THE FINAL hurdle in a series of state-backed incentives meant to keep one of Slovakia’s biggest factories operating – that of aluminium-maker Slovalco – was cleared September 26 as shareholders from power-producer Slovenské Elektrárne agreed to an eight-year contract for providing electricity at discount rates.
The firms have declined to provide details about their agreement, but the deal replaces a 20-year contract set to expire this year under which Slovalco, the Sme daily has claimed, paid about one-third of market electricity rates on average. That contract was negotiated when Slovenské Elektrárne was fully state owned, which it no longer is.
Among the leading costs for aluminium production is power consumption and the latest agreement comes on the heels of a related incentive that saw the government cap contributions to the state nuclear power fund at €2 million per year. In what largely amounted to a tax on power consumed, firms previously had to pay into the fund proportional to how much power they consumed no matter how high. Slovalco is expected to save €5 million next year alone because of the cap.
“It’s not clear how this funding gap in the fund will be filled,” Martin Vlachynský, an analyst with the free market oriented Institute of Economic and Social Studies (INESS), told The Slovak Spectator.
Slovalco’s plant in Žiar nad Hronom employs more than 3,000 people and the government-engineered incentives are the latest in a series that have sought to keep, and in some cases expand, manufacturing jobs in Slovakia. The Slovalco incentives are hardly unique, joining a list of other major firms that, fuelled by tax breaks or other government concessions, have opted to continue doing business in Slovakia in recent years. Among them are the Korean electronics firm Samsung, British papermaker Mondi SCP and Košice-based U.S. Steel.
The closing of the Slovalco plant would significantly boost the jobless rate in the Banská Bystrica region, where unemployment is already some 17 percent. Slovalco is owned by Norwegian Hydro Aluminium (55.3 percent) and ZSNP Žiar nad Hronom (44.7 percent) and produces approximately 165,000 tons of aluminium annually. Slovalco needs 14 megawatt hours (MWh) of electricity to produce each ton of aluminium.
In July, Slovalco signed an eight-year agreement on the purchase of electricity from Slovenské Elektrárne, but the deal was not approved by Slovenské Elektrárne shareholders until late-September. That new contract begins in 2014 and replaces a 20-year old contract that is due to expire. It calls for the sale of 19 terawatt hours (TWh) of electricity over that time-period.
The electricity producer Slovenské Elektrárne is 34 percent state-owned with the remaining shares in the hands of Enel Produzione SpA, an Italian energy firm. It is Slovakia’s largest energy producer and the second largest in the region trailing only the Czech Republic’s state-owned ČEZ. Slovenské Elektrárne has 5,739 electric megawatts of gross capacity and operates 34 hydroelectric, two nuclear, two thermoelectric and two photovoltaic plants, according to the firm.
Slovalco buys between 10-12 percent of Slovenské Elektrárne’s electricity each year, seemingly giving it significant bargaining power in price negotiations. On the other hand, it remains unclear whether any other electricity producer would have been capable of providing the necessary amount of energy, meaning the two sides likely had little choice but to work with one another. When contacted, Enel Produzione SpA officials declined to comment on whether Slovenské Elektrárne will actually make a profit off of the power it sells to Slovalco.
“It’s difficult to tell whether there was pressure by the government” on Slovenské Elektrárne’s majority shareholder Enel Produzione SpA, Vlachynský said.
A long term trend
Slovakia’s end-user electricity prices for businesses are among the highest in Europe. Vlachynský attributes this to a complicated blend of factors, including subsidies for the domestic coal mining industry and high voltage power lines that are all fully state owned and thus a tempting source of cash for the state budget during difficult economic times. Transmission costs generally account for about half of electricity’s market price.
The state nuclear fund is designed to finance the decommissioning of state-owned nuclear power plants. While the cap applies to all electricity consumers it is all but a direct subsidy to Slovalco, which is the only company that has breeched the cap in past years. Some have raised concerns that this cap, and what amounts to a €5 million subsidy, might breach European Union competition rules.
The state-backed incentives for Slovalco are the latest in a series provided by Prime Minister Robert Fico’s government as part of efforts to keep manufacturing jobs in the country. Among the biggest were some €19.8 million in incentives to help Samsung upgrade its facilities and maintain about 750 jobs. The paper maker Mondi SCP, with about 750 workers in Ružomberok, received some €25.4 million incentives and U.S. Steel in Košice – which employs more than 13,000 people – received some €15 million in the form of emissions taxes that were returned to buy new, more environmentally-friendly equipment.
The trend continued at a government session in Košice on October 2, when IBM received €1.6 million in state benefits and T-Systems Slovakia €5.1 million in assistance for expanding its IT centre. IBM is expected to generate 150 new jobs by 2015 and T-Systems some 350 by 2016, according to the government.
“These sorts of incentives began around 2002 and have continued more or less continuously since then,” Vlachynský said. “Governments everywhere are resorting to such things, but even tax breaks are expenses.”