Financial Times: "Romania intr-un moment de cotitura"

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Joi, 24 februarie 2005, 0:00


EU hopes spur new revolution
By Christopher Condon
Published: February 23 2005 07:49 | Last updated: February 23 2005 07:49

Somehow, the most dramatic and violent of the anti-communist uprisings that erupted in eastern Europe in 1989 and 1990 managed to provide the smallest democratic pay-off. Many Romanians now refer to it as the "stolen revolution".
Since then the country has been run mostly by ex-communists, though liberals and anti-communists had their chance, as well. Whatever their stripe, successive governments either resisted change or proved incompetent, allowing the 1990s to pass as a lost decade.
Under heavy pressure from the International Monetary Fund and the European Union, which Romania is keen to join, the last government finally took important steps and laid a foundation for economic growth. Yet, political leaders still avoided accountability, indulged in or excused corruption and delayed many fundamental political and economic reforms.

Romania, it seemed, remained haunted by the legacy of Nicolae Ceausescu.

In December, that may have changed when Traian Basescu, a former sea
captain, was elected president in a stunning victory over Adrian Nastase, the incumbent prime minister. A coalition government, led by Mr Basescu's Alliance for Justice and Truth, took power soon after. It immediately pledged to lower taxes, fight corruption and make other key reforms.
Combined with Romania's approaching membership in the European Union and solid prospects for economic growth, this is giving rise to hopes that, 15 years after Ceausescu's execution, Romania may finally have reached a decisive turning point.
The government showed its seriousness by rushing to conclude a coalition agreement with two smaller parties in order to implement a radical tax package before the year's end. This was crucial as tax code changes can be introduced in Romania only on January 1.

So, hours after being sworn in on December 29, the cabinet approved the introduction of a flat 16 per cent tax on both personal income and corporate profits. The government hopes the changes will help spur investment and reduce Romania's rampant tax fraud.
Mr Basescu's cabinet choices sent another important signal. In addition to avoiding, for the most part, figures associated with past governments, the president awarded several top posts to relative youngsters. He appointed a 40-year-old finance minister, a 36-year-old foreign minister and a 44-year-old human rights activist as justice minister.
"We can finally speak about a transition," says Calin Tariceanu, the prime minister. "A new political generation has come into power that has no links with the past."
It will take more than a few young faces, however, to convince Romanians that the country has turned a crucial corner ? a point Mr Basescu readily concedes. "I also have this feeling that we have made a break with the past, but a feeling is not reality," he says. "The key will be if my administration can prove this with action, if we can make changes as fast as possible."
Much is at stake both for Mr Basescu's government and for the country. In April Romania is to sign a historic accession treaty with the EU. This sets the stage for full membership in 2007 if the country can stick to promised reforms. A qualified majority of EU members can, however, postpone entry by a year if the government stumbles in addressing any of nine specific problem areas.

They include corruption, judicial independence, social security, border security, state aid and environmental protection.
Those same reforms will be painful, costing jobs and causing prices to
rise. In addition, EU membership may initially provide a shock, especially given the comparatively low bar set by the EU for Romania's entry. EU decisions on enlargement have always relied on a mix of technical and political considerations.

Candidates are required to meet a level of demonstrated readiness that can vary depending on the political willingness among members to open the club's doors. In Romania's case, some commentators say the EU diluted the formula in favour of political considerations more drastically than ever before, meaning Romania will be the least prepared country to join the union.
In his recently published book Theft of a Nation, Romania since Communism, British academic Tom Gallagher argues that the EU may regret lowering its standards in order to rush Romania's accession. But, he adds, Romanian companies may suffer the most for their lack of readiness for full exposure to the common market.
All the more reason, then, that the government should proceed quickly with reforms that reduce the state's distortion of the economy through bureaucratic interference, state aid and corruption.
A more level playing field now would give healthy companies more time to prepare for EU membership. Fortunately for Mr Basescu, many companies are already thriving despite those distortions. The economy is expected to grow 5.5 per cent this year, following on last year's 8 per cent expansion.

A bumper harvest, remittances from Romanians working abroad and a credit boom all explain part of that burst but it also includes, say economists, a healthy level of sustainable growth.
Recent privatisation deals struck by the previous government should begin to benefit the economy, as should a continued expansion of credit for companies and households. A heavy preference for foreign currency loans, however, has added an uncomfortable level of risk to the banking sector.

The government is also counting on the lower corporate tax rate to attract more foreign investment, especially in export-oriented manufacturing and services.
In short, circumstances are converging in Romania to justify more optimism than at any point since the 1989 revolution. Still, the government's task is enormous. "The most dramatic process of
modernisation Romania has ever gone through," says Mihai-Razvan Ungureanu, the young historian turned foreign minister. And Romanians have had their hopes dashed before. As one European diplomat put it: "Yes, it could be a turning point for Romania. But they could still screw it up."
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Bucharest: Plan to transform a brutalist image
By Christopher Condon
Published: February 23 2005 07:54 | Last updated: February 23 2005 07:54

In a region known for its elegant and increasingly restored cities, the
Romanian capital is, unfortunately, an ugly duckling among the swans.
Instead of dazzling visitors with art deco or baroque, Bucharest
overwhelms them with brutalist architecture. Add the dust, the traffic and
the ubiquitous trash and the city once described as the Paris of the east
is now sometimes referred to jeeringly as the New Delhi of the west.
Snide comments are not the only consequence. Though Bucharest is
prospering, city officials worry that the capital's rough appearance is
holding back the local economy. "Bucharest has an image problem," says
Adrian Bold, the city's chief architect. "It doesn't help attract
investors."
It does, however, have a neglected historic quarter ripe for
redevelopment. Most promising is the Lipscani district, once the grounds
of a 16th century royal palace built by Vlad Tepes, the Wallachian prince
who inspired the Dracula tale. The ruins of the palace remain, as well as
scores of 18th and 19th century houses along narrow, cobble-stoned streets
named for medieval guilds and merchant groups.
The city also has a plan, announced late last year, that aims to transform
the neighbourhood over the next two years and with it, Mr Bold hopes, the
image of the capital. City Hall has secured ?10m from the European Bank
for Reconstruction and Development to rebuild the area's decrepit
infrastructure, pedestrianise most of the streets and add small parks and
fountains.
The capital hopes to spark additional private investment by selling prime
real estate outside the historic quarter to developers on the condition
that they also invest in the Lipscani section. The idea is modelled, says
Mr Bold, on the scheme used to redevelop London's Docklands.

Plans for the Lipscani neighbourhood will only be the start.
According to Marinela Berza, head of the city's urban planning office, it
represents a 12 hectare pilot project, with the entire plan aiming to
redevelop 57 hectares in central Bucharest.
So far, property agents are intrigued but sceptical. Similar plans
surfaced a decade ago, but government officials always seemed to drop or
block the project. Funds mysteriously disappeared. This time, however, may
be different. A series of crucial factors are lined up to support, rather
than undermine the plan.
For starters, Romania is finally moving to resolve thousands of cases of
restitution stemming from communist-era property seizures. Many of these
cases, bogged down in the country's corrupt courts and opposed by the
previous government, had turned investment in historic properties into a
hazardous business.
The government, elected in December, not only supports restitution but is
also acting to clean up the courts. It also helps that Traian Basescu, the
president, was previously mayor of Bucharest. Unsurprisingly, the
government energetically supports the plan. The previous administration
treated Bucharest as enemy territory, refusing to help finance investments
or grant guarantees necessary for outside financing.
Equally important, Bucharest is booming. In addition to the explosion of
retail outlets, homes and office buildings, money is also flowing into
cafes, restaurants and galleries.
The nightlife has developed a distinct buzz, catering to the capital's
nouveau riche and expatriate crowd. But it still lacks a centre of
gravity. That could be the Lipscani district if the city follows through.
While some have their doubts, others have already begun investing. The
area's prices have doubled in the last year to ?600 to ?800 per square
metre, according to Adina Covaceanu, an investment sales broker for
Colliers International. That is, however, slightly misleading. Buyers
typically have to invest another ?400 per square metre to repair 60 to 80
years of neglect.
Additionally, Bucharest's property market is heating up so quickly that
there are plenty of easier ways to make money in town, drawing funds away
from the historic district.
Dragos Dragoteanu, general manager of Euroest, a property brokerage, says
most investors prefer to buy empty plots and build residential or office
space.
This allows larger single-project investments and avoids the hassles
associated with restoring historically protected structures. "It's a lot
less complicated," he says. Yet, there is no denying the romantic draw of
Lipscani and the potential it represents for a city desperately in need of
a facelift. "It has a character all its own," says Ms Covaceanu.
"There are all sorts of gems throughout the old town just waiting to be
polished off."
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Altex: How to be a multi-millionaire
By Christopher Condon
Published: February 23 2005 07:13 | Last updated: February 23 2005 07:13

The lure of the west is still strong for Romania's brightest young
graduates in spite of the recent inflow of investments and jobs. But back
in the early 1990s, when the country was a political mess and the economy
in a shambles, the lure was overpowering.
Sitting in his favourite fish restaurant in Bucharest, Dan Ostahie
remembers watching his sister and her husband emigrate to the US in 1992.
Each had a technical degree; she now works for Oracle, he for Cirrus
Logic. Mr Ostahie, a native of Piatra Neamt, a small city in north-east
Romania, was convinced that he would soon follow.
Of his 44 classmates in the electronics and telecommunications department
of Bucharest Polytechnic University, he estimates that at least 70 per
cent went abroad.
"I also wanted to leave," he says. "The dream was to go to the US."
He was, however, distracted by a small business venture he had launched
back in Piatra Neamt importing, repairing and selling used western
televisions. Focused on the job at hand, Mr Ostahie never did leave. Just
over a decade later, it is hard to see how he could have done better
living the American dream.
A boyish 38, he has built his company, Altex, into the country's largest
retail chain for electronics, white goods and home appliances. He is also
one of the country's wealthiest men, with a net worth estimated at between
?70m and ?80m.
The story of how Mr Ostahie went from student repair boy to
multi-millionaire is an impressive tale of resourcefulness, courage and
good timing, with a few acts still to come.
Now that Altex is several steps ahead of the multinational retailers just
now hitting the market, he may soon face a big decision as the company
becomes a prime target for acquisition.
Such a future was completely unimaginable in 1991 when, through a friend
of a friend, he managed to buy a truckload of clapped out televisions from
Switzerland with his $2,000 life savings. He quickly made his money back
but demand so outpaced his meagre supply he decided to take a loan.
Sceptical of the young Mr Ostahie and with little experience in lending to
small companies, the local bank demanded collateral. Much to his mother's
disapproval, Mr Ostahie's father agreed put up the family house for
$10,000. He had 30 days to repay.
"I did it because I enjoyed it," Mr Ostahie recalls, "first for the
technical repair and then I found I liked sales." The repairs, he says,
were sometimes difficult, but the sales came easily. "You could sell as
many as you could import. The market was like a sponge," he says.
He made his first deadline, to his mother's relief, and was soon able to
borrow more. Eventually, he diversified into household appliances. In
1994, he took the next logical step, opening a shop and importing new
goods. He struck a deal to sell goods for Rotel, the Swiss electronics
maker, whose representative acted like a business mentor to him.
Gradually, the number of shops grew to 34 by the end of 2001.
Until then, Mr Ostahie's success could be attributed to his own energy and
pluck. Good timing then came into play as privatisation of the banking
sector sparked an explosion in retail lending. He arranged Altex's first
consumer credit deal in 2002, and sales took off. "It was like putting up
the sails with the wind blowing in the right direction," he says.
Turnover leapt from ?16m in 2001, to ?35m in 2002, and to an impressive
?115m in 2003. Mr Ostahie projects sales this year to hit ?200m. Altex
now operates 125 shops ? 25 fully owned ? in 70 cities and towns. The
company has also opened four huge stores of 2,000 sq m to 4,000 sq m under
the name Media Galaxy, with a fifth set to open this month. It plans to
open shops in Serbia and Bulgaria in the next two years possibly followed
by Macedonia and Bosnia-Herzegovina.
With companies such as Germany's MediaMarkt and the UK's Electroworld
expanding in the region, it seems natural that he will field takeover
offers. Mr Ostahie, who owns 100 per cent of Altex shares, seems quite
open to the idea.
"Of course, there will be a chance to sell. The big question is whether I
would stay with the company or go. But I can handle either decision."
The young tycoon, who talks as eagerly about wine as his business, sounds
ready to try something new but not another start-up. "I will never be able
to start from scratch again. I have done that already," he says.
He is also showing no signs of wanting to emigrate.
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Economy: A big effort to make up for lost time
By Christopher Condon and Alex Fak
Published: February 23 2005 07:17 | Last updated: February 23 2005 07:17

Adriana Iliescu, the 67-year-old retired history professor who in January
became the oldest woman known to have given birth, may seem an odd sort of
an inspiration.
But her country is trying to do something rather similar. Romania wasted
its post-Ceausescu youth. Privatisation was slow and erratic, corruption
went unpunished and bureaucrats thrived in the tangle of regulations.
Investment was flooding out, not coming in.
It is now trying to make up for lost time. A dynamic government elected in
December and led by the centrist Alliance for Justice and Truth is pushing
wholesale reform. It hopes to usher the country into the European Union as
quickly as possible and to reshape a growing but distorted and unbalanced
economy.
For all its flaws, the previous government can take credit for laying some
of the foundation. The Social Democrats, under pressure from the
International Monetary Fund and Brussels, cut the official budget deficit
to about 1.5 per cent of gross domestic product in 2004. Inflation has
dropped from 55 per cent in 1999 to under 10 per cent.
The Social Democrats also belatedly cleaned up and began selling off the
banking sector. A subsequent credit boom, combined with a steady flow of
remittances from Romanians working abroad, has helped the economy expand
by more than 5 per cent every year since 2001.

Growth for 2004 is likely to have topped 8 per cent, mostly on strong
demand, though up to 2 per cent is due to a bumper harvest that followed a
drought in 2003. The government's growth target for 2005 is 5.5 per cent.
In October the EU declared Romania a "functioning market economy". Bond
yields and lending rates have fallen markedly.
In November, Fitch Ratings gave Romania its first ever investment grade
rating. Capping the positive run, the EU decided in December to open its
doors to the Balkan country on January 1 2007, though entry can be delayed
by a year if the government fumbles additional reforms.
Romania remains, however, an acutely poor country where the average net
wage is just $180 a month and annual GDP per capita just $3,090.
Registered unemployment has fallen over the last four years but so has
employment.
Bucharest and several of the country's larger cities are thriving, with
construction and retail sectors experiencing an unprecedented boom. But
the picture is much bleaker for rural Romania and is likely to get worse
before it gets better. One-third of employment in the country and 15 per
cent of GDP is tied up in the declining agricultural sector.
Moreover, though foreign investment has risen neatly to ?3bn in 2004, it
comes mainly on the back of one-off privatisations in the energy sector,
much of which will initially cause job losses as new owners pare down
bloated companies. Another significant portion of FDI has poured into
contract manufacturing in textiles and shoe making, low-skill sectors that
are likely to move further east before long.
"Romania is a country where foreign investment goes primarily into
privatising state-owned assets and using cheap labour," says Gabor Hunya
of the Vienna Institute for International Economic Studies
With the end of large-scale privatisation nearing, Romania must attract
more greenfield investments in export-oriented manufacturing and services
that demand higher skills.
Otherwise, the country may face real difficulty in creating jobs and
financing its current account deficit which rose to more than 8 per cent
of GDP at the end of last year.
Inter-company and tax arrears, allowed to balloon by flaccid tax
collection and weak bankruptcy laws, represent another dangerous
distortion of the economy. By some estimates, arrears equal 40 per cent of
GDP.
Not unlike Ms Iliescu, the elderly mother, the new government has launched
a last-minute Stakhanovite effort, hoping to remove constraints on
business, level the playing field and raise transparency.
Traian Basescu, the president, has announced a war on corruption and
slashed taxes. Corporate profit taxes have fallen from 25 to 16 per cent
in an attempt to spur investment. Personal income taxes have dropped to a
flat 16 per cent from between 18 and 40 per cent, a move designed to lure
tax cheats into the system. Tax evasion is so widespread in Romania that
the real economy is estimated to be nearly twice the size of official GDP.
Plans are afoot to toughen tax collection, tip the legal advantage from
debtors to creditors, beef up bankruptcy rules and make labour laws more
flexible for employers.
Changes will also come for capital markets. Romania will open its capital
account this year, giving foreign investors direct access to local
currency deposits and the ability to buy and sell domestic debt.
The new government is also planning to breathe life into the local
equities market by selling minority stakes in state-owned companies
currently up for sale and others already majority privatised. Stakes in
the savings bank CEC, oil company SNP Petrom and telecoms company
RomTelecom could hit the exchange as early as this year.
Yet even if the tax cuts, anti-corruption fight and capital markets
measures prove successful, the centrist government has a long way to go
before establishing its credibility and improving the business climate.
"I do hope we will not see these tax cuts reversed a few months from now.
One can never quite be certain in Romania of how things will evolve," says
Patrick Leonard, tax partner at KPMG in Bucharest.
Others point out that Romania's smothering bu- reaucracy will take years
to change.
"Investors probably have the correct impression that things here are very
Byzantine," says Matei Paun, managing partner at BAC, an investment
advisory firm.
Yet the new government is saying all the right things. Ionel Popescu, the
finance minister, told the FT that the state should act "more like a
referee than like a player in the economy".
President Basescu says that "the state has to privatise as much as
possible. The state is a disaster when it involves itself in business".
But for now, these are just plans and, while the government is clearly
ambitious, it may also prove unstable.
The alliance's coalition of convenience with two smaller parties holds a
very thin majority in parliament, and its popularity may fade as it takes
tough steps to win EU membership in 2007, such as raising energy prices.
Investors, like that dawdling Ms Iliescu, can be forgiven for taking their
sweet time
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Politics: Surprise victory for a 'wild political animal'
By Christopher Condon
Published: February 23 2005 07:21 | Last updated: February 23 2005 07:21

The colour was purely coincidental but it certainly did not hurt.
Shortly after the Orange Revolution toppled ex-communists in Ukraine, the
Alliance for Justice and Truth, also sporting orange as its primary shade,
defied nearly every prediction to turn the same trick in Romania.
Led by Traian Basescu, the surprise winner of December's presidential
election, the Alliance has since formed a coalition with two smaller
parties and launched an ambitious series of reforms aimed at strengthening
the economy, securing EU membership and, says Mr Basescu, "making Romania
a democratic country in real terms".
Romanians toppled the boorish dictatorship of Nicolae Ceausescu in 1989
yet managed to replace it with a swamp of corruption and client politics.
The Alliance claims it will change that, but is it for real? In a country
familiar with disappointment, many are sceptical. Cynics say there are few
broad policy differences between the Alliance and the Social Democrats,
the party it defeated.
Many also fear the current coalition, led by a surprisingly youthful slate
of ministers, will repeat the disaster of the patchwork government of
1996-2000, an administration remembered chiefly for its paralytic lack of
unity and spectacular incompetence. The coalition has little room for
error with a three-seat majority in the lower house of parliament.

A different platform of stated policy goals, however, is not what Romania
necessarily needs. No one actually stood against fighting corruption,
encouraging investment or joining the EU. What most Romanians desire is
the political will needed to achieve those goals.
Mr Basescu, who served as transport minister and then mayor of Bucharest,
may be the man to deliver. "He is a credible guy ? more so than I would
have given him credit for before the elections," says one European
diplomat.
A former oil tanker captain with a no-nonsense approach and an unpolished
form of charisma, he is not afraid to give bold orders and take risks. He
jumped into the presidential race only in October, after Theodor Stolojan,
the Alliance's first candidate, withdrew citing health problems.
"He took responsibility for running when no one believed in him and he
won," says Dorel Sandor, a political analyst who served as a paid adviser
to Mr Basescu's campaign. "He is a wild political animal."
In his first two months in office, Mr Basescu has used his bully pulpit to
great effect. He has championed a government anti-corruption drive and
warned civil servants to follow the law and not politics. This has ruffled
feathers, but it has also struck a chord with the public. The Alliance's
popularity has skyrocketed. Mr Basescu has, in turn, used this to great
advantage by threatening his own coalition partners with new parliamentary
elections should they think twice about supporting the Alliance's
legislative agenda.
Given the Alliance's popularity, some believe he should call a snap
election even without such pretext, but that is unlikely. In spite of the
temptation to reach for an outright majority in parliament, the Alliance
has pressing business. Romania must finalise its accession treaty with
Brussels, due for signing in April, and continue reforms in order to keep
accession, itself, on track for January 2007. A slip could cause EU
members to delay Romania's entry for a year. As for his cabinet ministers,
in a country eager for a break with the past, their youth and inexperience
may prove an advantage.
"What Romania needs at the moment are people who are determined to rebrand
the country," says Mihai-Razvan Ungureanu, the 36-year-old foreign
minister.
In any case, not all the cabinet ministers lack grey hair. Calin
Tariceanu, 53, the prime minister, has significant experience both in
politics and business without being tainted by accusations of corruption.
As a low-key personality, he also complements Mr Basescu, letting the more
flamboyant president dominate the spotlight while he has got down to work
in relative quiet.
The quiet is, however, unlikely to last. Mr Tariceanu has promised to
enforce bankruptcy rules and strengthen tax collection. Under its
accession treaty with the EU, Romania will also be obliged to end certain
industrial subsidies and nearly double energy prices. The prime minister's
true test will come after he follows through on reforms that he admits
will be "extremely painful".
Another intriguing question is whether the Social Democrats will be ready
to take advantage when the government's popularity fades. Following its
shock defeat, the party that ruled Romania for all but four of the last 15
years, is facing its first real internal crisis.
Most observers believe Ion Iliescu, the former president, who was elected
to the senate, and Adrian Nastase, former prime minister and now speaker
of the lower chamber, are engaged in a battle for control while other,
more modernising voices are also looking for an opening. "They could end
up transforming themselves or they could divide," says Mr Sandor. "At this
point it is difficult to envisage them [re-emerging] in the short term."
Still, the Social Democrats claim 600,000 members and enjoy wide support
among wealthy business figures, especially outside Bucharest. The party is
almost certain to make an eventual comeback.
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Governance: Coming to terms with corruption
By Christopher Condon
Published: February 23 2005 07:25 | Last updated: February 23 2005 07:25

It is the most often cited problem facing Romania. It infects the most
mundane of public services and the largest of public contracts. In
distorts the economy, twists the administration of justice and contributes
significantly to poverty by sapping public and private resources. It is,
of course, corruption.
In its quest to join the European Union, however, Romania has pledged to
confront the problem. A government led by the centrist Alliance for
Justice and Truth, appears to be taking that pledge seriously. It must,
however, pass some important tests before it makes a substantial impact.
Since taking office in December Traian Basescu, the president, has
repeatedly urged police, prosecutors, regulators and judges to remove
politics from their work. "Institutions in Romania have a habit of looking
to the ruling party [for direction]. What I say now is: 'Look at the law
and act accordingly'," he says.
The president surprised his own party and delighted rights groups by
appointing Monica Macovei as justice minister. Ms Macovei, formerly head
of the Romanian Association for the Defence of Human Rights, has long
called for anti-corruption measures and a more independent judiciary.
Now she will get a chance to implement "the reforms I was demanding when I
was on the other side of the barricades".

Earlier this month the government lifted the immunity from prosecution
privilege that former cabinet ministers enjoyed. Concrete cases have also
been launched. A former local leader for the Social Democrats, the
previous ruling party, was recently detained and charged with alleged
abuse of office and making false written statements.
In January police opened a more important criminal investigation against
several executives at Rafo Onesti, an oil refining company. Officials say
Rafo evaded ?480m in taxes by selling petrol off the books to black
market distributors. The company has denied the charge.
Calin Tariceanu, the prime minister, says he wants a team of investigators
experienced in tackling corporate fraud, possibly from Britain, France or
Germany, to help unravel the layers of offshore companies and complex
accounting the company has constructed, in his view, to hide corruption.
According to Jonathan Scheele, head of the European Commission's
delegation in Bucharest, the government's handling of Rafo will be watched
closely. "This is a very important test case," he says. "It is important
for the business environment, for the new government's ability to collect
taxes and for fighting corruption."
Dorel Sandor, a political analyst, agrees. He believes success in
prosecuting Rafo and a few other high-profile cases will have enormous
impact. "Basescu doesn't have to win a fight against 200 people, just 20.
After that the market for corruption will be changed," he says.
Mr Tariceanu says his government will also review ?3.6bn worth of state
contracts with three large western companies. The contracts are with
Germany's EADS to build a border security system for ?1bn, France's Vinci
in a ?500m motorway construction project and with the US company Bechtel
for a separate ?2.1bn motorway project.
All three contracts were signed by the previous government, which used
loopholes in the public procurement law to award the contracts without
competitive tender. Mr Tariceanu has not accused any of the companies of
corruption, but says the prices involved are too high. At the same time,
however, diplomats are warning the new government not to turn the
anti-corruption drive into a political vendetta.
Then there is the other great issue ? the 1989 revolution ? that any
Romanian government must address if it wants to come clean with its
citizens. Hundreds of millions of dollars in state funds, mostly under the
control of security services, are believed to have vanished after the
hasty execution of Nicolae Ceausescu.
But the mystery of the revolution is not only about money, it is also
about the truth surrounding the downfall of Ceausescu and the murky and
violent transition of power that followed.
Most Romanians are convinced the full story has been covered up by
political, military and intelligence officials with secrets to hide.
Mr Basescu says he is willing to open up classified government files and
that much will be revealed in the coming months.
"For me it is very simple: Ask the state institutions to put the truth on
the table," he says. If they resist, Mr Basescu says he "will make it very
difficult for them." Asked why he can be trusted to when past presidents
have failed, he says "because I was not involved. I watched the revolution
on television."

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Banking: Quest for a wider range of services
By Christopher Condon and Alex Fak
Published: February 23 2005 07:27 | Last updated: February 23 2005 07:28

Monica Fleseriu, Raiffeisen Bank's branch manager in the Transylvanian
city of Sibiu, hears the same story over and over from loan applicants:
"Don't worry, my real salary is much higher," they assure her. But, says
Ms Fleseriu, "I can't give them credit because they can't prove it."
Across the country, she says, Romanians looking for mortgages or new cars
are marching back to their employers and demanding that more of their real
pay go on the books.
Romania's growing appetite for household credit is proving a powerful ally
in the government's fight against tax evasion.
Not that Romanians are not borrowing already. Overall household lending
grew by two-thirds in nominal terms in the year to November. Mortgages
more than doubled. Banks partnered with white goods retailers to provide
consumer loans on the spot.
This follows a long-awaited clean-up and sell-off in the banking sector in
recent years that introduced a cluster of foreign banks to Romania.
In the last 18 months, they have turned aggressively to retail lending,
and that push will grow stronger when the government unloads two
state-owned banks in the next year.
Yet, even amid the fierce competition, banks in Romania are struggling to
penetrate the market with more sophisticated and diversified services.
They may also be facing a risky accumulation of foreign currency loans
that could sour if the local currency reverses its recent appreciation
against the euro and dollar.
For the moment, banks are still celebrating their ability to make profits
from loans, and understandably. Just two years ago, investing in treasury
bills was the only way to make money.
Concerned by inflation, the central bank tapped its foot on the brake in
2004, imposing stricter limits on lending. Even so, the expansion should
continue. Retail lending in Romania is just ?137 per capita.
Non-government credit is less than 20 per cent of gross domestic product.
"They have got a lot of room to catch up," says Tim Beck of Fitch Ratings.
No wonder, then, the approaching sale of Casa de Economii si Consemnatiuni
(CEC), the state-owned savings bank with ?1bn in assets, is generating
intense interest. CEC's total deposits have shrunk in recent years but it
retains millions of small customers and a presence in almost every
Romanian city and town. "Investors are falling over themselves to buy
CEC," says Charles Robertson, an economist at ING.
Erste Bank of Austria says it will bid for CEC, while Austria's HVB,
Raiffeisen and Rabobank, Hungary's OTP and Italy's Unicredito Italiano are
all reportedly interested. Erste Bank says it might take two years to
upgrade CEC's network of more than 1,400 rickety branches, but is worth a
shot. JPMorgan Chase is advising the government on the sale with an
invitation for bids expected next month.
The privatisation of Banca Comerciala Romana (BCR) will prove trickier.
With ?6bn on its balance sheet ? about one-third of the entire market ?
BCR is Romania's largest bank by assets. But the government has twice
tried to attract a strategic buyer, and each time failed to get a
satisfactory bid.
In 2003 it sold a combined 25 per cent to the European Bank for
Reconstruction and Development and International Finance Corp which have
helped restructure the bank.
Still, BCR is saddled with low-margin activities and will need additional
restructuring and significant investment. Daiwa Securities is advising on
the sale, expected by the first quarter of 2006. HVB, Erste Bank,
Unicredito and Germany's Deutsche Bank are reportedly interested. If
successful, the sale would add extra energy to the market.
"We expect a larger contribution to competition in the sector, including
through product diversification," says Cristian Popa, central bank deputy
governor.
Observers hope diversification picks up quickly because lending is
becoming riskier. Some banks have pulled together to set up two credit
history bureaus, but the effort is in its infancy. Delinquency rates are
low ? non-performing loans amounted to 3.3 per cent of banks' capital in
October ? but it remains easy to default on loans and a shock could
persuade first-time borrowers that debt repayment is for chumps.
Such a shock might come if Romania's leu, which has appreciated 10 per
cent against the euro in the last three months, weakens significantly.
Almost 60 per cent of domestic non-government credit is extended in
foreign currency, often to companies whose revenues are purely in lei.
Individuals borrow about 55 per cent in lei. The rest, warns Graeme
Justice, resident representative of the International Monetary Fund, are
living under an "interest rate illusion" that it is cheaper to borrow in
dollars and euros. Companies and households could get clobbered if the
national currency bounces off the ceiling. Thus the race for further
diversification into fee-based services, but that is proving difficult.
The explosion of retail borrowing in 2002 and 2003 astonished many bankers
but consumers and retailers remain wary of using other bank products.
Steven van Groningen, head of Raiffeisen's subsidiary in the country, says
Romanians refuse to bank by internet, phone or post; many trudge to a
branch just to get an inky olive stamp on their ATM receipts. Credit cards
are all but unheard of, says Mr van Groningen, and even debit cards
inspire suspicion.
"Customers just don't like the damn things," he says. When they receive
their salary on a card account, "the first thing they do is go to the cash
machine and take it all out". People would rather pay to take cash out of
ATMs than use their debit cards in the shop for free. Yet, he cannot blame
them. "I tried to pay at a petrol station a couple of days ago ? it took
me 15 minutes."
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Sibiu: A backwater transformed
By Christopher Condon
Published: February 23 2005 07:33 | Last updated: February 23 2005 07:33

Nearly nine centuries after its founding by Saxon settlers, the
Transylvanian city of Sibiu, originally Hermannstadt, is back in German
hands.
Under the leadership of Klaus Johannis, mayor since 2000 and a descendant
of Saxon settlers, Romanian chaos and corruption have been replaced by
Germanic efficiency and industriousness. That, at least, is the story told
repeatedly by locals ? mostly self-effacing ethnic Romanians ? who clearly
care little for political correctness.
In truth, Mr Johannis may be less validation of ethnic stereotypes than
proof that change can happen quickly in Romania, a country dogged by
poverty and corruption, if local officials are capable and committed.
In four years, the mayor, a former secondary school physics teacher, has
transformed a faded backwater into a model for municipal government and a
magnet for foreign investment.
"Before, people just wanted to leave," says Viorel Andrievici, a
management consultant in Sibiu. "Johannis has shown that one man can make
a difference. After four years, we are proud of our city again."
Immediately after his first election, Mr Johannis beefed up the contracts
for rubbish collection and street cleaning ? a practical and symbolic move
that seemed to awaken the city's sense of self-respect.
He has pared down the local bureaucracy and sold municipal land cheaply to
investors promising jobs. The airport was modernised to handle
international flights and tax collection was reformed. Previously
well-connected businesses, including state-owned companies, suddenly found
they could no longer dodge local property taxes and had to pay up with
everyone else.
City revenues more than doubled in Mr Johannis' first term allowing him to
improve local services and invest in schools, which lacked proper heating
when he took office. He also managed to convince the European Commission
to name Sibiu, along with Luxembourg, the EU's cultural capital in 2007.
When he ran for re-election in 2004, the mayor was rewarded with an
astounding 88 per cent of the vote. Locals like to joke that Nicolae
Ceausescu, the communist dictator, never won an election so decisively.
The business community seems equally pleased. "The city is really open to
the needs of investors, and the mayor is truly available to them," says
Monica Fleseriu, branch manager for Raiffeisen Bank in Sibiu.
Mr Johannis' efforts have put Sibiu on the map, especially in Germany
where he has made a special effort to attract investment. His efforts are
paying off just as a wave of foreign investment has hit Transylvania.
Overall foreign direct investment in Romania is up sharply but is driven
largely by privatisation. Transylvania, by contrast, is attracting
greenfield investment.

Along with Brasov, Timisuara and Cluj, Sibiu is benefiting from the
eastward flow of capital as wages in the new EU member countries rise.
Some investment is limited to low-skill industries such as textiles and
shoe making but more and more demand comes from the electronics,
automotive and software sectors.
In the last four years Sibiu has drawn ?150m (or about ?900 per capita)
in foreign investment, according to city officials. The largest single
investor is Continental Automotive Services, the electronic components
division of Continental, the German tyre maker. It opened a manufacturing
plant and engineering development centre last June that will employ 500 by
the end of this year.
Many in Sibiu give most of the credit to the mayor but the region also
offers a border with the EU and better infrastructure than the rest of the
country. Still, locals insist that Transylvania is distinct from eastern
and southern Romania for other reasons.
The ethnic German population has nearly vanished ? it accounts for less
than 2 per cent of Sibiu's 170,000 inhabitants ? but many say that
centuries of Saxon influence, as well as 200 years of Habsburg rule, gave
Transylvania a more dynamic and hard working character.
Mr Johannis at first tries to tread carefully around the subject, but
eventually concedes. "It is true. The history of Transylvania is different
from the rest of Romania," he says.
"The work ethic is different. And most mayors here see themselves as
public servants rather than taking care of their own interests."
Local pride, perhaps. Andreas Brand, general manager at Temic, cites low
wages, decent road connections to Hungary, daily flights to Germany and
the mayor's willingness to solve problems. But he does not discount the
German connection. "I am from Nuremberg, and the city really feels
familiar to me. I don't feel like a foreigner here."More German
investments are likely to be on the way.
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Energy: Bloated utilities start anew in private hands
By Christopher Condon
Published: February 23 2005 07:38 | Last updated: February 23 2005 07:38

After years of delay, those hoping for energy privatisation in Romania had
settled into an "I'll-believe-it-when-I-see-it" attitude. In 2004, they
finally saw it.
Under heavy pressure from Brussels and the International Monetary Fund,
the government launched a hefty sell-off that will continue into next
year. The decision will boost the Romanian economy by delivering bloated,
outdated and loss-making utilities into private hands. It will also prove
painful: thousands of jobs will be lost and energy prices will rise
drastically.
But in the long run, many expect the economy, and customers, to benefit
from the investment into, and more rational operation of such sizeable
companies.
Until now, prices have been kept artificially low. The government allowed
utilities to survive by dodging taxes and other charges. "It was a vicious
circle," says Radu Creciun, an economist with ABN Amro Bank in Bucharest.
"At some point they had to cut this circle and make these companies stand
on their own feet."
Beyond fixed-network services, the sale of oil and gas giant SNP Petrom,
Romania's largest company, will also have an impact by giving other
competitors fairer trading conditions. RomPetrol, a smaller, private,
company, is cheering the sale of Petrom as much as OMV, the Austrian
company that won the bidding.
That sector will see real competition, with ramifications for the wider
battle over the oil industry across central and eastern Europe.
The sell-off began last June, when Italy's Enel agreed to pay ?112m for
51 per cent in two electricity distributors. In October, Gaz de France
paid ?311m for 51 per cent in one of Romania's two large gas
distributors, and Germany's Eon bought 51 per cent in the other for
?304m. Deals with the Czech Republic's CEZ and Eon for two more
electricity distributors are almost complete. Four electricity
distributors and three gas or coal-fired generating stations remain.
For the investors in distribution, questions remain over pricing and other
regulatory decisions, although Romania must raise prices significantly by
the end of 2006 as a condition for joining the European Union.
Other aspects of market liberalisation remain hazy. Competition in the oil
industry, on the other hand, is all too clear. In July, OMV became a big
operator when it paid ?1.5bn for 51 per cent of Petrom. The company comes
with 8m tonnes of capacity at two refineries and 660 petrol stations. More
importantly, it produces 6m tonnes of crude oil and 4.5bn cu m of natural
gas annually and holds proven crude reserves of 1bn barrels.
The acquisition leaves OMV well placed to be the strongest oil and fuels
company in the Danube corridor from Bavaria to the Black Sea. In addition
to its home market of Austria, it has a strong marketing presence in
southern Germany, Hungary, the Czech Republic, Slovakia, Slovenia,
Bulgaria and Romania.
Nonetheless, Petrom will require a substantial makeover. The rest of OMV,
with 6,000 employees, reported ?7.6bn in sales in 2003.
By contrast, Petrom, with 51,000 on staff, had just ?2bn in revenues. In
addition, Petrom's refineries, production operations and station network
are all badly outdated.
By its own account, OMV will have to invest another ?300m to ?400m to
restructure and modernise Petrom over the next three years. In spite of
that, OMV looks to turn Petrom into a serious money spinner.
Regionally, OMV's main rival is Hungary's Mol. Domestic competition will
come mainly from RomPetrol. Ironically, OMV owns 25 per cent of RomPetrol
but will soon divest because of its Petrom acquisition.
Built around a single ageing refinery, Petromidia, that the state sold in
2001 largely for its debts, RomPetrol has become Romania's over-achiever.
In 2004 it posted ?1.61bn in gross revenues, up 27 per cent on 2003, and
$92m in earnings before taxes and deductions, up more than three-fold.
Revenues and profits should continue to rise this year because Petrom's
sale to OMV has ended the government's interference in pricing, which
suppressed the entire market.
Refining margins are also sky high. But even when conditions were more
difficult, RomPetrol showed itself to be smart and innovative. It
thoroughly transformed the Petromidia refinery and built Romania's most
modern retail and wholesale network.
Both OMV and RomPetrol, meanwhile, look sure to benefit from the new
government's crackdown on Romania's rogue refinery, Rafo Onesti. Until
recently, Rafo was allowed to carry huge debts to the state in unpaid
taxes and unpaid invoices from other state-owned companies.
It owed Petrom $400m for crude shipments. According to investigators, it
may also have supplied the black market with 2m tonnes of petrol every
year. Several Rafo executives are under criminal investigation.
Another sign that Romania's energy sector may be turning the corner.
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Outsourcing: Ever fiercer competition
< I>By Alex Fak

Published: February 23 2005 07:42 | Last updated: February 23 2005 07:42

In a neat office surrounded by rural huts in north Bucharest, Ahmad Agill
draws a diagram to demonstrate how Euro Fashion, the knitwear business he
manages, will perish unless it can push its brand.
Mr Agill, a native of Iraq whose company knits pullovers and makes blouses
for clients such as Lacoste, C&A and Roberto Cavalli, still has some
advantages over Asia. Shorter shipping distances reduce costs and allow
his clients to respond to changes in European fashion faster. But that
will not be enough before long, especially now that the European Union has scrapped quotas on textile imports from World Trade Organisation countries, which include China. "By 2007 [when Romania is expected to join the EU], salaries will be too high. Unless you are established and have capacity to invest, you will die," says Mr Agill.
Euro Fashion is trying to promote its own brand, but this is difficult.
Almost all its income comes from western clients who slap their own labels on the goods. Now Mr Agill is finding it harder to recruit enough workers for between ?200 and ?250 a month, well above the Romanian average wage: "If I find another 100 people tomorrow, I will hire them."
Mr Agill's looming headache is Romania's, as well. The country has
benefited from the outsourcing and offshoring phenomena in recent years, but has failed, so far, to add enough value that will keep the deals flowing as wages and salaries rise. Companies such as Euro Fashion will have to be more creative and Romania, in general, will have to attract much higher-skilled jobs if it hopes to prosper in the global economy.

Calin Tariceanu, the new prime minister, agrees. "Investments in Romania are using mainly our workforce and not our intelligence," he says.
A shift is beginning. Clothing, textiles and footwear accounted for 29 per cent of exports in 2004 but grew in total value by only 6 per cent over 2003, according to the Romanian National Institute of Statistics. Exports of machinery and electronics, meanwhile, grew by 33 per cent to account for 18 per cent of all exports.
There are also signs that Romania may grab a slice of the more recent trend among multinationals to offshore or wholly outsource back office business support services, such as call centres, accounting, transaction processing and IT services.
When consultant Schnecker van Wyk Pearson established TeleCenter.ro after deregulation of the telephone system in 2003, it hired 20 people to sell
lottery tickets, insurance and mortgages to Germans. By the end of 2004 the business had mushroomed to 350 employees and the company expects to quintuple in size within 12 months, says Viorel Pascale, managing partner. The average pay (wages and commissions) for each caller at TeleCenter is ?400 per month, against ?3,000 in Germany.

Mr Pascale says good managers are hard to find but language skills abound. Such jobs, as well as those demanding technical skills, are better able to withstand cost pressures. Offshore software development and IT services have thrived, growing by 30 per cent to ?146m in 2003, according to Pierre Audoin Consultants. One estimate suggests they have grown by as much again in 2004.

The education system's stress on hard sciences has survived communism, and Romania has no shortage of skilled geeks. Bucharest Polytechnic University alone churned out 29,000 IT graduates last year, says Liviu Voinea of the Group of Applied Economics. Moreover, says Mr Voinea, IT is a
low-investment, high-return business that allows Romanian start-ups to get a piece of the action.
Those start-ups now have to compete with foreign entrants. Aidan Joyce, an energetic native of Galway in Ireland, came to the country in 2003 and soon decided to move the entire software development part of his business to Bucharest.
His company, Infopoint Systems, designs software and portals for printing digital photography and has 1,000 terminals in supermarkets across the US. He says engineers in Romania are sharper than those in Ireland. "They are very resourceful with what they have...and they hack if they have to."
If Romania is going to benefit fully from its educated young
professionals, rather than continue to see many of them emigrate, the new government will have to work hard to help reduce the costs of doing business. Lowering the corporate tax rate from 25 per cent to 16 per cent was a good start, say companies, but much more is needed.

Bribe taking, for example, has not dampened since Mr Joyce used a belt to lock himself in the sleeper compartment of his Budapest to Bucharest train because Romanian guards kept poking around for what they called supplements.
"Corruption is in every facet and form here in Romania ? from establishing fixed phone lines to practically everything else," he says.
Dealing with bureaucracy is even more expensive. With just 25 employees, Infopoint has to maintain a full-time accountant and a lawyer. "The fiscal codes and the law change every day," says Mr Joyce. Red tape skews even well-meaning policies.

The previous government exempted young IT workers from income taxes but the law was so riddled with restrictions that many companies found it hard to take advantage.
Competition is growing fiercely with more than 1,500 IT companies in the market. Mr Joyce remembers being interviewed in depth by a man purportedly from a prominent US newspaper who turned out to be a commercial spy. Wage expectations, in turn, have risen.
Infopoint has already snooped around in Chisinau, Moldova's capital (too unstable for now, they concluded). Mr Joyce says he is learning Chinese.



















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