With a population of two million, Slovenia has a well-educated and productive workforce, well-integrated trade flows with the European Union (EU), and the most developed public and financial infrastructure of all former socialist countries. Small enterprises account for 94 per cent of registered companies, but their share of Gross Domestic Product (GDP) is minute. Around 50 per cent of GDP is still produced by state-owned enterprises. Being small means the Government and monetary authorities are in greater risk of losing control over key economic drivers. Therefore, the Government and the central bank have adopted a policy of tightly controlling inflows of foreign capital to keep inflation low and the exchange rate stable. This policy favours foreign direct investment (FDI) in enterprises and projects, but has effectively made portfolio investment in the securities market uninteresting for foreigners. While a substantial increase of FDI can be observed, the long-term rejection of foreign portfolio investors will keep the cost of capital high and may eventually prevent the country from reaching high growth scenarios.
Mass privatisation process
With the help of privatisation funds, a demanding mass privatisation program introduced ownership in 1,597 enterprises. The Law on Ownership-Restructuring of Enterprises (ZLPP) identified the new owners. So-called "social ownership", as opposed to state-ownership, prevailed under the former legal system of worker self-management. In 1993, the Government issued privatisation certificates to all Slovene citizens. The validity of these certificates was eventually terminated on 30 June 1997. This marks the formal completion of the mass privatisation process. The result of the ownership restructuring is a high degree of employee and management participation and a minority role for professional investors. Of the little less than two million Slovenes, 1.35 million citizens invested their certificates in one of 72 privatisation funds managed by one of 23 privatisation fund management companies. These certificates give the funds a theoretical firepower of 4.14 billion Deutsche Marks to invest. Of the 580,000 citizens who invested their certificates in the firms they work or used to work in, some four per cent of certificates ended up lost or forgotten. In the process, which took almost four years, it emerged that the Government had issued more privatisation certificates than the combined value of enterprises subject to the ZLPP. At the end of 1997, this situation left about 50 per cent of the issued certificates stranded with the funds, with nowhere to invest. The Government is currently debating which state-owned assets it is willing to offer to privatisation funds to allow them to invest their certificates.
There is majority insider control in 65 per cent of privatised companies. These account for only 16 per cent of the total equity of the 1,597 enterprises subject to the ZLPP. Large capital intensive enterprises have chosen other privatisation options, usually public stock offerings. In November 1997, 1,422 companies had their privatisation programmes approved by the Slovene Privatisation Agency, and over 1,170 were effectively allocated to their "identified owners". Companies that made stock offerings are required to introduce their stock to the Ljubljana Stock Exchange. Of 124 companies that carried out a public sale of their stock until November 1997, only 18 had their shares listed on the stock exchange (market A and B with listing requirements). Forty-four companies have their shares quoted over the stock exchange's price dissemination system (market C with very little requirements). Growth in the equity market has advanced slowly, in line with the slow development of the privatisation process. With few exceptions, Slovene companies have not used the Ljubljana Stock Exchange to raise new capital. Total market capitalisation in November 1997 was little over US$2.2 billion, little more than ten per cent of GDP. Average daily turnover was less than $2 million in November 1997.
Foreign direct investment (FDI)
In early 1997, the Czech company ICEC took over the bankrupt Videm Kr_ko, the largest paper and pulp producer, for 30 million Deutsche Marks. In December 1997, the largest United States (US) investment in Slovene history was signed between the Slovene rubber and tyre producer, SAVA, and the US multinational, Goodyear. Over a timeframe of four years, Goodyear will buy most of its assets from SAVA, including the brand, for a total of $500 million. Shell was able to open its first gas station in the town of Jesenice after a long struggle with the Government. AGIP is the next to go ahead. A lot of other much smaller deals between Slovene companies and foreign partners went through almost unnoticed. The total of FDI into Slovenia in 1997 amounts to around $300 million, almost three times more than in 1996.
Financial sector privatisation
The two major banks, Nova Ljubljanska Banka and Nova Kreditna Banka Maribor, are fully state-owned and successfully emerged from a rehabilitation program in July 1997. The method and timeframe for their eventual privatisation has not been announced. A sale to a strategic partner and a listing on the Ljubljana Stock Exchange, combined with a GDR issue, are the most likely options. The main insurance companies, Triglav and Zavarovalnica Maribor, are majority or fully state-owned. The rehabilitation and privatisation of insurance companies is discussed in Parliament and first steps are expected to be taken in 1998. As part of an ambitious reform of the pension system, Slovenia will allow for the establishment of pension funds, probably during 1999. The Government intends to restrict the number of players to three domestic companies. These companies are likely to look for strategic partners to bolster their capital base and to improve the scope of products and the quality of services.
All public utilities are either majority or entirely state-owned. For the energy sector, plans and ambitions for privatisation exist but are hindered by the inability of the Government to provide a new legal framework. The Slovene gas company, Geoplin, was restructured into a company with limited liability and privatised in 1991. It is owned by 140 Slovene companies and the state. The two oil companies, Petrol and Istrabenz, were privatised in accordance with the ZLPP and are listed on the Ljubljana Stock Exchange. The telecom sector reached a breakthrough in 1997 with the passing of a new telecomms law in the summer. Telekom Slovenije was formally restructured into a joint stock company by Government decree in December 1997. Of its equity, 26 per cent will be privatised in accordance with the ZLPP favouring employees and domestic funds; 74 per cent will remain in state ownership. The Government issued a tender for two GSM licences which were awarded in June to the Telekom owned company Mobitel, the incumbent, and to DIGITEL, a start-up company with Siemens and Telia among its shareholders. In 1998, the partial sale of the existing mobile operator Mobitel, which is fully-owned by Telekom, is contemplated. The state-owned part of Telekom may be up for sale to a strategic investor by 1999.
Role of advisers
The Slovene Government will usually conduct a sale of its assets through the Slovene Development Company (SRD). In case either the Government or the SRD choose to conduct the sales process of a particular company through advisers, the respective owner will issue a public tender in which he will solicit bids for the advisory role. Privatised Slovene companies seeking strategic investors usually conduct a search through business contacts and commercial banks. Only in the last phase of negotiations do they seek assistance from professional advisers, mostly for legal questions rather than for strategic and financial considerations. Foreign companies intending to invest in Slovenia are well-advised to seek assistance from one of several local investment advisers. The SRD can usually recommend competent advisers. In case the target company has been privatised according to the ZLPP, it is recommended that guidance be sought from an adviser with experience and connections to privatisation fund management companies, since privatisation funds are always shareholders in such companies.
After some impressive years with a balanced budget, the 1997 budget closes with a budget deficit of 1.2 per cent of GDP. The proposed budget for 1998 anticipates a budget deficit of 0.8 per cent of GDP. Macroeconomic achievements have not been bolstered by adequate microeconomic restructuring of state-owned companies that still represent almost 50 per cent of Slovenia's GDP. The budget memorandum for 1998 expects revenues from the sale of state-owned assets amounting to an equivalent of over 120 million Deutsche Marks. The Ministry of Finance is expected to draw up a list of companies for sale until the summer of 1998. Candidates include the Port of Koper, Ljubljana Airport, Telekom Slovenia, power generation and distribution companies, and several commercial companies in which the state still holds minor share packages. The SRD has a portfolio of around 200 companies which are theoretically up for sale. Among these companies are some large capital intensive enterprises in the metallurgical sector for which strategic partners will be sought. The state-owned steel holding Slovenkse Zelezarne has announced a program of asset sales, comprising mini-mills, rolling mills, casting plants and several manufacturers. Companies which are now emerging from ownership restructuring under the ZLPP will begin searching intensively for strategic partners. While it is true that the Slovene attitude towards foreign investment is rather hostile, companies and shareholders will be pragmatic in the end. Having identified owners for its medium and large enterprises, privatisation in Slovenia is just beginning.
Matthias Eckert is Managing Director of AKTIVA MAI d.o.o., an investment advisory firm in Ljubljana. Mr Eckert is a German national who has been working in Slovenia for over three years. He holds a degree in Economics from Kiel University in Germany. A qualified banker, he has worked with Deutsche Bank in Germany and South America. Mr Eckert has advised numerous foreign investors in their approach to Slovenia, assisting in the selection of suitable investment targets and in the implementation of investment projects and mergers and acquisitions.