24798 12/30/2004 15:22 04BUCHAREST3560 Embassy Bucharest UNCLASSIFIED 04STATE250356 This record is a partial extract of the original cable. The full text of the original cable is not available. UNCLAS SECTION 01 OF 13 BUCHAREST 003560
DEPT FOR EUR/NCE - WILLIAM SILLKWORTH AND TARA ERATH EB/IFD/OIA - ABRYAN DEPT PASS TO USTR USTR FOR LERRION TREASURY FOR DO/GCHRISTOPOLUS USDOC FOR ITA/ATAYLOR USAID FOR E&E
E.O. 12958: N/A TAGS: EINV, EFIN, ETRD, ELAB, KTDB, PGOV, RO SUBJECT: ROMANIA: INVESTMENT CLIMATE STATEMENT, 2005
REF: STATE 250356
A. Openness to Foreign Investment
Romania actively seeks foreign direct investment. A new center-right government that assumed power in late December 2004 has emphasized its desire to make Romania a more attractive investment destination and to improve aspects of the business climate. To date, despite Romania's marketplace of 21.7 million consumers, a well- educated workforce, and abundant natural resources, investment remains below potential. Favored areas for American investment include IT and telecommunications, biotechnology, manufacturing, and consumer products.
Romania is moving to lower tax rates and strengthen tax administration, enhance transparency, and create legal means to resolve contract disputes expeditiously. Until recently, legislative unpredictability continued to undermine investor confidence. Prospective U.S. investors should consult legal counsel to receive up-to- date legal information.
Successful U.S. companies tend to establish a local presence to familiarize themselves with the business climate. Using this expertise, firms develop longer- term strategies and commitments necessary for building lasting partnerships with the Government of Romania (GOR), local government authorities, labor unions, and local partners. These partnerships can ameliorate potential resistance to foreign investment that remains in some quarters, including nationalistic officials, workers fearful of losing their jobs, some managers of state-owned enterprises who are not accustomed to market economy business practices, and some local companies resisting competition through corrupt connections and practices.
Investments that involve the public authorities (GOR ministries, local public authorities) are generally more complicated than greenfield investments or joint ventures with private Romanian companies. Large deals involving the GOR - particularly public-private-partnerships- have been stymied by vested political and economic interests and bogged down by inaction within and lack of coordination among governmental ministries. Privatizations by lesser- known buyers have been at times obstructed by the privatization agency's failure to honor its commitments or take other actions consistent with the best interests of the privatized enterprise.
Romania has worked to create a legal framework consistent with a market economy and investment promotion, and is moving ahead with EU-compatible legislation in its quest to join the European Union. Implementation lags, however. With an increasing number of EU-driven pieces of legislation, it is at times hard for Romania to balance its EU accession goals with its WTO undertakings. To date, Romania has added into its national legislation over 2000 primary and secondary pieces of legislation from the EU acquis.
Romania provisionally closed pre-accession negotiations with the EU in December 2004. Pending continued progress in complying with membership criteria, Romania is to become a EU member on January 1, 2007. However, the EU added a safeguard clause into Romania's Accession Treaty, which enables the EU to postpone Romania's accession by one year, to January l, 2008, if there is clear evidence that Romania is manifestly unprepared to meet the requirements of EU membership.
The U.S. Department of Commerce recognized Romania as a market economy for anti-dumping investigation purposes in March 2003. Romania also received functioning market economy status from the EU in October 2004, thus meeting a necessary condition for EU membership. However, Romania's ability to withstand competitive pressures after EU accession remains a concern.
Romania's legal framework for foreign investment is contained in a substantial body of law, largely passed in the late 1990s and subject to frequent revision since. Local counsel should be engaged to navigate through the various laws, decrees, and regulations.
Romanian legislation and regulation provides national treatment for foreign investors, guarantees them 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 percent 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 their rights to other Romanian or foreign investors.
Foreign investors may engage in business activities in Romania via any of the following methods: - Setting up new commercial companies, subsidiaries or branches, either wholly owned or in partnership with Romanian natural or legal persons; - Participating in the increase of capital of an existing company or the acquisition of shares, bonds, or other securities of such companies; - Acquiring concessions, leases or agreements to manage economic activities, public services, or the production of subsidiaries belonging to commercial companies or state-owned public corporations; - Acquiring ownership rights over non-residential real estate improvements, including land, via establishment of a Romanian company; - Acquiring industrial or other intellectual property rights; - Concluding exploration and production-sharing agreements related to the development of natural resources.
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 interest, public order, and public health regulations.
Romania has made significant progress in privatizing industrial companies. To date, less than 5% of the industrial assets are still state-owned. Privatization in the energy sector also has progressed, with the privatization of national oil company Petrom, two energy distribution companies, and two natural gas distribution companies. Romania has granted some companies involved in energy privatizations with safeguards against paying for environmental remediation resulting from past contamination.
Under current law, the government ministry or agency that has authority over a state-owned company (the State Asset Resolution Authority (AVAS), the Ministry of Economy and Commerce, Ministry of Transportation, Ministry of Communications and IT, or in some cases, local government) also has the authority to privatize it. The law on privatization requires the setting up of pre-privatization management team to facilitate restructuring of the company and eventual privatization. The law permits the responsible authority to hire an agent to handle the entire privatization process.
Buyers of state-owned companies must negotiate requirements and restrictions concerning the company's purpose, scope of activities, turnover, and social protections in the form of limited layoffs or funding for retraining programs. Privatizing agencies continue the practice of rolling into privatization agreements provisions of previously negotiated collective labor agreements, which are labor-protective and restrict layoffs. Prospective investors are strongly advised to make a thorough due diligence review before any acquisition.
Property and Contractual Rights
Property and contractual rights are recognized, but enforcement through the judicial process can be extremely difficult, costly, and lengthy. Foreign companies engaged in trade or investment in Romania often express concern regarding the lack of commercial experience of Romanian courts. Judges generally have little experience in the functioning of a market economy, international business methods, intellectual property rights, or the application of new Romanian commercial law.
B. 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 hard currency and transferred abroad at the market exchange rate after payment of taxes. However, some conversion and transfer procedures can be time-consuming due to Romanian bureaucracy.
The Leu is freely convertible on current-account transactions, in accordance with the IMF's 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 February 1998, the Romanian government implemented new regulations that liberalized foreign exchange markets. However, procedural delays in processing capital outflows remain, mainly from the lack of a domestic inter-bank electronic system, which is under development and scheduled to become operational in 2005.
Capital inflows are relatively free from restraint. Only the opening of the ROL deposits by non-residents still requires approval by the Central Bank, in order to prevent inflows of "hot money" from abroad, but this restriction is expected to be removed in April 2005 as capital account liberalization advances. According to Romania's agreements with the European Union and international financial organizations, Romania will gradually implement such liberalization prior to Romania's accession to the EU (i.e. enable ROL- denominated deposit accounts to be opened by foreigners with resident financial institutions, and current and deposit accounts by residents abroad).
C. 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 potential litigation. Since 1989, there have been two American expropriation claims, one arising from a controversial privatization and the other the nationalization of an investor's assets. Several cases involving property nationalized during the communist era remain unresolved.
Investors should be aware, when purchasing land or a former state-owned company, that in those cases where a former owner wins title to a privatized asset, it may be restituted in kind and the investor compensated by the public institution that privatized it. If restitution is not possible in kind, the public institution must compensate the former owners. In either case, the current or former owners run the risk of less than fair market value compensation. Prospective investors must conduct a careful due diligence review encompassing potential restitution claims.
D. Dispute Settlement
Romania 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 New York Convention of 1958 regarding the recognition and execution of foreign arbitration awards. Romania is also a party to the European convention on international commercial arbitration concluded in Geneva in 1961 and a member of the International Center for the Settlement of Investment Disputes (ICSID).
Romanian law and practice recognize applications to other internationally known arbitration institutions, such as the ICC Paris Court of Arbitration or 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 (the "Arbitration Court"). Arbitration awards are enforceable through Romanian courts under circumstances similar to those in Western countries.
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 lags behind law-making, which often results in inconsistent outcomes. Moreover, social concerns often prevail over economic reasoning, resulting in the survival of overstaffed loss-making companies which should otherwise be dissolved.
To mitigate the time and financial costs of bankruptcies, Romanian legislation provides for administrative liquidation as an alternative to bankruptcy. However, investors have complained that the liquidators lack the competence and incentive to expedite liquidation proceedings. For state-owned loss- making companies, state subsidies, accumulation of arrears, debt rescheduling and debt-for-equity swaps are the preferred alternatives to putting such companies through insolvency or bankruptcy procedures. Both state- owned and private companies tend to opt for judicial reorganization to avoid bankruptcy.
E. Performance Requirements/Incentives
Since 1991, Romania's legislation has seesawed between granting, amending and suspending investment incentives. The availability of incentives is dependent on the economic situation, with the government at times suspending incentives in order to tighten fiscal policy. To meet the requirements of the EU body of law termed the "acquis communitaire" (short form: the "acquis"), Romania is revisiting its fiscal incentives to bring them in line with the EU state aid regulations. Investors are encouraged to verify the current status of investment incentives. As a general rule, new fiscal regulations do not grandfather past incentives.
As Romania prepares for EU accession, customs and tax incentives are being phased out for investors in free trade and economically disadvantaged zones. In line with the revised state-aid law, Romanian has capped the state aid available for major investments based on the investment size and location. The state aid available through incentives for companies in free trade zones and disadvantaged zones has been capped at 50% of the investment, and likewise state aid for small and medium- sized enterprises (SMEs) to 65% of the investment. Prospective investors are advised to investigate thoroughly the current status of fiscal incentives and consider possible future changes resulting from EU accession negotiations when drafting business and investment plans.
To reduce initial startup costs, a system of industrial parks and technological parks is being created. Tax incentives are available under the law solely for the industrial park operator, while companies that establish themselves in the park benefit from access to utility hookups and infrastructure, and eventual local tax rebates within state aid caps.
Romania has revised its tax system to bring it closer to EU models and more in line with the recommendations of the World Bank and IMF.
In December 2004, a new government amended the Fiscal Code by emergency ordinance, abolishing tax brackets and establishing a 16% flat tax on personal incomes. Corporate taxation will likewise be reduced from 25% to 16%. Both of the measures are to come into force beginning January 1, 2005. Offsetting these cuts is an increase in the micro-enterprise tax from 1.5% to 3%, and a rise of the tax on dividends obtained by individuals from 10% to 15%, in line with the corporate dividend tax of 15%.
Like many other Central and Eastern European countries, Romania provides tariff preferences for EU goods under its association agreement with the EU. In 2003, Romania came under generalized system of preferences (GSP) scrutiny because of preferential tariff treatment (reverse preferences) it offers the EU, but no formal review was taken because Romania reduced its tariffs on Bourbon - the main U.S. industry petitioner. However, Romania took no further action to reduce tariff preferences for other U.S. products, and may actually raise some of the tariffs previously reduced. In June 2004, a pharmaceutical company petitioned USTR for review of Romania's GSP status.
F. Right to Private Ownership; Establishing Firms
The Romanian constitution, adopted in December 1991, and revised in 2003, guarantees the right to ownership of private property. Mineral, air rights, and similar rights are excluded from private ownership. At the present time, property can only be purchased by foreigners through their participation in a Romanian company. As of January 1, 2007, EU citizens will be able to buy land without restrictions.
Foreign investors involved with commercial companies having any foreign capital may acquire land or property necessary for fulfilling or developing the company's corporate goals. If the company is dissolved or liquidated, the land must be sold within one year of the company's closure and may be sold only to a buyer(s) with the legal right to purchase such assets. Foreign investors cannot purchase agricultural land at this time. Under Law 268/2001, investors can purchase shares in agricultural companies that can lease land in the public domain from the State Land Agency.
G. Protection of Private Property Rights
Law No. 190/1999 on mortgage loans for real estate investments allows a debtor's receivables to be used as a guarantee, and specifically addresses the protection of both borrowers and creditors, in an effort to minimize risk to the lender. Domestic private and foreign capital banks and investment funds freely compete on the mortgage market with the state-supported Banca Comerciala Romana (BCR) and with the state-budget National Housing Agency (ANL). Using its limited state budget resources, ANL targets young applicants and charges interest of 7% per annum in EURO for applicants under 35, and 9% for applicants over that age. Banks charge an average 9.87% per annum for USD loans and 9.185% for Euro loans, practice more flexible terms, and have greater resources available for mortgages. Usually, interest charged tracks LIBOR at six months for loans granted in USD and EURIBOR at six months for loans granted in Euro, with the addition of Romanian country spread.
Intellectual 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 signed the Internet Convention to protect on-line authorship. While the IPR legal framework is generally good, enforcement is woefully weak. Romania has passed border IPR control enforcement provisions as required under the WTO, yet customs authorities and border police controls remain equally lax. As result of persistent problems in the enforcement of intellectual property rights, the U.S. Trade Representative (USTR) kept Romania on its Special 301 Watch List for 2004. High piracy levels continued across all sectors, optical disc piracy grew, and poor border enforcement led to a surge in imports of pirated material. The situation is further exacerbated by the lack of resources dedicated to enforcement. Prosecution of IPR violators is rare, and when cases are adjudicated, penalties meted out are light. No one has gone to jail for IPR piracy.
Romania is a party to the Paris Convention for the protection of industrial property and subscribes to all of its amendments. Foreign investors are therefore entitled to the same treatment as Romanian citizens. Patents are valid for 20 years. A patent application can be contested for six months. A modern Patent Law (No. 64/91) broadens and clarifies the basis on which a patent is granted. By GOR Decision 499 of May 2003, technical enforcement rules on the Patent Law came into force. Several other laws (No. 129/92, on the protection of industrial drawings and designs; No. 16/95, on the protection of integrated circuit designs, etc.) have helped bring Romanian patent legislation up to international standards. Legislation providing for transitory ("pipeline") patent protection was enacted in early 1998. The Romanian Parliament passed legislation to protect confidential drug test data submitted to regulatory authorities for marketing approval. Law 123 of April 2004 clearly articulates data exclusivity provisions.
Trademarks -- the legitimate aspirations of the Basque people. However, Zapatero said the GOS would consider legal action if the Basque Government chose to proceed with a referendum after Plan Ibarretxe had been considered (and rejected) by the national Parliament. Perhaps to show the Government's mettle, Attorney General Conde Pumpido announced that the GOS would pursue charges against Batasuna leaders, including Arnaldo Otegi, for organizing an "illegal" meeting of the group in November during which participants expressed support for dead or jailed ETA members.
//A DANGEROUS COURSE//
8. (SBU) This is the most significant domestic political crisis faced by Zapatero since he took office in April 2004. He is gambling that by giving the proposal a hearing in Parliament that Plan Ibarretxe will fail due to its legal and political contradictions without undue intervention on the part of the GOS. However, if the PNV ignores the decision of the national Parliament and carries out a referendum on Plan Ibarretxe as threatened, it will present the GOS with a serious constitutional crisis and expose Zapatero to opposition recriminations that he should have acted more forcefully. Moreover, the PNV's challenge to Madrid's central authority calls into question GOS plans to "review" and possibly reform autonomy statutes with other regions, a move widely interpreted as a GOS concession to PSOE-allied regionalist parties in Catalonia and elsewhere in Spain.
9. (SBU) Basque civil society faces an even greater challenge than Zapatero. With radical Batasuna openly backing an initiative of the moderate PNV, the divisions between Basque nationalists and their Basque "consitutionalist" opponents are greater than ever. The Basque electorate is divided roughly in half between the two groups. The constitutionalists believe that Batasuna's role in the approval of Plan Ibarretxe has exposed the PNV as apologists for violent radical nationalists and that Plan Ibarretxe is only the first step in a move toward eventual secession from Spain. Already, PP leaders in the constitutionalist stronghold of Alava have said they would not accept the implementation of Plan Ibarretxe. Meanwhile, the PNV argues that by coopting part of ETA's political message, it is siphoning off the terrorist's political support and drawing would-be radicals into the legitimate political arena. The legal and political sparring over Plan Ibarretxe is likely to dominate the Spanish political scene through the May regional elections. MANZANARES