Br where to invest 2014

Business Review

ECONOMY March 2014

Where to invest

www.business-review.eu

Editorial

Operation: Investment A Business Review contributor commented in a recent article that people living in Romania should have a common goal: “It is essential for our future to build and win national prestige, to increase the assurance that it is okay to invest both emotionally and financially in this country.”

According to data released by the National Bank of Romania (BNR), in 2013 Romania posted a 22.3 percent increase in foreign direct investment, taking it to a four-year high. In the first 11 months of 2013, FDI totaled almost EUR 2.4 billion, good news given that the economic climate is far from an easygoing one.

This guide features not only the most attractive industries, but also the opinions of the major chambers of commerce and embassies active in Romania, who outline the advantages and disadvantages of investing here as well as the areas of interest to their investors.

“Romania is a resource-rich country. We have a lot of good agricultural land, we have excellent potential for tourism, and we have oil, natural gas and minerals,” says Gabriel Biris, vice-president of the AOAR. James Hyslop, the EBRD’s director for Romania, adds, “Romania is first and foremost a country with one of the highest potentials of any European nation.”

There are certain industries that many specialists agree are attractive to both local and foreign investors. Agriculture, energy and tourism are mentioned in almost all the studies conducted on Romania and also recommended by most of the embassies and chambers of commerce to their investors.

I’m sure you will find more arguments for investing in Romania, either emotionally or financially, to quote the Business Review contributor, while reading the opinions and interviews within the first edition of this guide – a must-have tool for your future investments!

Raluca Comanescu

BR BR ECONOMY ECONOMY | 1

Opinion

Reaping the rewards of Romanian resources Gabriel Biris Vice-President, AOAR (the Romanian Association of Businesspeople) Founding Partner Biris Goran

Romania is a resource-rich country. We have a lot of good agricultural land, we have excellent potential for tourism, and we have oil, natural gas and minerals. Moreover, Romania is strategically positioned for global trade, we have one of the biggest harbors in Europe and we have the Danube to transport large quantities of merchandise, cheaply and quickly, to Central Europe. We are also strategically positioned to be an important player in regional politics.

Yet, we have one of the lowest levels of Foreign Direct Investment (FDI) in Europe, we lack infrastructure, the trade level is rather low and we are not at all an important regional player, politically speaking. Qualified workers are migrating en masse due to the lack of opportunities in the country.

This happens mainly because we lack coherent political leadership. We need to design good strategies and to focus on their implementation. Right now a great deal of energy is consumed by internal arguments and too little is spent on constructive dialogue. The good news is that there are win-win 2 | BR ECONOMY

solutions to develop the entrepreneurial mood in Romania and to keep the budget balanced while ensuring the funds for investing in infrastructure and education. Investing in education should have always been a top priority.

Romania needs serious investment in infrastructure and the recent disputes regarding the highways do not help. The Pitesti-Sibiu highway and another highway that links Moldavia to Western Europe should be priorities.

As regards the fiscal policies, we believe that the following actions must be taken: Ensure predictability The speed of amending the current taxes plus the introduction of new taxes really scares investors. For businesspeople it is impossible to produce a coherent business plan when the fiscal code and fiscal procedural code are changed more than ten times per year, every year, and when new and significant taxes are introduced, such as the controversial tax on constructions;

Opinion

Reduce labor taxes This can be easily accomplished by reforming the current social security system, namely by eliminating exceptions, capping the base of calculation for all social contributions at a decent level (maximum three months’ average salary) and allowing the personal deduction not only when calculating the base for the

income tax, but also for social contributions.

Enlarging the base and giving the system a fair basis will also help by reducing the current deficit while improving the business climate; Reduce VAT The current VAT rate is 24 percent but we actually collect only 13 percent. There is a lot of BR ECONOMY | 3

Opinion

room for improved tax collection and there are efficient measures to fight tax evasion that can easily be introduced.

Such a high VAT rate is severely affecting internal consumption, which should be the main engine for growth. On the other hand, tax evasion is really harming the honest businesses which simply cannot compete with the fraudsters; Improve administration ANAF should be much more active in preventing fraud and guiding taxpayers to properly observe the tax legislation. In addition, the Fiscal Procedural Code should eliminate any way for the tax authorities to abuse the taxpayers. Unfortunately, there are too many provisions that allow them to do that. It is worth mentioning the recent almost generalized penal complaints made by tax inspectors which suspend the judgment of appeals against decisions by the tax inspectors thereby preventing the taxpayer from obtaining a court ruling based on merit.

We have recently presented a study, which is in fact an inventory of all fiscal policy measures enacted by the government since 2009, the beginning of the financial crisis. More than 150 such measures were identified over the last five years (2009-2013). Despite this huge number of changes to the legislation, major Romanian tax problems remained unsolved.

I refer particularly to VAT evasion, excises, black market labor and reduced voluntary compliance.

Property taxes have not been reformed and the measures to support the auto market and to renew the fleet contributed to the collapse of the national market instead of helping it. Domestic consumption, an element that should be the main growth engine of the economy, has been continuously declining for the last five years.

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It is not only the number of changes that bother entrepreneurs, but also the quality of such measures. Some were so wrong that they needed corrections or even to be abolished. Many were intended to increase taxes or introduce new ones – but tax revenues have not increased. This shows how inefficient most of them have been. “Right” or “left”, all governments had the same wrong approach: new taxes.

However, we should all understand that there is no such thing as a perfect tax system and even if we could invent one, it would not be sufficient to generate growth. Of course, it could help a great deal. But we also need an efficient judicial system; we also need much more efficient legislation to protect the rights of creditors rather than debtors. Excessively protecting debtors is stimulating fiscal indiscipline, causing chain bankruptcies and destroying viable jobs.

From the inventory of all fiscal policy measures: Top 5 positive measures: 1. Holding companies (OUG 102/15.11.2013) – This measure is meant to attract foreign investors and to develop their long-term operations in Romania.

The recent amendments to the taxation of dividends highlight that dividends distributed by a Romanian company to a non-resident company established in a state that has concluded a Double Taxation Treaty (DTT) with Romania, are tax-exempt if this non-resident company (whether an EU or non-EU member) holds at least 10 percent of the Romanian company’s share capital for a period of more than one year, as opposed to the two year-period which was previously applicable.

2. Revaluation reserves (OUG 34/11.04.2009) - The revaluation reserves are

Opinion

taxed when the building or the land they are related to, and for which they were recorded, are sold by the company.

3. Mandatory social security contributions (OUG 117/30.12.2013 + OUG 125/30.12.2011) – the regulation of mandatory social contributions due from persons obtaining revenue from dependent activities and from other activities was introduced in the Tax Code, which led to a unitary approach concerning their tax treatment, but also to a decrease in the number of tax returns which the employers were due to submit before this decision was made.

4. The regulation of inactive taxpayers (OUG 46/25.05.2009) – transactions involving inactive taxpayers are no longer taken into consideration from the tax point of view.

In this regard, the National Agency for Fiscal Administration has the obligation to keep the Register of inactive taxpayers updated on its website.

5. Reverse charge for cereals (OUG 49/31.05.2011) – the reverse charge mechanism for transactions with cereals was introduced as a measure against tax evasion.

However, as this mechanism was introduced only in this sector, it led to some problems for the producers of cereals, as they had to request their input VAT be reimbursed. The VAT reimbursement is, however, very often delayed by the Romanian Tax Authorities.

Top 5 negative measures: 1. VAT rate increase (OUG 58/28.06.2010) – from 1 July 2010, the VAT rate was increased from 19 percent to 24 percent, which led to a decrease in consumption and also to an increase of tax evasion in Romania.

2. Tax on constructions (OUG 102/19.12.2013) - from 1 January 2014, a new tax was introduced in the Romanian Tax Code – a tax on constructions, which shall be

paid for group I constructions, as evidenced in the List of Fixed Assets grouped by classes and normal useful life, except for buildings on which a building tax is paid in accordance with Title IX of the Tax Code.

This tax shall be calculated by applying the 1.5 percent rate to the carrying value of the respective construction, as recorded in the accounting books on 31 December of the previous year; certain exceptions are mentioned in this respect. It is also worth mentioning that if the value of these constructions increases or decreases during the tax year, this will not have any impact on the tax due for the current year, but will be considered when computing the construction tax due for the following year.

3. Late payments penalties (OUG 39/28.04.2010) – the late payment penalties of 0.1 percent / day of delay were replaced from 1 July 2010 with late payment interests of 0.05 percent / day of delay + late payment penalties of 5-10 percent.

4. Changing the foreign exchange rate for calculating the excises (OUG 102/19.12.2013) – the exchange rate used to calculate the excises is the one published by the Central European Bank, unless the rate from the previous year is higher, in which case this rate is used, adjusted by the consumer price index in Romania for the respective year.

5. Minimum corporate income tax (OUG 34/11.04.2009) – this tax was introduced in May 2009 and its application made taxpayers that do not obtain taxable profits liable to pay this minimum corporate income tax, based on the turnover obtained in the previous year. It was eliminated in 2010, which led to problems concerning the manner in which corporate income tax was declared in 2010, as this created two fiscal periods, with two annual corporate income tax returns and consequently with two tax on profit calculations. ∫ BR ECONOMY | 5

“A 2014 volume of signings in the range of EUR 400-500 million in 20-30 projects.”

James Hyslop

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Interview

Developing a European future The EBRD develops projects that will assist Romania in maintaining stability in the financial sector, to support the further growth of local enterprises and small and medium-sized enterprises (SMEs). The bank supports Romania’s transition to a low-carbon economy, helps enhance its energy efficiency and security and promotes commercialization, competition and private sector involvement in infrastructure. Recently, the EBRD in its goal of continuing to facilitate Romania’s transition to a low-carbon economy through the further development of renewable energy resources, said it would provide a senior loan of EUR 49 million to fund the construction, commissioning and operation of the 108MW Crucea North Wind Farm in the Black Sea region of Dobrogea. James Hyslop, the EBRD’s director for Romania, talks about the bank’s plans for the Romanian market.

Where would you place and how would you describe Romania in the European context?

Romania is first and foremost a country with one of the highest potentials of any European country. The key attractions are: first, its strategic location, along with its relatively large population (close to 20 million people); second, its sound macroeconomic position, with low inflation, a government deficit below 3 percent of GDP and growing economy (3.5 percent in 2013); and third, the convergence potential – GDP per capita is just 50 percent of the EU average (adjusted for purchasing power standards).

On a 1 to 5 scale, how do you rank Romania as a country worth or not worth investing in?

What are its advantages and disadvantages?

I would prefer not to put arbitrary numbers on Romania’s investment potential, but would simply point to the numerous advantages. In addition to those mentioned above, Romania has significant cost advantages, in terms of labor costs, over most EU countries and a strong educated pool of potential workers.

However, there are areas that need attention: the business environment is sometimes cumbersome and difficult to navigate, and the quality of infrastructure is still well below BR ECONOMY | 7

Interview

the standards of the most advanced European countries. This is why it is important to accelerate the usage of EU funds, which are designed specifically to help countries converge in their living standards towards the EU average.

Which European country should Romania take as an example for development, as a role model?

Each country has different circumstances and there is no magic blueprint for economic success.

However, the countries that are most successful in Europe are typically those with a stable macro economy, well-functioning institutions and a strong sense of social cohesion, which make them very attractive for investors.

Which Romanian industries do you believe will perform well in the next five years?

Romania has significant potential in a range of areas – agribusiness, energy, high-tech, knowledge-intensive industries and tourism.

All of these have potential for strong growth in the coming years.

How much financing has the EBRD scheduled for Romania this year?

Since the start of its operations in Romania, the EBRD has invested approximately EUR 6.5 billion across over 350 projects in Romania and has further mobilized over EUR 13.5 billion for these ventures from other sources of financing.

The EBRD business volume in Romania in 2013 continued the recent years’ sequence of high volumes with a record number of new signings (32) totaling EUR 508 million. It is rather early in the year to make a prediction but we may forecast, similar to the last few years, a 2014 volume of signings in the range of EUR 400-500 million in 20-30 projects.

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Which industries will need financial support from the EBRD? The EBRD remains committed to supporting the Financial Institutions sector and ensuring its stability in a challenging period. It will work with banks and non-banking financial institutions to provide SME finance, including for energy efficiency and small-scale renewable energy. In addition, the bank will support financial institutions in their efforts to access the local capital market in order to diversify their funding sources and get access to medium- and long-term funding. For this purpose, the EBRD launched a dedicated EUR 150 million bond market framework to support investments in bonds issued by local financial institutions.

As part of this, the bank participated in the local currency bond issues of UniCredit Tiriac Bank and Raiffeisen Bank in 2013 and envisages further investing in such instruments raised by Romanian banks.

How are you supporting Romania to improve its EU funds absorption?

In 2013 the bank continued the series of projects under its Romania Regional Co-financing Facility for water and waste water treatment projects in the municipal sector with six projects signed in 2013 in Prahova, Maramures, Bacau, Dolj, Bihor and Botosani counties for a total of EUR 61 million, leveraging an additional EUR 600 million of EU cohesion funds and bringing the total amount of EU funds mobilized under this framework to over EUR 1.8 billion. Moreover, in the context of the Memorandum of Understanding between the EBRD and Romania on EU Funds, the bank will remain actively engaged, and will directly assist in capacity building and in improving the EU funds absorption level in parallel with promoting private sector participation and sustainable financing schemes.

Interview

What will the main areas of economic growth be this year (and your estimation regarding the economic growth)?

At present, we expect GDP growth in 2014 to be 2.4 percent. However, we were surprised by the strength of the recovery in 2013 – GDP growth of 3.5 percent exceeded our (and most others’) expectations, and there is potential for further strong growth this year provided political and macroeconomic stability is preserved and the Eurozone continues to show signs of recovery.

What are your expectations regarding this year’s privatization of state-owned companies on the Bucharest Stock Exchange?

Among the bank’s projects concluded in 2013 was the first comprehensive IPO participation including a corporate governance action plan. The bank invested EUR 50 million, in RON equivalent, for a 1.9 percent shareholding in Romgaz, the largest gas producer in Romania, as part of the IPO through which the state reduced its holding from 85 percent to 70 percent.

The purpose of the project is to assist Romgaz in its efforts to improve its corporate governance, internal control systems and environmental management practices.

With Romgaz shares dual listed on the Bucharest Stock Exchange and on the London Stock Exchange through GDRs, the project also contributes to the development of the local capital market in Romania.

The approach to the Romgaz IPO involving a Corporate Governance Action Plan is a model worth replicating.

Over the coming years, the bank will continue to be an active contributor to the development of a better investment climate and the Romanian economy, including in cooperation with the IMF, EC and WB, under the framework of their economic program, especially

in areas like privatizations, listings and the restructuring of state-owned corporations.

Is there a specific strategy for supporting SMEs/local companies? What profile of this type of companies would get your attention?

The EBRD is supporting SMEs indirectly, via dedicated credit lines channeled through financial intermediaries (as presented in Q6 above). It also targets Romanian SMEs directly through its Local Enterprise Facility under which it provides finance of up to EUR 10 million via a wide range of flexible financial products including equity and debt financing.

In the case of financing provided via financial institutions, SMEs are generally defined according to the EU definition and the scope of such finance covers both investment and working capital purposes, for a wide range of industries/sectors.

Agriculture, IT, energy and tourism are some of the most frequently mentioned areas of interest to foreign investors and others. What should Romania do for each of them specifically and all of them generally in order to be more flexible, transparent and attractive to investors?

Indeed, these are the sectors where Romania has strong potential. In general, it will be important to attract greater shares of foreign investment to these sectors, but this will happen only if there is a concerted effort to tackle business climate problems and remove unnecessary impediments to investment.

It is also important to think regionally about these sectors. For example, Romania’s participation in the South East Europe Energy Community opens up new investment possibilities that enable cross-border trading of electricity and gas. Developing tourism requires a strategic approach to regional transport links. ∫ BR ECONOMY | 9

Industries 11 Agriculture 17 Energy 21 Infrastructure 26 Online 29

Real Estate

33 Retail 36 Tourism

Note: The listing of all industries was done in alphabetical order.

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Agriculture

Local agriculture poised to generate growth The agriculture sector is without doubt an important piece in the economy’s supply chain. In spite of its great production potential, the opportunities to export Romanian agricultural products, with their subsequent positive impact on the balance of trade, have never fully been realized. However, there has been some progress in recent years.

Teodora Alecu, Ph.D., Director, Tax, Transfer Pricing Services, KPMG in Romania Răzvan Nan, Senior Manager, Banking Advisory, KPMG in Romania In 2010, according to the Romanian Ministry of Agriculture and Rural Development (MARD), Romania halved its food trade deficit compared to 2009, to approximately EUR 730 million. Exports increased by 40 percent to EUR 3 billion and imports of agricultural products reached EUR 3.7 billion, increasing slightly from 2009. In 2010, the highest earnings from sales both within the EU and outside came from corn, wheat, cigars and cigarettes.

Exports of rape seed, sunflower seeds and live animals were also significant. Last year, Romania also exported poultry, sugar, bakery and confectionery products, honey, wine, mineral water and chocolate. Turning to the imports of agricultural products, fresh or chilled pork remained in first place, followed by sugar and food preparations1.

In 2012, agriculture represented 5.3 percent of Romania’s GDP2, compared to the EU average of 1.7 percent3. Romania has a total agricultural area used in agricultural holdings of approximately 13.3 million ha, out of which

only 8.3 million ha is used as arable land4.

Since 1989, very few industries have been privatized as extensively as agriculture. So far, approximately 85 percent of agricultural land has been privatized, and the main form of privatization has been restitution.

Broadly, the structure of agriculture land is as follows: Figure 1 Agricultural land by use Arable Land 62.5% Pastures and hayfields 33.8%

Permanent crops 2.4% Family gardens 1.3%

Source: Romania Agriculture Census 2010 BR ECONOMY | 11

Agriculture

As can be seen in the above table, arable land represents the highest proportion, at 62.5 percent of the total, while family gardens make up the lowest, at 1.3 percent. Other types of agricultural land include pastures and hayfields, representing 33.8 percent of the total, and permanent crops, at 2.4 percent5.

As can be seen from the table below, the main crops occupy approximately 80 percent of the arable land, consisting of grain cereals (64 percent) and oleaginous plants (18 percent).

The grains are used mostly in producing bakery products, especially various types of bread.

Other types of crops that are grown are green fodder (10.9 percent), potatoes and vegetables (6.4 percent), and grain vegetables (0.5 percent). Remaining crops represent just under 0.3 percent of the total use of arable land6.

Figure 2 Types of crops Potatoes 3,1% Oleaginous plants 18,0% Grain vegetables 0,5%

Vegetables 3,3% Green fodder 10,9% Grain cereals 63,9% Other 0,3%

challenges driven by climate, regulatory and social change and smallholders’ difficult access to bank financing. Weather conditions have been responsible for fluctuating yields and shortfalls in supply, which have in turn influenced the price of crops. Government actions on trade or production subsidies also affect supply and demand. Where social forces are concerned, consumer reaction to food scares can be sudden and severe and have a large impact on demand.

Small farmers’ own funding potential is low due to lack of financial knowledge and trust in investment programs and cooperatives, which could provide the necessary funds for them to acquire land, equipment, irrigation systems, livestock technologies, and breeding programs as well as to build storage warehouses. One certainty in the agricultural sector is that taxation is increasing. There has been an increase in the overall burden because of a greater emphasis on compliance. (A few years ago, we rarely spoke about taxation of income earned by individuals from agriculture activities.) However, there has also been an enlargement of the base to which certain taxes are applied.

As can be noted from the graph below, there is still room for tax registration when it comes to farms.

Figure 3 Agricultural farms Agricultural non-fiscalized farms Agricultural fiscalized farms 4,600 4,400 4,200 4,000

Source: Romania Agriculture Census 2010 The Romanian agricultural sector has a long way to go to reach its full potential. It is facing 12 | BR ECONOMY

3,800 3,600 3,400

23 18 4,462

17 4,238

3,914

31 3,825

2002 2005 2007 2010 Source: Romania Agriculture Census 2010

Agriculture

The tax authorities are increasingly turning their attention to individuals in the sector, looking more closely at the way those earning income from agriculture declare their taxable base and pay the related tax. Where no fiscal administration office exists in the locality where the taxpayer lives, a protocol must be concluded with the local authorities, who will ensure collection of the relevant income tax.

It can therefore be expected that knowledge and discipline in the agriculture business in relation to the drafting of contracts, making payments on time and keeping accounting records will increase. Compliance can be expected to be enhanced, with a more corporate culture developing in the sector. In line with this trend, we can also expect to see less fragmentation of agricultural land, and consolidation around major players. Small farms that manage to form associations could perform well, but those that try to continue on their own may face more difficulties in surviving.

The breakdown of agricultural producers by size is presented in the following graph: Figure 4 Agricultural producers

Source: Romania Agriculture Census 2010 14 | BR ECONOMY

a)  Subsistence farm = A farm/household that produces for its own consumption and not to sell products on the market. b) Semi-subsistence farm = A farm/household that produces largely for its own consumption, but also to sell some products on the market. This type of farm is characterized by very diversified production determined by the needs of the household, and by a low level of technical equipment. c) Family farm = A farm/household that produces for its own consumption and the surplus is sold on the market. Activities on the farm are carried out mainly by family members.

The solution to the fragmentation of plots, which is a key contributor to the lack of access to funds for investments, is the association of farmers in cooperatives, which help achieve economies of scale, and can more easily secure loans for equipment, irrigation systems and storage.

Mechanization is comparatively poor in Romania, with one tractor available for every 54 ha, while the EU average is one tractor for every 13 ha. Approximately 170,000 tractors

INCREASING INVESTMENTS IN AGRICULTURAL LAND IN ROMANIA In view of the possibility of land acquisitions in Romania

by EU citizens or EU legal entities (including EEA states) starting from 1 January 2014, as well as considering the fact that agriculture was one of the main engines of Romania’s economic growth in 2013, we hereby briefly highlight specific matters of land acquisition by foreign investors in Romania.

Since 1 January 2014 the prohibition applicable to land acquisitions by foreigners has been removed. Currently, according to a draft law adopted by the Romanian Parliament (still to be published), any citizen or legal entity of an EU member state or an EEA state may acquire agricultural land in Romania on a reciprocal basis.

Romania presents well-known advantages for investors in agribusiness, such as: • large surfaces of arable land available for investments, i.e. the fifth largest arable surface in EU; • low land prices compared to the EU average, but prices will continue to rise in the coming years; • good climate and soil quality; • low labor costs, i.e. average gross nominal wages are still the second lowest in the EU; • strengthening the rule of law further to EU accession; • non-reimbursable EU funds and increasing farming subsidies available.

Foreign citizens, stateless persons and legal entities, all belonging to third party states (i.e. non-EU or non-EEA states), may acquire agricultural land in Romania only in the conditions stipulated under international treaties, on a reciprocal basis.

Moreover, favorable tax rules exist in certain respects: a flat tax of 16 percent, VAT reverse charge for cereals and technical plants to 31 December 2018; VAT of 9 percent for wheat, rye, wheat flour, bread & bakery; additional 50 percent deduction for eligible R&D expenses; favorable taxation of holding structures since 1 January 2014.

Nevertheless, for a complete overview of this sector, it should be mentioned that investors in agricultural land have to overcome certain difficulties on the Romanian market, such as: • the implementation of cadastral plans at national level is still in progress; • lack of cadastral measurements and Land Book registrations in several regions; frequent overlaps of arable land surfaces in practice; • restitution procedures started in 1991 but still not finished; a new deadline of 1 January 2016 was set for solving the restitution cases; • often defective keeping of public records of agricultural land; • large surfaces of non-farmed land; • legal restrictions on acquiring land in public ownership, subject to public auction; • frequent changes of legal and tax frameworks; • preemption rights for arable land; • swaps of leased arable land on site without notifying the landlord or the city hall; • the enforcing of lease agreements, which are writs of execution, could be difficult in practice.

We expect a constant increase in investments in agricultural land in Romania in the coming years, while the implementation of the mentioned legal changes will have to overcome certain administrative difficulties.

Mr. Bogdan Frăţilă - Attorney at law, Partner FRĂŢILĂ, RÖDL & PARTNER SCA

*Frăţilă, Rödl & Partner has been actively supporting foreign investors in agribusiness in Romania in recent years. The law firm’s portfolio includes assistance in the acquisition and farming of arable land of more than 20,000 hectares located in different regions of Romania, as well as legal and tax advice provided to producers and retail chains from the food industry.

Rödl & Partner is an international multidisciplinary consultancy firm, offering services in legal, audit, tax and financialaccounting matters, with 90 offices in 40 countries worldwide, including 30 offices in Central and Eastern Europe.

Contact: Mr. Bogdan Frăţilă - Attorney at law, Partner FRĂŢILĂ, RÖDL & PARTNER SCA Grand Offices, Calea Floreasca no. 55, 2nd floor District 1, Bucharest Telephone: +40 21 310 21 62 Telefax: +40 21 310 21 72 E-mail: bogdan.fratila@roedl.pro Web: www.roedl.com

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ADVERTORIAL

Prior to 1 January 2014, agricultural land was acquired by foreigners through Romanian business vehicles, i.e. legal entities, such as limited liability companies. In such cases no restrictions applied to the shareholding or management of such local business entities.

The draft law adopted provides certain measures concerning the limitations of acquisitions of agricultural land located outside the city limits by individuals aiming to consolidate farmland. The main restriction of the draft law relates to preemption rights; according to the draft law adopted by Parliament the following parties shall benefit from a preemption right of 30 days, in the following order: (i) co-owners of the land, (ii) land lessees, (iii) neighboring land owners, and (iv) the Romanian State.

Agriculture

exist in Romania, of which about 80 percent are aging or obsolete (source: Eurostat). Better access to financing for the acquisition of tractors and other equipment should be a priority.

To access state and European subsidies, subsistence farms need to become or be acquired by semi-subsistence or family farms.

Loans for land acquisition granted to semisubsistence farmers to acquire subsistence farms would reduce the fragmented nature of the current land stock.

Subsidies are an interesting topic. While all farmers seek support in the form of subsidies, from a tax point of view this may be a fata morgana.

Normally, taxable profit is a result of earnings from carrying out an activity. Subsidies are treated as taxable revenues, similar to income from sales. The state budget receives its contribution, but it is not a sign of actual growth. What agricultural producers should look for is to use subsidies as a financing source for investment in technology and equipment, to improve efficiency.

According to the 2010 Romanian Agriculture Census, of the total arable land, 48 percent consists of 1.1 million land holdings, i.e. subsistence, semi-subsistence and family farms with less than 100 ha per farm. These 1.1 million farms receive annual state subsidies of approximately EUR 175/ha, which represents approximately 20-40 percent of the cost of soil cultivation and harvest processing. Access to working capital loans is required for investments in seeds and fertilizers for cultivation and harvesting for smallholders.

The main problem encountered by Romania’s small farmers is the fragmentation and erosion of soil and obsolete technology. But, we should not forget how functional stock markets could support an increase in commercial flows.

Volatility in the price of crops is not something that can be avoided. Prices listed 16 | BR ECONOMY

on stock exchanges vary over time and it is difficult to anticipate whether they will go up or down. However, at least in the short term, better indications of market prices can be gained if the stock exchange market works well. The references currently available on the Matif Stock Exchange or the Cardiff Stock Exchange show current market prices far from Romania. Adjustments should be made, economically, for volumes of trade, additional transport and insurance costs, the quality of the crops, as well as losses in quantity and quality that could arise before arrival at the final destination.

In the end, prices lead to revenues and expenses and they all result in profit, which should be taxable. Agricultural producers should pay close attention to taxation, whether they are major players or small individual businesses.

The position can become even more complex when transactions are carried out with legal entities or individuals that are controlled either economically, or via a capital relationship. In these cases, the revenues and expenses considered for fiscal purposes should be backed by documentation of transfer prices. ∫

Notes 1. http://www.financiarul.ro/2011/03/14/deficitulromaniei-cu-produse-agroalimentare-depeste-doua-ori-mai-mic-in-2010-exporturilein-crestere-cu-40/ 2. The National Forecast Commission 3. _http://www.madr.ro/images/agricultura/ agricultura-romaniei-aprilie-2012.pdf 4. http://www.madr.ro/pages/raport/agriculturaromaniei-aprilie-2012.pdf 5. http://old.madr.ro/pages/raport/agriculturaromaniei-aprilie-2012.pdf 6. http://old.madr.ro/pages/raport/agriculturaromaniei-aprilie-2012.pdf

Energy

Legal changes see investors’ energy slump Currently, the biggest challenge for the Romanian energy sector is the intended liberalization of electricity and natural gas prices. This move, prompted by external pressure from the IMF and the European Commission, is about to blow apart the entire structure of wholesale contracts and regulated prices systems that have been in place since 2005 in order to both protect captive customers and ensure a certain degree of fairness in markets that could be dominated by major players.

Alexandru Valeriu Binig Director |Energy&Resources Industry Leader Deloitte Consultanta S.R.L. The government prepared for the favorable effects of these liberalization processes on the accounts of major beneficiaries, by inserting an additional windfall tax of some 60 percent of extra revenues obtained following price deregulation in the gas sector.

This simultaneous liberalization of both retail and wholesale markets generates a major challenge for the regulatory authority, which has to replace a system that has been in place for almost ten years, with a new system of “savage liberalization”, while preserving the balance between the interests of investors, consumers and the state.

While in the power sector, long-term bilateral negotiated contracts are being replaced by mandatory trading on centralized markets operated by OPCOM, in the natural gas sector the “price baskets” are expected to be eliminated while the price of indigenous natural gas increases, to a very ambitious schedule, which

might involve a 143 percent price increase within about two years.

This turmoil is not likely to attract major interest from investors in competitive businesses, such as conventional power generation or natural gas supply. On the contrary, the market has become rather unfriendly for strategic investors. Even those who made a long-term commitment to the local energy market are now having trouble convincing their corporate boards to channel more funds towards their Romanian activities. This issue also comes against the background of the arbitration actions launched by Electrica, the state-owned distributor/supplier, and holding company for its privatized affiliates, on grounds on the failure to observe the privatization contract provisions.

At this moment, no success has been registered in the Paris-based ICC procedures, and so no sums have yet been recovered from strategic investors, leading to potential negative investor sentiment. Moreover, major investment funds with the appetite for energy assets are not investing in power generation assets BR ECONOMY | 17

Energy

in Romania, as the rates of return are low and threatened by regulatory risk.

Under these circumstances, strategic investors’ enthusiasm for the Romanian energy sector is decreasing. Competitive activities are still exposed to regulatory risk, and hence do not provide an adequate confidence level for multinationals’ boards of administration, which compare different geographies in terms of investment opportunities and long-term prospects.

Additional negative sentiment has resulted from the recent government actions to correct the support scheme for electricity from renewable energy sources. While the proposed scheme, of which the European Commission 18 | BR ECONOMY

has been notified and which it has approved, brought Romania to the forefront of the investment destinations for electricity from renewable energy sources, the correction measures, which have drastically reduced the support and affected the implementation, allegedly without previous consultation of all stakeholders, have angered strategic investors active in Romania: some of them found themselves in the situation of building wind power plants, knowing that once the constructions were finished, they would already be money-losing facilities.

Such cases have also affected the appetite of strategic investors present in Romania in terms of the expansion of their business

Energy

portfolios in the country, as the regulatory risk is sometimes mixed with country risk.

The last two years have not witnessed major investment in “conventional” power.

Regulated businesses have made the mandatory investment allowed and imposed by the regulated tariffs methodologies (distribution, transmission).

No major power generation investment project has advanced, except for some rehabilitation and environmental retrofit activities, mainly financed by bank loans.

The Cernavoda Nuclear Power Plant units 3 and 4 project has suffered the withdrawal of the last two private investors in the Energonuclear project company, on the grounds of lack of progress and difficult economic conditions.

Negotiations with Chinese investors and contractors are rumored to be starting soon.

In addition, the Romanian authorities have been looking closely at the UK Hinkley Point C nuclear project in order to learn the necessary lessons about providing support to nuclear power generation (assimilation as clean power generation, contracts for differences, other forms of state aid for environmental protection, etc.).

Hidroelectrica has pushed another project towards completion, which had been started during communist times, but this success is not likely to be repeated. The remaining unfinished hydropower plant projects are becoming harder and harder to justify from a financial point of view.

Moreover, some of them were conceived to serve various complex purposes, such as protection against floods, drinkable water supply, irrigation, etc., which are not entirely quantifiable in financial revenues. Such investment objectives would be more suitable for economic analyses and support mechanisms such as structural funds or other state aid measures, given the slim chances of ensuring

profitability/bankability based only on revenue from low energy sales.

Even the renewable power generation sector, which has placed Romania on investors’ map in recent years, due to a promising support scheme, is subject to sudden changes to the legislative and regulatory framework that many claim are retroactive and highly adverse to the (overall) local investment climate.

Romania has witnessed volcanic growth in its installed capacity in renewable power generation, mainly wind and solar PV plants, bringing Romania close to achieving the EU Agenda 2020 objective, in terms of the share of final energy consumption covered by renewable energy sources, by 2014.

Such corrections were meant to moderate Romania’s corporate and household electricity bills, while several projects were yielding rates of return above the regulated figures notified to the European Commission. Under the new adjusted conditions (still subject to various legal challenges), the specific CAPEX would be crucial in determining further investment.

The wind power sector is apparently blocked, while the tremendous progress of solar panel technology, with rapidly decreasing prices, seems to keep generating investment and applications for accreditation for the awarding of green certificates.

Such spectacular penetration of uncontrollable power generation has put the Romanian National Power System under stress, both in terms of transmission infrastructure (the change of the weight center of generation with an increase in network losses, potential network congestion in the evacuation of the power from the windy Dobrogea region, etc.) and the available reserves of ancillary services (fast tertiary control, mainly).

Such stresses must be addressed immediately, by allocating a massive concentration of capital to building new network components BR ECONOMY | 19

Energy

or the long-awaited Tarnita-Lapustesti Pumped Storage Hydropower Plant. Corporate bonds might be a solution, both for Transelectrica, the state-controlled transmission system operator, but also for Hidro Tarnita, the newly created investment vehicle for the pumped storage project.

In conjunction with that, one can notice the increased expectation from private and institutional investors for the Hidroelectrica and Electrica IPOs announced for this year.

Rather than engaging in project finance schemes in a market that provides very low revenue predictability by means of long-term bilateral contracts, investors seem to prefer minority stakes in businesses that are regulated (network operation) or have guaranteed 20 | BR ECONOMY

market access in light of lower generation costs (hydropower generation).

Structural funds are also expected to play a catalyst role in the years to come. Energy efficiency measures related to building and heating network rehabilitation are among the expected beneficiaries. Further support is also to be provided to power generation from renewable energy sources that have previously suffered market failure, mainly biomass fired cogeneration, small hydropower plants, biogas, and even to some elements of distribution grids for connection. There is a debate now on the public sources to be used to support investment in major smart transmission grid components – the national structural funds budget or the Connecting Europe Facility. ∫

Infrastructure

Seizing the infrastructure opportunity The state of a country’s infrastructure explains its economic position. And while the market provides opportunities, investors need legal guarantees.

Dana Gruia Dufaut Managing Partner, Gruia Dufaut Law Office, registered at the Paris and Bucharest Bars Infrastructure is a hotly debated subject in the whole of the European Union. In Romania’s case, the subject has been included on all government agendas over the last 20 years, and its poor development also explains, to a certain extent, the reluctance of some investors to choose Romania to carry out their business in this part of Europe. When we speak about infrastructure, we speak about the need to massively finance road construction, the development of the energy sector, the water supply and sewage networks… Nowadays Romania has only approximately 600 kilometers of highways, plus county and communal roads that – even though it does not need to reconstruct them from scratch – require maintenance and modernization. There is the same need for investments and modernization for railway infrastructure, which is also obsolete.

Generally, airport infrastructure, where it is present, is the closest to European standards, given the modernization investments made by the authorities in order to fulfill the technical conditions for access to the Schengen Area.

However, Romania continues to have very few airports.

BR ECONOMY | 21

Infrastructure

Therefore, there is a need for major investments in various areas of intervention. I would not say that Romania’s infrastructure does not “totally” meet the EU standards, but I would point out that efforts must still be made to remedy the deficiencies in this domain.

Romania is already an important regional market, but its attractiveness for business may increase significantly once infrastructure is developed. And with concrete measures taken in this area, Romania could gain a lot in the area of infrastructure.

While it is true that major EU funding was and is available for the large projects necessary for the development of infrastructure, I would add that there are also national funds.

22 | BR ECONOMY

However, these funds were not and are not sufficient, given the needs in the area, which is why they must be managed correctly and efficiently so that these projects are carried out and completed. The lack of transparency in awarding and managing works contracts, as well as the poor and slapdash management of these projects and the allocation of the existing funds (mainly caused by the lack of responsibility of the public servants in charge of them, on one hand, and the collateral, or even political and electoral interests, on the other) have led to the unhappy existing situation.

Still, the current state of the country’s infrastructure cannot all be blamed on the lack

Infrastructure

of legislation on PPPs. At present, Romania has legislation allowing it to carry out major infrastructure projects (the law on public tender and concessions), fairly well adapted to the European legislation in this sector. The national jurisprudence in the field follows the European jurisprudence, and Romanian judges are increasingly well prepared and abreast of the European jurisprudence, especially if the lawyers providing assistance in such cases have extensive knowledge and experience in European law.

However, a law on PPPs could lead to a greater number of projects and a more rapid development of infrastructure. But without the two elements I have mentioned above (transparency and efficient management), the result will be the same as today. Having legislation is not enough; there has to be a real will to apply it correctly and continuously, and, moreover, there must be the will and the knowledge to manage those projects correctly and efficiently.

The legislation on PPPs is meant to provide the framework for efficient cooperation between the public and private sectors, by facilitating investments in transportation, the environment, energy and public services. Although PPPs have been a recurring theme in Romania since 2002, no major project has yet been completed.

Economic theory and practice underline the major role of infrastructure in a country’s economic and social development. The presence of an investor in a certain area ensures economic growth and jobs. Meanwhile, there is a close relationship between infrastructure and other activities, such as supplies and construction, but also the industries using it, such as the airline and road industries and transportation services. With a different approach, infrastructure development would also lead to the levelling out of development disparities between a country’s regions.

24 | BR ECONOMY

Investors are interested in all domains with potential and infrastructure is without doubt one of them, because there is so much to be done… Nevertheless, major deficiencies, the lack of transparency and the failure to apply the law in a uniform and equal manner have persuaded certain major investors in infrastructure to leave Romania. Others are following Romania with great interest and are waiting for better investment conditions, for assurances that their money and rights can be guaranteed. At the same time, taking part in concession procedures remains an option that certain investors in the infrastructure sector are considering.

Infrastructure development is dependent on far too many factors (the economy, legislation, resources, political will and so on) so we are not able to predict the situation for 2014; nevertheless, major projects, worth several billion Euros are expected in this domain.

The expected entry into force of the new law on public private partnerships may lead to an increase in the number of projects, at least for transportation infrastructure, but also for energy infrastructure, where the need for investments is also very high.

Investment opportunities are there, but Romania must want and know how to attract, protect and keep these investments! Romania can receive funding from the European Investment Bank or attract European funds, making the development of the public procurement sector more predictable. According to the authorities, the future Grand Infrastructure Operational Programme, which will also comprise European funds for transportation, will have at its disposal approximately EUR 9 billion from the European Commission between 2014 and 2020. Moreover, the Regional Operational Programme, which includes transportation infrastructure components, will benefit from over EUR 6 billion. ∫

Online

Investment in digital: 5 directions for 2014 An analysis conducted by Cowboy Ventures brutally blows apart the dreams of those who fancy themselves as the next Zuckerberg, Jobs or Gates: the chances of a digital start-up reaching a value of USD 1 billion are below 1 percent.

Dragos Stanca Managing Partner, ThinkDigital Even more interesting: the chances of this happening to an entrepreneur under 35 years old are even smaller. The winning formula seems to be co-founders with a wealth and diversity of experience. One more thing: a start-up waits an average of seven years for the first serious money.

So if you’re dreaming of the “big pot”, remember two things: prepare for a marathon, not a sprint. And eventually, if you are below 30, join forces with an experienced older person. If you are on the other side of the fence, do the opposite. More details about the study can be found on TechCrunch (Google this: Welcome To The Unicorn Club: Learning From Billion-Dollar Startups).

Of course, we're talking about big business jackpots – of which we all dream. In this region, CEE, there are still enough opportunities, despite the inevitable obstacles. When it comes to where to invest in 2014, in my field, a few principles become clear.

First, some ideas that led me to the conclusion below. Don’t you relate to the Internet only in terms of one side – a highly visible side, that’s true – the media side? The Internet is not 26 | BR ECONOMY

a medium, such as print, radio or the television: it is a communication channel. Therefore, before telling you the directions that make sense in 2014 in my opinion, I will tell you where not to invest. For example: do not invest in content, in publishing – unless you have an absolutely unique idea. The market is saturated in this regard and there is no more “room” at the moment.

In addition, most of the revenue from digital advertising – the main source of income for a project like this – is being snapped up by the major global players (Facebook, Google, Yahoo). The part left over for local and regional publishers is becoming smaller and smaller and polarized by significant local publishers.

The digital advertising market is growing, but this growth is not reflected in the pockets of local players. It is the same with the consumption of content. We won’t discuss the quality of such content here.

So, where do I believe that ROI can be significant? There are several directions and ideas that I believe in:

1. eCommerce An area from which we expect significant increases in the region is e-commerce.

Online

I believe in the response to the expansion of regional giants like eMag or global ones like Amazon, with local e-commerce businesses, very focused and specialized on sectors / products.

2. Regional and Global Another principle that anyone who wants to invest in digital should keep in mind is that, right from the beginning, the business should be set up with the possibility of extending it at least regionally, if not globally.

3. Mobile A highly visible trend is the increasing use of

digital through mobile devices, so any (good) idea which can improve the experience, be it smart apps or related services, continues to look like a good business opportunity.

4. Data Processing In the avalanche of information and the hysterical chase after relevant data, any business that can provide both valid data and the professional processing of existing data is also an interesting direction. However, this battle is mainly in the direction of the capacity to collect first and then analyze these data. And we are talking about large quantities of information that runs through fiber optic, wireless and mobile connections sites. Moving closer to the BR ECONOMY  |  27

Online

consumer, an interesting area remains the tools that can be developed in order to make life easier in the everyday communicative avalanche.

5. Connected world Last but not least, the revolution started by smartphones is expanding, slowly but surely, in all aspects of life. The TV has become a larger tablet, hanging on the wall. The tablet arose from the need for a larger mobile screen, once the smartphone created the consumer habit.

But obviously it does not stop here: connected cars, kitchens, watches, personal banking and much more will follow, like an avalanche. Therefore, new markets will emerge, new media applications will be friendlier, more useful, and easier to use.

Okay, that is somewhat obvious. Of course, great ideas and great success in business and 28 | BR ECONOMY

especially in the area of digital innovation do not necessarily follow the trends. Even if the creativity and the idea underlie the evolution in our field too, they are not everything: a new approach to something already released or simply the improvement of it is sometimes the winning solution.

Do not forget that Facebook was not the first social network, Google was not the first search engine, YouTube was not the first online video platform, and Amazon was not the first online store.

So innovation is good, but often, the solution to a winning investment in digital is reinvention: reinventing your own business or reinventing a product or service already present around us.

Whatever will be, the most important thing is to have a good year – in business and especially in life. ∫

Real Estate

Sustainable development The real estate sector went through a paradigm shift over 2009-2012: from a landlord’s to a tenant’s market. The evolution of real estate in 2013 contributed to a greater balance between landlords and tenants on all segments.

Razvan Iorgu Managing Director, CBRE Romania

a stable performance, while for others a bumpy road still lies ahead.

The situation was helped by the very good macroeconomic results recorded in 2013: GDP growth was of 3.5 percent (with an estimated 2.3 percent for 2014) coupled with record exports of approximately EUR 50 billion and industrial production growth of 7.8 percent.

This steady macroeconomic growth, combined with improving investor interest in Romania, is the basis for the sustainable development of the real estate market in 2014 and beyond.

2014 and beyond While we expect renewal and renegotiation activity to continue at a stable pace in 2014, the biggest change for the office market this year should come from pre-leasing activity.

With some large accounts already active since the start of the year, a number of pre-leases should be signed in the next 12 months.

Developer interest in new constructions is at a “normal” rate considering the overall climate, with a special focus on buildings with highgrade technical specifications. Properties such as Green Court Bucharest, AFI Park 2 and 3, Metropolis Bravo and Monolit Plaza will open up in the next 12 months.

Office 2013 The biggest news of last year was the total volume of office sqm transacted – over 300,000 sqm, the highest ever recorded in Bucharest.

Why is this important? Because it offers a new perspective on how demand has recovered in the past two years, creating the basis for a decrease in the vacancy rate and for the future recovery of the rental market.

2013 was dominated by transactions involving tenants from the IT&C sector: over 100,000 sqm in this segment alone. IT&C tenants signed some of the biggest deals ever recorded in Bucharest. Also, 2013 showed that the recovery is not linear and that some areas of Bucharest are moving more quickly towards

Retail 2013 Last year with multiple new openings in the retail sector: shopping centers Uvertura Mall Botosani, AFI Palace Ploiesti, Promenada Mall Bucharest, Galati Shopping City and a hypermarket-led scheme (Cora Constanta), totaling 124,000 sqm. At the same time last year was rich in new brand entries, with La Martina, Oliver Weber, Patrizia Pepe, BCBG Max Azria, Tchibo Store, Pretty Ballerinas, Suvari, H&M Home, Mim, Ethan Allen, Crabtree & Evelyn, BR ECONOMY | 29

Lego, Napapijri, Dolce&Gabbana, Anthony Morato, Laduree, Jumbo to name a few.

2014 and beyond The estimated level of new modern retail developments for 2014, 56,000 sqm, is quite low compared to the average new annual stock delivered over the past ten years. We will see such schemes as Vulcan Value Centre in Bucharest, plus Targu Jiu Shopping Centre and the extension of AFI Palace Ploiesti open.

Most importantly, though, the construction of large and very large schemes has started, mostly in Bucharest, meaning Parklake, Mega Mall and Ghencea Shopping Centre as well as Coresi Shopping City in Brasov. The completion of these schemes is expected in 2015-2016. As for new brands, Bucharest will still attract the majority of the new retailers and we expect the top operations to continue to strengthen their dominant position in Bucharest as well as in the provinces.

Industrial 2013 Last year the focus within the industrial market was on production and manufacturing facilities, rather than purely logistics/warehouse units. This demand comes mainly from the automotive sector, with the overall industrial production sector up 7.8 percent in 2013 and a major contributor to GDP growth. As with the office department, the total amount of transacted space was substantially up y-o-y (+82 percent), reaching over 250,000 sqm, with Bucharest and major cities like Ploiesti, Timisoara and Arad getting the most interest.

2014 and beyond We will see more transactions signed for built-to-suit units, both in the logistics and production sector. Production facilities will

Real Estate

continue to be the “hot” topic in the coming years, as Romania benefits from the availability of skilled workers, from a historical track record of industrial production and from optimal real estate costs. Even though demand is up and will continue to grow, new developments will be limited to build-to-suit facilities, a reflection of the fact that the banks are still reluctant to lend to developers on a speculative basis and that they expect high levels of pre-leases.

Investment 2013 The real estate commercial investment volume for 2013 stood at EUR 343 million, up 100 percent versus 2012 and similar in volume to 2011 and 2010. A total of 15 transactions involving 30 properties were recorded in the period with an average volume size of EUR 23 million.

Retail properties dominated the market in 2013, accounting for 73 percent of the investment 32 | BR ECONOMY

volume, followed by office (21 percent) and industrial (5 percent). In terms of players, the market is dominated by NEPI, which holds 40 percent of the investment volume recorded over 2010-2013, and Globalworth Real Estate.

As Romania consolidates as a stable business environment, we will see a number of new international players active within the market, making acquisitions of dominant real estate products.

2014 and beyond Retail and office properties are expected to be the most sought after in the next 12 months following the performance of recent years.

As seen before, assets located in the provinces will be also part of the target list for international, as well as national, players.

The exceptional macroeconomic indicators for 2013, meaning one of the best performances across EU countries, create a strong case for Romania as an attractive, investment-worthy market. ∫

Retail

Retailing the economy Retail is one of the most dynamic sectors of the Romanian economy, both in terms of investment and innovative technology solutions, as well as from the point of view of the efforts to identify a competitive business model.

Sorin Spiridon Manager, Ensight Management Consulting Retail, be it general or fashion, electro-IT or Do-It-Yourself (DIY), is, without doubt, a vital engine of the local economy, given the approximately EUR 17.2 billion of revenues generated by the retail market, the impact on GDP (24 percent of total GDP), the employed workforce (approximately 9 percent of the total workforce), and consumption (61 percent of household income is spent on retail goods).

While for most economic sectors the economic downturn was a constraining factor, it represented an opportunity of which international retailer players took full advantage.

The modern retail offensive continued in 2012 too: they opened new stores and acquired smaller players, while traditional trade seemed “frozen”. The paradox is that traditional trade lost ground even in the realm of convenience stores, where it should have been a strong competitor. For general retail there is, at least so far, a big winner – Kaufland, which managed to find the best recipe for the crisis: smaller formats, intensive territorial expansion, a very careful selection of suppliers and items, and an aggressive pricing policy.

While spectacular change is not likely for hypermarkets on the short term, on the medium term we expect the competition to become fiercer after Auchan completed the takeover of the Real chain. The fact is that

during the last two or three years we have witnessed a lot of takeovers: small networks have been taken over by large chains (Mega/ Canserv, Mega/Gima, Profi/Alimrom, Profi/ Alcomsib), but we have also witnessed the retreat of players who developed networks to seize the market opportunity, without being specialized strictly in this segment (Auchan/ Real, Lidl/Plus).

Another player who we believe has seen exciting development is Mega Image, which has expanded its store network at an impressive rate (from 72 stores in 2010 to 250 today).

Mega Image has focused intensely on the proximity segment (with 100 Shop & Go stores already). It has rearranged many of its locations, redefined the level of customer service and, extremely importantly, readjusted prices.

We have always stated that for convenience stores to gain ground in Romania, they have to provide a competitive service level and much lower prices than suggested by the business model specific to this segment.

Unlike in Romania, in countries with mature markets convenience stores can charge higher prices because shoppers don’t have too much free time to go looking for stores with low prices, which is not the case for most of the consumers in Romania. This theory is confirmed by the higher number of visits to hypermarkets in spite of the decreased amount of money spent, which can be considered an indicator of “shopping tourism” (consumers BR ECONOMY | 33

Retail

going to various locations in search of the best prices).

For the fashion retail market we notice that even though the market volume has remained roughly the same as during the last two years, at approximately EUR 1.5 billion, the top ten players had a significant increase in revenues both in 2011 and 2012. We estimate that the main source of growth was opening new stores rather than an increase in the activity of the existing ones.

The fashion retail market is dominated by three giants: Zara, H&M and C&A, which started from a cumulative turnover of EUR 20 million in 2008 and reached about EUR 220 million in 2012. On the other hand, some brands have disappeared from the Romanian retail market (Esprit, Etam and Celio), but this was mainly because they didn’t adapt to the Romanian market conditions rather than because of the economic downturn.

34 | BR ECONOMY

Going forward, the major players will continue their expansion plans and even if retail does not post a significant increase, the Romanian market will continue to be an attractive one because of its volume, and we can expect the entry of new large retail chains. Because of the Romanian appetite for brands and the lack of substantial offers from Romanian brands, the focus on international chains will continue. Many Romanian shoppers would prefer local brands, which are often perceived as having a very good quality/price ratio, but Romanian entrepreneurs have been unable to find a way to exploit this opportunity.

Another important retail sector is electroIT, the volume of which is estimated at EUR 1.7 billion. One of the features of this segment is the very high percentage of online sales, which puts a lot of pressure on “bricks and mortar” chains. Even so, after a painful process of restructuring, chain stores have begun to get

Retail

back onto more solid ground, and Altex even achieved very impressive sales growth. eMag remains a remarkable player and a standard bearer in terms of operational excellence and we believe that it will not have a worthy competitor in online retail in the near future.

Electro-IT will also be one of the most complex retail sectors in future, since firms will have to cope with a lot of challenges: greater product diversification, the shorter life cycle of these items and margin erosion due to multichannel sales, and a rapid commoditization of many product categories. The market entry of one or more major players would greatly complicate things, and therefore it remains a priority for the key players in this market to strive as much as possible towards operational excellence, this being one of the best ways they can become truly competitive.

The DIY market also has a major player that has taken advantage of the economic

crisis – Dedeman. This is one of the few cases in which Romanian retailers have managed to confront large, international retail chains, and do so successfully. Since market volume is strongly influenced by the construction sector and the public’s purchasing power, and since none of them are showing any sign of growth in the upcoming period, we expect the market to stagnate or grow very little. This will bring about a high level of competition between the existing players.

A general characteristic of retail in Romania is that development has been more of the extensive kind. More attention will have to be paid to the performance of existing locations. For this to happen, retailers will have to conduct further studies to more precisely identify consumer types, and, using internal data, they will have to determine customers’ buying behavior. The fact that in recent years there has been a lot of sales promotions can’t be explained just by the declining income of the public, but owes also to insufficient market knowledge and, consequently, poor customer loyalty.

Looking ahead, retail – especially in the general and fashion field – will continue to be a very active sector with a lot of investment, both by existing players, but also by new entrants on the market. Romania has some definite advantages – such as market size, large locations at reasonable prices, quality oriented consumers and the lower appetite of Romanian entrepreneurs to invest in this area – which will keep it on the map for attractive investments. However, the time has perhaps come for Romanian entrepreneurs to turn their attention more towards this type of business, given that they can capitalize on the existence of managers with good market know-how, consumers' attachment to Romanian brands with a tradition and an already educated workforce. ∫ BR ECONOMY | 35

Tourism

Business or passion Investing in Romanian tourism needs knowledge, professionalism and... education. Romania could obtain pole position within the ranking of “tourist countries”. Investments – already started or accomplished – are a reason for pride, as they certify the interest in the tourism industry as well as the capacity and will for developing local tourism, while their absence generates criticism and disappointment.

Razvan E. PIRJOL President, Skal International Romania Investments in Romania’s tourism are an issue, as we experience, shall we say, continuous dissatisfaction with the quality of infrastructure, services and offers in this sector – considered by some as minor, due to their small contribution to the GDP, and by others as a unique economic revival opportunity for the national economy. “Well if nothing has been invested...” seems to be a “leitmotif” responsible for the lack of success of the hospitality industry in Romania.

We definitely face this kind of situation, but claiming that there have been no investments at all and that Romanian tourism is the same as 20 years ago (or even 10) would be ridiculous, as would the assertion that in Romania we only have bad service and “communist-era” hotels and restaurants. Bucharest, for example, today offers a large choice of hotels, from chains to newcomer boutiques, not to mention the restaurants and bars of any capital in the world. Keeping the proportion, investments have been made in other cities too. Whether made out of simple caprice or passion, or for investment reasons, we find them in our hospitality structures, some quite nice and providing a large choice for all tastes.

36 | BR ECONOMY

So, where is the problem then? Why do we still entertain those “clichés” about the low quality of tourism in Romania, the lack of investments and bad – but expensive – services that Bulgarians do better etc, etc?

Maybe because of the lack of general strategy, vision and coordination from small to big and vice versa, the development of “tourismland Romania” is not visible enough.

Given that tourism has long been a mass phenomenon and in spite of the economic crisis, we are ready to renounce some of our comforts, but still have consumer credit for holidays.

The need for a master plan is crystal clear, as such a document provides a coordinated execution of the development directions and automatically of the investments. Such a document inspires security for potential investors, as they see a short-, medium- and long-term strategy, which gives them trust.

Romania has a master plan, created with the help of the WTO, for the period 2007-2026.

Even if, personally, I consider the period quite long, in a continuously changing “tourism world” that is hard to predict, we have a plan which can eventually be modified and updated.

What is essential for such a document, though, is a detailed “modus operandi”, the way we might want to implement the different

Tourism

initiatives and projects. Furthermore, these projects should be bankable and with well defined terms and deadlines of execution.

Local authorities, in their turn, should have a clearly defined strategy, which should coordinate both public and private investments in one “whole”, in order to obtain a destination strategy and, furthermore, the management of it. Again, joint efforts in this field should improve visibility and generate an increase in individual businesses.

Within the last few years, six main directions of development have been identified for the Romanian tourism sector. Within these, a USP was identified, which should help attract investment: imagine that a two-hour flight from the Western world, you can discover landscapes and charming people, generating experiences that both foreign and local visitors would savor.

All investments in these fields need continuity and must be presented within a general communication framework, not ad hoc for each new added brick. Any investor seeks security (as much as possible) or relies on trust. In its turn, trust is conditioned by vision and how and when the latter is implemented.

Tourism is not isolated from the other realities of a destination, but is strongly related to factors like security, the health system, transportation and ecology.

A city break is by definition a short stay, during which visitors like to visit and consume as much as they can of the local flavor. So investments in transportation facilities and their coordination are also essential.

Another extensive sector where Romania badly needs investments, both from the point of view of infrastructure and organizational ability is MICE (Meetings, Incentives, Conferencing, Exhibitions). Development and investment in this area would boost the entire hospitality industry through the high number

Tourism's six main development directions: 1. Rural (dubbed slow tourism)

This is about relaxing in a rural environment, enjoying organic food, in a village B&B, coordinated eventually with the globally known Slow Food Movement.

2. Nature & wildlife

Romania has a large amount of rare flora and fauna, of wild unspoiled nature. As well as the unique Danube Delta, there are also nature parks, mountains, caves and waterfalls.

3. Active & adventure

Our landscape offers extensive opportunities for outdoor sports, both soft and extreme.

4. Health (wellness)

Wellness tourism should be a major investment direction for anybody considering Romania’s potential, both for prevention as well as for specific medical treatments.

5. Circuits

Despite the large offer and opportunities, infrastructure problems will surface, especially regarding the easy transfer from one place to another.

6. City breaks

City breaks offer the opportunity to discover, relax, experience culture and also... go clubbing. Bucharest and Mamaia have seen huge investments in this leisure area.

of guests who discover, spend, acknowledge local values, tell others about their trip and hopefully return...

Not only is there no real conference center – adapted to modern standards (large conference room for 3,000 to 4,000 participants, with at BR ECONOMY | 37

Tourism

least 80 percent of this capacity in break-out rooms, parking, lodging facilities next door and so on) but neither do we have the capacity to organize such major events. The three major conferences organized in Bucharest showed the difficulties in communication between all entities involved in the project, from the organizers to the City Hall, police department, hotels, restaurants and so on.

So far we have addressed only the need for investment in infrastructure, walls etc, but we should not forget the need for the same in improving our general image as a destination.

An image, a country brand in general and not only for tourism, is created over time. It shows and stands for what you are known to be good at. This can be also achieved through sports, through culture. Romania has both elite sportspeople and sports managers, recognized worldwide, as well as cultural figures who could help bring in large events and the appropriate investors.

So the bottom line is that Romania has a good portion of the necessary ingredients to justify any investment in local tourism and accordingly to generate an interesting ROI. But why can’t we seem to make that needed and expected improvement – improve the quality, improve the numbers (GDP, number of tourists and so on)?

I wonder if the real reason is not a major lack of specific investment. And I mean probably the most important one, that sine-quanon basis needed to ensure that any activity is sustainable, quality oriented and profitable.

Asked for the three conditions for a hotel to be successful, Conrad Hilton answered: “Location, location, location”. Paraphrasing this, I would say that in order to be constantly successful over the long term, with a serviceoriented attitude, having the “pleasure to please” and the pride of things done well, we need “education, education, education”.

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I know and I agree that attitude cannot be necessarily taught, you have to have it “in your blood”... but I believe that through education and training, we can fine-tune it...

Investing in people is still seen as a risky investment, which does not immediately bring benefits, but it definitely shows a good ROI in term of results on the medium and long term.

“If you think education is expensive, try ignorance,” said Derek Bok, former president at Harvard University. We need strategic decision-makers, trained and experienced in tourism, with the capacity and ability to implement multiannual projects that are independent of political changes. Once we have that and once we all agree – public and private – on a common strategic development, at a general, local and regional level, and about the benefits of Romanian tourism, then we will all harvest the results, also individually.

To make this happen, we need education and training, we need an understanding of this business, we need the courage, will and “craziness” to change.

We need the education and mentality for growing a new generation behind us. We have a poor offer in terms of hospitality schools in Romania, Trainees often do not find internships and after graduating from even higher level courses, they are not given good professional opportunities. At a higher level of education, Romania still has no Hospitality Management Degrees and the main three Hospitality Management schools worldwide are not officially recognized, or at least not fully, in Romania.

So how do we ensure the future of the investments we would like to start today?

Well, through the education of all parties involved: pupils, students, owners and decision makers and takers. A public-private partnership could be an easy way to finance a high-quality Hospitality Management school, a Centre for Excellence. ∫

Institutions 40 AmCham 42

German-Romanian Chamber of Commerce and Industry (AHK)

44

Embassy of Austria

46

British Romanian Chamber of Commerce (BRCC)

48

Chambre de Commerce, D’Industrie et d’Agriculture Francaise en Roumanie (CCIFER)

50

Embassy of Greece

52

Camera di Commercio Italiana per la Romania (CCIpR)

54

Romanian South African Business Association (ROSABA)

Note: The listing of all institutions was done in alphabetical order.

BR ECONOMY | 39

AmCham

Betting on IT&C, agriculture, energy and tourism Anca Harasim Executive Director, AmCham Romania For the past 20 years, AmCham has been focusing on what could make businesses in Romania more competitive with the belief that supporting their success will lead to higher GDP per capita, profit margins and standards of living for citizens.

As the largest market in South Eastern Europe, and a member of the European Union and NATO, Romania is one of the most attractive destinations for investments in the region.

A promising GDP growth rate in comparison with other EU member states and significant progress in key areas, such as renewables and agriculture, have attracted the attention of investors worldwide. However, such opportunities should be matched by measures to address areas of major importance to investors, most importantly related to infrastructure, the fiscal climate, bureaucracy and labor costs.

AmCham has therefore continuously advocated for better policies in the areas of taxation, the labor market, infrastructure and energy, which address deficiencies, constantly militating for a favorable, stable and transparent business climate.

These are key factors in creating and supporting a healthy local business climate, 40 | BR ECONOMY

creating value in terms of innovation, performance and new jobs.

The need for transparent, genuine consultations when new legislation is proposed or public policies are adopted is high on AmCham’s list of priorities and pleaded for in most position papers and meetings with government officials. A functional consultation mechanism, in line with EU best practices, sends a positive signal to investors prospecting the market and contributes to ensuring the much needed predictability for businesses.

A revised and modern fiscal system, reduced bureaucratic barriers, and maintaining a competitive taxation level correlated to efforts to improve collection are leading recommendations in the area of taxation.

A determined fight against corruption, full transparency and accountability in managing public funds, implementing a comprehensive and coordinated plan to take Romanian infrastructure towards EU standards of quality and coverage, increased quality and accountability in public services, and building administrative capacity at both central and local level are the most frequent requests when it comes to governance and administration.

In terms of investments, AmCham has long been calling for a functional one-stopshop agency for investors that would actively

AmCham

promote Romania’s investment opportunities and support prospective and current investors.

Other measures that would help Romania attract investors’ attention would be to keep highly skilled specialists in the country and reverse the brain drain, building on the positive experience of the IT sector; stimulate investments in key export industries and create incentive packages for local and foreign investors based on new technology implemented, number of jobs created, and high value added export capacity created as well as to recognize and develop the capital markets as an important alternative source of capital, for both private and public lending.

In the recent AmCham Romania Impact Study launched at the end of 2013 on the occasion of AmCham’s 20th anniversary in Romania, our organization outlined its economic vision on Romania. Strategic sectors that in AmCham’s view are most likely to attract new investments and place Romania in a more competitive position are ICT, agriculture, energy and tourism.

Romania as a Regional IT Hub Not only is Information Technology an important tool for improving business performance, with proven results in many countries that have strategies for skills development and technology adoption, but the Digital Economy is also already upon us. For some organizations, this will unlock significant competitive advantages, whilst for others, dealing with the disruption will be a major challenge.

Romania as Europe’s Garden The increases in global food demand and prices have turned investors’ thoughts towards agriculture, not only in Europe, but everywhere in the world. This is a great opportunity for Romania to focus on harnessing its agricultural potential and becoming a leading

market for agribusiness and organic food.

Romania holds 8 percent of European crop land, more than Italy and close to Germany and Poland. More importantly, the country’s black top soil, covering 60 percent of the land, is very fertile and produces high-yielding crops. Romania’s diversity in farming climatic zones allows the production of a wide range of crops, while investment in farming technology could significantly impact production, as local companies are still poorly equipped.

Romania as a Regional Energy Hub The regional and global energy industry is caught up in a race to discover and secure diversified sources of energy that can bring greater predictability in energy prices and the valuable geopolitical independence from import energy that every country pursues.

Romania has stepped up as an ambitious actor on the global energy market. For the past two years it has been constantly ranked among the 10 most attractive markets in the world for wind energy investments and the 15 most attractive markets for renewables in general.

Romania as a Prominent Tourist Destination Tourism is often mentioned as one of the opportunities Romania missed when talking about existing and untapped potential.

Putting Romania on the regional and international tourist map relies on massive investments in infrastructure that are needed to facilitate easy access to the large variety of tourism destinations throughout Romania.

A more competitive economy would improve Romania’s profile on the world economic stage. Romania’s future is not solely linked to the economic performance of the large multinational companies present here, but the success of entrepreneurs and SMEs able to compete locally and internationally. ∫ BR ECONOMY | 41

AHK Romania

Romania: potential still there Sebastian Metz General Manager, German-Romanian Chamber of Commerce and Industry (AHK Romania) For a long time Romania did not have a good reputation, but with time the old clichés began to disappear, and with accession to the European Union on 1 January 2007, the country joined, economically and politically, an international community.

Romania offers advantages that can also benefit German investors.

For years, Germany has been the no. 1 trading partner for Romania, as well as one of the largest investors (third in 2012). Romania is also one of Germany’s most important economic partners in Eastern Europe. Trade between the two countries amounted to about EUR 18 billion in 2012: imports from Germany stood at EUR 9.5 billion, and exports EUR 8.4 billion. For 2013 we expect a slight increase in both imports and exports.

42 | BR ECONOMY

The largest potential is in the following fields: automotive, trade, IT, environment and food. Romania, as an investment site, has gained a lot in importance to German companies in various industries such as automotive, trade, environmental technologies and services. Many large companies, as well as many SMEs, are active on the Romanian market and some continue to expand. However, the economy and politics are moving in very different directions. Romania looks good from a macroeconomic perspective.

German companies are still interested in this investment location. We note a mix of both new companies investing here and companies that are already on the market, and continue to expand their activities. However, the signals coming from the government are not quite enough to encourage private companies, which are constrained by new taxes and fees.

The signals are not very positive for the business and investment environment, with new and sudden changes to taxes not benefiting the Romanian business environment at all. Talk of tax increases is understandable, but the measures need to be debated before being adopted, and there should be a dialogue between government and business representatives, especially because in areas such as transparency, the predictability of economic policies, corruption, social and political stability, the satisfaction level of companies in Romania has decreased since 2011, as shown in a recent survey.

AHK Romania

Investors are troubled by Romanian bureaucracy and the lack of professionalism of the authorities. The problems facing German investors are the problems facing all investors in Romania and represent the entire business environment.

There should be a friendlier structure for foreign investors and better advice to companies. In addition to bureaucratic obstacles and legislative framework conditions that unfortunately change far too often, another sore spot is the insufficiently developed infrastructure that gives investors much hassle.

Acute problems that are identical in almost all countries in Central and Eastern Europe, apart from those listed, include unpredictable economic policies, corruption, lack of transparency in public procurement and insufficient legal security.

In each of these four areas more than half of respondents to the questionnaire mentioned above, conducted by several bilateral German Chambers of Commerce in the region, described themselves as “very dissatisfied"; in Romania the share of dissatisfied companies was 80-90%. A look at the results of the first survey conducted in 2006 shows that companies’ satisfaction in the areas mentioned has decreased from year to year. And this has happened not because expectations have increased, but because there are many more reasons for companies to complain about the situation.

Still, Romania's potential has not yet been fully exhausted and the country is not sufficiently well known in Germany. Romania can achieve above-average growth rates, if it creates the necessary framework conditions in the coming years. Predictability and stability are important to any investor. Politicians should deal more with the economic problems, so the country's economy can return to its growth rate. ∫

No boom like the one seen in the years before the accession will return soon. In 2012, growth was 0.7% and German companies also fared well during the crisis. Despite a difficult European economic environment, we believe that investments will continue in Romania, which shows that Romania, as an investment location, remains interesting.

SOME USEFUL INDICATORS: • GDP will grow by 2% in 2013 and by 2.2% in 2014. In 2010 it decreased by 1.2%. In 2012 it returned to growth (a slight rise of 0.7%).

• The unemployment rate will remain at around 7% in 2014, the same as in 2012 and 2013.

• The budget deficit was 2.5% last year and will reach 2% in 2014.

• E xports to the German market were EUR 8.74 billion in 2012 from EUR 4.9 billion in 2008.

• Direct investment in Germany increased from EUR 4.7 billion in 2007 to 6.5 billion in 2012.

BR ECONOMY | 43

Embassy of Austria

Auto industry drives investment forward, say Austrians Rudolf Lukavsky Commercial Counselor, Austrian Embassy in Romania Austria is generally very strong in Central and Eastern Europe, where its companies are among the biggest investors. Romania is a very important market for Austrian investors, being the largest market in South East Europe.

It is particularly attractive to Austrian businesses due to a traditionally and historically established partnership and strong economic ties, geographic proximity, cultural likeness and compatibility, and an abundance of opportunities.

Romania enjoyed very positive economic development in 2013 and the projection for the coming years looks promising too. An industry

44 | BR ECONOMY

in Romania that is developing very well and where we expect new investment is the automotive industry. Dacia has already been running at full capacity for several years, and Ford has made great investments in a modern state-of-the-art facility. Romania has already attracted several large automotive suppliers and with the growth potential of Dacia and Ford the location could become even more attractive.

The development of municipal infrastructure and the economy, as well as tourism infrastructure with the help of EU structural funds, will generate good project opportunities for companies and give Romania the set-up for sustainable growth and development.

The investment boom in renewable energy has unfortunately been brought to a sudden stop through the partial suspension of the green certificate subsidy scheme. The way this suspension was handled was rather unfortunate and not the best advertisement for Romania as an investment location.

With the general economic environment picking up, good investment opportunities will be found in a wide range of sectors. The retail and service sector is ever expanding and we also expect the construction field to gain some momentum. Incentives or public investments in research and development would

Embassy of Austria

help attract more sophisticated investment with a higher local value added.

4.1% GDP growth for Romania in the third quarter of 2013, the highest rate out of all EU member states, is a very strong signal. And looking at the figures, Romania is all set for growth. Foreign debt is low, employment is relatively high, taxes and labor costs are comparably low and the recent economic performance gives reason for optimism.

However, there are of course issues that have a negative impact on the country’s economic development. Political stability, transparency, and the predictability of political decisions are Romania’s main problems. A structured dialogue between political decision makers and investors and foreign institutions would help businesses prepare and adapt their strategies regarding upcoming legislative changes. Unfortunately we have seen many instances of economically relevant regulations or taxes brought in at very short notice, without the previous involvement of investors or foreign institutions.

Overwhelming bureaucracy is a heavy burden on companies. This can be particularly observed in the process of applying for and receiving EU structural funds for projects in Romania. Fortunately, recent developments give hope for a more efficient absorption of EU funds, a source of funding and chance for structural development that Romania cannot afford to let pass.

Furthermore, the pervasiveness of black market labor and tax evasion make it difficult for international companies to compete. Romanian transport infrastructure is severely underdeveloped, costing local and international businesses time and money and weakening the attractiveness of Romania as a business location, despite its close vicinity to its major investors.

Also, a certain lack of skilled professional

labor force in Romania can be observed. By skilled labor force, companies do not refer to university graduates, who can be found in good numbers, but workers who are adequately educated in their profession. Here the Austrian approach of a dual education system could serve as a role model for vocational training in Romania. Romania and Austria are already engaged in a constructive dialogue and joint projects on this issue.

Austrian companies’ total investment in Romania amounted to EUR 10.9 billion by the end of 2012. That is almost EUR 1 billion more than in 2011. Austrian companies hold an 18.5 percent share in the overall FDI to Romania, second only to the Netherlands. It is quite remarkable that the investments from a country as small as Austria are as large as those from France, Italy, USA and the UK combined. Some 6,626 Romanian companies have registered capital from Austria; we estimate that roughly 1,000 Austrian firms are active investors in Romania. About 100,000 jobs in Romania are directly created through Austrian investments.

The country’s biggest investments in Romania are OMV/Petrom and Erste Bank/ BCR. In fact those are the two biggest investments ever to be made by Austrian companies worldwide.

Of course there are several other large Austrian investments in Romania in various sectors. Austrian companies are particularly strong in banking and insurance, oil and gas, environmental technology and services, renewable energy, real estate, agriculture, construction materials and services, wood processing, packaging, transport and logistics, and retail. Romanian investments in Austria are also increasing. Most notably, the Romanian firm Heidi Chocolate bought Niemetz, a Viennese company of great tradition, producing the legendary “Schwedenbomben”. ∫ BR ECONOMY | 45

BRCC

UK exporters find welcoming market Raymond A Breden Executive Chairman British Romanian Chamber of Commerce (BRCC) If you are looking for a new export market, Romania is an exciting prospect. It offers all the benefits of a sizeable EU member state, with good potential for economic growth and development.

With a population of approximately 20 million people, Romania is one of the largest countries in Central and South-Eastern Europe. And if you take neighboring countries into account, the figure is around 100 million people.

In addition to its excellent geographic location, Romania’s key strengths are its welleducated workforce (English is widely spoken), favorable tax regime and political stability. It is also benefiting from a flow of EUR 74 billion of EU development funds from 2007 until 2020.

If you go to Romania to do business, you will find an established and supportive British business community.

As an exporter, you may need to find a distribution partner, or decide what type of presence to establish.

If you decide to set up a company or branch in Romania, you will find the taxation and legal systems to be business friendly, thanks to several major reforms in recent years. An improvement in the collection of taxes also bodes well for future tax levels.

46 | BR ECONOMY

Areas of opportunity One of Romania’s key economic advantages is its diversity and range of sectors. Earlier this year, the Economist Intelligence Unit forecast growth of 4 percent in 2014. Against the background of the general problems in the Eurozone, this is encouraging.

There are considerable opportunities throughout the economy. However, the key sectors identified by UKTI as having the greatest potential are: energy, transport (road and rail) and logistics, the environment, the automotive industry, consultancy (for accessing and using EU funds), private-public partnership (PPP) projects and developing a scientific infrastructure.

In the energy markets, Romania has significant reserves of oil, gas and coal, and has a good track record in nuclear energy production. The country also has to increase renewable sources and has Europe’s second greatest wind farm potential after Scotland.

The automotive sector is one of Romania’s recent success stories. Dacia (Renault) is the largest manufacturer with Ford increasing its presence.

Agriculture offers potential with 4 million arable hectares – only France has more in the EU – an area that could feed 80 million people or nearly four times the domestic population.

EU funds are now going towards modernizing farming. As one of the most beautiful countries in Europe and home to the Carpathian

BRCC

Mountains, Europe’s last true wilderness, tourism also has great potential. Prince Charles has a home in the region and he works to protect local traditions there.

To encourage high-tech industry specialists to stay in the country and attract more from abroad, employees working in IT have been made exempt from income tax. The announcement in September 2013 from the Ministry of Public Finance covers a wide range of technologies, and one of our members has written an article on the conditions to be met.

The Romanian government is keen on large and small-scale PPP projects – a field in which the UK has much experience – in areas such as infrastructure, healthcare and prisons.

Given its population, size and diverse economy, Romania has the potential to jump up the rankings of EU countries in the GDP per capita table – an attractive prospect for exporters.

the BRCC, signed an agreement to join forces with UKTI in assisting SMEs wishing to export to or invest in Romania. I believe that businesses need help from those with experience doing business here in Romania.

Chambers of Commerce have always rightly maintained that businesses are well placed to provide advice and assistance to other businesses. The most satisfying thing for us at the BRCC is to have an investor come to us and achieve success in Romania and then pass on their knowledge to others.

You do need a business plan to succeed in Romania and it needs to be road-tested. Then you need to implement it.

The launch of the British Business Portal in June 2013 marked the start of our collaboration with the UKTI. This website provides practical advice on relevant topics such as how to start a business, legislation and useful contacts.

Educated workforce and familiar culture

Great location, easy travel

It’s not difficult to find well-educated people in Romania and the buoyant job market ensures plenty of applicants for every position advertised. Wage levels are generally around a quarter of UK levels (office space is cheaper too). Almost every professional person in Romania has a good knowledge of English.

Other languages spoken widely are French, German, Spanish Italian, Russian and Hungarian. The Romanian work ethic is characterized by flexibility, motivation, hard work, overtime and a willingness to travel.

Support for UK exporters The UK government department responsible for promoting UK exports and Investment – UK Trade and Investment (UKTI) – and the BRCC have always worked together, but in 2013 we,

The Romanian roads have improved considerably in recent years and billions of euros of EU development money has been allocated to new motorways, by-passes and rail links. The main Black Sea port is Constanta, and there are also ports on the Danube. The most important inland city after the capital, Bucharest, is Cluj-Napoca, where many large international companies are based. I believe that Bucharest’s airport at Otopeni is now one of the most efficient in Europe. British Airways and the national Romanian airline TAROM, along with budget airlines such as Wizz Air, easyJet and Ryanair operate flights to Bucharest and other airports from the UK – from Luton, Gatwick, Stansted and of course Heathrow. When you get here, you will find a wide range of highquality accommodation, ranging from some of the world’s best five-star hotels to budget rooms. ∫ BR ECONOMY | 47

CCIFER

More French investment en route Adriana Record Executive Director, Chambre de Commerce, D’Industrie et d’Agriculture Francaise en Roumanie (CCIFER) Actively seeking direct foreign investment, Romania offers around 19 million consumers, a well-educated workforce at a competitive cost, a strategic location and plentiful natural resources, making it an attractive marketplace, especially to French investors.

The global vision of the economy based on the November economic barometer presented at the 2013 Economic Perspective Conference indicates a value of 3.52, the most optimistic average since the research was first conducted.

Moreover, the annual average (3.36) is also high in comparison with previous years. Without doubt, the November economic barometer points to a positive trend for the Romanian economy.

This trend is essentially determined by companies’ economic performances. The year-end results also bode well for the future, reflecting the attempt to regain momentum and leading to a positive outlook for forthcoming investments.

Romania underwent a major fiscal consolidation over 2009-2013, especially in structural deficit terms: from 7.5 percent of GDP in 2008 to an estimated 1.4 percent in 2013 (cash), which was achieved through a combination of spending cuts and tax increases.

48 | BR ECONOMY

In a general context, economic growth is expected to remain subdued over the medium term, with the forecast for 2013 at 2.3-2.6 percent, driven mainly by exports and agriculture, while the forecast for 2014 is 2.2 percent.

Lower deficits are expected in 2014 and 2015. Romania has set a bold MTO for its structural fiscal deficit: 1.0 percent of GDP in 2015.

Achieving it requires better links between policies and resource allocation in the public sector.

In this situation, the external environment will remain uncertain and capital inflows will be subdued, leaving the absorption of EU funds as a reasonable alternative to boost economic growth.

Romanian-French bilateral relations In September 2013, 7,518 companies with French investments were entered in the Romanian Trade Register, (428 more than in the same period of last year), of which about half are currently active, generating more than 100,000 jobs. It stands to reason that French investors appear to be present in all major economic sectors, including agriculture, automotive (Renault, Michelin), the financial sector (BRD-Groupe Société Générale, Groupama, AXA Asigurări), telecom (Orange), energy (GDF Suez, Alstom, Veolia), construction (Lafarge, Saint Gobain), infrastructure (Colas, Bouygues

CCIFER

and Vinci), retail (Carrefour, Auchan, Cora), IT (Louis Berger, Alcatel-Lucent) and pharmaceuticals (Sanofi-Aventis, Servier).

Moreover, according to annual data published by the National Bank of Romania in co-operation with the National Institute of Statistics, at the end of 2012 France had a stock investment amounting to EUR 5.27 billion and a share of 8.9 percent of the total foreign investments in Romania, compared to EUR 5.04 billion and a share of 9.1 percent the year before.

French investors know that “Romania is the second biggest market in Central and Eastern Europe and serves as a competence reservoir in fields such as engineering and IT.

The advantages One of Romania's biggest advantages is the country's status as an EU member state (also one of the largest markets in Central and Eastern Europe) and, consequently, a seemingly large receiver of EU Cohesion and Structural Funding backed up by all major international financial institutions. Also, the country possesses important assets, such as: a highly skilled labor force at competitive prices (solid knowledge in foreign languages, technology, IT, engineering), rich natural resources, including surface and underground waters, fertile agricultural land, oil and gas and not least high potential for tourism.

Difficulties encountered by French investors One of the major talking points in Romania's case is the bureaucracy or heavy-handed administration which makes a major difference to a newcomer.

Others are the lack of foresight from the authorities, political and legal volatility,

more precisely the uncertainty in fields such as justice, and at the same time a lack of transparency.

There is also growing concern about the shortfall of young workers in the industrial and agricultural sectors. In other words, the (somewhat obvious) mismatch between the training offered by the educational system and real labor market needs.

Also, due to political instability, 2012 was a difficult year in terms of public interest projects. The operational programs came under EU investigation and many infrastructure projects and related payments were put on hold, turning an advantage into somewhat of a disadvantage.

Other obstacles that could pose increasing difficulties are: the inadequate road infrastructure and the weak organization in terms of the delivery chain (specifically by which agricultural products reach stores), the lack of predictability in terms of the legal framework (more specifically: legal issues concerning the limitation of the amortization deductibility and the environment tax for used vehicles).

Where are French firms investing?

French companies are most active in: trade, new technologies, industry, services and construction, and there is a growing investment interest in fields such as agriculture, new technologies, green energy and tourism.

In conclusion, taking into consideration the growing number of French stock investments in Romania as well as the increased presence of companies with French capital in recent years (despite the economic crisis), it is fair to say that the link between France and Romania in terms of economic development will continue to grow, transcending the everyday (political) circumstances, but, ultimately, to the advantage of both parties. ∫ BR ECONOMY | 49

Embassy of Greece

New Greek dynamism Effrosyni Mita Counselor for Economic and Commercial Affairs Embassy of Greece Romania has been an important business and trade partner for Greece over the years and its market remains very attractive to Greek businesspeople. Greek companies were among the first to come here in the early ‘90s. Indeed, Romania is considered a friendly country with a safe and stable environment.

In fact, Greek companies are active in the whole region, but Romania remains the top destination for Greek investors in South-East Europe, based not only on the value of their direct investments, but also the high number of them in the market as well as the very broad spectrum of their activities.

Greek investments amount to nearly EUR 4 billion and cover almost all sectors of economic activity. According to the ONRC, initially invested Greek capital makes Greece the sixth most important foreign investor. There were 5,740 companies with Greek interest registered in Romania at the end of September 2013, against 5,520 at the end of December 2012; that means that in spite of the crisis 220 new companies of Greek interest were registered in Romania during the first nine months of 2013, while another 318 companies had already started their activities in 2012.

The presence of Romanian companies with Greek shareholdings is very significant and visible in the financial sector (with four banks at the top of the banking system), in telecommunications, various branches of the manufacturing sector (the food and beverage industry, dairy industry, aluminum products, 50 | BR ECONOMY

etc), health services and medical equipment, the wholesale and retail trade, and construction. Investments in these sectors were among the first to develop, while over time Greek businesspeople became very active in consultancy and business services, real estate services, agriculture and animal breeding, green energy, tourism etc. Greek companies currently employ more than 35,000 Romanians.

Bilateral trade is also significant. Although its volume was affected to a certain extent, especially at the beginning of the international crisis, the trend started to change in 2010 and in 2013 bilateral trade recovered.

Despite the difficult environment for businesses due to the crisis, Greek companies are displaying a new dynamism.

Romanian banks of Greek interests – already prudent before the international financial crisis started –were well positioned at the outset of, and during the crisis and retained their exposure to the Romanian market when that was necessary.

Many Greek companies went on with their investment programs. Major investment plans were concluded in 2011, 2012 and 2013.

Examples include a new innovative factory of dairy products in 2011, and the construction of a new aluminum products processing factory in 2012.

Last year, a major investment in the bottling industry took place (worth more than EUR 35 million), new greenfield investments in the health and welfare sector and in agroindustry were inaugurated, while a weekly newspaper in Romanian was published. At the beginning of 2014, the completion of significant investments in the glassware industry as

Embassy of Greece

well as in cable production are awaited, both worth more than EUR 80 million. Furthermore, over the last two years, a significant number of Greek companies have invested in the field of renewable energy projects – especially in energy production from photovoltaic and aeolian energy sources – in cooperation with Romanian actors involved in this field.

In the coming years, Greek companies may became increasingly involved in the field of agriculture and bio-products, as well as in energy production from renewable sources like biomass – especially after the expected clarification of the relevant legal framework. Thus, clear legislation on the business activities in this field would be an important tool. Another promising domain is tourism cooperation.

The increased absorption of EU Structural Funds could also offer new opportunities for development and investments. Greek companies are in a position to contribute to producing results in this domain. The eventual launch of investment projects, with public or European finance, as well as PPP projects will also attract the interest of Greek investors. The new legislation for PPPs is another positive step.

Although, as mentioned previously, Greek businesspeople generally consider the entrepreneurial environment in Romania safe and stable, some proposals nevertheless should be considered.

For instance, new investment projects could be encouraged by the completion of certain legislative initiatives (eg the Investment Law) which could provide incentives for the development of specialized companies.

Another issue of great importance is the simplification of fiscal provisions in the new fiscal code and predictability regarding the level of taxes, for a short/medium-term period.

In the agricultural business, the simplification of licensing procedures for productive

units in the farming and animal feed sectors could facilitate access to financing and to regional development programs.

The new law on land ownership by nonRomanians based on EU legislation should also be mentioned. Regarding renewable energy, a stable legal framework is important for investors.

The Romanian economy has been becoming more stable since 2011 and prospects for growth in the current year are above initial predictions. This positive trend is expected to continue next year, encouraging Greek businesspeople to strengthen their position, both in terms of economic activity and employment.

The institutional framework for bilateral economic cooperation covers almost all fields of activities and the dialog between ministries and administrations is ongoing and open.

The participation of companies in international exhibitions in both countries is high and can develop further, given the collaboration between HELEXPO and ROMEXPO, the official expo organizers in the two countries.

Moreover, Greek businesspeople visit Romania and often address the Greek Embassy, Office of Economic and Commercial Affairs, for business information. The Greek Embassy also assists all Greek business associations that wish to explore market opportunities through organized business delegations.

Greek companies trust the potential of the Romanian economy. They contribute significantly to its strengthening and will continue doing so. The improved macroeconomic results and prospects of the Greek economy and the expected growth in Romania will be reflected in bilateral economic and trade relations as well. We expect these relations to prosper in the coming years, as there is ample room for strengthening joint entrepreneurship. ∫ BR ECONOMY | 51

CCIpR

Italian firms still showing gusto for local investments Adrian Dimache General Secretary, Camera di Commercio Italiana per la Romania (CCIpR) The main sectors in which Italian companies are investing in Romania are the manufacturing industry (from textile to car components), energy and agriculture. The main driver for these investments was, at the beginning, the low cost of labor, but as the value added chain has developed in Romania we’re now seeing an investment phenomenon that is equally linked to factors such as logistics, skilled labor and a relatively friendly tax regime. At the moment we’re still seeing a good influx of Italian capital to Romania, even if the originating country is not always Italy itself. We can take as examples UniCredit Tiriac bank, Generali and Enel to show that Italian capital is also flowing in from other countries.

The main burdens faced by Italian companies in Romania are the lack of legislative predictability and administrative transparency of local and central authorities. While the second aspect is improving, albeit in slow motion, the legislative matter is still a big issue. We have experienced, as frontrunners, the legislative uncertainty about the renewable energy incentives, where a lot of Italian companies have invested also because of our promotional 52 | BR ECONOMY

campaign in Italy. In 2013 we started to focus on the agricultural sector, organizing a first conference in Padua, Italy, which was followed by a conference in Romania on 4 December.

Our activities in the agricultural and energy sectors are aimed at creating platforms for information and business matching, getting together complementary companies that should do business together.

Because of the structural situation in Italy, we believe that agriculture is one of the most important sectors where Italian companies should look at Romania.

There are many reasons for this, starting from the existing gap between the Romanian and the overall European agricultural sector, where a real convergence has to happen. This is the kind of gap that offers Italian companies a lot of opportunities. The main issue we identified in the Romanian agricultural sector is the Land Registry. Too many land plots are not registered and the process of land identification is very difficult. This should become a political priority and it should be solved as soon as possible. When land ownership is noted in the Land Registry, it can easily be used as collateral for bank loans. This is the kind of issue on which our advocacy initiatives focus, in order to create a better business environment and improve transparency.

CCIpR

There is another fundamental sector where we are experiencing growing interest from Italian companies, namely manufacturing. The automotive sector especially is very active, because of the local presence of multinational companies active in the car parts business. Firms such as Leoni, Takata, Autoliv, Draxlmayer, Delhpi and Continental (and there are also others) attract a whole range of second- and third-level suppliers for components. Given that there has been a shift in recent decades that has seen Romania produce more cars than Italy, many Italian companies in this sector are looking for new opportunities abroad. This sector can also benefit from specific state aid, as state regulations do not play a major role.

We can expect Italy and Romania to become even more intertwined in the next few years. Apart from the potential attractiveness that Romania represents to Italian investors, there is also another major phenomenon: almost 2 million Romanians live and work in

Italy. We don’t expect them to come back to Romania, bringing know-how and capital, but we expect them to be a possible future bridge facilitating capital flows in both directions. We have seen many situations where an Italian company comes to Romania following input from one of its Romanian employees, which is a very interesting phenomenon.

Overall, we believe that Romania is still a very attractive country for business, with a lot of fascinating present and future opportunities. The authorities must be careful not to waste them, sending wrong signals that may frighten potential investors.

The Italian Chamber of Commerce for Romania (CCIpR, Camera de Comert Italiana pentru Romania) is the main gateway for Italian companies approaching the Romanian market or looking for investment opportunities in the country. The CCIpR is also active – on behalf of its members – in advocating for a business environment characterized by transparency, predictability and stability. ∫ BR ECONOMY | 53

ROSABA

A continent of opportunity Neal Barber Associate at Blue projects and President of Romania-South Africa Business Association (ROSABA) Despite the large geographical distance between South Africa and Romania, significant direct and indirect investment has taken place in Romania, in parallel with a vast increase in bilateral trade between the two countries. Many travellers to South Africa remain with the impression that it is an easy place to reach, significantly closer than most intercontinental destinations, because it is usually an overnight flight with no time difference from Romania.

Several South African businesses currently have interests in Romania and a number of leading management positions are held

by South African executives, and this trend is most definitely on the increase. Some of these companies have already established prominent positions across the complete spectrum of the local business environment and continue to grow, such as NEPI, SAB Miller, Blue Projects, Metair Group – Rombat, Bistrita Nasaud, Theranova (an Oradea-based NGO providing prosthetic amputee rehabilitation services), and the recent Naspers investments in retailer EMag and online payment processor PayU. Since the re-establishment of the South African embassy in Romania in 2009 , H.E. Mr. Pieter Swanepoel, off the back of the ever 54 | BR ECONOMY

increasing collaboration between the two countries, has sought to initiate the coming together of a formal body to focus energies on increasing trade amongst south African investments in Romania, as well as increasing bilateral trade and investment between South Africa and Romania, culminating in the formation of the Romanian South African Business Association (ROSABA).

In line with the increase of trade between the two countries, the number of visa applications has increased by almost 400 percent since 2006, and bilateral tourism has blossomed, especially on the South African incoming side. There a great deal of potential to explore in promoting Romania as a destination for South African tourists or business travellers.

Also, the academic framework was enriched last year when the Ubuntu Centre for African Studies was opened at Timisoara West University, with the primary goal of further strengthening bilateral relations.

For any investor who plans to expand in and/or from South Africa, the six priority areas of the NGP are worth considering, namely: • Infrastructure development (ports, rail, roads, electricity, water, communications and logistics) – a key focus area • Agriculture • Mining and beneficiation • Manufacturing • The green economy • Tourism

ROSABA

The EU remains South Africa’s single most important trading partner, and likewise South Africa is the EU’s largest trading partner in Africa. Therefore enormous opportunities exist for Romanian and South African businesses.

Despite the tough economic climate that currently prevails in Romania, and the global market, ROSABA’s members and their organizations continue to post great results, and as such we are collectively positive as we look forward into 2014.

Several initiatives to increase collaboration and business amongst ROSABA members are already underway, and should deliver positive results in 2014. Further to these local initiatives, ROSABA is planning a number of trade visits to South Africa to encourage investors in the potential opportunities that exist in Romania becoming a gateway to Europe for South African Investors, and subsequently South Africa being a gateway into Africa for Romanian Investors.

While goods and services contribute to approximately 60 percent of South Africa’s Gross Domestic Product (GDP), SA’s contribution to world trade stands at only 0.5 percent.

Exports continue to be dominated by raw material-based products, and imports are predominantly value-added manufactured products.

South Africa has gained an increasingly eloquent role in international affairs in the past decade: the corner-stone of this recognition is that South Africa is now broadly cited as the “S” in the acronym BRICS, the new rising power-center economies, together with Brazil, Russia, India and China. BRICS membership has offered huge potential for South Africa to boost its competitiveness via cooperation in investment and trade.

This group of powerful emerging economies underlines two main points: South Africa is recognized as a developing economy of

significance in its own right and is the gateway to the continent of Africa – the second fastest growing region in the world economy after Asia.

South Africa’s BRICS membership will also benefit the entire African continent because South Africa is the biggest investor in the continent and its companies are active in at least half of Africa's countries. This would not be possible without the consistent determination of South African business leaders and entrepreneurs aligned with the state’s long-term vision of sustainable development.

At the national macro-economic level, South Africa is powering immense development energies consolidated in the New Development Plan (NDP), the New Growth Path (NGP) and the Industrial Policy Action Plan (IPAP). In 2012, the National Planning Commission launched the NDP called Vision 2030, to put South Africa’s economy on a higher growth trajectory by transforming its current over-reliance on commodities to become an investment-based country.

The NGP aims to create 5 million jobs over the next 10 years by promoting international partnerships driving growth, eradicating poverty and inequality, and reducing unemployment by 10 percent. It targets the following sectors: infrastructure, manufacturing, the green economy, the public sector, the knowledge economy, mining, tourism, rural development, the social economy, agriculture and African regional development. Numerous Sector Integrated Projects (SIPs) have also been implemented in the targeted sectors.

And because nothing can be put into operation without proper funding, the South African Industrial Development Corporation (IDC) has committed more than 60 billion Rand (EUR 4.04 billion equivalent – for currency calculations a rate of EUR 1.00 = R 14.85 has been used) to support all these projects. ∫ BR ECONOMY | 55

Contact

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