EUROPEAN COMMISSION Brussels, 22.2.2017 SWD(2017) 89 final COMMISSION STAFF WORKING DOCUMENT Country Report Slovenia 2017

Including an In-Depth Review on the prevention and correction of macroeconomic

imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2017 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews

under Regulation (EU) No 1176/2011



{COM(2017) 90 final}

{SWD(2017) 67 final to SWD(2017) 93 final}



Contents Executive summary1 1.Economic situation and outlook4 2.Progress with country-specific recommendations10 3.Summary of the main findings from the MIP in-depth review13 4.Reform priorities17 4.1.Public finances and taxation17 4.2.Financial sector29 4.3.Labour market, education and social policies34 4.4.Investment39 4.5.Public administration45 A.Overview Table48 B.MIP Scoreboard54 C.Standard Tables55 References60 LIST OF Tables 1.1.Key economic, financial and social indicators - Slovenia9 2.1.Summary Table in 2016 CSR assessment11

3.1.MIP Assessment Matrix - Slovenia 201715 4.1.1.Cross-country comparison of some pension parameters21 4.2.1.Financial soundness indicators, all banks29 B.1.The MIP scoreboard for Slovenia54 C.1.Financial market indicators55 C.2.Labour market and social indicators56 C.3.Labour market and social indicators (continued)57 C.4.Product market performance and policy indicators58 C.5.Green growth59 LIST OF Graphs 1.1.GDP and contributions4 1.2.Differences in price growth between Slovenia and the euro area5 1.3.Price growth and confidence indicator5 1.4.Export market share (EMS)5 1.5.Real effective exchange rate based on ULC, IC-37 (a group of 37 industrial countries)6 1.6.Decomposition of external position (current and capital accounts)6 1.7.NIIP by sectors7 1.8.Decomposition of credit flows7 3.1.Decomposition of debt by sector14

4.1.1.Gross debt % of GDP - DSA19 4.1.2.Gross debt % of GDP - SGP and SCP scenarios19 4.1.3.Net Theoretical Replacement Rates of pensions, for average earners, by career length, in %, in 205320 4.1.4.Number of all patients waiting for specific procedures and the share of patient waiting above threshold time24 4.1.5.Waiting times for specific procedures24 4.1.6.The impact of the tax reform (by tax brackets)26 4.1.7.The impact of the tax reform (by wage decile)26 4.1.8.The impact of the tax reform on work incentives27 4.2.1.Evolution of NPL categories29 4.2.2.Net NPLs to own funds (%)29 4.2.3.NFC funding31 4.3.1.Employment rate, by age groups, 201534 4.4.1.Debt of non-financial corporations39 4.4.2.Debt of households39 4.4.3.Private and public investment40 4.4.4.Contributions to potential growth40 4.4.5.Barriers to FDI as seen by foreign businessmen41 4.4.6.Time and cost needed to obtain a building permit42 4.4.7.Restrictiveness indicator: Slovenia and the EU weighted average (2016)42

LIST OF Boxes 2.1.Contribution of the EU budget to structural change in Slovenia12 4.2.1.Selected highlight: reforms of the banking sector33 4.4.1.Investment challenges and reforms in Slovenia43 4.4.2.Productivity44 Executive summary This report assesses Slovenia’s economy in the light of the European Commission’s Annual Growth Survey published on 16 November 2016. In the survey the Commission calls on EU Member States to redouble their efforts on the three elements of the virtuous triangle of economic policy — boosting investment, pursuing structural reforms and ensuring responsible fiscal policies. In so doing, Member States should focus on enhancing social fairness to deliver more inclusive growth. At the same time, the Commission published the Alert Mechanism Report (AMR) that initiated the sixth round of the macroeconomic imbalance procedure. The in-depth review, which the 2017 AMR concluded should be undertaken for the Slovenian economy, is presented in this report. The Slovenian economy continued to experience solid growth in 2016. Economic output is estimated to have expanded by 2.5 % in 2016, after a 2.3 % growth in 2015. The rebound, which started in 2014, was initially driven by strong export performance supported by improved cost competitiveness. Subsequently, the recovery has spread as private consumption has picked up, boosted by an improving labour market, rising consumer confidence and continued low energy prices. Growth is forecast to increase to 3.0 % in 2017 and 2018, and remain broad-based with a further shift from external to domestic demand. The general government deficit is estimated to have decreased to 2.0 % of GDP in 2016 and to decline further to 1.7 % in 2017 and 1.4 % in 2018. Public debt peaked at 83.1 % of GDP in 2015 and is projected to gradually decline to 76.7 % of GDP in 2018. The positive labour market and social trends continued into 2016. Over a quarter of the people who found employment in the first quarter of 2016 were either long-term unemployed, low-skilled or young. However, long-term unemployment is still above pre-crisis levels and represents more than half of all people who are unemployed. Slovenia has one of the lowest levels of income inequality in the EU. In addition, the rate of people at risk of poverty and social exclusion continued to decrease. Exporting sectors are more competitive than sectors dominated by state-owned enterprises. The high and growing share of exports in GDP is indicative of how important the tradable sector has been in supporting the economic recovery. While the economy is growing at a solid rate, state-owned entities have underperformed compared to their privately owned peers in terms of productivity and profitability. Although several important state-owned enterprises have been privatised and a comprehensive framework to manage state-owned enterprises has been put in place, remaining weaknesses of corporate governance in state-owned enterprises still have some negative impact on private investment and growth. Overall, Slovenia has made some progress in addressing the 2016 country-specific recommendations. Limited progress has been made in ensuring the long-term sustainability of public finances. The appointment of the Fiscal Council has been further delayed and the amendments to the Public Finance Act still need to be adopted by the Parliament. The government published a white paper on pensions in April 2016, opening a wide public consultation on possible solutions for the new pension reform. The work on reforms in healthcare has yielded some progress with proposals to reform the health care system now in public consultation. Work on long-term care reform is advancing with limited progress. Limited progress has been made regarding the employability of vulnerable groups. An action plan on increasing the employment rate for older workers was adopted. Some progress has been made implementing several policy measures to enable the durable reduction of non-performing loans but only limited progress in improving access to alternative financing sources for business with relevant instruments still in preparation. In addition, revisions to the legislative framework further reinforced the corporate restructuring capacity of the Bank Asset Management Company. Thus, overall, some progress was made on this recommendation. Some progress was made on modernising public administration, reducing administrative burden and also on improving the governance of state-owned enterprises. Concerning the latter, the new comprehensive framework for the management of state-owned enterprises was implemented for the first time in 2016. Regarding progress in reaching the national targets under the Europe 2020 strategy, Slovenia has already achieved its national targets to reduce early school leaving and to increase tertiary educational attainment. Poverty and social exclusion declined in 2015. However, the number of people at risk of poverty or social exclusion is still considerably higher than the intended target. While Slovenia appears to be on track to achieve its national target for renewable energy and greenhouse gas emission by 2020, additional efforts would be needed to reach the national target regarding the employment rate and to remain on track towards the energy-efficiency target. In 2015, Slovenia moved further away from its R&D intensity target. The main findings of the in-depth review contained in this report, and the related policy challenges, are as follows: Risks to external sustainability have receded. Gains have been recorded in price and cost competitiveness and in export market shares. After the peak in 2015, the current account surplus remained high, at 7.4 % of GDP in 2016 and net external liabilities continued to decrease below 40 % of GDP. As domestic demand gradually strengthens, the current account surplus is expected to decrease but remain high in the medium term. Although it is already at a moderate level, the country's negative net international investment position is expected to improve further. The profitability of the banking sector has continued to improve, due to increasing asset prices and better risk management. Banks are well capitalised, with solvency ratios above EU average, and have access to sufficient liquidity. All banks are profitable; however the recent increase in net income is in large part due to a release of loan loss reserves that were built up over previous years. Non-performing loans have declined substantially and are expected to decline further, although they remain high. Pressures to reduce debt have started to ease and external financing for firms is becoming more available. While household debt is among the lowest in the EU, corporate debt is much higher. The corporate sector has considerably reduced its debt ratio since its peak in 2010 and is expected to continue to do so. Debt instruments are becoming increasingly available to small and medium-sized businesses but their access to alternative financing is still limited. This could help to diversify funding sources and reduce vulnerability to credit market developments. Lending to households turned positive in 2016. The business environment is improving but continues to be an obstacle for more private investment. Barriers to doing business are mainly linked to the public administration inefficiencies and complex and lengthy administrative procedures, especially in the field of construction and spatial planning. A strategy to modernise and increase the efficiency of public administration is being implemented with expected completion by end of 2017 or shortly after. Private investment is increasing but remains still relatively low and public investment is strongly dependent on EU funds. Private investment declined sharply below the euro area average during the crisis and has continued to decrease since then. At the same time, foreign direct investment in Slovenia has grown markedly in the last two years, partly supported by privatisation. The performance of state-owned enterprises has started to improve, underpinned by a new corporate governance system, but risks remain. The profitability of state-owned enterprises improved in 2015, albeit falling short of the intermediate target set in the management strategy. State ownership remains high despite the privatisation programme initiated in 2013. The implementation of professional and prudent policies on the management of state-owned enterprises are expected to reduce contingent liabilities to the general government budget from this area. A prolonged recession coupled with significant bank recapitalisations has resulted in a sharp rise in public debt in recent years. While the government deficit has been reduced and is no longer excessive, fiscal consolidation measures in recent years, particularly on the expenditure side, have been of a temporary nature. The fiscal framework reform, which provides an important anchor for sustainable public finances, is yet to be fully implemented.

Population ageing puts considerable pressure on the long-term sustainability and adequacy of the pension system. Despite the 2012 pension reform, major long-term risks remain. Slovenia has a very strong projected impact of age-related public spending in particular for pensions. Workers with shorter careers and longer career breaks can expect income adequacy problems in old age. Currently, a new pension reform is under preparation. The authorities presented the proposals to reform the health care system while the reform of long term care has been delayed. A central piece of health care legislation is in public consultation. It presents an important step towards reforming the health care system. The major changes concern funding of the health care system, management and responsibilities of the single insurer for compulsory health insurance, and the contracting process with health care providers. In addition, the authorities aim to prepare act to improve governance and performance of hospitals. Remaining challenges concern primary care as a gatekeeper for in-patient care, hospital payment systems, health technology assessments, and information systems. In addition, the benefits from centralised public procurement of medical products and services remain largely untapped. The accompanying long-term care reform, which aims to achieve a sustainable, high quality and affordable care system has been delayed. Other key economic issues analysed in this report which point to particular challenges facing Slovenia’s economy are as follows: The improving labour market offers an opportunity to provide employment for older workers. After five years of rising unemployment, the trend reversed in 2014 and the labour market conditions have improved further since then. Nevertheless, structural challenges in the labour market remain. Long-term unemployment is high and the employment rate of older workers is the lowest in the EU. In view of the rising labour demand and labour becoming increasingly scarce there is an opportunity to increase the labour market participation of older workers. This is also relevant in the context of the current discussion on the future pension reform. 1. Economic situation and outlook GDP growth The Slovenian economy expanded steadily in 2016. GDP growth of an estimated 2.5 % in 2016 was driven by rising exports and consumption, showing resilience despite a significant contraction in public investment. It is the third year of consecutive growth above 2%, following double-dip recession between 2008 and 2013 which caused a cumulative loss of more than 9 % of GDP. Strong export performance, boosted by improved competitiveness, drove the initial recovery, later supported by the strengthening of domestic demand. Private consumption and private investment grew strongly in the first half of 2016, supported by an improving labour market, rising consumer confidence and persistently low energy prices. Overall investment contracted, caused by large fall in public investment. Government consumption continued to contribute positively in 2016, after falling in 2010-2014 period. Graph 1.1:GDP and contributions Source: European Commission, 2017 winter forecast Momentum in economic growth is expected to be maintained. Real GDP is projected to grow by 3.0 % in 2017 and 3.0 % in 2018 according to the Commission’s 2017 winter forecast (Graph 1.1). Private consumption, supported by rising employment and increased wages, is set to be the principal contributor to growth. Both private and public investments are expected to contribute to GDP growth in 2017 and 2018. Private investment growth is expected to be significantly higher than public, in part due to the delayed rebound in EU funding. Wages are expected to further increase in 2017 and 2018, mostly due to the reversal of certain consolidation measures in the public sector. Exports growth is expected to stay resilient, although exports could be impacted by the slowdown of demand in trading partners. The contribution of net exports to GDP growth is forecast to fall, as rising domestic demand fuels imports. Export firms are driving the recovery, while a significant part of the economy is not contributing to the growth. The high and growing percentage of GDP represented by exports indicates how important the tradable sector has been in supporting the economic recovery. Although growing at a solid rate, a major part of the economy, namely state-owned firms and the sectors that they dominate is not adequately contributing to the recovery. Negative spill-overs from the high level of state involvement in the economy and inefficient corporate governance in state-owned firms distort resource allocation, harm the business environment and hamper overall investment. Exporting companies started to borrow again in 2014, while firms in the non-tradable sectors continue to reduce debt. This is reflected in the still contracting corporate credit growth as exporters have access to loans at better conditions from abroad. Inflation Inflation in Slovenia in the past two years was among the lowest in the euro area. Headline inflation (HICP) has been decreasing since mid-2013 and slipped into deflation in December 2014. For almost two years the growth in prices was lower than in the euro area (Graph 1.2). The fall in global oil prices had a stronger effect on the Slovenian headline inflation, due to the higher weight of energy in the consumer basket. The historically low core inflation was due to weak domestic demand. Graph 1.2:Differences in price growth between Slovenia and the euro area Source: European Commission Low inflation supported real disposable income. The inflation rate was negative at -0.2 % in 2016, after -0.8 % in 2015. However, prices started to recover in the second half of 2016 due to, rebound in oil prices and private demand. The latter reflects the growth of real disposable incomes as a result of the labour market improvement, higher employment and increasing public sector wages. Inflation is expected to pick up gradually in the coming years. Recovery of both oil and other commodity prices is expected to increase their contribution to the headline inflation. In addition, increase in wages and consequent rise in domestic demand are expected to put some pressure on price growth and bring inflation closer to the position of Slovenia in the business cycle. However, inflation might slow down due to structural changes arising from technological innovations, new shopping behaviours and demographic trends in the long run. Graph 1.3:Price growth and confidence indicator Source: European Commission, 2017 winter forecast Graph 1.4:Export market share (EMS) Source: Eurostat Competitiveness and external position

Competitiveness continued to improve. Following five years of market share losses, Slovenia gained 2.3 % of export market shares in 2013, 3.9 % in 2014 and 0.4 % in 2015 (Graph 1.4). This increase was mainly driven by gains in exports of manufactured goods. Rebalancing the economy towards tradable sectors and improved cost competitiveness have been the key underlying factors. Real effective exchange rates (Graph 1.5) deflated by nominal unit labour costs decreased significantly in the last two years. Competitiveness improved due to both productivity gains and continued wage moderation. Graph 1.5:Real effective exchange rate based on ULC, IC-37 (a group of 37 industrial countries) Source: Commission services (AMECO) After peaking in 2015, the current account surplus stayed high in 2016, supported by strong export performance (Graph 1.6). Services have traditionally been a positive contributor to the trade balance. However, the recent increase in the trade balance surplus was mainly driven by the rapidly increasing surplus in goods, which was supported by favourable terms of trade, high growth in real exports and subdued import due to sluggish domestic demand prior to 2016. Both goods and services balances have reached historically high levels. As domestic demand gradually strengthens, it is expected that the current account balance will start falling but will remain in significant surplus in the medium term. The primary income deficit might deteriorate due to higher dividend payments to foreign owners of non-financial corporations while the secondary income balance is expected to remain stable. The main underlying reason for the high current account surplus is that Slovenian companies continue to deleverage and retain cash balances instead of investing them (see Section 4.4 Investment). Graph 1.6:Decomposition of external position (current and capital accounts) Source: Eurostat The net international investment position (NIIP) is gradually improving. The NIIP worsened during the crisis, hitting a trough of -49.9 % of GDP in 2012. The trend was reversed in 2013, reflecting the adjustment in the corporate sector behaviour. It is expected that the NIIP will continue to improve in the coming years. Thus, risks to the external position are reduced. The structure of the NIIP has changed. The monetary and financial institutions have significantly reduced their net foreign liabilities since the height of the crisis, while the general government position had worsened until 2015. The government’s net borrowing, apart from financing the deficit, was used mainly to recapitalise banks. Graph 1.7:NIIP by sectors Source: Eurostat Financial sector Financial sector assets contracted in 2015, driven by further deleveraging in the private sector. The financial sector has yet to fully benefit from the improvement in the macroeconomic condition despite several encouraging signals, such as the banking sector's return to profitability and the positive trend in demand for new loans. While net credit flows remain negative for corporations (Graph 1.8), the pace of credit contraction has diminished and households’ credit flows turned positive in 2015. Subdued lending to non-financial corporations is also linked to the high level of state involvement in certain sectors of the economy. It is also affected by the high level of corporate non-performing loans on banks’ balance sheets and the ongoing financial and operational restructuring in the corporate sector. However, the capitalisation of the banking sector has improved while the decrease in the percentage of non-performing loans has gained momentum Non-performing loans (NPLs) have declined from 14.2 % in June 2015 to 9.1 % in September 2016 and the trend is expected to continue (Section 4.2). Graph 1.8:Decomposition of credit flows Source: Eurostat Labour market and social developments The better macroeconomic conditions help the labour market. The increase in employment and the decrease in unemployment seen in 2015 continued in the first half of 2016 with more people finding work than becoming unemployed. In the first half of 2016, 5.9 % of unemployed moved into employment, of whom 13.8 % were long-term unemployed, 7.6 % low skilled and 5.1 % young. The employment rate (in 20-64 age group) increased by 0.2 pps from Q3 2015 to Q3 2016. The increase was most significant for the age-group 25-29 (4.3 pps). Manufacturing was particularly strong while the only sectors not to witness an employment increase were construction, insurance, and financial services. Despite declining in the first half of 2016, long-term unemployment still represents more than half of all unemployed. It is still more than 10 pps (55.2% in Q2 2016) higher than before the crisis. Income inequality remains among the lowest in the EU despite its increase during the recession. In 2015 income inequality started to decline; however it remained above the pre-crises level. ( ) Specifically, the Gini coefficient of equivalised ( ) disposable income remains well below the EU average at 24.5 in 2015 (EU: 30.9), even though it increased by 1.8pps over 2007 - 2014. Similar developments are shown by the income quintile share ratio (80/20). By contrast, net wealth ( ) is not as equally distributed as income, but is within the range observed in other EU countries for which data were collected in 2013-2014 (ECB 2016). The tax and benefit system further reduces the already low degree of market income inequality. Specifically, the Gini coefficient on market income (before taxes and social transfers) is in the EU bottom quartile. After taxes and transfers, the Gini coefficient drops to a level which is among the lowest in the EU. The elderly are at the highest risk of poverty. The at-risk-of-poverty rate for elderly people over 65 years old is above the EU average before and after social transfers (including pensions). Almost 16% of them are at a persistent risk of poverty, which is among the highest in the EU. ( ) The at-risk-of-poverty rate for the age group 55 to 64 years is also among the highest in the EU due to its low employment rate (see Section 4.3). Public Finances General government deficit and debt are projected to improve gradually reflecting the favourable macroeconomic outlook. Slovenia has taken welcome steps in recent years to reduce the deficit and improve the sustainability of public finances. The deficit decreased considerably from 2013 (-15 % of GDP) to 2015 (-2.7 % of GDP), and is expected to decrease to -2.0 % of GDP in 2016. The general government deficit is expected to decline further to 1.7 % of GDP in 2017, mainly due to buoyant tax and social contributions receipts. Conversely, the structural deficit is expected to worsen and remains above the euro area average (Section 4.1). Public debt almost quadrupled from 2008 to 2015, but after peaking in 2015 at 83.1% of GDP it is expected to decrease in the coming years.

Table 1.1:Key economic, financial and social indicators - Slovenia Source: European Commission, ECB



2. Progress with country-specific recommendations Progress with implementing the recommendations addressed to Slovenia in 2016 ( ) has to be seen as part of a progress which started with the introduction of the European Semester in 2011. Since then, Slovenia has been recommended to improve the long-term sustainability of its pension system. While a comprehensive pension reform has been prepared, it was outvoted in a referendum in June 2011. A parametric pension reform was adopted in 2012 but the revisions do not safeguard the system's sustainability post-2025. Therefore the Council recommended adopting the necessary measures to ensure the long-term sustainability and adequacy of the pension system by the end of 2017. Measures have been adopted to improve the employability of low skilled and older workers. Since 2011 the Council has recommended measures to increase the employability of

low-skilled and older workers. The 2013 labour market reform and targeted active labour market policies somewhat increased employment opportunities for older and low-skilled workers, but their participation rate remains low. There have been some important reforms to reduce the weaknesses in the banking sector. The situation in the banking sector has been severely affected by the crisis. Consequently Council recommendations in 2013-14 have been focused on this sector, including (i) the conduct of a system-wide bank asset quality review, (ii) the transfer of assets to the Bank Asset Management Company, (iii) the improvement of governance and risk management and (iv) the privatisation of state-owned banks. Since 2014 the banking sector has stabilised. Nonetheless, although gradually decreasing, non-performing loans were still high compared to pre-crisis levels and the recommendation to enable the durable resolution of non-performing loans has been maintained in 2016. The Slovenian authorities have taken some action to improve the business environment. Specifically, the reduction of administrative burden, the restriction of barriers to regulated professions, and better governance of the state-owned enterprises (SOEs). In 2013-14 the Commission's analysis concluded that the high level of state involvement combined with weak corporate governance was hampering investment and growth and has spill over effects to the private sector. While a comprehensive corporate governance system for state-owned enterprises has been put in place over the last years, its effective implementation will be essential. After the initial progress which led to full deregulation of 40 professions in the crafts sector and 4 in culture, the reforms slowed down and have not been finalised as initially planned. Overall, Slovenia has made some ( ) progress in addressing the 2016 country-specific recommendations. Limited progress has been made to reduce fiscal risks and sustain public finances (CSR 1). The appointment of the Fiscal Council and the revisions to the Public Finance Act has been further delayed. The pension and long-term care reforms to ensure long-term sustainability are in the preparation phase, while the central act of the healthcare reform is in public consultation. Limited progress can be observed in addressing the employability of low-skilled and older workers (CSR 2). An action plan to increase the labour market activity of older workers was adopted. Some progress has been made to improve financing conditions for creditworthy business (CSR 3). Limited new financial instruments were offered to SMEs to improve their access to alternative equity financing sources and the authorities initiated several measures to facilitate the durable reduction of non-performing loans. Some progress has been made to reduce the administrative burden on business, modernise public administration, and improve the governance of state-owned enterprises (CSR 4). While the public administration action plan is slowly progressing, some specific measures have been substantially delayed. The new comprehensive framework for the management of state-owned enterprises was implemented for the first time. Table 2.1:Summary Table in 2016 CSR assessment Source: European Commission. 3. Summary of the main findings from the MIP in-depth review The 2017 Alert Mechanism Report called for further in-depth analysis to monitor progress in the unwinding of the imbalances identified in the 2016 MIP cycle. As Slovenia was identified to have macroeconomic imbalances in the form of weaknesses in the banking sector, high corporate indebtedness and fiscal risks last year, a new in-depth review (IDR) is needed to assess how these imbalances evolved. This report provides the in-depth review of how the imbalances identified have developed. In particular IDR relevant analysis is found in the following sections: fiscal risks related to fiscal policy, long-term sustainability and state-owned enterprises (sections 4.1.1 to 4.1.5); vulnerabilities in the banking sector (sections 4.2.1); labour market and older workers (section 4.3.1) and deleveraging and investment (section 4.4.1). Additional IDR relevant topics via their link to investment are the sections on business environment (section 4.4.2) and public administration (sections 4.5.1). 3.1 Imbalances and their gravity Despite major improvements, the stock of non-performing loans remains at a relatively elevated level. In a context of high public and private indebtedness, the crisis put the banking sector under significant stress. Between 2008 and 2014, profitability tanked while asset quality deteriorated quickly. Although asset quality in the existing loan portfolios has improved since then, the share of non-performing loans decreased substantially but remains relatively high (9.1 % of total loans in September 2016), originating mostly from the corporate sector, notably SMEs. High leverage in the corporate sector holds back investment and growth. In 2015, private debt fell to 87.3% of GDP, below EU average and in 2016 it further decreased. High leverage is mostly present in a handful of large companies and among SMEs (European Commission, 2015d). Conversely, household debt is among the lowest in the EU (27.8% of GDP in 2015). The high indebtedness in the corporate sector hampers investment growth. Weak private investment (16% of GDP in 2015) has in turn contributed to a significant downward shift in Slovenia’s potential growth (from 3-4% prior to the crisis to less than 1% after the crisis). Government debt has risen rapidly between 2007 and 2015 and ageing is expected to have an impact on public finances looking forward. The public debt ratio almost quadrupled between 2007 and 2015, to 83.1% of GDP. While public debt is projected to decline in 2016 and the following three years, in the absence of reforms, Slovenia is projected to see one of the largest increases in public pension expenditure in the EU until 2060. One-third of the increase of public debt can be attributed to fiscal and economic implications of state-owned enterprises (SOEs). The level of state involvement remains high in relation to other Member States. Combined with weak corporate governance, this has had considerable fiscal and economic implications. In particular, it has hampered investment and growth. SOEs have underperformed compared to their privately-owned peers in terms of productivity and profitability (European Commission, 2015d). The implementation of professional and prudent policies on the management of state-owned enterprises are expected to reduce contingent liabilities to the general government budget from this area. 3.2 Evolution, prospects and policy responses

Banking sector vulnerabilities have been reduced. Non-performing loans (NPLs) have declined from 14.2 % in June 2015 to 9.1 % in September 2016 and the trend is expected to continue (Section 4.2) ( ). They remain high compared to pre-crisis levels but are well provisioned (coverage ratio of 69.2 % in June 2016). Banks have acquired significant capacities and competences in the workout management of NPLs. The sector's profitability has improved supported by net releases of impairments and lower provisioning costs. The current context of low interest rates hampers banks' profitability further. The consolidation and restructuring of the sector is progressing, with a recent merger of three banks and the completed wind down of two smaller banks. Private sector debt decreased in 2015 by 10pps driven primarily by a decline in firm's debt. Deleveraging pressures in the corporate sector are easing but non-financial corporations continue deleveraging, albeit with important differences between individual firms. Credit flows in the household sector turned slightly positive in the first half of 2016. Graph 3.1:Decomposition of debt by sector Source: European Commission In 2015, private investment started to recover and foreign direct investment (FDI) inflows increased. The negative trend in private investment started to reverse in 2015 as deleveraging pressures started to ease and the government made efforts to improve the business environment. The stock of inbound foreign direct investment increased by 12.4 % in 2015 and reached 35 % of GDP, which remains below the EU average of about 50 % of GDP. Ongoing privatisation and corporate restructuring offers new opportunities for attracting FDI. Furthermore, the business environment needs to adapt to take full advantage of foreign investments. The public debt ratio is expected to have decreased from 2016 onwards. Strong nominal GDP growth and a reduction in the general government deficit are set to put public debt on a downward trend. The White Paper on pension reform was published in April 2016. Its purpose is to begin a public debate on a new pension reform to ensure long-term sustainability and adequacy of the pension system. In addition, a central piece of health care legislation is in public consultation. The proposed measures aim at diversifying funding sources of the health care system and reducing pro-cyclicality of health care expenditure. The reform of long term care however has been delayed. Profitability of SOEs managed by the Slovenia Sovereign Holding (SSH) has improved in 2015. The focus of the Slovenian Sovereign Holding has shifted onto improving the SOEs corporate governance and performance. The asset management strategy adopted in July 2015 sets the overall profitability target of the state portfolio as measured by return on equity at 8% by 2020, with intermediate targets at 6.3% in 2016 and 7.1% in 2017. Several important state-owned enterprises have been privatised in 2016. 3.3 Overall assessment Positive macroeconomic developments and effective policy action have gradually reduced the remaining vulnerabilities. The economy continued to grow strongly in 2016, both in real and in nominal terms, thus reducing the risks related to large indebtedness in the public and in the corporate sector. Progress on the front of banking sector restructuring has coincided with a rapidly falling share of NPLs in total loans, which remain however elevated but well provisioned. The corporate sector has undergone a considerable deleveraging and investment, which was compressed in past years, is resuming, including FDI. Government debt has peaked in 2015 and a continued downward adjustment is expected in the coming years. Relevant measures have been taken by the government, especially to consolidate and restructure the banking sector, and to improve the governance of SOEs. Several important bank mergers have been completed in 2016. A new comprehensive framework for the management of State-owned enterprises has been implemented. Looking forward, action is still needed to enhance the long-term sustainability of public finances, including on fiscal governance and on the business environment. Table 3.1:MIP Assessment Matrix - Slovenia 2017 (Continued on the next page) Table (continued) Source: European Commission 4. Reform priorities 4.1. Public finances and taxation 4.1.1.Fiscal policy* ( ) Deficit developments The general government deficit is expected to decline until 2018 while the structural deficit increases. Based on a headline deficit of 2.7 % of GDP in 2015, the Council decided to abrogate the excessive deficit procedure (EDP) in June 2016. The deficit is expected to continue to decline in 2016 (-2.0 % of GDP) and in 2017 (-1.7 % of GDP) along with economic growth and better labour market conditions. However, the structural deficit is expected to worsen in the coming years. In 2017, the structural deficit of 2.1 % of GDP will remain above the euro area average of 1.2 % of GDP. Based on the commonly agreed methodology the output gap estimate of –0.3% in 2016 indicates that the Slovenian economy is experiencing ‘normal times’. However, the plausibility test ( ) projection estimates the output gap at -1.5%. Even though this is a more negative output gap, it also indicates Slovenia is experiencing normal times". Therefore, this result would not lower the required fiscal adjustment. The positive macroeconomic outlook has been offset by expenditure pressures. The positive macroeconomic context, particularly for employment, is expected to result in buoyant tax and social contributions receipts. Nonetheless, these are offset by higher expenditure, particularly concerning public employees' salaries and social transfers. The decline in the 2017 deficit is mainly driven by the reduction of interest expenditure and low public investment levels. After falling by 40 % in 2016, public investment is expected to pick up gradually in the following years in line with the dynamics of the current EU financial programming period. Implementing structural measures would help reducing the structural deficit. The structural balance is expected to deteriorate in the coming years. This is to a large extent due to the quick closing of the output gap which is projected to turn positive in 2017. While GDP growth is projected to be considerably higher than in the euro area in 2017 (3 % v 1.6 %), potential growth is projected to be broadly similar (1.3 % v 1.2 %). The low potential growth is mainly the result of the low level of investment. This underscores the need to adopt measures to boost investment (Section 4.4). A budgetary strategy focused on structural measures would help reduce the structural deficit. The highest part of public expenditure is allocated to social protection, general services, health and education. Based on the classification by function of expenditure, the largest share of expenditure goes to social protection (36 %, 2014 data), general public services (15 %), health (13 %) and education (12 %). Expenditure in general public services and education were above the EU and EA average (7.5 % and 5.9 % of GDP vs 6.7 % and 4.9 % in the EU, respectively). Performance and efficiency of public services are further important indicators to be taken into account to achieve public policy goals.

Spending reviews are a useful tool to improve budgetary performance and expenditure allocation in order to reach policy objectives. According to the 2016 Report on Public Finances in the EMU, education, general public services, R&D and infrastructure could be analysed in the context of spending reviews (European Commission, 2016d). Spending reviews would help set firm and multi-annual expenditure limits and define the key improvements that can generate savings. In 2015, at the request of the national authorities, an International Monetary Fund (IMF) technical assistance mission took place to advice on establishing a spending review process. Education, health and social protection were identified as potential targets for a spending review (IMF, 2015d). A spending review in the field of social support has been prepared and was adopted in February 2016. Spending reviews on education and culture are ongoing. Debt sustainability Public debt rose sharply in recent years. It increased from 21.8 % of GDP in 2008 to 83.1 % of GDP in 2015, but it is expected to decrease as of 2016. While exceptional items, particularly bank recapitalisations, have contributed significantly to this increase, sustained primary deficits were also increasing debt. The debt-to-GDP ratio is expected to have peaked at 83.1 % in 2015. Supported by the economic recovery and a reduction in precautionary cash buffers, public debt is forecast to decrease to 80.9 % of GDP in 2016. The implicit interest rate on the state debt has been decreasing since 2013. The strategy is to extend the duration of the debt portfolio, reducing the roll-over risk while taking advantage of the current environment of low interest rates to reduce current financing costs in the medium-term. In addition, the authorities plan to reduce the previously accumulated large cash buffers (estimated to have decreased from 16 % at end-2015 to 13 % of GDP at end-2016). In 2017, the debt-to-GDP ratio is projected to continue to decline to 78.9 % of GDP, on the back of a lower headline deficit and reduction of the cash-buffers. Public debt is projected to decrease until 2023 but increase again thereafter under a no-policy-change assumption. Under the baseline scenario ( ) of the debt sustainability analysis (DSA) public debt is expected to decrease to 76.2 % of GDP until 2023 (Graph 4.1.1). From then onwards public debt is expected to increase as a result of medium term upward pressures to 80 % of GDP in 2027, particularly due to ageing costs. Conversely, if the ageing costs were excluded from the non-policy change scenario (as it would be the case if ageing costs were reduced via reforms) the debt ratio would continue to decrease in the medium term. Under a scenario ( ) where the structural primary balance (SPB) is assumed to converge to its historical average, debt levels would accelerate quickly on an upward trajectory from 2020 onwards. A similar result is obtained in a combined historical scenario ( ) where all main macroeconomic variables converge to their historical average. However, if Slovenia was to fulfil its commitments under the Stability and Growth Pact (SGP) ( ) the reduction of debt towards 60 % of GDP would occur at a much faster pace (Graph 4.1.2). If Slovenia were to adopt the fiscal commitments outlined in its own Stability Programme ( ), the reduction would happen at a slower pace than in the SGP scenario, but still considerably faster than in the baseline scenario. Therefore, maintaining fiscal discipline is a prerequisite for debt sustainability. The high public debt level represents a source of vulnerability for the Slovenian economy. In the medium-term, public debt poses significant risks. An increasing debt trajectory sensitive to potential macroeconomic shocks and a sizeable sustainability gap lead to high risks for public finance in the medium term. Firstly, high risks are revealed by the debt sustainability analysis (DSA). On the one hand standard sensitivity tests performed separately on nominal GDP growth, inflation and interest rates ( ) would each entail a debt ratio that is more than 4 pps. higher than in the baseline (i.e. about 84 %) in the last year of projections (2027). On the other hand, a very large set of jointly simulated shocks to GDP growth, interest rates and the primary balance, based on the size and correlation of past shocks under stochastic debt projections, indicate a 33 % probability that the debt ratio in 2021 would be higher than in 2016 (80.9 %), which entails risks given the already high starting level. Secondly, the medium-term sustainability gap indicator (S1) complements the results of the DSA indicating that, overall there are high risks in the medium-term. S1 ( ) indicates that the structural primary balance would need to improve by 2.9 pps of GDP in cumulated terms over a 5-year horizon (from 2018 until 2023) relative to the baseline no-fiscal policy change scenario to reach the 60 % public debt-to-GDP ratio reference value by 2031 ( ). The required fiscal adjustment reflected by S1 is essentially due to the debt ratio being currently above the 60% reference value and the projected ageing costs. Graph 4.1.1:Gross debt % of GDP - DSA Source: European Commission calculations Age-related expenditure, namely on public pensions, healthcare and long term care puts pressure on public finances in the long run. In the long run, Slovenia is at high risk as shown by the very high value of the long-term sustainability gap indicator S2 ( ). The indicator, calculated under a baseline of no-fiscal policy change scenario, indicates a high required fiscal adjustment of 6.9 pps. of GDP to ensure sustainability of public finances ( ). This is primarily due to the strong projected impact of age-related public spending. Here, with pensions accounting for 3.4 pps. of GDP required fiscal adjustment. Healthcare and long-term care account for an additional 1.9 pps. Graph 4.1.2:Gross debt % of GDP - SGP and SCP scenarios Source: European Commission calculations 4.1.2.pension SYStem* The 2012 pension reform has resulted in positive developments, but long-term sustainability and adequacy remain a challenge. In 2015, pension expenditure relative to GDP decreased by 0.6 pps to 10.9 % and the growth in the number of old-age pensioners was very low (ZPIZ, 2016). The old-age dependency ratio increased only slightly and the ratio between the retired and socially insured remained unchanged according to Eurostat and national data (MoLFSAEO, 2016a) respectively. Although the pension system is according to the Slovene Government projected to be sustainable up to 2025, an ageing population puts considerable pressure on its long-term sustainability and adequacy. Workers with shorter careers and longer career breaks can expect income adequacy problems in old age. This is demonstrated by projections based on the current legislation (see graph 4.1.3). While the impact of a short career on the benefit level is around the EU average, it could affect a high proportion of future pensioners. This is due to the low duration of working life, an increased number of part-time and fixed-term contracts during the economic crisis and delayed labour market entry (see European Commission, 2016a; European Commission and Social Protection Committee, 2015b). These concerns are particularly relevant in the context of the country's sustainability challenges and related plans to further tighten eligibility conditions for an old-age pension. Graph 4.1.3:Net Theoretical Replacement Rates of pensions, for average earners, by career length, in %, in 2053 Source: European Commission and Social Protection Committee, 2015a The White Paper on pensions was adopted by the Government in April 2016 to begin public discussion on a new long-term pension reform. The White Paper proposes to increase the statutory retirement age and the insurance period, to reduce the incentives to early retirement and extend the pensionable earnings base from 24 to 34 consecutive most favourable years. Nevertheless, the average career length is not projected to increase in the long-term. In addition, the White Paper proposes the point system, gradual alignment of the pension indexation to growth in prices over a period of 20 years and the options to strengthen supplementary pension provisions, especially the second pillar (MoLFSAEO, 2016a). The proposed measures would ensure long-term sustainability of the pension system under different scenarios. The impact of the presented scenarios on the adequacy of pensions merits further analysis taking into account the extended pension base, indexation and various employment trajectories together ( ). As part of a comprehensive pension reform securing a sustainable and adequate system, efforts should be made to ensure that old-age poverty risks are avoided in the future ( ). It is uncertain when the new reform will be passed and how closely it will follow the ambition proposed by the White Paper. Timely implementation of the reform and short phase-in period is crucial to preserve fiscal sustainability while maintaining an adequate pension income for all generations. The high fiscal sustainability risk in the medium term in Slovenia calls for quick action. A faster increase of the statutory retirement age to 67 years and phasing in the price indexation rule already over the coming decade would reduce sustainability risks further. Furthermore, the White Paper does not consider an automatic link of statutory retirement age to increases in life expectancy, one of the most effective mechanisms to tackle the cost of ageing population. Such link is one of the most common and important features of many recent pension reforms (see Table 4.1.1). It pays a double dividend – it strengthens pension system sustainability while improving the adequacy of pensions by accumulating more contributions because of the extended working lives. Currently, a number of EU Members States have such a balancing mechanism in place (Carone et al., 2016, p.18). All euro area countries also supported this principle in a recent statement adopted on 16 June 2016 ( ). Absence of such measures or their late introduction might call for additional corrections to the pension system in the future. In the future, supplementary pension schemes could provide an important share of income for pensioners. At the end of 2015, 59.2 % of those enrolled in the first (public) pillar were contributing to a supplementary pension scheme ( ). Yet, the average amount of supplementary savings per person is low ( ). Nonetheless, projections show that supplementary pensions could have a major impact on the adequacy of pensions for future pensioners. This is the case especially for those retiring after 2040 and with regular payments into the scheme (MoLFSAEO, 2016a). The White Paper puts forward the options for boosting the coverage of supplementary and in particular occupational pensions through collective bargaining or automatic enrolment. Table 4.1.1:Cross-country comparison of some pension parameters Source: European Commission Ageing report (2009, 2015), Commission services, updated for Finland and Belgium 4.1.3.health care and long term care systems* Health care Long-term fiscal sustainability of the health care system remains a challenge. In 2015, total health expenditure in Slovenia decreased by 0.1 pps to 8.4 % of GDP (OECD/EC, 2016c). This percentage is below the EU average of 9.9 % of GDP. Nevertheless, public health expenditure in Slovenia is expected to increase over the medium- and long-term, due to a rapidly ageing population, medical technology and individual behaviour (European Commission, 2016a). Measures to reduce costs and increase the efficiency of health care spending can contribute to financial sustainability of the health care system (European Commission, 2016c). The 2016 Country Report suggested that there is scope to increase the efficiency of the healthcare system in Slovenia. The efficiency gains could be made through improved governance and performance of hospitals in view of limited autonomy and responsibility of management in strategic decisions, fixed hospital budgets, weak competition in the contracting process, outdated public hospital network and inefficiencies in the purchasing process. A stronger primary care as a gatekeeper for in-patient care, supported by an adequate payment system for general practitioners and specialists, and a standardized framework to monitor the quality of services in hospitals would support the goal to curb expenditure growth. Other measures such as the use of health technology assessments and revised hospital payment system and joint public procurement to rationalize the use of medical goods and health services can help to contain expenditure growth while maintaining access to quality care. This year's report goes beyond the general assessment of the healthcare system. The report's objective is to assess current reform endeavours and analyse in-depth public procurement and recent developments in waiting times.

The authorities presented proposals to reform the health care system. "The Resolution on the National Healthcare Plan 2016-2025", which represents a strategic plan for the development of the healthcare system was adopted by the Parliament in March 2016. In January 2017, the draft Health Care and Health Insurance Act, which is the central piece of the reform was presented. In December 2016, the proposals to amend the Health Services Act and the Patient Rights Act were presented to coalition partners and the new Pharmacies Act was adopted. The implementation of measures to strengthen the primary health care is in progress. The National strategy of development of primary care until 2025 is under preparation. The "family medicine model" practice which aims at better management of chronic patients is being expanded. A progress has been made over the past year in the implementation of e-Health solutions. The most important goals of the proposed reforms are to improve quality and accessibility of health care services, ensure sustainable financing of the health care system and increase transparency, whereby standards, targets and indicators will be publicly available. Higher transparency can help to achieve better allocation of resources. The proposed draft Health Care and Health Insurance Act is an important step towards reforming the health care system. The proposed measures aim to diversify financial resources and ensure a more stable financing of the healthcare system. The contribution base for compulsory health insurance contributions is proposed to be extended by taking into account both active and passive income. The contribution rates are proposed to be unified across different categories of insured people, including pensioners. New sources are envisaged from the general budget while the budget is proposed to take over financing of some programmes (e.g. traineeships, specialisations, tertiary education). The voluntary complementary (top up) health insurance is proposed to be abolished and replaced by the income dependant health care levy as of 2019. The basket of rights is proposed to remain universal with rights being legally defined and excluding non-health services. The Health Insurance Institute of Slovenia (HIIS) is proposed to remain a single insurer for compulsory health insurance, however with the newly defined management structure and responsibilities. Specifically, the HIIS is proposed to act as an active buyer in charge of technical standards for material and medical devices, cost analysis and payment models. In addition, the HIIS is proposed to contract out health care services selectively on basis of efficiency and quality of providers and for at least two years. The adoption of the Health Care and Health Insurance Act by the Parliament is envisaged for 2017. The authorities aim to increase incentives for hospital managers to improve cost-effectiveness and quality. As reported in the Country Report 2016 hospital managers do not have sufficient incentives to increase efficiency and productivity. The reason is that they cannot take autonomous decisions related to activities, payments for performance of employees and the budget. To improve the performance of health providers, the authorities proposed changes in the governance of the HIIS and the contracting procedure with health care providers. In addition, the authorities aim to prepare the Act on Governance and Management of Public Health Institutions. Pharmaceutical expenditure is rising, due to higher consumption of medical products and new and very costly medicines. In 2014 pharmaceutical spending accounted for 1.7 % of GDP and 20 % of total health care expenditure, (1.5 % and 17.1 % in the EU). The latest data from 2015 suggest that overall pharmaceutical expenditure has started increasing again, most probably due to an increase in high cost medicines. The Slovene authorities also point out the specificities of the small market regarding prices and accessibility of new medicinal products to the population, which should be taken into account when different comparisons are considered. The data also suggest that consumption of medicines in Slovenia remains higher than the Organisation for Economic Co-operation and Development (OECD) average (Belloni, Morgan and Paris, 2016). Policies to improve transparency and promote the cost-effective use of pharmaceuticals would be beneficial, such as a comprehensive health technology assessment network and a fully operational system of e-prescriptions (European Commission, 2016a and 2016c). Public procurement Public procurement in health suffers from several deficiencies. As reported in the Country Report 2016 there is a scope for further centralisation of public procurement and less focus on the lowest price award criterion. Many hospitals in Slovenia continue to purchase selected supplies and services in a non-standardised way, i.e. without the list of codes and a central register. This prevents tapping the potential economies of scale linked to centralised procurement. In addition, public procurement in health sector is prone to corruption (see Section 4.5.1 on corruption). As a result prices for some medicine and medical devices are unjustifiably high and with large differences in prices for the same product (Ekstravizor ( )). Improvements in public procurement can lead to significant savings. Recent experience shows that centralised procurement in medical devices (four items) increased the number of bids from an average of 7 to an average of 14 and reduced the bidding prices by 10-35%. A new centralised public procurement for medicines is under preparation and is mandatory for all 26 hospitals. Systematically involving relevant health professionals in the purchasing process from the very start (technical dialogue) until the evaluation of tenders received remains a challenge. In addition, the small market needs to be safeguarded from the risk of developing monopolies that might result from the choice of a single per-product supplier. This could lead to unavailability of treatment and in the long term increase prices through market concentration. A transparent public procurement system can significantly improve resource allocation. Following public revelations of alleged irregularities in public procurement (Ekstravizor), the Ministry of Health in cooperation with all public health care providers announced at the end of 2016 to collect and publish information about hospital transactions and prices of medical products. Based on this data the central register of medical products is planned to be established in the first half of 2017. Its purpose is to increase transparency for all involved stakeholders. Easily available and transparent information about prices and characteristics of products will allow for more efficient allocation of resources. In addition, patients will have clearer information about their rights and how their money is spent. Waiting times Waiting times for some outpatient specialist services have increased. According to the 2015 European Health Interview Survey ( ) the share of people reporting long waiting time has increased from 6 % of population in 2007 to 13 % in 2015. Waiting times increased due to several reasons: the necessary fiscal adjustment measures during crisis, the lack of specialised doctors and "defensive medicine" (a current practice of family doctors to over refer patients to specialised services due to uncertainty on diagnosis). In addition, 15-20 % of patients on waiting lists that do not fulfil conditions for the services in question or they do not show up for the procedure. The ongoing eHealth projects such as e-appointment and e-referral are increasing transparency and can contribute to reducing waiting times. In addition, the authorities aim at strengthening the cooperation between family and specialised doctors and increasing patients' obligations. Structural improvements in the management of waiting times are the objective of the proposals to amend the Patient Rights Act. Improved allocation of resources can contain long waiting times, which typically have a bigger impact on poorer households. A pilot project "For better waiting times management" began in 2015 to identify the reasons for waiting times. In addition, more funding was allocated to health providers for certain procedures. According to the latest available data, the waiting time for targeted procedures has decreased on average despite the increase in the number of patients (see graph 4.1.4 and 4.1.5). Nevertheless, the experience from other countries show that measures which only increase funds channelled to reduce waiting times can only be successful in the short term (OECD, 2013). Waiting times norms, more efficient allocation of human and capital resources between sectors and specialisations, and the use of ICT tend to be more successful in the durable reduction of long waiting times (European Commission, 2016 c). In addition, they can better protect poorer households that are typically more affected by longer waiting times as the burden to purchase private providers services might be too high. Graph 4.1.4:Number of all patients waiting for specific procedures and the share of patient waiting above threshold time Source: The National Institute of Public Health (NIJZ) Graph 4.1.5:Waiting times for specific procedures Source: The National Institute of Public Health (NIJZ) Long-term care A reform to create a sustainable, flexible, high quality and accessible long-term care (LTC) system has been under preparation since 2002. To date, no comprehensive integrated long-term care exists in Slovenia. While it is provided within institutional care, community based services are underdeveloped and not integrated. The fragmentation of services is reflected in the fragmentation of funding. LTC needs are determined under several legislative acts, which may increase the budgeting and funding challenges. In addition, the number of recipients of LTC is high and has been increasing rapidly (European Commission, 2016a). Until now, no agreement has been reached with regard to the future sources of financing for LTC. This issue is linked to the healthcare reform package currently being developed. In 2017 the Ministry of Health will launch a 2-year pilot project to assess the LTC needs and to support proposed legislative solutions in the future LTC Act. The pilot project will be used for preparing concrete measures to reform long-term care. The authorities have planned to steer the LTC into two main directions: 1) towards the development of home care and 2) towards equality in access to long-term care. However, the ways to achieve the goals are not yet clear. Alongside the needs, the pilot will also assess the services and delivery mechanism. The threshold of eligibility for LTC services will be also decided. Based on these assessments, a one-stop-shop may be created where ‘planners’, with comprehensive knowledge of all services, will prepare integrated individual plans for beneficiaries, based on needs and preferences, including both health and social long-term care services. Consistently with the goals, community-based care (involvement of NGO’s, volunteers and local community) would need to be prioritised and activities, training and support for family members involved in caring would need to be established. The long-term care reform is in preparation; however several important challenges remain unclear. The authorities believe that cost effectiveness and sustainability of financing can be achieved by strengthening preventive measures, by promoting earlier rehabilitation, by improving the coordination between social and health care and through a better use of ICT (like more efficient e-public services). However, no clear quantification is yet available, as this relies on the definition of priorities in terms of needs and that of a basic basket of services. Once these are defined, it will be possible to build a microsimulation model to assess alternative financing options and their potential to that yield current and future savings. 4.1.4.fiscal framework* Implementing fully the envisaged fiscal framework would improve the credibility of the budgetary process in Slovenia. Following the adoption of the Fiscal Rules Act, the government intends to adopt revisions to the Public Finance Act. The previous deadline (December 2016) was postponed to the first quarter of 2017. The proposed amendments aim to strengthen the rules for all budgetary units and strengthen the role of the Court of Auditors in budget implementation. Until now, there was a lack of a multi-annual perspective in the budgetary planning process, and the focus has been on adopting measures on an annual basis. A multi-annual approach to budgeting, particularly binding expenditure ceilings promotes fiscal discipline and will provide greater certainty to citizens and businesses regarding policy measures in the coming years. The Fiscal Rules Act introduced a rolling three-year framework for the preparation of the budgets but its actual implementation is dependent on the revisions to the Public Finance Act. These revisions would put a multi-annual approach to budgeting on a statutory footing.

The establishment of the Fiscal Council has been further delayed. The implementation of the Fiscal Rules Act (passed by the Parliament in July 2015) will be overseen by the Fiscal Council. This is an independent state authority with three members, who are experts in the fields of macroeconomics or public finances. The Fiscal Council members should be proposed by the government and a two-thirds majority of the Parliament is required to confirm their appointment. After three unsuccessful procedures to appoint members, the government will have to restart an open call for applicants to find members of the Fiscal Council. Hence, the establishment of the Fiscal Council has been further delayed. Given the delays experienced to date and the need to operationalise the Fiscal Council, this timeline may jeopardise the Council’s ability to provide its opinion on the 2017 Stability Programme. 4.1.5.State owned enterprises* Following a series of reforms the implementation of the new comprehensive framework for the management of State-owned enterprises (SOEs) started in 2015. Equipped with a number of corporate governance tools, and mandated on the basis of an overall strategy approved by the national parliament ( ), the Slovenian Sovereign Holding (SSH) has been taking action to ensure vigorous implementation of SOEs management policies. According to the SSH Annual report, return-on-equity for the overall portfolio increased to 4.7% in 2015 (1.8% in 2014). Dividend pay-outs in 2016 have been higher by 7.4% compared with 2015. Major deals completed in 2016, include the closing of the NKBM sale and the debt-to-equity swap in SAVA. A new management plan for 2017, quantifying the performance indicators for each separate SOE and updating a list of assets for divestment, has been approved by the government on 19 January 2017. ( ) Signs of wavering at the political level suggest that the future of professional and independent SOEs management is still at stake. The SSH was confronted with major opposition when it tried to replace the supervisory board of the Luka Koper (Port of Koper) in July 2016. This led the head of the SSH to resign. The SSH is currently run by an interim CEO. In addition, the government appears reluctant to take the action required to fine-tune certain aspects of the SOEs management framework, despite the proposals tabled by the SSH. In particular, a revision of the strategy that was adopted in July 2015 has been advocated while not yet adopted. The revision could, amongst others, facilitate the progress in major deals, such as the NLB privatization (see section 4.2). In addition, it could make the strategy's ambitious performance goals more adaptable to changing circumstances. 4.1.6.Taxation Personal income tax Slovenia has adopted a tax reform which shifts taxes away from labour to capital. In September 2016 the Parliament adopted amendments to three tax laws taking effect as of 1 January 2017. The purpose of the changes is to boost the creation of high value added jobs, which would in turn support economic growth and increase fiscal revenue. ( ) ( ) Before the reform, the personal income tax system had four tax brackets and income was taxed progressively (16 %, 27 %, 41 % and 50 %). The aggregated taxable base could be reduced by different types of allowances. One of them targeted low wage earners, i.e. it applies to income (earnings and other income) up to an amount slightly above the minimum wage (up to EUR 10 866). The tax system was designed in such a way that about 90 % of all workers are taxed at 16 % and 27 % tax rate (Graph 4.1.6). ( ) Graph 4.1.6:The impact of the tax reform (by tax brackets) Source: European Commission, Joint Research Centre, based on the EUROMOD model The overall fiscal costs of the tax reform are estimated by the authorities at EUR 106 million (0.4% of GDP). The fiscal impact is expected by the authorities to be balanced by the increase in the corporate tax rate from 17 % to 19 % and more efficient tax collection. The authorities expect the measure to be fiscally neutral. The reform can be split in three parts. The first part increases the number of tax brackets from four to five, introduces an additional tax rate of 34 % and lowers the second highest tax rate from 41 % to 39 % (Graph 4.1.6). The costs of this part of the reform are estimated at EUR 56 million. The second part of the reform increases the basic allowance threshold for low wage earners just above the minimum wage, from EUR 10 866 to EUR 11 166. The costs of this part of the reform are estimated at EUR 5 million. Finally, the third part of the reform reduces taxation on performance bonuses (13th salary), i.e. up to 70 % of the average wage is exempt from the income tax. The costs of this part of the reform are estimated at EUR 45 million. Graph 4.1.7:The impact of the tax reform (by wage decile) Source: European Commission, Joint Research Centre, based on the EUROMOD model

Net earnings and mean annual net PIT liabilities take into account both changes in tax brackets/rates and changes to the basic allowance for low wage earners. The tax reform has the biggest impact on workers in the tenth (highest) wage decile (Graph 4.1.7). ( ) The reason is that the major part of the reform (i.e. the changes in tax brackets and tax rates) impacts only on workers with an annual taxable base above EUR 20 400, i.e. about 10 % of all workers. In the tenth wage decile more than 80 % of workers are affected by the reform. Their tax liabilities are reduced on average by about 7% (EUR 600 per year) while their net earnings are increased by 2 % (Graph 4.1.7). In this wage decile the main beneficiaries are workers with an annual taxable base above EUR 48 001 (Graph 4.1.6). They represent less than 1% of all workers. Their net earnings are increased on average by 4.3 % (more than EUR 2 000 per year). A very small proportion of low wage workers benefit from the changes in the eligibility for the basic allowance. The increase in the basic allowance threshold for low wage earners has an impact on workers in the first half of the wage distribution. However only 4 % of them benefit from the reform. The main beneficiaries are workers in the second and third wage decile, although only 7.2 % of workers in the second and 10.1 % of workers in the third wage decile are affected (Graph 4.1.7). Their tax liabilities are reduced on average by about 6.5 % and 6.0 % (EUR 23 and EUR 33 per year, respectively) while their net earnings are increased on average by 0.3 %. In the remaining deciles the proportion of affected workers is below 2 % and their changes in net earnings smaller than 0.1 %. While the tax reform is targeted, disincentives to work remain strong. The reform raises incentives to work for workers with the highest marginal effective tax rates (METR), i.e. workers in the second and the tenth wage decile (4.1.8) ( ). However, METR for these workers remain high. Changes in the basic allowance for low wage earners reduce the METR of workers in the second wage decile by 5.6 pps. to 44.3 %. Changes in tax brackets and tax rates reduce the METR of workers in the tenth wage decile by 4 % to 46.5 %. Income taxes continue to contribute the most to the METR for workers in the tenth wage decile. The tax reform will have a small impact on economic growth, employment and inequality. Over the next five years, GDP is expected to increase by 0.1 % and the employment rate by 0.07 % relative to the baseline. The impact of the reform is greater for high skilled workers as their employment rate is expected to increase by almost 0.3 %. The increase in the corporate tax rate is expected to reduce profits (after tax) by about 0.5 %. Inequality rises slightly as the Gini coefficient increases by 0.1pp to 24.5 %. The impact on the at-risk-of-poverty rate is insignificant. Graph 4.1.8:The impact of the tax reform on work incentives Source: European Commission Real estate tax The introduction of a revised version of the real estate tax was postponed until 2019. Revenues from recurrent immovable property taxation, which is less distortive to economic growth than labour taxes, are considerably below the EU average. The technical assistance provided by the IMF on the Property Tax Act, concluded that a single rate of 0.33% would generate recurrent real estate tax revenue of 1.2% of GDP (IMF, 2016g). The authorities plan to introduce a revised version of the real estate tax by 2019. Proceeds from the real estate tax will be revenues for the municipalities. Any additional income from this source will reduce the state’s funding of municipalities. The broader tax base would be measured as the market value throughout a mass valuation system ( ). In autumn 2017, the Property Tax Act is expected to be adopted by the Parliament. Mass valuation is to be applied to all properties in mid-2018. This legislation is therefore expected to be introduced in January 2019. 4.2. Financial sector 4.2.1.Banking sector* ( ) The profitability of the banking sector has continued to improve in the first half of 2016, thanks to higher asset quality and lower credit risk. The recent increase in net income is in large part due to a net release of loan loss reserves that were built up in previous years. In particular, banks were able to reduce their provisioning due to improving asset quality in the existing loan portfolios and the low credit risk of new loans. Despite these positive developments, the low interest rates continue to put pressure on net interest margins as loan rates drop faster than the funding rates for banks, where deposit rates are already below euro area average.

Table 4.2.1:Financial soundness indicators, all banks Source: ECB, CBD The solvency positions of banks have been generally improving due to increasing profitability and asset quality. A key driver behind these positive developments was the re-classification and the deleveraging of risky activities from the banks’ balance sheets. The aggregate Tier 1 ratio has steadily improved since 2013 to reach 18.4 % in June 2016. Smaller institutions and savings banks represent a higher solvency risk. Risks related to the increasing maturity gap between assets and liabilities could develop when the interest rates rise. As loan rates have dropped, existing and new borrowers have increasingly turned to longer maturity and fixed interest rate loans. In a parallel development, increased risk aversion and a general lack of high yield instruments have led investors to put most of their savings into sight deposits, which can be withdrawn at any time. As a result, the difference between the average re-pricing periods of the assets and liabilities has increased. The increasing maturity gap could become challenging in the event of an interest rate hike, effectively leading to a further compression of the net interest margins in the short to medium term. Furthermore, the dominant use of sight deposits as the main investment vehicle suggests an increased liquidity risk. Graph 4.2.1:Evolution of NPL categories Source: Bank of Slovenia

Note: The NPL categories are based on local risk category definitions. Claims of BAMC are outside the banking system and classified as NPLs. Graph 4.2.2:Net NPLs to own funds (%) Source: ECB (consolidated banking data)

Note: No data available for GB and SK for Q2 - 2016 and for RO, HR, CZ, LU and FI for Q4 - 2012



Non-performing loans have considerably decreased over the past year partly due to portfolio sales and transfers to the bad bank. Banks have acquired significant capacities and competences in the workout management of NPLs. The share of NPLs in the banks’ balance sheets is falling and the trend is expected to continue. In particular, the local NPL measure, which includes both loans that are more than 90 days in arrears and other risk categories, dropped to 11.3 % by November 2016 from 18.4 % at the end of 2014 (Graph 4.2.1). Although the absolute level is still high in comparison to other Member States, they are well provisioned (coverage ratio of 69.2 % in June 2016). The loss absorbing capacity has increased and the remaining spill-over risks to the sector have decreased substantially over the recent years (Graph 4.2.2). In mid-2016 Nova Ljubljanska Banka (NLB) sold two packages of NPLs of retail and corporate clients in Slovenia worth EUR 500 million to institutional investors. The portfolio sales and transfers to the Bank Asset Management Company (BAMC) contributed to about 50 % of the reduction in NPLs. Write-offs and restructuring contributed to 30 % and 20 % of the reduction of the stock of bad loans respectively. The Bank of Slovenia’s actions have effectively provided direct incentives for engaging in write-offs. To speed up the process of balance sheet cleaning, the Bank has issued guidance asking banks to specify annual targets and strategies for NPL reduction, which are being regularly revised. In addition, banks are asked to derecognise assets i.e. withdraw recognition of assets, within a specific timeline depending on the type of the asset and the exposures. The Bank of Slovenia played a leading role in the successful restructuring of the banking and corporate sector. The continued respect of its independence and of its role within the ESCB while carrying out its tasks provided for by EU law, including during pending domestic investigations, is of high importance. Banks are improving their risk management practices. Several banks are actively pursuing a strategy to shift to the internal-ratings based approach for credit risk. The current conditions do not provide immediate incentives for banks to formally apply such an approach due to the high default rates observed over the last years of crisis. However, the shift to internal-ratings based approach is seen as a longer-term ambition, which allows the banks to build up the necessary expertise and information. The consolidation and restructuring of the banking sector are progressing. The merger of Nova Kreditna Banka Maribor, Raiffeisen banka and Poštna banka Slovenije was completed in September 2016. The remainder of Factor banka and Probanka, two banks winding down since September 2013 was transferred to the BAMC in February 2016. Sberbank and Gorenjska Banka are on sale. State ownership in the banking sector is one of the highest in the EU. The state owns more than 50 % of the bank market, but is slowly reducing its stake. Maintaining a high level of state involvement in the longer run may entail some risks for economic efficiency and public finances. Nova Kreditna Banka Maribor was privatised in April 2016, and NLB is planned to be privatised (up to 75 %) by December 2017. The initial public offering was initially supposed to start at the end of 2016. NLB has been classified as an ‘important asset’ in the state assets management strategy. Therefore the government has to keep a minimum stake of 25 % (+1 vote) according to the law on Slovenian Sovereign Holding. Also, the strategy specifies that no private investor can acquire a stake higher than the government in certain firms, including in NLB. Although the legal effect of the latter provision is not clear, this is likely to reduce the attractiveness of NLB for private investors. It is also likely to decrease the sale price, unless the management of company’s operations is secured via other tools, such as shareholders’ arrangements on corporate governance. Finally, Abanka-Celje is expected to be privatised by June 2019, but no concrete step has been taken yet towards privatisation. Insurers seem well capitalised and resilient to the low interest rate environment, but supplementary health insurance may face challenges. Slovenian insurers showed good resilience in the European Insurance and Occupational Pensions Authority (EIOPA) stress test of 2016, and Solvency II entered into force smoothly. The complementary health insurance, which was highly profitable in the past, has seen its profit gradually decreasing. The government is considering the option to integrate the supplementary health insurance in the public scheme and to cover 100 % of the claims (section 4.1). State ownership in the insurance sector is unusually high and results in questionable investment strategies, weak corporate governance, supervisory issues, and risks for financial stability, economic efficiency and public finances. The state owns three major players of the Slovenian insurance market, representing a market share of about 60 %, which is by far the highest share in the EU. The Government seems to exert influence on the strategy of the insurers. The strategy on state assets management requires that state-owned insurers will not invest less than 30 % of their assets in domestic financial instruments. It also provides that these insurers’ supervisory board must obtain an approval by the Slovenian Sovereign Holding before disposing a stake in a company classified as ‘strategic’ or ‘important’. These restrictions on the investment strategy of state-owned insurers could hamper the asset allocations and lead to increased concentration risk. The independence of the Insurance Supervision Agency (AZN) and the Securities Market Agency (ATVP) might be under pressure. A number of international institutions (IMF, EIOPA and OECD) have issued recommendations to strengthen the independence of the supervisors, or shared concerns that this independence could be compromised. In particular, the draft law on public agencies aims to introduce potentially problematic provisions reducing the operational independence of the AZN and ATVP. The proposal stipulates that the Ministry of Finance should set annual goals for the two agencies. The failure to achieve these goals may be considered as adequate grounds for dismissal of the responsible director. Similarly, the proposal gives the Government the ability to interfere with the staffing and salary plans as well as the financial operations of the two agencies. These provisions may lead to a conflict of interest since both agencies are responsible for the supervision of a large number of state-owned enterprises. The market capitalisation of quoted non-financial corporations is very low compared to the EU average. While reaching EUR 19.2 billion in August 2007, it is now down to EUR 4.7 billion. The issuing of debt securities has been increasing but is still at a very low level. Non-financial corporations continue to prefer monetary financial institutions (MFI) loans as a source of funding (Graph 4.2.3), although the stock of such loans dropped from EUR 21.5 billion in July 2010 to a record low of EUR 10.2 billion (26.4 % of GDP) reflecting the transfers of impaired assets from the banks to the Bank Asset Management Company and significant deleveraging pressures. Graph 4.2.3:NFC funding Source: ECB, AMECO Slovenia is repeatedly late with transposing EU financial directives. It is among the Member States with the highest number of open infringement cases due to non-transposition of post-crisis financial directives. According to the authorities, the lack of administrative capacity (human resources) is one of the major reasons for delayed transposition. 4.2.2.Access to finance* Access to finance for small and medium-sized enterprises (SMEs) has improved and is in line with the EU average. In 2016, some 9 % of SMEs had their loan applications rejected, down from 24 % in 2014. Both the willingness of banks to lend money and access to public financial support that include guarantees have improved. Although certain SMEs are still facing financial challenges, access to finance is no longer one of the three main obstacles for the operation of Slovenian micro and small businesses (Small Business Agenda 2016 and CCIS Analytics, 2016). This is due to the economic recovery, the cleaning-up of bank balance sheets and non-performing assets, greater responsiveness of banks, and some new government debt funding programmes (by the Slovenian Enterprise Fund and the SID Bank). Nevertheless non-performing loans remain high among SMEs. To address the issue, a systematic approach to SME NPL work out has been prepared with the help of the World Bank. In addition, the government adopted a bill to set up a central credit register to enable more efficient risk management and reduce the risk of indebtedness. Since the trough in February 2016, household loans have grown by 1.6 %. At the same time, loans to firms and SMEs continue to contract although at a slower pace. Access to finance for businesses is expected to improve further as the deleveraging pressure eases. Limited steps have been taken to improve access to alternative financing sources and equity financing is still lower than in the EU. The Slovenian Enterprise Fund (SEF) and the SID bank (Slovenska izvozna in razvojna banka) have introduced mainly new debt instruments for SMEs including measures such as microcredits. One scheme of seed capital (around EUR 3.9 million) was implemented in 2016 by the SEF and some 47 SMEs were supported. In addition, SEF has signed the Competitiveness of Enterprises and SMEs Agreement under the European Fund for Strategic Investments. This will allow the SEF to provide EUR 180 million of guarantees to SMEs in Slovenia in three years. Based on a recent gap analysis, new financial instruments that would be backed by the structural funds are being prepared. Given the importance of access to finance for growth of small businesses, a large proportion of the ESIF (approximately EUR 450 million) will be delivered through financial instruments aimed at SMEs. These funds are planned to be delivered via more standard forms of financial instruments, such as loans and guarantees but also through alternative sources of financing, such as equity investments, venture capital and mezzanine financing. Incentives for venture capital companies are abolished as of January 2017. Before such an amendment, the Corporate Income Tax Act stipulated a special 0 % tax rate for venture capital companies, but only if they were established in Slovenia.

4.3. Labour market, education and social policies The recovery on the labour market continued in 2016. From Q3 2015 the employment rate increased by 0.2 pps to 70.4 % in Q3 2016 while unemployment rate continued to decline to 7.4 % in Q3 2016. In view of the rising labour demand there is an opportunity to activate and keep older workers in employment for longer. It is expected that demand for older workers will increase as labour shortages are expected to kick in soon. 4.3.1.labour market and older workers* ( ) The participation rate of older workers is well above pre-crisis levels but remains low, especially compared to other Member States (European Commission, 2016a). In the period 2011-2015, the employment rate of people aged 55-64 increased by 5.4 pps to 36.6 % (by 6.1 pps to 53.3 % at the EU average). This is the only age group to experience an increase in their employment in this period. The increase was mainly due to the 2012 pension reform (see Section 4.1.2) and the demographic effect of the 'baby boom' ( ), which led to more employed people entering the group of older workers than exiting (IMAD, 2016a). However labour market conditions for older workers remain unfavourable. Thus, the key challenges remain how to keep older workers in employment for longer and get the long-term unemployed back into work. Effectively addressing these challenges could have a substantial positive impact on employment and economic activity. ( ) One in three jobseekers is over 50 years old. The employment rate of older people continues to be among the lowest in the EU, despite the observed improvements and the recovery of the labour market. While the employment rate of older women (31 %) increased in 2015, it remains low compared to the Slovenian men (43 %) and the EU average for women (47 %). The retention rate of older workers is the lowest among all OECD countries. Only 18 % of those aged 55-59 who were employed in 2009 were still employed when aged 60-64 in 2014. The low retention rate is due to older workers becoming inactive. In addition, the unemployment rate of older people more than doubled since 2008, to a large extent due to termination of contracts for business reasons. More than 40 % of all long term unemployed are older than 50 and almost half of them have been unemployed for 2 years or more (37.1 months on average). Graph 4.3.1:Employment rate, by age groups, 2015 Source: European Commission Variations in adult skill levels are large with the lowest proficiency among the older people. The OECD Survey of Adult Skills (PIAAC) showed that about one in four Slovenes aged between 16 and 65 has poor literacy and numeracy skills, a slightly larger proportion than the OECD average (18.9 % and 22.7 % respectively). Nearly half of all Slovenians have poor digital problem-solving skills. Slovenian adults do better in numeracy than in literacy. This is despite a significant improvement in literacy skills compared to surveys from two decades ago. The skills of 55-64 year-olds are low both compared to the OECD average and to young Slovenians, creating one of the widest gaps across OECD countries (OECD, 2016b). Therefore, upskilling, reskilling and lifelong learning policies could improve their labour market participation. The national skills strategy, currently being drafted, intends to assess the national skills system and pave the way for policies and strategies to meet future needs and improve the link between supply and demand for skills. Older workers face many obstacles in staying active on the labour market despite the reform in 2013. Employers' perceptions play an important role. Employers doubt the capabilities of older workers and see them as more expensive and less flexible workers (Public Employment Service, 2015). Older workers may often not be attractive to employers due to their lower skills and the high seniority bonuses in Slovenia (OECD, 2016a). The 2013 labour market reform attempted to ensure greater competitiveness, employability and job retention of older workers. ( ) Nevertheless, despite the reform older people remain less attractive as workers. Older workers are approximately 15 % more expensive for employers than other workers (OECD 2016a). In addition to the basic salary, employers often have to pay more for them due to the seniority component of the salary system. In the private sector this commonly represents 0.5 % of the salary for each working year (although it may be agreed to be lower in collective agreements). The authorities are seeking to encourage employment of older workers. Recent measures concern tax relief and exemption from paying social security contributions for employers hiring older workers (55+ unemployed). The measure reduces labour costs temporarily as an employer is exempt from paying social security contributions for up to 24 months. The measure was introduced at the start of 2016, and will likely be extended beyond 2017. The unemployment insurance system allows people to retire as much as four years and one month earlier. In Slovenia, the duration of unemployment benefits increases sharply with work experience and age. Maximum benefit duration varies from two months for young workers with 6-8 months of prior employment, to up to 25 months. For workers over 55 years, with an insurance period of 25 years, the duration of unemployment benefit is set to 25 months as soon as nine months of contributions were made in the past 24 months. After this period unemployed older workers can receive pension and disability contributions for up to 2 years prior to fulfilling retirement conditions. This period will be reduced to 1 year as of March 2018. Because seasonal employment can be sufficient for older workers to re-establish benefit eligibility, incentives to seek permanent employment are weakened. Entering retirement via the unemployment insurance system has become increasingly common in recent years, with large spikes coinciding with anticipated pension reforms. Today, around 30 % of old-age pension recipients enter retirement via this route. (OECD, 2016a). To increase the employment rate of the elderly the government adopted a policy paper and an action plan in 2016. The policy paper 'Older Workers and the Labour Market in Slovenia' forms a basis for discussion with social partners and may, to some extent, address the challenges of demographic trends. The document complements the White Paper on pensions. Tackling the challenges the elderly face on the labour market is seen as a key factor for a successful pension reform (see Section 4.1.1). Based on the policy paper, the action plan was adopted. It includes 34 short term measures that should either start or finish in 2017, as well as 15 measures starting only in 2018. Four different ministries are involved in the plan. Some measures are a continuation of previous policies (Section 4.3.2) while others are completely new. Implementation of the plan is a key to improve activation of older workers. The proportion of low-skilled among all registered unemployed remains at the same high level compared to last year (at 28.8%). The employment rate of low skilled workers fell between 2008 and 2013. This was mostly the result of a significant decline in economic activity in the construction and manufacturing sectors, which employ mostly low-skilled labour. In recent years, their situation on the labour market improved: in 2015 their employment rate was up by 3.4 pps (48 %), from 2013. This is due to the structure of the economic recovery, which is based mainly on manufacturing exports (IMAD, 2016a). Nevertheless, the employment rate of low skilled remains 6.8 pps below the pre-crisis level and 4.6 pps lower than the EU average. Older and low-skilled workers continue to be underrepresented in active labour market policy (ALMP) measures. In 2015 the structure of ALMPs participants was as follows: 41.2 % young people, 47.6 % long-term unemployed, 17 % lower educated people and only 13.9 % older workers (50+) Some groups may overlap. Participation in lifelong learning in 2015 was high compared to other EU countries (11.9 % vs 10.7 % in the EU). However, it remains low among older workers and the low-skilled. The ALMP implementation plan adopted in January 2016 continues the approach implemented so far, with general measures such as subsidies for employment, encouragement of self-employment and public works. While public works seems to help in employing workers, particularly older workers, it can to a large extent represent quite an artificial reduction of unemployment, especially long-term unemployment. Since 2008, only three programmes were exclusive to older unemployed of which two were co-financed by the European Social Fund. The Ministry of Labour is preparing two new projects to address vulnerable groups on the labour market, including older workers. One will focus on providing employment to those who are unemployed for more than 24 months and are receiving social assistance. It will have a concept similar to public works and it will provide jobs in the public sector and associations with a social mission. A second new programme, 'Active ageing at work' will start in 2017. It will provide support for employers to manage the ageing workforce and provide training programmes for older workers. Both projects will be co-financed by the European Social Fund. 4.3.2.other labour market developments Despite the reform in 2013 labour market segmentation ( ) remains a challenge. The proportion of fixed-term contracts remains stable at 12.4 %. Newly concluded fixed term contracts have increased slightly among older and younger workers. However the proportion of fixed term contracts remains lower than before the reform. The number of self-employed remains stable at around 90 000. A policy paper prepared by the Ministry of Labour entitled "Decent Work" identified a number of reasons for using atypical contracts, such as rigid labour legislation and a tax system that leads to uncompetitive labour costs for permanent contracts (MoLFSAEO, 2016c). Against this background amendments of three different labour market acts are currently in public consultations. Amendments of the Labour Inspection Act will give more power to the labour inspectorate which should also help combat the increasing number of bogus self-employed ( ). Amendments of the Employment Relationship Act on dismissals in case of inability to work aim at making permanent contracts more attractive. Finally, changes of the Labour Market Regulation Act seek to ensure greater social security for