III. ECONOMIC TRENDS AND OUTLOOK Major Trends and Outlook Since the revolution in 1989, Romania has made considerable progress towards the development of democratic institutions and a private sector environment conducive to boosting economic growth. Romania started its transition to a market economy from an initially difficult condition. The legacy of the communist regime, extreme centralization, a high degree of autarky, and no experience of partial reforms such as those undertaken in other CEE economies during the 1980's, left Romania with one of the longest paths towards a market economy for which it was the least equipped sociologically and politically. Today, the legal framework for a market economy has been established, agriculture has been largely privatized, and private enterprise is rapidly accelerating in trade and services. The private sector has grown to account for 33-35 percent of GDP. Currently it includes 80 percent of agricultural property (some five million new landowners, equal to nearly half the workforce), and accounts for 40 percent of domestic trade, 30 percent of services, and 30 percent of foreign trade. There are more than a half million private firms, most of them with less than ten employees, mainly in the services sector, and about 33,000 joint ventures with foreign capital. In addition, sole proprietorships and family businesses number more than a quarter of a million. Some 80 to 90 percent of the previously government-owned housing stock has been sold to occupants. To pave the way for the implementation of an ambitious program for large-scale privatization of state-owned enterprises, certificates representing 30 percent of the ownership of state industries were distributed to every adult Romanian. After three years of plunging economic performance, GOR scored success in arresting output decline and registering about 1 percent growth in GDP for 1993. Better-than-expected performance was sparked by agriculture rebounding strongly and stabilization of industrial production. Positive performance by the newly emerging private sector, principally in small retail outlets, has been quite apparent over the last year. Other good news includes increasing exports and significant narrowing of the current-account deficit. In May 1994, Romania's long-delayed arrangement with the IMF was approved, opening the way for an inflow of USD 700 million in the next 19 months in stand-by and STF funds. Approval was a recognition of Romania's efforts toward normalization of the domestic situation and of such important achievements as the decrease of the inflation rate, the liberalization of the foreign exchange auctions, and the stabilization of the dollar-leu exchange rate. The three-year slide in the value of the leu has been halted after the introduction of a tight monetary policy and reforms in the foreign exchange market. Since April 1994, when Romania's foreign exchange system was liberalized, the currency has remained remarkably stable, and the gap between the official and black market rates has all but vanished. At least theoretically, there are now no limits for banks and companies when selling their lei for dollars at daily auctions. Investors, who have had trouble getting dollars to pay for imports, are now able to better facilitate production runs and market development. Foreign investors, too, can now exchange and repatriate their profits without major impediments. Romania's foreign trade registered dramatic disruptions after the 1989 revolution. The decrease in the quality and quantity of domestic production, on the one hand, and, on the other, the dissolution of the Comecon market and the costs of observing U.N. sanctions against Iraq and Serbia (two of Romania's traditional trade partners) were the main factors causing a sharp decline in Romanian exports in 1990-92 and a significant increase in the country's balance of trade deficit. The Romanian economy cannot function without a series of vital imports. About 60-80 percent of the country's imports are covered by raw materials (mainly oil and gas). Romania is also a net importer of minerals, machinery and electrical devices, plastics, and rubber. Imports of food products and consumer goods have also been quite large after the revolution, when domestic production was unable to meet soaring demand in this area. During the last four years, Romania paid for its imports mainly by drawing on its old hard currency reserves and on loans from international lending institutions. Only part of the cost of imports was offset by Romanian exports, which consisted of metals, transportation equipment (including automobiles to China and Latin America), wood and wood items (including furniture), textiles and apparel, leather goods, and glassware. To normalize the situation in this vital sector for the smooth running of the national economy, GOR has redefined its foreign trade policy, putting at its center, as a prominent component, the country's integration into Western markets. In agreement with this policy, Romania has sought association with the European Union (EU) and the European Free Trade Association (EFTA). Currently, about half of Romania's foreign trade is conducted with EU member countries. Romania has also made efforts to normalize its trade relations with the United States. The provisions of the U.S.-Romanian trade agreement (ratified by Congress in November 1993), which restored MFN treatment to Romania, together with the provisions of the bilateral investment treaty, are now the underpinning for a stable bilateral economic and commercial relationship and for a stronger American presence in Romania in both trade and direct investment. Membership in the EU and EFTA, together with greater access to the important U.S. market, promise to provide expanded opportunities for Romanian exports and support growth in other areas of the economy as well. Principal Growth Sectors Romania's economy combines strong agricultural and industrial sectors, as well as a growing services sector. Major agricultural sectors include grains (wheat, corn, barley), industrial plants, fruit-tree growing and viticulture, as well as animal husbandry. Major industrial sectors include oil and gas, chemicals, mining, and machine building (shipbuilding, automotive, aerospace, electrical equipment, machine-tools). The consumer goods area is growing, with specific emphasis on clothing, footwear, household appliances, glassware, china, and furniture. The services sector is still in its infancy. However, as compared with the situation existing before 1990, the progress achieved by the sector has been extraordinary. Having the best chances for a dynamic evolution, the sector is also a potential economic/social safety net, being capable of absorbing a substantial amount of the labor force currently unemployed (about 10 percent) or which will be laid off as a result of industrial restructuring. Agriculture is a source of substantial potential national wealth for Romania. It could easily not only meet domestic demand for food, but also generate surpluses for exports. However, during 1990-92 agriculture performed at very low levels. Factors impeding growth in this branch included the inability of the nascent private sector to participate effectively in market development, a scarcity of credit and hard currency, and several years of drought. Currently the situation is improving, as the government introduced policies to support farmers through low interest credits, tax relief, better access to farm inputs, and attractive producer prices. Prospects for 1994 indicate that Romania will harvest a normal crop, despite dry weather conditions early in the year. However, domestic supplies of such produce as barley and soybeans will not be adequate and, therefore, imports will be necessary. The livestock sector, which during the last three years has been severely affected by feed shortages, will continue to be unable to meet domestic requirements. Growth in industry over the last years has been slower than hoped, in part because of the sector's rigid structure and mammoth scale, loss of export markets, dependence on imported energy, and lack of investment. This sector, however, is currently receiving considerable attention, with plans for the restructuring of basic industries and plans for mass privatization of small and medium-sized companies assuming a clearer shape and nearing implementation. The Romanian Government has projected an average 7 percent annual growth rate for industry between now and the end of the century. In the near future, accelerated growth rates are expected in the light industry (textiles and garments, leather goods, furniture) -- partly as a result of export potentials opening because of restoration of MFN with the U.S. -- as well as in the production of electric appliances, automobiles, furniture and construction materials. As economic recovery progresses, growth is expected to be above the average rate for such sectors as coal mining, machine building (tractors, telecommunications equipment, machine tools), and fertilizers. Productivity is expected to be 24-26 percent higher in 1996 as compared with 1992, according to Ministry of Industries projections. The main industrial sectors which currently get special attention from the Romanian government in the complex process of restructuring and modernization are the following: Power Sector - In 1993, the Romanian Electricity Authority RENEL registered increased output. Production reached 54.0 TWH of electricity and 46.0 TCAL of thermal power for district heating installations. As a result, electricity imports were reduced by 41 percent reaching only 1.8 TWH compared to 4.4 TWH in 1992. Power plants based on hydrocarbons provide 34.3 percent of electricity output, the share of coal-based thermal plants is 42 percent, and hydropower plants cover 23.7 percent of output. The upgrading of existing capacity and the start- up of the Cernavoda nuclear station in late 1994 or early 1995, will put Romania into a position to export electricity to its neighbors. This eventuality seems practical as surrounding countries also have prospects for strong economic development, and thus will need more electricity for which they do not have capacity. Petroleum - Romania will process about 20 million tons of crude oil in 1994 and expects to increase processing to about 21 million tons in 1995. The design capacity of Romania's refineries totals 32.7 million tons per year, of which some 12 million tons is, therefore, excess capacity at this time. Romania is importing more crude as national oil extraction has fallen off to about 7 million tons per year. At current processing levels the domestic market is adequately supplied and about half of the feedstocks for petrochemical processing is available from local sources. Experts see an increasing internal demand while at the same time authorities wish to expand or recapture their export potentials. Exports, provided funds can be found to import crude, will principally be as gasoline, jet fuels and diesel fuels. Improvement in quality for these products, such as raising the octane number for unleaded gasoline and decreasing sulphur content of diesel fuels, is needed in order for them to be acceptable in international markets. Modernization projects have started which will improve product quality and refinery efficiency. Five of the eleven Romanian refineries are targeted for priority action to improve overall cost effectiveness. Expectations are that before 1997 Romania will be processing at full capacity. Natural Gas - Gas represents about 40 percent of the primary energy sources in Romania. Domestic production reached a peak of 39.3 BCM/year in the mid 1980's. Supplemented with imported Russian gas, the highest level of consumption was reached in 1986, when 41.8 BCM was used. Demand for gas has been concentrated mainly in the electric power generating sector, with basic industries following in importance but at only about half the rate as consumed for electricity. Geological surveys currently conducted by Romanian and foreign companies (including the U.S. company Amoco) are expected to lead to discoveries of new natural gas reserves. Major projects in this sector are related to the upgrading of the gas pipeline and gas transmission and dispatching system. Mining Industry - The Romanian mining industry, which employs about 250,000 people, has an annual production of about 50-60 million tons of coal, 10 million tons of non-ferrous and precious ores, and 5 million tons of non-metalliferous ores and salt. It is organized in seven public corporations (state-owned autonomous regies): for brown coal, pit coal, copper, lead and zinc, non-metalliferous ores, salt, and rare metals. More than 90 percent of the mining equipment currently used in Romania is also made locally. The country's eight large factories specialized in mining extraction and processing equipment employ about 20,000 people and are capable of manufacturing a wide range of products designed to meet the specific needs of this sector. Until recently, some of these products were also exported, mainly as part of arrangements among Comecon countries. Deposits of hard coal in Romania are small and, with few exceptions, low grade. Lignite deposits, on the other hand, are rather significant with some 3.5 billion tons in estimated reserves. Open pit mining is possible in much of the lignite area. In order to conserve crude oil and natural gas, production of coal is being substantially increased. The production of lignite is expected to advance more rapidly than that of bituminous and anthracite coal. More than two-thirds of the mined coal tonnage is used to fuel electric power plants. Lignite used for power generation must be supplemented with other fuels to assure proper burning and has been responsible for severe maintenance problems and shortened boiler life in generating units. Improved specifications on new boiler installations and replacements is expected to go some distance in ameliorating these problems in the future. Only small amounts of Romanian coal are usable in the manufacture of coke, in large part as an admixture to imported coking coals of superior quality. The severe and growing shortage of domestic coke supplies poses a major obstacle to the expansion of the iron and steel industry. Iron and Steel - The iron and steel industry has a long tradition in Romania. The main investments in the Romanian iron and steel industry were made during 1965-1980. At that time Romania erected new complexes in Galati, Targoviste, Calarasi, and Zalau, while at the same time extending and modernizing the old ones in Hunedoara, Resita, Campia Turzii, Otelu Rosu, Bucharest, and Braila. As equipment was mostly imported from advanced countries, the industry achieved world standards for productivity and consumption rates. Between 1980-1989, due to the isolation policy of the former regime which required that everything be obtained in the country, contact with the foreign equipment supplying companies was interrupted which also diminished the access to technical information. As a result, the present level of the Romanian iron and steel industry is 15-20 years behind. Due to the inability of replacing spare parts and process instrumentation which could not be repaired or replaced locally, the plants began to lose efficiency. In 1989, a peak year in the steel industry, Romania produced 13.4 million tons of crude steel of which 10.3 million tons was finished rolled products, 1.3 million tons steel pipes, 1.1 million tons cold rolled strip and sheets, and 0.5 million tons drawn wire. Out of this production Romania exported 3.2 million tons of steel products. Manufacturing - Industrial enterprises contribute 43.8 percent of Romania's gross domestic product of which nearly 60 percent is in manufacturing of industrial machinery and equipment. Companies are almost entirely state-owned businesses which are now adapting to the changing market. All of Romania's industry sectors are well developed with the exception of some high-technology areas such as computers and electronics. Workers are highly skilled, but managers, although generally proficient in terms of technical capability, often lack management skills and knowledge of the intricacies of a market economy. The transition period has been difficult for most firms as industrial production has fallen off by 53.4 percent since 1989. Several significant Romanian industrial manufacturing areas are highlighted below. -- Shipbuilding: The Romanian shipbuilding industry has eight shipyards of which six are situated on the Danube river and two on the Black Sea coast. These yards have been producing a wide range of seagoing vessels (from 2,800 DWT cargo vessels to 165,000 DWT bulk-carriers and 150,000 DWT oil tankers), various rivergoing ships and boats as well as special structures such as offshore oil drilling platforms. The shipyards located on the Danube have the capability of building ships up to 55,000 DWT. Bigger vessels are produced by the shipyards situated on the Black Sea coast (Constantsa and Mangalia). The ships built for the Romanian fleet have been equipped by and large with locally produced equipment. Romania manufactures a wide range of marine equipment such as: engines from 800 to 30,000 HP under Man and B&W licenses, 630- 1,250 KVA diesel generators, turbo-pumps for cargo, 100-6,000 Kg anchors and anchor chains up to 80 mm diameter. -- Machine Tools: Just before 1970, Romania started a large scale investment program that triggered a surge in domestic demand for machine tools. As a result, during the 70's numerous modern facilities were built which specialized in manufacturing this equipment and Romania became a worldclass machine tool manufacturer. According to "American Machinist," during the 80's Romania continuously ranked between the 12th to 16th place among the international producers. The machine tool output supplied most of the country's domestic consumption and provided considerable exports of basic-quality equipment sold at comparatively low prices. Furthermore, in the case of heavy machine tools, these developments led to production of some highly sophisticated machines which replaced potential imports from Western Europe in the local market; some were also exported. Currently, the Romanian machine tool industry has 40 facilities and employs about 58,000 people. These facilities have been producing a variety of machine tools ranging from the universal unsophisticated types needed in small mechanical workshops to very special types of heavy equipment. Romania's machine tool output reached a peak in 1986-1987. After the revolution of 1989 industrial demand for such equipment declined sharply. Today, less than 50 percent of production capacity is in use. Following the collapse of the Comecon market, the Romanian machine-tool industry has dramatically reduced its exports. -- Bearings: After a sharp decline in output following the 1989 revolution, the bearing sector of Romanian industry demonstrated signs of recovery in 1993. The value of exports rose in 1993 by 54 percent, from USD 52.6 million to USD 81.2 million. Romania has long been a leader in the Eastern European bearing market and currently boasts a modern production capacity based on Western technology concentrated in six facilities. Nevertheless, only about 60 percent of the total capacity is in use. Because of the favorable export potential and expected economic improvements in Romania, the GOR has listed three priority projects which will increase production capacity, but at improved technical and competitive levels to more readily enhance marketing opportunities. -- Oil Drilling Equipment: Romania traditionally is one of the top three oil drilling equipment manufacturers worldwide. According to the "World Oil Review" issue of June 1992, the first three oil drilling exporters in 1987 were the United States (50.2 percent), Romania (17.1 percent) and former Soviet Union (15.6 percent). Due to geographical and political reasons most of Romania's oil field equipment was exported to the former Comecon countries, China and Middle Eastern countries. Oilfield drilling equipment is produced in eight highly integrated facilities with a total of 46,500 employees. Currently, local production capacities are partially idle since the domestic market has seen its requirements drastically reduced and the main foreign client, the former Soviet Union has, also, reduced its buying capacity. Consequently, Romania is restructuring its facilities and reducing personnel. New products, such as drilling rigs for depths of 7-8,000 meters and temperatures ranging from minus 60 degrees centigrade to plus 50 degrees, and other new sophisticated equipment, parts and tools are currently being designed and tested. Exports reached 57.6 percent of the output in 1992 and there are prospects to increase their share to 58.2 percent by the year 2000. Major projects in the above-mentioned sectors which are on Romania's public investment list, being scheduled to be completed over the next 10-15 years, include the following: Power Generation: Cernavoda Nuclear Power Plant - Unit No. 2 (USD 737.4 million); Rehabilitation of Power Plants/District Heating Plants -- totaling 5,950 MW (USD 567 million); New District Heating Plants in Arad, Slatina, Bacau, Timisoara, Tirgu Jiu, and Pitesti -- totaling 700 MW (USD 687.4 million); SCADA/Modernization of Bucharest Power System (USD 120 million); Iron Gates II Hydropower and Navigation System (USD 232.5 million); Turbine Replacement (3 x 175 MW) at Iron Gates I (USD 51 million); New Hydropower Plants at 12 Locations -- totaling 1,300 MW (USD 1,807.7 million); Turnu Magurele 800 MW Hydropower Plant and River Crossing (USD 600 million). Oil Production/Petrochemistry: Petrotel Refinery Upgrading (USD 55 million); Arpechim Refinery Modernization (USD 87 million); Arpechim Petrochemical Plant Modernization (pyrolysis unit) (USD 52 million); Rafo Refinery Modernization (USD 51 million); Ammonia Plant (Kellogg process) Revamping (three locations: Doljchim, Sofert and Turnu) (USD 71 million); Oil Enhanced Recovery (10 operating oilfields) (USD 150 million); Gas Transmission and Dispatching System Upgrade (including communications) (USD 65.6 million); Black Sea Offshore Drilling and Exploitation (USD 60 million); Constantza Crude Oil Storage Terminal (3 million tons) (USD 100 million); Underground Natural Gas Storage (4 locations) (USD 300 million); Gas Pipeline projects (USD 800 million); Liquefied Natural Gas Terminal at Midia - Constantza (USD 600 million); LNG Bottling Plant Construction (99,000 tons per year; modernization of 4 existing plants, and new terminal construction) (USD 150 million). Mining: Timisani - Pinoasa Lignite Pit Expansion (USD 201.3 million); Petrosani Bituminous Coal Mine System Rehabilitation and Expansion (USD 138 million); Tismana II Open Pit Modernization (USD 175 million); Valea Brazi Bituminous Coal Production Expansion (USD 100 million). Pollution Control: Phoenix - Baia Mare Copper Refinery Modernization (USD 50 million); Revamping of Romplumb - Baia Mare Lead Extracting Plant (USD 50 million). Iron and Steel: Siderca - Calarasi Steel Plant Modernization (hot rolling mill and continuous casting) (USD 50 million); Sidex - Galati Steel Mill Modernization (coke ovens and rolling mills) (USD 242.9 million). Tractors and Vehicles: Tractor Plant Modernization at Brasov, Miercurea Ciuc, and Craiova (USD 125 million); Roman Truck Plant Modernization (USD 70 million); Van and Truck Production line at Rocar - Bucharest (USD 120 million); Astra Vagoane (Arad) Railroad Car Production Line (USD 51 million); Dacia Automobile Plant Modernization (USD 147 million); Oltcit Automobile Plant Modernization (USD 77 million); Aro Off-road Vehicle Plant Modernization (USD 80 million). As mentioned earlier, the Romanian services sector is growing rapidly. Hotel and restaurant services, leisure activities, banking/insurance services, legal and financial advise, advertising and media development -- all of these areas offer ample room for Western-type upgrading. Some progress has already been made, with Western accountants, bookkeepers, lawyers, and consultants beginning to offer their services to the public. Foreign trade brokers and agents are also available, as are independent distributors of consumer products. An area in need of great change is market research and advertising. Although independent companies have been established to offer servcies in this field, the scope of their activities is not comprehensive. Many Romanian researchers are still prisoners of old-style methods of market research. Several Western companies, however, have started to produce good research on specific topics. Product positioning is in its infancy. Romanian producers are awakening to the importance of brand identification, target marketing and effective mediums of advertising. Although old- type managers may view the costs of repeat placements as a loss in the short term rather than as an investment for the future, younger managers realize the benefits of advertising. Tourism - A natural landscape of great beauty and variety (the Carpathians, the Black Sea coast, the Danube Delta), and a wealth of cultural attractions including archaeological sites, medieval cities, and some of the purest expressions of old religious art and folklore in Europe -- all could turn Romania into a major destination for foreign tourists. In spite of this potential for development, the current situation in the industry is far from satisfactory. Tourist facilities are outmoded and services are notably below Western standards. The government's strategy for the restructuring and modernization of the tourist industry relies heavily on privatization, which is to be completed by 1996, and on the setting up of joint ventures with foreign investors. Already more than 400 tourist facilities have been sold to private investors, and 2,000 more have been targeted for privatization over the next year or two. There are 18 joint ventures operating in Romania's tourist industry with a total foreign direct investment of about USD 100 million. Government Role in the Economy The Romanian economy is still largely socialized. The government owns virtually all industry and controls the state farms which still account for about 10 percent of agricultural lands. The state owns all natural resources other than the former collective farms, which were privatized, and other lands which were left to private ownership during the communist regime. While it is true that the development of a private sector has started to modify the structure of the economy, it is obvious that basic industries have seen little change, expectations being that they will remain under state control for the foreseeable future. Despite attempts since 1989 to grant more freedom of initiative to lower management levels, supreme decision-making power still rests largely with controlling ministries. At this critical time of transition, the government has an essential role to play in modifying its own function in the economy and in creating a more propitious framework for structural and systemic changes meant to encourage the progress of economic reform. To monitor this complex process, on which depends the future functioning of the whole economy, GOR has created a Council for Economic Coordination, Strategy and Reform, an Agency for Industrial Restructuring, and an Agency for Privatization. In implementing reforms, GOR has preferred a gradualist approach in an effort to control inflationary pressures and to reduce the fall in production, the displacement of labor, and the attendant social costs. In late 1990, a reform agenda was devised to establish the basic laws, institutions and policies of the market economy. Much of GOR's reform agenda is now complete, including the establishment of a two-tier system of banking, the introduction of a modern tax system, the freeing of most prices and elimination of most subsidies, and the adoption of a tariff-based trade regime with low external tariffs. By mid-1992, the essential elements of the legal framework for the privatization of state-owned enterprises, private sector development, and foreign investment had been put in place. About 6,300 state enterprises had been converted into commercial companies (CCs), and a process was begun under which 30 percent of their shares would be transferred to five Private Ownership Funds (POFs), where they would be held on behalf of the population. The remaining 70 percent of CC shares are initially held by a State Ownership Fund (SOF) which, under the law, is to divest itself of its holdings over seven years by a variety of means depending on the size of enterprise. By March 1993, Romania citizens had received Certificates of Ownership in each of the POFs, to be used for purchase of individual enterprises or in mutual funds that may eventually be formed by POFs. Some 900 regie autonomous (public corporations) were formed in sectors considered to be of special economic importance (energy, transportation, utilities, defense, etc.). These corporations, whose social capital is entirely owned by the state, are, by law, entitled to budgetary subsidies. Substantial efforts have been made to reduce their number since; they now number 494, of which 79 of national importance and 415 of local interest. Ultimately, it is intended that only 44 public corporations of national importance will remain. Currently, the most important challenges facing the government are the restructuring of industry and the completion of privatization. The progress of privatization of commercial companies in Romania has been disappointing. At end-1993, slightly more than one percent of the total capital stock of state-owned enterprises had been divested, transferring around 130,000 jobs to the private sector. The largest numbers of sales occurred among "assets" -- which are activities, equipment or real estate divested by CCs, and include shops, restaurants, warehouses, land and machinery. The 282 small CCs (out of a total of 3,124) which were sold in 1993, were privatized in management-employee buyouts. The pace of privatization of small CCs has, however, accelerated during the first quarter of 1994, with some 60 to 80 CCs being divested each month. The restructuring of key industries has been initiated by the profiling of large inefficient state-owned enterprises which are creating severe problems and economic blockage because of huge debts, idle capacities and underemployed work force. The Council for Economic Strategy and Reform has been given the monumental task of drawing up plans for the restructuring of over 250 of these firms which account for at least 30 percent of all losses. Restructuring is partly associated with the privatization effort in that funds gained by the sale of some state-owned assets will be re-channeled into revamping and modernizing strategic industries. The Council will prioritize activities and program revitalization plans on an individual enterprise basis. In 1993, the first 30 problem enterprises - - operating in such energy-intensive sectors as the chemical/petrochemical, machine-building and metalworking industries -- were put under strict economic and financial surveillance. If incapable of recovery, they will be either shut down or split and privatized by the selling of shares. Romanian national assets in industry are not always as prime as conservatives believe them to be. Until recently, the large scale investments made prior to the late 1970's, which had given Romania a leading position in installed basic industrial capacity, have been neglected. Consequently, some of the country's industrial base is antiquated and both energy intensive and inefficient. Likewise, much of the nation's infrastructure shows signs of prolonged neglect. Because of this situation, the success of industrial restructuring will depend, to a large extent, on the availability of investment funds. Despite the fact that private sector activity in trade, services, construction and self-sufficient agribusiness has grown rapidly, private investment capital has been small. The state remains the predominant owner of productive resources and provides nearly a fourth of national investment. State-owned commercial enterprises provide another 48 percent from their own sources. Of considerable importance, in this context, will be the response of foreign capital, which currently is still trickling in at modest levels. Investment funds needed for industrial restructuring vary from sector to sector. An estimate of allocations for the next four years prepared by the Ministry of Industries shows that about 70 percent of available funds will go to energy and energy-related sectors (mining, oil, gas, chemical/ petrochemical), which will be developed to facilitate recovery and development of the other sectors. Restructuring of industry will rely in many cases on the ability of companies to generate needed financial support. The main sources will be companies' own revenues (36 percent), domestic (12 percent) and foreign (15 percent) loans, domestic (6 percent) and foreign (8 percent) private capital investment, state restructuring funds (16 percent) and budgetary allocations (7 percent). Note that budgetary allocations will be restricted to very few basic industrial projects in energy, mining and geology, and environment protection. Balance of Payments Situation Romania's national budget totals approximately USD 1.8 billion. Subsidies and transfers claim approximately a fifth of this amount, while 10 percent goes for national defense and 5 percent for debt servicing. Major revenue sources are a salary tax (26 percent), profit taxes (21 percent) and a Value Added Tax (18 percent). In 1993, the general governmental balance swung from a deficit of 6.9 percent of GDP to a small deficit of 0.1 percent of GDP. This substantial fiscal adjustment was possible due to the fact that the newly introduced VAT and excises surpassed revenue expectations. In the last quarter of the year, incentives introduced to personnel of the local fiscal authorities to improve tax collection also seemed to have had a salutary effect. But the most remarkable achievement was the dramatic cutback in expenditures. The improvement came from a sharp reduction in subsidies and transfers and a slight cutback in current expenditures. For each of the past two years, Romania ran current account and trade deficits. In 1993, the current account deficit was USD 1,345 million, of which USD 1,088 was FOB trade balance deficit. Balance of payments deficits are financed largely via loans and grants from international financial institutions and bilateral donors. Following the approval by IMF, in May 1994, of a new USD 700 million standby/special transfer facility package for Romania, G-24 also approved a Romanian request for USD 275 million in BOP assistance. The EU, which traditionally has covered half of the BOP gap, is also granting support. Trade and Investment Barriers Romanian legislation does not contain any provisions which could be regarded as directly prejudicing foreign business or investment in the country. On the contrary, in theory at least, foreign trade is strongly encouraged and the foreign investment climate is attractive. However, certain economic/commercial conditions in Romania may hinder the ability of U.S. companies to conduct business. -- Tariff preferences for EU and EFTA exporters. With the introduction, as of May 1, 1993, of a new Romanian tariff schedule which gives preference to products of EU and EFTA countries, U.S. products in many categories have become less competitive on the Romanian market. MFN reinstatement provides the two countries with a good basis for discussing tariff preferences and taking appropriate measures to keep American products competitive. -- Unsatisfactory handling of requests for repatriation of profits on invested capital. Although Romania's foreign investment law permits the repatriation of 100 percent of after-tax profits, actually getting money out continues to be a time-consuming undertaking. Because of hard-currency shortages, banks are unable to handle investors' requests for profit repatriation in a satisfactory way. The volume of hard-currency transactions conducted via the auctions organized by the National Bank of Romania has never exceeded USD 8-10 million per day, foreign investors having to wait for about 3-5 days before they can have their Romanian lei profits exchanged into a freely convertible currency. However, it should be noted that the current situation represents an extraordinary improvement versus the situation in 1993, when the waiting time at the hard-currency auction was as long as 90 days. The situation is expected to be completely normalized by the end of July 1994, when currency auctions will be fully replaced by an interbank currency market. -- Other impediments and irritants in conducting business with Romania would include the shifting nature of the legal framework, which is still in flux; the inadequacy of support services (even for most basic services such as telephone/fax); and the high cost of setting up a business operation (shortage of office and living space, high rents, high bills for telecommunications, etc.). While bemoaned by Romanian authorities, which are well-aware of the issues, the above hindrances are a natural offshoot of systemic transition. Efforts are being made to improve the situation. Problem areas for U.S. businesses are brought to the attention of Romanian leaders, and, where feasible, solutions are worked out on a case by case basis. Labor Force Romania has important manufacturing capabilities and local specialists are very skilled. The highly trained labor force and the low salary scale in Romania will assure this country a considerable comparative advantage in the years ahead. Romania's non-agricultural workforce numbers 6.9 million persons. The number of persons employed in industry is about 3,300,000, i.e. about a third of total employment. During 1990-93 industrial employment decreased by about 1 million persons. Employment in agriculture grew during the period - from 3,055,200 persons in 1990 to about 3,500,000 in 1993. Women constitute 48 percent of employment. Since 1989, GOR has passed new legislation covering hours of work; minimum wages; statutory holidays; paid vacations; and paid maternity leave. Generally, a working month is 170 hours. Employees are paid every two weeks, are entitled to additional pay for overtime and difficult work, and usually receive four weeks paid vacation per year. Salary levels benefit Romania's competitive ability, as the current average monthly wage is only USD 70. According to the Romanian Family Budget Survey, households in Romania obtain income from four main sources: wages, agricultural income, public and private transfers, and social benefits. Wages constitute about 50 percent of total income, followed by agricultural income (22 percent), public transfer (8 percent) and pensions (18 percent). These income sources finance three main categories of consumption: food (53 percent), non-food goods (29 percent), and services (13 percent). During the last four years, net after-tax income of Romanian households fell by more than 21 percent. This drop in income is mainly a result of a decline in real wages. It was exacerbated by a fall in public transfers and further by a sharp increase in the tax burden of Romanian households. However, rural households saw an 18 percent increase in their income from agricultural activities. GOR administers a national unemployment insurance plan that provides short-term benefits to employees who lose their jobs. Employers contribute 5 percent of gross employee salaries and employees contribute 1 percent of gross salaries. Employers are required to collect employees tax on salaries and other employees contributions and remit them to the State fund on behalf of the employees. Unemployment benefits, a part of the social security program, include up to six months unemployment insurance payments and retraining/job search activities under social security. Romanian legislation provides for special security benefits paid for in part by employer and employee contributions. Total employer contributions equal 30 percent of employee salaries and employee contribution equals 4 percent of employee salaries. Unions in Romania currently represent about 4.4 million members of the non-agricultural workforce of 6.9 million persons. Unions are based on the labor union concept (organized by industry or employer) or craft unions (organized by job classification). Major Local and Third-Country Competitors in Specific Sectors In 1993 the United States ranked sixth among the largest exporters to Romania, after Germany, Russia, Italy, Iran and France. Romania remains the region's third-largest market for U.S. products, behind Poland and Hungary. U.S. exports to Romania in 1993 totalled USD 372.9 million, of which USD 269.2 million manufactured goods and USD 103.7 million agricultural goods. Principal exports included aircraft equipment (USD 73.3 million), coal (USD 27.2 million), cotton (USD 24.7 million), meat (USD 17.1 million), telecommunications equipment (USD 11.1 million), soybeans (USD 8.9 million), and maize (USD 6.5 million). Romanian exports to the U.S. in 1993 amounted to only USD 69.1 million, major exports being footwear (USD 16.4 million), apparel (USD 14.7 million), and tractors (USD 7.1 million). A change in the structure of U.S. exports to Romania, with manufactured goods claiming a larger share, can be expected to occur in 1994 as a result of the restoration of MFN status. While MFN basically enhances Romania's export potential to the U.S. through reduction in tariffs (affecting most particularly textiles, apparel, leather goods including footwear, furniture, glassware and some other light industries), the increase in production of these items will facilitate factory modernization and expansion projects. Thus, U.S. export potential for equipment, technology, and services will be enhanced. Competition to U.S. products will generally come from both local production and foreign, mostly Western European, suppliers. In spite of this, the traditional reputation for high quality and reliability of U.S. products can successfully overcome competition in specific sectors, especially if U.S. companies are willing to engage in production joint ventures, conclude technology transfer agreements, and grant training facilities for local employees. Romanian industry is very capable in many machinery and equipment fields and, therefore, may present serious competition to U.S. exporters. Listed below are the sectors in which Romanian competition will be strongest: -- Agricultural machinery: Since agriculture is leading Romania's economic recovery, expectations are that much farm machinery will be bought in the near future. Local production (coming from 3 large tractor manufacturers and one harvesting combine manufacturer) is significant. It includes 30-100 HP and 320 HP wheeled tractors, 45-80 HP and 150-180 HP caterpillar-tracked tractors; self-propelled grain- and corn- harvesting combines (under Italian "Laverde" license); spraying and spreading equipment; sowers, harrows and tractor- drawn combines and tows. All of this equipment is quite competitive. However, in view of the new land ownership pattern in Romania, with small plots of land having the largest share, smaller and more versatile equipment (e.g. up to 20 HP wheeled tractors) will be in great demand. It is in this area that foreign suppliers are more likely to succeed. -- Power Generating Equipment: With the energy sector receiving 42 percent of anticipated investment funds, power generating equipment has become a leading sector. The work on the Cernavoda nuclear plant is responsible for a lion's share of the funds, but new and revamping work in hydro and thermal plants is substantial. In the area of thermal plant equipment, Romania has the capability of supplying the following: complete electric condensation turbogenerators of 50-330 MW; complete electric condensation/heating steam intake turbogenerators of 50-150 MW; nuclear turbogenerators of 700 MW; electric air/hydrogen/hydrogen+water cooled generators up to 700 MW; steam boilers of 50-1035 tons steam/hour based on lignite, brown coal, oil products and gas; hot water boilers up to 100 GCal/hour based on the same fuels. This equipment is of very good quality. It should be mentioned that the know-how for the manufacturing of turbine generator units for the Cernavoda nuclear plant has been acquired from General Electric (USA) and, for related facilities, from Ansaldo (Italy). In the area of hydropower plants, Romania manufactures 12 types of diesel motor generators with powers ranging from 740 HP to 2500 HP and speeds of 750 rpm and 1000 rpm, using Diesel engines incorporating know-how acquired from Sulzer (Switzerland) and ALCO (USA). The electric generators are based on local research and design. Over 150 Diesel motor generators of this category have been supplied to the local industry. -- Oil and Gas Field Equipment: Romania has 8 companies that are specialized in oilfield drilling equipment and parts. Eighty percent of the Romanian output of such machinery is concentrated in 4 facilities. The biggest one is UPETROM S.A. in Ploiesti. UPETROM employes 14,000 people out of which 1,500 are engineers and quartermasters, has an impressive range of equipment and facilities and once produced up to 75 drilling rigs yearly. In 1989, for instance, this facility exported 36 complete drilling rigs, 250 blow-preventers and 11,000 rock bits. A second facility is UPET S.A. in Tirgoviste, with 8,000 employees, a medium-level of technical endowment and producing mostly medium depth drilling rigs. These two facilities are presently very much under-used as both domestic demand and exports have been very much reduced. The other large facilities, STEROM S.A. and IAIFO - Zalau, specialized in drilling tools, valves and fittings respectively, are in a very different situation. The world oil industry still needs these parts so that Zalau's capacity was used up to 98 percent during the last several years. Some of the equipment and materials for oil and gas pipelines is manufactured in Romania. Romania has 8 main steel tubes manufacturing facilities whose production is coordinated by a holding called ROMTUB S.A. Products include longitudinally welded tubes, helicoidal welded tubes, and weldingless tubes. A considerable part of the output goes to export. Beginning in 1993, local increases in demand as well as some new export contracts triggered a partial recovery. The tubes industry, although partially idle, is still in place and capable of meeting competition on the local and neighboring markets. Romania produces compressors, pumps, medium and high voltage equipment and control equipment. However, local producers are not specialized in oil and gas pumps and compressors and will not be a major threat to American or European exports unless they form joint-ventures with Western traditional producers. -- Mining Extraction and Processing Equipment: Romanian mining equipment factories are currently undergoing a process of restructuring, reorganization and rehabilitation. Because of this, at least over the near term, local mining equipment production will not be an important source of competition for western suppliers. Rather, local factories will be end-users of state-of-the-art western equipment components and technologies. They are also likely to actively seek joint- venture and cooperation arrangements with western firms for the manufacturing of modern mining extraction/processing equipment for use on both the domestic market and on third markets. Third-country imports are more likely to be a serious source of competition within the market. Although some imports (mainly spare parts for existing equipment) may continue to come from Romania's former Comecon suppliers (Poland and CIS) the country's recent shift in its policy of sourcing will give an edge to imports of mining equipment from the West. -- Chemical/Petrochemical Equipment: Romania has seven plants producing machinery and equipment for the chemical industry. The principal types of equipment produced in Romania are synthesis columns, heat exchangers, tanks, and condensers of stainless and carbon steels, of titanium and nickel alloy steels, and of brass; vapor generators for vacuum distillation; pumps (of normal pressure suction head less than 1 meter) and valves with rubber, PVC, glass fiber reinforced polyester, and graphite linings; and measurement and control equipment to regulate temperature, pressure, and level. -- Production Machinery: With regard to the broad category of production machinery, Romania has local manufacturing in the following sectors, which will represent competition to U.S. suppliers: construction machinery (5 factories which specialize mainly in machinery used in road construction or earth moving); machine tools (ten major manufacturers); and metal cutting tools (16 manufacturers). In the following sectors, Romania either has no capacity or has obsolete technology which will pose little competition to state-of-the-art U.S. exports. Third-country competition will, however, be strong in some areas: -- Textile machinery: obsolete; main suppliers are Italy, Germany, and Japan. -- Packaging machinery: poor; main supplier is Italy. -- Paper industries machinery: obsolete; main suppliers are Germany, Scandinavia (mainly Finland) and Canada. -- Air conditioning, refrigeration and heating equipment: nil, except for boilers and some home refrigerators; main suppliers are Germany, Italy, and Japan. -- Printing trades machinery: obsolete; main suppliers are Germany and Japan. -- Food processing machinery: obsolete; main suppliers are the EU, Turkey, Lebanon and Syria. Special mention should be made of the following four high- technology areas where Romania has developing markets which could be successfully entered by the U.S., in spite of serious third-country competition: -- Aircraft and avionics: Romania's aircraft industry produces gliders, light multipurpose aircraft, trainers, helicopters, and the short/medium range twin-jet airliner Rombac 1-11. Otherwise, the main competitor supplier is France and the U.K. -- Telecommunications equipment: Telephone sets, analog switching equipment and digital networks are produced locally by joint-ventures with Siemens and Alcatel. Competition for other types of equipment will be heavy from such countries as France, Germany, Spain, South Korea, Italy and Japan. -- Computers and peripherals: Domestic production is still virtually nil, although there is one Romanian company which assembles clone computers (with Packard Bell). Many U.S. computer manufactures are already represented on the Romanian market. However, competition from Hong Kong, Germany, France, Arab Emirates, Korea, Singapore, Japan and China has tended to divide the market, hurting individual company profitability. -- Industrial and analytical instruments: Domestic production is practically nil. Competition comes from Germany. As seen from the above, in almost every sector, Germany is a major competitor for U.S. products. German interests have been increasing at a quiet but steady rate since the Romanian revolution of 1989. They have been based on both direct sales from Germany, and the activity of Romanian-German joint ventures. In terms of the number of joint ventures, Germany ranks first, although in terms of capital it ranks only the fourth. Infrastructure Situation Regarding Goods/Service Distribution A modern, free enterprise system of distribution is much needed in Romania. Only now is retailing emerging as a factor in the market and this has primarily been focused on supplying consumer goods. Distributors are not available for most goods and particularly absent for industrial goods and equipment such as wood products, construction materials, electric lighting and wiring equipment, general components (industrial fasteners, valves and pipe fittings, ball and roller bearings), and industrial and analytical instruments. There is no wholesale network for consumer non-durable products, groceries, drugs and cosmetics, cleaning preparations, etc. In the case of industrial goods, components and spare parts, the user has to contact a factory directly; there are no wholesale or distributor outlets. This is even true for automotive parts and equipment, although some private enterprises have developed for used parts which, in time, may develop into a more complete distribution network to mechanics, service shops, etc. Although the old state wholesale organizations are still in existence, most of these are practically defunct due to their manager's lack of interest and expertise. The old system was organized by counties, each county having one to three big outlets which are now virtually empty. New private initiative has not yet replaced them. Some possibilities exist to joint venture with local producers and access their direct sales efforts, particularly in the industrial goods area. These companies may also entertain carrying lines complementary to their own. But again, sales organizations are not usually adequately structured for rapid market development. In many cases the potential end-users are suffering extremely reduced capacity utilization and restricted purchasing power. Signs of improvement in distribution have recently been seen in the following areas: consumer durables (TV sets and refrigerators), soft drinks (Coca-Cola and Pepsi mainly), packed food (butter, cheese, salami, biscuits, etc.), textiles (mainly sportswear), and hand tools. Major Infrastructure Projects Underway Romania has obtained loans from multilateral lending institutions for the following major projects which are currently underway: 1. Transportation Project cost: USD 403.4 million; World Bank loan: USD 120 million; co-financiers: EBRD (USD 80 million) and EIB (USD 80 million); Romanian resources: USD 123.4 million (equivalent); project coordinator: Ministry of Transport. Due to its strategic location at the crossroads of Europe and Asia, Romania is rapidly becoming one of the busiest transportation areas in Central Europe. Because of this, improving the condition of the country's road network, restructuring railways, and upgrading the seaport of Constantsa have become imperative. The project addresses all of these three components of Romania's transportation system. -- Road rehabilitation (USD 180.3 million): About 1,100 km of national roads will be rehabilitated. The sections selected for rehabilitation have daily traffic ranging from 2,000 to 10,000 vehicles and are mostly on major East-West routes across Romania; -- Border crossing upgrading (USD 10.5 million): Six main border crossing posts (Nadlac, Varsani, Bors, Siret, Albita, and Giurgiu) will be modernized to ensure adequate flow of international road traffic; -- Road safety (USD 10.5 million): includes signalling and marking of 5,000 km of roads to improve information and safety levels on the network. These 5,000 km represent the total length of the designated "European Roads" in Romania, and the signalling and marking will be done according to the European standards. Funds for the road modernization component also include USD 27.7 million for the procurement of imported materials such as bitumen and fuel, and equipment for routine maintenance, traffic monitoring, and vehicle inspection. USD 1.6 million have been earmarked for technical assistance and training. -- Railway restructuring (USD 17.7 million): This component includes some urgently needed track maintenance and data processing equipment and spare parts, required under any scenario of railway restructuring, and related training in various countries. -- Port of Constantsa (USD 130.6 million): As the Eastern terminus of the Rhine-Main-Danube corridor, this port is strategically located and consequently can be developed into a major hub-port for Central and Eastern Europe. This has also been acknowledged by more than 40 companies operating worldwide which have indicated interest in setting-up operations in the Free Zone located at the South Port of Constantsa. The effect of economies of scale on the shipment of dry bulk commodities tend to favor the use or establishment of transshipment ports. Both the Danube river countries and others around the Black Sea could benefit by the future use of Constantsa as a transshipment port. In addition to this large project, several other projects in the field of transportation are on the Romanian government's priority list. The Ministry of Transportation has already started to look for potential foreign investors for the following projects: Bechet bridge over the Danube (USD 175 million); Constantsa - Bucharest motorway (USD 596 million); Bucharest subway extension (USD 50 million); Computerized Railroad Dispatching System (USD 50 million); Parking and Loading Area at Bucharest Central Railroad Station (USD 70 million); Bucharest - Giurgiu Motorway (USD 90 million); Bucharest - Pitesti - Nadlac Motorway (USD 800 million). 2. Telecommunications Project cost: USD 70-100 million; World Bank loan: USD 100 million; project coordinator: RomTelecom - Romanian Telecommunications Authority The project consists of a development over a five-year period (mid-1994 to mid-1999) to include the following elements: - construction of a digital overlay network and of an appropriate complement of local, long-distance and international network improvements, especially catering to business subscribers; - rehabilitation of existing exchanges, external plant and subscriber lines the continued operation of which is planned for years to come; - acquisition and implementation of network management centers, engineering testing instruments, operational and administrative software tools, PC terminals and servers, and miscellaneous microwave facilities; and - technical assistance to RomTelecom in its reorientation along commercial lines, especially in the areas of financial management, accounting, information technology, human resources management, training and marketing. Other major telecommunications projects which represent good business opportunities for Western companies over the next several years include the following: National Microwave System Reconversion from Analog to Digital (USD 54 million); GSM Celullar Telephone System, 900 MHz band (USD 65 million); Local Distribution Network: 2.5 million pair/Km Jelly Field Cables (USD 50 million); Digital Overlay Network, Phase II (USD 60 million). 3. Power Sector Rehabilitation and Modernization Project cost: USD 864.3 million; World Bank loan: USD 200 million; co-financiers: EBRD, EIB, Japan's Export-Import Bank (USD 192.7 million); project coordinators: Ministry of Industry, Ministry of Finance. The project has the following components: - Rehabilitation and modernization of thermal plants at Isalnita, Braila, Deva, Brazi, Palas, and the conversion of a total of 11 units in Iasi, Suceava, Giurgiu, Borzesti and Bacau from lignite to hard coal to curtail the present uneconomic long distance (230-670 km) transportation of lignite; - Development of a master plan for the economic rehabilitation of the entire distribution systems in Bucharest and three other urban areas; - Environmental component: rehabilitation and modernization of existing pollution control equipment at the thermal plants, to mitigate the major problems of dust and fly ash pollution; procurement and installation of pollution monitoring equipment and associated training. - Technical assistance for the development of the regulatory framework; instituting computerized plant maintenance program; electricity and heat pricing, power transmission system expansion, and fuel sourcing and supply studies. 4. Petroleum Sector Rehabilitation Project cost: USD 346 million; World Bank loan: USD 176.6 million; co-financiers: EBRD (USD 30.5 million), EIB (USD 51.3 million), EC PHARE (USD 2.0 million); Romanian resources: USD 102.8 million (equivalent); project coordinator: Ministry of Industry. The project has the following objectives: assist GOR in establishing a legislative framework for the petroleum sector that would enhance the exploration and production of oil and gas in Romania, and would provide the enabling environment to encourage involvement of foreign investors; improve the operational exploration, production, transmission and distribution efficiency of the sector entities; and, implement abatement measures to address environmental pollution in sector. The achievement of the above objectives is predicated on the involvement and commitment to these objectives by the entities that play a critical role in the sector, i.e. the Ministry of Industries (for policy and regulation); PETROM and ROMGAZ (responsible for oil and gas exploration and production); CONPET and ROMGAZ (responsible for crude oil and gas transmission and distribution); and PROSPECTIUNI (responsible for data acquisition for exploration). 5. Energy Efficiency Improvement Project cost: ECU 70.6 million; EBRD loan: ECU 70.6 million; project coordinator: RENEL - Romanian Electricity Authority The objectives of the project are to: finance the procurement of equipment and materials needed to rehabilitate small hydroelectric plants; improve the reliability and efficiency of thermal power plants; reduce gas emissions at a major coal-fired plant; install fuel gas anlyzers at several plants; and improve the maintenance facilities, reliability, and protection at high voltage sub-stations. The project also includes a component for consultants and trainers.