Thursday, July 17, 2008

Romania: Boosting Investor Confidence

Oxford Business Group Latest Briefing

A new investment law is to secure long-term financing from both local and foreign enterprises, offering Romania an opportunity to spread Bucharest's economic benefits to the country's furthest corners.

On June 27 the Romanian Government approved the long-awaited investment law. Initially a draft proposal, the government decided to promote the proposal through emergency ordinance, thereby avoiding a time-consuming approval process in parliament and having as "prompt as possible answer to the business environment's request to regulate the investment framework," Prime Minister Calin Popescu-Tariceanu told local media.

As Tariceanu explained, the aim of the law is to provide a legal framework for the provision of financial incentives to both foreign and domestic investors in an attempt to secure future investments. These incentives take the form of state aid and will be granted along criteria such as the objective, purpose, duration and budget of proposed projects.

The law provides an umbrella framework in which processes of application and allocation of such grants can be made on consistent, transparent and non-discriminative basis. Furthermore, the law mandated the ministry of economy and finance to draw up a legal framework for the establishment of the National Investment Agency by restructuring the Romanian Agency for Foreign Investments.

Although further specifications of the criteria are not yet in place, the state aids are meant to encourage investment into areas that are currently less popular.

A first key segment concerns rural areas. The gap in economic development between the capital and rural regions is widening to worrying levels. As Romanian central bank results show, Bucharest attracts 64% of foreign investment compared with the northeast region, which receives a mere 1.2%. As Paul Pacuraru, minister of labour, family and social equality, recently said in a presentation, this creates differences in minimum monthly wages from RL1200 (337 euros) for non-skilled workers and RL2400 (675 Euros) for skilled workers in Bucharest to an average of RL500 (140 euros) for many under-developed regions.

The prime minister also highlighted areas such as energy efficiency and output from renewable sources, water management, research and development, innovation and labour force employment and training.

The non-discriminative aspect of the law underlines the government's efforts to attract domestic as well as foreign investment in the targeted areas. Local investment remains unrecorded, which reflects its small size in comparison to foreign investment. However, industry insiders predict that this is about to change. The new investment law comes on the back of continued initiatives from the European Bank for Reconstruction and Development and the European Investment Bank as well as increased absorption rates of EU-funds; this will result in a much more prominent role for local sources of financing in the medium-term.

Foreign investors will welcome the law. The importance of foreign funds to Romania's economic growth is clear. Foreign direct investment (FDI) inflows are estimated to cover more than half of the current account deficit this year, Constantin Chirca, deputy general manager of the statistics department at the Romania Central Bank, told local media.

However, signals from the Foreign Investors Council (FIC) indicate that confidence in Romania as an investment destination has come under pressure, mainly due to the government's slow renewal of the previous investment law, which expired upon EU-accession.

"Investors became concerned by the lack of clarity and transparency over state aid implemented by the government and by the delays in setting the legislative framework for the allocation of EU funds," Richard Moat, CEO of Orange Romania and president of the Foreign Investors Council, told OBG. He added that "the situation could have had a negative effect on FDI, as investors have been unable to take advantage of many funding opportunities which ought to have been available."

With the introduction of the law, the country has taken a significant step in staying on top of investor's wish lists, looking to tap into the south east Europe region. It will be up to the government - facing national elections at the end of the year - to keep investors happy and the pace of national development going.

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