France has brought a partnership spirit to Romanian business, showing a long-term commitment to building up old state enterprises and introducing new markets
The French have not been afraid to invest vast amounts of money on large scale projects in Romania.
While businesses from other countries have often been fearful of venturing into Romania with a large cheque for a state firm, the French have certainly shown strength of character in negotiating the often tricky chicanes of the privatisation process.
Although they have followed the trend of western countries in relocating and establishing (or buying up) large facilities in heavy industry, unlike many foreign investors they have also taken a risk on the retail segment and now enjoy a strong local presence in hypermarket and home improvement brands.
But they have also worked in partnership with Romania, particularly in the fields of banking and car manufacturing, where French businesses have restructured well-loved, but under-funded local names with western knowledge and dynamism.
“Romania has to open its doors to the economy, because the evolution of other states is fast and the international competition is harsh,” says Herve Bolot, Ambassador of France to Romania. “Take a look at China's progress. I think that a large part of the global population has lost its taste for economic risk. We all deal with that. It's human nature. But here, in Romania, I see people who are willing to work, the geographic position is on its side, as is profit in agriculture and branches of industry,” Bolot adds. “Romania's problems are organisational and structural, and also in providing security for investments. Trust is the most important thing in any economy and, in developing countries, investors have to be sure about the financial conditions and the rule of law.”
Philippe Boin, France's economic counsellor to Romania, estimates his country has invested 2.5 to three billion Euro in Romania to date. According to the Agency for Foreign Investments (ARIS), there are 3,600 French companies active on the Romanian market. These employ between 60,000 to 65,000 people. “But this is just an estimate. Romanians don't have a proper statistical instrument for measuring such numbers,” says Boin.
France has managed to register a strong growth in privatisation, which Boin says constitutes many “success stories” for his country.
French gas utility Gaz de France officially became the owner of Distrigaz Sud - the gas distribution company for southern Romania - at the end of May, following the completion of a 311 million Euro deal signed in October last year. In the future, French companies may also be looking for opportunities in the electricity sector, as the market liberalises.
Three of the top five French companies, Gaz de France, Renault-Dacia and Lafarge Romcim entered the market through privatisation, along with the banking group Groupe Societe Generale, which bought Banca Romana pentru Dezvoltare in 1999 and has since become the second largest bank in Romania. Meanwhile the two other largest investors, Orange (which is owned by France Telecom) and Carrefour have beaten British competition in the south-eastern European region from rivals Vodafone and Tesco to establish a strong initial presence in Romania. However, this looks set to change. While Vodafone will enter the market later this year, Tesco is also rumoured to be moving further eastward.
A strong interest of the French is in greenfield investments, particularly in the retail sector, with large format out-of-town stores Cora, Carrefour and Bricostore taking on a gradual expansion around the country.
“We have greenfield investments also in industry,” says Boin.
“Saint Gobain is a good example. It has different types of activities, not just in the glass market, but also in the construction field, especially in the abrasive and insulating segments. The company decided to invest in Ploiesti in two branches.”
AGRICULTURE: COULD BE STRONGER
The main characteristic of the French companies is that they are spread all over the country and cover most business fields.
“This is the difference between us and Austrian or Italian investors,” says Boin. “We cover the services, the traditional industry and the new technology fields. In agriculture our presence is not as strong as it could be. There is potential and the investors will come along with the development of the distribution of the hypermarkets. This is the same as it was in western countries, where the agribusiness increased.”
Another main characteristic of French investments in terms of direct investment is expansion, says Boin. “All French companies which are already on the market, like Michelin, Lafarge and Alcatel, are expanding their business discreetly, but are very happy to be in this country and to take advantage of the market and of the location of the country in the Balkans,” says Boin.
For example Michelin is exporting tyres to European countries, Russia and also to the United States.
In the banking field, along with BRD - Groupe Societe Generale, BNP Paribas credit arm Cetelem has bought local consumer credit company Credisson for 40 million Euro, according to the counsellor. “There is also some interest from this bank regarding BCR, also CEC, but the competition is harsh,” continues Boin.
Interest in the metallurgy and mechanics fields has also been captured by medium-sized French companies. “More and more companies are interested in this field, not to buy firms but to outsource to Romanian partners,” adds Boin.
Bilateral trade between the two countries is very developed and has increased to 3.5 billion Euro, representing a 29.3 per cent rise on 2003. But this year the French are expecting it to further increase to four or five billion Euro. In 2004 Romania was the 36th largest customer of France. This trade is nearly balanced, with French exports to Romania last year at 1.9 billion Euro. Most of the products were machines and electrical equipment.
Romania is still a market in which the French business entrepreneurs will invest, Boin believes. Accor Group, for example, is opening its first own-brand four star hotel Novotel in the centre of Bucharest, but the competition between eastern European countries is heating up.
Another French company, Elcobrandt, has bought land for a factory to build washing machines in Militari, Bucharest. “It is not clear if this project is going on or not,” says the counsellor. This is because the French company has received a potentially better offer from Poland. This follows another large investor, Montupet, switching its decision to open an industrial parts factory from Cluj to Ruse in Bulgaria. So if Romania wants to attract large scale French businesses in the future, the country may need to look at its incentive system.
A happy mixture
A mountainous region with a blend of cultures and a strong tradition in medical care: Could Romania be the Switzerland to come? The Diplomat interviews the Ambassador Jean-Claude Richard
There is much Romania can learn from the Alpine state region five times smaller than itself. And we are not talking here about skiing lessons, even though the Sinaia and Azuga ski paths are to the Swiss lanes what a 75,000 lei plastic watch bought in a subway from a man in a dirty raincoat is to a Rado.
Switzerland's 7.5 million citizens are a patchwork quilt of ethnicities: Germans, French, Italian, Romansch and others. Therefore it is no wonder that this democratic machine which Switzerland is decided to have four official languages.
Romania's mix of Romanians, Rroma, Hungarians, Germans and so on may have sorted out some of the major differences which exploded among them after the Revolution (especially with the Hungarians and the Rroma), but there is still a lot of work to be done in eliminating stereotypes.
Jean-Claude Richard, Ambassador of the Swiss Confederation to Romania, was appointed to his Bucharest office in December last year. The first half-year of his mandate was a period of fairly intense work, with the changes of president and parliament which took place in Romania.
In healthcare, Richard has recently participated at the opening, in a Iasi hospital, of a neonatology and an emergency department equipped by Swisss experts. Also in the same district, private associations from Geneva and Neuchatel have set up a centre for care and schooling of handicapped teenagers.
According to the Swiss Ambassador, his country is quite active on the local cultural scene. Pro Helvetia, the Arts Council of Switzerland, opened its Romanian office in 1999 and develops numerous cultural programmes to promote Swiss culture in this country and has also sent and financed Romanian artists in Switzerland.
When talking business, Switzerland has a strong presence in the pharmaceuticals, electric machines, watches and food sectors, while Romania does offer many opportunities in developing the agricultural sector.
“Still, I would not limit Romania to its agriculture, there is much more to Romania than this,” Richard believes.
For example, the energy field will be a scene of quite intense relations between the two countries, after the treaty of cooperation in the energetic sector was signed last month between the two countries.
“The decision whether to participate or not in the privatisation of any Romanian energy company belongs to the companies, the state simply offered the frame for it,” Richard adds.
In the sector of environment protection, ABB and other smaller enterprises are already active in Romania and, speaking of small, the Ambassador reminds that: “Switzerland is too small to have large companies.”
Therefore petit Swiss companies are active in Romania through microfarms, IT and consulting.
On the other hand, for a country where 65 per cent of the GDP comes from the services sector, it would seem that Switzerland has much, especially in the financial sector, to offer Romania. Yet Swiss banks and insurance companies are still not present in Romania.
In February 2004 the compulsory visa for Romanians travelling to Switzerland was partially abolished, meaning that Romanians do not need a visa to enter as tourists, if they are paying a visit to friends or relatives, to get medical treatment or to attend seminars.
To continue the good news, last month Switzerland voted positively, through referendum, to become part of the Schengen area and the Dublin agreements.
This means that Switzerland, as a non-member of the European Union, will open its borders to its EU neighbours and cooperate more closely with the EU police force in the field of information exchange. By under-signing the Dublin agreements, Switzerland will have access at the Eurodac database, thus preventing people registering requests for political asylum in more than one European country.
“The relationship between Romania and the European Union are different from the relationship between Switzerland and the EU. For the moment, we are not discussing an accession to the EU,” says Richard.
Instead what Switzerland has settled for is a series of seven bilateral agreements, signed in 1999, in fields such as free movement of people, trade in agricultural products and transport by road and rail.
On 25 September this year, the Swiss will vote, through referendum, for the extension of the agreement on free movement to the ten countries which joined EU last year, giving someone from, say, Slovakia or Latvia the same right of movement as someone from Spain.
If the vote is negative, the existing agreements on free movement with other EU countries will no longer be valid, explains Richard.
“A 'no' on 25 September would be a sign of fear that the Swiss labour market would be troubled, a sign that the Swiss workers fear a negative effect [of the free movement agreement's extension],” Richard argues.
The real deal
Happy to be a close political ally, America would be a stronger business partner if contracts were always honoured, argues John Rodgers, economic counsellor at the USA Embassy
There should be an ideal business relationship between Romania and the United States.
Romanians' increasing spending power and a dynamism in local industry means for the first four months of this year trade was virtually balanced, with 318 million USD of Romanian imports to America and 324 million USD in exports to Romania.
US companies from agriculture to heavy industry and call centres have invested heavily in the country, including Wrigley, meat firm Smithfield and ball-bearing firm Timken. America's FDI in Romania is a respectable 881 million USD, placing the country fourth or fifth in the top investors.
Happy with this situation, economic counsellor John Rodgers says he is also “pretty confident” Romania will join the Euro club on 1 January 2007.
Politically, President Basescu has (to the surprise of some) allied his country closer to America than ever before. “This is something Washington notes and is favourable to investors,” says Rodgers.
But business could be better.
Some investors must give bribes to local administrators to establish a business and gain the correct permits to register legally. A situation which frightens entrepreneurs, says Rodgers, and restricts the development of the middle class.
“Corruption is not a major problem for large corporations,” he says. “Multinationals can stare down the corrupt officials who want bribes from them… But this means SMEs are scared away. They do not have the resources to overcome insistent and intransigent corruption. They will simply go somewhere else. Money is a coward, it goes to where it is well treated.”
Entrepreneurs do not have cash to waste on bribes to minor officials, but a delay in receiving a permit or getting their gas connected can cripple a business opportunity.
“In the past, this country has not carried out an anti-corruption strategy sufficiently strong to convince small investors that they should come here and risk their investment.”
Rodgers says that entrepreneurs should fail because “they made wrong business decisions, not because they got screwed by someone in bureaucracy.” But the diplomat is “hopeful” the new Government will fulfil its anti-graft agenda.
The importance of honouring contracts between business partners lacks seriousness, according to the Embassy official, and local courts do not help.
“Economic law requires individuals within the court system who understand economics and how to rule on economic subjects in contractual disputes. This is not the case in Romania.”
Judges sometimes make rulings that are “frankly perplexing to us and in some cases quite outrageous,” he says. “It is getting better, but it's not getting better fast enough.”
Swift judgements on contracts do not happen. “Sometimes the dispute goes on for years. Sometimes the loser appeals up the chains of courts and still refuses to pay and there is no recourse for the person who has asked for the money to get it back,” he adds.
Although the EU is monitoring Romania closer than it has ever watched an accession country on the justice issue, Rodgers concedes it will be hard to overhaul the whole system in 18 months, but: “We would be pleased to see a concerted and sustained attempt over the next months with benchmarks that the Government would work through, then we will see, as the test cases come, how well it is functioning. We are hopeful that this current Government understands the urgency of the matter.”
In business, Rodgers calls for a level playing field that does not give a certain company preferential treatment. However US firm Bechtel was criticised in December 2003 for accepting a contract from the state for 2.5 billion USD, without an open auction, to build a motorway between Brasov and the Hungarian border.
“The Romanian Government made a legal decision underscored by a parliamentary vote in law that the Bechtel deal should go forward,” says Rodgers. “The complaint has been that it was a sole source contract. But it was legal and valid. And still is.”
Rodgers says the benefits of the deal have to be highlighted. “The tourism industry could take off so explosively with a good road like the Bechtel road,” he says. “It goes right through an area of Transylvania that has so many beautiful things to look at.”
So far the Government has no cash to pay Bechtel and the US company could lay off hundreds of staff. Could this act as a deterrent to future investment?
“Absolutely,” says Rodgers. “That's what we've been warning the Romanian Government about. If it does not pay its bills on time that will immediately stop others coming in to offer their services. People expect to be paid for work done. That's the way it is in America. That's the way it is in the EU. Romania has to understand it has to live up to its commitments.”
As the nation develops, Rodgers sees the future in the service industry, especially in software. “Romania isn't just about goods,” he says, “it's about services now and that is a sign of a maturing market economy.”
US firms, such and Timken and Trinity have not been shy in picking up privatisations. While in financial services Citigroup has declared its desire to purchase state-owned bank BCR, Rodgers confirms there are “some American banking groups interested in the bank privatisations” without, of course, giving names.
But he adds that apart from the energy firms: “The portfolio for privatisation is essentially depleted for major American industry interest.”
Instead he says the best ways for companies to “buy into” Romania could either be through greenfield, equity or portfolio investment.
“Capital markets are still weak here, but we imagine that will pick up in the next few years,” he adds.
Looking to limit the financial risks, the favoured method of expansion by US large corporates is through franchises. Along with Pepsi and Coca-Cola, retail and services have begun to launch, such as Daylight Donuts and coffee store Gloria Jeans.
But apart from the firmly established McDonald's, US shops and restaurant chains are still wanting.
“The reason is money,” says Rodgers. “The overall ability of consumers to spend is just now taking off, is just rising. When America and retailers in Europe perceive a base of middle class incomes, then you will see a mad scramble to get in here. My prediction is that we won't see a Starbucks for another ten years here. But then again I hope I'm wrong. There might be so much dynamic in Romania, that Starbucks may say: 'Man, let's get in here quick'.”
Rodgers says the major interest may come in “five year's time”, depending on GDP growth, wealth distribution and whether the middle class finally kicks into life. But who are Romania's competitors for that FDI dollar? With new EU restrictions and some growth forecasts showing it may be hard for heavy industries to stay profitable in Romania, Ukraine is opening up with a cheaper workforce, pro-American stance and nearly double the number of Romanian consumers. But Rodgers says this should not be a threat.
“Because it will soon be a member of EU, is on the EU border and is also more rapidly developing its economy, objectively, Romania is still more interesting in some ways to foreign investors,” adds the counsellor.
Get in while you can
Right now is the time to invest in Romania, according to the American Chamber of Commerce (AmCham).
“Investors should look at this period that Romania is going through as an opportunity for investing in a growing market, and the sooner they decide to make a go at it, the better are the chances of establishing their businesses as leaders on the local market,” says Roberto Musneci, president of AmCham Romania, a non-profit trade organisation affiliated to the US Chamber of Commerce, Washington DC.
Among its members, AmCham argues the sectors most attracted to Romania include oil and gas exploration, car manufacturing, banking and finance, food processing, heavy engineering, IT&C, commercial construction and consumer products.
“We have witnessed, over the last period of time, the development of some specific industries that seem to evolve even more rapidly than in some other regions the best example is the IT&C sector, a crucial field for a competitive environment,” he adds.
Earlier this year the organisation carried out a 'Satisfaction Barometer' survey among its 200 members, the majority of which are US-based or US-affiliated companies, on their views on business in Romania.
“What was attracting foreign investors include an improvement in political stability, a highly qualified workforce, good banking and financial services, relative low costs, and strategic location that makes the country a potential regional center for south-eastern Europe,” says the president.
But the members registered most discomfort in the transparency and integrity of the Public Administration and the slow acceleration of the judicial reform. Businesses stated the level of execution and implementation of existing laws was “unsatisfactory”.
EU membership should give “a general seal of approval,” and impose a better legal framework, says Musneci. “As an EU state, Romania will develop a wealthier population with more disposable income to buy American products.”
But the closeness to the EU should not be a threat to American business interests. “Romania will become an EU market entry point for American investors with significantly lower labour costs than other EU countries,” says Musneci.
While he argues US investors will be at “a relative disadvantage” compared to European competitors in 2007, the tariffs and standards will be in line with its EU counterparts.
And one must not forget that the world's largest channel for trade and investment is still the marketplace between the US and EU, until China fully wakes up, that is.