NEW FACES, SAME STORY: SLOVENE PRIVATIZATION UPDATE

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TAGS: ECON EINV ETRD SI
SUBJECT: NEW FACES, SAME STORY: SLOVENE PRIVATIZATION UPDATE

REF: A. 05 LJUBLJANA 0889


B. 05 LJUBLJANA 0766

C. LJUBLJANA WEEKLY REPORT 10 FEBRUARY 2006

D. 05 LJUBLJANA 0489

Classified By: Chief of Mission Thomas B. Robertson, reasons 1.4(b) and
(d).


1. (C) Summary: The current Government of Slovenia (GOS),in
office since December 2004, came into power on a platform of
change. One of the key elements of the coalition agreement
was economic reform, including plans to extract the state
from the economy. The GOS has said it specifically wants to
sell off state shares in banking and telecom. Despite these
stated goals, the GOS has accomplished little on
privatization. A continuing "go slow" approach at the
highest levels of government, coupled with an unwillingness
to sell Slovene assets to foreign investors, remain the key
roadblocks to change. There may be value in remaining
conservative on the sale of valuable state assets, however,
continued lack of action by the government only ensures
choices not made now will be more difficult in the future.
End summary.

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Current Status
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2. (C) In office for more than 14 months, the center right
coalition continues the refrain that economic change is
necessary, in particular weakening the strong
government-business connection that has existed since before
Slovenia's independence in 1991. The GOS has appointed a
commission for economic reform (ref A),which has announced
plans for significant changes to the Slovene economy:
minimizing the tax burden, creating a more flexible labor
market, and generally creating a more open economic system
designed to encourage continued growth in the coming years.
In line with the coalition agreement, the reform committee
has also announced that a key part of economic change will be
privatization of state-owned industries. Since coming to
power, however, the government's record on privatization has
been lackluster. The sole example of state sell-off of
shares in Slovene businesses in the past year is the
back-room deal of retailer Mercator (ref B).


3. (C) The GOS, either directly or through state-owned funds
KAD and SOD, owns significant shares in nearly 60 percent of
the Slovene economy. While state-owned firms contribute to
Slovenia's economic growth rates of 3-4 percent in recent
years, many of these firms such as leather manufacturer IUV,
clothing company Mura, and car seat maker Prevent, are in
industries that are already struggling to be competitive and
have little future in a well-developed economy like
Slovenia's. In recent months, all have announced significant
layoffs and intentions to move production outside of
Slovenia. Post understands that other major Slovene
businesses, such as appliance maker Gorenje and crystal maker
Rogaska, are losing competitiveness and could struggle
financially in coming years. While privatization is not a
panacea to solving the competitiveness problems of these and
other Slovene businesses, the government also has not shown
itself to be the most effective manager of businesses even in
the best of times.

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Finance Minister Bajuk: Maintaining A "Golden" Share
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4. (C) On 10 February, COM hosted a lunch for Finance
Minister Andrej Bajuk (ref C) during which Bajuk acknowledged
he was "moving cautiously" on privatization plans for
Slovenia's two largest banks, Nova Ljubljanska Banka (NLB)
and Nova Kreditna Banka Maribor (NKBM). (Note: The GOS owns
more than half of NLB and 100 percent of NKBM.) Raised
abroad and a long time employee of the Interamerican
Development Bank, Bajuk seems to be a key advocate for
privatization within the GOS. Despite more Western leanings,
however, Bajuk told COM he felt it could make sense for the
Slovene government to retain a "golden" (i.e., significant,
but non-majority) share in certain industries, particularly
in financial services. Bajuk indicated that he remains

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interested in working with the European Bank for
Reconstruction and Development (EBRD) on a possible
"pre-privatization" stake in NKBM. EBRD sources tell
Econoff, however, that progress in this area is very slow.
The GOS (both current and previous) has long discussed plans
for privatization of the banking sector (ref D),but only
limited action has been taken.


5. (C) In addition to financial services, pundits in Slovenia
often point to the telecommunications sector as one that
needs reform and privatization. Telekom Slovenije, the
government-owned monopoly landline operator and Mobitel, its
cellular subsidiary that controls over 70 percent of the
mobile phone market, have been regular targets of criticism
by foreign investors and competition authorities from the EU.
While Bajuk told COM he was interested in privatizing
Telekom, he said he would first like to "improve the
competition situation." Referring to widely-rumored interest
by Deutsche Telekom in purchasing Telekom Slovenije, Bajuk
told COM he did not want to privatize the Slovene phone
operator merely by "selling to another monopoly." Bajuk did
not, however, elaborate on exactly how he might go about
ensuring an improved competitive environment in the Slovene
telecommunications sector. (Note: Despite Bajuk's desire to
see greater competition in Slovenia's phone market, the
responsibility for this rests with the Ministry of the
Economy and the Slovene Competition Protection Authority.)

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Comment: Is There Actually A Strategy and Timeline Here?
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6. (C) Slovenia's record of economic growth since
independence has been one of steady, if not stellar, growth.
With many of the key ingredients to support a strong economy
(healthy infrastructure, well-educated workforce, stable
political system) existing since 1991, Slovenia has been
loath to attempt the radical changes that other countries in
Central and Eastern Europe have undergone. Slovenia has
often also shown great reluctance to sell state-owned firms,
particularly to foreign investors. Perhaps tellingly, the
highest levels of government on occasion have expressed
concern in public fora over what might happen if foreigners
"take over" (ref B).


7. (C) Slovenia's "go slow" conservative approach to economic
change has, until now, been successful. Bajuk's efforts to
remain cautious on privatization indicate that there appears
to be no agreement in the GOS about making rapid changes. To
be sure, the current government's conservative approach has
been based in part on not wanting to rock the boat and
thereby risk introduction of the Euro, currently planned for
January 2007. Going forward, however, Slovenia will almost
certainly need to move faster. After nearly two years in the
EU, external market pressures continue to force Slovenia's
economy into a more dynamic and difficult environment. The
current GOS professes to understand this and says that
creating a more nimble, forward-looking economy will be
essential to Slovenia's success in the coming years. There
has been until now, however, little substantial action to
support these professions. Privatization, in particular, has
been slow in coming. What has been missing, moreover, in our
discussions with GOS policymakers, has been a clear strategy
and timeline for the way ahead in privatization.


8. (C) While the GOS has talked a good game on privatization,
popular suspicions about foreign ownership cause the current
GOS's stated intentions to sound much like those of its
predecessor. Post is unaware of any significant effort by
this government or those previous to counter these suspicions
and influence public opinion on privatization, at a time when
there is extensive discussion and debate on tax and other
reforms. We are concerned that social and political
obstacles to economic reform remain as strong as ever.
Interestingly, Post has on file a letter dated February 2003
from the Ministry of Finance to the Embassy, stating
precisely which companies in 2003 and 2004 the state planned
to privatize, and the share percentages of each that would be
sold. Companies on this list included NKBM, Telekom
Slovenije, IUV, and Slovenia's sole port operator, Luka
Koper. Of the more than 20 firms listed in the document, not
one has been privatized to this date and many could be found

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on the current list of companies the GOS says it plans to
sell. A well-planned approach to privatization is certainly
prudent and lack of traction in this area is not a new story
in Slovenia. Outside observers are beginning to interpret
the government's cautious moves, however, as intractability
and resistance to change by the GOS itself. It is time to
start the ball rolling.
ROBERTSON