Romania: Project Reboot

With a stabilising political system, the outlook for Romania’s law firms is good

A “coup against the rule of law” was how Romania’s president Traian Băsescu described his attempted impeachment at the hands of prime minister Victor Ponta during last summer’s clash between the country’s two dominant political forces – Ponta’s Socialists, the reformed heirs of the Communists, and Băsescu’s Democrat-Liberal allies.

Rattling the markets, sending the Romanian leu to a record low and raising fears that a country already ranked as the EU’s second poorest and third most corrupt may be faltering further, the dispute also threatened to damage the agreement of a crucial IMF loan and its ability to woo foreign investors.

However, the stand-off passed, and in March the IMF agreed to extend by three months Romania’s €3.5bn (£3bn) standby arrangement, approved in 2011, to 30 June.

Palace of the Parliament, Bucharest
Palace of the Parliament, Bucharest

Pulling together

So has cohesion and stability in the political realm returned?

“The problems haven’t gone away,” says BWSP Hammond Bogaru & Associates senior partner Nicholas Hammond. “But they are working together to encourage in- vestment and realise that what happened last year seriously affected the world’s perception of Romania.”

That stabilisation and the consequent increase in foreign investor confidence translated into a rise in legal work, claims Gabriel Sidere, managing partner of CMS’s Bucharest office, who has seen a 20 per cent rise in utilisation rates in the past quarter compared with the previous three quarters combined.

Alongside the political stabilisation, Cristina Togan, a senior associate in the banking and capital markets team at Gide Loyrette Nouel in Bucharest, says a new civil code introduced in 2011 and a new civil procedural code introduced earlier this year have made “the legal market more flexible, speeded up court procedures and given greater predictability to the legal system. New concepts such as worldwide independent guarantees have been recognised. This is helping the business environment.”

“The new civil procedure code is an improvement,” says Sidere, “but it’s too early to comment on whether it has a positive impact on the duration of cases, costs and the general efficiency of the process. But I’m confident it’s a move in the right direction.”

A new insolvency code project–financed by the World Bank is scheduled to conclude at the end of 2014. It unites all insolvency and pre-insolvency rules in Romania, with the aim of helping business and the enforcement of creditors’ rights. 

In terms of the economy as a whole, the government deficit was brought down from 9 per cent of GDP in 2009 to 5.2 per cent in 2011, and reached its targeted 3 per cent in 2012, as committed to under the EU Excessive Deficit Procedure.

Partly as a result of exchange-rate depreciation and partly due to increases in gas and electricity tariffs, inflation rose in early 2013, reaching 5.25 per cent in March — significantly above target.

GDP rose by 0.7 per cent in 2012, but a World Bank report claims Romania should see an economic hike of 1.7 per cent this year and 2.2 per cent in 2014, ranking fourth for GDP growth in the Central and Eastern Europe region.

A further improvement in the -Romanian economy was seen during 2012, when structural and cohesion funds from the European Commission amounting to €800m (£684m) entered Romania’s budget. The situation of fund absorption in the previous five years had been a significant cause of concern within Europe and by January 2012 only 4 per cent (or €1.8bn) of a potential €20bn of EU fund money had been channelled to Romania.

However, by this March payments had reached approximately €5.2bn, representing around 24.5 per cent of the EU allocation for 2007-2013 – although still far behind the EU average for absorption of allocated funds of 45 per cent.

Foreign investment policy

The other main source of money for investment in Romania is foreign. 

“If foreign investment comes, it will definitely be the most important engine for growth – there’s not enough money in Romania itself for this growth,” says Lucian Danilescu, founding partner of Mares Danilescu & Asociatii and vice-chair of the British Romanian Chamber of Commerce. “It is estimated that each €1bn from the EU funds attracts another €2bn in investment.”

Western European investors still make up the largest proportion of foreign money coming into Romania but, says Hammond, China is increasingly present in the market.

“The Chinese are looking at natural resources and technology – they are looking to acquire markets and influence both at the political and commercial level,” he says.

There is also an increase in activity among Romanian investors, particularly from the IT field.

“There’s a developing entrepreneurial class investing in the country rather than taking the money and running – that’s a good sign,” says Hammond

Sell division

A key part of Romania entering the European economic fold is its privatisation programme, part of a broader government drive to sell minority and majority stakes in state-run companies under the terms of the IMF-led €20bn bailout loan in 2009.

Local Romanian investors are playing a key part in this, with -Romania’s debt-ridden rail freight company, CFR Marfa, being sold last month for around €202m to Grup Feroviar Roman (GFR), with GFR pledging an investment of around €900m for ‘re-technologisation’.

Last month a government-approved strategy for the partial privatisation of state-owned nuclear power corporation Societatea Nationala Nuclearelectrica was also announced. It will see an IPO of 11 per cent of the company’s share capital.

However, the privatisation programme has been beset with delays. In May, privatisation of the postal service was postponed after it failed to attract a single bidder.

Romania is also running late in selling natural gas producer Romgaz and its stake in national air carrier Tarom.

As an emerging economy, Romania has potential to create investment growth through PPP involving infrastructure development and rehabilitation, road building and various construction projects, as well as environmental protection.

As well as EU funds earmarked for the transportation sector being unblocked – having been suspended due to concerns over corruption – there is a new PPP law being -developed that should help facilitate large infrastructure projects, including the Bucharest-Ploieşti-Brasov motorway (Comarnic-Brasov section).

Mares Danilescu & Asociatii managing partner Mihai Mares thinks such projects will be successful.

“A clarification of the legal regime would bring a more favourable approach to this type of investment and we will see much more activity in this sector, both in social areas like education and hospitals, and in  the big infrastructure projects being pursued now,” says Mares.

The government has “good intentions” adds Ţuca Zbârcea & Asociaţi managing partner Florentin Ţuca, who was involved in the Comarnic-Brasov project. He adds: “One of the most important problems of such a project is its bankability.”

Sidere also welcomes the government moves. “It’s always better to act than to think but do nothing – which has been the situation in recent years,” he says.

Referring to the CFR Marfa privatisation, Sidere notes: “The interest was definitely there – there were three bidders for a company that has a lot of issues. What’s important is that [the government] hasn’t stopped, but rather has learned from setbacks along the way.”

High energy

While infrastructure investment is attractive, the hotspot of Romania’s economy for the past three years has been energy, in particular renewable energy. However, this has seen some slowdown due to government adjustments in the green certificates support scheme. The adjustments were made due to concerns over the burden on the end consumer, including the vocal steel industry, and the energy regulator’s identification of overcompensation in the rate of return for solar, wind and hydro technologies.

Elsewhere in the sector, tenders have been launched to expand shale gas exploration. The US Energy -Information Administration estimates Romania, Bulgaria and Hungary could between them have enough gas to cover Romania’s consumption for almost 40 years.

Danilescu says: “Last year shale gas was a political issue, with the opposition party and government using it in the campaign. Now every-one has accepted exploration.”

Mona Musat
Musat

The European economic crisis coupled with the green shoots of a Romanian recovery means the domestic firms that dominate the market, such as Musat & Asociatii, saw activity in dispute resolution, restructuring and insolvency, M&A and privatisations, energy and natural resources, taxation, competition and labour law.

“We’re also witnessing a boost in white collar crime. Our criminal law department is currently managing 500 files,” adds Mona Musat, managing partner at Musat.

Financing transactions are rare says Togan, a situation that is unlikely to improve soon.

In terms of M&A, Hammond says: “There are a lot of industries being looked at, hunted and consolidated. Apart from M&A transactions, we are also seeing a pick-up in property construction. While it is still speculative development, it is sensible speculative development.”

CMS’s Sidere has also seen an increase in M&A activity, particularly in the oil and gas sector, and has noticed an increase in cross-border transactions in Romania and neighbouring jurisdictions. 

“There’s an interest in investors reorganising or reshaping their business in the region. That is not only keeping our corporate group busy but also our banking group, which acts as a banking hub for the region and is working on cross-border financings,” Sidere says. “Another active area is insolvencies around state-owned enterprises.” 

Resolving clients’ fiscal problems and projects was at the heart of Ţuca Zbârcea’s decision to set up a tax division dealing with consultancy and litigation last year.

Lit test

Across the market, litigation has seen an upswing. For Mares Danilescu this has been driven mainly by restructurings and insolvencies.

“The only real economic bubble we’ve had in Romania in the past 10 years was in real estate. That has given traction to the growth in litigation,” says Danilescu.

That growth has fed into fundamental shifts in the legal market, with many established practices that previously offered 80 per cent corporate consultancy services and 20 per cent litigation now offering anywhere between 50 and 80 per cent litigation.

“It is the right time for domestic law firms to reorganise in a way to become more efficient,” reasons Sidere. “There are good signs of economic improvement and it’s a time for domestic firms to find good allies for strengthening their presence – now could be the time for mergers or splits, for the reshaping of the legal market.”

The market agrees, with rumours of consolidation among law firms and mergers of established firms with international firms. 

Cătălin Băiculescu, a former co-managing partner and deputy managing partner at Musat, joined Ţuca Zbârcea at the end of last month.

Popovici Nitu & Asociatii and Bulboaca & Asociatii are two firms singled out by Ţuca as potential rivals to the established order.

“These firms are hungry and they are good firms – they have had a good evolution since their inception,” he says.

All this is welcomed by the likes of Mares and Danilescu, who say “for us it is good news, as it makes space for the ‘young wolves’ to set their own mark on the market in the future”.

Key figures: Romania

GDP: $189.8bn

Inflation (March 2013): 5.3%

Population (2011): 21.4m

Life expectancy at birth: 75

Unemployment (Apr 2013): 7.3%

Source: World Bank, Romanian National Institute of Statistics