Large state enterprises play an important role in the Romanian economy. As reported in the ECFIN analysis, they they generate 8% of the total output of non-financial corporations and employ nearly 4% of the total workforce, while government subsidies and transfers to these entities represent 2% of total public expenditure equal to 0,7% of GDP. Furthermore, these companies dominate particularly in the energy and transportation sectors, which provide strategic inputs to the global economy. The Romanian Ministry of Finance discloses a total of 247 enterprises owned by the central government and a total of 1.177 owned by local governments at the end of 2013, whether they are small or large (with more than 20.000 people and a turnover of 260 million EUR). Most of them are commercial companies, while less than 10% of them are "regii autonomous", a specific legal form, not subject to company law and used for entities considered as "non-privatizable" (see in this regard the district heating supply and regional public transport). Another specific category includes research institutes, with a legal framework closer to that of public institutions, rather than that of commercial companies.
In view of the large number of SOEs and their relative dominance in the energy and rail transport sectors on the one hand and the sub-optimal operational performance scenarios on the other hand, new assistance programs for Romania have become an important pillar in the balance of payments. In the 2013-2015 memorandum of understanding, the government committed to:
- improving performance through corporate governance reforms and a focus on reducing outstanding payments;
- the sale of minority or majority stakes in selected state-owned enterprises without public service obligations, especially in the energy and transport sectors, thus bringing in fresh capital and know-how, as well as improving the transparency of decision-making;
- the closure of those companies, with no public service obligations, which cannot be restructured into profit-making entities.
Despite this, only a part of the privatization procedures has been completed. As a result, there remains ample room for further operational improvements, restructuring and privatisation. The overall financial situation of Romanian public enterprises is worrying, especially when compared to private counterparts operating in the same sector, whether in terms of productivity or turnover. High debt rates and low yields are the main causes of insolvency problems. In 2012, the total debt of state-owned enterprises amounted to 45 billion lei (7,7% of GDP). The stock of overdue payments on these companies' balance sheets (including those in the context of bankruptcy or liquidation proceedings) amounted to 3,4% of GDP at the end of 2013, down from around 5% in 2010. The reduction of payment delays has been achieved through a mix of debt restructuring, ad-hoc increases in transfers from the state budget, corporate restructuring and liquidations. At the same time, the total operating profit of all SOEs combined was 0,4% of GDP in 2013.
The current size of debts and losses has negative effects both on the Romanian economic system and on the state budget. In 2012 alone, state-owned enterprises accounted for 17% of defaulted payments to suppliers, with the consequence of weighing on the budget of the public administrations. And while they only generated 8% of total production at the end of 2013, state enterprises accounted for 50% of total insolvencies. One explanation for the high share of total tax arrears could be that state-owned enterprises on average are much more loss-making than private-sector enterprises and therefore find it more difficult to pay their tax liabilities. Another explanation comes from the fact that compliance with tax obligations is less stringent than for private companies. This preferential treatment places publicly owned enterprises in a favorable position vis-à-vis their private sector competitors: loss-making state-owned enterprises have not been forced to restructure or close down, as is the case with private ones. In this scenario, social reasons also come into play, i.e. the prevention of job losses, and political reasons, such as the maintenance of position rents, or the same influence in a specific sector. So, these companies continue to accumulate losses and arrears. Not to mention all those classified outside the public administrations. While there are no major government guarantees in place for publicly owned enterprises at present, these SOEs may represent a contingent liability indirectly. They achieved debt levels of 5,4% of GDP in 2012 and a stock of overdue payments of 1,9% of GDP in 2013. In order to avoid job losses through liquidation or restructuring, Romanian authorities are keen to support certain loss-making entities through tax liability discounting and government subsidies or transfers.
In this scenario, the corporate governance framework becomes an important aspect in the transformation of economic activities, the management of which is currently fragmented between ministries or central and local government bodies. In both cases, property rights are exercised by the competent public guardianship authority. Such a governance structure fails to avoid political interference in the management of companies, unable to guarantee a strategic separation between ownership and policy-making functions. Adherence to sound corporate governance principles is therefore of the utmost importance, especially in an economic-institutional framework where an effective savings management strategy is lacking.
Corporate governance principles, as defined by the OECD in 2005, were incorporated into the Romanian legislation on commercial companies in 2006 and are applicable to most state enterprises. These principles establish:
- the separation of ownership and function of government policies,
- full transparency on strategic decisions, related party transactions and audited financial information,
- clarity and transparency on the management of appointments and remuneration of professional processes.
Here then is that the board members of these companies must be able to operate independently of direct interference by political power. In this scenario, ordinance 109/2011 does not attempt to change the configuration of state ownership, currently dispersed across multiple ministries and local governments. Performance monitoring is included, while still weak are the rules for applying such monitoring and improving performance. There is therefore still ample room for improvement in corporate legislation, along the principles set out by the World Bank. The monitoring unit within the Ministry of Finance lacks adequate law enforcement tools. Consequently, the application rules established by the emergency decree do not apply to companies that do not adhere to the transparency provisions. In the current BdP program context, the Romanian authorities have committed to comply with the current corporate governance rules, including the replacement of the provisional members of the board with the members selected according to the ordinance and full compliance with the transparency obligations. Emergency Ordinance 109/2011 is already binding, but will be amended and approved by Parliament, in the hope of improving the provisions and strengthening their implementation. The government, together with the World Bank, is currently carrying out an evaluation of the current text, in order to identify possible modifications with the aim of presenting the new bill in the first months of this year. These operations feed the chance of success only if local authorities are willing to fully engage in the restructuring and privatization process.
