Slovenia is privatised

Mira Puc
Managing Director, Agency for Restructuring and Privatisation

The Slovene privatisation process is now in its final stage. Next year 'social capital' will be history. Apart from exceptions like utilities Slovene companies will have Western-type shareholders and a board.

It has been a complex task. Indeed, our privatisation system is the most elaborate in Central and Eastern Europe. For four years privatisation has been the life of the 50 staff of this Agency. But we are well aware that the real challenge is yet to come: next the privatised companies will have to improve their profitability and international competitiveness. Privatisation has therefore only been a necessary prelude to the forthcoming period of reorganisation and recapitalisation.

Nevertheless, there is one aspect of Slovene privatisation which foreigner investors should bear in mind. Unlike most other Eastern and Central European countries, Slovene companies which have now been privatised were not state-owned.

This economic structure was unique and so a name had to be invented for it. The Slovenes call it social ownership, which means that there are no specific owners: neither the state, nor individuals, nor even the workers and certainly not the management. Slovene companies had become a kind of public patrimony like, for example, the roads or the forests.

This concept is not just a figure of speech. It has had a paramount influence on how Slovenes view their companies. Under this system the responsibility of the state was voluntarily reduced to trade (central planning) and therefore also to product range definition and investment (subsidies, or more or less imposed bank loans).

The first (obvious) consequence is that, in theory, foreign investors, cannot simply address a Ministry or this Agency in order to buy a company. Investors cannot even expect to obtain information on particular companies which might be looking for foreign partnership or investment. These matters are the exclusive business of the individual companies themselves - exactly as in the West. (In reality, however, the situation has proved more complex, because there is an exception. The Development Fund of Slovenia does sell companies and foreign investors can buy companies through it.)

The second consequence of more than 40 years of 'social ownership' is that individual companies developed a high degree of autonomy. Their managers were not nominated by the owners since owners did not exist. Neither were they nominated by the state. They were nominated by workers councils, ie, their own staff. Often this choice was directly or indirectly suggested by the state, but it remains a fact that each company behaved as an autonomous unit taking care of its own interests.

Combined with the central planning aspect of trade and investment, this system succeeded in spreading activity all over the country. The result was not necessarily the best situation economically, but it did ensure a socially optimal spread of employment.

Because of the autonomy of these companies (and of the fact that the state was not their owner) privatisation could not be carried out by the state or by official bodies. The post-independence Slovene authorities therefore set up a legal framework allowing for a range of privatisation routes, compelled companies to plan and implement their own privatisation within this legal framework and to complete it within set deadlines. The authorities also created the autonomous Agency for Privatisation in order to control and monitor the privatisation process.

The first objective of this complex legal framework was therefore not to restructure companies, but to change the 'ownership' aspect: from 'social ownership' towards known owners, ie shareholders. Restructuring was limited to what was necessary for the implementation of the ownership shift.


Therefore, around 1991 (independence) Slovene companies fell into a commercial gap. For a combination of reasons they lost up to 75 per cent of their regular (easy) market.

It became obvious that Slovenia - even if it was the most industrially efficient region of Central and Eastern Europe - would have to carry out a major restructuring of its companies in order to allow them to become competitive in other markets.

Restructuring - not only in Slovenia - means in the first instance reduction of surplus staff.

The manager of a socially-owned company, who is elected by his own staff and reports to his staff only (ie, to the workers council), faces a difficult task when restructuring means staff reduction. Therefore, initially management tended to delay restructuring.

Only when a company has known owners who nominate management, and a board to which the management reports and is responsible, is its management in a position in which restructuring measures can be envisaged for reasons of survival of the company (and of generating dividends out of profit).

In other words, it is now - after privatisation - that the restructuring process can start. This is because management is now in charge of the economic performance of the company and can independently put business plans into effect.

But will Slovene enterprises restructure? The answer is very simple: they have no choice. The existing production capacity of industry in general is faces high production costs and focuses too much on domestic needs. Export therefore is a must and this means becoming competitive.

Most companies were over-staffed before the transition, ie, in the old protected market. Companies used to be a social security system. Now, when output has fallen to two-thirds, half, or even less in certain companies, they are still employing the same number of staff.

Survival means both recapitalisation, increasing sales and reducing staff. Unfortunately the latter will have to come first in many cases. This complex restructuring process is now starting and will gain momentum over the next two to three years. Rethinking corporate governance, refinancing and foreign investment will be part of it.

Do Slovenes accept foreign investment?

Slovenes is not enthusiastic about the idea of selling 'their' companies to foreigners, which is perfectly understandable. Indeed, after centuries of Habsburg and decades of Serbian domination, Slovenes feel that by doing so they will lose their just-acquired autonomy.

One should also bear in mind that Slovenes are used to the concept of their own autonomous companies in 'social ownership', which was confirmed during the privatisation process where staff were allowed/encouraged to acquire and buy shares in their own enterprises.

Will this ever change? Probably. Public opinion in some small European Union member states known for welcoming foreign investment, took some time to register the advantages of foreign involvement.

Slovenia will soon discover that it has to adjust to new circumstances and close the technological gap accumulated during the transition, when attention was clearly focused on privatisation and on the recapturing of markets rather than on technological development.

In matters like these the discourse of the man in the street (and of the journalist, the member of parliament or the politician) and the manager and his board is clearly different.

Slovene companies face financial, commercial and technological problems. In view of situations where the profitability and the survival of a company is threatened, the company will often be more than happy to obtain foreign investment or to conclude joint ventures and other deals. In some cases foreign participation may even be viewed by them as a help in speeding up the restructuring process.

Why think of Slovenia when you think of business?

Slovenia is a small country: it has 2 million inhabitants. But these 2 million Slovenes have built up an impressive GDP per capita (by the end of 1996 it was expected to reach US$10,000). Hence, in just a few years, Slovenia has succeeded in surpassing Portugal and Greece and is approaching Spain. It is doing three times better than the second best former Eastern bloc country.

Being small has its advantages. Slovenia is not only ideal in view of its size, but also in view of its physical location. Slovenia has access to the Adriatic sea. A rapidly expanding harbour, with over 25 million tonnes, already now surpasses its neighbour Trieste.

A motorway and railway investment programme is being implemented which will put Switzerland, Austria, Hungary, the Czech Republic, Slovakia (all land-locked) and Bavaria nearer to the Slovene coast than to Antwerp, Rotterdam and Hamburg. Also Romania, Croatia, Serbia and Bosnia can be served through Slovenia: altogether 100 million consumers within a reach of 500 km. Slovenia will evolve to perform a gate function to this part of Europe.

Another reason for this natural role is that Slovenia has no other option than to be an exporter. It has the assets for it. Slovenia produces 16 per cent of the former Yugoslavia's GDP with only eight per cent of the population; it accounted for 32 per cent of exports. Exports as a whole are greater than domestic consumption.

Moreover, the diversity of the Slovene manufacturing sector insulates the country's economy from cyclical movements or a sudden downturn in one particular sector.

Stability is assured by other elements too. The strong and internationally convertible currency, the association agreement with the EU, membership of the Central European Free Trade Agreement and, the necessity to export, will unavoidably determine its political choices.

Slovene labour costs are half those of the West, but higher than in all other countries of the former Eastern bloc. However, foreign investors with experience elsewhere declare that the labour cost appears not to be a handicap - as they first thought - because they have found that it is largely compensated by productivity.

Agencija za prestrukturiranje in privatizacio

Privatisation under the law results first in the conversion of socially-owned enterprises into shareholding companies with a revalued capital base. Twenty per cent of the shares of each enterprise are reserved for acquisition by staff using ownership certificates. A further 40 per cent of shares are allocated for sale through employee purchases, public tender, or public auction and sale. For these shares employees are given a right of first refusal, with a 50 per cent discount on the price of the shares (a substantial incentive). The remaining 40 per cent are allocated as follows: ten per cent to the Pension Fund, ten per cent to the Compensation Fund and 20 per cent to the Development Fund SKLAD, which has to sell these shares to Special Investment Funds. The law explicitly allows companies, who have to realise their own privatisation, to plan the sale of the company in its entirety or the sale of the controlling interest in a company. The Pension and Compensation Fund and SKLAD are compensated in cash from the proceeds of such sales.

Non-transferable ownership certificates, equivalent to 40 per cent of the total social capital of enterprises, have been freely distributed among all citizens of Slovenia. They have been used to 'buy' shares either of companies or of Special Investment Funds, or offered through public sale.

SKLAD (the Development Fund)

A certain number of companies - which for different reasons were unable or unwilling to privatise are being transferred to the SKLAD portfolio. This means that they are, because of this transfer, considered as nationalised companies. SKLAD must sell them to private owners (Slovene or foreign) or liquidate them. Some companies are subject to prior restructuring by SKLAD, with a view to becoming saleable.

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