By Luka Oresković and Sašo Stanovnik
On Sunday, Slovenians vote for a new head of state in the second round of presidential elections. Although the incumbent, Danilo Türk, seemed a certain winner before the first round in November, Borut Pahor, the former centre-left prime minister, surprised pundits and pollsters by winning 40 per cent of the vote – leaving the two to fight it out again alone.
While the president’s role is largely ceremonial, the people’s choice this time could be critical for Slovenia’s long-term development.
The critical economic task facing the incoming president is to push for the long-promised – and long-delayed – privatisation of state companies. This process, if properly executed, would be a valuable source of funding given Slovenia’s dire economic circumstances.
However, when he was prime minister, Pahor shunned classical right-wing economic policies, repeatedly blocking efforts to privatise Mercator, Slovenia’s leading food retailer. He showed no interest in divesting state holdings in domestic blue chips such as Slovenije Telekom, Krka (pharmaceuticals), Zavarovalnica Triglav (insurance) or Petrol, the dominant auto-fuels retailer.
And his Social Democrat MPs still strongly oppose any privatisation.
Türk, on the other hand, recently said he was not against the privatization of Slovenian railways, a bastion of social democratic idealism and an economic basket-case – though he hedged himself against any public backlash by claiming there was no current plan to sell.
However, public rhetoric can be a false indicator as to where each stands on what, in Slovenia, is a highly contentious issue. The ruling party’s candidate, Milan Zver, who fell in the first round of the elections, advocated a lean economic state and privatisation. Yet the same right-wing coalition failed to privatise during its 2004 – 2008 term in office, when global economic conditions were more favourable.
A year ago, Sašo Stanovnik, one of the co-authors of this piece, wrote on the imminent need for Slovenia to privatise its non-strategic holdings. In spite of hopes that the incoming government would deliver, no significant progress has been achieved, while the holdings are an increasing burden on the budget.
Why and how should the government reform the state’s assets, and how could the president support this?
Why privatise? According to the Institute of Macroeconomic Analysis and Development in Ljubljana, the Slovenian economy will contract by 1.4 per cent in 2013. In 2008, Slovenia’s public debt was 22 percent of GDP, but with the fiscal deficit running at between 4 and 6 per cent ever since, public debt has this year surged above 50 per cent of GDP.
Government-appointed management has been ruinous at state-owned banks – the entire banking sector had amassed an estimated €7.0bn of bad debts by September – a staggering 19 per cent of GDP.
Current yields on Slovenia’s long-term government bonds are substantially above other EU countries with similar, relatively low, indebtedness levels. This perilous situation has analysts predicting Slovenia could be the next-in-line for a Troika bailout.
The new president, whoever is elected, should publicly endorse the government’s urgent search for extra-budgetary revenue.
What to privatise? The authorities need not search far. The Slovenian state has been very resistant to economic reforms since independence in 1991, maintaining majority stakes in numerous blue-chips inefficient banks. Nova Ljubljanska Banka, the country’s largest bank, may prove a hard sell: KBC, the Belgian bank that took a stake in NLB in 2002, is keen to exit as soon as possible.
The attempted sale of Mercator, the indebted retailer, has been a severely tangled story, but nevertheless attracted strong investor interest.
Three companies – Oil retailer Petrol, Telekom Slovenije, and insurer Zavarovalnica Triglav – would be particularly attractive to international buyers. The proceeds from selling just one would provide a ready buffer for the government to fill the budget gap, and buy enough time to ensure other assets are divested under the best possible terms.
Infrastructure companies, such as Luka Koper (Slovenia’s port) and Aerodrom Ljubljana, the airport operator, would also find willing buyers among Chinese, German, French and Turkish investors.
True, pricing would be difficult, given global financial conditions, but a commitment to the process would bring back investor confidence and reduce speculation about Slovenia’s ability to reform. Decisive moves will bring better terms for consequent sales.
How to sell? When Prime Minister Janez Janša came to power in January this year, he reiterated his commitment to privatise non-strategic state assets.
Apparently in preparation for this, the government has proposed concentrating all state holdings in a sovereign fund that would then, independently, increase transparency and single out non-strategic assets for sale.
While the vote on the sovereign fund passed the parliamentary procedure, the fund’s future is still uncertain due to opposition call for a referendum on the issue.
The creation of state asset funds have proved a successful strategy in several countries successful in privatization reform like Turkey, but the new entities have to be given complete independence to restructure, manage and sell the assets.
This might prove difficult to realize in Slovenia. Bizarrely, the current debate over the sovereign fund’s future appears more preoccupied with issues of maintaining political control than with sorting out state assets. The sovereign fund is a sideshow – it does not facilitate privatisation – it is rather a indication of politicians postponing difficult decisions.
In Slovenia, rhetoric matters. The newly-elected president, whomever it is, must speak out in support of substantial reform of the state’s holdings. Populist agendas and ideological discourse must be dispensed with.
The public – used to a soft, but ultimately very expensive, state-ownership model – needs educating about the need for reducing the state’s influence in the economy. But non-strategic assets must be identified transparently and sold to reduce the stifling burden on the state: only then will the Slovenian economy again thrive.
Sašo Stanovnik is the head of research and chief economist at Alta Invest.
Luka Oresković is a columnist for The Moscow Times and co-founder of the Strategic Asset Stewardship Initiative.