FDI switches from privatizations to greenfields (top 100 Foreign Investors)

FDI at the end of this September was in excess of EUR 5 billion, compared to almost EUR 8 billion in the first ten months of 2006, which included Erste Bank's EUR 2.2 billion.
Most of the foreign investors bet on real estate and, clients say, large over-priced, residential compounds or office buildings have started to spot the Romanian map, with an increasing interest in areas outside the capital city. The banking field has also seen some important investments as existing banks expanded frantically throughout Romania and foreign players decided to enter the market at high costs. Millennium bcp made its official entrance on the market last month through a costly greenfield investment, prefacing a trend that analysts say will soon become the norm. In the oil & gas sector, companies invested hundreds of million euros in modernizing their refineries and expanding their distribution networks, while there have also been some investments in alternative fuels near Ploiesti and Constanta.
So far, FDI this year covers about 43 percent of the constantly widening current account deficit.
The CA deficit for the first nine months of 2007 stands at EUR 11.8 billion, 76 percent more than in the corresponding period of the previous year.
Analysts saw the decrease in the deficit coverage coming and they also expect an overall change in FDI's structure in the years to come.
“My opinion is that FDI levels will go up in 2008 and 2009, but not at the same speed seen during privatization years. FDI will mostly result from capital increases and greenfields. It is difficult to have an explosion in greenfields because of the rise in the prices of production means and secondly because of the shortage in labor force,” said Florin Pogonaru, president of the Businesspeople's Association of Romania (AOAR).
Investors' increasing interest in greenfields was also pointed out by Ruxandra Bandila, marketing & business development manager with PricewaterhouseCoopers Romania.
“There is no doubt that FDI levels will continue to go up in 2008, although privatizations – except for the energy sector – have been completed and authorities should focus their attention on encouraging greenfield investments from now on,” said Bandila.
“Over the past two years we have noted a significant increase in foreign investors requesting due diligence on locally-owned businesses, especially around EU accession, some of which was of a short-term speculative character. The overall level of FDI in 2008 is difficult to predict, but it is likely that the character of investment will change, to be more focused on long term returns. Romania certainly presents many opportunities for investors in a wide variety of economic sectors,” said Wilson Balachandra FAS Partner at KPMG Romania.
“In the future, investors can be expected to be interested in putting their money into IT/software, call centers, outsourcing, and pharmaceuticals; sectors where we have strong skills and our foreign language knowledge would be fully used,” Balachandra added. “Romania also presents many possibilities for growth in tourism. Much of the country is outstandingly beautiful. The climate is suitable for year-round tourism,” he added.
Generally, Balachandra said in the future investors should bear in mind that there is more to Romania than real estate opportunities. Furthermore, in a fast-moving market as Romania is, it is difficult to say for how long such investments will continue to be profitable.
“Prices on the Romanian market are now high compared with many other EU member states, so it is unclear what sorts of returns investors are likely to make in 2008. Much will depend on macro-economic conditions primarily in Romania but also globally. However, it is clear that Romania has many infrastructure needs, both in cities and in rural areas. So there will be a demand for the construction industry in the future. Wise investors will concentrate on long-term projects, rather than on aiming for short-term speculative gains,” said Balachandra.
Pogonaru of AOAR listed some of the reasons why some investors are still shy about venturing out on Romanian land.
“In my view, the biggest problem we have right now comes from the steep increase in the price of production means over the past few years and from the fact that most of the businesses are concentrated around eight or nine major cities, where the price of land and wage levels have skyrocketed,” Pogonaru said.
The administration should develop the infrastructure, so that investors can access other areas as well, up in the northeast or in the southwest regions of the country, where production means are still affordable.
“Unfortunately, I did not see any great efforts in this direction and this affects the future growth of the economy,” said Pogonaru.
Balachandra also mentioned infrastructure as a key area for improvement. Patrick Leonard, Tax Partner with KPMG said there are other matters for concern as well.
“Investors are discouraged by continuing instability of legislation and lack of consultation with the business community when changes to the law are made. Changes take place to the Fiscal Code too often and with short notice, by government emergency ordinances. Excessive bureaucracy is also a problem, as well as lack of clarity of legislation, particularly with respect to taxation.
Continuing political instability has also started to discourage some investors, who have been particularly concerned about poor coordination and communication between ministries,” said Leonard.

Ana Maria David