Improving the management of public institutions has always been one of the FIC’s primary goals. The smooth functioning of institutions such as Parliament, Government, various state agencies as well as state-owned enterprises (SOEs) performing key activities in the economy provides the necessary framework for the healthy development of the business environment. Quality public services such as national security, public order, justice, healthcare, education, utilities and infrastructure is one of the main prerequisites for a competitive economy.
Over the last two years, a number of positive developments have been recorded in this area. The legislative framework on transparency in issuing new legislation has been further improved and it appears now also to be better implemented, as the consultation process between the authorities and private stakeholders is more systematic and better structured. GD no. 88/2013 established the framework for prioritizing public investments. The Government took a step towards better monitoring of budgets of public entities and set up a Delivery Unit to ensure implementation of its commitments in four areas; fiscal administration, public procurement, energy and youth employment. While implementation of GEO no. 109/2011 concerning professional management of SOEs has remained hesitant, the financial results of some of the companies which have applied the provisions of the GEO have been improving. Some progress has been recorded in advancing legislation on covered bonds. It also appears that the justice system is much more successful in tackling corruption, as witnessed by the substantial increase in the number of high-profile cases either prosecuted or for which final convictions have been secured over the last two years.
Since the publication of the previous White Book, the Government has passed GEO no. 88/2013 which set up the framework for prioritizing public investments. It seems that its provisions were taken into consideration when drafting the budget for 2014. This was expected to result in a concentration of the limited resources available towards high importance projects and a much higher rate of completion of projects. Unfortunately, there was instead a significant decline in the total volume of public investments, by about 0.3% of GDP compared to 2013, with, for instance, only about 50 km of new motorways being opened to traffic in 2014, some of which did not even meet adequate quality standards. This occurred in a year in which fuel excises were significantly increased specifically to provide additional resources for investments in infrastructure, and large amounts were available in EU grants but not used.
While it appears that there is no direct connection between the poor performance in public investments in 2014 and the attempt to prioritise them, the Government should analyse what happened last year and draw the necessary lessons. In the light of those lessons, the prioritisation process should be further refined and clear responsibilities should be assigned to those in charge of the implementation of the investment program once it has been established. This process has become even more urgent as progress on the motorway building program appears to have slowed even further, with only 10 more kilometres expected to be inaugurated in 2015.
Since May 2013, the date of the publication of the previous White Book, there has been little progress if any in this area. Salaries for some categories of public staff – most notably in education and healthcare – have been marginally increased, but the fundamental issue of properly rewarding responsibilities and skills has not been addressed. People holding key positions in public institutions – including the President of the country, the Prime Minister and Ministers - still earn salaries lower than many middle-managers in multinationals or even in some SOEs, which creates the perception that such positions are coveted based on adverse selection and for the wrong reasons. Other people with valuable and expensively-acquired skills, such as doctors, have such low wages that many prefer to emigrate. The longer such situations persist, the higher the price Romania pays, as talented and honest people prefer to avoid public service and consequently key activities are either not properly performed, or are performed at much higher costs.
The average salary in the public sector is not the main problem. According to official statistics, the average wage in public administration (defence and similar sectors not included) is higher than the national average wage. The issue is how to better distribute the total payroll fund to individuals working for state institutions, without increasing it, by rewarding performance and responsibility. To do this, the authorities should draw from international experience, for instance by using the expertise of highly-respected International Financial Institutions, such as the World Bank.
Some progress has been recorded over the last two years. In 2013, GEO no. 88 was passed, which among other provisions stipulates the setting-up of a system for checking, monitoring, reporting and control of the financial statements, legal commitments and budgets of public entities. In 2014, a Delivery Unit was created within the Prime Minister’s Office, with the purpose of monitoring and delivering results in four areas; fiscal administration, public procurement, energy and youth employment.
While we welcome the progress made in these areas, we believe much remains to be done on other issues. The authorities still appear not to have a proper monitoring system for the implementation of contracts involving public institutions, as demonstrated by the huge delays in delivering motorways on time. Some commitments assumed in connection with international organisations seem to fall below the authorities’ radar, as demonstrated by the attempts to pass a law on the insolvency of individuals, just months after the IMF Agreement prohibiting this was itself ratified by a law. Provisions of some “soft” laws – i.e., those which do not provide penalties in the case of non-observance – are not complied with or at least not properly complied with, as we have noticed in the case of Law no. 52/2003 as amended by Law no. 281/2013 concerning transparency in decision making in public administration, or in the case of GD no. 109/2011 concerning the management of SOEs. Consequently, we believe that the Government should improve its monitoring processes, either by expanding the capacity of the Delivery Unit and cascading its activity to lower-level entities (such as ministries and public agencies) or by setting up other suitable monitoring vehicles.
Transparency - new legislation should be the result of a comprehensive consultation with relevant stakeholders, accessible to all and easy to understand.
Predictability - any change in legislation should take place in the context of a long-term strategic framework and allow sufficient time for stakeholders to adapt to, and implement new rules.
Stability - the state’s rationale for new legislation must be coherent, institutionally consistent and free from arbitrary or retroactive amendments.
The passing of new legislation without proper public consultation with relevant stakeholders, as well as frequent changes in legislation are making the Romanian investment climate more uncertain and risky, and less competitive. Investors which must constantly adapt or acquire expertise to cope with the changes incur additional costs and require higher potential returns to initiate new investment projects. There have been many examples of stakeholders not being allowed an active role in the legislative process or of their efforts to improve legislation before it was issued being ignored.
To improve the regulatory framework in this area, steps were taken by amending Law no. 52/2003 on decisional transparency in public administration. The amendments to Law no. 52/2003, mainly consisting of stronger consultation requirements, were finally approved at the end of 2013 by Law no. 281/2013, but the provisions are not uniformly applied.
Currently there are situations in which two or more regulations have conflicting provisions, which raises many difficulties for the business environment, leading to diverging interpretations, and consequently to delayed or cancelled investment projects in many cases.
An additional source of difficulties in the uniform application of the law relates to the quality and stability of the legal framework. Lawmaking is still dominated by Emergency Ordinances - which usually fail to respect a minimum level of transparency and often give no space for proper assessment, preparation and consultation – though they have slightly decreased in numbers in 2014 as compared to 2013.
Any new regulation should respect the three principles outlined above and should be accompanied by an impact assessment which takes into consideration the ways in which businesses, consumers or other laws and regulations will be affected by the new legislation. GEOs should only be used in cases of real urgency, and this urgency should be properly explained.
There should be a clear regulatory separation between the roles of the state as policy maker and shareholder of SOEs. The overlapping of the two functions leads to inconsistent management of SOEs, which are often arbitrarily governed, making them less competitive and more unpredictable for their business partners. A coherent and transparent separation between the state’s roles as shareholder and as law maker would encourage investors to develop businesses in Romania and also ensure the conditions for the appointment of professional management in SOEs, leading to the development of a functional market. This regulatory separation should be reinforced by a full administrative separation, with the state’s role as shareholder in SOEs being transferred to one or more legally separate entities within the Government, which would be independent of the various ministries. The state should clearly define its behaviour in each of its capacities and disclose promptly any conflict of interest.
Separation between the state’s role as shareholder and as lawmaker should be formalised. The state’s role as policy maker should be to enact rules and regulations governing various sectors of the economy, while the state’s role as majority shareholder in SOEs should be to maximize those companies’ value for shareholders. Between the two roles, conflicts often arise because both roles are exercised by the same Government entities, usually ministries.
To manage these situations, corporate governance rules should be defined and implemented along the following lines: (i) SOEs should not be managed differently in any way from private companies, and general laws and regulations should be fully applied. (ii) Any regulations applied exclusively to SOEs should observe the transparency principles outlined above. (iii) Any regulations which affect SOEs should not grant them competitive advantages in competition with private entities on the free market. (iv) The state should diligently exercise its role as shareholder but refrain from becoming involved in the day to day management of SOEs. (v) Any obligations and responsibilities outside the generally accepted practices that SOEs are required to undertake should be clearly mandated by laws complying with the above recommendations. (vi)The state should disclose the ownership rules, meaning the overall objectives of the state ownership and its specific role in the corporate governance of the SOE. (vii)The ownership rights should be clearly delineated within the state’s administrative responsibilities as mentioned in the corporate governance recommendation.
For example, a very specific application of this principle could be achieved by the creation of a sovereign wealth fund which would take over the participations of the state in SOEs. The purpose of this fund should be to increase the value of the investments entrusted to it. The fund should be as independent as possible from political influence and it should operate in close connection with the business environment. Its main purpose should be to generate value for the state.
The implementation of the corporate governance ordinance in SOEs (GEO no. 109/2011) has generated beneficial effects, both financially and in terms of transparency for the companies which apply these provisions. There are still a large number of companies which either have not initiated the implementation of the provisions of the ordinance, or have not yet finalised the selection process for professional management. In some cases, the candidates for the board recommended by independent consultants and ultimately appointed were still politically affiliated or had no relevant professional experience.
There are cases when board members were appointed based on recommendations from independent human resources companies but were soon dismissed due to rejection of the administration plan, without proper justification.
The setting up of an inter-ministerial committee at government level whose role is to supervise the implementation of the GD is a step in the right direction but any tangible results of the work of this committee have yet to be seen.
The more the implementation process is delayed, the more chronic inefficiencies will affect SOEs. Likewise, a single public authority should be appointed to oversee the enforcement of the GD in all SOEs. This would streamline the process and would be a new sign of the government’s commitment to reform.
The inclusion of a requirement for SOEs to implement the GD’s provisions within a set period and to specify time limits on appointments of independent boards and general managers would be highly beneficial.
The GD is currently going through the parliamentary process of approval and we recommend that the Romanian Parliament should take into consideration and include in the law the feedback received from private stakeholders.
The listing procedures for SOEs initiated by the GOR in the last few years and supported by International Financial Institutions (IMF, World Bank) have had a positive effect on the Romanian capital market. Further listings and secondary offerings will contribute significantly to the local capital market’s chances of being reclassified from frontier to emerging market status.
The listing procedures should be formalised in a multi-year strategy approved by the Government, where companies up for listing are named, with clear timelines and expected listing dates set for each of them. In order for the transactions to have high chances of success, stakes to be listed should be at least 20% of the total shares issued by those companies.
Organisation of all Initial Public Offerings (IPOs) and privatisations should be centralised under one government entity, which should help ensure the highest market standards for each transaction.
Higher transparency requirements and a diversified base of shareholders for listed companies should help SOEs improve their financial performance and generate attractive returns for the state as well as new investors including Romanian retail investors and pension funds. The growth of the capital market should also allow SOEs and private companies to raise the necessary funding for investment projects, and this should lead to an acceleration in GDP growth.
In the medium term, the Government’s efforts to bring these companies to the market should lead to an upgrade of Romania’s capital market to emerging market status, which would encourage more foreign capital inflows into the Romanian economy. There are several suitable IPO candidates: Hidroelectrica, CE Oltenia, Telekom, Bucharest Airports, Tarom, CFR, Salrom, Constanta Port, CEC Bank.
Fiscal stimulants should be offered to encourage both medium and long term investment in Romanian state companies, as this would enhance the growth of the Romanian economy.
Recent practice in relation to listed companies that are facing financial difficulties and are subject to a procedure regulated by Law no. 85/2014 on insolvency prevention and insolvency procedures indicate certain inconsistencies or gaps in the applicable legal framework. For a listed company that is undergoing a financial recovery procedure, such as special administration or reorganisation, the general publicity and approval requirements applicable under the capital market law might prevent quick turnaround measures such as a share capital increase or a change in control. Law no. 85/2014 includes only very limited exceptions to the general requirements, and where such exceptions are provided, the issue of minority shareholders and protection of ownership rights remains unclear. Moreover, the delisting procedure is cumbersome and lengthy, even though a quick de-listing might be an appropriate step for a company facing financial difficulties.
FIC recommends enhancement of the legal framework applicable to listed companies in financial recovery procedures to provide for additional derogations from the general capital market rules, where practice indicates that such rules are slowing the financial recovery process. At the same time, the legal framework should ensure that adequate protection is provided to shareholders, including minority shareholders. Changes to the legislative framework should be based on consultations with listed companies in such situations, as well as with lawyers, insolvency practitioners, capital markets intermediaries and other parties involved in the process.
Currently Law no. 32/2006 regulates the issuance of mortgage bonds only, but no issuance has yet been made because the law is not aligned with international standards. The Romanian Banking Association (ARB) has suggested amendments to Law no. 32/2006 to align it with international standards. This would allow the development of the capital market and allow banks to diversify their funding sources with positive effects on credits granted to legal entities and private individuals.
In April 2014 the MF released for public debate a new draft Covered Bond Law. However, the new draft enactment has yet to be put on Parliament’s agenda. This would bring significant benefits for the economy. Currently, banks face discrepancies between the maturities of loans granted and of the resources attracted as deposits (1-3 months), which limit their potential to grant loans, especially long term ones and especially loans in RON. The issuance of covered bonds would allow banks to diversify their financing sources by using the existing loan portfolio, and, based on clear eligibility criteria, these covered bonds could be accepted as guarantees at the NBR (as happens in other EU member countries). The development of the covered bonds market would also make an important contribution to the development of the local capital market as a whole.
The legislative process needs to be prompt and the implementation of the new legal framework should be accelerated to allow and stimulate the development of covered/corporate bonds.