Dutch firms shift focus from cheap to skilled labor on local market

Among the various changing factors on Romania's political and economic scene are certain stable aspects on which the country should capitalize, officials say. Hans Smaling, economic counselor of the Embassy of the Kingdom of the Netherlands, and Peter de Ruiter, president of the Netherlands-Romania Chamber of Commerce, outlined to The Diplomat - Bucharest Romania's strong points, local mentalities and the opportunities to do

April 2013 - From the Print Edition

The future of Romania is no longer only in low labor costs. This is still an important, attractive factor, but we're seeing now in practice the added-value of the overall supply-production chain of products," Peter de Ruiter tells The Diplomat - Bucharest. "Creation value is taking place in Romania."

Even though the low cost of labor remains an important draw for investors, more and more companies are coming here for skilled workers. "IT companies especially, but also design companies that make use of engineering capacities, tend to near-source production to Romania simply because they cannot find these people in sufficient numbers in the Netherlands," says Hans Smaling. "A couple of thousand people are employed by Dutch companies."

However, for most Dutch firms, the attractiveness of the country is derived from a combination of these two factors: low labor costs and specific skills. "For example, at companies like Damen Shipyards, they need technical skills, but they also look for reasonable labor costs, so a company like Damen can be very competitive worldwide thanks to the presence of both skills and relatively low labor costs," Smaling adds. Peter de Ruiter points to the capable students who graduate in certain IT fields, who are bright and strongly motivated to work in the sector.

Not only Dutch companies, but also German firms benefit from the specific skills Romanians can offer. "Germany recently implemented a program for a German vocational school in Brasov (SGK) which trains technicians," Smaling says. "These people are educated in specific sectors and this is good for Romania, but it is also positive, on the longer run, for Germany; in a society where the workforce is getting older and older, they can plan for the future."

The main challenge for the Romanian authorities is to keep as many of their skilled people here as possible, as the country needs them for its economic growth, Smaling adds. "We do some positive things in this respect: we are the biggest investors, we bring companies here and we make use of Romanian skills here in Romania."

Aftermath of the 2012 political turmoil

Although 2012 was marked by a degree of political chaos, business continued on its course. Among the Dutch investments in 2012, Peter de Ruiter cites the EUR 150 million infrastructure project undertaken by Dutch company Van Oord, involving the partition of the port of Constanta.

However, last year's political events, even viewed dispassionately from a business perspective, did cause disappointment at the lack of progress, says de Ruiter. "Although it wasn't so dramatic that companies considered leaving or reducing their business activities, firms certainly did not feel encouraged to increase or develop. Overall one could say that the rule of law was somehow under pressure in that period and it was essential that measures be taken. But we're now seeing that the situation is much better and much more stable since the elections last December."

Hans Smaling points to the essential relationship between confidence in the country and business activity, adding that the political turmoil resulted in capital outflow and a higher cost of financing. He says that macroeconomic and fiscal stability are very important for sustainable growth. "When Romania joined the EU there was a lot of capital flowing in, people took out mortgages, they suddenly had high purchasing power and there was a lot of domestic demand that made the economy grow. But it wasn't sustainable growth; it was a kind of a bubble."

Peter de Ruiter identifies a strong point for Romania: its financial sector. "The financial sector has managed to remain a relatively stable factor in the country, which is truly impressive if you consider the surrounding countries that are having many more problems than Romania." He also stresses the positive collaboration between the Government and the International Monetary Fund (IMF) in terms of fiscal discipline and the further actions to modernize the state agencies, notably privatization projects. "This all has to be done in a very difficult environment. It's not easy to privatize companies or to modernize businesses or state agencies, but I think that the steps made are positive and constructive."

Tax collection and mentalities

In February 2013, a new Fiscal Code entered into force, but Peter de Ruiter does not think it will have a major influence on the business environment. "When going through the regulation, amendments and updates, I was pleasantly surprised. It fits into a certain system; there are some clear connections with certain European aspects." However, the president of the Romania-Netherlands Chamber of Commerce says that there is still a lack of precision about research and development (R& D) incentives. "In the context of the high significance the IT sector has for Romania's development, clarity about the R&D rules is required, in order to get the incentive really embedded into the business model," de Ruiter tells The Diplomat - Bucharest.

And there are other barriers to investment. Romania has not yet managed to deal with the issue of tax evasion, Hans Smaling says. "If you'd been able to generate more income out of taxes, if you had done that in the past, you wouldn't have needed any financial assistance from the IMF and it would have provided billions and billions in extra income."

The successful Dutch tax collection is embedded in a system where the rule of law is dominant, Peter de Ruiter explains. "As a taxpayer, you are absolutely sure that whatever happens with the rules around your obligation to pay taxes, they can be challenged before an objective court, in a fair way."

"Tax collection is a tradition in the Netherlands, where taxes are based on responsible behavior and taking part in society," Smaling tells The Diplomat - Bucharest. "Most people understand the importance of paying taxes, also because you get something back from it." Peter de Ruiter believes that in Romania, the relationship between the tax authorities and taxpayers is still, to a large extent, influenced by fear and by a regulatory environment which is not always that transparent.

As for measures that could help improve the tax collection system, de Ruiter emphasizes the need to reduce the number of payments, which is extremely high. "A company operating in Romania makes on average 40 payments every year." Another measure that could ease the burden of the tax collection system would be the reorganization of the National Agency for Fiscal Administration (ANAF), along with increased use of electronic process, according to Peter de Ruiter.

With regard to the better functioning of the tax collection system, Hans Smaling cites the local mindset as one of the biggest challenges. "People here, in my view, should think more about the public interest. They don't look enough at the bigger picture, the interest of the country." For the economic counsellor of the Royal Netherlands Embassy, the explanation for this lies in Romania's background. "People come from a place where there was no personal freedom or personal interest; everything was kind of collective, collective rights and collective interests," Smaling tells The Diplomat - Bucharest. "Now the country has become part of a democracy, where people have personal freedom and can explore their personal interest much more than before, and they are taking full advantage of it." Smaling thinks that a lot of people now have to learn how to contribute personally to the collective interest of the country.

Schengen issue and misconceptions

Dutch opposition to Romania's accession to the Schengen area can be seen as a paradox considering that the Netherlands is the biggest investor in Romania, with over 4,000 companies in the financial, consumer goods, agriculture, and transport and logistics fields. Hans Smaling explains that the Netherlands cares about the development of Romania as a business partner in a bilateral sense, but also as a partner within Europe, so it would like to see that the two countries have developed and implemented common norms and values. "Ultimately, these values, transparency, anticorruption and judicial reforms will also benefit the business climate and sustainable economic growth."

Peter de Ruiter thinks that the Schengen issue is losing its momentum, as Romania will enjoy free access to external labor markets anyway as of January 1, 2014. He agrees that there are, indeed, certain misconceptions about Romania in the Netherlands, but says that the Dutch business community is very active in trying to make sure that the image and the perception of Romania is right.

"In the coming year we will see a number of Dutch politicians coming to Romania for this very reason, including the Mayor of Rotterdam, Ahmed Aboutaleb, who is specifically keen and interested in finding out to what extent the city will see a large number of Romanians coming to the Netherlands, after January 1, 2014," de Ruiter tells The Diplomat - Bucharest. Hans Smaling thinks that Romania's bad reputation is caused by a lack of knowledge and says from his experience companies from the Netherlands welcome many Romanian workers.

"Everybody who comes to Romania for the first time comes with a cautious perception, but it only takes you two or three days to completely revise your opinion for the better," Peter de Ruiter adds.

By Diana Mesesan