May
2008
FEATURE - LAW
 
Vol. 4 No.4  
 

Let the discussions begin

Many medium-sized law firms are in talks with international practices for associations or takeovers
STORY TOOLS
post a comment
e-mail this story
print this story
 

Romanian law firms are in debate with global players for a closer cooperation and, while some brave international law firms are willing to go it alone, others are getting out while they can.
As The Diplomat went to press, Linklaters was rumoured to be shutting down its Romanian operations, while White & Case was planning to expand its new greenfield operation.
No one from Linklaters in Romania or its headquarters in London would confirm or deny the closure, but this would be a natural climax to the gradual downsizing of the British firm’s local subsidiary.
Since its heyday at the beginning of the decade as the law practice for privatisations, Linklaters Romania has suffered a series of high profile emigrations from its office, including its banking and finance team, headed by Adrian Bulboaca, which left at the end of 2006 to set up its own practice. Last autumn also saw the departure of partner Ted Cominos.
“It’s unfortunate that Linklaters is going through such a period of change,” says attorney-at-law at Wolf Theiss Steven Pepa, an ex-Linklaters man. “Nevertheless the Romanian market is solid. Competition and a maturing of the market is always welcomed by everyone.”
This does not seem to be a result of a lack of business on the Romanian market, although the firm’s specialised area, privatisations, have become scarcer in Romania.
“I don’t think Linklaters would close down its office in Romania because the firm did not have enough work to do,” says Todd Shollenbarger, managing partner at White & Case and a former lawyer at Linklaters. “The Romanian market is increasing tremendously and there are so many deals and transactions to take care of.”
The lawyers at Linklaters Romania who could lose their jobs will not have to remain unemployed for long, as there is such as massive demand for consultants on the local market. “There are good lawyers working there and, if they show interest, we will approach them,” adds Shollenbarger.

White makes a move

Meanwhile White & Case’s entry into the market in January has been the only major greenfield investment in the last 12 months from a foreign or domestic law firm.
The US group is headed by ex-lawyers from Linklaters, Todd Shollenbarger and Delia Pachiu. “To build the team and the practice areas on which we wanted to focus, I tried to cherry pick some of the lawyers with whom I had previously worked, such as at Linklaters and the Ministry of Justice, as well as those against whom I had worked,” says Shollenbarger. He added that he plans to grow the team from the current ten lawyers to 15. “The strategy of the office is not to look to international clients, but to be a strong local firm with international clients,” he adds. “We always want to be at the top of each market we are in.”
However Bruno Leroy, senior representative of French law firm Gide Loyrette Nouel, believes the time may not be ideal for a large firm to enter the country. “For international law firms like those in the Magic Circle it is too early or too late for them to come to Romania,” he says.
The Romanian market is still undeveloped, but it could be too late because the sector is very competitive. It will be difficult for a firm to enter the market now and gain a significant share, believes Leroy.
But at the same time, Bryan Jardine, managing partner of Wolf Theiss Romania believes the country has long “been ignored” by many international law firms who remained sceptical of its long term potential.

Start-up versus link-up

Many lawyers are sceptical of a law business starting from scratch in Romania.
“It is a disaster for an international company to start a greenfield in a market like Romania today,” argues Dragos Radu, partner at Radu Taracila Padurari Retevoescu (RTPR). “It is not enough to have good local lawyers if they do not form an efficient team.”
Foundations are necessary, argues Adrian Bulboaca, managing partner of Bulboaca and Associates. For a big international law firm to enter a new market such as Romania it is preferable to start the activity from a local existing base which has also some experience, such as acquiring a local company, the lawyer adds.
But correspondent law firm of PricewaterhouseCoopers David si Baias’ partner Sorin David believes it is difficult for an important international law firm to enter the Romanian market by association with a large local firm because most partners are reluctant to give up their top positions.
“The big Romanian law practices prefer a relationship of correspondence with law firms from abroad, so the small practices are more available for acquisition,” David says. “If I were in such a position, I would chose to make a greenfield investment.”
If an international law firm wants to gain a critical mass, it needs a brownfield association, argues Sebastian Gutiu, managing partner Schoenherr and Associates Romania. “If clients are willing to pay for a specialist to be flown in from Prague or London for a larger project – that’s fine, but with a greenfield operation, the problem is if a client needs a big project that requires 15 lawyers at once, the company has to shut down the whole practice for one client,” he says.
International law firms will probably want to take over a medium-sized, newly formed company which has a dynamic growth, a turnover in the single millions of Euro, but not a rigid management structure.
“It is not interesting from both the seller and the buyer to take over one of the leaders in the market,” says Florian Nitu, managing partner, Popovici Nitu and Associates. “This statement is valid now, I do not know if this will be true in the next two or three years.”
No Romanian firm has yet combined with an international law company, with the exception of UK giant Clifford Chance and its association with Daniel Badea’s local law practice.
“Romanian law firms do not want to be taken over,” says Catalin Baiculescu, co-managing partner, Musat and Associates. “For reasons including the desire to remain their ‘own boss’, as well as the lack of incentive to enter into an international tax structure, where one has to send profits to a foreign entity, instead of just taxing it on the Romanian system.”

Throwing out the bait

Romanian law firms have been subject to flirtations from international legal groups, but few are finally taking the step to marriage.
“Our law firm has been involved in talks for a possible association with White & Case,” says Gabriel Zbarcea, managing partner, Tuca Zbarcea and Associates. “At the moment, we are not involved in discussions with any law firm regarding a merger or a takeover.”
Gabriel Biris, founding partner of Biris-Goran, has been approached with association proposals from international law firms. “We are not interested in selling just yet,” he says.
Bulboaca has received propositions from international firms, but not a final offer. “We are interested in a future possible association with an international law firm as long as we can assure our operational independence,” he says.
Catalin Grigorescu, managing partner at bpv Grigorescu, states he has been approached by US law firm DLA Piper. “For us it makes sense to make any association if we consider that an added value is brought to the firm,” he says. He believes that a takeover from a law firm should also have a cash component as the transaction involves, besides the fixed assets, the client portfolio, brand awareness and the company itself. Some companies do not want to give up their independence for the sake of enlarging their business.
Stoica and Associates has received offers for buy-outs and associations with international firms and continues to co-operate with major foreign law firms. The firm’s present strategy is focused on independent growth. This company may be more interested in a co-operation relationship on its consultancy side, while maintaining as much as possible its autonomy in litigation.
Law firm RTPR has also been courted by international companies for buy-outs or associations. So far the firm has refused any proposals, but if the right opportunity comes along, the law firm will not refuse. Dragos Radu says many of the firm’s clients are being sent by international companies with whom RTPR has a cooperation. “It was not in our interest to accept a buy-out from one of these firms considering that we could jeopardise the connection with other international offices,” says Radu.

Circling the waters

Most international law firms already work in Romania, and Allen & Overy, Eversheds, DLA Piper and Freshfields are rumoured to be scouting the Romanian market for further associations or takeovers.
Spanish law firm Garrigues has also been preparing for the Romanian market and, as we went to press, was rumoured to be opening an office in the very near future.
“Foreign law firms will come to Romania if they manage to identify a niche market, including customers from their own country,” says attorney-at-law Dana Gruia Dufaut from law firm Gruia Dufaut. “Around 85 per cent of our customers are French citizens and they trust us because they realise that we understand both French and Romanian law.”

Local firms build on dominance

In the Romanian market, domestic firms have dominated and continue to grow their market. Among the largest firms by turnover are Musat and Associates, NNDKP and Tuca Zbarcea and Associates.
“The Romanian legal market was and will be dominated by local firms,” says Gabriel Biris, partner at Biris-Goran. “They have the best knowledge of the legal system and the way it works. They also know what investors expect from the market. It is not a handicap to be a Romanian law firm and not be incorporated in an international network. What really counts is to have a good reputation in certain areas of legal expertise.”
At present there is little argument for believing a local firm should give up its status to an international group.
“As long as the leading global players have been rather reserved about Romania, the first-tier Romanian firms enjoy a position on the market which makes takeover fairly unattractive for them,” says Alexandru Reff, senior manager, Reff and Associates, correspondent law firm of Deloitte Romania. “Unless some of the key founding partners of such leading local firms wish to retire, there is little chance that these practices will join an international firm while they may still play a lead role independently.”
However this situation could change if the economy takes a downturn and the legal market tightens up.
But Zbarcea says his firm is confident in its future as an independent. “We want to grow, but on a managed basis,” he says. “Still, we shall keep our options open and if the right fit becomes evident, then I think we would very seriously consider it.”

Come together

Last year saw no major break-outs of groups of lawyers from larger firms and few serious mergers. But last February Voicu & Filipescu and Stefanica Dutu and Associates underwent an agreement in which the latter’s lawyers joined with the former firm.
Mergers have not been very popular in Romania. There are exceptions. There was a regional link-up at the end of 2005 between east European group Hayhurst Robinson and international group CMS Cameron McKenna. Musat and Popovici merged for a short period of time until Popovici left to form his own company. While Zamfirescu joined Racoti Predoiu in 2005.
Only two of Stefanica Dutu and Associates’ six partners and 13 lawyers are coming to Voicu & Filipescu with only one partner, Daniel Stefanica, offered a similar position in the new firm. “The reason why we merged is a response to the lack of experienced lawyers,” says Daniel Voicu, partner at Voicu and Filipescu. “We also found that our firms can benefit from each other’s expertise and create a stronger firm.”
No money was exchanged in the transaction. “We are still open to discuss further association proposals,” adds Voicu.
A law firm with 22 lawyers and aiming to double its size in two to three years, bpv Grigorescu also had talks for an association with Stefanica Dutu and Associates. “This did not pass beyond initial discussions as we found out that we had a different strategy and approach to business,” says Catalin Grigorescu.
Meanwhile German-owned law firm Schindhelm has merged with German lawyer Michael Brenscheidt’s local practice, which includes four lawyers. This expands the German speaking capacity of the firm, which has changed its name in Romania to Schindhelm Brenscheidt.
“Competition is tougher and it will be harder to build up a practice than it was 15 years ago,” says Cristina Daianu, partner, Schindhelm. “I believe more mergers will happen. Everyone in the legal market feels the need to consolidate certain positions and specialities and to become a niche firm.”
But there is a strong debate over whether such mergers will continue. “There will not be a consolidation,” says Catalin Baiculescu. “It will be hard for partners of various firms to negotiate between themselves because of lawyers’ egos. Most of the smaller firms are ‘break-outs’ from bigger ones, so to merge would mean that these ‘break-outs’ are forced to swallow their pride and enter back into the fold. This is almost impossible from a psychological point of view, even if practically it makes sense.”
Partners are also very reluctant in giving up their top positions in case of an acquisition by an international law firm. “Once you have tasted the advantages given by the partnership it is very difficult to give it up,” says Mihai Mares, managing partner at Mares and Associates.
Many lawyers predict a few mergers between small and medium-sized companies. This will also be the case if a law firm can combine ‘synergies’, such as a speciality in real estate with one in banking and finance.
“I think mergers are improbable between the larger firms,” says Alexandru Reff, Reff and Associates. “They would have fewer reasons to merge and more difficulties to integrate cultures, procedures and client portfolios, but we expect to see more medium-size firms acquiring teams of lawyers or even smaller law firms in the near future.”
Tuca Zbarcea and Associates does not rule out taking over a smaller company including ten to 12 lawyers from another practice. Meanwhile Florian Nitu says Popovici Nitu and Associates has 45 lawyers and organically will add up to five lawyers this year. “We do not exclude [a merger], but we do not have a specific project of taking over a Romanian law firm at the moment,” Nitu says.


Litigation set to take off

Services in litigation are witnessing an upswing in the Romanian legal market

Litigation is becoming more popular in Romania. This includes cases against the state, in real estate restitution, public procurement such as the contesting fixed tenders and intellectual property.
“Before 1989 lawyers did almost all litigation, but after 1990 other activities such as consultancy started to develop,” says Calin Zamfirescu, senior partner, Zamfirescu Racoti Predoiu (ZRP). “In the last few years commercial litigation started gaining a good slice of the pie because new legislation was created and we have new standards and solid regulations. One of the future booms on the Romanian legal market will be in litigation.”
For companies like Tuca Zbarcea and Associates and David si Baias, litigation accounts for up to 20 per cent of the business, for ZRP this is around a third, while for Stoica and Associates, this covers between 65 and 70 per cent of its activity.
Founding partner Stoica and Associates, Cristiana Stoica, believes there are few good professional lawyers in litigation in Romania, because a litigator has to be more technically skilled, from a legal standpoint, than a consultant.
“A personal touch in litigation activity is obvious, while a consultant is always part of a team and his or her victory is less recognised in a personal way,” says Stoica. “This is the reason why there are so many law firms specialised on consultancy and so few on litigation.”
But Salans’ co-managing partner Anda Todor believes it is more challenging to find skilled legal consultants than litigators. “All members of the bar are trained in litigation,” she says. “The Romanian law schools are specialised in preparing future litigators and not future consultants.”
Stoica says the Romanian courts are becoming more balanced in their decisions. “In some cases an impediment was the lack of specialisations of the judges in a certain area and the risk is high if the judge does not understand the complexity of the case presented by the lawyer,” Stoica says.
To fill in vacancies needed in the judicial system, the Superior Council of Magistrates hires many young judges and prosecutors.
The disadvantage of this is that these judges lack experience, but the advantge is that they have brought a new sensibility to a system steeped in accusations of bribery and nepotism.
However Romanian courts are not as specialised as in many European Union countries in domains such as tax, intellectual property, commercial issues and labour law.
Even if a court’s decision favours a client, this does not mean the ruling will actually be applied. Stoica says that sometimes the process of applying the court’s decision is more time consuming than the litigation itself.
Clients should prefer arbitration or mediation as a better solution, if possible, than going to court. Todor says that a major problem in the Romanian justice system is the long time spent in courts. But the alternative is also often not so appealing.
“Out of court settlements are not popular in Romania,” says Catalin Baiculescu. “The so-called ‘conciliation meeting’ before the court is only a procedure – a moment to reassert the disagreement. There is no attempt at mitigation. Romanians want to litigate. They won’t back down from their position. There is an appetite for going to the courts. Even if it takes five or six years, this does not put people off. But foreign companies litigating in Romania try to find an agreement or sort out an issue out of court.”
But Gabriel Zbarcea believes the situation is undergoing a change in Romania.
“Now the mentality of going to court and suing everyone has changed a bit,” he says. “People are more pragmatic. They prefer to settle and negotiate to reach a better situation.”
Restitution claims can still take up to three years to sort out, especially due to the quantity of courts to go through. But Zbarcea says that a dispute in the commercial courts can now take less than two months to finalise.


Flight from the city

Cluj-Napoca is fast becoming Romania’s second city and some law firms are looking for a piece of the action

Cluj-Napoca remains the number one target for law firms in Romania looking to expand their practices, especially due to massive investments in shopping malls and factories, such as Nokia.
“Timisoara had its time of glory a few years ago and now Cluj-Napoca is at the centre of media attention,” says Adrian Bulboaca, Bulboaca and Associates.
This has prompted Reff and Associates to open an office in Cluj-Napoca this month, with a view to following partner company Deloitte’s strategy of expanding to other cities in the near future.
“Cluj-Napoca was an obvious choice given the development of the local economy, the significant foreign investment and the academic tradition in the field of law,” says Alexandru Reff. “In addition, we believe there is a lot of potential to attract talented Cluj graduates, train them in Bucharest and then assign them to projects in either office.”
But David si Baias, correspondent law firm of PricewaterhouseCoopers, has no intention to expand with offices in other cities in Romania.
Based on the number of lawyers registered in local bars, Bucharest is followed by Iasi, Cluj-Napoca and Timisoara, according to Calin Zamfirescu, ZRP. Tuca Zbarcea and Associates has already opened an office in Cluj-Napoca and is now looking to the prospect of opening an office further east.
If their clients show interest, the law firm will target Iasi and the Republic of Moldova, especially due to the opportunities in real estate in both regions. “We are investigating the opportunity of opening an office there,” says Zbarcea.
But Norr Stiefenhofer Lutz’s partner Joerg Menzer uses the German example to warn against exuberant regional expansion. “In Germany there were law firms who opened offices in different cities but then closed them,” he says. “A law firm doesn’t necessarily need a local presence, but to be able to offer knowledge and expertise.”
Law firms such as Popovici Nitu and Associates, Bulboaca and Associates, Salans and Stoica and Associates are not interested in regional expansion. “Romania is a small country in which is easy to get from one end to another very easily,” says Nitu. “We want to have a medium size structure in terms of number of lawyers, but offering specialised services in complex matters.”
ZRP has a correspondence relationship with local offices outside of Bucharest in 15 Romanian cities, while Bostina and Associates has 131 lawyers and consultants in the regions. Now this company has 13 offices around the country and plans to open seven more by the end of this year. “The money is spreading nationwide and we have to go there and get it,” says Doru Bostina, managing partner at Bostina and Associates. “Currently the less developed regions of Romania have the highest growing potential and we have to be present there.”

Salaries set to follow market

Lawyers in Romania are not shy about displaying the trappings of wealth – an elegant Italian sports car, a luxurious pre-war headquarters or the latest Omega watch, yet they are reticent to reveal the amount of money they make. Lawyers stated that partners are earning between 80,000 Euro up to 500,000 Euro per year in the top firms. Meanwhile, founding members among the largest practices could be taking home 1.5 million Euro per year, stated one Romanian lawyer. For a lawyer starting out, salaries can now be between 300 and 1,000 Euro per month. However there is not a rigid and transparent system of salaries.
“There is no salary structure for lawyers in Romania,” says Cristina Daianu, Schindhelm. “There is no career track for lawyers to go from associates to partners in five to ten years – the passage usually happens much sooner.”
Law salaries have increased in the last years by about 20 per cent per year, but in 2006 lawyers experienced a 40 per cent increase, according to David si Baias. “The artificial increase of wages especially among young lawyers is reflected in the firm’s profit and even though the turnover is increasing, expense is also rising,” says Dragos Radu, RTPR.
But this boom could be coming to a rest. “In 2007, the wages have finally stabilised and if the market grows by ten per cent, so will salaries,” adds Sorin David.


Credit crunch tests Romania’s growth

While merger and acquisitions are hitting a peak of intensity, financing may prove a tougher call as banks become more cautious, argue lawyers

Early signs are that the international credit crunch is affecting the ability of businesses in Romania to attract funding from abroad, as well as discouraging more risk-taking foreign investors, as The Diplomat quizzes lawyers on the state of the business market.
Many lawyers believe the full effect will take up to nine months, which means the pinch will be felt in the second half of this year.
“This could ultimately mean more competition among lawyers for a shrinking volume of transactional work,” says Bryan Jardine, Wolf Theiss. “We have already seen situations where firms have been more willing to discount their standard fees to secure business in a more competitive legal market.”
It is also becoming harder for property developers to attract external financing for new projects. For this reason, Florian Nitu, Popovici Nitu and Associates has seen many projects put “on hold” in the real estate field.
Some lawyers believe that in 2008 attracting over 50 million Euro loans, say, to expand a Romanian-located retail business from an investment fund or bank may prove a much harder prospect than last year. Prudence and caution are making themselves known to Romania.
“The main effect of the crisis in the West will be the reduced appetite for risks and a certain reluctance by some investors to put a foothold in Romania,” says Gabriel Zbarcea, Tuca Zbarcea and Associates. “From this perspective, investments are likely to slightly slow down, but I do not expect a major crash or mortgage crisis. However crediting could get tighter and interest rates are likely to grow.”
From a regional perspective, Sebastian Gutiu, Schoenherr, believes larger markets in central and eastern Europe, such as Poland and Romania, will feel the effects of the slowdown more than smaller countries. “In the region as whole, this is not having an effect, because Serbia and Albania are booming,” he says.
For law firms, this will mean increased business in crisis management of companies. “The early signs are that some companies are restructuring and taking fewer risks,” adds Gutiu.
This will also effect the enthusiasm of new investors. “The international economic situation will not stop local companies further continuing their planned investments,” says Sorin David, David si Baias. “But firms that are not currently present in Romania will give more thought and will calculate more thoroughly their expansion plans in Romania and other emerging markets.”
Providing they have a flexible portfolio of specialists, law firms are ensured against crises in the markets. “It is too early to say what will be the impact of the recession, but law firms in Romania will not go bust,” says Catalin Baiculescu of Musat and Associates. “When times are good, law firms invest in their mergers and acquisitions department and, when times are bad, their specialisations turn to restructuring and insolvency.”
Bankruptcies in Romania have increased by over one third in 2007 compared to the previous year, according to a report by risk analysts Coface Romania. “Romania will face more cases in liquidation,” adds Baiculescu. “This is becoming a more important sector.”

Mergers: can intensity continue?

Giant numbers of mergers and acquisitions drawn up at the end of 2007 have been announced recently, such as French insurer Groupama’s 350 million purchase of insurer Asiban, Ford’s purchase of car factory Automobile Craiova and the buy-out by French dairy group Lactalis of LaDorna. “We see an increased interest in Romania after the accession to EU,” says Bruno Leroy, Gide Loyrette Nouel.
EU legislation affects every area of legal work from privatisations to public tender procedures and makes Romania more predictable for investors – it also provides an umbrella of reassurance which is lacking in neighbours such as Ukraine, the Republic of Moldova and Serbia.
This is part of the reason why FDI in Romania in the first month of 2008 reached 663 million Euro, an increase of more than 65 per cent compared to January 2007.
But this investment enthusiasm may be reaching its peak. “I think M&A and private equity will slow a bit this year in comparison to 2007,” says Todd Shollenbarger, White & Case, “because financing is not as readily available as it has been historically. However, there’s still plenty of deal flow.”

Hot sectors

From a foreign investment sector, energy, IT&C, steel and the automotive business seem to be the most popular, while in the domestic market pharmaceuticals, banking and insurance are showing great dynamism.
The largest potential deal could be Austrian steel producer Voestalpine, which is allegedly searching Romania for 1,000 hectares to invest around five billion Euro in manufacturing. Added to this will be Daimler, which is looking for a factory site and Mitsubishi, which is also rumoured to be interested in Romania.
Romania’s total foreign investment is expected to stabilise at around seven billion Euro for 2008, the same as for 2007. “We would expect an important share of FDI to come from significant greenfield projects,” says Zbarcea.
But in expected deals in Romania, Jardine anticipates few private M&A deals in 2008 with the magnitude of the recent 1.8 billion Euro transaction of Kazakh state oil and gas group Kaz Munai Gaz of Romanian oil and gas firm Rompetrol.
There is also great potential in large Romanian infrastructure projects, such as new highways, ports and an airport for south Bucharest, which could use secure funding from the EU backed up by multilateral institutions and the state budget. This will keep the legal business busy with big deals for the next five years, predicts Jardine.

Real estate: cracks
in market emerge

Real estate remains the most dynamic sector in Romanian business, but this unruly market is witnessing more risks and smaller returns.
There is still a massive demand for commercial, residential, office and logistic space, but with more supply coming onto the market, investors are becoming choosier about where to place their money.
“For two years Romania was a real estate paradise, even with the US sub-prime crisis and its knock-on effects in the UK, it was still a mini-paradise,” says Sebastian Gutiu. “It’s too early to say what the effect will be this year. There are still good chances, but it is getting increasing difficult.”
There seems to be more of a consolidation of existing plots than major transactions in the land market. In some ways this is due to a lack of plots for sale, while banks and developers have also become more selective in where to invest their cash. Mihai Mares, Mares and Associates, says that lately the selling of land plots have not increased, but construction companies are showing more interest to enter the market.
While there are still thousands of residential blocks from the former regime, these old buildings risk becoming obsolete in the next 20 years. Investment in a Communist flat may, in the future, leave a home-owner stalled in negative equity. The prices for old apartments will drop, says Mares, but he says the prices for buildings in the centre of Bucharest will continue to grow.
“There is still not enough supply on the market of homes,” says Gutiu. “In Bucharest maybe only 2,000 to 5,000 units will be delivered this year. And how much are these prices affordable for people who are living in old buildings?”
The real estate lawyer believes that this year will see a deceleration in the price of property.
Meanwhile Bryan Jardine says, in the real estate market, sellers’ expectations have rationalised in reaction to the credit crunch and tightening of liquidity on the international markets. “The real estate market will likely be the most directly affected by the credit crunch,” he says. “But the effects may not be as profound as in the West, given that there has been no sub-prime lending in Romania and banks have traditionally been much more cautious when offering credit secured by mortgages over real estate.”
It will be harder for new entrants on the real estate market to attract significant financing, while investing in real estate may no longer be considered the safest option. “Businesses are now carefully considering every acquisition,” says Catalin Baiculescu, Musat and Associates. “Most of our clients are not in the business of buying and reselling, but more in buying and developing. Also, banks are not as willing to refinance as in the last couple of years. A track record of successful developments helps a lot when asking for financing.”
The quality of previous projects by construction firms and developers will start becoming an important factor in whether investors are willing to put up the vast amount of cash needed for real estate development.
Meanwhile Dragos Radu, RTPR, believes big Romanian cities will start to transform in the next years. “Developers will start from the outskirts to the centre buying old apartment buildings to demolish them and build new apartment buildings,” he says.
Gabriel Zbarcea agrees. “Bucharest is no longer the main target for investors, as they have spotted real business opportunities in other growing economic regions, such as the west of the country,” he adds.

Privatisations: main target energy

Major privatisations are over, but there are still a handful of strong state companies for sale.
Gabriel Zbarcea, an ex-president of Privatisation Authority, pinpoints pharma producer Antibiotice and aerospace companies Romaero, Avioane Craiova and Ghimbav as attractive for sale.
There are also electrical distributors, Electrica Muntenia Nord, Transilvania Sud and Nord. At present these companies are included in Minister of Finance Varujan Vosganian’s plan for a massive state energy company, along with hydropower firm Hidroelectrica, thermopower firm Termoelectrica and the power plants at Rovinari and Turceni.
“The power complex announced by Vosganian will need investment from private industries,” Gutiu adds.
But Zbarcea believes it is “too late” to create such an energy champion on the structure of Austria’s OMV or the Czech Republic’s CEZ, which will have to operate as a ‘private company’ in all but name, with well-paid managers from the private sector, but a paymaster in the Government.
“It will be very hard to keep and manage this type of company,” says Zbarcea.
“It is not a liberal idea for 2009. It would be best not to make the national champion of energy.”
The lawyer also fears it may not be able to pass the test of the European Commission, which is becoming tighter in its policy on state aid.
If the plan does not happen, individually all of these companies will be targets for international energy groups. Gas producer Romgaz is also a major target for investors, but Zbarcea does not believe that will ever be fully privatised, because it remains a strategic asset.
Hydropower firm Hidroelectrica is the most attractive of these companies but, because its energy resource is water, this is not likely to be considered for sale in the short term.
Not included in the ‘energy champion’ plan is the power plant at Craiova, which will be a major target for investor, to be sold through the privatisation authority.
However even proposed privatisations in the last two years have stalled. Sales of Antibiotice, the energy companies and savings bank CEC have all been postponed. This is not likely to change in the next nine months.
“In an election year privatisations will slow down,” says Baiculescu. “They need political parties to support them and legislative changes are necessary. It is hard to gain a consensus in parliament at this stage, so Parliament and Government lose their focus on privatisations.”
He believes privatisations will start up again after the elections at the end of this year, as they tend to happen in the first two years of a new Government.
There are also still huge opportunities in gaining business from the Government in the outsourcing of services, argues Doru Bostina, Bostina and Associates. There is also business in dealing with the state companies which could be entering into liquidation or restructuring. “The Privatisation Authority still has around 8,000 companies that are in the post-privatisation process and require specialised legal services,” Bostina adds.

Renewable focus

Many companies are looking to renewable energy, such as wind power, with energy giants Enel and Iberdrola buying projects in the east of Romania, around the Danube Delta region, where Gaz De France also has an interest.
But this will take some time to realise, as there are many legislative hiccups and environmental barriers to develop. “Wind energy will take a while until the market finally gets into shape,” says Gutiu. “At present 87 permits are needed to build a wind-power plant.”
Climate change has to be taken into account, which may change where the wind blows. The migration maps of avian life in the protected area of the Danube Delta are not yet defined. It is tough to state the environmental case for a windmill if its sails then proceed to chop up flocks of migrating birds.

Private-public partnerships:
delayed

Private-public partnership (PPP) is a buzzword thrown about by the current Government. Although Minister of Transport Ludovic Orban has spoken of private finance initiatives for infrastructure projects, few are happening.
Currently, PPPs are not functional in Romania because the legislation that regulates it cannot be properly applied. “To have an efficient PPP one needs political determination,” Doru Bostina says.
There are different forms of PPPs, such as a private company building, operating and running a road, before transferring this back to the state after 20 years, or mixing private finds with EU structural fund cash.
It is an inevitability that this will become important, but it is not happening in the short-term. “With many infrastructure projects required and significant EU funds available, we anticipate a significant grow in project finance and related legal assistance,” says Alexandru Reff, Reff and Associates.
Recently, a major private-public partnership in real estate, the Bucharest-based mixed use Esplanada project, has gained permission to construct. Hungarian group Trigranit will build the project, estimated to be worth around two billion Euro, which will be handed back to the state after 49 years.

Labour disputes: on the rise

One of the reasons Western investors such as Nokia and Renault have entered the Romanian market is due to the low wage workforce.
But with rising wages in the service sector, many unionised workers in manufacture are demanding salaries reflective of the rising cost of living.
Recent strikes include those at the Renault-Dacia factory in Mioveni, at steel manufacturer Arcelor-Mittal in Galati and at Belgian beer group InBev’s plant in Blaj, Alba county.
Sorin David believes the recent strikes will not scare foreign investors coming to Romania. “All these strikes rather take place in the privatised companies and not in the companies that were build up as greenfield investments and that is because when privatised the employees had higher expectations while their salaries were quite low,” he argues. “Many of such companies still have an excess of workforce compared to their productivity needs. In the future, these mega-structures will operate with fewer employees.”
Gabriel Zbarcea says that clients have become “increasingly aware” of the importance of labour issues. “Some of our clients do not participate in any negotiations with the labour unions without the presence of an attorney from our law firm,” he says.

Capital markets: stepping up

Although still an unsettled target for investment, local capital market operations are becoming more transparent and liquid, while foreign financial institutions from EU member states now have full access to the Romanian market.
“Erste Bank’s listing on the Bucharest Stock Exchange not only created a healthy precedent but also led to major legislative changes,” says Zbarcea.
Meanwhile Christopher Berlew, Salans, believes the capital market will see a growth in the near future.
“Overall the conditions seem right for more Romanian companies to be listing their shares both on the Bucharest Stock Exchange as well as on international stock markets like London or even Warsaw, Bratislava, Prague and Budapest,” Berlew says.
The local stock market will also be invigorated by the presence of the Ownership Fund (Fondul Proprietatea) in July 2009. The Romanian state will provide owners of property lost during Communism a total of four billion Euro of shares in state companies listed on the capital markets.
But this has been delayed by three years already, so this new date may also end up being a false hope.

Worker shortfall

Like many service industries expanding at a rapid pace in Romania, there is a massive worker shortfall of good graduates in Romania.
“There is a lack of supply and a growth of the market,” says Sebastian Gutiu, Schoenherr. “Another problem is that there are not enough existing lawyers who have the time to dedicate significant hours to training rookies.”
Training a probationary lawyer can take up to 18 months. “This could prove to be a bad investment,” says Dana Gruia Dufaut, “since the trainees can decide they do not want to become lawyers.”
Finding good local lawyers in a country such as Romania is considered to be the biggest impediment to an international law firm willing to enter a new market. “In Romania lawyers with the right skills are already hired,” says Salans’ co-managing partner Christopher Berlew. “An international law company, to establish locally, needs good Romanian lawyers with language skills and the ability to handle sophisticated transactions.”
Attracting Romanian lawyers back from the diaspora is an effective method of finding new workers. While a trained Romanian lawyer in New York may make a living doing deals on home foreclosures, in Bucharest he or she could get a job securing a half-billion Euro real estate deal.
“Many have chosen to re-establish themselves here,” says Cristina Daianu, Schindhelm. “It is much easier to start a firm and a career in Romania than in western Europe. In Germany lawyers would be in the top of their career in their 40s or 50s, here it’s in their 30s.”

Report by Michael Bird
and Ana-Maria Nitoi
Additional reporting by Corina Ilie


 
READERS COMMENTS
 
Name
Email
Comment
Validation Code
 
Comments