MAJOR INVESTORS VOICE THEIR OPINIONS ON SLOVAKIA’S PROGRESS – AND ITS CHALLENGES

The view from the executive suite

Legislative stability with even-handed government policies and regulations, application of the rule of law by an independent and efficient judiciary, and an educational system more responsive to the needs of business: these are three areas that business leaders whose companies have made large investments in Slovakia see as critical elements of an attractive business environment – one that they expect the country to further nurture.

Legislative stability with even-handed government policies and regulations, application of the rule of law by an independent and efficient judiciary, and an educational system more responsive to the needs of business: these are three areas that business leaders whose companies have made large investments in Slovakia see as critical elements of an attractive business environment – one that they expect the country to further nurture.

The Slovak Spectator spoke with George F Babcoke, President of U.S. Steel Košice, In-Kyu Bae, President and CEO of Kia Motors Slovakia, Paolo Ruzzini, CEO of Slovenské Elektrárne, Achim Saul, Chairman of the Board of Directors of Slovenský Plynárenský Priemysel, Andreas Tostmann CEO of Volkswagen Slovakia, and Marek Šenkovič, Chief Economist of Slovnaft about the challenges facing businesses in the post-crisis era, aches in Slovakia’s labour market, ideas for improving the country’s educational system and goals outlined in the new government’s programme statement.

The Slovak Spectator (TSS): What are the most significant challenges of the Slovak business environment? What are the key challenges in your business sector?
George F Babcoke (GFB):
There are still issues connected to the crisis and, despite some improvement, we can still feel the uncertain economic situation in North America and Europe and consequently, in almost all business areas, we see a high degree of caution. Slovakia was ranked 60th among 139 countries featured in the Global Competitiveness Report 2010-2011 released by the World Economic Forum on September 9. This represents a major deterioration in the country’s competitiveness as Slovakia ranked 47th in 2009. The report identified inefficient government bureaucracy, corruption, and restrictive labour regulations as the most serious factors that adversely affect business in Slovakia. Failures in the "rule of law" and inefficiency in the judicial system taken together are ranked as one of the most serious and recognised challenges. There have been no radical improvements in delays in proceedings in the courts.

Achim Saul (AS): The operations of all business entities last year, and in the year soon to end, have been influenced by the global economic crisis which led to a drop in demand for goods and services. This also affected the gas market which “strongly” felt the consequences. Energy demand declined and this resulted in a surplus of natural gas in Europe. This surplus of gas, combined with the complete opening of the Slovak gas market, challenged SPP with a highly dynamic market environment. SPP mastered these challenges with new solutions, more efficiency, and more flexibility.

Paulo Ruzzini (PR) The most important challenge for the Slovak business environment is to keep a consistent growth rate going into the future through increased efficiency and competitiveness in the activities performed in various sectors of the economy. We are operating in an increasingly integrated European and global market with rising competition. In our energy sector only the most effective offers can succeed because customers are very selective and focused on reducing their costs. That is why Slovenské Elektrárne considers being highly competitive in its business a necessity.

In-Kyu Bae (IKB): I believe that the most significant challenge the Slovak business environment currently faces is its insufficient network of highways for an economy that has experienced significant growth over the last decade. A second challenge is to achieve better flexibility in the labour force during the period when there are large swings in the market in orders. As for the challenges within the automotive sector I think that to be competitive companies must strive to increase their productivity and efficiency. Producers in Slovakia must fight with high energy prices when compared to conditions in other countries. Strong competition is typical in our industry due to a high frequency of new models offered to customers. The product cycle is being reduced and companies must invest a lot into developing and designing new models to overcome their competitors.

Andreas Tostmann (AT): Slovakia has an export-oriented economy that is very much connected to the conditions in bigger markets. Increasing demand for our cars shows that the market is reviving but despite that we are being cautious. There is no reason for euphoria because global economic conditions remain uncertain. A qualified workforce in the labour market, an effective education system and graduates who are totally prepared for future jobs are a necessity for Slovakia and its economy’s future. Not only will schools, universities and the state need to take part to make this happen but private companies must work closely with them to reach this goal.

Marek Šenkovič (MŠ): It is certainly still the prevailing opinion among a significant part of the population and among politicians that it is no longer necessary to continue with careful cost and wage policies. It is obvious that today’s highly competitive battle between firms and even between states is exactly about production costs or the costs of operating the state. It is necessary to halt the further indebtedness of states because it limits the availability of loans and pushes up their cost for firms and households and at the same time it reduces the effectiveness of invested government funds. As well it sends out a negative signal for some part of the population that the state is able to solve the problems of economic recession and the state, however, cannot do that. By its stimuli the state is only able to create the illusion that it can do so.

TSS: What attributes do you think make Slovakia an attractive business destination?
GFB:
Slovakia has attracted a number of companies in the automotive and electro-technical industries with the help of investment stimuli that have markedly contributed to economic growth and employment. We appreciate the highly skilled, productive and creative labour force that understands that prosperity does not exist without large effort and hard work. Thanks to its membership in the EU, NATO, the Schengen area and the eurozone, we consider Slovakia a stable political and economic environment. After one of highest levels of economic growth within the EU over the past 10 years we expect economic growth to continue in the future. Slovakia has to continue utilizing its geographic position, but it requires more investment into its transportation infrastructure. Currently we have an under-utilized railroad transport system and overloaded road transport.

AT: Volkswagen came to Slovakia – at that time still Czechoslovakia – in 1991. Since then we have grown into one of the largest companies in the country and we are definitely a success story. Slovakia has several positives. It is in the centre of Europe on the logistical crossroad between west and east. From a financial point of view, Slovakia is in the eurozone and it has an attractive tax system which makes it interesting for businesses in the region. Also, the country’s tradition in mechanical engineering and its skilled and qualified workforce in the automotive industry is another positive.

PR: We have made huge investments here because we consider Slovakia a good place for business. A well-educated labour force, a strong tradition in technical fields and a network of qualified suppliers are big advantages for the country. The completion of the Mochovce nuclear power plant is one of only three new nuclear units under construction in Europe and we are developing the facility primarily with the contributions of Slovak companies. At the same time we have to stress that to keep Slovakia an attractive business destination there needs to be more stability and predictability in Slovakia’s regulatory and legal framework. The economic risks of a large investment, especially in the current global economic conditions, should be mitigated by the support of a predictable and fair regulatory environment.

AS: Slovakia is competing with the businesses environment of its neighbouring countries. It can continue to be attractive for investments and further development if the legislative environment is stable, if economic and regulatory policies are predictable, if laws are enforceable and if administrative barriers are removed. Slovakia has made progress in all these areas during past years. However, there are areas where improvements are still required. Take, for instance, the regulation of the natural gas business. This must be improved since it does not allow companies to have their costs covered along with a certain profit margin. Supplying gas in the household area is a loss-making activity that costs SPP tens of millions of euros each year. Furthermore, regulation of gas distribution does not give space for fair coverage of investment costs needed for the renovation of pipelines. Both issues must be improved in the future. Fair and stable conditions are crucial for both foreign and domestic investors alike and for large companies as well as small traders.

IKB: The overall economic conditions of the country along with the developed business environment and a good geographical location to reach customers are the country’s benefits. The fact that several large companies have established operations in Slovakia contributes also to the country’s attractiveness and transmits a positive message to potential investors. Furthermore, Slovakia is part of the EU and the eurozone with an advantageous location within Europe and good conditions for export.

TSS: The business community has been calling for thorough reform of the country’s educational system. What should be the main principles of this reform?
GFB:
Employers complain of students’ unpreparedness for the actual working environment. We are certain that the partial reform of the school system has been a good step. It needs to continue with curricula that respond to the needs of industries. For several years we have witnessed a decreased interest in technically-oriented schools. Even if there has been some improvement in apprentice schools, there is still much work to do. Schools should make their longer-term plans while involving business, meaning that they should anticipate developments predicted for the future labour market. Our cooperation with the Technical University in Kosice and with several high schools gives us an advantage in training new employees for our company.

PR: Investment in education is a long-term project but at the end of the day it will be the one with the highest added value. Our experience with young graduates is very positive: they leave their universities with a high level of theoretical knowledge and in the next years we invest into them, of course, by boosting their practical knowhow. Where we see room for improvement is in the area of foreign languages, mainly the level of English that is not always sufficient right now. An area where companies and academia can collaborate is in providing students with the right mix of theory and practice and this could be supported by business case studies or experiences coming from not only the local but also the international environment. Our company is ready to share the experiences of our colleagues with students.

AS: SPP boasts over 150 years of tradition in the gas industry. Our top experts have experience with educating younger colleagues and with successfully helping them in practical work. In general we can say that education is a long-term investment that does not immediately produce measurable results. That is why any reform of the educational system should first be subject to thorough analysis and discussion so that the right decisions are made. Foremost, it is important to answer the questions of where the Slovak education system should be in several years time, what people the schools should send for work experience, in what fields, and with what depth and quality of knowledge. Just as importantly, though, is to put in place conditions for educated people to be able to apply themselves here so that they can link their professional future with their country. The potential in people is huge and the progress made in this area is quite evident to me as I have spent time in Slovakia since the mid-nineties.

AT: Volkswagen Slovakia has been cooperating with and supporting Slovak universities for a long time with projects such as Ing.A – Engineer in the automotive industry. The main principle should be connection of academia with businesses. Both sides can benefit from such cooperation as it brings the newest information from the field to academia and graduates leave the universities with up-to-date information and high skills. There is also a high potential for cooperation in the area of research and development oriented on production systems and Volkswagen Slovakia is active in this area. We have even established a study program on Automobile Production in cooperation with the Faculty of Mechanical Engineering of the Slovak University of Technology in which our experts cooperate in the preparation of syllabuses and lectures.

TSS: What would you define as main aches of the labour market? What legislative changes would help in your opinion?
GFB:
I already mentioned the planned changes to the Labour Code as one of the current initiatives of the government. We should also decrease the administrative burden of the HR agenda. There is a need to analyze and identify the quality of the existing workforce and then determine the predicted needs and adjust the educational system accordingly.

AT: One of the main aches in Slovakia is the still relatively high rate of unemployment. Even though some big investment projects are coming, such as our start of production of the New Small Family cars next year, which will bring around 1,500 work positions to Volkswagen Slovakia and around 3,000 at our suppliers, there is need for greater flexibility in the Slovak labour market. And making sure a qualified workforce is part of the labour market will also be necessary for the future of Slovakia and its economy.

AS: Without doubt the most painful topic in terms of the labour market in Slovakia is the fairly high level of unemployment, even though Bratislava is an exception. More than 400,000 unemployed in a country of five million is no small number, but that is an issue that cannot be resolved directly solely through legislation. Legislative measures represent just one of the requisites for cutting unemployment and it is always necessary to take into consideration the sides of both employers and employees. However, good conditions for the development of business are the most crucial, in the broadest sense of the word. Increasing employment can be achieved by attracting new investments, by building up the motorway network, by improving the business environment, and by investing in science and education.

PR: In general we can say that the labour market reflects the needs of the economy and we do not see any critical issues. The only difference I would mention is the low mobility of Slovaks. However, we see some tradition here: people’s attachment to their houses and families. But we believe that this is also partially a generational issue that will disappear in the future.

IKB: In turbulent economic days I think there should definitely be more flexibility in terms of employment. With the unstable demand for products, more flexible conditions for temporarily adjusting the demand for workers should be adopted as well.

MŠ: The labour market is inflexible and people who lose their jobs find it very difficult to get new jobs. This is why Slovakia has a relatively high unemployment rate and long-term unemployed who after a certain time lose their working habits and thus their chances to be employed. Another negative aspect is the fact that it is impossible to force people who reach retirement age to actually retire if a firm for some reason wants that to happen. Thus the firm is restricted from hiring young people who are thus losing the chance to gain real working habits, practice, professionalism and experience.

TSS: Which goals in the new government’s programme do you find the most appealing to business? Which ones might make businesses cautious?
GFB:
Employers are now calling for revisions in the Labour Code. The American Chamber of Commerce, where we hold membership, has already delivered its proposals to the Ministry of Labour and these suggested changes could potentially make the Labour Code more flexible. The current developments in the area of the European Union’s Greenhouse Gas Emission Trading System (EU ETS) and the focus of all stakeholders has been aimed particularly at the comitology procedure for the ETS benchmarks and allocation rules which are of crucial importance for the determination of free CO2 allowances granted to industrial installations that are deemed to be exposed to carbon leakage risk as of 2013. The future setup will significantly impact production potential and investment decisions of all manufacturers in the EU.

We welcome the government’s activities aiming at the independence of the judiciary, against corruption, and in favour of business ethics. Opposite trends will definitely slow down economic prosperity and depress the living standards of Slovak citizens. Improvement in governmental processes, especially the development of e-business, will help increase transparency and public trust.

AS: The government has set several ambitious goals that are intended to stabilise the economy and ensure its further development, and I will keep my fingers crossed for these. From the perspective of our company, however, I feel the most important thing is how the cabinet sees the development of the energy sector. I am glad that in its manifesto the government committed itself to minimising political influence on the energy sector and to ensure the professionalism and independence of the regulatory authority ÚRSO. The government wants to adjust the rules that excessively interfere with the economic management of energy undertakings. I am convinced that the creation of stable and fair conditions for the functioning of the energy sector in Slovakia is in the common interest of all those concerned, companies and consumers alike.

AT: It is hard to speak about the programme when we really do not know how the future will look. For us, it is most important that there will be a flexible labour market and a good educational system with possible support of the private sector and a well-developed infrastructure.

MŠ: I am convinced it is appropriate that the government is trying to correct a wrong image that had been transmitted – the illusion of a problem-free Slovakia. In the area of the economy it is appropriate to take measures which in the short term might be a burden but which will create preconditions so that growth in the future will be faster, healthier and sustainable over the long term. The adoption of restrictive measures quite certainly will calm down the purchasing habits of households and we count on the fact that this will be moderately reflected also in a slowdown in the growth of demand for oil products.

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

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