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Introduction |
 Restitution
of real estate wrongfully and abusively confiscated by the Communist
authorities in Romania after 1945 has been an arduous and often
pointless road traveled by their former owners. Beginning with the
infamous Law No. 112/1995 (which did little more than codify the
status-quo), and continuing with Law No. 10/2001 (which ostensibly
offers a glimmer of hope to former owners, but more often merely
prolonging the Romanian State’s dominion over its admittedly ill-gotten
booty), Romanian law only occasionally offered workable solutions for
the victims of communist-era expropriations.
The inadequacies of Law No. 10 have already been described in the March
2001 issue of the Romanian Digest, especially with respect to
Article 16, which awarded former owners an “equivalent” form of
restitution in the case where properties were used for a public or
social purpose. Falling under this category were many properties
occupied by various Romanian state institutions (such as schools, law
courts, hospitals and clinics), socio-cultural institutions, political
parties, NGO’s present in Romania, and much of what is being used and
occupied by the diplomatic community. In addition, Law No. 10 failed to
address the matter of restitution of agricultural land and other rural
properties, which also remained in the hands of the State. Moreover, no
law yet deals with the confiscation of businesses by the communists –
enterprises that the Romanian state continues to privatize, the cash
receipts for which it pockets without any recompense to the victims of
its theft. The victims’ restitution rights under Romanian law are
limited to real property. But even where a claimant has a legally
enforceable cause of action, the sluggishness of the process presents
further impediments to property restitution. Informed sources confirm
that less than 15% of the real properties seized by the Romanian
authorities have been returned by them to their former owners. |
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A New Beginning |
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In the July issue of the Romanian Digest, we anticipated the
passing of Law No. 247/2005, which we considered a golden opportunity
for the Romanian authorities to finally right the human rights
violations perpetrated against the former owners by the State. We noted
that the general principles of the new regulations regarding properties
were: (a) restitution in-kind of all the buildings which are in the
possession of the State; (b) the allocation of "just and equitable"
compensation; and, (c) the protection of tenants by way of
tenant-protection laws which will remain in effect so as not to infringe
on tenants’ interests. With respect to the first point, we discussed the
significant expansion of the types of properties subject to restitution,
including the important modification to Article 16 of Law No. 10, which
eliminated many of the "public use" exceptions (provided that certain
safeguards are put in place). We also pointed out that the new law
shifts the presumption of a claimant’s ownership from the claimant-owner
to the Romanian State, in order to alleviate the difficulty of proving
one’s right to restitution in an environment where documents are often
lost or missing. In that they opened the door to various classes of
properties subject restitution in-kind, the effect of Law No. 247 has
been to significantly improve the legal regime for the former owners. |
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The Property Fund |
The important improvements codified in Law No. 247, however, cannot
guarantee that all former owners will enjoy the return of their old
properties. Many properties were demolished decades ago, and others are
still not subject to restitution in-kind even under the new regime.
Under these circumstances, the new law provides for the possibility of
financial compensation through grant of shares in a Property Fund.
The purpose of the Fund is to create an item of value that will
constitute "just and equitable" compensation to the former owners,
without burdening the Romanian State budget with billions of Euros worth
of liability. As such, Law No. 247 has set up the Fund as a financial
investment company, and the press has already dubbed it the “sixth SIF,”
given its similarity to the current five well-known funds operating in
Romania’s capital markets. However, the Fund will not be subject to a 1%
equity ownership limit and will have no significant limits regarding the
areas of investment of the assets which make up the Fund. |
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Assets Valued at 5 Billion Euros |
Initially the Romanian State, acting through the Ministry of Finance,
will be the sole shareholder of the Fund before passing on shares to
claimants as a function of the value of their successful claims. In all,
the Romanian authorities intend to transfer assets valued at
approximately 5 billion Euros into the Fund. In keeping with the concept
of monetary compensation as damages for past injustices, taxes will not
be paid on any aspect of the transfer and registration of Fund shares to
claimants, although it remains unclear whether initial holders of these
shares will be subject to full tax on capital gains or distributed
dividends.
 The
assets which will make up the Fund include shares held by the State in
approximately 100 entities, including some of Romania’s best-known (if
not most profitable) institutions, such as Transelectrica, Loteria
Romana, Transgaz, Romtelecom, Posta Romania, Petrom, Romtelecom, Conpet,
the various “Electrica” and “Distrigaz” utilities, the Metrorex
transportation utility, as well as the Henri Coanda, Baneasa, Constanta
and Timisoara airports and the Galati and Giurgiu maritime ports. In
most cases, the shareholding in these entities is between 10% to 20% of
their total equity, so the Fund will not hold a controlling interest in
some of these larger entities (unless the Romanian state has reserved
any specific minority rights in any of these ventures). However, the
Fund will hold a controlling interest in some of the smaller businesses
which have been added to its portfolio. Originally, the Fund was also
supposed to hold a 9.9% share of CEC and a 4% stake in the BCR banks,
both of which are now being privatized. Since both entities are subject
to privatization, the Romanian authorities have confirmed that they will
contribute a pro-rated amount of the privatization proceeds to the Fund
in line with the equity portion which would otherwise have been
contributed to the Fund. In addition to receiving state-owned shares in
various entities, the Fund's most bizarre component will include
Romania's sovereign debt receivables from places such as Nigeria,
Somalia, Tanzania, the Democratic Republic of Congo, the Republic of
Congo, Sudan, Syria, Mozambique, Libya, Republic of Guinea, the Central
African Republic, North Korea, Cuba and Mongolia – about 2.5 billion
Euros worth of debt – at least on paper -- in all. |
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Roll-Out in 2006 |
According to Law No. 247, the Fund is due to be up and running early in
2006. Until the compensation procedures are finalized, the Finance
Ministry will represent the Romanian State as the sole shareholder of
the Fund. Claimants seeking compensation under the restitution regime
will have to file claims with the National Authority for Property
Restitution (NAPR), which will assess the value of the properties that
are the subject of restitution demands, and then issue compensation
awards to be converted into shares in the Property Fund. With respect to
former owners who won compensation awards under older restitution
regimes, they too will receive inflation-adjusted awards of shares in
the Fund, however, they will be restricted from trading in Fund shares
for a period of 6 months following the award date.
In early 2006, the Romanian authorities will hold a bid to select the
Fund manager, who will most likely be an internationally reputable firm
from Wall Street or the City of London. The manager will, in turn,
administer the fund according to the rules established by Government
Decision and other internal rules subsequently adopted by the Romanian
authorities. Once the Fund has been established, the timing of which
will be around mid-year 2006, claimants will start receiving shares in
the Fund. |
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Is the Fund Workable, Let Alone "Just and
Equitable? |
Members of the media, stock brokers and representatives of the Bucharest
Stock Exchange (BSE), not to mention claimants’ rights groups, have all
had a hard time seeing the Fund as a workable solution. Their skepticism
arises out of several areas. The first and most practical concern is the
Fund's projected 2006 listing on the BSE (not to mention a listing on
any other exchange). Under the current circumstances, with the Fund's
administrator and internal rules still missing, it seems unlikely that
the fund's portfolio of approximately 100 companies will be listed in
2006. In general, it takes anywhere between 6 months to 12 months to
list a single company on the BSE, and even if the effort is done for all
of the companies at once, the coordination and completion of the work
seems likely to drift into 2007.
Another problem is that of evaluating the claims of the former owners
who are subject to compensation through the Fund. Under Law No. 247,
various attempts have been made to eliminate any subjectivity from the
process of evaluating property restitution claims. However, the same
legal regime also indicates that the evaluators will have to be insured
in the event of an erroneous evaluation, and that they will be retained
by the NAPR and paid by the Romanian authorities. Given this conflict of
interest, it is not beyond imagination to assume that any evaluator
hired by the Romanian authorities will find it hard not issue decisions
which will be on the low side. Ideally, the Romanian government should
continue to work with internationally reputable firms to eliminate the
negative effects of this conflict of interest, but Law No. 247 does not
seem to go far enough in ensuring a truly independent evaluation
process.
On the flip side, the evaluation of the assets to be held by the Fund
also presents substantial problems. While there is a basis for judging
the market price for many of the shares of these entities (such as
recent purchase of some of these shares by various international
financial institutions, such as the EBRD), many of the entities on the
Fund list may not benefit from adequate market measures of value. In
addition, the value of other assets, especially that of the
sovereign-debt receivables, are very difficult to determine. The
Romanian authorities' reliance on the paper value of debts owed, for
decades, by some of the world's poorest countries seems very optimistic,
to say the least. Were they to sell such interests on the open market,
they would be lucky to get 5 cents on the dollar for most of them. Thus,
without a proper, outside evaluation done in real time for all of the
Fund assets, a true value of the compensation awarded under the Law No.
247 will remain highly speculative. |
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Can the Fund Cover All Claims? |
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The issue of the value of the Fund's assets will lead to additional
questions about the effectiveness of the Fund as a tool for compensating
the former owners. First, there is no guarantee that the Fund (if its
value will indeed be 5 billion Euros) will cover the value of all of the
claims filed with the NAPR. In the event that the Fund's value has
already been parceled out to winning claimants, what will happen to
subsequent claimants? Similarly, the very nature of the Fund will lead
to a drag on prices, since many of the former owners who will receive
shares in the Fund will be of an advanced age and will, most likely,
wish to sell their shares within a few months of award, rather seeing
them as a long-term investment. As there is a rush to sell, the Fund's
price per share will fall, leading to the situation in which the NAPR
will have to issue increasingly larger portions of the Fund's shares to
cover subsequent claims. According to the NAPR's own estimates, it
should receive between 100,000 and 120,000 compensation claims from
former owners, out of a total of 250,000 total restitution claims.
Assuming the official valuation of 5 billion for the Fund, each claim
would have to be under 50,000 Euros in order to cover a majority of such
claims, even without a rush to sell the Fund's shares. In the event that
the Fund cannot cover successful claims, the authorities will either
have to add to the list of assets making up the Fund, cover compensation
claims from the national Budget, or leave subsequent owners with
worthless Romanian judgments, none of which options will be easy for
Romania to bear. |
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Conclusion |
 The
Property Fund appears to be a good, if flawed, idea. Certainly, it is an
improvement over past practice. However, many details will have to be
worked out by the Romanian authorities, their hired evaluators and the
administrators of the Fund, if the idea stands a chance of living up to
its potential. In this environment of uncertainty, a few things are
clear. From a matter of timing, Romania's forecast of getting the Fund
off the ground in 2006 seems overly optimistic, and it will probably be
unreasonable to expect that the Fund will be listed with the BSE, let
alone facilitate awards, prior to 2007. A more significant aspect of the
Fund (and with Law No. 247) is one of moral rectitude. The Fund and the
new law, for all their faults, constitute Romania's first real, if
half-hearted, attempt to actually provide a restitution regime that acts
in the interest of the former owners. By providing a workable solution
to the issues of property restitution and "just and equitable"
compensation, Romania should receive the full support of the
international community so that these goals may become a reality.
However, if Romania again fails to do justice to the victims of
communist confiscations, it will undoubtedly find itself defending its
actions in international forums and over more than just real property
claims, at least with respect to the major claimants. Everyone
recognizes that Romania has limited cash resources out of which to
provide restitution that is not in-kind. But it holds a vast amount of
properties that can be used for restitution the loss of which would not
drain its budget and might actually spur new investment and development.
Romania will soon join the European Union where the respect for human
rights is paramount. Retaining all or part of the plunder of past
governments, while admitting the dastardly nature of the thefts, is
neither justice for the victims nor honorable for Romania. |
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Editors Note: It is our policy not to mention our clients by name in
The Romanian Digest™ or discuss their business unless it is a matter of
public record and our clients approve. The information herein is correct
to the best of our knowledge and belief at press time. Specific advice
should be sought from us, however, before investment or other decisions
are made.
Copyright 2005 Rubin Meyer Doru & Trandafir, societate civila de avocati.
All rights reserved. No part of The Romanian Digest™ may be reproduced,
reused or redistributed in any form without prior written permission
from the publisher.
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