Speeches & Transcripts

Speech by Ismail Radwan, Lead Public Sector Specialist in Europe and Central Asia

October 28, 2015


Ismail Radwan Business Review Foreign Investor Summit Bucharest, Romania

As Prepared for Delivery

Good morning and a very warm welcome to all of you. It is a great pleasure to be here today standing in for Elisabetta Capannelli the World Bank Country Manager who has been called away at short notice.

Romania as an attractive investment destination

First let me say that Romania is and should be an attractive destination for foreign investors. It is one of the fastest growing economies in the EU and has consistently been one of the top performers over the last 20 years. Government has maintained a stable macroeconomic environment, taking tough measures to reduce spending and curb the deficit when necessary.  Romania still has tremendous potential in terms of catching up to EU norms and living standards.

Labor costs are still relatively cheap and workers are well educated, especially in urban areas.  Romania has the fastest internet speeds in the EU and a thriving IT and software development industry. And there remains untapped opportunities in tourism, agriculture, construction and IT to name just a few sectors. 

So what else can be done to encourage investment in the country?  I believe we can still make progress in three key areas: (i) The business environment, (ii) improving infrastructure and (iii) good governance.

Improving the business environment

Romania has a good business environment in general. The World Bank ranks it as number 48 out of 189 economies in 2015. It has moved up from 50th place in 2014 but still ranks behind Poland at 32nd and Bulgaria at 36th. It’s easier to open a new business in Romania than it is in Poland or Bulgaria.

And Romania has shot up 76 places (to 52nd) in terms of easy of paying taxes after introducing electronic filing for companies and individuals. So where are the problem areas?

Getting electricity is the most problematic at 171st. It takes more than 200 days to get a connection approved to a new warehouse and costs five times the national per capita income. Dealing with construction permits is also time-consuming, taking more than 250 days to secure all the clearances for a new warehouse. Small and medium-sized enterprises (SMEs) complain about the burden of government regulation and the transparency of government policy making. But on the whole this government has proved to be supportive of the business community. 

The Prime-Minister holds regular meetings with representatives of the business community and this opportunity should be taken up by business leaders putting concrete policy proposals on the agenda, together with deadlines and responsible implementing agencies.

The Minister of Finance as well as ANAF have been serious about reducing Tax evasion in order to provide for a level playing field for all businesses – something that the World Bank is supporting through our Revenue Administration Modernization Project.

In the last year, government has also introduced a new insolvency law, simplified customs procedures and proposed a reduction in VAT rates from January 2016. Going forward there is a need to focus on finalizing the new law on cadaster and real estate registration and submitting it to parliament – again all issues that the Bank is supporting through our operations and technical assistance.

Improving infrastructure

Although much remains to be done in the infrastructure space, it is also true that a lot has been done already.  Romania has transformed its energy sector over the last ten years from one that was entirely state-owned and heavily regulated to a sector that has introduced private sector participation, achieved interconnection with EU energy markets and improved independent regulation. 

Last year, the Romanian energy supply and distribution company Electrica raised over USD600 million in an IPO on the Bucharest and London stock exchanges reducing the state’s ownership stake to 49 percent. Government is also moving to restructure and modernized other state-owned companies in the sector.  Romania has liberalized the non-residential gas market.

These are tremendous achievements that are not often talked about. Such efforts need to be sustained and continued. The sector has huge potential if government can stay the course on current reforms, continuing to privatize and list the relevant companies on the Bucharest stock exchange.

The corporate governance framework for SOEs (Ordinance 109/2011) is being amended to support professional management in the SOE sector. With professional managers running these SOEs market distortions will be reduced, fiscal discipline will be improved as will their contribution to the economy.

In the transport sector there is more work to be done.  Romania needs better motorways.  Out of almost 2,500 kilometers of Romania’s core TEN-T network, only 700 are up to standard. Completing the core TEN-T network will require more than €16 billion, while the EU Large Infrastructure Programme will allocate less than a quarter of this amount in the 2014–20 programming cycle.

And I do hope that we will be able to spend all of this amount having learned the lessons from the current programming cycle, where absorption of EU funds has been less than satisfactory.

Furthermore, additional investments are needed to build planned motorways and rehabilitate the existing network. In the past 20 years, only 5,000 kilometers of road have been rehabilitated, and it is estimated that around 40 percent of the network is still in poor condition.

Last year I traveled to Constanta along a new highway and arrived in less than 2 hours on a smooth safe road, so I know that building, upgrading and rehabilitating new roads is well within national capabilities.  To encourage foreign investors and support domestic exporters we need better road links to our neighboring countries.  And this is a priority area that deserves government’s ongoing attention. 

Romania’s railways are also in poor shape. In the 1990s they hosted 2/3rd of all traffic, but this has now decreased to just 1/3rd. The sector is heavily subsidized due to inefficient operations and an oversized network as traffic volumes decrease.  Sector governance is also problematic, including low employee productivity and the prevalence of companies operating at a loss, resulting in high arrears.

Rail companies are among the top ten generators of arrears among public entities.  This is an area that requires tough government decisions, restructuring unviable operations and introducing private sector participation where possible.

Good governance

Although this is the last of the three areas that I will discuss today, it is perhaps the most important. International investors flock to countries with strong governance and respect for the rule of law. Good governance includes maintaining a level-playing field for all investors, strong reliable institutions, especially the judiciary. The World Bank tracks the Worldwide Governance Indicators. They include things like political stability, regulatory quality, rule of law and control of corruption.  In all the areas we track Romania has made significant improvements in the last decade.

Nevertheless there is still more we can do especially in two areas:  (i) government effectiveness and (ii) anti-corruption.

 

  1. Government effectiveness remains at around the 52nd percentile of countries worldwide.  In this area, the Bank is supporting the government of Romania to strengthen the “center of government.”

    A delivery unit within the Prime-Minister’s office, focused on key national priorities, such as public procurement, tax administration, energy, and youth employment, has been successfully established. Future initiatives include establishing a strategy unit to coordinate priority policy making by linking sectoral strategies to national and EU-wide priorities. The Bank is also supporting efforts to link strategy formulation to budgeting and putting in place a system for coherent regulatory impact assessments.  These efforts will need to be supported by a strong monitoring and evaluation framework to track progress and ensure mid-course corrections where necessary.

  2.  Anti-corruption:  Romania has once again made significant progress in this challenging area.  It seems that hardly a week goes by without a high ranking politician or business person being arrested or indicted for corruption, bribery or influence peddling.

    Now we need to take the next step, to bring together all parts of the law and order and justice system in Romania; the ministry of justice, the ministry of finance, the DNA, ANAF, the court system, the police force and the prosecutors’ office to improve the system of confiscation and recovery of stolen assets.  So many parts of government are involved that no one has so far stepped up to lead this challenge.  But it is time that the people’s assets are returned and Romanians see justice being handed out to the corrupt elites that continue to give this wonderful country a bad name.

In short then, Romania is an attractive destination for investors both domestic and international.  Government is making steady progress on improving the business environment, maintaining fiscal discipline and making progress on important structural reforms that are needed to stimulate the economy and the World Bank is happy to continue our partnership with government in many of these areas to ensure that Romania continues to be an even more attractive investment destination. 

Thank you for your attention.