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Introduction |
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In the December 2005 and April 2006 issues of the Romanian Digest™,
we discussed the Property Fund – Romania’s attempt to provide
restitution to the victims of the wrongful and abusive confiscations of
their homes and properties by the Communist authorities after 1945. We
expressed the hope that the Fund would be an extraordinary opportunity
for the Romanian authorities to right the wrongs imposed upon owners of
pre-communist era properties where those properties could no longer be
returned in-kind under the restitution law regime outlined under Laws
Nr. 10/2001, as modified under Law 247/2005. Government Decision Nr.
1481/2005 was enacted to set up the Fund and provide for the possibility
of compensation to such "former owners" through grants of shares in the
Fund in proportion to the value of their successful claims. We viewed
the Property Fund as an example for other European nations grappling
with restitution issues – a unique moment when Romania could be held up
to the world as a paradigm of virtue. The Fund has been organized as a
"closed-end" financial investment company which issues shares in
settlement of restitution claims. Upon receiving the shares, the
recipient becomes a shareholder in one of Eastern Europe's largest
funds. The Fund currently has a portfolio of shares in some of Romania’s
best-known institutions, with the total assets currently held by it
estimated at almost €4 billion. However, the implementation of the Fund
has been delayed for many months thereby indirectly benefiting powerful
business interests in ways that this article explains. |
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The Delay in Listing the Fund |
The most immediate concern is the Property Fund's listing on the
Bucharest Stock Exchange, without which the Fund's shares cannot be
freely transferable. Based on a questionable interpretation by some of
the existing laws, an entity may not become listed with the Bucharest
Stock Exchange before the companies in its portfolio are all listed.
Some of the largest companies in the Fund's portfolio, such as the
National Lottery, the National Printing House, Transelectrica and
Transgaz are not currently listed. In the circumstances, without
legislation permitting the Fund to be listed with entities in its
portfolio that are not yet public, listing would be many years away –
and the fruits of restitution would become ephemeral to most claimants
who are already quite old.
Cognizant of this problem, the Romanian government prepared an ordinance
that contains a series of measures to reduce the burden placed on the
Fund in order for it to be listed with the Bucharest Stock Exchange, or
impose a temporary and official market for the sale of the Fund's shares
until such time as the Fund is listed on the Exchange. Since July, the
adoption of the Ordinance was described by the Government as "imminent''
and the text of the draft Ordinance was posted for a few months on the
Government’s web site at
www.cancelarie.ro . Nevertheless, the Ordinance
has not yet been adopted.
While the ordinance has languished for six months under a shroud of
silence in Romania, claimants have grown increasingly concerned about
the lack of progress in listing the Fund. They question the Government’s
resolve and ponder the reasons for the postponement of the Fund’s
listing. Unfortunately, such delays have also indirectly supported
certain powerful local business interests who are concerned about the
effect of the Fund on the liquidity of their own holdings in public
companies and who have continued an effort to find a means to capitalize
upon a €4 billion Fund that is about to emerge in their backyard. |
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Considerations in Creating the Fund |
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In
the period since July, critics of the Fund who had been silent since its
implementation reemerged to find fault with various aspects. Virtually
all of them are engaged in disingenuous political rhetoric offering
neither responsible alternatives nor solutions that could ever be
implemented.
Like any idea, the Property Fund is not perfect. But it is a well
balanced solution to differing constraints. Those constraints require
that any restitution solution:
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 must involve a quick and easy payout
(or cash equivalent) given that most claimants are elderly and will
not live another 10-15 years before they might redeem a bond or
similar instrument of lesser value;
- must be acceptable from the perspective
of the National Budget, i.e., a manner in which such payments can be
made without Romania being forced to pay €4 billion in cash;
- does not endanger the long run
borrowing capacity of Romania – particularly when Romania must
self-finance €3.5 billion per year in order to be awarded EU grant
money (a direct cash payment would imply, in effect, the
renunciation of a year’s worth of such grants -- €3.5 billion means,
e.g., 400-600 km of highways -- a social cost no government can
afford to pay);
- not impact inflation -- a rapid cash payment of several billion
euros would have a devastating effect on inflation and the balance
of payments -- the beneficiaries of restitution represent
approximately 0.5-1% of the whole population, but with a cash
payment solution, compensation would, in effect, be made by the
contribution of all the other citizens of Romania who would be
unfairly subjected to rampant inflation as a sort of collective
punishment.
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Fund Benefits Threaten Illicit Activities |
The persons who first conceptualized the Fund not only considered the
above-mentioned constraints, but sought to develop a method for
restitution that would turn a burden into an opportunity. And from this
point of view the Fund offers several significant advantages to Romania.
The Fund represents an important vehicle to strengthen the market
economy by bringing capitalist principles to Romania’s common people.
What the Thatcher Government did in the UK over time would be done
overnight in Romania by making over 150,000 people shareholders in a
listed company. Moreover, the listing of the Fund will introduce real
corporate governance into the state controlled energy sector. The
current public outcry regarding the Romanian energy industry would not
be so dramatic if proper and transparent corporate governance methods
would have been in place at the time of privatization. Most
significantly, the Fund will reduce the importance of the State and its
political control of the Romanian economy by what is, in effect, a
virtual privatization. Political interference in the market would almost
completely evaporate since the Fund’s board of directors would only make
decisions based on sound business principles. The listing of the Fund
will eliminate much of the opaque ability of elements of the Romanian
business community to manipulate aspects of the Romanian economy.
For the Fund’s supporters, it was clear from the beginning that the real
fight would be carried on in this front against the neo-communist and
conservative groups, and against those who in one way or another benefit
from the state companies. Understanding this, allows one to appreciate
why the Fund has been so harshly attacked by representatives of these
concerns and why progress on the adoption of the necessary ordinance has
been frozen under a shroud of silence. |
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Benefiting from the Vouchers for Shares Swap |
A major factor in delaying the Fund’s listing has been its effect upon
the business opportunities related to the swap of vouchers for Fund
shares. Some claimants entitled to receive compensation have been
receiving since 2003, vouchers from the Ministry of Finance. These
vouchers are tradable and the final owner is entitled to exchange them
for share’s in the Fund. From the beginning, these vouchers have been
traded at huge discounts since, initially, nobody knew when and how they
could be exchanged for cash. After the process of listing of the Fund
accelerated (initially expected in the early summer of 2006), the
standard discount of approximately 70-80% of face value fell to about
40% in May 2006. Immediately after the process was frozen, the discounts
went up again to 70%. In this respect it is worthwhile to note the
reversed correlation between these discounts and the prices of the SIFs.
It appears that many people are moving resources from one to the other.
Also, while only a relatively limited number of vouchers have been
issued -- most of the €4 billion claims are still to be issued -- a
delayed listing of the Fund’s shares allows more vouchers to be
“produced” and the owners, with no other cash alternative, presumably
will be keen to sell via a private transaction even at a huge discount.
Obviously, the persons buying the vouchers on the market have benefited
from the delay in listing the Fund’s shares – while, reprehensibly,
elderly claimants wait for their rightful restitution, many in a squalor
produced by the very thefts for which Romania has committed to
compensation. But the ability of these interests to effectuate delays
appears to far outweigh the pleas for justice from the victims of
communism. |
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Disingenuous Criticisms |
A considerable amount of public criticism of the Fund has focused upon
the method by which compensation is determined. In what can only be seen
as a deceitful assertion, these critics question how, e.g., €20 million
can be assessed on a claim for an asset that was sold by the State for
only €2 million. Clearly, the claimants seek restitution for what was
stolen, not what the government did to it – good or bad – in the sixty
years that followed. Yet these critics prefer to attack the government
asking how it could compensate someone for 10 times what the government
received for the same asset in privatization – ignoring the fact that it
obviously is NOT the same asset. Valuation is determined using
independent auditors who use the book value of the stolen properties on
the date of their confiscation as its value and, by means of the
consumer price index, arrive at a current value. While this does not
take into account the additional entrepreneurial and business
opportunity value that the confiscated companies may have had, it is
nevertheless a fair method of valuation, particularly in light of how
the non-listed companies in the Fund’s portfolio are valued.
 Indeed,
critics of the Fund have also focused upon the methods used to value the
Fund itself. On the one hand, about half of the companies in the
portfolio are listed. For them, their market value is easy to calculate.
The rest of the companies are among the preeminent companies in Romania,
mostly involved in energy, oil & gas and infrastructure -- a true cross
section of the Romanian economy. These companies are valued at their
book value. The critics who suggest that this is undervalued ignore the
fact that all of the privatizations of similar companies in Romania (and
abroad for that matter) have produced market values significantly higher
then the book values. And these companies entered into the Fund’s
portfolio at the net asset value, with the asset value at the historical
book value. In light of this, it is wrong to suggest that the Fund’s
shares will automatically plunge below face value, particularly with
Romania entering the EU (meaning a higher sovereign grade) and within
the context of a continuous economic boom expected to last for many
years by the rating agencies.
But this then gives rise to the concern of some critics that by
claimants receiving shares based on the nominal value of the Fund they
are obtaining a windfall since the actual value is quite likely higher.
Undeniably, the formula does not (in most cases) capture the
entrepreneurial value and the business opportunity value of a non-listed
company which can only be assessed by the buyer himself. But the
claimants are not being compensated at these values in the
determinations made as to the book value of their confiscated assets
because they are also unknown amounts. For example, in the recent
Transelectrica privatization, a prestigious international consultant,
with fully defendable arguments, put a value on the shares at the
initial public offering which the market then proved was more than three
times less then the actual market value – and this was within one month
of the IPO. Transelectrica is part of the Fund’s Portfolio.
Since the valuation made of the assets stolen from the claimants does
not take into consideration the entrepreneurial value and the business
opportunity value of that property, it is only fair that similar
hypothetical assessments of such values in the non-listed companies in
the Fund should not be considered. How can you fairly value restitution
if you use one means of valuation for the stolen asset and a different
one for the one you intend to use as a substitute in compensation?
Claimants are entitled to the same calculated method of valuation in
determinations regarding the market value of assets. Just like lost
opportunities during the past 60 years are not compensated for in the
Property Fund, or no money is offered for the oceans of unhappiness from
those arbitrary confiscations, so too, the State is not entitled to
value more than the book value of the shares in companies that it
proposes to substitute as compensation.
Finally, there are a few self-proclaimed representatives of a segment of
claimants who have been quite vocal in the Romanian press in attacking
the very idea of restitution through the Property Fund. They label it as
a ruse and a means to avoid real compensation. They are wrong, and the
fallacy of their assertions is demonstrated in this article. Sadly,
however, these few ill-informed claimants have colored the perception of
many Romanians who now mistakenly believe that the Fund is an inadequate
means for restitution. This segment of uninformed claimants has
inadvertently played into the hands of the nefarious groups of
profiteers who buy interests at discounted rates. |
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The Fate of the Fund |
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will happen if the government fails to enact the ordinance and commence
listing of the Fund soon? First, we believe that no matter what
government holds office, no government can close Pandora’s Box. The
Property Fund must be listed before long. Having acknowledged the value
of its debt to the claimants in decisions from AVAS and, most
significantly its obligation to provide compensation through the
issuance of titles by the Government, Romania cannot drag its feet or
change its mind in regard to the Property Fund and expect the whole
matter to just go away. Romania has officially acknowledged its
obligation to compensate the claimants for a sum certain and either it
uses the Property Fund to make those payments or it must do so in cash.
If it fails to act expeditiously, alternative means to convert the
titles into effective compensation will be taken and they will succeed.
While elderly claimants are, quite literally, dieing off waiting for
justice, a praiseworthy and principled plan is being turned on its head
and sullied through politics and folly. The voices of the victims of
communism quietly appeal for justice. Does anyone in Bucharest hear
them? |
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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 2006 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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