One thing is certain: privatization opportunities are dwindling and investors will focus their attention on greenfield projects.

During the first nine months of this year, FDI amounted to EUR 1.639 billion, according to the Romanian Agency for Foreign Investment (ARIS). The increase against the same period of the last year is 40 percent. Alexandru Popa, president of ARIS, says that total FDI should amount at the end of the year to EUR 3 billion, due to the finalization of the Petrom – OMV deal.

Popa admits that the key issues in this field are easing bureaucratic procedures, stamping out corruption and assuring legislative and fiscal stability. Still, progress in this field has been acknowledged by the EU through the functional market economy tag and by international rating agencies. ARIS’s prediction is that Romania will be part of the general trend of increased investment in automotive parts, energy and IT&C, seen throughout Central and Eastern Europe. Also, ARIS expects a surge in other fields, such as electric equipment, wood industry, retail, banking and tourism.

“The Labor Code remains a major problem to be solved immediately by the new government (low market flexibility and high social security costs); and the fiscal systems and bureaucracy are another problem. But there are not enough consultations with private sector representatives,” said Roberto Musneci, president of the American Chamber of Commerce.

FIC takes position

Gilbert Wood, the president of the Foreign Investors Council (FIC), is optimistic about the current business environment in Romania. “Perhaps the single most important indicator is the overall expansion of the economy. The Romanian economy is one of the fastest growing in Europe, with an average annual growth rate of approximately 4.5 percent during the past four years, one of the highest average rates in all of Europe. This year, it is expected to grow by 7.6 percent. Romania should sustain an average annual growth rate of 5.0-5.5 percent in the coming years.” The FIC is also encouraged by the reduction of inflation and of the budget deficit.

“However, the total FDI in the past decade is only $11 billion, a modest amount compared to some of our neighboring countries,” said Wood. The FIC thinks that Romania needs improvement in the following areas: a level playing field for all businesses, both domestic and foreign owned, comprehensive and uniform enforcement of existing legislation based on the rule of law, increased labor market flexibility, and the completion of the Code of Fiscal Procedure setting forth the rights and obligations of both the taxpayer and tax collector.

Wood says that the FIC would like to present its views to the new government early in its tenure, recommending mandatory prior consultation when drafting laws. “In order to create a favorable economic environment for all competitors in the Romanian marketplace, there must be clear assurances that companies have the same fair chances of competing for opportunities and are subject to the same obligations to the state. New EU-compatible state aid rules should be applied transparently with regard to tax forgiveness under the consistent supervision of Romania’s Competition Council. This should be coupled with effective implementation of existing bankruptcy laws which would result in many loss-making private and state-owned companies being closed, rather than allowing them to return for additional aid,” said the president. The FIC also emphasizes that the level of taxation is still high in the region, while the Labor Code lacks flexibility.

“It is time for Romania to focus on attracting greenfield investments. Banking, insurance, energy, automobiles, construction and metallurgy are the sectors most likely to attract more FDI in the immediate future,” concluded Wood.

The Italian Way

Marco Tempestini, president of Unimpresa Italia, says that Italian among other foreign investors still see the bureaucracy and lack of communication with state institutions as their main problems in Romania. “The stiffness of the new Labor Code and the lack of precise rules lead to an uncertain and shaky legal background for relations with the employees,” he says. Italian investors also cite poor infrastructure, difficult access to bank loans for the medium and long term, and the lack of some financial tools, such as real estate leasing.

Unimpresa, as the organization of Italian companies in Romania, has assumed the role of enhancing the dialogue between the firms and the local authorities, seeking transparency in the legislative process. The association has branches in Bucharest, Timisoara, Cluj, Oradea and Iasi. Unimpresa also denounces corruption, so that entrepreneurs are not exposed to risks. “Italian companies’ interest in Romania is still ‘hot’, but as Unimpresa sees it, the lohn traffic is no longer the main point of interest. Companies that represent advanced sectors technologically are starting to show interest in the possibility of outsourcing or expanding activity in Romania,” says Tempestini. He added that besides a good and competitive labor market, Romania is seen as a logistics gate to the former Soviet Union and, seen from the other perspective, as a gate to an enlarged Europe.

Romania has also been regarded as a profitable market: its 21 million population makes it the second largest in Central and Eastern Europe, after Poland. Italian entrepreneurs are therefore expecting a boom in the local food industry, an area in which they have a widely-known expertise.

Unimpresa defends the interest of 200 companies, employing some 30,000 people and representing around 60 percent of Italian subscribed capital, and 25 percent of total investment. Currently, some 4,000 Italian companies are registered in Romania with total investments reaching EUR 800 million. This puts Italian investment in Romania on top in terms of the number of companies, but it has skipped the podium because most of them are small and medium-sized. A situation that will change, according to Tempestini, as big Italian companies are considering moving to Romania.

Free energy market on its way

The energy industry finally saw in 2004 the U-turn that the EU and international financial institutions had long been waiting for: the decisive steps towards a competitive market, free from any major state intervention. The privatization of the national oil company Petrom, of gas distributors Distrigaz Nord and Sud, and the beginning of the privatization of electricity distributors are widely regarded as the necessary measures to cut losses and upgrade the quality of service.

Petrom has been described as one of the “diamonds of the crown” of the Romanian economy, along with BCR, Romtelecom and Tarom, and it has met expectations so far as the subject of the biggest privatization contract signed by the Romanian government. With a EUR 1.499 billion commitment for a 51 percent package in the company, Austria’s OMV will become the most important foreign investor from December 20, when contracts are finalized. The move also means that Austria will grasp first place in terms of investment by country of origin.

“Romania has made serious improvements to attract foreign investors; being successful as the number one foreign investor will be the best service we can offer the country,” OMV officials told Business Review.

The closure of this transaction was seen by both the company and the Romanian state as a success, though there have been accusations about possible underestimates of Petrom’s assets and bribery in the local media. OMV has made a giant step in its strategy to reach a 20 percent market share in Central and Eastern Europe. It currently has 9 percent and, by this deal, its market share in refining and distribution increases to 18 percent. This is due to the two refineries and 600 filling stations Petrom has.

For distribution, OMV will have a 40 percent quota in Romania, including 70 OMV gas stations, a fact which will allow the Austrian company to keep operations for both brands. OMV’s reserves will also increase dramatically, as Petrom’s reserves of gas and crude oil amount to a 1.116 billion barrel oil equivalent (boe), while the Austrians have only a 410 million boe. Similar too is the difference in production, as Petrom’s oil and gas production for this year is expected to reach 220,000 boe per day, while OMV’s will reach 120,000.

“Petrom has the opportunity to be a production and competence center in the area,” says Wolfgang Ruttenstorfer, CEO of OMV. The company’s officials add that their focus in 2005 will be on integrating Petrom into OMV’s operations.

During the next few years, the average yearly investment in Petrom will be EUR 300 million. Petrom, which has 57,000 employees, last year posted net profit of EUR 9 million on turnover of EUR 2.02 billion. OMV has 6,100 employees. Last year’s turnover was EUR 7.76 billion, while its market capitalization was EUR 4.5 billion.

The second biggest oil and gas business in Romania is Rompetrol, which operates the Petromidia refinery and gas stations in Romania and its neighboring countries. The group is majority owned by the local businessman Dinu Patriciu, but the investment was run through a company in the Netherlands. For this year, Rompetrol estimates a turnover of $1.58 billion and a net profit of $90 million. The total investment of the group amounted this year to $80-85 million.

Russia-based Lukoil Group finalized in November its $120.7 million restoration project of the Petrotel-Lukoil refinery. The three-year process was aimed at modernizing 18 industrial installations to international standards. “We’re considering some other investment projects in Romania, including a further $50 million in Petrotel, for the next two years,” said president Vagit Alekperov. Now, Petrotel-Lukoil’s refining capacity is 2.4 million tonnes per year. Alekperov added that Lukoil also wants to invest in the downstream sector, in motor oils, and possibly in the petrochemical industry – with Oltchim seen as a potential investment.

The company does not want to invest in another refinery in Romania. Lukoil’s total investment in Romania will reach $450 million by the end of this year. The company employs 5,000, of whom 1,200 are linked to the refinery near Ploiesti. The firm bought 51 percent of the Petrotel refinery in 1998, for $53.2 million, and has since increased its stake to 93 percent by capital increase or acquisitions from minority shareholders.

The downstream sector is keeping pace with the major developments of the energy industry, but is expected to become one of the most dynamic markets in the next few years. Lukoil now has 257 gas stations and 10 gas terminals, after a total investment of $285 million, giving it a 20 percent market share. The target is 350 gas stations in Romania, but major acquisitions from other companies are out of the question, according to Alekperov.

MOL Plc. bought last month the remaining 59 units of Royal Dutch Shell in Romania, in a long-expected deal. The value of the transaction was not disclosed, but local experts estimate the deal at about $70 million. Shell’s local LPG unit, Shell Gas Romania, was not subject to the deal. The lubricants, commercial and aviation divisions were taken over.

The total working capacity in Romania is 5 million tonnes. Gyorgy Mosonyi, executive director of MOL Rt, told Business Review that many of the newly-bought stations will be extended and re-branded. This would mean an average cost of $5 to 6 million.

MOL also intends to acquire other companies, if opportunities arise. Mosonyi added that the Hungarian firm is not focusing on acquiring any upstream units. “Romania is our second biggest market, and we want to concentrate on retail,” he explained.

Banking sector awaits BCR and CEC privatizations

The Romanian banking system is seeing tough competition between 38 commercial banks. Investment in the sector is rising every day as banks try to maintain their positions at the top of the hierarchy.

The main battle is currently in retail. This year CitiFinancial, Citibank’s retail arm, has been investing more in the suburban areas that foreign banks have so far ignored, which have been taken into account only by local banks such as CEC, Banc Post and BCR. Recently, BCR has also been expanding into suburban areas, although the Romanian bank is undergoing privatization and is supposed to be sold in 2005 to a strategic investor. CEC, the second largest bank owned by the state, is also to be privatized next year.

Together, BCR and CEC hold over 40 percent of the banking market. Smaller banks such as Eurom Bank, Daewoo, Garanti and Miro (which officially re-branded to Pro Credit Bank last week) have also invested in opening more branches, while mid-range banks (in Romania) such as Finansbank and Alpha Bank have not only opened more branches, but also started diversifying their products and services one step further than others: Finansbank expanded an experimental shopping credit card, CardFinans, to other shopping galleries than the Bucuresti mall (the first and until recently the only Western-standard mall in the country, before Plaza Romania was opened this October); while Alpha Bank’s new executive president Christos Giampanas said that all of the new products in Greece will be put up on the Romanian market.

All banks are contesting the card sector, as it is undersupplied, especially with ATMs and shopping cards (debit and credit). Up to now, the biggest investment ever made by a foreign bank in Romania was by BRD, followed by HVB and Raiffeisen. However, no current investment figures were made available. BRD sent, however, Business Review its results as of September 30, to International Accounting Standards: overall assets on the balance sheet in excess of 104,380 billion lei, own capital worth more than 13,417 billion lei, overall gross loans of 63,756 billion lei, a net result of 2,472 billion lei and 206 branches.

HVB eyes BCR

Bank Austria Creditanstalt, a subsidiary of HVB Group, responsible for the Central and Eastern Europe networks, intends to get a 10 percent share of the Romanian banking market via an acquisition, Dan Pascariu, president of HVB Romania, told Business Review.

According to sources, HVB may achieve more than that, as it intends – and according to analysts has the best chance – to buy BCR, the largest local bank, which is ready to be privatized and has in excess of 30 percent of the market.

“HVB Group is aiming for 10 percent of the market, which it has in most countries in the region. In the current context, though, we cannot reach the top five banks in Romania without a market acquisition. It is a prerequisite, and the decision to do this has already been made. The move depends, though, on what bank is available on the market at a certain moment,” Pascariu said. “But I am convinced that besides the privatization of BCR and CEC, there are other opportunities that the majority shareholder, Bank Austria Creditanstalt, may consider in order to grow its market share.”

He said that the banking system needs to consolidate, and create banks that are powerful nationwide. Currently, the top five banks in Romania own 63 percent of the total banking assets, but over 40 percent of the market is under state control. “I think that in the next five years no more than 15-20 banks will survive on the market, and that the top five banks will get hold of some 80 percent of the overall banking assets. The rest will operate in a niche,” said the president. He explained that the market conditions are highly linked to what happens with BCR and CEC’s privatizations.

OTP looks to buy CEC

The largest investments this year came from OTP, which bought the local RoBank. Sources say it is looking to buy the much larger CEC.

Laszlo Wolf, deputy chief executive officer of OTP, explained to Business Review that Hungary’s largest retail bank took over RoBank in a $47.5 million transaction, a move that falls under its expansion strategy which has recently included Bulgaria and Slovakia.

OTP plans to invest some $100 million to buttress its strategy, according to Sandor Csanyi, president and CEO of the bank. He added that the bank aims to operate 100 subsidiaries and gain a market share of 4-5 percent in the next three to four years, during which time operational losses are expected. RoBank now has 0.8 percent of the market and 16 branches. Its equities amounted in December 2003 to EUR 20.1 million and its total assets were valued at around EUR125.8 million.

When OTP took over RoBank, it found a bank focues on corporate clients, so it decided to launch into retail in the second quarter of next year, which will also see a re-branding process, the new president of OTP-owned RoBank in Romania, Anthony Fekete, told Business Review. “In the meantime, we will soon sign a major real estate transaction of several million euros, [details will not be disclosed – only the fact that it will exceed EUR 1 million], the first of its kind for RoBank, and something that OTP has a lot of experience in,” he said. OTP has financed a five-star hotel in Bulgaria, and owns a mortgage bank in Slovakia.

“I have had the chance to get to know the Romanian market very intensively. We intend to become a leading player. We recently increased the bank’s capital [by EUR 10 million], and further increases will come. We will expand the current 14-branch network to 100 branches in the coming three-five years,” Fekete said.

ING and ABN launch into retail

ING came on the market with a new concept in retail this July, called Self’Bank, almost entirely based on a card system and two types of ATMs: one for cash operations and the other for online payments and cash transfers between accounts. Last week its network was raised to 20 offices, as three more branches were opened in both Craiova and Timisoara.

Misu Negritoiu, deputy general manager of ING Bank Romania, said that Self’Bank has seen 15,000 accounts opened in Bucharest alone since July. “We intend to expand anywhere [nationwide], to allow clients to make secured operations at any time during the day,” he said.

ING Bank’s president Dirk Serbruyns added: “We believe that this innovative solution is very welcome on an increasingly competitive market.”

ING has about 800 employees in Romania, if the insurance division is counted. ING life insurance has pole position on the market, with 2,400 insurance advisers.

ABN Amro Bank’s long-awaited launch into retail banking services also came this year. “Don’t call it niche banking, as we don’t have a limit for lending. If you were to compare it, we are a five-star retail bank,” the president of ABN Amro, Henk Mulder, told Business Review. Many banks are fervently investing in developing retail, but although the market potential seems high, the demand for retail services is currently at a very low level.

ABN does not want to expand by acquiring other banks, and will not have, for the moment, separate branches only for retail. Investments of EUR 100,000 – 350,000 on average will be made for each of the 15 branches ABN has nationwide, says the newly-appointed retail division director, Haris Hanif. Before joining ABN this year, Hanif worked for Citibank in Pakistan, Singapore and the Czech Republic. “We will develop the bank at the pace of the market. We don’t think we are late in this market, but early. We think that other banks have been here too early and too aggressively,” Mulder said.

“We will have by year-end a team of 50 sales officers that will go to the clients’ location, if needed. A successful branch needs to have, generally speaking, some 500 good clients to be profitable.”

Citigroup: largest financial entity worldwide expands Into retail

Citigroup has been present in Romania via Citibank Romania S.A. since 1996, and recently decided to expand its local presence by new investments, especially in the retail sector. Citigroup’s dedicated retail arm CitiFinancial approached the individual retail loan segment in June 2003. Wade Robison, general manager of CitiFinancial, told Business Review: “Romania was the next priority target among the Central and Eastern European countries, after Poland and Slovakia. It was a strategic decision and we saw the opportunity to be in Romania from the very beginning of the development of the personal lending market. According to all estimates, the growth trend that this segment will achieve will be a significant one. Therefore, our presence on the market during the current development stage will allow us to better position ourselves on the market during the following years.”

Witold Zielinski, Citibank Romania’s president, explained that CitiFinancial addresses all market segments, with its main objective the development of its range of financial products and distribution system, to reach a broader spectrum on the credit market.

“CitiFinancial is currently offering cash loans for personal use (unspecified purposes personal loans) via its agents network as well as via the sales representatives, ensuring larger flexibility for its clients. Currently we operate in Bucharest, Ploiesti, Timisoara and Cluj through six branches, of which five are in Bucharest (Militari, Colentina, Pantelimon, Giurgiului and Drumul Taberei) and one is in Cluj,” Robison added.

The CitiFinancial strategy is to open more agencies throughout 2005. “The results up to now have been very encouraging, especially after the first agency opened in Bucharest – Militari, in November 2003. For the future, I foresee a development of the distribution network and a consolidation of the market position by using innovative products,” Robison said.

BCR invests in the London-based Anglo-Romanian Bank

Nicolae Danila, executive president of BCR, and Thomas Butler, CEO of the UK-based Anglo-Romanian, announced the end of the merger process of the French-Romanian Bank and Frankfurt Bukarest Bank under the flagship bank based in London. The EUR 100 million-capital, EUR 319 million-asset Anglo-Romanian Bank will be sold with the entire BCR holding, Danila said in an exclusive interview with Business Review. “We are obviously going to sell the entire BCR holding as a whole. That includes many other foreign stakes, such as the Romanian-Egyptian Bank, in which we have 19 percent, or the Romanian-Italian Bank, in which we have 7 percent. It also includes BCR Leasing, BCR Asigurari (the insurance division), the asset management division and the financial services one,” said Danila.

Anglo-Romanian Bank, an old bank set up abroad with JP Morgan Chase and Barclays Bank by the Romanian state (BRCE) to support and leverage Romanian exports, is now engulfing similar banks in Paris and Frankfurt, which have been bought by BCR.

In Frankfurt, BCR was confronted with the following situation: Bancorex was the initial owner of the majority stake in Frankfurt-Bucharest Bank and had a pre-arrangement to buy the shares of the German co-investors. That arrangement was irrevocable, so after BCR took over Bancorex’s assets, BCR has had to pay according to what had been previously set. The final amount that BCR paid for Frankfurt-Bucharest Bank was EUR 2 million, for a very small, residual package of shares of some 3.5 percent. BCR paid, gradually, an undisclosed amount to acquire the entire stake.

Consumer retail outlets spreading across Romania

In 2004, retail chains saw considerable growth as the number of outlets and clients both increased, proving that the hypermarket and cash & carry concepts can thrive in the Romanian market.

Carrefour, the first company to explore the hypermarket concept here with its Romanian branch Hiproma, intends to open two new outlets in Bucharest, according to Francois Oliver, general manager of Carrefour Romania. “We also want to open two stores yearly and be active outside Bucharest in all the main cities in the country with over 300,000 inhabitants. Our development plan is to have 15-20 Carrefour stores in Romania,” said Oliver.

With the opening of its outlet in Militari in June 2001, Carrefour inaugurated the hypermarket in Romania, a retail concept that was already popular in Western countries, and its number of outlets has since increased. With a sales area of 8,500 square meters and a commercial gallery of 6,500 square meters, Carrefour Militari was soon expanded, which required a total investment of about EUR 50 million. In September 2003, the firm opened up at Orhideea Commercial Center, with a total area of 30,000 sqm. EUR 38 million was invested in the commercial center, with EUR 25 million going into the hypermarket. In February 2004, Carrefour continued its expansion when it invested EUR 35 million to open its 22,000-sqm Colentina outlet. The first Carrefour hypermarket outside Bucharest was a Brasov outlet that covered a total area of 19,000 square meters and required an investment of about EUR 20 million.

Cash & carry companies are also enjoying a growth period. Selgros has opened new outlets in Constanta and Timisoara this year and plans to open a store in Oradea in the coming year. The Selgros expansion plan includes opening at least 15 stores in the larger cities across the country in the coming years, according to Corina Teslaru, marketing representative with Selgros.

The company entered the Romanian market in 2001 with a store in Brasov, which is where the company is located. In 2002, two new stores opened in Bucharest in the Pantelimon and Baneasa areas and one store opened in Targu Mures. A fifth store was opened in summer 2003 in the Berceni area.

The investment for each of the new outlets was about EUR 15 million, according to Teslaru. “The turnover last year was $200 million and for the moment we have seven stores where around 2,500 employees work,” she said. “The evolution of the retail market in Romania in the next years will see some changes with the growth of the average salary. In Brasov, for example, on a 600-meter distance there is a hypermarket and a Selgros cash & carry store and next year will also bring the opening of a store chain of the Discounter type. We think that small stores will have a stable growth, while the cash & carry trade will be more interesting for the hospitality traders.

Increasing Numbers Dialing into Telecom Services

The telecommunication industry saw growth this year as companies report increasing figures amidst tight competition.

The mobile telephony penetration is estimated at 42 percent in the Romanian market, which should increase to 56 percent by the end of 2005, say specialists.

On the mobile market there are four competitors for 9 million mobile customers, according to September data. Market research suggested that at the end of June there were only 8 million customers, which means that in only three months there was a total growth of one million customers or 12.5 percent.

“Romania is making great progress but is still slowed down by excessive bureaucracy and out of date rules, procedures, processes and documentation requirements. More confidence is needed that market forces and real competition benefit the consumer and that these are the healthiest ways to stabilize the business environment,” said Ted Lattimore, president and COO of Mobifon. “Romania’s demand for leading communication services and products is insatiable. This is only expected to increase as new applications and the ability to access video while mobile with 3G devices are becoming an easy and inexpensive option. 2005 will be a great year to be mobile in Romania.” Connex has invested over $120 million so far in 2004 with more to come to complete the 3G launch and company representatives estimate that 2005 will have a similar investment total. In terms of revenues, at the end of 2003 The firm registered $529 million in revenues and for the first nine months of 2004, service revenues amounted to $493.4 million compared to $384.4 million for the same period last year.

“Romania is continuing to grow economically and mobile communications are one of the areas that Romanians invest in as their financial situation improves. Connex sees this growth getting even bigger as the country approaches EU status and as leading 3G services are introduced to the country,” Lattimore said.

Connex introduced mobile communications services in Romania back in April 1997. Since then, it has invested over $1 billion, which makes it the biggest greenfield investment in Romania. The firm produces 1 percent of Romania’s GDP, according to Lattimore. The main shareholders are TIW (Canada) and Vodafone (UK).

Orange Romania representatives said that their company performance was high in 2003, as the total revenues rose from $370 in 2002 to $520 million in 2003, an increase of 43 percent. For the current year the total revenues are estimated to reach $772 million, which is a 46 percent growth over the 2003 figure.

“This year, the level of investments is around $130 million dollars, which was oriented towards network development, widening the coverage and bringing new services to our customers,” said Cristina Pop, spokesperson with the company. “Not only is Orange investing a lot of money in this market, we also have 1,700 Romanian employees and we are collaborating with many local suppliers which means we are contributing to Romania’s economic growth each year.”

The firm’s customer base grew from approximately 1.6 million customers at the end of 2001 to over 4.3 million currently. In 2003, Orange Romania registered the highest customer base growth rate in the Romanian mobile telecommunication market with a 50 percent growth from the previous year. From 1997 until the end of last year, Orange invested over $865 million in the Romanian market, which includes the GSM and the UMTS licenses.

“Romtelecom will accelerate the network modernisation program it started in 2004,” said James Hubley, CEO of Romtelecom. This program will involve replacing old technologies that cannot support demands for high speed internet access, video on demand and data applications. In addition, the program will also extend the current network facilities where such an investment would make economic sense.

Hubley is confident that Romania, through its efforts to join the European Union, can significantly improve its attractiveness to foreign investors by eliminating the uncertainties of the local business environment. “Investing has mainly to do with the art of managing risk. Most foreign investors have experience in assessing and managing business risks associated with competition, customer satisfaction and operations,” he said. “However, they become uncomfortable when they can’t assess the environmental risks of a country. This inability is caused by uncertainty, uncertainty in such things as how to interpret local laws, how tax codes are applied, or how regulations will be implemented.”

For the first nine months of this year, Romtelecom reported a turnover of EUR 618.3 million, a 4.7 percent increase against the past year, while the profit reached EUR 56 million, a 702.2 percent increase against 2003. The number of clients has also increased by 0.7 percent, to 4.3 million clients. In terms of efficiency, Romtelecom reports a ratio of 235 phone lines per each employee, while in 2003, it was just 181.