BLACK SEA BLOG: What's preventing Romania from developing faster?

By bne IntelliNews September 26, 2013

Bogdan Preda in Bucharest -

Romania's international bonds are providing some of their best returns these days, but that has to do more with appetite for short-term speculative moves driven by decisions of the US Federal Reserve rather than the Balkan country's real prospects. There is, without doubt, something rotten and strange about Romania these days, which not even the International Monetary Fund can deny - even though it continues to show a lot of willingness to lend the country more money.

More than nine months have gone by since the current governing coalition won a nearly 70% majority in parliament, the widest margin in more than a decade and a half. But Romania's government has so far failed to move the country forward to any degree or show even any signs it can drag it out of the post-crisis torpor.

The poor performance of the new government presents Romanians with a lack of options, given that they have exhausted nearly all parties and alliances in the past 23 years since the country broke with Communism. It feels like no political force is truly capable of pulling together as soon as it comes to power and finds itself in control of what's left of public assets and money. In a country that's a member of the EU and is also still considerably richer in natural resources when compared with its neighbours, this situation, which is closer to Latin American models, is hard to fathom.

With the exception of the period between its pre-accession and post-accession to the EU, which lasted from 2005 to 2008 and saw large amounts of money pouring into the country, Romanians have had to put with slower progress because of their own politicians. Romanians are now generally voting for what they hope will be the lesser of evils rather than for instigators of genuine progress.

One would have expected the two experienced political parties that won the elections last year - the Social Democrats and the National Liberals, which have formed the Social Liberal Union coalition - to know exactly what to do from day one of their government. And yet the much-needed foreign investments are mostly absent and the members of the governing coalition are far from having truly reached some sort of a consensus as to how to achieve an economic boost apart from introducing some new taxes.

The only good news so far comes from a better-than expected harvest this year, which helped keep consumer prices in check. But such seasonal effects can be of help only in the short term in the absence of sounder policies that need be implemented in the medium and long term.

Private sector pains

The lack of planning and consensus within the government not only hurts what's left of the state-owned economy, but also seriously affects business decisions in the private sector, which has started to become less competitive. Hundreds of thousands of small enterprises either closed or applied for insolvency in the past years as a result of the crisis and increasing costs.

In fact, the new government has managed to scare off considerable investment from foreigners. It started by altering legislation that had previously attracted investors in the renewable energy industry by reducing the subsidy schemes, causing large banks to no longer finance such projects. Companies such as CEZ of the Czech Republic, which is a major player on the Romanian energy market, recently stated that it faces losing up to €40m from that change in the legislation, which has decreased or postponed the awarding of green certificates to investors.

The central bank warned at the end of August that instead of looking at new financing opportunities on the local market, the local subsidiaries of foreign banks, which dominate Romania's banking industry, have repatriated as much as €5bn over the past 18 months. Such a lack of interest for new financing opportunities in the local market is also reflected by the percentage of non-performing loans, which has now reached about 30% of the total loans.

The absence of consistent incentives, mismanagement in the state sector, failure to absorb enough EU funds and the banks' reluctance to resume lending, has meant that successive Romanian governments doubled the country's foreign debt to €53.8bn in May, from €25.2bn at the end of 2008. About half of the new loans ended up in government hands, which used them to pay pensions and restore previously reduced state wages, even though the slow pace of economic recovery didn't justify such measures.

Lack of Accountability

The government, in another strange move in April, moved to change legislation that awards large national contracts via bidding procedures to offer them directly via a procedure called "competitive dialogue," arguing that this would speed up investments. The move raised questions about whether the country is still preserving a healthy competition environment.

More recently, the leaders of the governing Social Liberal Union coalition have clumsily handled an argument over the Rosia Montana open mining gold project, which is being run by Canada's Gabriel Resources. National Liberal Party head Crin Antonescu unexpectedly spoke out against it, forcing Prime Minister Victor Ponta to postpone a parliamentary debate on the project. The public spat showed cracks in the coalition, especially as it was followed by domestic accusations of corruption and even insider trading. Worse, it has resulted in threats of legal action from Gabriel and its billionaire backers to claim up to $4bn in damages if the project doesn't move forward.

A growing number of Romanians are now becoming increasingly worried about what lies ahead, prompting thousands to take to the streets in several anti-government demonstrations this September - the largest number of protestors in the past decade. Among their gripes are corruption, lack of transparency and the feeling that greedy politicians have failed to fulfil their electoral promises. Such protests mirror those in neighbouring Bulgaria, where daily demonstrations have been demanding the resignation of the government for almost two months.

Take for example one of the latest reports published by the Competition Council on August 28, in which it shows beyond any doubt that the cost to construct 1 kilometre of highway in Romania is on average three-times higher than in neighbouring Bulgaria, where corruption is also widespread. Romania, the second-biggest new eastern member of the EU after Poland, has only 548km of highways, especially because of such high construction costs. The country's National Highway and Roads Company in the past three years started tenders for 370km of new highways, but thus far only 42km have been completed, according to business daily Ziarul Financiar.

Escaping the state

The government's project to appoint private sector executives to manage its biggest state companies, as part of a publicized effort to stop losses now totalling hundreds of millions of euros and make them more efficient, also faces failure.

Some of the most prominent executives that embarked on such projects have either resigned, were forced to resign, or are about to resign, blaming political pressure and charging political parties of willing to use the companies as cash machines for electoral purposes.

Gabriel Dumitrascu, head of privatization at the Economy Ministry, was quoted by HotNews on September 19 as saying that politicians use anti-corruption prosecutors to wield control over state-owned companies. "I'm coming from the private sector and don't find my position working for the state as convenient," Dumitrascu said. "It's not comfortable to see that any day one or another threatens you with the National Anti-Corruption Department or the Court of Accounts."

There are many other recent cases of executives being put under pressure by politicians. Romanian national airline Tarom CEO Christian Heinzmann, who previously held executive positions in the airlines industries in Europe and Asia, was told to cut his term to one year from four years over differences with the company's board. Heinrich Vystoupil, a former Austrian Airlines representative in Romania and Moldova, who was about to become Tarom's general manager last year, refused to take up the job with the Romanian state airline a week after his appointment.

In April, Dimitris Sophocleous, a former Romtelecom and AD Pharma executive, left his position as general manager of passenger rail company CFR after the government rejected his plan to turn around the company. So did former banker Lucian Isar, who headed CFR's board. In a similar move, former banker Mustafa Aysun, head of the board of freight rail company CFR Marfa resigned less than two months after taking the job and was replaced with Sorin Mindrutescu, former CEO of Oracle Romania. However, on September 18, Mindrutescu also resigned.

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