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Romania - Second Private Sector Adiustment Loan No. 4675-RO
Release o f the Second Tranche - Full Compliance
I. BACKGROUND
The Second Private Sector Adjustment Loan (PSAL 11) was designed
to build on and complement the financial and enterprise sector
reforms already undertaken by the Government, supported by the
World Bank and the first Private Sector Adjustment Loan (PSAL I).
The loan pursued five key development objectives:
the exit o f public banks from government ownership through
privatization and other options acceptable to the Bank, accompanied
by measures to strengthen the overall environment for private
sector banking and financial sector modernization;
divestiture o f the largest public sector industrial and
commercial loss-makers from the government portfolio. This
divestiture was accompanied by other measures to complete
privatization o f pools o f enterprises and jo int ventures, to
ensure the privatization procedures are transparent, fair and
properly scrutinized so that the residual effects o f privatization
do not serve as an obstacle to future privatization
transactions;
reform o f the energy sector to introduce modem management
principles and sound regulation to ensure that utility companies
(e.g., electricity and gas) are not used as sources o f
cross-subsidization and soft credit (through arrears) that
forestalls needed restructuring o f enterprises. This reforni wil l
be accompanied by the adoption o f the necessary legal and
regulatory framework for private sector participation, increasing
prices towards cost recovery levels, ensuring consistency and
transparency in tariff structures, and increasing collections for
sustainable operations, needed reinvestment, and higher quality
services delivery;
strengthening o f the business environment by the removal o f
the administrative barriers that impede investment and trade, the
removal o f the most special hnds for fiscal consolidation and
transparency, and a strengthening o f accounting, governance and
bankruptcy standards and practices for a more competitive private
sector-oriented economy; and
provision o f meaningfid social protection for those displaced
by restructuring and privatization and strengthening the
effectiveness o f the social safety net in the long term.
11. RECENT ECONOMIC DEVELOPMENTS
Romania i s pursuing a broad reform agenda, including economic,
institutional and governance reforms, anchored in the process o f
EU accession. As a result, growth has been re-established with GDP
growth o f 4.9 percent in 2003, led primarily by investment and
exports. Inflation has also declined from 40 percent in 2000 and
22.5 percent in 2002 to 15.3 percent (CPI, period average) in 2003.
Good macroeconomic performance contributed to reach a record level
o f official reserves o f over US$7 bil l ion in 2003 - an
impressive increase o f US$3.5 bil l ion since 2000. However, there
has been a marked deterioration o f the current account deficit to
5.9 percent o f GDP in 2003 from 3.4 percent in 2003 fuelled in
part by expansion o f bank credit to
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Administrator29363
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the private sector, which grew by about 45 percent in real terms
(largely consumer credit and mortgages) and by the effects o f
earlier increases in wages.
FDI increased slightly in 2003, hovering around the last three
years' average and financing 46 percent o f the current account
gap. The fiscal deficit i s at a relatively manageable level o f
2.3 percent o f GDP, down from 4.0 percent in 2000. Public sector
debt at the end o f 2003 was 26.2 percent o f GDP.
Quasi fiscal deficits remain high however, stemming from arrears
and non-payment in the SOE sector. Problems are most persistent in
the energy sector, particularly district heating. Quasi fiscal
deficits and implicit subsidies are also prevalent in the mining
and railway sectors where non-payment to pensions and social funds
are common.
The banking sector i s on firmer footing and direct lending b y
the central bank has been eliminated. In contrast to the past,
privatization seems to be picking up momentum as well as
restructuring o f the railway and mining sectors. Progress in
stabilization and growth contributed to a decline in poverty to 29
percent in 2002.
IMF Program: The IMF successfully completed i t s fifth Stand-By
Agreement (SBA) with Romania in October last year and i s preparing
a Precautionary SBA which i s likely to be o f 24 months duration.
Two missions have been conducted for this new SBA. Agreement was
not reached on the program at that time. However, during the Spring
meetings an understanding was reached on a fiscal deficit o f 2.1
percent o f GDP (or less if revenue outturn i s larger than
currently projected). This was the only outstanding issue, and
subject to management approval o f the deficit target, the SBA i s
tentatively planned to go to Board June 30,2004. Reflecting i ts
concern about the size o f quasi-fiscal deficits, the Fund i s
insisting that all investment spending, including the large planned
road projects be kept on budget regardless o f the financing
mechanism.
The new SBA i s likely to continue the themes o f the previous
program with an emphasis on maintaining macro stability, reducing
inflation, limiting increases in the public sector wage bill and
the minimum wage, and pursuing privatizations. In addition, i t
will likely call for initiation o f bankruptcy proceedings against
non-payers o f taxes, layoffs in the mining sector, and the closure
o f inefficient district heating operations.
A significant portion o f the structural agenda for the Fund has
been worked out in close consultation with the Bank and a growing
portion o f the correspondence with the authorities on specific
issues has been issued jointly b y the Bank and the Fund, (for
example, related to privatization o f CEC Savings Bank, reform o f
the labor code, and development o f the mining sector reform
strategy). In a new development for the Fund's program, governance
issues are being directly addressed in the Letter o f Intent. This
has been done with consultation with the Bank and echoes closely
the content o f the PAL program. Managed well, this intensive
collaboration and reinforcing conditionality provides greater
impetus for the success o f both Bank and Fund programs and for the
overall reform process.
Overall, the Bank considers the macroeconomic situation and
policy framework in Romania satisfactory.
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III. PROGRESS AGAINST TRANCHE RELEASE CRITERIA A Bank
supervision mission has confirmed that the Government has made
satisfactory progress in carrying out the program outlined in the
Letter o f Development Policy and all the conditions for second
tranche release have been met overall in areas related to the
financial sector, energy sector, privatization and social
protection. Following i s a summary o f the Government’s actions
related to the conditions o f the Loan.
Financial Sector
1. The Borrower has offered for sale Banca Comerciala Romana in
accordance with applicable management, ownership, legal and
regulatory requirements of the National Bank of Romania, and has
taken all necessary steps for completing the sale of the said
bank.
Status: Condition has been met.
According to the revised privatization strategy, the selling to
EBRD and IFC o f a stake o f 25 percent plus two shares took place.
The transactions with the two international financial institutions
was completed on October 3,2003. The transactions were debated and
approved by the Boards o f the two international financial
institutions on October 28 and 30,2003. The signing ceremony o f
the two contracts took place on November 4,2003. On February 27 and
March 1,2004, the Shareholders’ Agreement and the contract o f
selling option were signed. The General Shareholders’ Assembly held
April 23,2004 approved the new structure o f the shareholders and
the changes in the by-law o f BCR regarding the separation between
the administrative and executive functions in the BCR’s management.
The second stage o f selling 8 percent o f shares to the staff was
also finalized.
2. The Borrower has submitted to the Bank evidence on
satisfactory progress in implementation of the restructuring plan
of the Savings Bank, as such plan has been agreed with the
Bank.
Status: Condition has been met.
On August 26, 2003, the team o f experts sent by Interprojects
GmbH started their activity to support CEC (the Savings Bank) to
implement i t s restructuring strategy, according to the concluded
twinning management contract. The technical assistance i s aimed at
supporting the management o f five main departments within CEC
(treasury, accounting, IT, network, cards) in the restructuring
process. The contract completion i s scheduled for June 2004.
Moreover, the Government decided to proceed with privatization
earlier than initially intended.
On April 7,2004, the Cabinet approved an Emergency Governmental
Ordinance including prior actions to launch the privatization o f
CEC. The privatization commission has been setup and the
announcement for hiring the privatization advisor was posted on May
17,2004 in Financial Times and other publications.
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Privatization
3. The Borrower has offered for sale o r has taken irreversible
measures, agreed upon with the Bank, for the disposition and sale o
f the assets o f ALRO and ALPROM.
Status: Condition has been met.
ALRO has been privatized (the contract was signed on April 30,
2002 with a consortium that includes Conef, Marco Acquisition and
Marco International). ALPROM also has been privatized (the contract
was signed on December 19,2002 with the same consortium as
above).
4. The Borrower has offered for sale, in privatization pools
acceptable to the Bank, eight o f the ten companies selected upon
agreement with the Bank; and has worked out, f rom work-out pools
acceptable to the Bank, eight o f the ten companies selected upon
agreement with the Bank, in accordance with the approved
restructuring plans.
Status: Condition has been met.
All companies in pools were offered for sale/work-out. Out o f
the 20 companies in pools, nine companies have been privatized,
three companies are under a voluntary liquidation process, two
companies are under negotiations, and for six companies offers are
expected to be received.
Energy Sector
5. The Borrower has offered Distrigaz Sud and Distrigaz N o r d
for sale through an open international competitive tender fo r
strategic buyers and announced the sale and the sale process to the
public.
Status: Condition has been met.
The contract with the Privatization Advisor Credit Suisse First
Boston was signed on March 4, 2003. The privatization strategy was
completed and submitted to the Government for i t s approval on
October 24, 2003. I t was approved and published in the Official
Gazette on November 14, 2003. On December 3, 2003 the Bank issued
no objection to the draft announcement and on December 5, 2003 the
announcement was published in Financial Times, Adevaml, Ziaml
financiar, Romania Libera, Bursa and Nine 0’ Clock.
By January 23,2004 the following companies submitted preliminary
and unbinding offers.
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Distrigaz Nord: Wintershall - Germany, Gazprom - Russia, Gaz de
France - France, E.ON/ Ruhrgas-Germany and Enel - Italy; Distrigaz
Sud: Gazprom - Russia, Gaz de France - France, E.ON/
Ruhrgas-Germany and Enel - Italy.
All investors were qualified for the next stage. The final
offers are expected to be submitted by July 16,2004.
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6. The Borrower has offered fo r sale at least fifty-one percent
(51 percent) o f the total capital o f Petrom, and has made
progress with the sale process, in accordance with a privatization
plan agreed upon between the Borrower and the Bank.
Status: Condition has been met.
The privatization advisor (consortium including Credit Suisse
First Boston and ING Barings) finalized the privatization strategy,
which has been approved by the Governmental Decision no.924/ 2003.
The sale announcement was published on August 26, 2003. B y
September 19, 2003, 15 expressions o f interest were received, out
o f which only 11 were short listed and only eight submitted
preliminary and unbinding offers. The privatization committee
reviewed these offers together with the privatization advisor. The
negotiations on the preliminary and unbinding offers were completed
by end-February 2004.
The final offers were received on April 15,2004 from
OMV-Austria, MOL-Hungary, Occidental Petroleum-USA. The winning
bidder was announced on May 21, 2004 and the Government started
concluding negotiations with OMV. The contract i s expected to be
signed by end-July 2004.
7. The Borrower has: (a) approved a privatization strategy fo r
the two electricity distribution companies, satisfactory to the
Bank, and offered fo r sale the controlling shares in said
companies; and (b) adopted a privatization strategy for the
electricity generation sector, acceptable to the B a n k
Status: Condition has been met.
(a) The pre-qualification o f the potential investors expressing
interest was completed at the end o f March 2003. Four companies
were prequalified and invited to bid. By the beginning o f July
2003, only ENEL-Italy announced their intention to submit the
preliminary and unbinding offers for both companies which were
received and have been negotiated. The final and binding offers
were received in March 2004. The contract i s expected to be signed
by end-June 2004. Two other distribution companies have been
offered for sale. The privatization o f these two and the remaining
four will be supported under the PAL program.
(b) In 2003 the Government approved a Road Map for the Energy
Sector. In addition to the restructuring o f Termoelectrica, th is
addresses the privatization o f two o f i t s four subsidiaries.
The process was launched and i s supported by the PAL program.
A similar restructuring and partial privatization will be
carried out for Hidroelectrica (the main hydropower generator). The
timing o f the privatization will be linked to the development o f
the electricity market, for which the Bank i s providing support
under the ongoing Electricity Market Project.
8. The Borrower had submitted satisfactory evidence to the Bank
that the cumulative year-to-date rate o f collection for payments
to Distrigaz Sud and Distrigaz N o r d has reached ninety-seven and
a half percent (97.5 percent) o f the total billings, and that
the
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accounts payable to the gas producers and gas transmission
companies, resulting f r o m gas delivery, wi l l be pa id within
sixty (60) days, commencing on January 1,2002.
Status: Condition has been met.
Collections are subject to monthly monitoring. By end-April
2004, the cumulative year-to-date rate (January - April 2004) o f
collection for payments to Distrigaz Sud and Distrigaz Nord was
about 105 percent o f the total billings. To eliminate seasonal
variations, collection performance i s also assessed on a 12-month
rolling basis. The collection rate on a 12-month rolling basis (May
2003 - April 2004) was about 100 percent o f 12-month billings. The
company-by-company breakdown o f year-to-date (and 12-month)
collection rates as o f end-April 2004 was as follows:
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Distrigaz Sud - 104.8 percent (12-month rate 101.9 percent)
Distrigaz Nord - 105.4 percent (12-month rate 98.1 percent)
The accounts payable to the gas producers and gas transmission
companies, resulting from gas delivery, was paid within 55 days o f
sales, commencing on January 1,2002.
9. The Borrower has submitted satisfactory evidence to the Bank
that: (a) the cumulative monthly rate o f collection for payments
to Electrica has reached at least ninety-seven and a ha l f percent
(97.5 percent) o f the total billings for the per iod commencing f
r o m January 1, 2002; (b) the monthly rate o f collection fo r
payments to Termoelectrica has reached one hundred percent (100
percent) o f the total electricity billings for each month
commencing f rom October 1,2001; and (c) the cumulative monthly ra
te o f collection for payments to Termoelectrica fo r district
heating supplies has reached a t least ninety-seven and a ha l f
percent (97.5 percent) o f the total billings for the period
commencing f r o m January 1, 2002.
la) Status: Condition has been met.
Jb) Status: Condition has been substantially met.
lc) Status: Condition has been substantially met.
Collections are subject to monthly monitoring. The primary
performance measure i s a 12-month rolling average to smoothen the
impact o f seasonal variations. The achievements at end-April 2004
were:
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Electrica - 99.0 percent (99.6 percent in April 2004)
Termoelectrica for electricity - 97.0 percent (144.6 percent in
April 2004) Termoelectrica for district heat - 95.3 percent (185.9
percent in April 2004)
(a) Electrica collections - collections f rom electricity
consumers. In 2003 Electrica achieved 98.0 percent collection
level, meeting the agreed 97.5 percent target. From May 2003 until
April 2004, the collection rate was slightly higher at 99.0
percent. While these are highly satisfactory collection rates,
challenges remain in collections from some state-owned enterprises
(SOEs) and
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government agencies. The Government has acknowledged it i s
ultimately responsible for these non-payments, and in May 2004
approved an Ordinance under which it undertakes to make payments
from the budget in cases where uti l i t ies are obliged to
continue to supply defaulting state-owned enterprises and other
government agencies. I t i s expected that th is explicit
commitment will help ensure that non-payment in the electricity
sector remains under control. Bill collection from non-government
consumers i s satisfactory and will remain the responsibility o f
the utilities without budgetary back-stopping.
During the gas and electricity distribution privatization
processes, the Government tried to pass on SOE and other govemment
agency arrears to the new private owner. Prospective investors,
however, regard the arrears to be uncollectible, and agreements
were negotiated under which such arrears are replaced by long-term
govemment bonds. These arrangements reflect the Government’s
acknowledgement that i t i s responsible for these arrears. The
same approach i s expected to be followed in the future electricity
discom privatizations - including the privatization o f the other
six discoms included in the P A L program.
(b) Termoelectrica’s collections - for bulk electricity supply.
The agreed target o f 100 percent collection has proven to be
optimistic. Termoelectrica’s collections at 97 percent closely
reflect those of Electrica’s. Termoelectrica collected 93.1 percent
o f i t s bill from Electrica and another 4 percent through a
system o f offsets. Instead o f the Government paying Electrica for
governmental electricity consumption, Electrica paying
Termoelectrica, and Termoelectrica paying taxes, the Government and
Termoelectrica offset these liabilities (i.e., govemment payments
for electricity consumption and Termoelectrica’s tax payments to
the Govemment were offset). In view o f Electrica’s collection
accomplishments and Termoelectrica’ s achievement o f collections
at 97 percent, the condition i s considered substantially met.
(c) Termoelectrica’s collections - for bulk heat supply. The
agreed target o f 97.5 percent collections has proven to be
optimistic given the poor financial and operational condition o f
most o f Termoelectrica’s bulk heat clients - district heating
utilities selling heat to final consumers, mostly households.
Termoelectrica has however been able to improve i t s collections
substantially to 95.3 percent through a combination o f measures:
(i) intensified pressure on the clients, and (ii) by transferring a
number o f i t s smaller district heating facilities to the local
authorities which are then also directly in charge o f their heat
production, in addition i t s distribution.
After having restructured electricity and gas sectors, the
Government i s now launching a program to restructure the district
heating sector. Romania has an extensive district heating system,
which even after some consolidation covers 179 cities. Many o f the
systems are under great operational and financial stress, but the
continued provision o f heating i s an essential service. While
tariffs have been adjusted, they have not kept up with increasing
costs. The Government at both the central and local levels has
responded by increasing subsidies, both to heat producers and to
heat consumers. As a result, the annual subsidy burden now exceeds
US$350 mil l ion and has become a major fiscal issue.
The Government has prepared with Bank and EU support a strategy
for the restructuring o f the district heating sector that aims to
address the sector’s most chronic operational and financial issues.
The strategy covers pricing, subsidies, and restructuring and
rehabilitation o f heat production, heat distribution and heat
consumption, including heat metering and heat control measures.
Diff icult decisions including politically sensitive pricing and
subsidy issues wil l then
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have to be addressed during the implementation o f the strategy.
Government approval o f the strategy was a condition o f the first
installment o f the P A L program. The proposed PAL2 (FY06) and
PAL3 (FY07) will support the implementation o f the strategy. I t i
s also proposed that, in parallel with the P A L program, the Bank
provide investment financing for the implementation o f key actions
o f the strategy.
The restructuring o f the district heating sector wil l be a
major challenge in Romania. Thus, the satisfactory and sustainable
resolution o f Tennoelectrica’s district heat collections issues
will not be possible until the program has made considerable
progress. In view o f the Government’s commitment to such
restructuring and i t s interim actions which have brought
collections to 95.3 percent (a highly commendable level given the
condition o f the clients), the condition i s considered
substantially met.
Social Protection System
10. The Borrower has (a) submitted satisfactory evidence that
sufficient portion within the Borrower’s budget i s allocated to
finance the Minimum Guaranteed Income Program: and (b) enacted a L
a w on the National Social Assistance System and enabling
legislation, satisfactory to the B a n k
Status: Condition has been met.
For each o f the last three years, the budget allocation for the
MIG program amounted to 0.4 percent o f the GDP, as agreed with the
Bank and the IMF. Through the Law approving the 2003 budget, it
provided Lei 6,867.7 billion, out o f which Lei 5,495.4 bil l ion
was from the state budget and Lei 1,372.3 bil l ion from the local
budgets.
In addition, the Parliament has enacted the Law 705/2001 on the
National Social Assistance System and Ordinance 68/2003 on Social
Assistance Services, satisfactory to the Bank.
11. The Borrower has enacted legislation, acceptable to the
Bank, to strengthen the financial viability and to rationalize the
structure and financing mechanism for unemployment benefits.
Status: Condition has been met.
The Law 76/2002 regarding the unemployment insurance and
employment incentives has been enacted and promotes a system o f
measures stimulating employment and ensuring the financial
viability o f the unemployment insurance budget. In this way, the
Government Decision 377/2002 approved the procedures regarding the
access to the employment incentives, financing means and
instructions for their implementation. Through the Law 76/2002 the
unique level o f the unemployment indemnity was established to 75
percent o f the country gross minimum wage in the case o f
unemployed persons, and respectively to 50 percent in the case o f
graduates not being able to be employed. Thus, the discrepancies in
the system o f setting up the unemployment indemnity were
eliminated and the indemnities were correlated with the level o f
the minimum wage. As a result, the Unemployment Fund has rzl~l a
budget surplus for the last three years.
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12. The Borrower has: (a) enhanced and consolidated the public
pension pillar reform, through amending necessary legislation in
manner satisfactory to the Bank; and (b) submitted to the
Parliament a draft legislation on the Mandatory Private Pension
Pillar, satisfactory to the Bank.
Status: Condition has been met.
[a) Status: Condition has been met.
Through the Law 333/2002 the Parliament approved some amendments
to the Law 19/2002 on the continuation o f the reform and
consolidation o f the public pensions pillar, setting up
transparent and financially viable indexation rules.
Jb) Status: Condition has been met.
The draft Law on the Mandatory Second Pillar was drafted and
posted on the website on November 14, 2003 for public debates. I t
was submitted to the Government for a f i rs t lecture on May 6,
2004 and was discussed on May 20, 2004. The draft Law was also
discussed on June 3, 2004 at a Cabinet meeting, and approved in
principle. I t i s expected to be published and submitted to the
Parliament in June 2004.
IV. CONCLUSIONS In view o f the overall performance and progress
with the implementation o f the program supported by the Loan, and
in compliance with the specific conditions o f release as described
in Section 2.02 (d) and Schedule 3 of the Loan Agreement, the Bank
has informed the Borrower o f the availability o f the second
tranche in the equivalent o f EUR 169,900,000.
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