Referat Privatization In Romania, A Bridge To The European Union

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       In 1989 Romania, together with many other countries, paced on the twisted way leading to a market economy. It proved to be a long-term, difficult task: to adopt new functional rules and structures instead of a centralized way of  “doing business”. A market economy is based on the private property. For the former communist countries the private property could have been established by two means: creating new private enterprises or privatizing state-owned companies. Yet the first solution had a smaller significance, because in all these countries there existed already a huge industrial potenrial as “public patrimony”. These resources, as well as already organized productions were an important point of departure, while the new created companies had to take it from zero. So, privatization is the essence of the economic reform in former communist countries.
        On the other hand it became evident that the economic development of our country would be much stimulated by a close cooperation with neighbor European countries, especially the developed ones. Romania has confirmed many times its determination to become a member of the European Union, and on the list of criteria to be achieved by the adherent countries clarification of the property rights, including privatization, clear definition of the public and private state sector and the problem of restitution, holds on important place. This aspect was underlined in the most important documents of Romania’s integration strategy: Agenda 2000, National Programs for Accession to the EU, National Strategy for Economic Development on medium term. The new Government has included the accession to the EU in its strategy as a priority objective, at least on a declarative level, and the items regarding the privatization maintain their importance. In a recent press release dating 18 Jan. 2001 Mr. Giovanni Ravasio, Director General for Economic and Financial Affairs at the European Commission underlined in his meeting with Romania’s President, Mr. Ion Iliescu and Romanian Prime Minister Mr. Adrian Nastase that the EU considers of major importance for Romania to accelerate the privatization and restructuring of the industrial sector.

1. Privatization in Romania.
       The methods and measures on which the privatization process was based do not constitute a clear and coherent strategy. 
        The first steps in creating private property in Romania were taken from the very first year after the Revolution: in August 1990 the Law 15/1990 created the legal frame for founding public commercial companies and “Regies autonomes”, a special type of company which is a private property of the state. Thus, the privatization process was conceived to take place in two steps: (1) state-owned enterprises have been converted either into commercial or joint-stock companies which are to be privatized, or into “regies autonomes” (in strategic sectors like defense, mining, infrastructure) and (2) the privatization itself. Commercial companies were required to evaluate their assets and to transfer shares equal to 30% of their value to the National Agency for Privatization created under the same Law, while the remaining equity should be sold, so as by the end of 1993 50% of the equity should be privately owned. This Law had some shortcomings, and in July 1991 a new Privatization law is adopted: the Law 58/1991 created the State-Ownership Fund (SOF) and 5 Private Ownership Funds (POF), the institutional framework for the privatization process, and also stipulated the methods used for the privatization: Romanian citizens would be given, free of charge, 30% of indirect interest in state-owned commercial companies, the share which will be transferred to the 5 POFs. The POFs will issue one ownership certificate to each eligible citizen (those over 19 years before December, 31, 1991) which will be in bearer form and freely transferable only among Romanian citizens The remaining share of 70% is transferred to the SOF in order to be privatized by selling the companies to the strategic investors (unforunately, this attribute of “strategic” was often looked over in the process of pravatization). New settlements were adopted in all following years.
     At the end of the 1997 the Urgent Government Ordinancy no. 88/1997 has canceled all previous laws and reglementations and has set a new legal frame for the privatization process, as well as the methods to be used in the privatization process. Some other stipulations of smaller importance were adopted in the last three years.
        As regards privatization offer of Romania, it included initially 5,937 companies with equity equal to 45,212 billion lei. Later the number of the companies to be privatized raised to 9,137, including some new companies into the privatization program, but mostly through division of big companies into smaller ones. The total equity increased to 53,455 billion lei; the difference results from the introduction of new companies, but also from the reevaluation of companies’ assets. By the end of 2000 there were only 1,286 companies left to be privatized. (Annex 1)
        In the process of private sector development foreign investments are essential, especially in Romania’s case, because this country is under-capitalized. Until now the foreign investment level was very low, but it is important to note that the main investors in Romania come from the EU countries.  In March 1991 was adopted Romanian Foreign Investment Law which allowed the creation of companies with 100% foreign capital or by association with Romanian natural or legal persons. The Law offers multiple facilities for the investors from abroad.  In general it may be considered that the overall legal frame for the foreign investments, which is based on the three principles: non-differentiated treatment of foreign and national investors, free access of foreign investors to nearly all economic sectors and minimal intervention of the governmental authorities, is favorable for the investment process. But there are some negative aspects, as well: for example, a less prudent stipulation in the legislation allowed some mini-investors to benefit from the exemptions and facilities offered to the foreign investors with a minimal real contribution (a foreign investor is considered to be one who contributes with at least 20% to the social equity of a company; at the same time, the minimal legal equity allowed for the limited liability companies was 100,000 lei. Thus, with a contribution of 20,000 lei (which meant at a certain time 46-48 USD) the investor could already benefit from his foreign investor status). This inadvertence led to an extraordinary spread of mini-joint-ventures (today more than 70.000 entities) which, nevertheless, do not produce too much of benefic influence on the national economy, as their spill-over effect is extremely small.

2. The limits of the privatization process in Romania
        Although in its report “Privatization in Romania 1992-2000” the SOF stated that it “assumes the responsibility to consider the privatization of commercial companies a successful process” , the reality is less optimistic.
        Unfortunately, the Romanian Government has taken the privatization for a scope itself, a scope which must be achieved by any means and in any conditions. But the privatization process is a way of making the companies and the whole economy more efficient. Due to the above-mentioned fact, multiple mistakes were made.

1) In the privatization process there is a dilemma: what should be done first – restructuring 
or privatization. The Romanian Government has chosen to restructure the enterprises before privatizing them; the logical basis of this decision being the consideration that this way the overall value of the companies which are to be privatized will be higher, and more funds could be raised from selling them, money which could be reinvested in restructuring other enterprises. But in the present conditions of Romania’s poor endowment with technical, technological and financial resources this approach ended up in a mere waste of funds.

2) Another major mistake was that the most efficient enterprises were sold first. The funds obtained from the sale were supposed to be invested in restructuring the “black-hole” companies with major losses. Excessive bureaucracy, rapid inflation and corruption slowed the process of the reinvestment and significantly decreased the sums, which were really invested; thus the expected benefic influence was annihilated.
        In my opinion, this decision lacks any economic logic. The idea of privatization is based on the premise that the State is an inefficient manager, because its decisions are based on political criteria rather than on the economic ones. Following this idea it is logical that the first to be privatized are those enterprises where the State proved its inefficiency as manager. The well-functioning enterprises do not need such a rush in selling them because they do not produce losses to the budget; on the contrary, they are a source of income. Privatization in this case is a way to improve the efficiency, not to restore it to, it is not an emergency. This solution of restructuring before privatizing has also lead to the increasing budgetary deficit, which is another obstacle on our way to the EU.

3) The process of privatization stopped on the transfer of the equity and did not follow the way in which the parties respected the conditions and clauses of the contract. The lack of post-privatization control is one of the main characteristics of the privatization in Romania. In this regard we may notice that some of the privatized companies were often simply closed as potential competitors by the purchasing firm, while other companies were simply sold out by pieces and old metal, as they were bought below the price of the old metal that could be obtained. Although there is a post-privatization control department at the SOF, it has only looked after the proper payment of price parts, if at all. (Annex 2)
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