* Hydro power company highlights problems of state sector* Romania's struggling economy needs more investmentBy Luiza IlieBUCHAREST, Oct 26 Behind closed doors in June, Romania's biggest power producer surprised its only private shareholder by declaring insolvency. The move helped largely state-owned Hidroelectrica to ditch deals under which it sold the bulk of its output at below market prices, causing losses of $1.4 billion over 6 years and prompting an investigation by the European Commission. But the decision will do little to encourage the investment that Romania, ranked as one of Europe's poorest and most corrupt countries, needs to encourage industry and improve living standards. Hidroelectrica's minority stakeholder Fondul Proprietatea had to cut to zero the value of its 20 percent share, initially estimated at 3.3 billion lei ($936 million), or a fifth of its net asset value. Most foreign investment in Romania so far this year is lending between firms, rather than new funds, and the risks deterring local and foreign investors are unlikely to fade away while politicians are wooing votes for a December parliamentary election."The Hidroelectrica ... insolvency will solve some problems but create others - especially in investors' and lenders' perceptions," said Radu Craciun, deputy manager of private pension fund Eureko SAFPP. Five years after joining the EU, Romania remains its second-poorest member, struggling to reform its state-dominated economy and deliver basic services such as running water and indoor plumbing for all its citizens.
The International Monetary Fund, which is leading a Romanian aid deal, has long urged successive governments to privatise transport and energy firms, including Hidroelectrica, or appoint proper managers to boost efficiency and attract the foreign cash needed to unlock economic growth. Governments have faltered on both levels, repeatedly delaying privatisation and falling months behind on efforts to replace politically-appointed managers. DELAYED SELLOFFS Earlier this month, the leftist government scrapped the sale of indebted chemical plant Oltchim. Two preceding governments failed to sell two of Romania's best assets, copper miner Cupru Min and a minority stake in Romania's biggest oil and gas firm Petrom.
Minority listings in big energy firms like Hidroelectrica, nuclear power producer Nuclearelectrica and gas producer Romgaz have been repeatedly delayed, while the timing of a listing for part of gas grid operator Transgaz is unclear. Together with Petrom, these would generate just under 1 billion euros, according to estimates based on data from Fondul, which was set up to compensate Romanians whose assets were seized under communism and holds stakes in various state firms."Progress in this area would encourage investment but this is such a mountain to climb," said Daniel Hewitt, emerging Europe economist at Barclays Capital. "The government would need to set a bargain price at first to get investors."Romania's economy is seen growing by less than 1 percent this year. Foreign direct investment amounted to just 941 million euros in the first eight months, compared with a 2006 pre-crisis peak of roughly 9 billion euros per year.
"Romania remains one of the least economically developed members of the EU," the IMF said in a report this week. "The slow progress in restructuring inefficient firms severely hampers investment and growth."POORLY MANAGED Romania's only successful privatisation under the current IMF deal, a minority stake in power grid operator Transelectrica , has a return on equity estimate of just 2.2 for December 2012. That indicator of corporate efficiency is significantly lower than for most European utilities companies. Italy's power group Enel, for instance, has a 10.7 ROE estimate for this year. Data from independent watchdog the Fiscal Council showed Romania had 645 state-owned companies in 2011, accounting for only 6 percent of the economy but a third of all unpaid debts, or 28 billion lei ($7.9 billion). They employed close to 10 percent of workers, but owed unpaid taxes to the state worth 2.4 percent of GDP. The inefficient management of politically-appointed leaders is one of the main deterrents to investing in state firms. Fondul Proprietatea has recently complained over government delays in appointing private management for Hidroelectrica."Only a few state-owned companies are somewhat interesting," Eureko's Craciun said, "the main problem being the quality of corporate governance." ($1 = 3.5254 Romanian lei)