## _cr1542

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---

### A. Introduction — macro-fiscal context
- Real GDP declined some 10 percent (deep recession among euro area countries).
- Public bank support to six banks at a fiscal cost of about 10 percent of GDP.
- Fiscal outcomes:
  - Fiscal deficits rose from near-zero in 2007-08 to almost 14 percent of GDP in 2013.
  - Debt ratio rose to close to 80 percent at end-June 2014.
- Expenditure dynamics:
  - Public spending increased by more than 5 percentage points of GDP during 2008–14 (excluding one-off bank support costs).
  - Expenditure-to-GDP ratio at some 46 percent (excluding bank support costs).
  - Revenue ratio broadly stable and above comparable country levels and the OECD average.
- Policy implication: focus consolidation efforts on the expenditure side.

### B. Pensions — current status and drivers
- Social spending:
  - Social benefits increased by more than 3 percentage points of GDP during 2007–13, to about 18 percent of GDP.
  - Pension spending accounts for almost two-thirds of social benefits (close to 12 percent of GDP).
  - Publicly-funded spending on health and education, including entities outside general government, amounted to almost 12 percent of GDP in 2011.
- Drivers of rising pension spending:
  - Demographics: share of individuals 60 years and older rose from 21.5 to 23.8 percent.
  - System generosity: relatively low statutory retirement age, early retirement options, high coverage rates, generous benefit determination and indexation.
  - Coverage/inflows: share of pensioners in population 65+ rose from 107 percent in 2010 to 121 percent in 2013.
  - High replacement ratios relative to advanced and emerging European countries.
- Shrinking contribution base:
  - Coverage among working age population in 2013 was only 88 percent of its 2008 level.
  - System dependency ratio (pensioners/contributors) in 2013: 0.67.
  - Old-age dependency ratio (elderly / working age) in 2013: 0.25.
- Financing gap:
  - In 2013, only some 75 percent of benefit expenditures could be financed by contributions (down from 85 percent in 2008).
  - Transfers from the budget widened to some 3 percent of GDP in recent years.

### C. 2012 Parametric Reform — measures and quantified effects
- Main measures (end-2012):
  - Gradual increase in statutory retirement age to 65 for men and women.
  - Tightening early retirement conditions; increase earliest permissible retirement age by 1 year on average; revise occupational lists.
  - Introduce early retirement penalties for remaining occupations with early access and deferred retirement benefit increases.
  - Increase averaging period for pensionable earnings from 19 to 24 years.
  - Index benefits to composite index of wages and prices (weights 60/40); freeze indexation for 2014 -15.
- Fiscal effects:
  - Short-term: freeze in indexation estimated to contribute to a cumulative reduction in pension expenditure of 0.3 percent of GDP over 2014–15 (temporary; expected to end in 2016).
  - Long-term: reform estimated to moderate pension spending by 1½ to 2 percent of GDP by 2050 (assuming decline in old-age pension eligibility rates from 120 to 105 percent and some offsetting increase in disability pensions uptake).
- Limitation: several important features not addressed by the reform likely to pressure long-term viability.

### D. Demographics, assumptions, and spending projections
- Demographic projections:
  - United Nations projections: old-age dependency ratio expected to more than double to reach 53 percent by 2050.
  - System dependency ratio projected to rise from 67 percent now to 145 percent by 2050 (assuming declining eligibility ratio to 105 percent).
- Projection assumptions:
  - Replacement rate assumed to gradually decline to 50 percent as result of 2012 reform measures.
  - Employment ratio kept constant near current level at 63 percent.
  - Compensation share in GDP kept constant near current level at 74 percent.
- Pension spending projections (with 2012 reform):
  - Pension spending projected to increase by 6 percent of GDP during 2013–50.
  - Pension spending projected to increase from 11¼ percent of GDP in 2013 to 12¾ percent in 2030 and 17½ percent in 2050.
  - Gap: some 5½ percent of GDP by 2050 compared to projection for advanced economies.

### E. Parametric policy options analyzed and fiscal impacts
- Focus: reduce pension expenditure rather than increase contributions.
- Options analyzed:
  - (a) Discontinuing the pension bonus.
  - (b) Reducing income tax easements enjoyed by pensioners.
  - (c) Price indexation of benefits.
  - (d) Closing the gap between statutory and effective retirement ages.
- Quantified impacts:
  - Pension bonus:
    - Annual pension bonus in 2013: 0.35 percent of GDP, or 2.9 percent of old age benefit expenditures.
    - Eliminating the pension bonus for pensions above the average: immediate permanent savings of 0.2 percent of GDP.
  - Tax treatment of pensions:
    - Elimination of the 13.5 percent pension-specific income tax allowance: up-front fiscal savings of almost 1 percent of GDP, rising to 1½ percent long term; mitigation via compensatory supplement for minimum pensioners suggested.
    - Alternative: eliminate allowance only for pensioners receiving benefits above the mean → yield ½ percent of GDP on impact and ¾ percent long term.
    - Elimination of the general tax relief for pensioners: yield 0.8 percent of GDP in the near-term, reaching just over 1 percent of GDP longer term; caveat on discrepancy with labor taxation.
  - Indexation to prices (see next section for detailed trajectory).

### F. Indexation — moving to full price indexation (quantified)
- Baseline assumptions:
  - Wage growth in line with productivity; real wage growth some 1½ percent on average.
  - Prices grow at 2 percent per year over the long term.
  - Current indexation weighs wage component at 60 percent.
- Effect of abandoning wage component (full price indexation):
  - Fiscal savings cumulate gradually:
    - slightly less than ½ percent of GDP by 2020;
    - 1.1 percent of GDP by 2030;
    - 2 percent of GDP by 2050.
  - Illustrative arithmetic (current formula): expected pension growth estimated at 0.4*2% + 0.6*3.5% = 2.9 percentage points; full price indexation would result in pension growth equal to inflation (2 percent).

### G. Measures to raise effective retirement age (design options)
- Possible measures to reduce early-retirement probabilities:
  - Limit long-service-time early retirement to no more than two years prior to statutory retirement age of 65.
  - Increase early retirement deduction from 0.3 to at least 0.5 percent of pension benefits per month, with progressively increasing monthly deductions for earlier retirement.
  - Reduce non-contributory service time recognition (maternity, national service, early insurance, occupational hazard recognition).
  - Limit purchase of insurance periods to two years and price it actuarially (present value of foregone contributions and additional pension payments).
- Quantification caveat: impact harder to quantify without detailed individual-level data and structural modeling.

### H. Combined reform impacts, system balance, and debt dynamics
- Near-term consolidation:
  - Reforms reducing pension bonus and tax allowance can contribute around 0.6 percent of GDP to near-term consolidation.
- Combined medium- and long-run effects:
  - Reforms limiting benefit indexation cumulate up to 2 percent of GDP by 2050.
  - Combination of proposed reforms could yield about 2.6 percent of GDP, reducing by about 40 percent the expected increase in pension spending by 2050.
- Pension system balance and NPV impacts (assumptions: constant pension contribution rates and labor shares):
  - Without reform: pension system balance projected to deteriorate from 2 percent of GDP at end-2013 to 8¼ percent of GDP at end-2050.
  - Net present value: cumulative deterioration of some 40 percent of GDP during 2015–50 without reform.
  - Combined reforms: cumulative improvement of just under 15 percent of GDP in NPV terms during 2015–50 relative to status quo.
- Debt-to-GDP projections:
  - Fiscal baseline (no pension reforms): debt-to-GDP ratio projected to rise to 200 percent by 2050.
  - With combination of proposed pension reforms: debt-to-GDP ratio would reach just over 100 percent by 2050.
  - Additional non-pension measures needed to place debt ratio on a sustainable downward path.

### I. Health and education spending, efficiency gaps, and potential savings
- Magnitude:
  - Publicly-funded spending on health and education reached almost 12 percent of GDP in 2011.
- Health sector:
  - DEA-based efficiency score for 2010–12 estimated at about 52 percent relative to best practice.
  - Healthy Life Years Indicator score: 0.55; gap to frontier 45 percentage points.
  - Estimated fiscal savings: closing half the distance to frontier could yield savings in health of some 2 percent of GDP.
  - Drivers of recent efficiency improvement: expenditure compression, control of pharmaceutical costs, low employment growth in sector, introduction of new technologies, partial shift to private complementary health insurance.
  - Sector rigidities: reliance on inpatient/specialist care, insufficient primary care and private ambulatory partnerships, generous benefit package, variable quality, insufficient focus on cost-effective treatments.
- Education sector:
  - DEA-based efficiency score for 2010–12 estimated at about 53 percent relative to best practice.
  - Score rose by about 6 percentage points in 2010–12 from average of about 47 percent up to 2009.
  - Estimated fiscal savings: closing half of education efficiency gap could yield around 1½ percent of GDP (also noted as 1.4 percent implied).
  - Rigidities: low pupil-teacher ratios in pre-primary and lower-secondary education; class size range from 4.5 to 24.2 pupils; around 40 percent of schools having less than 15 students per class; around 56 percent of schools having less than 200 pupils.
- Budgetary rigidities across sectors:
  - Growth and fragmentation of indirect budget users, weak oversight, quasi-autonomous hospitals, local government primary health clinics creating central fiscal obligations, central financing of operational costs for local schools.

### J. Health and education reform options and fiscal effects
- Health sector reform examples:
  - Implement health technology assessment to align care and purchases with cost-effectiveness.
  - Reform health financing: broaden contribution base (e.g., working students), align pensioner health insurance contribution with standard employee contribution, allow age-related premiums for complementary insurance.
  - Develop homecare options and consider vouchers.
- Education sector reforms:
  - Raise pupil-teacher ratios in pre-primary and lower-secondary education (minimum class size, especially urban).
  - Optimize school network to address overcapacity where not geographically isolated.
  - Rationalize teacher workloads.
  - Introduce universal tuition fees with means-tested grants and loans with income-contingent repayments for tertiary education.
- Budget process reforms:
  - Merge financial management across smaller indirect budget entities; increase central government involvement in financial plans of IBEs; standardize/unify budget execution systems (unique IT system).
- Fiscal impact assumptions:
  - Reforms begin to impact finances with a 2-year lag and gradually over an 8-year window.
  - Even if half of estimated savings (1 ¾ percent of GDP) were achieved, reforms can powerfully counteract population aging effects.
- Combined effect with pension reform:
  - Together, health, education and pension reforms would place the debt ratio on a firmly declining path through 2040 and allow stabilization broadly around 40 percent by 2050.

### K. Institutional quality, prioritization methodology, and top reforms for growth
- Assessment covers 116 indicators across eight areas: labor market; product and service markets; business regulations; legal system; finance and corporate governance; trade; infrastructure and corruption; education and R&D.
- Reform prioritization methodology:
  - Estimate growth effect via cross-country regressions and distance to frontier (average of five EU best performers).
  - Quantify cost of reforms following Tavares (2004) cost function increasing with required improvement.
  - Define reform efficiency as benefit (growth impact) divided by cost.
- Key results:
  - Top reform areas with largest long-run GDP impacts and efficiency include corporate governance, access to finance, and judicial processes (10 of top 15 reforms).
  - Examples of estimated impacts and efficiency (preserved exactly):
    - Protection of minority shareholders’ interests: Slovenia 3.4; Best 5 in EU27 5.6; Coefficient 1.2; Distance 2.2; Impact on long-run GDP 2.7; cost of reform 0.6; Efficiency 4.2.
    - Strength of auditing and reporting standards: Slovenia 4.9; Best 5 in EU27 6.0; Coefficient 1.2; Distance 1.2; Impact 1.4; cost 0.2; Efficiency 6.1.
    - Efficiency of legal framework in settling disputes: Slovenia 2.9; Best 5 in EU27 5.6; Coefficient 0.9; Distance 2.7; Impact 2.4; cost 0.9; Efficiency 2.6.
    - Quality of railroad infrastructure: Slovenia 2.9; Best 5 in EU27 5.8; Coefficient 0.7; Distance 2.9; Impact 2.1; cost 1.0; Efficiency 2.0.
    - Company spending on R&D: Slovenia 3.4; Best 5 in EU27 5.4; Coefficient 1.0; Distance 2.0; Impact 2.0; cost 0.6; Efficiency 3.6.
- Policy implication: prioritize corporate governance, judicial/legal efficiency, and access to finance; complement with reforms reducing red tape, simplifying trade/customs procedures, and boosting R&D.

### L. Insolvency regime reforms (2013) — features, activity, bottlenecks, and priorities
- 2013 reform objectives: align framework with international best practice and European Commission recommendations.
- Key procedures:
  - Compulsory settlement (reorganization), Simplified compulsory settlement (streamlined for micro/small firms), Pre-insolvency restructuring proceedings, Bankruptcy (liquidation).
- Activity (2012–14):
  - Compulsory settlements: about 30 completed per year during 2013–14.
  - Simplified compulsory settlements: increased to 90 cases in first ten months of 2014.
  - Pre-insolvency restructuring proceedings: some 8 proceedings concluded in 2014.
  - Corporate bankruptcy procedures: close to 1000 per year in 2013–14.
  - Personal bankruptcies: increased from 880 in 2013 to 4006 in 2014.
  - Judicial resources: six judges in the commercial division of the District Court of Ljubljana.
  - Insolvency administrators: 145 listed; estimated 80-90 active; qualification pipeline typically 2 or 3 candidates per year.
  - Corporate debt concentration: most indebted 100 companies responsible for between 52 and 56 percent of estimated debt overhang of 9.6 to 134.2 billion Euros.
- Reform features:
  - Introduced pre-insolvency restructuring with stay on creditor actions and majority voting.
  - Increased financial creditors’ control (initiate proceedings, introduce plans, take management control in certain cases).
  - Absolute priority rule: debtor equity eliminated if equity value is zero.
  - Allowed debt/equity swaps, corporate spin-offs; inclusion of secured creditors in compulsory settlement; pooling collateral and permitting write-down to market value with conversion of unsecured portions.
  - Simplified compulsory settlement: limited restructuring options for micro/small enterprises (no debt/equity swaps; secured claims may not be affected).
- Implementation bottlenecks:
  - Complexity of plan approval and voting rules; no creditor class voting.
  - Limitations of simplified procedure for SMEs.
  - Slow, litigious recognition of claims.
  - Asset sale difficulties; auction rules untested in practice.
  - Late initiation of proceedings; weak enforcement of director liability and avoidance actions.
  - Institutional issues: intensive judicial involvement, lack of specialization, court capacity constraints, limited cooperation with insolvency practitioners, insufficient number/skillset of administrators, divided supervision.
  - Enforcement of mortgages slow (two to four years); notary-sale enforcement suspended by Constitutional Court.
- Short-term priorities:
  - Maintain legal stability to absorb changes; implement and reinforce institutional framework.
  - Reinforce courts and allow judicial specialization in insolvency matters.
  - Professionalize and strengthen supervision of insolvency administrators; improve training and resources (accounting/finance skills).
  - Test auction rules and pre-insolvency proceedings in practice; streamline recognition of claims; reduce dilatory appeals.
  - Resolve constitutional suspension of notary-sale mortgage enforcement.
- Medium-term priorities:
  - Simplify and make insolvency law more flexible; consider basing simplified vs. ordinary differences on cost/complexity rather than firm size.
  - Fully integrate secured creditors and base voting on value of claims, grouping creditors in classes by hierarchy.

### M. Legal environment for credit and SME lending
- Findings:
  - Receivables are among most reliable collateral for enterprise financing, but current law does not give creditors sufficient assurances for using receivables as collateral.
  - Legal framework for movable assets is weak, diminishing lending opportunities beyond real estate collateral.
- Recommended measures:
  - Improve enforcement mechanisms for mortgages to enable speedy recovery consistent with Constitutional requirements.
  - Establish a public, easily accessible registration system for security interests over movable assets, especially receivables.
  - Strengthen rules for security over movable assets to develop new lending practices for SMEs.
  - Maintain legal stability in short run; then simplify insolvency law and integrate secured creditors to enable sustainable restructurings.

*Prepared by IMF staff; source content as provided.*

### References ____________________________________________________________________________ 22

### _cr1542 - References ____________________________________________________________________________ 22

### A. Introduction
- Slovenia suffered one of the deepest recessions among euro area countries, with real GDP declining some 10 percent.
- Bank support: significant public support to six banks at a fiscal cost of about 10 percent of GDP.
- Fiscal outcomes:
  - Fiscal deficits rose from near-zero in 2007-08 to almost 14 percent of GDP in 2013.
  - Debt ratio rose to close to 80 percent at end-June 2014.
- Expenditure dynamics:
  - Public spending is estimated to have increased by more than 5 percentage points of GDP during 2008–14 (excluding one-off bank support costs).
  - Expenditure-to-GDP ratio at some 46 percent (excluding bank support costs).
  - Revenue ratio has remained broadly stable and is above comparable country levels and the OECD average.
- Policy implication: Focus consolidation efforts on the expenditure side.

### B. Pensions — Key issues
- Social spending developments:
  - Social benefits increased by more than 3 percentage points of GDP during 2007–13, to about 18 percent of GDP.
  - Pension spending accounts for almost two-thirds of social benefits (close to 12 percent of GDP).
  - Publicly-funded spending on health and education, including entities outside the general government amounted to almost 12 percent of GDP in 2011.
- Drivers of rising pension spending:
  - Demographics: share of individuals 60 years and older rose from 21.5 to 23.8 percent.
  - System generosity: relatively low statutory retirement age, early retirement options, high coverage rates (ratio of pensioners to the elderly), and generous benefit determination and indexation.
  - Coverage and inflows: share of pensioners in population 65+ rose from 107 percent in 2010 to 121 percent in 2013.
  - High replacement ratios relative to advanced and emerging European countries.
- Shrinking contribution base:
  - Coverage among working age population in 2013 was only 88 percent of its 2008 level.
  - System dependency ratio (pensioners/contributors) in 2013: 0.67.
  - Old-age dependency ratio (elderly / working age) in 2013: 0.25.
- Financing gap:
  - In 2013, only some 75 percent of benefit expenditures could be financed by contributions (down from 85 percent in 2008).
  - Transfers from the budget widened to some 3 percent of GDP in recent years.

### C. 2012 Parametric Reform — Measures and Effects
- Main measures adopted end-2012:
  - Gradual increase in the statutory retirement age to 65 for men and women.
  - Tightening early retirement conditions: increase earliest permissible retirement age by 1 year on average and revise list of occupations permitting early retirement.
  - Introduction of early retirement penalties for remaining occupational categories with access to early retirement and deferred retirement benefit increases.
  - Increase from 19 to 24 years in the period over which pensionable earnings are averaged in entry pension determination.
  - Indexing of benefits to a composite index of wages and prices with weights of 60 and 40 percent, and a freeze in indexation for 2014 -15.
- Short- and long-term fiscal effects:
  - Short-term: freeze in indexation estimated to contribute to a cumulative reduction in pension expenditure of 0.3 percent of GDP over 2014–15 (temporary; expected to end in 2016).
  - Long-term: reform can moderate increase in pension spending; estimated effect in the range of 1½ to 2 percent of GDP by 2050 (assuming decline in old-age pension eligibility rates from 120 to 105 percent and some offsetting increase in disability pensions uptake).
- Limitations: Several important features not addressed by the reform likely to pressure long-term viability (see next section).

### D. Analysis — Demographics and Projections
- Demographic projections:
  - United Nations projections: old-age dependency ratio expected to more than double to reach 53 percent by 2050.
  - System dependency ratio projected to rise from 67 percent now to 145 percent by 2050 (assuming declining eligibility ratio to 105 percent).
- Projection assumptions:
  - Replacement rate assumed to gradually decline to 50 percent as result of 2012 reform measures.
  - Employment ratio kept constant near current level at 63 percent.
  - Compensation share in GDP kept constant near current level at 74 percent.
- Pension spending projections (taking 2012 reform into account):
  - Pension spending projected to increase by 6 percent of GDP during 2013–50.
  - Pension spending projected to increase from 11¼ percent of GDP in 2013 to 12¾ percent in 2030 and 17½ percent in 2050.
  - This represents a gap of some 5½ percent of GDP by 2050 compared to the projection for advanced economies.

### E. Policy reform options — Parametric measures analyzed
Focus: reducing pension expenditure rather than increasing contributions (contributions already high and labor-market concerns).

Options analyzed:
- (a) Discontinuing the pension bonus.
- (b) Reducing income tax easements enjoyed by pensioners.
- (c) Price indexation of benefits.
- (d) Closing the gap between statutory and effective retirement ages.

Estimated fiscal impacts and design considerations:
- Pension bonus:
  - Annual pension bonus in 2013 represented 0.35 percent of GDP, or 2.9 percent of the old age benefit expenditures.
  - Eliminating the pension bonus for pensions above the average could bring immediate permanent fiscal savings of 0.2 percent of GDP.
  - Design note: retain compensation (e.g., incorporate one-time increase into pension of lowest income retirees) to preserve progressivity.
- Tax treatment of pensions:
  - Current features: basic income tax schedule with four brackets but over 98 percent of old-age pension benefits fall into first two lower brackets; general tax relief of EUR 275 per month; pensioners enjoy 13.5 percent reduction of their assessed tax; only pension benefits exceeding EUR 1,095 per month are subject to income tax; only 5 percent of beneficiaries pay any income tax.
  - Elimination of the 13.5 percent pension-specific income tax allowance:
    - Could equalize taxation for labor and pensions.
    - Could result in up-front fiscal savings of almost 1 percent of GDP, rising to 1½ percent over the longer-term.
    - Mitigation: couple with one-off progressively applied compensatory income supplement fully compensating pensioners receiving the minimum pension and tapering off along distribution.
    - Alternative design: eliminate allowance only for pensioners receiving benefits above the mean → yield fiscal savings of ½ percent of GDP on impact and ¾ percent in the longer term.
  - Elimination of the general tax relief for pensioners:
    - Could yield 0.8 percent of GDP in the near-term, reaching just over 1 percent of GDP over the longer term.
    - Caveat: would introduce discrepancy with labor taxation; extending relief to non-pensioners could address this but may hurt labor market—seen as a second-best option.

### F. Conclusions (policy emphasis)
- Curbing fast-rising pension expenditures and reducing health and education spending could support fiscal consolidation over the medium term.
- Parametric pension reforms that target benefits and tax treatment offer sizable and relatively near-term fiscal savings while preserving labor-market considerations by avoiding contribution rate hikes.
- Specific measures with quantified impacts include:
  - Freeze of indexation for 2014–15: cumulative reduction of 0.3 percent of GDP over 2014–15.
  - 2012 reform longer-term effect: 1½ to 2 percent of GDP by 2050.
  - Eliminating pension bonus above-average: 0.2 percent of GDP (permanent).
  - Taxation measures:
    - Eliminating 13.5 percent allowance: almost 1 percent of GDP on impact, rising to 1½ percent long term (or ½ percent impact / ¾ percent long term if applied only above mean).
    - Eliminating general tax relief: 0.8 percent near-term, just over 1 percent longer term.

*Prepared by Csaba Feher, Ioannis Halikias, and Jules Tapsoba; source content as provided.*

### 16.      Indexing benefits to prices is estimated to yield savings of about 2 percent of GDP

### Indexing benefits to prices is estimated to yield savings of about 2 percent of GDP

### Indexation and pension savings
- Long-term baseline assumptions:
  - Wage growth in line with productivity, implying wage growth in real terms of some 1½ percent on average.
  - Prices grow at 2 percent per year over the long term.
  - Current indexation weighs the wage component at 60 percent.
- Effect of abandoning the wage component of indexation (moving to full price indexation):
  - Pension benefits as a share of GDP would follow a steady downward path.
  - Fiscal savings cumulate gradually:
    - slightly less than ½ percent of GDP by 2020;
    - 1.1 percent of GDP by 2030;
    - 2 percent of GDP by 2050.
- Note on long-run pension growth under current formula (illustrative arithmetic in source):
  - Expected pension growth over the long run estimated at 0.4*2% + 0.6*3.5% = 2.9 percentage points.
  - Full price indexation would result in pension growth equal to inflation (2 percent).

### Measures to raise the effective retirement age (reduce early-retirement incentives)
- Possible measures that could significantly affect retirement probabilities prior to statutory age 65:
  - Revising the long-service-time early retirement provision to limit early retirement at no more than two years prior to the statutory retirement age of 65.
  - Increasing the early retirement deduction from 0.3 to at least 0.5 percent of pension benefits per month, with earlier retirement linked to progressively increasing monthly deductions.
  - Reducing non-contributory service time recognition (including maternity-, national service-, early insurance– and occupational hazard-related recognition).
  - Limiting the opportunity to purchase insurance periods to two years, and revising it to reflect the actuarially fair price of earlier retirement (present value of foregone contributions as well as that of additional pension payments resulting from longer service time and the longer benefit payment period).
- Quantification caveat:
  - Impact quantification is more difficult due to need for detailed individual-level data and structural modeling beyond the chapter’s scope.

### Near-term consolidation and combined pension reform impacts
- Short-run measures:
  - Reforms reducing the pension bonus and tax allowance for pensioners can contribute to near-term fiscal consolidation by around 0.6 percent of GDP.
- Combined medium- and long-run effects:
  - Other reforms to limit benefit indexation cumulate over time, with savings estimated at up to 2 percent of GDP by 2050.
  - In total, a combination of proposed reforms could yield about 2.6 percent of GDP.
  - This would reduce by about 40 percent the expected increase in pension spending by 2050.
- Pension system balance and NPV impacts (assumptions: constant pension contribution rates and labor shares):
  - Without reform: pension system balance projected to deteriorate from 2 percent of GDP at end-2013 to 8¼ percent of GDP at end-2050.
  - In net present value terms, this represents a cumulative deterioration of some 40 percent of GDP during 2015–50.
  - Combined reforms can contribute to a cumulative improvement of just under 15 percent of GDP in net present value terms during 2015–50 relative to the status quo.

### Debt dynamics
- Fiscal baseline projection (no pension reforms):
  - Debt-to-GDP ratio projected to rise to 200 percent by 2050 as a result of rising pension spending and endogenously determined interest payments.
- With the combination of proposed pension reforms:
  - Debt-to-GDP ratio would reach just over 100 percent by 2050.
- Additional action:
  - Additional, non-pension-related measures would be needed to place the debt ratio on a sustainable downward path.

### Health and Education — magnitude of spending and efficiency findings
- Overall:
  - Publicly-funded spending on health and education reached almost 12 percent of GDP in 2011.
- Health sector efficiency and potential savings:
  - DEA-based efficiency score for Slovenia’s healthcare system for 2010–12 estimated at about 52 percent relative to best practice.
  - Pre-crisis (earlier period) score was broadly stable at around 32 percent.
  - Using the Healthy Life Years Indicator yields an estimated score of 0.55, with a gap to the frontier of 45 percentage points.
  - Estimated fiscal savings: closing half of the distance to the efficiency frontier could yield fiscal savings in health of some 2 percent of GDP.
  - Drivers of recent efficiency improvement noted: expenditure compression, control of pharmaceutical costs, low employment growth in the sector, introduction of new technologies, and partly shifting financing to private complementary health insurance.
- Education sector efficiency and potential savings:
  - DEA-based efficiency score for the education system for 2010–12 estimated at about 53 percent relative to best practice.
  - The efficiency score rose by about 6 percentage points in 2010–12 from an average of about 47 percent up to 2009.
  - Estimated fiscal savings: closing half of the education efficiency gap could yield savings of around 1½ percent of GDP (source also notes 1.4 percent of GDP as an implied figure).

### Drivers of low efficiency and budget rigidities (health and education)
- Sectoral rigidities (health):
  - Continued reliance on costly inpatient and specialist care undermining primary care.
  - Insufficient partnership with the private sector in ambulatory settings.
  - Historically generous public-health benefit package.
  - Variable quality of care, not always targeted to rewarding high performance.
  - Insufficient focus on treatments of proven clinical and cost effectiveness.
- Sectoral rigidities (education):
  - Rigid education system despite declining student population, resulting in low pupil-teacher ratios in pre-primary and lower-secondary education.
  - Wide geographic variation in population dynamics and class sizes (class size range from 4.5 to 24.2 pupils; around 40 percent of schools having less than 15 students per class; around 56 percent of schools having less than 200 pupils).
- Budgetary rigidities:
  - Growth and fragmentation of indirect budget users (institutional and legal structures beyond direct government funding control), with dispersed funding sources and weak oversight.
  - Quasi-autonomous legal status of hospitals constrains centralized rationalization.
  - Primary health clinics established by local governments create fiscal obligations (central government obliged to cover operating expenses, including wages) that are hard to control.
  - Local governments establish primary schools while the central government finances a significant share of operational and employment costs, creating resistance to rationalization of excess facilities.

### Policy reform options for health and education efficiency
- Health sector reforms (examples cited, from OECD recommendations):
  - Implement a health technology assessment to analyze alignment with best clinical practices (inpatient versus ambulatory care, supply of general practitioners) and cost-effectiveness of government purchases of medical equipment and pharmaceuticals; use results to improve practices and reduce costs.
  - Reform health financing further, building on recent steps (e.g., broadening contribution of compulsory health insurance to working students). Options include:
    - Aligning the health insurance contribution of pensioners with the standard contribution of employees.
    - Allowing for an increase in premiums of complementary health insurance with the age of participants.
  - Develop options for homecare and consider introducing a system of vouchers.
- General approach:
  - Comprehensive structural reforms in health are needed over the medium term to close remaining efficiency gaps and make recent efficiency gains durable.

*Source: IMF staff analysis as presented in the chapter "_cr1542 - 16. Indexing benefits to prices is estimated to yield savings of about 2 percent of GDP."*

### 30.      Efficiency gains in the education sector can be achieved though adjustments to

### _cr1542 - 30.      Efficiency gains in the education sector can be achieved though adjustments to

### Efficiency gains in education: findings and recommendations
- Efficiency gains can be achieved through adjustments to demographic trends and improved funding for tertiary education.
- Recent cost-cutting measures may not be sustainable if the recent tight public-wage policy (directly impacting a major component of the sector’s cost structure) were to be loosened.
- Structural reforms called for include:
  - Raise pupil-teacher ratios in pre-primary and lower-secondary education, including by increasing class size (through minimum class size, especially for urban zones).
  - Optimize the school network to address overcapacity of schools that are not geographically isolated.
  - Rationalize teacher workloads.
  - Introduce universal tuition fees along with means-tested grants and loans with income-contingent repayments to promote access and equity in tertiary education while minimizing costs.

### Budgetary process rigidities and reforms for healthcare and education
- Overcoming rigidities in the budgetary process for both healthcare and education is important for achieving efficiency gains.
- Align oversight and control over indirect health and education spending users with the degree of control exercised on direct spending users to improve expenditure control and strengthen expenditure efficiency.
- Measures to consider:
  - Merge financial management functions across smaller indirect budget entities (IBE) or make more and better use of shared financial services (accounting and reporting, internal control and audit).
  - Increase the involvement of the central government in the preparation of the financial plans by indirect budget entities. Supervising ministries should be able to review financial plans of indirect budget entities before approvals by their governing/management board.
  - Standardize and unify budget execution systems across IBE, for instance through the installation of a unique IT system for budget execution, payment, accounting and reporting system.

### Fiscal impact and public debt projections
- Assumptions for projected impact:
  - Reforms in health and education begin to have an impact on the sectors’ finances with a 2-year lag, and this impact is felt only gradually over an 8-year window.
  - Even if half of the fiscal savings estimated above (1 ¾ percent of GDP) could be achieved, reforms can make a powerful contribution to counteracting the effects of population aging.
- Combined effect with pension reform:
  - Together with pension reforms, health and education reforms would place the debt ratio on a firmly declining path through 2040, and allow it to broadly stabilize around 40 percent by 2050.

### Concluding remarks: scope, caveats, and future research directions
- Motivations for the paper:
  - Substantial deterioration of public finances through the crisis requires additional consolidation efforts.
  - Population aging is expected to put significant pressure on the pension system over the long run.
  - Evidence of inefficiencies in both healthcare and education spending.
- Main findings:
  - Significant fiscal savings could be achieved by reforming the pension, health, and education systems.
  - Pension reforms: changes to the pension bonus and the tax treatment of pension benefits can generate up-front savings; reforms to benefit indexation and policies to raise the effective retirement age help address longer-term challenges.
  - Healthcare and education reforms addressing sector-specific structural rigidities and budgetary controls could help close the efficiency gap with the best practice frontier and generate sizeable long-term savings.
  - Together, these reforms can help place public debt on a sustainable downward path.
- Important cautions:
  - Quantitative results should be interpreted with caution.
  - Pension results depend on assumptions and on the precise specification of reforms, including protection of low income pensions.
  - Results do not take into account potential behavioral responses to reforms.
  - For healthcare and education, life expectancy and PISA scores used in the analysis may capture the output of these sectors only imperfectly.
  - Scarcity of comparable data for a sufficiently large set of countries is an important limitation.
- Future research avenues suggested:
  - Welfare assessment of pension reform, given intertemporal effects and intergenerational equity issues.
  - Endogenize interactions between pension reform and labor market dynamics (the paper used a partial-equilibrium approach).
  - Consider structural/paradigmatic pension reforms (e.g., indexing statutory retirement age to life expectancy, reducing the role of the state in old age income replacement, relying more on fully funded, privately managed pension products).
  - Investigate non-contributory targeted social pensions as part of long-term pension policy.
  - Incorporate the impact of aging on longer-term dynamics of health spending in the analysis.

### Institutional features of Slovenia’s pension system (box summary)
- System type:
  - Mandatory, pay-as-you-go financed, contributory defined benefit public pension system.
- Benefits and schemes:
  - Pays old age, disability and survivor pensions as primary benefits; primary benefits may be supplemented by secondary pensions (assistance and attendance supplements, supplementary survivor benefits).
  - Other benefits include various cash and in-kind benefits for people with disabilities and other grants.
  - In addition to Compulsory Pension and Disability Insurance (CPDI), the system includes Compulsory (Occupational) Supplementary Pension Insurance (CSPI) and Voluntary Supplementary Pension and Insurance.
- Eligibility and retirement age (as of 2013):
  - Normal, full-entitlement retirement age was 63 for men and 61 years for women, by which ages individuals must have accrued at least 20 years of insurance periods.
  - Early retirement permissible no sooner than 5 years before reaching the normal retirement age, with a 0.3 percent pension deduction per month of early retirement.
  - Deductions do not apply to people who accrue 40 years of service without purchasing additional insurance periods; further easements available to various groups (mothers, those in compulsory national service, those who became contributors before turning 18).
- Benefit assessment and indexing (as of 2013):
  - CPDI benefits assessed on the basis of the average net wage of the best consecutive 19 years of insurance since 1970, subject to a floor and a ceiling—respectively at 76.5 percent and 306 percent of the previous year’s average economy-wide wage.
  - Application of the floor and ceiling compresses the benefit distribution and introduces a non-contributory minimum pension at 19.9 percent of the average wage in the year preceding retirement.
  - Benefits are regularly indexed to a 60/40 weighted composite of gross wage growth and the consumer price index, subject to a minimum of half the price index.
- Coverage and compliance (2013 figures and trends):
  - Full coverage: 100 percent and 90 percent old age pension coverage is reached by age 64 among men and women, respectively.
  - Since statutory retirement age is below 65 and early retirement is available, the eligibility ratio (old age pensioners as a percentage of people aged 65 and above) was 120% in 2013.
  - Age-specific eligibility ratios expected to decline as a result of retirement age increases and stricter early retirement rules; coverage assumed to remain full for people older than the statutory retirement age.
  - Compliance rates have been declining. Service time among new retirees between 2010 and 2013 is 38 years and 36 years, on average, for men and women, respectively.
  - Declining compliance rates expose the pension system to risks: contribution revenues would start to decline well before expenditures contract, driving the system’s deficit up; declining compliance among prime age individuals may compromise the system’s ability to provide an adequate pension.

### Estimating efficiency gaps: DEA methodology (box summary)
- Methodology:
  - Data Envelopment Analysis (DEA) used to trace a “best practice frontier” populated by countries that provide the optimal combination of inputs and outputs.
  - Frontier constructed using linear programming techniques from the most efficient observations, which then “envelop” the less efficient ones.
  - Efficiency gains measured as the distance from the frontier, expressed as a ratio of an observation’s distance from the efficiency frontier to the distance from the axis.
  - Gains can be defined as input reductions holding output constant (input inefficiency) or output increases holding input constant (output orientation).
  - Efficiency score ranges from 0 to 1 and measures the conversion rate of input into output; implicitly determines the size of potential savings.
- Application to Slovenia:
  - Life expectancy and PISA scores considered as socially valuable outcomes for health and education, respectively.
  - Conversion rate applied to both public and private systems due to lack of disaggregated data.
  - To evaluate fiscal gains, the size of savings is weighted by the share of the public sector in the expenditure; latest OECD figures suggest general government accounts for almost 80 percent in the education and health sectors.
  - Analysis focused on outcomes rather than outputs; variables selected for comparability across countries.
- Methodological caveats:
  - DEA is more appropriate for homogeneous samples such as OECD countries.
  - DEA is highly sensitive to sample selection and measurement errors; outliers can exert a large effect on efficiency scores and shape of the frontier.

*Source: IMF staff calculations and analysis as presented in the provided content.*

### 7.      This section attempts to assess Slovenia’s institutional quality in various areas

### 7.      This section attempts to assess Slovenia’s institutional quality in various areas

### Overview
- The assessment covers 116 indicators spanning eight main areas: labor market; product and service markets; business regulations; legal system; finance and corporate governance; trade; infrastructure and corruption; and education and R&D.
- Indicators were drawn from Cheptea and Velculescu (2014) and compiled from sources such as OECD (2013 data, as per end-2014 vintage), the World Bank’s Doing Business Report (2014 data as per their 2015 report), and the World Economic Forum (2012), with updates where possible.

### Key findings by area
- Labor market
  - Slovenia exhibits burdensome hiring and firing regulations and a relatively weak link of wages to productivity, showing large gaps to best practice.
  - The indicators do not fully reflect the impact of the 2013 reform. According to IMAD (2014), the 2013 Employment Relationships Act simplified hiring and firing procedures and lowered redundancy costs; it brought the OECD Employment Protection Legislation index for regular contracts against individual dismissals closer to the OECD average, though protection against collective dismissals remains higher than the OECD average.
- Product and service markets
  - Lag driven by pervasive involvement of the state, higher barriers to entry into some professions, and weak anti-monopoly practices.
- Business regulations
  - High level of red tape and regulations: lower scores on general indicators (regulatory burden and regulatory quality) and specific measures (e.g., days to register a property).
- Legal system
  - Less business-friendly: inefficiencies in enforcing many types of contracts, and weaknesses in impartiality and independence of the courts.
- Finance and corporate governance
  - Worse than EU peers particularly on protection of minority shareholders’ rights and restrictions on foreign ownership.
- Trade
  - Trade regulations (procedures to import and export, barriers to trade and investment) are relatively burdensome.
- Infrastructure and corruption
  - Quality of infrastructure (especially railroad) falls short, partly due to heavier government involvement and scope for perceived favoritism and corruption.
- Education and R&D
  - Fewer scientists and engineers, fewer patents per capita, and lower corporate R&D spending relative to best practice.

### Ranking relative to EU peers
- Figure 2 results (simple averages by area):
  - Slovenia lags particularly in finance and corporate governance and in the labor market (in both cases the average rank is 21).
  - The area with the lowest (better) average rank is business regulations (average rank 14).

### Methodology for prioritizing reforms
- Objective: choose and prioritize reforms based on impact on long-run growth, considering cost and relative efficiency (following Tavares (2014) and Cheptea and Velculescu (2014)).
- Step 1 — Estimate growth effect:
  - Use cross-country regressions of long-run growth against initial level of GDP (to control for convergence) and the relevant indicator.
  - The effect of a reform is quantified as the product of the estimated regression coefficient and the distance between the country’s starting position and the frontier (measured by the average of the five EU best performers along the given dimension).
- Step 2 — Quantify cost of reforms:
  - Follow Tavares (2004) approach: cost of reaching the frontier depends positively on how far the frontier is relative to the starting position (required percent improvement).
  - Denote cost function C(Xi, Besti) as the cost of reaching the frontier Besti from starting level Xi; the cost function is assumed to increase with the required improvement.
- Step 3 — Measure reform efficiency:
  - Define efficiency as benefit (growth impact) divided by cost.
  - The measure is invariant to rescaling of indicators: if indicator units are multiplied by a constant K, the estimated coefficient is divided by K, leaving efficiency unchanged.
  - Note: Cheptea and Velculescu also consider a “concave” specification for costs; that alternative measure of efficiency is not invariant to linear transformations of indicators and therefore is less suitable for cross-indicator comparisons unless units are meaningful.

### Results — reforms with largest estimated long-run GDP impacts and efficiency
- Labor market
  - Improving employer-employee relations (e.g., collective bargaining processes) — closing the gap with best practice in the EU is estimated to boost long-run GDP by 1.8 percent; relatively more efficient than other labor-market reforms.
  - Three other labor-market reforms (related to wage formation mechanisms and hiring and firing regulations) each have estimated impacts of about 1 percent (scope for the hiring/firing reform may have been partly addressed by the 2013 reform).
- Product and service markets
  - Strengthening effectiveness of anti-monopoly policies (give anti-monopoly institution more resources and powers) — largest impact of 1.6 percent on long-run GDP and highly efficient.
  - Limiting price controls to industries with economies of scale (e.g., power generation) — impact close to 1 percent.
- Business regulations
  - Improving general quality of the regulatory framework and reducing bureaucracy costs (cutting “red tape”) — estimated impact of 1–1.2 percent on long-run GDP; associated with high efficiency indices (relatively low implementation costs).
- Legal system
  - Several reforms estimated to have significant growth effects:
    - Improving efficiency of legal framework in settling disputes and challenging regulations, strengthening impartiality and independence of courts, and boosting legal basis of property rights (ensure collateral and bankruptcy laws protect borrowers and lenders) — each associated with estimated impacts in excess of 2 percent on long-run GDP.
    - Four other legal reforms (protection of property rights, insolvency processes, legal enforcement of contracts, integrity of the judicial system) — estimated growth impacts in excess of 1 percent.
    - Strengthening property rights and integrity of the legal system are among the most efficient reforms in this area.
- Finance and corporate governance
  - Highest growth impacts from enhancing protection of minority shareholders’ interests, improving access to loans, expanding venture capital availability, and increasing foreign ownership — closing the gap with EU best practice would be associated with a permanent increase in Slovenia’s GDP of about 2 percent for each of these areas.
  - Improving financing through equity markets and strengthening auditing and reporting standards would also bring substantial growth dividends; strengthening auditing and reporting standards is particularly efficient.
- Trade
  - Reducing the number of documents required to import — could boost GDP by about 1.4 percent.
  - Reducing non-tariff trade barriers and the compliance cost of importing and exporting — associated with a 1.1 percent higher long-run GDP.
  - Reducing burden of customs procedures and prevalence of trade barriers — associated with low relative cost and therefore high efficiency.
- Infrastructure and corruption
  - Reducing favoritism by government officials and strengthening infrastructure quality (in particular railroads) — associated with long-run GDP impacts in excess of 2 percent.
  - Strengthening other infrastructure areas also yields impacts of 1 percent or higher on long-term GDP and appears relatively efficient (note: actual economic costs of strengthening infrastructure may be higher than proxied by the assumed cost function).
- Education and R&D
  - Most reforms covered have estimated long-run GDP impacts in excess of 1 percent.
  - Largest impact (2 percent) associated with providing adequate incentives to increase company spending on R&D.
  - Bringing per-capita utility patents in line with EU best practice is estimated to be difficult/costly.
  - The least cost per point of long-run GDP impact is associated with increasing prevalence of internet access in schools.

*Source: _cr1542 - 7.      This section attempts to assess Slovenia’s institutional quality in various areas*

### 15.      Looking across the various areas, reforms improving corporate governance, access to

### 15. Looking across the various areas, reforms improving corporate governance, access to finance, and judicial processes appear most important for growth in Slovenia

### Key findings
- Reforms improving corporate governance, access to finance, and judicial processes represent 10 entries in the top 15 reforms with the highest long-run GDP impact, estimated—on average—at around 2 percentage points.
- Strengthening the protection of minority shareholders’ interest tops the chart for long-run GDP impact.
- Strengthening auditing and reporting standards tops the chart for reform efficiency.
- Judicial reforms enhancing the efficiency, predictability, and independence of the courts are key to facilitate access to finance and corporate restructuring.
- Other important growth areas include:
  - reducing the scope for corruption and favoritism by government officials,
  - improving the quality of the railroad infrastructure,
  - increasing spending on R&D,
  - reforming the education system to form more scientists and engineers,
  - strengthening cooperation in labor-employer relations.

### Reform efficiency and prioritization
- When accounting for benefits relative to costs (“efficiency”), a broader set of reforms could be prioritized beyond corporate governance and legal reforms, including:
  - enhancing strength of auditing and reporting standards,
  - strengthening structure and security of property rights,
  - reducing administrative burdens associated with customs and business regulations,
  - strengthening anti-monopoly policy,
  - reducing trade barriers,
  - improving port and air infrastructure,
  - expanding internet access in schools,
  - improving quality of research institutions and their cooperation with industry,
  - increasing the number of scientists and engineers,
  - clamping down on irregular payments and bribes.
- A reform strategy that maximizes growth impact while minimizing costs could encompass corporate governance and judicial reforms plus measures to reduce business regulations (red tape), simplify trade and customs procedures, and boost research and development.

### Quantitative estimates and impacts
- Closing gaps vis-à-vis best performers in the EU in corporate governance, legal and judicial efficiency, and access to finance would increase Slovenia’s GDP by some 2-2¾ percent.
- Aligning these areas with world-wide best practices would be associated with an even greater GDP dividend.
- Selected indicators and table-derived metrics (preserved exactly as in source) include:
  - Protection of minority shareholders’ interests: Slovenia 3.4; Best 5 in EU27 5.6; Coefficient 1.2; Distance 2.2; Impact on long-run GDP 2.7; cost of reform 0.6; Efficiency of reforms 4.2
  - Strength of auditing and reporting standards: Slovenia 4.9; Best 5 in EU27 6.0; Coefficient 1.2; Distance 1.2; Impact on long-run GDP 1.4; cost of reform 0.2; Efficiency of reforms 6.1
  - Efficiency of legal framework in settling disputes: Slovenia 2.9; Best 5 in EU27 5.6; Coefficient 0.9; Distance 2.7; Impact on long-run GDP 2.4; cost of reform 0.9; Efficiency of reforms 2.6
  - Judicial independence: Slovenia 3.8; Best 5 in EU27 6.4; Coefficient 0.8; Distance 2.6; Impact on long-run GDP 2.1; cost of reform 0.7; Efficiency of reforms 3.0
  - Ease of access to loans: Slovenia 2.3; Best 5 in EU27 4.3; Coefficient 1.1; Distance 2.0; Impact on long-run GDP 2.1; cost of reform 0.9; Efficiency of reforms 2.5
  - Venture capital availability: Slovenia 2.4; Best 5 in EU27 4.0; Coefficient 1.2; Distance 1.6; Impact on long-run GDP 2.0; cost of reform 0.7; Efficiency of reforms 2.8
  - Favoritism in decisions of government officials: Slovenia 2.7; Best 5 in EU27 5.2; Coefficient 0.8; Distance 2.5; Impact on long-run GDP 2.1; cost of reform 0.9; Efficiency of reforms 2.2
  - Quality of railroad infrastructure: Slovenia 2.9; Best 5 in EU27 5.8; Coefficient 0.7; Distance 2.9; Impact on long-run GDP 2.1; cost of reform 1.0; Efficiency of reforms 2.0
  - Company spending on R&D: Slovenia 3.4; Best 5 in EU27 5.4; Coefficient 1.0; Distance 2.0; Impact on long-run GDP 2.0; cost of reform 0.6; Efficiency of reforms 3.6
  - Availability of scientists and engineers: Slovenia 3.8; Best 5 in EU27 5.5; Coefficient 1.1; Distance 1.7; Impact on long-run GDP 1.9; cost of reform 0.4; Efficiency of reforms 4.3
- The source includes comprehensive tables (Table 1) listing indicators with columns: Significance of estimated coefficient, Slovenia, Best 5 in EU27, Coefficient, Distance (2)-(1), Impact on long-run GDP (3)*(4), cost of reform (5)/(6), Efficiency of reforms. Specific numeric entries are preserved in that table as shown above.

### Corporate debt overhang, insolvency, and investment
- The crisis exposed a large corporate debt overhang; corporate NPLs rose to around 20 percent of total loans (even after substantial transfers to the state owned asset-management company).
- Numerous companies require substantial debt restructuring or liquidation, underscoring the importance of effective corporate insolvency procedures.
- The paper notes that insolvency reforms implemented in recent years brought the framework closer to international best practices, but debt restructuring and deleveraging are proceeding slowly, suggesting remaining legal and institutional impediments.
- Reforms that facilitate equity finance directly (venture capital availability is among the top 15 most efficient reforms) or indirectly (protecting minority shareholder rights, strengthening auditing and reporting standards) can strengthen firm viability, facilitate debt repayment, and reignite investment.
- Enhancing court efficiency can facilitate equity financing and promote debt restructuring.

### Policy recommendations
- Prioritize reforms addressing corporate governance, judicial/legal efficiency, and access to finance to secure the largest estimated long-run GDP dividend.
- Strengthen protection of minority shareholders’ interests and the strength of auditing and reporting standards.
- Enhance efficiency, predictability, and independence of courts to support access to finance and corporate restructuring.
- Promote availability of venture capital and other equity financing channels to reduce corporate debt overhang.
- When resources (including political capital) are limited, prioritize reforms by accounting for implementation costs and efficiencies—include measures to reduce business regulations, simplify trade and customs procedures, and boost R&D.
- Address corruption and favoritism in government decisions to improve investment climate and growth prospects.
- Improve railroad, port, and air infrastructure where efficient and impactful.

### Caveats, limitations, and research implications
- Quantitative results estimating growth effects of reforms should be interpreted with caution: individual results are sensitive to assumptions and are indicative of relative importance only.
- Results should not be interpreted as additive across reforms without a joint cross-country growth regression including all relevant indicators; small sample sizes and high collinearity reduce estimate significance.
- Reform efficiency results are sensitive to the cost specification (convex versus concave). The convex cost function adopted implies efficiency increases with the starting level of institutional quality; alternative cost specifications and non-linear effects could change prioritization.
- Future research could generalize the functional form for the effect of institutional quality on growth and consider other functional specifications for reform costs that remain invariant to linear transformations of institutional indicators.

*Source: IMF — _cr1542 - 15. Looking across the various areas, reforms improving corporate governance, access to finance, and judicial processes appear most important for growth in Slovenia (PDF chapter/section)._

### 4.      To address this problem, two reforms of the Slovenian legal insolvency regime were

### 4.      To address this problem, two reforms of the Slovenian legal insolvency regime were

### Overview of 2013 reforms and insolvency procedures
- The 2013 reform represented the 5th and 6th time the insolvency law was amended since its implementation in 2007.
- Reform objectives: bring legal framework closer to international best practice and align largely with the rationale of the Recommendation of the European Commission.
- Slovenian insolvency procedures:
  - Compulsory settlement: a reorganization procedure applicable to companies and entrepreneurs, with special rules for mid-sized and large companies;
  - Simplified compulsory settlement: a reorganization option for micro-companies, small companies and individual entrepreneurs; similar to compulsory settlement but streamlined;
  - Pre-insolvency restructuring proceedings: tool for distressed mid-sized and large companies to restructure financial claims before becoming insolvent;
  - Bankruptcy: designed to liquidate insolvent, non-viable enterprises.

### Activity and key statistics (2012–14)
- Compulsory settlements: about 30 completed per year during 2013–14.
- Simplified compulsory settlements: increased to 90 cases in the first ten months of 2014 (introduced late 2013).
- Pre-insolvency restructuring proceedings: some 8 proceedings concluded in 2014 (first-time use in Slovenia).
- Corporate bankruptcy procedures: close to 1000 per year in 2013–14, double their level of 2012.
- Personal bankruptcies: increased from 880 in 2013 to 4006 in 2014.
- Judicial resources: only six judges in the commercial division of the District Court of Ljubljana.
- Insolvency administrators: 145 listed; estimated only 80-90 active.
- Qualification pipeline: typically only 2 or 3 candidates qualify each year to become insolvency administrators.
- Corporate debt concentration: the most indebted 100 companies are responsible for between 52 and 56 percent of the estimated debt overhang of 9.6 to

134.2 billion Euros in Slovenia.

### Boxed reform features (2013 reform highlights)
- Introduced pre-insolvency restructuring proceedings for large and medium-sized firms with a stay on creditor actions and majority voting.
- Increased control of the proceeding by financial creditors, including:
  - ability to initiate proceedings;
  - ability to introduce a plan that takes precedence over the debtor’s plan;
  - ability to take management control in certain cases.
- Absolute priority rule: if the value of equity is zero, debtor equity will be eliminated.
- Corporate restructuring features: debt/equity swaps and corporate spin-offs to facilitate viable firms continuing as a going concern.
- Inclusion of secured creditors in compulsory settlement and ability to pool collateral under a settlement plan.
- Permitted write-down of collateral to market value with corresponding conversion of unsecured portions into unsecured claims.
- Recognized possibility for creditor majorities to reduce principal on unsecured debt, extend maturity, and/or reduce interest rate for both secured and unsecured debt.
- Simplified compulsory settlement: streamlined reorganization procedure for micro and small enterprises, but with limited options for debt restructuring (no debt/equity swaps; secured claims may not be affected).

### Legal issues and implementation bottlenecks
- Complexity of plan approval:
  - Supermajorities required to adopt insolvency plans.
  - Intricate rules to calculate voting power of creditors; example: voting power of secured creditors in compulsory settlement is calculated by adding 20 percent to the value of the collateral to determine whether there is an unsecured portion for voting purposes.
  - Complex rules for voting power when a debt/equity swap is part of a reorganization plan.
  - There is no voting of insolvency plans by classes of creditors.
- Simplified compulsory settlement limitations:
  - Secured claims may not be affected by reorganization plans under simplified procedures.
  - Debt/equity swaps are not allowed in simplified compulsory settlement procedures.
- Recognition of claims: slow and litigious process
  - Process: initial recognition by insolvency administrator (basic list of claims) → possible objections → supplemented list → final list approved by court.
  - Decisions on recognition of claims are frequently appealed, delaying the insolvency process.
- Asset sales: difficulties due to scarcity of investors and rigid controls over sales
  - Reforms introduced initial auction price at 70% of market price, with an additional auction at 50% of market price; these reforms need to be tested in practice and rely on valuators’ quality.
- Late initiation of proceedings:
  - High number of liquidations suggests insolvency proceedings are initiated too late.
  - Personal liability rules for directors in event of corporate debt distress exist but do not seem applied or enforced.
  - Little experience with avoidance actions to recover assets illegally transferred before insolvency.
- Complexity and user perception:
  - Law is extremely detailed and procedural, often difficult to understand and apply.
  - Overlapping company law aspects and slightly different procedural rules across similar situations (voting, contents of plans, effects on creditors) hinder implementation.

### Institutional issues
- Intensive judicial involvement required:
  - Legislative model presumes a “hands-on” judge authorizing significant actions and deciding disputes; judges sometimes lack sufficient understanding of economic insolvency realities.
  - Appeal judges lack specialization; recent amendments concentrated appeal jurisdiction nationally in the appellate court of Ljubljana (opportunity for de facto specialization).
- Court capacity constraints:
  - Increase in corporate insolvency cases plus surge in personal insolvency cases overburdens courts.
  - Same judges handle corporate and personal insolvency cases; substantial time devoted to personal insolvencies detracts from macro-critical corporate cases.
- Limited collaboration between judges and insolvency practitioners:
  - Insolvency administrators are treated as officials of the court, but in practice there is barely any communication or cooperation.
  - Court supervision concentrates on formal aspects (timely submission of reports) rather than substantive cooperation.
- Insufficient number and skills of insolvency administrators:
  - Insufficient number relative to case volume and complexity.
  - Administrators tend to have legal backgrounds with limited accounting and finance skills.
  - Selection often random; remuneration not based on performance.
  - EBRD assessment: Slovenia among countries with weakest score (50 percent or below) for appointment of administrators and deficiencies in supervision due to no regular statutory monitoring.
- Divided supervision of administrators:
  - Supervision divided among courts, the Chamber of administrators (self-regulatory), and the Ministry of Justice, leading to no truly effective supervisory role by any single body.

### Legal environment for credit
- Enforcement of claims, particularly mortgages, is slow and cumbersome.
  - Enforcing a mortgage can take between two and four years.
  - Enforcement regime allows delaying tactics by debtors.
- Reforms introduced:
  - Reduction of appeals for several acts within the enforcement process.
  - Assignment of functions to judicial clerks to rationalize judicial resources.
  - Streamlined auction regimes inside and outside insolvency.
  - The reform enabling enforcement of mortgages by way of a notary sale has been suspended by the Constitutional Court, pending a final judgment.

### Implications and priorities for implementation (findings)
- Reforms of 2013 moved framework closer to international best practice but implementation is proceeding slowly.
- Key impediments to effective restructuring and liquidation include:
  - legal complexity (voting, plan approval, claim recognition rules);
  - limited restructuring tools for SMEs under simplified procedures;
  - judicial and administrative capacity constraints (judges, insolvency administrators, valuators);
  - weak supervision and appointment systems for insolvency administrators;
  - slow enforcement of secured claims and mortgage enforcement uncertainty.
- Operational success of legal reforms depends on:
  - testing and practical application of new auction rules and pre-insolvency proceedings;
  - strengthening judicial specialization and capacity for commercial and insolvency matters;
  - increasing the pool, matching, and skillsets (accounting/finance) of insolvency administrators;
  - improving cooperation mechanisms between courts and insolvency practitioners;
  - streamlining recognition of claims and reducing scope for dilatory appeals; and
  - resolving constitutional suspension of notary-sale mortgage enforcement.

*REPUBLIC OF SLOVENIA INTERNATIONAL MONETARY FUND*

### 20.      The legal system does not offer effective mechanisms to support lending to SMEs such

### _cr1542 - 20.      The legal system does not offer effective mechanisms to support lending to SMEs such

### Findings on collateral and access to finance
- Receivables are identified as among the most reliable collateral for financing of enterprises.
- The current law does not offer creditors assurances in the use of receivables as collateral for loans, diminishing opportunities to obtain fresh financing for numerous enterprises.
- Financing of enterprises requires the use of assets different from real estate; the legal framework for such movable assets is weak.

### Recommendations and conclusions (overview)
- Maintain legal stability in the short run to allow recent legal changes to be absorbed by economic and legal operators and to ensure existing legal tools can be used to facilitate corporate restructurings.
- Priority in the short term: implementation and reinforcement of the institutional framework of the insolvency system.
- Strengthen the legal environment for credit, including enforcement mechanisms and rules for security over movable assets (especially receivables).
- Over the medium term: simplify and make insolvency law more flexible; integrate secured creditors fully into restructuring processes; base voting on insolvency plans on the value of claims.

### Short-term priorities (implementation and institutional reinforcement)
- Reinforce the courts and allow specialization of judges in insolvency matters to enable effective implementation of the insolvency regime.
- Professionalize insolvency administrators by revisiting the system of qualification, designation and remuneration of insolvency administrators.
- Strengthen supervision of insolvency administrators as a precondition to granting them more powers and responsibilities and to alleviate courts’ responsibilities.
- Ensure insolvency administrators improve skills and have adequate resources to:
  - Implement the new law effectively.
  - Pursue enforcement actions against corporate directors when needed.
  - Pursue avoidance actions of antecedent transactions when needed.

### Legal environment for credit (specific measures)
- Improve mechanisms for enforcement of mortgages to afford speedy recovery of claims while remaining in line with Constitutional requirements.
- Implement a system that makes enforcement faster and more efficient to benefit access to credit and provide a solid foundation for debt restructuring activities.
- Strengthen rules for security over movable assets, especially receivables.
- Establish a system based on registration of security interests over movable assets, especially receivables, that is easily accessible to the public to provide necessary certainty and develop new lending practices for SMEs.

### Medium-term reforms (simplicity, flexibility, creditor integration)
- Make insolvency law simpler and more flexible; consider basing differences between simplified and ordinary compulsory settlement on reduction of cost and complexity rather than on the size of firms.
- Fully respect the principle of absolute priority and the best interest of creditors’ test as sufficient safeguards for all restructuring and reorganization plans, without limitation to their contents.
- Allow full integration of secured creditors in the process to enable more aggressive and sustainable corporate restructurings for viable companies.
- Base voting on insolvency plans on the value of the claims, with creditors grouped in classes according to their respective positions in the creditors’ hierarchy.

*Source: IMF staff report (excerpts provided).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1542.pdf_