Openness To, and Restrictions Upon, Foreign Investment
Romania actively seeks direct foreign investment. Romania's marketplace offers 21.5 million consumers, a well-educated workforce at competitive cost, a strategic location, and abundant natural resources, making it an attractive destination for investment. To date, favored areas for U.S. investment include IT and telecommunications, energy, services, manufacturing, and consumer products.
Romania has taken steps to strengthen tax administration, enhance transparency, and create legal means to resolve contract disputes expeditiously. Mergers and acquisitions are subject to review by the Competition Council. Romania's accession to the European Union (EU) on January 1, 2007 has helped solidify institutional reform. However, judicial, legislative, and regulatory unpredictability continue to negatively affect the investment climate.
The new Civil Code came into effect in October 2011, abrogating the Commercial Code and consolidating the provisions applicable to companies and contracts into a single piece of legislation. The Civil Procedure Code is scheduled to come into effect in 2012. Romania has also passed a judicial reform law with the objective of improving the speed and efficiency of judicial processes, including a plea bargaining procedure to shorten trials and provisions to reduce delays between hearings.
Prospective U.S. investors should exercise careful due diligence, including consultation with competent legal counsel, when considering any investment. The Government of Romania (GOR) has, on occasion, allowed political interests to supersede accepted Western business practices in ways harmful to investor interests. Struggling to reduce its budget deficit, the GOR in 2010 instructed state-owned energy companies, including those with private shareholder interests, to transfer a portion of their cash reserves to the state budget as a “donation,” without consulting private shareholders in advance. However, approval in December 2011 of an emergency ordinance establishing corporate governance standards for state-controlled enterprises (SOEs) should increase the transparency and accountability of SOE operations. This new legislation will also open the door for the introduction of private management in SOEs.
U.S. companies establish a local presence in the Romanian market in several ways. Many sign distribution agreements with local Romanian firms, which bring experience, expertise and access to the partnerships. Other firms cover Romania through a regional distributor or sales representative. Still other American companies choose Romania as a base for manufacturing or distribution, and establish a subsidiary directly in the country. The choice of strategy depends on the industry, the nature of the customer (government buyer or retail trade), and the business case. Companies relying on regular access to government authorities, or which have a significant service component, generally seek to establish a subsidiary, sometimes through acquisitions.
Investments involving the public authorities (central government ministries, county governments, or city administrations) are generally more complicated than investments or joint ventures with private Romanian companies. Large deals involving the government – particularly public-private partnerships and privatizations of key SOEs – can become stymied by vested political and economic interests, or bogged down due to a lack of coordination between government ministries. Although the Public-Private Partnership (PPP) Law was revised in 2011 to remove anticompetitive provisions, the law still lacks clear terms on risk sharing, PPP project management, and investment recovery. As a result, investor interest in PPPs has been weak. How the new PPP law is eventually implemented will be of considerable interest to investors over the next few years.
Romania became a member of the European Union on January 1, 2007. The country has worked assiduously to create a legal framework consistent with a market economy and investment promotion, and has largely concluded its efforts to enact EU-compatible legislation. At the same time, implementation of these laws and regulations frequently lags or is inconsistent.
Romania's legal framework for foreign investment is encompassed within a substantial body of law, largely enacted in the late 1990s, and subject to frequent revision. Major changes to the Civil Code were enacted in October 2011, replacing the Commercial Code and harmonizing Romanian legislation with international practices. Among other things, the new Code introduces the principle of good faith and stipulates that negotiating a contract without intent to conclude is bad faith. Under the hardship provisions, if the parties fail to agree on an amicable renegotiation of a contract, the court can mandate changes or even terminate the contract if it is deemed detrimental to one of the parties. The Civil Procedure Code, which will provide detailed procedural guidance for implementing the new Civil Code, is scheduled to come into force in 2012. In the meantime, Romanian authorities and legal professionals are in the process of exploring how best to implement the Civil Code. Given the state of flux of these legal developments, investors are strongly encouraged to engage local counsel to navigate the various laws, decrees, and regulations, as several pieces of investor-relevant legislation were challenged in both local courts and the Constitutional Court in 2010 and 2011.
This body of legislation and regulation provides national treatment for foreign investors, guarantees free access to domestic markets, and allows foreign investors to participate in privatizations. There is no limit on foreign participation in commercial enterprises. Foreign investors are entitled to establish wholly foreign-owned enterprises in Romania (although joint ventures are more typical), and to convert and repatriate 100% of after-tax profits. Foreign firms are allowed to participate in the management and administration of the investment, as well as to assign their contractual obligations and rights to other Romanian or foreign investors.
Foreign investors may engage in business activities in Romania by any of the following methods:
Foreign investor participation can take the form of: foreign capital, equipment, means of transport, spare parts and other goods, services, intellectual property rights, technical know-how and management expertise, or proceeds and profits from other businesses carried out in Romania. Foreign investment must comply with environmental protection, national security, defense, public order, and public health interests and regulations.
There have been few hostile take-over attempts reported in Romania, and as a result Romanian law has not focused on limiting potential mergers or acquisitions. There are no Romanian laws prohibiting or restricting private firms' free association with foreign investors.
In 2010, Romania extensively revised its competition legislation, bringing it closer to the EU acquis communautaire and best corporate practices. Companies with a market share below 40% are no longer considered to have a dominant market position, thus avoiding a full investigation by the Romanian Competition Council (RCC) of new agreements, saving considerable time and money for all parties involved. Resale price maintenance and market and client sharing are still prohibited, regardless of the size of either party’s market share. In a positive move, the authorization fee for mergers or takeovers has been capped at 25,000 euros. Under previous legislation, the fee was 0.04% of total turnover in Romania for all entities involved in the action, not exceeding 100,000 euros. The law now also requires companies to front a deposit equal to 30% of the fine while awaiting a court decision on the merits of the complaint.
To increase the absorption of EU funds, revisions to the public procurement law in December 2010 raised the open tender threshold for public projects to 4.485 million euro from 1 million euro. Government projects falling under the 4.485 million euro threshold have the option of being tendered through a “call for bids” to at least three companies. Additionally, the amendments stipulate that public procurement awards can only be challenged with the National Complaint Council (NCC). The NCC’s decision is binding, even if the contracting authority or a bidder challenges the decision in court. If the complaint against an award decision is determined to be unfounded, the contracting authority can withhold a percentage of the challenger’s bid participation fee as a penalty. To prevent competition distortions, the National Agency for Monitoring and Regulating Public Procurements now has the authority to review tender documents before they are posted on the public e-procurement website.
The State Asset Resolution Authority (AVAS) is responsible for privatizing state-owned industrial assets and managing them during the privatization process. The Ministry of Economy, Trade and the Business Environment oversees energy assets. Romania's privatization law permits the responsible authority to hire an agent to handle the entire privatization process, though ultimate decision-making authority remains with the Government.
Major energy sector privatizations remain stalled. The GOR has canceled plans to consolidate its remaining energy assets into two fully integrated, state-owned companies, which would have deterred competition in the energy sector, to instead consolidate lignite-fired power plants with lignite mines, and hard coal-fired power plants with hard coal mines. This new “bundling” action is being reviewed by the Competition Council.
Joint ventures between state-owned energy companies and private investors for electric power production have been stalled due to the absence of a liberalized energy market and unattractive conditions offered by the Government. The government’s attempt to sell a 9.84% minority stake in OMV/Petrom, Romania’s largest oil company in 2011 was unsuccessful but the GOR intends to try again in 2012. In 2011, the GOR approved agreements for onshore and offshore oil and gas exploration for both domestic and international companies that won tenders issued in 2010.
As agreed with the IMF, the GOR plans to sell minority interests in several energy companies through initial public offerings (IPOs) and secondary public offerings (SPOs) in 2012. A 15% IPO is planned for natural gas producer Romgaz, and 10% each for hydropower producer Hidroelectrica and nuclear power producer Nuclearelectrica. SPOs are planned for energy carrier Transelectrica and natural gas carrier Transgaz, both with 15% offerings. The GOR has also announced it intends to privatize chemical manufacturer Oltchim to a strategic investor. Spurred by the IMF and private investors, the government has also agreed to introduce private management in a select number of SOEs, many of them in the energy sector. The Ministry of Economy is in the process of selecting consulting firms to oversee the public offerings and head hunters to facilitate the selection of private management.
Romania is still in the process of implementing the EU’s Third Energy Package, which requires market liberalization for electric energy and natural gas. On December 14, the parliament passed a bill restricting natural gas exports, directly contravening an EU directive on creating an internal market for natural gas.
Prospective investors are strongly advised to conduct thorough due diligence before any acquisition, particularly of state-owned assets. Some firms have found it advantageous to purchase industrial assets through AVAS's budget arrears recovery process rather than through direct privatization. Through this method, AVAS uses the proceeds from the sale of state assets to cover any outstanding arrears of the company. By acquiring the assets and not the company itself, buyers may avoid assuming historical debt or encumbering labor agreements.
As a member of the EU, Romania is required to notify the European Commission's General Directorate for Competition regarding significant privatizations and related state aid. Prospective investors should seek assistance from legal counsel to ensure compliance by relevant government entities. GOR failure to consult with, and then formally notify, the European Commission properly has resulted in delays and complications in some previous privatizations. Some investors have also experienced problems due to the occasional failure of GOR entities to fully honor contractual obligations following conclusion of privatization agreements. Investors receiving state aid, whose investments have been affected by the global economic crisis, have found renegotiation of their state aid agreements to be cumbersome, in part due to local authorities’ failure to acknowledge that market conditions have changed.
Romanian law allows for the inclusion of confidentiality clauses in privatization and public-private partnership contracts to protect business proprietary and other information. However, in certain high-profile privatizations, parliamentary action has compelled the public disclosure of such provisions.
Property and Contractual Rights
Romania recognizes property and contractual rights but enforcement through the judicial process can be lengthy, costly, and difficult. Foreign companies engaged in trade or investment in Romania often express concern about the Romanian courts' lack of expertise in commercial issues. Judges generally have limited experience in the functioning of a market economy, international business methods, intellectual property rights, or the application of Romanian commercial and competition laws. Even when court judgments are favorable, enforcement of judgments is inconsistent and can lead to lengthy appeals.
According to the Heritage Foundation's Economic Freedom Report, Romania lags behind other countries in the region in the areas of labor freedom, property rights, and freedom from corruption, and the judiciary remains vulnerable to corruption and inefficiency. Romania regressed on Transparency International's Corruption Perception Index in 2011 to levels not seen since EU accession in 2007. Romania's ranking in the World Bank’s Doing Business report also deteriorated. Starting a business became more difficult due to an additional requirement that new companies obtain a tax clearance certificate before the company can be registered. Romania continues to rank below world average in paying taxes, dealing with construction permits, and setting up utility services.
Transparency International Corruption Perception Index
Heritage Foundation Index of Economic Freedom score
World Bank Doing Business ranking
Conversion and Transfer Policies
Romanian legislation does not restrict the conversion or transfer of funds associated with direct investment. All profits made by foreign investors in Romania may be converted into another currency and transferred abroad at the market exchange rate after payment of taxes.
Romania's national currency, the Leu, is freely convertible in current account transactions, in accordance with the International Monetary Fund's (IMF) Article VII. Proceeds from the sale of shares, bonds, or other securities, as well as from the conclusion of an investment, can also be repatriated. There is no limitation on the inflow or outflow of funds for remittances of profits, debt service, capital gains, returns on intellectual property, or imported inputs.
In 1997, the GOR implemented new regulations liberalizing foreign exchange markets. The inter-bank electronic settlement system became fully operational in 2006, eliminating past procedural delays in processing capital outflows. Commission fees for real-time electronic banking settlements have gradually been reduced.
Capital inflows are also free from restraint. Romania concluded capital account liberalization in September 2006, with the decision to permit non-residents and residents abroad to purchase derivatives, treasury bills, and other monetary instruments.
Expropriation and Compensation
The law on direct investment includes a guarantee against nationalization and expropriation or other equivalent actions. The law allows investors to select the court or arbitration body of their choice to settle disputes. Four cases against Romania are pending with the International Center for Settlement of Investment Disputes (ICSID). Several cases involving investment property nationalized during the Communist era also remain unresolved.
Romania increasingly recognizes the importance of arbitration in the settlement of commercial disputes. Many agreements involving international companies and Romanian counterparts provide for the resolution of disputes through third-party arbitration. Romania is a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Romania is also a party to the European Convention on International Commercial Arbitration concluded in Geneva in 1961 and is a member of ICSID.
Romanian law and practice recognize applications to other internationally-known arbitration institutions, such as the ICC Paris Court of Arbitration and the Vienna United Nations Commission on International Trade Law (UNCITRAL). Romania also has an International Commerce Arbitration Court administered by the Chamber of Commerce and Industry of Romania. Arbitration awards are enforceable through Romanian courts under circumstances similar to those in other Western countries, although legal proceedings can be protracted.
Mediation as a tool to resolve disputes is gradually becoming more common in Romania. Mediation became a legal profession in 2006 when the Romanian Parliament passed legislation recognizing it and establishing a certifying body, the Mediation Council, to set standards and practices. The professional association, The Union of Mediation Centers in Romania, is the umbrella organization for mediators throughout the county. There are recognized mediation centers in every county seat where court-sanctioned and private mediation is available.
There is no legal mechanism for court-ordered mediation in Romania but judges can encourage litigants to use mediation to resolve their cases. If litigants opt for mediation, then upon completion of the mediation process they must present their proposed resolution to the judge who must approve the agreement. The Union of Mediation Centers is a member of the European Mediation Network Initiative and is recognized by the European Union and other regional bodies.
Romania's bankruptcy law contains provisions for liquidation and reorganization that are generally consistent with Western legal standards. These laws usually emphasize enterprise restructuring and job preservation. Legal and economic education and the training of judges and lawyers lag behind law-making, which often results in inconsistent outcomes. To mitigate the time and financial costs of bankruptcies, Romanian legislation provides for administrative liquidation as an alternative to bankruptcy. However, investors and creditors have complained that the liquidators sometimes lack the incentive to expedite liquidation proceedings, and that, in some cases, their decisions have served vested outside interests. Both state-owned and private companies tend to opt for judicial reorganization to avoid bankruptcy.
In December 2009, the debt settlement mechanism Company Voluntary Agreements (CVAs) was introduced as a means for creditors and debtors to establish partial debt service schedules without resorting to bankruptcy proceedings. The global economic crisis did, however, prompt Romania to shorten insolvency proceedings in the past year.
Performance Requirements and Incentives
Currently, customs and tax incentives are available to investors in six free trade zones. State aid is available for investments in free trade zones under EU regional development assistance rules. Large companies may receive aid up to 50% of their eligible costs (limited to 40% in Bucharest and surrounding Ilfov County), while small- and medium-sized enterprises (SMEs) may receive assistance of up to 65% of their eligible costs. Prospective investors are advised to thoroughly investigate and verify the current status of state incentives.
In 2007, Romania adopted EU regulations on regional investment aid, and instituted state aid schemes for large investments and SMEs. Both Romanian and EU state aid regulations aim to limit state aid in any form, such as direct state subsidies, debt rescheduling schemes, debt for equity swaps, or discounted land prices. The EC must be notified of, and approve, GOR state aid that exceeds the pre-approved monetary threshold for the corresponding category of aid. To benefit from the remaining state aid schemes, the applicant must secure financing that is separate from any public support for at least 25% of the eligible costs, either through his own resources or through external financing. The applicant must document this financing in strict accordance with Ministry of Finance guidelines. Amendments made in 2010 to the state aid scheme for regional projects score applications based not only on the economics of the project, but also on the GDP per capita and unemployment rate for the country of intended investment.
In practice, GOR budget constraints and a less-than-fully transparent application process have limited access to these forms of state aid. Different ministries and government entities manage the various state aid schemes, and the rules and procedures are complex. Companies interested in state aid are encouraged to seek competent counsel and when developing a business plan, to set aside a generous amount time for moving through all the bureaucratic stages required for state aid scheme approvals.
To reduce initial startup costs, a system of industrial and technological parks is being created. Tax incentives are available for the park operator, while companies establishing themselves in the park benefit from access to utility hookups and infrastructure, as well as from potential local tax rebates under regional development aid schemes. There are 62 such parks throughout Romania.
In July 2011, the European Commission approved the GOR’s revised Green Certificate System, part of the Renewable Energy Law, which provides incentives for certain types of renewable energy. The Green Certificates are traded in parallel with the energy produced, providing an additional source of revenue for renewable energy producers. The revised system includes provisions to prevent overcompensation. Renewable energy projects that are eligible for other types of aid, such as EU structural funds, receive a smaller number of green certificates. Any renewable energy investment with an installed capacity over 125 megawatts must notify the European Commission. In order to ensure that the national energy grid remains balanced, renewable energy no longer enjoys priority access to the grid under the revised law.
As a member of the EU, Romania must receive European Commission (EC) approval for any state aid it grants that is not covered by the EU's block exemption regulations. The Romanian Competition Council acts as a clearinghouse for the exchange of information between the Romanian authorities and the EC. Specifically, the Council screens state aid notifications and provides an initial opinion to state aid grantors as to whether the request is consistent with EU directives, allowing for an opportunity to revise or withdraw a request before it is submitted to the Commission. Even after submission, the Council retains jurisdiction over competition and antitrust matters. The failure of state aid grantors to notify the EC properly of aid associated with privatizations has resulted in the Commission launching formal investigations into several privatizations. Investors should ensure that the government entities with which they work fully understand and fulfill their duty to notify competition authorities. Investors may wish to consult with EU and Romanian competition authorities in advance, to ensure a proper understanding of notification requirements.
Companies operating in Romania can also apply for aid under EU-funded programs that are co-financed by Romania. When planning the project, prospective applicants must bear in mind that the project cannot start before the financing agreement is finalized; the application, selection and negotiation process can be lengthy. Applicants also must secure financing for non-eligible expenses and for their co-financing of the eligible expenses. Finally, reimbursement of eligible expenses – which must be financed up front by the investor – is often very slow. Procurements financed by EU-funded programs above a certain monetary threshold must comply with the public procurement legislation. In an effort to increase the rate of EU funds absorption, Romania has amended the regulations to allow applicants to use the assets financed under EU-funded programs as collateral. However, understaffing and a lack of expertise on the part of GOR management entities, cumbersome procedures, and applicants’ difficulty obtaining private financing still remain as significant obstacles to improved EU funds absorption by Romania.
Since 1999, Romania has revised its tax system to bring it closer both to EU models and to the recommendations of the World Bank and IMF. In 2004, Romania adopted a flat tax of 16% on both personal income and corporate profit taxes, and simplified the tax code. The GOR reduced employers' payroll taxes by 2% in 2007 and by an additional 6%, in three stages, in 2008. In 2009, the newly-elected Government rolled back some of these reductions. For employment taking place in normal working conditions, payroll taxes are now 31.3%, with 10.5% payable by the employee and 20.8% by the employer (up from 27.5%, 9.5%, and 18%, respectively). For jobs with high mortality or disease rates, total payroll taxes are 36.3%, with employees paying 10.5% and employers 25.8% (compared to 32.5%, 9.5%, and 23% previously). For certain professions such as mining and aviation, where workers may be exposed to high levels of radiation, the current rate is 41.3%, with 10.5% paid by the employee and 30.8% by the employer (an increase from 37.5%, 9.5%, and 28% respectively). Accident and risk fund contributions range from 0.15% to 0.85%, depending on the company risk class (previously 0.4% to 2%). Rates for medical and unemployment insurance have remained unchanged; 5.5% medical and 0.5% unemployment for employees, and 5.2% medical and 0.5% unemployment for employers.
In July 2010, Romania increased the standard value added tax (VAT) rate from 19% to 24%. Investors should be aware that, due to budget constraints, the GOR has regularly delayed VAT reimbursements owed to foreign companies for extended periods of time, especially if the amount to be reimbursed is large. The country is fully integrated with EU customs, excise tax, and VAT transfer systems.
Upon EU accession, Romania implemented the EU Common Customs Tariff, the Generalized Preference Scheme, EU commercial safeguards, preference agreements and cooperation agreements concluded by the EU with third countries, as well as other EU commercial commitments vis-à-vis the World Trade Organization (WTO).
Right to Private Ownership and Establishment
The Romanian Constitution, adopted in December 1991 and revised in 2003, guarantees the right to ownership of private property. Mineral and airspace rights, and similar rights, are excluded from private ownership. Under the revised Constitution, foreign citizens can gain land ownership through inheritance. With EU accession, citizens of EU member states can now own land in Romania, subject to reciprocity in their home country.
Companies owning foreign capital may acquire land or property needed to fulfill or develop company goals. If the company is dissolved or liquidated, the land must be sold within one year of closure, and may only be sold to a buyer(s) with the legal right to purchase such assets. For a period of seven years after Romania's accession to the EU, foreign investors may not purchase agricultural land, forests, or forestry land (except for farmers acting as commercial entities). Investors can purchase shares in agricultural companies that lease land in the public domain from the State Land Agency.
In early 2006, the Parliament passed legislation that regulates the establishment of specialized mortgage banks, including the possibility of transforming existing non-banking mortgage credit institutions into specialized mortgage banks. The law also makes possible a secondary mortgage market, by regulating mortgage bond issuance mechanisms. Mortgage loans are offered by commercial banks, specialized mortgage banks, and non-bank mortgage credit institutions. Romania's mortgage market is now almost entirely private (although the state-owned National Savings Bank, or CEC, also offers mortgage loans).
The primary mortgage market demonstrated robust growth until the third quarter of 2008. Since then, credit has tightened in response to the international financial crisis and the implementation of much stricter national regulations on borrower qualifications. For loans denominated in Romanian lei (RON), standard banks charge three-month ROBOR (currently 6.4%), plus a spread of interest and commission fees, for up to 30 years. For euro-denominated loans, banks currently charge three-month EURIBOR, plus a spread of interest and commission fees, for up to 30 years. In response to the international financial crisis, many banks have cut back on mortgage lending and tightened qualifying conditions for prospective borrowers.
Protection of Property Rights
Romania is a signatory to international conventions concerning intellectual property rights (IPR), including TRIPS, and has enacted legislation protecting patents, trademarks, and copyrights. Romania has signed the Internet Convention to protect online authorship. While the IPR legal framework is generally good, enforcement remains weak and ineffectual, especially in the area of Internet piracy. The once-flagrant trade of retail pirated goods has largely been eliminated, but unlicensed use of software and personal use of pirated audio-video products remains high. The recording and film industries have expressed concern over increasing levels of Internet-based piracy. Romania has passed broad IPR protection enforcement provisions, as required by the WTO, yet judicial enforcement remains lax.
Romania is a party to the Paris Convention for the Protection of Industrial Property, and subscribes to all of its amendments. Romanian patent legislation generally meets international standards, with foreign investors accorded equal treatment with Romanian citizens under the law. Patents are valid for 20 years. Romania has been a party to the European Patent Protection Convention since 2002.
In 1998, Romania passed a trademark and geographic indications law, which was amended in 2010 to make it fully consistent with equivalent EU legislation. Romania is a signatory to the Madrid Agreement relating to the international registration of trademarks and the Geneva Treaty on Trademarks. Trademark registrations are valid for ten years from the date of application and renewable for similar periods. In 2007, Romania ratified the Singapore Treaty on the Law of Trademarks.
Romania is a member of the Bern Convention on Copyrights. The Romanian Parliament has ratified the latest versions of the Bern and Rome Conventions. The Romanian Copyright Office (ORDA) was established in 1996, and promotes and monitors copyright legislation. The General Prosecutor's Office (GPO) provides national coordination of IPR enforcement, but copyright law enforcement remains a low priority for Romanian prosecutors and judges. Many magistrates still tend to view copyright piracy as a "victimless crime" and this attitude has resulted in weak enforcement of copyright law. Due to increasing online piracy, copyright infringement of music and film is widespread throughout Romania.
Semiconductor Chip Layout Design
Romanian law protects semiconductor chip layout design. In order to benefit, designs must be registered with the Romanian Inventions and Trademark Office. Romania is a signatory to the Washington Treaty.
Transparency of the Regulatory System
Cumbersome and non-transparent bureaucratic procedures are a major problem in Romania. Foreign investors point to the excessive time it takes to secure necessary zoning permits, environmental approvals, property titles, licenses, and utility hook-ups. National and local officials often cannot provide potential investors with clear and comprehensive information on what permits or approvals are needed, or how they are to be obtained. Set fees for certain services, such as utilities, may not exist or may be subject to “negotiation” with local authorities or utility providers. Romania enacted a "Silent Approval" Law in 2003 to reduce bureaucratic delays, but it has yet to be universally enforced or recognized. Additionally, regulations change frequently, often without advance notice, and may be vaguely worded and poorly explained. These changes add to the costs of doing business, and can change the business prospects for an investor overnight.
Romanian law requires consultations with the private sector and a 30-day comment period on legislation or regulation affecting the business environment (the "Sunshine Law"). Unfortunately, not all government entities adhere to this requirement consistently. In many cases, even when the comment period is respected, public input does not appear to be considered seriously or incorporated into the final version. There have also been cases of authorities posting one version for public comment, but adopting a different version in the final instance.
Efficient Capital Markets and Portfolio Investment
Romania seeks to develop efficient capital markets. The National Securities Commission (CNVM) is responsible for regulating the securities market. In order to protect investors, the CNVM implements the registration and licensing of brokers and financial intermediaries, the filing and approval of prospectuses, and the approval of market mechanisms.
The Bucharest Stock Exchange (BVB) resumed operations in 1995, after a hiatus of 50 years. The BVB operates a three-tier system that, at present, lists a total of 78 companies, with 25 companies in the highest tier. The official index, BET, is based on a basket of the 10 most active stocks listed, while the BET-C index follows the trend of all stocks listed on the BVB. The BVB also has a RASDAQ (OTC) market segment that currently lists 1,193 different stocks. The BVB allows trade in corporate, municipal, and international bonds, and in 2007, the BVB opened derivatives trading.
Despite lower trading fees and a diversified securities listing, the situation on the international capital and financial markets has adversely affected the Romanian capital market. Country funds, hedge funds and venture capital funds continue to participate in the capital markets. Minority shareholders have the right to participate in any capital increase. Romanian capital market regulation is now EU-consistent, with accounting regulations incorporating EC Directives IV and VII.
There are 42 banks and credit cooperative unions currently operating in Romania. The largest, Romanian Commercial Bank (BCR), was privatized in 2006 by sale to Erste Bank of Austria and has a 19.8% market share. The second-largest is French-owned Romanian Bank for Development (BRD-Société Générale) with 13.8% market share, followed by Austrian-owned Raiffeisen (6.4%) and state-owned CEC Bank (6.3%). Other large banks include the privately-owned Banca Transilvania (6.3%), Greek-owned Alpha Bank (6.2%), and Italy’s UniCredit Tiriac Bank (6.0%).
According to the National Bank of Romania, overdue and doubtful loans now account for 14.2% of total bank loans and interest, and 1.64% of total banking assets.
The GOR has encouraged foreign investment in the banking sector, and there are no restrictions on mergers and acquisitions. The only remaining state-owned banks are the National Savings Bank (CEC Bank) and EximBank, comprising 7.3% of the market combined.
While the National Bank of Romania must approve all new non-EU banking entities, banks and non-banking financial institutions already approved in other EU countries need only notify the National Bank of plans to provide local services.
Competition from State-Owned Enterprises (SOEs)
Private enterprises compete with public enterprises under the same terms and conditions with respect to market access and credit. Energy production, transportation, and mining are majority state-owned sectors, while the government retains a monopoly on electricity and natural gas transmission.
While state-owned oil and gas companies received exploration and extraction licenses through direct allocation before 1989, they are now required to compete in transparent tenders organized by the National Agency for Mineral Resources. The most recent tender was held in May 2010, and foreign companies successfully competed for awards against consortia including Romanian state companies.
SOEs are required by law to publish an annual report. Majority state-owned companies that are publicly listed, as well as state-owned banks, are required to be independently audited. If properly implemented, the recently enacted legislation on corporate governance of SOEs should ensure the professional selection of board members and managers, and bring more transparency and accountability to the management and oversight of SOEs.
Corporate Social Responsibility (CSR)
Corporate social responsibility (CSR), as a concept, is slowly becoming more common in Romanian business, driven primarily by multinational companies infusing their corporate culture into the local market. Virtually all foreign enterprises in Romania have some kind of CSR program, and most follow generally accepted CSR principles, such as the OECD Guidelines for Multinational Enterprises. Romanian legislation allows companies to allocate part of their corporate income tax (a maximum of 0.3% of turnover and 20% of total corporate income tax due) for CSR under the sponsorship law.
There have been no reported incidents of politically-motivated damage to foreign investments (projects and/or installations) in Romania. Major civil disturbances are not expected to occur in the country in the near future.
Despite some improvement, corruption remains a serious problem. Romania was the third-lowest ranked among EU member states in Transparency International's (TI) 2011 Corruption Perception Index. According to the EC’s 2011 Report on Progress under the Cooperation and Verification Mechanism in Romania, corruption is still an issue that must be addressed more vigorously. The report recommends urgent measures to improve the recovery of proceeds from crimes, more active measures against money laundering, and improved measures to prevent conflicts of interest in the management of public funds. International organizations such as TI and local non-governmental "watchdog" organizations are present in the country.
U.S. investors have complained of both government and business corruption in Romania, with the customs service, municipal officials, and local financial authorities most frequently named. In some cases, demands for payoffs by low- to mid-level officials reach the point of harassment.
Romanian law and regulations contain provisions intended to prevent corruption, but enforcement is generally weak. Corruption is currently punishable under a variety of statutes in the penal code. Prison sentences are sometimes imposed, but powerful and influential individuals have often evaded prosecution or conviction. Under pressure from the EU, the GOR is attempting to prosecute several high-level political officials from previous governments, including a former Prime Minister.
The Ministry of Justice published in late 2011 a national anti-corruption strategy for 2012-2014, focusing on strengthening administrative review and transparency within public agencies, preventing corruption, and implementing anti-corruption legislation. The objectives include increased and improved financial disclosure and conflict-of-interest oversight, more aggressive investigation of money laundering cases, and passage of legislation to allow for more effective asset recovery.
In December 2002, Romania passed an anti-money laundering and terrorism financing law, which was amended in April 2008. With U.S. assistance, in September 2002 the GOR established the National Anti-Corruption Prosecutors' Office (PNA) under the Prosecutor General, staffed by prosecutors and police; the PNA was upgraded to the National Anti-Corruption Directorate (DNA) in 2005 and given significant autonomy, though it still formally reports to the Prosecutor General. A new Criminal Code was passed in 2003 and the revised Civil Code came into effect in October 2011. Romania is in the process of training its prosecutors, judges, and attorneys to ensure they are completely familiar with the new legislation.
In 2007 Romania also established the National Integrity Agency (ANI), which is tasked with collecting, managing and auditing compulsory comprehensive financial disclosure statements submitted annually by some 100,000 politicians and public sector employees at all levels. ANI has administrative powers only to identify conflicts of interest and questionable increases in personal assets. It must then forward such cases to prosecutorial authorities for further legal action. In 2010 a Constitutional Court ruling brought into question ANI's legal status, but after a contentious battle involving all three branches of government the GOR succeeded in passing legislation that allowed ANI to retain its jurisdiction and authority.
Bucharest hosts the 13-member Southeast European Law Enforcement Center (SELEC), and Romania is one of the three members of the SELEC Joint Cooperation Committee. Romania has signed and ratified the Agreement on Cooperation to Prevent and Combat Trans-border Crime of May 1999.
In March 2002, to reduce corrupt practices in public procurement, the GOR inaugurated a web-based e-procurement system (http://www.e-licitatie.ro/). Initiated with seed money from the U.S. Agency for International Development (USAID), the system provides a transparent listing of both ongoing and closed solicitations, with the names of the winners and the closing prices made available to the public. The use of "e-licitatie" has increased government efficiency, reduced vulnerability to corruption, and improved fiscal responsibility in government procurement. Initially the system was used solely for basic, straightforward procurements but now more complex projects are included, such as EU-funded programs. State entities, as well as public and private beneficiaries of EU funds, are required by law to follow public procurement legislation and use the e-procurement system. However, their compliance with these requirements is not complete.
Romania's public procurement law, passed in 2006 and amended several times, establishes ex-ante controls on public procurement processes, stricter rules on eligible participants, and an appeals mechanism for complaints against the process. The National Agency for Public Procurement has general oversight over procurements and can draft legislation, but procurement decisions remain with the procuring entities. Procurements for projects receiving EU funding above a certain monetary threshold must comply with the public procurement law.
The Romanian judicial system suffers from corruption, inefficiency, lack of expertise, and excessive workloads. Divergent and often contradictory rulings are not uncommon, complicating normal commercial activities. Companies routinely complain that commercial disputes take too long to resolve through the court system and, once a verdict is reached, court orders may not be enforced. Errors in court procedures, whether peripheral to the outcome or not, may result in complete retrials, further delaying verdicts. Courts are overburdened and the number of magistrates and judges is small. Litigants in virtually all cases have a right to two appeals, contributing to clogs in court dockets throughout the system and lengthy delays. Final judgments are not binding until all appeals are exhausted. Clerks, attorneys and judges reportedly remain susceptible to bribes or other "extra-judicial" payments, most commonly to "speed up" litigation, to assure a particular judge is assigned to a case, or to create intentional procedural errors leading to retrial. In December 2011, the World Bank published an Analysis and Assessment Report as part of its 18-month court optimization program, intended to address many of the shortcomings listed here.
Romania has one of the world's highest occurrences of Internet fraud. The problem is illustrated by a growing stream of complaints, some of which involve U.S. companies and their customers being defrauded of millions of dollars. The most common problems result from the use of stolen credit card numbers for the purchase of goods online, fraudulent use of online auction platforms, and sophisticated phishing schemes to defraud customers of legitimate e-commerce companies.
Romanian hackers also have gained notoriety for hacking into U.S. companies' servers and stealing proprietary information, including customer credit card data. There have been cases where Romanian hackers have offered to sell the method by which they hacked into a U.S. company's server back to the victim. On other occasions, hackers have attempted blackmail by threatening to release sensitive data or the means to hack the system, unless a specific amount of money is paid.
An e-commerce law that defines and punishes cyber crime came into force in July 2002. Law enforcement efforts are still not commensurate with the scale of the problem, but enforcement activities have increased notably, thanks in part to substantial assistance U.S. law enforcement agencies are providing their Romanian counterparts.
Bilateral Investment Agreements
The U.S.-Romanian Bilateral Investment Treaty (BIT) on the Reciprocal Encouragement and Protection of Investment (signed in May 1992 and ratified by the U.S. in 1994) guarantees national treatment for U.S. and Romanian investors. The agreement provides a dispute resolution mechanism, liberal capital transfer, prompt and adequate compensation in the event of an expropriation, and the avoidance of trade-distorting performance requirements. The U.S. Government negotiated an agreement with the EU and eight accession countries, including Romania, to cover any possible inconsistencies between pre-existing BITs and the countries' future EU obligations. This revised BIT was ratified by the U.S. Senate and the Romanian Parliament in 2004, and went into effect on February 9, 2007. Other bilateral trade agreements with third countries were terminated upon Romania's EU accession.
OPIC and Other Investment Insurance Programs
The Overseas Private Investment Corporation (OPIC) began operations in Romania in late 1992, and continues to actively finance projects in the country. Romania has been a member of the Multilateral Investment Guarantee Agency (MIGA) since 1992.
Romania has traditionally offered a large, skilled labor force at comparatively low wage rates in most sectors. The labor pool has tightened in highly skilled professions, despite growing unemployment overall. The university system is generally regarded as good, particularly in technical fields, though foreign and Romanian business leaders have urged reform of outdated higher education curricula to better meet the needs of a modern, innovation-driven market.
The quality of work of Romanian craftsmen, engineers, and software designers is well regarded by foreign managers. With appropriate on-the-job training, local labor performs well with new technologies and more exacting quality requirements. However, labor shortages have appeared in certain sectors, resulting in strong upward pressure on wages in recent years. Outward labor migration and the number of students graduating without the practical skills needed for the modern workplace are considered the main causes for this trend. Slowing growth and recession in Western Europe were expected to alleviate domestic labor market shortages somewhat, as some Romanian workers returned from abroad. Although Romanians have not returned in large numbers, the country has experienced a marked increase in unemployment as the recession has deepened. Unemployment officially stood at 7.5% in September 2011, representing 727,000 people, slightly higher than the 7.35% reported in September 2010. Underemployment is also a significant problem.
Since Romania’s revolution in December 1989, labor-management relations have occasionally been tense, the result of economic restructuring and personnel layoffs. Trade unions, much better organized than employers' associations, are vocal defenders of their rights and benefits. In January 2011, after extensive negotiations between unions, employers associations, and the government, the national minimum wage was set at 670 RON (about USD 201) for full-time employment of 170 hours per month, or approximately 3.94 RON (USD 1.18) per hour. In 2012, this amount is expected to increase to 700 RON a month (around USD 210), or approximately 4.11 RON (USD 1.24) per hour. The GOR adheres to the International Labor Organization (ILO) convention on protecting workers' rights. According to Eurostat, Romania's minimum wage of 232 points (adjusted for purchasing power parity) is next to last among the 27 EU member states, ahead only of Bulgaria.
In May 2010 a new Labor Code came was passed, giving employers more flexibility to evaluate employees based on performance, and significantly relaxing hiring and firing procedures. The revised Labor Code eliminated national collective labor contracts, extended the maximum duration of temporary contracts from 24 to 36 months, and introduced new collective layoff regulations.
Payroll taxes remain steep, resulting in an estimated 25-30% of the labor force working in the underground economy as "independent contractors," where their salaries are neither recorded nor taxed. Even for registered workers, under-reporting of actual salaries is common.
Current law makes it very costly to engage non-EU citizen staff in Romania. Foreign companies often resort to expensive staff rotations, special consulting contracts, and non-cash benefits. Work permits are issued for a maximum of one year for a fee of 200 euro (payable in the RON equivalent of that day’s exchange rate), except for students and seasonal workers, who pay 50 euro. These permits are automatically renewable with a valid individual work contract. There are 41 Romanian Immigration Authority offices – one in each county – to issue work permits for foreign citizens. Since Romania acceded to the EU, citizens of other EU countries can work in Romania without work permits if their own country does not impose restrictions on Romanian citizens. Although several companies hire non-EU citizen employees, mainly from Turkey, China, India, Pakistan or Moldova, most Romanian businesses are still reluctant to bring in large numbers of foreign employees. In 2011, Romania issued 5,500 work permits, out of which 4,000 were for permanent workers. Overall, 2,500 fewer permits were issued in 2011 than in 2010.
Foreign Trade Zones/Free Ports
Free Trade Zones (FTZs) received legal authority in Romania in 1992. General provisions include unrestricted entry and re-export of goods, and exemption from customs duties. The law further permits the leasing or transfer of buildings or lands for terms of up to 50 years to corporations or natural persons, regardless of nationality. Foreign-owned firms have the same investment opportunities as Romanian entities in FTZs.
Currently there are six FTZs, primarily located on the Danube River or close to the Black Sea: Sulina, Constanta-Sud Agigea, Galati, Braila, Curtici-Arad, and Giurgiu. The administrator of each FTZ is responsible for all commercial activities performed within the zone. FTZs are under the authority of the Ministry of Transportation.
Foreign Direct Investment Statistics
Romania did not attract significant foreign direct investment (FDI) until after the 1990s, due to delays in post-Communist economic reforms. According to data provided by the National Office of the Trade Registry, the cumulative net stock of FDI from January 1990 to September 2011 totaled USD 42.47 billion, about 21.2% of Romania’s GDP. Romanian direct investments abroad from January to September 2011 totaled USD 246.4 million.
Major sectors for foreign investment include:
-- Automobile and automotive components (Renault, Daimler Benz, Ford, Siemens, Continental, Alcoa, Delphi Packard, Johnson Controls, Honeywell Garrett, Michelin, Pirelli);
-- Banking and finance (Citibank, Société Générale, AIG, ING, Generali, Volksbank, Raiffeisen, Erste Bank, Unicredit, Alpha Bank, National Bank of Greece, Intesa Sanpaolo, Millenium Bank, Garanti Bank);
-- Information Technology (Hewlett Packard, Intel, Microsoft, Oracle, Cisco Systems, IBM);
-- Telecommunications (Orange, OTE, Telesystem International Wireless Services, Vodafone, Liberty Media/UPC);
-- Hotels (Hilton, Marriott, Best Western, Howard Johnson, Sofitel, Crowne Plaza, Accor, Ramada, Radisson);
-- Manufacturing (Timken, General Electric, Cameron, LNM, Marco, Flextronics, Holcim, Lafarge, Heidelberg, Plexus, Lufkin, Toro);
-- Consumer products (Procter and Gamble, Unilever, Henkel, Coca-Cola, Parmalat, Danone, Smithfield Foods);
-- Retail chains (Metro, Delhaize, Dm Drogerie, Carrefour, Cora, Billa, Selgros, Auchan, Kaufland).
Officially, the value of U.S. direct investment in Romania as of September 2011 was USD 901.3 million. The U.S. is the 13th-ranked foreign investor nation, after the Netherlands, Austria, Germany, France, Cyprus, Greece, Italy, Panama, Spain, Switzerland, the UK, and Luxemburg. U.S.-source investment represented 2.1% of Romania's total FDI. However, because official statistics do not fully account for the tendency of U.S. firms to invest through their foreign, especially European-based, subsidiaries, the actual amount of U.S. FDI is higher. Romanian statistics also over-emphasize physical, capital-intensive investments, while overlooking the impact of foreign investment in services and technology. Significant U.S. direct investors (including investments made through branches or representative offices) include:
- Advent Central and Eastern Europe - investment fund;
- AECOM - engineering and design;
- Chartis - general insurance;
- Alico (Met Life) - life insurance;
- Alcoa - automotive, aluminum processing;
- Bunge - grain trading;
- Cargill - grain export and food processing;
- Citibank - banking;
- Coca-Cola - beverage, food;
- Cooper Cameron - gas field equipment manufacturer;
- Delphi - automotive parts;
- EuroTire - mining and heavy equipment tires;
- Flextronics – medical, telecom, automotive;
- Ford - automotive assembly;
- General Electric - diversified industrial products;
- Hewlett Packard - IT equipment, services;
- Hoeganaes - iron powder for automotive;
- Honeywell Garrett - automotive;
- IBM - IT equipment;
- Johnson Controls - automotive;
- Kodak - film processing;
- McDonald's - food;
- Microsoft - software services;
- New Century Holding - investment fund;
- Office Depot - office and business supplies;
- Oracle - IT services, consulting;
- Pepsico - beverage;
- Philip Morris - tobacco products;
- Procter and Gamble - consumer products;
- Qualcomm - telecommunications;
- Sigma Bleyzer - investment fund;
- Smithfield Foods - food production and distribution;
- Timken - industrial bearings;
- Liberty Media UPC - cable television operator;
- Visa - financial services;
- URS - engineering.
In addition to these companies, the European Bank for Reconstruction and Development (EBRD) remains the single largest investor (debt plus equity) in Romania, with some USD 7.2 billion invested. The U.S. is a 10% shareholder in the EBRD.
The largest amounts of investment in Romania come from the following countries:
- The Netherlands - USD 8.23 billion (19.4 % of total FDI): IT, banking, insurance, consumer products, food;
- Austria - USD 5.94 billion (14.0%): banking, insurance, construction materials;
- Germany - USD 5.52 billion (13.0%): insurance, food, machine construction, chemicals, cement, banking;
- France - USD 2.80 billion (6.61%%): food, IT, automotive, manufacturing, cement, agriculture, banking, hypermarkets;
- Cyprus - USD 2.55 billion (6.0%): banking, retail, services;
- Greece - USD 2.40 billion (5.65%): banking, food, consumer products, retail;
- Italy - USD 1.78 billion (4.2%): footwear, textiles, food, banking, insurance;
- Panama - USD 1.36 billion (3.20%): services;
- Spain - USD 1.33 billion (3.13%): manufacturing, consumer products, banking;
- Switzerland - USD 1.25 billion (2.97%): food, manufacturing, consumer products;
- U.K. – USD 1.03 billion (2.44%): tobacco, banking, insurance;
- Luxemburg – USD 1.02 billion (2.41%): retail, constructions, food;
- U.S. - USD 901.33 million (2.12%): IT, automotive, banking, insurance, hospitality, manufacturing, consumer products.
The Authority for State Assets Recovery
Ministry of Public Finance
Ministry of Economy, Trade and Business Climate
International Centre for Settlement of Investment Disputes
Romanian Copyright Office
Ministry of Communications and Information Technology
National Securities Commission
Bucharest Stock Exchange
National Bank of Romania
National Anti-Corruption Prosecutors' Office
Romanian Government's Web-Based e-Procurement System
Overseas Private Investment Corporation
Ministry of Labor, Social Solidarity and Family