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FINANCE MINISTRY LEVIES HEFTY FINE FOR ALLEGED PROFITEERING

Audit condemns Slovnaft

SLOVNAFT'S high spirits from record profits in 2004 did not last long for the major oil refiner. Late December, the country's Finance Ministry decided to fine Slovnaft for what they call "unjustified profit and abuse" of the refinery's industry monopoly.
Slovnaft claims that the Ministry's decision lacks legal merit and disregards market trade principles.
Slovnaft will have to pay Sk1.3 billion (€33.9 million) into state pockets based on an inspection initiated by the Labour and Finance Ministries and the country's antitrust authority, the Slovak Antitrust Office.

SLOVNAFT'S high spirits from record profits in 2004 did not last long for the major oil refiner. Late December, the country's Finance Ministry decided to fine Slovnaft for what they call "unjustified profit and abuse" of the refinery's industry monopoly.

Slovnaft claims that the Ministry's decision lacks legal merit and disregards market trade principles.

Slovnaft will have to pay Sk1.3 billion (€33.9 million) into state pockets based on an inspection initiated by the Labour and Finance Ministries and the country's antitrust authority, the Slovak Antitrust Office.

The audit concludes that the refinery violated price discipline by selling fuel at a price that brought the company unjustified profit. The audit also says that Slovnaft provided Slovak authorities with incorrect data.

Slovnaft continues to argue that the Finance Ministry's calculations are misleading. The company submitted original documentation in addition to objections over the audit findings.

Slovnaft claims that submitting incorrect data was a "technical mistake". However, the mistake comes with a hefty price tag: Slovnaft will pay a Sk1 million (€38,600) fine for the error.

The Finance Ministry said that the new documentation submitted by Slovnaft does not change the results of the original audit.

"Slovnaft did not provide any new information that would change the results. Most of [Slovnaft's] claims lacked any objective basis; rather, they were subjective and unfounded opinions that in no way challenge the audit's findings. Thus the auditing authority will stick to its initial conclusions," Peter Papanek, advisor to the Finance Minister, told The Slovak Spectator.

According to the audit's findings, unjustified prices resulted in additional profits of Sk252 million [€6.5million] in 2002, Sk276 million [€7.1 million] in 2003 and Sk824 million [€21.3 million] in the first nine months of 2004.

The audit also shows that Slovnaft tripled its total profits in 2004. In the first nine months of 2004, Slovnaft recorded Sk1.9 billion (€49 million) in profits, a figure that exceeds 16 percent of the company's costs. In comparison, for the same period in 2003, the company made a profit of Sk842 million [€21.8 million], or 7.16 percent of its costs. In 2002, also for the same period, it made Sk516 million [€13.7 million], or 5 percent of its costs.

The Finance Ministry declared that Slovnaft's investments in its production and employees was illegal as well. Slovnaft objected, saying that it is precisely those long-term investments that are responsible for the company's increased profits.

Minister Ivan Mikloš said the Finance Ministry launched the price inspection in early November based on an unambiguous opinion on Slovnaft's dominant market position by the antitrust authority.

"The Antitrust Office's stance justifies the price inspection," said Mikloš.

Corporations have been unhappy with Slovnaft's price policy and high excise taxes on fuel saying that both strongly discourage business.

Slovnaft started the new year by pushing down its prices by 60 hellers for gasoline and Sk1.10 for diesel, resulting in the lowest prices over the past one and a half years.

However, business leaders are not happy with high excise taxes on fuel, either.

"Slovakia has one of the highest excise fuel tax rates in Central and Eastern Europe. It is higher than what the European Union recommends. We see ample room for decreasing [the taxes]," Executive Director Tibor Gregor of Club 500 told The Slovak Spectator.

Club 500, which unites businesses that have more than 500 employees, has been protesting against fuel prices since March 2004, blaming the rising costs on Slovnaft's unfair pricing policies and high excise taxes.

The Finance Ministry acknowledges that fuel prices seem high in Slovakia, but it maintains that the matter has nothing to do with excise tax levels.

The excise tax on one litre of gasoline in Slovakia is Sk18.50 (€0.46); it is slightly lower on diesel, at Sk17.30 (€0.43).

Finance Ministry advisor Papanek told The Slovak Spectator that taxes alone do not determine the end price a customer pays for fuel.

"It is the producer and distributor who establish the end price," he said.

He also told the press that Slovakia, along with other EU countries, promised not to unilaterally lower excise fuel taxes because of growing oil prices. Too much disparity between national fuel prices would create imbalances.

The European Commissioner for exchange rates, Joaquin Almunia, insists that cutting excise fuel taxes is a matter that requires consultation with other EU ministers.

"The Labour Minister [Ľudovít Kaník] considers Slovnaft's ability to increase profits by 350 percent year-on-year in times of record oil price hikes shocking. Inflated fuel prices reduce labour mobility and impact everyone's cost of living.

The Labour Minister will ask the government to use its authority to prevent Slovnaft from abusing its dominant market position," Labour Ministry spokesman Martin Danko told the press.

Analysts agree that the government has a right to investigate pricing policies put in place by dominant private companies, according to antitrust laws. However, some analysts are sceptical about the results of exercising such control.

"I think that if the government had regulated fuel prices this year, prices would be very similar to what we are experiencing now," Tatra banka analyst Robert Prega told The Slovak Spectator.

Says Juraj Kotian, analyst with the Slovenská sporiteľna bank, "It is in the Finance Ministry's best interest to determine what is behind the high cost of fuel - excise taxes, rising oil prices or ruthless profit margins. If the state authorities prove that profit margins are to blame, they will definitely bury the voices calling for reduced excise taxes."

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