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Last train to state aid financing due to depart

The final call for the current state aid scheme has been sounded, with 2013 the last year when investors can still apply for the existing version of the scheme. Specialists from law firm Noerr Group Romania analyze how investors can still access this type of financing

April 2013 - From the Print Edition

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Out of the EUR 1 billion available through the 2009-2013 framework, about EUR 436 million has been used and more than half of the overall amount is still available," says Iulian Sorescu, associated partner and head of the financial department at Noerr. In comparison to the Structural and Cohesion funds, where the absorption rate in Romania reached only 11.5 percent at the end of 2012, according to the Authority for Structural Instruments Coordination, the absorption rate for the state aid funds has been much higher. "About 41 percent of the available funds for the 2008-2013 state aid scheme have been consumed," Noerr specialists say.

State aid, representing non-reimbursable funds from the Romanian Government, is exclusively aimed at investment, production and innovative industry, and should the amount not be completely used by the end of 2013, it cannot be transferred to other budgets. Investors can apply both for European funds and state aid, but they will be approved for only one scheme.

In addition to the current state aid scheme which runs out at the end of 2013, another scheme was introduced in August, 2012, aimed at increasing the innovative sectors on the Romanian market. "We are currently talking about two categories of state aid," explains Sorescu. First, there is the scheme for investments larger than EUR five million, initiated in 2008 and approved by the Emergency Ordinance no.1680/2008, financing 40 or 50 percent of new investments. Secondly, there is a scheme for investments in IT&C and R&D, introduced in August 2012 and approved by Government Decision no. 797/2012, financing 40 or 50 percent of salary costs (gross salary plus related taxes) for two consecutive years for employees that are part of the project. "The need [for the second scheme] stems from Romania's gap in competitiveness in comparison to developed EU countries," said ex-minister of public finances Florin Georgescu. In addition to these two categories, there is another scheme for large projects with investments higher than EUR 100 million, of which the EU Commission has been informed. It is in the process of being approved by the Romanian Government, Sorescu adds.

The overall budget for 2013 for the two running state aid schemes amounts to RON 3.22 billion, according to the Law on the State Budget for 2013. Figures provided by the Ministry of Public Finance stipulate that the maximum financing level for a company in Bucharest and, Ilfov can reach EUR 22.5 million and for the other regions, EUR 28.125 million.

Eligibility

To be eligible for the first state aid scheme investments must be larger than EUR five million. Specialists at Noerr say that this scheme provides financing for 40 or 50 percent of new investments, including production halls, manufacturing equipment, software, licenses and knowhow. As for the second state aid scheme, aimed at boosting innovation, the main conditions are the existence of an IT&C component of at least 20 percent of the investment plan and the creation of 200 new jobs that must be kept for at least five years, according to Government Decision no. 797/2012. "Theoretically, looking into the eligible fields, there are no restrictions," Sorescu says. "On the other hand, the Ministry of Public Finances is looking at the value-added of the project; therefore you have to prove the long-term viability of the project." Investors should consult the authorities at the Ministry of Public Finances in the initial phase of the project, to check its eligibility, and identify issues and major risks, adds Sorescu. Sectors that are not eligible for state aid financing include those in the coal, steel, shipbuilding and synthetic fibers sectors, under Government Decision no. 797/2012. Nor is the land related to the project financed.

Ticking clock

Specialists say that time is a crucial factor, as the average period for the preparation, submission and approval of a project amounts to about five or six months. "If you come with an application in September and they don't have time to discuss it, then the application is lost," explains Sorescu. "From our point of view, a reasonable time to place the application is between the end of May and end of June. If it's later, it may be too late." This leaves companies hoping to apply for the state aid scheme with about three or four months in which they can decide and start preparing the application.

Companies can internally co-finance the projects or reach out to third parties. About 50 percent of the amount can be provided through the state aid scheme, which is non-reimbursable funds, while another reimbursable 50 percent can be secured via commercial banks or institutions like the European Bank for Reconstruction and Development (EBRD), explains Ovidiu Morariu, banker with the EBRD Bucharest Office. "We finance everything from secure debt to equity. We like a lot the kind of investments that bring manufacturing to Romania. As for the relationship with the financing banks, we don't necessarily compete with them, we tend to complement them." Morariu says that there is a practical threshold for financing. "While the minimum amount is around EUR five million, we can go as high as practice requires." He adds that the information needed to apply for this type of co-financing is pretty similar to the business plan required for the ground application.

Step by step

The application process starts with an investment decision, followed by the preparation of the documents, which lasts about two or three months. "You really need a firm decision, meaning that the management has to be convinced that the project is viable," says Sorescu. "Internal approval is very important, because when you need the turnover certificate you don't want resistance from the management or a situation where the figures from the sales team do not match the figures from the accounting team."

Once the request for financing has been sent, there follows another period of about three or four months, during which the Ministry of Public Finances analyzes the application. Sorescu says that the project should not be initiated before the return financing agreement is received. "You cannot start construction or hiring employees. Once you have the agreement, this is a written commitment from the Romanian Government to invest, to reimburse your money if the figures from the applications are realized." Only after the financial approval has been obtained can the investment implementation be carried out. Projects should be implemented by the end of 2018, Noerr specialists say.

"However, there is also a monitoring process of five years during which officials come once a year, to see that the location, equipment and employees are still there and they compare this with the budget, with what was estimated in the application," Sorescu explains. "Overall, it is a step by step process."

During the monitoring periods, an investor is allowed a maximum of two deviations. "If you mention in your initial application that you'll employ 300 people and next year you say, ‘sorry, but I've changed my mind, let's create only 250 jobs,' this will be considered a significant deviation and you'll need to explain why," Sorescu says. In this regard, Noerr specialists say that prudency is the best choice in the current economic climate where it's hard to make estimations for the next five years, thereby avoiding a situation where the investor promises a EUR ten million turnover and instead makes only EUR six million. Other types of deviations are technical and temporal. Technical ones refer to situations where a company promises to generate one product and within a year decides to change the product. As for temporal deviations, they involve decisions to postpone the investment, specialists say.

Reasonable degree of bureaucracy

The documents which have to be submitted to the Ministry of Public Finances in order to benefit from state aid include a technical and economic study. "The study should contain the presentation of the project, company, products, customers, suppliers, whatever is necessary to prove that the project is viable, that there is an investment plan," says Sorescu. "On one hand it's complicated to prepare all this, but on the other hand, when you go to the bank, they ask for even more documents, so the level of documents for such an application is a reasonable one." Specialists say that clarity and viability are the main criteria for such an application, as the investors should be able to show that they will pay taxes to the Romanian authorities and retain the employees. Other documents that are required include supporting certificates, certificates showing you don't have any taxes outstanding.

The Ministry of Public Finances is the only institution in the country that can approve the application. "Even if the project is located in Timisoara or another city, the documents must be submitted in Bucharest, to the Ministry of Public Finances, because state aid is centralized," explains Sorescu. "The team working in the state-aid department has been the same over the last four years and besides being stable it is also really flexible and available to discuss proposals."

Curriculum Vitae: 2009-2013

Due to the crisis, few investors have been coming to Romania and the state aid scheme had a slow start in 2009. However, the number of investors increased afterwards, especially when the Romanian authorities decreased the minimum investment from EUR 30 million to EUR five million. "Now there is a boom, a lot of projects that have been postponed are being submitted at the last minute to get financing," explains Sorescu. As for the success stories, no preferences or restrictions have emerged, with various industries having been financed: industrial, medical services and automotive, and multinational as well as national companies. According to specialists at Noerr, among the success stories in the automotive industry are Renault/Dacia, with various projects, Robert Bosch, with speed sensors and automotive electronics, and Rombat, for auto batteries. In the medical sector, companies such as Gral Medical (a hospital) and Polisano (an R&D center) have been among the approved projects. In industrial production, companies such as Premium Aerotec, Lufkin Industries and ROMCAB have benefited from state aid.

Although the production scheme runs out at the end of 2013, there are rumors that the scheme will be extended, says Iulian Sorescu, associated partner and head of the economic department at Noerr. However, the intensity of financing and the percentage offered will not remain the same. "Pieces of information from the Ministry of Public Finances and from colleagues in Brussels lead us to believe that the financing will probably go below 50 percent and the financed regions won't be the same," Sorescu says. "There is a clear preference to finance only some regions, for example Moldavia, while for regions that are already developed, like Bucharest, or cities in western Romania, like Timisoara or Cluj, the percentage will be much lower."



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