This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 BUCHAREST 000986 
 
SIPDIS 
 
DEPT FOR EUR/NCE - WSILKWORTH, EB/MTA/MST 
DEPT PASS TO USTR 
USTR FOR GBLUE 
TREASURY FOR DO/GCHRISTOPOLUS 
USAID FOR E&E 
 
E.O. 12958: N/A 
TAGS: ECON EIND EFIN ENRG EINV RO
SUBJECT: ROMANIA: PRIVATIZATIONS PROGRESSES, BUT MORE WORK 
AHEAD 
 
REF: A) BUCHAREST 02153, B) BUCHAREST 03902, C) BUCHAREST 
 
02058 
 
SUMMARY 
¶1.  Romania made substantial progress in privatizing state- 
owned assets in 2004, a year which could be dubbed "the year 
of energy privatizations."  Major priorities for 2005 
include completion of energy privatizations, privatization 
of the Romanian Commercial Bank and National Savings House, 
and attaching tax arrears run up by state-owned and favored 
private companies.  END SUMMARY 
 
2004 - Decisive Year for Energy Sector Privatizations 
--------------------------------------------- -------- 
¶2. The completion of privatizations is necessary for Romania 
to become a fully functioning market economy.    The sale of 
a 25% stake in Romania's largest commercial bank to the 
European Bank for Reconstruction and Development (EBRD) and 
International Finance Corporation (IFC) for $222 million as 
well as privatizations of the giant oil company Petrom and 
four major energy distributors contributed significantly to 
Romania's $4.4 billion FDI inflow in 2004. 
 
¶3.  In transactions totaling an estimated $3 billion, five 
privatizations in the energy sector resulted in European 
investors taking control of key companies forming the 
backbone of the Romanian energy sector.  Austrian group OMV 
paid $2 billion for the former state-owned petroleum 
corporation Petrom.  Before taking over Petrom, OMV was a 
secondary player in the oil market.  After acquiring Petrom, 
however, OMV's market share rose from 6% to 30% in Romania 
and to an estimated 18% in the Danube region.  The Italian 
group ENEL paid $147 million for the electric distribution 
companies Electrica Banat and Electrica Dobrogea.  The GOR 
signed a privatization contract for the sale of 30% of 
Distrigaz Nord on October 2004 with the German firm Ruhrgas 
for $165 million, with a further investment of $236 million 
forthcoming to ensure Ruhrgas's equity share reaches 51%. 
In the same month, Gaz de France signed an agreement to take 
over Distrigaz Sud in a transaction worth approximately $410 
million.  These two privatizations will be finalized in 
¶2005. 
 
Which Privatization Authority? 
------------------------------ 
¶4.  While the Authority for State Asset Resolution (AVAS), 
which was formed last March through the merger of the 
Authority for Banking Asset Resolution and the Authority for 
Privatization and Management of State Shareholding (APAPS) 
is generally referred to as the "privatization authority," 
it is not the only entity involved in the privatization of 
state assets.  Equally important is the Office for State 
Shareholding and Privatization in Industry (OPSPI) under the 
Ministry of Economy and Commerce, which controls 
privatizations in the energy production and mining sectors. 
Other ministries also control state assets.  The most 
notable is the Ministry of Public Finances, which is in 
charge of the sale of The National Savings Bank (CEC). 
Under Romanian practice, privatization decision-making and 
negotiations are conducted with the privatization entity 
which owns the asset.  Moreover, major privatizations such 
as those in the energy or banking sector, or divestiture of 
socially sensitive industrial plants must be approved by the 
cabinet and the Parliament. 
 
2005 Privatization Plan 
----------------------- 
¶5. In the energy sector, the focus will be on: 
-- Electric Power Distribution.  Complete the privatization 
of Electrica Moldova with E.ON (Germany) and of Electrica 
Oltenia with CEZ (Czech Republic); proceed with the 
privatization of Electrica Muntenia Sud, which supplies 
electricity for the area including Bucharest 
(PriceWaterhouseCoopers is the privatization consultant); 
and initiate privatization of three remaining branches 
(Electrica Transylvania Nord, Electrica Transilvania Sud, 
and Electrica Muntenia Nord). 
-- Electric Power Generation.  The OPSPI is preparing for 
sale three coal and gas-based integrated energy complexes 
(Turceni, Rovinari and Craiova).  Deloitte Central Europe 
has been selected as the privatization consultant. 
 
¶6. In the banking sector, AVAS's priority is the 
privatization of the Romanian Commercial Bank (BCR) one of 
the commitments undertaken in the GOR's agreement with the 
IMF.  Highly respected names in international finance, 
including the German group HVB, Deutsche Bank, Unicredito 
and Erste Bank have indicated an interest in BCR, the 
largest Romanian bank in terms of assets.  The Ministry of 
Public Finance plans to initiate the privatization of the 
National Savings Bank (CEC) this year.  CEC is the largest 
credit institution in Romania in terms of the number of 
branches. 
 
¶7.  In the industrial sector, AVAS sold 62 medium and large 
companies in which the state was a majority shareholder in 
¶2004.  In addition to these transactions, AVAS privatized 
minority stakes in 85 companies, resulting in revenues to 
the state of approximately $381.2 million.  AVAS still holds 
stock in some 1,000 companies, although half of these are 
non-privatizable, most of them subject to liquidation.  Of 
the remaining 500 companies, AVAS has majority stakes in 
only approximately 100.  One of these is Electroputere, an 
electric motor manufacturer located in Craiova.  After 
repeated failures to privatize the company as an integrated 
whole, AVAS plans to re-launch the privatization process, 
splitting up the company into units to make it more 
attractive to investors.  Success will depend upon how the 
units are packaged, as only the locomotive production unit 
and the rotating electric machine unit have attracted 
investor interest. 
 
Mind the Devil in the Details 
----------------------------- 
¶8. Investors are cautioned to exercise due diligence in 
privatizations, to undertake their own thorough independent 
investigation, and not to rely primarily on the information 
and representations found in privatization documents. 
Having a good local counsel with solid knowledge of the 
intricate Romanian privatization process and state aid 
legislation is crucial to success.  Buyers of state-owned 
companies must negotiate requirements and restrictions 
concerning the company's purpose, scope of activities, 
turnover, and social protections in the form of limited 
layoffs or funding for retraining programs.  Privatizing 
agencies continue the practice of rolling into privatization 
agreements provisions of previously negotiated collective 
labor agreements, which are labor-protective and restrict 
layoffs. 
 
Comment 
------- 
¶9. Prime Minister Tariceanu has implied AVAS and OPSPI will 
merge into one agency in summer 2005.  Post will continue to 
work with the GOR privatization agencies, advocating for 
transparency in the privatization process and fair treatment 
of investors.  End Comment. 
 
¶10.  AmEmbassy Bucharest's reporting telegrams are available 
on the Bucharest SIPRNet website: 
www.state.sgove.gov/p/eur/Bucharest/. 
 
Delare