Deputy Prime Minister on Property Tax, Agrokor, INA, EU Funds, Reforms

By 27 August 2017

Martina Dalić talks about the Government’s plans for the Autumn.

Deputy Prime Minister and Economy Minister Martina Dalić spoke in a major interview with Jutarnji List on August 27, 2017, on government economic plans for the future and reform efforts. Here are some of the more interesting parts of the interview.

While you were in opposition, your favourite topic was the pay system for employees in the public administration system. Now it seems that this subject has simply disappeared. Are you doing anything with regards to the issue?

Of course, there are many things happening. And I still think this is perhaps the most important reform we have to implement when we talk about removing structural barriers to growth and creating more favourable conditions for growth. I, therefore, continue to advocate for this reform in the government. By the end of the year, the goal is to adopt a law that will establish a new reward system that will link rewards with the results of the work. Those who work more professionally, faster and better should be better rewarded.

The quality of the civil service is essential for the functioning of the state itself. In short, I see the adequate remuneration of the state administration together with its depoliticisation as an important step in creating a more favourable business climate, but also a significant contribution to increasing the sense of justice in society. It is simply not fair that in the private sector a worker can lose a job overnight and in the civil service they do not lose their jobs even when they do not do anything.

What is the key change in the reward system?

The key difference is the depoliticisation and linking of promotion and salary levels to work outcomes. At the beginning of the term, we have stated that one political level of appointments in the civil service should be abolished to create a highly professional management staff from within the public service career employees. Another important change is the development of mechanisms for determining the results of work in the public service. This is not easy, but the results of the work are measurable. Third, today everyone in public administration receives excellent marks for their work, which is not logical. Therefore, I think it is necessary to establish a limit on the number of people who can be rated by the best grades.

What can we do to change the situation in which we are recognisable as an unattractive investment destination? How can Croatia become attractive to investors?

Answers should be sought in the overall better functioning of state administration and judicial system, in simpler laws and accompanying regulations, in greater efficiency... However, as long as the whole system does not start functioning the way we want, it is useful that there is a particular procedure for faster and safer realisation of significant investment projects. I am not happy that we need to have such a law because it means that the system does not function as a whole. However, when we already have it, then this process has to be more used for private investments. It is not the goal of such a law to almost exclusively or mostly deal with state projects. The law aims to help private investors.

That is why we will introduce a new law to reduce the threshold for investments to be considered strategic and remove some barriers, such as a mandatory guarantee of 10 percent of the value of the project, regardless of whether or not the investor has invested something or not. The third significant change is an agreement with the investor that will define mutual obligations, and also the deadlines in which the state will carry out its part of the deal. And major state projects funded from EU funds will automatically receive the strategic designation.

Are you satisfied with the withdrawal of money from EU funds?

The use of EU funds is finally accelerating. By mid-August, contracts for the use of European funds had been signed in the amount of 26 percent of the total available funds. This is a significant breakthrough since at the beginning of the year we were at just 9 percent. I am particularly satisfied with the fact that the fastest progress has been achieved in the part of European funds intended for entrepreneurs, for which the Ministry of Economy is responsible. That only shows that the entrepreneurial sector is the one most ready to withdraw the funds. In the eight months of this year, the Ministry of Economy has approved 1,211 project applications totalling 1.6 billion kunas. And for comparison, in the two previous years, this figures totalled 300 applications and 500 million kunas.

Agrokor's extraordinary administration has recently published a report which showed that total write-downs of debts could be quite high. So far, vendors have talked publicly that they might lose some 20-30 percent of their claims. Now it is quite realistic to expect 50% and higher write-offs. What if suppliers begin to demand from the government to cover these additional losses?

The state has not caused the losses of Agrokor and will not pay them. Agrokor is a private company, and creditors' claims have to be paid from assets and income. At this point, the final balance sheet for 2016 is not yet known, and that is why any claims about the percentage of write-offs are really just speculation. As far as suppliers are concerned, the company is currently preparing to repay the second round of old debts, and Agrokor's small suppliers, more than 2,100 of them, have been completely repaid.

The question of the future of Agrokor is open. Does the government believe that Agrokor should be kept as a group or would it be better to break it into parts? It is currently apparent that the food sector in Agrokor is operating well, while retail trade is piling losses.

We should not forget that Agrokor has a restructuring adviser, and it is one of the most prestigious companies in the world. Among other things, it is expected to answer the question of how to organise the Agrokor system. On the other hand, the problems in Agrokor, due to its size and interdependence with various segments of the Croatian economy, have been a systemic risk for the entire economy. I believe that the future structure of Agrokor, which will be a result of an agreement between creditors, should reduce the possibility of new systemic risks. To keep the Agrokor system as a whole would probably not be the optimal outcome if we are talking about systemic risks to the national economy.

What about legal danger for the state in the case of Agrokor? Do you expect lawsuits against the Republic of Croatia?

Anyone can file a lawsuit, but what its outcome will be is another question. I find it particularly interesting that you have asked me about legal risks of the extraordinary administration procedure. And if there were no extraordinary administration, what would we be discussing in that case? You would probably ask me why the government has allowed 10,000, 20,000, 30,000 people to lose their jobs and what we were planning to do. It must not be forgotten that the Agrokor's finances were so badly aggravated that they threatened not just with a collapse of Agrokor but also of many other companies that were doing business with Agrokor. In addition to 27,000 employees of Agrokor in Croatia, just Konzum’s vendors employ additional 148,000 people, and most of their jobs would be in danger.

What about the IPO of the Croatian Electric Company (HEP)? Is there a timeline? Can it happen in the next two years? Is this a serious project that this government really wants to implement?

My personal opinion about this is unchanged. The clear objective of the government is to stabilise and accelerate economic growth, and increasing the efficiency of state property usage is one of the ways to ensure this growth. HEP’s IPO would have multiple benefits in that respect, and it is necessary to work on explaining the arguments in favour of the IPO. I think this government has the capacity and the political will to carry out such a project.

And what about the purchase of shares of INA from MOL? Has that process stopped? Have you tried to find a strategic partner that would replace MOL?

The decision was made to proceed with the selection of a consultant for the process of repurchasing MOL’s shares of INA. Their task will be to analyse possible options for future ownership structure, including the role of potential strategic partners. At the moment when the political decision to re-buy the stake in INA was made, we did not solve the issue of INA’s future. It is, therefore, necessary to consider different options, bearing in mind that petroleum business is by its nature a large business.

What will the government do with the property tax? We have heard the explanations that calculations were not ready and that at local levels authorities were not well-prepared. However, the Finance Minister held a large number of meetings with the local authorities. There is a lot of unclear issues.

When the law was passed, we did not want the property tax to be a new burden on citizens and entrepreneurs. But, there was a fear that this tax would bring new expenses, a new burden, and I believe this is a chance to expand the communication so that everyone can get a clarification. Some businesspeople have expressed concerns about the way the new tax would be calculated, due to the discretionary right of local government units. Particularly those in the tourist industry saw this as a possible new source of business insecurity. This is also an opportunity to fix some of the weak points in the existing law.

Translated from Jutarnji List.