The Legal and Institutional Framework of Privatization Process

15

Liberalization, privatization

and the European Social Model

WP7:

Privatization experience in Romania

By

Codruta-Liliana Filip

1. Privatization methods

The legal and institutional framework of privatization process in Romania was created by the Law no. 15/1990. It concerned the conversion of former ‘’socialist enterprises’’ which enshrined the notion of no-privatizable entities, the so-called ‘’regii autonome’’. Then followed Law no.18/1991, the ‘’Land law’’ and Law no.58/1991 the ‘’Privatization Law’’.The latter covered everything from the above mentioned laws and contained very ambitious and radical Mass Privatization Program. It shared some elements with solutions used in other Eastern European countries, and contained some specifically Romanian elements. For fully five years (1992-1996) the term ‘’privatization’ in Romania had only meant whatever Law no.58/1991 had been allowed, almost by default, to cover. Whole process of privatization was divided into three steps:

·  The reform of state-owned enterprises (commercialization),

·  Allocation of 30% shares of privatized enterprises to all adult Romanian citizens, using voucher system (vouchers were distributed for symbolic price, they were tradable);

·  Selling of the remaining 70% shares to Romanian and foreign investors (in 7 years, 10% of capital to be privatized yearly).

The preferred method of mass privatization was the manager employee buyouts method (MEBO) for small and medium sized enterprises combined with standard methods for big size industrial giants.

Several institutions were created to coordinate the privatization process. National Agency for Privatization (NAP) was responsible for controlling of the whole process, and subsequently for privatization of small enterprises too. State Ownership Fund (SOF) was responsible of carrying out the 3rd stage of privatization process, and of management of privatized companies. It was totally independent from the state budget. Moreover, 5 Private Ownership Funds were created, owning the 30% shares of companies allocated to voucher system, responsible for accelerating privatization e.g. by active participation in privatization of enterprises.

The picture of the privatization transactions carried out between 1 January 1996 and 31 August 1999, broken down as per privatization methods used, is captured by the table below.

Auctions / Direct negotiations / Sales on capital market
Number / % of total / Number / % of total / Number / % of total
1996 / 455 / 31.3% / 1006 / 68.7% / - / -
1997 / 231 / 17.7% / 1064 / 81.6% / 9 / 0.7%
1998 / 991 / 78.2% / 244 / 19.3% / 32 / 2.5%
I-VIII/1999 / 1000 / 79.6% / 204 / 16.2% / 53 / 4.2%

The figures presented show a very non-uniform recourse to the various privatization methods available. It is only in the latter part of the interval that a pattern seems to become discernible: absolute prevalence of auctions, and increasing recourse to sales made directly on the capital market. A caveat should also be made in what concerns the statistical significance of conclusions derived from the observation of privatization developments expressed in terms of number of deals carried out, rather than in terms of capital divested. Broadly speaking, the share of direct negotiations in the overall capital divested is larger than that of any other method, while that of sales on the capital market is also larger than the percentage recorded by the same method in terms of number of companies sold off.

2. Privatization of the enterprise sector

Not all state-owned enterprises were subject to privatization process. Some branches (e.g., arms industry, energy production, mining, transport, and telecommunications) were excluded from it, and that enterprises were transformed into so-called “regies autonome”, prepared to remain state-owned.

For all other enterprises, taking part in the privatization program was obligatory (unlike in Poland or Hungary). Method of privatization of a particular enterprise was to be chosen by central administration (SOF) in each case.

Already in 1990, the first year of transition, the first piece of the legal framework

regarding state enterprise restructuring was developed. The Law on State Enterprise

Reorganization (15/1990) divided the companies into two groups. Companies in the first

group, (called "Commercial Companies,") were obliged to commercialize and become either

joint-stock, or limited liability companies, with the state as their exclusive owner. In the first

seven years these formed the population firms to eligible to privatization. The other group,

called "Regii Autonome," remained under the authority of branch ministries and were not

included in any privatization program by 1997, when the legislation ordered the

corporatization and subsequent privatization of the Regii.

Those firms were supposed to be reorganized as Regii Autonome, which operated in the

strategic industries of the economy, such as armament manufacturing or energy production.

However, the law was obscure enough to allow the placement of a large number of firms into

category which were not "strategic" at all.As a consequence, firms from construction,

trade or tobacco branches were restructured as Regii, and not included in the group of firms

allowed to become private. The group of Regii was not numerous, but they were quite large

average: according to the Romanian Enterprise Registry, a database containing all firms

with more than 3 employees in 1992, Regii accounted for 22 percent of state-owned firms' in

1992. Furthermore, they tend to be capital-intensive, accounting for about 47 percent of the

total book value of state-owned enterprises (Romanian Development Agency (1997)). Thus,

almost half of the initial book value of the state-owned firms was not privatizable in the first

seven years of transition, companies which had a chance at least to become private being only

those which formed the group of Commercial Companies.

While the control of the Regii were kept by the ministries, the ownership rights of the

Commercial Companies were delegated to two newly established organizations: the State

Ownership Fund (SOF) and one of the five Private Ownership Funds (POFs). The former

received 70 percent of each company's shares, while the latter the remaining 30 percent.The

SOF was a conventional state holding organization, which was formed in each transitional

country. The POFs were established to carry out the voucher privatization, through which 30

percent of the shares of commercial companies were supposed to be distributed among the

population.These holdings were aimed to operate on behalf of the adult Romanian citizens,

the de jure owners of the funds: all of them received a free-of-charge certificate of

ownership, which entitled them to control the POFs, and to receive dividends after the

certificates, until they were exchanged to shares of the companies. However, de facto it was

impossible to control the POFs. First, the ownership was totally dispersed and no institution

was set up to provide information on their activity. No dividends were distributed during the

five years of existence of the POFs, and the board of directors was appointed by the

Parliament and the Government.

The magnitude of the "mass"privatization was also diminished: only about two-thirds of the commercial companies were included in the program, and in each included company the state retained 40 or 51 percent of the shares for latter direct sales.

As a result, the outcome of this program was the partial privatization of the companies, with an extremely dispersed private ownership structure with only one owner in a controlling position: the state.

The last method of privatization applied in Romania were case by case of shares of the

company. Although the first law of privatization already stated the importance of this method

and named the sales methods (auction, direct negotiation and public offering), only in 1996

started this method gaining significant share in privatization. Between 1996 – 2000 a large

number of firms became owned by outsiders – domestic or foreign, as a result of case-by-case

sales of shares.

In conclusion, essentially all important types of owners are present in the Romanian

post-privatization ownership structure. To start with, the SOF, representing the state, has

been and it is still an influential owner of many firms. The five POFs' portfolio and name

changed after the voucher privatization, but the identity of their real owners is still a big open

question: it is sure that the citizens are not among them.Besides these two owners, a

complete set of real private owners emerged as a consequence of MEBO, mass privatization

and case-by-case sales. MEBOs, being most popular in the first years of transition (1993 –

95) gave space for insiders, through the mass privatization (1995 – 96) a large number of

domestic individuals received tiny fractions of ownership. The last method, direct sale of

shares was mostly used after the MPP (1996 – 2000). Both domestic and foreign investors

obtained the shares of state-owned companies. Thus, practically all possible owners are

present in the Romanian firms.

The evolution of the post-privatization ownership structure is shown in Table 1 and

Figure 1, where each owner's average yearly share weighed by employment and capital is

presented. Weighted by employment, state ownership fall from 100 to 28 percent between

1992 and the middle of 2000. Among private owners, insiders have the largest share (29

percent in 2000:II). The figure also shows that before 1996 it was practically the single

significant privatization method.Citizens who received their shares in the MPP, have on

average 18 percent, while domestic and foreign outsiders are the least prevalent owners with

14 and 7 percent, respectively. Thus, MEBOs are the most important privatization method

not only that this method was used almost exclusively by 1996, but the largest number of

employees was transferred by this methods from state into private ownership. The table also

shows that capital intensive firms were less likely to be privatized: only 53.1 percent of the

book value of state-owned commercial companies was privatized.MEBO privatization

transferred only 10 percent of the total capital. In the case of the other types of owners, the

employment and capital weighted average privatizations are quite similar.

3. Transport privatization

The transport infrastructure, according to the Romanian Constitution, is public property of the state. Therefore, these assets are being administered by national or lower government entities, or companies, or corporations, under the jurisdiction of the Ministry of Transports, Constructions and Tourism (MTCT) or the Ministry of Administration and Interior who may award these assets for concession, in accordance with the provisions of the Romanian laws

Over the past decade NAR (National Road Agency) has secured grants (EU-ISPA) and several loans from International Financial Institutions (the World Bank, EIB, EBRD) guaranteed by the state, to upgrade its main road corridors. The Government is actively pursuing new external IFI financing or Public-Private Partnerships to further upgrade the main roads and improve RNCMNR institutional capacity. RNCMNR's multi-year Highway Development Program and a multi-year Highway Rehabilitation Program are both primarily funded through loans and grants. The communal road network has recently begun receiving support from EU's SAPARD program and the World Bank's Rural Development Project.

Road transport is privatized and performed by numerous buses and trucks operated either by their owners or bus and trucking companies

Road transport competes aggressively with rail and has continued to gain in the share of the combined freight market (in terms of tonnage), and of the intercity passenger transport market (in terms of number of passengers). International trade is still important for the Romanian railways with imports accounting for 11% of the traffic, exports about 6%, and transit about 1%.Railways incurred losses caused by decline in market share, overstaffing, outdated equipment, and historical non-payment by many loss-making state-owned enterprises (SOEs). The railways could not finance maintenance and investment in facilities and equipment. Railways covered the losses by accumulating arrears to the state and through debt to other creditors. As a result, the Government launched a railway reform program in 1996 – supported by World Bank, EBRD, EU-PHARE. The previous state railway company (SNCFR) was initially separated into five companies, subsequently merged into three: infrastructure (CFR), freight (Marfa), and passenger (Calatori), with the state as the sole shareholder in all three. The restructuring also created a regulatory agency (AFER) within MTCT, in addition to the Ministry’s railway department that coordinates the operations o f the railway companies.

Maritime transport. In the maritime and inland waterways transport sector, similar principles have been adopted where State owned bodies or entities are in charge of the port infrastructure (quays, breakwaters, landfill, etc.) and award concessions to private bodies for port operations. The ports and navigation infrastructure are administered by the APM-SA Constanta National Company, CAN-SA Constanta National Company, APDF-SA Giurgiu National Company, APDM-SA Galati National Company, and AFDJ-SA Galati Autonomous Regie.

Air Transport. The national airline, TAROM, is fully state owned and there are no current prospects for its privatization. Air transport infrastructure (airports) is managed by “National Company” type entities for international airports, with the Ministry of Transports, Constructions and Tourism as the owner and the administrator. The other airports (serving only national air traffic) are organized as “Autonomous Regie”, which are local public companies.

4. Telecommunication privatization

Romania made an important progress by transforming regies in the telecommunications sector (Radio-communications and Romanian Post) into state-owned commercial societies as a first step towards privatization process.

The privatization of ROMTELECOM started in October 1998, when OTE-Greece bought 35% of the company shares.

This policy: is part of the restructuring strategy in the field of telecommunications and is in accordance with the European Association Agreement.

Presently, the basic telephonic services are provided by ROMTELECOM, which has a 15 year license starting December 1998; in this area ROMTELECOM was a monopoly until 31 December 2002.

The Romanian telecommunication market was fully liberalised in 2003 and the regulatory

environment has been significantly changed since. Currently in the telecoms market, including local and long distance voice telephony, there is a healthy competitive environment. The challenge faced now by the sector is to significantly increase access to communications networks, provide new services, and improve the overall quality of the service. The Government decided in the national Strategy for Communications and IT issued in 2004 to privatise by end 2006 the last state owned telecom operator, SN Radiocomunicatii (Radiocom), and to restructure and privatise the postal services provider, Posta Romana.