Czech Investments Roundtable:
Romania's picture will keep heading towards a positive direction, as turning back is quite difficult, echoed the Czech community present at the first edition of the "Czech Investments in Romania Roundtable" organised in mid-November by The Diplomat - Bucharest. But where are the investors heading? By Alexandra Cioboata (Lopotaru)
Romania is one of the most stable and attractive markets in the region, with the justice sector seeing significant improvements in the recent period and low labour costs and a skilled workforce continuing to represent an asset. However, the lack of public investments pulls the country down, unpredictability and instability of the legal framework affect business one way or the other, while companies need to create a strong local team in order to succeed, which can be quite difficult to do from the beginning. These were the main conclusions of the first conference dedicated to Czech investments in Romania, organised by The Diplomat - Bucharest, under the auspices of the Embassy of the Czech Republic in Bucharest and benefiting from the support of platinum partner CEZ Romania and partners Noerr, Omifa and Skoda Romania. Moderated by Philip Smitka, associated partner at Noerr, Prague Office, the conference gathered diplomats, experts and important players at the Hotel InterContinental Bucharest to debate topics such as macroeconomic perspectives, opportunities and challenges of the Romanian market and sectors of growth for Czech companies.
Romania and the Czech Republic, engaged in dynamic relations
With a total FDI of more than one billion Euro at the end of 2013 on the local market and occupying the 17th position among the economic partners of Romania, and with a volume of commercial exchanges of almost three billion Euro, the Czech Republic finds Romania attractive for investments due to the country′s size, skilled workforce, access to the Black Sea and Asia and expanding economy, said the Ambassador of the Czech Republic in Bucharest, Vladimir Valky, in his opening speech. In addition, he noted, Czech companies appreciate the fact that Romania is a member of the European Union, has adapted its laws to the EU laws and belongs to the community market, thus tilting the scales favourably towards the status of a good market to invest in.
"It is very important to continue the dynamic relations between Romania and the Czech Republic on the sectoral level and to continue to stimulate the economic cooperation and investment," said the Ambassador. "Overall, the year 2014 and the first ninth months of the year 2015 may be described as a great period for Romania′s economy, with an increase of the gross domestic product (GDP) and a massive increase of exports. Romania is well on track to another year of three per cent GDP growth as it registers one of the best performances in the EU. Romania's convergence programme for 2015-2018 predicts steady economic growth. Thus, Czech companies discover in Romania great perspectives for their business plans. Among decisive investment factors there are especially the low costs of labour force as well as its high qualifications," he added.
Romania's exports reached in 2014 the value of 52.5 billion Euro (up by 5.8 per cent), while imports reached a total 58.5 billion Euro (up by 5.9 per cent). The Czech Republic is also among Romania's important trade partners, occupying 17th position, with the volume of commercial exchanges between the two countries reaching a total value of 2.948 billion Euro, an increase of 20.5 per cent. There are more than 800 Czech companies registered on the local market, present in all major fields which at the end of December 2014 had a subscribed share capital of over 422 million Euro, according to the Ministry of Foreign Affairs. According to the Ambassador, there is still room to improve cooperation between both countries in fields such as production industry, transport, environment, automotive, construction, energy, textile and food industry, agriculture and IT. "Of course there are great opportunities for Czech investors in the field of commerce as well," he added.
The Czech Ambassador went on to underline the other side of the Romanian coin: disadvantages for investors. According to him, while Romania is increasingly attractive for trade and investment, liberalization of the energy supply, and reform of the education and healthcare systems are needed to register further progress in the upcoming period. In addition, transport connectivity is also an important issue. "There are a few discontentments, not only for Czech investors, especially regarding infrastructure," he said. "Romania with no more than 700 kilometres of highways is placed in one of the lowest positions in Europe represents in these days, a great disadvantage."
Milan Peprnik, the Counsellor-Minister at the Embassy of the Czech Republic in Bucharest, also took the floor to compare Romania′s current infrastructure status with the one of Poland's years ago, the latter being an older EU member which has managed to constantly grow ever since. According to him, Romania now has the possibility to follow the same example. "I read a very interesting article recently regarding the cooperation between Romania and Poland," said Peprnik. "It mentioned that there are two tigers in Europe now, which are growing in all the fields, including in terms of macroeconomics. When we are discussing Romania′s problems, we have to take into consideration that Romania is a young member of the EU. When Poland became a member of the EU, it had only 50 km of highway and now it has 1,500 km. So, now it is time for Romania to rise as soon as possible because it has the same possibilities. I hope to go from Bucharest to Timisoara [completely] by highway as soon as possible."
Nevertheless, Romania took high marks when "justice" came up into discussion. Jana Klokockova, president of the Mixed Czech-Romanian Chamber of Commerce and Industry, has highlighted that the local market has seen significant improvements in this regard in the last few years, especially in terms of public procurement litigations. "I would like to confirm one of the good experiences with Romanian justice, which is getting better, particularly in a very special sector: public procurement litigations," she said. "I must congratulate Romania because there is an institution [National Council for Solving Complaints] which works very good in this sector, being professional on many levels. It has the competences of court and makes the solutions of litigations in public procurement very quickly and professionally. Every group of judges is composed of three: one is jurist, one is economist and one is technician and every team is sustained by a group of experts. This is great and it doesn't exist in the Czech Republic. So, Romania is more advanced. It is efficient and works very well in comparison with the same situation in our country."
Romania, "good spot" for Czech companies
CEZ Group, a state-owned company which produces, distributes and sells electricity, is the largest Czech investor in Romania, present on the local market since 2005, when it took over the power distribution company Electrica Oltenia SA. Between 2005 and 2014, the group invested in Romania around 6.8 billion RON (around 1.5 billion Euro), operating in the Dobrogea region the largest on-shore wind farm in Europe, with 600 MW total installed power. Moreover, through its distribution company in Oltenia region, CEZ Distributie, the group is controlling about 15 per cent of the electricity distribution market in Romania.
Martin Zmelik, country manager of CEZ Group in Romania and also CEO and President of the Management Board of CEZ Romania, confessed during the event that Romania is the most stable and promising market within South-eastern Europe, with huge growth potential in upcoming years. "It is a great opportunity for us to be here, in Romania," said Zmelik. "The country has huge potential, not only in the electricity field, but overall. It is fast developing, one of the most progressive countries at the moment within the EU and I think this is the right moment to be here. (...) There are a lot of producers moving their production sites from China to Romania, as the ratio between performance, the price, and the stability within the EU place Romania in the top three countries where to place your production site worldwide."
The country manager also highlighted the fact that Romania and the Czech Republic have the great advantage of sharing a common history, thus helping further development in terms of bilateral economic relationship. Furthermore, according to Zmelik, the success recipe for Czech companies to thrive business-wise is to build a strong local team, paying close attention to the selection of the employees.
"My personal feeling is that Romania and the Czech Republic are able to cooperate if there is a good understanding, a lot of common ground and a lot of respect from the both sides," said Zmelik. "If you are paying a close attention to the selection of the employees, you may get very highly motivated people, with the willingness to grow and learn. I would strongly suggest to companies to build a strong local team, because one needs to have someone that already understands the local dynamics, the local development, legislation, especially in the context of the few last years, where the whole economic and legal frameworks have gone through heavy changes and transitions."
Zmelik went on to add that the good news in this transition period is that Romania will introduce a new fiscal code favourable for the business environment which, according to him, is very inspiring even for the Czech Republic. Nevertheless, the country manager pointed also several challenges that companies are currently facing on the local market, including the lack of strategy for certain industries, bureaucracy, poor infrastructure and lack of public investments.
"In the energy sector, we are missing a long-term vision," said Zmelik. "Another weakness continues to be the missing transport infrastructure, limiting the country and the connection between the South and North ways. Moreover, public investments are missing. Unfortunately, one can see this in the school and health systems, which are under-invested," he concluded.
Investments go on
Besides the largest Czech investor CEZ, there also other significant players which have set their eyes on the Romanian market for business. Some are old long-term partners, while others are just now setting foot on Romanian soil. Real estate developer Portland Trust, present on the local market since 1997, has invested around 400 million Euro in Romania so far, building more than 110,000 sqm of office space: Opera Centre - delivered in two phases in 2001 and 2002 and sold to CA Immo; Bucharest Business Park - delivered in 2006 and sold to CA Immo; Floreasca 169A - finished in 2009 and sold to NEPI; and Floreasca Park - finished in 2013 and still in Portland Trust′s portfolio.
The latest on-going office project of the developer is Oregon Park, developed in Pipera on a 3.4-hectare piece of land, which will have three buildings with a GLA of 73,000 sqm in total. The first two buildings - A and B - which will count 44,000 sqm will be finished in July 2016, requiring an investment of 45-50 million Euro. The third building is currently under evaluation and the company will decide by the end of the year whether to start building it or not, according to Jozef Banik, the CFO of Portland Trust.
"The construction of the office park started in January this year," said Banik during the event. "The first two buildings are in the process of construction, while the last one is not 100 per cent decided yet. I think we will decide this by the end of the year." Asked if the company considers an expansion outside Bucharest, Banik confessed that even if Romania's Capital is Portland Trust's core market, the company has other projects in the pipeline outside the city, declining further details. "We find this market [Romania] very interesting and profitable for many years, so we would definitely like to stay, invest more and find new opportunities," he added.
Another Czech investor present at the conference was Forez, a supplier of metallic and plastic parts for automotive and electrical industries, who has officially established its first foreign branch in Oradea in late November this year. If in the Czech Republic the company already has 800 employees, four factories and revenues of almost 26 million Euro (around 700 million CZK), in Romania the company plans to build in the next two years a factory to produce plastic parts for the automotive industry, generating 70 work places by 2017, according to Daniel Brabec, the sales manager and business developer of the company. Furthermore, the company expects to count 200 staff in Romania by 2022.
"Our intention is to develop in Euro Business Parc Oradea nearly 200 new and stable employment contracts," said Brabec. "We will invest three million Euro in the following period mainly in industrial plant equipment, technology and training of the personnel in the Czech Republic. Of course, we would like to serve our production of plastic parts mostly to customers from Romania, Serbia and Hungary," he added.
Capital market needs to continue on the progressive path of the last two years
Czech-based Wood & Co is one of the pioneers in the evolution of the European Emerging equity markets and currently the number one international broker in Romania. The company became a member of the Bucharest Stock Exchange in 2007 and last year it opened its Bucharest office headed by Bogdan Campianu. According to the managing director of the Bucharest office, Romania′s macroeconomic perspectives look positive this year, given the fact that the country recorded low inflation, low unemployment, one of the largest GDP growths in Europe and has even started to pick up in the public investments sector. However, what is very important for Romania is to continue the development of the capital market as it has done in the last two years, says Campianu, when big names such as Romgaz and Electrica appeared on the Bucharest Stock Exchange.
"Last year, we opened our Bucharest office and this year we are already number one in terms of trades on the Bucharest Stock Exchange," said Campianu. "Every day we face investors who want to invest in Romania. At first, they are interested in the macroeconomics, and then in the specific industries of the listed companies where they plan to invest. The macro picture of Romania looks great. Even public investments have started to pick up in the last couple of quarters. From our perspective, what is important is to continue the development of the capital market, which got a boost in 2013 and 2014 with the listing of the state-owned companies. But this year really nothing happened and we think that it would be a pity to lose the momentum created last year and the year before (...) In my perspective, what happened this year was a matter of lack of decision-making. Hopefully, with the changes we are seeing today some decisions will be taken to continue on this path which is important not only for us, but for the economy also."
Campianu went on to add that a normal consequence of the privatisation of state-owned companies through the stock exchange should be that private companies gain confidence and follow the listing trend. However, private companies contemplating the listing are still reluctant due to a misperception echoing in the market, said the managing director, according to which investors mostly prefer state-owned companies. "We do have a perception issue in Romania which was, unfortunately, to some extent, created or propagated by financial media: that investors prefer state-owned companies listed and they do not like private companies," he said. "This is due to the history that we saw in terms of the listing of state-owned companies which were successful and some failed processes for private companies. I am strongly against this perception. Investors don't distinguish between state-owned or private companies, they simply like good investments and this is a matter of each process, how it is prepared, what is the story behind that listing that drives success or failure of certain issue. The perception is there still and the shareholders of private companies contemplating the listing have to get over this perception in order to take such important step."
Mihai Macelaru, associated partner, head of M&A at Noerr, also expressed his opinion regarding the hesitation of private companies in terms of their listing on the stock exchange. According to him, this is a matter of transparency. "In my opinion, this is a problem related to the lack of actual information about what is happening on the stock exchange market and what you can get out of it," said Macelaru. "From my experience, the Romanian entrepreneurs are a bit reluctant to go there due to the things they would have to do once they are listed on the stock exchange market. It is not rather a problem of reporting or being organised, it is rather a problem of being transparent. This is something we are not used to and we are not keen of putting everything on the table so that everybody who wants to buy some shares or to contribute to a share capital increase would need to know."
State aid, an effective financing solution
As state aid could be a decisive investment factor for companies when taking into account either an expansion or a new market penetration, it represented an important topic during the discussions. Currently, Romania finds itself in the second edition of the financing programme, the first period of financing ending last year with a 99 per cent absorption rate for one of the state-aid schemes and with 67 per cent for the other. According to Valentina Craciun, financial advisor and auditor at Noerr Finance & Tax, state aid - allotted exclusively from the Romanian budget - is very effective and has proven its advantages for companies such Continental, Vodafone Shared Services, Endava and Microsoft Romania.
"In our opinion, state aid schemes are the most attractive funding sources for investors and I think they are very effective," she said, adding that currently, in Romania, there are two state-aid plans running: one related to investments in assets, the other for creating new work places. The first state-aid scheme is for companies that are investing a minimum of ten million Euro in Romania, whether for Greenfield, for diversification or for changing fundamentally its production flow. According to Craciun, the state-aid scheme grants 50 per cent from eligible cost throughout almost the whole country, except the west and Bucharest. In terms of the second state-aid scheme, eligible applicants are those who create at least ten workplaces in Romania, benefiting of up to 50 per cent of their salary cost for two years.
Adaptation to market realities, a must
Besides state-aid, another important source of financing is EU funds, as Romania is eligible to receive around 43 billion Euro in the 2014-2020 programming period. Czech-based consultancy firm Confima focuses primarily on advising Czech companies wishing to access European funds in Romania, offering them assistance with their entry into the Romanian market and stressing the opportunities one can find with European funds. Present at the event, Valenti Canal, consultant at Confima, confessed that foreign investors face three main challenges when entering the market, aspects which could lead to the withdrawal of the company′s business from the local market if they are not solved in time: the failure to adapt to the local legal changes, the failure to find suppliers and to form a stable local team.
"When a company arrives in Romania, it needs to accept the specific instability of the legal environment," said Canal. "It is important they do not try to fight the situation. This instability is not very big, but it is a real problem when companies arrive here and it is better to accept it. Another point is the problem regarding the connection with the local suppliers. When you arrive in Romania, theoretically it is easy to find suppliers, but in reality the situation is different. The third aspect we see is that companies need to create a stable local team, which is pretty complicated to do so from the beginning. All these problems arise at the beginning and the newcomers get tired after one or two years and go back. They need to accept those three points and to take it step by step."
According to Dan Mihai, partner at Jinaru, Mihai & Notingher, the main issue for the local market is not necessarily the changing of the legal framework, but rather the inconsistency of its interpretation by the authorities. "The different interpretation [of the legal framework] from agency to agency is a problem that needs to be solved," he said. "This is one of the most important issues that frustrate the investors. And this is a matter of creating, let's say, the right bureaucracy. I think that there have been very good steps made forward: for instance, on the tax point of view, we have a national commission on the tax level that is starting to regulate not only the legal frame, but also its interpretation."
Cristian Rusu, sales manager at manufacturer of metal gratings Lichtgitter Ro, present on the local market since 2007, underlined during the conference the specific challenges the company is facing, confessing that clients are very demanding, while the people they want to hire have higher expectations compared to their performances. "The requests of our clients are very peculiar, from client to client," said Rusu. "They want the merchandise today, while the actual delivery period of merchandise is one month. And they are not willing to pay extra money for a faster delivery service. In addition, the staff which we want to hire in order to sustain the growth of our volumes has very high expectations, when in fact they do not know exactly what to do. We hope to solve those problems in the future."
"Just the beginning"
After two hours of open discussions, where diplomats, experts and important players analysed and compared the main opportunities and challenges of Romania, it seems they have reached a common vision surrounded by optimism: Romania's picture will be better, as worse is pretty difficult. Furthermore, Philip Smitka concluded: "I have gained the impression that Romania is the beautiful bride in the CEE where investors actually find good investment climate despite, maybe, different aspects that mostly linger from the past. I think it is very promising and gives me the impression that, after very prominent investors have come from the Czech Republic and more and more companies are starting to invest, this is just the beginning of a really long-term and strong bilateral relationship."