Adina Postelnicu in London -

Decades after the Communists seized many people’s properties and assets, the Romanian state is trying to right past wrongs via, ironically enough, the free market. But the investment fund being created for this is proving divisive, drawing applause as well as criticism even before it's been fully implemented.

Hoping to rectify some of the past injustices inflicted by the communist regime, the government has created a €3.9bn fund made up of a mishmash of state assets to reimburse victims who had their assets stolen. These owners are to get shares in the newly created fund, the Proprietatea Fund (Property Fund), according to the value of their successful property claims.

With the fund set to be listed on the Bucharest Stock Exchange (BSE), the victims will be able either to sell their shares or keep them and benefit from any rise in their value.

However, while very few dispute the necessity of the fund, the mechanism set for pricing and allocating the shares has come under fire.

The underlying assumption of the fund is that people will be compensated for the loss of their property with securities that should rise, but could also fall in value. This will inevitably hurt disproportionately those victims who are either too old or too poor to wait for a better time to sell their shares.

"The mechanism looks like something the mob might have come up with. It’s absurd to compensate people by giving them risky assets," reckons Florin Citu, chief economist at ING Romania.

Mixed bag

There are gripes too about what is actually going into the fund. The portfolio consists of shares in 114 companies in energy, transportation, banking and telecommunications. Among them are shares in prized companies such as Petrom (the country's largest oil company that was recently taken over by Austria's OMV), Romtelecom (in which Greece-based OTE has 51%) and Transelectrica. However, there are also stakes in loss-making enterprises that still depend on state support.

"I agree that some of these companies do not meet the fund’s purpose…there are some loss-making companies and some of them are even close to bankruptcy," Alexandru Nicolae Paunescu, the president of the Proprietatea Fund conceded to bne in an interview. "We were not consulted when the portfolio was created."

However, Paunescu says that discussions have since taken place to weed out the worst assets and most inefficient companies.

Even so, analysts argue it will be difficult for investors to evaluate the fund’s proper value given the lack of reliable information about non-listed companies, though this should be mitigated somewhat by the fact it will eventually be listed on the BSE.

The fund's portfolio also includes cash holdings from unpaid debt owed to Romania by countries in Africa and the Middle East. According to Paunescu, the fund has already received around €4.4m from debt repayments by countries including Bangladesh, Iraq, Russia and Albania.

Russia redux

In an attempt to speed up the process of listing the fund on the BSE, the Finance Ministry issued draft legislation that, among other things, would allow people to sell their shares even before the fund is listed. Critics have voiced fears that such a provision would help rich people buy up these shares from poorer people at steep discounts before the market gets to price the fund properly, in a similar way that Russia's oligarchs amassed their wealth during the 1990s.

"This favours those with lots of liquidity; those [without money and] who have waited years to see their money back will decide to sell the titles on the black market at a big discount," believes ING's Citu.

Florin Petria, analyst and editor-in-chief of the well-known Piata Financiara magazine, agrees. At best, Petria said, the Romanian government should have first completed the compensation process, and only then listed the remainder of the fund's shares on the stock market. Even better, he argues, would have been for the state to have compensated victims of confiscation with Romanian government bonds. That way, he argues, "they could sell those securities in a very transparent manner on the secondary markets."

According to the Finance Ministry's draft law, those who have claims of less than €200,000 can receive the sum immediately in cash. "Such a high limit puts a question over the purpose of the fund," Petria adds.

So far, it is not clear when and how much of the fund’s shares will be listed on the BSE. "Probably no later than 10 months after the new ordinance is approved by the government," says Paunescu.

In the first three years, the fund will have to sell at least 75% of its shares on the internal market. Moreover, the fund is restricted to investing only in the European markets.

Despite all the above issues, Corin Trandafir, partner at a law firm affiliated with the New-York based Hertzfeld & Rubin, reckons the fund "is a good thing." But he adds one condition – it has to be listed on the BSE.

"The fund’s main flaw is that it came so late," Trandafir says, adding that the fund should also only compensate those whose properties do not exist anymore, while the others should continue to seek compensation through the courts.

His firm, Rubin Meyer Doru & Trandafir, is representing the survivals of Nicolae Malaxa and Max Ausnit – two of the country's most prominent businessmen whose factories were nationalised by the Communists. The government has issued reimbursement titles worth €327m for Malaxa’s holdings and $11.4m for Ausnit’s.

About 3,000 claims are currently being evaluated by the National Authority for Property Restitution, an organization within the prime minister’s office. About 2,669 approvals have been granted with a total value of the approved claims is approximately €500m.

The fund is currently run by a the Supervisory Council, which reports to the Finance Ministry, but a management company will be selected through an international tender later this year.

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