British investors show stiff upper lip despite crisis

With UK investments in Romania amounting to EUR 4 billion, British businesspeople are among the most long-standing foreign direct investors in the country. More than 4,000 British companies are active in Romania, with the number of newly registered companies falling in the last two years from 859 in 2007 to 353 in 2008 and only 165 last year, according to data from the National Trade Register Office (ONRC).

Simona Bazavan

Adding to an unfavorable international business environment, the latest domestic economic developments and fears about possible future VAT and profit tax increases have raised the alarm among potential investors.

“We are starting to lose our competitive advantages as a country because structural reforms were postponed (…) The lack of predictability as far as taxes are concerned, following the recent developments related to the negotiations with the IMF, will not help,” Livia Constantinescu, partner with DLA Piper, told Business Review.

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Despite the challenging economic context, Russell Johnsen, managing director of Provident Financial Romania, believes that Romania still presents opportunities for foreign investments but much depends on the country’s fiscal policy. “Romania has a competitive and open labor market, with a skilled and professional workforce. Although some improvements have been made in the past years, the transport infrastructure and living conditions are often still a challenge for the local business environment. We believe that further initiatives to consolidate the regulatory framework along with a longer-term strategy for sustainable development will make Romania even more attractive for foreign investments,” Johnsen said.

As for the industries that have the potential to attract future British investments, Constantinescu mentioned the healthcare and IT sectors but added that from DLA Piper’s contact with British companies active in Romania, “many are skeptical due to the unstable economic conditions and have put their plans on hold.”

Britain’s Royal Bank of Scotland has been active in Romania since 2007 when it successfully led the consortium bid for ABN AMRO, and in October 2008 the bank was rebranded in Romania as RBS. For the first quarter of 2010 RBS has reported a profit of about EUR 10 million, which represents approximately one third of its RON 130 million profit in 2009, according to the bank’s quarterly report. In spite of these results the British group has decided to cut down on loans granted in Romania by 12 percent, to EUR 1.79 billion in March, thus reducing its exposure to the Romanian market.

The consumer credit company Provident entered the local market in 2006 and in 2007, after the success of its pilot operation in Bucharest, the company expanded nationally. Its territorial infrastructure now consists of 17 branches and 26 working points in other cities, covering over 70 percent of the country’s urban population.

“The investments made by the company in 2009 in infrastructure and staff exceeded EUR 22 million, which lifts the total value of investments in the Romanian business to over EUR 50 million. The investments focused on developing our employees and our representatives and on increasing the operations in the areas that we already serve,” Johnsen told Business Review.

“Provident had over 164,000 customers at the end of 2009, up from 85,000 in December 2008. The loans issued last year exceeded EUR 71 million, compared to EUR 42 million in 2008. Revenues doubled from EUR 19.5 million in 2008 to 40 million last year. The company now has over 550 employees, up from 390 in December 2008 and over 2,400 representatives, compared to 1,600 in late December 2008,” he added.

In 2010 Provident opened a new branch in Oradea but does not intend to open more this year. It also plans to launch a product that allows customers to choose how they receive and repay their loan.

British telecom interests

In the telecom industry, one of the major players is Vodafone, the British multinational mobile network operator. It came to Romania in 2005, taking over Connex.

“Vodafone is a major investor on the local market and on the long term. Our continuous investments over the years have focused on developing our network, our products and services, including mobile data services, to offer our customers the best-in-class communications services and the best customer experience, through a top performing network,” Liliana Solomon, CEO of Vodafone Romania, told Business Review.

“Our total revenue reached EUR 1,166 million for the financial year 2008-2009, to March 31 2009. In the last few years we have maintained a constant number of employees, around 3,000,” she added. “I believe that 2010 will be a challenging year for the local economy and for the telecommunications industry as well. We expect to continue to operate in a difficult economic environment, therefore we are looking at how all the markets and indicators evolve (…) Our offers are adapted to the current market conditions and meet the customers’ needs for flexibility, efficiency and better cost control,” Solomon went on.

Brits lay down the law

The Romanian legal services market had witnessed intense activity in the years prior to the economic crisis but 2009 proved to be a less favorable year for local outfits.

“Law firms are directly affected by the activity of other industry sectors. Prior to the financial downturn they were kept incredibly busy dealing with corporate and M&A work due to an unprecedented rise in demand. 2009 by contrast has seen some of the largest law firms on the local market freeze salaries, stop recruiting and in many cases (particularly in the real estate field) let people go. These decisions came after a very successful year which had fuelled expectations that the market would continue to grow by as much as 50 percent, and that salaries would correspondingly increase. Instead firms had to make tough decisions in response to the fact that there is simply less work on the market in order to protect profit margins from being badly eroded. Smaller firms were less impacted by this shock than some of the largest firms,” Costin Taracila, managing partner of RTPR Allen & Overy, told Business Review.The law firm is an association between Radu Taracila Padurari Retevoescu SCA and British Allen & Overy LLP. The two firms had worked together prior to the 2008 association.

Elsewhere, DLA Piper announced it had met its business objectives in 2009, exceeding the initial plan by 7 percent and expecting a 20 percent turnover growth in 2010. The Romanian office currently employs 34 people, 21 of whom are lawyers.

“While one of DLA Piper’s most important hubs is in the UK, we are an international practice with offices in 29 countries in Europe, Asia (including the Middle East) and the US. We have been active in Romania since 2008,” Livia Constantinescu, partner with DLA Piper, told Business Review. Turning to the Romanian business environment, she added that obstacles include the lack of stability and clear strategies for long-awaited reforms, which impact all business sectors. “The consultation of the business environment should become an important part of the process of establishing key priorities and measures for reform and enacting new legislation,” Constantinescu added.

UK investors get real

In the last year the real estate sector has felt the lack of cash keenly. Among the most prominent insolvencies was that of developer Mivan Kier, which built the Liberty Center mall and the New Town residential project. The developer had run up debts of EUR 20 million. Mivan Kier was a joint venture between Irish firm Kier and British Mivan Group. The group includes Mivan Limited, which is the owner of Liberty Center mall and the residential New Town compound in Bucharest. Mivan had said it was planning to develop shopping malls under the Tiago Mall brand throughout Romania worth approximately EUR 700 million in the next couple of years.

Another important player on the market is Willbrook Management, which last year got the approval from the city hall to compete the Cathedral Plaza project. The office building, which will be made up of 18 levels above ground and five underground floors, is being built near the Romanian-Catholic archbishopric in Bucharest, on a land plot of 1,822 sqm. When completed in July, it will deliver a total built area of almost 26,000 sqm. The company also plans to deliver this September another office center, Platinum Business & Convention Center following an investment of approximately EUR 100 million.

The project developer Willbrook Management International holds a EUR 6 billion portfolio of projects in Romania, Bulgaria, Turkey, Latvia, the Czech Republic, Georgia and Poland.

Big names in wine and fashion think long term

In the food and beverage industry, a British company with a long-standing presence in Romania is Halewood International Ltd which began importing Romanian wines to the UK as early as 1987. Ten years later the company set up its first Romanian subsidiary and now operates three. The company’s total investments so far amount to almost USD 10 million. Halewood Romania manages 400 ha of vineyard and has an annual wine production of approximately 42,000 hl.

British Debenhams is present in Roamania through Rafar, the fashion franchise division of RTC Holding The company has recently opened a new Debenhams store in Bucharest following a EUR 700,000 investment. The 1,000-sqm shop is located in the Sun Plaza commercial center. It is the seventh outlet in the network and the eighth that Rafar has set up in Romania and the Republic of Moldova since it brought the brand onto the local market in 2007.

“Given the difficult year we are going through, the sales expectations for the short term are not very high. I am convinced though that the decision to open a Debenhams store in the newest mall in the southern part of the city will be a profitable one long term, once the mall becomes an established shopping destination within a year or two,” said Ramona Stanciulescu, CEO of Rafar.

Other Debenhams outlets are present in Bucuresti Mall, Plaza Romana, Baneasa Shopping City, Sun Plaza, Constanta’s City Park Mall, Polus Center in Cluj, Lotus Center in Oradea, and Shopping MallDova in Chisinau, with a total sales area of 12,000 sqm.