Fondul Proprietatea: Draft Emergency Ordinance on Sovereign Fund leaves state enterprises at the discretion of political interference and abuse

Fondul Proprietatea has published a statement saying it is “highly concerned” by the draft Government Emergency Ordinance (“GEO”) setting up the general framework applicable to the Sovereign Fund for Development and Investments (“FSDI”), published by the Ministry of Public Finance on 29 September 2018. According to FP, “The draft disregards corporate governance principles and transparency rules, thus providing no guarantees that such instruments would remain shielded from potentially corrupt practices and abusive decisions resulting from political interference.”

“Fondul Proprietatea is first and foremost concerned with the possibility of portfolio companies in such a fund to be exempted from the corporate governance principles established by GEO 109/2011, meaning that SOEs (state-owned enterprises) will no longer have the obligation to select a professional management and be transparent towards the general public, minority shareholders and the Ministry of Public Finance. Also, of utmost concern is the fact that these SOEs will cease to observe the rights of the minority shareholders.

In addition, the current draft GEO lays the foundation for FSDI which would manage highly valuable assets belonging to all Romanians, but offers no safeguards against arbitrary decisions taken by the respective fund’s administrators and managers, through independent oversight by the Financial Supervisory Authority. Basically, there is no watchdog in terms of efficiency and honesty.”

Commenting on the draft GEO, Johan Meyer, CEO of Franklin Templeton Investments Limited and Portfolio Manager of Fondul Proprietatea said: “Setting up a Sovereign Fund for Development and Investments is not necessarily a bad idea, but needs to be properly established so that it can help to develop and put into action a common vision of Romania’s development strategy through better management of SOEs to the advantage of all Romanians. However, if founded on a total disregard of corporate governance and transparency rules, this instrument will surely do much more harm than good. It is of paramount importance to select professional managers in a transparent manner and to hold them accountable for the entire duration of their mandate. We have seen many examples of managers and administrators, selected arbitrarily and without merit, managing SOEs into insolvency and to the verge of bankruptcy. Just imagine how infinitely worse it would be to concentrate the control of the largest, most profitable SOEs in the hands of a few people, not transparently selected, nor accountable for their actions. Romanians cannot afford to let the political leadership play hide and seek with the country’s assets worth billions of euros.”

FP’s statement continues: “It is high time that the current Cabinet pays attention to and implements the provisions of the Governing Program 2017-2020, reading that “Improving corporate governance in public enterprises is one of the structural reforms which deserve to be taken into consideration for implementation.” This can be achieved by creating a legal framework for future FSDIs which offers good premises for the growth of SOEs instead of leaving loopholes by which the “smart guys,” who plagued the functioning of these enterprises for many years, could return.

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Considering the damaging aspects deriving from the draft GEO published by the Ministry of Public Finance, Fondul Proprietatea believes the following modifications would make it a valuable instrument, serving its strategic investment purpose and bringing value to Romanian citizens:

• The Sovereign Fund for Development and Investments should comply with transparency rules similar to those applied to listed alternative investment funds regulated by the Financial Supervisory Authority (e.g. Fondul Proprietatea, SIFs);
• The monthly reporting of the net asset value (NAV) should be compulsory for the FSDI, and subjecting this reporting to ASF’s supervision should guarantee the accountability of the FSDI’s management as regards the control of the portfolio companies;
• The appointment of FSDI supervisory board and directorate members should be made in a transparent and competitive manner, in accordance with the provisions of GO 109/2011;
• The remuneration of the directorate and supervisory board members should be dependent on performance objectives (e.g., increase of NAV/share; the number of companies in portfolio listed on the stock exchange after the setting-up of FSDI; increase in the profitability of portfolio companies);
• Listing of the companies in the FSDI’s portfolio should represent a priority for the management bodies in order to increase transparency, ensure accountability and implement sound corporate governance principles;
• The maximization of returns and the increase of portfolio companies’ share value should be the main objective of the FSDI. Also, in the alternative, the FSDI should aim to develop the Romanian capital market so that Romania is upgraded to emerging market status by listing the companies in the FSDI’s portfolio with a free-float of at least 25%.

In addition, in order to be recognised as a sovereign wealth fund from an international perspective, the FSDI should implement the Santiago Principles as agreed by The International Working Group of Sovereign Wealth Funds.

Fondul Proprietatea has sent a detailed form of the abovementioned proposals to the Ministry of Finance and has expressed readiness to engage in a dialogue, offering solid arguments in favour of its suggestions, based on OECD good practices. After Poland became the first CEE country to be upgraded to a developed market, Romania could, in the year of its EU Presidency, aspire to an emerging market upgrade, but it needs to get things right.”