FDI Summit Slovenia 2011 Conclusion Paper

Conclusion paper from the second Foreign Direct Investment (FDI) Summit 2011

Between Crisis Management & Sourcing Capital for Development Organised under the honorary patronage of the President of the Republic of Slovenia, Dr. Danilo T端rk

Conclusion paper from the second Foreign Direct Investment (FDI) Summit 2011

Between Crisis Management & Sourcing Capital for Development Organised under the honorary patronage of the President of the Republic of Slovenia, Dr. Danilo T端rk

FDI Summit 2011 Conclusion Paper Published by The Slovenia Times Prepared by Tilen Majnardi, M. Sc. Ljubljana, December 2011

FDI Summit 2011 Profile The FDI (Foreign Direct Investment) Summit 2011 Slovenia was a major international business event focusing on foreign direct investment and current development issues.

The 2011 conference was held in Ljubljana on 13 and 14 October 2011 with more than 20 eminent speakers in seven round table discussions over the two-day period and with 170 participants from Slovenia and abroad attending.

The conference speakers and participants included: - established international and domestic experts, - CEOs of domestic and foreign companies, - key representatives of government institutions responsible for shaping the business environment, - existing and potential foreign investors, - representatives of domestic and foreign international institutions from the fields of business and economics, - economic diplomatic representatives from several countries.

The organiser of the conference was The Slovenia Times in partnership with the Public Agency of the Republic of Slovenia for Entrepreneurship and Foreign Investments (JAPTI) and the Ministry of the Economy.

The programme partner of the conference was the Faculty of Economics, University of Ljubljana.

The honorary patron of the FDI Summit 2011 was the President of the Republic of Slovenia, Dr. DaniloTürk.

FDI Conclusion paper

5

FDI Summit 2011 Profile Moderating team – Chairpersons of the panels Prof. Marko Jaklič, Faculty of Economics, University of Ljubljana doc. Maja Makovec Brenčič, Faculty of Economics, University of Ljubljana Tine Kračun, Institute for Strategic Solutions Maja Dragović, The Slovenia Times Primož Cirman, Dnevnik newspaper Jernej Šmajdek, STA (Slovenian Press Agency) Tilen Majnardi, Solutia, co-organiser of the FDI Summit 2011

Speakers Žiga Debeljak, Mercator, Chairman of the Board Christof Droste, Hella Saturnus Slovenija, Managing Director Biljana Weber, Microsoft Slovenia, Managing Director Stephen Kai Wong, Director of the Hong Kong Economic and Trade Office Branko Žibret, A. T. Kearney Slovenia, Partner Luca Olivari, A. T. Kearney Italy Matjaž Rakovec, Zavarovalnica Triglav, Chairman of the Board Rudolf Klötscher, BSH Hišni aparati,CEO Igor Plestenjak, JAPTI, Director Thierry Villard, Goodyear Dunlop Central & South East Europe, Managing Director Giulio Bonazzi, Aquafil-Gruppo Bonazzi, President & CEO Saša Bavec, Knauf Insulation, Chairman of the Board Damir Kuštrak, Agrokor Group, Executive Vice President for Export Markets Marjan Hribar, Director Internationalisation Directorate, Ministry of the Economy Marko Voljč, KBC Group, CEO for Central and Eastern Europe and Russia Prof. Dušan Mramor, Dean of the Faculty of Economics, University of Ljubljana Iztok Lesjak, Technology Park Ljubljana, Director

6

FDI Conclusion paper

Platform of the Conference

“The detrimental years of doing nothing” The first FDI Summit, in the autumn of 2010, took place amidst modest post-crisis optimism which was characteristic of all of the world’s most developed countries as well as the emerging new global superpowers. It also held true that Slovenia, given the implementation of certain investment projects and the reorganisation of the state administration, aimed at achieving greater efficiency and effective service for the economy and citizens, had good prospects for a new economic cycle and even for attracting foreign capital.

The first conference went far beyond addressing the issue of foreign investment, with the final outcome of the conference contained in its final report (Conclusion paper), “Integrated management of state competition and credible governance as a key element of economic development” which, based on domestic and international experiences and trends in the global economy, laid a solid foundation for the formulation of an effective development policy in Slovenia.

Despite the modest optimism that marked the FDI Summit 2010 conference, it is clear that over the past year, despite some bold plans in the field of public infrastructure and acquisition of strategic partners for Slovenian companies, Slovenia has not made any headway in terms of actual project implementation. Conversely, in many areas, stagnation has turned into a disturbing lag and the common denominator of all the accumulated problems is the collapse of credible corporate governance of the State and its assets, from the highest to the lowest levels.

The findings and guidelines from last year’s conference together with the conference partner, Peter Kraljič, were combined into practical guidelines for enhancing all levels of competitiveness, from national, regional and corporate to personal, have not been implemented by Slovenia, i.e. by its governing structures in the daily economic activities of the State, even to a minimum degree.

The summer and even more so the autumn of 2011, heralded the possibility of a new rapid deterioration in the economic situation of Slovenia. Slowly, but steadily, credit rating houses began to punish Slovenia’s reform inability, the credit crunch grew worse, companies had increasing difficulty obtaining the funding necessary to maintain production and at increasingly higher prices, development projects were more or less at a standstill and the government was without a basic operational plan for possible anti-crisis State investments.

The failure to eliminate the obvious shortcomings of the young socioeconomic system. The inefficient and bureaucratic, over-regulated

FDI Conclusion paper

7

Platform of the Conference public administration, incomplete preparation of various investment documentation, delays in launching economic projects, inadequate legal security, politically and regionally irrational fragmentation of the available investment potential, irrational politicisation of even simple economic facts and the inability to define the true national economic interest – are the elements pushing Slovenia down on all scales of international competitiveness.

Despite the general strategy of encouraging and promoting foreign investment, the State is becoming increasingly inhospitable in systemic and political terms to potential investors (who are hard to find due to the escalating crisis in the EU and U.S. and are also much more cautious than in the years before the crisis) and to economic partners with its image increasingly becoming one of a friendly and nice but, a frivolous and unreliable partner.

Over the last two years, the economic crisis fully revealed Slovenia’s unwillingness within the context of global expansion and unrealistic economic optimism, to assume the “post-independence” challenges of state governance, strategic guidance of the economy and identification of new trends in changed and unstable global circumstances.

The accumulated problems escalated into an internal political crisis in the autumn of 2011 which led to a vote of no-confidence in the Government and the announcement of early elections in December 2011.

The political crisis also put certain key reform projects on hold in terms of public finance and with regard to important national projects.

The prospects of economic recovery in Slovenia and the European Union vanished in October and November 2011 with the escalation of the euro crisis and the unsuccessful and inglorious salvaging of Greece, indicating serious and long-term problems for the entire eurozone.

8

FDI Conclusion paper

Core Theme of the Conference

“The worsening global crisis does not allow for any more time to be wasted” The cornerstone of Slovenia’s new development strategy – utilising Slovenia’s potential as a regional “hub” or regional entry point for conducting business in South East and Central Europe.

international platform for doing business in south-eastern and central-eastern europe

GERMANY

Slovenia Member of EU, Eurozone, OECD and Schengen At the crossroads of the main European transport corridors

Prague

CZECH REPUBLIC Brno Stuttgart Műnchen

AUSTRIA

Bern

Budapest

SWITZERLAND

HUNGARY SLOVENIA Venezia

Shortest connection from the Port of Koper to the Middle East and Far East

SLOVAKIA

Vienna Bratislava

Milan

Ljubljana

ROMANIA

Zagreb

CROATIA Beograd

BIH

Bologna

Sarajevo

ITALY Rome

SERBIA

MONTENEGRO

BULGARIA

MACEDONIA ALBANIA

400 km Radius More than 45 mio consumers 11 countries, jointly representing more than 40% of the total GDP of the EU

FDI Conclusion paper

9

Key Substantive Issues of the Conference How can Slovenia be more effective in utilising its strategic geographical location for so-called hub development projects, its infrastructure potential in the broadest sense, natural features, preserved environment, relatively well-educated workforce and what is still an enviable level of quality of life? Can we improve our image as a country that is not deemed interesting in terms of investment?

Can Slovenia translate its numerous general decisions and theoretical projects into investments and economic practice in the relatively limited timeframe imposed by the deepening euro crisis?

Where can investment capital be obtained in the current situation?

How to ensure its efficient use both in the public and private sectors?

What can be the core of the new development cycle? A look at Slovenia’s development in the last twenty years shows that it was founded on the industrial “base” of the 1970’s and 1980’s. A new “European” concept of development in Slovenia was not developed due to Slovenia’s excessive infatuation with its own performance during the transition, which resulted in its failure to enter new markets and develop high value-added production.

Does the critical undercapitalisation of the Slovenian economy, given the tightening situation in the fiscal system, allow for any operational development policy at all? Do we have enough domestic and foreign resources to maintain minimum growth?

10

FDI Conclusion paper

Key Substantive Issues of the Conference How should plans for the more effective governance of the State and its assets, which includes attracting foreign capital, be put into practice?

Repeatedly emphasised findings by both domestic and foreign experts, suggest that only this will allow the release of the internal financial and human development potential and increase its attractiveness for foreign investors.

Can we count on foreign capital in the current situation, whether for the sale of state assets in state enterprises or for “greenfield” investments? Will short-term borrowing for investment purposes still be possible? Given the country’s deteriorating creditworthiness, problems may arise in connection with borrowing for the repayment of old debts.

Is it possible to replace general apathy and the unconstructive search for mistakes within the political elite at any cost, with efforts to find minimum consensus solutions to stabilise public finances and lay the foundation for new economic development?

How should an exaggerated and unconstructive social and economic pessimism be replaced with realistic assessments of the situation and required measures? It is clear that Slovenia’s position is far from catastrophic but what is alarming is the accelerating negative trend which must be stopped as soon as possible to avoid the more extensive problem of the “Greek scenario”.

What portion of development funds should be used for the restructuring of domestic public spending and its effective management? Will the government be able to raise funds for more comprehensive government investment or public-private partnerships in future years due to its focus on public finance rehabilitation?

FDI Conclusion paper

11

Round Table Highlights

Seeking the path from stagnation Investor & Management perspective on creating a Regional Hub Žiga Debeljak, Mercator, Chaiman of the Board “Until now Slovenia definitely had (and could have) a role as a regional hub when talking about the Western Balkan countries. It knows the region well, it knows how to manage the complexity of the region, it has good infrastructure with a very strong geo-strategic position and a highly skilled labour force.

But, we must be aware that after those countries join the European Union and I must say that I strongly support this process of integration, those countries will become more attractive for foreign investors from the whole world and the EU because alot of the complexity elements of those countries will disappear. The ‘negative’ consequence of this process will be that alot of those element that Slovenia used as a competitive advantage to be a hub for the Western Balkans will disappear, the complexity of the markets will lower, all countries will be integrated into the EU market, the geo-strategic position will become less important. Therefore, it is very important for Slovenia that our companies use their ability to serve as a hub for the region in the mediumterm horizon of the next few years, after that Slovenia’s role as a hub will be less and less important, especially from the perspective of infrastructure.

In future,the soft elements will be more important. Slovenia can become a competence centre, with a highly skilled labour force, a country with alot of know-how about doing business in the region.”

Christof Droste, Hella Saturnus Slovenija, Managing Director “If we are talking about a ‘hub’, on the one hand Slovenia can operate as a hub toward the Balkan region, on the other it can be a hub open to the world.

From Luka Koper it is very easy to go to the Far East. So you should not look just toward the south to the Balkan countries, but also to the north, to Italy, Austria, Germany. For example, companies in Munich would like to use Luka Koper as their hub to the Middle and Far East. But, for the moment, this is very difficult because we all know in what kind of situation is your railway, so this must be improved very fast and alot of companies would appreciate using Slovenia not just as the hub to the Balkan region but also for the countries of the Far East.

When Slovenia became an independent state, a lot of people had the vision that Slovenia could become ‘The Switzerland of the Balkans’, a very successful and rich country. The preconditions were, in that time, definitely there but they were not used in the right way. I think that the other Eastern countries caught up alot. Slovenia had a big advantage, it was a very good education system, alot of educated people were available. What, from my point of view is missing, is a clear master plan behind the vision, you must know where you want to be in 5, 10, 20 years and this master plan must be accepted by the whole society and all political parties.”

12

FDI Conclusion paper

Round Table Highlights Biljana Weber, Microsoft Slovenia, Managing Director “The advantage of the Slovenian market, compared to other markets in the region, was always knowledge and adoption of technology. Slovenia was always advanced compared to the others in Central and Eastern Europe.

The most advanced IT projects in this region were developed in Slovenia.

An innovation culture, the readiness to accept new technologies, new things are our big competitive advantage. When we look at what is driving growth in Slovenia today, so-called mid-tech and high-tech industries, an example of a mid-tech industry would be Hella Saturnus and high-tech is Krka. We need more of these examples to drive the competitive advantage of Slovenia, globally as well as in the region, because we are playing in the global market.

We are often looking too narrowly but techology is allowing us to compete anywhere in the world at any point in time. So further investment into the knowledge and education system is very important. There is a paper called ‘Slovenia 2020’ with the vision of where the country wants to be and there is a big emphasis on investment in R&D. So the programme is good but there are no real funds behind it and this must be improved”

FDI Conclusion paper

13

Round Table Highlights

Crucial elements of state competitiveness. What it takes to become a regional hub – Hong Kong and the ‘Tuscan life science case’ case study Stephen Kai Wong, Director of the Hong Kong Economic and Trade Office “If we look at the basic facts of Hong Kong and compare those facts to Slovenia we can find more than a few similarities. Both have a relatively small economy and depend heavily on the service sector, in Hong Kong more than 92% of GDP comes from the service sector, in Slovenia I think that this is around 64%. We both have a small population but a huge market. We have mainland China and Southeast Asia, the Asia-Pacific region, you have Central and Eastern Europe and particularly the Balkans.

An important development factor that Slovenia has been sharing with us is the skilled and multi-lingual workforce. We have invested alot of our resources into education, 20% of our budget is allocated to the education system. Also important, is that our universities are constantly touring the world trying to attract the best talent to study and work in Hong Kong. We also came to Ljubljana to attract talent because this is something that we believe in: if you don’t know how to keep and attract the talent you will lose competitiveness.”

Branko Žibret, A. T. Kearney Slovenia, Partner “In 2010 it happened for the first time in global economic history that transition and emerging economies were taking the largest share of global FDI inflows. Until 2010 this was always in the hands of the so-called most developed economies. This is an important message for us: 1. those economies are growing and not facing the crisis like the western world including Slovenia; 2. where or in what way should we concentrate our economic activities in the future.

After taking care of the basic infrastructure of the country, we should really discuss the strategic focus: No. 1, we should really forget being a low cost country, we should build the country on knowledge, we know today the majority of R&D investments are going to digitalisation, nano-technologies, sustainability, life sciences.... but this doesn’t mean that Slovenia must invest in all those techologies but it should be closely connected to all these trends and build up the services and products around them. No. 2, we should develop a supply chain hub where we can leverage the regional position, not only from the logistics point of view but also the wider supply chain including production driven R&D and a high level of specialisation.”

14

FDI Conclusion paper

Round Table Highlights Luca Olivari, A. T. Kearney Italy “For example, Tuscany has decided to keep its strong regional economic position by focusing on a very limited number of industries: the first choice was obviously tourism, as you might imagine wine goes by itself; real estate and life science. So the decision was that Tuscany would go with those three industries, they are not saying that they are the right ones but they made their bet.

What are the key lessons for Slovenia? The first one is focus, focus versus fragmentaion of resources. If you want to make a bet, decide where you will make the bet and make it simple. You do it by sector, as Tuscany did with three and within the sector you should be selective. The second important thing is proper marketing. That means qualify the idea, support it and take into consideration all of the connected environment and make it visible to the people that you want to attract. If today you say ‘Tuscany’ people will immediately see wine, tourism, a nice place to be, good climate, no one would think that it is a life science hub and this is the new challenge for effective promotion.”

FDI Conclusion paper

15

Round Table Highlights

Using the potential of Slovenia as a regional hub for the CEE and SEE markets Igor Plestenjak, JAPTI, Director “I should not be so pessimistic as many of the others. I must say that this year is a successful year for FDI promotion and the incentive system inside JAPTI. The growth in attractivness of Slovenia for foreign direct investments is coming. What´s the reason for that? I think that there are two reasons: first, Europe recognises Slovenia as a potential FDI location and the second is that we have managed to have results in so-called ‘lead generation’. We are marketing Slovenia where there is the biggest interest from investors and we try to contact directly all the potential investors and present the opportunities that Slovenia has. That is the reason that the amount of FDI is increasing this year and not decreasing and I think that this will go on also next year.”

Matjaž Rakovec, Zavarovalnica Triglav, Chairman of the Board “It´s obvious that the region is currently undergoing the process of consolidation and involvement in this process will enable the opening of opportunities for greenfield investments. I think that Slovenian companies wanting to create a foundation as a financial hub in the SEE region have alot of advantages. The first, the reputation of Slovenian brands in the region is extremely high and we all know that Slovenia is known for its hard working workforce and loyal and knowledgeable employees. Due to our geographic and cultural proximity to the countries of the region, I think that we also have the advantage of knowing the language, culture and we understand some specifics of this region. It´s also significant that, due to the relatively small size of Slovenian companies, SEE countries do not feel threatened by our companies entering their markets.

I´m in fact, very optimistic, we completely changed our strategy, the strategic institutional partners want to be our partners in expanding in the region. As you know in June this year we signed an equity appraisal letter with the IFC and we are going toward the direction to shortly become a hub for SEE countries in the field of our core business and that is insurance.”

Rudolf Klötscher, BSH Hišni aparati, CEO “Why are we using Slovenia as a springboard? It´s obvious! We are sticking to the 4Qs (Qualities of Slovenia): excellent links to the regional markets, this is a huge benefit for us; for sure high quality of infrastructure which is not comparable to the other countries, those nine in the region; the quailty of the workforce is of an excellent level and last but not the least, the quality of life because to work is one thing, life is another. At the end of the day the people in Slovenia should be aware that also each investment in the wider region brings new employees in Slovenia. It´s not the case that our investing in Croatia, Serbia, Bulgaria means that the money and workforce goes out.

Investing in those countries automatically means investing in your homeland.”

16

FDI Conclusion paper

Round Table Highlights

The right recipe for strategic high value added FDI: a blend of R&D, production, effective logistics, marketing & sales (establishment of competence centres) Thierry Villard, Goodyear Dunlop Central & South-East Europe, Managing Director “What really happened from 1997 when we started a joint venture with Sava Tires is that we invested approx. 170 million euros to transform the facility from a low value-added production site to a very sophisticated company. I think that now, it is amongst the top three in Europe, not only terms of quantity but more importantly in terms of quality. The beginning was opportunistic then we really saw the benefit of being here and having the right people to help us to develop our factory in the right direction.

What is worrying at this moment is not the potential of Slovenia as a country to invest in. The problem is the level of confidence that the country can resolve their economic difficulties. I strongly believe and I´m not an expert in politics, that the government should try to find a way to bring the neccessary reforms to make Slovenia more attractive for foreign investors and importantly not just bringing the reforms but bringing continuity and unity in the way to do things, that´s my perception as a foreigner, in a foreign company in Slovenia.”

Giulio Bonazzi, Aquafil-Gruppo Bonazzi, President & CEO “Slovenia has alot of advantages and also some disadvantages. The size and domestic market are definitely not the things that investors are coming here to explore but, Slovenia is part of the EU so we are talking about the EU market. What we really like is the level of education, that is a very important advantage if you want to produce high quality products. From our experience, the small size of the country can also be an advantage. If you want to talk to the relevant people, if you have some problem, you need some permisssion or you want to quickly explore some new possibilities, it is much easier to attract the attention of the important political and economic decision makers. It is much easier to talk to the Prime Minister of Slovenia than to speak with Mr. Obama. From this point of view, the small size can also be a great advantage of the country.”

FDI Conclusion paper

17

Round Table Highlights Saša Bavec, Knauf Insulation, Chairman of the Board “In the past, due to the size of the company, it was not able to compete with the big players in the European markets, so the focus became industrial customers. When in 2006, Knauf Insulation came into the story, the first response was that this was just another production plant but when their consultants went through all the documents, files, production data and saw how much profitability industrial customers can bring and later, in the two, three years of experience whilst working with the people in Škofja Loka, they found out that there was also a lot of technical expertise here. So during 2009, when everything was going down in Europe, by April we had already started growing again and slowly started to gain trust and this was followed by the decision that the specialised business unit for industrial customers be brought to Škofja Loka. Now, from Škofja Loka, we are increasingly exporting all over the world, not just Europe but Australia, Chile..., so now we are really a hub for industrial insulation products.”

18

FDI Conclusion paper

Round Table Highlights

On the hunt for development capital.

How to establish an effective platform for promotion and realisation of investments and development projects in the increasingly volatile European and global economy?

Damir Kuštrak, Agrokor Group, Executive Vice President for Export markets “There were a lot of small companies in Croatia that, after the crisis, had big problems with banks because they suddenly changed their risk policies. That´s why I believe that, because of this continuous crisis going on around us, in future we will need some approach from governments toward companies who cannot easily come to the capital markets and also to those who can. I believe that the companies with a good perspective will have no problems to find the money for their projects.

Obviously it was the policy in the 90´s and after the year 2000, that Slovenia was very careful and cautious about privatising all kinds of sectors - each country has their own strategy. In some cases I think that Slovenia has been too cautous which in these times of crisis is now a big problem.”

Marjan Hribar, Ministry of the Economy, Director Internationalisation Directorate “Today it´s clear to everybody in Slovenia that we really need additional capital to improve our economy and competitiveness. Why did we realise this so late, that is a good question? I think we all, not only in Slovenia, Europe and other countries, lived in some virtual reality where everything seemed possible. The moment of truth came two years ago, some parts of the world were not so affected. For us, as a rather small economy, we were affected more than we expected. So now, it is definitely clear that quick steps for developing a new basis for economic development are needed as soon as possible.

Thanks to the now present foreign investors in Slovenia, we can say that Slovenia as a country is a good and attractive choice for investing. We must say this very clearly, we have to work on it, we have to build up our strategy and work very hard on that. We know our strengths, they lie in our assets, human and natural resources, dedication to perfection and complete knowledge in different industries. We also have our weaknesses, they come from our legal framework, one of the main issues is how to put one project into life, into the space.”

FDI Conclusion paper

19

Round Table Highlights

Finding a successful development concept for Slovenia in the global economy urgent improvement in state competitiveness, quality of governance, a clear definition of strategic companies/sectors, a credible strategy for state withdrawal from non-strategic parts of the economy, effective utilisation of the geo-strategic location and the implementation of sustainable development strategies Marko Voljč, KBC Group, CEO for Central & Eastern Europe and Russia “The nature of the problems that we face is very clear and very well understood.

The recipe to remedy the situation is also relatively straightforward. What is lacking is the political and social will to make these changes happen and here I do see some similarities with the Greek scenario. Obviously they were (or probably they still are) in a state of denial about what the Greek society needs to do and you can see some of the statements. Demonstrations of that are also in Slovenia where people are essentially resisting anything that would cut their privileges, their current situation and position in the society and that has pretty much paralysed all attempts by the government, which of course were not particularly well communicated, to really move ahead.

Since we did not use the last crisis as an opportunity to somehow get Slovenia on solid ground, I hope that in the next (present) crisis there will be enough political and social consensus that indeed, major sacrifices are needed before things can get better because not doing anything is not an option.”

Iztok Lesjak, Technology Park Ljubljana, Director “We should improve the distribution of the public money to investments. The pattern in the past, was that public money was just distributed, the return on investment was not calculated.

A major problem that we are also witnessing is that the people who are capable and have potential, are looking for other environments where their talent will be much more appreciated and developed much faster than in Slovenia. Again, we are competing in the European and global markets and the fiscal system must follow this reality.”

20

FDI Conclusion paper

Round Table Highlights

FDI Conclusion paper

21

Prof. Dušan Mramor, Dean of the Faculty of Economics, Ljubljana

Conclusions of the programme partner of the conference

Diagnosis of the Slovenian economy

We are in a very interesting situation as we know what we have to do, but we don’t do it or we do it very inadequately.

22

“Given the current macroeconomic indicators of the Slovenian economy, there is no doubt that comparisons with Greece are exaggerated. The problem lies in the negative trend and general atmosphere in society with respect to necessary changes in different areas. We can see that all necessary changes which enjoyed the widespread confidence and support of most economic experts, (even though we economists have a saying that two economists will find at least three different solutions or methods for solving a problem) were recently rejected by a large majority of the Slovenian public. The problem is therefore implementing the changes into practice. As the Chairman of the board of Gorenje once put it: ‘everything depends on the effective implementation of projects and that’s where we are lacking’.”

The importance of translating general decisions into economic reality “We are in a very interesting situation as we know what we have to do, but we don’t do it or we do it very inadequately. Our current macroeconomic

FDI Conclusion paper

Prof. Dušan Mramor, Dean of the Faculty of Economics, Ljubljana situation, in comparison to other countries is still relatively good, both in terms of public and external debt. As I said, a big problem is the deterioration trend in the overall picture of the Slovenian economy, particularly its critical lack of response to problems. What is crucial for the near future, is that the new Slovenian government makes a radical breakthrough in the actual implementation of the changes. We all agree that we need pension and health care reform and labour market reform aimed at greater flexibility and we clearly require a new attitude toward knowledge and research and their integration into the economy.”

Acute problem - the credit crunch

“I would divide the issue of the functioning of the financial system in these times of crisis into two parts. First, when we began to deal with the global economic crisis, the government simply failed to properly address the crisis in the banking system. Instead of putting deposits worth EUR2 billion in banks, it should have recapitalised the banks. Banks cannot do much with such deposits. They regard them as high risk resources and therefore do not approve loans and as a consequence, companies do not obtain fresh funds for projects. The problem lies in the refinancing of existing debt, the lack of growth in GDP, the decrease in employment and the perpetuation of the vicious cycle which we have been running for some time now. Such actions by the Slovenian government stand in stark contrast to measures taken by the developed countries of the European Union.They increased the capital of banks quickly enough thus preventing a credit crunch,which is why those economies emerged from the first crisis shock relatively unscathed. In the current, second cycle of the crisis which is largely a result of what is happening in Greece, although the government is discussing recapitalisation, Slovenia has still not solved its problems from the first cycle, thus complicating the situation. The economy continues to stagnate, we are still in a credit crunch and there are no significant investment funds available. The problem is also substantially exacerbated with people refusing to take out more loans for fear of the future. In this situation, although it is already very late, I still suggest rapid recapitalisation and a clear plan for addressing the condition of banking institutions, including the refinancing of bad debts, which will restore confidence and facilitate the normal functioning of banks. However, we have to do this immediately for I feel we are already three years behind schedule.”

Urgent short-term measures

“We are definitely focusing too much on social issues and the redistribution of what has been created, although this segment is very important at a time of crisis from a citizens perspective. We are simply not allocating enough time, energy and consequently measures, to developing a competitive business environment which is the basis for a new development impetus.

In the short term, we must take immediate action to simplify legislation especially regarding conditions for the functioning of the economy and citizens in general. Various legal, regulatory and administrative procedures that have been in place for years are simply stifling the competitiveness of

FDI Conclusion paper

The problem is also substantially exacerbated with people refusing to take out more loans for fear of the future. In this situation, although it is already very late, I still suggest rapid recapitalisation and a clear plan for addressing the condition of banking institutions, including the refinancing of bad debts, which will restore confidence and facilitate the normal functioning of banks.

23

Prof. Dušan Mramor, Dean of the Faculty of Economics, Ljubljana It is important in the short-term that, based on expert analysis, we particularly limit those budget items that have the lowest multiplier effect on Gross Domestic Product. There is no doubt that these items comprise social transfers, public sector wages and salaries and to a lesser extent, material costs.

the economy and the innovativeness of people. The efficiency of the public sector is simply too low, so I look forward to the new National Assembly and the new government urgently taking the necessary steps.”

Key short-term dilemma: how to stimulate economic activity while making extensive savings in the public sector.

“I believe that the need for fiscal and development incentives can surely be balanced with necessary restrictions on public spending. We would definitely first have to address the conditions for establishing the long-term fiscal stability of our system. The ageing population problem is certainly of central importance. If this problem and its macroeconomic consequences are effectively neutralised, this will send a signal to the financial markets that we are a fiscally solid state in the long-term and boost confidence in the country as a whole and improve our credit rating. In addition, due to the obvious crisis in the form of the letter “W”, a form I anticipated and predicted as far as Slovenia is concerned at earlier business conferences last year – it is necessary to immediately reduce the current state budget deficit.”

Recipe for a revised crisis budget

“Of course we have to address what is otherwise an urgent revision of the budget, very carefully and cautiously. It is important in the short-term that, based on expert analysis, we particularly limit those budget items that have the lowest multiplier effect on Gross Domestic Product. There is no doubt that these items comprise social transfers, public sector wages and salaries and to a lesser extent, material costs. On the other hand, we of course have an item with the highest multiplier effect on Gross Domestic Product and that is investment, which cannot be reduced but rather must be increased within the extremely limited parameters available to us. This can be done and we have already done it in the past. When I was Finance Minister in late 2002 and early 2003, we successfully corrected the aforementioned budget items resulting from the economic slowdown. We first reduced the share of wages and then increased the share of investment, thus directly addressing the problem and stimulating the economy. The room for such action has been reduced in this period but that is the only real rule or concept of action in this tough situation.”

How to lift the blockade imposed by trade unions?

Building trust is key to success and trust can be achieved through an open and clear dialogue and credible action in all areas.

24

Personally, I believe it is possible to reach reasonable agreement with the unions, both in the private and public sectors. A big problem is the current chronic lack of trust which basically hinders negotiation. Building trust is key to success and trust can be achieved through an open and clear dialogue and credible action in all areas. In the past, we reached important agreements with unions, even in more difficult times. Negotiations have always been difficult however we finally succeeded in reducing the share of wages in the public sector, encouraging investment and new, more vigorous economic growth and lowering inflation thereby increasing real income.”

FDI Conclusion paper

Prof. Dušan Mramor, Dean of the Faculty of Economics, Ljubljana Why is Slovenia one of the biggest casualties of the crisis?

“What are the main reasons for these pronounced problems in Slovenia compared to others? I would first like to point out the large, even incredible increase in the external debt of the Slovenian economy from 2004 to 2008. It increased by more than 160%. We lived very comfortably, without any problems, wasting our abilities and obtaining loans from wherever we requested them. Since becoming a part of the eurozone, we have increased our visibility and reputation whilst interest rates have been extremely favourable. The public sector has also been borrowing abroad due to low interest rates, which has led to changes in the domestic and foreign debt structure.

Once we entered the crisis, high foreign debt, its short-term nature and consequently, the urgent and extremely difficult refinancing of these loans resulted in an immediate credit crunch, meaning companies are unable to finance projects otherwise available to them. Hence the sudden drop in GDP in 2009 by eight percent. “

Problematic structure of the Slovenian economy

“An important reason for the severity of the crisis in Slovenia is undoubtedly the structure of our economy. Slovenian companies are largely subcontractors/ suppliers in various stages of the manufacture of final products. Our economic model has demonstrated that a reduction in demand by the final producer affects most the lowest subcontractors in the production chain. For instance, given a 10% drop in demand by the final producer, the fourth subcontractor in the chain will experience a 50% drop in revenue. This has greatly affected Slovenia as our exporters mainly export semi-finished products or components for final products. This economic structure is extremely unfavourable in a crisis, as already discussed at length in the 1990s, as well as for restructuring and risk reduction, but unfortunately no practical specific measures have been adopted in Slovenia. During the period of growth, we took advantage of the benefits this export structure brought us while disregarding the dangers.”

Are financial incentives or lower taxes the right recipe for attracting foreign investment?

“The fact is that we don’t have a lot of reserve in the tax system and even at this moment for example, our profit tax is about 19% which is relatively favourable and attractive from the perspective of investors, even when compared to less developed countries. Another question is the scope of taxation of employee incomes. There has been a lot of talk regarding this. Some reserves certainly exist here but, in my opinion, not much. In any case, the attractiveness of each country for foreign investment is determined by a number of different

FDI Conclusion paper

We lived very comfortably, without any problems, wasting our abilities and obtaining loans from wherever we requested them.

Since becoming a part of the eurozone, we have increased our visibility and reputation whilst interest rates have been extremely favourable.

25

Prof. Dušan Mramor, Dean of the Faculty of Economics, Ljubljana In any case, the attractiveness of each country for foreign investment is determined by a number of different factors, so our action must also be complex and comprehensive.

Simply lowering taxes does not necessarily result in higher capital inflows but it can quickly lead to an even more serious fiscal situation.

factors, so our action must also be complex and comprehensive. Simply lowering taxes does not necessarily result in higher capital inflows but it can quickly lead to an even more serious fiscal situation. Indeed in certain cases, in particular those concerning investments in high added value and high-end technology – and these are the ones we want in Slovenia – systemic conditions for foreign investment are extremely important: a highly educated work force, efficient spatial planning, legal protection, good infrastructure, a flexible labour market. Of course, we cannot disregard the fact that we, as a society, sometimes have an irrational, negative attitude toward foreign capital. When it comes to foreign investment and the question of foreign versus domestic in general, it is nevertheless important to understand that historically speaking, Slovenia has been a relatively closed country and that is probably also why we have a specific view on the issues of ownership, equality and justice. In this sense we are probably most similar to the Scandinavian countries. “

How to return to the “success story” track?

“The fact is that the atmosphere in the past two years in Slovenia has been extremely negative, pessimistic and partly even self-destructive. We must not forget however, that we were only recently regarded as a model of successful transition and economic development. I have personally been invited to various schools around the world where I have presented our macroeconomic model of success. Many of my associates and colleagues from abroad cannot believe what is happening to us. The fact is that we are still the same country and more or less the same people with the same and perhaps even greater knowledge and development potential. In the past, we usually adopted correct and effective solutions and of course, we were caught up in a special atmosphere of major historical events: independence, EU accession, adoption of the acquis and the adoption of the Euro. In these processes we made important and what is crucial also, very difficult decisions. If we apply the same logic, make correct and often difficult decisions, work hard and maintain a positive approach, of which we have proven ourselves capable, we should not fear the future.”

In the past, we usually adopted correct and effective solutions and of course, we were caught up in a special atmosphere of major historical events: independence, EU accession, adoption of the acquis and the adoption of the Euro. In these processes we made important and what is crucial also, very difficult decisions. If we apply the same logic, make correct and often difficult decisions, work hard and maintain a positive approach, of which we have proven ourselves capable, we should not fear the future.”

26

FDI Conclusion paper

FDI Awards

Granting of awards to the best foreign investors What are FDI Awards?

The project of granting awards to the Foreign Investor of the Year has been implemented for six years in a row by the leading English-language business magazine in Slovenia, The Slovenia Times, and the Public Agency for Entrepreneurship and Foreign Investments (JAPTI) as the basic institutional coordinator for the promotion of foreign investment in Slovenia. For the second year running, the awards ceremony was held as part of the FDI Summit conference as an evening social networking event.

How are the winners selected

Every year a project group of experts is formed for the purpose of selecting candidates and winners and with the use of criteria agreed on in advance, this team analyses the business results of companies with majority foreign capital and selects the foreign investor whose business activities and social responsibility in the previous financial year contributed the most to the development of the company and local community in which it operates. The project group is composed of representatives of JAPTI, The Slovenia Times, the Institute of Macroeconomic Analysis and Development (IMAD), SID bank and the Agency of the Republic of Slovenia for Public Legal Records and Related Services (AJPES).

FDI Conclusion paper

27

FDI Awards Criteria for FDI Awards 2011

The basic criteria for including potential candidates for the 2011 awards were: the business entity possesses foreign capital or more than 10% of its capital from abroad; the entity is active and is not undergoing active bankruptcy, receivership, liquidation or registration deletion proceedings, etc.; the entity’s VAT identification has not been cancelled (by reason of termination of activities or suspected VAT tax evasion); the entity operated positively in 2010; the entity’s total income in 2010 exceeded EUR 1,000,000; the entity had more than 10 employees in 2010; the entity has not been blocked in the past two years.

In addition to these indicators, the project group also takes certain qualitative criteria into account for the purpose of recording companies with aboveaverage performance and above-average potential for future growth. These criteria included: sales revenue, 2010/2009 sales revenue growth index, 2010/2007 sales revenue growth index; number of employees, 2010/2009 employment growth index, 2010/2007 employment growth index; share of exports in sales: value, 2010/2009 growth index, 2010/2007 growth index; added value per employee: value, 2010/2009 growth index, 2010/2007 growth index.

The latest stage in the preparation of the scale included ratings in accordance with AJPES methodology a review of other publicly available information about the individual company’s operation.

This year’s FDI Awards winners

This year the awards were divided into three basic categories: “Large company” “Company performance” “Greenfield” (beneficiary of financial incentives for foreign investors) and the “Special award” category.

Special award winner

Thierry Villard, Goodyear Dunlop Central & SouthEast Europe, Managing Director

28

Goodyear Dunlop Sava Tires, d.o.o.

Special recognition was awarded to Goodyear Dunlop Sava Tires, one of the largest foreign-owned companies in Slovenia and one of the most important companies in Gorenjska, which since its entry in Slovenia 14 years ago has invested EUR 170 million in the development of the company, including EUR 11 million last year alone with similar plans envisaged for the upcoming year.

This is especially important for an industrial city such as Kranj, which has lost quite a few companies in recent years. The company is an example of a

FDI Conclusion paper

FDI Awards socially responsible international company that understands the importance of cooperation with the local community. A company with relatively little debt and high capital strength and liquidity can be a role model in the field of corporate financial administration. The company’s conservative funding policy ensures a high level of security for future business and represents a good basis for dealing with potential business risks. Despite the continued economic crisis, the company significantly increased its revenue and profitability in 2010, achieving even higher added value per employee, which is high above the Slovenian average.

Winner in the “Large Company” category

Julon, d.d.

As early as 1995, Italy’s Aquafil group bought Ljubljana’s Julon and has since invested EUR 70 million in modernising the latter’s production. It invested an additional EUR 17.6 million in the new Econyl production, which was officially launched in mid-May. The Ministry of the Economy supported this investment with EUR 3.6 million. The company, which has been negligibly affected by the economic crisis in recent years, proved in 2010 that a significant increase in sales and high added value can be achieved even in continued tight market conditions. This, along with effective assets management, ensures liquid operations and thus easier management of increased business risks in the current crisis. In 2009, Julon generated EUR 143 million in sales revenue, while in 2010 sales jumped by more than 20 percent to EUR 173 million, generating a net profit of EUR 1.2 million. If everything goes according to plan in 2011, sales will reach at least EUR 180 million.

In 2010 the Aquafil Group had EUR 420 million of consolidated revenues with Julon accounting for EUR 173 million of the amount. The Aquafil Group has 12 manufacturing plants on three continents: five factories in Italy, three in Slovenia and one each in the U.S., Croatia, Thailand and China.

Giulio Bonazzi, AquafilGruppo Bonazzi, President & CEO

Winner in the “Company performance” category

Saubermacher Slovenija, d.o.o.

Saubermacher, together with its related companies in Slovenia, provides garbage collection, processing and disposal services to 51 municipalities, and provides other services throughout the Republic of Slovenia. The parent company, Saubermacher DAG, with its registered office in Graz (Austria), was founded in 1979 as a family-run waste-management business. After 1990, it began expanding its operations to neighbouring countries, growing into the largest privately-owned waste-management company in Central Europe. In 2009 Saubermacher received funds from JAPTI for the CeROLenart project.

The entire project, valued at EUR 3,550,000, will generate 31 jobs, and the company currently already employs 42 people. The company has achieved a steady growth in revenue and operating results, and since 2007 the number of its employees has increased by 20%, reaching 128 at the end of 2010. High profitability, liquidity and productivity (added value) ensure that the company will maintain its position as one of the largest companies in its branch in Slovenia in the future. This is the first award to a foreign investor in Slovenia

FDI Conclusion paper

Rudolf Horvat, Saubermacher Slovenija, CEO

29

FDI Awards that is a service company operating in a sector extremely important for reducing the environmental burden and for the recycling of waste materials.

Winner in the “Greenfield� category

Ertl Glas Steklo, d.o.o.

This is a major, indeed one of the few genuine, greenfield investments in the Ribnica area and even in the whole of Slovenia in recent times. The value of the project lies just under EUR 8 million, enabling Ertl Glas to generate 80 new jobs which will be of immense importance for this economically weak region. The project includes the construction of a production hall and the start-up of production. The project was developed in collaboration with the strategic partner Inles Ribnica. During the first phase, production will include the cutting and gluing of insulating glass such as that used in the manufacture of windows and doors, while in the future the company will expand its operations to tempered glass. The production process is equipped with a state-of-the-art automated line. All glasses manufactured by Ertl Glas fall into the higher price range.

Andrej Zrinski, Ertl Glas Steklo, CEO

30

FDI Conclusion paper

Conference Conclusions – a Final Word from the Organisers

Time for the country’s maturity test The FDI Summit 2011 concluded essentially as the last, almost imploring call to political decision makers to take the necessary steps to stabilise and further develop the Slovenian economy. This call could not have come at a better time as the conference took place amidst preparations by political parties for the December election.

The findings of the 2011 conference are effectively an upgrade from the 2010 findings. As established last year, in conjunction with the conference programme partner Peter Kraljič, Slovenia and its public administration are weakest when it comes to the actual implementation of projects and the possibility of increasing, or at least controlling, the competitiveness of the state which is essential for competing in the global economy. This has been demonstrated most radically in situations where quick and effective action is required. Following accession to the European Union and the adoption of the euro, Slovenia fell into an ‘idle’ state which may not have resulted in radically adverse consequences for its development, had the internal lack of vision not been compounded by the general economic crisis, the collapse of financial markets and finally, the grave crisis of the eurozone and the EU as a whole.

To make things even worse, there are clear indications in the global economy of the shortcomings in the existing global economic order in which nation states, with the traditional tools involving national economic policies and prevailing economic nationalism, cannot or do not know how to resolve fluctuations and current development problems such as unregulated environmental degradation, inappropriately factored into the production process, the growing unbridled power of multinational corporations, widening

FDI Conclusion paper

The FDI Summit 2011 concluded essentially as the last, almost imploring call to political decision makers to take the necessary steps to stabilise and further develop the Slovenian economy.

31

Conference Conclusions – a Final Word from the Organisers Slovenia is certainly fortunate to have begun its journey from a relatively good starting point so that until now, we have been able to afford quite a few mistakes, clumsiness and slowness in making decisions.

social disparities, inadequate allocation of the benefits of economic progress and wealth, and speculative and under regulated processes in international financial markets.

At this moment, one can conclude with certainty that Slovenia has fared poorly in these processes and part of this failure can certainly be attributed to our “youth” as a country, having just entered the third decade of our existence. Slovenia is certainly fortunate to have begun its journey from a relatively good starting point so that until now, we have been able to afford quite a few mistakes, clumsiness and slowness in making decisions. This period is clearly and irrevocably over and reliance on our continuing solid “economic base”, given the country’s disastrous borrowing trends, decreasing competitiveness and structural economic obsolescence, is pushing Slovenia toward a Greek scenario where a country eventually gets caught up in the long-term and socially harmful extinguishing of “fires” in all areas of activity, whilst in the worst-case scenario, these fires may turn into real fires burning on the streets of that country.

It may definitely be concluded, with optimism, that virtually all Slovenian economists as well as experts from abroad agree what the country needs to do both in the short and long term. The key findings are basically a stabilisation and development programme for a period of several years which includes the following elements: immediate short-term stabilisation of public finances with a temporary freeze on public sector wages, pensions and social transfers, immediate implementation of (already prepared) steps to ensure the long-term stabilisation of public finances which entails neutralising the adverse effects of the ageing population (pension and health reform), restructuring of the state budget aimed at increasing the percentage of expenses with a high multiplier effect on the economy (investment in R&D),

It may definitely be concluded, with optimism, that virtually all Slovenian economists as well as experts from abroad, agree what the country needs to do both in the short and long term.

32

redefining social transfers aimed toward preventing poverty in the most socially vulnerable segments of the population with a simultaneous increase in efficiency – the goals of which must not cause anomalies in the labour market, increase in labour market flexibility while ensuring social security in cases of loss of employment (flexicurity), integration of Slovenia’s competitive advantages (its strategic geographical location and natural resources – the environment, a relatively well-educated workforce, a high standard of living) with operational development strategies (realisation of logistic and development projects, formulation of an effective and sustainable energy strategy, utilisation of the comparative advantages in the tourism and agricultural sectors, utilisation of natural resources, etc.)

FDI Conclusion paper

Conference Conclusions – a Final Word from the Organisers Provided there is increasing efficiency and especially clarity in the functions of the public administration and if the problem of the chronically slow operation in the rule of law is resolved, all this will put Slovenia on the list of countries where companies (both domestic and foreign) want to invest because of its systemic conditions and the high quality of life for its workforce. The implementation of these measures is also required if we wish to discuss new and above all realistic and feasible projects, the placement of facilities into physical space and planned business objectives, rather than broad strategies and lost opportunities, with foreign investors at the next FDI Summit in 2012.

Organisers of the conference, Brane Krajnik and Tilen Majnardi

Preliminary date for next FDI Summit Slovenia 2012 is 20 September 2012

FDI Conclusion paper

33

The conference FDI Summit Slovenia 2011 was enabled by Organising Partners

Programme Partner

Premium Partners

A-COSMOS

Partners

Institutional Partners

Official Agency of the Conference

logotip Dnevnik 1

logotip Dnevnik 2

FACULT Y OF ECONOMICS

zelena C 70 / Y 100 rdeÄ?a M 100 / Y 100

Main Media Partner

logotip Dnevnik 3

Media Partner

www.fdi.si