Note to reader The titles in the GMB series of Doing Business with… guides for each of the 10 countries that joined the European Union on 1 May 2004 were first published in hard copy over the 18 months preceding entry. Since publication, there have been changes in the law and regulatory environment in each country, both in the period up to accession as countries strove to complete the harmonization of their systems with the EU’s acquis communautaire body of legislation and directives and during the 18 months since. In some countries there have been changes in the taxation regimes or in accounting regulations. Change has occurred in political environments too, following parliamentary elections or in the balance of coalition governments. The economic climate of some states has been affected by the continuing malaise of the EU15 economies. Six of the EU10 (Cyprus, Estonia, Latvia, Lithuania, Malta and Slovakia) have entered the EU exchange rate mechanism 2, the eurozone’s ante-chamber, and expect to join in 2007 or 2008. The Central European states are less advanced in meeting the eurozone entry criteria and previous plans for early entry have been modified with entry dates slipping to 2009–2010 or later. All of these developments are reflected in the revised ebook editions, which GMB now offers in its online EU10 collection. The texts of the revised editions have been amended accordingly and the changes are tabled in the accompanying updates to each ebook for the benefit of readers who have been working with the original edition. Further updates are programmed at regular intervals and readers purchasing ebook editions now have the opportunity to take out annual subscriptions for the update services. In this edition of Doing Business with Slovakia, updates are included for the following chapters: 2.2 and 2.3.
Doing Business with Slovakia
GLOBAL MARKET BRIEFINGS
Doing Business with Slovakia Consultant Editor
Jonathan Reuvid
GMB
Publisher’s note Every possible effort has been made to ensure that the information contained in this publication is accurate at the time of going to press and neither the publishers nor any of the authors, editors, contributors or sponsors can accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editors, authors, the publisher or any of the contributors or sponsors. Users and readers of this publication may copy or download portions of the material herein for personal use, and may include portions of this material in internal reports and/or reports to customers, and on an occasional and infrequent basis individual articles from the material, provided that such articles (or portions of articles) are attributed to this publication by name, the individual contributor of the portion used and GMB Publishing Ltd. Users and readers of this publication shall not reproduce, distribute, display, sell, publish, broadcast, repurpose, or circulate the material to any third party, or create new collective works for resale or for redistribution to servers or lists, or reuse any copyrighted component of this work in other works, without the prior written permission of GMB Publishing Ltd. GMB Publishing Ltd. 120 Pentonville Road London N1 9JN United Kingdom www.globalmarketbriefings.com This edition first published in 2004 and updated in 2005 by GMB Publishing Ltd. © GMB Publishing Ltd. and contributors Hardcopy ISBN 1-905050-28-3
E-book ISBN 1-905050-69-0
British Library Cataloguing in Publication Data A CIP record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Doing business with Slovakia / consultant editor, Jonathan Reuvid. p. cm. -- (Global market briefing) Includes index. ISBN 1-905050-28-3 (hardcover) 1. Slovakia--Economic conditions--1993- 2. Slovakia--Economic policy--1993- 3. Slovakia--Commerce. 4. Industrial laws and legislation--Slovakia. 5. Investments, Foreign--Slovakia. I. Reuvid, Jonathan. II. Series HC270.3.D65 2003 330.94373--dc21 2003013894
Contents Foreword Mikulas Dzurinda, Prime Minister
ix
List of Contributors
xi
Map 1: Slovakia and its Neighbours Map 2: Bratislava and Surrounding Districts Introduction Jonathan Reuvid
xiv xv xvii
Part One: The Economy and the Business Environment 1.1 1.2 1.3 1.4 1.5 1.6
Political and Economic Overview Bank Austria and Jonathan Reuvid Progress Report on EU Accession Bank Austria Foreign Direct Investment Bank Austria and Jonathan Reuvid Foreign Trade Jonathan Reuvid Regional Development in Slovakia Slovak Investment and Trade Development Agency (SARIO) Business Risk Assessment Coface
3 10 16 23 33 43
Part Two: The Legal Structure and Business Regulation 2.1
Legal Framework CMS Cameron McKenna 2.2 Foreign Investment Regime CMS Cameron McKenna Updates are given at the end of this chapter
49
2.3
Alternative Corporate Structures CMS Cameron McKenna Updates are given at the end of this chapter
55
2.4
Agency Agreements, Distributorship and Franchising CMS Cameron McKenna Employment Law CMS Cameron McKenna
61
2.5
52
64
vi
2.6 2.7
Contents
Intellectual Property CMS Cameron McKenna Dispute Resolution CMS Cameron McKenna
67 73
Part Three: Finance, Accountancy and Taxation 3.1 3.2 3.3 3.4 3.5
Banking SARIO and Jonathan Reuvid Accountancy and Audit Deloitte & Touche Business Taxation Deloitte & Touche Financial Support and Finance Facilities from the EU Bank Austria Capital Markets SARIO and Jonathan Reuvid
79 86 89 98 106
Part Four: Key Sectors of Business and Industry Primary Industries 4.1 Agriculture and Food SARIO 4.2 Gas and Mining, and Metallurgy SARIO 4.3 Metallurgy and Glass SARIO 4.4 Construction and Building Materials SARIO 4.5 Wood Processing and Wood Products SARIO Manufacturing Industries 4.6 Machinery and Equipment SARIO 4.7 Electrical Engineering SARIO 4.8 Automotive Industry SARIO 4.9 Chemical and Pharmaceutical SARIO 4.10 Textiles, Clothing, Leather and Shoes SARIO Service Industries 4.11 The Transport Sector SARIO
115 119 123 127 131
142 152 163 172 181
186
Contents
4.12 Communications SARIO 4.13 Insurance Igor Horvat and Martin Tkac, Aon Slovensko, s.r.o. 4.14 Human Resources Oliver Schmitt, Managing Partner, Jakub Kuvik, Marcela Hrapkova, Consultants, Teamconsult 4.15 Advertising and the Media SARIO 4.16 Retailing – Tesco in the Slovak Republic Ian Hutchins, International Corporate Affairs Manager, Tesco Plc 4.17 Bratislava Commercial Property Markets Peter Murphy, DTZ Zadelhoff Tie Leung
vii
193 199 209
218 224
229
Part Five: Appendices Appendix 1 Sources of Further Information Appendix 2 Contributor Contact Details Appendix 3 Bank Austria Creditanstalt Contact List
247 251 254
Index
257
Other titles in this series from GMB
266
INSPEKTA, a.s.
INSPEKTA SLOVAKIA, a.s.
The largest independent inspection, certification and consulting companies operating in the Slovak Republic and in the Czech Republic Field of operations : • technical inspections, QA/QC services (Quality Assurance/Quality Control), vendors’ surveillance, vendors' audits • technical supervision of projects implementation, erection, equipment installation, testing • turn key services related to the application of the Slovak technical legislation in force (equipment certification/CSK/by Slovak Notified Bodies, equipment approvals by Slovak Authorities, performance of the mandatory equipment inspections before operation, consulting about the technical regulations and codes) • overall Projects' control, EIA performance, costs control, progress follow-up • inspection and consulting services for financial sector/mostly for banks/ – projects feasibility studies, contractual consulting, verification of allocated credits/loans, financed projects progress, technical & environmental due-diligence, consultancy in the pre-acquisition phase • COST R, UKR Sepro certification of goods exported to Russia and Ukraine • loss and damage surveys for insurance companies Full operations in QA/QC services (inspections, supervisions) in Europe and other major industrial territories of the world. List of references and references from the world known companies and the banks operating in subjected countries available on demand. High flexibility, excellent experience, many references, skilled staff with knowledge of foreign languages (generally English and Russian, frequently German) is a common standard. Our contacts: INSPEKTA SLOVAKIA, a.s. Zelinarska 2 82005 Bratislava 25, Slovak Republic Dr.Vojtech Besedic, Managing Director tel: +421-2-55573266.-55573296 fax: +421-2-55573371
[email protected],
[email protected]
INSPEKTA, a.s. Olbrachtova 1 14002 Praha 4, Czech Republic Robert Hlinovsky, Commercial Manager tel: +420-241443027, -244002111 fax: +420-241441029 mobile: +420-606544409
[email protected]
Foreword As you are opening a book that will be your gateway to doing business with Slovakia, I welcome the opportunity to share with you my thoughts and encourage you to browse through its pages. I encourage you to do even more than that: to do business with Slovakia. There are five points I would like to make. First, we are witnessing a fascinating and truly historical moment. Last November, Slovakia received an invitation to join NATO. Later in the year, the invitation came to join the EU. This year, we signed the Accession Treaty with the EU. In mid-May, our citizens in a nationwide referendum voiced a firm ‘yes’ to a unified Europe, free and at peace, and to our membership in the EU. As of 1 May 2004 Slovakia will be a member. This is a momentous change compared with the period 14 years ago when we could only dream about freedom, human rights, a market economy and rejoining European and transatlantic institutions. Even five years ago, Slovakia was a pariah, left out from integration into the EU and the North Atlantic Alliance. Our economy was failing, our boat was sailing off course from democracy. Today, we are far from saying that Slovakia has turned from a pariah into a prophet. On the contrary, we know that we have challenges to address and we try to do that even more honestly, even more directly, even more truthfully than we tried to four years ago. For the first time in our national history we have a reason to feel secure. We make free choices. And we have opportunities that preceding generations could only dream of. This is a tremendous challenge for Slovakia and we are ready to face it. Second, there are principles we believe in and we do what we believe is right. During the last four years, we have rebuilt the foundations of our economy and placed them on solid bedrock. Those of you who have already invested in Slovakia are aware of the road we have travelled. You know how we overcame the roadblocks – including the legacy of several decades of economic devastation. We did it in a simple way, believing that free enterprise and investment incentives are key to a better future for the country, economic development and more jobs. This year, we are determined to take vigorous steps in this direction. We have already reformed and liberalized our Labour Code, which brings flexibility to our work force. We have also agreed upon a tax reform. When I first took my oath of office as Prime Minister in 1998, corporate income tax stood at 42 per cent. Today, it is 25 per cent. And, starting next year, we plan to cut it down to 19 per cent. Social reforms
x
Foreword
that will motivate people to seek work are underway. This year, we will prepare a pension reform that will comprise cuts in the level of social security contributions. A pension reform that should avoid the problems afflicting all the pension systems in Europe today. Third, besides protection and opportunities, we also have a feeling of shared responsibility: shared responsibility for promoting and enhancing the values of liberty and democracy; shared responsibility in the international context; participation in the protection of our values. We are well aware of what was the driving force for the peace and prosperity that Western Europe enjoyed in the second half of the last century. We remember what accelerated the peaceful collapse of communism in Eastern Europe. And we believe that all of that deserves to be cherished and promoted, today and in the future. Fourth, we are proud of ourselves. You will find well-educated and creative people in Slovakia: people whom the difficult past has taught how to cope with roadblocks, how to overcome obstacles. People who, after the lifting of the Iron Curtain, had to face competition under much tougher conditions than their Western counterparts. People who have repeatedly demonstrated that they have what it takes – at home, in Europe and in the United States. Fifth, we are committed to our partnership with you. Today, Slovakia is not only a country that is safe, a country holding promise for investment, but it is also an investment-friendly country. I would like to give you my assurances that this is the situation today and that it will be even more so tomorrow, after our reforms have been implemented. I also want to stress that we are committed to this goal, and are ready to help you in making the right decision. I invite you to do business with Slovakia. Mikulas Dzurinda Prime Minister The Slovak Republic
List of Contributors Aon Slovensko is one of the leading insurance-broking companies in the Slovak Republic’s insurance market. It is part of the Chicago-based Aon Corporation’s worldwide network of 550 offices in 120 countries. Aon Slovensko has provided service to both international and local clients since 1994. The company specializes in the insurance, risk management and alternative risk transfer of industrial and other large customers and is based in Bratislava. The company has specialists in industrial property damage, business interruption and construction insurance, liabilities, professional lines, hydrocarbon exposure, fire protection, claims handling, customs bonds, car fleet insurance, employee benefits, and specialities, etc. The country manager is Mr Igor Horvat and the main international contact is Mr Martin Tkac. The Bank Austria Creditanstalt Group is responsible for the markets in Central and Eastern Europe within the HVB Group, Europe’s third largest banking group. Bank Austria Creditanstalt is Austria’s largest commercial bank and one of the leading banking groups in the East. This is reflected in a comprehensive network of banking subsidiaries, representative offices and other financial services companies. Within the HVB Group, the economics department of Bank Austria Creditanstalt is competent for the entire macro- and microeconomic research for Austria and the CEE region. In fulfilling these tasks, the department coordinates the data provided by and made available to the economic research units of the group’s CEE subsidiaries. It is also the EU competence centre for lobbying and for questions on eastward enlargement. CMS Cameron McKenna has been advising clients in Central and Eastern Europe since 1991. It is an award-winning, full service, international commercial law firm that advises businesses, financial institutions, governments and public service bodies. CMS Cameron McKenna is a founding member of CMS – the transnational legal and tax organization. CMS law firms provide clients with access to integrated pan-European legal services, managed by a single point of contact and with common high calibre service standards. The organization currently employs in excess of 1,700 lawyers, with a total staff of 3,500 in 24 jurisdictions. CMS has a leading reputation in Central and Eastern Europe with one of the largest and most extensive office
xii
List of Contributors
networks throughout the region. In Slovakia, CMS Cameron McKenna works in association with the law firm of Jan Carnogoursky. The resident legal team consists of some 12 lawyers. Their languages include English, French, German and Italian, as well as Slovak. The main contacts are Jan Carnagoursky and Ian Parker. Coface is the world number one in export and credit insurance and insurance business rating. It is also a leader in the provision of credit information drawn from its network of offices and partnerships and from a unique database, updated in real time, of 35 million companies. Active in both traditional and B2B enterprises it has been involved in the development of international trade for over 50 years. Deloitte & Touche Central Europe spans 17 countries and has 27 offices, but it operates as one cohesive entity. In 1997 they integrated their national practices to form Deloitte & Touche Central Europe because they realized that to best serve their clients they needed to be able to share their knowledge and their manpower throughout the whole of their geography. Their integration has allowed them to manage regionally and deliver locally, adding value to their services and allowing them to be performed in the most efficient manner. In becoming one firm, they positioned themselves as the professional services firm to beat. Deloitte & Touche Central Europe has the expertise and the cultural diversity that is necessary to provide world-class services in the 21st century. In addition to all the resources they have to draw on within Central Europe, they also have the expertise of their global organization, Deloitte Touche Tohmatsu. As part of Deloitte Touche Tohmatsu, their clients are given the same high level of services that they provide, anywhere in the world. The partner for international contact in Bratislava is Remi Troch. DTZ Zadelhoff Tie Leung provides market-leading consultancy to major international investor and developer companies and international and local occupier companies in the three major property disciplines of business space agency, professional services and property management. DTZ Research produces twice-yearly overviews on the commercial property markets in the Central and Eastern European region as well as quarterly office market updates on the main office markets. Other publications produced by DTZ research are regular research alerts on topics of interest to property investors, owners, occupiers and other end-users of property in the Central and Eastern European region. Peter Murphy has been with DTZ since 1998 and heads up DTZ Research in the region, based at the DTZ Budapest office, established in 1990. He is supported by Chris Bennett, Tim Hulzebos and Mark Freeman.
List of Contributors
xiii
Ian Hutchins is international corporate affairs manager at Tesco plc. Based in the UK, he supports teams in each country to manage press and government relations. Prior to joining Tesco he worked for Shell Chemical Europe in a commercial role based in Warsaw, Poland. Before joining Shell he studied Russian and East European history at the School of Slavonic & East European Studies, University of London, and undertook postgraduate research at the University of Gdansk (Poland). He is a fluent Polish speaker. The Merchant International Group, (MIG), is an international security and intelligence-gathering group, working across 140 countries. MIG undertakes bespoke project work globally and serves many major international corporate clients. The primary mission of MIG is to identify, quantify and manage the risks associated with overseas investments. MIG looks at the world differently and thereby provides its clients with intelligence and insight expanding the options available to them. Jonathan Reuvid graduated in economics at Oxford and was employed as an economist by the French national oil company, Total, at the time of its UK market entry. From there he moved into investment banking, financial consultancy and marketing strategy. After seven years working for a US multinational engineering group with European general management responsibility, he engaged in the development of joint ventures and technology transfers in Northern China. In 1989, Jonathan embarked on a new career in business publishing, editing and writing a series of international business books with Kogan Page. The Slovak Investment and Trade Development Agency (SARIO) promotes and facilitates the inflow of direct investment to the Slovak Republic. The agency focuses on manufacturing sector investment but is engaged also in service sector and infrastructure development projects. The international contact for further information, in addition to the SARIO Web site, is Mrs Suzuzanna Eberiesova, marketing manager. Oliver Schmitt, Dipl.-Kfu, is the managing partner of Teamconsult. A graduate of the University of Economics, Passau, he was regional manager of HVB Bank Czech Republic and a member of the Board of Directors of Transfinance and the Supervisory Board of Allianz penzijni fond until joining Teamconsult in 1999. His co-authors in the Teamconsult chapter on human resources are consultants Jakub Kuvik and Marcela Hrapkova.
Map 1
Slovakia and its neighbours
Map 2
Bratislava and surrounding districts
Introduction The national referendum in May 2003 sealed Slovakia’s entry to the EU in May 2004. Although turnout was low at 52 per cent, more than 90 per cent of those taking part voted in favour of joining the EU. However, as Prime Minister Mikulas Dzurinda points out in his stimulating Foreword to our book, there are still major economic challenges for the Slovak Republic to face in the next few years. Real GDP growth is slowing this year from the 4.4 per cent achieved in 2002, but is forecast to rise again in 2004. Inflation is already picking up and may reach 8 per cent in 2003, fuelled by price deregulation, but should ease in 2004. However, the domestic economy’s most persistent problem, unemployment, will probably not fall below 16 per cent either this year or next. Foreign direct investment is unlikely to reach the record level of 2002, although it is widely expected to recover at least to the 2000 level in 2004. However, the coalition government’s achievement in re-growing the economy since 1998 is considerable and the outlook is favourable, both in foreign trade and for inward investors. Doing Business with Slovakia is a new title in the Kogan Page Global Market Briefings series, which covers the 2004 EU accession countries and countries further afield, including China and Russia. For foreign companies that have taken the decision to engage with Slovakia, a working knowledge of the legal system, regulatory framework, taxation, and audit and accountancy regimes is essential preparation for taking advantage of the opportunities for investment or market entry initiatives. Thorough understanding of general economic and business conditions and of key manufacturing and service industries in which a market entrant intends to do business are equally important. Part One provides overviews and commentary on the Slovak economy, the business environment, foreign trade and investment and the development of the regions. Part Two describes the legal structure and business regulatory environment. Part Three is devoted to finance, accountancy and taxation, banking, and capital markets. Together, these three parts provide recommended reading for all those who have taken the decision in principle to engage with Slovakia and have moved on to evaluating ways and means. In Part Four, key industries and business services that make up the main sectors of opportunity in the Slovak economy are described individually. The material is provided either by the Slovak Investment and
xviii
Introduction
Trade Development Agency (SARIO), edited and updated with available information from regular Kogan Page sources, or, in the case of service industries, by leading international firms active in Slovakia. We commend to you the input of all our contributors who are themselves sources of more detailed, authoritative information for those readers who find this book useful and are now planning actively their business entry into Slovakia. Their contact details and sources of further information are detailed in the appendices.
Acknowledgements Our principal knowledge partners, who have provided most of the content for Parts One to Three, are Bank Austria Creditanstalt, and the Bratislava offices of CMS Cameron McKenna, Deloitte & Touche, Coface and MIG. All four Kogan Page collaborators have participated in other Central and Eastern Europe titles in the series and will be providing a continuing flow of updates and material for the revision of these texts. Without their involvement, the book in this form would not have been possible and the contributions of individual authors are gratefully acknowledged. We are also grateful to our collaborators at Aon, Teamconsult, Tesco and DTZ Zadelhoff Tie Leung for their contributions based on specific experience of doing business in Slovakia. The editor’s thanks are due to SARIO for their consent to the use of content developed by and accredited to the agency. Finally, we express our thanks to Prime Minister Dzurinda for his Foreword and to the British Embassy in Bratislava and Trade Partners UK for their interest and encouragement. Jonathan Reuvid London, July 2003
Part One
The Economy and the Business Environment
1.1
Political and Economic Overview Bank Austria and Jonathan Reuvid Modern Slovakia, officially named the Slovak Republic, dates from 1 January 1993 when the former Czechoslovakia divided into two separate republics in a peaceful transition process. A customs union constructed between the two emergent states remains in force but the initial common currency was replaced in February 1993 by two independent currencies: the Slovak crown (SKK) and the Czech crown. With a population of 5.4 million, compared with the Czech Republic’s 10.3 million, and with the former seat of Government in Prague, Slovakia had a difficult start. Immediate tasks were the construction and introduction of the institutions and working systems of central administration in Bratislava, including central banking and the machinery of monetary controls and taxation. In fact, the final division of assets and gold reserves was not completed until May 2000. Trade between the two republics has remained strong and the Czech Republic is currently Slovakia’s second-largest trade partner after Germany (see Chapter 1.4).
Political landscape Parliamentary elections were held in Slovakia in September 2002 and resulted in government continuity, with Prime Minister Mikulas Dzurinda, first appointed in 1998, remaining in office. Mr Dzurinda’s party, the Slovak Democratic and Christian Union (SdKU), performed significantly better than the opinion polls had predicted and Robert Fico’s Direction (SMER) rather worse. The Movement for Democracy (HZD) led by Ivan Gasparovic, a recent offshoot of Vladimir Meciar’s Movement for a Democratic Slovakia (HZDS) party, received only 3.3 per cent of the vote and failed to overcome the 5 per cent hurdle to enter Parliament. However, the HZD succeeded in splitting the vote for HZDS, removing the threat of a return to the previous Meciar administration of 1993–1998 during whose tenure Slovakia was dropped (in July 1997) from the list of first-round candidates for accession to both the EU and
4
The Economy and the Business Environment
NATO. A second important outcome of the elections was the replacement of the SDL (Party of the Democratic Left) by the ANO, led by Pavol Rusko, as coalition partner in government. Finally, the Communists succeeded in taking seats in Parliament for the first time since 1989. The full results of the parliamentary election are detailed in Table 1.1.1. The election results were significant for Slovakia’s position in the international community. In December 2000, Slovakia became the OECD’s thirtieth member. Now, with a stable centre-right pro-reform coalition government, positive votes for membership of NATO and EU accession in the national referenda to be held in 2003 are probable. The election results are also of great significance in terms of economic policy. The privatization of Slovenske Elektrarne, the largest electricity producer in Slovakia, is now expected to proceed apace. Most importantly, the political prerequisites for fiscal restraint have greatly improved. The voters behind the parties that formed the present government are less averse to firm measures than was the case for SDL supporters. Conflict within the SDL repeatedly brought the previous government to the brink of collapse.
Managing the past – the economy pre-2000 Like all reform countries, Slovakia’s economy had to undergo a painful restructuring process, but the changeover after separation from the Czech Republic was particularly difficult because the economic policy pursued before the collapse of the Eastern Bloc had focused on large capital-intensive enterprises including weapons manufacturing. As these state-owned enterprises had exported a high percentage of their products to the former COMECOM countries, they were particularly Table 1.1.1
Slovakia’s political landscape (2003) % of votes
Seats
HZDS (Movement for a Democratic Slovakia)
19.5
36
SdKU (Slovak Democratic and Christian Union)
15.1
28
SMER (Direction)
13.5
25
SMK (Party of the Hungarian Coalition)
11.2
20
KDH (Christian Democratic Movement)
8.3
15
ANO
8.3
15
KSS (Communist Party of Slovakia)
6.3
11
Total seats Source: Slovakia Statistical Office, Bank Austria Creditanstalt Economics Department
150
Political and Economic Overview
5
hard hit by the economic weakness of these countries in the early years of the transformation process. Ten years later, Slovakia’s development remains burdened by past economic policies, of which the high rate of structural unemployment, still at the 18 per cent level, is the most noticeable legacy. As late as 2000, enterprises with 250 or more employees continued to dominate the economy and generate more than 40 per cent of the net domestic product. Meanwhile, as a result of the transformation process, both heavy industry and agriculture steadily lost importance and shrunk continuously in line with the other transition countries. Between 1992 and 2000, industry’s share of GDP declined from 32 per cent to 26.3 per cent while the shares of the construction industry and agriculture fell from 6 per cent to 4.8 per cent and from 5.3 per cent to 4.1 per cent respectively. Conversely, the unofficial shadow economy grew steadily throughout this period. According to studies of the National Bank of Slovakia (NBS), it accounted for more than 10 per cent of GDP in 2000. However, not all of Slovakia’s economic difficulties in the period 1993–1998 can be ascribed to inherited problems. Although the economy grew in strength during this period, the Meciar government followed an unsustainable policy resulting in a fiscal deficit of 6 per cent and a current account deficit of 10 per cent by the end of 1998. The new coalition government, which came to power under Mr Dzurinda in September 1998, set about re-balancing the economy in order to contain the twin budget and current account deficits. The tough economic measures needed temporarily dampened GDP growth and led inevitably to increasing unemployment, particularly in some areas of Eastern and Central Slovakia where the unemployment rate exceeded 30 per cent in 1991 against a national average of almost 20 per cent. The new government attempted to restore economic balance while promoting foreign direct investment (FDI) by a number of tax holidays and other incentives for growth. Following a bleak IMF report in 1999, further economic measures were taken. Subsequently, successful privatizations and a greater external awareness of the improved political and economic climate in Slovakia generated a major increase in FDI. In 2000, Slovakia garnered EUR2,089 million of foreign capital, representing 60 per cent of cumulative FDI since 1995.
Onward and upward – the economy post-2000 After the cold turkey measures adopted by the first Dzurinda coalition government in its early days, the economy has begun to recover from 2000 through 2002. Real GDP growth accelerated from 2.2 per cent in 2000 to 4.4 per cent in 2002. With less hikes in administered prices, consumer price inflation declined from 12.0 per cent to 3.3 per cent in
6
The Economy and the Business Environment
2002. It is expected to rise again in 2003 to 8.3 per cent because of new hikes in prices and VAT, before falling back again to a more modest 5.4 per cent level in 2004. Some improvement is anticipated in 2003 in unemployment; from its 2002 level of 17.8 per cent perhaps to 15.4 per cent, and the general government budget deficit, which rose to 7.2 per cent of GDP in 2002, should be reduced in 2003 again. A statistical overview of Slovakia’s economy is included in Chapter 1.6, which includes Bank Austria Creditanstalt’s forecasts for 2003/4. Slovakia’s GDP growth was driven by a strong rise in public and private consumption (4.0 per cent yoy and 5.3 per cent yoy for the full year) and export share increases during the second half of 2002 despite slow growth in Europe. In 2002, exports of goods and services combined grew by 7.8 per cent, slightly higher than growth in imports of 6.7 per cent. As a result, the current account deficit decreased marginally from 8.6 per cent of GDP in 2001 to 8.2 per cent of GDP in 2002. Inward FDI increased by EUR2.6 billion to EUR4.3 billion. This was more than the total foreign investment received for the three previous years. Strong GDP growth in 2002 also helped to contain unemployment; the jobless rate of 17.8 per cent was one half of a percentage point lower than a year earlier. Average real wages in 2002 were 3.9 per cent up on the previous year, compared with 0.8 per cent growth in 2001. An alternative measure of Slovakia’s recent progress is that it was the second country after Cyprus and the first country in the Central Eastern European (CEE) region to complete access negotiations with the EU before the Copenhagen summit in December 2002, having pulled back from its relegation to the second rank of possible candidate countries prior to the December 2000 summit in Nice. A summary of macro-economic indicators for the ten-year period 1993–2002 is provided in Table 1.1.2.
Budget measures 2003 The budget for 2003 was passed at the beginning of December 2002, giving a clear statement of the Government and Parliament’s reform intentions. The budget measures were aimed at increasing revenues, as well as cutting expenditures by: • reclassifying some goods and services, in particular in the hospitality and freight forwarding sectors, from the lowest 10 per cent VAT category to the 23 per cent rate; • raising petroleum and tobacco taxes; • freezing wages and cancelling certain bonuses, as well as freezing or reducing staff numbers in some branches of public administration; • revising various laws affecting expenditures for welfare support and residential construction subsidies.
Political and Economic Overview
Table 1.1.2 Year
7
Slovakia’s macro-economic indicators (1996–2002)
GDP Y/y inflation, growth, % %
Unemployment, %
New FDI inflow, EU million
1996
5.8
5.8
12.6
206
1997
5.6
6.1
12.9
195
1998
4.0
6.7
13.8
609
1999
1.3
10.6
17.5
666
2000
2.2
12.2
18.2
2,089
2001
3.3
7.1
18.3
1,674
2002
4.4
3.3
17.8
4,070
Sources: Bank Austria Creditanstalt Economics Department
With these measures the government has targeted revenues for 2003 at SKK235.4 billion (20.4 per cent of GDP) representing a nominal increase of 7 per cent (SKK15.5 billion) on 2002. This target includes an estimated 17 per cent increase in tax revenues over the previous year’s budget. Expenditures are projected at SKK291.4 billion (25.3 per cent of GDP), which is also 7 per cent higher than in 2002 after allowing for increased expenditure on wages and social transfers. The budget calculations are based on assumptions of GDP growth of 3.7 per cent for 2003, annual average inflation of 8.8 per cent and an unemployment rate of 18 per cent. Bank Austria Creditanstalt forecasts a lower unemployment rate of 15.4 per cent but rather lower increases in GDP (3.3 per cent) and inflation (8.3 per cent) due to sluggish international economic recovery and weak private and public consumption. According to preliminary calculations based on the Maastricht method, the central government deficit for 2003 is projected at SKK56.9 billion, or at just under 5 per cent of GDP, similar to the outcome for 2002. In order to maintain the planned level of deficit reduction, the 2003 budget consolidation implies a continuing restriction on growth.
Economic policy The chapter on economic policy in the second Dzurinda government’s programme of November 2002 devotes considerable attention to the planned reform of public finances. In the first phase of the new legislative period the budget deficit is to be lowered to 3 per cent of GDP by Maastricht standards. Together with the central bank, the government has declared its intention to introduce the euro in 2006, provided that external conditions remain favourable. The State budget
8
The Economy and the Business Environment
is to be consolidated by implementing reforms in key areas of expenditure, coupled with a simultaneous reduction in levies and taxes. Certain indirect taxes are scheduled for increase and the VAT rates will be consolidated into a single rate prior to EU accession in May 2004. Conditions for obtaining State guarantees for loans are to be made much stricter. In addition to reforming public finances, the Government plans to implement a wide range of other measures: • • • •
improved administration of EU funds; liberalization of the energy market; stronger efforts to combat corruption; reform of legal procedures in the court system in order to speed up the processing of cases; • greater utilization of modern information technology; • reform of pension insurance administration and the financing of the healthcare system; • tighter control of social benefits to ensure that they reach those who are entitled to them. Undoubtedly the reform plans will cause some social hardship, with labour union association protests, but the tensions expected in the current coalition are not expected to hinder the reform plans seriously.
Economic outlook The rapid pace of reforms adopted by the new coalition government will lead Slovakia’s economy to grow on a J-shaped curve: slow for the next one or two years and then accelerating rapidly based on these reforms. With unemployment likely to remain high, inflation on the rise again and moderate increases in real wages, the current account deficit should not grow alarmingly. While the flow of FDI will not reach the heights seen during the peak phase of privatization, privatization proceeds for 2003 are planned to reach SKK13 billion (approximately EUR300 million) but FDI should still fluctuate between EUR2.4 billion and EUR3.4 billion in 2003/4, mainly due to brown-field and green-field investment. Yet, even though the fast track of reform is promising for the future, it will not be devoid of problems, and the impact of slow growth of EU member state economies, notably Germany, may cause a steeper dip in the growth J-curve than the government would wish. Neither should it be forgotten that Slovakia has a long way to go to raise its standard of living to the average living standards of the EU15. In 2002, Slovakia’s GDP per capita of EUR4,556 compared with EUR23,856 for the EU15 and EUR20,870 for the EU25 after
Political and Economic Overview
9
inclusion of the ten accession candidates. However, in purchasing power parity (PPS) terms Slovakia’s adjusted GDP per capita of EUR11,944 was marginally above the new members’ average of EUR10,742 although lower than all other entrants except for the three Baltic States and Poland. This chapter includes content derived from: Bank Austria Creditanstalt Economics Department CEE-Report 1, 2000; East–West Report 4, 2002; and ‘Investment Guide on Slovakia’, March 2002.
1.2
Progress Report on EU Accession Bank Austria EU enlargement The programme of EU enlargement underway at the start of the 21st century, and confirmed at the Copenhagen summit on 13 December 2002, is a major challenge for the EU. There is an opportunity now for all the countries of the European continent to grow closer together by peaceful means by forming a political and economic union in which democratic rights are respected and the economy functions according to the principles of a market economy. The prospects of EU integration oblige the accession candidates to adopt a type of market economy arising from the tradition of Western Europe, not the tradition of the United States or Japan. This consolidation signifies a strengthening of the socio-economic ideals of the European continent. The negotiation process that was launched in 1998 began with six countries and was later expanded to include six further countries. In December 2000 the European Commission announced that it expected the most advanced applicant countries, which at that time did not include Slovakia, to finish negotiations by the end of 2002 and committed itself to make the EU ready for enlargement by the beginning of 2003. With the exception of Bulgaria and Romania, the process neared completion in December 2002 when the final negotiations were concluded at the EU Copenhagen summit. The outcome was in doubt until the last minute, with final agreement between the EU and Poland, Hungary and the Czech Republic outstanding as Poland in particular pressed its case for the best possible deal. In the end the EUR40.4 billion of aid on offer to the admission candidates was supplemented by an additional EUR1 billion for Poland’s government budget in 2004–2006, taken from its allocation for EU-financed regional aid and an additional EUR300 million for the other nine candidates. Entry is now firmly set for May 2004, subject to a referendum about membership to be carried out in each country – both the present EU membership and new entrants – during 2003. Second after Hungary, Slovakia has set its referendum for 16–17 May and is expected to register
Progress Report on EU Accession
11
a convincing majority in favour of accession. An EU ‘Eurobarometer’ survey published in January 2003 indicated a 69 per cent Yes vote with only 11 per cent committed to voting No. Support in Hungary was even higher at 77 per cent and it is hoped that favourable outcomes from the first two referenda will help to encourage the Eurosceptic states, including the Czech Republic, Slovenia and Poland, to vote Yes. In contrast to Slovakia, the Czech Republic is the most sceptical of the Central European countries with barely 50 per cent support for entry.
The economic effects of enlargement The new EU25 will have a population about one-fifth larger, with the new member states together accounting for just over 15 per cent of the total EU population. However, GDP will only increase by about 5 per cent due to the wide income gap that still exists. As Table 1.2.1 demonstrates, with a combined GDP of just over EUR400 billion, the candidate countries will therefore account for a relatively modest share of only 4.5 per cent of the total economic power of the EU25. In reality, this disparity should be seen not as a problem, but as an advantage; an opportunity and potential. With an average income of Table 1.2.1
Comparison of EU15 with EU25 EU15
New members1
EU25
Share of new members, %
Population (million)
381
75
456
16.4
GDP (billion euros)
9,084
423
9,508
4.5
0.8
2.3
0.9
0.1
23,856
5,661
20,870
27.0
Unemployment (%)
7.9
12.9
8.1
0.2
Money supply M3 (billion euros, 2001)
7,087
250
7,337
3.4
Consumer prices (y/y, %)
2.1
3.1
2.1
0.0
Public deficit (billion euros)
164
23
187
12.6
Public deficit (as % GDP)
1.8
5.5
2.0
0.2
Public debt (billion euros)
5,660
155
5,814
2.7
62
3
61
–1.1
Real GDP (y/y, %) GDP per capita (euros)
Public debt (as % GDP)
1) Estonia, Cyprus, Czech Republic, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia Sources: Bank Austria Creditanstalt
12
The Economy and the Business Environment
less than EUR6,000 per year per inhabitant, superficially the new member states lag far behind the current EU15 average of EUR24,000. In fact, all of them (except for Cyprus) rank below the least affluent country in the EU15, Portugal, with its annual average of EUR12,500. However, once the lower price levels in the new member states are taken into account, this income gap narrows from 1:4 to 1:2 in terms of purchasing power parity. Aggregate comparisons represent only a part of reality and can be misleading. When the sometimes-major differences in wealth within the various candidate countries are examined, the central regions of Slovakia and the Czech Republic, for example, are revealed as having a higher level of affluence than the EU average. For Slovakia as a whole, as we have already noted in Chapter 1.1, the national adjusted GDP per capita was EUR11,944, and this was almost precisely 50 per cent of the EU15 average in 2002. The relatively small size of the new countries, in terms of economy, also reduces the possible risks to the stability of the new EU25. Accounting for less than 5 per cent of total GDP and only 3.5 per cent of the money supply, these countries would pose little danger to the EU25 as a whole, even if they were to have substantially higher rates of inflation. Moreover, the candidate countries have improved their stability in recent years; their aggregate inflation rate in 2002 at 3.1 per cent was only slightly above the EU15 average and several have individual rates of inflation that are lower. And it is unlikely that the uncomfortably higher unemployment of the new members, in particular Poland and Slovakia, will be exported to EU15 member states since the shortage of employment opportunities in those countries is generally structural and not a reflection of economic downturn. Indeed, although restrictive budgeting measures, as in Slovakia, may have certain dampening effects in the years ahead, the economic growth outlook in the Central Eastern European (CEE) region is generally optimistic. EU accession will further stabilize the region and, above all, encourage investment in the accession countries with all its positive stimuli for the economy of the region as a whole. The new member states seem likely to reach their potential for real growth of 4–4.5 per cent on entry to the EU in 2004, even without the support of a buoyant neighbouring German economy. Of course, the outlook does not preclude possible setbacks, as in Poland in 2001–2002, triggered by the global economic trend or the domestic business cycle. Nevertheless, factoring in the higher inflation anticipated in connection with the post-entry catching up process and assuming stable exchange rate trends, annual GDP growth in euros could rise to about 8 per cent in the medium term. This rate of growth implies that market growth in the region of the new CEE members will be nearly twice as high as in the old EU15, opening up economic opportunities that some EU15 member states, Austria and Germany in particular, will be well-placed to exploit. Bank Austria
Progress Report on EU Accession
13
Creditanstalt estimated recently that the growth will generate additional income of nearly EUR250 billion in the old EU15 over the next ten years. A good indicator of which countries will benefit most may be found in the significance of their foreign trade with candidate countries. Based on this criterion, Austria and Germany are the clear winners standing to profit most from the EU enlargement eastwards. Bank Austria Creditanstalt expects Germany to reap more than EUR100 billion, almost half of the additional income over the next decade and equivalent to 5 per cent of current German GDP. However, Austria is expected to benefit the most proportionately with the additional income of EUR24 billion forecast over the next ten years, representing 10 per cent of its current GDP. On average, Austria holds a 5 per cent market share of the imports of the new EU countries, although nearly twice as much in Hungary and Slovenia. The German and Austrian shares of Slovakia’s imports are analysed in Chapter 1.4 as 25 per cent and 4 per cent respectively.
The CEE economies compared The relative economic outlooks for Slovakia and the seven other CEE countries joining the EU in 2004 are compared in Table 1.2.2 in terms of major indicators. GDP real growth prospects among the eight are not dissimilar, with Slovakia at the lower end of the scale. Whereas increasing rates of growth are forecast for all the other economies except Lithuania in 2003 and 2004, Slovakia is not expected to maintain the GDP growth of 4.4 per cent achieved in 2002. However, the 3.4 per cent GDP growth
Table 1.2.2 Comparative indicators of the CEE economies (y/y change, %) GDP real
Industrial output Consumer prices Unemployment
2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004 Slovakia 4.4
3.4
4.1
6.6
6.4
5.1
3.3
8.3
5.4
17.8 15.4 15.2
2.0 Czech Republic
2.6
3.5
4.8
4.0
5.0
1.8
0.7
3.3
9.2 10.2 10.1
Hungary 3.3
3.3
4.0
2.6
4.5
7.0
5.3
4.5
4.3
5.8
Poland
1.4
2.5
3.1
1.4
5.6
6.2
1.9
0.8
2.7
Slovenia 3.2
2.6
3.7
2.4
0.8
3.0
7.5
5.5
4.3
Estonia
5.8
4.6
5.5
8.0
7.2
6.9
3.6
3.3
Latvia
6.1
5.7
5.8
5.8
6.2
6.5
1.9
2.9
Lithuania 6.7
6.1
6.2
7.5
6.0
7.0
0.3
1.8
Source: Bank Austria Creditanstalt CEE-Report 1, 3–2003
6.0
5.7
17.8 17.9 17.6 6.3
6.4
6.2
4.4
10.3 10.0
9.3
3.2
12.4 11.8 11.2
2.7
13.3 12.8 12.0
14
The Economy and the Business Environment
forecast for Slovakia in 2003 compares favourably with current forecasts of around 0.6 per cent for the euro area and 1.8 per cent for the United Kingdom. There is more uniformity in the growth of real industrial output. Except for Slovenia (3.0 per cent) all CEE countries are forecast to achieve output growth of 5.0 per cent or more in 2004. However, Slovakia’s 5.1 per cent forecast growth is a decline on the 6.6 per cent level of 2002, which is against the trend of rising output growth from 2002 through 2004 for most of the other seven countries. By 2004, consumer price inflation is expected to range from 2.7 per cent (Poland and Lithuania) to 4.4 per cent (Estonia), with inflation rising in Slovakia from 3.3 per cent in 2002 to 8.3 per cent as a result of government economic policies before falling back to 5.4 per cent in 2004. Generally, as a corollary of higher growth rates, less stability is forecast in inflation terms among the CEE countries than in the EU where CPI rates of 1.8 per cent and 2.8 per cent in 2003 and 1.3 per cent and 2.4 per cent in 2004 are forecast for the euro area and the United Kingdom respectively. Unemployment remains the weakest area of economic performance among all eight CEE countries, with marginal improvements only forecast in six: Hungary, Poland, Slovenia, Estonia, Latvia and Lithuania. Slovakia and Poland will continue to sustain the highest rates of unemployment in the EU25 with Slovakia’s employment problem remaining the most intractable for the reasons given in Chapter 1.1. Unemployment in the Czech Republic is forecast to rise to 10.1 per cent in 2004. Foreign direct investment is analysed at length in Chapter 1.3 and Slovakia’s foreign trade in Chapter 1.4. The two remaining indicators reviewed here are budget balances and gross foreign debt, each expressed as a percentage of GDP in Table 1.2.3. All eight CEE accession countries maintain budget deficits, although Estonia’s budget balance was marginally positive for 2002. As a percentage of GDP the Czech Republic’s deficit is highest at 8.9 per cent but is forecast to decline to 6.5 per cent in 2004. Similarly, Slovakia expects to bring down its budget deficit from 7.0 per cent of GDP in 2002 to 5.0 per cent in 2004. In fact, all eight economies except for Latvia are expected to bring down or hold their budget deficit to GDP ratios and, in Latvia’s case, the increase is to only 2.9 per cent in 2004. Against the 2002 euro area budget deficit ratio of 2.2 per cent (UK 11.4 per cent), the deficit ratios of Slovakia, the Czech Republic, Poland and Hungary are currently high but are not untoward at this stage in their economic development. Likewise, levels of gross foreign debt in the range of 35–55 per cent of GDP should be comfortably manageable, remembering that significant additional funding is provided through EU budgets. Slovakia’s gross foreign debt ratio, set to decline to 43.4 per cent is near the mid-
Progress Report on EU Accession
15
Table 1.2.3 Budget balances and gross foreign debt among CEE economies (% GDP)
Slovakia
Budget balance 2002 2003 2004 –7.0 –5.5 –5.0
Gross foreign debt 2002 2003 2004 51.4 44.0 43.4
Czech Republic
–8.9
–8.0
–6.5
32.0
28.2
26.5
Hungary
–6.0
–4.5
–3.5
58.9
54.5
53.7
Poland
–6.5
–6.3
–6.3
43.2
40.5
40.3
Slovenia
–2.8
–1.0
–1.0
36.0
36.0
35.2
Estonia
0.7
–0.3
–0.4
62.0
59.7
56.2
Latvia
–1.8
–2.5
–2.9
73.2
73.1
72.2
Lithuania
–1.8
–1.9
–1.8
43.0
42.5
40.5
Source: Bank Austria Creditanstalt CEE-Report 1, 2003
point of this range. The Czech Republic’s gross foreign debt, forecast to decline from 32.0 per cent to 26.5 per cent of GDP in 2004, is encouragingly low. Only Latvia’s debt is expected to remain worryingly high at a level in excess of 70 per cent. This chapter is based on content from: Bank Austria Creditanstalt Economics Department CEE-Report 1–2003 and 3–2003 and East–West Report 4, 2002.
1.3
Foreign Direct Investment Bank Austria and Jonathan Reuvid Like the other Central and Eastern European (CEE) countries in the first wave of entrants to the European Union in May 2004, Slovakia’s economic restructuring is heavily dependent on a substantial inflow of foreign direct investment (FDI) for which privatization has been the magnet, principally since 1998. In 2000 alone, inflows amounted to EUR2.09 billion, which was more than half the FDI inflows since the beginning of the transformation process (almost EUR3.8 billion). In 2001 FDI net inflow fell back to EUR1,630 million, but in 2002 reached a new record of EUR4,253 million thanks to the sale of a 49 per cent stake in the State-owned Slovak Gas.
Inward investment strategy Until 1998, when the first Dzurinda government took office, foreign investment into Slovakia had been sluggish, as charted in Table 1.1.2. However, the new government’s strategy recognized the strong correlation between FDI and new technology with the advantage that a substantial part of the risk is borne by the foreign investor. In its wake, FDI inflows would also bring the host country the benefits of job creation, access to new markets and higher exports with state-of-theart technology transfers resulting in the production of higher added value and more competitive goods. Based on July 1998 data, the Slovak Investment and Trade Development Agency (SARIO) calculated that per capita FDI in Slovakia amounted to just US$320; seven times less than in Hungary, almost four times less than in Slovenia, two and a half times less than in the Czech Republic, and two times less than in Poland. Taking these countries as a comparative ‘operational basket’, the average per capita FDI (including Slovakia) was US$1,055 and the government set itself the target of raising per capita FDI to this level over the three years ending December 2001. This goal translated into the need to increase cumulative FDI to US$5.7 billion and was achieved in 2002 – only one year behind target.
Foreign Direct Investment
17
Up to 1998 the emphasis of foreign investment had been on service industries; under the new policies, the focus was shifted to the manufacturing industry aimed at the production of higher-added-value goods in the export-oriented sectors in order to redress external imbalances. Government objectives also include the attraction of FDI into the regions with high levels of unemployment and low entrepreneurial activity where industrialization is insufficient and the utilization of production capacity is low. In the first instance, FDI had been concentrated in areas surrounding bigger cities, particularly in the western part of the country. The drive to encourage foreign investment was also accompanied by instruments and measures for the support of FDI inflow in the legislative area and the financial area, including tax relief and tax holidays, duty-free imports, financial and non-financial incentives and improvements to the administration of investment projects.
FDI achievements since 1998 Foreign capital invested by country of origin In their 2002 ‘macroeconomical information’ sheets SARIO were able to report on the distribution of the total volume of FDI, defined as equity capital plus reinvested earnings, by investor country as of 30 September 2001 (reproduced in Table 1.3.1). The data is broken down
Table 1.3.1 Foreign capital in Slovakia by country as of 30 September 2001
Germany The Netherlands Austria United States Czech Republic United Kingdom Hungary Belgium Italy France Other countries TOTAL
Corporate US$ million 1,046.4 920.5 404.7 247.4 155.5 165.1 185.7 109.9 58.5 81.9 232.3 3,608.0
Source: National Bank of Slovakia
sector Banking sector % US$ % million 29.0 50.5 7.3 25.5 56.7 8.2 11.2 388.4 56.0 6.9 34.9 5.0 4.3 67.4 9.7 4.6 38.4 5.5 5.1 – – 3.1 – – 1.6 44.0 6.3 2.3 10.9 1.6 6.4 2.7 0.4 100.0 693.9 100.0
Total US$ % million 1,096.9 25.5 977.2 22.7 793.1 18.4 282.4 6.6 222.9 5.2 203.5 4.7 185.7 4.3 109.9 2.6 102.6 2.4 92.9 2.2 235.0 5.5 4,302.0 100.0
18
The Economy and the Business Environment
between the corporate sector and the banking sector, since the latter accounts for 16.1 per cent of the cumulative total. Major investments in the banking sector took place in 2000 and 2001, when the government sold 87 per cent of Slovenska Sporitelna (Slovak Savings Bank – SLSP) to Austrian Erste Bank and 92 per cent of IRB Bank, and Italian IntesaBci bought 85 per cent of Vseobecna Uverova Bank (VUB). By 30 September 2002 the rankings had changed somewhat to those outlined in Table 1.3.2: Table 1.3.2
Country FDI rankings in terms of cumulative share
Rank
Country
% share of cumulative FDI
1
Germany
22.8
2
Austria
3
The Netherlands
4
Italy
9.6
5
United Kingdom
6.2
6
United States
5.9
7
Czech Republic
5.4
8
Hungary
3.5
9
Belgium
2.2
8.7 18.6
Source: National Bank of Slovakia
Although the United Kingdom was ranked the fourth largest investor in Slovakia during 2001 and in the first three quarters of 2002, UK investment has been relatively cautious but was increased significantly by Tesco’s acquisition of seven K-Mart department stores in 1996 and more recent substantial investment in hypermarket development. Major UK investors are represented by Shell, Imperial Tobacco (Slovak International Tabak), CP Holdings (Slovakia’s biggest health spa), Tate & Lyle and SEWS (formerly Lucas).
Structure of foreign capital investment by sector In the same SARIO report, the structure of foreign capital at 30 September 2001 was analysed by sector and is summarized here in Table 1.3.3. In line with government investment strategy, 48.2 per cent of investment was in the manufacturing sector with the financial sector (19.1 per cent), transport, storage and communications (15.1 per cent) and the distribution and vehicle repair sectors (11.8 per cent)
Foreign Direct Investment
19
Table 1.3.3 Foreign capital in Slovakia by sector as of 30 September 2001 Industry sector Agriculture, hunting and forestry Mining and quarrying Manufacturing Electricity, gas and water supply
Value US$ million
%
4.0
0.1
33.1
0.8
2,074.0
48.2
8.2
0.2
28.9
0.7
508.0
11.8
28.2
0.7
Transport, storage and communications
649.8
15.3
Banking and financial services
819.7
19.1
Real estate, rents and business activities
132.5
3.1
1.6
–
Other community, personal and social services
12.4
0.3
Extra-territorial organizations
11.5
–
3,608.0
100.0
Construction Distribution and motor vehicle repairs Hotels and restaurants
Health and social work
TOTAL Source: National Bank of Slovakia
together accounting for a further 46 per cent of total foreign capital investment. Of course, the financial sector includes the banking industry described above plus an additional US$125.8 million in financial services in which the sale of 85 per cent of the Slovak Insurance Company is a major element. Since September 2001, a number of major privatization projects have shifted the balance of investment between the sectors. In December 2001, the Government approved the sale of crude-oil pipeline operator Transpetrol to Yukos, and in March 2002 the Slovak Cabinet approved a 49 per cent sale of Slovensky Plynarensky Priemysel (Slovak Gas–SPP.) to a consortium formed by the German Ruhrgas, the Russian Gazprom and Gaz de France. At a final price of US$2.7 billion, the sale of SPP was Slovakia’s largest ever privatization deal. Plans to privatize Slovenske Elektrarne, the state power utility were delayed but the transaction is expected to be completed in 2003. Reflecting these more recent transactions, sectoral shares of cumulative FDI totalling US$5,785 million as of 30 September 2002 were as outlined in Table 1.3.4.
20
The Economy and the Business Environment
Table 1.3.4
Sector FDI rankings in terms of cumulative share
Sector
% share of cumulative FDI
Industrial production
40.6
Financial services
28.2
Transport, storage and communications
12.9
Wholesale and retail trades
12.5
Property rental and development
3.2
Source: National Bank of Slovakia
Structure of foreign capital investment by regions FDI as of 30 September 2001 was also analysed by region and this dispersion is summarized in Table 1.3.5. Investment in the banking sector was wholly injected into Bratislava as Slovakia’s banking centre and a further 43.2 per cent of overall capital investment was directed to the Bratislava region. The only other region to capture more than 10 per cent of FDI is the eastern Kosice region, where the dominant investment partner is US Steel which gained control over the massive loss-making Kosice Steel Works at the end of 2000 in a transaction valued at SKK24.6 billion. With Bratislava and Kosice regions accounting for 77.3 per cent of total FDI, the residual 22.7 per cent is spread rather evenly among the remaining six regions. The US Steel involvement extends beyond its commercial interest in the Kosice Steel Works. In exchange for extended tax concessions, US Table 1.3.5 Foreign capital in Slovakia by region as of 30 September 2001 Region
Value US$ million
%
2,550.0
59.3
Trnava
197.4
4.6
Trencin
143.8
3.3
Nitra
145.4
3.3
Zilina
194.2
4.5
Banska Bystrica
188.0
4.4
Presov
110.3
2.6
Kosice
772.9
18.0
TOTAL
4,302.0
100.0
Bratislava
Source: National Bank of Slovakia
Foreign Direct Investment
21
Steel has assumed a key investment agency role in stimulating investment generally in Eastern Slovakia.
Investment incentives Generous income tax incentives are provided by the Slovak Republic for foreign and local investors as tax credits against their corporate income tax liabilities. As ‘state aid’, all types of tax credit are limited by the maximum amounts that can be granted. The structure of these tax credits is detailed in Chapter 3.3. New incentives have been available to foreign investors since 8 May 2002 under the Investment Incentives Act of 1 January 2002, which are not available to companies in receipt of the previous incentives. However, since the new Act does not cancel the old incentives, it seems that companies not already claiming can choose whether to apply for the old or new incentives.
Old incentives No tax is payable for five consecutive taxation terms if an investor meets set conditions. Throughout the period, foreign investments must account for at least 60 per cent of the registered capital of the corporate entity, the company must be established before 2004 and the minimum registered capital must be: • EUR4.5 million in production companies; • EUR3 million for production companies in districts with an unemployment rate in excess of 10 per cent; • EUR2 million for companies in selected service industries.
New incentives The new Act provides three main types of incentive for investors: • a ten-year tax holiday following the first year when a profit is declared; • grants for the creation of new jobs up to SKK160,000 per job; • grants to retrain employees of up to SKK10,000 per job. Applications should be submitted to the Ministry of the Economy, provided that the following specific requirements are met: 1. In a region with an unemployment rate less than 10 per cent, minimum investment is SKK400 million of which at least half is financed from the company’s own resources. (In regions where the
22
The Economy and the Business Environment
unemployment rate is 10 per cent or more at the time of the application, the amounts are halved). 2. At least 80 per cent of the company’s turnover is generated by activities qualifying for relief. 3. The fixed assets are acquired and the proposed activities started within three years of the date of approval of the application.
Other incentives The import of machinery and equipment included in the OECD list of items with harmonized customs code numbers HS 84 and HS 85 (high technologies) attract no import duty, provided that the equipment is new and has not been depreciated in another country. This incentive applies to enterprises whose registered capital is foreign invested and were established after 1 September 1999 for the manufacture of goods or provision of services, but excludes banking and insurance services, commercial services and brokerage. The duty-free concession is available provided that the minimum total customs value of the imported machinery and equipment is SKK5 million, the import process is completed within three years and the importer continues to own the machinery or equipment imported for three years. Land adapted for investment purposes is provided to investors at a nominal cost, provided that the relevant municipality arranges an interest-free loan up to an amount equal to 50 per cent of the costs of building the industrial infrastructure. Investors in regions with high unemployment are eligible for subsidies for the creation of new jobs, maintenance of existing jobs and retraining. Unemployment insurance premiums payable by the employer can be decreased or remitted for an enterprise that meets the various conditions described above. The content of this chapter is derived primarily from reports provided by the Slovak Investment and Trade Development Agency (SARIO) and by the Commercial Section of the British Embassy, Bratislava.
1.4
Foreign Trade Jonathan Reuvid The evolution of foreign trade since 1991 Like the other Central and Eastern European (CEE) countries scheduled for EU accession in May 2004, there has been a shift in Slovakia’s merchandise trade away from the former COMECOM markets towards those of present EU members. However, a higher share of Slovakia’s foreign trade remains with CEE countries, the Baltic States and the CIS (32 per cent of exports and 39 per cent of imports in 2000) than in the case of the Czech Republic (19.4 per cent and 17 per cent), Hungary (9.7 per cent and 13.5 per cent) or Poland (17.3 per cent and 18.3 per cent). Nevertheless, the EU15 comprise Slovakia’s dominant group of trade partners. In 2001, 60 per cent of merchandise export shipments were made to EU member states and 49.8 per cent of imports were drawn from these sources. In Table 1.4.1 the evolution of exports and imports of merchandise and commercial services is charted for the period from 1992, the first year following the separation of the former Republic of Czechoslovakia, to 2001. During this period Slovakia’s foreign trade increased by almost 137 per cent. Except for 1993 and 1994, the total trade in imports exceeded total trade in exports each year, although a continuing surplus in commercial services has helped to maintain the deficit within manageable bounds (US$1.653 million in 2001). The trade gap in 2002 was EUR2,260 million and is currently forecast by Bank Austria Creditanstalt to remain close to EUR2 billion through 2004. The current account deficit reached EUR2.1 billion at the end of 2002, representing 8.2 per cent of GDP. The absolute deficit is expected to rise marginally to EUR2.1 billion at the end of 2004 but to represent then a reduced 6.5 per cent of GDP.
Slovakia’s foreign trade partners The dominance of the EU15 in Slovakia’s foreign trade is emphasized in Table 1.4.2, which identifies imports and exports by region for the
24
The Economy and the Business Environment
Table 1.4.1
Slovakia’s exports and imports (1992–2001; US$ million) Exports
Imports
Merchandise Commercial Total Merchandise Commercial Total services trade services trade 1992
6,355
–
6,355
6,670
–
6,670
1993
5,460
1,939
7,399
6,325
1,666
7,991
1994
6,690
2,221
8,911
6,610
1,549
8,159
1995
8,580
2,378
10,958
8,770
1,800
10,570
1996
8,830
2,060
10,890
11,125
1,997
13,122
1997
9,635
2,151
11,786
11,725
2,062
15,787
1998
10,720
2,275
12,995
13,075
2,272
15,347
1999
10,240
1,886
12,126
11,265
1,812
13,077
2000
11,870
2,218
14,088
12,775
1,779
14,554
2001
12,630
2,461
15,091
14,765
1,979
16,744
Source: WTO international trade statistics 2002
Table 1.4.2
Slovakia’s merchandise exports and imports worldwide
Total merchandise (US$ million) Region
Exports Imports 1999 2000 2001 1999 2000 2001 10,240 11,870 12,630 11,265 12,775 14,765 %
%
%
%
%
%
North America
1.6
1.6
1.4
2.8
2.2
2.1
Latin America
0.6
0.4
0.3
0.6
0.5
0.6
Western Europe
63.5
63.5
64.1
54.3
51.4
52.5
EU
59.4
59.1
60.0
51.7
48.9
49.8
CEE/Baltic States/CIS
31.9
32.0
32.1
35.7
39.1
37.7
CEE
29.0
29.3
29.1
22.0
20.1
21.1
Russian Federation
1.0
0.9
1.0
12.0
17.0
14.8
Africa
0.7
0.5
0.5
0.3
0.3
0.3
Middle East
0.5
0.5
0.5
0.2
0.2
0.2
Asia
1.0
1.3
1.0
5.3
5.4
5.8
Major product groups
%
%
%
%
%
%
Agriculture
6.5
5.4
5.7
8.3
7.5
7.4
Mining
8.2
10.4
10.1
16.4
21.2
18.9
84.8
83.6
83.7
75.2
71.2
73.7
Manufacturing
Source: WTO international trade statistics 2002
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three-year period 1999–2001. These statistics indicate that the shares of both exports to and imports from North America, Latin America, Africa and the Middle East are stagnant and relatively insignificant, amounting to 2.7 per cent and 3.2 per cent, respectively, of the totals. Slovakia is a net exporter to Western Europe (including the EU) and to the other CEE countries collectively. However, it is a significant net importer from the Baltic States and the CIS, Asia and the Russian Federation, most particularly from the latter where the value of imports outstripped that of exports by US$2.059 billion – only slightly less than the overall deficit in merchandise trade. Table 1.4.2 also shows that the relative proportions of agriculture, mining and manufacturing in total merchandise exports and in imports have remained relatively stable. However, manufacturing accounts for a higher proportion (83.7 per cent) of exports than of imports (73.7 per cent), while the reverse holds true for mining and agriculture. Table 1.4.3 profiles the shares of specific country partners, as revealed by the foreign trade statistics for 2001. Slovakia’s most important trading partners are Germany followed by the Czech Republic, to which Italy and Austria must be added as export markets and Russia as a source of imports. There are serious implications for Slovakia’s foreign trade, particularly exports, in a prolonged slowdown of the German economy.
Principal exporters After 1989, the state-owned Foreign Trade Companies created to sell the production of enterprises and cooperatives to foreign markets Table 1.4.3
Export and import shares of key trading partners (2001)
Country
Export shares %
Country
Import shares %
Germany
26.0
Germany
22.6
Czech Republic
15.2
Czech Republic
15.1
Italy
10.7
Russian Federation
12.5
Austria
7.7
Italy
6.9
Poland
5.3
Austria
4.2
Hungary
5.5
France
4.4
France
4.2
Hungary
2.7
The Netherlands
3.0
Poland
3.2
United Kingdom
2.4
Spain
3.1
Belgium
2.1
United Kingdom
2.5
Others
17.9
Source: Statistical Office of the Slovak Republic
Others
22.8
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The Economy and the Business Environment
under the former command economy became private joint stock companies owned by manufacturers, investment funds and other legal entities. Although many of them have disappeared, most of them – thanks to their broad experience and contacts – not only survived but still rank among Slovakia’s leading exporting companies. Of these, Technopol, Kerametal, Omnia (Bratislava) and Martimex (Martin) are the most significant. Traditionally, the main exporting industries are the chemical, pharmaceutical and rubber industries followed by metallurgy, power engineering and the woodworking industry. In recent years, the engineering industry has recovered its leading position, mainly as a result of the large investments made by Volkswagen and other multinational engineering groups. Slovakia’s top industrial exporters are: • • • • • •
Volkswagen; VS (East Slovakia’s ironworks); Slovnaft; SPP (Slovak Gas Industry); Slovalco; Severoslovenske Celulozky and Papieme (Northern Slovakia’s pulp and paper mills); • Matador Puchov.
The present foreign trade regime Slovakia is a member of the WTO, as well as an associate member of the EU in advance of full membership from May 2004. It is also an OECD and a CEFTA member. After the split of the former Czech and Slovak Federal Republic (CSFR), the Czech Republic and Slovakia formed a customs union. Today, foreign trade in Slovakia is almost completely liberalized. Any natural or legal person listed in the Commercial Register may carry out foreign trade activities, and restrictions relate to individual commodities rather than business activities. Certain goods, such as firearms, ammunition, specific foodstuffs and raw materials, require an export licence. Similar restrictions apply to the import of firearms, foodstuffs and strategic raw materials. Slovakia levies the lowest average import duties in Central Europe. However, most imported goods are subject to compulsory certification.
Certification (conformity assessment) As from 1 January 2000, Law No. 264/99 Coll. on Product Regulation and Conformity Assessment took effect in Slovakia. In effect, this law
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implements the same directives, regulations and resolutions as applied in EU member states for conformity assessment. It replaces the previous state testing system with a system of authorizations accrediting legal and natural subjects (notified bodies) to perform conformity assessment tasks. This certification law, the Amendment Act on Consumer Protection and the new Law on Indemnification for Damages Caused by Faulty Products form a package of complementary laws that provide manufacturers, suppliers and consumers with the same environment as in the EU.
Products subject and not subject to certification According to Law No. 264/99, the basic principle for traders is a judgement stating whether their product or imported goods are considered a regulated product or not. Regulated products cannot be offered in the Slovak market unless compliance with the appropriate legal requirements has been assessed. The description of goods defined as regulated products can be found in the Slovak government enactments as well as in the different government enactments concerning regulated products, of which there are 24. Entrepreneurs do not need to declare conformity for products not subject to certification, known as ‘non-regulated products’. However, the law does not prevent them from freely assessing or declaring conformity for their goods and marking them with the appropriate conformity mark pursuant to the valid legislation. No declaration of conformity is required for spare parts intended for the importer’s own production equipment, nor for imported raw materials cleared for processing but not for selling.
Conformity assessment procedures Before offering a product on the market, producers and importers of regulated products are obliged to issue a written declaration of conformity with the applicable technical rules and containing the standards used to verify compliance with the directives. The law provides that products can be self-certified by manufacturers and importers, or that they can have their products tested by an accredited and authorized laboratory to verify that the results described in the examination certificate meet the legal requirements and therefore self-declare conformity with confidence. Examination certificates by foreign institutions will be accepted where a mutual recognition agreement has been signed with the respective country. The Slovak conformity mark for regulated products, CSK, and its positioning have been conceived as equivalent to the CE mark for use in the EU. The notified bodies authorized to perform conformity assessment inspections are known as SKTCs, the acronym for Slovak Testing
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The Economy and the Business Environment
Centres. There are some 140 SKTCs, each specializing in a specified range of regulated products. Substantial fines are levied in cases of infringement of Law No. 264/99.
Special customs provisions Assessment of payments The basic legal regulations that apply to the area of customs value are Article VII of the General Agreement on Tariffs and Trade (GATT) (governmental Decree No. 59/1948 Coll. as amended) and the Agreement on the Execution of Article VII of the GATT (decree of the Ministry of Foreign Affairs No. 120/1984 Coll.) on which Regulations 29–41 of the customs law are based. Principally, the customs value of the goods that are being imported is a transaction value – ie the price actually paid or price to be paid for goods sold for import into Slovakia; typically the invoiced price. If the transaction value is not available or not acceptable to customs authorities, they may determine the customs value in a substitutional way, but not on the basis of: • a domestic sales price of goods produced in Slovakia; • a system of acceptance of the higher of two alternative values for customs purposes; • prices of goods on the home market in the country of export; • production costs different from certified values determined for identical or similar goods; • prices of goods for export into another country; • minimal customs values.
Procedures with economic impact and suspensive procedures Customs procedures with economic effect include storage in customs warehouses, inward processing procedures, processing under customs control, temporary use and outward processing procedures. Goods may be released into the customs procedures with economic effect only on the basis of the customs authorities’ consent. Suspensive customs procedures include transit, storing in customs warehouses, inward processing in a suspension system, processing under customs control and temporary use. Customs authorities may condition the release of goods into the suspensive customs procedures by the securing of the customs debt that could occur subsequently.
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Transit The transit customs procedure enables goods that are under customs supervision to be transported from one customs office to another without being subject to import or export payments. For the transit of goods other than by railway, air, water and mail transport, as well as by pipeline, the declaring party must provide the customs debt that could occur before their release. Storing in a customs warehouse Foreign goods stored in a customs warehouse are not subject to import duty or to commercial and political measures. The procedure also enables the storage of Slovak goods that are to be exported and for which the special regulations (eg tax regulations) stipulate advantages which usually apply to the export of goods and which can be gained as a result of storing in a customs warehouse. It is also possible to store there goods to which prohibitions and restrictions apply, provided that conditions according to special regulations (eg for handling of waste, protection of health or protection of the environment) are maintained. Customs warehouses may be public (open to storage by all persons) or private (useable by only one person entitled to operate a bonded warehouse). In a customs warehouse it is possible to conduct, with prior approval, only operations that are necessary to secure the goods, or handling for the purposes of their packaging or sale quality, or their adaptation for transport. If economically justified, customs authorities may also permit goods in the customs warehouse to be processed according to the inward processing procedure or processing under customs control. The period for the storage of goods in a customs warehouse is not restricted and may be specified by customs authorities only in exceptional cases. However, customs authorities may insist on the securing of the customs debt that could occur in a customs warehouse. Any transfer of ownership occurring in a customs warehouse must be notified in a written form to the customs authorities within a maximum of five working days from the date of transfer of ownership. Inward processing The inward processing procedure permits foreign goods that are to be exported in the form of processed products (suspension system), or goods released into free circulation with the return of exemption from import duty or other payments in the event of their subsequent export in the form of processed products (drawback system), to undergo processing operations. Processing operations include: • the processing of goods including their installation, assembly, completion or combination with other goods or adaptation to other goods;
30
The Economy and the Business Environment
• the remaking of goods; • the repair or adaptation of goods including renovation or restoration to their original state; • the use of equivalent goods that are not included in processed products but enable or facilitate the production of these products, although in production they are partially or completely consumed. Processed products and their parts or goods in an unchanged state may be temporarily exported from Slovakia for the purpose of their further processing, which may be undertaken on the basis of permission from the customs authorities and under conditions specified for the outward processing procedure. In the event of an inward processing procedure in the drawback system, the goods may be released into the free circulation procedure under the conditions that: • they are not subject to quality import restrictions; • they are not subject to preferential measures; • they are subject to a compensation levy to market regulation measures in agriculture; • there is no export compensation specified for export of the processed products. Processing under customs control Processing under the customs control procedure permits foreign goods to be processed in Slovakia with their consequent release into free circulation by a processing operation that will change their tariff classification or their state in such a way that they would not be subject to import duty or commercial and political measures. The customs authorities may issue permission for this procedure upon the request of a person who carries out the processing or, in special cases, upon the request of a person who will organize the processing, who must be a Slovak person and must observe special conditions. Temporary importation The temporary importation procedure allows foreign goods that are to be re-exported abroad in an unchanged state to be used for a certain period of time in Slovakia with a complete or partial exemption from import duty and other payments. Cases and conditions for a complete exemption of goods released into temporary import procedure from import duty are specified in paragraphs 120–165 of the Decree of the Ministry of Finance No. 17/1994 Coll. on Exemption of Goods from Import Duty. The permission for temporary importation procedure, with a partial exemption from import duty and other payments, may be granted by
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customs authorities only for goods that remain in the ownership of a foreign person. Outward processing The outward processing procedure permits Slovak goods to be exported temporarily abroad for the purpose of undergoing processing operations. The processed products are then released into free circulation with a complete or partial exemption from import duty or other payments. The person requesting permission for the release of goods into the outward processing procedure must be a Slovak, who must provide evidence that the processed products have come from Slovak goods that were temporarily exported. The customs authorities will specify the period within which the processed products must be imported back from abroad. If the purpose of the outward processing is the repair of goods, and the repair must be paid for, these goods, at the time of re-import, will be only partially exempt from import payments. The basis of assessment will be the costs of the repair carried out. Simple exchange A simple exchange allows for the product sent for repair to be replaced by an imported substitute product. A substitute product must be of equal commercial quality and have technical characteristics similar to the product scheduled for repair abroad. A substitute product may also be imported before the export of the Slovak product for repair, but the substitute product must be exported abroad within the period of two months after acceptance of the customs declaration for its release into free circulation. The customs authorities may extend the stated period upon request by the person to whom the permission was issued.
Free customs zones and warehouses As in other developed trading economies, free customs zones and warehouses are parts of the customs territory in which imported goods are treated as goods situated outside the customs territory and are not subject to the usual customs control. The perimeter, entrances and exits of the free customs zones and warehouses are under customs authority control. Goods that enter the zones and warehouses directly from abroad do not have to be presented to customs officials and a customs declaration does not have to be submitted. The permitted period of placement in a free customs zone is not restricted. Goods leaving free customs zones and warehouses may be either exported in the export procedure or reexported back abroad or they may be delivered into another part of the territory provided that special conditions are observed.
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The Economy and the Business Environment
Content for the Slovak foreign trade regime, analysis of principal exporters, certification, and special customs provisions sections are derived from material published, with consent, by the Slovak Investment and Trade Development Agency (SARIO).
1.5
Regional Development in Slovakia Slovak Investment and Trade Development Agency (SARIO) In 1996, state administration in Slovakia was devolved in law from the central government to eight local regional administrations, which are further subdivided at the district level. With 79 districts altogether, the regions held their first local elections in December 2001 and their next elections in 2002. The Slovak Government has defined each region as an independent territorial and administrative unit, giving local governments a large measure of control over education, healthcare and other public functions that relate to the territory. A statistical profile of each of the eight regions is provided in Table 1.5.1.
Bratislava While Bratislava is the smallest of the country’s regions, it has so far enjoyed the lion’s share of investment and development. With a large Table 1.5.1 Region
Statistical profile of Slovakia’s regions (30 June 2002)
Area, No of Population Population Population Unemployment sq municipalities density, increase, rate, km sq km % %
Bratislava 2,053
88
599,015
301
0.78
5.58
Banska Bystrika
9,455
515
662,121
70
–1.27
22.92
Kosice
6,753
438
766,012
113
1.88
24.12
Nitra
6,343
342
713,422
113
2.25
21.11
Presov
8,991
665
789,968
87
3.62
23.16
Trencin
4,501
275
605,582
135
–1.47
11.42
Trnava
4,225
249
561,003
130
–0.11
14.55
Zilina
6,874
314
692,332
100
0.66
14.94
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The Economy and the Business Environment
concentration of industry, the greater Bratislava area also has a very solid infrastructure, with modern highway, river, rail and air transport capabilities. The Bratislava region borders on the Czech Republic, Austria and Hungary, with high-quality roads and highways leading into each country. This position, close to key trading partners, has been behind Bratislava’s modern and historical importance – the city was also capital of the Hungarian kingdom between the sixteenth and eighteenth centuries while Turkish forces occupied Buda and Pest.
The economy Today, the GDP per capita of the Bratislava region is comparable to that of Spain, and the region has created a broad space for development activities, as well as business and cultural cooperation. All sectors of industry find a home in Bratislava and with over 70 per cent of the country’s industrial workers, the region has Slovakia’s highest density of industry. However, Bratislava is not all factories, and the southern areas around the Danube River also provide fertile ground for agriculture and food production. Bratislava is the driving force behind the economic development of the Slovak Republic and also the educational, cultural and social level of the population. However, from the economic, social and technical point of view, the region still has a high potential for development.
Education The Bratislava region has the highest share of university graduates in Slovakia and education is provided by a system of 101 secondary schools, of which 29 are university preparatory schools, 40 are specialized secondary schools and 32 are apprentice training centres. More than 40 per cent of all Slovak university students study in Bratislava’s three major universities.
Transport infrastructure The Bratislava region is very easily accessible by all means of transport. Besides its modern highway system and Slovakia’s most important airport, there is also transport on the Danube, both upriver to Vienna and downriver to Budapest.
Banska Bystrica The picturesque region of Central Slovakia, with high mountains and stunning scenery, Banska Bystrica is a powerhouse in forestry and
Regional Development in Slovakia
35
metallurgy, besides being an attractive tourist destination and the spiritual capital of the country. The area hosts three national parks and efforts are underway to connect the region with high-quality transport infrastructure. A region covered by high mountains and forests, centrally located Banska Bystrica has the lowest population density of the Slovak Republic. Hosting parts of the Low Tatras, Muranska Planina and Slovesky Raj national parks, as well as containing protected biospheres and the town of Banska Stiavnica (a UNESCO site and probably Slovakia’s most beautiful historic town), Banska Bystrica draws many tourists annually for summer hiking and camping, as well as skiing and other sports in the winter.
The economy The northern part of the region has a relatively high level of industrialization – particularly in timber, wood processing, metallurgy, mechanical engineering, electro-technology, textiles, food, pharmaceuticals, civil engineering and the production of building materials. Dominant among these is the metallurgical sector, drawn from the exploitation of mineral resources in the region’s long history as a mining centre. Before the discovery of the Americas in the sixteenth century, the Banska Bystrica region was one of the most important producers of silver in Europe. The mint at Kremnica has been turning precious metals into currency for hundreds of years, and metallurgy continues to account for 60 per cent of Banska Bystrica’s industrial exports. In the lower and flatter south of the region, food processing and agriculture are the major economic activities, as well as timber and wood processing.
Education Education in the region is provided by a system of 338 elementary schools, 25 university preparatory secondary schools and 61 vocational secondary schools. There are two universities in the region – University of Matej Bel in Banska Bystrica, which focuses on social sciences, and the Technical University in Zvolen.
Transport infrastructure The transportation system in Banska Bystrica is undergoing continuous upgrading to meet the needs of its growing economy. There are already rail connections west to Bratislava, east to Kosice, and north to Zilina, on the main east–west corridor. While the mountainous landscape has hindered highway construction, numerous development
36
The Economy and the Business Environment
projects are currently underway. The airport at Sliac serves the Banska Bystrica region, mainly through charter service.
Kosice Home to Slovakia’s second-largest city, Kosice is also second to Bratislava in terms of exports and GDP. American steel giant US Steel’s acquisition of Europe’s largest steel factory in 1999 has assured the region of its industrial future and Kosice enjoys modern road, rail and air connections with surrounding countries. High levels of education and underemployment also characterize the region. With its mountainous western area and low-lying eastern plains, the Kosice region borders on Hungary in the south and Ukraine in the east. Containing Slovakia’s lowest point as well as alpine areas of the Sloveske Rudohorie mountain range, the Kosice region is highly varied, which is reflected in its blend of agriculture and industry.
The economy A major Hungarian city in the past, Kosice is one of Slovakia’s most cosmopolitan cities and is the seat of the country’s Constitutional Court. Metallurgy and steel production account for the largest share of the region’s industrial production and export – 60 per cent and 50 per cent respectively – and Kosice is home to one of Europe’s largest steel mills, now owned by US Steel. Foreign investment has also allowed significant adjustment of the region’s industrial infrastructure from a command to a market economy. However, economic transformation has left a significant number of industrial facilities lying dormant, and the unemployment rate in the Kosice region is among the country’s highest. Along with its major export and production role, the Kosice region produces a number of natural resources, including natural gas, coal, timber and minerals, besides processing facilities, particularly for wood and metals. Agriculture also plays a major role in the Kosice region, with corn, sunflowers, wheat, apples and pears being grown throughout the region, as well as other fruits and vegetables. The Kosice region is also a centre for the production of Tokaj wine, a delicacy famous throughout the world, but which can only be cultivated in the unique soils of South-eastern Slovakia and North-eastern Hungary. Industry is concentrated mostly in the Kosice and Michalovce districts and comprises all sectors, from food processing to metallurgy. The Spisska Nova Ves district in the northern part of the region is also a centre for wood production, as well as electro-technology and engineering.
Regional Development in Slovakia
37
Education There are 340 elementary schools in the region, of which 15 per cent provide education in the Hungarian language. There are also 150 secondary schools, attended by 47,311 students. Kosice is also a major centre for higher education, hosting three universities and two other higher education institutes – the School of Agriculture (600 students) and the School of Aviation (300 students).
Transport infrastructure The region has a very well-developed transportation network with a major junction in its regional centre, the city of Kosice. With the most important rail yard in East Slovakia, Kosice offers rail links to Hungary, Ukraine, Poland and Bratislava. Kosice is also the seat of Slovakia’s second most important international airport.
Nitra The Nitra region boasts both industrial and agricultural strengths, although farm and food products dominate. Lying on the flood plain of the Danube, Vah and Nitra rivers, the area is ideal for wine and corn production. Slovakia’s largest port lies within this region at Komarno, on the north bank of the river Danube across from Hungary. Because the Nitra region is the warmest area of Slovakia, it is the country’s agricultural centre, though significant industries are located here as well. The Nitra region is situated in the south-western part of Slovakia and shares a border with Hungary, as well as with the Trnava, Trencin and Banska Bystrica regions. Three major rivers – the Vah, the Hron and the Danube – flow through this region, helping to make an ideal climate for sunflowers, corn and wine grapes as well as a number of other fruits and vegetables. Thanks to its agricultural character, Nitra is also home to Slovakia’s largest annual farm and food product trade fair, which takes place in the regional capital every summer.
The economy Food processing also plays a major role in the region’s economy. In addition, Nitra is home to some of Slovakia’s highest-quality wines. However, the area also has important branches of the mechanical and chemical engineering industries, as well as significant energy producers.
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Education The education system is highly developed, with more than 340 elementary schools, 25 per cent of which teach in the Hungarian language, and around 100 secondary schools, most of which specialize in agriculture and trade fields. Nitra is also a centre for higher education with two universities in the region.
Transport infrastructure Like all of Southern Slovakia, the Nitra region has a well-developed transport infrastructure. Its one airport, serving mainly charter flights, is less than 150km from the major air terminals of Budapest and Vienna, and the region is also home to Slovakia’s largest river port at Komarno.
Presov The largest of Slovakia’s regions, Presov is the seat of the High Tatras mountain range, the country’s leading tourist attraction. However, the area is also a centre for the engineering, textile, timber and wood processing industries. With a highly skilled workforce and slowly growing industry, Presov is ripe for development. Presov also has the largest population of Slovakia’s regions. The Presov region is important for its natural resources, including wood, salt, gravel, sand and clay for the production of bricks and building materials. Important rivers and hydroelectric facilities also find a home in the Presov region including the Poprad, Dunajec and Topla rivers and the huge Domasa dam, which besides providing power also forms an artificial lake that has become a favourite spot for summer holiday travellers.
The economy Industrial production in the Presov region is made up of chemicals, engineering, textiles, apparel, electro-technology and wood processing. Agriculture, particularly potatoes, corn and wheat, can be found throughout the region. Engineering and electro-technology industries are concentrated in the Presov and Svidnik districts, while the wood processing industry is centred in the Presov, Vranov and Topsou districts. Far removed from the Slovak capital, the Presov region has struggled with economic transformation and the region is trailing behind the rest of the country in terms of available work positions. Besides the high level of education that is found throughout the
Regional Development in Slovakia
39
country, the Presov region has Slovakia’s lowest average wages and among the highest rates of unemployment.
Education There are more than 480 elementary schools and 125 secondary schools in the region, as well as Presov University in the regional capital.
Transport infrastructure The road and railway system of the Presov region is well developed with numerous rail and highway crossings to Poland and south to Hungary through Kosice, Slovakia’s second-largest city. There is one international airport, in Poprad, which offers regular and charter services, while the city of Presov is only 40km from the Kosice international airport.
Trencin The second most economically powerful region, Trencin is host to textile, food, chemical, rubber and machine tool producers. While the area was a centre of Soviet era weapons manufacturing, political and social change have left Trencin with a surplus of skilled workers and unused industrial capacity. Forming Slovakia’s north-western border with the Czech Republic, the Trencin region contains a landscape of broken hills surrounding the flood plain of the river Vah, Slovakia’s longest waterway. While the northern ends of the White and Small Carpathian mountain ranges characterize the area, the Vah cuts a path through the hills, making the Trencin region a key transport corridor for road and rail traffic.
The economy The country’s second most productive region behind Bratislava, Trencin is host to a robust industrial sector, boosted by its many tourist attractions and natural beauty – nearly 49 per cent of the region is covered by forest. While food products, textiles and apparel represent the strongest industrial sectors, machinery, chemicals, rubber and petrochemical industries also drive the Trencin region to the position of having Slovakia’s second-highest per capita GDP. During the socialist regime, this region was a major centre for the arms industry in the Warsaw Pact, but economic and political transformation has led to extensive restructuring in the area of industrial orientation.
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The Economy and the Business Environment
With its thick cover of trees, forestry and timber-related industries also play an important role in Trencin, as does tourism.
Education Besides 233 elementary schools, there are also 15 university preparatory secondary schools, 29 technical secondary schools, oriented mainly towards business and engineering, and 34 apprentice training schools. While Trencin’s university was founded relatively recently, the region is home to detached faculties of several Slovak universities.
Transport infrastructure Trencin also enjoys well-developed road and rail transport, particularly on the main east–west Slovak rail and road corridor, as well as connections to the Czech Republic. Air transport is available through the airports in Piestany and Zilina for charter flights, or through Bratislava’s airport, about one and a half hours away.
Trnava Another largely agricultural region, Trnava is a centre for wine production and other food products, but is also a leader in the Slovak energy sector. Metallurgy, glass and chemical industries find their home here, as well as a chocolate factory, the sweet scent of which wafts over the eponymous regional seat. Surrounding the Bratislava region, Trnava also borders on three countries – the Czech Republic, Hungary and Austria. Containing the Small Carpathians and the White Carpathians, the Trnava area is a premier wine-producing region and also contains fertile lowlands. The western and south-western part of the region is made up of the Zahorska lowlands, which is divided between the Borska and Chvojnicka plains. The Chvojnicka plains border on the White Carpathian Mountains in the north-east, while the Borska plains are in the south and west.
The economy While agriculture still forms a large part of Trnava’s economy, the area also has a long history of industrial production. Food production characterize the southern part, while the northern part is famous for its building industry. Trnava’s industries include all branches, ranging from mechanical engineering to glass production. Trnava is also the dominant producer of electricity in Slovakia. The region contains the Jaslovske Bohunice nuclear power plant as well as the hydroelectric powerhouses Gabcikovo and Madunice.
Regional Development in Slovakia
41
Over 90 per cent of Trnava’s exports come from the polygraphy, metallurgy, chemistry and glass industries. At the same time, over three-quarters of the Trnava region is covered by farmland, with the heaviest concentration in southern districts.
Education In the Trnava region, there are 72 elementary schools, 42 secondary schools specializing in economics, commerce, services, industry, transport, building, horticulture, health services, agriculture, hotel services and tourism, plus an additional 29 apprentice training centres with instruction adjusted to the needs of the region. Two universities are located in the Trnava regional capital, educating students from across the country.
Transport infrastructure In Piestany there is an international airport, mostly used for chartered transportation, and Slovakia’s main international airport, MR Stefanik in Bratislava, is accessible from every regional town within one hour. The Trnava region also has a well-developed road and rail network.
Zilina This northern region is a rail transport hub between Slovakia, Poland and the Czech Republic and features active metallurgy, chemical, textile and energy industries. Over half of the region is under some measure of environmental protection, making it an attractive, if underused, tourist destination. Zilina is prevailingly of mountainous character made up of the mountain ranges of the West Tatras and the Giant and the Little Fatra. The population is concentrated in the valleys of major regional rivers: the Vah, the Orava and the Turiec. The region borders on the Czech Republic and Poland and also has as its neighbours the three Slovak regions of Trencin, Banska Bystrica and Presov.
The economy Proximity to the industrial areas of the Czech Republic and the lack of fertile soil have resulted in an industrial economy representing 72 per cent of Zilina’s annual turnover. The export orientation of the region is generally low with the exception of the Ruzomberok and Zilina districts. The workforce of the Zilina region is characterized by flexibility and dexterity, owing to a long tradition of industrial production locally. The
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The Economy and the Business Environment
largest proportion of the population with university education is located in the Zilina and Martin districts, which account for 8.5 per cent of the whole population. The most productive companies in the region are focused on the production of wood, pulp, paper and their derivatives. Three other key industry sectors are metallurgy – relatively speaking, the biggest export sector – engineering and electronics. In common with the other regions, the construction industry in Zilina contributes strongly (13 per cent) to output. Thanks to the investment activities of foreign investors (eg Alcatel, Punch and Matsushita), electronics has a growing share of industry in the region. There is a significant concentration of production in Liptovsky, Hradok, Nizna and Trstena.
Education There are 286 elementary schools in Zilina. Higher education is provided by a system of 23 grammar schools, 50 specialized high schools and 33 apprentice centres. Three institutions in the region offer university education: the Technical University of Zilina, the Military Academy in Liptovsky Mikulas and Commenius University in Martin.
Transport infrastructure The region is an important international crossroads linking the transportation networks of three states: Slovakia, the Czech Republic and Poland. Its air connection is secured by a regional airport at Zilina, also providing irregular interstate transport. Two autoroutes of European importance cross the region. The E-50 connects the Czech Republic and Ukraine, and the E-75 connects Austria with the Czech Republic. The complete road network comprises 1,973km of roads, of which 436km have been designated class 1. There is a new motorway from Bratislava to Zilina. The railway network is composed of the main Bratislava–Kosice route, which passes through Zilina, and routes from neighbouring Poland and the Czech Republic crossing Cadca.
1.6
Business Risk Assessment Coface Rating: A4 An already patchy payment record could be further worsened by a deteriorating political and economic environment. Nevertheless, the probability of default is still acceptable.
Assets • The prospect of EU membership in May 2004 enhances the country’s economic and financial situation. • Bank and industrial company privatizations have expanded the country’s economic potential. • Slovakia enjoys a privileged geographic position at the crossroads of Central Europe.
Weaknesses • The economy has been registering substantial fiscal and external deficits. • External financing needs are not negligible and the external debt is relatively high in percentage-of-GDP terms (about 50 per cent). • Health system, civil service and labour code reforms are lagging. • Unemployment is high.
Risk assessment The Government’s expansionary fiscal policy had contributed strongly to energizing the economy in 2002. With public spending expected to drop in 2003 to absorb the public-sector deficit, investments and exports should pick up the slack. Meanwhile, price deregulation will tend to spur inflation.
44
The Economy and the Business Environment
Concerning external accounts, the current deficit rose, owing notably to sustained capital goods import growth linked to restructuring and foreign direct investment (FDI). Both privatization-linked and greenfield investments have been underpinning the local currency and contributing to the expansion of foreign exchange reserves. Politically, renewal of a coalition favourable to reforms after the September 2002 legislative elections has bolstered investor confidence. Included in the EU wave of enlargement scheduled for May 2004, Slovakia is one of the first candidate countries to have closed all chapters of the acquis communautaire (the body of EU law).
MIG analysis Introduction Investors breathed a sigh of relief following national elections in September. The Movement for a Democratic Slovakia (HZDS), led by thuggish populist Vladimir Meciar, was again kept out of office despite winning the greatest share of the vote. A centre-right coalition headed by outgoing Prime Minister Mikulas Dzurinda should ensure political stability, and keep NATO and EU accession on track. The Slovak economy has performed solidly since the ousting of Mr Meciar’s spendthrift regime in 1998. Growth is set to reach around 4 per cent in 2003 and 2004, and inflation has fallen significantly. FDI has slipped since a record haul of US$2.2 billion in 2000, but remained fairly healthy at US$380 million in the first half of 2002. Fourth quarter 2002 Grey Area Dynamics (GAD)™: 61.5 (Europe and FSU GAD rating: 60.87) • • • • •
Fighting index: Crime levels: Bureaucracy: Cultural integration: Religious extremism:
Low Medium to high Medium to high Medium to high Medium
Practice Corruption and bribery Progress has been made here. Slovakia no longer ranks among the most corrupt states in Europe. EU officials have recognized this, noting the effect of new measures this year including the drawing up of a code of ethics for the public sector. However, the problem remains significant, and progress has been patchy. The country was rated 52 out of 102 countries by Transparency International. Customs and taxation,
Business Risk Assessment
Table 1.6.1
45
Econometric data
Change from previous 1999 2000 year in % GDP (real) 1.3 2.2 Industrial output (real) –2.7 8.8 Gross fixed capital –18.5 1.2 formation (real) Consumer prices 10.6 12.2 (yearly average) Unemployment 17.5 18.2 (yearly average) Budget balance –1.8 –3.0 (% of GDP) In euros, (million) Merchandise exports 9,592 12,782 Merchandise imports 10,617 13,740 Current account –1,076 –692 Current account –5.7 –3.3 (% of GDP) FDI (inflow, net) 666 2,077 Gross foreign debt 9,859 11,689 (end of period) Gross foreign debt 52.1 54.9 (% of GDP) Import cover 2.9 3.2 (in months) Average exchange 44.3 42.6 rate: SKK/euros Average exchange 41.4 46.2 rate: SKK/US$
2001 3.3 6.8 9.6
2002
2003 2004 (forecast) (forecast) 4.4 3.3 4.1 6.6 6.4 5.1 –0.9 3.4 5.4
7.1
3.3
8.3
5.4
18.3
17.8
15.4
15.2
–4.5
–4.8
–4.8
–4.3
14,102 15,244 16,486 17,506 –1,961 –2,058 –8.6 –8.2
16,900 18,800 –1,800 -6.5
17,800 20,300 –2,100 –6.5
1,674 4,258 12,577 12,770
2,430 11,700
3,353 11,600
55.1
51.0
41.6
37.9
2.9
5.6
5.4
5.4
43.2
42.7
42.1
42.0
48.3
45.3
38.9
36.6
Sources: WIIW, National Bank of Slovakia, Bank Austria Creditanstalt Economics Department
for example, have seen improvement, while the judiciary, police and healthcare remain highly problematic areas. Regulation and judiciary Slovakia has adopted a raft of judicial reforms over the past two years, many of which are yet to be properly implemented. Cases are long and backlogs are large, partly owing to a shortage of effectively trained judges. Despite the progress, corruption is seen as rife by Slovak citizens and the independence and political neutrality of the judiciary is questionable. Organized crime This is the country’s greatest GADTM. Slovakia is both a major transit point and destination for smuggled illegal aliens, drugs and weapons,
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The Economy and the Business Environment
and the Government is increasingly recognizing the threat. The country has significant research and development capacity for the production of modern weapon systems and has been implicated in numerous arms scandals, including a 2001 UN report on illegal arms shipments to Liberia. The country is also a major transit point for illegal drugs, often in the hands of Albanian gangs. EU enlargement Slovakia is set to join the EU in 2004, following the conclusion of negotiations in 2003. It was also invited to join NATO in November 2002.
Essentials Austria, the Czech Republic and The Netherlands were the biggest investors in Slovakia in the first half of 2002, although the United Kingdom was the biggest single investor by virtue of the heavy involvement of UK banks in foreign deals. By sector, wholesale and retail trade took the bulk of investment (33 per cent), insurance and financial business took 30 per cent, power and gas production and distribution claimed 19 per cent and industrial production took 8 per cent. Privatization has been in full swing since 2000. In 2003, the sell-off of the Slovensky Plynarensky Priemysel (SPP) (Slovak Gas Industry) gas pipeline and the privatization of power generation has opened up opportunities in the energy export sector and related areas of industrial production. Bank privatization is well advanced and foreign investment has helped to restore the sector to profitability. Over 80 per cent of the country’s GDP is now generated by the private sector.
Concerns Recent economic success has come about only through fiscal prudence, and many have fallen by the wayside. Slovak unemployment, at around 18 per cent, is one of the highest rates in Europe. The fiscal position remains problematic. Slovakia exceeded its target deficit level of 3.5 per cent of GDP by as much again in 2002, and a looser target of 5 per cent is set for 2003. The IMF has criticized the Government for insufficiently radical fiscal reforms. The growing popularity of extremist nationalist parties is a potential threat in the medium term. Meciar’s call for an end to privatization and ‘reflation’ of the economy received substantial (20 per cent) support in the September elections. The Government needs to display tangible benefits to an increasingly discontented populace if its proreform mandate is to remain viable.
Part Two
The Legal Structure and Business Regulation
2.1
Legal Framework CMS Cameron McKenna Introduction The Slovak Republic’s legal system belongs to the same group as Continental Europe. Until the end of 1992, the Slovak Republic was one of two republics of the former Czech and Slovak Federative Republic. At the beginning of 1993, the legal systems of both republics were very similar. However, ten years of different legal development has resulted in the legal systems being more diverse today, although fundamental principles are very similar. The key characteristics of the Slovak Republic’s legal system are: • laws are drafted in broad conceptual terms to cater for a wide range of legal situations; • judges are supposed to interpret the law in relation to the specific facts of each specific situation; • unlike in Anglo-Saxon jurisdictions, precedent has no legal status; the decisions of the courts are not binding on other courts, only on the parties to the proceedings. However, decisions of the Supreme Court are used in legal arguments, owing to their authority; • there is no ‘judge-made law’ – the legal system is developed only by the amendment of existing laws and the enactment of new ones.
Structure Slovak law is based on the principle that no lower legal regulation can vary from a higher legal regulation. The constitution is the highest legal regulation; this is followed by laws enacted by Parliament and then legal regulations issued by the Government, ministries and local authorities. This system, together with the rule that no regulation can be in conflict with an existing regulation, aims at consistency of the legal system. Legal regulations are essentially divided into public law, which regulates relationships between the State and its citizens, and private law, which regulates relationships between citizens.
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The Legal Structure and Business Regulation
Practice Primary legislation is enacted by Parliament as the representative of legislative power, and secondary legislation is issued by the representatives of executive power. Primary legislation includes the constitution and laws enacted by Parliament. In general, draft laws are proposed by the Government, although parliamentary committees and Members of Parliament also have this power. The Government, ministries, and local government and administrative bodies can issue secondary legislation only on the basis of the constitution and Acts of Parliament. However, the Government does have the constitutional power to issue decrees to implement law adopted by Parliament or to clarify obligations imposed by law. Ministries and central administrative bodies (for example regulatory authorities such as the Financial Market Authority and the Slovak National Bank) are allowed to issue decrees to implement laws adopted by Parliament only if the relevant law contains a specific authorization to do so. This system allows a certain degree of flexibility in the legal system. Secondary legislation may not be contrary to laws enacted by Parliament or the constitution, nor may they widen the scope of obligations imposed by the relevant primary legislation. A separate group of secondary legislation is legislation issued by local government. Such legislation may only concern matters of local government; otherwise it is ultra vires. No particular mandate is required in a specific law in order for the local government unit to issue the legislation. However, such legislation may not contradict the constitution or laws enacted by Parliament. The Slovak court system consists of the Constitutional Court and a system of ordinary courts. The Constitutional Court hears cases specified by the constitution, for example whether particular legislation is in accordance with the constitution and allegations of certain human rights breaches. The system of ordinary courts in the Slovak Republic includes: • district courts; • regional courts; • the Supreme Court of the Slovak Republic. These courts decide all disputes that are not handled by the Constitutional Court. There are no specialized courts for criminal, civil or administrative matters; all courts have jurisdiction over all types of case. The Slovak Republic has a two-level appeal system (in special cases it is possible to appeal to a third level, but this possibility is rare). A first-degree court decision can be revised by a higher court. (If the
Legal Framework
51
first-degree court is the Supreme Court, the appellate body is the other tribunal of the Supreme Court.) The decision of a second-degree court is in most cases final. Courts are the only bodies authorized to officially interpret the law in a binding way.
Essentials As stated above, law is divided into public and private law. Public law rules regulate those areas of law which are of vital concern to the State. They set out the duties and obligations of the citizen. Criminal law, tax law, accounting law, environmental protection law and construction law, amongst others, are the main branches of law to which public law rules apply. The most notable features of these rules are that they are controlled by state authorities and their provisions are mandatory. These rules regulate relationships between the State and natural persons or legal entities, and state authorities have the power to enforce fulfilment of duties set out by these rules. Private law rules regulate relations between citizens and include civil and commercial relations. Subjects in most cases have the opportunity to regulate these relationships by agreement. The provisions of private law are only of a supplementary nature and generally only apply in cases where the relevant issue has not been expressly regulated by the parties. However, there are a number of mandatory provisions that cannot be excluded or amended by agreement between the parties. They generally apply where one of the parties is acting in a non-business capacity. The division into public and private law is supplemented by a further division into material law and procedural law. Material law rules are contained in both public and private law and define the rights and duties of the subjects of law. Procedural law rules set out the formal process by which legal rights and duties are enforced. There are several kinds of legal procedure in the Slovak Republic (eg criminal procedure, civil procedure and administrative procedure).
2.2
Foreign Investment Regime CMS Cameron McKenna Introduction With the aim of encouraging direct investment into the country, the Slovak Government has initiated a series of attractive incentives for foreign investors. The incentives include a tax credit system with cash grants for newly created jobs and the provision of training. The tax credit system is based on commercial legislation that the Government has passed for this purpose. Slovakia’s recent invitation to join NATO in November 2002, coupled with its proposed EU accession in 2004, will add value to its current reputation and integration within the European market. Slovakia’s business and legal environment is founded upon EU standards with the country being a member of the WTO and the OECD.
Structure Slovak law is currently going through a process of significant change, partly owing to Slovakia’s programme of harmonizing its laws with those of the EU. Substantial changes have been made to general commercial law as well as to legislation specific to the area of investment incentives. Since coming into force on 1 January 2002, the Investment Incentives Act has had a significant impact on foreign investment. The Act introduces the possibility for companies to apply for various benefits provided they satisfy certain conditions. Examples of benefits include tax relief, and employment and training subsidies. Foreign investors appear especially interested by the tax credit incentive, which provides a benefit of up to 50 per cent of the qualifying expenditure on investments outside of the Bratislava region and will apply for a period of up to ten years. Within the Bratislava region, benefits can amount to up to 20 per cent of the qualifying expenditure.
Foreign Investment Regime
53
Practice In general, foreign investors are allowed to conduct business in Slovakia under the same conditions, and to the same extent, as residents. Potential investors are able to participate in the establishment of a new Slovak legal entity or to be a partner, member or shareholder of an existing Slovak legal entity. Foreign investors also have the option of opening a branch office in the Slovak Republic. Whilst the law does not consider a branch office as being a separate legal entity (and thus all its obligations are those of the ‘parent’ company) it does have its own management, accounting and tax requirements. The current Commercial Code recognizes the following five basic forms of establishment of an independent legal entity: • • • • •
general commercial partnership; limited partnership; limited liability company; joint stock company; cooperative.
The forms of legal entity most favoured by foreign investors as subsidiaries are the limited liability company and joint stock company. Partnerships are sometimes used but generally only if there are tax reasons and/or the subsidiary is to be created out of existing structures or assets. A foreign entity may lease office premises without any special permits, registrations or authorizations.
Essentials The Government has sought to reduce barriers to market entry and strengthen market exit rules. First steps have been taken to increase inward investment by streamlining and shortening the market entry process for new enterprises, although there remains scope for further progress and development. The provision of local financing for new entrants is still viewed as a problem, although this constraint should be significantly reduced by the recently adopted collateral legislation which includes the ability to take pledges over moveable assets. To tackle the issue of market exit, the Government has introduced a reform of the bankruptcy framework with a view to enhancing creditor rights, accelerating procedures, and making restructuring a more realistic and successful option for failing businesses. The restructuring and privatization of the Slovak banking sector is now almost complete. Between 1999 and 2000, the Government finished the restructuring of its three largest state-owned banks (with
54
The Legal Structure and Business Regulation
a combined asset share of almost 50 per cent) by injecting capital (around 2 per cent of GDP) and carving out bad loans (around 12 per cent of GDP). In the course of 2001, the Government successfully privatized the banks by selling its shares in them to foreign direct investors. Many small and medium-sized state-owned banks have also now been almost completely privatized whilst some insolvent small and medium-sized institutions have now fully exited the economy. Foreign-owned banks now own a combined share of more than 90 per cent of the total bank assets in Slovakia. The state-owned work-out institutions, to which the bad loans had been transferred, were merged in 2003, with the Slovak Consolidation Agency now being the only collection agency in the country. The debt work-out is being conducted through different market-based methods and the agency is currently looking for a foreign joint venture partner to bring in additional expertise. The legal basis for the regulation and supervision of the financial sector has been substantially enhanced, but the upgrading of the implementation capacity to international standards has gained momentum only recently. Despite this, improvements are already evident. Government intervention in the business sector is now markedly reduced, largely owing to the fact that the current government has severed its ties with the banking sector and achieved much progress in its restructuring and privatization programmes. Nevertheless, some of the remaining public institutions still receive a considerable amount of subsidies and guarantees from the State.
Concerns Since 1998, Slovakia has made very good progress in improving the structural underpinning of its economy. Having said this, it is important to recognize that the process is not yet finished. The restructuring and privatization of the inherited, largely insolvent, banking sector, which started in 1999, has basically now been completed. In parallel, most remaining non-financial state-owned enterprises have been privatized. Measures have been taken to create an environment which facilitates and encourages sound private-sector development whilst promoting the restructuring of many enterprises at the same time. Further steps are, as often is the case, still welcomed and necessary. The legal framework has been improved considerably. However, the ability to implement those improvements (and further ones) in practice is lagging behind. The largest constraint is still seen as the judicial system, which needs further substantial reform. The judiciary still suffers from numerous problems – in particular, a lack of human and technological resources, low managerial efficiency and little insulation against corruption.
ONLINE UPDATES - 30 August 2005 Foreign investment regime (Chap. 2.2) Right to operate on Slovak territory A foreign entity gains the right to operate on Slovak territory from the date that it or its constituent organization is registered in the Companies’ Register. A foreign business may only operate in the sphere and to the extent of its operations which are recorded in the Companies’ Register. The application for registration must be made by the foreign business entity itself. A foreign business entity may participate in the establishment of a Slovak legal entity, or it may participate as a shareholder or partner in an already established Slovak legal entity. It may also establish a Slovak legal entity itself.
Jurisdiction A legal entity, may be established according to Slovak law, or any other law. The founder or founders of a company registered in Slovakia are therefore enabled to provide in its memorandum of foundation or in the deed of association that a contract will be regulated by other than Slovak law. However, the provisions of a contract may not in any way contradict the regulations made in the Slovak Commercial Code. In this way, the Commercial Code protects both the property and assets of a legal entity with foreign share ownership and the property rights of a foreign entity, ie its shares within a Slovak legal entity. The Slovak Republic has made agreements with many foreign countries beyond the EU concerning mutual support and protection of investments. Companies registered in EU member states are, of course, protected under EU law.
Relocation to Slovak territory A legal entity established according to the laws of another country and with its headquarters in a foreign country, may relocate its headquarters to Slovak territory. The provisos to such relocation are that the company where the headquarters were previously located was established according to the laws of that country originally and that the laws of that country permit relocation. Relocation comes into effect once the foreign entity is registered in the Companies’ Register. In principle, even after relocation, the internal legal affairs of the company continue to be governed by the laws of the country in which it was established. Commercial Department of the Embassy of the Slovak Republic, London, as at May 2005
2.3
Alternative Corporate Structures CMS Cameron McKenna Introduction Under the Commercial Code, any foreign person, whether natural or legal, can engage in business activities under the same conditions, and to the same extent, as Slovak persons unless the law specifically provides otherwise. Business activities include, but are not limited to, founding and acquiring legal entities.
Structure A foreign citizen or legal entity may: • establish a branch office in the Slovak Republic; • found or acquire a Slovak legal entity; • participate in the business of a Slovak legal entity as a ‘silent partner’; • set up an association.
Branch office Establishing a branch office means registration in the Slovak Republic of a branch that is not a separate legal entity from the company establishing it. The company establishing the branch may be a foreign company. The branch must be registered in the Commercial Register.
Legal entities Legal entities in the Slovak Republic include: • general partnership (v.o.s.); • limited partnership (k.s.);
56
The Legal Structure and Business Regulation
• • • •
limited liability company (s.r.o.); joint stock company (a.s.); cooperative; association of legal entities.
General partnership (v.o.s.) This kind of legal entity may be founded by two or more persons (natural or legal). The founders, and their successor owners, are called ‘spolocnici’ (usually translated as ‘partners’). All partners are liable to the extent of their assets for the liabilities of the partnership. Limited partnership (k.s.) As with the general partnership, this kind of legal entity may be founded by two or more persons (natural or legal), again called partners. Partners are divided into two groups. Partners in the first group, called ‘general partners’, are fully liable for the liabilities of the company. Partners in the second group, called ‘limited partners’, are only liable for the liabilities of the partnership up to their unpaid share of the registered capital of the partnership. Owing to the greater liability of the first group of partners, they are also statutory representatives of the partnership (ie they can sign legally binding documents on its behalf) by virtue of law. Limited liability company (s.r.o.) This kind of legal entity may be founded by one or more natural or legal persons. (In Slovak they are called ‘spolocnici’, the same term used for the founders of the general and limited partnerships. However, in the case of a limited liability company, the term is generally translated into English as ‘members’ or ‘participants’.) The number of members may vary from 1 to 50. Unless it is agreed otherwise, the proportion of a member’s participation in the company is equal to the proportion of his contribution to the whole registered capital of the company. The liability of each member for the liabilities of the company is limited to the amount of his unpaid contribution to capital, as registered in the Commercial Register. Joint stock company (a.s.) This kind of company can be founded by one or more legal entities, or at least two natural persons. One natural person cannot establish a joint stock company, although, over time, it can take ownership of all the shares of the company and become the sole shareholder. This type of company is the most regulated of all companies permitted by Slovak law. Only shares in a joint stock company can be publicly traded on a securities market.
Alternative Corporate Structures
57
Cooperative At least five natural persons or two legal entities may found a cooperative. Members are not liable for the liabilities of the cooperative. However, the members’ assembly may approve a resolution that creates an obligation for members to increase their contribution to cover any loss of the cooperative. The minimum registered capital of a cooperative is SKK50,000. Association of legal entities This is not a standard legal entity used for business activities. Usually, it is established by legal entities to achieve an aim of a non-profit character, for example the creation of a trade association. It must be founded by at least two legal entities, and the members of the association are fully liable for its liabilities.
Practice General partnership (v.o.s.) Each partner is a statutory representative of the general partnership. Unless the partnership agreement stipulates otherwise, each of the partners is allowed to manage the partnership. However, the partnership agreement may appoint one partner to manage the partnership, in which case the others lose their powers to act on behalf of the partnership vis-à-vis third parties. The power to act on behalf of the partnership can also be restricted by the partnership agreement to some of the partners. Limited partnership (k.s.) The fully liable partners do not have to pay any contribution to registered capital. The minimum contribution to capital of the partners with limited liability is SKK10,000 each. Limited liability company (s.r.o.) The minimum registered capital of a limited liability company is SKK200,000. The highest body of the company is the general meeting. Generally, each member has voting rights equal to its contribution to registered capital. The general meeting must be convened at least once a year and the quorum must be at least 50 per cent of votes of all members. For some resolutions of high importance, the consent of twothirds of all members’ votes is needed. The general meeting appoints executive directors that are the statutory governing body of the company. The general meeting may, but does not have to, create a supervisory board of the company. Distribution of profit is made proportionally to the contributions of partners to the registered capital of the company. The distribution of
58
The Legal Structure and Business Regulation
the profit can be varied if the members agree to change it in the company’s memorandum of association. Joint stock company (a.s.) The registered capital of a joint stock company is divided into shares. There are two kinds of shares, bearer shares and registered shares. The shares can be in paper form or dematerialized – ie registered on a database at the Securities Centre, an institution set up for this purpose (soon to be replaced by the ‘Central Depositary’). Bearer shares cannot be in paper form and have to be registered on the shareholder’s account at the Securities Centre. Shares represent the right of shareholders to participate in the management of the company (usually via the general meeting), to share in the profit and, in the case of dissolution of the company, the right to a liquidation payment. The highest body is the shareholders’ general meeting. This body appoints the board of directors (unless the company’s constitutional documents reserve this right to the supervisory board); this body and the supervisory board of the company, are both mandatory company bodies. The board of directors is the statutory body and also manages the company. The supervisory board monitors the activities of the board of directors and reports to the general meeting. The general meeting must be called at least once a year. Under certain circumstances, the board of directors, the supervisory board or a minority shareholder (owning more than 5 per cent of shares) may call an extraordinary general meeting to deal with certain issues. There is no quorum stipulated by law for the general meeting. For general decisions, a 50 per cent majority of votes of attending shareholders is needed; for certain important decisions, the consent of twothirds of votes of attending shareholders is needed. Cooperative The mandatory bodies of a cooperative are: the members’ assembly, the presidium and the controlling committee. If the cooperative does not have more than 50 members, the presidium and controlling committee do not have to be established. The highest body is the members’ assembly. Unless it is agreed otherwise, each member has one vote at the members’ assembly. Association of legal entities The law does not specifically regulate the bodies and internal rules of an association. Most of these issues are left to the decision of the members of the association. An association may be founded by written agreement of the members or by a constitutive meeting of the members approving the foundation of the association.
Alternative Corporate Structures
59
Essentials Members of statutory bodies must be Slovak residents or have a residence permit. This does not apply to citizens of a member state of the EU or OECD in whose case no residence permit is required. Branch office A branch office is not a separate legal entity; it is part of a company located abroad. There may be some tax and accounting advantages in establishing a branch office. The person entitled to sign documents on behalf of the branch is generally registered on the Commercial Register as branch director. General partnership (v.o.s.) A general partnership has no formalized bodies. Each partner is a statutory body of the partnership. No registered capital is required. Distribution of the profit is equal unless agreed otherwise. Limited partnership (k.s.) Half the profit is distributed equally between fully liable partners and half the profit is distributed to limited liability partners proportionally according to their contribution to registered capital. This can be varied by agreement between the partners. Limited liability company (s.r.o.) A natural person can be a sole member of a maximum of three companies. A company with a sole member cannot be a sole member of another company. Profit is distributed proportionally to the paid contributions of the members, unless stated otherwise in the memorandum of association. Joint stock company (a.s.) Distribution of profit is usually equal for each share. However, joint stock companies are permitted to issue preference shares which may give the holders limited preference rights to dividends and liquidation proceeds. Cooperative When a cooperative is established, it must create a non-divisible fund which must not be distributed to the members during the existence of the cooperative. This fund must be at least 10 per cent of the registered capital. A cooperative may not merge with any other legal entity other than another cooperative.
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The Legal Structure and Business Regulation
Concerns The Commercial Register in the Slovak Republic is of utmost importance to all registered legal entities. For certain matters (for example the company name or registered address) the details set out in the Commercial Register are determining; for other matters (for example the identity of company directors) the Commercial Register may not be determining but, nevertheless, counterparties are entitled to rely on the information in the Commercial Register. The running of the Commercial Register has improved but it still can be extremely slow when judged by the standards of certain Western European countries, which devote more resources to it. Consequently, certain matters can take a long time to register, particularly those generally associated with company restructuring, such as capital increases, capital decreases and mergers.
ONLINE UPDATES - 30 August 2005 Alternative corporate structures (Chap. 2.3) Business names The business name of a person is his/her first name and surname, which may also contain an affix to distinguish the person of the entrepreneur from his/her business activity. The business name of a company or cooperative is the title under which they are registered in the Companies’ Register. This title must must also contain its legal form (eg, a.s., s.r.o., v.o.s.). If the entity is not registered in the Companies’ Register, its business name is the name under which it was formed.
Shareholders’ rights on disposal If the shareholding of a partner in a company ceases or is terminated in some way, the shareholder has the right to be compensated for its value. The value of this compensatory share is set on the basis of the financial statements of the company for the period in which the partner’s shareholding ceased. Compensation is paid in money unless the deed of association or other regulations state otherwise. On liquidation, the shareholder has the right to a share of the residuary estate.
Founders’ liability for company debts If one or all of the founders of a company took company debts upon themselves prior to the establishment of the company, all the founders are liable and responsible for these debts equally. The debts are transferred to the company on its establishment, ie registration in the Companies’ Register.
Cessation A company ceases to exist when it is deregistered from the Companies’ Register. In the event that a company’s assets are transferred to a new assignee, the company is dissolved. Partners/associates may agree that a company will be transformed into another legal form of company or cooperative, or that it will merge or amalgamate with another company, or that it will be divided. In the case of split/division, the assets are transferred to the newly established companies, each of which is liable for the debts transferred to it up to the level of the net business assets received.
Limited liability company (s.r.o.) Formation The value of the basic equity of the company must be at least SK200,000. A partner may only participate in the establishment of an s.r.o. with an investment of at least SK30,000 in value. The value of partners’ investments may vary, but the number must be divisible by 1,000. The total value of the deposits must equate to the basic equity of the company. If a deposit is to be made in non-monetary terms, the deed of association must specify the asset involved, its value and the method of valuation. Before the proposal for registration in the Companies’ Register is submitted, at least 30 per cent of each partner’s investment must be paid in. The total value of monetary and non-monetary deposits must be a least SK50,000. If the s.r.o. was founded by a single founder, the basic equity must be paid for in full before the company may be registered in the Companies’ Register. The reserve fund A company is obliged to create a reserve fund, which is used to cover company losses or to assist the company in getting through difficult times. If the reserve fund is not set up when the company is formed, the company is required to establish such a fund from after-tax profits to the value of 10 per cent of profit from the year in which profits are
first made, but not more than 5 per cent of the basic value of the equity. Thereafter, the fund is supplemented annually by at least 5 per cent of after-tax profits until the value of the reserve is at least 10 per cent of the company’s basic equity. The acting secretary of the company is required to call a shareholders’ general meeting if the value of the reserve fund falls below half its value as at the date of the last shareholders’ general meeting. Supervisory board A supervisory board is only established for an s.r.o. if its creation is specified in the company’s deed of association. The members of the supervisory board, of which there must be at least three, are chosen by shareholders’ in their general meeting. An acting secretary may not be a member of the supervisory board.
Joint stock company (a.s., akc or spol.) Basic equity The value of the basic equity of a joint stock company must be at least SK1000,000. Shareholders’ meetings Resolutions and decisions of shareholders in general assembly may only be made if the nominal value of the shares of those present constitutes at least 30 per cent of the basic equity, unless the company’s regulations state otherwise. If there are insufficient members present, the board of directors must call an alternate shareholders’ general meeting to be held within three weeks of the date of the original meeting, with the same agenda, at which the attendance requirement does not apply. Supervisory board The appointment of a supervisory board is required to watch over the activities of the Board of Directors, the smooth running of the company and the realization of its annual goals and to scrutinize the annual financial report and the proposed distribution of profits. At last three members of the supervisory board must be appointed by the shareholders in general assembly. If the company has 50 or more full-time employees at the time of voting, the employees choose one-third of the supervisory board and the members choose two-thirds.
The reserve fund As in the case of an s.r.o., a joint-stock company is obliged to create a reserve fund. In this case, if no fund is created when the company is established, the requirement for the first year of profit is that the fund be established with not less than 20 per cent of the after-tax profit, but not more than 10 per cent of the value of the basic equity. Supplementary annual allocations to reserve of at least 5 per cent of after-tax profit must be made until the value of the fund reaches 20 per cent of the basic equity.
Cooperative indivisible fund Cooperatives are similarly required to establish indivisible funds of not less than 10 per cent of the value of their registered basic equity. Supplementary allocations of at least 10 per cent of annual after-tax profits must be made until the value of the reserve fund reaches 50 per cent of the registered basic equity. During its lifetime, a cooperatives’ indivisible fund must not be divided among its members.
Companies’ Register The Companies’ Register, which plays a key role at the stage of a company’s establishment, is a public catalogue where data required by law are recorded concerning entrepreneurs or other persons. Register courts where the records are maintained perform the same role as chambers of commerce or industry in other European countries. The facts, which must be recorded in the Companies’ Register for every type of business entity and which then become public knowledge, are specified in the Commercial Code. Commercial Department of the Embassy of the Slovak Republic, London, as at May 2005
2.4
Agency Agreements, Distributorship and Franchising CMS Cameron McKenna Introduction Doing business in Slovakia through an intermediary is a less costly alternative for a foreign manufacturer than setting up a new operation in the country. It also has the advantage of speed: establishing a subsidiary or branch can be time consuming.
Structure There are three specific forms of contract recognized by the Commercial Code which are relevant to trading through an intermediary: • A commission agent’s contract can be concluded between principal and commission agent. The main advantage to the principal of such a contract is that although no obligations attach to the principal as a result of the commission agent’s relationships with third parties, the principal can enforce the obligations on the third parties if the commission agent is unable to do so. • A brokerage contract is generally used for one-off transactions. Under this form of contract the agent (broker) agrees to engage in activities aimed at enabling his client (principal) to conclude a contract with a third party. • A commercial representation agreement is used if the agency relationship is intended to last for a longer period of time, or if it is intended that the agent will procure a number of customers or suppliers for his principal. Under this form of contract the agent (commercial representative) may execute legal acts in the name of the principal (eg sign contracts). However, this is not an obligatory provision of such an agreement, and the agent’s responsibilities and powers can be limited to procuring customers or suppliers.
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For any other form of intermediary relationship, a so-called ‘innominate contract’ has to be used. An ‘innominate contract’ is one which does not fall within a specific category of contract recognized by the Commercial Code and consequently it is governed by the Code’s general provisions.
Practice Agency Commercial representation is the most common form of commercial agency. It can be used for all types of products except securities. Securities trading and related contracts have a special regime.
Distributorship In a distributorship, the distributor finds customers for his principal’s goods, but the goods become the property of the distributor before they are resold to the final customer. Slovak legislation contains no special provisions regulating distributorship, and an innominate contract must be used. The provisions of the Commercial Code that apply to distributorships are generally those that apply to the sale and purchase of goods generally, and most of them can be varied by agreement between the parties.
Franchising The principle of franchising is generally understood in the Slovak Republic, but there are no particular franchise-specific laws. The most common form of franchise agreement is a combination of a distributorship agreement and the licence of a package of intellectual property (IP) rights, typically of know-how and trademarks. The licence of the IP rights will be subject to the specific laws governing the IP rights in question (see Chapter 2.6).
Essentials The laws relating to agency, distributorship and franchising have been greatly affected by the process of harmonizing Slovak law with that of the EU. Most of the provisions governing commercial representation have been harmonized with the Commercial Agents Directive, and consequently the Slovak Commercial Code provides for mandatory compensation to the agent on termination of the agency relationship and other
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provisions with which companies that use commercial agents in the EU will be familiar. Distributorship agreements and franchise agreements typically contain provisions imposing certain restrictions on the distributors or franchisees, for example restricting the territories in which the distributor or franchisee can actively operate, or restricting competition by the distributor or franchisee with the producer or franchiser. Such restrictions are acceptable provided that they fall within the parameters of ‘block exemptions’. Block exemptions set out the terms on which agreements, which contain anti-competitive restrictions, can be exempted from the provisions of the Act on Protection of Economic Competition (which prohibits such restrictions). The provisions of the Slovak block exemptions reflect very closely those of the EU. If any anti-competitive provisions go beyond what is permitted by the block exemptions, the consent of the Anti-Monopoly Office would need to be obtained, or the parties to the agreement risk a fine of up to 10 per cent of turnover (as recorded in the previous financial year). The fine can be imposed repeatedly.
Concerns As with many areas of commercial law, the main concern is the inadequate judicial system, which makes the enforcement of rights a time consuming process, such that in certain situations it defeats the purpose of litigation. For example, the inadequacies of the courts should make franchisers particularly wary about appointing a headfranchisee who will contract with sub-franchisees. Franchisers may be well advised to contract directly with each franchisee individually. A head-franchisee will effectively control the network, and outlets will be leased to themself or their sub-franchisees. If the head-franchisee decides to switch allegiance to another franchiser, the original franchiser’s remedies would be limited, even if the head-franchisee were to act in flagrant breach of contract. Cases of this nature usually take at least two to three years for a first-instance decision, and it is also extremely difficult to obtain injunctions from Slovak judges. In the meantime, the original franchiser’s outlets could have disappeared from public view.
2.5
Employment Law CMS Cameron McKenna Introduction The Slovak Labour Code stringently regulates employment relationships, and there is little scope for individual agreement. At present, the Labour Code primarily protects the rights of employees. However, the Slovak Republic is considering an amendment to the Labour Code that would significantly strengthen the power of the employer and allow more flexibility.
Structure Employment relationships in the Slovak Republic are regulated by several Acts. The most important and complex is the Labour Code. Employment law is a separate area of law, and the structure of the Labour Code reflects this. For this reason, in some areas employment law may appear to differ from the civil law regulations. In circumstances where the employer or the employee is foreign, Slovak legislation leaves the choice of law to the parties. However, if the employer and employee are Slovak, the Labour Code must apply to the employment relationship. An employment relationship may be established by several kinds of contract (all of them are formalized and the legal requirements are set out by the Labour Code); however, a written employment contract is the most commonly used method.
Practice To conclude an employment contract for a fixed term or indefinite period, the potential employee must be over 15 years of age and have finished the minimum legal school education. The maximum period of employment for a fixed term is three years. After three years it is possible to conclude an employment contract for a fixed term only for certain expressly stipulated jobs.
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It is possible to agree a probationary period. It must be in a written form and must not exceed three months. During the probationary period, either party may immediately terminate the employment without giving any reasons. An employment contract must include details of the wage, job description, place of work and start date. It is important that the job description is well defined in the contract since the employee will not be obliged to do work that is not defined in the contract. Full-time employment is deemed to be 40 hours a week. Overtime is limited to 18 hours a week and the total amount of overtime per year must not exceed 150 hours.
Essentials Currently, the minimum wage is set at SKK5,570 per month. The employee has the right to be paid in cash. Holiday entitlement is set at four weeks, increasing to five weeks for employees who have worked over 15 years after the age of 18. Should an employee not take up their full holiday entitlement, the remaining days are required to be carried over to the next year. Contributions to medical and social insurance, and to the ‘employment fund’ (the fund from which unemployment support is paid), are divided between the employee and the employer. Medical insurance is 14 per cent of the employee’s gross salary. The employee pays 4 per cent and the employer pays 10 per cent. Social insurance is 32.8 per cent of the employee’s gross salary. The employee pays 7.8 per cent and the employer pays 25 per cent. The payment to the employment fund is 3.75 per cent of the employee’s gross salary. The employee pays 1 per cent and the employer pays 2.75 per cent. Contributions of the employer are taken from the profits of the employer and are not deemed to be part of the gross salary of the employee.
Termination of a contract Employment contracts may be terminated by mutual agreement, by giving due notice or by instant dismissal. Mutual agreement The agreement of the parties must be in writing and must state the reasons for which the employment is being terminated and the date of termination. Notice The employer is much more restricted by law when giving notice than the employee. The employee does not have to state any reason for
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wanting to terminate their employment, whereas the employer may only give notice where it is permitted by the Labour Code. The grounds for dismissal of an employee under the Labour Code are: • • • • •
the employer is put into liquidation; redundancy; medically certified ill health; inability to meet the standards required by labour law; serious breach of work discipline after a warning.
The reason must be specified in the notice, otherwise the notice is null and void. The notice period is two months and is the same for both the employee and the employer (in cases of redundancy and liquidation of the employer, the notice period is three months). It begins on the first day of the month following the month in which the notice was served. Instant dismissal The employer may immediately dismiss an employee only in the following situations: • in certain circumstances if the employee is convicted of a criminal offence; • the employee has committed a very serious breach of work discipline. In these cases, the employment is terminated at the moment of delivery of the notice.
2.6
Intellectual Property CMS Cameron McKenna Introduction Slovak intellectual property law and its principles, as part of the civil law system, are based on Continental law concepts of copyright (rights of authors and rights similar to authors’ rights) and industrial property rights. Works that are subject to copyright do not need to be registered in order to gain legal protection. On the other hand, generally, industrial property rights are only protected if they are registered at the Industrial Property Office of the Slovak Republic (IPO), unless they are protected under an international industrial property convention. Recently, the Slovak Parliament adopted several laws relating to intellectual property and, as a result – on paper at least, many aspects of Slovak intellectual property regulation are already compatible with current EU standards and legislation. However, the practice of protection of intellectual property rights against infringement still does not meet common standards in EU member states, especially because of the length of court proceedings. It is advisable for foreign entities conducting business in the Slovak Republic to protect intellectual property rights when establishing Slovak subsidiaries, employing individuals or using independent contractors or distributors during the creation, modification and distribution of their products and services in the Slovak Republic.
Structure Copyright Any work that is the unique result of the creative intellectual activity of an author and is expressed in an objective appearance is subject to copyright under the Act on Copyright. This Act also governs rights similar to authors’ copyright, such as the rights of performing artists, producers of audiovisual recordings and publishers. Copyright protection is not based on registration.
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Trademarks Trademarks are governed by the Act on Trademarks. Protection of trademarks requires registration in the Trademark Register maintained by the IPO. However, the registered trademark is protected from the date when the application for registration was filed at the IPO (priority date).
Inventions, biotech inventions and innovations The Patent Act regulates the granting of patents for inventions, European patents and additional protection certificates for pharmaceuticals and products used for the protection of plants. An invention is protected if a patent is granted by the IPO. Patents are registered by the IPO in the Register of Patents. Biotech inventions can also be protected by patents under the Patent Act. Innovations are governed by the Act on Inventions, Industrial Designs and Innovations. Innovations are not subject to registration by the IPO.
Designs The external design of a product or part of a product that is new and unique may be protected as a design under the provisions of the Act on Designs. Designs are registered in the Register of Designs by the IPO.
Utility models Technical solutions that are new, have a level of inventiveness above the common expert norm, and are of industrial use are protected as utility models under the provisions of the Act on Utility Models. Utility models are registered at the Utility Models Register held by the IPO.
Licensing intellectual property rights Licence agreements in respect of industrial property rights are generally governed by the provisions of the Slovak Commercial Code. Special types of licence agreement are provided for in the Act on Copyright for the licensing of works that are subject to copyright. Licences for patents, trademarks, designs and utility models must comply with special licensing provisions of the relevant Act referred to above, as well as the requirements of the Commercial Code. Generally, such licences are effective as of the date of registration in the relevant register maintained by the IPO. There are other intellectual property rights, such as topography rights or rights in plant varieties or animal breeds, that are protected
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in the Slovak Republic. Although ‘know-how’ and ‘logos’ are not protected as such, they may enjoy protection as business secrets or trademarks.
Practice Copyright The following works are subject to copyright: literary, artistic and scientific works, in particular works of music, drama and photography; audiovisual work; cinematographic work; architectural work; and computer programs and databases. Only the individual person who created the work can be the author. There are two types of rights arising from Slovak copyright protection: • authors’ moral/personal rights; • authors’ economic rights (mostly the right to use the work). Moral rights are not transferable to third parties, but the author may grant a licence in respect of economic rights. Copyright generally lasts the duration of the life of the author and 70 years after their death, except in the case of personal rights which are not limited. In the case of databases, copyright protection lasts 15 years from the creation of the database.
Trademarks Trademarks are protected for use within set classes of goods and services according to the Nice classification. Trademark protection lasts 10 years as of the filing date and is renewable. However, the IPO can delete a trademark from the Trademark Register based on reasons provided for in the Act on Trademarks, for example if its owner or licensee has not used it in the Slovak Republic for a period of five years in respect of the products or services protected by the trademark, or the use of a trademark constitutes unfair competition. Here the IPO may act upon the application of a third party or the owner of the trademark, or on the basis of a court judgement.
Inventions and innovations Patents are granted for inventions that are new, are of a technical nature and have practical industrial application. A patent is granted for 20 years from the date on which the application for granting a patent was filed. Patents are not granted for inventions contradictory to common interests and public order, medical diagnostic or illness
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prevention methods, human cloning methods, methods of human or animal genetic identity modifications or newly developed plant varieties or animal breeds. New plant varieties and animal breeds are protected by separate laws. The plant developer or animal breeder can apply to the Ministry of Agriculture for a certificate that is evidence of the plant developer’s or animal breeder’s authorship. Biotech inventions Patents are granted for biotech inventions under the same conditions; these include inventions concerning a product which consists of or includes biological material, or methods of producing or adjusting or using the biological material, even if: • the biological substance is isolated from its natural environment or produced via a technical process; • it concerns a plant or animal, if the technical use of the invention is not limited to a certain variety or breed; • it concerns a microbiological or another technical process or product which was created as a result of such a process; • the item has been isolated from the human body or technically produced in some other way.
Designs Any product design that is new and unique may be protected as a design if it is registered in the Register of Designs maintained by the IPO. A design means an external modification of a product, which in particular consists of lines, colours, shapes and structure. A design is protected for five years from the filing date (priority date) and the protection period is renewable for up to 25 years.
Essentials Copyright Unless otherwise agreed, if an author created the work as an employee within the course of his employment, the employer is entitled to exercise the author’s economic right. The employer needs to obtain the employee’s consent before licensing the work to third parties. This consent can be given in the employee’s employment contract.
Trademarks Protection for a trademark in the Slovak Republic can be claimed by the owner from the priority date of a trademark application in any
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member state of the Paris Convention for the Protection of Industrial Property or member state of the WTO. A trademark licence agreement and assignment of the trademark to a third party is effective towards third parties upon its registration in the Register of Trademarks. Slovak law also allows the pledging of a trademark as security and grants the trademark owner the right to ask the Slovak customs office not to release commercial goods into the Slovak market where the markings of such goods infringe the rights of the trademark owner.
Inventions and innovations The inventor or their legal successor is entitled to the patent. If an inventor created an invention as an employee within the course of their employment, unless otherwise agreed, the rights to the patent pass to the employer. The employee must notify the employer of the invention. The employer must assert the right to the invention in writing within three months, otherwise the right to register the patent passes to the employee. The employee/inventor is entitled to appropriate remuneration, which is based upon the technical and economic importance of an invention and the benefit acquired from it. Additional remuneration may be payable if, in the future, the benefits acquired by an employer are disproportionate to the original remuneration. Similar provisions apply to innovations created by employees. Innovations are technical, production or operating improvements, as well as solutions to work safety and environmental problems. Rights arising from innovations arise if they do not contravene patent rights or registered design rights. Biotech inventions Biotech inventions patent registration is identical to the proceedings used for patenting other inventions.
Designs The natural person who is the creator of a registered design is generally the owner of it. However, unless otherwise agreed, if a creator produces a design as an employee within the course of their employment, the right to the design passes to the employer, which must assert this right in writing to the employee within a specified period after being notified by the employee of the creation of the design. The employee, as the creator, is entitled to remuneration based upon similar principles to those used to calculate remuneration in relation to inventions.
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Licensing intellectual property rights Registration of a licence agreement by the IPO is generally required to make the licence effective against third parties. The licence may be exclusive or non-exclusive. In the case of copyright works, exclusive or non-exclusive licences may be granted to third parties, and no registration of the licence is required. In order to be valid, the licensing of copyright must be entered into in writing. If an exclusive licence is granted by the copyright owner, they are not permitted to grant the licence to any other third party. A licence may be limited for specific types of use of the copyright work.
Concerns Intellectual property rights holders now have certain recourse within customs proceedings, which allows them to observe and sometimes block the export or import of infringing material, or to apply to the court for permission to destroy the infringing material. However, owing to lengthy and costly Slovak court procedures, the enforceability and effectiveness of protection in practice remains insufficient. At present, as a result of pressure from software companies, the criminal authorities have started to investigate software piracy cases more frequently.
2.7
Dispute Resolution CMS Cameron McKenna Introduction When a deal is struck, everyone is optimistic and looking to co-operate with each other. However, there is the possibility that problems will arise further down the line, some so serious that even experienced business executives cannot sort them out between themselves. This chapter looks at how such problems can be resolved by dispute resolution procedures.
Structure In the Slovak Republic, as in all Western European countries, there are two main ways to deal with a dispute: court litigation and arbitration. Court litigation is the default procedure for solving disputes for most contracts. If the contract does not set out a dispute resolution mechanism and the parties cannot agree on a method of resolving the dispute, a party may turn to the courts. However, the parties should consider the fact that, as in other countries, in the Slovak Republic the court procedure may be expensive and time consuming. In 1996, the Slovak Parliament introduced an Arbitration Act, but its practical application was limited. As a result, another Act was adopted in 2002, based on UNCITRAL standards. The new Arbitration Act has made substantive changes aimed at helping to secure inward foreign investment by providing an internationally acceptable system for dispute resolution by arbitration. The legislation allows for ad hoc arbitration or arbitration conducted by one of the permanent courts of arbitration, of which the main one is the arbitration court attached to the Economic Chamber of the Slovak Republic. The arbitration court is based in Bratislava, but has a number of regional offices throughout the country. Each arbitration court has a list of the Slovak arbitrators who can be called upon to arbitrate proceedings. The Arbitration Act does not exclude the possibility for foreign persons to act as arbitrators, if the parties so wish, provided that they are qualified in their home country.
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Practice Court proceedings in the Slovak Republic are usually conducted in public, even if this goes against the wishes of the parties. The Civil Procedure Code provides for exceptions but they are not usually applicable to commercial disputes. It is possible, and advisable, for an agreement to be governed by the law of a country where there is an established procedure for dealing with commercial disputes. If both parties to the agreement are Slovak entities (including Slovak subsidiaries of foreign companies) and the agreement does not have an ‘international’ element, the agreement must be governed by Slovak law. Arbitration gives the parties the benefit of being able to choose arbitrators who they believe will be able to understand the technical details or other relevant information of the case, and who are experienced and have integrity. Arbitration cannot be undertaken without the written consent of the parties, which can be given either before or after the dispute arises, in the form of a separate arbitration agreement or an arbitration clause in the agreement underlying the dispute. Care needs to be taken in drafting arbitration clauses. If an arbitration clause is improperly drafted, this may lead to a court dispute about the proper interpretation of the clause, which may have to be heard before the arbitration itself can begin. When the parties agree on arbitration, it is possible for them to decide the place where the arbitration will be held. The place of arbitration need not be in the country whose law governs the relevant agreement. For example, many foreign companies doing business in the Slovak Republic choose venues such as Vienna, Prague, London or Geneva. The choice of venue dictates the underlying procedural law governing the proceedings and the award. It is important to select a venue in a country that has ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (‘New York Convention’). Slovakia has ratified the New York Convention and consequently awards made in other countries that have ratified the New York Convention can be enforced in the Slovak Republic.
Essentials Litigation The parties to litigation have to prove their case by submitting evidence. Consequently, it is not unusual that the first hearing takes place more than one to two years after the claim has first been filed at
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court. An automatic right to appeal against the first-instance judgement is available to litigants in every case and this can further increase the length of proceedings. In general, unless there is a bilateral treaty between the Slovak Republic and another country, or unless there is a mutuality of principle duly respected between the Slovak Republic and a particular foreign country, foreign court judgements are not recognized and are unenforceable in the Slovak Republic. However, in practice, a number of foreign judgements in commercial and civil cases (with some exceptions, for example private personal cases) are dealt with as Slovak judgements; that is, they are recognized and enforced in Slovakia.
Arbitration The process of arbitration is confidential, with the arbitrators owing a duty of confidentiality to the parties. Unlike proceedings in litigation cases, arbitration takes place in private, thereby allowing confidential information to remain so. Once the arbitration has been commenced, the dispute may not be submitted to a court for resolution or to other arbitration proceedings. The arbitration tribunal may examine only the evidence submitted by the parties. (Slovak courts on the other hand may examine other evidence, not only that submitted by the parties to the dispute.) Once an arbitral decision has been reached, the arbitrators will issue it in writing, giving the grounds for the arbitral award, unless the parties dispense with this requirement. Unlike litigation, there is no automatic appeal, unless the parties have expressly agreed in the arbitration agreement, or the relevant clause, that the arbitral award may be subject to review by another arbitrator(s). Pursuant to the Arbitration Act, any party to the arbitration may file a court claim against a domestic arbitral award and require the court to cancel it if any of the grounds for cancellation provided in the Arbitration Act have occurred.
Alternative dispute resolution (ADR) In addition, mediation is a new process gaining ground in alternative dispute resolution. ADR aims to encourage parties to settle, and normally costs a fraction of the cost of litigation and arbitration. In the Slovak Republic, a government project focused on implementing mediation – ‘Improvement of Access to Justice’ – is pending with support of the London-based Centre for Effective Dispute Resolution. The parties can agree to use ADR in a similar way as they can agree to international or domestic arbitration.
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Concerns The litigation process in the Slovak Republic has advanced. However, owing to the shortage of experienced judges and a large backlog of cases, it can take years to obtain a first-instance judgement. Although the Government has implemented anti-corruption measures, corruption in the court system is still seen as a serious problem for fair and effective dispute resolution. Corruption within the judiciary can lead to longer trials or the appointment of judges biased towards one party. Recently, the position of higher court clerks was introduced to the judiciary system in the Slovak Republic in order to deal with certain cases, including non-contentious cases, cases with underaged persons, bankruptcy, and execution proceedings, including enforcement of security. However, judges are still burdened with a great deal of administrative work, which, although it has to be done, could be done by officials rather than judges. The judicial structure is also not sufficiently equipped with information technology (both hardware and software). Currently, a local communication infrastructure at all courts of the Slovak Republic is in the process of being installed. A project for electronic connection among the courts and for the supply of computers to judges is being prepared. The next measure is to create standard computer applications for all court registries.
Part Three
Finance, Accountancy and Taxation
3.1
Banking Slovak Investment and Trade Development Agency (SARIO) and Jonathan Reuvid There has been a two-tier banking system in Slovakia since the foundation of the Slovak Republic on 1 January 1993: The National Bank of Slovakia, the central bank, and the network of commercial banks and State financial institutions.
The National Bank of Slovakia As the central bank of issue of the Slovak Republic, the main functions and legal position of The National Bank of Slovakia (NBS) are defined by the Act of the National Council of the Slovak Republic No. 566/1992. It is established as an independent institution with responsibility for securing the stability of the currency.
Act No. 566/1992 In order to fulfil its main task of securing currency stability, the NBS: • determines currency policy; • issues coins and banknotes; • controls the circulation of the currency, coordinating fluid and efficient payment-bank connections and clearings; • oversees the performance of commercial bank activities within the scope of the Act and secures safe and reasonable functioning of the banking system; • represents the Slovak Republic in international currency institutions and secures the implementation of tasks arising from this representation; • is directed by the Bank Board as its supreme management body; • supports the Government’s national economic policy within the scope determined by the Act; • sets interest rates, payment terms and other conditions of transactions performed in accordance with the Act;
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• sets and declares, according to the Act on banks, the rules for liquidation, capital resources and other regulations for the prudent management of bank enterprises; • sets minimum reserve requirements for commercial banks to maintain accounts on deposit with the NBS, which are usually noninterest bearing; • sets the exchange rate of the Slovak crown (SKK) against foreign currencies; • acts as registrar of foreign banks and financial institutions operating in the territory of the Slovak Republic, which are required to register before commencing their activities; • reviews applications for bank licences and issues pertinent decisions.
Bank control The NBS exercises bank control over the activities of both banks and individuals other than banks having banking licences according to the specific regulations of exchange control legislation and commercial law. NBS control is based on the international regulations accepted by the Bank for International Settlements in Basle, for which the purpose is to track and evaluate the prudent activities of banks according to the following: • capital adequacy – the share of capital in risky assets; • interest involvement of bank and non-bank clients – the share of net interest involvement in the capital of banks; • liquidity position – the difference between assets and liabilities stated according to their payment terms; • currency position – the share of individual convertible and nonconvertible currencies in the capital of a bank; • evaluation of outstanding debts according to the risks involved – a regular bank classification of debts and balancing the obligations of individual clients.
The commercial banking sector At the end of 2000 there were 21 banks, 2 branches of foreign banks and 11 foreign banks operating in the territory of the Slovak Republic through representative offices. Table 3.1.1 lists the top 10 banks operating in Slovakia at the end of 2001 in balance sheet order with details of their ownership. The foreign ownership illustrated in Table 3.1.1 indicates the outcome of privatization in the Slovak banking sector and the extensive consolidation process that has taken place. Along the way, Slovenska Sporiteina bought the Priemyseina Banka in Kosice, AG
Banking
Table 3.1.1
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Overview of the leading Slovak banks
Bank
Shareholders
Total assets EUR million
Slovenska Sporiteina
Erste Bank (67.2%), EBRD (19.9%)
4,723
Vseobecna Uverova Banka
Comit Holding Int (IntesaBCI) (94.5%)
4,091
Tatra Banka
Raiffeisen Zentralbank (72.3%)
2,615
CSOB
KBC (81.51%), EBRD/IFC (11.8%)
1,628
UniBanka
UniCredito (74.6%), EBRD (19.9%)
789
HVB Bank Slovakiaa
BA-CA (HVB Group) (100%)
766
Prva Komunalna Banka Dexia Kommunalkredit (79.0%)
633
Ludova Banka
Osterreische Volksbanken AG (82.1%)
622
Citibank Slovakia
Citibank (100%)
601
Postova Banka
Staatlich (100%)
587
Source: IMF, Geschaftsberichte der Banke
Bank had its licence withdrawn and, after a period of forced administration, Slovenska Kreditna Banka and Dopravna Banka declared bankruptcy. In 2001 the privatized Hungarian bank Orzagos Takarekpenztar es Kereskedelmi (OTP) bought IRB. The significant role of the EBRD as a minority shareholder in three of the first five Slovak banks is also identified in the table. In Table 3.1.2 the evolution of the Slovak banking industry from 1998 to 2002 is charted, showing that the foreign share of capital had risen from 40 per cent to 85 per cent at the end of September 2002. Table 3.1.2
Overview of the Slovak banking industry 1998
Number of banks Number of branches Number of employees
1999
2000
2001
2002
26
25
23
21
20
–
1,229
1,101
1,052
1,018
23,905 23,171 22,332 21,324 20,043
Return on assets (ROA)
–0.48
–2.34
1.47
1.01
2.61
Return on equity (ROE)
–13.4
–36.5
25.2
22.7
–
6.6
12.6
12.5
19.8
22.3
40.0
25.7
229.3
79.3
85.0
34.2
34.1
44.7
90.1
–
Solvency ratio Foreign banks’ market share of capital (%) Foreign banks’ market share of total assets (%)
Notes: 1: All figures exclude Konsolidacna Banka; 2: 2002 data at 30.09.02 Source: NBS, IMF, Bank Austria Creditanstalt
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There is a noticeable correlation in the data of Table 3.1.2 between the banking industry achieving profitability in 2000 and the increasing participation of foreign banks.
The Banking Act For the purposes of the Slovak Banking Act, banks are defined as legal entities located in the Slovak Republic and established as joint stock companies or State financial institutions that accept deposits and grant credits and have a licence to act as a bank for these activities. A banking licence may also include permission to perform other activities, such as: • • • • • • • •
• •
investment in securities on the bank’s own account; financial leasing; financial connection and clearing; issue and administration of means of payment, eg bank cards, travellers’ cheques; the provision of guarantees; open letters of credit; the provision of cash points; trading on the bank’s own or a client’s account: – with foreign exchange values; – in futures and options, including currency and interest trading; – with convertible securities; – with gold and silver coin. safe deposit box leasing; mortgage trading.
Bank licences A foreign bank intending to open a branch in the territory of the Slovak Republic must submit an application for a banking licence to the NBS as specified in NBS Provision No 6. Share acquisitions and disposals in the basic capital of a bank The prior approval of the NBS is required, following negotiation with the Ministry of Finance, for: • the acquisition of shares or exceeding a share interest in the basic capital of a bank, or in voting rights, by 10 per cent, 20 per cent, 33 per cent or 50 per cent in one or several operations directly, or by acting in concert; • a merger, fusion or division of a bank and for an increase or reduction in the basic capital in cases where the decrease is not caused by losses; • the sale of a bank, a foreign bank branch or any part of it.
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83
Any legal procedure is invalid without prior NBS approval.
Mortgage banking For the purposes of the Banking Act, mortgage banking is defined as the granting of mortgage credits connected with the issue of a mortgage note and the granting of communal credits connected with the issue of mortgage bonds by a bank. A foreign bank branch may not undertake mortgage banking, which must be executed in Slovak crowns. A bank performing mortgage banking can deposit temporarily free financial means acquired from mortgage banking in a bank located in the Slovak Republic or in a foreign bank branch in Slovakia. Such funding may be used for the purchase of: • • • • •
mortgage bonds issued by other mortgage banks; communal credits issued by other mortgage banks; NBS treasury bills; public debts; State treasury voucher.
Application for a bank licence This regulation is the most important norm for opening a bank and specifies the requisites for application for a bank licence, the minimum financial deposit in the bank’s basic capital and the necessary documentation to fulfil the required conditions. The minimum requirement for deposit as basic capital to gain a bank licence is SKK500 million or a corresponding amount in convertible foreign currency. If the licence application includes mortgage operations, the minimum deposit is SKK1 billion or the equivalent in convertible foreign currency.
Licence to operate as a foreign bank branch An application by a foreign bank to open a branch in the Slovak Republic is evaluated through a formal application procedure. The regulations prescribe the minimum amount of permanently available funds and document the fulfilment of the binding conditions for granting a bank licence. The minimum net book value of permanently provided funds by a foreign bank to its branch, which is a necessary condition for granting a licence, is SKK500 million or a corresponding amount in convertible foreign currency. Funds must be deposited in the bank’s deposit accounts from the date of foundation of the branch.
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Representation of a foreign bank A foreign bank establishing a representative office in the Slovak Republic submits its application to register the representative to the NBS. The application must include a definition of the activities of the bank authorized by licence in the country where the bank’s head office is located, reasons for establishing the representative, the suggested period of its operation and the subject and scope of its proposed activities. Financial operation in the accounts of the representative must not exceed the needs connected with the subject of the representative’s activities and the premises of the representative office must not give the impression of being a foreign bank or its branch.
Deposit protection The Act governing the protection of depositors is concerned with the protection of deposits of natural persons in banks and foreign bank branches and compensation for these deposits when they become uncollectable. A Fund of Deposit Protection has been established for this purpose, which concentrates and administers financial contributions from banks and foreign bank branches to provide compensation. The deposits of natural persons in banks carry the obligation of a bank or a foreign bank branch to a depositor to repay him in full, including interest and other property benefits connected with the deposit. The deposits of natural-person-entrepreneurs made for business purposes and anonymous deposits are excluded from these provisions. Under the law, banks accepting deposits from natural persons must participate in the protection of natural persons’ deposits and make contributions to the Fund. The branches of foreign banks must participate in deposit protection and make full contributions if deposits placed with them are: not protected or insured in the country in which the founding bank’s head office is located; or are protected, or insured, in the country where the head office is located on a smaller scale than the Slovak Act requires. A foreign bank has no obligation to participate in the protection of deposits according to this Act if the deposits are protected in the country where its head office is located to the extent defined by the Act and reciprocity is guaranteed. Compensation given for uncollectable deposits in a foreign bank branch, which participates in the protection or insurance of deposits in its home country, cannot under Slovak law be higher than compensation according to the Act. Types and amount of contribution Banks have an obligation to pay an initial contribution, annual contributions and extraordinary contributions to the Fund. The initial
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85
contribution of a bank is a fixed SKK1 million; the annual contribution is calculated at 0.1–0.3 per cent of the bank’s deposit value according to the average deposit balance in the previous quarter. An extraordinary contribution arises when the Fund needs extra funds to pay off heavy compensation for uncollectable debts. The Fund’s decision must be approved by the NBS. If a bank fails to repay deposits in a 48-hour period, in spite of using all means of liquidation including compulsory minimum reserves, the bank must report its default to the NBS and the Fund no later than the following working day. The amount of compensation against an uncollectable deposit payable by the Fund to a depositor is limited to 30 times the average monthly salary in the Slovak Republic (60 times in the case of Building society deposits). Average monthly salary is determined by the Institute of Statistics figure for the previous calendar year. The compensation payable to a depositor may be reduced by offsetting any liability of the depositor to the defaulting bank.
Inter-bank payment system The inter-bank payment system of the Slovak Republic operates through a single clearing centre. Under the law, all banks are obliged to make all domestic transactions through the centre. The clearing centre, called the Slovak Bankers’ Clearing Centre (SBCC), is a joint stock company owned by the banks. Both domestic banks and foreign bank branches are direct participants in the inter-bank payment system. In addition, certain non-banking entities, with the approval of the NBS, may have access to the system as third parties. The first two third parties that have been granted access are the Bratislava Stock Exchange and the Slovak Authorization Centre, both joint stock companies. The SBCC operates as a clearing house. Payment transactions are processed on a gross clearance basis. Data transfer between the banks and the SBCC is performed by electronic telecommunications or magnetic media. Throughout the clearing day the SBCC processes payment transactions continually and updates the balances on banks’ technical accounts. For each transaction the Centre checks that the relevant bank has sufficient coverage to make the payment.
3.2
Accountancy and Audit Deloitte & Touche Introduction A new accounting system was introduced in the Slovak Republic on 1 January 1993, when the Law on Accounting came into effect. The Law represents a fundamental change from the accounting principles of the communist era, which were designed to generate information for statistical and tax collection purposes only. The Law draws heavily on EU regulations and International Financial Reporting Standards (IFRS). It also implements a framework for a chart of accounts, originally modelled on the French system, and is now much more flexible.
Structure The Law on Accounting allows the Ministry of Finance to prescribe a mandatory framework for the formatting of accounts. These are known as the ‘frame of chart of accounts’. Separate formats exist for the following types of business: • entrepreneurs (the majority of businesses) within which there are various categories; • banks; • insurance companies; • municipalities and institutions that are financed by the State budget; • non-profit-making organizations, political parties, civic associations and other similar bodies. Statutory audits are required by: • • • •
joint stock companies; limited liability companies; limited partnerships; cooperatives with prior year turnover exceeding SKK40 million and/or assets exceeding SKK20 million and/or average number of employees exceeding 20 (two of three conditions must be met).
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87
Practice In general, assets should be recorded at cost. Fixed assets are shown at either cost or, in some cases, replacement cost. Assets are written off over their useful economic lives as determined by the entity. Prescribed depreciation rates are applied only for tax purposes. At the year end the financial instruments (securities, derivatives) are valued at fair value. All risk and impairments should be reflected. Stock is valued at the lower of cost or market value. Audits are governed by both the Law on Auditors and Slovak Auditing Standards issued by the Chamber of Auditors and are based on the International Standards on Auditing (ISA). As a result, a properly conducted Slovak statutory audit should not differ significantly from one performed in accordance with the ISA. Beginning on 1 January 2004, ISA will be fully adopted in Slovakia, as will the IFAC Code of Ethics. Early application is recommended.
Essentials Nevertheless, Slovak accounting standards differ from International Accounting Standards (IAS) in a number of ways, including: • all leases are treated as operating leases (this will be changed in 2004); • the effect of any change in accounting policy must be reflected in the accounts of the year in which the change occurred, including the effect of first-time IAS application; • there are regulations governing accounting for derivatives taken from the first version of IAS 39, but detailed guidance and updates are not available, and experience, in general, is lacking; • the guidance for provisions is not detailed enough and is not fully in compliance with IAS. The year-end financial statements consist of a balance sheet, a profit and loss account and notes, including a cash flow statement. The notes must contain information to assess the entity’s assets, liabilities, financial position and results of operations. The required information includes the accounting principles, valuation methods and depreciation rates used in the period. The balance sheet and income statement must be prepared on preprinted forms and the Ministry of Finance specifies the content of the notes in detail. The effects of any changes in accounting policy must be reflected in the year of change – prior year adjustments are not permitted. The reasons for any change and the effect on financial statements must be stated in the notes.
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Finance, Accountancy and Taxation
The offset of assets and liabilities, or income and expenditure, is only possible if specifically permitted by the Ministry of Finance. The financial statements and the company’s tax return must be submitted to the local tax authority by 31 March following the calendar year end. The deadline is extended to 30 June for companies that must be audited or have their tax returns signed by a registered tax adviser. The financial statements can be adjusted after the dates mentioned above until its approval (at the shareholder meeting). All financial statements should be sent to the Company Register (available to the public). Audited entities must prepare an annual report, including complete financial statements with notes, the auditor’s opinion and a comment on the business’s past and projected future performance and financial position. This public document should be made widely available and should be sent to the public Company Register. Consolidated accounts must be prepared by any company that owns more than 20 per cent of another company or where one company effectively controls the other, regardless of its equity holding. Consolidated financial statements are treated the same way as individual financial statements. Consolidated companies must adopt uniform and consistent accounting policies for the purposes of consolidation.
Concerns Specific penalties apply for failure to comply with accounting and disclosure requirements – a penalty of up to 3 per cent of total net assets (before provisions for impairment and risks). The tax authorities have responsibility for the enforcement of the Law. The detailed rules are not yet known.
3.3
Business Taxation Deloitte & Touche Introduction The Government of the Slovak Republic recognizes that foreign investment is essential to the development of the economy. Foreigners are allowed to carry out business activities in the Slovak Republic under the same conditions and in the same way as Slovak nationals.
Structure The following forms of business organizations can be established in the Slovak Republic: • • • • •
joint stock company; limited liability company; general commercial partnership; limited partnership; cooperative.
A foreign investor may operate through a branch or may establish a Slovak entity. Partners in a general commercial partnership are subject to personal income tax. General partners in a limited partnership are taxed with respect to their individual shares of profit and are subject to personal income tax. The profit of limited partners is subject to corporate income tax. Unless a different division of profits is stipulated in the partnership agreement, profit is distributed equally among the partners.
Resident entities An entity is regarded as resident if its legal seat is registered in the Slovak Republic. Resident entities are subject to corporate income tax on their worldwide income. Capital gains are included in the tax base for corporate income tax purposes. Foreign-source business income is included in the corporate income tax base.
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Finance, Accountancy and Taxation
Tax losses accumulated during no more than three proceeding tax periods may be carried forward for five years, with the obligation to reinvest the losses utilized in the acquisition of fixed tangible assets. No carry-back of tax losses is allowed. Tax losses from securities trading are deductible if the securities are listed on the securities exchange and the buy/sale price did not differ more than 10 per cent from its average rate on the day of purchase/sale; in other cases this applies only to the extent of revenue from securities trading (this does not apply to registered securities traders). These restrictions, however, apply only if the total acquisition price of all securities sold exceeds the total revenue from securities trading (in the case of overall profit from the securities trading, individual losses are deductible).
Non-resident entities A legal entity with its legal seat outside the Slovak Republic is subject to tax on Slovak-source income only. Various types of income are deemed to have their source in the Slovak Republic, such as income derived from business carried out through a permanent establishment. Technical or consulting services performed in the Slovak Republic are also regarded as Slovak-source income. The domestic definition of a permanent establishment expressly includes a fixed place of business, a building site, construction or assembly project (if it exists for more than six months), or the provision of services (if they are provided for more than 183 days in any 12 month period). An agent who has the right to conclude contracts on behalf of a foreign entity results in the creation of permanent establishment for the foreign entity. When a double tax treaty applies, the treaty definition of permanent establishment should take precedence over the definition provided by Slovak Republic legislation.
Practice Taxable income Taxable income is determined as the accounting results, adjusted as required by the tax law for tax deductible, non-deductible and nontaxable items. The standard rate of corporate income tax for both resident and nonresident entities is 25 per cent of taxable income – 15 per cent in the case of companies in the agricultural sector.
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91
Inventory valuation The purchased inventory is valued at its acquisition price (market value including related acquisition costs) using either the FIFO (first in – first out) or the weighted average valuation method. An inventory produced by the business itself is valued at the direct and related indirect cost incurred to produce it. Interest income Interest income is generally included in the corporate income tax base. However, the 15 per cent withholding tax, which is applied to interest on deposits, is treated as an advance payment towards the entity’s total tax liability (not refundable in case of tax loss). Depreciation Intangible assets are depreciated within five years of acquisition, in line with the accounting depreciation. For tangible assets, there are two methods available for tax depreciation: straight-line and accelerated. For leased assets, there is a special accelerated depreciation method allowing the leasing companies to depreciate assets over a shorter period of time than under normal conditions. Starting from the 2003 taxable period, the depreciable life of tangible assets has been shortened. For tax purposes, assets are divided into five categories, for which the prescribed periods of depreciation are as follows: Category
Includes
Depreciation period
1 2 3 4
Computers, passenger cars and some lorries Machinery, furniture, specific road vehicles Ships, rail vehicles, air-conditioning equipment Buildings (made from wood or plastics), railway track, pipelines Other buildings
4 years 6 years 12 years
5
20 years 30 years
Allowable business expenses and deductions Expenses incurred to generate, ensure and maintain income are generally treated as tax deductible. Some categories of expenses are deductible only after being paid. In certain cases, expenses are deductible only up to the limits defined in the tax law (depreciation, leasing expenses, creation of provisions and reserves). Neither directors’ nor representatives’ remuneration is tax deductible. Remuneration paid to gainfully employed members of staff and the workforce is generally deductible.
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Interest Loan interest is deductible, provided that the thin capitalization rules are not infringed. A debt-to-equity ratio of 4:1 is allowable for loans from related parties (6:1 in the case that the debtor is a bank or insurance company). Interest on debt exceeding this ratio is not deductible and requalifies as dividend. Interest paid to non-bank entities is deductible only when paid. Bad debts The tax law allows a deduction for the creation of provisions for bad debt up to a certain percentage, depending on the age of the debt (more favourable treatment is available for banks). The write-off of the bad debt is deductible under certain conditions: if bankruptcy proceedings are completed, and if receivables are classified as loss receivables.
Investment incentives Depending on the fulfilment of various requirements, the Slovak Republic provides income tax incentives for foreign and local investors in the form of a tax credit against the investor’s corporate income tax liability. Currently, these tax credits can be separated into two different categories: • Tax credits available after fulfilment of the conditions stipulated in the Income Tax Act. Such credits can amount to 100 per cent of the tax liability in years 1–5 of the investment and 50 per cent of the tax liability in years 6–10 of the investment. • Tax credits which can amount to 100 per cent of the tax liability in years 1–10 of the investment. All types of the tax credits are considered ‘state aid’ and therefore are limited by the maximum amount that can be granted. Such aid can amount to 50 per cent of the cost of acquisition of land, buildings and machinery. State aid can be granted mainly for the following purposes: • • • • • •
development of regions; small and medium enterprises; training of employees; support of employment; research and development; environment.
Taxation of non-resident legal entities The rules for computing taxable profits of non-resident legal entities are generally the same as for resident entities and the corporate tax
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93
rate of 25 per cent applies equally. The approach of the tax authorities is to determine the tax base of permanent establishments as the difference between income and expenses, adjusted for tax purposes. Various categories of Slovak-source income are subject to withholding taxes.
Withholding taxes Some income is not included in the general individual annual tax base subject to the progressive rates (individuals) or subject to a rate of 25 per cent (legal entities). Such income is subject to withholding tax at various rates: • 25 per cent on royalties paid to non-residents; • 25 per cent on payments for business, technical or other consultancy, for management and intermediary activities, the provision of services performed on the territory of the Slovak Republic; • 25 per cent on the interest payment on loans; • 25 per cent from the payments on the liquidation balance of a company; • 20 per cent on income from lottery winnings, bets and similar gains, winnings from advertising contests and prizes in public contests and sports competitions; • 15 per cent on yields from securities (stocks, shares, bonds, except for mortgage bonds and government bonds issued in foreign currency), distributed profits of limited liability companies, limited partnerships, profit shares from silent partnerships, interest from deposit certificates paid by a Slovak resident entity to resident and non-resident individuals; • 15 per cent on income received by individuals from interest and other yields from savings, deposit accounts and certificates, which are not designed for business activities; • 10 per cent on income of up to SKK4,000 a month from contributions to Slovak newspapers, magazines, television or radio; • 5 per cent on the interest income received by individuals from the savings accounts where money is deposited for at least three years.
Collateral tax The tax authorities may oblige the tax payer to withhold a collateral tax of up to 10 per cent of the payments made to other tax payers, to be used as a prepayment for the corporate income tax liability. Tax payers are obliged to withhold a collateral tax of 15 per cent from the gross amount, when making payments (other than those which are taxed by withholding tax) to non-resident tax payers, including non-residents who, after meeting a time test, will have a PE in Slovakia.
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If the receiver of the payment is a resident of a tax haven (determined by a decree issued by the Ministry of Finance), the collateral tax is withheld at the corporate income tax rate (25 per cent). Please note that the Ministry of Finance has not yet issued such a decree, so the respective provision is not applicable as at present. The collateral tax is not withheld in the case that the non-resident is paying advance payments for corporate income tax liability in Slovakia.
Corporate assessments and payments A tax payer must submit an annual income tax return on or before 31 March of the year following the end of the respective tax period. However, if the return is submitted by an authorized tax adviser then the due date is extended to 30 June. Advance payments must generally be made if the last known tax liability exceeded SKK50,000. The following scale applies: Last known tax liability
Advances
SKK50,000–500,000 SKK500,000+
quarterly monthly
Advances are paid in equal amounts based on the last known tax liability, the last advance (for December or last quarter) being due only for 50 per cent. Any outstanding tax liability must be paid within the deadline for the submission of the return. The tax may be assessed, or additionally assessed, normally no later than five years after the end of the tax period during which the duty to file the tax return or declaration arose or during which the tax liability arose without a concurrent duty to file a tax return or declaration. In case the tax authorities audit the tax return within this five-year period, the period is extended for another five years. Tax payers have 15 days from the issue of a notice of assessment by the tax authorities to file an appeal. The appeal may be passed to a directorate, whose decision is final.
Other taxes and employers’ contributions The rates of other significant national taxes and employers’ contributions are:
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95
VAT standard rate
VAT
most goods most foodstuffs and services financial, insurance, educational and healthcare services exports of goods
20% 14% Exempt Exempt with input VAT deduction
Employers’ social security contributions health insurance fund social insurance fund sickness insurance fund unemployment fund guarantee fund
10% of salaries (cap SKK32,000) 21.6% of salaries (cap SKK32,000) 3.4% of salaries (cap SKK32,000) 2.75% of salaries (cap SKK24,000) 0.25% of salaries (cap SKK24,000)
Employees’ contributions health insurance fund social insurance fund sickness insurance fund unemployment fund
4% of salaries (cap SKK32,000) 6.4% of salaries (cap SKK32,000) 1.4% of salaries (cap SKK32,000) 1% of salaries (cap SKK24,000)
Land tax agricultural land according to use other land according to area and type
variable variable
Buildings tax floor space and usage
variable
Real estate transfer tax based on the higher of the value as determined by the Decree on Valuation of Buildings and Land or the transfer price
at progressive rates (1–6%)
Miscellaneous taxes are levied as duties on fuel and lubricants, alcohol and spirits, beer, wine and tobacco products, or as road tax on owners of motor vehicles used for business activities in the Slovak Republic, including owners of motor vehicles registered abroad who use their vehicles in the Slovak Republic.
Essentials Tax considerations for groups No provision exists for group consolidation of profits or losses for tax purposes. Transfer pricing provisions apply when the contract price of a transaction between economically or personally related persons differs from the usual market price. The profits of a branch are subject only to corporate income tax (no withholding tax on transfer of profits from the branch). By contrast,
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the distributions of a subsidiary are also subject to withholding tax at 15 per cent, subject to relief provided by the terms of the applicable double tax treaty.
Corporate assessments and withholding tax The tax year is the calendar year. Tax is basically self-assessed. Tax payers calculate their own liabilities and claim any exemptions and reliefs on the annual tax returns. Income subject to final withholding tax is excluded. The withholding tax rates may be reduced under the double taxation treaties that the Slovak Republic has negotiated. A number of these treaties were negotiated by the former Czechoslovakia; however, most treaty partners have formally agreed to continue to apply the treaties to the successor states or are doing so in practice.
Value Added Tax VAT is payable on all sales of goods and services and on the import of goods, and is based on the price of goods and services including duties. VAT legislation is being amended to gradually remove all differences between the VAT systems in the Slovak Republic and the EU. Under certain circumstances, non-resident persons may obtain refunds of Slovak VAT. There is no reverse charge mechanism.
Employers’ deductions Employers must calculate and withhold tax from monthly salaries and wages. If a foreign employer employs personnel for more than 183 days and does not have a permanent establishment (with the exception of commercial, technical, and other consulting services and of foreign diplomatic missions in the country) he is generally obliged to withhold and remit Slovak tax from the employees’ income.
Foreign nationals Foreign nationals may be employed on the same basis as Slovak nationals, provided they have the necessary visa and work permits. Resident individuals are subject to Slovak personal income tax on their worldwide income and gains. Non-resident individuals are subject to tax on income and gains derived from Slovak sources only. An individual is regarded as resident if his or her permanent residence or usual domicile is in the Slovak Republic, which is judged to be the case if he or she is present in the country for at least 183 days in the calendar year (different under some double tax treaties).
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97
Concerns The Slovak Republic continues to observe the multilateral treaties concluded by Czechoslovakia and members of the former Council for Mutual Economic Assistance (COMECON), which provide for the exemption of dividends, interest and royalties from taxation in the source country. Some other members have decided not to reciprocate or have since signed treaties with the Slovak Republic which supersede the COMECON treaties. Old Czechoslovak bilateral agreements on social security, not previously enforced, are being enforced now and new agreements are being concluded; so more careful consideration should be given to social security for expatriates. The Slovak Republic does not levy business licence or trade taxes, but administration and court fees are levied on those registering a business or independent activities.
3.4
Financial Support and Finance Facilities from the EU Bank Austria The Accession Partnerships and their operation The EU makes available some EUR3 billion annually to ensure that the appropriate flanking measures accompany the accession process. This substantial financial assistance is intended to be used for drawing up tailor-made plans to assist countries in preparing for accession. However, the actual investments required of the candidates are many times greater. The budgetary basis for the EU programme is the Agenda 2000, which sets the financial framework for the EU for the years 2000–2006. Accession Partnerships are drawn up annually for each accession candidate to define its short-term, medium-term and longterm goals, which also include the major financial assistance being granted, so that they are the core element of European assistance for enlargement. Each Accession Partnership is supplemented by a National Programme for the Adoption of the Acquis (NPAA), produced by the accession candidate, which states the concrete actions they plan to take to achieve the goals set down in the Accession Partnership. On this basis, the European Commission signs what is known as a Financial Memorandum every year with each individual accession candidate. This memorandum contains the projects and programmes which are to be co-funded by the EU. Following accession to the EU, assistance thereafter will be based on European regional policy directives and regulations, and the programmes of the Structured Funds and the Cohesion Fund will apply from the negotiated accession dates. Presumably, most accession regimes will be classified as Objective 1 regions (regions whose development is lagging behind). At present, some 70 per cent of European assistance goes to Objective 1 regions. Therefore, unless the EU decides to exceed greatly the budget fixed for the period up to 2006, the
Financial Support
99
successful accession candidates will initially receive only a certain percentage of the possible funding assistance. Sufficient assurance must also be given that each country has adequate administrative capacity to implement the European assistance policy and to monitor efficiently the use of resources.
EU budgetary issues The European Commission’s plan has diverged from the Agenda 2000, concluded in March 1999, in two respects; the first countries will join the EU in 2004 at the very earliest (instead of 2002) and the number of first wave accessions is now assumed to be ten instead of the original six. Prior to the Copenhagen conference, obligations in the EU budget towards accession candidates were set at EUR10.8 billion (2004) with increases to EUR13.4 billion (2005) and EUR16 billion (2006). Specific provisions were earmarked within the overall budget for agriculture – possibly the most divisive issue in the accession negotiations – structural policy and ‘internal policies’, such as nuclear safety. In the case of agriculture, the allocation to market measures of the Common Agricultural Policy (CAP) is EUR516 million. In its draft report, following discussion at the Berlin summit, the Commission foresaw a two-phase model according to which direct payments will be gradually increased until they match the level of support that is generally applicable to all EU member states in 2013. A second area in the chapter on agriculture concerns rural development in relation to managing the effects of the CAP. The financial resources assigned to this area would amount to EUR1.532 million in 2004 rising to EUR1.781 million by 2006. One-third of these funds could be provided through the Cohesion Fund, with the advantage that the co-financing by the EU would amount to 85 per cent instead of 80 per cent. Structural policy is the second major expense area. The subsidies granted to the new member states are massive compared to their per capita GDP, which is low by EU standards. The Commission proposes that funds amounting to EUR7.067 million be made available to the new member states in 2004, increasing to EUR8.150 million in 2005 and to EUR10.350 million in 2006. A further area of support is the building of institutions, referred to above, but these funds will be reduced after accession. A total of about EUR1 billion is currently being made available, mostly under the Phare programme, to the candidate countries for the development of their administrative systems and for taking over the acquis communautaire. The overall financial framework for enlargement for the period 2004–2006 is summarized in Table 3.4.1.
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Table 3.4.1 Financial framework for enlargement 2004–2006 (EUR million, 1999 prices) 2004
2005
2006
Agriculture
2,048
3,596
3,923
Structural actions
7,067
8,150
10,350
Internal policies
1,176
1,096
1,071
503
558
612
Total commitment appropriations
10,794
13,400
15,966
Total commitment appropriations (Berlin 1999 scenario)
11,610
14,200
16,760
Payment appropriations (enlargement)
5,686
10,493
11,840
Payment appropriations (Berlin 1999 scenario)
8,890
11,440
14,220
Commitment appropriations
Administration
1) Scenario: Accession of 10 new member states in 2004 Source: European Commission
Difficult negotiation issues Agriculture The number of persons employed in the agricultural sector and the relevant share of GDP is much higher in the candidate countries than in the EU. However, the employment percentage in Hungary at just over 10 per cent is in contrast to Poland, where agricultural employment is highest at 25.7 per cent, but is more than twice that of the Czech Republic (4.8 per cent). Contributory factors in the significance of the agricultural sector in the Central Eastern European (CEE) region have been motives such as self-sufficiency in food production and the high subsidies received by the sector generally in the region. Whatever the reasons, the impact of the CAP will be considerable. Unemployment in Slovakia has not diminished since 2000 although GDP has continued to grow quite strongly. Agriculture is just one of the sectors where increased productivity has impeded progress in reducing unemployment.
Direct payments Among the measures agreed at the 1999 Berlin summit for the reform of the CAP were a reduction of intervention prices with the objective of moving from price subsidies to direct payment. The lowering of intervention prices, which reduces income, was offset by higher direct
Financial Support
101
payments. As the agricultural prices in the candidate countries in the CEE region are also partly below the intervention prices, this measure would amount to an additional price subsidy. The efforts of recent years to establish a competitive agricultural system in the CEE region, which were supported by the EU, would be countered or at least delayed from a prompt and complete outcome by taking over the system of direct payments. Not only would the present structure become more inflexible, but new tensions would also result as incomes in the agricultural sector would rise to well above those of an industrial worker. For this reason the Commission called for a plan to be implemented gradually by stages. However, at present France and Germany, while insisting on imposing a cap on overall farm spending in Europe, have combined to block any general reform of the CAP.
Financial support from the EU for accession candidates The European Commission has tasked itself with providing a comprehensive finance package to help the ten accession candidates (Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovak Republic and Slovenia) prepare for accession to the EU. The support is being provided through three programmes from 2000 to 2006: Phare, ISPA and SAPARD. The total annual budget of about EUR3 billion for the three initiatives is allocated as follows: EUR1.5 billion for Phare, EUR1 billion for ISPA and EUR0.5 billion for SAPARD.
Phare The Phare programme takes the form of non-repayable grants from the Commission to support goals set in the Accession Partnerships to prepare candidates for EU accession. There are two main priorities: • Investment support to help the accession candidates adapt their infrastructure and enterprises and bring them up to EU standards (70 per cent of Phare is allocated to meeting this goal). • Institution-building: 30 per cent of the budget is allocated to the goal of developing and strengthening institutions so that the candidate is equipped to adopt and implement the EU legal system with the necessary administrative resources. Phare programmes are no longer based on demand from the individual countries, but exclusively on the needs arising from the forthcoming accession. General programmes for the environment, transportation infrastructure and agriculture are no longer included. A number of needs-
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oriented programmes have been created for each accession candidate on the basis of the Accession Partnership and the ensuing Financing Memorandum. The REC has set up a separate Internet page for each country and sector: http://europa.eu.int/phare-cgi/plsql/prog.search. Like ISPA and SAPARD (see below), the Phare programme is implemented in a decentralized manner – ie the recipient countries are responsible for programme execution. In most projects funded by Phare, the companies that are to carry out the projects are determined in international tendering procedures. Forecasted tenders are published by the Commissions’s office for external aid programmes, ‘EuropeAid Cooperation Office’, on the following Web page: http://europa.eu.int/comm/europeaid/cgi/frame12.pl. Companies and experts wishing to participate in the public tenders should first enter their names in the central Consultant Register, which serves as the central database for the European Commission. Based on the project information provided on the Internet, companies can register their interest by sending a ‘letter of interest’. If the company is put on the ‘short list’, it can participate in the actual public tender. There are currently about 60 programmes for the Slovak Republic. National programmes A large part of Phare funds go to national programmes negotiated by the Commission and the accession candidates on the basis of the Accession Partnerships. These programmes include schemes promoting cross-border cooperation with neighbouring countries. Slovakia is conducting programmes with Austria, Germany, Poland and the Czech Republic. Individual projects are drawn up on the basis of the national programmes. The final report containing key statements and information on a project can be obtained from the Delegation of the European Commission in the country concerned: Delegation of the European Commission Slovakia Panska 3 SK-811 01 Bratislava Tel: +421 2 544 317 18 Fax: +421 2 544 329 72 e-mail:
[email protected] Multi-beneficiary programmes Most of the remaining funds go to horizontal and cross-border initiatives tailored not to a single country, as are the national programmes, but to promoting a given sector or topic. They apply equally to all accession candidates and are administered by the Commission in cooperation with the countries involved. The Commission is reducing
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programmes that do not provide assistance tailored to accession as a part of the realignment of Phare. Existing programmes can be found at: http://europa.eu.int/comm/enlargement/pas/phare/programmes/multi -bene/index.htm. Opening up of EU programmes to accession candidates Since 1998, successive steps have been taken to open up sectoral programmes open to all EU member states to the accession candidates as well. An overview of the EU programmes in which Slovakia participates is presented on the following Web page: http://europa.eu.int/comm/enlargement/pas/ocp_index.htm.
ISPA Since the beginning of 2000, an annual EUR1.040 million in structural assistance has been made available to EU accession candidates through the Instrument for Structural Policies for Pre-Accession (ISPA). The funds are directed to three areas: • Environment – to bring accession candidates up to EU environmental standards, with a focus on areas involving heavy costs – ie drinking water supply, waste-water treatment, and air pollution and solid-waste management. • Transport – with the goal of improving the mobility of people and the transport of goods through investment in infrastructure, particularly in relation to the development of the Trans-European Networks (TEN). • Technical assistance – a minor part of the budget is used to fund feasibility studies and project management. (There is a similar Phare programme.) Financial assistance can cover up to 75 per cent – in special cases up to 85 per cent – of project costs; projects should involve a minimum investment of EUR5 million. Co-financing arrangements can be entered into with international finance institutions or with commercial banks. Project selection and monitoring is carried out by the European Commission. There are current provisions for annual assistance of EUR35–57 million under ISPA for the Slovak Republic. Details may found at: http://europa.eu.int/comm/regional_policy/funds/ispa_en.htm. Companies planning to carry out projects in the accession candidate countries with Phare or ISPA assistance are advised to contact the office administering the relevant programme at an early stage to discuss a potential inclusion of that project. A list of contacts for ISPA and the Phare Address Book are readily available from the Bank Austria Creditanstalt Group’s EU Advisory Team identified in Appendix I.
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SAPARD The Special Accession Programme for Agriculture and Rural Development (SAPARD) came into effect at the beginning of 2000 and is intended to: • promote sustainable rural development; • resolve the problems related to the long-term adaptation of the agricultural sector and rural areas; • support the accession candidate countries in adopting and implementing the acquis communautaire in the area of the CAP and related measures. Priorities vary considerably from country to country. Overall, under SAPARD, more than EUR500 million annually is made available. The funds allocated differ considerably among the individual countries; the Slovak Republic receives approximately EUR19 million annually. A SAPARD agency has been set up in each country to agree the projects to be selected and to administer a Multi-annual Financing Agreement with the EU as a master agreement for the priorities to be financed. The maximum project size varies from country to country and an Annual Financing Agreement is signed determining the amount to be committed for each year. SAPARD funds take the form of non-repayable grants up to a maximum of 50 per cent of project costs and are advanced to enterprises, individuals and, in certain cases, government agencies in the agricultural sector of candidate countries. Beneficiaries are responsible for raising the remaining funds. SAPARD differs from other external aid programmes of the European Commission in that projects must be filed directly with the SAPARD agency in the relevant country. Further information about SAPARD is available at the following Web site: http://europa.eu.int/comm/agriculture/external/enlarge/ index_en.htm.
EU SME Finance Facility Phase II (SME FF) In addition to the three basic aid programmes, the European Commision launched a regional Finance Facility in 1999 for the ten applicant countries. The Commision administers the programme in cooperation with the EBRD, the EIB and the Council of Europe Development Bank (CEB) or KfW (Kreditanstalt fur Wiederaufbau). The Facility is funded from Phare resources. The essential purpose of the programme is to facilitate long-term lending to small- and medium-sized enterprises (SMEs) by local financial institutions (banks and equity funds) in the applicant countries. Support is extended to these intermediaries in two ways: the
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‘traditional’ lending procedure through the so-called ‘Loan and Guarantee Window’; and the ‘Equity Window’, whereby the EBRD makes available equity capital and management support. The final borrowers, local SMEs, have to meet certain minimum local and national standards in the areas of environmental protection, security and health protection. HVB Bank Slovakia a.s. (http://www.hvb-bank.sk) has signed agreements for refinancing lines – covering a total amount of EUR70 million – with EIB and, since 2001, with KfW. These funds may be used by SMEs, and also for infrastructure projects by territorial authorities, PPPs and companies active in promoting the interests of communities. The refinancing lines are a pre-condition for participation in the ‘Loan Window’ of the EU SME Facility in which HVB Bank Slovakia is negotiating participation as an intermediary. In the Slovak Republic, SME FF arrangements currently exist with the following institutions: Vseobecna Uverova Banka, a.s. (http://www.vub.sk) and Slovenska Zarucna A Rozvojova Banka, s.p.u./Slovak Guarantee and Development Bank (http://www.szrb.sk); and in the Equity Window with: GIMV Czech and Slovak SME Fund/G.I.M.V. Czech Partners Management Company B.V. c/o E1CZ, s.r.o. (http://www.gimv.be). The content of this chapter is a consolidation of papers from the Bank Austria Creditanstalt Economics Department publication’s: ‘Investment Guide on Slovakia’, (March 2002) and ‘East–West Report 4/2002’.
3.5
Capital Markets Slovak Investment and Trade Development Agency (SARIO) and Jonathan Reuvid Legal framework and background Operation of the capital markets in Slovakia is controlled by several laws and legal regulations. The basic legislation for the whole area of business and financial relations is Commercial Code No. 513/1991 Coll., as amended by subsequent legislation, in particular the parts concerning business relations and obligations, and the protection of foreign persons doing business in the territory of the Slovak Republic, including their investments in Slovak legal entities. The existence of shares of public limited companies is fundamental to the development of capital markets. In Slovakia this area is regulated by Law No. 600/1992 Coll. on Securities, as amended by later regulations. This law deals with the system of securities as tools of the capital markets, basic concepts in this area, securities contracts, traders in securities, and notification duties of the issuer of securities as well as questions of investor protection. Other laws regulating the securities area include Law No. 191/1950 on Bills of Exchange and Cheques and Law No. 385/1999 Coll. on Bonds and Law on Collective Investments. These laws stipulate conditions for issuing securities. The majority of shares in Slovak public limited companies were issued in the process of mass privatization. A voucher method was used for their emission, and inhabitants who took part in privatization could exchange 1,000 so-called ‘investment points’ in five auctions for shares of privatized companies. Together with direct investors, they also had an opportunity to join an investment privatization fund, organized as a kind of ‘close-end’ fund. Under the amendments to Law No. 361/1991 on Bonds, permission of the Ministry of Finance is not required from 1 January 2000 for the issue of municipal obligations, regardless of their maturity, and bonds with maturity shorter than one year. The issuers of bonds not requiring permission are still obliged to inform the Ministry of Finance and the National Bank of Slovakia.
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The main regulations for the trading of securities on the public securities market include the following: • Trading may be carried out on the basis of a licence from the Ministry of Finance. • Securities must have a form stipulated by law. • Shares of public limited companies must contain an ISIN (National Securities Identification Number). • Securities of issuers in the territory of Slovakia are indicated by the prefix SK. Securities of Slovak companies issued before the independence of Slovakia begin with the prefix CS. • A security must be issued with a single face value. • In the case of non-marketable securities, a licence from the Ministry of Finance is not required. • The register of shares of public limited companies is managed by the Stredisko Cennych Papierov SR (SCP SR – Centre of Securities of the Slovak Republic). Since 1 January 2000, the SCP SR also manages the register of non-marketable registered securities. • The register of T-notes is managed by the National Bank of Slovakia. • The primary subscription of T-bonds and T-notes is organized in the form of auctions by the National Bank of Slovakia. • The primary subscription of shares and bonds of other issuers can be organized by managers (banks or traders in securities) or by the issuers themselves.
The Bratislava Stock Exchange Founded in 1991, the Bratislava Stock Exchange (BSE) is organized as a joint stock company. Its shareholders include banks, traders in securities and Fond Narodneho Majetku (FNM SR – Fund of the Slovak Republic). As a legal entity it is entitled to organize, at a specified time and place, the offer and demand for securities via authorized persons. Stock trades may only be transacted by members of the stock exchange, which includes traders in securities and banks. According to the law, the National Bank of Slovakia can also do business on the BSE. A necessary pre-condition of membership of the BSE is that the applicant’s business is defined as securities trading conducted on the basis of a licence from the Ministry of Finance. A BSE member may do business on their own or on somebody else’s account. BSE members are entitled to buy and sell on their securities via a broker. Stock exchange regulations provide for full and temporary memberships. Membership of the BSE is subject to the following rules: • A trader in securities or a bank becomes a full member after the payment of the membership fee of SKK1 million.
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• Temporary membership is limited to a period of one year. • State supervision of the stock exchange is executed by the Urad Pre Finaneny Trh (UFT – Financial Market Bureau). • The general assembly of shareholders is the basic body of the BSE. It approves the structure of the Stock Exchange Chamber, which is the statutory body of the company. • The operation of the BSE, as well as its activities, are directed by the general secretary and two under-secretaries. • Other bodies of the BSE organization structure include the trading committee, securities listing committee, membership committee, arbitration court (solving disputes between members of the BSE) and a derivatives trading preparatory committee. The securities traded on the BSE include shares and government, municipal, bank and company bonds. The BSE organizes securities trading on three markets: the listed companies market, the registered companies market and the free market. Companies whose shares or bonds are traded on the BSE listed companies market are obliged to publish their financial results once every six months. No strict conditions are applied to securities traded on the free market. Trading on the BSE is carried out through an electronic system. Clearing and settlement of trades are executed within three days of the date they are closed (T+3). BSE members may close direct or through anonymous trades. Slovensky Akciovy Index (SAX – Slovak Share Index) is the BSE’s official share index. Its initial base value of 100 points is related to 14 September 1993 and is calculated by reference to the market capitalization of its constituent securities. The development of the bond market is reflected in Slovensky Dlhopisovy Index (SDX – Slovak Bond Index), which is in two parts. The first part represents State bonds and the second part represents the bonds of companies and towns. A BSE member becomes a market maker in a particular security by entering into a contract with the BSE. A member may become a market maker in any number of issues of securities, and the rights and obligations of all market makers are equal. A market maker is obliged to maintain every issue in which he is registered in the listing throughout the period of trading and to observe the price spread stipulated by the BSE. The spread is the permitted difference between the purchase price and the selling price of a security for which the market is being created. In Slovakia the system of market makers was created mainly for State bond issues. On 1 November 2000 a new law, Law No. 330/2000 on the Stock Exchange, came into effect, which transferred competencies to issue permission and carry out State supervision in the area of stock exchanges from the Ministry of Finance to the UFT. On the same day, Law No. 331/2000, which modifies and amends Law No. 600/2000 on
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Securities as amended by later legislation, became effective. Legal regulation included in these two laws of 1 November 2000 solves problems that had remained in the market since the period of privatization through vouchers and had been one of the main reasons for nontransparency of the market.
Centre of Securities of the Slovak Republic The Centre of Securities of the Slovak Republic (SCP) was established by the Ministry of Finance in the form of a joint stock company and was registered in December 1992. The establishment of the SCP resulted from the need to transfer State property to private entities and subsequently to register all changes in ownership rights. Almost all shares of such companies were issued in dematerialized form. The operations, rights and duties of the Centre, as well as its relations with other capital market entities, are stipulated by the Securities Law (Act No. 600/1992) as amended by the later legislation referred to above. The SCP has built a computer system with a securities-owner database, which is used to provide information services to other capital market entities. The database was partially transferred from the Centre of Voucher Privatization and handles over 100 registration, information and trading services through a network of ten regional centres. Orders for these services can be entered into the system on paper, by electronic media or via an online connection with the SCP. The SCP is also appointed by the Ministry of Finance to act as national numbering agency allocating ISINs to publicly marketable securities and complying with the international standards ISO 6166 and 3166. Prospectuses of all issuers may be examined at the SCP’s head office. The SCP maintains the register of the owners of dematerialized securities, as well as the register of issuers and their issues. By 2001 the database comprised more than 2.6 million securities owners, about 700 issuers and over 1,000 issues.
Foreign traders in securities The 1999 amendment to Law No. 600/1992 Coll. on Securities included foreign traders in securities and changed the form of materialized security transfers. A foreign trade in securities was defined as an organizational unit of a foreign legal entity having the permission of a competent body of the state in which it is based to provide services in the area of securities. A foreign trader in securities may conduct activities that include purchase, sale or the provision of sale or purchase of securities on the basis of a licence from the Slovak Ministry of Finance.
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It must take the form of a joint stock company with a minimum basic capital of SKK5 million. The activities of a foreign trader in securities in the territory of Slovakia are under the State supervision of the Ministry of Finance, which is also the licence issuing authority. The Ministry of Finance will decide upon granting a licence within 60 days of receipt of an application in the prescribed form. The licence is issued for an unlimited period of time and is non-transferable.
Law on collective investment A new Law on Collective Investment No. 385/1999 was enacted by the Slovak Parliament at the end of 1999. This replaced Law No. 248/1992 Coll. on Investment Companies and Funds. Collective investment is defined as the raising of financial means from the public on the basis of an initial public offering (IPO) and includes the management of property acquired through investment raised in this way. The 1999 law, effective from 1 January 2000, regulates collective investment, the activity of a management company (a company which manages mutual funds), the protection of investors and State supervision. It is possible to carry out business in the area of collective investment only on the basis of a licence granted by a State supervisory body. According to this law, an IPO includes the dissemination of information via printed matter, radio, TV, circulars, brochures or other written materials. Also included is material personally addressed to an addressee and electronic communication and information systems other than personal contact, which are all considered tools of dissemination of an IPO. A management company that manages mutual funds must be a joint stock company entitled to create and manage mutual funds for which the prior approval of a State supervisory body is required. A formal procedure for application in writing is laid down.A management company may issue only registered shares and its basic capital – a minimum of SKK50 million – must be fully paid up before the submission of an application for a licence to do business in the area of collective investment. The following are basic requirements for maintaining a licence and operating a management company: • A management company is obliged to create and manage at least one mutual fund within six months of its entry in the Commercial Register, otherwise the licence will expire. • Each management company is obliged to create at least one openend fund with a minimum net asset value of SKK50 million. • The remuneration of a management company for each year of management of a mutual fund cannot exceed 4 per cent of average
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•
•
•
•
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annual net asset value in an open-end fund and 3 per cent of net asset value in a close-end fund. A bank with an address in the territory of the Slovak Republic having a licence for the activities of a trader in securities and for the activities of a depositary can also be a depositary of a management company and mutual fund. If a foreign management company, having a licence in its own country to do business in the area of collective investment, wants to issue participation certificates of mutual funds that it manages in Slovakia, it must request a licence in written form in advance from a State supervisory body. A licence is granted to a foreign management company only in the case that: – its business is exclusively in the investment in shares of public limited companies; – the level of protection for the participants of collective investment in the country where the management company is based is not lower than in Slovak law. A foreign management company based in an OECD or EU member country may issue securities in the Slovak Republic, unless within two months of the application the State Supervisory body decides that the issuing of securities is not in compliance with the law. The relationships of a foreign management company issuing its securities in the territory of Slovakia to domestic investors should be based on a principle of equal treatment of all investors.
Notwithstanding the provisions of Law No. 385/1999 Coll. on Collective Investment, many legal experts consider that the provisions for a foreign management company are inoperable because the most important aspect – the method through which it is possible to start the distribution of foreign funds into the Slovak market – is not stipulated at all by this law. Slovakia is the only country where procedure in this respect is not clear. At the root of the problem is the Law’s failure to differentiate between asset management and the distribution and/or sale of participation certificates of individual funds. Foreign management companies considering dong business in Slovakia should consider this issue carefully and take informed professional advice.
Open- and close-end funds According to the Law on Collective Investment, an open-end fund is a mutual fund whose shareholders are entitled to present for disbursement their participation certificates in the open-fund to the management company that issued them. Conversely, the management company managing an open-end fund is obliged to secure
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disbursement of a presented share to the shareholders for an amount calculated according to the law. The statutes of an open-end fund should include its name, orientation and aims of the investment policy of the management company, together with a description of the securities into which the fund will invest. Other matters that should also be specified in the statutes are: • • • • • •
principles of the management of fund property; rules for appraisal of the property in the fund; method of publishing reports on the financial results; information on the prospectus; remuneration for the management of the fund; form of participation certificates.
An open-end fund is obliged to invest in domestic shares in public listed companies and securities accepted for trading on foreign stock exchanges regulated by state supervision in OECD or EU member states, as well as in current assets. The fund may invest a maximum of 10 per cent of its asset value in other securities, including deposit certificates. The securities of one issuer must not exceed 10 per cent of the asset value, and mortgage bonds of one bank must not exceed 20 per cent of the asset value of the fund. In certain cases, the State supervisory body may permit the creation of an open-end fund whose only investments consist of State securities or securities guaranteed by the State. The Law on Collective Investment enables the founding of a close-end fund by a management company only in those cases where the value of the property managed in open-end funds exceeds SKK100 million. A close-end fund can be founded only for a clearly defined period of time which must not exceed ten years. The minimum value of managed property in this type of fund is SKK50 million.
Part Four
Key Sectors of Business and Industry
4.1
Agriculture and Food Slovak Investment and Trade Development Agency (SARIO) Agriculture Slovak agriculture has undergone significant changes since 1989 when farming was concentrated on agricultural cooperatives and Stateowned farms. The economic transformation completely changed the way of doing business, and by 2000 there were approximately 19,000 self-employed farmers working fields with areas from 1 to 700 hectares for whom agriculture is not necessarily the only source of income. Agricultural cooperatives farm some two-thirds of agricultural land, although their numbers declined by 10 per cent in 2000 year-on-year. As at 31 December 2000 there were 732 agricultural cooperatives and 342 business firms engaged in farming, the latter accounting for a 30 per cent market share. For at least ten years, Slovak agriculture has recorded losses. The loss was lowest in 1997, when it was less than SKK1 billion. Agricultural production increased in 2000 by comparison with 1999. In the first nine months of 2000 the losses recorded by lossmaking enterprises at SKK1.697 billion were more than offset by the recorded profits of profitable enterprises at SKK2.287 billion. However, although 51 per cent of enterprises recorded profits, better economic results were not the product of better economic conditions or performance but arose from State subsidies in the order of SKK3.3 billion, which compensated agricultural companies for poor crops caused by a disastrous drought. The overall economic results were also influenced by the only partial selection of high loss-making companies that terminated their activities on the land, the increase of agricultural product prices and the inclusion of advance subsidy payments. The credit burden of agricultural production enterprises decreased in 2000, partly as a result of credit repayments but most of all due to the lower volume and value of new credits provided by commercial banks. In effect, banks reduced their financing of agricultural production. Although investments in agriculture increased, they were not sufficient for a more radical renovation of fixed assets. However, a considerable year-on-year increase of 36 per cent was recorded for
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investments into plant and machinery, reflecting a changed Government attitude to subsidy policy.
Food industry Development history The 1990s were a difficult period for the food industry in Slovakia, which was heavily subsidized by the State until 1990 and absolutely dependent on domestic agricultural production. Agriculture and, subsequently, the food industry were affected significantly by the post1989 political and economic changes. Until 1990 the demand for and consumption of food on the domestic market were increasing. The market situation then started to change dramatically; the supply of food exceeded demand and the opening of borders and liberalization of trade enabled foreign producers to enter the market. Following liberalization of the market the Government no longer had the means to maintain its ‘cheap food’ policy with State subsidies. The market was now determined more by the economic capabilities of Slovak inhabitants than its needs. Demand slackened, resulting in decreases of domestic production. After 1994, when the Slovak economy recovered from recession, real wages started to increase, which had a positive influence on the Slovak market. The revival was reflected in the increased purchasing power of the consumer and the growth of expenditure on food. In 1998, expenditure on food was 40 per cent higher than in 1995 at the then inflation rate of 18.6 per cent. However, over the same period in terms of GDP at constant prices, food production showed a growth of only 6.8 per cent. It followed that, after the market’s revival, traders serviced the unsatisfied demand with imported food products. Slovakia is a net importer of food products. The negative balance in the three years 1998–2000 was at the level of SKK15 billion each year, on foreign trade at the level of SKK50 billion. After deducting the value of imported commodities that Slovakia is unable to produce (eg coffee, citrus fruits, cocoa beans, rice, spices, etc) the negative balance of replaceable commodities is reduced to SKK5 billion.
Post-1989 development Until 1990 the Slovak food industry was a profitable sector of the economy. However, although the State regulation of prices provided marginal profitability, enabling companies to manage the basic issues of production, profits were insufficient to fund the purchase of equipment as technology progressed.
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By 1998, in spite of unfavourable financial results, the value of tangible and intangible assets had increased by 16 per cent to SKK52.7 billion. Nevertheless, low investment over a long period had resulted in stagnation through wear and tear. In 1999, 58 per cent of enterprises recorded profits, and asset values increased slightly by 2.8 per cent year-on-year. The industry workforce decreased to less than 48,000 and labour productivity increased by SKK1,000 to SKK10,472 per employee. At this point, liabilities to raw material suppliers had increased to SKK3.3 billion and food production had reached 4.13 per cent of GDP. The insufficient use of resources is a negative phenomenon of the Slovak food industry, reflecting weak market demand as well as relatively high technology production and price development. In 2000, the utilization of the capacities of various sub-sectors of the food industry were estimated, as shown in Table 4.1.1. Table 4.1.1
Percentage utilization of production capacity Utilization
Dairy industry
66%
(Butter production)
36%
Beer and malting industry
70%
Sugar production
67%
Canning industry
40%
Meat industry abattoirs
35%
The investment of foreign capital into the Slovak food industry has been relatively slow but could have some dynamic effects. However, there are food industry sub-sectors in which there has been more aggressive foreign direct investment, which include: • • • • •
breweries cheese processing chocolate starch sugar
Heineken Bongard Jacobs Suchard Amylum Slovakia Word Eastern Sugar Agrana SPA Nord Zucker
Between 1992 and 1997 the biggest investments were in the modernization of technology and equipment, and the renovation and reconstruction of the whole food industry.
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The biggest companies in the Slovak food and tobacco industries, in descending order by asset value, are: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Slovak International Tabak, a.s. Palma-Tumys, a.s. Nestlé Food, s.r.o. Jacobs Suchard Figaro, a.s. Heineken Slovensko, a.s. Tauris, a.s. Hradok Masdokombinaat, s.r.o. I.D.C. Holding, a.s. Coca-Cola Beverages Slovakia, s.r.o. Rajo, a.s.
Bratislava Bratislava Prievidza Bratislava Nitra Rimavska Sobota Lueenec Bratislava Bratislava Bratislava
In the 1990s most companies suffered from a lack of modern packaging equipment, the consumption of fuel and energy was very high and some companies had no ecological equipment. In spite of State subsidy policies the inflow of funds into the food industry was insufficient. With the failure of the Agriculture and Food Industry State Support Fund, through lack of resources, to enhance production capacity by subsidies and contributions, the industry has been even more reliant on increased foreign capital participation.
4.2
Gas and Mining, and Metallurgy Slovak Investment and Trade Development Agency (SARIO) Mining Mining in Slovakia dates back to the thirteenth century, when the first mining settlements and mining towns were founded. Precious metals and copper, as well as iron, mercury, lead and other metals were mined and extracted. Thanks to the contribution of Slovakia, Hungary became one of the biggest producers of precious metals in the world, with mining centred on Kremnica, Banska Stiavnica and Banska Bystrica. Slovak copper was exported throughout Europe and by the beginning of the sixteenth century Slovakia was one of the world’s biggest copper producers. The growth of the Slovak mining industry peaked in the period from the end of the seventeenth century to approximately the middle of the nineteenth century. According to historical data, one half of European production in 1829 was extracted from Hungary, of which two-thirds was mined in Slovakia. Today Slovakia’s mining industry is focused on brown coal (Novaky, Cigesk, Handlova, Vescky Krtis and Holie), crude oil (Ggbely), salt (Presov), magnesium (Lubenik, Jelsava, Kosice), talc (Hnuska), gold (Hodrusa-Hamre), siderite (Nicna Slana), barytes and copper concentrates (Rudoany), as well as limestone and non-ore raw materials at several deposits.
Coal mining Coal mining accounts for approximately 25 per cent of the mining industry’s total sales. In 1999 the mining industry recorded sales of SKK12.1 billion (1998 – SKK12.6 billion), with a loss of almost SKK2 billion against a small profit of SKK241 million in 1998. The influence of the price regulation of electricity and gas poses a substantial problem for the mining industry in the extraction of coal. Producers of electricity and fuel for heating have been unwilling to
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accept increases in coal mining production costs resulting from the effects of inflation on the prices of inputs into the production process. Unless customers accept increases in coal prices that reflect the level of production costs and allow for an adequate profit, the sector will have to continue relying on subsidies from the State budget. Entry to the EU and the adoption of EU energy regulations may help to solve this problem. In 1999 three joint stock companies operating in the areas of Horna Nitra, Zahorie and Vescky Krtis, and employing almost 8,000 people, extracted 3.8 million tons of coal. Their main customer in the Slovak Republic is Elektrareo Novaky, which purchased almost 2.7 million tons of coal. In 2000, extractable reserves of coal in Slovakia were assessed at 85 million tons and it was forecast that, by 2020, annual extraction would decrease from 3.8 million tons to 2.6 million tons.
Ore mining In 1989, ore mining was heavily subsidized by the State to the amount of SKK865 million, but since 1993 State subsidies have been removed. Within the framework of the national attenuation programme, the extraction of copper, mercury, lead and zinc, antimone and polymetallic iron ores was halted. Today, only monomineral ores in Nicna Slana, iron-barylitic ore in Rudoany and precious metal ores in HodrusaHamre are extracted.
Magnesia In the period 1990–1994 the extraction and production of magnesium fell by 60 per cent, the production of loose matter by 68 per cent and of basic building materials by 65 per cent. The sharp decline of this subsector was a direct result of the disintegration of COMECON and the resultant loss of markets in the former states of the USSR. The decrease was aggravated by the world crisis in metallurgy. Following the recession there was a recovery in the demand for refractory products, which generated some revitalization of the Slovak magnesia industry. By the end of the 1990s the extraction of magnesium in Slovakia at Slovenske Rudohorie had stabilized at an annual level of 11.5 million tons. Stabilization of the magnesia industry was supported by the reopening of Eastern European markets (Ukraine and Russia), sales into new territories (Venezuela, India and the United States) and a demand for higher quality in Western European markets – especially in Germany and France. New products, including basic-preparation monolithic materials that have been gradually replacing basic-formed building materials in the developed metallurgical industry, have also contributed to the increase in export sales.
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There has been no significant decrease in employment since 1995 and by 1999 the magnesia industry workforce stood at 5,000 employees. The magnesia companies SMZ, a.s., Jelsava and Slovmaag, a.s., Lubenik have invested substantially in the reconstruction of technological equipment. Foreign direct investment in Slovak mining and extraction companies has been minimal.
Gas The primary sources of energy in Slovakia comprise gas fuel (32 per cent), solid fuel (30 per cent) and liquid fuel (18 per cent). The Slovak gas monopoly, Slovensky Plynarensky Priemysel (SPP) controls the Slovak section of the pipeline that transports 70 per cent of Russian gas exports to Western Europe. The SPP remit includes the purchase, distribution and sale of natural gas, the construction of gas networks and the supervision of their reconstruction. Altogether, SPP manages 5,883km of gas pipelines and 19,521km of local networks. Since the Slovak system of international transport is part of the European transportation network, SPP provides transit services to companies in Austria, Croatia, France, the Czech Republic, Germany, Italy and Russia. In 2001, more than 80 billion cubic metres of natural gas flowed through the Slovak pipeline system, while 7 billion cubic metres of gas were retained for domestic consumption. By the year 2010 it is anticipated that the natural gas retained should provide 35 per cent of the power energy needs of the Slovak Republic. The main route of the gas transit pipeline consists of four main branches. Including the loops of a fifth line and branches to the Czech Republic and Austria, the pipeline network is 2,267km long. The Slovak natural gas transportation system is interconnected with the main European transportation systems and provides services to European gas companies including Gazprom, Wintershall, Verbundnetz Gas, Ina, Geoplin and Transgas directly and also to Ruhrgas, Gaz de France, SNASM and OMV indirectly. The purchase of natural gas to satisfy the needs of SPP has been secured, up to 97 per cent, by imports from the Russian Federation. Supplies of natural gas to cover peak needs in winter periods are provided within the framework of agreements with foreign gas companies transiting gas across the Slovak territory. The balance of 3 per cent in overall requirements is extracted from domestic sources. The import of natural gas from the Russian Federation is carried out on the basis of a long-term contract on the supply and transportation of gas across the territory of the Slovak Republic with the Russian exporter Gazexport Moscow. Purchases from domestic sources are under an agreement with Nafta, a.s., Gbely. In order to ensure a
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trouble-free and continuous supply to consumers, storage of natural gas had been secured contractually in underground tanks constructed and owned by Nafta Gbely. The capacity of the underground tank Dolne Bojanovic in the Czech Republic has also been pressed into service. Natural gas is stored up to a total volume of 2 billion cubic metres. The privatization of the Slovak gas industry is pending. The government has offered management control of SPP with 49 per cent of the share capital. Price expectations were raised when a 97 per cent stake in the neighbouring Czech gas industry was sold in December 2002 to RWE Gas of Germany for EUR4.1 billion. Although the shareholding sold in Transgas was almost twice that offered in SPP, the Czech equivalent transports only half as much as SPP. Gaz de France, Ruhrgas of Germany, Snam of Italy and, reportedly, Gazprom have formed a bidding consortium, RWE , which already has a 34 per cent interest in SPP’s storage arm, has chosen not to bid directly but is working with another undisclosed company. The only other reported bidder as a late entrant to the tender is TotalFinaElf of France. There is criticism within the five-party coalition government, which faces an election in the autumn of 2003. The Democratic Left Party has urged its coalition partners to halve the shareholding on offer.
4.3
Metallurgy and Glass Slovak Investment and Trade Development Agency (SARIO) Metallurgical industry Development history The production of metals from raw materials in Slovakia, particularly iron and copper, has a long tradition. The metallurgy of iron originated in what is now called Podbrezova where, as a result of the AustroHungarian Parliament’s decision of 1840 to build railways, State ironworks were founded for the production of rails. In this way Podbrezova became the production and technology base of iron metallurgy. The production of iron was also concentrated in Krompachy. The first Krompassk-pohornadska Company persisted until 1922 and, in the early twentieth century, the Rimamuransko-sallgotarianska Company produced 10,000 tons of steel and employed a workforce of 3,000 in two blast furnaces and six Siemens Martin furnaces. In 1937 a new method for the production of copper was founded upon the original bases and traditions which still exist today. The 1950s was the decisive decade for the creation of the present production base of metallurgy in Slovakia. At that time it was decided to build an aluminium factory in Cziar nad Hronom, a ferrous alloys production facility in Istebne and an integrated steelworks in Kosice. Thanks to an extraordinary effort of manpower and the concentration of necessary potential, the production facilities were put into operation very quickly. The first ferrous alloys were produced in 1952; the first tons of aluminium were cast one year later, and in 1963 the production of nickel was started. In 1966, the opening of the oxygen-converter steelworks at Vychodoslovenska Zeleziarne in Kosice completed the metallurgical cycle.
Post-1989 development Today, iron and steel, ferrous alloys, aluminium and copper are the primary metallurgical products of Slovakia. The production of nickel in
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Serei was halted in the early 1990s due to its lack of profitability. Several bigger companies are also engaged in secondary metallurgical production. The financial results of the metallurgical industry were influenced by world recession and market crises, which were factors in the liquidation of one steel company in Kosice and one copper producer in Krompachy. After registering a pre-tax profit of SKK800 million in 1997, metallurgical enterprises fell into a loss in 1998 of SKK10.3 billion, which was reduced to SKK6.1 billion in 1999. Industry sales in 1999 were SKK66.2 billion (more than SKK5 billion less than in 1998), of which SKK48.8 billion were exported (1998 – SKK50.3 billion). In 1999 the average monthly salary in the metallurgical industry was SKK15,360.
Foreign investment and ownership The National Property Fund of the Slovak Republic retained a shareholding in part of the aluminium industry. Otherwise, all enterprises of the metallurgical industry are privatized. Since 2000, development programmes of the metallurgical industry have been directed towards the restructuring of production facilities with progressive characteristics and investment in production areas with higher utility characteristics and higher added value. Driven by the burgeoning automotive industry, the main directions of development have included broadening the production of surface coated sheets, coach-works, building industry products, and increases in the production of aluminium castings, especially for the automobile industry, and copper wires for the electrical engineering industry. Direct foreign investors in the metallurgical industry include the Norwegian company Hydro Aluminium in a subsidiary company, ZNP – Slovalco, a.s., supported by the EBRD as a minority shareholder; the Finnish company Rautaruukki and the American US Steel have joint ventures with VSZ, a.s., Kosice. At the end of 2000, US Steel acquired control over the failing Kosice Steel Works in a transaction valued at SKK24.6 billion. Since 2000, Sitno Holdings has attempted to revive the production of copper in Krompachy. The major US Steel investment, referred to in Chapter 1.5 in the section on Kosice, effectively rescued the Slovak steel industry and has injected fresh hope for industry in the Kosice region, where steel production and the remaining metallurgical industry represent 60 per cent of regional GDP and 50 per cent of exports. As a part of the programme, US Steel has received favourable tax treatment for its investment and has committed US Steel Kosice, s.r.o., to spearhead Eastern Slovakia’s inward investment programme through the establishment of a dedicated Economic Development Centre.
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Glass industry Development history The glass industry, including costume jewellery and mineral fibres, has a 640-year-long tradition in Slovakia. The first glassworks was founded in 1350 in Sklene Teplice. Many more were founded in the seventeenth and eighteenth centuries, and at the industry’s height there were 100 glassworks in Slovakia. After World War II only a few remained; in Utekae, Nemsova, Lednicke Rovne, Katarinska Huc, Malines, Zlatno and Nova Baoa, with approximately 2,000 employees in total and with worn and obsolete equipment and low production efficiency. In the period 1960–1969 new glassworks were built and a programme of reconstruction and development of the glass industry was carried out. The new investments included a technical glassworks in Bratislava-Dubravka, a glass fibres plant in Trnava, non-decorative glassworks in Lednicke Rovne, important changes in the production structure of non-decorative glass into basalt and mineral fibres in Nova Baoa, and the modernization of the glass-wool production plant in Utekae. Further substantial reconstruction and development of the Slovak glass industry took place in the period 1985–1990, in the final years of the old regime, when State modernization and development projects included the reconstruction of glass fibres in Skoplast Trnava, mineral fibres in Nova Baoa and packaging glass in Skloobal Nemsova. Machine-made non-decorative glass production was intensified in Lednicke Rovne.
Post-1989 development At the end of the 1980s the glass industry employed more than 10,000 people, with a product value of approximately SKK2.3 billion generating profits of more than SKK200 million. Since 1990, all glass, costume jewellery and mineral fibres enterprises in the Slovak Republic have been independent companies in their own right. The Slovak glass industry is well placed in both the Slovak economy and export markets. It benefits from a relatively accessible raw material base and produces both glass and mineral fibres. Products range from technical glass, packaging glass and non-decorative potash to plumbous glass, lustre glass and thermos flasks. Economic developments abroad have influenced developments in the Slovak glass industry. While the 1980s saw a period of undisturbed growth, development slowed in 1992 as a result of the world recession that continued into 1993. Signs of an improvement appeared in 1994, first in the US
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market and later in Europe, and a boom took off in 1995. This mixed period of development was reflected in a reduction of employee numbers, changes in organizational structures and investments into more efficient technological equipment and processes. The Slovak glass industry is considered to be a stable and developing industry sector and is also viewed as keenly competitive by companies in developed countries, not only because of low wages and other production costs but also because of its highly qualified labour force and long tradition of excellence. The transformation and privatization processes in glass industry enterprises are finished. Although the glass industry ranks as one of the smaller sectors of the Slovak manufacturing industry in terms of its production value, its export productivity is high. In 1999, exports represented 75 per cent of goods produced. In the same year, value added in the glass industry was measured at almost SKK2.8 billion. In 1991, the industry employed 9,187 people in organizations with more than 25 employees, but by 1999 this workforce had decreased to 6,794. The reduced employment and a simultaneous growth in production were reflected in increased labour productivity. Today, the Slovak glass industry is represented by approximately 20 enterprises with more than 25 employees. As a result of the large investments in 1985–1990 and the import of state-of-the-art machinery, the technical and technological level of production and the technical base of the Slovak glass industry are on a par with those of Western Europe and, in the sub-sectors of glass fibres and non-decorative glass, meet world standards.
Investment The rate of investment in the transformation of the Slovak glass industry during the 1990s was uneven. In 1993 and 1994 investment fell below the level of depreciation, which had a negative effect on the wear of plant. In each of the following three years, 1995–1997, investment was approximately SKK1.3 billion, which was three to four times higher than depreciation. Most investments were directed into modernization, with a consequent positive effect on plant wear. In 1999, a foreign strategic investor, the Austrian group RHI AG Vienna, acquired a shareholding in Izomat, a.s., Nova Baoa. An inflow of foreign capital, as well as higher penetration of foreign markets, is needed to finance the continuing technological modernization of the Slovak glass industry and ensure its future health. So far, although negotiations with potential foreign partners have been a frequent phenomenon, the majority of Slovak glassworks remain in Slovak ownership.
4.4
Construction and Building Materials Slovak Investment and Trade Development Agency (SARIO) Post-1989 evolution The two main characteristics of the Slovak building industry are the contribution of this sector to the creation of national GDP and its share of total employment. After 1989, both indicators registered a sharp decline in the contribution of this sector to the economic results of the Slovak Republic. In 1989, the building industry created more than 9 per cent of GDP and employed more than 10 per cent of the labour force. The first serious setback for the industry was the reduction of engineering production in Slovakia, which resulted in a 30 per cent decline in budgeted resources nationally, with a consequent effect on construction. A shutdown of subsidiary systems for housing construction followed, with an accompanying decline in the number of new apartments being built from 33,500 in 1989 to 6,157 in 1995. The combination of these factors, together with the absence of any strategy for the development of the construction sector, resulted in the departure of more than 100,000 employees from the building industry from 1992 to 1994 and a reduced contribution to GDP of less than 5 per cent. By the millennium, the building stock deficit in the Slovak Republic was apparent. There was a lack of technical communications and infrastructure, apartments and other fully serviced buildings. The structure and utilization of office premises and factory buildings also required improvement. In effect, the whole building stock was neglected, with more than 80 per cent of buildings being in an unsuitable state and falling short of the required heating and fire regulations. The operational usefulness of many buildings was at risk due to their physical degradation. Building industry shares of GDP creation, employment and industrial production all declined in the 1990s:
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• Share of GDP: The building industry’s share of GDP creation decreased from 9.1 per cent in 1989 to 4.6 per cent in 1994 and 1995. A modest revival brought the share back to 4.7 per cent in 1996 and 5.6 per cent in 1997. By 1999 its share had fallen back to 4 per cent. • Employment: The building industry’s share of employment was 10.3 per cent in 1989 falling to 6.9 per cent in 1996 and rising again to 7.3 per cent in 1997 before falling back to 7.1 per cent in 1998. • Industrial production: Although building industry GDP in 1997 reached 96.1 per cent of its 1993 level at constant prices, the production value of the sector was only 51.5 per cent of the 1989 level. The highest drop in building production was recorded in 1999 when the volume fell to only 36 per cent of the 1989 level. Focusing on 1999 as the nadir of the building industry, construction works fell to SKK64 billion. New construction represented approximately 73 per cent of total building production, including modernization and reconstruction work, in which utility construction and waterworks predominated. The area of civil construction was dominated by administrative and business premises construction, including banks, business centres and buildings required for government offices. The decline in the building of schools and healthcare centres continued. The construction of manufacturing facilities was undertaken only where foreign investment capital was available. By 1998 the privatesector share in the construction field had reached 83.7 per cent. In the housing sub-sector, the construction of apartments rose from 7,000 in 1997 to approximately 8,000 in 1998 and 10,700 in 1999. However, in comparison to 1989, the 1999 achievement marked a 68 per cent reduction from the 33,500 new apartments built then. In 1999, employment in the building industry fell to 137,000 from the level of approximately 150,000 employed over the previous few years. The export of construction work in 1999 to foreign countries remained at the low level of about 5 per cent of total building industry production registered for 1998 and was directed mainly to Russia, Poland, the Czech Republic, Austria and Germany. Looking back, construction abroad had represented 13.2 per cent of total building industry production in 1992. Evidence of the transformation process in building production during the 1990s could be seen in ownership relations, the legal form of private companies and a marked change in the number and size of construction companies. The Bureau of Statistics of the Slovak Republic recorded that in 1995, as a result of the privatization process, more than 80 per cent of construction production was carried out by the private sector compared with State ownership of all construction companies before 1990. The profile of construction companies changed dramatically between 1989 and 1999. In 1989 there were 231 enterprises, including tradesmen, registered in the construction sector. The
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average size of workforce was approximately 2,500. At the end of 1999, more than 41,000 construction companies were registered in the Slovak Republic, of which tradesmen and small businesses represented almost 98 per cent, and medium-sized companies 2 per cent. Big firms also accounted for 2 per cent of all enterprises. The building industry consists of a great number of crafts, materials and technologies used in the construction of a given building, irrespective of size. Therefore, subcontracting is an integral part of the construction market and a large number of firms employing 20 to 30 people are exclusively subcontractors. Their behaviour, as well as their position in the market, is quite different from firms that are either utility construction companies or typical general suppliers.
Building materials industry In the period of decline between 1994 and 1999 the various segments of the building materials industry reflected the general economic recession. Thanks to its high proportion of exports, only the segment of mortar and cement fibre production remained detached from the general economic recession. The total income of the building materials industry was SKK23.7 billion in 1999, of which mortar accounted for almost SKK10 billion and silicate prefabrication approximately SKK6.6 billion. Building materials’ foreign trade turnover exceeded SKK10 billion in 1999, an increase of 9 per cent on 1998. The principal export destinations were the Czech Republic, Hungary and Poland. More than 15,000 people were employed in the building materials industry in 1999, of which more than 4,000 worked in the stone industry. The average labour productivity per employee was SKK1.5 million and, in the segment of mortar products, reached SKK2.6 million.
The role of foreign investment New construction in commercial and industrial buildings is heavily dependent on foreign direct investment. In 2001, foreign capital invested in construction in Slovakia amounted to US$28.2 million in the first nine months – an annual rate of US$37.6 million. The role of foreign investment today in the purchase and rental of office and retailing space in the dynamically growing Bratislava region is described in Chapter 4.17. Similar growth patterns may be repeated in other major Slovak cities. Foreign investment is also being channelled into manufacturing facilities, mainly in the industrial parks at locations throughout Slovakia, such as the following:
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Key Sectors of Business and Industry
Devinska Nova Ves; Sladkovievo; Levice – Geoa; Kechnec; Chemko Strazske; Chemes Humene; Vrable; Maly Krts.
Other locations of significant investment in industrial construction are Trnava and the three development areas close to Bratislava referred to in Chapter 4.17, including the Logisticko-Distribucny Park and Lincoln’s Autogistics Park at Lozorno.
4.5
Wood Processing and Wood Products Slovak Investment and Trade Development Agency (SARIO) Position of the sector within industry in the Slovak Republic The wood processing industry is not a significant element in the overall Slovak economy, even though the environment and large forest tracts provide a large potential for wood product manufacturing. The share of GDP achieved by wood processing in 2001 was only 0.65 per cent. Compared with other production sectors, this figure illustrates its low ranking in the generation of added value, but the intermediate consumption of the total gross production represents as much as 70 per cent. Moreover, it should be noted that the majority of inputs originate domestically and that production is therefore not import dependent. GDP per capita in wood processing exceeds the average value of industrial production, illustrating that the sector is stronger than the earlier figure for share of GDP indicates. In 2001, the sector employed 10,460 people, which represents 2.7 per cent of all employees in industry (based on the data of companies having 20 or more employees). The average monthly wage in wood production increased by 3.3 per cent to SKK10,120 in companies employing 20 or more in 2001, representing a drop in real wages of 3.7 per cent after adjustment for inflation. The sector managed to cope with the growing trend of industrial production only until the end of 2000, after which wood processing started to stagnate and even decline. One of the most significant problems for the Slovak economy is the high trade-balance deficit, which still represents more than 8 per cent of GDP. Exports exceed imports in the area of wood processing (industry sector code OKEC 20). In 2001 the trade balance recorded for wood processing and products was a surplus of SKK6.3 billion. However, the growth of the sector’s exports lagged behind the average of Slovak export growth. Wood
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cutting, shaving and impregnation dominate the sector’s exports and these activities are all low-value-added products. As far as the foreign trade of the furniture industry (industry sector code OKEC 361) is concerned, exports in 2001 exceeded imports by approximately SKK8 billion. The most successful part of furniture manufacturing was the production of armchairs, chairs and furniture, except for kitchen and office furniture. The positive trade balance of the wood and furniture industries in 2001 was 1.4 per cent of GDP. Based on Slovak Republic Statistical Office data, companies in this sector employing 20 and more generated a profit before tax of SKK168 million or eight times more than in 2000.
Sector characteristics In the wood processing industry there are several sub-sectors. A common feature is the processing of raw wood and manufacturing of wood or wood-based products at different levels of finishing. This analysis covers just two of these sectors: the wood processing industry (sector code OKEC 20 – wood and cork production, with the exemption of furniture production and the production of straw, wattle and similar products); and furniture production (sector code OKEC 36 – furniture production, other furniture production). Both of these sectors can be characterized by the following factors: • independence from imported input materials; • large share of small- and medium-sized businesses (more than 80 per cent of the companies operating are limited liability companies); • low level of products finishing within the wood industry; • high export performance compared to other sectors of the industry; • low purchasing power of the Slovak population; • sufficient amount of labour and significant source of jobs in some regions of Slovakia; • low economic strength of Slovak companies and their high level of debt; • insufficient commercial activity by companies in this sector – poor promotion of wood and wood products; • need to certify forests; • foreign capital investment.
Position and characteristics of the sector in EU countries and worldwide Sectors related to the forestry and wood sectors Worldwide, the forestry and wood sectors are defined as follows:
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• Forestry – growth, protection of forests and wood cutting; • Wood processing – wood sawing, production of timber, basic products intended for further industrial processing, use of wood as building material or production of final products. (This area also includes production of paper and cardboard, and their by-products.); • Furniture production.
Forestry, wood production and basic trends in the global environment Forestry, including wood production, comprises round wood, sawn products or timber, planed wooden parts, and wood boards and panels. Often, wood and cardboard are included in forestry products. Value added and price for the individual product groups differ by the level of processing. In general, the sectors that produce and process forestry products may be described as highly cyclical. During periods of economic expansion, the production of forestry and wood processing products increases for the reason that these products can be utilized in all sectors. Their consumption largely depends upon the economic activity during the individual periods and the purchasing power of the population. The largest producer within the forestry and wood processing sector is North and Central America: their combined share of global production is 28.3 per cent. The United States, with its market share of 65.1 per cent of regional output, is the dominant producer in North and Central America. The European continent, including the Russian Federation, is the second-largest regional producer, with a global market share of 21.9 per cent. However, the present 15 countries of the EU produce more than half of the continent’s output. The participation of Central and Eastern European (CEE) countries in forestry and wood processing output is only 2.9 per cent. Europe is the largest global exporter of forestry and wood production, with a world market share of more than 51 per cent. The most important export country in the European region is the Russian Federation, which achieves a significant trade surplus. The EU is the largest importer in Europe, with its imports representing 36.9 per cent. Similarly, from a global perspective, the European region is also the dominant importer of wood products, representing almost 43 per cent.
Raw material Global forest resources amount to about 30 per cent of the world’s land surface. It is estimated that there are 3.87 billion hectares of forest worldwide, of which 95 per cent are naturally growing forests
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and 5 per cent are planted forests (forest nurseries, artificially afforested areas and forest orchards). Deforestation and the devastation of forests in the tropics significantly impact the potential for forestry commodities, production and services. European forest resources account for 58 per cent of the global forest area. The landmass of Europe, including the Russian Federation, amounts to approximately 2,260 million hectares; 46 per cent of the area is forested. The share of European forest areas suitable for wood cutting differs with respect to the location of the country, ranging from 49 per cent to 99 per cent. Countries in Southern Europe have the lowest proportion of forest areas. Within the EU, Sweden has the largest forest area of 27.136 million hectares, followed by Finland with 21.935 million hectares and France with 15.341 million hectares. In the Visegrad V4 region, the country with the largest forest area is Poland (9.047 million hectares), followed by the Czech Republic (2.632 million hectares), Slovakia (2.177 million hectares) and Hungary (1.840 million hectares). Within the region Slovakia has the highest proportion of forests (45 per cent of its total area) followed by the Czech Republic (34 per cent), Poland (30 per cent), and finally Hungary (20 per cent). In terms of forest proportions, Slovakia is comparable with Estonia and Bosnia-Herzegovina.
Trends in the European furniture industry in 2001 The furniture industry is one of the largest industrial sectors in the EU, representing about one-half of global furniture production. The industry utilizes many types of material besides wood – mainly metal products, textiles, leather and glass. As Table 4.5.1 shows, after three years of good results, overall EU production in 2001 increased only slightly by 0.9 per cent to EUR82.2 billion. The growth of furniture exports from the EU in 2001 to countries outside the EU was only 3.9 per cent year on year, due to the economic
Table 4.5.1
Furniture production in the EU
Year
Value (EUR billion)
1996
71.6
1997
73.5
1998
75.7
1999
78.2
2000
81.5
2001
82.2
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recession in the major export markets. In the EU the largest exporter of furniture is Italy, with a 43 per cent share of total EU exports. It is followed by Germany, with 18 per cent market share and France with 8 per cent market share. The pace of Slovak export growth to the EU was the fastest among the CEE countries and achieved a value of 40 per cent in 2001, putting Slovakia in the position of fourteenth largest EU import partner, with a value of EUR263 million. The largest exporter of furniture to the EU is Poland, with a share of 20 per cent. Conversely, the largest furniture importer into the EU is Germany, with a 38 per cent share, followed by Great Britain with 18 per cent and France with more than 10 per cent shares.
Analysis of market impacts Furniture is classified as a long-term consumer durable. Its characteristics are a high unit price, a long period of utilization and sensitivity to fashion trends. Furniture demand is highly cyclical and depends mainly on its elasticity (sensitivity) to disposable household income, the general economic situation, interest rate development, demographics, advertising and marketing intensity and wealth distribution. Germany is the largest European market, with a value of furniture at retail prices of approximately EUR32 billion. This country has the leading position in both EU retailing and manufacture, and distribution strength in furniture products. The European country with the largest number of retail outlets is Italy, where the estimated value of the furniture market is EUR11.3 billion.
Cost structure and value added The average proportion of material and services in product value is more than 60 per cent in EU countries, with material representing 45 per cent and services related to production, development, distribution and customer support representing 15 per cent. Therefore, the remaining approximately 40 per cent of furniture value is represented by value added, of which labour costs represent about 78 per cent. During the 1990s, average labour productivity in EU furniture production increased by approximately 20 per cent.
Investments and innovation The level of investment differs each year, but on average represents 4 per cent of production value, or 10 per cent of value added. Investments are directed into four major areas:
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new machinery; design and development of new models; advertising and marketing communication; establishment and/or efficient control of distribution channels.
Prospects for the Slovak wood processing and furniture industry in relation to the EU and the world The forest area in Slovakia represents 45.3 per cent of its total landmass. Timber density represents 253m3 per hectare of forest areas, which is the highest value compared to the European average (112m3/ha), the EU average (140m3/ha) and V4 countries average (225m3/ha). However, the forest area of Slovakia represents only 0.21 per cent of all European forests (including Russia) and almost 14 per cent of the forest area of V4. A comparison between the production structure of the EU and Slovakia is made in Table 4.5.2. Panels and boards are the most sophisticated wood processing products and sell for about five times more than round logs. It follows that the Slovak product mix is focused towards the lower-value-added segment.
Certification of forests Within forest management the role of certification is to confirm, according to the criteria defined by the certification body, that the forest is managed in line with sustainable forest management practices and in line with modern environmental principles. More and more buyers prefer wood and wood products originating from certified forests. Compared to other European countries, Slovakia lags significantly in forest certification. Slovakia has started preparatory works to introduce the national certification of forests, pursuant to the pan-European system of certification, PEFC. A National Certification Centre is being established in the Slovak Republic. To date, approximately 50,000
Table 4.5.2 Comparison of forestry and wood processing production structures in the EU and Slovakia (2001) EU (%)
Slovak Republic (%)
Pulp wood production
23.0
43.5
Panels and boards
10.6
2.2
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hectares of forests managed by the Presov Branch of Lesy Slovenskej Republiky have been certified. In spite of a significant supply of raw material, the wood processing and furniture industry sectors face an unfavourable situation. In the early 1990s, production decreased as the result of the local market recession, deregulation of material prices, a decline of the building industry and loss of markets. The bankruptcy of former large companies resulted in the establishment of small- and medium-sized entities that do not have sufficient investment funds for the necessary innovation and modernization of production and machinery.
Production structure in the wood processing industry The product mix in Slovakia’s wood processing industry consists of: • • • • • •
sawn products; fibre-boards; semi-solid fibre-boards (MDF); other aggregated materials; plywood materials and ply-boards from glued wood veneer; construction/carpenter products.
Furniture manufacturers in the Slovak Republic Companies that have invested foreign capital into the wood processing and furniture industries are highly important to Slovakia in terms of recovering production levels. The most important foreign invested enterprises are: • • • • •
Kronospan Slovakia (Presov); Swedwood Slovakia (Trnava); Malacky (Krupina); Lind Mobler (Krupina); Weser – Okna, s.r.o. (Nove Mesto nad Vahom).
Raw material basis in the Slovak Republic Slovakia is among the most densely afforested countries in Europe (more than 40 per cent of its total area). Its forest management is considered to be developed. The European Commission (EC), when assessing the quality of European forests, ranked Slovakia in third position, confirming that Slovak forestry meets certain quality and quantity parameters, and that the EC assessment or comparison with pan-European criteria of sustainable forest management practices was positive.
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Regional representation of wood processing and furniture industry In terms of regional dispersion, the wood processing and furniture industry is present in each region. However, there are regional differences within the sector in concentration levels and production volumes. The largest concentration of the wood processing industry is in the Presov, Banska Bystrica and Zilina regions. The largest concentration of furniture production is in the Zilina and Trencin regions, where forest product companies account for 33 per cent of the total number of companies. The most significant representatives of the sector are: • • • • • • • •
Bueina, a.s. (Zvolen); Bukoza Holding, a.s. (Hencovce); Kronospan Slovakia, s.r.o. (Presov); Pilvud, s.r.o. (Spisska Nova Ves); Swedwood Slovakia, s.r.o. (Trnava); Centro Mobili, s.r.o. (Trencin); Decodom, s.r.o. (Topolcany); Kanapa, s.r.o. (Brezova pod Bradlom).
International trade In general, the international trade in these commodities is considered positive. According to customs statistics, exports of the wood processing industry earned more than SKK12 billion against imports of SKK5.9 billion in 2001, while exports of the furniture sector were approximately SKK15.9 billion against imports of SKK7.9 billion. Considering the increase in demand for wood finishing, this is a positive sign that Slovak furniture production, other than office furniture, is strengthening its competitive advantages. The foreign trade balance in the armchairs and seats segment of the furniture industry is growing. From a zero balance in 1998, the balance in 2002 probably exceeded SKK5 billion. The growing export of furniture is viewed very positively as it moves the finishing of domestic wood raw materials significantly towards an effective level.
Ownership relations As the result of the economic reform of forest management in Slovakia, the majority of forested land was transferred after 1990 to State-owned forest-management organizations, although non-state ownership of forests had been maintained formerly. The company Lesy Slovenskej Republiky represents state ownership, being a State-owned company that was established with
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the objective of managing forests in State ownership. Currently, this company also manages non-state-owned forests, mainly the forests that have not been transferred. Regarding the private ownership of forests, the largest group of landowners consists of communities and associations of private forest owners. Municipalities, church and agricultural cooperatives form the smaller share.
Government incentives For the revival of successful relations in the wood trade certain incentive measures applicable both to wood suppliers and buyers must be resolved – for example, a decrease in the VAT rate on raw wood from 23 per cent to 10 per cent. Another incentive initiative is the proposal to establish a Support Fund for production, processing and utilization of wood, as a non-government fund. The fund’s objectives and scope of activities shall be designed from the basic documentation of the sector and the professional associations operating in forest management and the wood processing industry. A programme supporting the development of processing and utilization of wood raw material is aimed at covering the interest rates on loans provided for projects. This will ensure a higher utilization of wood mass. The State is concerned to provide for an increase in raw material in the twenty-first century. This is an action programme of the Slovak Ministry of Economy. It envisages increasing end-wood processing by 2005 to at least a 20 per cent increase in the export of finished products, and an increase in domestic market sales.
Legislation relevant to the wood processing and furniture industry The role of the Slovak Republic in the integration process is to harmonize forestry legislation and the institutional framework, while respecting Slovak specifics. Currently, the main task is to integrate forestry research into research and development programmes and EU projects, and to introduce national criteria and indicators for assessment of sustainable forest management.
SWOT analysis Strengths • Sufficient in-country raw material base • Export oriented sectors
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• Completed privatization process • Increasingly sophisticated production process as a result of foreign investment • Low dependency upon imports • Gradual foreign capital inflow • Established system of secondary and university education for the sector • Some production requiring relatively low capital investments to establish new operations
Weaknesses • • • • • •
Lack of balance in the supply and demand structure of the wood market Government incentives in the form of legislation and economic tools Technological obsolescence Existing reserves in research and development A new certification programme for forests For the banks, low creditworthiness of entities owned by Slovak capital
Opportunities • Starting inflow of foreign investment into the wood processing and furniture industry that may result in increasing employment • Relatively cheap labour compared to the EU region • Increasing level of standardization of the furniture industry that will stimulate production • Relatively high yields from forests • Use of the increasing wood surplus in Slovakia as a prerequisite for a broad innovative programme for non-traditional utilization (building, energy sectors) • Building of an industrial park • New ownership structure – majority of traditional domestic producers are in bankruptcy and their assets will be sold
Threats • Dependency on economic development – sectoral and regional recession • High investments already made in neighbouring countries • Centres of unemployment in some regions
Conclusion With respect to existing forest resources in Slovakia, managed at relatively high standards, the forests represent significant potential for the
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development of the Slovak wood processing sectors. Other competitive advantages for Slovakia are cheap labour and the potential and tradition in primary wood processing and furniture production. The transformation process that occurred in the 1990s influenced the furniture and wood processing industry negatively. In recent years we have observed a gradual recovery in these sub-sectors. Since Slovakia is independent in input material supply, this revival is considered to be a very positive feature. The negative features of the sub-sectors are the lack of technological advancement and a low level of materialized investments, which is connected to their debt levels. The sub-sectors do not have sufficient funds to finance their operating needs and, due to the high value of their outstanding loans, they face problems with obtaining new investment loans. Companies in both sub-sectors face financial problems. The added value generated is not sufficient to cover the costs related to companies’ core activities and is thus reflected in operating income losses. Slovakia has no problems with accession to the EU in respect of this sector. It is expected that there will be a more than sufficient raw material base and that existing capacities will be attractive to the potential investor. However, further differentiation of the market is also anticipated. Some non-profitable operations will be dissolved and the remainder will sharpen their skills in this new competitive environment.
4.6
Machinery and Equipment Slovak Investment and Trade Development Agency (SARIO) Position of the sector within industry in the Slovak Republic The manufacturing of machinery and equipment is one of the most important sectors of the Slovak economy. The recent intensity of growth has generated a sense of optimism that the high activity levels of 1998 are once again attainable. One out of ten employees in the manufacturing industry work in this sector. The machinery and equipment sector share of GDP was almost 2 per cent in 2001. However, the sector has a continuous input requirement. Consequently, for each Slovak Crown (SKK) of output SKK0.70 is required for material inputs. The machinery industry is a production sector with high intermediate consumption. Within overall industrial production the sector produces high-value-added products. In 2001, the machinery and equipment sector employed 46,994 workers representing 10.7 per cent of all employees in those companies with workforces of 20 or more engaged in industrial production. Last year the average monthly wage in this sub-sector increased to SKK13,246, an increase from the previous year of 9.6 per cent. After deducting for inflation, real wages increased by 2.3 per cent against a real wage increase in the overall economy of 0.8 per cent. While industrial production increased by 2.4 per cent in 2001, the production index for machinery and equipment recorded an increase of 5.6 per cent during the first nine months of 2002, which represented a lower rate than the 7.1 per cent growth registered for industry production as a whole. In 2001, imports exceeded exports in the machinery and equipment sector by SKK7.9 billion. However, for the first nine months of 2002 the deficit increased to SKK16.2 billion. This is a significant reversal from the same period in 2001 when there was an export surplus of
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SKK7.2 billion. The increase in imports was due mainly to a higher intermediate consumption and the fact that foreign direct investments were in their start-up phase, when there is a greater need to purchase new technologies. A more detailed look at the components of foreign trade reveals that exports in 2001 increased primarily in bearings, gear wheels, gearing and control elements production (SKK13.2 billion), household electrical appliances (SKK6.7 billion) and machine tools production (SKK6 billion). However, in 2001, the largest element of imports was for the production of machine tools (SKK11 billion) and special purpose machines (SKK9.3 billion).
Characteristics of the sector in the Slovak Republic The detailed sector classification of economic activities defines the sector as machinery and equipment production (OKEC). In Slovakia the sector can be characterized briefly by: • • • • • • •
foreign investor entries; need for highly qualified labour; under-utilization of research and development potential; government support; demand for large imports; dependency upon economic development; technical standards harmonization.
Position and characteristics of the sector in EU countries and worldwide The machinery and equipment industry is a sector that delivers products for long-term consumption to the industry itself and also to related sectors such as construction, agriculture, forestry, mining, automobiles and so on. These sectors then require specialized machinery in their respective industries of food, textiles, chemicals, and paper. The machinery and equipment sector also covers the manufacture of machine tools, white goods appliances and special machined products such as weapons and ammunition. The machinery industry itself is a capital intensive industry, largely dependent upon the continuing supply of investments to other sectors of industry.
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Three leading sources of worldwide production Three countries and regions, the United States, the EU and Japan, dominate the worldwide production of machinery. Together they account for approximately three-quarters of global machinery production, in the proportions listed in Table 4.6.1. The period 1995–2000 was characterized by similar developments in the machinery industry in the EU and the United States. In both cases the sector achieved growth in the years 1995–1998, decreased in 1999, and experienced a resurgence in 2000. Japan also experienced high growth from 1995 to 1997 but suffered a decline in 1998 and 1999 before turning around with an increase in 2000. Despite the fact that the sector as a whole is considered highly periodic, there are several sub-sectors that report greater fluctuations than others. This is particularly evident in sub-sectors OKEC 2912 and 2913. This group includes the manufacture of pumps, compressors, taps, valves, bearings, gear wheels, gearing and control elements. The year 2001 was a year of global economic depression. The dip in the machinery industry reflected its strong dependency on the general economic climate. Reasons for these decreases were the rising prices of material inputs, the increase in interest rates, and other pro-cyclic factors. Demand for machinery began to decrease towards the end of 2000. At the beginning of 2001, demand was further affected by a growing distrust in business and the economy and lack of consumer confidence. These two factors impacted mainly on machinery production in the US economy.
Machinery industry in the EU The largest machinery producer in the EU is Germany, followed by Italy, Great Britain and France. These three countries together were responsible for nearly the same production volume as Germany itself. These top-ranking producers represent about an 80 per cent share of Table 4.6.1 in 2000
Distribution of global machinery industry production EUR billion
EU
340
United States
305
Japan
257
Other countries
317
Source: VDMA
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145
EU machinery production, and the machinery industry represents a traditional and important part of these countries’ economies. Table 4.6.2 lists the shares of individual members in total EU machinery production. When comparing the generation of value-added products by the EU industry sectors (based on Eurostat data in 1999) we observe that the chemical industry, machinery industry and food industry dominate European industrial production. When examining the significance of value-added generated products in terms of share of GDP, the machinery industry was dominated by Germany, Italy and Austria, followed by Denmark and Sweden. The balance of foreign trade in EU machinery production with third countries remained positive in 2000, during a time when exports (EUR116 billion) were almost double imports (EUR60 billion). The largest exporters were Germany and Italy, while Spain and Portugal were major importers and lacked machinery exports. Nearly 30 per cent of EU machinery production was exported to third-party countries. Significant markets for EU manufacturers were North America and Asia. Of these regions, the United States purchased 23 per cent of EU machinery exports.
Global trends in the machinery industry The economic recession that became established in 2001, and still plagues much of Europe, created an urgent need for change among global machinery producers. Forced by low revenues, zero profits, or losses, many manufacturers began to implement cost reduction programmes through workforce downsizing, closure of redundant production plants and total business restructuring. Table 4.6.2 in 2000
Distribution of EU machinery industry production %
Germany
41
Italy
18
Great Britain
11
France
10
Spain
4
Sweden
4
Austria
3
The Netherlands
3
Others
6
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Globalization of the machinery industry has recently intensified. The market environment is becoming more competitive. Buyers require higher performance, higher quality and reliability, and more flexibility to change or to alter their machines and equipment to meet the demands of function and price. To cope with these market pressures many companies worldwide build universal, multi-purpose machinery operations in order to better utilize production machines and equipment, and minimize downtime. Design, electronic distribution channels and human resources management (training and education of employees) are becoming an integral part of machinery companies’ operations. The movement towards globalization is reaching the regional research and development centres that many companies are establishing.
Prospects for the Slovak machinery and equipment industry in relation to the EU and the world During the era of command economies, all countries of Central and Eastern Europe (CEE) (Bulgaria, the Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia) paid significant attention to machinery. Heavy industry development was one of the priorities of these planned economies. Dependent on economic cycles, the sector experienced a strong transformation and an ensuing recession after 1989. In 2001, machinery production of the Visegrad countries amounted to EUR11.8 billion. The largest producer is Poland, followed by the Czech Republic, Hungary and Slovakia. When comparing the development of machinery industry production among the V4 countries, the sector achieved its fastest pace in the Slovak Republic, where the production index increased from a value of 1 in 1995 to 1.583 in 2001. One of the most significant stimuli was the dynamic growth of the automotive industry, which, in turn, created orders for the machinery industry. This sector achieved its second-highest growth rate in the Czech Republic. Its development illustrates the potential for the transition economies of a transfer from countries with established machinery production to countries with lower production costs. Table 4.6.3 compares six years of development in machinery industry production in V4, EU and OECD countries. The current situation of the global economy significantly influences machinery industry production in the CEE. Production is decreasing in Poland and Hungary and only increasing slightly in the Czech Republic. The reason for this is the continuing competitive challenge for international investments.
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Table 4.6.3 Comparative index of machinery industry production in V4, EU and OECD countries 1996
1997
1998
1999
2000
2001*
Slovakia
1.145
1.197
1.311
1.358
1.515
1.583
Czech Republic
1.068
1.229
1.272
1.195
1.312
1.468
Hungary
0.946
0.942
1.028
1.085
1.204
1.330
Poland
1.105
1.203
1.191
1.151
1.192
1.153
EU
1.008
1.036
1.065
1.045
1.108
1.102
OECD
1.031
1.068
1.047
1.023
1.088
1.049
*Estimated Source: OECD
Non-financial factors in the development of Slovakia’s machinery industry In Slovakia, the machinery industry has a long-standing tradition of representing an important part of industrial production. Throughout the period of centralized planning the sector was deformed by the enforcement of political interests. During the last decade, manufacturers in the machinery industry faced many significant transformation challenges in the area of ownership as well as the reorientation of production to Western markets. The automobile industry played an important role in supporting the development of companies manufacturing components and automobile accessories. In this sector, foreign investments also played a key role. We observe that the majority of prosperous and financially sound companies are owned by foreign investors, often multinational corporations, while domestic companies are still suffering from under-capitalization. Since 1995 the Slovak machinery industry has reported positive trends reflected in the discontinuation of production and a decrease in exports, cooperation with significant international investors and a restructuring of the product mix. Despite persistent problems, the trends are stable and indicate a return to an increasing export performance.
Entry of investors The tradition of manufacturing bearings in Slovakia attracted INA, the second-largest European manufacturer in that sector. The company has begun to integrate its dispersed bearings production and property structure. Similarly, Whirlpool, a worldwide producer of household electrical appliances, has offered Slovakia a new look in the production of modern washing machines and compressors, and has plans for further increases in production.
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Key Sectors of Business and Industry
Education Several secondary schools and universities in Slovakia offer education and training for the machinery industry. Indeed, the secondary industrial schools, secondary vocational schools and universities play an important role in the industry. Slovakia is experiencing an increasing shortage of qualified labour, not only in the tool-making and metalworking professions but also in the technical and engineering professions.
Research and development During the years 1996 to 2000, the machinery industry provided the largest share (approximately 43 per cent) of total revenues generated by research and development. The basic research of this sector is undertaken in the Slovak Academy of Science and, to a lesser extent, in technical universities, while applied research is concentrated mainly in the manufacturing companies. The major centres for research and development in Slovakia are: • The Slovak Academy of Science – The Institute of Machinery, Materials and Mechanics; • Machinery Engineering Faculty of the Slovak Technical University; • Faculty of Special Technology at Trencin University; • Machinery Engineering Faculty at Kosice University; • Machinery Engineering Faculty at Zilina University; • Environmental and Production Technology Faculty at Technical University of Zvolen. Applied research, within machinery production, is mainly carried out in the following companies: • • • • •
VYVOJ Martin, a.s.; VURAL, a.s., Zilina, Vyskumny Ustav Zvaracsky V Bratislave; ZTS VVU Kosice, a.s.; ZTS – Vyskum A Vyvoj, a.s., Dubnica nad Vahom; WUSAM, a.s., Zvolen.
Government incentives The sector is supported by investment incentives under the Act on Investment Incentives No. 565/2001 Coll. They represent new forms of individual government support to initial investments and newly created jobs in connection with these investments. The Act governs the individual support to the regions in the form of investment incentives. One of the major incentives is represented by the establishment of
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149
industrial parks, which in practice will mean the development of infrastructure and the provision of tax and customs relief and other benefits to companies operating in that territory.
Investments Based on National Bank of Slovakia data, in 1999–2000 the following amounts were invested into machinery and equipment production in the form of capital subscribed and profits reinvested:
1999 2000 2001
SKK billion 2,907 4,028 4,067
Completion of the integration drive by the Slovak Government will certainly contribute to the increased inflow of non-privatization investments and an improved perception of the Slovak Republic by investors, particularly through membership of the OECD, the recent invitation to the Slovak Republic to join NATO and Slovakia’s forthcoming accession to the EU.
Harmonization of technical standards An important role in conformity to EU standards is played by the harmonization of technical standards related to machinery production. The key elements in this process are: Protocol to the European Agreement on Accession between the European Communities and their member countries and the Slovak Republic; and Protocol on Conformity Assessment and Industrial Products Recognition (PECA).
Regional representation of the machinery industry in the Slovak Republic In 2001, 554 entities were registered in the BZCS database within sector classification 29 (production of machinery and equipment) representing a decrease against the previous year when 648 entities were registered. The strongest regions since 2000 are the regions of Trencin and Bratislava (approximately 16 per cent share). Conversely, the weakest representation is in the Trnava region where the share is approximately 10 per cent.
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Key Sectors of Business and Industry
Selected representatives of the sector The following are among the leading manufacturers of machinery and equipment in Slovakia: • • • • • • • • •
Whirlpool Slovakia, s.r.o., Bratislava; INA Skalica, s.r.o., Skalica; Kinex, a.s., Bytca; Sachs Slovakia, a.s., Trnava; ZTS Dubnica nad Vahom Plus, a.s.; PSL, a.s., Povazska Bystrica; Trens, a.s., Trencin; Tatramat, a.s., Poprad; WAY Industry, a.s., Krupina.
SWOT analysis Strengths • A high percentage of companies have acquired the quality management system certificate • Enforcement of adopted legislation and incentives by domestic and foreign investors under partially improved conditions for foreign capital entries to Slovakia • Gradual implementation of EU directives into Slovakia’s legislation • Application of technical standards • Improvement in the quality of production and products • Value-added and labour productivity growth • Export performance growth while the negative balance is attributable to large imports
Weaknesses • Loss of traditional markets • Unfavourable corporate economic results, lack and unavailability of financial resources among companies without foreign capital for technological developments and restructuring of production • Short life cycle of the products • Insufficient educational structures, lack of qualified labour • Expected gradual growth in energy prices, which will probably impact on the development trends of the sector negatively • Stagnation of research and development activities in the development process of the sector
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Opportunities • • • •
Further inflow of foreign investments to the CEE region Expansion of information and telecommunications technologies Increasing product quality Potential recovery of the military industry or set-off programmes after Slovakia’s entry to NATO
Threats • Transfer of some labour intensive industries to countries with lower wages • High sensitivity to international market fluctuations • Lengthy processes of bankruptcies and settlements
Conclusion In Slovakia, the machinery industry is among the traditional sectors. During the economic transformation in the first part of the 1990s, activities of machinery companies were depressed and the impact of this situation persists. Primarily, manufacturing for the military sector has been affected. Formerly, this represented a large share of machinery production, which could still recover to its former level. Nor has the entry of foreign investors into some companies eliminated negative developments in the machinery industry as a whole. However, the planned expansion of foreign investors like Whirlpool, INA and others is a positive development. The dynamic growth of the automobile industry in Slovakia has created conditions to stimulate the development of other machinery industry sub-sectors which, for example, deliver components in the form of subcontracts. The ability of producers to meet the required quality criteria gives them access to international markets.
4.7
Electrical Engineering Slovak Investment and Trade Development Agency (SARIO) Position of the sector within industry in the Slovak Republic One of the most significant sectors in the Slovak economy is the production of electrical and optical devices. Strong growth in recent years has made this sector an important pillar of Slovak industry. In 2001, the sector’s share of GDP was 2 per cent. Currently, intermediate consumption is at a relatively high level compared to other sectors. However, the value added per employee lags behind the processing industry average by 20 per cent. In our opinion, this may be partly due to the large proportion of imported inputs, as the labour productivity in this sector is high in developed countries. In 2001, the sector employed 45,166 people, representing 11.8 per cent of all employees in industrial production (based on the data of companies with 20 or more employees). Last year the average monthly wage in the sector increased by 7.5 per cent to SKK12,696 which, after adjustment for inflation, represents a real wage increase of 0.2 per cent. During the first eight months of 2002, the production index of electrical and optical devices increased by 27.9 per cent. Compared to the previous year this represents the most dynamic growth among all sectors of the processing industry. The foreign trade deficit of Slovakia continues to be at a high level, due partly to a significant negative trade balance in electrical industry production. Although the sector’s exports increased significantly in 2001, the pace of imports was still high and exceeded exports by SKK34.5 billion. Approximately one-third of the total foreign trade deficit was represented by this sector.
Electrical Engineering
153
Characteristics of the sector in the Slovak Republic The detailed sector classification of economic activities (OKEC) is defined in Table 4.7.1. Common features of the electrical engineering industry are: • large numbers of small- and medium-sized businesses (more than 80 per cent are limited liability companies); • foreign capital investments; • sufficient qualified labour; • completed privatization process; • prerequisites for successful research and development; • prevalence of less sophisticated electronics and a slower pace of expansion in higher-valued-added products when compared to developed countries; • relatively high import requirements; • dependence upon economic development.
Position and characteristics of the sector in EU countries and worldwide The electrical engineering industry comprises various products with diverse economic characteristics, and must be subdivided into individual product groups. Electrical products (transformers, substations, cables, illumination sources, machines, etc) and consumer electronics (radios, television sets, DVD players, etc) represent an integral part of the sector. Another group is modern electronic products (computers, peripheral computer facilities, networks, etc), which together with software and telecommunications are classified under ‘information technology’. An important sub-sector is the production of semiconductor components that form the basis for consumer electronics, information technology and electronic products for industry. A common feature of all elements of the electrical engineering industry is a high correlation with the economic cycle of the country, Table 4.7.1 300 310 320 332
Classification of electrical and optical devices sector
Production of office machines and computers Production of electrical machines and devices Production of radio, television and communication equipment and devices Production of measuring, control, testing, navigation and other equipment and devices, except industrial process control devices
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Key Sectors of Business and Industry
region and the world. The periodicity of the sector is influenced by the fast pace of innovations, which impact the short life cycle of the product. Producers are forced to react in a flexible way to market requirements by adjusting the scope and structure of their manufacturing capacities.
Global trends in the electrical engineering industry The developments in telecommunications and the effects of globalization result in technological and/or product convergence: ie the products of different manufacturers are getting closer to each other in their features. Success or failure is often determined by marketing strength and the ability to offer flexible delivery terms. This trend is reflected in consolidations, mergers and acquisitions within the sector. The objective of these actions is to raise sufficient capital for marketing, distribution and innovation. E-commerce development provides manufacturers with the opportunity to address a larger market, and this does not apply solely to the manufacturers of consumer electronics, but also industrial electronic devices. For many manufacturers the increasing level of e-commerce represents a means to reduce operating costs. Innovation and design centres represent key elements for finished products and for functional module manufacturers, as the final producers have to react quickly to end-user requirements. Therefore similar changes are expected on the part of components suppliers. Such changes do not apply fully to components producers, because their situation depends almost entirely on the price and flexibility of the supplier.
Semi-conductors sub-sector Semi-conductors play an important role in the global economy and in technological progress. With the improvement of consumer products and industrial facilities, the share of semi-conductors as a component of these products is constantly increasing. Production characteristics of this sub-sector allow us to develop an image of the electrical engineering industry as a whole. Two of the principle features are: • a close link between general economic development (GDP, industrial production, consumer confidence, etc) and the engineering industry’s production and development of sales revenue in broad terms; • interconnection between the development in consumer electronics, communications and information technologies production (as parts
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155
of the electrical engineering industry) and development of the semiconductors sub-sector. Semi-conductor usage in 1999 and projections for 2003 are compared in Table 4.7.2. During the expansion period of 1999–2000 it was believed that this sector had lost its cyclical character due to the increased demand for semi-conductors in the global economy. The belief that expansion would be sustained and a high degree of consumer confidence brought pressure to bear on the electronics and information technology manufacturers. In turn, this caused components suppliers to increase their capacities and inventories, and led management to increase capacities further in order to satisfy the growing demand. The resultant surplus of production capacity has retarded the growth of the electrical engineering industry. The year 2001, when sales decreased by more than 30 per cent, was considered to be the most depressed year in the history of the semi-conductor industry. By contrast, the automotive electronics sub-sector has experienced dynamic growth. This segment of the electrical engineering industry offers one of the highest potentials for growth.
International trade with electronic engineering industry production The share of office machines, equipment and telecommunication technology in international trade increased from 8.8 per cent in 1990 to 13.8 per cent in 2001. The average annual rate of growth reached 10 per cent. Economic expansion and the subsequent depression impacted the growth of international trade in the years 1999–2001. The growth in trade in the Office and Telecommunication Facilities category increased substantially in 2000 – by 22 per cent – compared to previous years. The subsequent decrease in 2001 – by 14 per cent against the previous year – demonstrates the sensitivity of international trade in these commodities in relation to the general economic climate. Table 4.7.2
Comparative semi-conductor usage by application
Applications
1999 %
2003 (forecast) %
Computers
49
45
Communication technology
18
22
Consumer goods
17
19
Industrial
9
8
Automobile industry
6
6
Government needs
1
–
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Key Sectors of Business and Industry
The distribution of the electronics production and components sector is highly global, with more than half of the revenues of the largest manufacturers being generated outside the domestic market. Negotiations at WTO level have led to a substantial elimination of customs tariffs, import licences, quotas and other international trade barriers for these commodities.
Prospects for the Slovak electrical engineering industry in relation to the EU and the world The electrical engineering industry, combined with the production of optical devices in the Czech Republic, the Slovak Republic, Hungary, Romania, Bulgaria and Slovenia, forms a strategic grouping of industrial production which represents an important part of the research and development activity of these countries. The sector is generally considered demanding, both in terms of research and development and in terms of qualified labour. During the second (post-1993) phase of transformation, the industry reported an increase in production and exports, with sound prospects for the future. This positive development was partially responsible for the general economic recovery of the Central and Eastern European (CEE) countries. It was also a factor in the high growth of other sectors supplied by components from the electrical engineering industry (eg the automobile industry) and the main factor in the inflow of foreign direct investments (FDI) with a strong orientation towards production for export. Slovakia’s membership in CENELEC (the European commission for standardization in the electronic engineering industry) and its meeting the terms for signature of PECA (Protocol to the European Agreement on Accession, Conformity Assessment and Industrial Products Acceptance) between the Slovak Republic and the EU represent major steps in Slovakia’s accession to the EU. Hungary has dominated the production of office machines and computers, electronic machines and equipment, radio, television and communication facilities and devices in the region. However, the Czech Republic is also a significant producer as the result of foreign capital investments in the sector.
Characteristic features of the electrical engineering industry in Central and Eastern Europe The common feature of all sub-sectors in the electrical engineering industry is foreign capital inflow. Electrical engineering production
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is a traditional sector in CEE. The failure of the socialist regimes saw the demise of the COMECON markets, due to an inability to compete with Western European products. Foreign investment entailed the entry of new shareholders into company management, and an inflow of capital, new technology, know-how, and modern products able to compete in Western markets. Often, only assembled electronic parts and components imported from abroad were used to produce low-value-added products. At the same time, research and development has been suppressed in these regions due to a lack of technology transfer. In terms of exports, the sector ranks high in importance in Hungary but less so in Bulgaria and Romania. However, in all these countries the sector achieves an above average level of export and a dynamic growth in exports. The imports of this sector are influenced by the import needs of foreign investors for machines, equipment and material for further processing. The result of this high level of imports is the production of low-value-added products. The second factor important to import growth is the increasing demand for consumer electronics and information technologies. The industrial sector of electrical and optical devices production in CEE is a significant destination for FDI, mainly due to the low prices for qualified labour and the suitable geographical location in the wider European region for exports and logistics. In addition, there are significant government incentives and tax relief for building industrial parks. In general, the future prospects of the sector are positive with regard to the dynamics of export growth, production quality improvement and domestic market potential. On the other hand, risk is present for the products produced, which largely take the form of subcontracts to cyclical sectors (the information technology and automobile industries). Elimination of risks from sudden changes in production volumes can be achieved only through producing highervalue-added products. The electrical engineering industry is a traditional sector of Slovakia’s industry and is currently considered the country’s most actively developing sector of industrial production. Due to the low absorption of the Slovak market, the majority of production is export oriented. In the electrical engineering industry the negative trade balance is mainly caused by heavy imports – by the growth of import of information technologies and automated data processing machines for the national economy. Substantially increasing exports are focused on radio, television and telecommunication equipment and devices (OKEC 32) and exports of electrical machines and devices (OKEC 31).
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Key Sectors of Business and Industry
The privatization process of the electrical engineering industry is complete and currently the sector is represented by a large number of recognized foreign investors that have entered the market with important projects. The dynamic growth of the electrical engineering industry is illustrated in Table 4.7.3 by the major economic development indicators.
Geographic direction of exports The exports of the electrical engineering industry sectors are largely oriented to EU countries. In the period 1997–2001, the share of exports increased from 72.5 per cent to 81.2 per cent and sales from SKK16.1 billion to SKK46.9 billion. In the same period the share of exports to the CEFTA countries decreased from 26.3 per cent to 17 per cent, while sales value rose from SKK5.9 billion in 1997 to SKK9.8 billion in 2001. Exports to countries beyond Europe represented 1.2 per cent in 1997 with a value of SKK300 million. In 2001, sales had risen to SKK1.1 billion, representing 1.9 per cent of total export value. Slovakia’s largest export partner is Germany, which had a 46.2 per cent share, or SKK10.3 billion in 1997. Exports increased substantially in 2001 to SKK20.8 billion but the overall share fell to 36 per cent. The second-largest trading partner was the Czech Republic, with a value of SKK5.1 billion and an export share of 23.1 per cent in 1997 – rising in 2001 to sales of SKK5.5 billion. Other important trading partners are France, Austria and the United Kingdom.
Investments In 2001, companies in Slovakia employing 20 or more, invested
Table 4.7.3 Economic development indicators for the electrical engineering industry 2000/1999
2001/2000
Value added
1.18
1.15
Sale for exports
1.28
1.31
GDP/employees
1.07
1.11
Revenues
1.14
1.24
Total sales
1.16
1.17
Employees
1.10
1.04
Source: ME SR
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SKK96.150 million at current prices, representing an increase of 33.1 per cent of which the total value invested in the electrical engineering sector was SKK23.935 million. The increase over the year 1997 represented 81.9 per cent and the majority was targeted into the production of electrical machines and devices.
Education The specialized educational system for the electronic and electrical engineering industry has already educated a significant number of professionals during the past decade. The system is recognized not only domestically but also in other European countries. In addition to many secondary vocational schools and secondary technical schools, the education system of this sector concentrates mainly on bachelor, university and post-graduate studies, both daily and external.
Dominant universities and faculties in the electrical engineering sector • The Slovak Technical University Bratislava – Faculty of Electrical Engineering and Informatics • Technical University Kosice – Faculty of Electrical Engineering and Informatics • Zilina University – Electrical Engineering Faculty • Economic University Bratislava – Faculty of Economic Informatics • Comenius University Bratislava – Faculty of Mathematics, Physics and Informatics • Pavol Jozef Safarik University in Kosice – Section of Information Technology aimed at work with health and the socially disabled
Government incentives The Slovak Government has developed and promoted conditions that are advantageous for development. The building of industrial parks is one of the major incentives for the future. The initiative provides for the development of infrastructure and allows for tax and customs relief and other benefits for companies operating in the parks. Other forms of incentives are customs duty relief on imported raw materials and processed materials for export, and the relief of customs duties from imported investment technologies.
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International trade in the electrical engineering industry The sector is mostly export oriented and some companies, such as BSH Drives and Pumps, export their entire production. The production value destined for export since 1998 is growing at a rate of approximately SKK10 billion. As an example, exports in 1998 were SKK32.9 billion; in 2001 they had increased dramatically to SKK61.9 billion.
Selected representatives of the sector Currently, the major producers are represented by global companies that have found appropriate conditions in Slovakia for their businesses, such as developed labour and infrastructure. Simultaneously, the largest investors represent the largest manufacturers – such as Siemens, Sony, Leoni, Emerson and others.
Production of office machines and computers ON Semiconductor Slovakia, a.s., Piestany Delipro, s.r.o., Piestany Samsung Electronics Slovakia, s.r.o., Galanta
Production of electrical machines and devices Siemens AG Siemens Business Services, s.r.o. Telegyr Systems, s.r.o. Reaktortest, s.r.o. Trnava, SMS Slovakia, s.r.o. Siemens Automotive, s.r.o., Michalovce Volkswagen Elektricke Systemy, s.r.o. Nitra, SAS Automotive, s.r.o. Siemens Building Technologies Slovensko, s.r.o. Osram Slovakia, a.s., Nove Zamky BSH Drives and Pumps, s.r.o., Michalovce Leoni Autokabel Slovakia, s.r.o., Trencin Emerson, a.s., Nove Mesto nad Vahom BEZ Transformatory, a.s., Bratislava Alcatel Slovakia, a.s., Liptovsky Hradok
Production of radio, television and communication equipment and devices Sony Slovakia, s.r.o., Trnava Tesla, a.s., Stropkov
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Production of measuring, control, testing, navigation and other devices KRIZÍK, a.s., Presov
SWOT analysis Strengths • Foreign capital entry into more sophisticated production • Enforcement of adopted legislation and incentives by the domestic and foreign investors which have partially improved the conditions for foreign capital entrants to Slovakia • Gradual transposition of EU directives into Slovakia’s legislation • Application of the European standards and improvements in the quality of production and products • Increasing share of newly established and medium-size businesses in total production of the sector • Increasing value-added products and labour productivity • Cross-sector characteristics and close links with the expanding automobile industry • Export performance, while the negative balance is determined by large imports
Weaknesses • Loss of traditional markets • Lack and unavailability of financial resources for technological development and restructuring of production processes in companies where there is no foreign capital • Lack of experience in company management • Demand stagnation substantially limiting production growth • Gradual growth of energy and other prices by the end of 2002 will probably have a negative impact on the sector’s development prospects • Lack of foreign capital causes stagnation of research and development activities in the organization • Dependence of the sector upon development in the world, as the electronic and electrical engineering industry actually copies global markets’ development
Opportunities • Further inflow of foreign investments to the CEE regions
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• Penetration of electronics into larger spectrum of industrial technologies • Expansion of information and telecommunications technologies • Increasing demand for software, complex instrumentation and control projects
Threats • Transfer of some labour intensive production to countries with lower wages • High sensitivity to international market fluctuations • Outflow of highly qualified specialists to other countries
Conclusion The electrical engineering industry represents a traditional industrial sector of Slovakia and is among the most active sectors of the Slovak economy. The important position of the sector in industry is underlined by the fact that it employs every tenth worker in the processing industry. The well-established education system ensures support and development of the sector. Since 1996, all companies in the sector are private. A majority of them are managed by international investors, which entered the Slovak market either in the form of green-field projects or through the acquisition of parts of the former production facilities. For Slovak companies the presence of international investors provides availability of distribution channels to international markets, which compensates for the low absorption capacity of the Slovak market. However, this also entails a direct dependency upon the economic climate in international markets. The foreign trade balance of the sector is negative, despite a large volume of exports, confirming its high dependency upon imports. The Government provides incentives through legislation for the further inflow of investors to the Slovak market. It also supports Slovakia’s accession to the EU through the current harmonization of national legislation and technical standards with the EU acquis.
4.8
Automotive Industry Slovak Investment and Trade Development Agency (SARIO) Position of the sector within industry in the Slovak Republic Automotive production is the single most important sector of the Slovak economy. The presence of international investors suggests that the automotive industry is fully integrated into the European economy. The industry employs the most sophisticated technologies, which, linked with cheap and qualified labour, creates a competitive advantage for Slovakia. The sector’s share (including trailers and semi-trailers) of GDP was 1.82 per cent in 2001. The sectoral share of total gross production is much higher (almost 5 per cent), but intermediate consumption in automotive production is very high compared to other sectors. The GDP per employee generated by the sector is almost 32 per cent higher than the industrial production average. Although the sector’s share of national GDP is low in terms of labour productivity, the automotive industry is ranked as the most important segment of industrial production. Effectively, the automotive industry represents the core sector of Slovak industry. In 2001, the automotive industry employed, on average, 24,884 people representing 6.5 per cent of all employees in industrial production (based on the data of companies with workforces of 20 or more). The average monthly wage in the automotive industry increased in 2001 by 15.2 per cent to SKK17,446, which represents 7.4 per cent real wage growth net of inflation.
Impact on trade balance In recent years, Slovakia has generated a large foreign trade deficit, in which automotive production represents a very important element. In both 2000 and 2001, exports from Sector 34 economic activities, which includes automotive vehicles, trailers and semi-trailers, amounted to approximately SKK113 billion while imports were SKK65 billion and
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SKK86 billion respectively. In 2000 the positive balance represented 5.4 per cent of GDP, but in the year 2001 only 2.1 per cent of GDP. The decrease in this sector’s positive balance was caused by growth in domestic demand, which resulted from a dramatic increase in accumulated consumption. The strong domestic demand has been reflected in increased automotive imports. On the other hand, exports stagnated due to the restructuring of some production lines of the nation’s most significant exporter. If more input from Slovakia could be secured, both the trade balance and GDP per capita growth would improve rapidly.
Profitability of the automotive industry As far as financial results are concerned, companies with 20 or more employees engaged in automotive production managed to increase their net profit by 36.3 per cent to SKK5.8 billion in 2001. This represented 13 per cent of the total profit of companies engaged in industrial production. (Source: Statistical Office of the Slovak Republic)
Characteristics of the automotive sector in the Slovak Republic In principle, the automotive vehicle industry can be subdivided into final production (production of passenger cars, buses, light utility vehicles, trucks, specialist vehicles, semi-trailers and trailers) and components production. The individual parts of the automotive sector are interconnected and the development of the one depends upon the development of the other and vice versa. The character of the whole industry is based on this interdependence and can be described in the following way: • cross-sectional character of the industry which influences the development of many other sectors; • pro-export character of the industry; • major importance of Volkswagen Slovakia, a.s., within the sector; • sector intensively supported by the State; • high level of foreign investment; • high level of production concentration; • increasing share of components sourced from domestic suppliers; • qualified labour; • privatization process in principle completed; • adopted EU legislation determines the establishment of new waste recycling and processing sub-sector; • need to develop research and development; • sector income determined by large investments.
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Position and characteristics of the sector in EU countries and worldwide The automotive industry, compared to other sectors of production, has an important position in the manufacture of durable products. Worldwide, the automotive industry share of industrial production represents 17–20 per cent, and its rate of annual growth is usually higher than the growth of industry as a whole. The automotive sector reacts very sensitively to economic development and a negative condition immediately impacts on production; characteristically, demand and production are cyclical. In 2001, according to OICA (Organisation Internationale des Constructeurs d’Automobiles), Europe’s share of the global volume of manufactured automobiles was 35.69 per cent, the share of NAFTA (United States, Canada and Mexico) was 31.84 per cent, while Asia – represented mainly by Japan and South Korea – maintained its 31.77 per cent share. In Central and Eastern Europe the five largest automotive manufacturing countries are Russia, the Czech Republic, Poland, the Slovak Republic and Hungary.
Prospects for the Slovak Republic automotive industry in relation to the EU and the world Slovakia is gaining ground in the EU through the quality of its assembled products, mainly passenger cars, but also through the quality of the components that it supplies. Compared to other countries of the EU, Slovak production is influenced by its relatively cheap and qualified labour. Competitiveness is influenced by the following factors: • product structure and quality; • strategic investment; • foreign markets’ needs. The product structure of the domestic automotive industry is determined primarily by the production of passenger cars, representing approximately 99 per cent of total product, and secondarily by the production of utility vehicles, trucks and buses, tractors, semi-trailers and trailers. Current automobile production in Slovakia is represented by Volkswagen Slovakia, a.s. Other final producers are of local importance only; typically, their low capital strength does not allow them to influence the automobile industry market significantly. Slovak production is mainly aimed at the production of passenger cars for low to upper middle class income groups. The Volkswagen AG group in Slovakia produces passenger cars that do not compete with
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Key Sectors of Business and Industry
other VW brand cars. Market demand is high due to their good quality and relatively low price. The Slovak automobile industry produces passenger cars of a quality that has been assessed as comparable to the rest of the world. This achievement is confirmed by the international certificates awarded to Volkswagen, a.s., in the area of quality management systems, specifically DIN ISO 9002/EN 29002 standards, and the quality certificate VDA 6.1 for gears production. Globalization and the opening of the market will have a positive impact on individual manufacturing locations and regions within Slovakia, mainly from the point of view of production capacity development, employment growth, and a reciprocal strengthening of development in the other industrial sectors cooperating with the automotive industry. Globalization is being accompanied by the further inflow of foreign direct investments, which provide a recovery and improvement in production quality and efficiency. When looking at the demands of international automobile markets, the following economic indicators are relevant: • • • •
GDP development; private consumption development; development of new passenger cars registration (PC registration); development of new passenger cars production (PC production).
International market demand can be tracked on the basis of GDP and assumed private consumption growth in the EU. Registration of new passenger cars, which represents the volume of actual purchases, is sourced from departments responsible for vehicle registration and is not directly linked to production.
Government incentives The success of the automotive industry in Slovakia, which is often equated with the single brand Volkswagen, is reflected in the substantial emphasis placed on this sector by the State. There are several types of incentive that could make the Slovak economic environment more attractive for foreign investors. The most important documents and forms of incentive for the automotive industry are: • tax holidays, tax relief, investment incentives, incentives for the establishment of industrial parks; • National Strategy and Policy of the Slovak Republic, Strategy for Development of the Slovak Industry in the 21st Century (SR Industrial Policy); • Programme for Development of the Automobile Industry in the SR.
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167
A new element within Slovak legislation that influences the automotive industry is the directive on the recycling of wrecked or junk vehicles. The directive is part of the system of standards for environmental protection. The programme of development for the Slovak automotive industry is the result of enforcement of the Government resolution No. 453/1998 Coll. dated 7 July 1998. Within the Government strategy framework, the institute of the Slovak Government Plenipotentiary for automotive production development was established, which was assigned the task of coordinating implementation of the programme and reporting back to Government by 31 March 2003. Slovakia should participate, through its competitive advantages, in the dynamic growth of the industry in the EU.
Development of the Slovak automotive industry The Slovak automotive industry is composed of the following segments: • production of passenger cars, representing the largest portion of the sector; • production of buses, light utility vehicles, trucks, special purpose vehicles, trailers, semi-trailers and tractors; • components production. In Slovakia the main representatives of the automotive industry are members of The Association of the Slovak Republic Automotive Industry (ZAP SR). The revenues of the manufacturing organizations that are members of ZAP SR increased 15.7 per cent in 2001, following an increase of 23.8 per cent in 2000 over 1999. VW Slovakia earned revenue increases of 65.6 per cent in 1999, 65.6 per cent in 2000 and 59 per cent in 2001. Over this period the VW share of automotive industry production, after increasing from 63.8 per cent to 65.6 per cent in 1999, fell back to 59 per cent in 2001. The production of components and parts for the automotive industry in Slovakia merits special attention. In line with expectations, the volume of supplies and subcontracts is increasing. This positive feature reflects the fact that supplies are more and more related to Slovak producers, which means that in relation to new green-field opportunities even the existing component manufacturers are able to satisfy the quality requirements of the automotive constructors.
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Key Sectors of Business and Industry
Production concentration One of the main requirements of automotive industry development is to provide for the logistics of the manufacturing process, determined by the establishment of infrastructure, roads, quality telecommunications and labour mobility. Their importance is underscored by the strong technological links between manufacturers and suppliers located in the vicinity of the manufacturers in order to decrease transport and time costs. One advantage of Slovakia is its favourable position, which is ideal – from a logistics point of view – for expansion into Eastern European markets. Prospective manufacturers consider these markets to be highly significant.
Energy demand Energy represents an important cost item in each industrial sector, and the increase of energy prices will have an important impact on the net income of manufacturers and sellers. Prices in the Slovak Republic are regulated; since 1 January 2003 prices shall increase only as the result of the Decision on Energy Prices Adjustment. The gradual liberalization of the energy market will have an impact not only on increased costs for manufacturers but also for retailers, which will in turn be reflected in their decreased real income.
Investments In 2001, investments of the automotive industry into technologies represented SKK14 billion. In addition to investments in VW Slovakia, there were industrial parks built in Lozorno, Kuster and Plastic Omnium, in the western part of Slovakia, where total investments of EUR220 million (approximately SKK9.3 billion) were made.
Employment of qualified labour The automotive industry is among the significant employers within the Slovak Republic. In 2001 the number of ZAP SR employees increased against the previous year by 18.5 per cent after stagnation in the employment level in previous years. The majority of the new jobs were created in the Zahorie region, where industrial parks, as a consequence of the Volkswagen plant, were established. Recently, the PSA Peugeot Citroen proposal to invest SKK28 billion into a new plant at Trnava, which was submitted in May 2002, has been approved. The new factory will have a planned annual capacity of
Automotive Industry
169
300,000 small cars from 2006 and should employ 3,500 directly. The strategic Trnava location gives easy access to a potential 190-acre business park for component suppliers.
Regional presence of the automotive industry and selected representatives of the sector From a regional point of view the automotive industry is present in each region of the Slovak Republic; however, there are major differences in the level of concentration and volume of production. The highest production density is found in the region of Western Slovakia (Bratislava and Trnava regions) as the result of the presence of Volkswagen Slovakia, a.s. This is soon to be augmented by the approved new plant at Trnava of PSA Peugeot Citroen, which is expected to create up to 3,500 primary and a further 6,000 secondary job opportunities. Martin (Zilina region) is an important centre of components production.
SWOT analysis Strengths • The automobile industry has a large share in total Slovak exports • The transformation process is completed • The strategic position of the Slovak Republic presents the opportunity to expand to the Russian and Ukrainian markets • There is a growing number of domestic suppliers with decreasing dependence on imports • Development of associated sectors • A new industrial sector dealing with waste recycling and processing of automobile industry products has been established • The State gives support through legislation and economic incentive tools • The Slovak Republic is flexible in reacting to the EU accession requirements • Identical technological principles to the EU • High-quality, qualified labour
Weaknesses • The industry is dependent upon global economic development • Areas outside of Western Slovakia have insufficient infrastructure, which is a prerequisite for establishment of new industrial zones • The sector is dependent upon one manufacturer (VW)
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• Current dependency upon imports • Existing weak reserves in the area of research and development
Opportunities • Completion of the privatization process in Slovak Automobile Transport and provision of incentives for bus production • There is an inflow of international investment into sectors supplying the automotive industry • Growth of jobs, qualified labour • Relatively cheap labour within the EU and among accession candidate countries • Some products are exclusively manufactured in Slovakia • Local manufacturers subcontracted by systems suppliers • There is a positive example of a successful investor (VW) for attracting potential investors
Threats • There is wide competition • The sector is dependent upon the global economy • The number of suppliers in the region could be decreased by the unification of components • Stagnation in sales of automobiles (US crisis, loss of consumers’ trust) • Within automotive groups, manufacturing capacities may be transferred away from Slovakia
Conclusion The overall development of the automotive industry was influenced by the transformation of the Slovak economy. At the outset, the sector was tossed around by the crisis and many companies reduced their capacities or were dissolved. The entry of the global group Volkswagen to the Slovak market ushered in a new era for the development of the Slovak automotive industry. The entry of the investor was accompanied by investments into the sector that provided for capacity development. The investor started to involve an increasing number of components manufacturers and other industrial sectors engaged in supplying the automotive industry. In recent years following major investments, the sector has moved from loss-making to the generation of profits, and it is assumed that this trend will continue. The share of the domestic suppliers is increasing, while the sector’s demand for imports is decreasing, and qualified labour ensures quality production and product competi-
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tiveness in global markets. Of advantage to the whole sector is the strategic location of Slovakia, providing the opportunity to reach Eastern European countries with their large market potential. Inclusion of the Slovak automotive industry into a global group operating in European and world markets has created a promising outlook for the sector.
4.9
Chemical and Pharmaceutical Slovak Investment and Trade Development Agency (SARIO) Position of the sector within industry in the Slovak Republic The production of chemicals and chemical products is among the strategic sectors of Slovakian industry. The sector encompasses the production of basic chemicals, pesticides and agrochemicals, coating compositions, pharmaceuticals, cleaning agents, cosmetics, chemical fibres and other chemical products. It provides semi-products for further processing in the industry and products needed by other sectors in the economy, including consumables for the general public. In 2000, there were 214 ventures involved in the chemical and pharmaceutical industry in Slovakia, of which 146 employed more than 20 people. The chemicals sector contributed 1.37 per cent to Slovakia’s GDP for 2001 and generated 6.3 per cent of the GDP (at current prices) derived from industrial production. In 2001, the sector employed 18,973 people, accounting for 5 per cent of all employees in industrial production. During the year, the average monthly wage in the sector increased by 12 per cent to SKK16,172. In recent years, the trend in production of chemical products has been in line with the overall trend of industrial production, with a decrease observed only at the beginning of 2001. This dip was mainly related to the restructuring of different sectors and their sensitivity to the economic cycles of the EU. In Slovakia the high foreign trade deficit (more than 10 per cent of GDP) represents a chronic problem. The situation in the chemical industry, where the deficit is 2.2 per cent of GDP, is not favourable, because the chemical industry is largely dependent upon imported raw materials. The chemical products share of Slovakia’s total imports was 9.6 per cent in 2001, when the sector registered a negative trade balance value amounting to SKK21.5 billion.
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Sales depend upon the development of world prices of input raw materials and chemical products, which in turn are determined by the global market leaders and input raw material prices in the domestic market. In 2001, the chemical production sector achieved sales revenues from industrial production of SKK48.4 billion and a pre-tax income of SKK2.4 billion. Since 1999, revenue from the chemical industry has shown an upward trend, as some recovery from the global recession has been experienced – mainly in the United States and EU.
Characteristics of the chemicals sector in Slovakia Individual production within the product groups differs by character and also level of finished production outputs. Common features of the chemical and pharmaceutical industries are: • high export performance, but also the need for imports; • high energy and material demand of production; • prevalence of the so-called ‘heavy’ chemistry products and slow progress in the increase of higher-value-added (more sophisticated) products, as compared to the developed countries; • tight technological links; • highly qualified labour requirement; • quite demanding research and development; • high level of production concentration; • completed transformation and privatization process. With the majority of production destined for exports, the chemicals industry is greatly influenced by global economic development. The sector is largely dependent upon imports of input raw materials, which is reflected in the economic results of individual entities in the sector.
Position and characteristics of the sector in EU countries and worldwide The global chemical industry is dominated by the United States and the EU. Based on UNIDO 2001 estimates, the global sales revenue of chemical products was EUR1,568 billion, a gain of 0.3 per cent over 2000. EU manufacturers accounted for 29.6 per cent of this total, while revenues of US companies provided a further 29.5 per cent. The two leaders were followed by Japan with a 15.1 per cent share and other Asian countries.
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Worldwide, the chemicals industry emphasizes research, development and innovation. On the one hand, research and development ensures medium-term sustainable growth for the industry; on the other hand, it is the consequence of objectives to decrease the environmental impacts of harmful processes and substances. In the EU the success of the pharmaceutical industry is considered to be due, in some part, to the ageing population of the European continent. Characteristics of the global chemical industry can be summarized as follows: • • • • • •
open and linked economies within this sector; sophisticated production (research and development); need for highly qualified labour; lower energy and material demand of production than in Slovakia; high level of production concentration; globalization process.
Prospects for Slovakia’s chemical and pharmaceutical industry in the EU and world competition The chemical and pharmaceutical industry in Slovakia provides products similar to other CEFTA countries. However, it lags behind the EU in several areas – in the structure of the product range and technological process standards – that would reduce demand for raw materials and energy and stimulate higher labour productivity. In EU markets the Slovak industry is gaining ground with lowervalue-added products. Intensive competition and consistent channels of distribution and supply dominate the more sophisticated production markets. The Slovak chemical and pharmaceutical industry within the global market needs to be viewed from several aspects: • production structure; • price competitiveness; • foreign markets’ needs. The character of the production facilities has an impact on the production structure of the sector, which suffers from reduced profit margins due to a lack of sophisticated products. Therefore, a priority task for Slovak chemical companies is to restructure the production process. In terms of price competitiveness, the companies operating in the Slovak chemical and pharmaceutical industry are not those that determine the prices of products in the European and global markets. For example, Slovak chemical sector revenues represent only 3.6 per cent of
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175
the revenues of BASF and Bayer, the leaders in the European and global chemical industry markets. The pricing of Slovak companies’ products is often derived from competitors without taking into account the level of production costs. The benefits of foreign capital investments into the chemicals industry, in addition to the financial input, are apparent in the modernization of technologies and the ease of delivering more sophisticated products to new markets. The global EU market poses several risks for the Slovak companies in this sector resulting from: • the possible increase of competition by the new member countries (which would have been even more relevant in terms of the mutual volume of trade within the sector if the Czech Republic had entered the EU earlier than the Slovak Republic); • entry of the current international chemical and pharmaceutical companies into the Slovakia market. Global development is a major influence on Slovak industry. The majority of production is exported and, as already noted, the sector is largely dependent upon imported raw material inputs. This factor is also reflected in the economic results of the firms operating in the sector. The competitiveness of domestic chemical and pharmaceutical products in the global and domestic markets is largely influenced by: • • • • •
high material and energy demands of production; relatively low labour productivity compared to the EU; over-employment; lower levels of profit margins resulting from product structure; ability to cope with the environmental protection requirements and constant modernization of the production facilities and technology.
The countries of the EU and CEFTA represent the core markets. Slovakia’s exports of chemical and pharmaceutical products totalled SKK44.574 billion in 2001, an increase of almost 2.5 per cent from the previous year. In terms of total Slovak exports, the chemicals industry share decreased from almost 8 per cent in 2000 to 7.3 per cent in 2001. The breakdown of exports by country is presented in Table 4.9.1. So far as more sophisticated production is concerned, heavy chemistry products – chemical fibres and pharmaceuticals – are the major export commodities. A comparative disadvantage of the sector is its dependence upon basic raw material imports – fossil fuels (crude oil, natural gas). In the event of a substantial price rise, companies engaged in their production and the trade balance of the sector will suffer a negative impact. Import dependency is also significant when compared with
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Table 4.9.1 Slovak Republic exports of chemicals to EU and CEFTA countries Year 2000 SKK billion
%
Year 2001 SKK billion
%
Total exports of chemicals (SIT C5)
43.5
100
44.6
100
to the EU
15.3
35.2
15.2
34.2
Germany
7.0
16.1
6.5
14.6
Italy
2.5
5.8
2.6
5.8
Austria
2.0
4.7
2.1
4.8
France
0.8
1.8
1.0
2.3
to CEFTA
22.6
51.2
23.3
52.4
13.2
30.3
13.1
29.4
out of that
out of that Czech Republic Source: SO SR
other basic production raw materials, partially finished products and chemical products. Again, the reason for this is the lack of production of these products in Slovakia and/or high prices of the Slovak inputs. A strong competitive environment also exists in the domestic market due to: • liberalized trade; • a lack of administrative barriers to the entry of new competitors; • no administrative measures that could lead to protection of local manufacturers. The advantage of selling to foreign markets is timely payment by foreign customers. In Slovakia, the buyers of these products belong to the health sector – pharmaceutical products – and agriculture – agrochemicals. The financial situation is not favourable and the outlook for a return to financial health within the relative sectors is uncertain.
Foreign investments Foreign investors have entered Slovakia in lower numbers than in neighbouring countries. Foreign direct investment (FDI) in the chemical industry totalled SKK5.667 billion up to 31 March 2001. This was 3.26 per cent of total FDI and 6.26 per cent of investments into industry. Within the sector, foreign capital is present in joint ventures established by major chemical and pharmaceutical companies, mainly in the following areas:
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• Pharmaceutical production – Fermas, spol. s r.o., Slovenska L’upea foreign investor: Degussa AG – Hoechst-Biotika, spol. s r.o., Martin foreign investor: Hoechst AG • Chemical fibres – Rhodia Industrial Yarns Slovakia, a.s. foreign investor: Rhodia Industrial Yarns – Nylstar Slovakia, a.s., Humenne foreign investor: Nylstar • Electro-foils – Terichem, a.s., Svit foreign investor: Raniplast • Industrial agents and detergents – Sloveca, Slovenska Condea Augusta, spol. s r.o., Bratislava foreign investor Condea Augusta S.p.A. – Henkel-Slovensko, spol. s r.o., Bratislava foreign investor Henkel, KgaA • Heavy chemistry – Novacke Chemicke Zavody, a.s., Novaky foreign investor: Exall Resources Ltd From a regional view, the chemical industry is present in each region of the Slovak Republic. There are, however, significant differences in capital strength and importance of these companies within the Slovak Republic economy.
New foreign investment In September 2002, the Feed Additives Business Unit of Degussa AG Dusseldorf announced plans to extend its investment at its whollyowned subsidiary Fermas spol. s.r.o. by building a second large-scale production plant for L-threonine at Slovenska L’upea. The new plant, which will meet the growing demand of Degussa’s global customer base, will have an annual production capacity of 30,000 metric tons and is scheduled for start-up in 2006. The new threonine production facility will take advantage of synergies and infrastructure at the existing fermentation plant and apply the advanced fermentation process, which is a result of the company’s extensive research and development work in biotechnology. Degussa’s existingL-threonine production at Fermas is already operating at full capacity and will be expanded incrementally to 20,000 metric tons by 2005 from its present capacity of 10,000 tons. (L-threonine, one of the three most important amino acids required for animal nutrition, is a protein building block, playing a vital role in
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balancing amino acid levels in diets and enhancing efficiency while reducing nitrogen excretion.)
Support programmes The Government’s industrial policy is to support small and mediumsized businesses operating in the chemicals sector through a loan programme implemented by the National Agency for Small and Midsize Businesses Development. Since June 2001 this agency had provided 27 loans to the chemical and pharmaceutical industry, amounting to SKK101.64 million, representing 2.9 per cent of the total volume of loans to industry. The maximum amount of each loan is SKK5 million, with a maximum repayment term of 5 years. Another form of government support is oriented toward research and development. The Ministry of Finance of the Slovak Republic has drafted measures for financing the new model of research and development, a concept of government research and technical policy.
Economic policy in the environmental area The chemical and pharmaceutical sectors are among the heaviest environmental polluters in industry. In the year 2000, the chemical industry generated approximately 35 times as much waste and pollutants per single unit of value as the entire production industry. Extensive investments into environmental protection are being initiated within the process of Slovakia’s accession to the EU, based on EU environmental legislation – the environmental acquis. In this respect Slovakia has already adopted several legislative norms.
SWOT analysis Strengths • • • •
Increased foreign capital flow into the sector during past years High export performance Cheaper labour compared to the European average Qualified labour
Weaknesses • Lack of emphasis on prospective trends in the chemical and pharmaceutical industry (biotechnologies, genetic engineering) • High energy and material demands of production
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• High raw material dependency • High dependency upon economic and political cycles in the Slovak Republic • A very low correlation of industry growth to the prosperity of the EU • Incompatibility between the currencies utilized for imports of raw materials and exports of production from this sector • Regulated energy prices and slow energy market liberalization, mainly for natural gas
Opportunities • Intention of the OECD countries to increase investment inflow to the sector in the countries of Central and Eastern Europe • Expectation of growth of chemical products production in the EU • The Czech Republic, as one of the major partners within this sector, expects strong aggregate demand growth
Threats • Increased competition due to an inflow of cheap products from Asia and Russia • Need for large environmental investments following adoption of EU environmental legislation • Possible loss of competitiveness in the event of further significant increases of input raw material and energy prices • Suspension of investment inflow due to unfavourable internal political development
Conclusion The chemical and pharmaceutical industry is among the processing sectors that will have a significant impact on the development of the Slovak economy. In the global competitive environment it is essential that Slovakia’s chemical and pharmaceutical industry comes closer to the standards of the EU and developed countries. This is important not only in terms of product ranges but also in technological processes, which will help to reduce production demands for raw materials and energy, but also increase labour productivity. The sector will be in a position to maintain its competitiveness with the prerequisite that the restructuring of production will increase the number of products with high unit prices, decrease the material demands of production, and maintain the ratio between the labour productivity and wages growth. It follows that the growth of performance parameters, competitiveness and export performance of the sector will require implemen-
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tation of measures at enterprise level. Without this commitment, it will not be possible to maintain the position of chemical and pharmaceutical products within the EU or in wider international markets.
4.10
Textiles, Clothing, Leather and Shoes Slovak Investment and Trade Development Agency (SARIO) Textiles and clothing industry Development history The production of textiles dates back to the Middle Ages within the framework of specialized crafts – fustian production, weaving, drapery and glove making. Technical development arrived with the first spinning machines at the end of the eighteenth century and further developments in industrial production began in the 1860s with flax production in Kezmarok and a drapery plant in 1868 in LueeneOpatova. At the end of the nineteenth century and beginning of the twentieth century there was a further period of technical development and expansion, with drapery plants in Trencin, Eadce and Rajec, and a cotton spinning mill and thread production plant in Bratislava. By 1910 the textile industry in Slovakia employed 10,000 people. The textile factories in Ruzomberok and Zilina were the biggest of their kind in Slovakia (then Hungary). After the foundation of the Czechoslovak Republic in 1918 there followed a long period of decline and stagnation in the textile and clothing industry due to strong competition from neighbouring territories. A revival in the textile industry took place after 1948, within the framework of the industrialization of Slovakia, when old factories were reconstructed and several new factories equipped with modern technology were built. By 1980 approximately 72,000 people were working in the textile and clothing industry with production concentrated in 13 State-owned enterprises.
Post-1989 performance During the period of economic transformation after 1989 the Slovak textile and clothing industry suffered a considerable decline in
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Key Sectors of Business and Industry
domestic production and employment, mainly due to the disintegration of the former COMECON markets, the collapse of the domestic wholesale network and, above all, as a result of the import of cheap goods from abroad and the reduced purchasing power of the consumer. Individual enterprises were impacted by all these factors. Today, especially in the textile industry, most companies have serious problems and are in deep crisis. The problems have been characterized by a high incidence of insolvency, excessive production capacities in relation to opportunities for gaining market share, lack of working and investment capital and an obsolete production base that does not address the consumer demand of highly developed export markets. All of these influences resulted in the regression of the textile and clothing industry as a whole throughout the transformation process. Comparing 1999 with 1990, the production of goods in the textile and clothing industry fell by approximately 30 per cent. However, the negative effects of strong competition from developing countries with low wage costs were partially offset by the growth of some companies in the clothing industry that have been able to use their production capacities to fill orders from EU countries, thanks to comparatively favourable wage rates and related changes in production structures. By 1999 over 75 per cent of textile and clothing production was exported to Western European markets, creating an added value of some SKK7.4 billion, of which SKK4.5 billion was in the clothing industry. Clothing manufacturers are likely to benefit further from Slovakia’s EU entry. Although employment by companies in the clothing sub-sector rose between 1990 and 1999, the decrease in employment in the textile and clothing industry overall was 30 per cent, reducing the workforce to 47,000 and mirroring the fall in production. So far, decreases in employment have not resulted in significant gains in labour productivity.
Investments Unfavourable financial results have meant that reinvestment in the industry has been minimal. From 1993 to 1998 investments in the clothing and textile industry combined did not even reach the level of depreciation With prices increasing for machines and equipment imported from abroad, the lack of investment led to a deterioration in the production and technology base. The plant base is heavily worn and it was estimated in 2000 that more than two-thirds of machines were beyond their economic service life. The situation in the clothing sector is rather better because of lower investment costs, and annual investment has been maintained at slightly above the level of depreciation. Foreign capital in the textile and clothing industry is low. Cooperation with foreign companies is
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183
usually in the form of production agreements that take advantage of the comparatively low labour costs. The privatization process in the textile and clothing industry since 1990 is complete. In 1990 there were 18 State-owned production companies. By 2000 there were 222 private enterprises employing 20 or more persons, of which 73 are in the textile sector and 123 in clothing manufacture.
Leather and shoe industry Development history The tannery guilds of the Middle Ages usually included craftsmen processing leather. According to historical sources, the oldest Slovak tannery guild was founded in the Liptov region in the 1470s, while the guild of furriers in Kosice had already been founded in 1307. Tannery production in Slovakia dates back to the 1860s, when the first enterprises for the industrial processing of leather were founded in Bosany and the Liptovsky Mikulas region. By the 1890s there were six tannery plants in Liptovsky Mikulas equipped with the latest machinery and technology. World War I was a boom period for the leather industry in Slovakia, when production was increased to meet army orders and the industry received investment from bank institutions. In 1930 the Baca company from Zlin entered the market, installing large tanneries in Bosany and acquiring some smaller tannery firms. By 1939 the Bosany factory was the largest shoe producer in Slovakia and the manufacture of rubber shoes and semi-finished shoe products was introduced. A new factory was built at Partizanske (then Bakovany) to which shoe production was transferred from Bosany. After 1948 leather production was concentrated and centralized; the majority of small factories were closed down. Shoe production in Partizanske in 1948 reached 9.1 million pairs of shoes and 4,866 workers were employed. Production capacity and volumes were expanded with the construction of new factories in Holle, Moravske Lieskova, Perievidza, Bardejov, Zlate Moravce, Komamo and Llava. Production was to a standard quality, oriented towards consumption in the COMECOM and Soviet Union markets. Extensive growth continued until the political regime change in 1989 when historically the highest volumes of production were achieved. At this time, the leather and shoe industry consisted of nine State enterprises and organizations of the Union of Production Cooperatives and Communal Enterprises. The leather and shoe industries could then produce almost 1 billion m2 of leather and around 47 million pairs of shoes annually, which far exceeded the consumption requirements of former Czechoslovakia.
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Key Sectors of Business and Industry
Like the textile and clothing industry, the Slovak leather and shoe industry was heavily affected by the transformation of the Slovak economy after 1990 and the ensuing privatization programme. Negative development influences included the following: • • • • • • •
disintegration and liquidation of the domestic wholesale network; loss of Eastern market shares (especially the former USSR); interruption of financial flows; insolvency; weak product range through mass production; obsolete production base; penetration of cheap competition from Asia.
Slovak consumer purchasing power and domestic market sales in Slovakia also declined. The net effect of all these factors was a sharp decrease in production from 47 million pairs of shoes in 1989 to less than 10 million pairs in 1999. As a result, production efficiency declined steeply and the industry leaders: Cebo Holdings Slovakia, a.s. (Partizanske), JAS, a.s. (Bardejov), and Kozelucne, a.s. (Bosany), experienced survival problems. However, these three are the most important representatives of the Slovak tannery and shoe industry in terms of product volume, number of employees and material asset value. Between 1990 and 1999, industry employment halved from more than 30,000 to 15,000 with no increase in labour productivity. In fact, industry output per employee fell from SKK525,000 in 1990 to SKK380,000 in 1999, when value added was almost SKK2.2 billion.
Investments Low rates of investment in the leather and shoe industry (below depreciation until 1995) and increases in the prices of imported machines and equipment, made even simple plant renovations impossible and resulted in an average wear level of 70 per cent for machinery and technological equipment. The degree of wear was even higher in the case of tannery production. In the few years up to 2000, industry annual investments ran at approximately SKK280 million annually, which was slightly under the level of depreciation. Private enterprises in the industry were not able to generate funds for investment from profits or loans. However, the importance of the leather and shoe industry as a key sector of the Slovak economy has made it necessary for the Government to include its reconstruction among long-term national development priorities.
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185
Leading companies Due to the continuing financial problems of the three biggest companies in the industry (identified above), smaller companies, free from bad debts, have been founded on the premises of the larger companies. Subsidiary companies of major European shoe manufacturers have also been established in the Slovak market. Two production facilities of the company Rieker-Obuv, s.r.o., in Komarno and Llava employ more than 2,000 people. The German-owned companies Gabor Slovensko, s.r.o. (Banovce nad Bebravou), and Elefanten Slowakei, s.r.o. (Partizanske), and the Danish-owned company Ecco Slovak, a.s. (Martin), are also doing business in Slovakia.
4.11
The Transport Sector Slovak Investment and Trade Development Agency (SARIO) Airports and routes There are six international airports in Slovakia serving the entire country. While Bratislava’s Milan Rastislav Stefanik airport and the Kosice International Airport offer the most regular service to international destinations, Slovakia’s other airports are available for charter flights. Austria’s main international airport, the Schwechat, is only 50km from Bratislava and, as a result, provides regular air connections for those travelling from Slovakia to European and global destinations. Regular bus and train services connect Bratislava to the airport. The Budapest Airport, located 250km from Bratislava, is another alternative. It is also possible to use the airport Ruzyne Prague in the Czech Republic, which has a regular connection with the airport of Milan Ratislav Stefanik in Bratislava.
Bratislava Milan Rastislav Stefanik is Slovakia’s main international airport and is named after a professional aviator who helped found the Czechoslovak State in 1918. Stefanik airport is 9km from Bratislava city centre and operates 24 hours a day. With 477 hectares and good climate conditions, the airport is ideally located to serve Western Slovakia, the Vienna area and the Gyor area of North-western Hungary. In 2001, the airport served 293,236 passengers, a number which increased significantly in 2002, thanks to the start of SkyEurope airlines, a low-cost Central European carrier based in Bratislava. Stefanik airport meets all international standards and its qualified staff and modern technological resources allow the airport to serve the whole range of passenger and cargo traffic. The airlines operating out of Stefanik airport are: Slovak Airlines, SkyEurope Airlines, Czech Airlines, Air Slovakia, Hernus Air, LOT and
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Tunisair. Regular destinations are: Kosice, Poprad, Prague, Moscow, Venice, Kuwait City, Leipzig, Sofia, Split, Tel Aviv, Tunis, Warsaw and Larnaka. Web site: www.letiskobratislava.sk
Kosice The Kosice International Airport is the second most important airport in the country. Located 6km from the centre of Slovakia’s secondlargest city, the facility was completely reconstructed in 1992, including new equipment for air traffic monitoring and control. With regular daily service to Bratislava, Vienna and Prague, Kosice airport has been steadily increasing its passenger turnover, most markedly in 2002 with the introduction of the SkyEurope service to Bratislava. The airlines operating out of Kosice airport are: Czech Airlines, SkyEurope, Slovak Airlines and Tyrolean. Destinations include Bratislava, Vienna and Prague. Web site: www.airportkosice.sk
Poprad-Tatry In September 2002, SkyEurope instituted regular services between Poprad and both Bratislava and Prague, marking the first time in six years that Slovakia’s premier tourist destination has enjoyed a regular international service. Still a centre for charter and recreational aviation, the airport also features cargo services, flight training, sightseeing, mountain rescue and medical flights, and aviation exhibitions, and is the home of several Slovak and international flight clubs. Nestled in the shadow of the High Tatra mountains, Poprad-Tatry airport is only 5km from Poprad city centre and 2km from the E50 highway. SkyEurope is the single airline operating out of Popra-Tatry airport and destinations are confined to Bratislava and Prague. Web site: www.tanap.sk/airport/sk.html
Piestany Serving primarily the world famous spas at Piestany, the airport is regularly used for charter flights, as well as meeting the cargo needs of the surrounding area. Equipped as a small regional airport, Piestany can provide handling services for cargo flights and for passenger aircraft with a capacity up to 95. Web site: www.airport-piestany.sk
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Key Sectors of Business and Industry
Zilina Besides being used for charter passenger and cargo services, Zilina airport is used by the Slovak military for training flights and regular operations. Private pilots and corporate aviators also fly out of Zilina, and the airport is host to a number of flight exhibitions, sport flying, medical operations and other aviation-related activities. Web site: www.letisko.sk
Map 4.11.1
Airports in the Slovak Republic
Railway network Slovakia’s railway network is modern, mostly electrified, well maintained and serves the entire country. With 3,665km of track, almost all of which meets international standards fully, virtually every Slovak city and town is accessible by rail transport. As a member of European conventions on transport routes, Slovakia ensures that international standards are observed in the field of railway operations and administration. The following international corridors cross Slovakia: • Corridor No IV: North-western Europe – CZ – Kuty – Bratislava Sturovo – Hungary – Balkans • Corridor leg No Va: Bratislava – Zilina – Cierna nad Tisou – Ukraine • Corridor No VI: Baltic States – Warsaw – Zwardon – Skalite – Cadca – Zilina (with further continuation via corridor No Va) • Corridor No IX (north–south corridor): Warsaw – Krakow – Muszyna – Plavec – Presov – Kysak – Kosice – Cana – Hungary – Romania – Bulgaria – Greece
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Modern inter-city trains allow passengers to travel the 445km distance between Bratislava and Slovakia’s second-largest city, Kosice, in just under five hours. Inter-city services are also available between Bratislava and Prague, and Bratislava and Banska Bystrica in Central Slovakia. Web sites: www.slovakrail.sk and www.zsr.sk
Map 4.11.2
The railway network in the Slovak Republic
Road system Currently, Slovakia has 297km of highway and further development is already underway. There are an additional 658km of Class I roads connecting to international corridors, which are suitable under international road conventions for the transport of goods and passengers. In particular, the Bratislava region is well connected to the highway infrastructures of neighbouring Hungary, Austria and the Czech Republic. Slovakia’s highway network forms a part of major trans-European corridors, including: • Corridor No IV: Berlin – Prague – Bratislava – Budapest – Istanbul • Corridor No Va: Bratislava – Zilina – Kosice – Ukraine • Corridor No VI: Gdansk – Katovice – Zilina Distances in kilometres between regional capitals in Slovakia are charted in Table 4.11.1.
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Table 4.11.1
Inter-city road distances in the Slovak Republic (km)
Banska Bystrica 204
Kosice
214
Nitra
119
85
317
Presov
208
412
120
327
Trencin
139
124
337
88
301
Trnava
164
49
362
91
376
181
Zilina
117
202
259
169
223
78
Zilina
153 Trnava
Trencin
Presov
Nitra
Kosice
402
Bratislava
Banska Bystrica
Bratislava
The corresponding travel times by road between the regional capitals in Slovakia are identified in Table 4.11.2. Table 4.11.2
Inter-city travel times by road in the Slovak Republic
2h 20 1h 25 5h 10 1h 40 4h 50
Trnava
2h 15 0h 30 5h 20 0h 40 5h 25 1h 00
Zilina
1h 30 2h 40 3h 55 2h 40 3h 25 1h 30 2h 20 Trnava
3h 10 5h 45 0h 20 4h 50
Trencin
Trencin
Presov
Presov
1h 35 1h 00 4h 50
Nitra
Nitra
Kosice
3h 40 5h 50
Bratislava
2h 40
Kosice
Banska Bystrica
Bratislava
Zilina
Banska Bystrica
Bratislava is already connected to the highway infrastructure in the EU member state of Austria and, with the accession processes going ahead in Slovakia, the Czech Republic and Hungary, Slovakia is well set to deal with road transport when it joins the EU in 2004. Map 4.11.3 depicts Slovakia’s highway and road transport system.
The Transport Sector
Map 4.11.3
191
The highway and road transport system in the Slovak Republic
River transport Besides modern rail and road transport, Slovakia also enjoys advantageous river transport and modern port facilities. The river transport infrastructure in the Slovak Republic connects to the following European corridors: • Traffic Corridor No IV: Berlin/Nuremberg – Prague – Budapest – Constance (Thessalonica) – Istanbul • Traffic Corridor No V (arm A): Bratislava – Zilina – Kosice – Uzhorod • Traffic Corridor No VI: Gdansk – Warsaw – Katowice – Zilina • Traffic Corridor No VII: Danube (includes an inland river Danube, the Black Sea–Danube canal, the Danube afflux to Kili an Sulin, inland waterways connecting the Black Sea with Danube, the Danube–Sava canal, the Danube–Tisa canal) Map 4.11.4 illustrates Slovakia’s river transport infrastructure. Waterway E81 – the Vah waterway (Agreement AGN) – is located directly in the route of road transport corridors Nos V and VI. A number of Slovak rivers also have potential for waterborne transport through canals, including the Nitra, Hron and Ipel rivers, as well as the Laborec–Latorica–Bodrog corridor in the east of the country. Although waterborne transport on the Danube is confined to the south-western regions of Slovakia, there are plans to expand river transport to the north-west of the country. Public ports operating for passenger traffic and/or freight are located in Bratislava, Komarno and Sturovo. Slovakia’s largest port in Bratislava offers modern technical infrastructure and hydro-technical equipment along the most important waterway, the Danube River. In
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Key Sectors of Business and Industry
Key:
• Ports
Map 4.11.4
The river transport system of the Slovak Republic
addition, the port at Komarno offers advantageous connection to Slovakia’s rail and road network and is a modern facility ideal for handling all manner of cargo, especially agricultural and food products. Web site: www.spap.sk
4.12
Communications Slovak Investment and Trade Development Agency (SARIO) Summary Slovakia’s developed telecommunications (telecoms) infrastructure has been deregulated and the fixed-line monopoly of Slovak Telecom (ST) expired at the end of 2002. Besides fixed lines, Slovakia has two wireless GSM and UMTS service providers – EuroTel and Orange – and a third combined GSM UMTS licence, as yet unclaimed. Following a period of modernization, ST lines were 70 per cent digital by the end of 2000, while GSM coverage of the country exceeds 98 per cent of the population. Slovakia also has well-developed data transfer services with six licensed companies and 30 Internet service providers.
Network Infrastructure Fixed-line operator Slovenske Telekomunikacie (ST) possesses a highquality and extensive infrastructure for fixed-line telecoms throughout Slovakia. The network structure of the company is not only used to provide the latest voice and data services, but also as a reliable connection with national mobile network operators and top international telecoms operators. Great emphasis has consistently been put on the development of scalability, quality of services, reliability, sufficient capacity and manageability. These five basic factors contribute to a high level of performance in carrier operations.
Switching network Facing an increase in demands for ISDN network services and increased customer awareness, the top priority at ST has been improving selected technical conditions in ISDN service. More than
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Key Sectors of Business and Industry
54,000 basic ISDN access installations have been deployed. The upgrade of technological conditions has allowed a more than 380 per cent increase in the number of active users. The total number of installations of ISDN primary rate access rose to 1,545 by the end of the year 2001. At the end of the 1990s, the construction of the switching network became a main priority for ST. In 2001, ST made huge progress in connecting the domestic network with international operators and mobile networks, as well as increasing the coverage of digital lines and services. Also in 2001, the number of newly deployed telephone lines exceeded 120,000, while the coverage of digital lines exceeded 73 per cent.
Access network In 2001, ST also worked to broaden and upgrade its access network, mostly by introducing integrated access systems. Over the year, the number of these systems increased by 66 per cent compared to 2000. By the end of 2001, total capacity had reached around 47,000 equivalent channels, a more than 145 per cent increase over the year 2000. ST has also increased its optical cable paths within the access network to 612km. In addition, traditional metal cable network upgrading has also continued and reached a capacity of 333,894 kmp in the year 2001. In the field of radio access, the number of radio networks was increased by 39 and the number of radio access points increased to 11,500.
Transport network The year 2001 also saw further developments in ST’s data transfer network, progressing hand in hand with the development of other technologies in response to customer demand for an increase in data transfer capacities. The number of network nodes remained more or less stable throughout 2001. The priority fields targeted from the beginning were traffic protection and transmission capacity increase between nodes. The capacity of the transport network has grown significantly over the last couple of years and more than tripled between 1998 and 2001. The use of 2.5 Gbit per second systems increased notably in comparison to 622 Mbit per second systems. In addition, traffic protection was achieved by using technological equipment, protecting all traffic within a given segment, while at the same time improving efficiency within the installed transport capacity. The share of automated traffic protection on 2.5 Gbit per second systems almost doubled in the year 2001. In the same year, the length of new optical cable paths within the transport network reached 93km.
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195
The projected incorporation of DWDM technology into the network in the year 2002 was one of the major development decisions made in that year.
ST – WAN/VAN network The WAN/VAN network (wide area network/value-added network) serves, within the network infrastructure in ST, mostly as a platform facilitating the provision of data services for end users. The ST – WAN/VAN network, which consisted of a total of 234 nodes in the year 2001, is based on the backbone network formed by 34 Mbit per second links. In the year 2001, the ST – WAN/VAN network provided more than 2,000 digital leased lines. In providing Frame Relay Services, almost 1,000 access circuits were provided. The total number of private customer networks showed an 80 per cent growth rate, compared to the previous year.
ST – IP network Four new access routes were installed in the central nodes of the ST – IP network in Bratislava, Banska Bystrica and Kosice. This step significantly upgraded dial-up services, and the number of access ports increased by 5,700 to reach 9,500. Another upgrade was carried out on the hardware server platform supporting Internet service providers. New high-power servers were incorporated into the network, making these services more reliable and available than they were in the previous years.
ST – ATM network From the viewpoint of the end-user, the ST – ATM network currently consists of the STM – 1, E3 and E1 ports designed for direct provision of ATM services, as well as the HSSI and E1 ports, designed for Frame Relay services and Ethernet ports 10BaseT or 10Base5T designed for LAN network connection. The ST – ATM network also includes E1 ports for circuit emulation, as well as ports for video services and for voice transmission over ATM (VoATM). In international networks, the ST – ATM connections run on basis 2xSTM – 1 with Czech Telecom and 1xSTM – 1 with Telecom Austria.
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Key Sectors of Business and Industry
Participating companies Slovenske Telekomunikacie, a.s. (Slovak Telecommunication, joint stock company) While Slovenske Telekomunikacie (ST) will lose its fixed-line monopoly at the beginning of 2003, it remains the dominant provider of the fixed public telecoms network. ST provides basic services including: • • • •
voice service; ISDN; Internet access; data services: – ST Frame Relay; – telephone circuit lease; • services with added value: – telephone cards; – Slovakia Direct. Web site: www.telecom.sk
Eurotel Bratislava, a.s. Slovakia’s first wireless telecoms provider, EuroTel offers services on the NMT mobile analogue network and digital GSM service on the 900 MHz and 1,800 MHz frequency bands, as well as services on the VSD public data network. • The company has 664,555 clients (as at 30/6/2001). • Territorial roaming with the net GSM is 81 per cent and NMT 79 per cent. • Population roaming with the net GSM is 98 per cent and NMT 96 per cent. Web site: www.eurotel.sk
Orange Currently Slovakia’s largest wireless provider, Orange operates a digital GSM mobile network on the 900 MHz and 1,800 MHz frequency bands. • The company has 1,141,153 customers (as at 30/6/2001). • Territorial roaming with the net GSM is 82.6 per cent. • Population roaming with the net GSM is 95.6 per cent. Web site: www.orange.sk
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197
Regulation The main operational framework for business entities in the area of telecoms in the Slovak Republic has been governed by Law No. 195/2000 Coll. on Telecommunications since 1 July 2000. The state administration bodies in telecommunications include the Ministry of Transport, Post and Telecommunications (MDPT) and the Telecommunications Office of the Slovak Republic (TU). The MDPT (www.telecom.gov.sk) prepares proposals for national telecoms policy and concepts for the development of telecoms activities, presents them to the Government for approval, is responsible for international relations at governmental and intergovernmental levels, and works out proposals for the national frequency spectrum for government approval. The actual regulator of the Slovak telecoms market is TU (www.teleoff.gov.sk), whose powers under #10, subsection 2 of the Law include: • • • • • • •
granting permission for telecoms activities; regulating the operation of telecoms networks; telecoms equipment and the provision of public telecoms services; regulating restricted sources (eg numbers, call signs, frequencies); price regulation (in cooperation with the Ministry of Finance); approval of the technical specifications of telecoms equipment; executing State supervision over telecoms activities.
All providers of telecoms services in Slovakia must be registered with TU. A licence is required for the establishment and operation of public telecoms networks and the provision of public telecoms services which require the granting of restricted sources. Other telecoms services (eg Internet services) may be provided on the basis of so-called ‘general permission’ and, before that is granted, on the basis of ‘permission on preliminary conditions’. The Law on Telecommunications requires that the provider of a public telecoms network with a 25 per cent or higher share of the relevant market is obliged, on a contractual basis, to enable another operator to connect to a network operated by the first provider and to grant access to a network operated by this provider. The obligation to mutually interconnect their networks applies to all providers of public telecoms networks and telecoms services. Under the Law ST, while it was the fixed-line monopoly supplier, became provider of a ‘universal’ service – ie it had to provide each interested person with a telephone line and certain selected services at a uniform price. An account of the universal service into which all providers of the public telephone service (including mobile telephone operators) contribute was created to cover demonstrable losses from this activity.
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Key Sectors of Business and Industry
In compliance with #42, subsection 4 of the Law, a telecoms company providing a public telephone service is obliged to ensure that from: • 1 January 2003 a user can choose another telecoms company providing an equal service either in the form of adjustment of preselection of a number or through an individual choice of a number; • 1 January 2005 a user may keep his/her telephone line number in spite of any change in the public network telecoms company when the geographical location of the user is unchanged. Since 1 January 2003, when the State-guaranteed ST monopoly ended, it has become possible for telecoms operators entering the Slovak market to do business in the area of voice services in the public telecoms network.
4.13
Insurance Igor Horvat and Martin Tkac, Aon Slovensko, s.r.o. History Insurance in Slovakia dates from the second ha1f of the eighteenth century and was mainly focused on fire insurance in the larger cities. Transportation on the Danube created a demand for transport insurance. Likewise, the State wanted to offer benefits to the higher positioned State officers (police, clerical staff and so on), which led to the development of pensions insurance. Until 1948 the insurance market was relatively well developed. Unfortunately, after 1948, when a monopoly Czechoslovak insurance company had been established, the market began to become isolated. A minor change came in 1969, following the introduction of the new federation law in Czechoslovakia, when the monopoly insurer was split into ‘Ceska Statni Pojistovna’ and ‘Slovenska Statna Pojistovna’. 1 March 1991 was a very important date in insurance history, when the new Insurance Act No. 24/1991 launched the liberalization of the insurance market. Since then the insurance market has undergone revolutionary developments and structural changes which should complete harmonization with EU rules and regulations.
The Slovak insurance market – general information On 1 April 2002, the Financial Market Authority (FMA) was established by the Act No. 96/2002 on Supervision over the Financial Market and on the Change and the Amendment of Certain Acts, as a legal subject authorized to conduct supervision in the area of public administration in accordance with the above mentioned Act and special laws. The Financial Market Authority carries out supervision over the activities of traders in securities, branch offices of foreign traders in securities, investment services providers, the Security Stock Exchange, the Securities Central Depositary, trustee companies, shareholders
200
Key Sectors of Business and Industry
funds, insurance companies, branch offices of foreign insurance companies and insurance brokers. Within the scope provided for by Act No. 96/2002 or a special law, supervision of the Financial Market Authority extends to other persons and subjects and over groups of persons and subjects that are subject to special laws in the fields of capital markets or insurance. The Authority also cooperates with the Ministry of Finance of the Slovak Republic in the preparation of generally binding draft legislative regulations in the fields of capital markets and insurance, and cooperates and exchanges information with foreign supervisory authorities in the field of capital markets and insurance. Each insurance company issues its own general insurance conditions. The supervisory authority is no longer responsible for their authorization, only for registration. Local practice is to have a one-year policy with tacit renewal if not cancelled six weeks before the anniversary date. Policies are normally issued in local currency (SKK). Non-admitted insurance is not allowed; however, the import of the insured goods under INCOTERMS is accepted, and re-insurance abroad is also allowed. Tariffs are provided for two types of insurance – Motor TPL and Accident insurance for Work Accidents and Work Diseases. Full liberalization of the Motor TPL is expected in the near future. There are no taxes and stamp duties on insurance contracts in Slovakia. The Slovak Association of Insurers (SAP) has 25 insurance companies as regular and 3 as associate members. The Slovak Association of Insurance Brokers (SAMP) has a current membership of 14 regular and associated members. A full list of members is provided towards the end of this chapter. Generally, the Slovak market is under the influence of the German market mainly due to the fact that Munich Re is widely used as reinsurer, and also because the majority of insurance companies are Austrian which, in turn, are German owned. After recent privatization of Slovenska Poistovna, a.s., by Allianz Poistovna, a.s., the market is dominated by a newly created company – Allianz–Slovenska Poistovna, a.s. Bank assurance is another new trend in the Slovak insurance market.
Insurance products The insurance products available on the Slovak insurance market are listed and described below. Obviously they fall into two large groups: life insurance lines and non-life insurance lines. Following recent changes in legislation, insurers that apply for a licence for the first time have to choose the line of business in which they will specialize. If an insurance company plans to be engaged in
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both categories, the establishment of two separate legal bodies each applying for a specific life/non-life insurance licence is necessary. However, products that are not available ‘on the shelf ’, can be delivered from the major international insurance and re-insurance markets – for example, from the London market using special insurance and re-insurance arrangements. Both insurance brokers and re-insurance specialists at the good insurance companies are able to assist in such procedures.
Compulsory insurance cover (non-life only) There are two basic types of compulsory insurance in the Slovak Republic: • Compulsory State-regulated insurance: The conditions are specified in the legislation or set by a State-controlled institution. Insurers need a special approval or license for such a product. There can be one insurance provider only (most monopoly insurers are Stateowned bodies) or several (commercial insurance companies or noncommercial fund-type companies, but with the same or very similar conditions for a specific insurance type). In most cases no broker involvement is permitted. • Compulsory, but principally commercial, insurance: Only the obligation to secure this type of insurance is determined in the legislation, together with very basic standards of such insurance cover. The insurance products are offered by different insurance companies, which compete through their conditions. The following are typical compulsory insurance products: • • • • • • • • • • •
Workers’ Compensation/Employers’ Liability; Health/Medical Treatment Insurance; Pension Insurance; Medical Malpractice Liability; Travel Agency Bankruptcy Cover; Tax Advisers’ and Auditors’ Liability; Lawyers’/Legal Aid/Notaries’ Liability; Liability of Architects, Designers, Engineers in Construction; Hunters’ Liability; Aviation and Air Traffic Control Liability; Automobile Third-party Liability (mandatory minimum cover is SKK5,000,000 for property damage and loss of profit per occurrence and SKK19,000,000 for bodily injury per injured individual, while excess insurance cover is available on the market), including a Green Card – a part of the European Green Card Treaty; • Ionization Liability for users of ionization sources.
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Free-of-choice (voluntary) insurance products This group includes both life and non-life insurance products.
Non-life insurance products – basic overview • Property Damage/Business Interruption cover protects, subject to the insurance conditions, tangible and/or intangible property including the expected profits of companies and/or individuals; the scope of cover extends from very basic fire insurance up to ‘all risks’ insurance cover. • General Third-party Liability cover protects the financial stability of a company or individual in the case of a claim arising from the common operation given by a third party using either negotiation, trial or direct indemnity arranged by the insurer. • Other Special Types of Liability insurance extend the General Liability cover to specific fields, such as Product Liability, Environmental/Pollution Liability, Freight Forwarders’ Liability, Contractors’ Liability and many others. • Marine Insurance protects shipments or stocks in different places and/or loaded onto different modes of transport. In comparison with general property damage insurance, marine insurance is not tied to specific places and in most cases provides a broader cover. • Construction/Erection All Risks cover principally protects the property during construction/erection works, prior to property damage insurance cover coming into effect. • Accident Insurance cover indemnifies the injured or their family in the case of permanent disability or death caused by accident. • Travel Insurance includes basic arrangements that provide insurance cover for medical expenses during trips abroad, which are not covered under mandatory domestic Health Insurance. Extended covers are available, providing insurance cover for different perils, such as baggage loss or damage, accident cover, liability cover, flight delay and so on. • Automobile Insurance covers own damage or theft. • Customs Duty Insurance can replace a bank guarantee or cash payment for customs duty. • Credit Insurance helps the insured protect their receivables. • Legal Aid Insurance covers the legal costs in specific cases. All insurance contracts are issued in a written form and include insurance terms and conditions approved by the State authority. Virtually every indemnity payable from claims from all the above named insurance lines is subject to a deductible self-retention, according to the individual insurance contract.
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Life insurance products – basic overview • Life Insurance; • optional covers related to Life Insurance. Some insurance products, such as Accident/Permanent Disability Insurance, can be purchased from both life and non-life insurance companies, while the life insurance companies sell primarily life insurance cover.
Overview of the Slovak insurance market Premium income statistics and the market shares of the top ten Slovak Insurance Association Members in life and non-life business are recorded in the tables and charts that follow. They are based on the data collected by the Slovak Association of Insurance Companies (SAP). There are additional insurers present in the market that are not members of SAP: Poistovna AIG Slovakia (life) and Poistovna Cardif Slovakia (non-life); they are also properly licensed, but their data is not included. Table 4.13.1 life insurers No
Premium income and market share of the ten largest
Ten largest life insurers
Premium written life lines
Market share %
1.
Slovenska Poistovna
3,364,131
29.50
2.
Poistovna AMSLICO AIG Life
2,064,480
18.10
3.
Nationale-Nederlanden Poistovna
1,479,113
12.97
4.
KOOPERATIVA Poistovna
1,322,242
11.59
5.
KONTINUITA SZP
568,829
4.99
6.
Allianz Poistovna
565,789
4.96
7.
Poistovna ERGO
496,166
4.35
8.
QBE Poistovna
236,707
2.08
9.
UNIQA Poistovna
205,567
1.80
Prva Cesko-slovenska Poistovna
198,131
1.74
Others
903,328
7.92
10.
Source: SAP
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Key Sectors of Business and Industry Prva Cesko-slovenska Poistovna 2% UNIQA Poistovna 2%
Others 8%
QBE Poistovna 2% Poistovna ERGO 4%
Slovenska Poistovna 29%
Allianz Poistovna 5%
KONTINUITA SZP 5%
KOOPERATIVA Poistovna 12% Poistovna AMSLICO AIG Life 18% Nationale-Nederlanden Poistovna 13%
Source: SAP
Figure 4.13.1
Market share of the ten largest life insurers
List of members of Slovak Insurance Brokers Association Members (in alphabetical order) Please note that official market share data on members is not available. Aon Slovensko APS Renomia BMS Harris & Dixon Slovakia GARANCIA SENICA GrECo SLOVAKIA MAI – Instar Insurance Brokers MARSH Maxima Broker MBI – Marketingberatung International MPS OVB ALLFINANZ SLOVENSKO RESPECT SLOVAKIA STACH & K.B. Univerzalna maklerska spolocnost YOUNG & FREEMAN GROUP Associate member Assure
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Key Sectors of Business and Industry
Supplementary pension insurance system Supplementary pension insurance is a special, relatively new segment of the market and the development of the related legislation is still continuing. There are currently four players in this particular market (Lipa, Pokoj, Stabilita, Tatry-Sympatia) that report constant growth. Tatry-Sympatia is the major player. Supplementary Pension Insurance is based legally on the Act of the National Council of the Slovak Republic No. 123/1996. The position of this insurance line is inseparable from the social security system of Slovak Republic citizens. The passing of this Act signalled the start of a multi-pillar system of social insurance for citizens, and embodied the concept of ‘social insurance reform’. In recent years the growth in the proportion of old persons in the population, caused by a decrease in the birth rate and by the extension in life expectancy, is mirrored in continuous growth of social insurance funding in a very adverse way. Due to this trend, the ratio of contributors to the number of beneficiaries is expected to decrease from 1.69 in 1998 down to a forecasted 0.77 in 2040. The result of this decline will be a continuous decrease in the benefits of pension insurance in comparison to wages/salary at the time of retirement – currently approximately 44 per cent. Supplementary pension insurance is funded by the contributions of the employer and/or employee or by a self-employed person for the particular purposes of the insured individual. The supplementary pension insurance companies are established on a non-profit principle, while the control, motivation and regulation of the system are assured by the Government (including the setting of limits for management costs). Benefits from the supplementary pension insurance system are divided into the following categories: • • • • • •
Supplementary old age pension; Lump sum settlement; Supplementary disablement pension; Compensation in money; Half-pay; Survivors’ pension.
The fundamentals of the supplementary pension insurance system follow these principles, according to the relevant Act: • Voluntary entry – participation in supplementary pension insurance is voluntary, meaning that any employee or self-employed person can join and leave the system virtually any time, at their own decision.
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• Employer/employee participation – contributions for supplementary pension insurance in favour of the employees may be paid by the respective employer alongside the employee’s payments. • Plan of benefits – participants in the supplementary pension insurance system will decide on the amount of contributions to be paid into the system, while the amount of the benefit calculation is based only on the sum saved at the time of the application for payment out from the system. • Collective management – any supplementary pension insurance company is managed by the board of trustees, while their management is audited by the supervisory board consisting of representatives of the employers and representatives of the insured and participating beneficiaries. • Profit distribution model – the entire profit recorded by the supplementary pension insurance company is distributed among the insured and beneficiaries. • Investment restriction – the supplementary pension insurance company is a conservative investor that can invest only in a very safe way. The relevant Act sets the ways, where and to what extent the company can invest the funds of the insured and beneficiaries. • Limited costs and expenses – the Act determines the maximum amount of management costs of the supplementary pension insurance company. • Tax benefit – the contributions paid to the system by both the employer and the insured can reduce the tax base to a certain extent, as determined by the law. • Governmental audit – the State supervision authorities supervise the operation and the management of each supplementary pension insurance company to ensure the protection of the rights and funds of the insured and beneficiaries.
4.14
Human Resources Oliver Schmitt, Managing Partner, Jakub Kuvik, Marcela Hrapkova, Consultants, Teamconsult Since the ‘Velvet Revolution’ in 1989, the Slovak Republic has been moving towards a market economy. Among other things, this has resulted in constantly increasing foreign direct investment (FDI) inflows; the record was reached in 2002 with SKK245.5 billion (almost EUR6 billion). Universities have started to teach modern know-how, and international scholarships make it possible for students to study abroad. As the post-revolution generation of managers is growing in power, the ‘old-boy network’ is losing its importance, and real skills are becoming the essential criteria for success. Expatriates are being replaced by local management. All these factors have led to dynamic changes in the labour market, bringing it closer to a modern market economy.
Education Secondary education School attendance is compulsory until the age of 15. However, over 85 per cent of people in their mid-20s have attained secondary education (EU average 69 per cent). The curriculum includes one compulsory foreign language, and today 95 per cent of students learn English.
Universities/MBAs The best-known universities are Komensky University (one of the oldest universities in Europe), University of Economics (VSE) in Bratislava and University of Matej Bel (UMB) in Banska Bystrica. After three years of study, the title awarded to economics and science graduates is ‘bakalar’ (this is the Slovak equivalent of a BA or BSc – abbreviated as ‘Bc’); after five years of study they get the title ‘inzinier’ (‘Ing’ is the Slovak equivalent of an MSc), and social sciences graduates
210
Key Sectors of Business and Industry
receive ‘Magister’ (Mgr). More than 10 per cent of the population is computer literate. Recently, the MBA programme has been gaining in popularity. It is usually taken by young professionals with two to three years’ work experience or by people who graduated before the revolution. It is the most significant prospective group of people, who are able to build the necessary bridge between East and West.
Educating staff Over the last 13 years, many, mostly foreign, companies have made important investments in educating and training their staff. Employees, predominantly managers, attend soft skills and professional training courses. Administrative workers attend mostly language and PC skills courses, in addition to professional courses. With a growing number of foreign investors in the country, strengthening one’s language skills has proven an imperative. Even nowadays, it may be quite an art to find a sufficient number of employees with strong language skills. Therefore, foreign investors have appreciated services of executive search companies, such as Teamconsult, when they are in need of foreignlanguage competent personnel. The English language has become dominant among the other foreign languages used in the workplace.
Labour market Regional differences The Slovak Republic is a relatively centralized country, with Bratislava as its economic, political and cultural centre. Qualified people coming from a wide range of educational and training facilities/institutions will be found here. With low unemployment, good knowledge of foreign languages and strong competition among employers, salaries are in general 50 per cent higher than in the other parts of Slovakia. The national average rate of unemployment in 2002 was 17.45 per cent, with a mere 5.18 per cent in Bratislava. Unemployment in the region of Kosice, however, reached 24.26 per cent. East Slovakia (the regions of Kosice and Presov), previously the centre of the mining and steel industries, has traditionally registered the highest unemployment levels in the country due to a weak infrastructure and shortage of foreign investment.
National specifics The legal working week is 42.5 hours long, with half an hour lunch break per day included. Despite the fact that Slovakia officially
Human Resources
Table 4.14.1
211
Slovak Republic regional unemployment (2002)
Region
Economically active inhabitants
Unemployment (%)
Bratislava
323,989
5.18
Trnava
283,860
12.99
Trencin
306,507
10.91
Nitra
360,011
21.51
Zilina
348,677
14.74
Banska Bystrica
327,189
23.77
Presov
380,004
23.00
Kosice
374,743
24.26
2,704,980
17.45
Slovakia TOTAL
Source: National Statistical Office, Bratislava (2003)
registers a huge unemployment figure (17 per cent), there is no great social unrest. This fact suggests that many people work in the grey economy. The new Labour Code should help to push this number down. Nevertheless, there are hundreds of medium-sized companies that see a big potential in the Slovak market. The planned entry of the country into the structures of NATO and the EU, along with a relatively stable right wing government enhancing a pro-business climate, are expected to contribute to a rise in FDI inflows in upcoming years. Teamconsult’s experience shows that search results are always subject to what is available on the market. In the 1990s, managerial positions in Slovakia were often taken by young professionals, since the over-40 generation lacked the required experience, drive and flexibility. Moreover, in state-owned companies, the communist management had to be replaced at once for political reasons. As a result, young people have been spoiled by vast career opportunities over the last ten years. There was a real chance to make fast career progression in the 1990s, but nowadays the opportunities for young people have changed. The company management structures are already filled. Also personnel costs are rising faster than productivity, so company leaders tend to increase productivity by training and requalifying present staff rather than investing in the hiring of more people with proper qualifications (ie university graduates). Certainly another major issue is mobility, or the lack of it. Most people are neither ready nor willing to commute to faraway areas to get a job. Qualified people know they can find employment in Bratislava; there is not enough pressure for them to make compromises or to go the extra mile to take the job. Related to this issue there is a problem with housing, especially for young people. State flats are very valuable because of low regulated rents. Moving to another part of the country
212
Key Sectors of Business and Industry
means incurring substantially higher rents on the deregulated housing market. As a consequence, people often do not move even if they are unemployed. To solve this problem, some companies provide housing for their employees.
Compensation Salary levels In the data released on 12 December 2002 by the National Statistical Office, the average national salary in the third quarter of 2002 was SKK13,715 (EUR328), representing a 6.1 per cent rise in real terms on the same period in 2001. However, these figures may be misleading in that they do not reflect the significant difference in salary levels between the countryside and large cities, mainly Bratislava. This difference is higher for top management and administrative employees but lower for manual workers and specialists. The variable salary component usually reaches 30 per cent for top management, sales representatives and specialists. There is no evidence that company size and wage are interrelated. Macroeconomic indicators, the company’s economic results and the labour market situation equally contribute to wage increases; none of them are overly significant. • Manual workers do not usually have good foreign language skills. There are several relatively large areas with high unemployment (ie East Slovakia), where average salaries are significantly lower (this rule applies to all job categories to be mentioned later in the text). Gross salaries average between EUR190 and EUR360 per month. • Secretaries’ salaries range from EUR190 to EUR480 depending on the person’s language skills, region and range of duties. Top office managers achieve up to EUR840 per month. • University graduates’ salaries differ with their specialization. • Economics graduates with one foreign language achieve a starting income of about EUR410 per month in Bratislava, rising to about EUR720 after two years of work experience. For technical positions, salaries are less comparable. The average age of graduates is relatively low at 23–24 years. • Bookkeepers with good language skills are relatively hard to find in the regions, except for Bratislava where the average monthly salary for people without a degree and with two years’ experience is EUR430. • Controllers with a university degree, one foreign language and five years of experience average EUR1,200 to EUR1,900 per month. • Middle managers earn approximately 2.5 times more than other employees do. A top manager in Bratislava earns 6.5 times the wage
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of a manual worker. Middle management in Slovakia is relatively young, since most companies prefer managers who completed their studies after 1990. It is not uncommon for people with five years of professional experience to take on managerial functions. Depending on the size of the department and business field, salaries range from EUR960 to EUR2,400. • Head of finance for a Bratislava-based company with a turnover of EUR20 million can expect between EUR2,400 and EUR3,600 per month, plus bonus. • Top management has a very wide range of salaries – similar to Western countries. Board members of the biggest companies in the Slovak Republic achieve annual incomes of up to EUR240,000. Salaries of local partners in international law, tax or management consulting companies are in the region of EUR72,000–120,000 per year. The CEO of a sales company with a turnover of EUR20 million is likely to earn between EUR3,600 and EUR4,800 per month.
Retaining good staff In the past, staff fluctuation has been rather high, often reaching up to 20 per cent. This was mainly due to very low wages after 1990 and low employee loyalty under communism. Regarding compensation, the common practice is 12 monthly salaries plus 1–2 monthly bonus salaries (usually before summer holidays and at Christmas). Bonus structures depend on position: 8–15 per cent of annual income for junior positions and support staff, 15–25 per cent for middle management and other senior positions and around 30–40 per cent for top management. Manager packages usually include a company car, a mobile phone and a notebook computer. Increasingly, more companies offer full salary during sick leave for up to six weeks. In addition, pension plans, insurance or stock options can be offered but are not necessarily the standard. To increase employee loyalty, some companies also offer loans to enable selected employees to purchase a flat or house. Concerning holidays, the legal minimum is 20 days per year; however, most companies offer 5 extra days a year. As well as a general increase in salaries, other work conditions also become more and more important: • • • •
stable, safe and professional work environment; opportunities for training and learning; career prospects; cooperation with and acceptance in international teams.
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Key Sectors of Business and Industry
Recruiting – how to get good staff There is a high demand for a skilled workforce. This is partly due to the fact that on higher management levels, local managers are gradually replacing expatriates. Overall, it is no longer a problem to find a good general, sales or production manager, but financial professionals are less abundant in the market. Competent and experienced HR managers are still very scarce. Most sought-after are local businesspeople, preferably with wide international working experience. It is a big advantage for people in top positions to have an MBA. Foreign languages competence is the single most sought-after skill, regardless of the industry sector or task specification. The process of hiring new personnel is generally a matter of individual approach according to the situation at the client’s company. Standard methods include online recruiting, job advertisements, job agencies and executive search.
Application documents Do not expect much. A CV and maybe a motivation letter is all you get unless you ask clearly for more. Photos on CVs are not common. Candidates do not usually include their school transcripts/certificates with their applications. References from previous employers are not very common yet; nor do most candidates have these references. There are no standard application forms.
Online recruitment Recruitment online seems to be the easiest way to recruit. You can choose between several online recruitment companies in the Slovak Republic. However, it is important to bear in mind that Internet penetration has not yet reached Western levels and that the motivation of job seekers on the Internet is often low. Therefore, this search method works best for IT or telecoms positions.
Search advertisements Most companies use a search advertisement on a regular basis. The two most read dailies are SME and Pravda. The cost of a 1/3-page advertisement in these newspapers is about EUR900. However, even more than in other Western countries, search ads for managerial positions bring only poor results, both in terms of quantity and quality. Indeed, the unemployment among skilled managers and professionals is so low that they are not likely to search actively for work or read ads in newspapers. Thus, ads can be recommended only for recruiting junior and support staff.
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Job agencies There are dozens, if not hundreds, of job agencies on the market. They rely mostly on their databases but they do not necessarily interview candidates before recommending them. The fees are about two months’ wages (of the job being offered). Job agencies can be best used to hire support staff.
Executive search In today’s fast changing Slovak economy, it is critical that business leaders have not only the right mix of skills and experience, but also the right cultural compatibility. Unfortunately, in the service sector there are few people with appropriate competencies. For any organization looking to appoint people at this level, executive search is a very effective method and sometimes the only way of identifying and recruiting suitable staff. Executive search is mostly used to hire professionals for senior and managerial positions as well as specialists positions. After ten years of search and selection assignments in Central Europe, we know that only executive search is able to identify and find proper candidates in various segments. It is not common, but sometimes there are positions for which it may be impossible to find the ideal candidate even after using a highly systematic approach. Then, the solution will be to hire the next best manager whose qualities and personal values are close to those expected. In such a case, additional training would cover the gap between the job requirements and actual competency of the candidate. The most important role for managing directors in foreign companies is to provide a bridge between foreign owners and local employees. The needs of foreign companies have been changing in the last few years. While at the beginning of the 1990s Western executives were preferred to undertake an interesting business assignment, nowadays the market indicates a preference for local managers. The results achieved by the local managers are impressive, since adaptability to local conditions is the most critical success factor. At present, quite a few local and international search firms operate in Slovakia. Most of them cover all fields because the market is too small for specialization. Yet, there is no association of executive search companies to guarantee certain market standards. Fees are in the range of 35–40 per cent of the candidate’s annual income. Some consultants work on retainer fees, others on a success-fee basis. Thanks to Teamconsult’s experience in providing recruitment services, consultancy, coaching, and research, we understand the changing dynamics of the Slovak market and the new skills and competencies required in new leaders. Teamconsult’s executive search brings additional value to our clients because our consultants have extensive experience in the
216
Key Sectors of Business and Industry
market and a network of contacts that can help define clients’ objectives and identify suitable candidates for each assignment. The standard employee search includes: • A clear understanding of the client’s organization – its history, culture, operations and needs – and the scope of the assignment. Each assignment is to be defined clearly in writing, including the timeframe and anticipated fees and expenses. • Research and sourcing begin when both the client and executive search company agree upon the specific definition of the position and the attributes of the desired candidate. Next, data sources are reviewed, including proprietary databases, and target industries are analysed. Also, confidential discussions are initiated with sources of candidates at this stage. • Interview and evaluation takes place after the research and sourcing efforts identify the best candidates. They are interviewed, their level of interest is determined and their qualification and personal suitability are evaluated. • Candidate reports and recommendations are submitted to the client only for the best-qualified candidates. Reports reveal a candidate’s personal and business history, as well as a candidate’s appraisal of their fit within the parameters of the position. • Client interview and assessment – the executive search company then arranges meetings with selected candidates and helps the client evaluate the outcome. This includes answering questions that may arise and arranging subsequent meetings if necessary. When the client has made a clear choice and makes an offer to the candidate, the executive search company navigates the final steps in the search process. Teamconsult conducts in-depth reference checks to verify a candidate’s qualities or to resolve any doubts, helps to negotiate the final offer to ensure speedy completion, and advises the candidate on fair and firm separation from their current employer. A good executive search company then ensures long-term cooperation with its client, exceeding the timeframe of the contract, and stays in contact with the client throughout the trial period.
Outlook As the Slovak Republic prepares for EU accession in 2004, FDI inflows are expected to increase. However, no significant large-scale migration from the Slovak Republic into the EU is expected. If there is any, it will be well-trained young professionals going abroad to gain more experience, only to return home later to Slovakia. People are slowly adjusting themselves to an international work style. Salaries are likely
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to continue rising, though not as dynamically as in the past. Good managers will continue to be scarce and their salaries will reach Western levels. On the other hand, career progression in hierarchies will become more difficult because of the relatively low average age at practically all management levels. Teamconsult has endeavoured to present its view of the current situation of HR in the Slovak Republic. All information and estimates provided are based on Teamconsult’s ten-year experience with executive search in the Slovak Republic.
4.15
Advertising and the Media Slovak Investment and Trade Development Agency (SARIO) Development of the industry Slovak advertising and also the media markets have a short, ten-year history. Lack of complete data that could enable a detailed analysis of this Slovak market has been a characteristic feature during the period of its development. In the area of printed matter there is no authoritative data on the number of copies sold; declared numbers only represent circulation data stated by publishers who use them as a marketing tool. Complete and precise data on advertising revenue in all kinds of media are missing. Numbers provided by monitoring agencies are distorted and do not cover the whole market. The volume of advertising in Slovakia has been monitored by two agencies: Observer, s.r.o., Bratislava, representing the company A-Connect Prague, and AC Nielsen Media International Slovakia. The data used in this chapter, sourced from Trend-Economy and Business Weekly, is quite out of date. Until 1999 the volume of advertising and resources invested in advertising increased sharply. From 1993, when the first estimates of advertising media spend became available, until 1998 expenditure on advertising increased almost seven-fold. In 1999 the value of advertising exceeded SKK8 billion; however, the slight increase in comparison with the previous year did not necessarily represent a real increase in advertising spend. In the poor situation of a stagnant market some media adjusted terms and conditions for big advertisers, but this was not reflected in the tariffs on which monitoring is based, with the result that monitored volumes correspond to lower real expenditure on advertising and there is an increased level of distortion. The considerable distortion in monitoring is caused by its methodology. The volume of broadcast/published advertising, from which advertising spends are calculated by applying price lists, is monitored but monitoring does not take into account the various discounts and
Advertising and the Media
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bonuses granted to advertising clients. Therefore, the results are always exaggerated to a certain extent in comparison with the financial resources actually invested. Allowing for such corrections, the value of the advertising market in Slovakia could be estimated at SKK3.7 billion in 1997 and SKK5.1 billion in 1998. Due to deteriorating market conditions, the level of distortion could have changed by comparison with previous years and it is harder to estimate the results for 1999 onwards. According to the weekly Trend journal, the 1999 results were the same as for the previous year.
Media audience levels Media audience levels in Slovakia have been tracked by several media researchers. For several years the most detailed and complete research has been conducted by two companies – AISA Slovensko, s.r.o., Bratislava and Median Prague, s.r.o., Research, called MML ‘99 (Market, Media and Lifestyle) – on a representative sample (sex, age, education, size of place of residence and region) of more than 7,000 respondents, which was completely re-evaluated in the course of 1999. The media market in Slovakia is said to have stabilized in terms of audience levels. This stability is most marked in the segment of printed matter where only a few changes had taken place very slowly in the five-year period to 2001. The most read daily newspaper is Novy Eas whose long-term readership rate is about 30 per cent of the population from 14 to 79 who replied positively to the question ‘Did you read it yesterday?’. The second most successful newspaper is Pravda whose long-term readership rate is 11 per cent, although in 1999–2000 it fell to less than 8 per cent. The readership of Sport is at a similar level to Pravda and the readership shares of SME, Praca and Uj Szo, in descending order, were all less than 5 per cent in 2000. In the past, among the weeklies the leading trio included Civot, Slovenka and Eurotelevizia, whose readership rate has fluctuated from 17 to 22 per cent. From 2001 the weekly Plus 7 dni has gradually progressed to the top of the weeklies list. The sector of printed matter was more and more affected by the deteriorating economic situation of the late 1990s. Total readership of both dailies and magazines fell, while their relative positions remained largely unchanged. Readers did not change titles but they moved to electronic media – the total audience share of radio stations as well as television has been increasing gradually. In Slovakia the TV market is stable but unbalanced. In 1996 a new commercial TV station, Markiza, started broadcasting and acquired a dominant market position. From February to May 1999 Markiza viewing figures reached 76 per cent against an STV1 viewing rate of 37 per cent. The Czech commercial TV station, Nova, whose TV signal
220
Key Sectors of Business and Industry
covers approximately one-third of Slovakia’s territory, reached a calculated 20 per cent viewing rate. STV2, the second channel of Slovak TV, was watched by 7 per cent of the population and satellite television, VIV, was viewed by 4 per cent. However, viewing figures do not reflect accurately the situation in the TV market because part of the population watches both STV and Markiza news broadcasts and these viewers are included in the viewing figures of both TV stations. Their mutual position can be understood better from the parameter of market share, showing not only the number of viewers but also the time viewers spend watching TV. Market share is calculated by expressing the quarters of an hour spent by viewers watching a given TV station as a percentage of the total number of watched quarters of an hour. By this criterion only three TV stations in Slovakia reach market shares higher than 10 per cent. Markiza’s share is 63 per cent, STV1’s share is 15 per cent and Nova’s share reached 11 per cent. These figures demonstrate Markiza’s market strength against weak competition and, consequently, its dominance of TV advertising in Slovakia, estimated at 80 per cent. In contrast to the TV market, the radio audience market is dominated by the State-owned Slovensky Rozhlas s.r.o. The radio station with the highest audience rating in 1999 was reported to have been Slovensko 1 with a 35 per cent audience share in the first half of the year. It was followed by Rock FM with a 16 per cent market share, Fun Radio with 10 per cent, Radio Twist with 7 per cent and Radio Koliba with 6 per cent. The market shares are also a reflection of the depth and width of coverage; only Slovensky rozhlas has complete territorial coverage and, for this reason, private radio stations cannot compete with it on a national scale. The situation is different for the regions. Although the strongest position in all seven regions is still occupied by Slovensko 1, Radio Twist holds the highest audience share in the Bratislava region. In the next three regions of Slovakia the station with the second-highest audience rating is a private regional station rather than Rock FM.
The advertising market Like the media, the Slovak advertising market has stabilized in the last five years, following rapid development after 1990. It has gradually come to resemble foreign market models with full advertising agencies and also specialized agencies, including media agencies and creative boutiques as well as direct marketing, public relations and promotion agencies, which have won their place in the market. The market also stabilized gradually from an institutional point of view and today there are established functional professional associations: Klub reklamnych agentur Slovensaka (KRAS – Club of Advertising
Advertising and the Media
221
Agencies of Slovakia), the Association of Public Relations, the Direct Marketing Association, and the self-regulating body Rada pre reklamu (RPR – Board for Advertising). KRAS and RPR are permanent members of both the European Association of Advertising Agencies and the European Advertising Standards Alliance. Slovakia was the second post-socialist country to introduce an advertising effectiveness contest (EFFIE). It is clear from Table 4.15.1, which reproduces data on the largest advertising agencies in Slovakia published by the weekly journal Trend, that the majority of the strongest advertising agencies in Slovakia are branches of international networks. The five strongest agencies all belong to such international groups and there are only two Slovak non-network agencies among the first ten. Table 4.15.1 is based on so-called ‘equivalent billings’ data, which represent turnover modelled on the assumption that earnings are calculated as 15 per cent of such turnover (equivalent billings = 6.67 × agency sales).
The structure of advertisers in Slovakia The 15 biggest advertisers in 2000, charted in Table 4.15.2, included 11 multinational corporations and only 4 Slovak-owned enterprises. The commercial TV stations Markiza and TV Tip themselves were ranked 14 and 15 respectively in 2000 among top advertisers. Table 4.15.1 Largest advertising agencies (equivalent billings, SKK million) 1995
1996
1997
1998
1999
Soria & Grey
731
928
1,152
1,152
1,396
Mark/BBDO
–
487
780
910
1,110
Wiktor/Leo Burnett Group
86
224
438
652
903
Euro RSCG Artmedia
226
429
625
733
756
B.O.A.T. Publicity
188
182
270
383
569
Creo/Youing & Rubicam
137
158
346
383
547
Istropolitana D’Arcy
–
–
65
153
406
Ogilvy & Mather
–
–
293
276
378
Remark/WWP
–
–
216
268
316
Progress Promotion
–
–
188
251
245
Source: TREND – Economy and Business Weekly
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Key Sectors of Business and Industry
Table 4.15.2
Top 25 advertisers in the Slovak Republic (2000) Advertising spend (SKK million)
1. Procter & Gamble
308
2. Eurotel
282
3. Drukos
264
4. Globtel
220
5. Nestle
220
6. Unilever SR
197
7. Coca-Cola
175
8. Reckitt Benckiser
174
9. Agentura Teltex
171
10. Danone
160
11. Kraft Jacobs Suchard
151
12. Henkel
147
13. Wrigley’s
147
14. TV Markiza
146
15. Danona Eokoladovny
137
16. TV Tip
132
17. Slovenska Poscova
92
18. Slovenske Telekomunikacie
88
19. Ferrero
77
20. Beiersdorf
76
21. Pivovar Saris
70
22. Zlaty Bazant Huranovo
69
23. Agentura Forsa
66
24. Nofra Bratislava
65
25. Alliance Poskova
62
Source: TREND – Economy and Business Weekly
The Slovak market is dominated by heavy advertisers. The first 15 advertisers in Table 4.15.2 accounted for 30 per cent of the total monitored media spend in 2000. The regional situation is very weak and it is hard to illustrate it clearly because relevant information on the value of advertising is unavailable. This is because the big advertisers find the strong all-territory-covering media more advantageous. Mediumsized and small companies are not developed as much as in other more mature markets, and those that are active regionally do not appreciate the possibilities and necessity of advertising. On the other hand, the present structure of advertisers has a positive impact on the media market in an environment where
Advertising and the Media
223
different political and economic influences that are present can deform the market. Multinational corporations have reacted to political influences by hiring professional advertising and media agencies to plan their advertising campaigns for them. Agencies base their decisions only on media parameters – audience shares and target groups. In this way, the majority of the advertising spend has flowed into successful independent media and facilitated a balanced development of the media environment.
4.16
Retailing – Tesco in the Slovak Republic Ian Hutchins, International Corporate Affairs Manager, Tesco Plc Tesco Plc is the United Kingdom’s largest retailer, with 1,000 stores in 11 countries. Established in 1932, for the first 70 years of its history Tesco focused almost exclusively on the UK grocery market. By 1995 Tesco had become the number one UK supermarket and systematically overhauled its strategy to expand from its traditional UK base into new products, services and countries. Today, Tesco operates in 11 countries with a clear strategy, comprising four key elements: • Strong UK core business: focused on becoming cheaper, offering better value and providing more choice for customers in the domestic UK market; • Non-foods: developing the Tesco general merchandise offer, with the long-term goal to be as strong in non-food retailing as in food retailing; • Retail services: following the customer into new areas of demand and delivering innovative services such as Tesco.com (the world’s largest Internet-based home shopping operation) and Tesco Personal Finance; • International growth: expanding beyond the UK in order to access additional growth. The addition of international growth to the Tesco strategy has lead it to look for new opportunities outside of its traditional UK base and to date has focused on two regions: Central Europe and South-east Asia.
Why Slovakia? Tesco made its first venture into Central Europe with the acquisition of two small supermarket chains in Hungary and Poland in 1995. This
Retailing – Tesco in the Slovak Republic
225
was followed by the decision to target Slovakia and the Czech Republic as a logical next step. In assessing the suitability of Slovakia as a potential location for investment, Tesco considered four main factors: • Growth: In order to accelerate growth, Tesco sought markets offering the opportunity of potential growth rates at a higher level than those predicted for its traditional UK base. • Market size: Any potential overseas market needed to be of sufficient size to allow Tesco to achieve critical mass. Rising consumer incomes and increasing car ownership pointed to a promising opportunity for future spend on both food and non-food products. The opportunity to build a leading position within a market was also critical if Tesco was to attract the staff and suppliers it needed to deliver for customers and to achieve its growth targets. • Environmental factors: The political and legal situations were examined carefully to ensure that barriers to entry did not exist which would prevent Tesco from opening stores and serving customers. • Opportunity to apply strengths: Rather than venture into completely new areas, Tesco sought opportunities to apply the core retail strengths it had successfully developed within the home UK business. On each of the above counts, Slovakia met fully with Tesco’s criteria and in 1996 the company acquired six existing department stores across Slovakia from US retailer K-Mart.
What Tesco did post-acquisition Pre-acquisition research showed a clear opportunity for retailers offering a wide range of food and non-food products at the right price all under one roof. In order to maximize the opportunity, efficiency and low operating costs would be crucial. As a result, Tesco decided to focus on the development of a hypermarket business to complement the existing department stores (a hypermarket being a single-level store of around 100,000sq.ft, offering a range of 50,000 products and devoting equal space to both food and non-food products). It also decided to look for opportunities across Slovakia for potential sites, and set in motion an ambitious hypermarket-opening plan focused on achieving sufficient scale for Tesco Stores Slovakia to trade efficiently. The acquisition of the department stores gave Tesco immediate access to a team of experienced retail staff, upon whom it was able to draw as an initial pool of local talent. It also provided Tesco with an
226
Key Sectors of Business and Industry
existing base of suppliers, property and customers. To maximize the benefits, the decision was taken to re-brand all existing department stores under the Tesco name.
How Tesco operates in Slovakia Pre-entry research convinced Tesco that it could not simply export the model it operates in the United Kingdom to Slovakia. Instead, Tesco has developed a unique approach, based on a combination of worldclass skills and local focus.
World-class skills, systems and ways of working All hypermarkets operated by Tesco in Slovakia are based on a blueprint of state-of-the-art systems and ways of working that help the local management team manage people, customers, finance and operations in a manner consistent with Tesco best practice. In addition to the framework of retail operations, a concerted effort has been made to transfer core skills built up within the UK support functions such as site research, supply chain, marketing and HR.
Slovak managers, staff, range, suppliers, marketing etc Tesco realized that local cultural differences meant that it needed to really understand Slovak customers if it was to meet its ambitious goals. Tesco understood that the most effective way of achieving this would be to recruit and develop a pool of Slovak managers to run the local business. As a result, 100 per cent of all Tesco hypermarket and department store directors in Slovakia are Slovak nationals, as are the heads of the majority of head office support functions in Bratislava. This approach has enabled Tesco to understand the reality of Slovak seasonality, range requirements and shopping patterns.
Listening to customers and adding value The combination of world-class ways of working and local focus has led Tesco Stores Slovakia to focus on areas where additional value for customers could be created in order to increase loyalty. This, in turn, has led Tesco to introduce a number of innovations to the Slovak retail market: • 24-hour opening: As lifestyles have changed in Slovakia over the last ten years, Slovak customers increasingly want to shop at times that
Retailing – Tesco in the Slovak Republic
227
are convenient to them. The result has been the introduction of 24-hour non-stop opening in eight out of the nine Tesco hypermarkets across Slovakia. • Cutting prices: Customer feedback has highlighted the importance of price to Slovak customers. As Tesco has grown, it has undertaken a number of programmes aimed at increasing productivity within the business. When combined with growing scale and efficiencies, this has enabled Tesco to make substantial savings in operational costs, which it has then been able to invest in reducing prices. • Own-label development: As trust has grown in relation to a previously unknown brand, Tesco has introduced a wide range of ownbrand products. Not only has this benefited Slovak customers, but it has also provided opportunities for smaller Slovak suppliers to work with Tesco and use the strength of the Tesco brand for the benefit of their own businesses. • Buying better: Local sourcing is popular with customers and, for a company focused on maximizing efficiency, it makes good business sense. Tesco has worked closely with Slovak suppliers through the sharing of technical and marketing support, which has led to an increase in the quality and attractiveness of products offered through Tesco stores. Over 90 per cent of all products stocked within the Slovak hypermarkets are sourced from suppliers based within Slovakia. A further benefit of this approach is that supplier standards have increased, which, in turn, has increased supplier competitiveness and their export potential (both to Tesco and to other retailers). Tesco has also provided Slovak suppliers with access to Internet-based auctions for supply to Tesco stores outside of Slovakia both within Central Europe and beyond.
Benefits The increasing scale and internationalization of Tesco sales and purchasing operations have made a significant contribution to efficiency, long-term profitability and growth of the whole of the Tesco Group. The input of the Slovak business has been an increase in turnover in four years of over 163 per cent (December 2001 vs December 1997) and a direct contribution to profit. Tesco has also learned a huge amount from operating in Slovakia, with an increasing amount of the learning being shared not only regionally (eg from Slovakia to other countries in Central Europe) but also back to the United Kingdom. Indeed, the layout, merchandising and operation of the newer Tesco Extra stores in the United Kingdom is based on the hypermarkets developed by Tesco in Central Europe.
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Key Sectors of Business and Industry
Tesco Stores Slovakia – key facts Hypermarkets: 12 Department stores: 5 Employees: 6,000 Percentage of store directors who are Slovakian: 100
No of Slovak suppliers: 1,500 No of own-brand lines: 300 Customers per week: 900,000+ Retail floor space (Dec 2002): 1.7 million sq.ft
4.17
Bratislava Commercial Property Markets Peter Murphy, DTZ Zadelhoff Tie Leung Summary Economic overview Since 2000, Slovakia has been on a strong growth path, with yearly GDP growth of between 3.5 and 4.5 per cent. This is forecast to continue through 2003–2004, while GDP growth of 5–6 per cent is forecast for the second half of the decade. The general election result in autumn 2002 and the country’s now almost-assured accession to the EU in May 2004 have combined to boost economic prospects and the outlook for foreign investment.
Office market The Bratislava market has developed quickly since the late-1990s. There are currently some 200,000m2 of speculatively developed Class A and B new-build and modern refurbished space. There are five buildings of Class A standard comprising over 80,000m2, with another four buildings under construction comprising around 75,000m2 and due for completion in 2003–2004. As supply has increased, so has leasing activity, with around 20–30,000m2 of transactions over the past four years. Top rents are now less than EUR15/m2 per month. The majority of the leases signed are in the EUR12–14 range. A true investment market has yet to emerge. So far there has been a limited number of investment transactions. However, investor interest is increasing. Further transactions are expected within the 12 months ending May 2004.
Retail market In tandem with the steady economic growth, retail sales have been increasing dynamically. Bratislava is a small market with a limited,
230
Key Sectors of Business and Industry
albeit growing, spending power. The city, however, has recently seen considerable retail development. Hypermarket and DIY operators such as Tesco, Carrefour, Billa, Metro, and Baumax have been active on the market since the late1990s and are expanding. By summer 2003, three major shopping centre schemes were operating, namely the Carrefour-anchored Polus Centre, the Aupark scheme, and the Avion retail park, which incorporates IKEA and food hypermarket Hypernova.
Industrial market A market for modern warehousing and distribution space is slowly emerging with a number of small schemes being developed. Areas with development potential include the old Istrochem zone, which is home to much owner-occupied space. The Volkswagen plant outside Bratislava has been the trigger for a number of ancillary logistics developments.
Bratislava Bratislava is the capital of the Slovak Republic and the seat of Government, the ministries, the consulates, central bodies of administration and, importantly, the mass media. The city has a unique geographical position as a gateway city into Central Europe. Its proximity to Vienna (65km), Gyor (60km) in Hungary, the Hungarian capital Budapest (190km), and Brno (80km) in the Czech Republic gives it a significant strategic importance. In addition, Bratislava is 325km from Prague, 630km from Warsaw and 1,220km from Kiev. The Bratislava–Gyor–Vienna triangle is widely recognized as a potential hotspot for economic growth. Bratislava is on the planned transnational European highways between Prague and Budapest, and Vienna and Warsaw. Table 4.17.1
Overview of the Bratislava office market 2001 2
2002
2003**
193,000 200,000 275,000
Modern office stock* (m ) New office supply (m2) 2
Office take-up (m ) 2
46,400
7,100
75,000
20,000
20,000
30,000
15
14
13–14
Prime office yield (%)
11–12
10–11
9.5–11
Office market vacancy rate (%)
12–15
12–15
12–15
Prime office rental level (EUR/m per month)
* Modern stock includes open-market Class A and Class B buildings for leasing; ** Forecast; All figures are year-end Source: DTZ Research
Bratislava Commercial Property Markets
231
Bratislava is an important junction of railway, road and river transport. It lies at the intersection of seven arterial roads and the main lines of passenger and freight railway lines in Slovakia. The port on the Danube River, which connects Bratislava with other countries and the Black Sea, is connected to the North Sea via the Rhone-Mohan Channel. The airport is situated 9km from the city centre. Schwechat airport outside Vienna is just 50km from Bratislava. Bratislava is home to 33 per cent of the total number of registered companies in the country. It is the largest and most densely populated Slovak city. The city has a population of approximately 452,000, or approximately 8.4 per cent of the total population of Slovakia. The population increases during working days to approximately 640,000 due to commuters and tourists. The capital produces 43 per cent of the country’s total GDP and accounts for 33 per cent of annual retail turnover. It has attracted 60 per cent of all foreign direct investment into Slovakia since 1990. The border crossings of Berg (Austria – 2.5km from Bratislava) and Rajka (Hungary – 14km) are used by 6 million and 1.75 million people a year respectively. In 2000, according to the EBRD, Bratislava’s GDP per capita in PPP (Purchasing Power Parity), was 98 per cent of the EU15’s level. This compares with a total of 46 per cent for the country as a whole in that same year. Table 4.17.2 GDP at Purchasing Power Standards (PPS) of selected CEE countries and regions (2000) GDP per capita, 2000 euro (PPS)
GDP per capita, 2000 EU15=100 (PPS)
8,783
39
Mazowieckie
13,316
59
Czech Republic
12,701
56
Prague
27,354
121
Hungary
11,227
50
Central Hungary
17,094
76
Slovakia
10,375
46
Bratislava
22,134
98
Western Slovakia
9,638
43
Central Slovakia
8,745
39
Eastern Slovakia
8,014
35
Country Region Poland
Source: Eurostat
232
Key Sectors of Business and Industry
The office market Background The slow pace of economic reform and development throughout the 1990s, as well as a generally unfavourable investment climate, discouraged foreign investors from entering the Slovakian market. However, the change of government in 1998, caused a dramatic increase in business confidence and, consequently, investment inflows. Until the late-1990s, the market was entirely comprised of older inefficient secondary-grade buildings, constructed during the socialist period. It is estimated that the total of pre-1990 secondary product in Bratislava is about 500,000m2. A significant number of international tenants are still occupying space in such buildings and paying historically high rents. There has been considerable development since the late-1990s. Most development, however, has been on a built-to-suit or owner-occupation basis. Compared to Prague or Budapest, there is a relatively low stock of modern office space for letting. Foreign developers, mainly from Austria, entered the market in the late-1990s. Immoconsult, the investment and property developer arm of Volksbank, has been the most active Austrian developer, particularly around SNP square. Immoconsult are currently developing the Europeum Centre in that area. The Bratislava Business Centre (BBC), developed by the local HB Reavis Group, was the first Westernstandard speculatively developed space over 5,000m2 for leasing, and appeared in 1997–1999.
Locations CBD/centre Hodzovo namestie is one of Bratislava’s major intersections, where routes north, south and west meet, and can be considered a prime location. The Presidential Palace is located here, as well as the landmark hotel, The Forum. The adjacent new-build office scheme, the Tatra Centrum, was completed in summer 2001. On the other side of the Forum Hotel at the top of Sturova – the main road south of Hodzovo towards the river – Immoconsult’s Europeum scheme is under construction, as noted above, and will complete in mid-2003. SNP square leads onto Sturova, which forms the eastern boundary of the Old Town. It is home to several speculative, built-to-suit and owneroccupied buildings, including CAC Leasing, Generali, Ceskoslovenska Odchodna Banka, Immoconsult, Volksbank and Zurich Insurance just off the main road. East of Sturova are Grosslingova ulica and
Bratislava Commercial Property Markets
233
Lazaretska ulica, where several multi-let and built-to-suit Class B buildings in the 2,000–3,000m2 size range have been developed, and the Jakubovo area, where smaller tenants, eg lawyers and designers, occupy smaller spaces in refurbished period buildings. The Old Town is a relatively small area with little office development. The area is mostly protected, which prohibits large-scale newbuild development. There is a relatively developed high-street shopping market, with a number of Western franchises present, eg Benetton and Nike, as well as many tourist-oriented outlets. Smaller office occupiers, such as designers, lawyers, media agencies and travel agencies, have taken space in refurbished space here. Most embassies are located here as well.
Out of centre Vajnorska Avenue is one of the main arterial roads leading north-east from the downtown core of Bratislava. It bisects the old Istrochem industrial zone and has seen much built-to-suit modern refurbishment of the office elements of older industrial stock for new light industrial and mixed use, eg Alcatel, Interporsche (VW), BMW, Wella, Linde, Tetrapak, 3M and others. This has been primarily due to the large number of available sites for sale there, which it has been relatively straightforward to acquire. The first Western-standard shopping complex, Shopping Park Soravia, is located on Roznavska, the main road adjacent to Vajnorska. The TriGranit office and retail mixed-use scheme Millennium/Polus (19,600m2 office/27,000m2 retail) is also on Vajnorska but at the more central Nove Mesto end of the avenue. TriGranit have begun construction on the second office phase of the project, Millennium Tower II with 22,000m2 of office space, which should be completed in 2003.
Harbour area This area is bounded by the main roads Dostojevského and Karadzicova to the west, Mlynske nivy and Prievozska to the north, the motorway to the east and the Danube to the south. The first Westernstandard office building, the 33,400m2 BBC, is located here. The area has a lot of available sites with development potential. Modern Class B buildings, eg SIT (Slovak Tobacco), SPP (Slovak Gas) and Slovak Telecom, are located on the river bank. The 35,000m2 BBC V – ABC Centre scheme, which is under construction at the time of going to press, is also located in this area.
South Bratislava/Petrzalka There are few modern office buildings in Petrzalka, the area south of the river. Several high-profile retail schemes are located here,
234
Key Sectors of Business and Industry
including the Aupark retail/leisure scheme, the Carrefour-anchored mall Danubia, and Tesco. The area is a high-density residential area with a population of 150,000.
Old Town Most embassies are located in the Old Town. Those that aren’t are located in the up-market area north of the castle district and west of Hodzovo namestie. Companies occupying converted residential space in this area include Ernst & Young.
West city Slovakian developer J&T’s Westend projects are located in the old industrial zone, Technicke Sklo. The area is situated to the far west of the city, off the highway towards Brno and Prague and close to the intersection with the Vienna and Budapest motorways.
Supply By the end of 2002, approximately 200,000m2 of modern new-build and refurbished office space had been developed in Bratislava. This compares with 1.8 million m2 of open-market space in Warsaw, 1.3 million m2 in Budapest, and 1.3 million m2 in Prague. As well as the
Map 4.17.1
Development location map of Bratislava
Bratislava Commercial Property Markets
235
speculatively developed space, approximately 25,000m2 of built-to-suit space and an estimated 200,000m2 of modern owner-occupied space has been built. Five major modern speculatively developed schemes have been completed to date: the BBC I–IV (completed in 1997–1999), Millennium Tower I, Carlton and the Tatra Centrum (all in 2001), and Westend Tower (2002). Together, these five buildings comprise just less than 84,000m2. Tatra Centrum, which is wholly occupied by the Raiffeisen daughter company Tatra Banka as their headquarters, was developed by another Raiffeisen subsidiary, RPI (Raiffeisen ProInvest). In terms of location, design, and layout it is widely considered as Bratislava’s best building to date. The Carlton is a refurbishment of the old Hotel Carlton, and incorporates an SAS Radisson hotel. Construction on phase II of TriGranit’s Millennium scheme is due to complete in late 2003. IBM have recently pre-let 3,500m2 there. Westend Tower is a 7,100m2 18-storey refurbishment by J&T Global to the west of the city in the Lamacska area, close to the junction of the Brno–Prague and Vienna–Budapest motorways. In addition to these larger schemes, there is an estimated total of 120,000m2 comprising smaller developments in the 1,000–5,000m2 size range. These buildings are all either Class B new-build grade or adequately refurbished space. Examples include the 3,000m2 Immoconsult building on Grosslingova ulica (whose tenants include Nokia and Providence International), the 2,500m2 PP building, also on Grosslingova, and the 2,500m2 Dobrovicova 8 (occupied by Zurich Insurance and GE Capital). Rental levels in such buildings are in the EUR13–15m2 range. In addition, an estimated 500,000m2 of pre-1997 secondary space exists. Typical rental levels here are EUR10–12/m2 per month. In terms of pipeline supply, there are four Class A schemes under construction at the time of writing (see Table 4.17.4) totalling an extra 75,000m2 of quality modern office space, which will be added to stock before the end of 2003. There are a number of major planned schemes that are in the public domain, but the timing of these is uncertain. Irish developer Ballymore Properties is planning a development comprising a large 45-hectare site in the Priobonova area, close to the river in the general Harbour area, with a view to developing a large mixed-use scheme of approximately 80,000m2. However, it is still unclear when, if at all, the scheme will be realized. Similarly, two large-scale schemes – local developers J&T’s Danube Riverside scheme and Austrian developers Soravia’s Danubius Printinghouse – both have unclear schedules.
Harbour/ Plynarenska
Harbour/ Plynarenska
Harbour/ Plynarenska
North-east/ Vajnorska
Centre/ Hviezdoslavonam
Centre/ 2001 11,600(3) Hodzovo nam
West city/ Patronka
BBC II
BBC III
BBC IV
Millennium Tower I
Carlton
Tatra Centrum(2)
Westend Tower(5)
Built-to-suit;
(3)
Office element only;
Source: DTZ Research
Deal-driven transactions;
(1)
J&T
83,500
2002 7,100
(4)
99
100
100
100
95
Pfizer, Tyco, ABB, Fiat, Danone, Damovo, Holcim, DAF, Leaseplan, Baxter, Storck, Opavia, HVB
Tatra Banka, Delvita (retail)
(5)
12–13
15
15–16
11–13(1)
15–16
14–16
14–16
14–16
Refurbishment
95
100
Accenture, KPMG, Allen & Overy, Sony, 96 CSC, Servier, Canadian Embassy
Eurotel, IBM, Glaxo-SmithKline, Kodak
AIG, Air France, Alcatel, Orange, Columbex, Ditec, Microsoft, Tatra Banka, Sodexho
Ceska poistovna, Merck Sharp & Dohme
Telenor, Nextra
Air Liquide, Citroen, Deloitte & Touche, Kapsch Telecom, Nextra, Oracle, Reuters, Rittal, Telenor, VUB, Würstenrot, Boehringer Ingelheim
% leased Rent (EUR/m2 per month)
Raiffeisen Property Invest – property development arm of Raiffeisen;
Tractabel
2001 11,800(3)
RPI(4)
TriGranit
HB Reavis/ BSR Group
HB Reavis/ BSR Group
HB Reavis/ CA Immo AG
2001 19,600
1999 16,000
1998 2,800
1998 2,800
HB Reavis/ CA Immo AG
Developer/owner Major tenants
TOTAL
(2)
Harbour/ Plynarenska
BBC I
1997 10,800
Location
Year m2
Major existing Class A schemes
Building
Table 4.17.3
(1)
1,700m2 of retail on the ground floor;
Source: DTZ Research
TOTAL
(2)
Harbour
n.k.
Not known at the time of writing
P
(2)
2005
75,000
n.k.
(2)
10,000
30,000
Ballymore site
P
2005
Downtown
P
Danubius Printinghouse
10,700
Embankment
2005
2003
Ballymore Properties
Soravia
J&T
HB Reavis
Lindner
Immoconsult
7,800(1)
Danube Riverside
P
UC
2003
TriGranit
BSR Group
Developer
22,000
35,000
North-east/ Airport
Lindner Office Center I
UC
2003
35,000
East of centre
Centre (next to Forum Hotel)
Europeum
UC
2003– 2004
m2
HB Reavis scheme
North-east/ Vajnorska
Millennium Tower II
UC
Year
75,500
Harbour/ Plynarenska
BBC V – Absolute Business Centre
UC/P
TOTAL
Location
Lindner, Hilti
n.k.(2)
25
n.k.(2)
15
10
n.k.(2) IBM
% leased
Tenants
Major pipeline Class A schemes – under construction (UC) or planned (P)
Building
Table 4.17.4
11–12
15
12–14
12–14
Asking rents (EUR/m2 per month)
238
Key Sectors of Business and Industry
Demand Given the limited amount of modern supply, the letting market in Bratislava is relatively small. New buildings delivered to the market have tended to be mostly leased on completion, as tenants are keen to relocate to higher-quality premises in better locations. Take-up of modern new-build has averaged 20,000–35,000m2 since 1997. In 2000, gross take-up reached a record 45,000m2, boosted by a number of large lettings by the two GSM-operator lettings, as well as the GlaxoSmithKline and IBM lettings in the Millennium Tower. Letting activity in 2001 and 2002 returned to the 20,000–35,000m2 level. Apart from the KPMG, Holcim and ABB lettings in 2002, there were few transactions larger than 500m2. Annual demand for modern office space for 2003–2004 is forecast to average approximately 30,000–35,000m2. Although some demand has been taken off the market by built-tosuit developments and owner-occupations, new demand can be expected from the financial and IT sectors in the near future. Several large-scale tenants are known to have requirements on the market. The GSM operators signed sizeable leases in 1999–2000 in modern buildings, but certain expansions might be expected. Such companies are unlikely to relocate, although they could expand in the near future. In addition, an EU effect arising from the now almost-assured accession in May 2004 is expected to boost demand in 2003 from the business and financial services sectors as well as the government sector.
Vacancy The overall market vacancy rate, including secondary space is estimated at between 12 and 15 per cent. Vacancy in the new-build schemes, however, is below 10 per cent. Both in the city centre and out of town, there is a shortage of lettable modern space with adequate car parking. The largest speculatively developed schemes – BBC, Millennium, Carlton, and Westend – are all over 95 per cent occupied.
Rental levels and typical terms The majority of leases signed are in the EUR12–14/m2 per month range. Currently, Carlton is achieving the highest rents at around EUR15m2. Some of the larger deals, however, can be considered as deal-driven rather than at market price. Rental levels have softened since the late-1990s when asking rents in the newly delivered BBC IV were EUR15–16m2. Rents for refurbished office space and older secondary buildings are currently quoting EUR7.5–10.5m2.
Bratislava Commercial Property Markets
Table 4.17.5
239
Major office transactions (1999–2003)
Year Building
m2
2003 Millennium II
3,500 IBM
ICT/IT
12–14
2002 Carlton
3,000 KPMG
FIRE/Auditor
14–16
2002 Westend Tower
1,750 Holcim
Industrial/ Construction
n.k.(4)
2002 Westend Tower
1,100 ABB
Industrial/Energy
n.k.(4)
Tenant
Tenant profile (see key below)
Rent(3) (EUR/ m2 per month)
2001 Westend Tower
900 Pfizer
Industrial/ Pharmaceutical
n.k.(4)
2001 Carlton
700 Accenture
ICT/IT
15
2001 Carlton
700 Allen & Overy
Business services/ 15.5 Legal services
2001 Carlton
700 Computer Sciences Corp 700 Sony
ICT/IT
n.k.(4)
Industrial/ Consumer
15
2000 Millennium Tower I 13,750 Eurotel
ICT/Telecom
11(5)
2000 Millennium Tower I
4,960 IBM
ICT/IT
13
2000 Kosicka(1)
2,500 Asset Soft
ICT/IT
2000 Millennium Tower I
1,000 GlaxoSmithKline Industrial/ Pharmaceutical 500 Siemens Industrial/ Engineering
16.5
1999 BBC IV
9,000 Globtel(2)
ICT/Telecom
14.5
1999 BBC IV
2,070 Alcatel
ICT/Telecom
15
1999 Obchodna(1)
2,000 Generali
FIRE/Insurance
15
1999 BBC IV
1,960 KPMG
FIRE/Auditor
14.5
ICT/IT
14.5
2001 Carlton
2000 Westend Point
1999 BBC I (1) (5)
1,250 Oracle (2)
Class B buildings; Now an Orange franchise; Deal-driven transaction
Key: ICT IT FIRE
(3)
Approximate;
Information and communications technology Information technology Financial services, insurance, real estate services
Source: DTZ Research
(4)
8.5
n.k.(4)
Not known at time of writing;
240
Key Sectors of Business and Industry
20 18 16 14 12 10 8 6 4 2 0 1998
1999
2000
2001
2002
2003*
Source: DTZ Research * Forecast
Average rental levels (EUR/m2 per month)
Figure 4.17.1 Table 4.17.6
Typical office lease terms
Lease lengths
3–7 years
Rents
Typically paid in SKK linked to EUR
Indexation
Annually according to CPI
Service charges
EUR2.30–3.30/m2
Management fees
EUR0.4–0.6/m2 of lettable space on top of service charges
Parking ratios
City centre – 1:60–110 Out of city centre – 1:30–80
Add-on factors
0–10%
VAT
0% or 10% for the rent, 10% or 23% for services
Corporate tax
29%
Transfer/property tax
4–20%
The investment market The year 2000 saw the first significant institutional deal. BBC I, II, III and IV were sold in three portions, at yields between 10.5 and 14.5 per cent. Smaller office and industrial developments have been sold to local investors with yields of 13.5–15.5 per cent. Typical transactions are between EUR0.8 million and EUR2.2 million. The market is attracting a lot of attention, however, and more deals are expected soon.
Bratislava Commercial Property Markets
241
Table 4.17.7
Major investment transactions
Building
Year
m2
Yield
Buyer
BBC I, II
2000
10,755 + 2,735
11%
CA Immo AG
BBC III, IV
2000
2,804 + 17,056 10.5–14.5%
BSR Group
The retail market Retail development in Bratislava began to take off in the late 1990s. Hypermarket and DIY operators such as Tesco, Carrefour, Billa, Metro, and Baumax have been operating hypermarkets and stand-alones since then and have plans for expansion. Three major retail and entertainment schemes are currently operating. The 39,000m2 Carrefour-anchored TriGranit development Polus opened in 2000, while the 38,000m2 Aupark was completed in late 2001 by Slovakian developer HB Reavis Group. Avion, a 50,000m2 retail park anchored by the Hypernova hypermarket and with an IKEA outlet on site, opened in 2002 in the eastern suburbs towards the airport. The Lindner office building is situated opposite this scheme. In addition, a second phase of the first-generation 15,000m2 Soravia Centre is planned. Tesco is currently completing its biggest Bratislava outlet yet, adjacent to the SPS II on Roznavska. As the economy strengthens, purchasing power and retail sales are forecast to rise. Despite the fall in real income since 1990, retail sales in Bratislava have been growing by more than 10 per cent per annum since 1998. As new supply comes on stream with competitive conditions for retailers, and which can attract international retail chains, consumer spend that had travelled across the border to Vienna, which is only 65km away, should remain in Slovakia. In 2000, Slovaks, mostly from Bratislava, spent nearly EUR230 million in Austria. Average rent in shopping centres is in the range EUR13–23/m2 per month, depending on location. Smaller units are renting at EUR25–50m2, units of 150–400m2 for EUR18–35m2, and floorspace over 400m2 at EUR13–20m2.
242
Key Sectors of Business and Industry
Table 4.17.8 Scheme
Major existing shopping centres
Year
m2
Major Tenants
Type
SPS I & II 1996–1998 Roznavska/ 15,100 Soravia (Shopping North-east Pk Soravia)
Billa
Firstgeneration mall. Clothes, shoes, electronics.
Polus City 2000 Centre
Vajkorska/ North-east
38,500 TriGranit
Carrefour, Ster Century, Datart, Chameleon
Hypermarketanchored retail & entertainment
Danubia
2000
Petrzalka
25,500 Campegnon Carrefour, Hypermarket/ Bernard electronics inline retail units
Aupark/ 2001 Bratislava Shopping Centre
Petrzalka
42,500 HB Reavis
Terno, UCI, Giacomelli, Mexx, Humanic, Reno
Avion
Airport/ North-east
50,000 Ahold
Hypernova, Retail park IKEA
2002
Location
Developer
Supermarketanchored retail/leisure (12-screen multiplex)
Source: DTZ Research
Table 4.17.9 Major hypermarkets and stand-alones (existing and pipeline) Scheme
Year
Location
m2
Tesco
2003
Roznavska/North-east city
15,000*
Tesco
1995
City centre (off Sturova)
12,250
Baumax
1999
Roznavska/North-east city
10,000
Tesco
2000
Petrzalka
8,500
Metro
2000
Ivanka pri Dunaji
9,000
Tesco
2001
Roznavska
13,700
Carrefour
2002
Polianky
13,800
Billa
2002
Bajkalska
4,000
Kaufland
2002
Dubravka
3,500
Baumax
2002
Bajkalska
12,400
* Estimate Source: DTZ Research
Bratislava Commercial Property Markets
243
Retailing in the downtown core of the city is mainly tourist-oriented, although a number of Western franchises, eg Benetton, Nike and Max, are present.
The industrial market In the light of Slovakia’s approaching membership of the EU and the central geographic location of the country, particularly Bratislava, the medium-term prospects for the Slovakian industrial market are quite promising. However, the market has yet to take off. Currently, no Western-standard speculatively developed warehouse and distribution space for leasing exists. International companies such as Sony, Reemstma, KJS, Hilti, Danzas, Tibbett & Britten, Cargo Partners, Kuhne & Nagel, Tesco and Billa, are all occupying older warehouse space. Some companies such as Coca-Cola and Ivensys have chosen built-to-suit solutions in Bratislava and Trnava respectively. In Bratislava, along the arterial road Vajnorska leading north-east from downtown to the D1 highway, there is a cluster of new light industrial and commercial developments, including car showrooms and mixed-use space. The area is home to several available sites for sale. This area, and further out along the highway, is favoured by some companies in preference to the western side of the city, for its access to the central and eastern parts of the country. The J&T-Dak Kuester ‘Logisticko-Distribucny Park’ development next to the Volkswagen (VW) factory north of Bratislava comprises over 31,000m2 of modern warehouse space and is let to automotiverelated users supplying Volkswagen, such as SAS Automotives and Michelin. Also connected to VW’s plant is AIG/Lincoln’s Autologistics Park. This is a multi-phase development on a site located just outside Bratislava, at Lozorno, 20km from VW’s main factory towards Brno. Phase I has been fully leased and completed. Phase II is under construction. The scheme comprises up to a total of 100,000m2 of light industrial space, custom built for suppliers of VW Slovakia, to provide components for auto manufacturing. Tenants signed include Johnson Controls, Lear, Brose, and HP Pelzen. In the biggest investment into Slovakia to date, in January 2003 Peugeot Citroen decided on Slovakia as the location for a new EUR700 million manufacturing plant in Trnava, 50km from Bratislava in Western Slovakia.
Part Five
Appendices
Appendix 1
General Sources of Further Information State Administration The Office of the President of the Slovak Republic Hod ovo nám. 1 P.O. Box 128 810 00 Bratislava 1 Email:
[email protected] Web: www.prezident.sk The Government Office of the Slovak Republic Úrad vlády Slovenskej republiky Námestie slobody 1 813 70 Bratislava Slovak Republic Tel: +421 2 5729 5111 Fax: +421 2 5249 7595 Email:
[email protected] Web: www.government.gov.sk The Ministry of Foreign Affairs of the Slovak Republic Hlboká 2 833 36 Bratislava 37 Slovak Republic Email:
[email protected] Web: www.foreign.gov.sk The Ministry of Economy of the Slovak Republic Mierová 19 827 15 Bratislava 212 Slovenská republika Tel: 02 / 48541111 Fax: 02 / 43337827 Web: www.economy.gov.sk
248
Appendices
The Ministry of Interior of the Slovak Republic Department of European Integration and Foreign Relations Pribinova 2 812 72 Bratislava Slovak Republic Tel: +421 2 5094 4452 Fax: +421 25094 4009 Email:
[email protected] Web: www.minv.sk The Ministry of Finance of the Slovak Republic Štefanovic¡ova 5 PO Box 82 817 82 Bratislava Tel: 00421/2/5958 1111 Fax: 00421/2/5249 8042 Email:
[email protected] Web: www.finance.gov.sk The Ministry of Justice of the Slovak Republic ¡ upné námestie 13 Z 813 11 Bratislava Tel: +421 259353574 Fax: +421 259353607 Email:
[email protected] Web: www.justice.gov.sk The Ministry of Labour, Social Affairs and Family of the Slovak Republic www.employment.gov.sk The Ministry of Environment of the Slovak Republic www.lifeenv.gov.sk The Ministry of Transport, Posts and Telecommunications of the Slovak Republic www.telecom.gov.sk The Ministry of Construction and Regional Development of the Slovak Republic www.build.gov.sk
General Sources of Further Information
249
Antimonopoly Office of the Slovak Republic Drienova 24 826 03 Bratisalava Tel: +421 2 43337 305 Fax: +421 2 43333 572 Web: www.antimon.gov.sk Statistical Office of the Slovak Republic www.statistics.sk INFOSTAT, Institute of Informatics and statistics Dubravska 3 845 24 Bratislava Tel: 59379 111 Fax: 5479 1463 Web: www.infostat.sk
Other Institutions Bratislava Stock Exchange PO Box 151 Vysoká 17 814 99 Bratislava 1 Slovak Republic Tel: +421 2 49 236 111 (Switchboard) Email:
[email protected] Web: www.bsse.sk The National Bank of Slovakia Narodna banka Slovenska Imricha Karvasa 1 813 25 Bratislava Tel: +421/2/5787 1111 Fax: +421/2/5865 1111 Web: www.nbs.sk Federation of Employer’s Associations of the Slovak Republic Nobelova 18 831 02 Bratislava Slovak Republic Tel: +421 52 / 7152 111 Fax: +421 52 / 7152 374 Web: www.azzz.sk
250
Appendices
Slovak Investment and Trade Development Agency (SARIO) Martincekova 17 821 02 Bratislava Tel: +421 258 100 310 Fax: +421 258 100 319 Email:
[email protected] Slovak Chamber of Commerce and Industry Gorkého 9 816 03 Bratislava Tel: 02/54433291 Fax: 02/54131159 Email:
[email protected] Web: www.test.sopk.sk
Appendix 2
Contributor Contact Details Aon Slovensko Trnavska 50/A SK – 8221 02 Bratislava Tel: +421 244 460 666 Fax: +421 244 460 666 Email:
[email protected] Contact: Martin Tkac Bank Austria Creditanstalt Dr. Karl Lueger-Ring 10, 1010 Wien Austria Tel: +43 1 53131 – 41964 Fax: +43 1 53131 – 41050 Email:
[email protected] Contact: Bernhard Sinhuber CMS Cameron McKenna Jelenia 4 P.O. Box 21 814 99 Bratislava 1 Tel: +421 257 201 718 Fax: +421 257 201 777 Email:
[email protected] Contact: Ian Parker Deloitte & Touche Central Europe. Prievoska 12 821 09 Bratislava Tel; +421 258 249 111 Fax: +421 258 249 222 Email:
[email protected] Contact: Remic Troch
252
Appendices
DTZ Zadelhoff Tie Leung Central and Eastern Europe BV Bajcsy-Zsilinsky ut 42–46 Budapest 1054 Hungary Tel: +36 1 269 6966 Fax: +36 1 269 6965 Email:
[email protected] Contact: Peter Murphy. Ian Hutchins Tesco PLC Tesco House Delamere Road, Cheshunt Hertfordshire United Kingdom Tel: +44 1992 632222 Fax: +44 1992 648206 Email:
[email protected] The Merchant International Group Limited 75–79 Knightsbridge London SW1X 7RB United Kingdom Tel: +44 20 7259 5060 Fax: +44 20 7259 5090 Email:
[email protected] Contact: Dr Rashna Writer Jonathan Reuvid Little Manor Wroxton St. Mary Banbury Oxfordshire OX15 6QE United Kingdom Tel: +44 1295 738 070 Fax: +44 1295 738 090 Email:
[email protected] Slovak Investment and Trade Development Agency (SARIO) Martincekova 17 821 02 Bratislava Tel: +421 258 100 310 Fax: +421 258 100 319 Email:
[email protected] Contact: Suzuzanna Eberiosova
Contributor Contact Details
Teamconsult s.r.o. Italska 2 120 00 Praha 2 Czech Republic Tel: +420 222 510 251 Fax: +420 224 531 123 Email:
[email protected] Contact: Oliver Schmitt
253
Appendix 3
Bank Austria Creditanstalt Contact List Economics Department Marianne Kager, Chief Economist Gigergasse 1, A-1030 Vienna Tel: (+43 1) 711 91 ext.51952 Email:
[email protected] Stefan Bruckbauer, Deputy Department Head Dr.-Karl-Lueger-Ring 10, A-1010 Vienna Tel: +43 (0) 505 05 ext. 41951 Email:
[email protected] Kurt Fesselhofer Gigergasse 1, A-1010 Vienna Tel: (+43 1) 711 91 ext. 1953 Email:
[email protected] Hans Holzhacker Dr.-Karl-Lueger-Ring 10, A-1010 Vienna Tel: +43 (0) 505 05 ext. 41965 Walter Pudschedl Dr.-Karl-Lueger-Ring 10, A-1010 Vienna Tel: +43 (0) 505 05 ext. 41957 Manfred Weidmann Dr.-Karl-Lueger-Ring 10, A-1010 Vienna Tel: +43 (0) 505 05 ext. 41962 Email:
[email protected]
Bank Austria Creditanstalt Contact List
Brussels Representative Office Peter Rieger Avenue de Cortenbergh 89 Tel: (+32 2) 735 41 22 Email:
[email protected]
International Export and Trade Finance Robert Fleischmann, Department Head Am Hof 2, A-110110 Vienna Tel: (+43 1) 711 91 ext. 56901 Email:
[email protected] Florence Werdisheim, Deputy Head Am Hof 2, A-1010 Vienna Tel: (+43 1) 711 91 ext. 50330 Email:
[email protected] Margit Slezak, Deputy head Am Hof 2, A-1010 Vienna Tel: (+43 1) 711 91 ext. 87320 Email:
[email protected] Brigitte Elmecker Am Hof 2, A-1010 Vienna Tel: (+43 1) 711 91 ext. 50320 Email:
[email protected]
Commodity Trade Finance/Structured Trade Finance Michael Heger, Head Am Hof 2, A-1010 Vienna Tel: (+43 1) 711 91 ext. 53390 Email:
[email protected]
255
256
Appendices
Corporate and Project Finance Martin Frank, Department Head Schottengaasse 6, A-1010 Vienna Tel: (+43 1) 531 31 ext. 44202 Email:
[email protected]
EU Finance Otto Giebneer Landstrasser Hauptstrasse 1, A-1030 Vienna Tel: (+43 1) 711 91 ext. 52546 Email:
[email protected] Karin Heiling Landstrasser Hauptstrasse 1, A-1030 Vienna Tel: (+43 1) 711 91 ext. 5434 Email:
[email protected]
Corporate Customer Advice and Export & Investment Promotion Finance Tel: (+43 1) 531 31 ext. 44405, 44424 Email:
[email protected]
Index access network, telecommunications 194 Accession Partnerships 98–99 accident insurance 202 accountancy 86–88 ADR (alternative dispute resolution) 75 advertising 218–23 job 214 market 220–21 media audience levels 219–20 structure 221–23, 221, 222 agency agreements 61–63 Agenda 2000 98 agriculture sector 115–18, 117 EU negotiations 100 airports 186–88, 188 alternative dispute resolution (ADR) 75 application documents 214 arbitration 73, 75 a.s. see joint stock companies 56 Association of the Slovak Republic Automotive Industry (ZAP SR) 167 associations of legal entities 57, 58 ATM network 195 audit 86, 87 automobile insurance 202 automotive industry 163–71 position within Slovakia 163–64, 166–70 position worldwide 165–66 bad debts, tax allowances Banking Act 82–83 banking licences 82, 83
92
banking sector 53–54, 79–85 commercial banking 80–85, 81 National Bank 79–80 Banska Bystrica 34–36 biotech inventions 68, 70, 71 branch offices 55, 59 bank 83 Bratislava 33, 33–34, 230–31 airports 186–87 see also commercial property markets Bratislava Stock Exchange (BSE) 107–09 bribery 44–45 brokerage contracts 61 BSE (Bratislava Stock Exchange) 107–09 budget measures 6–7 budgets CEE economies compared 14, 15 EU 99, 100 building industry 127–30 building materials industry 129 business interruption insurance 202 business risk assessment 43–46 capital markets 106–12 Centre of Securities 109 foreign traders 109–10 law on collective investment 110–11 legal framework 106–07 open– and close-end funds 111–12 stock exchange 107–09
258
Index
CEE (Central and Eastern Europe) economies comparison 13–15, 13, 15 electrical engineering in 156–58 Centre of Securities of the Slovak Republic (SCP) 109 chemicals industry 172–80 position in Slovakia 172–73, 174–80 position worldwide 173–74 close-end funds 111–12 clothing industry 181–83 coal mining industry 119–20 collateral tax 93–94 collective investment law 110–11 commercial banking sector 80–85, 81 commercial property markets 229–44, 231 industrial market 243 investment market 240, 241 office market 232–38, 234, 236, 237, 239, 240 retail market 241–43, 242 Commercial Code 53 Commercial Register 60 commercial representation agreements 61 commission agent’s agreements 61 common agricultural policy (CAP) 99 communications 193–98 network infrastructure 193–95 participating companies 196 regulation 197–98 companies 56, 57–58, 59 compulsory insurance cover 201 conformity assessment, foreign trade 26–28 consolidated accounts 88 constitution 50 construction all risks insurance 202
construction industry 127–30 consumer prices, CEE economies compared 13, 14 contracts of employment 64–65 termination 65–66 cooperatives 57, 58, 59 copyright 67, 69, 70 corporate income tax 90 corporate structures 53, 55–60 corporate tax assessments 94 corruption 44–45, 76 court litigation 73, 74 court system 50–51 credit insurance 202 crime, organized 45–46 customs duty insurance 202 customs provisions 28–31 free zones and warehouses 31 procedures with economic impact 28–31 customs warehouses 29 Czech Republic, relations with 3 deductions allowable for tax 91 made by employers 96 Degussa AG Dusseldorf 177 deposit protection 84–85 depreciation 91 designs, protection of 68, 70, 71 direct payments, EU negotiations 100–01 dismissals 65–66 dispute resolution 73–76 distributorships 62–63 economic overview 4–9, 7, 44–46, 45 effects of EU enlargement 11–13, 11 policy 7–8 regional comparisons 34, 35, 36, 37, 38–39, 39–40, 40–41, 41–42 education 209–10 electrical engineering 159
Index
machinery industry 148 regional comparisons 34, 35, 37, 38, 39, 40, 41, 42 elections, parliamentary 3–4 electrical engineering 152–62 features in Central and Eastern Europe 156–58 position within Slovakia 152–53, 153, 155–56, 158–62 position worldwide 153–54 semi-conductors sub-sector 154–55, 155 employers’ deductions 96 employment, automotive industry 168–69 employment law 64–66 energy demand, automotive industry 168 environmental issues, chemicals industry 178 equipment sector see machinery and equipment sector European Union accession 10–15, 11 CEE economies compared 13–15, 13, 15 financial support 98–105, 100 automotive industry 165–66 electrical engineering industry 153–54 enlargement 10–13, 11, 46 financial framework 100 furniture industry 134–35, 134 machinery industry 144–45, 145 EuroTel Bratislava 196 executive search 215–16 expenses, allowable 91 exports see foreign trade farming see agriculture sector FDI see foreign direct investment Fermas spol. s.r.o. 177 Financial Market Authority (FMA) 199
259
Financial Memorandum 98 financial sector 54 financial statements 88 financial support, EU 98–105 Accession Partnerships 98–99 budgetary issues 99, 100 difficult negotiation issues 100–101 programmes 101–04 SME FF 104–05 FMA (Financial Market Authority) 199 food industry 116–18, 117 foreign bank licensing 83 foreign direct investment (FDI) 5, 16–22, 46 achievements since 1998 17–21, 17, 18, 19, 20 by country of origin 17–18, 17, 18 by sector 18–19, 19, 20 by regions 20–21, 20 CEE countries compared 14 chemicals industry 176–78 construction industry 129–30 food industry 117 glass industry 126 incentives 21–22 inward investment strategy 16–17 machinery industry 147, 149 metallurgical industry 124 regime 52–54 foreign nationals, taxation of 96 foreign securities traders 109–10 foreign trade 13, 23–32 automotive industry 163–64 certification 26–28 chemicals industry 174–76, 176 electrical engineering industry 155–56, 158, 160 evolution 23, 24 exporters 25–26 food industry 116 machinery and equipment sector 142–43
260
Index
partners 23–25, 25 present regime 26 special customs provisions 28–31 wood processing industry 131–32, 135, 138 forestry sector 132, 133–34, 136–37 ‘frame of chart of accounts’ 86 franchising 62–63 free customs zones and warehouses 31 Fund of Deposit Protection 84–85 furniture industry 132, 134–35, 137 gas industry 121–22 GDP levels 5, 6 Bratislava 231, 231 CEE countries compared 13–14, 13 wood processing industry 131 general partnerships (v.o.s.) 56, 57, 59, 89 general third part liability insurance 202 glass industry 125–26 government incentives automotive industry 166–67 chemicals industry 178 electrical engineering 159–60 machinery industry 148–49 wood processing industry 139 gross foreign debt, CEE economies compared 14–15, 15 groups, taxation of 95–96 hours of work 65 human resources 209–17 compensation 212–13 education 209–10 labour market 210–12, 211 recruiting 214–16 hypermarkets see retail property market; Tesco plc
imports see foreign trade incentives see government incentives; investment incentives industrial output, CEE economies compared 13, 14 Industrial Property Office (IPO) 67 industrial property market 230, 243 industrial property rights 67 industrial sectors, foreign investment by 18–19, 19, 20 initial public offerings (IPO) 110 ‘innominate contracts’ 62 innovations 68, 69–70, 71 instant dismissal 66 Instrument for Structural Policies for Pre-Accession (ISPA) 103 insurance 199–207 market overview 203–06, 203, 204, 205 products 200–03 supplementary pension insurance system 206–07 intellectual property 67–72 inter-bank payment system 85 interest income 91 tax 92 International Accounting Standards (IAS) 87–88 inventions 68, 69–70, 71 inventory valuation 91 investment automotive industry 168 electrical engineering 158–59 leather and shoe industry 184 machinery and equipment sector 149 textiles and clothing sector 182–83 wood processing industry 135–36 see also foreign direct investment; foreign investment regime
Index
investment incentives 21–22, 52–54, 92 Investment Incentives Act 21–22, 52 investment property market 240, 241 inward investment strategy 16–17 inward processing of foreign goods 29–30 IP network 195 IPO see Industrial Property Office; initial public offering ISDN services 193–94 ISPA (Instrument for Structural Policies for Pre-Accession) 103 job agencies 215 joint stock companies (a.s.) 58, 59 judicial reform 45
56,
Kosice 36–37 airport 187 metallurgical industry 124 k.s. see limited partnerships Labour Code 64 labour market 210–12, 211 Law on Product Regulation and Conformity Assessment 26–27 leather industry 183–85 legal aid insurance 202 legal entities 53, 55–60 legal framework 49–51 capital markets 106–07 Lesy Slovenskej Republiky 138–39 liability insurance 202 licensing, bank 82, 83 licensing of intellectual property rights 68–69, 72 life insurance products 203 limited liability companies (s.r.o) 56, 57–58, 59
limited partnerships (k.s.) 57, 59, 89 litigation 74–75 local government law 50
261
56,
machinery and equipment sector 142–51 position in Slovakia 142–43, 147–51 position worldwide 143–46, 144, 145, 147 macro-economic indicators 6, 7 magnesium extraction industry 120–21 marine insurance 202 market entry and exit rules 53 material law rules 51 MBA programmes 210 MDPT (Ministry of Transport, Post and Telecommunications) 197 media markets see advertising metallurgical industry 119, 120–21, 123–24 MIG analysis 44–46, 45 minimum wage levels 65 mining industry 119–21 Ministry of Transport, Post and Telecommunications (MDPT) 197 mortgage banking 83 multi-beneficiary programmes, EU 102–03 mutual agreement, termination by 65 National Adoption of the Acquis (NPAA) 98 National Agency for Small and Midsize Businesses Development 178 National Bank of Slovakia (NBS) 79–80 national programmes, EU supported 102
262
Index
NBS (National Bank of Slovakia) 79–80 network infrastructure, telecommunications 193–95 New York Convention 74 Nitra 37–38 non-life insurance products 201–02 non-resident entities, taxation 90, 92–93 notice of employment termination 65–66 NPAA (National Adoption of the Acquis) 98 Objective 1 regions 98 office market 229, 232–38, 230, 239, 240 demand 238, 239 locations 232–34, 234 rental levels and terms 238, 240 supply 234–35, 236, 237 on-line recruitment 214 open-ended funds 111–12 Orange 196 ore mining 120 organized crime 45–46 outward processing of goods 31 parliament, laws enacted by 50 Parliamentary elections 3–4 partnerships 56, 57, 59 tax 89 Patent Act 68 pension insurance 206–07 Phare programme 101–03 pharmaceutical industry see chemicals industry Piestany airport 187 political overview 3–4, 4 Poprad-Tatry airport 187 Presov 38–39 primary legislation 50 printed matter sector, audience levels 219
private law rules 51 privatization 46 banking 53–54, 80–81, 81 gas industry 122 probationary periods 65 procedural law rules 51 property damage insurance 202 property markets see commercial property markets public law rules 51 radio market, audience levels 220 railway network 188–89, 189 ratings, business 43 recruitment 214–16 regional differences 33–42, 33 automotive industry 169 labour market 210, 211 machinery industry 149 wood processing and furniture 138 rental levels, office property market 238, 240 representative offices, banks 84 research and development, machinery industry 148 resident entities, taxation 89–90 retail property market 229–30, 241–43, 242 retailing 224–28 risk assessment 43–46 river transport 191–92, 192 road system 189–90, 190, 191 salary levels 65, 212–13 SAP (Slovak Association of Insurers) 200 SAPARD (Special Accession Programme for Agriculture and Rural Development) 104 SAX (Slovak Share Index) 108 SBCC (Slovak Bankers’ Clearing Centre) 85 SDX (Slovak Bond index) 108
Index
search advertisements 214 secondary education 209 secondary legislation 50 semi-conductors sub-sector 154–55, 155 shares and shareholders 58, 106 shoe industry 183–85 simple exchange of goods 31 Slovak Association of Insurers (SAP) 200 Slovak Bankers’ Clearing Centre (SBCC) 85 Slovak Bond index (SDX) 108 Slovak Insurance Brokers Association 204–06 Slovak Investment and Trade Development Agency (SARIO) 16–17, 18 Slovak Share Index (SAX) 108 Slovak Testing Centres (SKTCs) 27–28 Slovenske Telekomunikacie see ST Slovensky Plynarensky Priemysel (SPP) 121 SME Finance Facility Phase II 104–05 Special Accession Programme for Agriculture and Rural Development (SAPARD) 104 SPP (Slovensky Plynarensky Priemysel) 121 s.r.o. see limited liability companies ST (Slovenske Telekomunikacie) 193–94, 196 WAN/VAN, IP and ATM networks 195 staff training 210 staff turnover 213 Stefanik airport, Bratislava 186 stock exchange, Bratislava 107–08 strengths and weaknesses 43–46 supplementary pension insurance 206–07 Supreme Court 51
263
suspensive customs procedures 28 switching network, telecommunications 193–94 SWOT analysis automotive industry 169–70 chemicals industry 178–79 electrical engineering industry 161–62 machinery industry 150–51 wood processing industry 139–40 tax 89–97 credits 92 investment incentives 21–22, 52, 92 practice 90–95 returns 88, 94 structure 89–90 taxable income 90–92 telecommunications see communications Telecommunications Office (TU) 197 temporary importation procedure 30–31 termination of employment contracts 65 terms and conditions of employment 212–13 Tesco plc 224–28 Slovakian operating methods 226–27 textiles industry 181–83 trade see foreign trade trademarks 68, 69, 70–71 training 210 transit customs procedures 29 transport network, telecommunications 194–95 transport sector 186–92 air 186–88, 188 rail 188–89, 189 regional comparisons 34, 35–36, 37, 38, 39, 40, 41, 42
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Index
river 191–92, 192 road 189–90, 190, 191 travel insurance 202 Trencin 39–40 Trnava 40–41 TU (Telecommunications Office) 197 TV market, audience levels 219–20 unemployment CEE economies compared 13, 14 regional comparisons 211, 211 universities 209–10 utility models 68 vacancy rates, Bratislava office market 238 value added tax (VAT) 96
voluntary insurance cover 202–03 v.o.s. see general partnerships wage levels 65, 212–13 WAN/VAN network 195 warehouses, customs 29, 31 withholding taxes 93, 96 wood processing and products industry 131–41 position in Slovakia 131–32, 138–40 position worldwide 132–36, 134 prospects 136–38 ZAP SR (Association of the Slovak Republic Automotive Industry) 167 Zilina 41–42 airport 188
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