EU and OECD member countries may purchase land for business use.
Financial Freedom70.0 Back to the top
Most state-owned banks have been sold, and the presence of foreign banks is strong, with three foreign banks accounting for about 60 percent of total assets. Non-performing loans have declined to less than 5 percent of total loans. All financial service operations are regulated by the central bank. Interest rates have been liberalized, and credit limits have been abolished. The financial sector has become increasingly diversified as insurance and securities companies have grown. Capital markets remain relatively small and are not fully developed. With little exposure to the structured financial products that triggered the global financial turmoil, banking remains stable and well capitalized. Adoption of the euro proceeded smoothly in January 2009.
Property Rights55.0 Back to the top
The judiciary is independent and comparatively effective, although decisions can take years and corruption remains significant. The courts recognize and enforce foreign judgments, subject to the same delays. Secured interests in property and contractual rights are recognized and enforced. The mortgage market is growing, and the recording system is reliable. Intellectual property rights are protected under Slovak law and in practice except for inadequate storage of proprietary data and improper registration of companies to produce generic drugs that are still under patent protection.
Freedom From Corruption50.0 Back to the top
Corruption is perceived as significant. Slovakia ranks 52nd out of 179 countries in Transparency International’s Corruption Perceptions Index for 2008. Legislative and executive branch corruption especially affects health care, the judiciary, and education. Slovakia is a signatory to the OECD Convention on Combating Bribery, and it is a criminal act to give or accept a bribe.
Labor Freedom65.1 Back to the top
Slovakia’s labor regulations are relatively flexible. The non-salary cost of employing a worker is moderate, and dismissing an employee is not costly. Regulations on work hours remain relatively rigid.
After restructuring of Slovenske elektrarne, a.s. (SE), the new company Slovak Electricity Transmission System (Slovenska elektrizacna prenosova sustava, a.s.), (thereinafter SEPS) has been established. As the only one out of the separated branches is not considered for privatisation and will remain 100 % state-owned. Richard Kvasnovsky interviewed the Director General of SEPS Alexander KSINAN about visions and goals of the company within the Slovak power industry.
What is the position of SEPS after separation from the mother company SE?
SEPS has been registered on January 21, 2002 by a recording in the Commercial Register of the Slovak Republic. SEPS acts as the transmission system operator and ensures electricity transmission through 400 and 220 kV lines on the territory of Slovakia, as well as electricity import, export, and transit. The company mission is to ensure a reliable electricity supplies to customers, maintenance, renewal, and development of the transmission system equipment, dispatching control on the territory of Slovakia, and co-ordination of the system control within internationally connected system. SEPS provides transmission and system services to its customers, i.e. electricity generation and distribution companies, customers connected to the transmission system, as well as importers, exporters, and transit companies on a contractual basis, while applying tariffs agreed by the Regulatory Office for Network Industries. SEPS has been appointed by the Ministry of Economy as the temporary market operator.
Is SEPS as a part of the Slovak power industry also planned for privatisation?
SEPS, as per the Act No. 92/1991 Coll. on conditions of the national property transfer to other entities, as amended by later regulations, has a character of a natural monopoly with assets owned by the National Property Fund of the Slovak Republic. SEPS privatization is not considered at present, and as declared by competent national bodies, privatisation is not considered in the intermediate-term of the next five or six years either.
SEPS has long been trying to implement the project of 400 kV line construction between Austria and Slovakia. What is preventing from the project implementation and what is its importance for the country?
Intensive negotiation about preparation of the 400 kV interconnection between Slovakia and Austria (Stupava - Vienna) started in 1990. CEZ (Czech Republic) suggested a competitive alternative of strengthening the Austrian interconnection with the East European systems by installation of the second 400 kV line (Slavetice - Dürnrohr) with lower costs. The Austrian, however, preferred the connection from Stupava to Vienna in order to increase operational safety of the Austrian system interconnection in the east-west direction. The line should have been commenced before CENTREL integration with UCTE and the line was to be connected to a Vienna-South station that would allow for a direct commercial co-operation of the Slovak transmission system with UCTE system even in case of asynchronous operation. The line was designed from Stupava to the state border in the area of the settlements Zahorska Bystrica - Angern. The bilateral efforts were topped with signing the contract between SEP and ÖVG on December 21, 1993. The contract was also co-signed by the Czech party (Director General of CEZ, Mr Karas) due to 2 x 220 kV line Sokolnice - Bisamberg. Both parties started with the construction preparation on their territories. In 1995 the works were stopped in Austria, for the Mochovce NPP completion and Bohunice V-1 NPP (electricity exports to Austria) were made political issues. The last negotiation between ÖVG and SE was held in Austria in May 29, 1995. It was declared at the meeting that the contract is still valid. However, based on the political reasons, which might endanger further existence of the signed contract for the transmission line construction, the Austrians demanded discontinuance of the construction preparation. It was assumed that the situation might be better after Mochovce NPP commissioning. In October 1995 the Austrians requested SE that the Slovak party should not insist on the approval process on the Stupava - Bisamberg line, since it might endanger other transmission line projects in Austria, particularly the construction of 400 kV line Vienna Southeast -Kainachtal. SE asked ÖVG a few times to bring the project back to life, and after SEPS the company management contacted Verbund company with the aim to continue in construction as soon as possible. It was agreed at a meeting held in Vienna on April 8, 2002 that the project shall continue at the level of a joint expert group. The 400 kV cross-border connection Stupava - Vienna Southeast remains a priority in the development of the Slovak transmission system. With the parallel operation of CENTREL and UCTE the line has a transmission capacity similar to the one Györ-Wien Southeast and will be the only direct interconnection of the Slovak transmission system with western systems. The interconnection is assumed to be used for the following purposes:
* direct electricity exchanges and export/import
* mutual emergency aid
* electricity transit in favour of contractual and third parties
* electricity exchanges to reduce negative environmental impacts of power plants
* increased reliability of the both power systems operated within UCTE.
New technical possibilities of transmission at the east of CENTREL systems will increase the capacity of transits from the north and east to Austria. The east of CENTREL systems currently represents the UCTE operation border, where the system is connected to the IPS/UPS system of the Union of independent states. Only a small, limited volume of electricity can be transmitted through the present border between eastern and western systems. Slovak and Polish power industries have jointly erected a double 400 kV connection Lemesany - Krosno to increase the capacity.
A few days ago you have been appointed the Vice-president of UCTE, the Union for the Co-ordination of Transmission of Electricity. What’s the main objective of the organisation and what’ the position of Slovakia in it?
UCTE is an association of 35 transmission system operators from 21 countries of the continental Europe, which provides a reliable market basis through effective and safe “electrical highways”. The synchronously interconnected system meets technical conditions for a reliable operation and is useful for all market participants, since the system guarantees access to the market. More than 50 UCTE has been co-ordinating - through various technical rules and recommendations - an international operation of extra-high and ultra-high voltage grids, which work at so-called one “heart rhythm” at the frequency of 50 Hz. UCTE is in charge of the development of the system so as to meet all new market requirements with no loss in relation to reliability and safety of the existing system. UCTE grid allows for safe electricity supplies for population of more than 400 million. It means that UCTE co-ordinates one of the largest synchronously interconnected systems on the globe. I can mention a few characteristics for illustration to confirm the fact: installed capacity of 512 GW, electricity consumption in 2001 amounted to 2160 TWh, total sum of electricity exchanges among members according to UCTE rules 230 TWh, total length of transmission lines controlled by UCTE is 200 000 km. UCTE is convinced that reliability of the largest European electrical synchronous interconnected area and development of stable conditions for flourishing electricity markets in the area are mutually related.
Slovakia is represented in UCTE through SEPS, which has been a fully-fledged member since May 17, 2001 with all rights and duties arising from the membership. The duties are the following:
* responsibility for safety of the whole UCTE system, i.e. system ability to withstand major or sudden failures such as trip of generation units, grid elements, as well as accidents due to calamities
* UCTE system adequacy, that is a structural ability of the system to ensure an even balance between the electricity generation and consumption
* each UCTE member is responsible for his own transmission system quality, and jointly with the others maintains a high technical level that is the basic presumption for market development
* quality assurance of international transmission services and early warning in case of reduced generation or transmission capacities that might lead to sudden limitations or adverse effects on competitive electricity markets.
What effects can be expected by consumers with approaching electricity market liberalisation?
Electricity market liberalisation will allow for electricity supplier selection, at first for large customers, whose consumption is higher or equal to a level set by a regulation of the Ministry of Economy, hence the customers can buy electricity under better conditions. In the next step, in line with the market liberalisation schedule, the supplier will be selected also by customers with lower electricity consumption, including households that might result in lower prices, as well as improved services related to electricity supplies. In the end the electricity price will be modified so as to express the actual value at various voltage levels. One of the possibilities how to provide comprehensive service to customers with the best price is the comprehensiveness of electricity delivery combined with other products, i.e. gas, water, or telecommunication services (data transmission, internet connection) respectively.
What are the future SEPS tasks in relation with integration of Slovakia in the European Union?
Firstly it is essential to get a full membership in the Association of the European Transmission System Operators (ETSO), where SEPS obtained an associated membership on January 1, 2002. ETSO is an association dealing with the economic agenda of the transmission system operators, and for Slovakia the questions of cross-border transmission tariffs and solution of so-called electricity transmission narrow points will be certainly important. The next task is the need of active involvement in the liberalised power environment formation in Europe, as well as to be a trustworthy and hot partner in the European electricity market. Other permanent basic tasks in the future will include ensuring a reliable and safe operation of international transmission system interconnections from the synchronous area as the basic assumption for trouble-free electricity exchanges by ensuring the domestic as well as cross-border non-discriminating access to grids.