COMMENT: Romania's Social Democrats need to try harder to hook foreign investors

COMMENT: Romania's Social Democrats need to try harder to hook foreign investors
Liviu Dragnea will have to battle to persuade President Klaus Iohannis to accept him as prime minister.
By James Wilson of the EU-Romania Business Society December 12, 2016

The man who wants to become Romania’s next prime minister, Liviu Dragnea, is an enthusiastic fisherman, deploying not a dragnet, as his name might suggest, but a rod and reel to catch carp in his country’s magnificent lakes. Dragnea’s Facebook feed this summer featured photographs of him holding up a 13kg catch that he said had cost him “90% patience, 10% struggle”.

But the 54-year-old Social Democrat will need more than that if he wants to hook and reel in a new wave of foreign investors, a breed that has begun to spurn Romania’s murky business waters for more fertile feeding grounds.

According to the US State Department’s 2016 Investment Climate Statement, Romania provides an “attractive marketplace” with 19mn consumers, a well-educated and competitively priced workforce, a strategic location, and abundant natural resources. “Romania actively seeks foreign direct investment,” the report said.

The State Department is in the business of diplomacy, of course, which can sometimes involve sugar-coating difficult truths. At the EU-Romania Business Society, we also recognise Romania’s many attractions as a marketplace, but sometimes you have to call it as you see it – and the truth is that Romania’s recent record with foreign investors has been woeful.

Dragnea’s first challenge after his Social Democratic Party’s (PSD) emphatic win in the parliamentary elections on December 11 is to persuade President Klaus Iohannis to accept him as prime minister. A 2001 law bars convicted criminals from taking ministerial office and Dragnea was given a suspended sentence in April for electoral fraud. A battle of wills looms as Iohannis presses the PSD to find another candidate.

But if, as expected, he does become premier, Dragnea faces more substantial challenges, not least delivering on campaign promises of public sector pay rises and increased social spending, while keeping the budget deficit in check. In detailed spending plans issued on December 8, the PSD pledged to raise public sector wages by a fifth and state pensions by as much as 30%.

Dragnea also committed his government to meeting Nato’s 2% GDP target for defence spending, which would imply a 40% increase in the armed forces budget. To help pay for that he is planning to slash government spending elsewhere, notably in the finance, energy and communications ministries. He is also planning to cut the administrative costs of the parliament by about a fifth.

The likely new prime minister will only be able to keep the budget deficit within reasonable levels, however, if economic growth meets his own rather optimistic forecasts. The PSD’s plan is predicated on GDP growth of 5.5% in 2017; the International Monetary Fund (IMF) predicts growth of around 5%, but even that looks too hopeful after official statistics this month showed third-quarter growth falling to an annualised 4.4%, hit by weak demand and a slowdown in investments. That is still the highest growth rate in the EU, but Romania is officially the second poorest EU member state after Bulgaria, so it’s starting from a low base.

Investment blues

Foreign direct investment (FDI) is on a long downward trend. The greenfield investment monitor fDi Markets has recorded consistent year-on-year declines in FDI into Romania from 2011 to 2015, from a peak of 181 projects down to just 112 last year. It registered a one-third fall in job creation and a two-thirds fall in capital expenditure.

Such figures come as no surprise if you follow the troubles that have faced foreign firms operating in Romania. In July, the government lost its third major case at the International Court of Arbitration in Paris, which rejected its $900mn claim against the Italian utility Enel for alleged breaches of its privatisation accord. It had already been rebuffed in similar claims against Germany’s E.ON and the Czech utility CEZ.

It is also embroiled in a dispute with KazMunaiGas (KMG), the Kazakh state oil and gas company, whose Romanian subsidiary, KMG International, had an estimated $2.1bn worth of assets frozen in May two weeks after it announced a joint venture with a Chinese conglomerate, China Energy Company Limited (CEFC). KMG entered the Romanian market in 2007 when it bought a controlling stake in Rompetrol, whose assets include the huge Petromidia refinery and a network of petrol stations. The company, which employs 5,000 people directly in Romania, complains that is being deliberately undermined in a sort of back-door renationalisation. If the Romanians have to visit Paris again, they could be facing another defeat.

Under a strategy adopted in 2014, EU member states are meant to be working together to ensure the bloc’s long-term energy security, which means, inter alia, reducing its reliance on Russian crude and gas. Why then would Romania be so keen to chase off Kazakh suppliers, who are sitting on some of the world’s largest reserves? By effectively blocking the CEFC deal, Romania is showing a similarly hostile attitude to investment from China.

Officially, Romania provides “national treatment” for all foreign investors, which means that they should be treated no differently from local companies. That is not being respected. Romania should also be reminded of the EU-Kazakhstan cooperation deal signed a year ago, which ensures fair treatment for Kazakh companies operating across the EU.

My organisation, as its name suggests, exists to argue the case for market-opening investments and business development in Romania. Even we would not pretend that increased FDI is the answer to all the country’s problems, but it certainly has to be part of the solution if Romania is to live up to its potential.

Perhaps Dragnea should approach the problem as a carp fisherman would do. Every angler knows that it’s not just enough to be patient and wait for the fish to take the hook: you have to move around your target, try different baits or set-ups, in other words “play the percentages”. He must look beyond Romania’s borders and ensure that his government actually means what it says when it professes to welcome outside investment. Dragnea’s campaign slogan, “Dare to Believe in Romania!”, clearly served him well. I should say that I too believe in Romania, in its people and its future as a place to do business; I do not yet dare to believe that its next prime minister will recognise the importance of foreign investment. We will continue to remind him of it.