Romania Gears up for FDI Inflow

The Historic Gateway to
Europe's Trade
Routes

Since early 1990, Romania has had a free market economy despite continuing government presence in the industrial sector. Successive governments have taken steps to liberalize and privatize the economy. Romania sits on the crossroads of many historic trade routes that allow access to another 200 million consumers within a 1,000-km radius of Bucharest.
The main channels of these routes are the Danube river and the port of Constanta, one of the largest ports on the Black Sea, which is linked to the North Sea by a new navigation route through the Rhine-Main-Danube Canal. Romania has a large skilled workforce experienced in areas such as engineering and manufacturing and cheaper labour costs compared to many other East European countries.
Many of the country 's big cities boast of a large industrial infrastructure, which along with Romania 's considerable natural resources offer substantial potential for exploitation and development.
Like many countries in Eastern Europe and the former Soviet Union, Romania had been struggling to turn its command economy into a market economy. Successive governments have found it difficult to turn the economy around because of a lack of hard currency and the inability to secure external funds due to the country's high budget deficits, much of it accrued from financing loss-making state industries. Old economic and financial structures have been slow to change just like the bureaucratic culture inherent in many old institutions. In the last five years, the overall business climate has improved and the economic indicators look healthier.
Leading industries.
Manufacturing and engineering are Romania 's backbone industries. The country also possesses substantial energy resources and agricultural land. Most sectors of the economy remain under-exploited and offer great potential, particularly manufacturing, agriculture and tourism. The technology sector continues to play an increasingly important role in the economy due to the high level of skill among its workers and rather low wage costs. The real estate sector also offers significant growth opportunities.
Sectors that attracted foreign investment in recent years include oil and natural gas, automotives, metallurgy, banking and finance, food processing, heavy engineering, telecommunications, construction and consumer goods manufacturing.
Investors have expressed interest in newly-privatised industries as well as in greenfield projects.
State-Owned Units & Privatization
Romania 's government has reaffirmed its commitment to privatize the remaining state-owned companies, particularly those in energy, heavy industry, pharmaceuticals and utilities.
The relevant privatisation strategies are formulated, approved and executed every year by the concerned ministries in collaboration with the state privatization authority, the Authority for the Disposal of State Assets (AVAS). Most of the companies up for privatisation are listed on the two major capital markets Bucharest Stock Exchange and RASDAQ. Privatization is often carried out on these markets through electronic auction, public equity offer and/or firm commitment underwriting. Moreover, in the case of big state-run companies undergoing privatization, direct negotiations are a common practice.
Foreign direct investments increased by 75% last year to EUR 9.1 billion, including EUR 2.2 billion from the privatization of the Romanian Commercial Bank (BCR), according to the National Bank of Romania. In 2005 Romania attracted EUR 5.2 billion in FDI. For 2007,FDI is projected to be around EUR 6.5 to 7 billion. Last year, foreign investors showed a special appetite for the automotives sector, electronics and household appliances, construction, pharmaceuticals and bio-diesel production.
Automotives was appealing to investors because of its long tradition in Romania. Production of consumer electronics and household appliances benefits from the ample availability of skilled workforce. The construction sector flourished due to the continuing boom in the real estate market and bio-diesel production benefited from large areas put to fuel-yielding crops.
The Information Technology and Communications (IT&C) sector has also attracted foreign investment due to the availability of highly qualified IT specialists. AVAS has announced that it would put up 62 companies for privatization in 2007, hoping to collect RON 1 billion this year, 60% of it coming from privatisations. The procedure to release shares are already under way in the case of nine of these 62 companies, while share packages of another 26 companies should be put up for sale by the end of the third quarter. Moreover, AVAS is expecting to put up for privatization another 27 companies which were taken over from the National Office of State Shareholding and Privatisation in Industry (OPSPI) portfolio. The most important companies from the OPSPI portfolio are the power plants in Turceni, Rovinari and Craiova and power distributors Electrica Muntenia Nord, Electrica Muntenia Sud, Electrica Transilvania Nord and Electrica Transilvania Sud. Regional and international trade agreements and associations Romania has been a signatory to the General Agreement for Tariffs and Trade, the World Trade Organisation, the European Free Trade Agreement and the Central European Free Trade Agreement. Besides, Romania has entered into over 80 agreements for the avoidance of double taxation and the prevention of tax evasion on income and capital. Romania is also a member of the International Monetary Fund, the World Bank (i.e. the International Bank for Reconstruction and Development and the International Finance Corporation), and the European Bank for Reconstruction and Development. As a EU member state, Romania adheres to the bloc 's Common Commercial Policy and accepts the European Commission as a collective negotiating body for important international trade-related matters, particularly negotiations within the WTO. It also conforms to the anti-dumping and anti-subsidy measures adopted by the Community, and does not adopt any trade defence measures or instruments against other EU member states.
Major Trading Partners
On 1 January 2007, Romania along with Bulgaria became EU member states, taking the number of countries in the bloc The accession process involved undertaking a vast array including harmonizing Romania 's legislation with the entire body of EU law.
Toward Romania 's integration into the EU, a wide spectrum of changes has been put in place throughout 2006 and will continue to be announced in the near future. These changes concern the creation of EU Internal Market conditions in Romania. The business areas where these changes have come into play are accounting and financial reporting, audit regulations and the role of auditors, Company Law, corporate governance, customs procedures, employment and social security, reporting for VAT and other indirect taxes, intellectual property rights, competition, consumer protection, etc. Some of these aspects are dealt with in detail in the subsequent chapters.
Doing Business in Romania & Investment Incentives
There are no specific investment approvals required for setting up a business in Romania. Foreign and domestic investors are offered equal opportunities to invest in Romania. In general, incentives are intended to boost economic development of the country, particularly the acceleration of industrialization in underdeveloped zones, as well as the development of small and medium enterprises (SMEs) and micro enterprises.
Romanian laws provide customs duty incentives for direct investment in the equity of a Romanian company exceeding USD 1 million (or the equivalent in Ron or other convertible currencies), which contributes to the development and modernisation of Romania 's infrastructure and creates new employment. No customs duties are imposed on “new goods ” (eg. technology and automation equipment, installations, measuring and control devices, software products, etc.). In order to benefit from this incentive, these assets have to meet two requirements: (i) must have been manufactured a maximum one year before entry into Romania; and (ii)must not have been used before Romanian legislation provides certain financing incentives to SMEs such as state assistance and loans guaranteed by the state. a Romanian legal entity, called the administrator-company. No shareholder company using the facilities and/or infrastructure of the industrial park can hold direct or indirect control over the administrator-company.
Tax Waivers
The following incentives currently apply to the setting up and development of industrial parks: exemption from taxes due on conversion of agricultural land to be used for industrial parks; buildings, constructions and land located inside industrial parks are exempt from local property tax; other incentives which may be granted in compliance with the law by the local administration. An industrial park may be set up through collaboration between central and local administration authorities and research and development institutes and/or other interested partners. An industrial park is administered by the local administration.
Scientific and Technological Parks.
A scientific and technological park may be set up by a partnership agreement between an accredited university and/or another research and development centre and a consortium of companies, associations or individuals, Romanian or foreign. A scientific and technological park needs to be authorised by the Ministry of Education and Research, which is empowered to monitor.
Free Trade Zones
The Free Trade Zones regime is regulated by Law 84/1992, subsequently amended. There are seven free trade zones in Romania, located in Constanta Sud-Agigea (on the Black Sea, including the harbour area), Sulina, Galati, Braila, Giurgiu (along the Danube), Basarabi and Curtici-Arad (on the Romania-Hungary border). The activities carried out within a specific free trade zone should comply with the list of activities provided by legislation and should be licensed by the administrative authority of the zone. Free trade zones are characterized by a specific customs regime: the customs supervision is limited to the boundary of such areas.
Means of transport, products and other goods are admitted into the free trade zones regardless of their country of origin or destination. However, import of goods subject to prohibition under domestic law or under international agreements to which Romania is a party, is forbidden.
Banking
Since 1990, Romania 's banking system has undergone major restructuring. The key elements of this restructuring process are :enforcing legislation to give the NBR the statute of country 's central bank; opening up the banking system to private and foreign banks; and :privatization of state-owned banks.
Stock Exchange
Most of the banks currently operating in Romania are privately owned and belong to foreign shareholders. The main capital market in Romania is the Bucharest Stock Exchange (BSE) which includes the order driven and over-the-counter (RASDAQ) In addition, Financial and Commodities Exchange in Sibiu is Romania 's premier futures and options exchange. The BSE was established in 1995 with Canadian assistance and uses a computerised trading system that connects brokers (through remote terminals), the shareholder registry and the clearing and settlement system.