Romania's Property Fund becomes political football

By bne IntelliNews December 3, 2009

Graham Stack in Bucharest -

Dana Lulache, head of Romania's Property Fund, says the fund is more about kick-starting capitalism than compensating people for communism - and insists that the political instability currently plaguing the country won't scupper it.

The latest potential hiccup in the rather tortuous history of the fund is over the fate of the international asset manager that a government commission chose in May from among eight bidders to manage the fund, which holds 88 minority stakes in a broad spectrum of major local companies.

The involvement of Franklin Templeton, home of emerging market guru Mark Mobius, has now been put in question by repeated delays to the signing of the contract to hand over control of the fund. The Ministry of Finance, still the fund's majority shareholder, has now declared that the signing of the contract should be delayed until a new government is formed after the presidential run-off election to be held on December 6. This places a question mark over Franklin Templeton's future role: the deadline for signing the contract with the US fund manager will expire on December 9, six months after it was chosen.

Mircea Ursache, chairman of the Property Fund's supervisory board and the man held responsible for the delay, is a member of the Social Democratic Party (PSD), whose candidate Mircea Geoana is likely to win the second round of Romania's hard-fought presidential elections and then preside over the formation of a new coalition government.

The PSD - the Communist Party successor - has frequently criticized the Property Fund in the past as an unsuitable means of compensation for those whose assets were expropriated by the communists. Ursache, in particular, has stated that he regards Franklin Templeton's reputed €13m annual fee as too expensive, and that it would be cheaper to retain the current Romanian team under the leadership of the 44-year-old Lulache.

However, Lulache says a group of individuals like her team, "however good, will never be able to match a global institution when it comes to maximising the value of assets under management." Indeed, the law requires the fund be managed by an international asset management company selected in a competitive tender.

She also denies that party allegiances will scupper the Property Fund project. "Politically, all parties that might govern have been involved in creating the legislative framework for the fund," she says.

Other concerns include the potential conflicts of interest between the state's ongoing role as owner of 66% of the fund and the fund's management of stakes in strategic companies in energy and infrastructure. "The state's ownership will have been reduced to zero by the time of closing the fund in 10 years," she says, "and the articles provide for far-reaching independence of the fund manager."

She also denies Romania's budgetary cash-flow problems could prompt the government to tap the fund for cash, which has a market value of a whopping €4bn. Following recent divestments, the fund is one of Romania's richest companies with a cash pile of nearly €500m, according to financial analysts. And with the government frantically searching for ways to fund the budget after the International Monetary Fund and EU halted disbursements of an international loan due to the political paralysis in the country, this cash pile could be seen as easy pickings. Lulache says the fund bought government treasuries a year ago as a diversification strategy, but that there has been no pressure - "not even a phone call" - telling the fund to credit the government now, "although perhaps they would like us to."

Kick-starting capitalism

Although the Property Fund was formally set up to compensate victims of communism, Lulache says the fund is really a national investment flagship destined to kick-start capitalism - and all the more relevant given the current crisis.

Some 20 years after the fall of communism, Romania is the only emerging European country to have established a procedure for full compensation of those expropriated under communism. In 2005, legislation was passed setting up the fund consisting of minority state stakes in around 100 enterprises, with shares going to the tens of thousands whom it was impossible to compensate by restitution.

But Lulache prefers not to dwell on the past. "The fund was originally set up for these specific reasons, but it has the potential to be a whole lot more." She sees the real role of the fund in the future as a driving force in Romanian capitalism, rather than just compensating for communism. She talks eloquently of the Property Fund as an energy and infrastructure national champion, which after floating on the stock exchange will attract long-term money from institutional investors, including pension funds. "It will be a flagship company for the country and its capital market, and it will also improve corporate governance in the 88 companies it owns stakes in."

And although stock markets across the region went belly up last year, everyone is talking about energy - and this is one of the trumps of the fund, as it has stakes in several energy companies. Some 70% of the fund's current value consists of three assets: a 20% stake in Petrom, the country's largest oil and gas producer and distributor; a 20% stake in Hydroelectrica, Romania's hydroelectric power generator; and a 20% stake in Nuclearelectric, the nuclear power generator. "These assets mean that the fund is a core major energy and infrastructure holding," says Lulache. "Energy is a perfect defensive investment - in good times it surges, but in bad times it holds well. It is also a sector which is difficult to access for private investors, so this is a unique opportunity."

Besides energy and power production and distribution, the fund owns stakes in national airports, telecommunications and the post office.

The fund's strategy, as fixed in legislation, restricts investment largely to Romanian listed and unlisted companies, ensuring that the fund will remain a national project. But there are no restrictions on foreign investors participating. Mobius has said a stock market listing at home and internationally would follow within a year of Franklin Templeton taking charge of the fund. "It is theoretically doable within 6-12 months," says Lulache, "so I would not say that the floatation is no longer on the agenda for 2010."

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