Life in the slow lane
3 January 2011 | By James Swift
12 January 2009
4 January 2010
24 April 2006
2 January 2012
3 January 2011
Economic recovery is being held back by unhelpful government actions, typified by recent legislative moves on PPPs.
Romania is one of Europe’s stragglers in terms of economic recovery. After a sharp economic decline of 7.7 per cent in 2009, credit ratings agency Fitch announced in December 2010 that it expected the country’s GDP to contract a further 2 per cent that year, and only grow by 2.5 per cent in 2011.
And, as surrounding jurisdictions emerge from the downturn, the continued dearth of investment into Romania is beginning to frustrate lawyers who see the country’s government passing measures and taking steps that seem to hinder recovery more that help it.
“It’s nonsense to still complain about the crisis after two years. The country should have reshaped its business by now,” says Adriana Gaspar, senior partner at Nestor Nestor Diculescu Kingston Petersen (NNDKP).
“Unfortunately, what makes us special is that this global crisis caught us when we were still weak. We haven’t had enough time to grow and mature, and the latest crash managed to overlap with an incredibly long and drawn-out political crisis. Since 2009 we have been in a continuous political crisis and we are on the verge of significant social crisis too: this explains some trends in the market.
“Romania remains a resource-rich jurisdiction and there are high-yield opportunities here, but with such things going on in the background there’s little hope to see massive investment or a strong trust in Romanian institutions,” Gaspar adds. “We had just managed to build some trust and now it’s gone again. There’s not enough trust in our legislative ability.”
One particular piece of legislation that has provoked the ire of the legal and business community is the new PPP law. Romania is in desperate need of investment to improve its infrastructure and public services, but the new laws on PPP projects are unworkable, say lawyers. What makes the situation even more galling is that Romania had a perfectly workable PPP regime until it was repealed in 2006.
When the law is a Buchar-pest
“The pre-existing legislation offered all the instruments to develop projects and it was in line with EU legislation,” says Gaspar.
“There was no doubt that a PPP could be developed using the law. What was missing were a few clear provisions on international PPPs: rules on stopping rights for banks or non-recourse rights, for example. But the new law doesn’t even address these.
“This law is a step back, not a step forwards. Because of the overlap with previous laws people won’t know which law to apply, and even if they do there will be significant problems in tender pricing. We can’t afford such a delay in infrastructure projects. This new law is more of a pest than a benefit.”
The concept of PPPs was first recognised in Romania in 2002 when a standalone piece of legislation was created to develop and implement them. However, this law was repealed and replaced in 2006 by Government Emergency Ordinance 34/2006. The ordinance, which did not specifically regulate or refer to PPPs, was designed to unify procurement laws in Romania and covered all forms of public acquisitions. At the time it was thought the ordinance would bring the country more in line with EU law principles, which do not separate PPPs from other forms of concession.
Although the ordinance was detailed enough that PPPs could be developed under it, there were gaps. Among other things, the law did not address lenders’ step-in rights and the non-recourse principle, which made international investors wary.
“In the absence of a clear legal basis for these mechanisms, Romanian contracting authorities don’t have the comfort to accept them contractually,” says one lawyer at NNDKP.
Lawyers and businesses subsequently made their thoughts on these deficiencies known, but when the government came to finally do something about them, instead of just plugging the gaps in the ordinance a whole new law was drafted, one that addressed PPPs specifically. The law was initiated at the beginning of 2010 and approved by parliament in July that year.
It soon became clear, however, that the new law was no better than the last. In fact, it might have been worse. None of the legal provisions addressing the implementation of PPP projects that were lobbied for were included. The new law established only general principles governing public procurement rather than addressing matters of interest relating to the initiation and implementation of international PPPs.
Following an outcry from business community associations such as the American Chamber of Commerce and even Romania’s ministry of finance, the act was sent back to parliament before it could be promulgated. Unfortunately, the law was subjected only to a limited examination and was quickly re-approved and sent to the president, who could not send it back down again. It was enacted on 5 October.
“What happened with the PPP laws was nothing unusual,” says Salans’ Bucharest managing partner Christopher Berlew. “Romania is not usually behind in drafting laws, but the capacity to draft good complex legislation is often lacking. What has happened with the PPP law is symptomatic of the process: it’s just a lack of capacity in the ministries. Before the crisis the government probably would have hired external advisors, but now they must do it in-house.”
There are even fears that the new law could lead to an infringement case against Romania brought by the EU. One of the main problems with the act is that it is not clear when it is applicable, or when a developer should refer to the existing law on concessions. A situation, which, according to lawyers at NNDKP, “could be regarded as an infringement of European directives in the field”.
Lack of transparency
Transparency is another issue. Under the new law, the public tender process used for most public procurement projects is replaced with a series of negotiations, which allow for a large amount of discretion on the part of the public partner, and it appears that this is the only process permitted under the act. Furthermore, it is not clear who, out of the public and private parties, owns what in the assets created under the PPP.
The norms for the application of the act have been drafted and the government is expected to approve them soon. It could be that these will clear up some of the problems with the act. However, not everyone believes that, even if the PPP law is rectified, it would lead to the healthy stream of deals needed to modernise the country’s infrastructure.
“The fact is that PPP is overrated from a legal point of view,” says Catalin Baiculescu, co-managing partner of Musat & Asociatii. “There are many laws in this area and none are useful for entrepreneurs. The government has changed the laws many times, sometimes having parallel pieces of legislation running. But I don’t think it’s going to be a big area of work in the near future because funding PPPs is difficult.”
“The way I see it, just because we have a new law it doesn’t mean that we’ll get more PPPs,” agrees Bryan Jardine, managing partner of Wolf Theiss’ Bucharest office. “We haven’t had any success stories in the sector in Romania.
Low on energy
The legislative regime is not the real problem in attracting investment. The problem is the government’s commitment to follow through on projects, once initiated.
“I’d rather see the government focusing its efforts to complete the secondary legislation with regard to the renewable energy sector, where we know there are interested investors,” says Jardine.
Indeed, the renewable energy sector is another one where the Romanian government is seen as dragging its feet in terms of legislation. Romania was once one of the most attractive jurisdictions in Europe for renewable energy deals, particularly wind farm projects. But the country has been overtaken by its neighbours, Bulgaria and Hungary, as hundreds of millions of euros worth of investments have been put on hold for nearly two years while developers wait for Romania’s new energy laws to be approved.
“Green energy was like the new real estate gold rush,” says Baiculescu.
“Nobody buys land to make into offices anymore. Now they do it to build wind farms. But very few deals have started or are about to start because there’s been a lot of legal hesitation surrounding the area.”
The problem lies with green energy certificates. Unlike its neighbour Bulgaria, which adopts a ’feed-in tariff’ system of subsidies for renewable energy projects, Romania opted for a system whereby distributors of energy must buy an annual quota of tradable certificates representing green energy produced - green energy certificates.
One megawatt per hour of electricity generated and delivered to the grid using green energy sources is worth one green certificate, and green energy producers make money from both the sale of electricity and the certificates.
A new law - Law220 - was initiated in 2008, increasing the number of certificates for green energy produced. Under the law two certificates would be awarded for each megawatt per hour created by wind power, three for biomass, biogas and geothermal and four for solar. However, Romania has failed to get approval from the European Commission, apparently because the country failed to provide enough information about the law. Developers want to wait for the new, more generous law to be implemented before going forward with a project.
Of course, it is only really a formality and should be resolved soon. But the unnecessary delay contributes to the view that government isn’t doing its part to drive recovery forward.
“Romania is a market that’s decreased over the past year and the outlook for 2011 is not particularly positive,” says BPV Grigorescu managing partner Catalin Grigorescu.
“This is because of political uncertainty and the incapacity of the government to adopt measures to restart the economy.”