Foreign Investors Summit 2018 | Serban Roman (Enterprise Investors): “There’s a lot of money on the Romanian market, but entrepreneurs don’t always know what to do with it”

Florin Godean – Country Manager | Adecco Romania

• People are unable to adapt to companies they work at – because HR has to forecast what will happen in the near future and convince management about what to do to keep people in the company
• The market is changing and we have to adapt our companies, our industries and that’s how we keep our people onboard
• People from outside the EU are of course welcome, but let’s try to bring in people with higher education – those coming in now, low-skilled, are covering the problem we have today but they won’t be able to solve the problem we’ll have in the future

Laurian Lungu – Economic Advisor | FIC & Co-Founder | CPAG

• FIC has developed a platform called VaUrma
• FIC considers that Romania has the potential to become EU’s 10th largest economy by 2036. Any long-term project needs a vision
• Three main pillars to sustain growth over the next 20 years: infrastructure, human capital and private and public sector increased efficiency
• You need capital, labour and productivity to increase output
• We looked more into detail at specific numbers and did projections for GDP for all EU members – essentially, all the three pillars have three sub-pillars
• If you start to invest in one of the pillars today, the payoff comes in ten years
• Romania has one of the worst efficiencies in capital spending in Europe
• In education, Romania’s lagging far, far behind
• What we are missing with EU funds is that we don’t have the infrastructure in place and the experts. These skills have to be rebuilt
• Romania needs to build in institutional infrastructure to attract EU funds

Alina Andrei – Founding Partner at Cabot Transfer Pricing

• There is a dialogue with the Finance Ministry and a taskforce among Romania’s business environment – we keep making proposals but unfortunately we don’t see them applied in practice
• We’ve made a proposal to the ministry to improve legislation for R&D and encourage companies to invest in R&D as we can gain a competitive advantage over other EU countries
• You cannot hire people from outside the EU in Romania unless you pay them the average wage – there are pros and cons to changing this law – maybe a solution would be to focus on the industries that are worst hit by the lack of skilled workforce
• The perspective is to move to east. I had a client 5 years ago who said it was moving to Iasi, not Timisoara or Cluj. 10 years ago the flat tax and very cheap labor force was enough for investment, now it’s not an incentive that much.

Moderator – Prof. Dr. Jörg K. Menzer – Partner, Head CEE Offices | Noerr

Keynote Speech

Alejandro Hajdenberg – Resident Representative for Romania & Bulgaria | IMF

• Growth in 2017 was second-largest in the EU, mostly driven by private consumption but also to some extent by private investment
• At the same time, it was fueled by fiscal relaxation, rapid wage increases and a favourable external environment
• In the first half of 2018, economic growth has slowed and reached 4 pct in first two quarters
• We’re seeing that this growth has resulted in some signs of overheating of the economy – on three main fronts
• First, labour market: rapid wage increases and record low unemployment – growth of employment has reached levels prior to financial crisis – wage growth mostly in public sector, but partly also in private sector
• Inflation level has risen significantly – now down to 5 percent but still above target of central bank – due to external factors like energy prices but also reflecting strong growth of domestic demand
• The strong economic growth and domestic demand, which has surpassed the growth of economic activity has resulted in a deterioration of the current account balance and trade deficit
• On a positive side, the funding of the deficit has been good, mostly through non-direct flows like foreign investments and EU funds
• Large fiscal relaxation – the largest in Europe over past 3 years – fiscal deficit Romania in 2017 was second-largest in EU
• Separately, a deterioration in the composition of the budget
• The deterioration is pro-cyclical – the fiscal deficit has increased when the economy was growing rapidly, which is not usually expected. Usually, when the economy grows the fiscal deficit also improves
• We’ve also seen a large decline in tax revenues – this reflects significant cuts in taxes, especially VAT but also others, also reflects inefficiency in collection by the administration
• We will have a mission visiting Romania next week to assess the economic outlook and make suggestions for future development
• For the medium term, we’re predicting growth will remain around 3 percent
• Inflation will converge to the top end of the central bank’s range by the end of the year and will then remain within the range for the medium term
• Current account deficit will remain broadly stable on the medium term
• Deficit – 3.6 pct of GDP, above target of the government and the EU – we’ll assess whether there are measures to decrease the deficit by the end of the year
• Based on current policies, we’re also predicting deficit will remain above 3 percent in the next year
• Risks: external and domestic
• On the external front, the world economy is slowing down and so is the European economy – the main risk is changing market sentiments towards emerging markets
• The business cycle is maturing and major central banks are normalizing their monetary policies and this will affect the sentiment towards Romania
• Risks also related to trade – trade tensions related to US-China/US-EU disputes are generating uncertainty
• Domestically, main risks are further deterioration of fiscal policy and weakening domestic institutions
• This is a good period, when we should prepare for worse times – we want to protect these buffers
• Romania’s preparedness for bad times is deteriorating – external current account has deteriorated and fiscal deficit has also increased
• Public debt could rise to 50 percent of GDP in the following years
• We emphasise the need for predictability of policies and increasing the medium-term orientation of policies – so private sector can make consumption, saving and investment decisions
• Improving the mix of macroeconomic policies
• Re-energizing structural reforms to alleviate constraints on growth
• Preserve and deepen progress on rule of law
• We estimate that by improving efficiency on tax collection, revenues could increase by 2.5 pct of GDP
• The quality of public infrastructure in Romania is quite weak, so public investment management institutions should be strengthened
• Room for improvement in absorbing EU funds – Romania is not fully using the funds available – Romania’s GDP could increase by 10 pct by 2022 if absorption increases to 95 percent
• PPPs need to be adequately designed and implemented and make the right choices in implementing a project – whether directly through public funds or through PPP
• Sovereign Investment Fund – an initiative by the govt to shift the ownership of SOEs to a separate fund – we advise that this fund needs to be managed according to the best international practices – transparency, auditing, management selection, etc.

Panel Discussion | Eyes on the future. Ways to enhance Romania’s attractiveness as an investment destination

Radu Constantinescu – Managing partner | Qualitance

• We started as a small company and did outsourcing for big companies and we then extended this business and found a connection in Silicon Valley
• At that point we realised that we still had a lot to learn, even though our business was 5 years old
• We understood that it’s not just engineering capabilities that are important but also imagining what tech products would look like
• We got ourselves some advisors from the US and Romania and started a learning journey – how to scale up business and create things that have impact, and integrated a UX and design company from Silicon Valley and brought more value to our clients
• I see engineers looking to build products in Romania
• I look what can we do from small companies, bottom up; In other countries, the state creates premises for these small companies to succeed.
• Big development centers made a great job to keep engineers here
• In our case, we invest a lot in blockchain and AI. We see medtech as a big area.

Serban Roman – Vice President, Country Director | Enterprise Investors

• There are several sectors driving our economic growth and we see some healthy growth in consumption in some export-driven industries
• We’re a private equity fund, meaning we provide equity capital to companies – either to acquire shares or accelerate the expansion of companies by providing capital increases – almost 150 companies in 8 years – a good track record in this regard
• There are several nice companies who grew to dominate their markets and this created opportunity – not sure how many of them will attract people from outside, but they’ll create a lot of traction and growth within the country
• Romania’s entrepreneurial class is not as developed as neighbouring countries’ because our more brutal history – it’s much younger, but still very powerful
• There’s a lot of money in the market and entrepreneurs don’t always know what to do with the money – most of the projects we see today are entrepreneurs who want to sell their businesses – this shows that we’re not ready to conquer the region, the world – the problem of Romanian companies is usually that the founder is also the manager so it’s normal for them to be tired
• There are more opportunities for IT young guys to stay into the country and create something here
• There are sectors which are attractive and will look attractive – all these export-driven, B2B, production and retail. Other sectors like construction and infrastructure should come.
• There is opportunity to grow in each sector in Romania
• Automation has a predictable cost compared to the cost of the workforce in Romania

Daniel Heymann – General Manager | Dräxlmaier Group, Brasov, Romania

• We have one side the production side and the large interior development center.
• Sometimes we have huge troubles to get our people in the plant due to the poor infrastructure.
• We have over 15,000 people in Romania and we are one of the biggest employers in Romania. We are believing in Romania and it’s a good country.
• Just in the last 6 years, we invested just in Brasov, in building, some EUR 60 million.
• From our development point of view, we are getting good people where the universities are. Unfortunately, exactly these people are quickly moving in other lands. He said that some of these young people are moving to other car producers abroad.
• We are having factories that are doing the full capacity and full products, all of our portfolio and technology from international level. Our need for technical people is constantly growing. Aside from the workforce, the challenge is to train the people – keeping them here is the hard challenge and it’s not just the salary.
• In Brasov, we are the first to do the dual education system like in Germany. We are growing our own people.

Sebastian Popescu – Financial Advisor & Auditor | Noerr Finance & Tax

• The state aid launched in Romania about 10-11 years ago worked well.
• In the last years, state aid has become more familiar and more companies know about it. The state aid is granted by national authorities.
• Popescu explained that each member state can choose the structure of the state aid.
• “Romania chose to grant free cash in comparison to other countries such as Hungary or Poland that have more complex state aid mechanisms,” said Popescu.
• On companies eligible for state aid, it doesn’t matter if you are an SME, a large company, or a start-up. The investment threshold for this year to apply for state aid is EUR 3 million.

Dragos Cabat – Managing Partner | RisCo Business Intelligence

• Romania now is very divided between large cities such as Bucharest, Iasi, Timisoara and the rest of the country. We have a large IT infrastructure in these large cities. The rest of the country has huge problems, other areas have poor infrastructure and people that are not very well trained.
• Although we see an economic growth of more than 7 percent in 2017, which is strange and stupid, we didn’t increase our sales revenue in line with that.
• We need to solve the division in Romania between the poor and the rich and the community of young smart IT community and the rest of the country.
• Foreign investors are very optimistic about Romania. They are optimistic, but too many Romanians are going to work abroad. We can’t expect the government and state policies to make them stay. The only ones that can do this are the foreign investors.

Moderator – Prof. Dr. Jörg K. Menzer – Partner, Head CEE Offices | Noerr