This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 02 BUCHAREST 000986
SIPDIS
DEPT FOR EUR/NCE - WSILKWORTH, EB/MTA/MST
DEPT PASS TO USTR
USTR FOR GBLUE
TREASURY FOR DO/GCHRISTOPOLUS
USAID FOR E
E.O. 12958: N/A
TAGS: ECON EIND EFIN ENRG EINV RO
SUBJECT: ROMANIA: PRIVATIZATIONS PROGRESSES, BUT MORE WORK
AHEAD
REF: A) BUCHAREST 02153, B) BUCHAREST 03902, C) BUCHAREST
02058
SUMMARY
1. Romania made substantial progress in privatizing state-
owned assets in 2004, a year which could be dubbed "the year
of energy privatizations." Major priorities for 2005
include completion of energy privatizations, privatization
of the Romanian Commercial Bank and National Savings House,
and attaching tax arrears run up by state-owned and favored
private companies. END SUMMARY
2004 - Decisive Year for Energy Sector Privatizations
--------------------------------------------- --------
2. The completion of privatizations is necessary for Romania
to become a fully functioning market economy. The sale of
a 25% stake in Romania's largest commercial bank to the
European Bank for Reconstruction and Development (EBRD) and
International Finance Corporation (IFC) for $222 million as
well as privatizations of the giant oil company Petrom and
four major energy distributors contributed significantly to
Romania's $4.4 billion FDI inflow in 2004.
3. In transactions totaling an estimated $3 billion, five
privatizations in the energy sector resulted in European
investors taking control of key companies forming the
backbone of the Romanian energy sector. Austrian group OMV
paid $2 billion for the former state-owned petroleum
corporation Petrom. Before taking over Petrom, OMV was a
secondary player in the oil market. After acquiring Petrom,
however, OMV's market share rose from 6% to 30% in Romania
and to an estimated 18% in the Danube region. The Italian
group ENEL paid $147 million for the electric distribution
companies Electrica Banat and Electrica Dobrogea. The GOR
signed a privatization contract for the sale of 30% of
Distrigaz Nord on October 2004 with the German firm Ruhrgas
for $165 million, with a further investment of $236 million
forthcoming to ensure Ruhrgas's equity share reaches 51%.
In the same month, Gaz de France signed an agreement to take
over Distrigaz Sud in a transaction worth approximately $410
million. These two privatizations will be finalized in
2005.
Which Privatization Authority?
------------------------------
4. While the Authority for State Asset Resolution (AVAS),
which was formed last March through the merger of the
Authority for Banking Asset Resolution and the Authority for
Privatization and Management of State Shareholding (APAPS)
is generally referred to as the "privatization authority,"
it is not the only entity involved in the privatization of
state assets. Equally important is the Office for State
Shareholding and Privatization in Industry (OPSPI) under the
Ministry of Economy and Commerce, which controls
privatizations in the energy production and mining sectors.
Other ministries also control state assets. The most
notable is the Ministry of Public Finances, which is in
charge of the sale of The National Savings Bank (CEC).
Under Romanian practice, privatization decision-making and
negotiations are conducted with the privatization entity
which owns the asset. Moreover, major privatizations such
as those in the energy or banking sector, or divestiture of
socially sensitive industrial plants must be approved by the
cabinet and the Parliament.
2005 Privatization Plan
-----------------------
5. In the energy sector, the focus will be on:
-- Electric Power Distribution. Complete the privatization
of Electrica Moldova with E.ON (Germany) and of Electrica
Oltenia with CEZ (Czech Republic); proceed with the
privatization of Electrica Muntenia Sud, which supplies
electricity for the area including Bucharest
(PriceWaterhouseCoopers is the privatization consultant);
and initiate privatization of three remaining branches
(Electrica Transylvania Nord, Electrica Transilvania Sud,
and Electrica Muntenia Nord).
-- Electric Power Generation. The OPSPI is preparing for
sale three coal and gas-based integrated energy complexes
(Turceni, Rovinari and Craiova). Deloitte Central Europe
has been selected as the privatization consultant.
6. In the banking sector, AVAS's priority is the
privatization of the Romanian Commercial Bank (BCR) one of
the commitments undertaken in the GOR's agreement with the
IMF. Highly respected names in international finance,
including the German group HVB, Deutsche Bank, Unicredito
and Erste Bank have indicated an interest in BCR, the
largest Romanian bank in terms of assets. The Ministry of
Public Finance plans to initiate the privatization of the
National Savings Bank (CEC) this year. CEC is the largest
credit institution in Romania in terms of the number of
branches.
7. In the industrial sector, AVAS sold 62 medium and large
companies in which the state was a majority shareholder in
2004. In addition to these transactions, AVAS privatized
minority stakes in 85 companies, resulting in revenues to
the state of approximately $381.2 million. AVAS still holds
stock in some 1,000 companies, although half of these are
non-privatizable, most of them subject to liquidation. Of
the remaining 500 companies, AVAS has majority stakes in
only approximately 100. One of these is Electroputere, an
electric motor manufacturer located in Craiova. After
repeated failures to privatize the company as an integrated
whole, AVAS plans to re-launch the privatization process,
splitting up the company into units to make it more
attractive to investors. Success will depend upon how the
units are packaged, as only the locomotive production unit
and the rotating electric machine unit have attracted
investor interest.
Mind the Devil in the Details
-----------------------------
8. Investors are cautioned to exercise due diligence in
privatizations, to undertake their own thorough independent
investigation, and not to rely primarily on the information
and representations found in privatization documents.
Having a good local counsel with solid knowledge of the
intricate Romanian privatization process and state aid
legislation is crucial to success. Buyers of state-owned
companies must negotiate requirements and restrictions
concerning the company's purpose, scope of activities,
turnover, and social protections in the form of limited
layoffs or funding for retraining programs. Privatizing
agencies continue the practice of rolling into privatization
agreements provisions of previously negotiated collective
labor agreements, which are labor-protective and restrict
layoffs.
Comment
-------
9. Prime Minister Tariceanu has implied AVAS and OPSPI will
merge into one agency in summer 2005. Post will continue to
work with the GOR privatization agencies, advocating for
transparency in the privatization process and fair treatment
of investors. End Comment.
10. AmEmbassy Bucharest's reporting telegrams are available
on the Bucharest SIPRNet website:
www.state.sgove.gov/p/eur/Bucharest/.
Delare