COMMISSION STAFF WORKING DOCUMENT Assessment of the 2014 national reform programme and stability programme for SLOVENIA Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Slovenia’s 2014 national reform programme and delivering a Council opinion on Slovenia’s 2014 stability programme
Date: 2014-06-02
Institutions: European Commission
Subjects: Slovenia, budget deficit, competitiveness, economic convergence, economic disparity, economic recovery, economic stabilisation, financial control, industrial restructuring, macroeconomics, stability programme, structural adjustment













EUR-Lex - 52014SC0425 - EN











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52014SC0425

COMMISSION STAFF WORKING DOCUMENT Assessment of the 2014 national reform programme and stability programme for SLOVENIA Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Slovenia’s 2014 national reform programme and delivering a Council opinion on Slovenia’s 2014 stability programme /* SWD/2014/0425 final */









Contents
Executive summary. 3
1....... Introduction. 5
2....... Economic situation and
outlook. 6
3....... Challenges and assessment
of the policy agenda. 7
3.1......... Fiscal policy and
taxation. 7
3.2......... Financial sector 15
3.3......... Corporate restructuring
and State ownership. 18
3.4......... Structural measures
promoting sustainable growth and competitiveness. 21
3.5......... Labour market, education
and social policies. 27
3.6......... Modernisation of public
administration. 31
4....... Conclusions. 33
Overview table. 35
Annex. 40

Executive summary

After a prolonged recession, recent data indicates that
a fragile recovery has commenced in Slovenia. In
2013, real GDP was 10% below its 2008 peak but
quarter-on-quarter growth in all quarters of 2013 was positive with a
particularly strong pick up in the final quarter. The recovery appears to be broad based with improvements on both
the external and domestic side. In light of the improving consumer and business
confidence, real GDP is forecast to grow by 0.8% in
2014 and accelerate to 1.4% in 2015. The
key drivers of the projected recovery are continued investment by the
government mostly through EU-funded projects and the positive contribution from
the external side
Slovenia has made some progress in addressing the 2013 country-specific
recommendations. It has made substantial
progress towards stabilising the banking sector and limited progress in fiscal consolidation, safeguarding long-term fiscal
sustainability, restructuring of the corporate sector, privatisation and improving
the business environment. New legislation to
establish the Slovenian Sovereign Holding was adopted in late March 2014. The
necessary legal basis to underpin restructuring of the corporate sector was approved
at the end of 2013. The adoption of the Fiscal Rule
Act, which would provide the legal basis for the general government budget
balance/surplus rule, has been delayed and other important reforms identified in the 2013 country-specific
recommendations have lagged. 
The 2014 stability programme and
national reform programme set out the policy priorities and the
path for the correction of the excessive macroeconomic imbalances. The stability programme provides the macro-economic and fiscal forecasts for Slovenia until 2018 and reaffirms Slovenia's commitment to
correcting the excessive deficit by 2015. The 2014 national
reform programme sets out policy priorities and
structural reforms for the next two years. The
government presented a three-pillar strategy, covering the financial sector
(further restructuring and consolidation of banks, restructuring and
deleveraging of companies, insolvency procedures), management of state assets
in the corporate sector including privatisation (the Slovenian Sovereign
Holding) and further fiscal consolidation (including adoption of the Fiscal
Rule Act, mid-term fiscal planning and long-term sustainability of public
debt). The three-pillar strategy provides for additional structural measures
that could underpin the economic recovery and improve the competitiveness of
the Slovenian economy.   
The main challenges for Slovenia are:
·        
Fiscal policy and long-term fiscal
sustainability: There are risks to Slovenia reducing its deficit in line with
the excessive deficit procedure (EDP) recommendation. Furthermore, the
government debt-to-GDP ratio has increased substantially in recent years and is
forecast to surpass 80% of GDP in 2014. High public debt may hamper growth
prospects by dampening domestic demand and reducing productive public spending. In light of an ageing population, substantial pressure is mounting on the
sustainability of public finances, especially from increasing expenditures on the pension and healthcare system. 
·        
Restructuring of the banking sector: Significant
effort has been made to stabilise the banking sector. However, the restructuring is far from complete and
substantial challenges lie ahead. The
level of non-performing loans is still high relative to pre-crisis levels. In
turn, this erodes banks’ profitability and discourages banks from providing new
credit, affecting the corporate sector and especially SMEs. Further recapitalisation and consolidation of the banking sector,
particularly small state-owned banks, could be needed. 
·        
Corporate sector restructuring: The
insolvency framework has been amended in order to facilitate the swift
resolution of non-performing loans. In practice the
financial and operational restructuring of the corporate sector is just beginning. The successful
restructuring of significant cases could substantially improve the business
climate in the corporate sector, which is currently burdened with a high level
of indebtedness. Reducing the sector’s debt overhang could support its capacity
to invest in innovative projects.
·        
Better management of state-owned and state controlled enterprises:
The legal basis for the Slovenian Sovereign Holding was adopted in
April 2014 and the strategy for classification of state assets is expected
to be adopted by July 2014 as stipulated in the law. Greater
clarity on the government's strategy for managing
state-owned enterprises, coupled with improved corporate governance and a transparent privatisation process could assist in creating a more favourable business environment and help to attract foreign direct
investment.
·        
Better business environment: Ongoing
privatisation and corporate restructuring offer many new possibilities for
private investors. However, the challenging business environment with lengthy
bureaucratic procedures and vested interests
hinders Slovenia from taking full advantage of this process. Furthermore,
product market regulations are unfavourable and hinder effective competition,
especially in services. 
·        
Labour market: The 2013 labour market reform has yielded positive effects to date and
has marginally reduced labour market segmentation. While the reform requires
time to take full effect the evaluation published in April 2014 points to
challenges that need to be addressed (i.e. employment
of older workers). 
·        
Improvement of the efficiency of public
administration: Greater efficiency of public
administration would improve the capacity to effectively
implement and monitor strategies, laws and structural reforms. High
levels of corruption weigh on the economy. Despite recent
reforms
and improvements, the civil justice system remains slow
and suffers from a backlog of cases. 

1.        
Introduction  

In
May 2013, the Commission proposed a set of country-specific recommendations (CSRs)
for economic and structural reform policies for Slovenia. On the basis of these
recommendations, the Council of the European Union adopted nine CSRs in July
2013. These country-specific recommendations cover the following topics: fiscal
policy and long-term fiscal stability (including pension reform and long-term
care); effective tailor-made active labour-market policy measures, skills
mismatches, wages and labour market segmentation; restructuring of the banking
and corporate sectors, including Slovenian Sovereign Holding; privatisation;
selected aspects of the business environment; and the efficiency of the public
administration. All of these issues impede the competitiveness of the Slovenian
economy. This staff working document (SWD) assesses the state of implementation
of these recommendations in Slovenia.
This
SWD assesses policy measures in light of the findings of the Commission’s
Annual Growth Survey 2013[1] and the third annual Alert Mechanism
Report[2], which were published in November
2013. The AGS sets out the Commission’s proposals for building the necessary
common understanding about the political priorities for action at national and
EU level in 2014. It identifies five priorities to guide Member States to
renewed growth in 2014: pursuing growth-friendly fiscal consolidation;
restoring normal lending to the economy; promoting growth and competitiveness
for today and tomorrow; tackling unemployment and the social consequences of
the crisis; and modernising public administration. The AMR serves as an initial
screening device to ascertain whether macroeconomic imbalances exist or risk
emerging in Member States. The AMR found positive signs that macroeconomic
imbalances in Europe are being corrected. To ensure that a complete and durable
rebalancing is achieved, Slovenia and 15 other Member States were selected for
a review of developments in the accumulation and unwinding of imbalances. These
in-depth reviews were published on 5 March 2014, along with a Commission
communication.[3]
Against the background of the 2013 Council Recommendations, the AGS,
the AMR and the in-depth review, Slovenia presented the 2014 national reform programme (NRP)[4] on
15th of April 2014 and the stability programme[5] on 28th of April 2014. Both programmes have been
prepared and approved prior to the dissolution of the Parliament in May 2014
and provide detailed information on progress made since July 2013 and on the government’s
planned measures. The 2014 national reform programme went through comprehensive
public consultation. The information included in these programmes, combined
with information provided on several bilateral meetings that have taken place
in the course of 2014, are the basis for the assessment made in this staff
working document. 

2.        
Economic situation and outlook

Economic situation
After
a prolonged recession, recent data indicates the start of a fragile recovery. In 2013, Slovenia’s real GDP contracted by 1.1% and was 10% below the peak levels
experienced in 2008. However, in 2013 the economy grew quarter-on-quarter every
quarter and growth was particularly strong in the fourth quarter. The recovery
appears broad-based with improvements on both the external and domestic side.
Exports remained resilient throughout 2013 and investment was slightly positive
thanks to EU-funded projects. Unemployment increased from 4.4% in 2008 to 10.2%.
The budget deficit increased significantly in 2013, to 14.7%, largely due to
the support given to banks (4.4% without bank recapitalisation). The
current account surplus increased to 5.3% of GDP in 2013.
Economic outlook
The recovery is expected to take
hold in 2014. In light of the positive developments in 2013 and
improving consumer and business confidence, the Commission 2014 spring forecast
expects real GDP to grow by 0.8% in 2014, accelerating to 1.4% in 2015. The key
drivers of the projected recovery are continued investment by the government mostly
through EU-funded projects and net exports. While the ongoing deleveraging
process is expected to continue weighing on domestic demand, private
consumption is expected to turn positive in 2014 and increase further in 2015.
The moderate recovery in domestic demand is expected to bring growth of real
imports more in line with that of exports. However, the external balance of
goods and services is set to improve further, also due to still favourable terms
of trade. Employment is expected to stabilise in 2014 before growing modestly
again in 2015. Labour force developments are projected to lag employment
dynamics and the unemployment rate is expected to peak in 2014 at around 10%.
Private sector wages are expected to continue increasing very moderately this
year and slightly accelerate in 2015, while public-sector wages are frozen
until end-2014 but are expected to increase by 1.5% in 2015, on a
no-policy-change basis. As a result, overall unit labour costs are projected to
grow moderately this year and next. Given the very low pressure on inflation
from import prices and labour costs, inflation is forecast to decline further
to historically low levels in 2014 and pick up slightly in 2015. The
government deficit is forecast to stand at 4.3% of GDP in 2014, including 0.9%
of GDP for the planned recapitalisation of Abanka and Banka Celje. Furthermore,
the authorities have extended the deadline for the recapitalisation of
Gorenjska Banka until 31 December 2014 and have committed to recapitalise the
bank with state funds if private sources do not materialise. In
2015, the deficit is expected to fall to 3.1% of GDP, based on a
no-policy-change assumption, helped by the improving economic outlook. No
recapitalisation needs have been factored into the 2015 deficit forecast. 
The
macroeconomic scenario underlying the budgetary projections of the stability programme
and the national reform programme was revised upwards in March 2014. According
to the projections of the Institute of Macroeconomic Analysis and Development
(IMAD), real GDP will grow by 0.5% in 2014, 0.7% in 2015 and 1.3% in 2016.
Assessed against currently available information, including the Commission
2014 spring forecast and internal projections for growth
beyond 2015, IMAD's macro scenario for 2014 and 2015 appears cautious. 

3.        
Challenges and assessment of
the policy agenda

The 2014 national reform programme confirms that Slovenia has made some progress in implementing the 2013
country-specific recommendations, yet, the work is far
from complete. Slovenia continues to experience excessive macroeconomic imbalances which
require specific monitoring and continuing
strong policy action (see Box 3). The national
reform programme provides an insight into government
plans on how to address the existing excessive imbalances and policy challenges
and thus contains important new commitments, which could
help to effectively tackle the challenges faced by Slovenia, if implemented in
a rigorous
and timely
manner. A assessment of the
implementation progress achieved in regard to the
2013
country-specific recommendations is available in Section 4.
The remainder of this staff working document assesses the policy agenda in light of these challenges, with
a particular emphasis on determining whether this agenda is sufficiently
ambitious and credible in order to address the identified excessive imbalances.

The
2014 stability programme reaffirms Slovenia's commitment to correcting the excessive deficit by 2015 in line with the
excessive deficit procedure and achieving a balanced
budget position in structural terms by 2017. The programme
provides the macro-economic and fiscal forecasts for Slovenia until 2018 and
is the first update of the authorities' macroeconomic and fiscal projections
since the 2014 Budget. Furthermore, it provides
details of the path anticipated for the debt until 2018, which is projected to
remain above the 60% of GDP reference value for the duration of the
programme.  

3.1.                
Fiscal policy and taxation

Budgetary development and debt dynamics
The
objective of the budgetary strategy outlined in the 2014 stability programme is
to correct the excessive deficit by 2015 and reach the medium-term objective
(MTO) by 2017. While the programme confirms the
previous medium-term objective of a balanced budget, which is in line with the
Stability and Growth Pact requirements, it forecasts a deficit in structural
terms for the duration of the programme. The programme plans to bring the
deficit below 3% of GDP in 2015, in line with the target set in the excessive
deficit procedure recommendation. Beyond 2015, the programme envisages a steady
decline in the deficit before turning to a surplus of 0.3% of GDP in 2018.  
The deficit
increased significantly to 14.7% of GDP in 2013, from 4% in 2012, largely due
to the one-off recapitalisation of the banking sector. The
general government deficit excluding bank recapitalisations stood at 4.4% of
GDP, as against the 4.2% target in the previous programme update and the 3.8%
estimate in the Draft Budgetary Plan (also excluding recapitalisations), and 0.7
pp. of GDP above the excessive deficit procedure recommendation of 3.7%. The
other key drivers of the deviation were non-financial one-offs unforeseen at
the time, namely the impact of court rulings on public sector wages and the
compensation of persons removed from the register of residents after
independence, which added a net 0.7% of GDP to the deficit.
The structural
adjustment, recalculated according to the commonly agreed
methodology[6],
falls short of the excessive deficit procedure requirement
for 2013. The
shortfall amounts to 0.6 % of GDP in 2013. Based on a bottom-up assessment,
which estimates the size of the additional fiscal effort on the basis of the
discretionary revenue measures and the expenditure developments under the
control of the government between the baseline scenario underpinning the June
2013 excessive deficit procedure recommendation and the Commission 2014 spring
forecast, the overall fiscal effort for 2013 amounts to around 1% of GDP, broadly
in line with the additional consolidation measures mentioned in the June 2013
excessive deficit procedure recommendation as consistent with reaching the
structural target for 2013.
Box 1. Excessive deficit procedure for Slovenia
Slovenia is currently subject to the corrective arm of the Stability and
Growth Pact. The Council opened the Excessive Deficit Procedure for Slovenia on 2 December 2009 and on 21 June 2013 recommended to correct the excessive
deficit by 2015 at the latest. The recommendation specified a headline general
government deficit target of 4.9% of GDP in 2013 (3.7% of GDP without 1.2% of
GDP one-off expenditure to recapitalise the two largest banks as estimated at
the time of the recommendation), 3.3% of GDP in 2014 and 2.5% of GDP in 2015,
which is consistent with an annual improvement of the structural balance of 0.7
pp. of GDP in 2013, 0.5 pp. of GDP in both 2014 and 2015. Furthermore, the
recommendation specified that Slovenia should rigorously implement the measures
already adopted to increase indirect tax revenues and reduce the public-sector
wage bill and social transfers, while standing ready to complement them with
additional measures if their yield would prove less than foreseen. In addition,
  Slovenia should specify, adopt and implement new structural consolidation
measures that are necessary to achieve the correction of the excessive deficit
by 2015.
The year following the correction of the excessive deficit, Slovenia will be subject to the preventive arm of the Pact and should ensure sufficient
progress towards its medium-term objective. As the debt ratio in 2015 is
projected at 81.1% of GDP, exceeding the 60% of GDP reference value, during the
three years following the correction of the excessive deficit Slovenia will be subject to the transitional arrangements as regards compliance with the
debt criterion, during which it should ensure sufficient progress towards the
debt benchmark.
Based on its 2014 winter forecast, the Commission considered that
there were risks to Slovenia achieving a durable correction of the excessive
deficit by 2015. In light of this, on 5 March 2014 an Autonomous Commission
Recommendation was addressed to Slovenia indicating that Slovenia should make efforts to ensure full compliance with the Council recommendation of
21 June 2013 and take the necessary steps to ensure that the structural effort
recommended by the Council is met.
In 2014, the
headline deficit is projected to improve considerably to 4.1% of GDP. This is
significantly below the headline deficit envisaged in the Draft
Budgetary Plan of 6.7% of GDP but the difference is due to the timing
of bank recapitalisations. Excluding bank recapitalisations, the stability
programme envisages a deficit of 3.2% of GDP vs. 3.3% in the Draft Budgetary
Plan. The
most significant cause of the deviation from the Draft Budgetary Plan is the
decision by the constitutional court to repeal the new real estate tax, which
was expected to yield additional revenue of 0.5% of GDP in 2014. The government
has introduced several revenue raising and expenditure reducing measures, which
partially offset this, but the headline deficit remains above the 3.3%
envisaged in the excessive deficit procedure recommendation. The
programme also includes in 2014 one-off proceeds of 0.4% of GDP arising from
the auction of the 4G telecom spectrum licenses, completed in April
2014.
In 2015, the
authorities target a deficit of 2.4% of GDP, which is slightly below the excessive
deficit procedure recommendation of 2.5% of GDP. No
additional bank recapitalisation needs are included in the programme beyond
2014. The programme expects a significant further decline in the public-sector
pay bill by 5% in 2015, which would be largely due to a continuation of both
the freeze in wages that has yet to be agreed with the trade unions, and the
reduction in public sector employment, which has proved difficult to enforce at
the sub-central government level. The programme also includes cuts to other
expenditure items that need to be specified in detail, while it projects tax
revenues to decline in 2015 also due to the expected subdued nominal GDP
growth, on the back of continued fiscal consolidation.  
The consolidation is
expected in the programme to continue also in 2016-18, focusing mainly on the
expenditure side. The revenue-to-GDP ratio is projected to decrease by
1.3 pp. from 2013 to 2018, whereas total expenditure (without one-offs) is
targeted to drop by around 6 pp. over the same period. 
The revenue
measures outlined in the programme are of a more permanent nature than the
expenditure measures. The budgetary implications of most
envisaged measures are quantified both for 2014 and 2015 (see Box 2). Furthermore, the programme envisages to step-up the fight against the grey economy
and improve the collection of taxes, which is expected to yield 0.2 pp. of GDP
in 2014. Several of the measures necessary to meet the deficit targets for 2015
and beyond are unspecified. 
An Autonomous
Commission Recommendation was issued to Slovenia in March 2014 asking for full
compliance with the excessive deficit procedure recommendation. The
programme does not include a dedicated section regarding the Autonomous
Commission Recommendation and the actions that are being taken to address it,
despite the Autonomous Commission Recommendation requesting one. The programme
identifies some additional measures that assist in narrowing the gap between
the planned fiscal effort and that recommended under the excessive deficit
procedure. Based on this it is considered that the programme has partially
responded to the Autonomous Commission Recommendation. To mitigate the
risks identified in the Autonomous Commission Recommendation,
additional measures beyond those specified in the programme may be needed. 
 
Based on the
assessment of the programme and the Commission 2014 spring forecast there are
risks to Slovenia meeting its deficit targets for 2014 and in turn ensuring the
correction of the excessive deficit in a credible and sustainable manner by
2015.
In 2015, a risk to the envisaged deficit is the possible need of additional
capital supports to the banks stemming from the 2013 asset quality review and stress test, as the
deadline for the recapitalisation of Gorenjska Banka was extended until
end-2014 and the government committed to use state funds if private sources do
not materialise. There are also risks that measures producing a sufficient
structural effort will not be adopted over the forecast horizon. In
2014 in (recalculated)
structural
terms, the programme projects an improvement of 0.8 pp. of GDP in 2014,
i.e. above the 0.5 pp. recommended effort. The Commission 2014 spring
forecast, however, expects no improvement in uncorrected structural terms and a
‑0.7 pp.
of GDP
deterioration in corrected structural terms. In 2015, the (recalculated)
structural balance is planned to improve by 0.6 pp, again slightly better
than the recommended 0.5 pp. of GDP. By contrast, the Commission forecast,
based on a no-policy-change assumption, projects a headline deficit of 3.1% of
GDP and a structural adjustment of just 0.2 pp. of GDP in uncorrected terms and
0.1pp. of GDP in corrected terms. Over the period
2013-2014, the
cumulative fiscal effort in corrected structural terms falls
short of the recommended effort by 1.4% of GDP. The bottom-up
assessment of the forecast fiscal effort indicates that, in 2014, the effort
would be approximately 1% of GDP, some 0.5 pp. below the additional
consolidation measures mentioned in the June 2013 excessive deficit procedure
recommendation as consistent with reaching the structural target for 2014. 
 Box 2. Main measures   The public finances measures in 2014 largely continue policies initiated in 2012-13. The tax income shortfall created by the repealed real estate tax is planned to be partly offset by a combination of new and one-off measures (e.g. increased dividends). On the expenditure side, the intention is for several policies to extend into 2015: freezes in indexation arrangements (already agreed for pensions, planned also for public wages), decrease in public sector employment and continued reduction in intermediate consumption and subsidies. Detailed annual budgetary impacts of major macro-structural reforms (e.g. pension reform) over the programme horizon are not presented.   
 Main budgetary measures 
 Revenue || Expenditure 
 2013 
 ·         Reduction in the corporate income tax rate to 17% (-0.1% of GDP) ·         Higher road user charge (full-year impact 0.1% of GDP) ·         New tax on financial services and amended bank assets tax (0.1% of GDP) ·         Increase in VAT rates from 1 July (full year impact 0.7% of GDP) ·         New taxes on lottery tickets from 1 August (full year impact 0.05% of GDP) || ·         Cut in public sector holiday allowance (‑0.15% of GDP) ·         Cancelled indexation of public sector wages (‑0.15% of GDP) ·         Cancelled promotions for 2013 (-0.15% of GDP) ·         Higher meals allowance for students (permanent) (0.1% of GDP) ·         Additional measures to curb the public sector wage bill from 1 June (full year impact -0.2% of GDP) ·         Lower unemployment benefits from 1 July (full year impact ‑0.05% of GDP) ·         Lower capital expenditure (full year impact ‑0.3% of GDP) ·         Lower intermediate consumption (full year impact ‑0.1% of GDP) 
 2014 
 ·         Biodiesel - the abolition of the excise duty refund labour law from April (0.05% of GDP in 2014 / full year impact 0.1% of GDP)    ·         Increase of excise duty on fuels, alcohol and tobacco from April (0.1% of GDP in 2014 / full year impact 0.2% of GDP) ·         Continued measures to tackle grey economy (0.2% of GDP) || ·         Cancelled indexation of pensions (-0.1% of GDP) ·         Cancelled indexation of public sector wages (‑0.15% of GDP) ·         Cancelled promotions for 2014 (-0.15% of GDP) ·         Lower transfers to indirect budgetary users (‑0.1% of GDP) ·         Payment of promotions relating to 2011-2012 (+0.2% of GDP)   
 2015 
 ·         PIT - Extension of 4th bracket – planned (0.04% of GDP) ·         Tax on insurance contracts - planned (0.10% of GDP) || ·         Cancelled indexation of pensions (-0.1% of GDP) ·         Cancelled indexation of public sector wages - planned (-0.15% of GDP) ·         Lower transfers to indirect budgetary users (‑0.1% of GDP) 
 Note: The budgetary impact in the table is the impact reported in the programme, i.e. by the national authorities or in parallel budget documents. A positive sign implies that revenue / expenditure increases as a consequence of this measure. The degree of detail reflects the type of information made available in the stability programme and other budget documents. 
Looking beyond
2015, after correcting the excessive deficit, the consolidation
effort declines gradually over the programme horizon. The
(recalculated) structural balance is planned to continue improving at a slower
pace in the outer years of the programme, by 0.5 pp. of GDP in 2016, 0.2 pp.
in 2017 and 0.5 pp. in 2018. This is not fully in line with the requirement
under the preventive arm of the Stability and Growth Pact of at least 0.6 pp.
of GDP improvement when the output gap closes to above ‑1.5% of GDP,
which is expected to happen as from 2016. 
The general
government gross debt is projected to remain above the 60% of GDP reference
value for the duration of the programme. Debt increased
sharply in recent years, to 71.7% of GDP in 2013, and continues to rise under
the programme to 80.9% in 2014, due to the projected sharp increase in interest
expenditure and the still negative primary balance. The debt ratio is projected
to stabilise at 81.1% of GDP in 2015. This is broadly in line with the Commission
2014 spring forecast, which estimates debt at 80.4% and 81.3% of GDP in
2014 and 2015 respectively. For the period 2016-18 the debt is expected to fall
steadily to 70.4% of GDP in 2018 due to the increasing primary surpluses and
healthier output growth rates. 
Fiscal framework
Slovenia did not progress adequately in improving its fiscal framework. In 2013, Slovenia received a country-specific recommendation
concerning the adoption of a general government budget balance/surplus rule,
the introduction of a binding, encompassing and transparent medium-term
budgetary framework, and the strengthening of the independent bodies monitoring
fiscal policy. The analysis in this staff working
document leads to the conclusion that Slovenia has so far made limited progress in addressing this
recommendation.  
The authorities
are currently preparing to overhaul the legislation underpinning Slovenia’s
fiscal framework, in compliance
with the Treaty on Stability, Coordination and Governance in the European
Monetary Union and secondary European legislation on fiscal governance (in
particular Council Directive 2011/85/EU on requirements for budgetary
frameworks). The Slovenian Constitution was amended in May 2013 to provide the
basis for the general government budget balance/surplus rule. Nevertheless, the
authorities have missed the November 2013 deadline for implementation of the
necessary legislation, namely the binding Fiscal Rule Act.[7] A draft bill
has been prepared and made available to the Commission in mid-March 2014. The
programme foresees the Fiscal Rule Act to be adopted by parliament with two
thirds majority but fails to define a timeline for its adoption. Given the
current political situation in Slovenia, there are risks to the adoption of the
legislation.
A fiscal council
was established in 2009, but its effectiveness has been limited by its unclear
mandate and it is currently not operational. The Fiscal Rule Act provides an opportunity to strengthen
the role of the fiscal council and enhance its visibility and resources so that
it can provide a genuine multi-annual perspective on fiscal policy. It is
envisaged that the responsibility for producing the macroeconomic forecast on
which the government’s budgetary plans are based will remain with the Slovenian
Institute of Macroeconomic Analysis and Development, which is a government
entity charged with monitoring and analysing current and structural economic
developments.  
Linked to the Fiscal Rule Act, the
government also foresees the adoption of the Public Finance Act, which would contain very specific provisions for preparation,
implementation and monitoring of the budget of all the governmental budgetary
users. This act would regulate preparation and implementation of budgets with
special attention to be given to control mechanism and sanctions, in order to
reduce fiscal imbalances and consequently ensure medium-term sustainability. The national reform programme fails to define a
timeline for its adoption, thus it cannot be excluded that adoption of this act
may be postponed.  
Long-term sustainability
Slovenia
appears to face fiscal sustainability risks in the medium term. The
medium-term sustainability gap[8] , showing
the adjustment effort up to 2020 required to bring debt ratios to 60% of GDP in
2030, is at 1.9% of GDP, primarily related to the high level of government debt
(forecast at 81.3% of GDP in 2015) and the projected ageing costs (contributing
0.9 pp. of GDP per year until 2030). 
In the long
term, Slovenia appears to face high fiscal sustainability risks, primarily
related to the projected ageing costs, in
particular in the field of pensions. Aging costs
are projected to contribute 6 pp. of GDP over the very long run. The
long-term sustainability gap[9]
shows that the adjustment effort needed to put the debt-to-GDP ratio on a
non-increasing path is of 6.6 pps of GDP. Risks would be higher in the event of
the structural primary balance reverting to lower values observed in the past,
such as the average for the period 2004-2013. It is therefore appropriate for Slovenia to reduce government debt and to further contain age-related expenditure[10]
growth to contribute to the sustainability of public finances in the medium and
long term.
Risks
to the long-term sustainability of the pension, health and long-term care
systems, as identified in the 2013 country-specific recommendations, persist. In
2013, Slovenia received a country-specific recommendation on strengthening the
long-term sustainability of the pension system and improving the efficiency and
cost-effectiveness of the long term care. The analysis in this staff working
document leads to the conclusion that Slovenia has made limited
progress
on addressing this recommendation. The pension reform, adopted in
December 2012 and taking effect from January 2013, has shown
positive first effects despite the initial transition period. While certain fiscal savings have been realised in 2013, further
stabilisation of pension-related expenditures is expected for the period
2014-20, before it
would become unsustainable (as projections after 2020
show). Old-age pensions benefit levels remained largely unchanged, but the Act
on Executing the State Budget temporarily froze the indexation of pensions in
2014-15. The number of new old-age pensioners in 2013 decreased almost by
40% compared to 2012.[11] Such
a low level in 2013 could be explained by anticipation effects of the new
regime. People, eligible for retirement, retired under the old legislation that
provided benefits for years of education and military service. Despite
certain positive developments, the 2012 pension reform does not link
pensionable age to gains in life expectancy and does not explore measures to
stimulate private contributions to the second pillar. These options could be
explored in the framework of the White Paper that would launch public
consultation on a comprehensive post 2020 pension reform, as suggested by the national
reform programme. 
To avoid inefficient linear budgetary cuts, a targeted
reorganisation of the healthcare system to explore
internal synergies and realise savings would be beneficial. In
the last two years, efforts have concentrated on budget consolidation measures
including cutting prices of healthcare services and increasing the share of
private funding and contribution rates for certain groups. In parallel, the
number of patients on waiting lists (which measures access to healthcare
services) increased substantially from around 40 000 for 52 services (end
of 2011) to 62 000
for 46 services (end of 2012). The authorities have requested the
World Bank’s technical assistance to review expenditures in health care system
in order to improve cost-effectiveness, quality and service delivery. As
suggested by the national reform programme, the authorities are committed to
the reorganisation of health care sector that would bring substantial savings
through the joint public procurement and regional organisation of back-office
services but the timeline for action is unclear. A pilot project of joint
public procurement was conducted and substantial savings have been realised,
proving that it would be beneficial to extend this approach to the whole
system. However, increasing the scope of the procurement bids could increase
the risk of overpricing[12] or
delivering unsatisfactory quality of products. To address previous allegations of corruption,
the introduction of common tenders should be transparent, with sufficient reviews and quality control mechanisms. 
Long-term
sustainability pressures stem from increasing demand for long-term care. The
government adopted a blueprint for long-term care reform at the end of 2013,
and the related legislation is expected to be adopted by November 2014, as
suggested by the national reform programme. However, the adoption of the
legislation risks to be postponed given its linkages to the healthcare reform.
More particularly, the financing of the long-term care is linked to the
redistribution of the existing funding received through several sources,
including the current healthcare insurance system. The reform is a step in the right
direction to contain age-related increase in long-term care, while ensuring
access to quality services. It envisages creating a single entry point, a
uniform expert procedure for assessing long-term care needs, individual care
plans, training measures for informal carers as well as a stronger focus on
prevention and rehabilitation. 
Tax system
At
37.7% (in 2013), Slovenia's total tax-to-GDP ratio was slightly below the EU
average (38.8% in 2011). Taxation on labour has declined, as
shown by a drop of the implicit tax rate on labour from 37.3% in 2006 to 35.2%
in 2011. While the implicit rate on consumption is above the EU average,
taxation of capital, especially corporate income, is one of the lowest in the
EU. Revenues from environmental taxation have increased in percentage of GDP
since 2006; in particular, revenues from energy taxation were the highest in
the EU in 2012. To support fiscal consolidation, the government increased VAT
rates in July 2013, which yielded an estimated additional 0.35% of GDP in 2013
and expected cumulative increase of 0.7% of GDP in 2014. Excise duties on
fossil fuels, biofuels, alcohol and tobacco products were also raised in 2014,
while the previously planned reduction in corporate income tax rates was
stopped last year. 
Property
taxes are low in Slovenia, with revenues amounting to 0.5% of GDP in 2012. A
real-estate tax, to take effect as of January 2014 and replace the existing
levies, was a key element of the government's 2014 budgetary plan. The proposed
tax was expected to contribute an additional EUR 200 million annually however,
in March 2014 the Slovenian Constitutional Court repealed the act underpinning
the tax citing that the law does not specify the methods of real estate
evaluation. In light of this, the compensation for the use of land will remain
in force in 2014. In the stability programme the government states it will
explore options to propose a new property tax, taking on board the comments
from the Constitutional Court, however no clear timeline for the introduction
of a new property tax is provided and no revenues from it are factored in the
budgetary plans.
The government adopted a programme to mitigate
the impact of the ‘grey economy’, including measures to prevent undeclared
employment. The size of the
non-observed economy in Slovenia is estimated at more than 10 % of GDP.[13] To support fiscal consolidation efforts, the 2013
recommendation asked for improved tax compliance. The
analysis in this staff working document leads to the conclusion that Slovenia has made some progress in addressing this recommendation but challenges persist. Undeclared employment will
be addressed through the introduction of special online voucher register. The
law was adopted by the parliament in April 2014 and should be implemented in
timely manner. The level of tax frauds was contained through stricter rules for
using cash-register software. Early indications suggest that the programme,
introduced in July 2013, has yielded positive results; the authorities
anticipate additional revenues amounting to 0.2% of GDP in 2014. A more
detailed assessment of the effectiveness of measures to date is required in
order to determine whether further steps, such as comprehensive online systems,
would be beneficial. Proposals for tighter restrictions on cash operations are
currently also being prepared and the further
modernisation of tax administration could be beneficial.

3.2.                
Financial sector

In 2013, Slovenia received a
country-specific recommendation on carrying out a system-wide bank asset
quality review, the implementation of a comprehensive banking sector strategy,
and the divestment of banks’ state shareholdings. Slovenia has made
substantial progress on addressing this recommendation.
The government took decisive action but the
work is far from complete and focused action is required
to fully restructure banking sector. 
Doubts regarding the health
of the Slovenian banking sector highlighted the need for an asset quality review
and stress test.[14] In order to regain market confidence and provide the necessary
clarity regarding the outlook a system-wide bank asset quality review, as requested
in the 2013 country-specific recommendation was conducted. The exercise[15] was
carried out by independent experts and identified
weaknesses in the banking sector and in particular in the area of corporate governance and risk management systems (i.e. limited workout
capacity and weaknesses in risk assessment, data quality, the credit approval
process and statistical disclosure). It is important that these weaknesses are
addressed in a comprehensive way to minimise the risk of a repeated build-up of
losses. The authorities announced a strategy for the banking sector in December
2013, yet the progress to date has been limited.
Based on the outcome of this
exercise, banks were promptly recapitalised in line with state-aid rules. The stress test identified capital deficits of up to EUR 4 778
million under the adverse scenario.[16] The European Commission approved recapitalisation measures for the
two largest state-owned banks (NLB, NKBM) on 18 December 2013. In parallel, it temporarily approved rescue aid for Abanka and
adopted a decision allowing for the liquidation of Probanka and Factor
Banka. Once these decisions were adopted, recapitalisation to the five institutions, totalling EUR 3 214
million, was completed.[17]
The transfers of
non-performing loans to the Bank Asset Management Company have been completed
but the loan workout strategy needs to be refined. Loans
from the two largest banks (NLB and NKBM) with a gross value of EUR 3 301
million were transferred to the Bank Asset Management Company in December 2013
for a total consideration of EUR 1 012 million, representing an average
discount of 69 %. For Abanka, Slovenia’s third largest bank, loans with a
gross value of approximately EUR 1 150 million are due to be transferred
once the submitted restructuring plan is approved by the European Commission.
The Bank Asset Management Company’s strategy for the workout of these loans
remains unclear. In the national reform programme, the government has committed to adopt a business plan and
strategy for the Bank Asset Management Company by September 2014. A
comprehensive business plan would provide greater clarity on the strategy for
the workout of each portfolio of asset, details on the redemption targets,
budget, asset management plans and expected returns. The Board has not yet fully
put in place the necessary infrastructure and corporate governance arrangements
to ensure transparency and help maximise the recovery value for the state. It is important that any subsequent transfers of loans from other banks
are designed in a way that would provide the Bank
Asset Management Company with a majority of the
outstanding loans in the
major restructuring cases and as a consequence allow it to take the lead in the restructuring. 
Privatisation
of state-owned banks and considerable restructuring and consolidation of the
sector will continue in 2014. As a result of four
consecutive years of balance sheet contraction and asset transfer, the total
assets of the banking sector in Slovenia shrunk by one-fifth between 2009 and
2013. In September 2013, a decision was taken to wind down two smaller domestic banks (Probanka and Factor Banka), in line with Bank of Slovenia’s strategy to consolidate the sector. Both banks will most likely exit the market in 2014. Despite significant consolidation, a further reduction in the size
of banks’ balance sheets is likely.[18] Banka Celje, a small privately owned domestic bank, requested
state aid at the end of April 2014 and is preparing a restructuring plan. Gorenjska
Banka, which currently complies with the Bank of Slovenia’s capital
requirements but has to increase its capital in line with the stress test
result. The
government committed
to use state funds if private sources do not materialise. Mergers, in particular between smaller
domestic banks, could exploit cost synergies and result in creating the third
largest domestic bank. In December 2013 the
government announced its intention to fully dispose of the ownership of NKBM
and Abanka, and to reduce its participating share in NLB to 25 % plus one
share in the medium term[19]. In
the national
reform programme, the government confirmed the commitment
to privatise the banks, referring to the timeframe agreed with the European
Commission in the state aid restructuring plans for NLB and NKBM. Prompt
implementation of these measures would send a strong signal to the market and could
facilitate further restructuring in the sector.  
The banks' capacity to work
out non-performing loans could be reinforced. The
transfer of non-performing loans to the Bank Asset Management Company has improved
banks’ balance sheets, but the levels remain high relative to pre-crisis levels
and still need to be restructured in a sustainable manner. The successful
restructuring of non-performing loans would be key to restore sustainability
and profitability in both the banking and the over-indebted corporate sector.
Although the national
reform programme has recognised the importance of this
issue, more concrete measures (as part of the wider action plan on
restructuring) could accelerate the process. Enhancing banks' internal workout
capacity is one of the key prerequisites for successful restructuring and could
include strengthening the internal asset management units and management
incentives. Workout units focused on maximising recovery value and tackling the
loan books in a comprehensive and strategic way could reduce the potential for
further state injections in the future. 
The approved restructuring
plans need to be fully implemented. The
restructuring plans for the NLB and NKBM, and the corresponding commitments,
provide for (i) enhanced corporate governance designed to prevent unnecessary state
influence on banks; (ii) an improved risk-management framework; (iii) divesture
of non-core businesses; (iv) reduction of exposure to non-performing loans; (v)
adequate capital levels over the restructuring period, and (vi) increase
efficiency and introduction of adequate pricing aimed at restoring banks’
profitability. Prompt implementation of the plans will help to restore the sector’s
profitability and long-term sustainability. It will also enhance banks’ attractiveness
as investments. 
Box 3: Conclusions from the March 2014 in-depth
review on Slovenia
The third in-depth review (IDR) for Slovenia was published on 5 March 2014. On the basis of this review, the
Commission concluded, for the second consecutive year, that Slovenia continues to experience excessive
macroeconomic imbalances which require specific monitoring and continuing
strong policy action. These imbalances have been
unwinding over the last year, thanks to macroeconomic
adjustment and decisive
policy action by Slovenia. Yet the magnitude of the necessary correction means that substantial risks are
still present.  More specifically, the risks stemming
from an economic structure characterised by weak corporate governance, high
level of state involvement in the economy, losses in cost competitiveness, the corporate debt overhang, the increase in government debt warrant
very close attention. While considerable progress has been made in repairing the banks’
balance sheets, determined action
with respect to the full implementation of a comprehensive banking sector strategy,
including restructuring, privatisation and enhanced supervision is still required.
The main observations and findings from the IDR analysis are:
·     
Slovenia has taken decisive policy action in 2013 which
has stabilised the banking sector but further restructuring and consolidation
is required for the sector to return to long-term sustainability and
profitability. 
·     
The sharp increase in government
debt in recent years, albeit from a relatively low level, creates new
challenges and risks, which underscores the need for sustainable policy
actions. 
·     
A substantial loss of export
market shares over the past five years shows that Slovenia is not competing
effectively in world markets. 
·     
The postponement of the
financial restructuring of viable companies delays the re-establishment of
investment capacity and the recovery of the economy. 
·     
The complex nexus of state
ownership limits adjustment and distorts resource allocation, especially as
regards new investment. 
The IDR discusses
policy challenges that could be explored in order to address the identified
imbalances and risks: 
·     
Further restructuring and
consolidation in the financial sector beyond the progress made in 2013 is
required to return to long-term profitability and sustainability. 
·     
Prudent and credible fiscal
policy, including pension and long- term care reform, is necessary to maintain
market confidence and ensure debt sustainability in the medium-term.
·     
Containment of labour costs is
essential for restoring, including through a reform of the minimum wage, labour
taxation and public- sector wages.
·     
Enhancing governance in the
corporate sector and providing the tools to effectively address the debt
overhang will help to unlock productivity.
·     
Encouraging private
ownership and a comprehensive strategy for the management of strategic/core
assets could improve the adjustment capacity of the real economy.

3.3.                
Corporate restructuring and State ownership

Corporate restructuring 
Reforms to the legal
framework to facilitate the swift rehabilitation of viable companies and the acceleration
of restructuring were adopted in 2013. A
simplified compulsory settlement procedure and a preventive restructuring procedure
(in the pre-insolvency stage) are among the new tools included in the
Insolvency Act in May and December 2013. The law has shortcomings, for example,
it is not possible to impose a principal haircut on a secured creditor as part
of a restructuring plan. The effectiveness of these tools and of other
insolvency procedures should be closely monitored and evaluated based on
appropriate indicators at aggregate level, such as recovery rates in all types
of insolvency procedures, the types of measures agreed in the restructuring
plan and their applicability and effectiveness, the proportion of the principal
haircut agreed, where relevant, and the amount of debt involved in the
restructuring (per business sector and size of company). The commercial courts
have seen a rise in insolvency cases and their capacity to resolve cases has
not yet stabilised. In bankruptcy cases against legal entities, the clearance
rate fell from 83 % in 2012 to 67 % in 2013, leading to a
32 % increase in the number of pending cases. Case-management reforms in
commercial courts have not yet brought stable improvements to insolvency
proceedings. Nevertheless, despite a rising number of incoming cases, the
proportion of insolvency proceedings involving legal entities resolved within
nine months of filing improved slightly, from 57 % in 2009 to 63 %
in 2013.[20]
Despite the recent
amendments to the legal framework, the financial and operational restructuring
of the corporate sector is yet to begin on a larger scale. The initial plan was to attribute a key role in pushing forward
corporate restructuring to the Bank Asset Management Company. Following the transfers of assets executed in December 2013 the Bank Asset Management Company faces
difficulties in taking the lead in many major restructuring cases due to the fragmented nature of the loans transferred and their minority
position vis-à-vis other creditors. A centralised and comprehensive approach towards the various credit
exposures in the banking system could accelerate the workout process and
facilitate restructuring negotiations, particularly in the case of complex
inter-connected groups with a high number of bilateral contracts and
conflicting interests. A task force with
experienced representatives of all stakeholders (including the government, the
Bank of Slovenia and possibly external experts) could provide the necessary
expertise, guidance and advice, and facilitating the negotiation process
between all stakeholders involved. It could further drive the negotiation
process for a number of large cases by establishing a list of the most urgent
restructuring cases and setting priorities in an action plan for the overall
restructuring process. Furthermore, it could ensure hands on training to
relevant stakeholders regarding the application of the revised insolvency
framework, promote the use of the available legal mechanisms and international
best practices and explore foreign and domestic private investment as sources
of financing.
In the national reform
programme the government has committed to establish a working group coordinating
the overall restructuring process. The working group
will be responsible for overlooking some of the largest cases, for monitoring,
accelerating and coordinating the overall restructuring process. It will further
prepare an action plan for improving corporate governance in restructured
companies. To guide the process, the government has adopted non-binding
restructuring principles, as proposed by the Banking Association, though their
effectiveness has not yet been tested. In the meantime, swift and efficient
closure of some ongoing urgent cases would help establish best practice for
corporate restructuring in Slovenia. Moreover, building strong management
incentives and technical capacity within banks’ internal asset management units,
as well as ensuring that companies have sufficiently experienced management in
place to implement turn-around plans, is also an integral part of corporate
restructuring. 
State ownership
The level of state ownership
and influence prevalent in Slovenia poses a serious impediment to improving the
real economy’s adjustment capacity.
State-owned and state-controlled enterprises account for one-sixth of total
value added in Slovenia and form a complex network of domestic banks, insurance
groups and non-financial corporations. Cross-shareholding and the level of
state influence in Slovenia create significant risks to public finances, both
directly and indirectly through guarantees[21] given that the state-owned and state-controlled enterprises continue to generate losses and remain highly indebted.
Sub-optimal corporate governance, inefficient governmental
subsidies, political interference and vested interests have been identified
as the main reasons for the subdued performance as well as low attractiveness of business environment for foreign direct
investment and the instability of the banking sector. Recent studies[22] have indicated that political connections are
more prevalent in state-owned and state-controlled enterprises or firms owned by municipalities, rather than in private
companies. Politically affiliated supervisory board members represent negative
influence on productivity of the company, whereas on the contrary,
participation of non-affiliated parties on supervisory board increases productivity
and efficiency. This is especially evidenced in non-tradable sector. In light of these
challenges, Slovenia
received a recommendation in 2013 for better management
of state-owned enterprises. The government has made limited progress in addressing this
recommendation. 
The authorities identified a list of 15 companies for
accelerated privatisation in May 2013. While progress to date has been mixed, the national reform
programme sets out the government’s commitment to implement the privatisations
over 2014-2015. The sales of two companies from the list have been completed to
date.[23] The privatisation of Elan is in final stage,
with sales agreement expected to be closed before summer 2014. The
privatisation of Telekom Slovenije (the largest asset on the list is expected
to be completed by July 2014 in line with the government’s commitment. The
privatisation of NKBM (the second largest bank in Slovenia and the only bank on
the list), is proceeding slowly. The process for Airport Ljubljana and Adria
Tehnika is moving forward, with a call for interest published for the airport
and non-bonding bids received for Tehnika. The authorities have provided a
timeline for each of the remaining sales processes, but limited progress has
been made to date.[24] 
The
new legislation underpinning the Slovenian Sovereign Holding was adopted in
late March 2014. In 2013, Slovenia received the country-specific recommendation to
make the Slovenian Sovereign Holding fully
operational by September 2013 in order to consolidate both the ownership and
the management of the government stakes in companies under one umbrella, and
prepare a comprehensive strategy and a precise classification of assets. Should
the recently adopted legislation be implemented as planned, it could address the
immediate risks stemming from the complex nexus of state ownership. In order
for the Slovenian Sovereign Holding to become
operational, it must be underpinned by an efficient strategy for classification
of State assets that could be divided into strategic, important and portfolio
assets. The strategy is currently being prepared and is planned to be proposed
by the government in July 2014 (deadline set by the law and proposed by the national
reform programme). However, given the political situation, there is a tangible
risk that the strategy may be delayed. An experienced and capable management
and supervisory board are still to be appointed in a transparent way for the
SSH and for the companies under its management. This will be key for ensuring
the success of the SSH as an effective and independent manager of state-owned
assets.    
The government did not opt for full consolidation of
ownership and management of State assets under the Slovenian
Sovereign Holding umbrella. Only a part of the State assets will be
consolidated under the Slovenian Sovereign Holding. The SSH will be a result of transforming
the Slovenska odškodninska družba, d.d. (SOD), a compensation fund, with
the competences stipulated by the new law and incorporating several other
holdings. However, Kapitalska družba, d.d. (KAD), a pension insurance
scheme, and its assets as well as assets in the energy transmission and
distribution sector will not be transferred to the Slovenian Sovereign
Holding. The Slovenian Sovereign Holding will have the capacity to independently manage its assets,
as well as those belonging to the state. The mandate includes running the
privatisation process, whereas under certain conditions it will coordinate and
drive the sales procedures in case of KAD's assets. According to the
authorities, the different ownership structures (State, Slovenian
Sovereign Holding and KAD) do not weaken the Slovenian
Sovereign Holding's powers, as it is meant to act
autonomously on the mandate given by the law. The Slovenian Sovereign Holding also acts as the fiduciary of corporate governance by
promoting best practices and codes to be applied in the management of State
assets. Various mechanisms to ensure integrity, reduce conflicts of interest,
prevent corruption, and reinforce transparency have been laid down in the law.
The election of the supervisory and management board will confirm whether the
provisions are applied in practice. Similar issues are to be addressed in the
forthcoming Corporate Governance Code for State assets to be prepared by
September 2014 as proposed by the national reform programme. If designed and
implemented properly, this code should contribute to more efficient and
independent management of state assets.
Despite its shortcomings, thee new legal basis underpinning
the Slovenian Sovereign Holding
is a welcomed step in the right direction. Weaknesses arising from the adopted legislation include:
unclear definitions and inconsistencies, multiple implementing acts,
complicated relationship between the State, the Slovenian
Sovereign Holding, the KAD and proposed Demographic
Fund and lack of clarity regarding the relationship of the initial 15 companies
identified for privatisation and possible incorporation of the other holdings. The
capacities of the management and supervisory boards of the Slovenian
Sovereign Holding and its underlying companies (the
same applying also to KAD), will play a key role in applying sound management
policies and attaining the goals outlined in the law. The supervisory board of
the Slovenian Sovereign Holding will be
appointed by the parliament on a proposal from the government but all steps
should be taken to ensure a politically non-affiliated body. For the Slovenian
Sovereign Holding supervisory and management board to
succeed, its work must be closely based on its mission, and the separation of
the State’s functions must be respected.     

3.4.                
Structural measures promoting sustainable growth and
competitiveness

Focused measures to spur the competitiveness and
productivity of the real economy can help Slovenia to unlock its growth
potential. Slovenia’s industrial structure is dominated by low to
medium technology and labour-intensive products. There is a lack of focus on
high-value-added segments, which would sustain the country’s export market
share in the coming years. Exports are driving Slovenia’s fragile recovery, but
the economy tends to be characterised by a low inward foreign direct investment
stock ( 34.1% of GDP vs.
47.1% of GDP on average in the EU in 2012)). Increasing foreign direct investment would bring
in fresh capital, new technology, higher productivity and better corporate
governance. Privatisation and corporate restructuring offer many new
possibilities for private investors, yet the business culture has to adapt to
embrace new realities and take full advantage of it. The biggest obstacle to
businesses is the complex network of state-owned and state-controlled
enterprises, including banks (see Section 3.3). Furthermore, domestic business
tends to be hampered by poorly designed policy measures, whose goal is to
improve the business environment. The underlying environment has to facilitate
the business, providing for a solid legislative framework, efficient
bureaucracy and independent functioning of the Competition Protection Agency. The 2013 OECD study on product market regulation[25]
shows that Slovenia has a highly-regulated business environment with high
government involvement, in particular in the network sectors. Burdensome business
and competition environment, lengthy and costly licencing procedures,[26] state involvement and complex cross ownership
of Slovenian companies deter both domestic and foreign investment, needed to
produce the necessary value added and ensure sustainable economic growth.
Against this background, Slovenia received a country-specific recommendation in 2013 to improve business environment. While reforms undertaken need time to take full
effect the government has made limited
progress in addressing this recommendation. 
Modulation of a single strategy for business support 
Slovenia would substantially benefit from an improved business
environment and modulation of a single comprehensive strategy for business
support. Currently, Slovenia would need a set of clear and consistent objectives to improve business conditions
and restore, in some cases, competitiveness. Various strategies have been
prepared, but they are not integrated and are inconsistent despite the fact
that they are administrated by the same ministry. Lack of prioritisation, implementation
and hands-on ex-post controls for monitoring weighs on their credibility. The
2013 Industrial Policy Strategy, which aims to increase the country’s
productivity from the current 60 % to 80 % by 2020 in order to
close the productivity gap, has not been implemented; the fate of the 2011
Research and Innovation Strategy is similar. The Smart
Specialisation Strategy linked to absorption of the European Investment and
Structural Funds for the period 2014-20 will provide an opportunity to focus on
key measures, such as the creation of tradable innovative products but its
preparation lags behind. Given the
current environment of reduced public investments and scarce foreign direct
investment, these strategies provide the opportunity to focus resources on maximising
returns of the European Investment and Structural Funds. The OECD report[27] for Slovenia, analysing innovation
policy, states that the main weakness of the system is uneven innovation
performance, proliferation of policy tools and diverging views of stakeholders.
  Slovenia would thus benefit substantially from improved framework conditions.
While the national reform programme does not put focus on this issue,, the
Partnership Agreement, within the thematic objective number one, proposes
measures to strengthen research, technological development and innovation. 
Slovenia displays average performance in innovation and R&D.[28] Since
2000, the level of R&D investment in Slovenia has increased substantially
and Slovenia now ranks 6th among EU Member States in term of R&D
intensity. But its lower ranking in term of innovation performance calls
into question the quality of the investment.[29]
Improving governance and setting clear research and
innovation priorities in a context of smart specialisation with a stronger
focus on knowledge transfer remain the main challenges for the Slovenian
research and innovation system. The split in
the governance of research and innovation has resulted in fragmentation and
lack of cooperation with the stakeholders of the knowledge triangle as well as significant
delays in implementation, putting the effective and efficient use of available
resources at risk. An assessment of the efficiency of spending would be a
beneficial input for any further measures in this respect. Measures to foster
knowledge transfer and commercialisation of research results, such as the
introduction of funding linked to research performance, removal of obstacles to
establishing university spin-offs and cross-border venture capital investments would
contribute to creating a favourable business environment for innovative
companies in key sectors. While state subsidies are not the most
efficient way to support businesses, development of new, upgraded financial
instruments, and closer cooperation of relevant stakeholders to establish a
coherent strategy that promotes research, innovation and industrial policy,
with a clear objective of the maximisation of the economic value added and job
creation may also be beneficial. Low
employment in fast-growing innovative firms could be related to the low levels
of venture capital in Slovenia, and particularly to seed finance, aggravated by
the low levels of foreign direct investment. According to the Partnership
Agreement, Slovenia will make
efforts to increase the share of innovation-active firms and the number of researchers and developers in the economy.
Financing future growth potential 
Business activities are affected by fiscal consolidation
and the credit crunch,[30] indicating the need for
alternative sources of finance. The
positive effects resulting from the stabilisation of the banking sector will
take time to materialise. Meanwhile, given SMEs’ dependency on bank lending and
scarce alternative sources of finance, access to credit is likely to remain
constrained, further aggravating the situation for viable SMEs and hampering
their growth and competitiveness. The Slovenian Enterprise Fund, co-financed by
the Structural Funds, provides funding for SMEs through public guarantees and
has backed a handful of local venture-capital funds. Based on experience from
2007-13, the Slovenian Enterprise Fund developed instruments that were
considered a success, showing better results than traditional subsidies.
Despite low absorption (i.e. in the case of the SID bank programme)[31] and overlapping of certain financing, programmes offered by the Slovenian
Enterprise Fund and SID banks worked well and helped SMEs by providing
guarantees and subsidised loans. However, these instruments were not enough to compensate
for the reduction in banking finance. In line with the structural funds’
regulatory framework, a gap assessment of the potential for financial
instruments on the Slovenian market is being carried out. New financial
instruments are currently being prepared, which focus on start-ups and fast-growing
micro-enterprises and companies in the first phases of growth, neglected by the
existing instruments. Moreover, given limited equity
market with developing alternative financial sources for viable smaller firms, there may be scope to further incentivise venture-capital
investments from foreign sources, given that currently only locally-established
funds benefit from tax breaks. However, in the national reform programme the
authorities explore options for establishment of a single channel for financial
instruments that would underpin the funds received from the European
Investment and Structural Funds.
Service market regulation and competition issues
Enhancing competition in the service sector could unlock further
growth potential. For several
services (e.g. chimney sweeping, cemetery and funeral services, nature and
environmental conservation), Slovenia introduced a system of concessions, which
limits the number of service providers through quantitative and territorial
restrictions and tariff setting. These concessions, predominantly managed at local
level, mostly hamper domestic businesses from entering into service sectors, but
they also hinder cross-border provision of services. The limited choice in
terms of quality and the higher costs of these services
which are inputs for business have
a negative impact on the potential growth of the Slovenian economy. Neighbouring
countries do not impose such a high number of authorisation rules. Authorisation
rules must be in line with internal market principles, and in particular with
the rules established by the Service Directive.
Deregulation of regulated professions would contribute to
increasing the number of domestic and foreign services providers and thus
contribute to increased competitiveness. In 2012, a process of deregulating regulated professions
started, and so far the number of regulated professions decreased from 323 to 262.
Some progress has been achieved, but at a slower pace than initially planned.
The adoption of the Slovenian Small Business Act in July 2013 reduced the
number of regulated craft activities from 64 to 24. In addition, acquired
knowledge and experience is now also accepted to justify the required
qualification level for a number of craft activities. Revisions made to the
legislation on professions in construction and tourism should be finalised in
the first half of 2014. The second package of amendments to sectorial
legislation is under way and should be adopted by the end of October 2014. The national
reform programme announces the government’s commitment to reduce the number of
regulated profession by 100, respecting the needs of business and cross border
mobility in provision of services. The ongoing mutual evaluation of regulated
professions at European level could be an opportunity for the authorities to
accelerate the reform process.
The product and service markets need efficient oversight,
but the Competition Protection Agency still faces threats to its independence. The
agency has been subject to severe cuts in its 2014 budget allocation (its
funding has been cut by around 10%, much higher than the average cost
reductions across public service), which affects its operations, in particular
the possibility to carry out inspections, and makes its participation in
European and international cooperation nearly impossible. Moreover, its
expenditure has been subject to very detailed budgetary scrutiny by the
Ministry of Economic Development and Technology, which is not required by law.
This excessive oversight of its expenses together with sustained administrative
investigations into the Competition
Protection Agency’s actions,
including final decisions upheld by the court, weigh on its independence and
daily operations and, through press leaks, may adversely affect its reputation.
Unlike other agencies, the Competition
Protection Agency also lacks the power to impose fines directly on undertakings
in its administrative decision establishing an infringement of the EU
competition rules. Instead, following the adoption of the administrative
decision, it has to conduct separate minor offence proceedings identifying the
responsible natural persons in order to fine the undertakings involved. The
procedure is further complicated by the fact that the administrative decision
and the minor offence decision imposing fines are appealed before different
review courts. This duplication of procedures impairs the efficiency of the Competition
Protection Agency and could even lead to limited imposition of fines and
under-deterrence.
The lack of appeal reduces access to the review procedures
and limits competition on public procurement market. Despite formal guarantees of the National
Review Commission’s independence, there is no possibility to appeal against the
decisions of the National Review Commission, which adversely affects access to
public procurement review procedures. 
Box 4:
Potential impact of structural reforms on growth – a benchmarking exercise
Structural reforms are
crucial for boosting growth. It is therefore important to know the potential
benefits of these reforms. Benefits of structural reforms can be assessed with
the help of economic models. The Commission uses its QUEST model to determine
how structural reforms in a given Member State would affect growth if the
Member State narrowed its gap vis-à-vis the average of the three best EU
performers on key indicators such as the degree of competition in the economy
or labour market participation. Improvements on these indicators could raise Slovenia's GDP by 5.3% in a ten-year period.
Some reforms could have an effect even within a
relatively short time horizon. The model simulations corroborate the
analysis of Section 3.4 and 3.5, according to which (i) final goods sector
mark-ups (e.g. through increased competition on
product and service markets and thus improved functioning of the Competition
Protection Agency) and (ii) carrying
out labour market reforms focused on raising participation of the elderly
could produce particularly large gains.
Table
1: Structural indicators, targets and potential GDP effects[32]
Source:
Commission services. Note: Simulations
assume that all Member States undertake reforms which close their structural
gaps by half. The table shows the contribution of each reform to total GDP
after five and ten years. If the country is above the benchmark for a given
indicator, we do not simulate the impact of reform measures in that area;
however, the Member State in question can still benefit from measures taken by
other Member States.[33]
*The long-run effect of increasing the share of high-skilled
labour in the population could be 2.2% of GDP and of decreasing the share of
low-skilled labour could be 2.0%. **EU average is set as the benchmark.
Energy and infrastructure
Inefficiencies in the governance
of infrastructure has hindered economic performance. The limitations of Slovenia’s transport infrastructure
weighs on its growth potential as a transit country. Slovenia remains heavily
reliant on road transport modes, while railways still play a marginal role for
both freight and passengers. Market barriers in the railway sector prevent the
market from functioning properly. Railway infrastructure and transport
operators are not fully separated, and both remain state-owned. Furthermore, a lack
of administrative capacity is endangering the implementation of co-financed
projects and the preparation of a comprehensive transport strategy. This
strategy will be instrumental for investments under the European Investment and
Structural Funds and the Connecting Europe Facility in 2014-20 and will aim to
address all bottlenecks in all transport sectors, especially the
underdevelopment of railway infrastructure. A large part of the Slovenian TEN-T
railway network does not meet TEN-T standards, which creates bottlenecks for
business (the one-tier Divača-Koper railway line is the main logistical
bottleneck for freight transport from Port of Koper, a core TEN-T port). Most
large railway and environmental infrastructure projects co-financed by the
Cohesion Fund in 2007-13 are delayed due to lengthy project preparation,
procedures for permits and public procurement. If they are not completed by the
end of 2015, Slovenia will risk losing available funds and will fail to comply
with Accession Treaty commitments on EU environmental legislation.
Unpredictable winter weather
and floods[34] has
damaged a large part of energy and railway infrastructure. The natural disasters have exposed the serious underinvestment in
maintenance and causing significant economic losses to businesses and the general
population. Yet this is an opportunity for investment in modern infrastructure.

There is untapped potential
to increase absorption and the efficiency of the electricity grid through the deployment of smart grids, which could also enhance
the functioning of the electricity market. In 2012-13, competition on the electricity
market increased, and the incumbent providers lost some of its market share in
favour of competitive providers GEN-I and Petrol, who together secured 12.5 %
of the market. Slovenian industry has managed to keep its ratio of energy costs
to value added well below the EU average, maintaining the relative importance
of high-energy-intensive sectors such as chemicals, plastics, metals and paper
in its manufacturing structure.[35] Energy imports are quite well diversified. The proportion of
renewable energy in Slovenia slowly increased from 19.4 % in 2011 to 20.2 %
in 2012. However, the Europe 2020 target (25 %) can only be achieved if
further measures are put in place. The renewable energy used for electricity
(31.4 % in 2012) comes primarily from hydropower. Renewable heating is
based almost exclusively on solid biomass. In February 2014, a new
comprehensive Energy Act was adopted. However, it is too early to assess its impact
on the energy market. Slovenia has not yet transposed the third package. Two
infringement procedures are open before the European Court of Justice, which
can issue a judgment at any time.
Slovenia has made progress in bringing energy efficiency gains to businesses and individuals as a
result of policy initiatives. However, the level of
energy intensity remains high due to the very high energy intensity of its
transport sector, which is partially explained by the geographical position and
transit through Slovenia. Furthermore, Slovenia continues to stand out because
of its high levels of CO2 emissions, again especially in the transport
sector and in households, both of which have one of the highest carbon
intensities in the EU. Energy
import origins are quite diversified, but energy’s contribution to the trade
deficit is approximately double the EU average. The outlook for energy
efficiency looks promising, but achievements will depend on the policy
commitment and funding provided. Slovenia has developed a strong package
targeting the industrial sector, including excise duties on gas and electricity
above the EU minimum rates, and a CO2 tax. In addition, Slovenia used cohesion policy funding to tackle the refurbishment of buildings (public and
private), although work had to be slowed down due to budget constraints. Policy
plans for the future are well developed and comprehensive, and are a good basis
for the complete and prompt transposition and effective implementation of the
Energy Efficiency Directive (due to be transposed by June 2014). Slovenia saw moderate increases in the proportion of renewable energy it used[36],
but it can only reach the Europe 2020 target if further measures are put in
place.
More could be done to raise
further energy efficiency gains. Slovenia’s
percentage of SMEs that take resource-efficiency actions (saving energy,
minimising waste, saving materials and water) is below the EU average.[37]
There is scope for further support to businesses in order to economise
resources and save jobs. Significant savings could be made through support
programmes that help SMEs to implement resource-efficiency measures, targeted
and comprehensive support to SMEs could bring average savings of EUR 8 000
for energy firms and over EUR 19 000 for environmental technologies.[38]

3.5.                
Labour market[39], education and social policies

The employment
and social indicators for Slovenia worsened in the course of 2013. Unemployment increased, affecting young people and the long-term
unemployed. In 2013, unemployment reached 10.3% and youth unemployment reached
21.6%, %, while the long-term unemployment rate peaked to 5.2%. The increase in the proportion of young people, who are not in education,
employment, or training (NEET), from 6.5 % in 2008 to 9.3 % in 2012,
is also worrying. Given high unemployment rates in 2012-13 and VAT increase, Slovenia experienced the fourth highest fall in gross household disposable income in the EU,
while inequalities remained at a low level compared to the EU average.[40] Also low labour productivity affects the competitiveness of the
Slovenian economy. Labour market segmentation, distortive use of student
work, ineffectiveness of labour market policy and wage setting, as identified
in the 2013 country-specific recommendations, remain significant challenges for
  Slovenia. The government has made limited progress in implementing the 2013’s recommendations addressing labour market issues. In the social policy field, there has been
limited progress as regards the long-term sustainability and adequacy of the
pension system and access to long-term and health care services.
Labour market issues
Slovenia has adopted a labour market reform in 2013. The reform aimed to reduce segmentation and introduce greater
flexibility to the labour market by reducing protection of permanent contracts,
simplifying dismissal procedures and reducing dismissal costs. Furthermore, it
tightened the regulation of fixed-term contracts and restricted the use of
temporary agency work. The evaluation of the reform was presented in April
2014. The first results point towards decreased segmentation of the labour
market, an increasing use of permanent contracts and in-company flexibility
measures that resulted in renegotiation of seven different collective
agreements in order to explore options for containment of labour costs. Despite
reduced social contributions and the introduction of occasional work for
retired persons, the employment rate of older workers (above 55) did not
increase, while the use of other contractual forms increase somewhat. The
effects of the reform will display in full over a longer period of time. 
Currently,
Slovenian labour productivity is below the EU average.[41] This is the result of many factors,
including poor reallocation of labour across firms and sectors, high employment
in state-owned enterprises, which tend to have low productivity but
disproportionally high growth of salaries, low inflow of foreign direct investment, poor technology
transfer and skills mismatch. Nominal compensation per employee between 2008
and 2011 has been increasing, though it has been accompanied by a decrease in
output.[42]
Salaries slowly started to adjust in 2012. In 2013 salaries adjusted in all
sectors except for the state-owned utilities sector (electricity and gas),
where net salaries rose by 13 % in 2008-13.[43] Civil servants’ wages have been temporarily cut by an average of
1.25% (on top of the 3 % cut from June 2012) and some workers’ allowances
have been cut in the framework of consolidating public finances. Incentives to
employ both young and older workers through reductions in social contributions
have been introduced.
Limited
progress has been made in ensuring that wage developments support
competitiveness and job creation. The minimum
wage is only indexed to inflation, while the Act on Minimum Wage allows for
indexation to other economic conditions, which are not defined by the Act.
Also, the structure of the minimum wage includes a wide range of allowances.
However, the minimum wage increased in January 2014, resulting in a further rise
in labour costs, adding pressure on the cost competitiveness of the economy. While
the social partners find themselves deadlocked due to their diverging
interests, the NRP envisages that the Social Agreement should have been
negotiated in April 2014. As stated in the NRP, the government has plans to
globally address the issue of labour costs and, in this context, to discuss
the revision of the minimum wage. The review of the minimum wage may have
implications for households’ disposable income and for expenditure on social
benefits. In January 2014, more than 46.700 (or 8%) of employees received
minimum salary, most commonly in manufacturing (almost a quarter of employees
in this sector).[44] 
Slovenia made limited progress in developing measures to increase the
employment rate of vulnerable groups. In
2013, Slovenia implemented a new active labour market policy, whose
effectiveness will be closely monitored and evaluated in the context of
European Social Fund implementation, which is the main source of funding. The
share of GDP invested in active labour market policies is low but increased in
2013 compared to 2012, thus the number of participants also increased. The
share of older workers remains low (15.9% in 2013), although their labour
market participation is projected to somewhat increase as a consequence of the
increasing retirement age. A public works programme totalling EUR 43 million
and targeting the long-term unemployed was adopted in 2014. It promotes new
activities in social enterprises for vulnerable groups, but does not address
the specific needs of low-skilled or older workers. Measures to adapt work
environments to longer working lives would be important, but the active and
healthy ageing strategy is not expected before 2016. The national reform programme announces an analysis of active
labour market policies and the introduction of additional tailor made measures
in the period 2014-2015.
Student work and youth unemployment
The high
incidence of temporary work among students is a result of the current
legislative arrangement. The current legislation provides disincentive for students to finish their studies in time, causes
late integration into labour market and burdens the budget through generous
student benefits. According
to the national reform programme, the new Student Work Act should be adopted by
the summer 2014. The proposed Act allows students to continue earning extra
money, but the introduction of social contributions will increase the overall
cost of student work by 43%. Thus it will limit its appeal, reducing unfair
competition from student work and thus labour market segmentation. Establishment
of central register of students will increase transparency and control in order
to prevent misuse of student status.
Contrary to the high uptake
of student work, it is increasingly difficult
for young graduates to find regular employment. The
increase in youth unemployment was one of the highest in the EU-28 in 2012 (4.9
pp). The growing unemployment rate among young and young graduates has
been addressed through Youth Guarantee Implementation Plan, which was adopted
in January 2014. The plan, which covers the young up to the age of 29, includes
measures to fight youth unemployment through the provision of traineeships and
apprenticeships, to facilitate education-to-work transitions, and integration
of entrepreneurship into all levels of education with a view of empowering the
young. However, there remain numerous challenges to delivering Youth Guarantees[45] in Slovenia. Namely, there is a lack of a sustainable long term strategy
that goes beyond the currently planned two-year time-frame and there is
insufficient outreach and support provided for the NEET.[46] Public employment services will need to have the capacity to
ensure that young people register for the programme. 
Education 
Although
the education system in Slovenia performs rather well, skills mismatches
persist. The quality of lower secondary education is
uneven.[47] A rapid
succession of governments has slowed down reforms in the area of education and
training, failing to address skills mismatches. According to the national
reform programme, amending the Law on Primary Schools has allowed to better
focus on special interests and learning a second language whilst improving
quality of education. Slovenia’s employment service is preparing ways to assess
future labour market needs based on a pilot project. A comprehensive system of
life-long career guidance will be put in place at all levels of education and
linked to the system delivered by the public employment service. 
Vocational education and
training (VET) is not attractive enough to engage young talent. Students prefer to enrol in general education, but Slovenian
industry offers mainly medium- and low-skilled jobs. This has led an increasing
number of educated young people to emigrate.[48] The main challenge for VET, in particular at upper-secondary
level, is to stop the decline in enrolment and to intensify cooperation with
employers (both in defining curricula and providing apprenticeships). This task requires a targeted action plan from the government,
since the economy consists mainly of SMEs, which are unable to set up such a
system on their own. Amendments to the Post-Secondary Vocational Education Act,
adopted in November 2013, strengthened the link between education and economic
operators.[49] The government plans to reintroduce a dual system for vocational
training in 2016-17, although
the national reform programme does not contain any specific measures on this
issue. However, the national reform programme provides the commitment of the
government to increase funding of scholarships for pupils and students, who preparing
to enter deficit professions. 
Skills mismatches and long
study times remain significant issues for the higher-education sector. Tertiary graduates are less likely to be employed by organisations
that employed them in the past[50] and
universities have been given more autonomy in determining study content. Institutions
need to teach additional skills, such as entrepreneurial skills, and students
need to consider professions that are more attuned to labour-market needs.
Further amendments to the Higher Education Act are currently under discussion, and
would address university quality and financing. Defining student status more restrictively
and putting in place an electronic student register should help to shorten
study times.
Social policies
The social situation in Slovenia continues to deteriorate. Initially, the crisis
only had a moderate impact on household income, as the social protection system
performed well despite relatively low social protection expenditure (as a proportion
of GDP). However, as the crisis dragged on, the power of automatic stabilisers
weakened and household disposable income dropped, undermining private
consumption. This was also a partial effect of the 2012 social policy reform,
which increased targeting of social benefits (such as social assistance,
supplementary allowance and child benefits). In 2013, the take-up of social
assistance increased again, with almost 75 % receiving social assistance
for more than a year. One of the most vulnerable segment of the population are
the older people, especially women. The increasing debt-to-income ratio
combined with falling saving rates indicates pressure on household income and
indebtedness. However, the indebtedness of Slovene households is still very low
when comparing to other EU member states.[51] These trends have translated into an increasing risk of poverty
and social exclusion and changes in taxation are expected to further reduce households’
disposable income. However, given the public finance consolidation needs, the national
reform programme does not foresee any measures to address these issues outside
of the Cohesion Funds.    
Limited progress has been
made in safeguarding the adequacy of pensions. The
2012 pension reform introduced new rules for calculating the pension assessment
base in order to halt the gradual decrease of pensions.[52] According to the assessment of the 2012 pension reform, the
difference between average pension and average salary remained fairly constant
between 2012 and 2013, while the replacement rate stabilised in 2013. However,
pension indexation has been frozen for 2014 and 2015 and the take-up of income-support
benefits considerably decreased with the adoption of the 2012 social reform,
which increased the risk of poverty for older people. Amendments to the reform
were therefore introduced in December 2013 to ease the income and property
conditions for entitlement to social benefits, and to extend eligibility to
income support for the elderly. There is no concrete information on the
financial impact of these changes on the budget. 

3.6.                
Modernisation of public
administration

The 2014
Annual Growth Survey outlines priorities in the area of public administration,
such as delivering better services, improving the business environment and
providing for efficiency gains through better coordination of and cooperation with
stakeholders. Slovenia must address these challenges if it is to improve the credibility
of and trust in its public administration and create a simpler business environment. According to the 2013 Autumn Barometer[53],
trust into national authorities in Slovenia is very low. For instance, trust
into the national parliament (6%) is the lowest among all surveyed member
states and candidate countries and trust into national government (10%) is the
second lowest.
More efficient judiciary
Some progress has been achieved in
increasing the efficiency of the judiciary system. While
a case management reform on commercial and civil justice has improved the
functioning of the court system, the length of trials remains long. Recent
positive trends concerning litigious civil and commercial cases have been
maintained. The disposition time was reduced from 431 days in 2010 to 348 days
in 2013 and unresolved pending cases were reduced by 17 %. The courts
were largely able to resolve more cases than they received in 2012 and 2013.[54]
Despite this progress, the backlog of enforcement cases remains high in
comparative terms[55] and
the target set in the 2013 national reform programme has not been achieved. The
current statistical methodology used to keep track of enforcement cases at
local courts does not accurately reflect the status of the enforcement process.
The electronic system for the enforcement of authentic documents continued to
resolve cases quickly. According to the 2014 national
reform programme, amendments will be introduced to the
enforcement legislation to improve decision-making and efficiency.
Challenges of public administration
Slovenia is taking up the initiative in using e-government. As of 2015, doing business with the government will only entail e-invoicing.
Paper invoices will no longer be accepted. A fully-operational one-stop-shop enables
online registration of a company for free. Yet, on the other hand, the Point of
Single Contact, set up in the framework of the Service Directive, is far from
completed, lacking the possibility of completing procedures online. Furthermore,
the transition to e-procurement has not been fully achieved. An electronic
portal was launched in 2012 but electronic tenders cannot be submitted. Slovenia is one of the few remaining EU Member States, in which it is not possible to
submit electronic tenders. 
The newly-adopted strategy
is set to cut red tape by 25% and thus improve the legislative and business
environment and to boost competitiveness. It
is comprised of a set of measures, contributed by various stakeholders, to be
implemented in the medium term. These measures firstly need to be clearly
prioritises and secondly, the implementation of these measures must be
monitored to assess the efficiency of the policy action. The government failed
to undertake a full-scale SME test (SME test is still in the pilot phase) about
the potential influence of proposed measures on small businesses, causing a
potential risk that the new legislation would not be SME-friendly. Municipal
fragmentation and administrative inefficiencies pose severe burden on
businesses, namely, long lasting and costly spatial planning procedures and
delays in issuing building permits, which are a significant barrier to entering
Slovenian business environment – for local and in particular foreign investors
as well as for absorption of EU funds. In the national reform programme, the
government is dedicated to fight the red tape and reduce burden on businesses,
including resolution of long procedures for building permits. However, the
issue of municipal fragmentation is only going to be addressed through the
optimisation of public expenditures and modification of municipality funding that
would in turn bring to a merger of smaller municipalities, rather than through
a comprehensive analysis and planning on how to best merge the municipalities. If
  Slovenia used its resources efficiently, it could reduce business costs and
facilitate trade. 
The challenge for the future is to ensure high-quality public services. Quick successions of governments, coupled with numerous changes of
ministers, have had a negative impact on the policy implementation record of
several ministries, in particular in health care sector. A targeted
reorganisation of the healthcare system designed to exploit internal synergies
and realise necessary savings has been pending on the reform agenda of the
government. In spite of the political rhetoric, there appears to be little
political will to tackle accumulated problems. Slovenia is in the early stages
of preparing a comprehensive public-sector reform (to be adopted by January 2015),
which aims to ensure better quality and accessibility of services, addressing
human resource management and strategic planning of legal, organisational and
procedural aspects. Various strategies have been prepared, but implementation
is weak. 
There is a need to ensure
adequate administrative capacity in the office involved in managing the cohesion
funds in order to be able to reap full benefits of the programmes. 
In 2014,
activities related to the two programming periods will cumulate. In order to deal with the challenging tasks of finalising the
2007-2013 period and starting
of the 2014-2020 period at the same time, the managing authority will need to reinforce in terms of
sufficient staffing and administrative capacity. This
will require specific expertise, most notably in the field of public
procurement, state-aid and project management, to ensure that projects are
closely monitored and rationalised. A stronger leadership of the managing authority
vis-à-vis other ministries and municipalities is also necessary in order to
ensure needed systemic changes and to allow for timely reprogramming decisions,
leading to a full absorption. Without improving the management of cohesion policy
in Slovenia and without addressing the key bottlenecks (lengthy public
procurement and permit procedures), the whole exercise may be at risk. The
burden on the State of cohesion fund implementation could be substantially
reduced by making more use of technical assistance within the operational
program. So far, Slovenia has one of the lowest allocations of funds for
technical assistance of all member states.
Credibility
of public administration
Slovenia has to restore the quality and credibility of public
administration and improve the management of structural funds and enhance
transparency. Slovenia is facing interruption of the
interim payments for the operational programmes for the second consecutive year
due to allegations of corruption and systemic control problems. The Commission
interrupted payment claims in March 2014 (total amount of EUR 185 million) on
the basis of the Commission audit, which identified deficiencies in the audited
operations in Slovenia. This deficiency relates to the first-level management
verifications of the managing authority. The Commission has also found that
expenditure in a certified statement of expenditure is linked to serious
irregularities in application of public procurement rules.
The
EU Anti-Corruption Report 2014 shows a decline in the political drive against
corruption.[56] Allegations of corruption, political interference and doubts
about the integrity of high-level officials either within the public
administration at state and local level or in state-owned companies came to the
forefront of public attention in 2013-2014. The 2013 Eurobarometer on corruption
shows that 76 % of respondents in Slovenia (the second-highest number in
the EU) believe that corruption increased, and 88 % of respondents
consider that using connections is the easiest way to obtain public services. In
this context, the Commission for Prevention of Corruption, which has achieved
some results in detecting corruption, needs to preserve its independence and
influence. However, the recent appointment procedure of the leadership of the
Commission for Prevention of Corruption has contested its image and has been
univocally seen as inappropriate. Insufficient progress has been done to
safeguard the operational independence of anti-corruption bodies and
prosecution services specialised in combating financial crime, to put in place
strong anti-corruption systems in state-owned and state-controlled companies,
or public procurement and privatisation procedures. Gaps remain between the
legal and strategic framework and effective enforcement due to weak control
mechanisms at both the state and fragmented local level. For public
procurement, in spite of limited progress in achieving transparency, particular
vulnerabilities are broadly noted in the energy, construction, urban planning
and healthcare sectors, where anti-corruption safeguards are not working, also
because they are not protected from strong political interference. Corruption
allegations have been reported also in allocation of subsidies. According to
the 2013 Eurobarometer, 94 % of Slovenian businesses (the highest number
in the EU) believe that business competition in their country is hampered by
favouritism.

4.        
Conclusions

Structural weaknesses of the
Slovenian economy weigh on its performance. Fiscal
consolidation has not been sufficiently addressed. The sharp increase in
government debt in recent years, albeit from a relatively low level, could be a
major source of long-term vulnerability. The postponement of financial
restructuring of viable companies delays the re-establishment of investment
capacity and the recovery of the Slovenian economy as a whole. The complex
nexus of state ownership limits adjustment and distorts resource allocation,
especially as regards new investment. 
The analysis in this
document leads to the conclusion that Slovenia has made some progress in
addressing the 2013 country-specific recommendations. Substantial progress has been made in repairing the banks' balance
sheets, but further restructuring and consolidation is required for the sector
to return to long-term sustainability. Policy action has included asset quality
reviews, stress tests and recapitalisation of the state owned banks and asset
transfer. The markets have welcomed the government’s prompt recapitalisation
and announced strategy for restructuring, as evidenced by the recent decrease
of yields. However, limited progress has been made in fiscal consolidation, safeguarding long-term fiscal
sustainability, restructuring of the corporate sector, privatisation and
improving the business environment. 
The priorities presented in
the 2014 national reform programme echo the main challenges identified in the
2014 in-depth review on Slovenia and this staff working document. These
measures signal welcome reform intentions, which could help to effectively
tackle the challenges faced by Slovenia, if implemented in a rigorous and
timely manner.  
The stability programme
reaffirms Slovenia's commitment to correcting the excessive deficit by 2015 in
line with the excessive deficit procedure and achieving a balanced budget
position in structural terms by 2017.
Furthermore, it provides details of the path anticipated for the debt until
2018, which is projected to remain above the 60% of GDP reference value for the
duration of the programme. Greater details on the further fiscal
consolidation measures required to sustainably achieve the stated objectives of
the programme would further enhance the robustness of the document. 

Overview table

 2013 commitments || Summary assessment[57] 
 Country-specific recommendations (CSRs) 
 CSR 1: For 2013 and beyond, implement and reinforce the budgetary strategy, supported by sufficiently specified structural measures, to ensure the correction of the excessive deficit by 2015 in a sustainable manner and the improvement of the structural balance specified in the Council recommendation under the EDP. After the correction of the excessive deficit, pursue a structural adjustment effort that will enable Slovenia to reach the MTO which should be set in line with the Stability and Growth Pact by 2017. Durable correction of the fiscal imbalances requires the implementation of ambitious structural reforms, which would increase the adjustment capacity of the economy and boost potential growth and employment. Safeguard growth-friendly spending, adopt measures to improve tax compliance and implement measures on the expenditure side underpinned by systematic reviews of public expenditure at all government levels. To improve the credibility of consolidation, complete the adoption of a general government budget balance/surplus rule in structural terms, make the medium-term budgetary framework binding, encompassing and transparent, and strengthen the role of independent bodies monitoring fiscal policy by end 2013. Take measures to gradually reduce the contingent liabilities of the state. || Slovenia has made limited progress in addressing CSR 1: ·       Slovenia has made limited progress in safeguarding fiscal sustainability. After the excessive deficit procedure has been extended to 2015, the government implemented several structural reforms both on the revenue side (increase in VAT rates as of July 2013 and other duties), and on the expenditure side (nominal public sector wages were temporarily cut by 1.25% in 2013, on top of the 3% cut from June 2012, and some allowances were also cut). The Commission stated that the draft budget for 2014-15 is in line with the Stability and Growth Pact rules, albeit with no margin. The consolidation of public finances is progressing slowly, predominantly through revenue-increasing reforms without a thorough review of the expenditure side. ·       Slovenia has made limited progress in safeguarding a durable correction of the fiscal imbalances. In May 2013, a constitutional amendment providing the basis for the general government budget balance rules was adopted. It was stipulated that the Fiscal Rules Act, which would detail the applicable concepts and mechanisms, would be adopted within six months (by November 2013), but it has been delayed. 
 CSR 2: Strengthen the long-term sustainability of the pension system beyond 2020 by further adjusting all relevant parameters, including through linking the statutory retirement age to gains in life expectancy, while preserving the adequacy of pensions. Contain age-related expenditure on long-term care and improve access to services by refocusing care provision from institutional to home care, sharpening targeting of benefits, and reinforcing prevention to reduce disability/ dependency. || Slovenia has made limited progress in addressing CSR 2: ·       Slovenia has made limited progress in safeguarding the sustainability and adequacy of its pension system. The pension reform began in January 2013, and aimed to ensure the medium-term sustainability of pension system. Evaluation of the reform was presented in April 2014, showing first positive results. A White Book (due by the end of 2014) will launch a public consultation on the long-term sustainability of the pension system post-2020. Apart from the evaluation, no further action has been taken. ·       Slovenia has made limited progress in reforming the system of long-term care: legislation is expected to be adopted before the end of 2014. However, there is a risk that the act will be delayed due to its link to the reform of the health insurance scheme (its funding) and the review of public spending in the healthcare sector, which is being negotiated with the World Bank. Discussions are ongoing since 2002 and there are limited expectations that the act will be finalised in 2014. ·       A sharp increase in government debt (Spring forecast: 80.4% in 2014) creates new challenges and risks that require durable policy action to ensure debt sustainability. 
 CSR 3: Ensure that wage developments, including the minimum wage, support competitiveness and job creation. Monitor closely the effects of the recent labour market reform and if necessary identify the areas where further action is needed to foster job creation and tackle segmentation, including through the regulation for student work. Take further measures to increase the employment of young tertiary graduates, older persons and the low-skilled by focusing resources on tailor-made active labour market policy (ALMP) measures while improving their effectiveness. Address the skills mismatch by improving the attractiveness of the relevant vocational education and training programmes and by further developing cooperation with the relevant stakeholders in assessing labour market needs. || Slovenia has made limited progress in addressing CSR 3: ·       Slovenia has made limited progress in ensuring that wage developments support competitiveness and job creation. No amendments to the act on the minimum wage have been made; the minimum wage now stands at EUR 789.15 and is indexed to inflation. Social partners are in a deadlock, and the government remained inactive. A new social agreement, which envisages a comprehensive approach to labour costs, is being negotiated. Gross wages fell slightly in 2013, mostly as a result of wage restraint in the public sector, while wages in non-tradable sector continued to grow. ·       Slovenia has made some progress in labour market reform. A reform was adopted in May 2013 and an evaluation is was prepared in April 2014, which showed the first positive developments. The Student Work Act is to be adopted by summer 2014. It introduces social contributions, making student work more expensive. It is not clear what kind of an impact this would act have on the position of young graduates on the labour market. The draft amended Higher Education Act aims to tighten student-status eligibility. However, the timeline for adoption of this act is unclear. ·       Slovenia has made limited progress in implementing tailor-made active labour market policy measures; it would focus mostly on the young unemployed (up to the age of 30) by using the Youth Guarantees (action plan adopted in January 2014). Some tailor-made active labour-market policy measures have been introduced, however their effectiveness still needs to be ascertained. ·       Slovenia has made limited progress on vocational education and training and on developing ways of cooperating with stakeholders in assessing labour-market needs. 
 CSR 4: Take the necessary steps, with input from European partners, to contract an independent external adviser in June 2013 to conduct a system-wide bank asset quality review. Complete this exercise in 2013, with faster progress in the cases of the two banks already subject to the state aid procedure, to accelerate their balance sheet repair. Stand ready to provide additional capital should the asset transfer or asset quality review reveal additional shortfalls. All measures, including objective assessments of capital needs, transfer of assets to Bank Asset Management Company (BAMC), asset protection scheme, operational implementation of the restructuring measures should be implemented in full compliance with state aid rules in case state aid is involved. In parallel, develop by March 2014 and implement a comprehensive sector strategy to ensure arms-length management of reformed banks and to substantially improve governance, risk management and profitability in the sector, including through consolidation where appropriate. Swiftly proceed with preparations for the announced privatisation of NKBM and establish, by September 2013, an ambitious timetable for the divestment of direct and indirect state shareholdings of banks. || Slovenia has made substantial progress in addressing CSR 4: ·       Slovenia has fully addressed the recommendation regarding the independent bank asset quality review and stress test, which were carried out in the second semester of 2013 and covered 70 % of the banking sector. The results were published on 12 December 2013. Transfers of non-performing loans took place after the Commission approved restructuring plans and state aid for the NLB and NKBM banks (18 December 2013). The given concessions were to fully privatise the NKBM and 75 % of the NLB. State-aid approval for the third largest bank, Abanka, is pending for the Commission’s approval of the restructuring plan sent in mid-February 2014. ·       Slovenia has fully addressed the recommendation on the recapitalisation of banks. Based on the results of the exercise, the government provided a total of EUR 3.2 billion in December 2013. ·       Slovenia has made no progress regarding the situation of the Bank Asset Management Company (BAMC). The BAMC has been made operational but it lacks an asset management strategy and a business plan. ·      Slovenia has made limited progress in privatising the NKBM (to be completed by the end of 2014). 
 CSR 5: Review the bank regulatory framework by end 2013, and based on this review, strengthen supervisory capacity, transparency and statistical disclosure. || Slovenia has made limited progress in addressing CSR 5: ·       Slovenia has fully addressed the recommendation on reviewing the bank regulatory framework by the end of 2013. However, it appears that reflection on the asset quality review and stress test results has been limited. The Bank of Slovenia stated that it would provide a report specifying the further steps to be taken. ·       Slovenia has made no progress on strengthening supervisory capacity, transparency and statistical disclosure. Despite CRD IV coming into force on 1 January 2014, the authorities have not adopted the necessary legislation (adoption is planned before summer 2014). 
 CSR 6: Accelerate the reform of regulated services, including a significant reduction of entry barriers. Improve the business environment, including through ensuring the independence of and providing sufficient and autonomous financing to the Competition Protection Agency. || Slovenia has made limited progress in addressing CSR 6: ·       Slovenia has made some progress in addressing the regulated professions; their number has been reduced from 323 to 262. The authorities have also made it easier to obtain business licences. ·       Slovenia has made no progress on improving its business environment (especially in streamlining and shortening the time required to obtain necessary spatial planning and building permits, which are currently one of the most significant obstacles for foreign direct investment). ·       Slovenia has made no progress in ensuring sufficient and autonomous financing of the Competition Protection Agency, whose budget was cut by approximately 10 % in 2014, and it is subject to administrative investigations and a high degree of budgetary ex-ante oversight by the Ministry of Economy. 
 CSR 7: Build on previous efforts to further reduce the length of judicial proceedings at first instance in litigious civil and commercial cases and the number of pending cases, in particular enforcement cases. || Slovenia has made some progress in addressing CSR 7: ·       Slovenia has made some progress in reducing the length of judicial proceedings: disposition times and case backlogs in overall litigious civil and commercial cases improved, as a consequence of the case management reforms (e.g. Triaza project) and other initiatives. However, the length of trials remains long and the same indicators have not shown a positive trend for enforcement cases.  
 CSR 8: As part of the planned strategy of the government, to be completed by September 2013, classify core and non-core state assets according to economic criteria, with a view to divesting non-core assets. Make the Slovenian Sovereign Holding (SSH) fully operational in a timely manner, and transfer both ownership and management of all stakes to the SSH, potentially excluding those that are on the list for immediate full privatisation. Ensure professional management of the SSH from the outset, potentially including international expertise, and a clearly defined arms’ length relationship with the companies involved. For core stakes, develop sector-specific strategies to improve profitability and corporate governance. Introduce an obligatory and publicly available register of management and supervisory board appointments in state-owned enterprises with requirements for disclosure of interests. Ensure that the regulatory framework facilitates divestment of non-core state assets and administrative hurdles are minimised. || Slovenia has made limited progress in addressing CSR 8: ·       Slovenia has made limited progress regarding the Slovenian Sovereign Holding (SSH). A new law was adopted in the parliament in late March 2014. The law empowers the government to submit a strategy for the SSH within three months of the law coming into force (that is July 2014).     
 CSR 9: Identify and start to work on removing all existing legal and administrative impediments to sustainable restructuring of over-indebted/undercapitalised but viable companies through market-based solutions. In this context, take measures to ensure sufficient private burden sharing, to increase private investment, including foreign direct investment, and to achieve efficiency gains in troubled companies as part of the restructuring process. Adopt the necessary legal framework for out-of-court restructuring by September 2013, ensuring that it is coherent with the existing provisions on insolvency and provides incentives for both creditors and shareholders to reach out-of-court restructuring agreements. Improve the enforcement of corporate insolvency procedures and in-court settlements, including swiftly resolving pending court cases related to bankruptcy procedures, in order to maximise recovery value and to facilitate the prompt and efficient resolution of non-performing loans. || Slovenia has made some progress in addressing CSR 9: ·       Slovenia has made no progress in ensuring a restructuring of the economy and increasing private investment, especially FDI. ·       Slovenia has made some progress by adopting several amendments to the Insolvency Act introducing, amongst others, a preventive restructuring proceeding (in the pre-insolvency stage) and a simplified compulsory settlement proceeding. The impact of the reform is yet to be assessed as it remains largely untested. The level of non-performing loans in the corporate sector has substantially increased. Slovenia has made limited progress in addressing the case backlogs and the length of proceedings governed by the Insolvency Act. 
 Europe 2020 (national targets and progress) 
 Policy field target || Progress achieved 
 Employment rate (%): 75 % || As the employment rate stagnated in 2012 (68.3 %) compared to 2011 (68.4 %), Slovenia moved away from its target. 
 R&D target: 3 % || In the 2007-12 period, R&D intensity increased at an annual rate of 12.7 % and reached 2.8 % in 2012 (2.6 % in the private sector and 0.64 % in the public sector). Slovenia is on track to reach its target by 2020. 
 Greenhouse gas (GEG) emissions target: +4 % compared to 2005 || Slovenia is on track to meet its target on GHG emissions in sectors not covered by the EU Emissions Trading System (ETS). GHG emissions are projected to increase by 4 % (compared to 2005) by 2020.[58] Non-ETS emissions have been reduced by 1 % between 2005 and 2012. Slovenia continues to stand out for its high level of CO2 emissions, especially in transport and households, both of which have one of the highest carbon intensities in the EU. 
 Renewable energy target: 25 % Proportion of renewable energy in the transport: 10 % || The proportion of renewable energy reached 20.2 % in 2012, up from 19.4 % in 2011. The share of renewables in transport increased and reached 2.9 % in 2012, up from 2.1 % in 2011. 
 Energy Efficiency target: 10 809 GWh saving   By 2020: level of 7.31 Mtoe primary consumption and 5.1 Mtoe final energy consumption   || Slovenia has set an indicative national energy efficiency target of 7.31 Mtoe primary consumption and 5.1 Mtoe final energy consumption by 2020. Slovenia notified the Commission about its plans to implement Article 7 of the Energy Efficiency Directive. 
 Early school leaving target: 5 % || The target has been achieved. Early school leaving fell from 5.6 % in 2006 to 3.9 % in 2013. 
 Tertiary education target: 40 % || Tertiary education rates continuously improved and reached the target in 2013 (40.1 %) 
 Target for reducing the population at risk of poverty or social exclusion: 40 000 (compared to 360 000 in 2008) || The number of people at risk of poverty or social exclusion, which is still far below the EU average, increased markedly between 2010 and 2012, from 366 000 in 2010 to 392 000 in 2012. This shows that Slovenia is moving away from the target. 

Annex

Standard Tables
Table I. Macro-economic indicators
Table II. Comparison of macroeconomic
developments and forecasts
Table III. Composition of the budgetary
adjustment
 
Table IV. Debt dynamics
Table V. Sustainability indicators
Table VI. Taxation indicators
Table VII. Financial market indicators
Table VIII. Labour market and social
indicators
Table IX. Product market performance and
policy indicators
Table
X. Green Growth 
List
of indicators used in Box 4 on the potential impact on growth of structural
reforms. 
Final goods sector mark-ups: Price-cost
margin, i.e. the difference between the selling price of a good or service and
its cost. Final goods mark-ups are proxied by the mark-ups in selected services
sectors (transport and storage, post and telecommunications, electricity, gas
and water supply, hotels and restaurants and financial intermediation but excluding
real estate and renting of machinery and equipment and other business
activities[59]).

Source: Commission services estimation
using the methodology of Roeger, W. (1995). "Can imperfect
Competition explain the Difference between primal and dual Productivity?" Journal
of Political Economy Vol. 103(2) pp. 316-30, based on
EUKLEMS 1996-2007 data. 
Entry costs: Cost of
starting a business in the intermediate sector as a share of income per capita.
The intermediate sector is proxied by the manufacturing sector in the model. 
Source: World Bank, Doing Business
Database. www.doingbusiness.org. 2012 data.
Implicit consumption tax rate:
Defined as total taxes on consumption over the value of private consumption. In
the simulations it is used as a proxy for shifting taxation away from labour to
indirect taxes. The implicit consumption tax-rates are increased (halving the
gap vis-à-vis the best performers) while labour tax-rates are reduced so that
the combined impact is ex-ante budgetary neutral.
Source: European Commission, Taxation
trends in the European Union, 2013 edition, Luxembourg, 2013. 2011 data.
Shares of high-skilled and low-skilled: The
share of high skilled workers is increased, the share of low-skilled workers is
reduced (halving the gap vis-à-vis the best performers). Low-skilled correspond
to ISCED 0-2 categories; high-skilled correspond to scientists (in mathematics
and computing, engineering, manufacturing and construction). The remainder is
medium-skilled. 
Source: EUROSTAT. 2012 data or latest available.

Female non-participation rate: Share
of women of working age not in paid work and not looking for paid work in total
female working-age population
Source: EUROSTAT. 2012 data or latest
available.
Low-skilled male non-participation
rates: Share
of low-skilled men of working age not in paid work and not looking for paid
work in total male working-age population
Source: EUROSTAT. 2012 data or latest
available.
Elderly non-participation rates (55‑64
years): Share
of the population aged 55‑64 years not in paid work and not looking for
paid work in total population aged 55‑64 years.
Source: EUROSTAT. 2012 data or latest
available.
ALMP: Active Labour
Market Policy expenditures as a share of GDP over the share of unemployed in
the population. 
Source: EUROSTAT. 2011 data or latest
available.
Benefit replacement rate:  Share
of a worker's pre-unemployment income that is paid out by the unemployment
insurance scheme. Average of net replacement rates over 60 months of
unemployment. 
Source:
OECD, Benefits and Wages Statistics.
www.oecd.org/els/benefitsandwagesstatistics.htm. 2012 data.
[1] COM(2013) 800 final.
[2] COM(2013) 790 final.
[3] Aside from the 16 Member States identified in the AMR, Ireland was also covered by an in-depth review, following the Council’s conclusion that it
should be fully integrated into the normal surveillance framework after the
successful completion of its financial assistance programme.
[4] http://ec.europa.eu/europe2020/pdf/csr2014/nrp2014_slovenia_sl.pdf
[5] http://www.mf.gov.si/fileadmin/mf.gov.si/pageuploads/mediji/2014/program_stabilnosti_2014.pdf
[6] Cyclically
adjusted balance net of one-off and temporary measures, recalculated by the
Commission services on the basis of the information provided in the programme,
using the commonly agreed methodology.
[7] The legislation must provide definitions
of revenue and expenditure, general government, structural balance, as well as
the format and mandate of the Fiscal Council. It must also provide details of
the escape clause, a definition of significant deviations from the mid-term
objective (MTO) or the adjustment path towards it, and the activation of the
underlying correction mechanism. Furthermore, the necessary legislation has to
be passed by a two-thirds majority in the parliament.
[8] See Table 5 in the Annex. The medium-term sustainability gap (S1)
indicator shows the upfront adjustment effort required, in terms of a steady
improvement in the structural primary balance to be introduced until 2020, and
then sustained for a decade, to bring debt ratios back to 60% of GDP in 2030,
including financing for any additional expenditure until the target date,
arising from an ageing population. The following thresholds were used to assess
the scale of the sustainability challenge: (i) if the S1 value is less than
zero, the country is assigned low risk; (ii) if a structural adjustment in the
primary balance of up to 0.5 p.p. of GDP per year until 2020 after the last
year covered by the autumn 2013 forecast (year 2015) is required(indicating an
cumulated adjustment of 2.5 pp.), it is assigned medium risk; and, (iii) if it is greater than 2.5 (meaning
a structural adjustment of more than 0.5 p.p. of GDP per year is necessary), it
is assigned high risk.
[9] See Table 5 in the Annex. The long-term sustainability gap (S2)
indicator shows the immediate and permanent adjustment required to satisfy an
inter-temporal budgetary constraint, including the costs of ageing. The S2
indicator has two components: i) the initial budgetary position (IBP) which
gives the gap to the debt stabilising primary balance; and ii) the additional
adjustment required due to the costs of ageing. The main assumption used in the
derivation of S2 is that in an infinite horizon, the growth in the debt ratio
is bounded by the interest rate differential (i.e. the difference between the
nominal interest and the real growth rates); thereby not necessarily implying
that the debt ratio will fall below the EU Treaty 60% debt threshold. The following thresholds for the S2
indicator were used: (i) if the value of S2 is lower than 2, the country is
assigned low risk; (ii) if it is between 2 and 6, it is assigned medium risk;
and, (iii) if it is greater than 6, it is assigned high risk.
[10] Ageing costs comprise long-term projections of public age-related
expenditure on pension, health care, long-term care, education and unemployment
benefits. See the 2012 Ageing Report for details.
[11] According to the national reform programme 2014-15 and the
Evaluation of the pension reform (April 2014) the number of new retirees in
2013 reached 15.512, almost 40% lower than in 2012 (25.262).
[12] The national TV Slovenia 1 reported on 5 April 2014 about a public
procurement for a blood thinner in the hospital in Slovenj Gradec (http://www.rtvslo.si/zdravje/video-varcevanje-v-zdravstvu-v-praksi-direktor-bolnisnice-kar-k-proizvajalcu/333911).
Two domestic wholesalers (Salus & Kemofarmacija) offered practically
identical offers charging EUR 200.643 and EUR 199.973, while the French
producer Sandofi-Aventis directly submitted a 10 times cheaper offer at EUR
19.546.
[13] http://www.stat.si/eng/novica_prikazi.aspx?id=4526
[14] SWD(2013) 374 final.
[15] The exercise covered 70 % of the banking system and the
participating institutions provided granular data for two million loans and 14 000
collateral assets. The AQR incorporated the results of 4 235 individual
loan file reviews and the assessment of 15 358 real estate valuations carried
out by independent third parties. The implementation was coordinated and
supervised by a Steering Committee, comprised of representatives of the Bank of
Slovenia, the Ministry of Finance, international consultants, and observers
from the European Commission, the ECB and the EBA.
[16] See: Slovenia — Review of progress on policy measures
relevant for the correction of macroeconomic imbalances, European Commission
(20 February 2014).
[17] Further details available here: http://europa.eu/rapid/press-release_IP-13-1276_en.htm
[18] See Box 3.2 in the 2014 IDR (COM(2014) 150 final).
[19] Further details are available in the press release "Bank of Slovenia and Slovenian
government announce results of stress tests" of 12 December
2013 available here: https://www.bsi.si/iskalniki/sporocila-za-javnost-en.asp?VsebinaId=16219&MapaId=202#16219.
[20] All data from the Supreme Court of Slovenia.
[21] Slovenia: State-Owned and State-Controlled Enterprises, S.
Georgieva and D. M. Riquelme (June 2013)  
[22] Domadenik et al., Political connections and productivity of firms:
micro evidence of legal corruption. 
[23] The sales agreement for Helios was signed
in October 2013 and sales agreement for Fotona was signed in at the end of
January 2014.
[24] Table 2 in Slovenia — Review of progress on policy
measures relevant for the correction of macroeconomic imbalances, European
Commission (20 February 2014).
[25] See: http://www.oecd.org/eco/reform/indicatorsofproductmarketregulationhomepage.htm
[26] Construction permits, property registration and paying taxes are
the three problematic backlogs identified by the Doing Business Report 2014.
According to this report, it takes 182 days to obtain a construction permit in
Slovenia (against the OECD average of 147.1 days), registering a property takes
109.5 days (against the OECD average of 24.1 days) and the tax declaration
takes 260 hours to complete (against the OECD average of 175 hours).
[27] See: http://www.oecd.org/innovation/oecdreviewsofinnovationpolicyslovenia.htm

[28] A new
indicator proposed by the Commission. Slovenia ranks 14th, showing
diversified performance in its components: while performing exceptionally well
in exports of medium- and high-tech manufacturing goods, it performs poorly in
knowledge-intensive services. Employment in fast-growing innovative firms is
relatively low. http://ec.europa.eu/economy_finance/publications/qr_euro_area/2013/pdf/qrea4_section_2_en.pdf
[29] The research and innovation system in Slovenia has obvious
weaknesses in knowledge commercialization (3.1 patents per billion GDP compare
to the EU average of 3.9) and research quality (only 7% of cited scientific
publications compare to the 11% at EU level).
[30] The amount of bank loans to domestic non-banking sectors fell by
EUR 1.9 billion in the first eleven months of 2013, nearly three times as
much as in the same period of 2012. Source: IMAD, Economic Mirror, December
2013.
[31] See finance programme of EUR 333 million from SID Bank. Only
EUR 16 million were absorbed. 
[32] Final goods sector mark-ups is the difference between the selling
price of a good/service and its cost. Entry cost refers to the cost of starting
a business in the intermediate sector. The implicit consumption tax rate is a
proxy for shifting taxation away from labour to indirect taxes. The benefit
replacement rate is the % of a
worker's pre-unemployment income that is paid out by the unemployment scheme. For
a detailed explanation of indicators see Annex.
[33] For a detailed explanation
of the transmission mechanisms of the reform scenarios see: European Commission
(2013), "The growth impact of structural reforms", Chapter 2 in QREA No.
4. December 2013. Brussels; http://ec.europa.eu/economy_finance/publications/qr_euro_area/2013/pdf/qrea4_section_2_en.pdf
[34] Between 2002 and 2013, the total direct
costs of the seven recorded floods amounted to EUR 1 500 million - Study on economic and social
benefits of environmental protection and resource efficiency related to the
European Semester, February 2014, Risk & Policy Analysts Limited.
[35] European Commission, European Economy, Energy Economic
Developments in Europe, 1/2014.
[36] Slovenia increased its proportion of renewable energy to 20.2 % in 2012, up from
19.4 % in 2011; the proportion of renewables used in transport increased
to 2.9 % in 2012, up from 2.1 % in 2011.
[37] Flash Eurobarometer 381: SMEs, resource efficiency and green
markets, report, fieldwork: September 2013, Publication: December 2013.
[38] Study on economic and social benefits of environmental protection
and resource efficiency related to the European Semester, February 2014, Risk
& Policy Analysts Limited.
[39] For further details, see the 2014 Joint Employment Report,
COM(2013)801, which includes a scoreboard of key employment and social
indicators.
[40] These data are part of the scoreboard of key employment and social
indicators (2014 JER). The scoreboard aims at the identification of key
employment and social challenges, taking due note of the Employment Performance
Monitor and of the Social Protection Performance Monitor.
[41] Member States Competitiveness Report 2013.
[42] IDR 2014, Chapter 3.3.
[43] Data of Statistical Office or Republic of Slovenia.
[44] Economic Mirror, March 2014
[45] Pursuant to the Council Recommendation of
22 April 2013 on establishing a Youth Guarantee (2013/C 120/01): "ensure
that all young people under the age of 25 years receive a good-quality offer of
employment, continued education, an apprenticeship or a traineeship within a
period of four months of becoming unemployed or leaving formal education".
[46] Eurostat data, NEET rate aged 15-24, 2013.
[47] Slovenia
shows mixed results in the 2012 OECD Programme for International Student
Assessment (PISA): while mathematics and science scores remain above the EU
average (but with no improvement), reading skills lag behind the EU average and
show a deteriorating trend.
[48] SORS data: in 2011, 2006 people with a high school degree and
919 people with a higher education degree left Slovenia in search of a better
job. In 2012, this figure increased to 3598 for high school graduates and 1588
for higher education graduates. 2013 data are not yet available, but the trend
continued with similar intensity.
[49] They increased the number of hours of compulsory practical work included
in courses and made it easier for young experts from enterprises to teach in
post-secondary vocational institutions.
[50] Historically, tertiary graduates were
mainly employed by the public sector and large corporations, who stopped hiring
because of the economic crisis. Finding employment in SMEs requires different
or additional skills, like entrepreneurship, which so far have been given less
attention in education.
[51] Eurostat data for gross debt-to-income
ratio of households show that the indicator for Slovenia reached 47.08% in
2012, well below the Eurozone average of 98.43%. 
http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&plugin=1&language=en&pcode=tec00104  
[52] The ratio of average pensions to average salary in 2012 stood at 62.1%,
down from 73.2% as in 2001.
[53] http://ec.europa.eu/public_opinion/archives/eb/eb80/eb80_anx_en.pdf
[54] Data from the Supreme Court of Slovenia and the 2014 EU Justice
Scoreboard — Communication from the Commission to the European Parliament, the
Council, the European Central Bank, the European Economic and Social Committee
and the Committee of the Regions, COM(2014) 155 final, available at: http://ec.europa.eu/justice/effective-justice/scoreboard/index_en.htm
[55] In 2012, there were 8.3 pending enforcement cases per 100
inhabitants in Slovenia.  This is above the EU median of 0.3 cases per 100
inhabitants. See Council of Europe (CEPEJ), Study on the functioning of
judicial systems in the EU Member States: Facts and figures from the CEPEJ
2012-2014 evaluation exercise, prepared for the European Commission (DG
Justice).
[56] COM(2014) 38 final.
[57] The following categories are used to assess progress in
implementing the 2013 country-specific recommendations: No progress: The
Member State has neither announced nor adopted any measures to address the CSR.
This category also applies if a Member State has commissioned a study group to
evaluate possible measures. Limited progress: The Member State has announced some measures to address the CSR, but these measures appear insufficient
and/or their adoption/implementation is at risk. Some progress: The Member State has announced or adopted measures to address the CSR. These measures are
promising, but not all of them have been implemented yet and implementation is
not certain in all cases. Substantial progress: The Member State has adopted measures, most of which have been implemented. These measures go a
long way in addressing the CSR. Fully addressed: The Member State has adopted and implemented measures that address the CSR appropriately.
[58] Latest European Environmental Agency
greenhouse gas emission projections.
[59] The real estate sector is excluded because of statistical difficulties
of estimating a mark-up in this sector. The sector renting of machinery and equipment
and other business activities is conceptually part of intermediate goods
sector.