The privatization process

In 1989 Romania started its way to a new market economy. The process through which

Romania, as well as countries all around the world were about to go into is called privatization

and it is based on “the ownership transfer of business, enterprise, agency, public service or public

property from the public sector to the private sector”1.The first change was the private propriety.

Since Romania was a communist country, establishing private propriety was possible by creating

new private enterprises or privatizing state-owned companies. The last method was mostly used

in Romania since all East-European countries already had a huge industrial potential. Therefore,

privatization was the base of economic reform.

This economic development was completely necessary due to Romania’s intention for

adhering to the European Union as the propriety rights, which included privatization, is a clear

indicator for the public and private state sector. Romania’s acceleration of the process of

privatization and restructuration of the industrial sector was considered of major importance as

stated by Giovanni Ravasio, General Director for Economic and Financial Affairs at the

European Commission, in a press release dating January 18, 2001.

The Law 14/1990 from August 1990 tells us the process of privatization was made in two

steps. In the first one, the state-owned enterprises have been converted into commercial

companies which are to be privatized or into ‘’regies autonomes’’(strategic sectors like defense,

mining, infrastructure). The second step is the privatization itself. The same law states that 30%

of their assets value goes to National Agency for Privatization and the remaining equity should

be sold.

The Law 58/1991 states the further steps in the process of privatization that created the

State-Ownership Funds (SOF) and 5 Private Ownership Funds (POF). According to this law

Romanian citizens would be given free of charge 30% of indirect interest in state-owned

companies, the share which will be transferred to the five POFs. The remaining 70% would be

transferred to the SOF to be privatized by selling the company to investors. The OUG no.

88/1997 cancelled all previous laws and regulations.

1 Definition given by http://en.wikipedia.org/wiki/Privatization

When the process of privatization started in Romania it included 5,937 companies with

equity equal to 45,212 billion lei. By the end of 2000 there were only 1,286 companies left to be

privatized and the equity increased to 53,455 billion lei. For an under-capitalized country the

development of the private sector is essential; and as the investment level was very low, it is

important to note that the main investors in Romania come from the EU countries2. The

Romanian Foreign Investment Law was adopted in March 1991 allowed the creation of

companies with 100% foreign capital or by association with Romanian natural or legal personas,

Law which offers multiple facilities for the abroad investors3. (annex 1)

The limits of privatization process in Romania as described in the SOF report

“Privatization in Romania 1992-2000” is less optimistic than it appears to be. The SOF “assumes

the responsibility to consider the privatization of commercial companies a successful process”4

Privatization has an improved efficiency. Private companies don’t share the profit and can

cut out costs to be efficient. The lack of political interference makes the business motivated to

profit, not pressured by the state to employ too many workers. A private company can add or

remove as many employees as it is considered necessary. Also, investors are more likely

attracted by a private company because of the long-term view they represent and the existence of

the pressure of the shareholders to make profit. Since this allows more firms to enter the

industry, the increased competition is the greatest factor to better efficiency. The government

will raise revenue from selling companies, but it also means we will lose dividends from the

profits of public companies.

From what we’ve seen, all the advantages of privatization should be enough reason to

enroll in such a beneficial process but despite of this, privatization also scores some

2 In the top by total equity bought by the foreign investors in Romania in 1990-2000 first three positions are occupied by Holland, Germany and France (accordingly 659.88, 634.74 and 410.66 billion USD or 13.2%, 12.7% and 8.2% of the total value). Italy and Great Britain also enter in top ten investing countries. Source: National Institute of Statistics and Economic Studies Monthly Statistical Bulletin.

3 Among these: the possibility of transfer of the whole convertible currency profit abroad after payment of taxes and of the annual profit in lei up to 8-15% of the initial equity contribution in cash or kind; protection against expropriation, nationalization or any other similar cases; tariff exemptions for such items as: machinery, equipment, installations and means of transport imported as the foreign investor’s participation in a business and for raw materials and supplies imported for production purposes; exemptions on profit taxes on reinvestment of the profits, export-oriented production and creation of at least 50 new jobs.4 SOF Report “Privatization in Romania 1992-2000”, October 2000

disadvantages hard to take. For one, privatization can encourage the natural monopoly. A clear

example of this is the electricity. The higher prices created by the competition of firms might led

to exploiting the consumers. Also the privatization of some public services like education or

public transport might transfer the focus prom the public care to the profit.

Although the privatization process has been consider to be of huge help for our economy

by making it more efficient, some mistakes were still made:

1. The first mistake starts right at the beginning and that is the battle between restructuring

and privatization as a first step. The Romanian Government has chosen to restructure the

enterprises before privatizing them (the overall value of the companies to be privatized

will be higher and their selling price will be higher). => waste of funds as the endowment

with technical, technological and financial resources in Romania were poor.

2. The second mistake was selling the most efficient enterprises first.

3. The privatization process stopped on the transfer of the equity and the lack of post-

privatization control became one of the main characteristics of privatization in Romania.

In this process most of the companies were simply closed by competitors by purchasing

them or sold out by pieces. As an example we have the privatization contract Petrotel –

Lukoil. The selling price was low because Petrotel Company was in liquidation process.

4. The privatized companies had a questionable selling price5. The price should have been

determined by the existing bid and offer but in conditions of inexistent bid the

stipulations lead to even greater loss.

5. The 1997 OUG that cancelled all previous settlements in the field of privatization

encouraged the fraud by forbidding the Counting Court access to checking out the

privatization contracts.

6. In 1997, by the liquidation of the most important animal farms, Romania had to import

more of the meat products and so instead of outputs in national currency, Romania

transferred to outputs in foreign currencies.

5 An example in this regard is the sale of IMGB Company occupying around 200 ha of land which was sold for 500,000 USD. A simple calculation allows the conclusion that the land was sold to the Kvaerner company at the price of 0.025 USD/m2, even if we do not take into consideration the price that could be obtained from selling separate assets or old metal. This case could be explained if the Querner company would significantly contribute to the investment process and to the development of the Romanian economy, but it seems that this company has only managed to become the main debtor to CONEL, the Romanian energy supplier.

7. Another big mistake was the size of the companies to be privatized. They were mostly

big companies with more than 5000 employees, fact which makes the restructuration

process very difficult.

The Regular Report from the Commission on Romania’s Progress towards Accession on

year 2000 has brought into the light the slow progresses and lack of efficiency in the Romanian

privatization process. The Report says that “Romania cannot be considered a functional market

economy”, that our country still “has to design and implement structural reforms” and that

“priority should be given to [...] restructuring the large loss-making public enterprises”.

As we have acknowledged the mistakes above, it is safe to say that Romania does not have

a definite strategy of privatization process. For what our country is concerned, this process is a

very important issue and its condition is vital. Before the integration to the European Union the

new Government at that time has confirmed its intention to follow the strategy as started in its

Development Strategy on medium term.

The European Union sustained Romania in its movement towards the accession. The press

release dating from January 29, 2001 says that Mr. Enrico Grillo Pasquarelli, EU’s Chief

Negotiator with Romania has underlined the significant increase in non-reimbursable funds

offered by the EU to Romania in 2000-2006. And the Commission is also ready to offer help by

other means than financial.

On the large scale the privatization process was, at the beginning, more of a draw back

factor for the European countries as the privatization data from The World Bank presents. The

only entry in the top 30 countries which have raised money in process is The Russian Federation

(ranked 22) with Svyazinvest Company situated in the infrastructure sector in 1997. It is a

private sale deal type and its worth is 1.875,00 million dollars. As referring to the champion of

privatization between1988-1999 it is Argentina, a country that occupies 6 of the top 30 position.

The millions dollars that the first place proceeds is 15.400,00 through a trade sale deal type of

the Yacimietos Petroliferos Fiscales (YPF) Company in 1999. Another country whose deals are

worth millions of dollars of proceeds is Brazil, occupying 12 out of the top 30 positions. The

auction of Telesp Participacoes S.A. in the infrastructure sectors brings Brazil no more than

4.967,00 million dollars through this auction and places her on the second place as the

privatization champion. Another countries in the top 30 are also Kazakhstan (third place –

4.325,00 million$), China, Mexico, Venezuela, Columbia, Indonesia.

If the privatization database from 1998-1999 shows us champions who are mostly the

South American countries, the situation of the privatization process between 2000 and 2008 is

quite different. It displays ex/communist countries in the large majority of the top 30 and even

further. What catches our eyes is China who occupies half of the companies whose proceeds are

the highest. The public offering from the first place was the one giving China 22.041,00 million

dollars through the Industrial and Commercial Bank of China in the financial sector in 2006.

Closely second is the privatization of Bank of China through the same deal type and sector in

2006, a process whose proceeds counted 13.714,00 million dollars. Other countries placed in the

top 30 most profitable privatization processes are also The Russian Federation, Turkey, Ukraine,

Poland, Brazil, Mexico and the Czech Republic. Romania also finds a spot, number 16, when the

divestiture of the Romanian Commercial Bank brings proceeds worth of 4.700,00 million dollars

in 2006.

For drawing a better conclusion we have also analyzed the responses of 17 people

regarding the process of privatization in Romania. The respondents were both males and females

from both the urban and rural environment and having different ranges of age. When asked if the

privatization process was a good thing that happened in Romania 14 out of 17 people responded

yes; all of them from the urban environment and the majority was females ( 10 out of 14 ). The

first thing that comes to people minds in proportion of 30 is money. The rest of the individual

answers brought up concepts as productivity, freedom, safety, evolution, education, corruption

and risks. Also, among the things that should never be privatized 12 out of 17 respondents feel

like running water should never be taken out of the public sector. ( annex 2). According to our

study, 1 out of 3 people considers that corruption and bribe is the main disadvantage of

privatization while 2 out of 5 people take increased competition and efficiency as the benefic

parts of this process. Also, for supporting their previous statements regarding the disadvantages

of privatization the respondents also said that “Before 1989 people who worked in the public

companies were earning a salary that was enough to support their family and save money. Now

they have to ask banks for money in order to survive” and that “The fact that people (owners),

always put on the first place money, before public safety”. Among the reasons why privatization

also has advantages we can count the following answers: “Sometimes the privatization of a

former public facility into one private from my opinion will change everything and it will make

it better” and “The only thing that is keeping the prices reasonable is the competition nowadays”.

All responses are in annex 3.

In conclusion it is our firm belief that privatization was a beneficial process both for

Romania as well as the other countries. As all things, it had advantages as well as disadvantages

but overall it was an efficient process. As far as Romania is concerned her adherence to the

European Union in 1st of January 2007 shows us that the involvement of the European Union in

the privatization process in Romania was more than vital and led us to great accomplishments.

Bibliography

1. Costariol, Mario - “The Small and Medium-Sized Enterprises in the Transition Process: the Case of

Romania”, CNA Veneto & Euro-in Library, 1993.

2. SOF Report “Privatization in Romania 1992-2000”, Universul S.A., October 2000.

3. Albu, Mircea – “International Economic Cooperation”, lectures, 2001.

4. National Program for Accession to the European Union, 1999 and 2000, the EU Information

Center, Bucharest.

5. National Strategy for Economic Development of Romania on Medium Term, 1997, the EU

Information Center, Bucharest.

6. Agenda 2000 “Commission Opinion on Romania’s Application for Membership of the European

Union”, Brussels, 15th July 1997, the EU Information Center, Bucharest.

7. Regular Report from the Commission Romania’s Progress towards Accession, 2000, the EU

Information Center, Bucharest.

8. National Institute of Statistics and Economic Studies - Monthly Statistical Bulletin Year XI No.12

2000.

9. Zainea, Eugen, journalist, graduate of the Faculty of Electronics and Communications and of

PosGraduate studies in Management – interviews, February 2001

10. Press releases by the European Commission representatives and by the Government of Romania,

the EU Information Center, Bucharest.

11. www.cns.ro – Internet site of the National Commission for Statistics.

Annex 1

*Companies resulted from the division of Regie Autonome “Romanian Electrical Energy”

** Companies resulted from the division of Regie Autonome “National Society of Romanian

Railways”

Source: SOF Report “Privatization in Romania 1992-2000”, October 2000

Annex 2

39.80%

27.51%

16.28%

4.14%9.27% 3.00%

State patrimony at 30.09 2000

Regies Autonomes, National Companies/Societies

Privatized by SOF and other agents

SOF

Ministry of Agriculture and Ministry of Finance

Ex RENEL*

Ex SNCFR**

Running water

Prisons Fire Dept. Medical care

Gas Electricity0

2

4

6

8

10

12

1412

5 54

7

5

Faur Ioana

Tirnovan Andra Teodora

Journalism year II