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It’s been a long haul for Calin Tomosoiu. Since the Romanian Bank for Development was set up as an independent commercial bank in 1990, he has been thinking about how it should be privatized. In 1994, he was appointed head of the new privatization team at the bank, which western bankers regard as the most advanced of Romania’s four main public-sector banks. Three years on, Tomosoiu finally believes that his goal is in sight. Very little could be achieved until the Romanians had an authoritative assessment of their banking system. They obtained that in 1993, when consultancy firm McKinsey produced a report on the Romanian economy and banks. “It’s like a Bible for economic reform,” says Tomosoiu. In autumn 1993, the government announced that the Romanian Bank for Development would be the first state-owned bank to be sold off. The sale process picked up speed in 1994 when Coopers & Lybrand was hired to carry out due diligence and adjudged the bank as commercially viable and fit to face scrutiny by investors. By autumn of that year the privatization team had been brought together and began studying how state banks had been sold in Poland, Hungary and the Czech Republic. Then the state had to give its seal of approval. The state ownership fund, the organization that owns most of Romania’s state companies, carried out an evaluation in 1995. Finally, the state as shareholder produced a letter of intent to sell the bank. Romanian Development Bank had passed a series of examinations, but had overlooked one crucial point. “What was missing was a legal framework that would enable the privatization to become reality,” says the bank’s chairman, Marian Crisan. In the early 1990s, the Romanian parliament passed a law allowing state assets to be privatized. Yet somehow the drafters forgot to include banks. So after the government decided to privatize banks, a new law was needed. A series of texts was produced, but all were rejected either in the draft stage, or by ministers or parliament. By September 1996, just before the old government lost power in the elections, the bank privatization law had been through more than 10 versions. The final version passed through the upper house of parliament last year but was then rejected by the chamber of deputies in September. Elections were due, and for the time being the four main banks would have to remain in state hands. At that time, privatization looked further away than ever. Romanian Development Bank had reluctantly to dismiss its adviser, Crédit Commercial de France (CCF), because there was no point in obtaining any more advice until the new law on bank privatization came into force. The turning point came with the election of a new centrist government in November 1996. Victor Ciorbea, the new Prime Minister, made it clear that he wanted a dramatic pick-up in the pace of reform as Romania had made little progress away from socialism since the fall of Ceausescu’s communist regime at the end of 1989. Furthermore, the new government is motivated not only by reformist zeal, but by the fact that success will be rewarded with much-needed cash from the International Monetary Fund and the World Bank. This is not so much a second chance as a fifth. Romania has had four standby programmes with the IMF since 1990, all of which had to be suspended early because the government failed to carry out agreed reforms. Last year World Bank loans were frozen too. Other conditions for the restoration of money include the sale of two state-owned banks before the end of 1997. Michel Camdessus, managing director of the IMF, visited Romania in December and his visit was a signal of encouragement to the new government. But a few months have passed since then without much progress. Ciorbea has said, for instance, that he wants to privatize 50 companies a week until the end of the year, but has not yet made a convincing start. When World Bank President James Wolfensohn visits Romania in May, it could well be to chide the government. Meanwhile, the Romanian public is beginning to lose patience as its post-election euphoria wears off. “People are prepared to wait six months,” says one Romanian corporate financier at a foreign bank in Bucharest. “If they hear that a big international company has invested in Romania and if they see that the government is keeping its promises, then they will wait longer.” The completion of a couple of successful privatizations would buy the government time to achieve all its other objectives. A privatization of sorts has taken place over the past three years when shares were given away. Each Romanian citizen received vouchers exchangeable for stock in one of the few locally listed companies, in the state ownership fund, or in one of the five private ownership funds (investment funds that are essentially managed by the state). The first phase of privatization ended in March 1996, but confusion reigns with the state ownership funds still trying to work out how much of each privatized company they own, how much the five private ownership funds own and how much is traded on the stock exchange. Business people say, however, that the scheme does not really deserve the name privatization because it didn’t attract investment from any significant western corporations. And the scheme did not even meet its original completion date of 1994 because of disagreements in parliament. Potential investors in Romania have been deterred by corruption, bureaucracy, insufficient infrastructure, an inefficient banking system and unclear legislation. Most western firms prefer joint ventures. British Telecom, for instance, has used that structure for its new partnership with Logic Telecom, a Romanian telecoms network. The new government wants foreign investors to give it a second chance but to get it, the right legislation must be in place. Under heavy pressure from the World Bank, the government has promised that 57 laws will be passed by April 30 and another 42 by the end of this year. The first batch includes the bank privatization law, an amended foreign investment law allowing foreign investors to repatriate profits and a new land law enabling foreigners to own land in Romania. But informed observers in Bucharest believe that the government is so overworked and parliament so divided that there is almost no chance that the deadline will be met. And, even if the bank privatization law is one of those that gets through parliament by the end of April, investors can’t yet be sure what it will say. Romania’s new government is a coalition and each party is trying to inject its own views into this piece of legislation. Even less than a month before the law was to be presented to parliament, several competing versions of the text were doing the rounds. Even inside government, no-one can be sure that the version that will go before parliament will be the same version agreed with the World Bank and the IMF in recent weeks. But the World Bank has made clear to the government that the loans will not be restored unless the correct version becomes law. Even leading members of the government still seem to be changing their minds about the law’s main principles. Ulf Spinanu, the influential minister for reform, said at Euromoney‘s conference on Romanian capital markets on March 6 that investors in Romanian companies would in future have to wait one year before repatriating their funds. A few days later, the minister retracted his words, saying that his interpreter had made a mistake. So while business people hope that the law will finally allow investors to repatriate their profits in full, they cannot be certain until parliament publishes the text later this year. “We had a lot of talks a year ago because we thought privatization would happen soon,” says Tomosoiu. “But it might be a waste of time to negotiate now. It’s difficult to make decisions on moving ground.” Unlike its predecessor, the new government seems happy to take advice from the World Bank and the IMF. Originally Ciorbea’s government wanted to limit the shareholding of any investor in the banks to 10% because it was worried that Romania’s powerful tycoons would take control of banks and abuse them for their own business purposes. But the World Bank persuaded them no serious foreign investor would accept such an insignificant stake. Now the government has conceded that a majority share will be possible, and Ciorbea is offering investors stakes of up to 95%. The likely proviso in the new law is that any majority shareholder will have to be approved as “fitting” by the central bank or the finance ministry. Romanian Development Bank has long since decided that it would like an international bank to become its majority shareholder. Tomosoiu’s team admires the way privatization was conducted in Poland, where the government originally barred majority foreign investors but changed its mind after less than six months when it realized that this was the only feasible way to bring in sufficient capital and expertise. The team also wants to attract institutional investors and to allow bank staff to buy up to 10% of the bank’s capital. They are optimistic that the Romanian government will agree. Identifying a willing investor will be the difficult part. Ciorbea is taking the key decisions on privatization issues and has received a stream of visits from bankers in the past few weeks including delegations from JP Morgan, Merrill Lynch, Credit Suisse First Boston, Deutsche Morgan Grenfell and several others. But none has come as a potential investor in the Romanian economy: their aim is merely to earn fees as lead manager of a forthcoming government Eurobond issue. There was excitement in Bucharest after Ciorbea met Peter Tils, a senior Deutsche Bank manager, on March 11 and declared that his visitor had expressed interest in bank privatization. Romanians, eager for good news, took that as meaning that Deutsche Bank was planning to buy a stake in Romanian Development Bank. In fact, Tils was merely lobbying for a mandate as the Romanian government’s adviser on bank privatization. That issue, too, has not been resolved either. Romanian Development Bank would like to work with CCF again, but Tomosoiu has no idea whether the government will re-appoint CCF, choose a different adviser such as Deutsche Bank or do without outside advice at all. Deutsche Bank says its policy in eastern Europe is to set up its own local banking operations from scratch rather than to buy existing banks. That way it has avoided many of the difficulties that trouble Romanian Development Bank and the three state-owned banks which are up for sale: Romanian Foreign Trade Bank (Bancorex), Banca Agricola and Romanian Commercial Bank. Superficially, the banks seem to be in good shape. Romanian Development Bank for instance, achieved a 52% return on equity in 1996 with a capital adequacy ratio of 22%. Each of the main four banks has a strong position in one or another market: Romanian Development Bank deals with most of Romania’s leading companies and has an extensive branch network. Banca Agricola has a near monopoly in servicing the agriculture sector, Bancorex is crucial in foreign trade and currency trading. Yet there are worries about their loan portfolios. Until last year each of the banks was allocated a set of clients from specific state-owned industries, and was effectively ordered by the government to provide loans even where the company’s credit risk was unacceptably high. Terms were often dictated, too. That is why Banca Agricola, originally one of the two candidates for early privatization, has been forced to the back of the queue. As the bank’s owner, the state could order the bank to grant loans to farmers at unprofitable rates. Rather than acting as a bank, Agricola was simply an agency for distributing subsidies, often to loss-making companies that had no hope of repaying the loans and no need. In most cases, no provisions have been made for these bad loans. The IMF has now agreed with the government that the state will no longer direct banks to make such loans. Romanian Development Bank denies that it has been forced to make unviable loans over the past several years, but sources in the authorities say otherwise. Its ratio of non-performing assets is currently 11%. Accusations of corruption throughout these banks continue, even after the election. The government seems to be dithering between sacking top managers and making a fresh start, and persuading them to reform. In mid-March Bucharest was full of talk that Crisan of would be removed along with Gheorghe Barbulescu and Razvan Temesan, the presidents of Banca Agricola and Bancorex, while Ion Ghica of Romanian Commercial Bank would stay. A conflicting report says the prime minister met the four of them on March 10 to tell them their jobs were safe. “It’s a toss-up between keeping the corrupt management and replacing it with inexperienced staff,” believes one of the main western portfolio investors in Romania. Once the government’s policy is resolved, it seems most likely that an international agency will emerge as the strategic investor in Romanian Development Bank and one of the others, probably Romanian Commercial Bank. In other central European countries, the strategic investor has usually been a commercial bank acting with the EBRD or the World Bank, such as the purchase of Budapest Bank in Hungary by GE Capital (27.5%) and the EBRD (32.5%) in October 1995. But Romania’s economy is much less advanced than Poland’s or Hungary’s, and official agencies may have to play the lead role. In the final stage, hopefully after just a year, will be floated on the Bucharest stock exchange. That’s provided, of course, that the relevant law is changed in time. |
