Romanian government envisages €10bn sovereign wealth fund

By bne IntelliNews February 13, 2017

Romania’s government discussed plans for the proposed Sovereign Fund for Development and Investment (FSDI) on February 9, the government announced. The aim of the fund is to identify and finance profitable and sustainable investment projects with an impact on durable economic development and workplace creation in the long term, according to a memorandum drafted by the ministry of economy. 

There are some concerns about the timing of the fund’s creation, given the government’s recent attempt to adopt an emergency decree that would water down anti-corruption legislation. Although this was later revoked, the government’s credibility is low. Creating new institutions for the management of public money is a delicate issue at this moment. There are also fears that the fund could be diverted to finance the budget deficit, as budget revenues will be hit if dividends from state-owned companies are channeled into the fund. 

The details of the project have not been decided yet, but the plans for the fund were sketched in the 2017-2020 Ruling Strategy of the senior ruling Social Democratic Party (PSD). Under the strategy, the government wants to put together its holdings in profit-making companies, evaluated at around €10bn, as the capital of the fund. 

The fund will cooperate with IFIs such as the European Bank for Reconstruction and Development (EBRD), the European Investment Bank and the World Bank to finance strategic projects for the country with systemic impact.

The fund will use the dividends received from the companies in its portfolio plus the revenues from issuance of shares and bonds to develop existing or set up new businesses, alone or in partnership with investment funds or direct investors, in priority sectors. The investments should be self-sustainable. 

The projects envisaged include the development of production facilities in agriculture and industry, but also the capitalisation of key companies such as flag carrier Tarom, railway company CFR, Santierul Naval Constanta shipyards, CEC savings bank and nuclear company Nuclearelectrica.

In addition, by listing state-controlled companies that are not yet listed, the fund will contribute to the stock exchange's capitalisation - the only condition still to be met by Romania's capital market before being upgraded to emerging market status. The fund will also contribute to the absorption of EU funds by co-financing projects. 

A commission has been set up to give the relevant institutions a chance to express their views on this plan, Minister of Economy Alexandru Petrescu said after the government’s talks on the fund, quoted by Agerpres. The commission will include representatives of the ministry of economy, ministry of finance, competition body Consiliul Concurentei and financial markets supervisor ASF.

The project, although in principle reasonable, is vulnerable to criticism for at least two reasons. Firstly, giving the state a more important role in the economy requires robust credibility from the government, but the credibility of the government plunged after its recent attempt to help corrupt politicians by amending relevant legislation.

There have been cases, most recently the supplementary excise tax on car fuel, when funds collected for a particular purpose ended up financing the budget deficit. There are no guarantees that the fund will not be eventually used to finance more pressing issues such as fiscal slippage or property restitution instead of financing key infrastructure projects.  

In order to allay fears on this issue, the government specified that it has started talks with "the main players in the national investments area", so that the launching of the fund will receive their "approval and their general willingness". In this regard, the transparent management of the fund is of paramount importance, as is defining a firm investment strategy. The government has not specified yet who will manage the fund, but it did not express the intention of appointing a private manager. 

Secondly, the plan will have a significant impact on the budget at a critical time. The government has just instructed its representatives to vote for a 90% payout ratio (versus the statutory 50%) in companies where the state is a majority or minority shareholder. If the fund takes over all the profitable companies, the budget will lose the dividends, which might make the difference between observing or breaching the 3% of GDP deficit target. Last year (when the payout ratio was 75%), the companies where the state is still a shareholder paid €500mn (0.3% of GDP) to the budget, of which €330mn was paid by companies in the energy sector.

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