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Slovakia risk: Infrastructure risk(RiskWire Via Thomson Dialog NewsEdge) COUNTRY BRIEFING FROM THE ECONOMIST INTELLIGENCE UNIT RISK RATINGSCurrentCurrentPreviousPreviousRatingScoreRatingScoreOverall assessmentB31B31Infrastructure riskB31B31Note: E=most risky; 100=most risky.SUMMARY This particular risk category is improving gradually, although certain parts of Slovakia's infrastructure need further investment. The inadequacy of the rail and road network, particularly the road system serving Bratislava, may increase transportation costs for business. The quality of road and rail links will gradually improve with EU funding. Air transport is set to become more efficient, with the privatisation of one of the main airports, and Slovakia's increasing role as an air travel hub. Fixed-line telecoms services are still largely unreliable and limit the use of the internet by both individuals and firms, but the incumbent, T-Com (formerly Slovak Telecom), is planning to invest heavily in triple-play technology. A third mobile-phone operator, Telefonica, is due to enter the Slovak market in early 2007. Prospects for energy market liberalisation have nevertheless been rendered more uncertain as a result of the government's intention of limiting the price growth of electricity. SCENARIOS Greater meddling by government in setting electricity prices increases uncertainty and hampers business planning (High Risk) Slovakia has liberalised its electricity sector, and the regulatory office (URSO) no longer has a say in the setting of contractual prices between Slovenske Elektrarne and the regional power distributors. The regional distributors originally proposed price rises of over 10% for 2007. However, the government's pressing request to electricity providers and distributors to leave prices unchanged in 2007 or even lower them led to the proposal of a number of amendments to the network industries regulation law. Some of the more controversial amendments, which would have weakened the independence of URSO from the government, were scrapped in November following pressure from the EU and domestic business organisations. However, Mr Fico has repeatedly stated that the government should have a greater say in the determination of electricity prices. This is owing both to the government's populist instinct, and to a conviction that lower energy prices will help Slovakia achieve the Maastricht inflation criterion. It currently appears likely that electricity prices will still rise somewhat in 2007, but business planning exercises should reflect some uncertainty over the future course of electricity prices in Slovakia. Inadequate road and rail networks cause delays (Moderate Risk) Pre-accession funds helped to update the rail network, but delays are occurring given the political difficulties in initiating the substantial downsizing of the workforce needed to complete reforms. There is a risk that funding for road and rail might be delayed or that other budget spending priorities, such as welfare spending, may emerge from general cutbacks in government spending on infrastructure. However, greater EU funds should be forthcoming soon. Freight and passenger services were split in 2005, but the privatisation of the railway freight company, planned by the previous administration, has been abandoned by the Smer-SD government. The sale of Bratislava airport met the same fate, although that of Kosice airport is to proceed. Despite gradual improvement, foreign companies should expect further transportation difficulties within the country over the forecast period. BACKGROUND (Updated: February 6th, 2007) Natural Resources and the Environment At only 49,035 sq km in area, Slovakia is a small country even by European standards, but it has abundant resources to attract tourists. Forests cover about 40% of the country's territory and contain a wide range of fauna; farmland covers roughly 50% of the area. Natural conditions in four major agricultural regions favour the cultivation of wheat, corn, sugarbeet, potatoes, sunflowers and grapes. The climate is continental and Slovakia is not at risk from major natural disasters such as hurricanes or earthquakes. Water shortages are not a concern, although flooding (as was the case in early 2006) and drought have occasionally caused some damage and lowered crop yields. Slovakia suffers from serious environmental degradation. By 1993 the government had begun publishing regular statistics on air, water and ground pollution, and identified 12 particularly polluted regions, including the two major urban areas, Bratislava and Kosice. Generally, any area with a population above 15,000 suffers from what the authorities call a strongly disturbed or an extremely disturbed environment, mainly as a result of acid rain and agricultural run-off. Brown coal, used in central heating plants and generating stations, is the principal cause of pollution, followed by the iron, steel, aluminium and chemical industries, the location of which (in mountain valleys) tends to trap emissions. Although the bulk of the country's environmental legislation conforms to EU standards, and measures are being prepared to create incentives for environmental protection, Slovakia lacks sufficient financial resources to place these issues high on the political agenda. Environmental expenditure (current plus investment-related) amounted to around 1.5% of GDP in 2004, the bulk of which is accounted for by private funding. EU funds to deal with environmental issues should be available, although there are still concerns about national and local governments ability properly to absorb the incoming funds. Transport, Communications and the Internet Despite its favourable location for international trade, Slovakia's physical geography places it at a disadvantage. Because its mountains run from east to west and its valleys from north to south, east-west transport is slow, and crossborder linkages to Poland and Hungary remain limited. The rise in car ownership has placed increasing pressure on the road network. The quality of the network varies according to region and type of roads. Western districts, including the Bratislava region, have reasonably good connections to the European motorway network. However, large maintenance backlogs have accumulated for the secondary and smaller roads that comprise around 75% of the network. No alternative financing scheme replaced the National Road Fund that was scrapped in 2001, and the road budgets in 2002 and 2003 were cut sharply, although in June 2003 the government approved a further allocation of 600m (US$680m; 3% of GDP) for road construction during the following three years, backed by EU funds. The government is also looking to foreign strategic investors to inject capital into infrastructure projects. This has led to schemes for replacing the current model, which makes use of road stamps, with electronically charged tolls, which would allow private investors to receive a rate of return on funds invested in roads. Motorway construction with private-sector participation is planned for southern Slovakia, although the stretch of the route from Bratislava to Zilina in north-western Slovakia was given priority following the decision of Kia Motors (South Korea) to locate its new car plant near Zilina. The 40 km of the route that has not yet been completed was originally to have been opened in 2009, but the new deadline is November 2006. The government hopes that delays on other motorway stretchesparticularly the D1 motorway linking Bratislava and Kosicecan be eliminated by the participation of private capital, despite disappointing experiences in the Czech Republic and Hungary. Road vehicles in use, 2004('000; end-year)Cars1,197Vans & lorries140Buses9Motorcycles52Source: SUSR, Statistical Yearbook of the SR.The main east-west rail line runs through the north of Slovakia, linking Ukraine with Ostrava in the Czech Republic, thereby bypassing Bratislava and the south. Modernisation of the railway system, which is the primary mode of transport for both passengers and goods, lacks the necessary investment capital, as Slovak Railways (ZSR) continues to operate at a heavy annual loss, despite rapid liberalisation of fares in recent years. Only around 40% of the 3,665-km network is electrified, and speeds of 100km/hour are possible on less than one-fifth of the tracks. EU funds are helping to update the rail network, connecting the dense, if outdated, Slovak rail system to the European-wide express rail network. In 2006 ZSR plans to invest Sk39.8bn (US$830m) in railway infrastructure, and the company expects the use of half of the proceeds from the privatisation of power utility Slovenske Elektrarne (SE) to set it on course for profitability from 2007 onwards. Transformation of ZSR started in January 2002. The first step was to split the railway into two entities: ZSSK, which was authorised to ensure the gradual economic consolidation of the firm and operate the railways; and Zeleznicna spolocnost (ZS), which took over other activities, as well as part of ZSRs debts. The government's plan includes laying off about 16,000 employees over seven yearsthe current workforce is 48,000, making it Slovakias largest employer. At the beginning of 2005 ZSSK was split into freight and passenger transport companies, inheriting debt amounting to Sk4.7bn and assets of Sk11.5bn. In April 2005 the government decided to sell its 100% stake in the freight unit, ZSSK Cargo, in a direct sale by the end of the year, but delays and the early general election mean that the sale will not be realised until late 2006 at the earliest. Slovakia has three ports on the Danube at Bratislava, Sturovo and Komarno. The Bratislava and Komarno ports were the major international ports for Czechoslovakia, and the completion of the Rhine-Main-Danube Canal gives these ports access to the pan-European waterway system. In addition to Bratislava, Poprad and Kosice now receive international flights, and Bratislava is rapidly becoming an air transport hub for central Europe, thanks to the emergence of low-cost carriers in the region. There are also regional airports at Piestany, Banska Bystrica, Svidnik, Lucenec and Zilina. The relatively poor quality of lines and the unreliability of telecoms services has been a barrier to rapid growth in Internet use, and accordingly, only 23% and 7% of households had Internet and broadband connections, respectively (compared with EU25 averages of 48% and 23%), in 2005. Nevertheless, 55% of the population used the Internet at least once during 2005, according to Eurostat, the EU's statistical office. This figure is in line with the EU average. The high prices (in relation to incomes) of both telecoms services and personal computers (PCs) have also been a barrier to rapid growth in Internet use. However, the digitalisation of the network and investment in fixed-line services is expected to lead to a rapid expansion in Internet use over the next five years. The full liberalisation of telecoms services will be a driving factor behind the increase in the number of users, as competition between Internet service providers (ISPs) is opened up. As competition between ISPs picks up, new services such as digital subscriber line (DSL) facilities will increase Internet penetration, and ST announced in March 2006 that it intends to invest in "triple play" technology, covering high-speed Internet access, voice services and digital media. This will encourage greater Internet use at home, and is also expected to boost the online retail market, which currently accounts for only a small proportion of overall retail sales. Multinational retailers have so far concentrated on building hypermarkets rather than developing e-commerce, but the adoption of a new advertising act in mid-2001 and an act on electronic signatures that came into force at the start of 2002 are expected to encourage growth in e-commerce and Internet banking. The number of periodicals in circulation fell sharply to 886 in 2004 from around 1,500 in each year since 2000. The number of daily newspapers fell to 12 in 2004, from 21 in 2003, as declining circulation and heightened competition for advertising revenue forced further (and rapid) consolidation of the market. The combined circulation of the daily press also fell, to 191,666, compared with 216,294 in 2003. The tabloid Novycas is the most widely read newspaper. Prominent dailies include the centre-left Pravda (the former newspaper of the Communist Party of Slovakia) and the centre-right SME. The main daily newspapers focusing on economic issues are Hospodarske noviny and Narodna obroda, with the weekly Trend providing in-depth analyses of economic sectors and industrial branches. Slovenska republika, owned by the former ruling Movement for a Democratic Slovakia (HZDS) before collapsing in 2000, was succeeded by Novyden. The broadcast media are the main source of information for the majority of the population, and the state-owned Slovak Television (STV) and Slovak Radio (SRo) were tightly controlled by the governments led by Vladimir Meciar. However, their influence was steadily eroded by the emergence of private broadcasters, particularly the highly successful Markiza TV channel and the Czech station Nova (which can be received in western parts of the country and provides extensive Slovak news coverage). The news departments of STV (and, to a lesser degree, those of SRo) are generally regarded as objective sources of information. Telecoms The number of telephone main lines in Slovakia has fallen in recent years, from 309 per 1,000 population in 2000 to 232 per 1,000 in 2004. This is considerably lower than in other transition economies in the regionfor example, the Czech Republic and Hungary had 36 and 35 lines per 1,000 population in 2004, respectivelyand is also lower than in other EU member states. As elsewhere in the region, the main reason for this fall is that cellular telephony has boomed in recent years, reaching 794.3 telephones per 1,000 population in 2004, compared with 208.2 per 1,000 in 2000. Deutsche Telekom (Germany) paid 1bn (US$917m) in July 2000 for a 51% stake in the fixed-line telecommunications provider, ST, and also owns Slovakia's second-largest mobile telephone operator, Eurotel. The leading cellular operator, Orange Slovakia (formerly Globtel), is majority owned by France Telecom, with foreign portfolio investors, led by the US financial group AIG, holding minority stakes. The telecoms market has been fully liberalised since January 1st 2003. However, it was more than two years before alternative operators began entering the market, with only large corporations able to choose between several providers of voice services, through Voice over Internet Protocol (VoIP). The lack of competition was owing to the high prices that ST charged for connecting its network with those of alternative providers. In May 2005 seven alternative fixed-line operators signed interconnection deals with ST, with one provider claiming that ST modified its terms after scrutiny by the Telecommunications Office (TU). The government's tender to sell a third mobile licence, for both Global System for Mobile Communications (GSM) and universal mobile telecommunications service (UMTS) provisions failed in 2001. The two current operators took the opportunity to buy a UMTS licence, and in March 2006 Orange Slovakia announced the launch of third-generation (3G) services, which it hoped would cover about 43% of the population by the end of 2006. Foreign capital is driving the expansion of Internet services, which is being led by ST, Norway's Nextra and Telenor, US-based GTS, and Euroweb, controlled by the Dutch telecoms firm KPN. Although delays in restructuring and commercialisation have resulted in slow reform of the telecoms sector, the current low line density indicates that there is ample space for rapid growth. Energy Imports account for more than 80% of Slovakias energy needs. Most of the country's oil, gas and nuclear fuel supplies are imported from Russia. This has contributed to a level of energy efficiency that is far below the west European average. Primary energy consumption was an estimated 18.6m tonnes oil equivalent in 2004, largely in line with the average of the five previous years. Gas, electricity and oil prices for households were cross-subsidised by industrial consumers until the end of 2002. However, fiscal pressures forced the government to phase out these subsidies, and large price rises for household consumers in January 2003 (for electricity) and 2004 (for gas) almost entirely eliminated the cross-subsidy. An independent regulator has assumed responsibility for deregulating prices and liberalising the energy market. This should eventually lead to price cuts, after the former monopolies, now foreign-owned, have increased the efficiency of energy production and distribution. The electricity market is being deregulated in stages, starting with the largest consumers, with customers able to choose a supplier when a certain consumption level is reached. Full deregulation for industrial customers occurred in 2005 and is scheduled to take place by 2007 for households. Slovakia is a strategic transit country for shipping Russian oil and gas, both to the surrounding region and to western Europe. It also stands to gain from its potential to provide storage services that are close to the consuming centres, further enhancing the value of the transit system. The gas monopoly Slovensky Plynarensky Priemysl (SPP), along with the main pipeline operator, Transpetrol, has obtained significant financing from the European Investment Bank (EIB) and other Western lending institutions to widen and upgrade links to the Austrian and Czech borders. Moreover, the sale of a 49% stake in SPP (along with management control rights) to a consortium of Ruhrgas (Germany) and Gaz de France (GDF), completed in March 2002 for US$2.7bn, promises to enhance efficiency, improve the quality of service and enable the company to compete and develop in the increasingly liberalised European gas market. Electricity sector Privatisation of 49% stakes in the three regional electricity distributors, ZSE, SSE and VSE, was completed in 2002, the stakes being sold to E.ON (Germany), Electricite de France and RWE Plus (Germany), respectively, for a total of 618m (US$569m). In 2005 VSE reported a net profit of 41.5m, a 7% increase over the previous year, and invested 33.7m. The latter was a 25% rise year on year, with the bulk of the increase related to the modernisation of the distribution network. The sale of a 66% stake in the former monopoly electric power generator, Slovenske elektrarne (SE), to Enel (Italy) was finalised in April 2006. Enel paid 840m (U$1.1bn) for the stake, and pledged a further 2bn in investment over the next seven years. Slovakia generated 30 twh of electricity in 2004, slightly less than in previous years. About 57% of the country's electricity is generated by nuclear power, with thermal and hydroelectric stations generating about 31% and 12%, respectively. The Jaslovske Bohunice nuclear-power station has four reactors, each of which has a nameplate capacity of 440 mw, and there are a further two reactors (also with a nameplate capacity of 440 mw) at the Mochovce station, all owned by SE. Two of the reactors at the Bohunice station are due to be decommissioned in 2006-08, at a cost of Sk15bn (US$0.5bn). This will be met partly by an off-budget fund (which will contribute Sk8.5bn) and partly by the EU. Enel announced that the construction of the second two blocks of the Mochovce nuclear power planta factor holding up the completion of the SE salewould be restarted, and is expected to publish a feasibility plan by April 2007. The lost capacity of the two Bohunice reactors will be replaced by new gas- and coal-burning power plants, to be built by foreign private investors. Copyright 2007 Economist Intelligence Unit |