Staying ahead of the competition

A competitor always wants to stay one step ahead of the competition. Though Slovakia’s adoption of the euro and the country’s higher labour productivity have provided it with a competitive advantage over other central and eastern European countries, if growth stops in other significant indicators or if these indicators improve less vigorously, another regional country could easily surpass Slovakia.

A competitor always wants to stay one step ahead of the competition. Though Slovakia’s adoption of the euro and the country’s higher labour productivity have provided it with a competitive advantage over other central and eastern European countries, if growth stops in other significant indicators or if these indicators improve less vigorously, another regional country could easily surpass Slovakia.

Moreover, Slovakia’s continuing problems with corruption and enforceability of its laws can no longer be considered as missteps of an adolescent country emerging only since 1993 – they now present a serious challenge that Slovakia, as a maturing democracy, must directly address.

Even though the government of Prime Minister Iveta Radičová has not heralded any radical reforms for its four-year term, it is promising a lower public finance deficit, a healthier business environment, more active civil society, a political and public environment less tolerant of corruption and cronyism, a better judicial system, enough new jobs to prevent social strife, progress towards a more innovative society, and access for citizens to quality health care. At least this is how Radičová summed up the priorities of her government when appealing for the parliament’s endorsement of the governing coalition’s programme statement earlier this year.

Even if no radical reforms have been announced, the expectations of the business community seem quite positive as indicated by the third quarter 2010 Business Sentiment Index prepared by the Deloitte accountancy firm: 42 percent of the surveyed executives said they have positive expectations for the regulatory environment in Slovakia and only 13 percent expect negative developments in the future. Slovak CEOs appear more optimistic than CEOs in other countries of the region according to the survey. This might be attributed to the fact that two parties of the current coalition, the Slovak Democratic and Christian Union (SDKÚ) and the Christian Democratic Movement (KDH) were part of the government between 1998 and 2006, a period which has been termed a reformist era in Slovakia’s modern history and which earned the country the title of the “Tatra Tiger”.

While the government’s new programme statement includes several specific suggestions presented by the Slovak Business Alliance (PAS), the four-party coalition government will be under pressure to perform from both public opinion and a strong opposition in parliament represented by Smer, the party of former prime minister Robert Fico, and the nationalist Slovak National Party (SNS).

Strength of the business environment

Several laws adopted between 1998 and 2006 simplified the tax system, made the labour market more flexible and geared the country for the arrival of many large investors: first in the automotive industry and later in the electro-technology industry. Thus, Slovakia gradually developed an economy that had the highest share of people employed in industrial production in the entire European Union and the highest per capita production of automobiles in the world.

German, Austrian and French investors have listed Slovakia’s positive factors as primarily its membership in the EU, a labour force willing to work hard at a relatively moderate cost, and a predictable tax system.

“The introduction of the euro in particular turned out to be a favourable criterion for the Slovak Republic during the [economic] crisis,” said Markus Halt of the German-Slovak Chamber of Industry and Commerce in an earlier interview. “Investors also appreciate the motivated and qualified workforce at relatively low costs.”

Hourly wages are among the lowest in the region and average labour productivity reached the level of 79.1 percent of the overall productivity of the EU in 2009. For Slovakia, among the newer EU members, this is the fourth best result following Malta at 88 percent, Cyprus with 87.3 percent and Slovenia at 84.9 percent.

UK businesses operating in Slovakia also praise the country’s economic dynamics, tax system, friendly business climate, central geographic location and its competitive costs for operating a business.

“Slovakia is not a huge market but offers good opportunities, mainly to those who would like to use it as a springboard to either the west or the east,” Eva Majerníková, senior trade and investment adviser at the UK Trade & Investment department of the British Embassy in Bratislava, told The Slovak Spectator. “The economy has been growing, despite the economic downturn. And the latest advantage is Slovakia’s membership in the eurozone.”

In the pre-crisis period before 2009 Slovakia’s economy was among the fastest growing within the European Union and the forecasted GDP growth for 2010 is the strongest in the EU.

Business environment challenges

Enforcement of laws, elimination of corruption, and construction of infrastructure topped the list of issues that require urgent attention by the Slovak government, according to a survey conducted among German, Austrian and French investors in 2010. Nevertheless, 92 percent of them said that they would again pick Slovakia as the destination for their investment.

“[Decisions in] lawsuits need to be accelerated,” said Halt, commenting on the results of the annual survey conducted among 114 major German, Austrian and French investors. He pointed to the ineffectiveness of the justice system and said this often prevented companies from enforcing legal claims within a reasonable period of time.

Halt added that in order to reduce corrupt practices in the public sector, government tenders need to be fully transparent based on international standards. He also described the current state of infrastructure in central and eastern Slovakia as poor and said investors need a high quality transportation network throughout the country.

The annual survey was organised by the German-Slovak Chamber of Commerce, the Slovak-Austrian Chamber of Commerce, the commercial section of the Austrian Embassy and the French-Slovak Chamber of Commerce. In another survey conducted among its members, the American Chamber of Commerce (AmCham) reported that corruption, along with non-transparent public procurement, were the biggest thorns in the side of businesses operating in Slovakia.

Jake Slegers, the executive director of AmCham, told The Slovak Spectator in an earlier interview that the survey revealed that lack of transparency and corruption are two of the most important concerns directly impacting foreign investors in Slovakia.

“The World Economic Forum (WEF) identified the high level of corruption and cronyism as one of the top barriers to business and investment along with low enforceability of laws and ineffective functioning of public institutions, a high administrative burden, lagging education, restrictive labour legislation and a lack of transparency in public procurement,” Robert Kičina, the executive director of the Slovak Business Alliance, told The Slovak Spectator.

Slovakia was ranked 60th in the world in the World Economic Forum’s competitiveness chart for this year and four EU countries lagged behind Slovakia: Romania at 67th, Latvia at 70th, Bulgaria at 71st and Greece at 83rd.

Ľubomír Jahnátek, the economy minister in the previous government, expressed incredulity about the report and attributed Slovakia’s lower ranking for 2010 to political antipathy by the Slovak Business Alliance, WEF’s partner in Slovakia, towards the past government. Kičina responded to the criticism by saying that PAS was only responsible for coordinating the survey and in doing so it picked 500 large and 500 small and medium-sized businesses to participate in the survey based on the WEF’s methodology.

He further explained that 220 firms were then randomly picked from the sample and given a unique access password to directly and confidentially complete a questionnaire on the WEF’s website.
“PAS does not have a chance and has never had any intention of influencing the structure of the respondents,” Kičina told The Slovak Spectator. “It [PAS] does not access individual answers of the businesses [participating].”

A common denominator in all these international comparison surveys has been that Slovakia’s position in the rankings has declined and many of the positive efforts launched in previous years have fallen by the wayside.

The new government responds

“Zero tolerance of corruption and securing access to justice,” has become one of the catchword phrases of the new government. During its first 100 days in office, Radičová’s government passed a rule that requires all contracts financed from government funds to be published in a Central Registry of contracts beginning January 1, 2011. Moreover, no government contracts will become valid until they are posted online for public review and additionally the contracting government institution has the right to terminate any contract within 10 days of its signing for any reason.
“The proposal submitted by the government will significantly increase public control over the management of public funds and public property,” said Peter Wilfling, a lawyer with the Via Iuris association which has been advocating much wider public access to government-related information. According to Wilfling, the proposal will help considerably in preventing corruption and the uneconomical use of public funds and property.

Lucia Žitňanská, Slovakia’s Justice Minister, has also initiated several changes within the judiciary in reaction to the criticism of a slow pace of justice in the country. These include changes in the composition of the country’s Judicial Council, amending a law that governs judges, having all verdicts published online, and preventing former judges from returning to the courts after they have been in appointed political positions. According to the minister these changes would further open the judiciary to public control.

Highways and infrastructure

Slovakia’s highway infrastructure has regularly been among the top concerns of the business community. Just as almost every government has done since the independence of the country, the current government has announced a goal of completing a cross-country highway linking Bratislava with the eastern second-city of Košice by 2014, though the new government says this might not necessarily consist entirely of high-speed motorways.

Highway construction was a priority for the former government and that government, headed by Robert Fico, opted for public-private partnership (PPP) projects as the method to accomplish the goal of an east-west highway connection. The new Transport Minister, Ján Figeľ, has said that his ministry plans to continue building highways via PPP projects though he has revisited several PPP-related decisions made by his predecessor.

“I want to have them [PPPs] as one of the pillars of road network construction,” Figeľ said, as quoted by the Sme daily on August 3, adding that these kinds of projects will be combined with EU financing and funding coming from the country’s private second pension pillar.

Burdensome Slovak bureaucracy

Government bureaucracy continues to present a considerable burden to business, as it has for some time. The World Bank and PricewaterhouseCoopers in their joint study Paying Taxes ranked Slovakia 119th on their chart assessing the overall simplicity of countries’ tax systems.

According to Clare Moger, Director of the Tax Department at PricewaterhouseCoopers, Slovakia’s fairly low corporate income tax rate helped the country remain attractive to investors during the economic downturn as did, the relative simplicity of its income tax system.

Moger said however that income taxes are only one aspect of taxes and the country’s payroll taxes cause Slovakia’s relatively low ranking because employers’ contribution rates for employees’ social insurance benefits are higher compared to other countries in the region.

Economy Minister Juraj Miškov said that his ministry aspires to reduce the administrative burden by 25 percent by 2012.

Labour market and education

The media headlines of 2008 were about a lack of qualified labour threatening economic growth and labour shortages pushing wages up during those times when Slovakia’s economy was booming. Even though the unemployment rate was nearly 10 percent at that time, most of the long-term unemployed then consisted of young people who did not have the required qualifications in the labour market or those who did not have the necessary experience.

Even though the economic crisis has somewhat stabilised the problem, Slovakia might again face a shortage of qualified labour in certain sectors as a consequence of the failure of the education system to adjust to the needs of the labour market and insufficient investments by the government and the private sector in education, research and development.

“Production companies, in particular, might not find all the skilled workers they need for expansion,” said Markus Halt of the German-Slovak Chamber of Industry and Commerce. “Another important factor is within the Slovak system of vocational training which does not prepare young people well enough for working life. The major problem of the educational system is the poor link-up between theory and practice. Graduates thus very often lack the practical skills needed for their profession.”

A new law on professional training passed in 2009 aims to create more bridges between employers and founders of various kinds of vocational schools; an approach which could help to match the demand and supply in the labour market. Critics say that vocational training has been neglected over the past two decades in Slovakia and what has been offered in vocational education has had the tendency to move towards just general training. The labour market has shown rather clear warning signs that there is an imbalance.

The global economic downturn did press the previous government to adopt several laws that have had an impact on the labour market. Labour market experts welcomed some of these changes but suggested that measures such as the so-called ‘flexi-account’ which was designed to handle reduced work demands will only have a positive impact during periods of economic crisis.

The ‘flexi-account’ helped employers and employees adjust to the difficult economic environment, particularly in 2009. Within this scheme workers could stay at home and receive wages when their employer did not have orders and could not operate. As production resumed, workers were expected to pay off previously compensated hours in their ‘flexi-account’ that were not worked through overtime hours.

Calls for more flexibility in the country’s Labour Code and a more systematic approach in dealing with the problem of the long-term unemployed have grown stronger. Even if Slovakia’s annual growth in GDP is slowly reaching its pre-crisis levels, growth in employment has not experienced a significant revival. Experts have said that the country’s unemployment rate might return to its pre-crisis level only within the next five years. However, an October analysis prepared by Slovenská Sporiteľňa bank stated that this time period could be shortened by strengthening the stability and predictability of the labour market, bringing down administrative barriers and simplifying the hiring of new employees, along with allowing more part-time employment.

Currently, a vigorous debate on the nature of changes in Slovakia’s Labour Code is taking place among employers, trade unions and the government. It is expected that a modified labour law – that could be effective from July 2011 if enacted by parliament – could make the hiring and layoff of employees easier for employers.

More information about Slovak business environment you can find in our Investment Advisory Guide.

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