Romania's corruption fight puts the brakes on investment

Reuters News
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Posted: Apr 08, 2015 1:39 AM

By Matthias Williams and Luiza Ilie

BUCHAREST (Reuters) - Romania's crackdown on corruption is having an unintended consequence: investment is slowing as many officials avoid approving projects lest they become the next target of the investigators.

Civil servants and ministers who would otherwise sign off on projects, sometimes but not always in return for bribes, have become hesitant. Even honest officials fear the deals will attract scrutiny by prosecutors and that they will join a long line of public figures to be investigated or imprisoned.

In the long term, most observers say, rooting out corruption will bring huge benefits to Romania, the European Union's second poorest country. For now though, it is delaying both private investment and the signing of contracts for firms to undertake projects for the state.

The latest casualty in the fight against graft is Finance Minister Darius Valcov, who resigned last month after being accused of taking bribes. Prosecutors later found more than 100 paintings, some by Picasso and Renoir, as well as gold bars and cash stashed away in various places including his safe. He denies wrongdoing.

The head of Romania's fiscal watchdog says the slowing of decision-making has helped to drag down capital expenditure, with net public investment spending as a share of GDP at a 7-year-old low, according to Eurostat data.

"By and large if you talk to most of the businesses I have come across they believe it (the anti-graft fight) was long overdue, some message had to be given," Ahmed Hassan, a managing partner at the consultancy Deloitte in Bucharest, told Reuters.

"The drawback of it - we have seen that in the last one year specifically, even vis-à-vis our projects - (is) decisions are just not happening. Some people are waiting, maybe it'll go away from me and someone else will do the approval."

"And that's just not good. Sometime strategic projects could be delayed because of over-nervous bureaucrats."

Business executives are reluctant to discuss openly which of their projects have been held up, fearing that publicity will lead to yet more delays.

However, Olguta Vasilescu, a prominent mayor, said local administrators are on a "signature strike".

Aristotel Cancescu, the head of the council in the central city of Brasov agrees. "At present it is a risk to work in local public administration," said Cancescu, who himself is under investigation for money-laundering and taking bribes.

"Anything can be interpreted and from what I know there is now a blockage at the county council and in many other local administrations, because people are afraid to sign anything," he said earlier this year.

A LOT OF FEAR

Corruption has cost Romania dearly in the quarter of a century since Communism fell.

Data compiled by Reuters based on statements by prosecutors shows the problem. Investigations in 2014 suggest graft may have cost the state and private companies around 1.02 billion euros ($1.1 billion). That's enough to build 200 km (120 miles) of motorway in a country with some of the worst infrastructure in Europe.

Bribery to secure contracts appears widespread, with local officials receiving cash, cars, holidays, clothes, free dental work and even trout and whisky in exchange for favours. One former judge was accused of taking bribes worth 83,000 euros including in the form a cemetery shrine.

"The local capital has been plagued by crony capitalism," Mihai Bogza, chairman of Romania's Foreign Investors Council and of lender Bancpost, told Reuters. "That's why we are very happy about the current fight against corruption."

"This being said, the fight against corruption is coming hand-in-hand with the fact that many public employees appear to be very reluctant to take on any kind of responsibility," he added. "Such attitudes should be clearly discouraged."

According to a study by consulting firm A.T. Kearney last year, Romania had the second-biggest black economy in Europe, after its neighbor Bulgaria.

One in 10 businesses report being asked for bribes, according to 2013 World Bank figures. The stigma of corruption is partly why Romania, along with Bulgaria, is kept out of passport-free EU Schengen zone until its performance improves.

"Public capital spending continues to be very low," said Ionut Dumitru, who heads the Fiscal Council, an independent authority which monitors the state budget.

"Many spending management authorities know they have problems with their contracts and the pace of works or approvals are delayed or postponed because they fear legal problems," said Dumitru, who is also chief economist at Raiffeisen Bank Romania.

Octavian Vidu, an investment manager at the China-backed CEE Equity Partners, stopped discussions on two projects after being asked for kickbacks. A supporter of the crackdown, he says businesses traditionally close to politicians will struggle to cope, and some might eventually become ripe for acquisition.

"It's going to be a vacuum. However painful for everybody, I think that's going to bring a different level of trust for investors like us," he told Reuters. "There is a lot of fear, there is a lot of caution out there, but I'm not sure if the old habits have died yet."

($1 = 0.9210 euros)

(editing by David Stamp)