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U.S. CHARGE D’AFFAIRES DUANE BUTCHER’S Remarks at Bucharest Stock Exchange for Three Year Anniversary of Fondul Proprietatea Listing  



Delegate Minister Voinea, Mr. Sobolewski, Mr. Anghel, Mr. Mobius, distinguished guests:


It gives me great pleasure to be here today to celebrate the third anniversary of Fondul Proprietatea’s listing on the Bucharest Stock Exchange. 


Over the last three years, Fondul’s net asset value per share has increased by 22%.  Its shares traded at an all-time high in December 2013.  Fondul is now the largest closed end fund in the world.


Fondul’s investor roadshows have showcased Romania and Romanian companies to international investors, eliciting investor interest in the Romanian capital market and in the Initial Public Offerings (IPOs) of Romanian companies.


Altogether, Fondul Proprietatea has attracted over 1.2 billion euros to Romania in portfolio investment from foreign institutional investors in the three years since it was listed on the BVB. 


I commend Fondul’s managers for this impressive achievement.


Following the successful IPOs of Nuclearelectrica and Romgaz last year, the market capitalization of the Bucharest Stock Exchange was 47% higher in December 2013 than in December 2012. 


Fondul, the Stock Exchange and the successful IPOs and SPOs of state-controlled energy companies have demonstrated that there are attractive investment opportunities in Romania. 


And investors -- international and domestic, institutional and retail – are clearly interested in investing in Romania. 


However, the Romanian capital market continues to lag behind exchanges in other EU member states:  the BVB’s market capitalization is equivalent to only 1.27% of the German Stock Exchange, and 12% of the Warsaw Stock Exchange. 


In 2012, equity market capitalization in Germany was 45% of GDP, 36% in Austria and over 40% in Poland.  In comparison, at the end of 2013, following the very successful Romgaz IPO, equity market capitalization in Romania was still less than 13% of GDP in Romania. 


In order to tap the full potential of its capital market, Romania needs to make more progress on modernizing its financial regulatory structure, which would make Romania more appealing to investors and issuers alike. 


For example, lowering trading fees and reducing bureaucratic requirements for investment would help make the Romanian capital market more attractive to investors.

Access to the Romanian capital market remains a challenge.  According to a recent study, opening an account to begin trading in Romania may take up to 6 months, while in most developed countries in Central and Eastern Europe it takes only a few hours. 


Additionally, the Romanian stock market is one of the most expensive markets in the CEE region, due to administrative fees and fees charged on trading both by the stock exchange itself and by the Financial Regulatory Authority.


On a macroeconomic level, Romania is faring pretty well: it has brought down its current account deficit to an all-time low, it has reduced its budget deficit to the lowest level since EU accession, and inflation is at historic lows. 


However, growth remains well below potential. 


Romania is the seventh largest country in the EU in terms of population, but under-performing in the economic realm, and much of the population has yet to see the effects of economic growth through improved living standards. 


Developing the capital market is important to attract the financing needed for critical investment and working capital in both private and state-owned companies. 


But that is not enough.  The truth is that the stock market alone will not generate long-term growth.  Attracting new investment, both domestic and foreign direct investment, is essential.


However, investors will hesitate to come to Romania and those already on the ground will not expand their investments if the playing field is not level, or the rule of law is not consistently enforced. 


Companies have options about where to invest, and those countries in which decision making is non-transparent and rules are not predictable are at a disadvantage in attracting new investment. 


Investors will think twice about investing here if they have concerns about a government that disregards investors' concerns, or that focuses primarily on budget revenues rather than on promoting sustainable development through investment-friendly laws and regulations. 


Benjamin Franklin, one of the U.S. Founding Fathers, said, “In this world nothing can be said to be certain, except death and taxes.”  Companies operating in Romania have learned that nothing is certain about taxes here either. 


We note companies’ and other stakeholders’ disappointment that the government chose to adopt and publish an emergency ordinance establishing the special constructions tax in the Official Monitor on November 15, one day after the draft ordinance was posted on the website of the Ministry of Finance for consultation.  One day is clearly not enough to allow effective consultation with stakeholders.


The government has not conducted an impact study to evaluate either the effect of the new tax on the companies – many of which are state-owned – that will be subject to the new tax, or the value of the revenue that will be collected.


We encourage the Ministry of Finance to consult with all stakeholders, including all affected companies, before implementing the decision to levy the new property tax on special constructions.  We also encourage the parliament to consult with the affected companies when it reviews the emergency ordinance, to avoid making the tax a penalty on investment.


As the U.S. Assistant Secretary for European Affairs, Ambassador Victoria Nuland pointed out during her recent visit to Bucharest, the rule of law, working against corruption, transparency and predictability are all essential for business, and for security.  As she said, it is what we owe our citizens.


Benjamin Franklin also said “Creditors have better memories than debtors.”  So do investors.  When investors compare Romania to other potential investment destinations, they will look at the track record of the Romanian government in ensuring the stability and predictability that investors need. 


Private investment, domestic and foreign, is a must if Romania is to achieve sustainable development.  It is critical for the government and the parliament to be reliable investment partners.  They must have transparent, across the board, consultations with all stakeholders on every piece of legislation, whether on rule of law, corporate governance, or taxation.  Stakeholders must be given the time necessary to provide meaningful input and need assurances from the government that their input will be considered.


In 2014, Romania plans to launch additional IPOs in the energy sector and to hold a new bid round for oil and gas licenses.  If done properly, these actions would positively impact Romania’s economic growth, and we encourage the government to move forward with these steps. 


However, investor interest will likely be dampened if Romania drafts its energy strategy in a non-transparent manner; if it does not effectively enforce the corporate governance code in all of its state-owned companies; and if it does not hold transparent consultations and conduct an impact assessment for the planned revision of its royalty system.


Good corporate governance, and ensuring that state-owned companies are managed according to good business practices rather than political expediency, benefits the companies because good management translates into higher profits.  It benefits the government, because well-managed, profitable companies are not a drag on the state budget. 


Most importantly, good corporate governance benefits the ultimate shareholders of state-owned companies, the people of Romania.  The people bear the brunt of poor service and the costs associated with subsidizing poorly managed companies.  By doing so, they forego other much needed public services.  Absent these costs, state budgetary pressure would be alleviated and the Romanian government could dedicate the freed-up resources to improved public services, benefiting all Romanians.


Fondul Proprietatea and its investment manager, Franklin Templeton, continue to advocate for and foster sound corporate governance and reform in the state-controlled entities, to the benefit of the state budget and of the citizens themselves.  I congratulate them on their commitment to ensuring accountability and good management.


The Embassy strongly supports greater transparency and consultation between the government and all stakeholders, including business and civil society representatives, on tax and regulatory issues, including the government’s anticipated revisions to the royalty scheme for oil and gas.   


For example, we are ready to work with the government to help develop a roadmap for conducting transparent and inclusive consultations on oil and gas royalties.  We hope such an approach could be replicated as a best practice for ensuring transparency in economic decision making in other areas. 


Romania and the United States have a strong, deep and strategic alliance.  We will continue to encourage Romania to progress towards steady enforcement of the rule of law, working against corruption.  We will continue to support Romania to ensure transparency and predictability in its decision making. 


We will do it because, as Assistant Secretary Nuland said, “the United States wants the strongest possible, cleanest possible, democratic Romania to continue to be our great ally here in Europe and around the world.”


Thank you.  La multi ani.