Water power: the Vidraru hydro power plant, which is owned by Hidroelectrica © Reuters

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When lawmakers from the ruling Social Democratic party proposed a five-year moratorium on privatisations in April, it seemed like another setback for Romania’s stop-start attempts to sell-off state-owned enterprises.

Since the fall of communism, the privatisation process has encountered a series of political and economic hurdles. The draft law on the moratorium was submitted for public debate in July, but opinion is divided on what it means: was it purely for public consumption in a country that is sceptical of privatisations, or a serious legislative proposal with the potential to discourage investors?

In July, social democrat leader Liviu Dragnea — viewed as the real power behind the government — gave the draft law his qualified support, saying that it was “not bad” but needed further analysis.

Where many other ex-communist countries had a wave of privatisation in the early 1990s, Romania was a laggard, partly due to its difficult political transition following its violent 1989 revolution. Bryan Jardine, managing partner for law firm Wolf Theiss in Romania, recalls that privatisation gained traction only in the late 1990s, thanks to a programme backed by the World Bank.

Assets divested included:

  • Sidex steel mill, acquired in 2001 by Lakshmi Mittal’s LNM, now part of ArcelorMittal
  • Petrom, the oil and gas group and Romania’s largest company, sold to Austria’s OMV in 2004
  • BCR, Romania’s biggest bank, bought by Vienna-based Erste in 2006
  • Various regional electricity distribution companies were also sold off, with European power companies including ENEL, Eon and CEZ among the buyers.

OMV-Petrom was one of the biggest successes. Its new owners transformed it from a lossmaking behemoth that was milked by unscrupulous politicians and businessmen into a regional leader that has invested nearly €1bn a year since privatisation and contributes about a tenth of Romania’s tax income, according to Fondul Proprietatea, an investment fund set up by the Romanian state and listed in London and Bucharest.

A second wave of privatisation started in 2007, this time through initial public offerings on the growing Bucharest Stock Exchange (BVB). These enabled the government to both sell off stakes in state-owned entities — often minority holdings — and improve corporate governance and transparency while boosting the bourse.

The first of several utility companies to be sold off was energy transmission operator Transelectrica in 2006. The biggest and latest utility privatisation was the sale in 2014 of a 51 per cent stake in electricity supplier Electrica, which raised 1.95bn leu ($490m). However, there have not been any further big state enterprise sales since Electrica’s IPO, which was pushed through under pressure from the IMF.

The state’s next IPO is likely to be of a minority stake in Hidroelectrica, a hydroelectric power operator, expected in the second half of 2018. It is the country’s largest electricity producer, with an installed capacity of 6,432MW — more than four times that of Romania’s sole nuclear power plant at Cernavoda. With a market share of 25 per cent, it has an ebitda margin of about 63 per cent, according to Daniel Tunkli, a senior analyst at regional brokerage Concorde Securities.

Listing Hidroelectrica would help the BVB meet its target of upgrading to MSCI Emerging Market status, thus strengthening its appeal to international investors.

The company has a recent history of mismanagement in state hands. In 2012, it declared insolvency after losing $1.4bn over six years; a legal challenge pushed it back into insolvency two years later. While the management was acquitted of having formed an organised crime group related to strategic privatisations, several members were sentenced to prison for abuse of power. After an extensive turnround process, Hidroelectrica became solvent in June 2016 and Fondul Proprietatea, which holds a 19.94 per cent stake, rates it highly.

It holds a 19.94 per cent stake, the largest component of its unlisted portfolio, yet has concerns about the way the expected date of listing keeps being postponed. On September 8, Fondul said that it was considering selling its stake given a lack of progress on the listing.

“We have frequently highlighted the benefits a Hidroelectrica IPO can bring to Romania’s capital market,” Greg Konieczny, chief executive and portfolio manager of Fondul Proprietatea, told the Financial Times. “However, very little has been done so far on this front for concluding the listing. Without a set deadline for listing and real commitment and support from the government level, we are afraid the Hidroelectrica listing may be delayed indefinitely.”

Chemical company Oltchim is one entity that may be sold soon. The company’s history is indicative of post-communist experience common to Romanian state entities. It was once one of communist Romania’s most successful companies but its transition since 1989 was poorly managed.

Several attempted privatisations failed or stalled, and Oltchim became a political football. After operations at the plant were suspended in 2012 and arrears piled up, exhibitionist media mogul-turned-politician Dan Diaconescu reacted to having his bid for the company rejected by turning up on the doorstep of the Ministry of Finance with €3m in cash withdrawn from his personal account, offering to pay worker’s wages.

Otherwise, privatisation has slowed again. Radu Magdin, an analyst at Bucharest- based Smartlink Communications, gives four reasons for this:

  1. Many of the bigger and better state enterprises have already been sold.
  2. The government is reluctant to sell majority stakes in companies regarded as strategically important, including several of the utility companies already part-privatised via the stock exchange.
  3. Privatisations are politically unpopular and Romania’s governments have proved fragile. There have been six prime ministers since 2012, not including caretakers. Most recently, the technocratic government of Dacian Ciolos (November 2015-January 2017) did not move ahead with privatisations partly because it lacked an electoral mandate to do so.
  4. The current government has plans to bundle many of its holdings into a sovereign wealth fund and to use the profits to finance investments in infrastructure.

A fith challenge, according to others, is the quality of the remaining enterprises that have regularly been touted as potential privatisations over the past decades, such as national airline Tarom, rail freight company CFR Marfa, and postal operator Posta Romana.

“Some of the state-owned companies are in such bad shape that there would be no interest in buying them, while others should be privatised for rather symbolic amounts which politically might not be acceptable,” says Radu Craciun, director-general of private sector pension fund BCR Pensii. “There are actually very few companies left which could be privatised on the stock market, as to list a company needs a history of profitability and sound management, and many do not meet such criteria.”

Nonetheless, Fondul Proprietatea’s Mr Konieczny argues there are still a number of state-owned businesses that could be suitable for IPOs, including Aeroporturi Bucuresti (which operates two airports in Bucharest), Portul Constanta (the operator of Romania’s biggest port), and salt producer Salrom.

BVB president Lucian Anghel hopes that the planned wealth fund may become “a trigger for potential future minority stake selling”, rather than a distraction or a means to stall privatisation. “Investors are very keen on profiting from one of the strongest economic growth outlooks in the EU via investing in Romanian companies,” Mr Anghel adds.

While few expect the privatisation process to grind to a halt permanently, observers will scrutinise closely the government’s preparations for launching the Sovereign Development Fund in 2018 and the fate of companies like Hidroelectrica for signs of real progress. Investors have heard many words on privatisation in Romania — but it is deeds that will count.

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