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YEAR IN BUSINESS - REVIEW

2007: Investments kept pouring in

January

Illustrative stock photo(Source: SITA)

January

THE V1 nuclear power plant at Jaslovské Bohunice shut down its first block on December 31. Under pressure from the EU in 1999, the Slovak government approved a plan to decommission the two units of the V1 nuclear power plant in Jaslovské Bohunice: one in 2006 and one in 2008. Prime Minister Robert Fico said the shutdown marked the beginning of an era of energy dependence on external sources in Slovakia. He described the commitment to shut down the two units as an act of energy high treason by the previous government. Costs for the preparation and the shutdown of the V1 nuclear power station were estimated at Sk16 billion (€482.6 million). Liquidation of the facility was expected to require an additional Sk25 billion.

The Slovak Antitrust Office (PMÚ) levied a Sk300 million fine on Bratislava-based crude oil refiner Slovnaft on January 2. The authority concluded that the company had abused its dominant position to overcharge a wholesale customer. Slovnaft said it would appeal the verdict.

A trade dispute between Belarus and Russia cut off the flow of oil through the Druzhba pipeline on January 8, causing collateral damage for Slovakia and other European states. Slovnaft was running on the company’s oil reserves. The company and the government started preparing to use crude oil from the state’s material reserves.

The PMÚ announced that it would not allow British retail chain Tesco to buy out supermarkets in Slovakia owned by French chain Carrefour. The PMÚ analysed the possible impact of the move on three local markets – Bratislava, Žilina and Košice – where Tesco and Carrefour’s activities in Slovakia currently overlap. The bureau claimed that if the deal was allowed to go through, Tesco would be able to create or strengthen a dominant position.

Slovakia posted a preliminary trade surplus of Sk3.982 billion in January – its first monthly trade surplus in nearly three years, the Slovak Statistics Bureau reported on March 14. January’s trade balance was more than Sk12 billion higher than in January 2006.

February

Slovakia filed its first complaint against the European Commission on February 7 over reduced limits on carbon dioxide emissions. Slovakia asked for permission to produce 41.3 million tonnes of carbon dioxide annually between 2008 and 2012, but the EC changed its limit to 30.9 million tonnes. Slovakia filed the complaint after its talks with Brussels failed. Fico stated that reducing CO2 emissions by more than 10 million tonnes would cause great difficulties in Slovakia’s economy. Later in February, steel producer U.S. Steel Košice joined the Slovak government and filed a similar complaint against the EC.

Igor Barát, previously the spokesman of Slovakia’s central bank, became the new government proxy for euro introduction as of February 15. Barát replaced Ivan Štefanec, who resigned from the post in July 2006 after the new government took power.

Fico announced that the country’s dominant power- producer, Slovenské Elektrárne (SE), would complete the third and fourth blocks of the Mochovce nuclear power plant. The Italian firm Enel, which holds a 66-percent stake in SE, announced the decision 10 months after it joined SE. The third and fourth blocks could start electricity production in 2012. The head of Enel, Fulvio Conti, said SE would invest approximately Sk62 to Sk63 billion (€1.9 billion) into the completion of Mochovce.

Fico blocked the efforts of Transport Minister Ľubomír Vážny and the railway transportation company Železničná Spoločnosť Slovensko (ŽSSK) to make rail travel more economical by cancelling some loss-making regional train lines. ŽSSK had planned to cancel 22 little-used regional lines as of March 4, but Vážny said the prime minister intervened. Fico said that ŽSSK had received what it asked for in this year’s budget – Sk5.6 billion – so it had no business cutting service, the minister said. “Man proposes, the prime minister disposes,” Vážny said.

March

The Bratislava I district court agreed to begin bankruptcy proceedings for Slovakia’s national carrier, Slovenské Aerolínie (SA), on March 12. SA had already cancelled all regular flights from Bratislava to Brussels and Moscow as of January 31. The cancellations came after SA’s majority owner, Austrian Airlines, took back two planes it had made available to SA, citing the “reluctance of the Slovak government to settle hidden liabilities at the company”. The move left SA with just one airplane. Austrian Airlines gained a 62-percent stake in SA in 2005 in a controversial basic capital increase that was seen as a back-door privatisation.

The Korean electronics firm Samsung and Slovak Economy Minister Ľubomír Jahnátek announced in mid-March that Samsung would build a new €400-million factory in Slovakia. The investment was expected to total approximately Sk16 billion. The new LCD monitor production in Voderady, near Trnava, would give jobs to 4,500 people. The company has already been operating a Slovak plant in Galanta.

The European Central Bank announced on March 17 that the EU, at Slovakia’s request, agreed to move the central parity of the Slovak crown from Sk38.455 per euro to Sk35.4424 per euro, which is an appreciation of 8.5 percent. The Slovak crown was allowed to fluctuate plus-or-minus 15 percent from the central parity in the ERM II (European Exchange Rate Mechanism), which is called the waiting room for the euro. The new limits for the crown are now Sk40.759 per euro and Sk30.126 per euro. Slovakia joined ERM II in November 2005.

The National Bank of Slovakia (NBS) cut its key interest rate for the first time in 2007 on March 27. The two-week sterilisation repo rate decreased by 25 basis points to 4.5 percent, the one-day refinancing repo rate decreased by a 25 basis points to 6.0 percent, and the one-day sterilisation repo rate was reduced by 75 basis points to 2.5 percent.

April

UniCredit Bank, created from the merger of UniBanka and HVB Bank, entered the Slovak market on April 2. It became the fourth-biggest bank in Slovakia, with 93 branches across the country. UniBanka and HVB Bank Slovakia’s shareholders officially approved the merger on February 20.

PSA Peugeot Citroen announced that it would not increase production at its plant in Trnava, as originally planned. The original plan was to increase production capacity to 450,000 vehicles from the current 300,000, but then factory chief Alain Baldeyrou said such an increase was no longer on the table.

Talk about tax cuts angered Fico, who referred to the opposition’s suggestion to reduce income taxes from the current 19 to 17 percent as “sabotage”. “If these gentlemen are so smart, they should have introduced a 17-percent tax rate when they were in power and not sabotage the country now,” Fico said. Július Brocka of the Christian Democratic Movement (KDH), Iván Farkas of the Hungarian Coalition Party (SMK) and Ivan Mikloš, the former finance minister and one of the originators of the 19-percent flat tax, which put Slovakia’s name on the global investment map, said that the country could still afford further tax reductions.

The NBS again decided on April 24 to lower key interest rates by 0.25 percentage points. This means that the rate for two-week repo tenders went down to 4.25 percent, while the rate for overnight refinancing operations was cut to 5.75 percent, and the rate for overnight sterilisation operations fell to 2.25 percent.

May

Fico and representatives of Slovnaft met several times to discuss fuel prices. “Despite the fact that fuel prices have increased in neighbouring countries, the Slovak government stands firm in its view that Slovnaft’s increased profits and the firming of the Slovak koruna don’t provide any reason for raising fuel prices,” Fico’s spokesperson Silvia Glendová said. The government believed the situation allowed for a slight reduction in fuel prices, she said. However, Slovnaft argued that price development on the Slovak market should correspond with price development on global markets. The refinery said that prices in Slovakia were growing at a slower pace.

“Tax Freedom Day”, a symbolic marker used to measure each country’s overall tax burden, fell on May 25 in Slovakia this year, said the F. A. Hayek Foundation and the Association of Slovak Taxpayers. This means that Slovak taxpayers’ earnings between January 1 and May 24 were in effect handed over to the state, while taxpayers would be able to keep all the money they earned for themselves as of May 25. In 2006, Tax Freedom Day fell on June 1.

The TRI R joint-stock company signed an agreement to buy Rádiokomunikácie, a former unit of the dominant fixed-line operator Slovak Telekom, taking over TV and radio broadcasting and the company’s RK Tower. Slovak Telekom signed a framework contract on the purchase of TBDS, which consists of Rádiokomunikácie and RK Tower, with the new owner on May 17. Neither the purchase price, nor any other terms of the transactions were disclosed.

June

Slovak Agriculture Minister Miroslav Jureňa and Polish Minister for Farming and Rural Development Andrzej Lepper signed an intergovernmental agreement on how their respective traditional cheese products would be labelled on May 28. It was agreed that Slovakia would use the registered trademark “slovenský oštiepok,” while Poland would use “oscypek” for the countries’ similar salty white cheeses.

The Cabinet approved on June 27 the transfer of a 34-percent stake in Slovak Telekom from the Transportation Ministry to the government privatisation agency, the Slovak National Fund.

Parliament approved a revision to the Labour Code on June 28 that gave workers more protection and trade unionists more power. The new Labour Code granted workers more generous severance conditions and introduced a definition of “dependent work”, which can only be carried out by employees and not contractors. The new Labour Code was severely criticised by employers.

July

Viliam Ostrožlík, a member of the board at the National Bank of Slovakia, was appointed the central bank’s vice-governor for monetary policy on July 11.

VÚB Banka signed a contract on July 20 to purchase a majority stake in the B.O.F. leasing company. Neither company revealed the terms of the deal.

August

The Cabinet approved new legislation on August 2 that would let the state hold corporate entities criminally responsible for illegal actions. Former justice minister Daniel Lipšic previously suggested sanctions for companies, but his attempts to push forward legislation on the matter failed. Current Justice Minister Štefan Harabin said criminal responsibility for corporate entities must be enacted in law, but he said he did not know how.

One in five Slovaks admitted to giving a bribe, according to a corruption survey published by the Hospodárske Noviny economic newspaper on August 13. Bribes were chiefly given by the older generation, creative specialists, businesspeople and trades workers. On the other hand, young people and people with an elementary school education most often refused to give bribes. Two-thirds of people believed that bribery mainly flourishes in the health sector, judicial system and police.

Russian oil company Promneftstroi was reported to be the new owner of a 49-percent stake in Slovak oil pipeline operator Transpetrol. Promneftstroi, which allegedly acted on behalf of Russian oil company Rosneft, bought the foreign assets of bankrupt oil company Yukos – including the Transpetrol shares – at an auction on August 15. The Slovak government, which owns the other 51 percent of the Transpetrol shares, did not take part in the auction, and the Economy Ministry remained cautious about commenting on the developments. Promneftstroi won the auction of the Yukos Finance BV assets, paying US $305 million (Sk7.7 billion, or €227.5 million) for the bankrupt oil firm’s foreign units. However, a source close to Rosneft told Reuters that if the events took place as described by Interfax, it was merely a technical move and Rosneft would be the ultimate owner of Yukos’ assets.

Slovak Telekom paid a fine of Sk1 million for not letting its clients keep their telephone number when they wanted to switch to another operator.

Fico said there was a growing risk that pension savers in the capitalisation pillar would not even receive the sum they first contributed to their accounts if pension fund management companies’ investments do not achieve their expected growth. He later compared pension fund management companies to pyramid schemes and provided the media with salary figures for the companies’ managers. According to the chairman of the Pension Fund Management Companies Association (ADSS), Peter Socha, the losses of pension fund management companies could not harm pension savers. Pension savers’ money is deposited in pension fund accounts and the economic performance of the companies has absolutely no effect on their clients’ savings, he said. The NBS also supported the companies, stating that they are safe institutions.

After two ill-fated tender attempts, the Finance Ministry finally picked an agency to run a massive campaign to educate the country about the euro, the currency Slovakia hopes to adopt in early 2009. The consortium of Creo/Young & Rubicam and affiliated company Mediaedge:cia got the contract for the information campaign worth Sk134 million (€4 million), not including VAT.

September

Slovakia got its first bank ombudsman, Eva Černá. Bank clients who fail to solve their disputes with the bank can turn to the ombudsman for help. Based on the opinions of her team of financial and legal experts, the ombudsman will issue a recommendation to solve the problem.

Slovakia met its euro inflation targets for first time on August 24, the Statistics Office reported in September. EU-harmonised inflation reached 1.2 percent year-on-year in August. Slovakia’s inflation rate was one of the lowest in the EU-27 that month, said Juraj Valachy, an analyst with Tatra Banka.

Steelmaker U.S. Steel Košice officially opened its new hot dip galvanising line on September 25. Construction on the line began in June 2005 and the company spent a total of US$160 million on it (about Sk3.87 billion). Its capacity was 350,000 tonnes of hot dip galvanised body sheets for the automotive industry. About 75 percent of the production that uses the new line will go to the auto industry. The new line created about 150 jobs.

The government approved a new law on September 26 that was designed to ensure a smooth transition from the Slovak crown to the common euro currency in Slovakia. The legislation dealt with dual circulation, dual pricing, rules for rounding up and down prices in converting crowns to euros, and rules for exchanging cash in crowns after the Slovak currency is stopped.

Slovak Telekom escaped paying a record fine of Sk885 million (€25.9 million). On September 28, the Regional Court in Bratislava cancelled a decision of the Antitrust Office that ordered Slovak Telekom to pay the fine for misusing its dominant position on the market in 2002. The Antitrust Office does not have the right to appeal. This means that it would have to take up the whole case from the very start, said a spokesperson for Slovak Telekom, Jana Burdová.

October

The monthly minimum wage in Slovakia went up by Sk500 to Sk8,100 (€244.60) as of October 1. Social insurance premiums and health insurance premiums would rise as well, since the minimum wage serves as the lowest base for calculation of these.

Slovenské Elektrárne announced on October 22 that it had taken out a seven-year revolving-loan contract worth €800 million, the most expensive company financing project in the history of Slovakia. SE said it would use the loan to cover the financing of its investments, which were expected to reach Sk110 billion (€3.27 billion) by 2013. SE general manager Paolo Ruzzini said the most important energy project in Slovakia was to finish construction of the third and fourth blocks of the Mochovce nuclear plant. The loan, signed between SE and several banks, was to be drawn as of 2008.

The state announced plans to build 151 kilometres of highways and dual carriageways using the public-private partnership model. The government proxy for road infrastructure construction, Igor Choma, announced on October 23 that the cabinet agreed to stick to its plan despite the Finance Ministry’s warning that 95 kilometres would be more realistic.

The Slovak cabinet approved a minimum network of health care facilities, which set out the number of public hospitals that health insurance companies must cover with their contracts. The new list, approved on October 24, included 34 state-run hospital facilities. Originally, the network consisted of 42 hospitals that were deemed necessary to provide urgent health care.

Parliament approved the revision to the law on health insurance companies on October 25. As of 2009, heath insurance companies would have to use all of their profits from public health insurance to finance the provision of health care services. The amended law also stated that the percentage of funds destined to cover the administrative costs of health insurance companies would be lowered from four percent to 3.5 percent of collected health insurance premiums. The law faced heavy criticism from the opposition. Private insurers called the law hostile to the investments of their major shareholders and said they planned to take Slovakia to international courts.

The Public Procurement Office (ÚVO) turned down objections filed by failed bidders in the tender to provide the euro information campaign in Slovakia. The group of applicants – Publicis/Knut, MUW/Saatchi & Saatchi and Unimedia – objected to the fact that the procedure for evaluating the tender bids did not conform to the procedure set in the tender terms, which meant the principles of transparency, non-discrimination and anonymity could be violated. The ÚVO rejected the objections as baseless.

Investment incentives will be directed mainly to regions with high unemployment rates and investments with a higher added value, according to the draft bill on investment incentives that parliament approved on October 29. The bill called for investment incentives to go to projects in the areas of industrial production and technology, strategic services and tourism centres.

Eurostat asked Slovakia to inflate its general government deficit for 2006 by 0.3 percentage points to 3.69 percent of the GDP, requesting that the country include the performance of the public service Slovak Radio and Slovak Television in the general deficit. The country is still waiting for Eurostat’s decision whether the National Highway Company should be calculated into the general government deficit as well. Some media suggested the revision could throw a major hurdle between Slovakia and the euro, however market watchers remained optimistic. The country’s Finance Ministry was also quick to announce that even with the Eurostat adjustment, the country would keep its public finance deficit for 2007 under three percent of the GDP.

Parliament approved the long-discussed and highly criticised amendment to the Social Insurance Act on October 30. Students and people born after 1986 who enter the labour market for the first time were given a six-month period in which to decide whether to sign up for the private second pillar of the pension system. Until now, they have been obliged to join the second pillar. However, in a chaotic vote on various government and opposition amendments, parliament approved two contradictory amending proposals.

November

A Dutch court decision meant the Slovak government, which owns a majority share in the Transpetrol pipeline operator, could come back into play as a prospective buyer of the remaining 49-percent stake in the company. A court in Amsterdam recognised that the people who favoured a deal with Fico’s cabinet – which wants the shares back – were the legitimate heads of Dutch shareholder Yukos Finance. According to the Economy Ministry, it was not clear what impact of the court verdict would have on an auction held earlier this year by Yukos receiver Eduard Rebgun, who sold Yukos Finance for Sk7.6 billion to Promnesfstroi.

The largest air carrier flying out of Bratislava, low-cost airline SkyEurope, cancelled flights to the Swiss city Basel, Amsterdam and some holiday resorts. SkyEurope moved a significant number of its flights from the Bratislava airport to Vienna, meaning lower incomes ahead for Bratislava.

On November 12, Fico led negotiations with representatives of food chains operating in Slovakia. Fico had repeatedly accused retail chains of taking advantage of a global spike in food prices. The Economy and Agriculture Ministries prepared a bill that was designed to prevent retail chains from abusing their market position.

The Transportation Ministry released the public-private partnership (PPP) tender for the first package of highway sections on the European Union Official Journal’s public procurement website on November 17, inviting companies and consortiums to submit their bids by January 8. This was the first PPP project the country has embarked on. The winner of the tender would plan, construct, finance, operate and set up maintenance for five stretches of the D1 highway, covering a total distance of 74.84 kilometres. The contract would be signed for 30 years.

Prices of cigarettes and tobacco products in Slovakia were approved to go up in 2008. President Ivan Gasparovič signed an amendment to the law on excise tax on tobacco products on November 19, which introduced higher tax rates. As of January 1, 2008, the minimum excise tax per cigarette would increase from Sk1.70 to Sk2.10.

Getrag Ford Transmissions Slovakia officially opened its new transmission factory in the Kechnec industrial park in eastern Slovakia on November 22. The Kechnec-based plant was planned to produce 110,000 gearboxes for cars and 100,000 motorcycle transmissions each year. It would hire up to 450 employees.

Slovak MPs on November 27 approved the amendment to the Social Insurance Act – which President Ivan Gašparovič returned back to parliament – for a second time. The president returned the amendment after MPs approved two contradictory provisions.

Parliament approved a draft amendment to the law on value added tax (VAT), which should shift books from the basic VAT rate of 19 percent to the 10 percent category, on November 28. According to the amendment, lower VAT on books would cause a shortfall in tax revenues of Sk137 million in 2008, Sk143 million in 2009 and Sk150 million in 2010.

As of July 2008, suppliers and consumers would pay excise tax on electricity, coal and natural gas, according to the draft bill that the Slovak Parliament approved on November 28. Households were to be exempt from this tax. The tax would be two hellers per kilowatt hour from July 1, 2008 until the end of 2009. As of 2010, the tax would double. The tax would not apply to energy produced from renewable resources.

Slovakia and Austria were close to agreeing on some form of cooperation between the Bratislava and Vienna-Schwechat airports, Austrian financial daily Wirtschaftsblatt reported. It stated that Schwechat would most likely take control of the Bratislava airport, either through a 20-year agreement or by establishing a joint venture. A spokesperson for the Slovak Transportion Ministry confirmed the talks, but denied that a deal was expected soon.

December

Apartment prices rose dramatically during the third quarter of 2007, the National Bank of Slovakia reported in December. The average price for a flat or house reached Sk38,728 (€1,160) per square metre, a 25.4-percent increase from the third quarter last year. Real estate prices shot up 117 percent from the third quarter of 2002. The NBS monitors real estate prices with the National Association of Real Estate Agencies.

Parliament approved the draft budget for 2008 on December 4. The state budget projects the general government deficit at Sk31.981 billion, which is a decrease of more than Sk6.4 billion compared with the 2007 budget. Revenues were projected at Sk348.252 billion and expenditures at Sk380.233 billion. The general government deficit was not expected to exceed 2.3 percent of the GDP. Fico also got parliament’s support for his cabinet to keep ruling, as the budget vote was tied to a vote of confidence in the government.

The European Commission said on December 7 that it increased Slovakia’s carbon dioxide emissions limit for 2008 to 2012 to 32.6 million tonnes, which is 1.7 million tonnes more than the originally approved emissions cap. The Slovak Environment Ministry said in a statement that the increase did not cover Slovakia’s needs. In its efforts to reach an out-of-court settlement, Slovakia requested an increase of at least five million tonnes annually.

Parliament passed a draft bill introducing one-off extraordinary measures to accelerate construction of some highways and dual-carriageways on December 11. However, the draft bill may end up in the Constitutional Court. Opposition MP Daniel Lipšic said the law contradicts the Slovak constitution, as it allows highway construction on land where ownership rights have not been settled – which means on private land that has not been bought or expropriated yet.

Slovakia was still searching for a contractor to build and operate an electronic toll system for Slovakia’s road network in mid-December. The National Highway Company (NDS) published the first tender in July 2007. The tender took three attempts to get rolling. A total of eight bidders delivered applications to participate in the third tender. The NDS dropped five of them, citing incomplete data from the bidders. The five-member Slovak-Swiss consortium ToSy.sk and the two-member SanToll filed appeals with the Public Procurement Office.

However, NDS director Igor Choma said in December the third tender is running according to plan. Electronic toll collection is to start functioning in Slovakia on January 1, 2009 for motor vehicles over 3.5 tonnes on a network of roads and highways of about 2,400 kilometres.

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