State Owned Companies: state capture, clientelism and corruption in Romania

Romania is currently the country with the largest number of state-owned companies in Europe. The government is a majority shareholder in approximately 250 companies, and the local authorities own over 1,100 companies. The exaggerated size of the public sector, the very large number of companies and their scattered distribution all across Romania make monitoring difficult and contribute to avoiding public scrutiny, creating opportunities for corruption and clientelism.

Poor management and corruption in state-owned companies means either wasting public money but also distorting competition on some markets, channelling public resources to corrupt or clientelistic networks. The activity of state-owned companies also has an impact on various markets, and poor administration of these companies is a loss in economic terms and it distorts competition.

The report is assessing the situation of SOCs, the development of the legal framework, the enforcement of the law, and provides examples of effects of a governance framework on the good operation of public companies.

This report is based on mixed data collection methodology. The project “State-Owned Companies – Preventing Corruption and State Capture” (SOESC), financed by the European Commission was the first opportunity to collect comparative data about state capture in state-owned companies in four members states of the European Union (EU). Bulgaria, the Czech Republic, Italy and Romania.

This report reflects the results of the research in the Romania case study measuring the extent of corruption and clientelism in state-owned companies. It is obvious that there is no indicator to measure in a single figure the overall level of corruption or clientelism in state-owned companies, but capture mechanism can be monitored

and a framework can be designed to monitor the evolution in time of the level of corruption and clientelism.

The main conclusions of the Report are:

1. There has been a significant improvement of the corporate governance legal framework for state-owned companies. The legislation observes the principles of the Organisation for Economic Cooperation and Development (OECD) and even if it was not fully applied, it resulted in significant improvements, at least for some larger companies, in particular for those under the control of the central administration. At the level of local (utility) companies, both legislation enforcement and performance are lagging behind, when compared to those at central level.

2. The positive effect of the general corporate governance framework was amplified by sectoral reforms, such as: liberalisation and increase in transparency in the energy sector, listing of some companies at the stock exchange, strengthening of certain regulations, tariff reforms for utilities-many under the pressure of the European Commission or t he IMF.

3. There is a clear correlation between the quality of the corporate governance framework and the “performance” of state-owned companies. With the improvement of the corporate governance framework in 2011, state-owned companies performed better. For instance, in 2016 companies in the “Fondul Proprietatea” portfolio distributed to the state budget dividends 12 times higher than before the adoption of G.E.O. 109/2011 – from 117 million lei to 1.4 billion lei. Performance differs from sector to sector, depending on the strictness with which the corporate governance framework was enforced and depending on sectoral reforms. For example, the performance of Hidroelectrica improved significantly with the energy reforms and with the increase in transparency regarding the activity of the company, but the performance remained low in the case of CNADNR, where no corporate governance framework was enforced, and where there were no sectoral reforms.

4. The experts interviewed were of the opinion that the minority shareholder can be a “change agent” or a “pressure factor”, which could determine observance of corporate governance rules within state-owned companies.

5. The success of anti-corruption prosecutors in several high-profile cases played a positive role and discouraged some practices such as unprofitable procurement (Romsilva, CFR) or undervalued sale (Romgaz, Hidroelectrica). The activity of the National Integrity Agency (ANI) discouraged conflicts of interests and incompatibilities. The National Anticorruption Strategy for 2016-2020 included corruption prevention measures in state-owned companies. But there are still vulnerabilities in the administrative control mechanisms (the responsibility of sectoral ministries, the activity of the Court of Accounts etc.).

6. As of 2017, there is a significant risk for most of the achievements to be lost again. Both the corporate governance framework and some sectoral reforms are taking important steps back. Law 111/2016 is not enforced in the majority of state-owned that were analysed. The Ministry of Public Finance has not published the analysis of the situation of state-owned companies for 2016 and it applies no sanctions for non-observance of Law 111/2016, although this law is systematically infringed, for example, by “turning interim management into permanent management” in state-owned companies. There is an attempt to amend Law 111/2016 in the Parliament, to exempt dozens of SOEs from the application of the corporate governance framework.

7. State-owned companies, especially those in the energy sector, were forced to distribute to the state a minimum of 90% of their net profit (and not a minimum of 50%, as provided by the law) and, moreover, they were forced to distribute, as additional dividends, the undistributed profit of the previous years, established as financial reserve. This had a significant impact on their investment capacity and on their long-term development – including on projects essential to energy security or crucial for meeting commitments to the EU (e.g.: interconnections in the energy sector).

8. Two other matters with a potential major effect on the governance of state-owned companies are the uncertainties related to the enforcement of legislation on public procurement (excluding sectoral contracts) and the recent set-up by the Bucharest authorities or by other municipalities of many new state-owned companies, with unclear scope, status and applicable legislation. We could not make a thorough analysis in our report regarding the situation of the 22 municipal companies undergoing incorporation by the Bucharest City Hall. Based on the information we have so far, we would like to raise attention with regard to poor governance and political clientelism. These companies would get budgets of approximately EUR 130 million – more than 10% of the budget of the Capital city – without clear justification of the reason for their set-up, their duties, he criteria of appointment for the management, how they would be monitored, and in disregard of the law on transparent decision-making at the time of their incorporation. We noticed that appointment of managers in all these companies is made based exclusively based on their close relationship with the mayor of Bucharest and without any proof of their training in the scope of business of these new companies. At the same time, the City Hall’s investments practically came to a stop in 2017, awaiting the set-up of these companies which would manage huge amounts of money.

In conclusion, we request abandoning the initiatives to amend Law 111/2016 for the approval of G.E.O. 109/2011, and the immediate and integral enforcement of this Law, both to existing state-owned companies and to new companies undergoing incorporation by local authorities.

Aside from the issue of setting up new state-owned companies, the public agenda should re-focus on the inflated size of the state sector in the Romanian economy. This must be done by defining clear shareholding policies for the state – by defining the notion of Service of general economic interest – but also, by indicating – for each company – the reasons justifying state ownership (through local or central authorities) of shares. This should be specified in the Letter of expectations, which is a provision introduced by Law 111/2016.

Reducing the state sector by privatisation, issuing and selling shares, preserving and applying the principles of corporate governance in all state-owned companies whose existence is justified objectively, decreasing the number of new companies set up by local public authorities – all these measures will lead to an improvement of their economic performance and also, as a side effect, to mitigating corruption.

You can download here the Executive Summary Romania

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