Since the early 90s when it started operating in Central and Eastern European region, the European Investment Bank (EIB) built up a portfolio of about EUR 10 billion in Romania. In fact, the EIB is a very significant player on the Romanian economic scene, but it tends to keep a lower profile than other institutions. Romania needs a favourable environment to attract more foreign direct investments, and, together with money from international financiers and European funds, it can reach its economic growth potential and converge faster to EU standards, says Flavio Schiavo Campo, Resident Representative, EIB Representation Office in Romania, in an exclusive interview for Romania-Insider.com.
International financial institutions increased their role during crisis, which is far from over considering there are some countries still in recession. How is that seen at CEE level, and how about Romania?
The potential of all CEE countries is significant because of the young, well-trained and vibrant societies prevailing in these countries, and Romania is not an exception. The country will certainly benefit from the slow, gradual economic recovery that we are observing for a few months. Macro-economic discipline, pursued in Romania since 2009, has produced notable positive results, recognized by the international community. Fiscal consolidation and macro-economic stabilisation have started under the previous Government and are continued by the present majority, which demonstrates to the international authorities and investors that the country as a whole perceives the importance of measures intended to create a favourable environment for investment and growth.
Romania is one of the main member states of the EU by all standards (size of land and population, economic activity, cultural heritage...) and the European Investment Bank has an obligation to support the country during the current recovery phase with all the valuable instruments it can offer. The EIB is the long-term lending institution of the European Union and is owned by the EU member states. It makes long-term finance available for sound investments in order to contribute towards EU policy objectives.
Since the early 90s when it started operating in CEE, the EIB built up a portfolio of the order of EUR 10 billion in Romania. In fact, the EIB is a very significant player on the Romanian economic scene, but we tend to keep a lower profile than other institutions and may be relatively unknown among the larger public: some say that we are a silent “giant”. Few European citizens are aware that the EIB is very significantly larger than the World Bank and the EBRD and finances a lot of the transport, energy, water infrastructure they use each day and the production plants they see when travelling across the country, or contributes to the environmental improvements and jobs created in the economy.
How did the exposure for Romania diversify, what are the main segments of the economy financed? What are the plans for this year, in what segments?
The EIB supports all the sectors of the Romanian economy. Our activity has evolved over time. During the 90s we participated very significantly – predominantly, I would say, with respect to the other international financial institutions – to all the major infrastructure modernisation investments, notably in the transport and energy sectors, extending billions of euros for the rehabilitation of the obsolescent road and rail networks, the renewal of the fleet of state-owned airline TAROM, the completion of unfinished works at the port of Constanta, the conversion of the polluting power generation plants across the country, just to mention some of our projects.
The EIB played also an important role in supporting the industrial sector, especially small ventures promoted by small and medium sized enterprises (SMEs) and midcap companies in the areas of agriculture, industries and services. Today, this latter area of the EIB activity has become relatively larger in Romania, principally due to the abundance of European Funds (grants) available to finance larger infrastructure projects, but also to the lack of structured finance initiatives – including Public-Private Partnerships (PPPs) – which still prove difficult to structure and finance in Romania.
How about the SME sector, what exposure and equity participation do you have?
As mentioned, the Romanian SME sector has received increasing attention from the EIB and now represents about a third to half of the overall new annual business. Because of its scarce staff resources and the availability of an effective and efficient domestic banking system, EIB lends funds to SMEs through a network of financial intermediaries comprising essentially all the prime commercial banks and leasing companies operating in Romania. The EIB funding is provided to these intermediaries at the most competitive cost on the market and at the longest maturities. You may know that the EIB is rated “AAA” and can therefore collect money on capital markets to pursue its activity at the cheapest cost for the benefit of its clients.
Thus, the EIB, being not-for-profit, can make funding available to its intermediaries essentially at AAA conditions, with the contractual obligation for the intermediaries to pass onto the beneficiary SMEs the financial advantage deriving from the relatively cheaper EIB funding. You can easily imagine how powerful this instrument can be to revitalise the SME sector in Romania and create jobs there where the larger industrial estates are restructuring and downsizing employment.
The EIB employs equity instruments through its subsidiary the European Investment Fund (EIF) only. These instruments remain a relatively limited share of the overall EIB Group activity.
What about the financing for the banking system? How did the lending conditions to banks, from international financial institutions evolve after crisis?
The EIB does not finance the banking system as such, in the sense that it does not provide support in the form of capital relief to ailing banks, initiatives that have kept national and EU monetary and fiscal authorities “busy” during the last few years. In addition to the specific intermediated funding for SMEs mentioned before, the EIB has actively sought in recent years to diversify its offer to the banking system by increasing the level of “sophistication” of its products.
Just to mention a few initiatives, we have defined new avenues of co-financing with European funds by blending debt and grants in favour of investments of EU relevance, or worked on structures intended to make European funds revolving for a programme of investments rather than a one-shot financial support to one single project. Furthermore, the EIB is ever more active in providing technical assistance not directly linked to a lending activity, which is a departure from our “banking” vocation, but is equally crucial to support the design, procurement and implementation of works on investments of EU relevance.
How do you see international lenders reacting at the recent Standard &Poor’s investment grade rating upgrade for Romania?
Of course, a rating upgrade has an inevitable, somehow “automatic” favourable impact on a country’s status and reputation, cost of borrowing and consequently economic and financial potential. But I believe that Romania, independently from the current level of the rating that often depends upon contingent positive or negative factors, can take advantage of the perception that international investors have of its underlying longer-term potential as a country well-rooted politically, economically and culturally within the EU, well endowed with natural resources (especially superior agricultural land and, prospectively, substantial off-shore gas reserves) and a young, skilled and still relatively convenient labour force.
Romania is still a very attractive place where to relocate industrial activity from within the EU and where to install new activity for non-EU investors seeking opportunities to produce and service the rich European markets from within the EU.
What must Romania do to grow better and healthier, and within its deficit target agreed with the Troika?
I presume everyone is aware that Romania is not a country recovering under the supervision of the so-called “Troika” (like Greece and Portugal for example). Romania decided wisely and voluntarily to collaborate with the International Monetary Fund, the European Commission and the World Bank, under the successive IMF agreements, to keep its reform programmes on track. As a matter of fact, Romania has performed successfully during these last few years and precious results have been achieved in terms of macro-economic stabilisation and fiscal consolidation. These efforts will undoubtedly continue whether or not under formal agreements with the IMF and this will help Romania to grow better and healthier, as you say.
At the same time, to have the macro-economic aggregates in order is certainly not sufficient. Proper national strategies for all the vital sector of the economy have to be defined and implemented steadily, without conceding to short-sighted conveniences and particular agendas. In this respect, proper governance of state-owned enterprises is a must. And, of course, last but not least, political stability is crucial as well to carry forward any ambitious initiative, but since the EIB is an EU policy-driven but not a “political” institution as such, I am happy for not having to interfere in the lively national political debate.
A favourable domestic environment will improve the prospects of raising the level of foreign direct investment (FDI) to the notable levels achieved in the pre-crisis years (2004-2008). Abundant FDI together with a higher absorption of the European Funds available and EIB financing feeding the best large investment projects and the SME sector will allow the Romanian economy to be fed with all it needs to grow and converge faster to EU standards.
By Bogdan Tudorache, business writer