Management of Public Institutions
Improving the management of public institutions has always been one of the FIC’s primary goals. The smooth functioning of institutions such as Parliament, Government, various state agencies as well as state-owned enterprises (SOEs) carrying out key activities in the economy provides the necessary framework for the healthy development of the business environment. Quality public services such as infrastructure, education and healthcare, efficient use of existing resources, less bureaucracy and more digitalisation are prerequisites for Romania fully to achieve its economic potential of becoming the 10th largest economy in the EU by 2036.
Over the last two years, a number of positive developments have been recorded in this area. The legislative framework on transparency in issuing new legislation has been further improved, including by implementation of the Transparency Register and weekly updates on legislation under consultation.
While implementation of Government Emergency Ordinance 109/2011 concerning professional management of State Owned Enterprises (SOEs), approved by Law 111/2016 which entered into force on 1 June 2016, has remained hesitant, the financial results of some of the companies which have applied the provisions of the Ordinance have been improving. Legislation on covered bonds has been adopted by the Romanian Parliament. The justice system has also been much more successful in tackling corruption, as witnessed by the substantial increase in the number of high-profile cases either prosecuted or for which final convictions have been secured over the last two years.
The consultation process has also been sporadically more substantive than in previous years. The business community was widely consulted during the redrafting of the Fiscal Code and Fiscal Procedure Code as well as on the National Anticorruption Strategy.
The Government adopted OUG 88/2013 which set up the framework for prioritising public investments. However this has not been properly followed up. Its provision are sometimes taken partly into consideration when the state budget is drafted but not enough to achieve a real prioritisation of investments.
In the past few years, there has been a significant decline in public investments in Romania according to data from the Ministry of Finance. From a high of 4.58% of GDP in 2009, public investments have hovered around 2.5% of GDP in 2014, 2015 and 2016. Investments were 23 billion RON in 2009, 17 billion in 2014, 18 billion in 2015 and 19 billion in 2016. The FIC believes Romania should significantly increase the level of its public investments. However, given that they are currently declining, prioritisation is even more important in order to direct financial resources to the most important projects.
While it appears that there is no direct connection between the poor performance on public investments in past few years and the attempt to prioritise them, the Government should analyse what has happened and draw the necessary lessons. In the light of those lessons, the prioritisation process should be further refined and clear responsibilities should be assigned to those in charge of the implementation of the investment program once it has been established.
Source: European Commission, Country Report Romania, 2017
There has been some progress in this area since the last edition of the White Book. Salaries for some categories of public staff – most notably in education and healthcare – have been increased and the Government plans further increases for public sector employees together with the development of a single grid for the remuneration of public employees. However, the fundamental issue of properly rewarding responsibilities and skills has not been addressed. People holding key positions in public institutions still earn salaries lower than many middle-managers in multinationals or even in some SOEs, which creates the perception that these positions are filled based on adverse selection and for the wrong reasons. Other professionals with valuable and expensively-acquired skills, such as doctors, have such low wages that many prefer to emigrate. The longer these situations persist, the higher the price Romania pays, as talented and honest people prefer to avoid public service and consequently key activities are either not properly carried out, or are carried out at much higher cost.
The average salary in the public sector is not the main problem especially bearing in mind the increases that have taken place in the past two years. According to official statistics, the average wage in public administration (excluding defence and similar sectors) is higher than the national average wage. The priority should be to better distribute the total payroll fund to individuals working for state institutions, without increasing it, by rewarding performance and responsibility. To do this, the authorities should draw from international experience, for instance by using the expertise of highly-respected International Financial Institutions, such as the World Bank.
The Government should focus its attention on better and more efficient ways of rewarding public employees. The total payroll as a percentage of GDP should not increase as this would create an unsustainable burden for future budgets.
Very little progress has been recorded over the last two years on this issue. In 2013, Government Emergency Ordinance 88 was passed, which included a provision for the setting-up of a system for checking, monitoring, reporting and control of financial statements, legal commitments and budgets of public entities. However, it remains a fundamental problem that the Romanian central authorities have very little oversight of the effects of consequences of policies and legislation once they have been put in place.
The authorities still appear not to have a proper monitoring system for the implementation of contracts involving public institutions, as demonstrated by the long delays in delivering motorways on time. Some commitments assumed in connection with international organisations are neglected. Provisions of some “soft” laws – i.e., those which do not provide penalties in the case of non-observance – are not complied with or at least not properly complied with, as we have noticed in the case of Law 52/2003 as amended by Law 281/2013 concerning transparency in decision making in the public administration sector, or in the case of Ordinance 109/2011 concerning the management of SOEs. Consequently, we believe that the Government should improve its monitoring processes by setting up a suitable unit for this purpose and also by digitalising its activity as a top priority.
Transparency – new legislation should be the result of comprehensive consultation with relevant stakeholders, accessible to all and easy to understand.
Predictability – any change in legislation should take place in the context of a long-term strategic framework and allow sufficient time for stakeholders to adapt to, and implement new rules.
Stability – the state’s rationale for new legislation must be coherent, institutionally consistent and free from arbitrary or retroactive amendments.
The passing of new legislation without proper public consultation with relevant stakeholders, as well as frequent changes in legislation make the Romanian investment climate more uncertain and risky, and less competitive. Investors which must constantly adapt or acquire expertise to cope with the changes incur additional costs and require higher potential returns to initiate new investment projects. There have been many examples of stakeholders not being allowed an active role in the legislative process, or of their efforts to improve legislation before it was issued being ignored.
To improve the regulatory framework in this area, steps were taken by amending Law no. 52/2003 on decisional transparency in public administration. The amendments to Law no. 52/2003, mainly consisting of stronger consultation requirements, were finally approved at the end of 2013 by Law no. 281/2013, but the provisions are not uniformly applied.
Currently there are situations in which two or more regulations have conflicting provisions, which raises many difficulties for the business environment, leading to diverging interpretations, and consequently to delayed or cancelled investment projects in many cases.
Lawmaking is still dominated by Emergency Ordinances - which usually fail to respect a minimum level of transparency and often give no space for proper assessment, preparation and consultation. Parliamentary debates also pose difficulties as meetings are announced with a very short deadline and the relevant documents, proposals and amendments are often not available online for interested stakeholders to consult.
Any new regulation should respect the three principles outlined above and should be accompanied by an impact assessment which takes into consideration the ways in which businesses, consumers or other laws and regulations will be affected by the new legislation. Emergency Ordinances should only be used in cases of real urgency, and this urgency should be properly explained. The Parliament should have a more structured and predictable timetable allowing citizens and all stakeholders to follow its debates.
There should be a clear regulatory separation between the roles of the state as policy maker and shareholder of SOEs. The overlapping of the two functions leads to inconsistent management of SOEs, which are often arbitrarily governed, making them less competitive and more unpredictable for their business partners. A coherent and transparent separation between the state’s roles as shareholder and as law maker would encourage investors to develop businesses in Romania and also ensure the conditions for the appointment of professional management in SOEs, leading to the development of a functional market. This regulatory separation should be reinforced by a full administrative separation, with the state’s role as shareholder in SOEs being transferred to one or more legally separate entities within the Government, which would be independent of the various ministries. The state should clearly define its behaviour in each of its capacities and disclose promptly any conflict of interest.
The Government has announced its intention to set up of a sovereign wealth fund, Fondul Suveran de Dezvoltare şi Investiţii (FSDI), to finance strategic national projects such as highways, railways, hospitals, etc. Another purpose of the FSDI is the setting up of new companies in Romania’s underdeveloped regions, thus supporting the development of the local economy by creating local economic ecosystems.
Separation between the state’s role as shareholder and as lawmaker should be formalised. The state’s role as policy maker should be to enact rules and regulations governing various sectors of the economy, while the state’s role as majority shareholder in SOEs should be to maximise these companies’ value for shareholders. Between the two roles, conflicts often arise because both roles are exercised by the same Government entities, usually ministries.
To manage these situations, corporate governance rules should be defined and implemented along the following lines: (i) SOEs should not be managed differently in any way from private companies, and general laws and regulations should be fully applied. (ii) Any regulations applied exclusively to SOEs should observe the transparency principles outlined above. (iii) Any regulations which affect SOEs should not grant them competitive advantages in competition with private entities on the free market. (iv)The state should diligently exercise its role as shareholder but refrain from becoming involved in the day to day management of SOEs. (v) Any obligations and responsibilities outside the generally accepted practices that SOEs are required to undertake should be clearly mandated by laws complying with the above recommendations. (vi) The state should disclose the ownership rules, meaning the overall objectives of the state ownership and its specific role in the corporate governance of the SOE. (vii)The exercise of ownership rights should be clearly identified within the state’s administrative responsibilities as mentioned in the corporate governance recommendation.
The FSDI should be overseen by an independent and professional supervisory board appointed in a transparent manner and the day to day management should be conducted by a professional management team/fund manager. Remuneration of the management should be linked to: i) NAV/share increase ii) the number of successful listings per year iii) the absolute value for distributions from underlying holdings.
The FSDI should contribute to the development of the Romanian capital market through listings of state owned companies with a minimum of 25% free float, should have well defined and transparent investment objectives and a dividend policy from underlying companies of at least 70% in dividend payout ratios.
All investment projects where the FSDI is involved must be commercially viable, made in accordance with state aid rules and regulations and have a positive Internal Rate of Return (IRR) and Net Present Value (NPV).
The FSDI should have similar reporting obligations to listed companies including publication of a monthly net asset value. The annual financial statements should be audited by an internationally recognised audit firm and published for public scrutiny.
The implementation of the corporate governance ordinance in SOEs (OUG 109/2011) has generated beneficial effects, both financially and in terms of transparency for the companies which apply these provisions. However, a large number of companies have still either not initiated the implementation of the provisions of the ordinance, or have not yet finalised the selection process for professional management. In some cases, the candidates for the board recommended by independent consultants and ultimately appointed were still politically affiliated or had no relevant professional experience.
There have been cases when board members were appointed based on recommendations from independent human resources companies but were soon dismissed due to rejection by the Government of the administration plan, without proper justification.
The approval of the application norms which detail the steps in the selection procedure for board members and managers has led to delays in the implementation of the provisions of Government Ordinance 109/2011.
The longer the implementation process is delayed, the more chronic inefficiencies will affect SOEs. Likewise, a single public authority should be appointed to oversee the enforcement of the Ordinance in all SOEs. This would streamline the process and would be a new sign of the government’s commitment to reform.
The Government should consider revising GO 109/2011 and its application norms, to simplify the procedural steps which have led to delays in implementing the legal provisions on the selection of board members and managers.