Romania ‘needs new investment success stories’

With Romania suffering from a 36 percent fall in foreign direct investment in the first eight months of this year to around EUR 1.1 billion, Mihai Bogza, president of the Foreign Investors’ Council (FIC), the advocacy group, says the country needs to work diligently on preparing the privatizations of state-owned companies in order to attract high-profile bidders from abroad.

Ovidiu Posirca

Why has FDI in Romania dropped this year?

Over the last few years during the crisis, and in particular in 2013, we have seen a significant drop in the volume of foreign direct investments (FDI) in Romania. And the trend seems to be going from bad to worse, with the amount of FDI for the first eight months of 2013 falling by about 36 percent (e.n. to EUR 1.1 billion) against the same period of last year.

Overall, it seems that 2013 may be a comparable year to 2003, a year in which Romania was not yet even sure whether it would actually join the EU.

I think that apart from the crisis, Romania has failed to meet expectations in a number of areas in comparison with its main competitors, which are basically countries in CEE.

What are the issues facing investors seeking to start businesses locally?

On the entry point, I think the main channel for big investments coming into a country such as Romania is still major privatizations. Unfortunately, Romania has failed in three major privatizations during the last year: Oltchim (e.n. the state-owned petrochemical plant), Posta Romana (e.n. the state-owned post operator) and CFR Marfa (e.n. the state-owned railway freight operator). All three privatizations were prepared in a hurry, failed to attract interest from major investors and in the end the process will have to be restarted from a much worse departure point, given the negative publicity surrounding the initial failure.

The problem with such failures is that they discourage investors from involvement in future privatizations as well. Time must pass after the failed privatization before investors regain the courage to participate in a new one.

Also, in the greenfield area, Romania is not doing as it should. A good example is the Rosia Montana gold project, a decision about which has been pending for 15 years and we still don’t know whether or when it will be made one way or the other (e.n. approval or rejection). I am afraid the recent events regarding shale gas are not very encouraging for investors either.

I remember when the banking system was restructured between 1999 and 2000, and as a result it attracted massive interest from foreign investors. It still took some time to happen, because investors wanted to see not only that the overall framework had been put in place, but also that it operated properly thereafter.

But then we had the privatization of BCR, the most successful in terms of the money the state generated from it. I think the same should go for the rest of the economy. We need to put things in place first, and after a few years we will see a revival in investors’ interest, crisis or no crisis.

Do you think the current privatization program agreed with the IMF, in which the government plans to sell controlling stakes in Posta Romana and CFR Marfa, could become a success story?

If it’s well prepared and well executed, with transparent criteria, without the rules changing during the game, I think this could become happen. If not, history could be repeated. By the way, it is difficult to sell in good conditions a major asset in an economy which is not growing at a good rate.

Why do you think privatization tenders have failed to attract high-profile bidders from abroad?

They need to see an environment they can understand, which is predictable, in which institutions are working well. In other words, investors need transparency and predictability and they want to have as counterparts authorities who consider the economic performance of the country their main priority.

What are the operational challenges faced by foreign investors?

Romania is marginal to the EU from a geographical point of view and unfortunately we have done little so far to ensure better connections with the rest of the continent. We have a very limited network of motorways and the pace of building new ones is very slow. Also, the railway infrastructure is obsolete; Romania seems to have one of the lowest traffic speeds in Europe.

The local market itself is not growing as it should. Romania has yet to return to the GDP level of 2008 (pre-crisis level) and the pace of the recovery is very slow. Unfortunately, the absorption of EU funds, which could perhaps ensure better growth, has remained very limited throughout the crisis.

On the relationship between the private and public sector, I think Romania’s public sector should do much better. Take the arrears run up by the state in comparison with private companies. While private players are penalized if they run up debts to the state, public sector bodies, including the central budget, local budgets and state-owned companies, record significant delays in paying their duties and the volume of arrears has been a major issue in the agreements concluded with international lenders over the last four years.

Foreign investors are looking for predictability. They want an environment they can understand and where they can gauge future development. Overall, the problem is the lack of long-term strategies, which prevents investors from really understanding what a government might do in an area over a longer period of time.

Also, Romania is one the largest markets in this part of Europe, but the fact is that only 50 percent of the working-age population is economically active, which means that a significant part of the population is outside the labor market. This also means the supply of qualified workers is not as big as it should be.

What are the fiscal and legal shortfalls?

On the fiscal side too there is a lot of uncertainty. This year, for instance, the Fiscal Code has already been changed twice with more changes to come. On top of this, there is huge tax evasion, which puts additional pressure on honest taxpayers, as the state needs to increase the overall sum it collects from the good payers to compensate what it fails to cash in from the bad ones.

There is unfair competition between companies paying their taxes and those avoiding doing so, who apparently in some cases are not duly penalized by the state. This is distorting competition.

There are also concerns regarding public procurement. There are companies that are fairly competing to win such tenders, while others apparently win them based on kickbacks, again distorting the competitive environment.

I think there is still a lot of concern about how the legal system is working. If you look at the way in which insolvency cases are being handled by a number of judges, the perception is that there is a lot of corruption involving the judiciary. The recent actions taken by the DNA have tackled mostly high-profile cases, with little influence on what is happening in the lower courts.

Overall, this signals significant areas for improvement, which if properly addressed will make the way in which companies operate in Romania much better and help generate increased activity, economic growth and more revenues for the budget.

How does the FIC operate in Romania?

We have been in Romania as an organization for 16 years, and of course some of the investors have been on this market for longer. Currently we comprise around 120 companies, representing about two thirds of the total stock of FDI in Romania, which is EUR 59 billion.

We aim to ensure strong and sustainable growth for Romania by improving the economic environment. We are trying to do this by presenting concrete solutions to the authorities.

We have a board of 15 people who chair or co-chair a number of taskforces centered on some issues we consider crucial for Romania’s economy. For instance, this year we have 11 taskforces and the number changes almost every year depending on the issues we believe are important. They involve public institutions and management, SMEs, energy, public education and so on. For each of these we present concrete proposals.

How is the dialogue between FIC and the authorities going?

The picture is mixed but tends to the negative side in the sense that rather few proposals made by the business community in the past have been accepted by the authorities. One of the rather positive examples is the Labor Code, which was changed not to our full satisfaction, because it was the result of a dialogue between several stakeholders, and the trade unions, for instance, had a different opinion than ours on some points; still, we believe the new one represents a significant step ahead versus the old one, as it was brought closer to the best EU practices than it was in the past.

One other area in which we were partially successful was the issuance of the Emergency Ordinance no 109/2011 concerning the professional management of state-owned companies. As a result, some professional managers were put in place at a number of companies. Unfortunately, we have recently witnessed some significant backward steps in implementing this Ordinance.

Can you give me any examples of failures?

For the Insolvency Code, we prepared a very detailed position paper with concrete proposals on the draft law put forward by the authorities. We had a discussion with the authorities on a Tuesday and the next day they passed the bill through an emergency ordinance. It was clear they had not had the time to seriously analyze our proposals. Actually, very few of our proposals were taken into consideration. It is a pity because insolvency legislation plays a key role in improving how the economy functions in Romania.

I think the way in which the insolvency legislation was applied over the last few years does not protect neither creditors, nor debtors. It just helps the interests of a number of people that stand to gain from the liquidation of companies that enter insolvency – in some cases the shareholders of these companies and in other cases those involved in the insolvency, such as probably some of the judges, administrators and so on. They are making money on the back of the creditors.

We never lobby for one of our members specifically. We always make proposals for the public good, which will benefit not only foreign investors but investors in general. In some cases, none of our members will benefit directly, and that is why we fell so frustrated when our proposals do not get proper attention from the authorities. For instance, when we made the proposal regarding professional managers at state-owned companies, we were fully aware of the fact that should this kind of company produce more revenues for the state, then the fiscal burden would definitely be eased for all the other taxpayers.

What initiatives are you currently working on?

Very recently we have been trying to engage the authorities on the Fiscal Code because there have been recent changes, and there are changes ahead, about which we are very concerned. Also, we understand that there are significant shortfalls in the projected budget revenues and made concrete proposals about how to address this without resorting to new taxes. We have been very active on the Insolvency Code, as I mentioned before; unfortunately we do not yet have a result, but we will continue the dialogue at the level of Parliament, because that ordinance has to go through Parliament as well.

We are active concerning renewable energy, because we have recently seen a major shift in the government’s position. We understand the government can change its opinion but this should not happen at the expense of companies that have made major investments in a certain area, based on previous publicly assumed government policies, as this would set a very negative example for any potential new investors. And, overall, we remain alert to any initiative which could contribute to improving the business climate in Romania.

ovidiu.posirca@business-review.eu

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